-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MjrDLfhPEDA1VJzo4t5lGFyHAZlog56mu41LoGbrHo+GCwacppujlRvpi3Y9YpKO NqrrimuelOlHLTbS0/gyYA== 0000950131-96-002285.txt : 19960517 0000950131-96-002285.hdr.sgml : 19960517 ACCESSION NUMBER: 0000950131-96-002285 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PPT VISION INC CENTRAL INDEX KEY: 0000704460 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 411413345 STATE OF INCORPORATION: MN FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: S-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-03755 FILM NUMBER: 96565254 BUSINESS ADDRESS: STREET 1: 10321 W 70TH ST CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6129425747 MAIL ADDRESS: STREET 1: 10321 W 70TH ST CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 FORMER COMPANY: FORMER CONFORMED NAME: PATTERN PROCESSING TECHNOLOGIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PATTERN PROCESSING CORP DATE OF NAME CHANGE: 19840318 S-2 1 FORM S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1996 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- PPT VISION, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-1413345 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 10321 WEST 70TH STREET EDEN PRAIRIE, MINNESOTA 55344 (612) 996-9500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE) --------------- JOSEPH C. CHRISTENSON PRESIDENT PPT VISION, INC. 10321 WEST 70TH STREET EDEN PRAIRIE, MINNESOTA 55344 (612) 996-9500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: THOMAS G. LOVETT IV, ESQ. HENRY D. KAHN, ESQ. ROBERT E. TUNHEIM, ESQ. LAWRENCE R. SEIDMAN, ESQ. LINDQUIST & VENNUM P.L.L.P. PIPER & MARBURY L.L.P. 4200 IDS CENTER 53 WALL STREET MINNEAPOLIS, MINNESOTA 55402 NEW YORK, NY 10005 TELEPHONE: (612) 371-3211 TELEPHONE: (212) 858-8900 Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If the Registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------
PROPOSED TITLE OF EACH CLASS OF MAXIMUM PROPOSED MAXIMUM SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) REGISTRATION FEE - ----------------------------------------------------------------------------------------- Common Stock, $.10 par value per share....... 1,840,000 $17.25 $31,740,000 $10,945 - -----------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Includes 240,000 shares of Common Stock issuable which may be purchased by the Underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(c) and based on the average of the high and low sales prices for the Registrant's Common Stock on May 13, 1996 as reported on the Nasdaq National Market. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PPT VISION, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K
FORM S-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS -------------------------------- ---------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus..... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.... Inside Front Cover Page; Available Information; Incorporation of Certain Documents by Reference; Outside Back Cover Page of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Prospectus Summary; Risk Factors 4. Use of Proceeds............... Use of Proceeds 5. Determination of Offering Price........................ Not Applicable 6. Dilution...................... Not Applicable 7. Selling Security Holders...... Not Applicable 8. Plan of Distribution.......... Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered................ Price Range of Common Stock; Dividend Policy; Description of Capital Stock 10. Interests of Named Experts and Counsel...................... Not Applicable 11. Information with Respect to the Registrant............... Prospectus Summary; Risk Factors; Price Range of Common Stock; Dividend Policy; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Principal Shareholders; Description of Capital Stock; Available Information; Incorporation of Certain Documents by Reference 12. Incorporation of Certain Information by Reference..... Incorporation of Certain Documents by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................. Not Applicable
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion May 15, 1996 1,600,000 Shares [ PPT VISION, INC. LOGO ] Common Stock -------- All of the shares offered hereby are being sold by PPT Vision, Inc. ("PPT VISION" or the "Company"). The Company's Common Stock is traded on the Nasdaq National Market under the symbol "PPTV." On May 13, 1996, the last reported sale price as quoted on the Nasdaq National Market was $17.75 per share. See "Price Range of Common Stock." -------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5. -------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO DISCOUNTS AND TO PUBLIC COMMISSIONS COMPANY(1) - ------------------------------------------------------------------------------------------ Per Share........................ $ $ $ - ------------------------------------------------------------------------------------------ Total(2)......................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Before deducting expenses of the offering estimated at $ . (2) The Company has granted the Underwriters a 30-day option to purchase up to 240,000 additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." -------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland on or about , 1996. Alex. Brown & Sons Piper Jaffray Inc. INCORPORATED THE DATE OF THIS PROSPECTUS IS , 1996 [Pictures] [In upper left-hand corner, next to the name "PPT VISION", is a photo containing pictures of individuals using PPT VISION systems] [At the left margin, the following text appears: Machine Vision Systems PPT VISION is a leading designer, manufacturer, marketer and integrator of a complete family of machine vision systems for end user manufacturers, system integrators and machine builders. The Company's machine vision systems are used for a broad range of manufacturing applications, including electronic and mechanical assembly verification, verification of printed characters, packaging integrity, surface flaw detection and gauging and measurement tasks. The Company's systems are sold principally throughout North America, Europe and the Far East to various industries, including electronics, pharmaceutical, medical, automotive, consumer products and plastics. [Series of three photos appear along right-hand side of page under the caption "Three Complete Systems" - Top photo is picture of Passport 440 machine vision system; Middle photo is picture of Passport 240 machine vision system; Bottom photo is picture of Scout machine vision system] The following text accompanies the photos: Three Complete Systems All PPT VISION systems are capable of operating at inspection speeds of over 12,000 parts per minute. Passport(TM) 440 PPT VISION's top-of-the-line industrial-cased system. Designed to operate with up to four asynchronously functioning cameras for multiple inspection views and complex imaging tasks. Passport(TM) 240 PPT VISION's industrial-cased two camera system. Passport 240 is widely used in the electronic connector, metal stamping, and automotive components industries. Scout(TM) The Scout is designed for industrial applications that do not require rugged enclosures. Scout is capable of running two cameras with similar speed and power to the Passport 240. ---------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." PPT VISION(R), Passport(TM) and Scout(TM) are trademarks of the Company. 2 [Across middle of the gatefold, under the heading "How Machine Vision Works" and a series of numbered headings pointing to various features on the photo (text is provided below), is a photo of the machine vision inspection process] How Machine Vision Works PPT VISION's machine vision systems consist of a combination of proprietary computer software and hardware, cameras and lighting, working together to capture and analyze images of moving parts to determine the quality of manufactured parts and control manufacturing processes. Lighting and Optics Camera, lens and lighting options are configured to capture a high definition image of each part as it passes the camera. PPT VISION Capabilities: . Image parts that vary in size, shape, surface texture, color, etc. . Provide cost effective, flexible and long lasting lighting solutions. . Integrate high precision lens and camera for accurate measurement of intricate part details. Image Acquisition The camera's image of the part is sent electronically to the vision system framegrabber where it is converted to a digital image ready for processing. PPT VISION Capabilities: . High-speed image capture of parts "on-the-fly". . Ability to capture up to four images at the same time. . Ability to capture only a part of the image if required. Image Processing The vision system image processor measures critical part features and compares the digital image to a preset standard that has been programmed into the system. PPT VISION Capabilities: . Provide a wide range of inspection algorithms for many different applications. . Process the image in a few thousandths of a second. . Make the system easy and intuitive to program through a proprietary graphical user interface. Outputs The results of the inspection are sent to the production-line controller which may mark or reject the failed part or shut down the production line. PPT VISION Capabilities: . Provide output signals to a wide variety of production line controllers. . Output the results at high speed to keep up with the production line. . Provide data to the host manufacturing control system to enable improvement in the production process over time. Results Increase in cost-effective and efficient manufacturing through: . 100% inspection to eliminate shipping of defective product and reduce scrap product. . Removal of defective parts from the assembly process. . Continuous data collection to spot trends in the production process and adjust equipment before defective products are produced. . Ongoing improvement of the manufacturing process and product quality. [To the right of such photo is a diagram of charts showing results of machine vision inspection process] [Across the bottom of the page, under the heading "Where PPT VISION Systems Are Used", is a series of four photos, each depicting a PPT VISION machine vision system inspecting parts, with the following text below such photos:] Where PPT VISION Systems Are Used By meeting industry demands for 100% inspection of stamped parts at speeds of over 12,000 parts per minute, PPT VISION sets the industry standard for processing power. Subpixel accuracy is achieved with the Line Gauge Tool. PPT VISION's new, proprietary line of LED lighting products are an example of the Company's commitment to innovation and providing complete solutions for end- users. Lighting is a critical element of a complete on-line machine vision solution. Date, lot code and mark verification for the pharmaceutical, medical, and electronics industries is a rapidly emerging application for machine vision. PPT VISION's Optical Character Verification (OCV) Tool is employed to meet industry standards for 100% on-line inspection. Inspection of electronic connectors using the Connector Tool is one of the Company's most widely applied technologies. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and financial statements and notes thereto appearing elsewhere or incorporated by reference in this Prospectus. THE COMPANY PPT VISION is a leading designer, manufacturer, marketer and integrator of a complete family of machine vision systems for end user manufacturers, system integrators and machine builders. The Company's machine vision systems consist of a combination of proprietary computer software and hardware, cameras and lighting, working together to capture and analyze images of moving parts to determine the quality of manufactured parts and control manufacturing processes. PPT VISION's systems enable manufacturers to achieve 100% on-line inspection, thus achieving zero defect production, in situations where previously only random sampling or less precise human inspection was used as a means of monitoring quality. In addition to functioning as a quality control tool, PPT VISION systems provide manufacturers a window on their manufacturing processes by producing real-time statistical process control feedback. This allows manufacturers to take earlier corrective action to improve their manufacturing process. The Company's machine vision systems are used for a broad range of manufacturing applications, including electronic and mechanical assembly verification, verification of printed characters, packaging integrity, surface flaw detection and gauging and measurement tasks. The Company's systems are sold principally throughout North America, Europe and the Far East to various industries, including electronics, pharmaceutical, medical, automotive, consumer products and plastics. Major manufacturing end users of PPT VISION systems include AMP, Abbott Labs, Berg Electronics, Chrysler, the Delphi Electronic Division of General Motors, Imation, Johnson & Johnson, Kemet, Molex, Siemens and 3M. PPT VISION believes that it has a leadership position as the most vertically integrated developer of machine vision systems and solutions for a wide range of manufacturing applications. Through this approach, PPT VISION can rapidly and cost-effectively provide machine vision system solutions to a wide variety of manufacturing end users while enabling them to concentrate their engineering and manufacturing expertise on the products they manufacture. PPT VISION's library of machine vision software tools enables end users to implement machine vision solutions to a growing number of manufacturing applications quickly and cost effectively. The Company has pioneered the development of an icon-based, graphical user interface programming system for machine vision applications operating in the Microsoft(R) Windows(TM) environment through its Vision Program Manager ("VPM"). VPM enables users to program PPT VISION systems to perform desired image analysis and processing functions by creating a flowchart of icons linked together, thereby enabling reduced implementation cost and time, as well as increased flexibility in operation. In contrast, other machine vision systems require users to write a computer program in a programming language such as C or to use a complex, pull-down menu-based system. The Company's proprietary hardware architecture is capable of capturing and processing full frame video images at a rate of 3,600 images per minute in both strobed and shuttered modes. Most competitors are limited to capturing full frame images at 1,800 images per minute, which is the industry standard. Much higher inspection rates are achieved through the use of the Company's exclusive partial scanning technology and split-screen imaging, which enables inspection speeds of over 12,000 parts per minute. The machine vision market is rapidly growing and highly fragmented. Key drivers of the expansion in the machine vision market include the growth and demand for machine vision systems in the semiconductor and electronics industries and global competitive trends which have led manufacturers worldwide to dramatically redesign manufacturing processes in order to reduce costs and increase 3 productivity and quality. The Automated Imaging Association ("AIA") estimates that the North American market for machine vision systems in 1995 was approximately $900 million, with worldwide levels estimated at approximately $2.3 billion. The AIA expects this market to grow at approximately 15% per year through the year 2000. The AIA estimates that there are over 200 machine vision companies based in North America, over 70% of which had annual revenues of less than $5.0 million in 1995. PPT VISION was incorporated in Minnesota in 1981. The Company's executive offices are located at 10321 West 70th Street, Eden Prairie, MN 55344. Its telephone number is (612) 996-9500. THE OFFERING Common Stock offered hereby............ 1,600,000 shares Common Stock to be outstanding after the offering.......................... 5,279,717 shares(1) Use of proceeds........................ For working capital associated with expanded sales and international distribution, research and product development and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.......... PPTV
SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED APRIL YEAR ENDED OCTOBER 31, 30, ------------------------------------ ------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ ------ ------ INCOME STATEMENT DATA: Net revenues.............. $2,889 $4,294 $5,935 $6,587 $9,750 $3,995 $6,347 Gross profit.............. 1,454 2,439 3,396 3,561 5,308 2,108 3,776 Income (loss) from operations............... (205) 296 439 (253) 879 66 1,127 Net income (loss)......... (207) 338 435 (213) 1,347 89 1,178 Net income (loss) per share.................... $(0.10) $ 0.12 $ 0.13 $(0.06) $ 0.37 $ 0.03 $ 0.31 Weighted average common and common equivalent shares outstanding....... 1,982 2,899 3,236 3,455 3,650 3,497 3,825
APRIL 30, 1996 --------------------- ACTUAL AS ADJUSTED(2) ------ -------------- BALANCE SHEET DATA: Working capital......................................... $5,351 $31,563 Total assets............................................ 7,404 33,616 Long-term debt.......................................... -0- -0- Shareholders' equity.................................... 6,530 32,742
- -------- (1) Does not include 235,299 shares of Common Stock issuable upon exercise of outstanding options under the Company's 1988 Stock Option Plan as of April 30, 1996, of which 193,936 are currently exercisable. See "Capitalization," "Description of Capital Stock--Outstanding Stock Options" and Note 6 of Notes to Financial Statements. (2) Adjusted to reflect the sale of 1,600,000 shares offered by the Company hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds." Unless otherwise indicated, all information in this Prospectus (i) assumes that the Underwriters' over-allotment option is not exercised and (ii) gives effect to a three-for-two stock split which occurred on April 5, 1996. As used herein, a "fiscal year" means a year ending October 31. 4 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. Technological Change and New Product Development. The market for the Company's products is characterized by rapidly changing technology. The Company's future success will continue to depend upon its ability to enhance its current products and to develop and introduce new products that keep pace with technological developments and evolving industry standards, respond to changes in customer requirements and achieve market acceptance. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on the Company's business, results of operations, financial condition and liquidity. In addition, there can be no assurance the new products and services or product and service enhancements, if any, developed by the Company will achieve market acceptance. See "Business--PPT VISION Strategy" and "--Research and Product Development." Dependence Upon Principal Customers. During each of the past several years, the Company has had one or more customers that accounted for ten percent or more of its net revenues. During the fiscal year ended October 31, 1995 and the six months ended April 30, 1996 sales to one customer, Simac Masic B.V., a European distributor for the Company, represented 17% and 14%, respectively, of net revenues. In addition, direct sales to AMP, Inc. represented 10% of net revenues for fiscal 1995. The Company also realizes substantial additional sales to AMP, Inc. indirectly through other channels, including systems integrators, machine builders and international distributors. The loss of, or significant curtailment of purchases by, any of the Company's principal customers could have a material adverse effect on the Company's results of operations. See "Business--Markets and Customers." Cyclicality of Capital Spending by Customers. A significant portion of the Company's revenues are derived from sales to various segments of the electronic component industry, such as metal stamping, electronic connectors and passive components. The markets for these segments, and for the electronic component industry in general, can be cyclical, resulting in varying amounts of capital spending. Any significant downturn in capital spending in these markets, or in any other markets served by the Company's products, could have a material adverse effect on the Company's business and results of operations. Management of Growth. The Company's revenues increased 48% in fiscal 1995 compared with fiscal 1994 and have increased at an average annual rate of 30% over the past five years. The Company's future success will depend on the ability of its officers and key employees to manage growth successfully through maintenance of appropriate operational, financial and management information systems and to attract, retain, motivate and effectively manage its employees. If the Company's management is unable to manage growth effectively, the Company's business, results of operations, financial condition and liquidity could be materially and adversely affected. Proprietary Technology. The Company relies heavily on its image acquisition and image processing hardware designs, along with proprietary software technology. Although the Company has been issued patents in the past on certain of its technology and has patents pending on new technologies, it currently relies most heavily on protecting its proprietary information as trade secrets. There can be no assurance that the steps taken by the Company will be adequate to prevent misappropriation of its technology by third parties or will be adequate under the laws of some foreign countries, which may not protect the Company's proprietary rights to the same extent as do laws of the United States. In addition, the possibility exists that others may "reverse engineer" the Company's products in order to determine their method of operation and then introduce competing products. Further, many high 5 technology markets, including segments of the machine vision industry, are characterized by the existence of a large number of patents and frequent litigation for financial gain that is based on patents with broad, and often questionable, application. As the number of the Company's products increases, the markets in which its products are sold expands and the functionality of those products grows and overlaps with products offered by competitors. As a result, the Company believes that it may become increasingly subject to infringement claims in the future. Although the Company does not believe any of its products or proprietary rights infringe upon the rights of third parties, there can be no assurance that infringement claims will not be asserted against the Company in the future or that any such claims will not require the Company to enter into royalty arrangements or result in costly litigation. See "Business--Patents and Trademarks." Quarterly Fluctuations. The Company has experienced quarterly fluctuations in operating results and anticipates that these fluctuations will continue. These fluctuations have been caused by various factors, including the order flow of its principal customers, the timing and acceptance of new product introductions and enhancements and the timing of product shipments and marketing. Future operating results may fluctuate as a result of these and other factors, including the Company's ability to continue to develop innovative products, the announcement or introduction of new products by the Company's competitors, the Company's product and customer mix, the level of competition and overall trends in the economy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Comparisons." Dependence on Outside Contractors and Suppliers. The Company currently contracts with third party assembly houses for a substantial portion of its components and assembly needs. Although the Company endeavors to inspect and internally test most components prior to final assembly, reliance on outside contractors reduces its control over quality and delivery schedules. The failure by one or more of these subcontractors to deliver quality components in a timely manner could have a material adverse effect on the Company's results of operations. In addition, a number of the components integral to the functioning of the Company's products are available from only a single supplier or from a limited number of suppliers. Any interruption in or termination of supply of these components, or a material change in the purchase terms, including pricing, of any of these components, or a reduction in their quality or reliability, could have a material adverse effect on the Company's business or results of operations. See "Business--Manufacturing." International Revenue. In the years ended October 31, 1993, 1994 and 1995 and the six months ended April 30, 1996, sales of the Company's products to customers outside North America accounted for approximately 13%, 27%, 33% and 34%, respectively, of the Company's net revenues. The Company anticipates that international revenue will continue to account for a significant portion of its net revenues. The Company's operating results are subject to the risks inherent in international sales, including various regulatory requirements, political and economic changes and disruptions, transportation delays and difficulties in staffing and managing foreign sales operations and distributor relationships. In addition, fluctuations in exchange rates may render the Company's products less price competitive relative to local product offerings. There can be no assurance that these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's operating results. See "Business--Sales, Marketing and Customer Support." Competition. The Company competes with other vendors of machine vision systems, many of which may have greater financial and other resources than the Company. There can be no assurance that the Company will be able to compete successfully in the future or that the Company will not be required to incur significant costs in connection with its engineering research, development, marketing and customer service efforts to remain competitive. Competitive pressures may result in price erosion or other factors which will adversely affect the Company's financial performance. See "Business--Competition." 6 Dependence on Key Personnel. The Company's success depends in large part upon the continued services of many of its highly skilled personnel involved in management, research and product development and sales, and upon its ability to attract and retain additional highly qualified employees. The loss of services of these key personnel could have a material adverse effect on the Company. The Company does not have key-person life insurance on any of its employees. See "Management." Possible Volatility of Stock Price. The Company believes that factors such as the announcement of new products by the Company or its competitors, market conditions in the machine vision industry generally and quarterly fluctuations in financial results could cause the market price of the Common Stock to vary substantially. In recent years, the stock market has experienced price and volume fluctuations that have particularly affected the market prices for many high technology companies and which often have been unrelated to the operating performance of such companies. The market volatility may adversely affect the market price of the Company's Common Stock. See "Price Range of Common Stock." Anti-Takeover Considerations. Certain anti-takeover provisions of the Minnesota Business Corporation Act and the ability of the Board of Directors to issue preferred stock without shareholder approval may have the effect of delaying or preventing a change in control or merger of the Company, which could operate to the detriment of other shareholders. See "Description of Capital Stock--Anti-Takeover Provisions of Minnesota Business Corporation Act." 7 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby are estimated to be $26.2 million, assuming an offering price of $17.75 per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds for working capital associated with expanded sales and international distribution, research and product development and other general corporate purposes. The Company may use a portion of the net proceeds for acquisitions, joint ventures or licensing agreements associated with businesses, technologies or products complementary to the Company's business, although no such acquisition, joint venture or licensing agreement is being negotiated or planned as of the date of this Prospectus. Pending such uses, the net proceeds are expected to be invested in short-term, investment grade securities. PRICE RANGE OF COMMON STOCK Since December 28, 1995, the Common Stock of the Company has been listed on the Nasdaq National Market under the symbol "PPTV." Prior to that time, the Common Stock was traded on the Nasdaq Small Cap Market under the same symbol. The following table sets forth the high and low sales prices of the Company's Common Stock on the Nasdaq National Market for the period beginning December 28, 1995, and the high and low closing bid prices for the Company's Common Stock on the Nasdaq Small Cap Market for the periods prior to December 28, 1995, each as reported by Nasdaq. The Nasdaq Small Cap Market quotations listed below indicate inter-dealer prices without retail mark-up, mark-down or commissions, and may not represent actual transactions.
HIGH LOW ------ ----- FISCAL YEAR ENDED OCTOBER 31, 1994 First Quarter............................................. $ 4.17 $3.33 Second Quarter............................................ 3.33 2.83 Third Quarter............................................. 3.33 2.67 Fourth Quarter............................................ 2.67 2.17 FISCAL YEAR ENDED OCTOBER 31, 1995 First Quarter............................................. $ 2.50 $1.67 Second Quarter............................................ 2.75 2.17 Third Quarter............................................. 3.83 2.33 Fourth Quarter............................................ 8.67 3.50 FISCAL YEAR ENDING OCTOBER 31, 1996 First Quarter............................................. $13.17 $8.50 Second Quarter............................................ 16.00 8.83 Third Quarter (through May 13, 1996)...................... 18.00 14.25
On May 13, 1996, the last reported sales price of the Common Stock on the Nasdaq National Market was $17.75. At April 30, 1996, the Company estimates that there were approximately 2,530 beneficial holders of the Company's Common Stock. DIVIDEND POLICY The Company has never declared or paid any dividends on its Common Stock. The Company currently intends to retain any earnings for use in its operations and expansion of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. 8 CAPITALIZATION The following table sets forth the capitalization of the Company as of April 30, 1996 and as adjusted to reflect the sale of 1,600,000 shares of Common Stock offered by the Company pursuant to this offering and the anticipated use of the estimated proceeds therefrom. See "Use of Proceeds."
APRIL 30, 1996 -------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Long-term debt............................................ $ -0- $ -0- ------- ------- Stockholders' equity: Preferred stock, no par value, 10,000,000 shares authorized, no shares outstanding....................... -0- -0- Common stock, $.10 par value, 10,000,000 shares authorized; 3,679,717 shares issued and outstanding; 5,279,717 shares issued and outstanding, as adjusted(1)............................................. 368 528 Capital in excess of par value........................... 11,865 37,917 Accumulated deficit...................................... (5,703) (5,703) ------- ------- Total shareholders' equity.............................. 6,530 32,742 ------- ------- Total capitalization................................... $ 6,530 $32,742 ======= =======
- -------- (1) Excludes 235,299 shares that may be issued upon exercise of options outstanding as of April 30, 1996, of which 193,936 are currently exercisable. See "Description of Capital Stock--Outstanding Stock Options" and Note 6 of Notes to Financial Statements. 9 SELECTED FINANCIAL DATA The balance sheet data at October 31, 1991, 1992, 1993, 1994 and 1995 and the income statement data for the years then ended are derived from and should be read in conjunction with the more detailed financial statements of the Company and the notes thereto, which have been audited by Price Waterhouse LLP. The reports on the financial position of the Company at October 31, 1994 and 1995 and the results of its operations and cash flows for each of the three fiscal years in the period ended October 31, 1995 are included elsewhere and incorporated by reference in this Prospectus, and should be read in conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," which follows this section. October 31, 1991, 1992 and 1993 financial information is derived from the audited financial statements contained in the Company's Forms 10-K as filed for such years. The balance sheet data at April 30, 1996 and the income statement data for the six months ended April 30, 1995 and 1996 are derived from the unaudited financial statements of the Company included elsewhere in this Prospectus. In the opinion of management, the unaudited financial statements have been prepared on a basis consistent with the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for such periods. Results for the six-month period ended April 30, 1996 are not necessarily indicative of the results that may be expected for any subsequent period.
SIX MONTHS ENDED APRIL YEAR ENDED OCTOBER 31, 30, ------------------------------------- ------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net revenues.............. $2,889 $4,294 $5,935 $6,587 $9,750 $3,995 $6,347 Cost of sales............. 1,435 1,855 2,539 3,026 4,442 1,887 2,571 ------ ------ ------ ------ ------ ------ ------ Gross profit............. 1,454 2,439 3,396 3,561 5,308 2,108 3,776 Selling expenses.......... 692 1,005 1,576 1,970 2,279 1,075 1,231 General and administrative expenses................. 400 451 550 711 851 359 530 Research and development expenses................. 567 687 831 1,133 1,299 608 888 ------ ------ ------ ------ ------ ------ ------ Income (loss) from operations.............. (205) 296 439 (253) 879 66 1,127 Other income (expense).... (2) 42 (4) 40 61 23 51 ------ ------ ------ ------ ------ ------ ------ Net income (loss) before taxes................... (207) 338 435 (213) 940 89 1,178 Income tax benefit........ -0- -0- -0- -0- 407 -0- -0- ------ ------ ------ ------ ------ ------ ------ Net income (loss)........ $ (207) $ 338 $ 435 $ (213) $1,347 $ 89 $1,178 ====== ====== ====== ====== ====== ====== ====== Net income (loss) per share.................... $(0.10) $ 0.12 $ 0.13 $(0.06) $ 0.37 $ 0.03 $ 0.31 ====== ====== ====== ====== ====== ====== ====== Weighted average common and common equivalent shares outstanding....... 1,982 2,899 3,236 3,455 3,650 3,497 3,825 ====== ====== ====== ====== ====== ====== ======
OCTOBER 31, ---------------------------------- APRIL 30, 1991 1992 1993 1994 1995 1996 ------ ------ ------ ------ ------ --------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital................... $1,159 $1,502 $3,071 $3,253 $4,132 $5,351 Total assets...................... 2,049 2,370 4,005 4,449 6,098 7,404 Long-term debt.................... 182 -0- -0- -0- -0- -0- Shareholders' equity.............. 1,436 1,833 3,384 3,719 5,145 6,530
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus, including the information set forth in this section and the information incorporated by reference herein, contains forward-looking statements. Actual results could differ significantly from those contained in the forward-looking statements. In connection with the forward-looking statements which appear in these disclosures, prospective purchasers of the Common Stock offered hereby should carefully review the factors set forth in this Prospectus under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Certain Factors Affecting Future Performance." OVERVIEW The Company was founded in 1982 to commercialize technology for statistical pattern recognition as applied to the then new machine vision market. In 1984, the Company introduced its only product based on this technology, the APP 200. In 1986, the Company introduced the APP 250, which employed direct contrast sensing hardware which was more appropriate for factory automation applications. The APP 300, which implemented a user-friendly interface (Inspection Manager), was introduced in 1988. The Company embarked on a new product direction in 1989, with the launching of a project to develop an easy-to-use and fast machine vision system for the end user market. This project focused on the development of an icon-based graphical user interface operating under Microsoft(R) Windows(TM) and proprietary hardware designed to plug into standard PC architecture. The first product of this effort, the 400VPC, was introduced in 1991. The 400VPC, with the Company's proprietary VPM software, was the first system for the end-user machine vision market to use an icon-based graphical user interface operating under Microsoft(R) Windows(TM). The basic architecture of the VPC series and VPM form the foundation of the Company's current Passport and Scout family of machine vision systems introduced in 1994. The Company has made significant investments in product development and is continuing to invest in next generation software and hardware architecture that will expand its lead in speed, ease-of-use and the ability to deliver cost effective complete solutions to its customers. The Company's basic software and hardware architecture, together with an increasing array of specific software tools such as the Connector Tool, have been the major drivers of the Company's growth. In recent years, the Company has directed significant resources to building its sales and applications engineering capabilities, its corporate infrastructure and its research and product development activities to support expanded sales of its family of complete machine vision systems to the end user market. In fiscal 1994 the Company recognized a net loss of $0.2 million due to the significant investment in infrastructure, combined with a lag in timing of order flow. However, the Company began to realize the benefit of these investments in fiscal 1995 when a substantial growth in revenues generated net income before taxes of $0.9 million. Although operating expenses are expected to continue to grow in absolute dollar amounts, the Company expects its efforts to generate significant increases in net revenues will not require escalating increases in such expenditures as a percentage of net revenues. 11 RESULTS OF OPERATIONS The following table sets forth certain financial data (i) expressed as a percentage of net revenues for the years ended October 31, 1993, 1994 and 1995 and for the six months ended April 30, 1995 and 1996 and (ii) expressed as a percentage increase from the previous period's results:
PERCENTAGE OF NET REVENUES PERCENTAGE INCREASE ---------------------------- -------------------------- SIX MONTHS SIX MONTHS YEAR ENDED ENDED YEAR ENDED ENDED OCTOBER 31, APRIL 30, OCTOBER 31, APRIL 30, ---------------- ---------- --------------- ---------- 1993 1994 1995 1993 1994 1995 1995 1996 TO 1994 TO 1995 TO 1996 ---- ---- ---- ---- ---- ------- ------- ---------- Net revenues............... 100% 100% 100% 100% 100% 11% 48% 59% Gross profit............... 57 54 54 53 59 5 49 79 Selling expenses........... 27 30 23 27 19 25 16 15 General and administrative expenses.................. 9 11 9 9 8 29 20 48 Research and development expenses.................. 14 17 13 15 14 36 15 46 Income (loss) from operations................ 7 (4) 9 2 18 -- -- 1,594 Net income (loss).......... 7 (3) 14 2 19 -- -- 1,217
Comparison of Six Months Ended April 30, 1996 to Six Months Ended April 30, 1995 Net Revenues. Net revenues increased 59% to $6.3 million for the six month period ended April 30, 1996 compared to net revenues of $4.0 million for the same period in fiscal 1995. The increase in net revenues in fiscal 1996 was due to a 61% growth in unit sales, with sales of the Company's machine vision systems increasing to 229 in the first six months of fiscal 1996 versus 142 for the same period in fiscal 1995. The Company attributes its sales growth to increased demand in all markets, with particularly strong results shown internationally. In the first six months of fiscal 1996 net revenues increased 89% outside North America and 49% in North America over the same period in the prior year. Sales to customers outside North America represented 34% of net revenues for the six month period ended April 30, 1996, compared to 29% for the same period in fiscal 1995. The increase internationally is primarily the result of increased sales to electronic component manufacturers in the Far East through international distributors. The increase in North America is primarily the result of increased sales to electronics and automobile manufacturers. Gross Profit. Gross profit increased 79% to $3.8 million for the six month period ended April 30, 1996, compared to $2.1 million for the same period in fiscal 1995. As a percentage of net revenues, the gross profit increased to 59% from 53% for the same period in fiscal 1995. The increase in gross profit as a percentage of net revenues in 1996 is primarily due to economies of scale related to increasing volume and to decreased material costs. The Company anticipates that it can support increased net revenues at its current manufacturing capacity. Selling Expenses. Selling expenses increased 15% to $1.2 million for the six month period ended April 30, 1996, compared to $1.1 million for the same period in fiscal 1995. As a percentage of net revenues, selling expenses declined to 19% for the first six months of fiscal 1996 from 27% for the same period in fiscal 1995. The decline in selling expenses as a percentage of net revenues is primarily due to the Company's ability to leverage its sales, applications engineering and international distribution infrastructure. Selling expenses for international sales are generally incurred by the Company's distributors. Although the Company anticipates selling expenses to increase in the remainder of fiscal 1996 as the Company invests additional amounts in sales and applications engineering, the Company believes that these expenditures will not increase substantially as a percentage of net revenues for the remainder of this fiscal year. General and Administrative Expenses. General and administrative expenses increased 48% to $0.5 million for the six month period ended April 30, 1996, compared with $0.4 million for the same period in fiscal 1995. As a percentage of net revenues, general and administrative expenses decreased to 8% for 12 the first six months of fiscal 1996, compared to 9% for the same period in fiscal 1995. The increase in expenditures in the first six months of 1996 is primarily attributable to increased expenses associated with operating the Company as it continues to grow and to investments in management infrastructure. The decrease as a percentage of net revenues is mainly related to operating leverage provided by the Company's growing revenue base. The Company believes that general and administrative expenses may decline slightly as a percentage of net revenues during the remainder of fiscal 1996. Research and Development Expenses. Research and development expenses increased 46% to $0.9 million for the six month period ended April 30, 1996, compared with $0.6 million for the same period in fiscal 1995. Research and development expenses as a percentage of net revenues declined to 14% for the first six months of fiscal 1996, compared to 15% for the same period in fiscal 1995. The increase in expenses in the first six months of fiscal 1996 is mainly due to new product development programs and increased staffing to support these efforts. The decline as a percentage of net revenues in the first six months of fiscal 1996 is the result of the Company's growing revenue base. As the Company continues to invest in next generation software and hardware development, it expects research and development expenses may remain constant or increase slightly as a percentage of net revenues during the remainder of fiscal 1996. Income Tax Benefit. No income tax expense or benefit was recorded in the six month period ended April 30, 1996 or in the same period in fiscal 1995. Depending on the results of operations for the last six months of fiscal 1996, the Company may determine that it is prudent and necessary to fully recognize the remaining potential future tax benefits of loss carry forwards and net deductible temporary differences available to offset taxable income in future periods. Comparison of Year Ended October 31, 1995 to Year Ended October 31, 1994 Net Revenues. Net revenues in fiscal 1995 increased 48% to $9.7 million, compared with $6.6 million for fiscal 1994. The increase in net revenues was due to a 48% growth in unit sales, with sales of the Company's machine vision systems increasing to 333 in fiscal 1995 versus 225 in fiscal 1994. The Company attributes its sales growth to increased demand in all markets, with particularly strong results in international markets. In fiscal 1995 revenues increased 84% outside of North America and 35% in North America. The increase internationally was primarily the result of a 492% increase in Far East sales through distributors. The increase in North America is primarily due to demand in the electronic components market as well as increased sales to systems integrators. Gross Profit. Gross profit for fiscal 1995 increased 49% to $5.3 million, compared with $3.6 million for fiscal 1994. The gross profit as a percentage of net revenues for fiscal 1995 remained constant at 54%. Selling Expenses. Selling expenses increased 16% to $2.3 million in fiscal 1995, compared with $2.0 million in fiscal 1994. As a percentage of net revenues, fiscal 1995 selling expenses declined to 23% from 30% in fiscal 1994. The increase in selling expenses in 1995 was related to expanded marketing and promotion efforts and the addition of new employees in the sales and customer support areas. The decline in selling expenses as a percentage of net revenues in fiscal 1995 is primarily due to increased productivity from the Company's sales and applications engineering teams and increased sales through international distributors. General and Administrative Expenses. General and administrative expenses increased 20% to $0.9 million in fiscal 1995, compared with $0.7 million in fiscal 1994. As a percentage of net revenues, general and administrative expenses decreased to 9% in fiscal 1995 compared with 11% in fiscal 1994. The increase in expenditures in 1995 was primarily due to incurring a full year of lease expense in the Company's new facility and investments in management infrastructure. The decrease as a percentage of net revenues is mainly related to operating leverage provided by the Company's growing revenue base. 13 Research and Development Expenses. Research and development expenses increased 15% to $1.3 million in fiscal 1995 from $1.1 million in fiscal 1994. Research and development expenses as a percentage of net revenues declined to 13% in fiscal 1995 from 17% in fiscal 1994. The increase in expenditures in 1995 is mainly due to new product development programs and the necessary new employees to support these efforts. The decline as a percentage of net revenues in 1995 is the result of the Company's growing revenue base. Income Tax Benefit. The income tax benefit of $407,000 recorded in fiscal 1995 reflects partial recognition of the potential future tax benefits of loss carry forwards and net deductible temporary differences available to offset taxable income in future periods. No income tax expense or benefit was recorded in fiscal 1994. Comparison of Year Ended October 31, 1994 to Year Ended October 31, 1993 Net Revenues. Net revenues in fiscal 1994 increased 11% to $6.6 million, compared with $5.9 million in fiscal 1993. Unit sales of the Company's machine vision systems increased to 225 in fiscal 1994 versus 186 in fiscal 1993. In fiscal 1994 net revenues increased 131% outside of North America and declined 7% in North America. The increase internationally is primarily the result of increased sales in Europe through distributors. The decline in North America in fiscal 1994 is primarily the result of unusually low first quarter order flow following a very large number of shipments in the fourth quarter of fiscal 1993. Gross Profit. Gross profit for fiscal 1994 increased 5% to $3.6 million, compared with $3.4 million for fiscal 1993. The gross profit as a percentage of net revenues for fiscal 1994 was 54%, compared with 57% for fiscal 1993. The decline in gross profit as a percentage of net revenues for fiscal 1994 was primarily due to start-up costs related to the introduction of the Passport and Scout product lines as well as the portion of increased expenditures related to the move to the Company's new facility in fiscal 1994 that was allocated to cost of sales. Selling Expenses. Selling expenses increased 25% to $2.0 million in fiscal 1994, compared with $1.6 million in fiscal 1993. As a percentage of net revenues, fiscal 1994 selling expenses increased to 30% from 27% in fiscal 1993. The increase in selling expenses in fiscal 1994 was due primarily to investments by the Company in its sales and applications engineering infrastructure. General and Administrative Expenses. General and administrative expenses increased 29% to $0.7 million in fiscal 1994, compared with $0.6 million in fiscal 1993. As a percentage of net revenues, general and administrative expenses increased to 11% in fiscal 1994, compared with 9% in fiscal 1993. The increase in expenditures in 1994 was primarily due to increased expenses associated with operating the Company as it continued to grow and with increased expenditures incurred in the move to its new facility during fiscal 1994. Research and Development Expenses. Research and development expenses increased 36% to $1.1 million in fiscal 1994 from $0.8 million in fiscal 1993. Research and development expenses as a percentage of net revenues increased to 17% in fiscal 1994 from 14% in fiscal 1993. The increase in expenditures in fiscal 1994 reflected increased personnel expenses and costs associated with the continuation of enhancements for software tools and development work on the Company's Passport and Scout product lines. Quarterly Comparisons The following table sets forth certain quarterly financial data for the first two quarters in 1996 and the four quarters in each of fiscal years 1995 and 1994, as well as certain of such information expressed as a percentage of net revenues for the same periods. This quarterly information is unaudited but has been prepared on the same basis as the annual financial statements and, in management's opinion, reflects all adjustments, consisting only of normal recurring adjustments required for a fair presentation 14 of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED ------------------------------------------------------------------------------------------- JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, 1994 1994 1994 1994 1995 1995 1995 1995 1996 1996 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Net revenues............ $1,283 $1,669 $1,632 $2,004 $2,029 $1,966 $2,751 $3,004 $3,135 $3,212 Gross profit............ 692 975 817 1,077 1,066 1,042 1,506 1,694 1,832 1,944 Income (loss) from operations............. (142) 6 (148) 31 48 19 296 517 534 593 Net income (loss)....... (135) 16 (137) 43 56 33 315 943 557 621 Net income (loss) per share.................. (0.04) 0.00 (0.04) 0.01 0.02 0.01 0.09 0.25 0.15 0.16 AS A PERCENTAGE OF NET REVENUES: Gross profit............ 54% 58% 50% 54% 53% 53% 55% 56% 58% 61% Income (loss) from operations............. (11)% 0% (9)% 2% 2% 1% 11% 17% 17% 18% Net income (loss)....... (11)% 1% (8)% 2% 3% 2% 11% 31% 18% 19%
The Company has experienced quarterly fluctuations in operating results and anticipates that these fluctuations will continue. These fluctuations have been caused by various factors, including the number and timing of new product introductions and enhancements, the buying patterns of the Company's target markets, the timing of product shipments and marketing. Future operating results may fluctuate as a result of these and other factors, including the Company's ability to continue to develop innovative products, the announcement or introduction of new products by the Company's competitors, the Company's product and customer mix, the level of competition and overall trends in the economy. Net revenues have generally increased from quarter to quarter since the first quarter of fiscal 1994 which ended January 31, 1994. Net revenues of $1.3 million in that quarter decreased significantly from net revenues of $2.1 million for the preceding quarter ended October 31, 1993, which was the result of a very large number of orders being completed and shipped in the earlier quarter. Such fluctuations in quarter-to-quarter net revenues may occur in the future due to variations in product mix and the long selling cycle and application-specific customer requirements inherent in the end user machine vision market. Furthermore, given that the Company attempts to ship products within a relatively short time of specific product orders, quarter-to-quarter comparisons will be significantly affected by order flow and the timing and acceptance of new product introductions. The Company's gross profit in the quarter ended April 30, 1994 increased due to an unusually large order for the Company's Image Processor and Framegrabber board sets, which carry a higher gross margin than complete vision systems. The gross profit in the quarter ended July 31, 1994 declined due to the shipment of an order which carried a lower gross profit percentage due to an unusually high pass-through element of cost. This order consisted of equipment purchased by the Company to be integrated with the Company's machine vision system which was passed on to the customer at minimal increase in cost. The Company does not anticipate incurring similar cost of sales charges in the future. Gross profit as a percentage of net revenues has been increasing beginning with the quarter ended July 31, 1995 due to economies of scale related to increasing volume and to reduced material costs. Net income for the quarter ended October 31, 1995 includes the impact of an income tax benefit of $407,000. LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $5.4 million on April 30, 1996 from $4.1 million on October 31, 1995. The Company financed its increased sales in the first six months of fiscal 1996 through internally generated cash flow and existing cash and cash equivalents. Net cash provided from operating activities was $0.5 million for the six month period ended April 30, 1996. Due to the increased level of sales activity and a higher percentage of sales occurring in the last half of the second quarter ended April 30, 15 1996, accounts receivable increased $0.4 million during the first six months of fiscal 1996. Inventories increased $0.3 million during the first six months of fiscal 1996 due to raw material purchases to support increased sales and new product introductions. The Company used $0.3 million in cash flow in investing activities, primarily for the purchase of capital equipment. In addition, the Company generated $0.2 million from its financing activities as a result of issuances of its Common Stock upon exercise of stock options and warrants. Current assets increased to $6.1 million at April 30, 1996 from $4.9 million at October 31, 1995. This increase was primarily due to an increase in cash and cash equivalents to $1.7 million at April 30, 1996 from $1.2 million at October 31, 1995. Accounts receivable also increased to $3.1 million at April 30, 1996 from $2.7 million at October 31, 1995. The Company's current liabilities decreased to $0.7 million at April 30, 1996 from $0.8 million at October 31, 1995. This was mainly due to lower trade accounts payable. The Company believes that its cash flow from operations, existing cash and cash equivalents at April 30, 1996 and the net proceeds of this offering will be adequate for its foreseeable operating needs. CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE Although the Company has experienced significant growth in net revenues over the past five years, there can be no assurance that prior growth rates are indicative of future operating results. In addition, while the Company has directed, and intends to continue to direct, significant resources to building its sales and applications engineering capabilities, corporate infrastructure and research and product development activities, there can be no assurance that such investments will result in increased net revenues or more favorable operating margins. Future operating results may fluctuate due to factors such as demand for the Company's machine vision systems, technological change, the introduction by the Company or its competitors of new products, product enhancements or services, the acceptance by the Company's customers of such new products, product enhancements or services, demand for the products of the Company's customers, the capital spending patterns of the Company's customers, availability of components integral to the functioning of the Company's products, changes in the level of operating expenses and competitive conditions in the machine vision industry. The machine vision industry is highly fragmented and the Company faces competition from a number of companies in the machine vision market, some of which have greater manufacturing and marketing capabilities and greater financial, technological and personnel resources than the Company. The Company may incur significant costs in connection with its engineering research, development, marketing and customer service efforts in order to maintain or enhance its competitive position. In addition, the Company and certain of its competitors which are public companies have historically reported strong operating margins. However, while to date the Company has not experienced significant price competition, competitive pressures may in the future result in price competition among the Company and its competitors which would negatively affect operating margins in general for companies in the machine vision industry and, specifically, could materially and adversely affect the Company's financial condition and results of operations. The Company anticipates that international sales will continue to account for a significant portion of its net revenues. International sales are subject to a number of risks, including various regulatory requirements, political and economic changes and disruptions, transportation delays and difficulties in staffing and managing foreign sales operations and distributor relationships. In addition, fluctuations in exchange rates may render the Company's products less price competitive relative to local product offerings. These factors may, in the future, contribute to fluctuations in the Company's financial condition and results of operations. Although the Company's results of operations have not been materially adversely affected to date by these factors, the long-term impact of these factors on the Company's financial condition or results of operations, including any possible affect on the business outlook in other developing countries, cannot be predicted. 16 BUSINESS OVERVIEW PPT VISION is a leading designer, manufacturer, marketer and integrator of a complete family of machine vision systems for end user manufacturers, system integrators and machine builders. The Company's machine vision systems consist of a combination of proprietary computer software and hardware, cameras and lighting, working together to capture and analyze images of moving parts to determine the quality of manufactured parts and control manufacturing processes. PPT VISION's systems enable manufacturers to achieve 100% on-line inspection, thus achieving zero defect production, in situations where previously only random sampling or less precise human inspection was used as a means of monitoring quality. In addition to functioning as a quality control tool, PPT VISION systems provide manufacturers a window on their manufacturing processes by producing real-time statistical process control feedback. This allows manufacturers to take earlier corrective action to improve their manufacturing process. The Company's machine vision systems are used for a broad range of manufacturing applications, including electronic and mechanical assembly verification, verification of printed characters, packaging integrity, surface flaw detection and gauging and measurement tasks. The Company's systems are sold principally throughout North America, Europe and the Far East to various industries, including electronics, pharmaceutical, medical, automotive, consumer products and plastics. Major manufacturing end users of PPT VISION systems include AMP, Abbott Labs, Berg Electronics, Chrysler, the Delphi Electronic Division of General Motors, Imation, Johnson & Johnson, Kemet, Molex, Siemens and 3M. PPT VISION believes that it has a leadership position as the most vertically integrated developer of machine vision systems and solutions for a wide range of manufacturing applications. Through this approach, PPT VISION can rapidly and cost-effectively provide machine vision system solutions to a wide variety of manufacturing end users while enabling them to concentrate their engineering and manufacturing expertise on the products they manufacture. PPT VISION's library of machine vision software tools enables end users to implement machine vision solutions to a growing number of manufacturing applications quickly and cost effectively. BACKGROUND A machine vision system consists of computer software and hardware, working together with cameras and lighting, to perform image analysis and image processing for automated inspection, measurement and identification functions in the manufacturing process. Commercial use of machine vision technology for manufacturing quality control began to emerge in the early 1980s. However, machine vision systems at that time were complex to program and maintain, difficult to install, limited in performance and not cost effective. Through advances in microprocessor and software technologies, these barriers have been removed, enabling machine vision to emerge as a powerful process control technology that allows manufacturers to improve quality and increase productivity. The machine vision market is large and highly fragmented. The AIA estimates that the North American market for machine vision systems in 1995 was approximately $900 million, with worldwide levels estimated at approximately $2.3 billion. The AIA expects this market to grow at approximately 15% per year through the year 2000. According to the AIA, over 70% of the estimated 200 companies in the North American machine vision market have less than $5 million in annual revenues. Demand for machine vision systems comes from end user manufacturers who apply these systems as an integral part of their manufacturing process, OEMs who incorporate machine vision systems into their products, systems integrators and machine builders. The AIA estimates that a substantial majority of the North American market for machine vision systems consists of sales to end user manufacturers. 17 A key factor in the expansion of the machine vision market is the growth in the demand for machine vision systems in the semiconductor and electronics industries. The growth in demand for personal computers, cellular communications and other electronic devices, as well as the increase in electronic components inside other products such as consumer appliances and automobiles, is stimulating demand for electronic and semiconductor components. In an effort to rapidly ramp up manufacturing capability while at the same time introducing innovative new designs and improving quality, manufacturers of these components are increasingly turning to machine vision as a vital part of their manufacturing process. The growth of the end user machine vision market is also being driven by global competitive trends, which have led manufacturers worldwide to dramatically redesign manufacturing processes in order to reduce cost and increase productivity and quality. In order to meet today's manufacturing quality requirements, statistical sampling methods are insufficient and 100% on-line inspection is required. To accomplish these objectives, manufacturers are increasingly adopting machine vision solutions. Manufacturers are demanding expanded capabilities from machine vision systems, including faster processing capabilities and greater ease of use. Manufacturers are also demanding more comprehensive services from machine vision providers, including application engineering, technical support and training. Furthermore, manufacturers are seeking the ability to monitor trends, to better comprehend the manufacturing process and to identify problems. In addition, manufacturers are being challenged to maintain high production levels which require rapid set up times, flexibility and seamless networking with the host manufacturing control system to provide comprehensive diagnostic and process control feedback. THE PPT VISION SOLUTION The Company's machine vision systems are primarily targeted at providing manufacturers with 100% on-line inspection in high speed discrete part manufacturing applications. This typically replaces older off-line random sampling techniques or human vision inspection techniques as a means of monitoring quality, thus enabling manufacturers to achieve zero defect production. PPT VISION's family of machine vision systems which include its proprietary VPM graphical programming software provide significant performance advantages that meet manufacturers' critical requirements. These requirements include high speed, flexibility, ease-of-use, networkability and statistical feedback, all without sacrificing performance. All PPT VISION systems are supported by the Company's focus on providing its customers with complete solutions, not just components, and a major commitment to providing its customers with value-added application engineering services. PPT VISION has developed products which have specific advantages in terms of speed and ease-of-use. The Company's machine vision systems are capable of operating speeds of over 12,000 parts per minute performing 100% on-line inspection. This speed is critical to successfully employing machine vision in many applications. PPT VISION also pioneered the use of an icon-based visual programming system (VPM) operating in the Microsoft(R) Windows(TM) environment. Users are able to program the Company's systems by creating a flowchart of icons linked together rather than having to write a computer program in a programming language such as C or using a complex, pull-down menu-based system. This results in lower cost and time for implementation. The Company is pursuing what it believes is the most fully vertically integrated business model in the machine vision industry. PPT VISION develops its own image acquisition and processing hardware, image analysis software, application specific software tools and general purpose graphical user interface. The Company also provides lighting solutions and value-added application engineering services on a direct basis to manufacturers. These capabilities enable PPT VISION to provide its customers with (i) 18 application specific software tools (such as the Connector Tool used for inspection of fully assembled electronic connectors), (ii) complete application specific products (such as the Stampede providing high speed inspection for precision metal stamping applications), and (iii) complete custom solutions. This strategy enables PPT VISION to leverage its investment in core software and hardware architectures while providing improved service for the end user manufacturing customers. In addition, PPT VISION markets its vision systems to manufacturing system integrators and machine builders who address the end user market with unique expertise in specific vertical markets. Many system integrators and machine builders prefer to use the Company's complete vision systems, which enable them to reduce programming development time, save money and concentrate their expertise on material handling and integration issues. The Company believes that this business model gives it a decisive competitive advantage in providing cost effective, complete solutions to the end user machine vision market. PPT VISION STRATEGY The Company's objective is to be a worldwide leader in the design, manufacture, marketing and integration of machine vision systems for automated manufacturing applications in the end user machine vision market. Through the successful integration of the Company's five core competencies, including image acquisition, image processing, application development software, optics and illumination and vision system integration, the Company believes it will be able to meet its objective and successfully implement its strategy. Key elements of the Company's strategy include: . Provide Complete Solutions to End Users. The Company focuses on providing complete machine vision solutions to end user manufacturers, system integrators and machine builders. PPT VISION is pursuing what it believes to be the most fully vertically integrated business model in the industry, including the design, manufacturing, marketing and integration of complete machine vision solutions. The Company believes this provides it with a competitive advantage in delivering cost effective complete vision solutions. . Extend Technology Leadership in Speed and Ease-of-Use. The Company is continuing to aggressively invest in next generation software and hardware architectures that will expand its lead in speed, ease-of-use and the ability to deliver cost effective complete solutions to its customers. New products currently in development will feature significant enhancements in speed, accuracy and breadth of application through new proprietary technology. Key software products will enable support for different hardware and user interfaces, as well as increasing the development speed of application specific software tools. . Target Expanding Markets Through Continued Development of Application Specific Software Tools. The Company's application specific software tools are a proven solution for a wide variety of electronic component inspection applications. In response to the worldwide expansion of the semiconductor and electronics industries, the Company is developing additional software tools for electronic component, electronics and semiconductor applications. The Company also focuses considerable effort on expanding the offerings of application specific software tools to the industries it identifies as being poised to exhibit significant growth in demand for machine vision solutions, such as pharmaceuticals, medical devices, automotive and plastics. . Provide a Superior Level of Value-Added Application Engineering Support. The Company delivers a high level of value-added application engineering support to its end user customers through its own in-house applications engineering resources. Manufacturing end users increasingly want to concentrate their engineering expertise on the products they manufacture, not on engineering machine vision systems. They are seeking complete machine vision solutions with the associated application engineering support on an on-going basis. . Increase International Market Presence. The Company is aggressively focusing on increasing its market share in the worldwide machine vision market. The Company believes international 19 markets represent a significant opportunity and intends to capture a significant share of this market through investment and expansion in its international sales distribution and support infrastructure. PRODUCTS PPT VISION's systems consist of proprietary software and hardware working together with cameras and lighting to capture and analyze images of parts on- line. The four key process steps in the PPT VISION solution are lighting and optics, image acquisition, image processing and outputs. In lighting and optics, cameras, lenses and lighting options are configured to capture a high- definition image of each part as it passes the camera. Image acquisition involves capturing an image at extremely high rates of speed and preparing the image for further processing. In image processing, the machine vision system measures critical part features and compares algorithmically the digital image to a preset standard that has been programmed into the system. The output function typically involves sending the results of the inspection process to the production line controller or the host manufacturing control system, as well as providing real-time process control data which can be used to improve the production process over time. TYPICAL PPT VISION SYSTEM CONFIGURATION EXAMPLE [GRAPHIC OF TYPICAL SYSTEM CONFIGURATION (INCLUDING PROCESSOR, MONITOR AND SAMPLE CONVEYOR) APPEARS HERE] 20 Software Operating System and Tools. All PPT VISION systems run on proprietary software in a Microsoft(R) Windows(TM) environment using the Company's VPM user interface. VPM is an icon-based, graphical language which is easy to use and extremely flexible. It allows the Company's customers to create complete inspection solutions with no training in computer programming languages. Instead of writing a computer program in a programming language such as C or using a complex, pull-down menu-based system, the vision system is set up by creating visual flowcharts. Clicking the trackball, the user graphically grabs icons (representing machine vision functions) out of system toolboxes and arranges them in the workspace on the system monitor. The icons are then connected with different colored lines to indicate execution and data flow throughout the inspection routine. Machine vision functions are performed by the Company's extensive set of software tools. PPT VISION has developed a library of over 40 vision tools contained in four toolboxes covering imaging, input/output ("I/O"), utility and control functions. The Company's imaging toolbox contains all system tools directly associated with image acquisition, processing and analysis. These tools provide access to all of the Company's vision algorithms, which are the vital core of all inspections performed by its vision systems. The I/O toolbox holds all the tools which permit an inspection developer to control vision system input and output options. These tools allow for system networking, data collection and application control. The tools in the utility and control toolboxes access functions such as counters, reset and display functions, math and logical operations, data collection and screen controls. These toolboxes also provide control of data flow to a variety of peripherals such as disk drives, serial ports and Microsoft(R) Visual Basic(TM) programs. TYPICAL PPT VISION GRAPHICAL USER INTERFACE [GRAPHIC OF VPM GRAPHICAL USER INTERFACE (INCLUDES SAMPLE PROGRAM AND TOOLBOXES) APPEARS HERE] 21 Hardware Architecture. PPT VISION's machine vision processor includes the Company's proprietary high performance Framegrabber and Image Processor boards with a Texas Instruments DSP (digital signal processor) and high speed pipeline architecture along with an integrated PC for inspection set-up and networking and fully integrated I/O capability. All PPT VISION systems are capable of capturing full framed video images at a rate of up to 3,600 images per minute, in both strobed and shuttered modes. Most competitors are limited to capturing full frame images at 1,800 images per minute, which is the industry standard. Much higher inspection rates are achieved through the use of the Company's exclusive partial scanning technology and split-screen imaging, which enables speeds of over 12,000 parts per minute. PPT VISION Product Family. The Company's machine vision systems are the Passport 440, Passport 240, Scout and Stampede. Each of these systems includes a machine vision processor, a Super VGA touch-screen color display monitor and VPM. The Passport 440 is the Company's top of the line product, designed to operate with up to four asynchronously functioning cameras for multiple inspection views and complex imaging tasks. The Passport 240 has all of the basic capabilities of the Passport 440 in a two-camera model. Both systems are housed in industrially rugged enclosures and are capable of operating at speeds of over 12,000 inspections per minute. These systems are widely used in the electronic connector, metal stamping and automotive components industries that demand speed, accuracy and flexibility while maintaining industrial ruggedness. The Scout is a cost-effective machine vision system designed for industrial applications that do not require rugged enclosures. It is packaged in a non- industrial desktop style enclosure and is capable of running two cameras with similar speed and power to the Passport 240. The Stampede is a turnkey inspection system specifically designed for the precision stamping industry. The system includes a Passport vision processor, mechanical fixturing, precision camera optics and lighting integrated on a mobile platform. In addition, the Company sells a broad range of peripheral services and components, including applications engineering, installation and training services, customer lighting solutions, fixturing, cameras, cabling and various software options. MARKETS AND CUSTOMERS The Company sells its products to a broad range of industries, including manufacturers of electronic components, pharmaceuticals, medical devices, automotive components, consumer products and plastics. As of April 30, 1996, the Company had sold 1,337 machine vision systems to over 200 customers, since inception. In the area of electronic components, eight of the ten largest electronic connector manufacturers in the world have purchased PPT VISION systems. These companies are included in the list shown below. The following is a representative list of end users of the Company's products. AMP ITT Cannon Philips Abbott Labs Imation Reynolds Metals Akso I-Stat Siemens Allied Signal JST Sumitomo Augat Japan Aviation Electronics Suzuki Berg Electronics Johnson & Johnson Syntex Chrysler Kemet Thomas & Betts Framatome Molex 3M Ford Motorola Toshiba GM-Delphi Division Novo Nordisk United Technologies Hewlett Packard Philip Morris Vishay 22 In each of the past several years, the Company has had one or more customers that have accounted for ten percent or more of the Company's net revenues. During the fiscal year ended October 31, 1995, sales to one customer, Simac Masic B.V., a European distributor for the Company, represented 17% of net revenues. In addition, direct sales to AMP, Inc. represented 10% of net revenues for fiscal 1995. The Company also realizes substantial additional sales to AMP, Inc. indirectly through other channels, including systems integrators, machine builders and international distributors. SALES, MARKETING AND CUSTOMER SUPPORT The Company sells its products primarily on a direct basis in the United States to end users, system integrators and machine builders. Outside the United States, the Company sells primarily through a network of five distributors covering Europe, Singapore, Taiwan, Korea and Japan. The Company markets its products through appearances at industry trade shows, advertising in industry journals, articles published in industry and technical journals and through direct-selling in specific vertical markets. In addition, the Company's strong customer relationships serve as valuable references. The Company focuses on delivering a high level of value-added applications engineering support to its end user customers through its own in-house applications engineering resources. The Company also provides extensive training opportunities for its customers, either at the Company's facilities or on-site at the customer's facilities. The Company's sales and applications engineering departments are structured along a team concept, with each team having dedicated sales and applications engineering resources. The Company believes this team approach provides it with increased flexibility in responding to customers' needs. The following table sets forth the percentage of the Company's net revenues (including sales delivered through international distributors) by geographic location during the past three years:
YEAR ENDED OCTOBER 31, SIX MONTHS -------------- ENDED APRIL 30, 1993 1994 1995 1996 ---- ---- ---- --------------- North America.............................. 87% 73% 67% 66% Europe..................................... 10% 24% 21% 18% Far East................................... 3% 3% 12% 16%
Substantially all of the Company's export sales are negotiated, invoiced and paid in United States dollars. BACKLOG The Company does not believe backlog is a key indicator of future revenues in the end user machine vision market. PPT VISION products are typically shipped within 30 days after receipt of an order. The Company believes that maintaining as short a time as practical for delivery is a competitive advantage in the end user machine vision market. The nature of the end user machine vision market is that customers do not normally place orders for large multiples of units with scheduled deliveries over many months. Rather, end user machine vision addresses a specific application or problem at a specific manufacturing site. In this environment the Company focuses considerable attention on managing the sales pipeline to ensure that sales targets are achieved. However, the Company has received orders from certain customers with deliveries scheduled throughout fiscal 1996. Product backlog was $2.2 million at April 30, 1996, of which approximately $1.0 million is deliverable in the third quarter of fiscal 1996, as compared with $0.8 million at April 30, 1995, of which $0.7 million was deliverable in the third quarter of fiscal 1995. 23 RESEARCH AND PRODUCT DEVELOPMENT PPT VISION's products are distinguished by the Company's proprietary technology and its significant commitment to research and product development efforts. The Company's research and product development efforts are focused on its five core competencies, including image acquisition, imaging processing, application development software, optics and illumination and vision system integration. The Company believes that the integration of these core competencies is essential to achieving long term success in the machine vision market. The Company's five core competencies can be described as follows: Image Acquisition. This refers to the means and methods by which an image is captured, stored, and then made available for subsequent processing and display. Image acquisition combines the disciplines of photo-optics and electrical engineering. Imaging Processing. This refers to the means and methods whereby an image is analyzed or enhanced to produce some desired information, measurements or results. Image processing combines the disciplines of software engineering, mathematics, algorithm development and electrical engineering to implement efficient solutions to computationally complex problems. Typical image processing tasks include real-time inspection, guidance, gauging and recognition. Application Development Software. This refers to the means and methods whereby a machine vision system is configured and controlled. The development and support of applications development software requires expertise in the disciplines of object-oriented programming, graphical programming environments, man-machine interfaces, device drivers and general software engineering. Optics and Illumination. This refers to the means and methods by which a scene is illuminated and optically presented to an input device such as a video camera. Special optics and illumination techniques are often used to reveal features in an image which would otherwise go undetected or to optimize an image for subsequent processing. Strobed illumination is often used to "freeze" the motion of continuously moving parts. Optics and illumination draw on skills from the disciplines of physics, mechanical engineering and electrical engineering. Vision System Integration. This refers to the means and methods whereby a machine vision system is interfaced to and combined with other factory automation equipment for purposes of creating a complete solution for the customer. This may include material handling for part presentation, mechanical fixturing for mounting camera and lighting components, networking and programmable controllers for process control and reject mechanisms for ejection of defective parts. Various configurations of the Company's products include proprietary design work performed by the Company's employees in each of these five areas. PPT VISION believes that continued and timely development of new products and enhancements to existing product characteristics is essential to maintaining its competitive position. The Company has committed and expects to continue to commit substantial resources to its research and development effort, which plays a significant role in maintaining and advancing its position as a leading provider of complete machine vision systems. The Company's current research and development efforts are directed to increasing performance in image acquisition, image processing and application development software, which could produce systems with greater speed attributes while also providing end users with more expanded software tools. New products currently in development will feature significant enhancements in speed, accuracy and robustness through new proprietary technology. Key software products will enable support for different hardware and user interfaces, as well as increasing the development speed of application specific software tools. The Company also intends to expand its offerings of application specific software tools to the industries it identifies as being poised to exhibit significant growth in demand for machine vision solutions, such as the electronics, semiconductor, pharmaceutical, medical, automotive, consumer products and plastics markets. 24 Research and development expenditures were $0.8 million, $1.1 million, $1.3 million and $0.9 million during the fiscal years ended October 31, 1993, 1994, and 1995, and during the six month period ended April 30, 1996, respectively. MANUFACTURING The Company assembles, configures and tests its products at its suburban Minneapolis facility. The Company's printed circuit boards are custom built by several manufacturers. Most of the components used in the Company's machine vision systems are available off-the-shelf. However, some components are available from only a single supplier or from a limited number of suppliers. The Company typically purchases inventory and builds products in response to quarterly sales forecasts, enabling it to ship products within 30 days after receipt of an order. Much of the Company's product manufacturing, consisting primarily of circuit board manufacturing and assembly and machined parts production, is contracted with outside vendors. Company personnel inspect incoming parts and perform final assembly and testing of finished products. The Company believes that its outsourcing strategy enables it to employ its resources on the key core competency areas from which it derives its competitive advantages. COMPETITION The machine vision industry is highly fragmented. Recent data provided by the AIA show that there were approximately 200 machine vision companies in North America in 1995, of which over 70% had revenues of less than $5 million. Currently, no competitor holds a significant aggregate market share percentage, although some dominate individual niches within the overall machine vision industry. The Company believes that over the next several years, the industry will experience a continuing trend toward consolidation. However, given the application specific nature of the industry, the Company also believes that the machine vision industry will continue to have a relatively large number of competitors. Although the Company believes that its products are unique, competitors offer technologies and systems that are capable of certain of the functions performed by the Company's products. The Company faces competition from a number of companies in the machine vision market, some of which have greater manufacturing and marketing capabilities and greater financial, technological and personnel resources. Certain competitors in this market include the machine vision group of Allen Bradley, the Acuity Imaging division of Robotic Vision Systems, Inc. and Cognex Corporation. Although the Company believes that its current products offer several advantages in terms of speed and ease-of-use and although the Company has attempted to protect the proprietary nature of such products, it is possible that any of the Company's products could be duplicated by other companies in the same general market. There can be no assurances that the Company would be able to compete with similar products produced by a competitor. PATENTS AND TRADEMARKS The Company relies on a combination of patent, copyright, trademark and trade secret laws to establish its proprietary rights in its products. The Company has applied for foreign and domestic patents with respect to several key technologies. One United States patent application has been allowed. Although the Company believes that its patents may have been useful in protecting its proprietary products and may be useful in protecting potential future products, the Company also believes its ability to efficiently develop and sell high performance, cost-effective vision systems on a timely basis, whether patented or not, is more crucial to the Company's future success. The Company requires each of its employees to enter into standard agreements pursuant to which the employee agrees to keep 25 confidential all proprietary information of the Company and to assign to the Company all rights in any proprietary information or technology made or contributed by the employee during his or her employment or made thereafter as a result of any inventions conceived or work done during such employment. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization or to develop similar technology independently. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries. The Company has obtained United States federal registration of its "PPT VISION" trademark and has pending registrations for its "Passport" and "Scout" trademarks. The Company intends to file for federal registration of additional trademarks in the future. Although no assurance can be given as to the strength or scope of the Company's trademarks, the Company believes that its trademarks have been and will be useful in developing and protecting market recognition for its products. EMPLOYEES As of April 30, 1996, the Company had 61 employees, including 22 employees in research and development, 20 in sales and marketing, 14 in manufacturing and 5 in finance and administration. To date, the Company has been successful in attracting and retaining qualified technical personnel, although there can be no assurance that this success will continue. None of the Company's employees are covered by collective bargaining agreements or are members of a union. The Company has never experienced a work stoppage and believes that its relations with its employees are excellent. PROPERTIES The Company leases approximately 28,400 square feet of office and manufacturing space in suburban Minneapolis pursuant to a seven year lease entered into in March 1994. The Company believes that its facilities are adequate for its current operations and that additional space will be available for expansion, if necessary. LEGAL PROCEEDINGS From time to time the Company may be involved in litigation relating to claims arising from its operations in the normal course of business. The Company is not a party to any pending legal proceedings as of the date of this Prospectus. 26 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Joseph C. Christenson.......... 37 President, Director Thomas R. Northenscold......... 38 Chief Financial Officer Larry G. Paulson............... 45 Vice President of Research and Development, Secretary, Director Arye Malek..................... 40 Vice President of Marketing Bruce C. Huber(1)(2)........... 48 Director David C. Malmberg(1)(2)........ 53 Director P. R. Peterson(1)(2)........... 61 Director
- -------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Joseph C. Christenson has been President of the Company since January 1989 and a director since December 1987. Prior to being elected President of the Company, he had been its Chief Operating Officer and Chief Financial Officer from December 1987 to December 1988, General Manager and Chief Financial Officer from August 1986 to November 1987, and financial analyst and marketing manager since joining the Company in May 1985. Mr. Christenson has a Masters in Business Administration from the University of Michigan and a Bachelor of Arts degree from St. Olaf College. Thomas R. Northenscold has been Chief Financial Officer of the Company since February 1995. Prior to that, he had been the Senior Vice President of Operations in the City Directory Division of R.L. Polk and Company, a directory publishing company, from April 1992 to April 1994. Mr. Northenscold was previously employed at Cardiac Pacemakers, Inc., a medical device company, in several finance and operations positions from June 1985 to April 1992. He has a Masters in Business Administration in finance from the University of Michigan and a Bachelor of Science degree from Mankato State University. Larry G. Paulson was a co-founder of the Company and has been Vice President of Research and Development, Secretary and a director of the Company since December 1981. Mr. Paulson is also a Registered Professional Engineer and holds Bachelors and Masters Degrees in Science from the University of Minnesota. Arye Malek has been the Vice President of Marketing of the Company since May 1996. He joined the Company in May 1990 as a Senior Account Manager and became Director of International Operations in November 1992. Mr. Malek holds a Bachelor of Science Degree from the University of Minnesota. Bruce C. Huber is a Managing Director and the Director of Equity Capital Markets at Piper Jaffray Inc., a full service investment bank based in Minneapolis, Minnesota. Mr. Huber has been a director of the Company since September 1985. Mr. Huber is also a director of Computer Petroleum Corporation. David C. Malmberg has been the President of David C. Malmberg, Inc., a consulting and investment management firm, since May 1994. Prior to that time, he served in various capacities with National Computer Systems, Inc., a global data collection services and systems company, including Vice Chairman and President. Mr. Malmberg is Chairman of the Board of National City Bank Corporation in Minneapolis, Minnesota and serves as a director of Three Five Systems, Inc. Mr. Malmberg began serving as a director of the Company in May 1994. 27 P. R. Peterson is the Secretary and a director of Electro-Sensors, Inc., a manufacturer of machine control systems. Mr. Peterson is also a director of Applied Biometrics, Inc. Mr. Peterson is also President of P.R. Peterson Co., Inc., a venture capital firm, and has been active in the venture capital business for over 20 years. Mr. Peterson served as a director from the Company's inception in 1982 to 1985. He was again elected a director of the Company in December 1988 and continues to serve in that capacity. 28 PRINCIPAL SHAREHOLDERS The following table sets forth, as of April 30, 1996, the number of shares of the Company's Common Stock beneficially owned (i) by each director, (ii) by each person known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock and (iii) by all officers and directors as a group. Unless otherwise indicated, each person has sole voting and dispositive power over such shares.
PERCENTAGE OF OUTSTANDING NUMBER SHARES OF SHARES ----------------- NAME OF BENEFICIAL BENEFICIALLY BEFORE AFTER OWNER OWNED(1) OFFERING OFFERING - ------------------ ------------ -------- -------- P. R. Peterson(2)............................... 930,757 25.2% 17.6% ESI Investment Co. 6111 Blue Circle Drive Minnetonka, MN 55343 Bruce C. Huber.................................. 118,444 3.2% 2.2% Larry G. Paulson................................ 95,119 2.6% 1.8% Joseph C. Christenson........................... 80,077 2.2% 1.5% David C. Malmberg............................... 12,450 * * All Officers and Directors as a group (7 persons)......................... 1,274,566 33.9% 23.8%
- -------- (1) The table excludes shares purchasable pursuant to the Company's 1995 Employee Stock Purchase Plan. The table includes options under the Company's 1988 Stock Option Plan exercisable within 60 days of April 30, 1996 in the following amounts: Mr. Peterson, 15,225 shares; Mr. Huber, 15,450 shares; Mr. Malmberg, 6,000 shares; Mr. Paulson, 16,414 shares; Mr. Christenson, 15,750 shares; and all officers and directors as a group, 76,864 shares. (2) ESI Investment Co. is the record owner of 549,084 shares of Common Stock. Mr. Peterson is a controlling shareholder of Electro-Sensors, Inc., the parent company of ESI Investment Co. Mr. Peterson also owns 161,148 shares of Common Stock individually and controls 112,750 shares as trustee of the P. R. Peterson Co. Profit Sharing Trust. He is also a one-third owner of Peterson Brothers Securities Company which owns 92,550 shares of Common Stock in its investment account. 29 DESCRIPTION OF CAPITAL STOCK GENERAL The Company's Articles of Incorporation authorize the issuance of up to 10,000,000 shares of Common Stock, $.10 par value, and up to 10,000,000 shares of Preferred Stock, no par value. As of April 30, 1996, 3,679,717 shares of Common Stock were issued and outstanding and no shares of Preferred Stock were issued and outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote per share. There is no cumulative voting for directors, and holders of Common Stock have no conversion rights and no preemptive or other rights to subscribe for additional securities. Upon liquidation or dissolution, the holders of Common Stock will be entitled to share ratably in all assets available for distribution after the payment or provision for payment of all debts and liabilities and subject to the rights of the holders of Preferred Stock which may be outstanding. Each share of Common Stock is entitled to such dividends as may from time to time be declared by the Board of Directors out of funds legally available therefor. The shares of Common Stock are traded on the Nasdaq National Market under the symbol "PPTV." The outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors of the Company is authorized, without further shareholder action, to issue Preferred Stock in one or more classes or series and to fix the voting power, dividend, redemption rights or privileges, rights on liquidation or dissolution, conversion rights and privileges, sinking or purchase fund rights, and other preferences, privileges and restrictions, of such classes or series. The voting and other rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. OUTSTANDING STOCK OPTIONS As of April 30, 1996, the Company had outstanding options to acquire 235,299 shares of Common Stock awarded pursuant to option plans maintained by the Company. Of this amount, options to purchase 193,936 shares are currently exercisable at exercise prices ranging from $1.00 to $11.33 per share. The Company had reserved as of April 30, 1996 an additional 136,470 shares for future grants under its 1988 Stock Option Plan. The Compensation Committee of the Board of Directors intends to grant options under the 1988 Stock Option Plan to purchase up to an aggregate of 110,000 shares of Common Stock in varying amounts to each of the Company's employees, effective upon consummation of this offering, at an exercise price equal to the Price to Public set forth on the cover page of this Prospectus. ANTI-TAKEOVER PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT Section 302A.671 of the Minnesota Business Corporation Act provides that, unless the acquisition of certain new percentages of voting control of the Company (in excess of 20%, 33 1/3% or 50%) by an existing shareholder or other person is approved by a majority of the shareholders of the Company other than the acquirer (if already a shareholder), the shares acquired above such new percentage level of voting control will not be entitled to voting rights. The Company is required to hold a special 30 shareholders' meeting to vote on any such acquisition within 55 days after the delivery to the Company by the acquirer of an information statement describing, among other things, the acquirer and any plans of the acquirer to liquidate or dissolve the Company and copies of definitive financing agreements for any financing of the acquisition not to be provided by funds of the acquirer. If any acquirer does not submit an information statement to the Company within 10 days after acquiring shares representing a new threshold percentage of voting control of the Company, or if the disinterested shareholders vote not to approve such an acquisition, the Company may redeem the shares so acquired by the acquirer at their market value. Section 302A.671 generally does not apply to a cash offer to purchase all shares of voting stock of the issuing corporation if such offer has been approved by a majority vote of disinterested board members of the issuing corporation. Section 302A.673 of the Minnesota Business Corporation Act restricts certain transactions between the Company and a shareholder who becomes the beneficial holder of 10% or more of the Company's outstanding voting stock (an "interested shareholder") unless a majority of the disinterested directors of the Company have approved, prior to the date on which the shareholder acquired a 10% interest, either the business combination transaction suggested by such a shareholder or the acquisition of shares that made such a shareholder a statutory interested shareholder. If such prior approval is not obtained, the statute imposes a four-year prohibition from the interested shareholder's share acquisition date on mergers, sales of substantial assets, loans, substantial issuances of stock and various other transactions involving the Company and the statutory interested shareholder or its affiliates. In the event of certain tender offers for stock of the Company, Section 302A.675 of the Minnesota Business Corporation Act precludes the tender offeror from acquiring additional shares of stock (including acquisitions pursuant to mergers, consolidations or statutory share exchanges) within two years following the completion of such an offer unless the selling shareholders are given the opportunity to sell the shares on terms that are substantially equivalent to those contained in the earlier tender offer. The Section does not apply if a committee of the Board consisting of all of its disinterested directors (excluding present and former officers of the corporation) approves the subsequent acquisition before shares are acquired pursuant to the earlier tender offer. These statutory provisions could also have the effect in certain circumstances of delaying or preventing a change in the control of the Company. TRANSFER AGENT The transfer agent for the Company's Common Stock is Norwest Bank Minnesota, N.A. 31 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement (a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part), the Underwriters named below (the "Underwriters") through their representatives, Alex. Brown & Sons Incorporated and Piper Jaffray Inc. (the "Representatives"), have severally agreed to purchase from the Company the following number of shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus.
NUMBER OF UNDERWRITER SHARES ----------- --------- Alex. Brown & Sons Incorporated................................ Piper Jaffray Inc.............................................. --------- Total...................................................... 1,600,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of the Common Stock offered hereby if any of such shares are purchased. The Company has been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company has granted to the Underwriters an option, exercisable not later than 30 days from the date of this Prospectus, to purchase up to 240,000 additional shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 1,600,000, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 1,600,000 shares are being offered. The Underwriting Agreement contains covenants of indemnity and contribution between the Underwriters and the Company against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended. 32 The Company, its officers and directors, and ESI Investment Co. and P. R. Peterson Profit Sharing Trust, which are controlled by P. R. Peterson, a director of the Company, have agreed not to offer, sell or otherwise dispose of any additional shares of Common Stock for a period of 90 days after the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated, except that the Company may issue, and grant options to purchase, shares of Common Stock under its existing stock plans. The rules of the Securities and Exchange Commission (the "Commission") generally prohibit the Underwriters and other members of the selling group, if any, from making a market in the Company's Common Stock during the "cooling- off" period immediately preceding the commencement of sales in the offering. The Commission has, however, adopted an exemption from these rules that permits passive market making under certain conditions. These rules permit an Underwriter or other member of the selling group, if any, to continue to make a market in the Company's Common Stock subject to the conditions, among others, that its bid not exceed the highest bid by a market maker not connected with the offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters and other members of the selling group, if any, may engage in passive market making in the Company's Common Stock during the cooling-off period. Bruce C. Huber is a Managing Director and the Director of Equity Capital Markets at Piper Jaffray Inc., one of the Representatives of the Underwriters. Mr. Huber is a Director of the Company. LEGAL MATTERS The validity of the Common Stock offered hereby and certain other legal matters will be passed upon for the Company by Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota and certain legal matters will be passed upon for the Underwriters by Piper & Marbury L.L.P., New York, New York. EXPERTS The financial statements of the Company as of October 31, 1994 and 1995 and for each of the three years in the period ended October 31, 1995 included and incorporated by reference in this Prospectus and in the Registration Statement have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and the Commission's regional offices located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's Common Stock is quoted on the National Market System of the National Association of Securities Dealers Automated Quotations System ("Nasdaq"), and such reports, proxy statements and other information regarding the Company can be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. 33 The Company has filed with the Commission a Registration Statement on Form S- 2 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the shares of Common Stock offered hereby, reference is made to such Registration Statement, copies of which may be inspected in the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and copies of which may be obtained from the Commission upon payment of the prescribed fees. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission pursuant to the Exchange Act are incorporated into this Prospectus by reference: (a) the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995 (which incorporates by reference certain portions of the Company's definitive Proxy Statement for the Company's 1996 Annual Meeting of Shareholders); (b) the Company's Quarterly Reports on Form 10-Q for the quarters ended January 31, 1996 and April 30, 1996; and (c) the Company's Current Report on Form 8-K filed with the Commission on December 19, 1995. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of any such person, a copy of any or all of the documents incorporated herein by reference, other than exhibits to such documents (unless such exhibits are specifically incorporated by reference in such documents). Written requests for such copies should be directed to Thomas R. Northenscold, Chief Financial Officer, PPT Vision, Inc., 10321 West 70th Street, Eden Prairie, Minnesota 55344. Telephone requests may be directed to Thomas R. Northenscold at (612) 996-9500. 34 PPT VISION, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................................ F-2 Income Statements for the Years Ended October 31, 1993, 1994 and 1995 (audited) and for the six months ended April 30, 1995 and 1996 (unaudited)............................................................. F-3 Balance Sheets as of October 31, 1994 and 1995 (audited) and April 30, 1996 (unaudited)........................................................ F-4 Statements of Cash Flows for the Years Ended October 31, 1993, 1994 and 1995 (audited) and for the six months ended April 30, 1995 and 1996 (unaudited)............................................................. F-5 Statements of Shareholders' Equity for the Years Ended October 31, 1993, 1994 and 1995 (audited) and for the six months ended April 30, 1995 and 1996 (unaudited)........................................................ F-6 Notes to Financial Statements............................................ F-7
F-1 To the Board of Directors and Shareholders of PPT Vision, Inc. In our opinion, the accompanying balance sheet and the related statements of income, of cash flows and of shareholders' equity present fairly, in all material respects, the financial position of PPT Vision, Inc. at October 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three fiscal years in the period ended October 31, 1995 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Minneapolis, Minnesota November 22, 1995 except as to Note 12, which is as of April 5, 1996 F-2 PPT VISION, INC. INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS YEAR ENDED OCTOBER ENDED APRIL 31, 30, ---------------------- -------------- 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ (UNAUDITED) Net revenues............................ $5,935 $6,587 $9,750 $3,995 $6,347 Cost of sales........................... 2,539 3,026 4,442 1,887 2,571 ------ ------ ------ ------ ------ Gross profit........................ 3,396 3,561 5,308 2,108 3,776 ------ ------ ------ ------ ------ Expenses: Selling............................... 1,576 1,970 2,279 1,075 1,231 General and administrative............ 550 711 851 359 530 Research and development.............. 831 1,133 1,299 608 888 ------ ------ ------ ------ ------ Total expenses...................... 2,957 3,814 4,429 2,042 2,649 ------ ------ ------ ------ ------ Income (loss) from operations........... 439 (253) 879 66 1,127 Interest income......................... 14 39 61 24 44 Interest expense........................ -- -- (2) (1) (1) Other income (expense).................. (18) 1 2 -- 8 ------ ------ ------ ------ ------ Other income (loss) before taxes........ 435 (213) 940 89 1,178 Income tax benefit...................... -- -- 407 -- -- ------ ------ ------ ------ ------ Net income (loss)................... $ 435 $ (213) $1,347 $ 89 $1,178 ====== ====== ====== ====== ====== Per share data: Net income (loss) per share........... $ 0.13 $(0.06) $ 0.37 $ 0.03 $ 0.31 ====== ====== ====== ====== ====== Weighted average common shares outstanding................... 3,236 3,455 3,650 3,497 3,825 ====== ====== ====== ====== ======
The accompanying notes are an integral part of the financial statements F-3 PPT VISION, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
OCTOBER 31, -------------- APRIL 30, 1994 1995 1996 ------ ------ ---------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents........................ $1,092 $1,235 $1,651 Accounts receivable, net......................... 1,938 2,687 3,060 Inventories...................................... 785 943 1,231 Other current assets............................. 40 47 112 ------ ------ ------ Total current assets........................... 3,855 4,912 6,054 Restricted cash.................................... 213 213 213 Fixed assets, net.................................. 316 501 653 Other assets, net.................................. 65 65 77 Deferred income taxes.............................. 407 407 ------ ------ ------ Total assets................................... $4,449 $6,098 $7,404 ====== ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable................................. $ 462 $ 564 $ 462 Commissions payable.............................. 43 55 54 Accrued expenses................................. 97 162 186 ------ ------ ------ Total current liabilities...................... 602 781 702 Commitments and contingencies Deferred rent.................................... 128 172 172 Shareholders' equity Preferred Stock: authorized 10,000,000 shares; issued and outstanding 87,499, 0 and 0.......... 256 -- -- Common Stock $.10 par value; authorized 10,000,000 shares; issued and outstanding 3,440,485, 3,578,704 and 3,679,717....................................... 344 358 368 Capital in excess of par value................... 11,347 11,668 11,865 Accumulated (deficit)............................ (8,228) (6,881) (5,703) ------ ------ ------ Total shareholders' equity..................... 3,719 5,145 6,530 ------ ------ ------ Total liabilities and shareholders' equity..... $4,449 $6,098 $7,404 ====== ====== ======
The accompanying notes are an integral part of the financial statements F-4 PPT VISION, INC. STATEMENT OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS YEAR ENDED OCTOBER ENDED APRIL 31, 30, --------------------- -------------- 1993 1994 1995 1995 1996 ----- ------ ------ ------ ------ (UNAUDITED) Net income (loss)....................... $ 435 $ (213) $1,347 $ 89 $1,178 Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization......... 115 131 164 66 114 Deferred rent......................... -- 128 44 32 1 Deferred income tax benefit........... -- -- (407) -- -- Change in assets and liabilities: Accounts receivable................... (889) (72) (749) (63) (373) Inventories........................... (188) 9 (158) (96) (288) Other assets.......................... 16 5 (7) 4 (64) Restricted cash....................... -- (213) -- -- -- Accounts payable...................... 29 31 102 22 (103) Commissions payable................... 30 (6) 12 10 -- Accrued expenses...................... 26 (44) 65 (10) 24 ----- ------ ------ ------ ------ Total adjustments................... (861) (31) (934) (35) (689) ----- ------ ------ ------ ------ Net cash provided (used) by operating activities............................. (426) (244) 413 54 489 Cash flows from investing activities: Purchase of fixed assets.............. (84) (194) (349) (122) (279) ----- ------ ------ ------ ------ Net cash used by investing activities... (84) (194) (349) (122) (279) Cash flows from financing activities: Proceeds from issuance of common stock................................ 1,116 548 79 24 206 ----- ------ ------ ------ ------ Net cash provided by financing activities............................. 1,116 548 79 24 206 ----- ------ ------ ------ ------ Net increase in cash and cash equivalents............................ 606 110 143 (44) 416 Cash and cash equivalents at beginning of year................................ 376 982 1,092 1,092 1,235 ----- ------ ------ ------ ------ Cash and cash equivalents at end of period................................. $ 982 $1,092 $1,235 $1,048 $1,651 ===== ====== ====== ====== ======
The accompanying notes are an integral part of the financial statements F-5 PPT VISION, INC. STATEMENT OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
CAPITAL IN COMMON COMMON EXCESS OF PREFERRED PREFERRED ACCUMULATED SHARES STOCK PAR VALUE SHARES STOCK (DEFICIT) --------- ------ ---------- --------- --------- ----------- October 31, 1992........ 2,631,505 $263 $ 9,545 162,499 $475 $(8,450) Stock issued through the exercise of stock options.............. 33,099 3 14 Stock issued through the employee stock purchase plan........ 21,843 2 44 Stock issued through conversion of preferred shares..... 42,856 4 191 (66,667) (195) Stock issued through private placement (net of issue costs). 495,000 50 1,002 Net income............ 435 --------- ---- ------- ------- ---- ------- October 31, 1993........ 3,224,303 322 10,796 95,832 280 (8,015) Stock issued through the exercise of stock options.............. 64,743 6 32 Stock issued through the employee stock purchase plan........ 26,082 3 68 Stock issued through conversion of preferred shares..... 5,357 1 24 (8,333) (24) Stock issued through private placement (net of issue costs). 120,000 12 427 Net Loss.............. (213) --------- ---- ------- ------- ---- ------- October 31, 1994........ 3,440,485 344 11,347 87,499 256 (8,228) Stock issued through the exercise of stock options.............. 65,370 6 37 Stock issued through the employee stock purchase plan........ 16,599 2 35 Stock issued through conversion of preferred shares..... 56,250 6 249 (87,499) (256) Net income............ 1,347 --------- ---- ------- ------- ---- ------- October 31, 1995........ 3,578,704 358 11,668 0 0 (6,881) Stock issued through the exercise of stock options.............. 51,513 5 77 Stock issued through the exercise of warrants. 49,500 5 120 Net income............ 1,178 --------- ---- ------- ------- ---- ------- April 30, 1996 (unaudited).......... 3,679,717 $368 $11,865 0 0 $(5,703) ========= ==== ======= ======= ==== =======
F-6 PPT VISION, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1: ORGANIZATION AND OPERATIONS The Company designs, manufactures, markets and integrates machine vision based automated inspection systems. The systems are used to improve productivity and quality by automating inspection tasks in manufacturing applications such as assembly verification, flaw detection, character verification or measurement tasks. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTS RECEIVABLE Accounts receivable are shown net of allowance for doubtful accounts of $35,000 at October 31, 1995, and $55,000 at October 31, 1994. INVENTORIES Inventories are stated at the lower of cost or market, with costs determined on a first-in, first-out (FIFO) basis. As of October 31, 1994 and 1995, and April 30, 1996 inventories consist of the following:
YEAR ENDED SIX MONTHS OCTOBER 31, ENDED ----------------- APRIL 30, 1994 1995 1996 -------- -------- ---------- (UNAUDITED) Manufactured and purchased parts............ $493,567 $680,919 $1,044,263 Work-in-process............................. 230,924 214,410 114,389 Finished goods.............................. 60,113 47,532 72,104 -------- -------- ---------- Totals.................................. $784,604 $942,861 $1,230,756 ======== ======== ==========
OTHER ASSETS Other assets at October 31, 1994 and 1995 consist of the following:
YEAR ENDED OCTOBER 31, ---------------- 1994 1995 ------- ------- Patent and trademark.................................... $63,307 $70,515 Security deposits....................................... 7,187 192 Investment in related party............................. 52,500 52,500 ------- ------- 122,994 123,207 Less accumulated amortization........................... (57,565) (58,859) ------- ------- Total other assets.................................. $65,429 $64,348 ======= =======
The investment in a related party represents common stock the Company intends to hold as an investment and is recorded at cost. During 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS). No. 115 requires certain investments in debt and equity securities to be recorded at fair market value. No adjustment to market value was recorded as of October 31, 1994 and 1995 as the difference was not material. Patent and trademark costs are amortized over 60 months. F-7 PPT VISION, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FIXED ASSETS Fixed assets consist of furniture, fixtures and equipment, and are stated at cost net of accumulated depreciation. Depreciation is computed for book purposes on a straight-line basis over the estimated useful life of the asset and for tax purposes over five and ten years using accelerated and straight- line methods. At October 31, 1994 and 1995 furniture, fixtures and equipment consisted of the following:
YEAR ENDED OCTOBER 31, ------------------------ 1994 1995 ----------- ----------- Equipment....................................... $ 1,412,187 $ 1,743,291 Furniture and fixtures.......................... 231,584 234,967 ----------- ----------- 1,643,771 1,978,258 Less accumulated amortization................... (1,327,838) (1,477,173) ----------- ----------- Total fixed assets.......................... $ 315,933 $ 501,085 =========== ===========
REVENUE RECOGNITION The Company records sales revenue based on shipment to the customer. RESEARCH AND DEVELOPMENT Expenditures for research and development are expensed as incurred. INCOME TAXES Income taxes are provided on the liability method. Under the liability method, deferred income taxes are provided on the difference in basis of assets and liabilities between financial reporting and tax returns using expected tax rates. INCOME (LOSS) PER SHARE Income per share computations are based on the weighted average number of common shares and common share equivalents outstanding during the year. Common share equivalents consist of convertible preferred stock, options and warrants outstanding during the year. CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand and investments with original maturities of three months or less. Non-cash transactions in 1995 consist of $255,952 related to the conversion of 87,499 preferred shares into 56,250 shares of common stock and $37,514 related to the transfer of long-term assets to inventory. In 1994 non-cash transactions consist of $24,376 related to the conversion of 8,333 preferred shares into 5,357 shares of common stock and $15,345 related to the transfer of long-term assets to inventory. In 1993 non-cash transactions consist of $16,093 related to the transfer of long-term assets to inventory. ESTIMATES BY MANAGEMENT The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 PPT VISION, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of management, PPT Vision, Inc. has made all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of the financial condition of the Company as of April 30, 1996 and the results of operations and cash flows for the six-month periods ended April 30, 1995 and 1996, as presented in the accompanying unaudited financial statements. NOTE 3: CUSTOMER INFORMATION SIGNIFICANT CUSTOMER INFORMATION During 1995, revenue from one customer accounted for 17% of net revenues. During 1994 and 1993, revenue from another customer accounted for 10% and 18% of net revenues respectively. CUSTOMER GEOGRAPHIC DATA North American and export sales as a percentage of net revenues in 1993, 1994 and 1995 are as follows:
YEAR ENDED OCTOBER 31, ---------------- 1993 1994 1995 ---- ---- ---- North America.............................................. 87% 73% 67% Europe..................................................... 10% 24% 21% Far East................................................... 3% 3% 12%
NOTE 4: ACCRUED EXPENSES Accrued expenses at October 31, 1994 and 1995 include:
YEAR ENDED OCTOBER 31, ---------------- 1994 1995 ------- -------- Vacation................................................ $30,152 $ 30,152 Employee Stock Purchase Plan payroll deductions......... 33,813 33,053 Compensation............................................ 0 68,257 Other................................................... 32,913 30,820 ------- -------- Total............................................... $96,878 $162,282 ======= ========
NOTE 5: PREFERRED STOCK In 1985, the Company issued a total of 166,666 shares of Series 1985 Convertible Preferred shares ("Series 1985 Shares"). As of October 31, 1995, all the Company's Series 1985 Shares had been converted to common stock. NOTE 6: COMMON STOCK OPTIONS AND WARRANTS Under the Company's 1988 Stock Option Plan the Company may issue options to purchase up to 600,000 shares of common stock to employees and directors. Options are granted at prices equal to the average of the bid and ask prices on the date of the grant. The granting of options and their vesting is within the discretion of the Company's Board of Directors. F-9 PPT VISION, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) A summary of stock options issued and outstanding under the 1988 Stock Option Plan is as follows:
NUMBER OF SHARES ------------------------ EMPLOYEE DIRECTOR OPTIONS OPTIONS ----------- ----------- Balance at October 31, 1992........................... 234,847 27,450 Granted............................................. 57,750 3,000 Exercised........................................... (33,099) (12,000) ----------- ----------- Balance at October 31, 1993........................... 259,498 18,450 Granted............................................. 71,250 39,000 Exercised........................................... (64,743) 0 Forfeited........................................... (1,462) 0 ----------- ----------- Balance at October 31, 1994........................... 264,543 57,450 Granted............................................. 22,125 0 Exercised........................................... (63,870) (1,500) Forfeited........................................... (4,687) 0 ----------- ----------- Balance at October 31, 1995........................... 218,111 55,950 =========== =========== As of October 31, 1995: Price Range of Outstanding Options Options........................................... $1.00-$6.33 $1.67-$4.00 Expiration Dates.................................. 1996-2000 1996-1999 Options Exercisable............................... 164,077 29,175
During the year ended October 31, 1995, stock options were exercised at prices of $0.44 to $3.59 per share under the Employee Stock Option Plan. In April of 1993, the Company issued a warrant to purchase 49,500 shares of common stock with an exercise price of $2.50 and an expiration date of April of 1996. NOTE 7: STOCK OFFERINGS In February of 1994, the Company completed a private equity placement, issuing 120,000 shares of common stock at $3.66 per share, that raised $438,365 net of offering costs of $1,635. NOTE 8: EMPLOYEE STOCK PURCHASE PLAN In March 1995 shareholders approved the adoption of the 1995 Employee Stock Purchase Plan to replace the 1990 Employee Stock Purchase Plan which expired in 1995. Under the terms of the 1995 Purchase Plan, 225,000 shares have been reserved for issuance under the Plan. The first phase of the Plan began on June 1, 1995 and employees were granted the right to purchase 29,925 shares at $2.19 per share under the Plan. Phase five of the 1990 Plan ended on May 31, 1995 and employees purchased 16,599 shares at $2.19 per share. F-10 PPT VISION, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 9: COMMITMENTS & CONTINGENCIES Rental expense under operating leases was $163,100, $162,823 and $97,960 in 1995, 1994 and 1993 respectively. Minimum future rental payments due under noncancelable operating lease agreements are as follows: 1996............................ $156,048 1997............................ 179,688 1998............................ 184,416 1999............................ 189,198 Thereafter...................... 262,436 -------- Total....................... $971,786 ========
LETTER OF CREDIT During 1994 the Company obtained a standby letter of credit for a security deposit related to the Company's building lease. The letter of credit is secured by the restricted cash balance of $212,792. Beginning in June 1996 the restricted cash balance begins to decrease on a dollar for dollar basis as rental payments are made. NOTE 10: EMPLOYEE SAVING PLAN The Company provides a supplementary retirement savings plan which is structured in accordance with Section 401(k) of the Internal Revenue Code. Employees eligible for the Plan may contribute from one to fifteen percent of their monthly earnings on a pre-tax basis subject to annual contribution limitations. The Company makes matching contributions of fifty cents for each dollar contributed by each Plan participant up to a maximum of $750 annually. The Company's contributions under this program were approximately $30,876, $26,407 and $14,620 for the years ended October 31, 1995, 1994 and 1993 respectively. NOTE 11: INCOME TAXES No current tax provisions were recorded in the fiscal years ended October 31, 1995 and 1994 due to the utilization of net operating loss (NOL) carry forwards. The deferred tax provisions of approximately $36,000 and $60,000 for the years ended October 31, 1995 and 1994, respectively, are offset by reductions in the valuation allowance. At October 31, 1995, the Company has approximately $6.6 million of combined loss carry forwards and net deductible temporary differences available to offset taxable income in future periods. The $6.6 million of future tax deduction is comprised of net operating loss carry forwards for tax return purposes of approximately $5.9 million (expiring in fiscal 1999 to 2009) and net deductible temporary differences available to offset taxable income in future periods of approximately $700,000. The Company also has approximately $340,000 of research and development tax credit carry forwards which generally expire over the same time period. At existing tax rates, the future tax benefit approximates $2.6 million for financial statement purposes. The utilization of the operating loss carry forwards and net deductible temporary differences to offset future tax liabilities is dependent upon the Company's ability to generate sufficient taxable income during the carry forward periods. The carry forwards are also subject to certain annual limitations pursuant to IRS Code Section 382. A valuation allowance was established for the entire net tax benefit associated with all carry forwards and temporary differences at October 31, 1994. At October 31, 1995, a reduction to the valuation allowance was recorded because future realization of a portion of this benefit is expected. F-11 PPT VISION, INC. NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) An analysis of the effective rate on earnings and a reconciliation of the expected federal statutory rate for the years ended October 31, 1994, and 1995 is as follows:
1994 1995 -------- ---------- Expected tax provision at statutory rate.......... $(72,000) $ 320,000 State income tax provision, net of federal tax effect........................................... (13,000) 56,000 Research and development credit................... 17,000 17,000 Increase/(utilization) of net operating loss carry forward.......................................... 66,000 (397,000) (Reduction) of valuation allowance................ 0 (407,000) Other............................................. 2,000 4,000 -------- ---------- Total......................................... $ 0 $ (407,000) ======== ==========
Deferred tax assets (liabilities) are comprised of the following at October 31:
1994 1995 ----------- ----------- Depreciation.................................... $ 90,000 $ 102,000 Deferred rent................................... 51,000 69,000 Other........................................... 88,000 94,000 Net operating loss carry forwards............... 2,794,000 2,361,000 Valuation allowance............................. (3,023,000) (2,219,000) ----------- ----------- Net deferred tax asset.......................... $ 0 $ 407,000 =========== ===========
NOTE 12: SUBSEQUENT EVENTS On March 14, 1996, the Board of Directors of PPT Vision, Inc. approved a three-for-two stock split in the form of a fifty percent (50%) stock dividend. The distribution of shares was made on April 5, 1996 to shareholders of record as of March 25, 1996. All historical share and per share data included in the financial statements and footnotes have been restated to reflect the stock split. F-12 Market Driven Application Specific Software Tools The ability to develop software tools for a steady stream of new applications to run on proven hardware is a company strength. Recognizing expanding markets and reacting with software tools like those described here positions PPT VISION for growth. This is evident in electronic component manufacturing and precision metal stamping. All PPT VISION systems run on proprietary software in a Microsoft(R) Windows(TM) environment using the Company's Vision Program Manager (VPM) icon-based graphical user interface. [Below this description is a photo of the Company's Vision Program Manager screen] [Next to the heading "Connector Tool" is a photo of a part and a photo of an icon with the following related text:] Connector Tool Problem: A multi-national manufacturer of electronic connectors sought an automated solution for pin tip position of assembled connectors. Solution: PPT VISION responded by creating the Connector Tool. The Connector Tool checks the conformance of an entire array of pin tips to a series of user defined criteria. These criteria include grid conformance, linear regression and linear progression, providing comprehensive pin tip position inspection. Grid conformance verifies that each pin tip is within a specified radial distance from its calculated ideal position. Linear regression ensures that each row of pins is both parallel to all other rows and is itself straight. Linear progression is used to verify all pin-to-pin distances. The Connector Tool can also inspect connectors that are too long for a single field-of-view by "stitching" multiple images together. [Next to the heading "Line Gauge Tool" is a photo of a part and a photo of an icon with the following related text:] Line Gauge Tool Problem: A manufacturer of stamped metal parts wanted to monitor a number of critical physical dimensions of the parts as they were fabricated in a high- speed metal stamping operation. Solution: PPT VISION designed the Line Gauge Tool to provide a means of making multiple independent measurements between selected points on the image. Up to sixteen separate gauging lines can be drawn in a single instance of this tool, with multiple Line Gauge Tools available in every program. Once the initial edges have been detected, the tool examines a small neighborhood around selected measurement endpoints to determine the location of the detected edges to subpixel accuracy. The tool will pass only if the distance measured between the detected edges is within user-specified tolerances. The measured distances are available as output data from the tool. [Next to the heading "OCV Tool" is a photo of a part and a photo of an icon with the following related text:] OCV Tool Problem: High speed inspection and verification of printed alphanumeric characters is required by many industries including pharmaceutical, medical, electronics and automotive. New regulations require 100%, on-line verification of the date/lot codes printed on pharmaceutical packaging labels. Solution: PPT VISION's Optical Character Verification (OCV) Tool was designed specifically for alphanumeric character inspection and verification. The tool inspects both printed characters and background areas, and not only verifies that the correct code has been printed, but it inspects the print quality of the characters themselves. Once the tool is set up, an operator can easily retrain it on a new character string using VPM's control panels. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPEC- TUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 5 Use of Proceeds........................................................... 8 Price Range of Common Stock............................................... 8 Dividend Policy........................................................... 8 Capitalization............................................................ 9 Selected Financial Data................................................... 10 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 11 Business.................................................................. 17 Management................................................................ 27 Principal Shareholders.................................................... 29 Description of Capital Stock.............................................. 30 Underwriting.............................................................. 32 Legal Matters............................................................. 33 Experts................................................................... 33 Available Information..................................................... 33 Incorporation of Certain Documents by Reference........................... 34 Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1,600,000 Shares [PPT VISION, INC. LOGO] Common Stock ------------ PROSPECTUS ------------ Alex. Brown & Sons INCORPORATED Piper Jaffray Inc. , 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION SEC registration fee............................................ $10,945 NASD filing fee................................................. 3,674 Nasdaq listing fee.............................................. 17,500 Accounting fees and expenses.................................... 25,000* Legal fees and expenses......................................... 60,000* Printing expenses............................................... 40,000* Blue Sky fees and expenses (including legal fees)............... 10,000* Transfer agent and registrar fees............................... 5,000* Miscellaneous................................................... 27,881* -------- Total....................................................... $200,000* ========
- -------- *Except for the SEC registration fee, NASD filing fee and Nasdaq listing fee, all of the foregoing expenses have been estimated. ITEM 15: INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 302A.521 of Minnesota Statutes requires the Registrant to indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person with respect to the Registrant, against judgments, penalties, fines, including reasonable expenses, if such person (1) has not been indemnified by another organization or employee benefit plan for the same judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys' fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions; (2) acted in good faith; (3) received no improper personal benefit, and statutory procedure has been followed in the case of any conflict of interest by a director; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) in the case of acts or omissions occurring in the person's performance in the official capacity of director or, for a person not a director, in the official capacity of officer, committee member or employee, reasonably believed that the conduct was in the best interests of the Registrant, or, in the case of performance by a director, officer or employee of the Registrant as a director, officer, partner, trustee, employee or agent of another organization or employee benefit plan, reasonably believed that the conduct was not opposed to the best interests of the Registrant. In addition, Section 302A.521, subd. 3, requires payment by the Registrant, upon written request, of reasonable expenses in advance of final disposition in certain instances. A decision as to required indemnification is made by a disinterested majority of the Board of Directors present at a meeting at which a disinterested quorum is present, or by a designated committee of the Board, by special legal counsel, by the shareholders or by a court. The Registrant's Bylaws provide for indemnification of officers, directors and employees to the fullest extent permitted by Minnesota law as it may be amended from time to time. As permitted by Section 302A.251 of the Minnesota Business Corporation Act, the Restated Articles of Incorporation of the Registrant eliminate the liability of the directors of the Registrant for monetary damages arising from any breach of fiduciary duties as a member of the Registrant's Board of Directors (except as expressly prohibited by Minnesota Statutes, Section 302A.251, subd. 4). II-1 ITEM 16. EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 4.1 Restated Articles of Incorporation, incorporated by reference from Exhibit 3.1 of the Registrant's Form 10-K for the fiscal year ended October 31, 1989. 4.2 Bylaws, as amended, incorporated by reference from Exhibit 3.2 of the Registrant's Form 10-K for the Fiscal year ended October 31, 1988. 5.1 Opinion and Consent of Lindquist & Vennum P.L.L.P., counsel to the Company. 10.1 Lease Agreement dated February 11, 1993 for facilities at 10321 West 70th Street, Eden Prairie, Minnesota, incorporated by reference from Exhibit 10.3 of the Registrant's Form 10-K for the fiscal year ended October 31, 1993. 10.2 1988 Stock Option Plan, incorporated by reference from Exhibit 10.4 of the Registrant's Form 10-K for the Fiscal Year ended October 31, 1993. 10.3 1995 Employee Stock Purchase Plan. 10.4 Employment Agreement with Joseph C. Christenson dated as of May 7, 1984. 10.5 Employment Agreement with Larry G. Paulson dated as of February 1, 1984. 10.6 Employment Agreement with Tom Northenscold dated as of February 27, 1995. 10.7 Employment Agreement with Arye Malek dated as of May 1, 1990. 23.1 Consent of Price Waterhouse LLP. 23.2 Consent of Lindquist & Vennum P.L.L.P. (included in Exhibit 5.1 to the Registration Statement). 24 Power of Attorney (included in the signature page of the Registration Statement).
ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions of the Minnesota Business Corporations Act, the Restated Articles of Incorporation or Bylaws of the Registrant or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Eden Prairie, State of Minnesota, on the 15th day of May, 1996. PPT VISION, INC. /s/ Joseph C. Christenson By __________________________________ Joseph C. Christenson, President POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Joseph C. Christenson and Thomas R. Northenscold, and each of them (with full power to act alone), such person's true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for such person and in such person's name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, as well as any related registration statement (or amendment thereto) filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933 with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as such person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons on May 15, 1996 in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ Joseph C. Christenson President and Director ____________________________________ (principal executive Joseph C. Christenson officer) /s/ Thomas R. Northenscold Chief Financial Officer ____________________________________ (principal financial and Thomas R. Northenscold accounting officer) /s/ Larry G. Paulson Director ____________________________________ Larry G. Paulson /s/ Bruce C. Huber Director ____________________________________ Bruce C. Huber /s/ David C. Malmberg Director ____________________________________ David C. Malmberg /s/ P. R. Peterson Director ____________________________________ P. R. Peterson
II-3 EXHIBIT INDEX
EXHIBIT PAGE NO. DESCRIPTION NO. ------- ----------- ---- 1.1 Form of Underwriting Agreement............................... 4.1 Restated Articles of Incorporation, incorporated by reference from Exhibit 3.1 of the Registrant's Form 10-K for the fiscal year ended October 31, 1989 4.2 Bylaws, as amended, incorporated by reference from Exhibit 3.2 of the Registrant's Form 10-K for the Fiscal year ended October 31, 1988 5.1 Opinion and Consent of Lindquist & Vennum P.L.L.P., counsel to the Company............................................... 10.1 Lease Agreement dated February 11, 1993 for facilities at 10321 West 70th Street, Eden Prairie, Minnesota, incorporated by reference from Exhibit 10.3 of the Registrant's Form 10-K for the fiscal year ended October 31, 1993 10.2 1988 Stock Option Plan, incorporated by reference from Ex- hibit 10.4 of the Registrant's Form 10-K for the Fiscal Year ended October 31, 1993 10.3 1995 Employee Stock Purchase Plan............................ 10.4 Employment Agreement with Joseph C. Christenson dated as of May 7, 1984.................................................. 10.5 Employment Agreement with Larry G. Paulson dated as of Febru- ary 1, 1984.................................................. 10.6 Employment Agreement with Tom Northenscold dated as of Febru- ary 27, 1995................................................. 10.7 Employment Agreement with Arye Malek dated as of May 1, 1990. 23.1 Consent of Price Waterhouse LLP.............................. 23.2 Consent of Lindquist & Vennum P.L.L.P. (included in Exhibit 5.1 to the Registration Statement) 24 Power of Attorney (included in the signature page of the Reg- istration Statement)
EX-1.1 2 FORM OF UNDERWRITING AGREEMENT Exhibit 1.1 1,600,000 Shares PPT VISION, INC. Common Stock ($.10 Par Value) UNDERWRITING AGREEMENT ---------------------- ___________, 1996 Alex. Brown & Sons Incorporated Piper Jaffray Inc. As Representatives of the Several Underwriters c/o Alex. Brown & Sons Incorporated 135 East Baltimore Street Baltimore, Maryland 21202 Gentlemen: PPT Vision, Inc., a Minnesota corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of 1,600,000 shares of the Company's Common Stock, $.10 par value (the "Firm Shares"). The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to sell at the Underwriters' option an aggregate of up to 240,000 additional shares of the Company's Common Stock (the "Option Shares") as set forth below. The shares of Common Stock, $.10 par value per share, of the Company are hereinafter referred to as the "Common Stock." As the Representatives, you have advised the Company (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. --------------------------------------------- The Company represents and warrants to each of the Underwriters as follows: (a) A registration statement on Form S-2 (File No. 333-_____) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended, (the "Act") and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. The Company has complied with the conditions for the use of Form S- 2. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Any reference herein to the Registration Statement, any Preliminary Prospectus or to the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rules 424(b) and 430A, and prior to the termination of the offering of the Shares by the Underwriters. (b) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Minnesota, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification. The Company has no subsidiaries, direct or indirect. (c) The outstanding shares of Common Stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated -2- herein will be validly issued, fully-paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. (d) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof continued in the Registration Statement. The form of certificates for the Shares conforms to the corporate law of the jurisdiction of the Company's incorporation. (e) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform to the requirements of the Act and the Rules and Regulations. The documents incorporated by reference in the Prospectus, at the time filed with the Commission conformed, in all respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the Act, as applicable, and the rules and regulations of the Commission thereunder. The Registration Statements and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (f) The financial statements of the Company, together with related notes and schedules as set forth or incorporated by reference in the Registration Statement, present fairly the financial position and the results of operations of the Company, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed herein, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data included or incorporated by reference in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. -3- (g) Price Waterhouse LLP, who have certified certain of the financial statements filed with the Commission as part of, or incorporated by reference in, the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (h) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company before any court or administrative agency or otherwise which, if determined adversely to the Company, might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company or to prevent the consummation by the Company of the transactions contemplated hereby, except as set forth in the Registration Statement. (i) The Company has good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company occupies its leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. (j) The Company has filed all Federal, State, local and foreign income tax returns which have been required to be filed and has paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due. All tax liabilities have been adequately provided for in the financial statements of the Company. (k) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Company has no material contingent obligations which are not disclosed in the Company's financial statements which are included in the Registration Statement. (l) The Company is not, and with the giving of notice or lapse of time or both will not be, in violation of or default under its Articles of Incorporation or By-Laws, each as amended, or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it or any of its properties is bound and which default is of material significance in respect of the condition, financial or otherwise, of the Company or the business, management, properties, asset, rights, operations, condition (financial and otherwise) or -4- prospects of the Company. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company is a party, or of the Articles of Incorporation or By-Laws of the Company, each as amended, or any order, rule or regulation applicable to the Company of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (m) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (n) The Company holds all material licenses, certificates and permits from governmental authorities which are necessary to the conduct of its business; and the Company has not infringed any patents, patent rights, trade names, trademarks or copyrights, which infringement is material to the business of the Company. The Company knows of no material infringement by others of patents, patent rights, trade names, trademarks or copyrights owned by or licensed to the Company. (o) The Common Stock of the Company is designated on the National Association of Securities Dealers Automated Quotations National Market System. (p) To the Company's knowledge, there are no affiliations or associations between any member of the NASD and any of the Company's officers, directors or 5% or greater security holders, except as set forth in the Registration Statement or as otherwise disclosed in writing to the Representatives. (q) Neither the Company, nor to the Company's knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. (r) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations of the Commission thereunder. (s) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to -5- maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (t) The Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaged in similar industries. (u) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension Plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (v) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business with Cuba and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. ---------------------------------------------- (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $_______ per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. (b) Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds by certified or bank cashier's checks drawn to the order of the Company against delivery of certificates therefor to the Representatives for the several accounts of the -6- Underwriters. Such payment and delivery are to be made at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland, at 10:00 A.M., Baltimore time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and are not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date. (c) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is two or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company against delivery of certificates therefor at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland. 3. OFFERING BY THE UNDERWRITERS. ---------------------------- It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The -7- Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY. ------------------------ The Company covenants and agrees with the several Underwriters that: (a) The Company will (i) use its best efforts to cause the Registration Statement to become effective or, if the procedures in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, (ii) not file any amendment to the Registration Statement or supplement to the Prospectus or document incorporated by reference therein of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations and (iii) file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters. (b) The Company will advise the Representatives promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. -8- (d) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may be reasonably requested), including documents incorporated by reference therein, and of all amendments thereto, as the Representatives may reasonably request. (e) The Company will comply with the Act and the Rules and Regulations and the Exchange Act, and the rules and regulations promulgated thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will either (i) prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus or (ii) prepare and file with the Commission an appropriate filing under the Exchange Act which shall be incorporated by reference in the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with law. (f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (g) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. -9- (h) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company, or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock or agreement for such will be made for a period of 90 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of Alex. Brown & Sons Incorporated except that the Company may, without such consent, issue options and shares pursuant to the Company's 1988 Stock Option Plan and 1995 Employee Stock Purchase Plan, each as described in the Registration Statement. (i) The Company has caused each officer and director of the Company and ESI Investment Co. and P.R. Peterson Profit Sharing Trust to furnish to you, on or prior to the date of this Agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to offer, sell, sell short or otherwise dispose of any shares of Common Stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for shares of Common Stock or derivative of shares of Common Stock owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 90 days after the date of this Agreement, directly or indirectly, except with the prior written consent of Alex. Brown & Sons Incorporated. (j) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus. (k) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such manner as would require the Company to register as an investment company under the 1940 Act. (l) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (m) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. COSTS AND EXPENSES. ------------------ The Company will pay all costs, expenses and fees incident to the performance of its obligations under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters' Invitation Letter, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including legal fees and disbursements incident to securing any required review by the NASD of the terms of the sale of -10- the Shares, the Listing Fee of the Nasdaq Stock Market, and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. The Company agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of directed shares of the Common Stock by the Underwriters to employees and persons having business relationships with the Company. The Company shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification under NASD regulations and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied or because this Agreement is terminated by the Representatives pursuant to Section 11 hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on its part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. --------------------------------------------- The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any written request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable request. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Lindquist & Vennum P.L.L.P., counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to -11- the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Minnesota, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Company. (ii) The Company has authorized and outstanding capital stock as set forth in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; the outstanding shares of the Company's Common Stock have been duly authorized and validly issued and are fully paid and non-assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form filed with the Commission, are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person who has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. -12- (v) The Registration Statement, the Prospectus and each amendment or supplement thereto and all documents incorporated by reference therein comply as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules included or incorporated by reference therein). The conditions for the use of Form S-2 set forth in the General Instructions thereto, have been satisfied. (vi) The statements under the captions "Business--Patent and Trademarks," and "Description of Capital Stock" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to or incorporated by reference in the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed, incorporated by reference or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company, except as set forth in the Prospectus. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Articles of Incorporation or By-Laws of the Company, each as amended, or any agreement or instrument known to such counsel to which the Company is a party or by which the Company may be bound. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The execution and delivery of this Agreement and the consummation by the Company of the transactions contemplated thereby will not violate any law of the United States or the State of Minnesota, any rule or regulation of any governmental authority or regulatory body of the United States of the State of Minnesota, or any judgment, order or -13- decree known to us and applicable to the Company of any court or governmental authority (other than laws, rules and regulations of the NASD or State securities and Blue Sky laws as to which such counsel need express no opinion). (xiii) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act, and the rules and regulations of the Commission thereunder. In rendering such opinion Lindquist & Vennum P.L.L.P. may rely as to matters governed by the laws of states other than Minnesota or Federal laws on local counsel in such jurisdictions, provided that in each case Lindquist & Vennum P.L.L.P. shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Lindquist & Vennum P.L.L.P. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received from Piper & Marbury L.L.P., counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii), (iii), (iv), (v) and (ix) of Paragraph (b) of this Section 6, and that the Company is a validly organized and validly existing corporation under the laws of the State of Minnesota. In rendering such opinion Piper & Marbury L.L.P. may rely as to all matters governed other than by the laws of the State of Maryland or Federal laws on the opinion of counsel referred to in paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of -14- the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of material fact or omitted to state a material fact, necessary in order to make the statements, in light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Piper & Marbury L.L.P. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representatives shall have received at or prior to the Closing Date from Piper & Marbury L.L.P. a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (e) The Representatives shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of Price Waterhouse LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to the Underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and Prospectus. (f) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company, on behalf of the Company, to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission. (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be. (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made. -15- (iv) Such officer has carefully examined the Registration Statement and the Prospectus and, in such officer's opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement, including any document incorporated by reference therein, were true and correct, and such Registration Statement and Prospectus or any document incorporated by reference therein did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and, since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment. (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company, whether or not arising in the ordinary course of business. (g) The Company shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (h) The Firm Shares, and Option Shares, if any, have been approved for designation upon notice of issuance on the Nasdaq Stock Market. (i) The Lockup Agreements described in Section 4(i) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Piper & Marbury L.L.P., counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. -------------------------------------------- The obligations of the Company to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the -16- Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. --------------- (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages or liabilities to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding and expenses reasonably incurred in responding to a subpoena or governmental inquiry whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue -17- statement or omission or alleged omission has been made or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder -18- (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 8(c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. -19- (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. DEFAULT BY UNDERWRITERS. ----------------------- If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), you, as Representatives of the Underwriters, shall use your best efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on -20- the part of the non-defaulting Underwriters or of the Company except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. ------- All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered or telegraphed and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention: Peter M. McGowan, Managing Director; with a copy to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention: General Counsel; if to the Company, to PPT Vision, Inc. 10321 West 70th Street, Eden Prairie, Minnesota 55344, Attention: Joseph C. Christenson, President. 11. TERMINATION. ----------- This Agreement may be terminated by you by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares, (iii) suspension of trading in securities on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely -21- affect the business or operations of the Company, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of trading of the Company's Common Stock by the Commission on the Nasdaq Stock Market or (viii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. This Agreement also may be terminated by you, by notice to the Company, as to any obligation of the Underwriters to purchase the Option Shares, upon the occurrence at any time prior to the Option Closing Date of any of the events described in subparagraph (b) above or as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. ---------- This Agreement has been and is made solely for the benefit of the Underwriters and the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. ------------------------------------ The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus. 14. MISCELLANEOUS. ------------- The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -22- This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, PPT VISION, INC. By: _____________________________ Joseph C. Christenson, President -23- The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. ALEX. BROWN & SONS INCORPORATED PIPER JAFFRAY INC. As Representatives of the several Underwriters listed on Schedule I By ALEX. BROWN & SONS INCORPORATED By:_________________________________ Authorized Officer -24- SCHEDULE I Schedule of Underwriters Number of Firm Shares Underwriter to be Purchased ----------- --------------------- Alex. Brown & Sons Incorporated Piper Jaffray Inc. _______________ Total -25- EX-5.1 3 OPINION AND CONSENT OF LINDQUIST & VENNUM P.L.L.P. [LETTERHEAD OF LINDQUIST & VENNUM P.L.L.P] Exhibit 5.1 May 14, 1996 PPT Vision, Inc. 10321 West 70th Street Eden Prairie, MN 55344 Re: Registration Statement on Form S-2 Ladies and Gentlemen: In connection with the Registration Statement on Form S-2 to be filed by PPT Vision, Inc. (the "Company") with the Securities and Exchange Commission on May 15, 1996, relating to a public offering of 1,600,000 shares of Common Stock, $.10 par value ("Common Stock"), to be offered by the Company (plus up to an additional 240,000 shares of the Company's Common Stock to be offered if the Underwriters exercise in full their over-allotment option), please be advised that as counsel to the Company, upon examination of such corporate documents and records as we have deemed necessary or advisable for the purposes of this opinion, it is our opinion that: 1. The Company is a validly existing corporation in good standing under the laws of the State of Minnesota. 2. The shares of Common Stock being offered by the Company, when issued and paid for as contemplated by the Registration Statement, will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to our firm under the heading "Legal Matters" in the Prospectus comprising a part of the Registration Statement. Very truly yours, /s/ Lindquist & Vennum P.L.L.P. LINDQUIST & VENNUM P.L.L.P. EX-10.3 4 1995 EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.3 PPT VISION, INC. 1995 EMPLOYEE STOCK PURCHASE PLAN Section 1 Purpose ------- The purpose of this Employee Stock Purchase Plan is to provide a greater community of interest between PPT Vision, Inc. shareholders and its employees, and to facilitate purchase by employees of additional shares of stock in the Company. It is believed the Plan will encourage employees to remain in the employ of the Company and will also permit the Company to compete with other corporations offering similar plans in obtaining and retaining the services of competent employees. It is intended that options issued pursuant to this Plan shall constitute options issued pursuant to an "Employee Stock Purchase Plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Section 2 Definitions ----------- A. "Plan" means the 1995 PPT Vision, Inc. Employee Stock Purchase Plan. B. "Code" means the Internal Revenue Code of 1986, as amended. C. "Company" means Pattern Processing Technologies, Inc., and any of its subsidiaries (as that term is defined by Section 425(f) of the Code) to which PPT Vision, Inc. and such respective subsidiaries by action of their Boards of Directors shall make this Plan applicable. D. "Employee" means any person, including an officer, who is customarily employed twenty (20) hours or more per week and more than five (5) months in a calendar year by the Company. E. "Eligible Employee" means an Employee of the Company who is eligible for participation in the Plan in accordance with Section 4. F. "Participant" means an Eligible Employee who has elected to participate in the Plan in accordance with Section 5. G. "Committee" means the committee provided for in Section 11. H. The "Commencement Date" of the Plan means June 1, 1995 or such other date established by the Committee. I. "Base Pay" means regular straight time earnings annualized as of the date of commencement of a phase excluding payments, if any, for overtime, incentive compensation, incentive payments, premiums, bonuses, and any other special remuneration. J. "Termination Date" shall mean the earlier of (i) the day immediately preceding the one year anniversary of the commencement of a particular phase of the Plan, or (ii) the effective date of any merger or consolidation in which the Company is not the surviving corporation. K. "Shares" shall mean common shares of the Company of the par value of $.10, subject to adjustments which may be made in accordance with Sections 16 and 17. Section 3 Term and Phases of the Plan --------------------------- A. The Plan will commence on the Commencement Date and will terminate five (5) years thereafter. Notwithstanding the foregoing, this Plan shall be considered of no force or effect and any options granted shall be null and void unless the shareholders of the Company approve the Plan within twelve (12) months before or after the date of its adoption by the Board of Directors. B. The Plan shall be carried out in five (5) phases, each phase being for a period of one year, or such other length of time as made be determined by the Committee. No phases shall run concurrently. A phase may commence immediately after the termination of the preceding phase. The commencement of each phase shall be determined by the Committee, provided that the commencement of the first phase shall be within twelve (12) months before or after the date of approval of the Plan by the shareholders of the Company. In the event all of the stock reserved for grant of options hereunder is issued pursuant to the terms hereof prior to the commencement of one or more phases scheduled by the Committee or the number of shares remaining is so small, in the opinion of the Committee, as to render administration of any succeeding phase impracticable, such phase or phases shall be cancelled. Phases shall be numbered successively as Phase 1, Phase 2, Phase 3, Phase 4 and Phase 5. 2 Section 4 Eligibility ----------- A. Any Employee of the Company who has completed at least two (2) weeks of continuous service on or prior to the commencement of a phase of the Plan shall be eligible to participate in the Plan, subject to the limitations imposed by Section 423 of the Code. B. Any Employee who is a member of the Board of Directors of the Company shall be eligible to participate in the Plan. C. Notwithstanding any provision of the Plan to the contrary, no Employee shall be granted an option: 1. If such Employee, immediately after the option is granted, owns shares possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or a parent or a subsidiary of the Company. For purposes of determining share ownership, the rules of Section 425(d) of the Code shall apply, and shares which the Employee may purchase under outstanding options shall be treated as shares owned by the Employee; or 2. Which permits the Employee to purchase shares under such plans of the Company or a parent or a subsidiary of the Company to accrue at a rate which exceeds $25,000 of the fair market value of such shares (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. Section 5 Participation ------------- A. An Eligible Employee may elect to enroll as and become a Participant in any phase of the Plan by completing a payroll deduction authorization on the form provided by the Company and filing it with the personnel office at least seven (7) days prior the date the phase commences. B. Payroll deductions for a Participant shall commence on the date when his payroll deduction authorization becomes effective and shall end on the last payday immediately prior to or coinciding with the Termination Date of the particular phase unless sooner terminated by the Participant as provided in Section 9 or as otherwise provided herein. 3 C. A participant who ceases to be an Eligible Employee, although still employed by the Company, thereupon shall be deemed to discontinue his participation in the Plan and shall have the rights provided in Section 9. D. Participation in the Plan shall be voluntary. Section 6 Payroll Deductions ------------------ A. Upon enrollment in any particular phase of the Plan, a Participant shall elect to make contributions to the Plan by payroll deductions (in full dollar amounts calculated to be as uniform as practicable throughout the period of the phase), in the aggregate amount not in excess of the sum of 10% of such Participant's Base Pay for the term of the phase, as determined on the basis of his annual or annualized Base Pay at the commencement of the phase. The minimum authorized payroll deduction shall be $10 per month. B. All payroll deductions made for a Participant shall be credited to the Participant's account under the Plan. The Participant may not make any separate cash payments into such account. C. A Participant may discontinue his participation in the phase and terminate his payroll deduction authorized at any time as provided in Section 9. D. A Participant may reduce the amount of his payroll deduction by completing an amended payroll deduction authorization on the form provided and filing it with the personnel office, but no change can be made during a phase of the Plan which would either change the time or increase the rate of his payroll deductions. Section 7 Terms and Conditions of Options ------------------------------- A. Stock options granted pursuant to the Plan may be evidenced by agreements in such form as the Committee shall recommend and the Board of Directors shall approve; provided that all Employees shall have the same rights and privileges and provided further that such options shall comply with and be subject to the following terms and conditions. B. As of the commencement of a phase when a Participant's payroll deduction authorization becomes effective, the Participant shall be granted an option for as many full shares as he will be able to purchase with the payroll deduction 4 credited to the Participant's account during his participation in the phase, subject to the limitations of Section 10. The maximum number of shares subject to purchase by a Participant shall equal the total amount to be credited to the Participant's account under Section 6 hereof divided by the option price set forth in Section 7, paragraph C.1. hereof. C. The option price of shares to be purchased with payroll deductions for an Employee who becomes a Participant as of the commencement of a phase shall be the lower of: 1. 85% of the fair market value of the shares on the date the phase commences, or 2. 85% of the fair market value of the shares on the Termination Date of the phase. D. The fair market value of the shares shall be determined by the Committee for each valuation date in a manner consistent with Section 423 of the Code. Section 8 Exercise of Option ------------------ A. Unless a Participant gives written notice to the Company as provided in Section 9, an option for the purchase of shares will be exercised automatically as of the Termination Date of the phase for the purchase of the number of full shares which the accumulated payroll deductions in the Participant's account at that time will purchase at the applicable option price, but in no event shall the number of full shares be greater than the number of full shares which the Participant is eligible to purchase under Section 7, paragraph B. B. By written notice to the Company within one week prior to the Termination Date of the phase a Participant may elect, effective at the Termination Date, to: 1. withdraw all the accumulated payroll deductions in the Participant's account at the time, without interest; 2. exercise his option for a specified number of full shares less than the number of full shares which the accumulated payroll deductions in his account will purchase at the applicable option price, and withdraw the balance in the Participant's account without interest, but in no event shall the number of full shares be greater than the 5 number of full shares to which a Participant is eligible to purchase under Section 7, paragraph B. Section 9 Death, Withdrawal or Termination -------------------------------- A. In the event of the death of a Participant during any phase of the Plan, the person or persons specified in Section 18 may give notice to the Company within sixty (60) days of the death of the Participant, but in no event later than the end of the period specified in Section 8, paragraph B., electing to purchase the number of full shares which the accumulated payroll deductions in the account of such deceased Participant will purchase at the option price specified in Section C of Section 7 and have the balance in the account distributed in cash without interest. If no such notice is received by the Company within the period described in the preceding sentence, the accumulated payroll deductions will be distributed in cash. B. Upon termination of the Participant's employment during any phase of the Plan for any reason other than the death of the Participant, the payroll deductions credited to his account without interest shall be returned to such Participant promptly. C. A Participant may withdraw all or any part of the payroll deductions credited to his account under the Plan at any time by giving written notice to the Company. The Participant's payroll deductions credited to his account shall be paid to him promptly after receipt of his notice of withdrawal and no further payroll deductions shall be made from his compensation. Any amounts not withdrawn shall remain in the Participants account. Section 10 Shares Under Option ------------------- A. The shares to be sold to a Participant under the Plan may, at the election of the Company, be either authorized but unissued shares or shares acquired in the open market by the Company. The maximum number of shares which shall be made available for sale under the Plan shall be 150,000 shares subject to adjustment upon changes in capitalization of the Company as provided in Sections 16 and 17. If the total number of shares for which options are to be granted on any date in accordance with Section 7 exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Committee shall make a pro rata allocation of the shares remaining available in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable. In such event, payroll deductions to be made shall be 6 reduced accordingly and the Committee shall give written notice of such reduction to each Participant affected thereby. B. As promptly as practicable after the Termination Date of a phase, the Company shall deliver to each Participant the full shares purchased under exercise of his option, together with a cash payment equal to the balance (without interest) of any payroll deductions credited to his account which were not used for the purchase of shares. C. The Participant will have no interest in shares covered by his option until such option has been exercised. Section 11 Administration -------------- The Plan shall be administered by the Board of Directors of the Company, or in its discretion, by a Committee consisting of not less than two (2) members who shall be appointed by the Board of Directors of the Company. Each member of such Committee shall be either a director, an officer or an employee of the Company. Unless the Board of Directors limits the authority delegated to the Committee in its appointment, the Committee shall be vested with full authority to make, administer, and interpret such rules and regulations as it deems necessary to administer the Plan, and any such determination, decision or action of such Committee with respect to any action in connection with the construction, interpretation administration or application of the Plan shall be final, conclusive and binding on all Participants and any and all other persons claiming under or through any Participant. It is provided, however, that the provisions of the Plan shall be construed so as to extend and limit participation in the Plan only in a manner consistent with the requirements of Section 423 of the Code. For all purposes of this Plan other than this Section 11, references to the Committee shall also refer to the Board of Directors. Section 12 Amendment of the Plan --------------------- The Board of Directors of the Company may at any time amend the Plan, except that no amendment may make any change in any option theretofore granted which would adversely affect the rights of any Participant, and no amendment shall be made without prior approval of the shareholders of the Company if such amendment would require sale of more shares than are authorized under Section 10 of the Plan or change the qualifications of Eligible Employees under the Plan. 7 Section 13 Nontransferability ------------------ Neither payroll deductions credited to a Participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way by the Participant and any such attempted assignment, transfer, pledge or other disposition shall be null and void and without effect, but the Company may treat such act as an election to withdraw funds in accordance with Section 9. Section 14 Use of Funds ------------ All payroll deductions received or held by the Company under this Plan may be used by the Company for any corporate purposes and the Company shall not be obligated to segregate such payroll deductions. Section 15 Interest -------- No interest will be paid on any amounts in any Participant's account. Section 16 Changes in Capitalization, Merger, etc. --------------------------------------- A. Subject to any required action by the shareholders, the number of shares covered by each outstanding option, and the price per share thereof in each such option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of the Company resulting from a subdivision or consolidation of shares or the payment of a share dividend (but only on the shares) or any other increase or decrease in the number of such shares effected without receipt of consideration by the Company. B. Subject to any required action by the shareholders, if the Company shall be involved in any merger or consolidation, in which it is the surviving corporation, each outstanding option shall pertain to and apply to the securities to which a holder of the number of shares subject to the option would have been entitled. A dissolution or liquidation of the Company shall cause each outstanding option to terminate, provided in such event that, immediately prior to such dissolution or liquidation, each Participant shall be repaid the payroll deductions credited to his account without interest. 8 C. In the event of a change in the shares of the Company as presently constituted, which is limited to a change of all its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the shares within the meaning of this Plan. Section 17 Adjustments to Shares --------------------- A. To the extent that the foregoing adjustments relate to shares or securities of the Company, such adjustments shall be made by the Committee, and its determination in that respect shall be final, binding and conclusive, provided that each option granted pursuant to this Plan shall not be adjusted in a manner that causes the option to fail to continue to qualify as an option issued pursuant to an "employee stock purchase plan" within the meaning of Section 423 of the Code. B. Except as hereinbefore expressly provided in Sections 16 and 17, the optionee shall have no right by reason of any subdivision or consolidation of shares of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of any class or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation, and any issue by the Company of shares of any class, or securities convertible into shares of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to the option. C. The grant of an option pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. Section 18 Beneficiary Designation ----------------------- A Participant may file a written designation of a beneficiary who may elect to purchase shares or receive cash to the Participant's credit under the Plan in the event of such Participant's death prior to delivery to him of such shares and cash. Such designation of beneficiary may be changed by the Participant at any time by written notice delivered to the Company. Upon the death of a Participant and upon receipt by the Company of proof deemed adequate by it of the identity and existence at the Participant's death of a beneficiary validly designated by him under the Plan, the Company shall deliver such shares and cash to such beneficiary in accordance with 9 paragraph A of Section 9. If upon the death of a Participant there is no surviving beneficiary duly designated as above provided, the Company shall deliver accumulated payroll deductions to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company) within sixty (60) days following the Participant's death, the Company shall deliver such accumulated payroll deductions to the surviving spouse, if any, as though named as the designated beneficiary hereunder, or if there is no such surviving spouse or child, then to such relatives of the Participant as would be entitled to such amounts, under the laws of intestacy in the deceased Participant's domicile as though named as the designated beneficiary hereunder. The Company shall not be liable for any distribution made of shares or cash pursuant to any will or other testamentary disposition made by such Participant, or because of the provisions of law concerning intestacy, or otherwise. No designated beneficiary shall, prior to the death of the Participant by whom he has been designated, acquire any interest in the shares or cash credited to the Participant under the Plan. Section 19 Registration and Qualification of Shares ---------------------------------------- The offering of the shares hereunder shall be subject to the effecting by the Company of any registration or qualification of the shares under any federal or state law or the obtaining of the consent or approval of any governmental regulatory body which the Company shall determine, in its sole discretion, is necessary or desirable as a condition to or in connection with, the offering or the issue or purchase of the shares covered thereby. The Company shall make every reasonable effort to effect such registration or qualification or to obtain such consent or approval. Section 20 Plan Preconditions ------------------ The Plan is expressly made subject to (i) the approval by shareholders of the Company, and (ii) at its election, the receipt by the Company from the Internal Revenue Service of a determination letter or ruling, in scope and content satisfactory to counsel, respecting the qualification of the Plan within the meaning of Section 423 of the Code. If the Plan is not so approved by the shareholders and if, at the election of the Company, the aforesaid determination letter or ruling from the Internal Revenue Service is not received on or before one year after this Plan's adoption by the Board of Directors, this Plan shall not come into effect. In such case, the accumulated payroll deductions credited to the account of each Participant shall forthwith be repaid to him without interest. 10 ADOPTED BY BOARD OF DIRECTORS: January 10, 1995 APPROVED BY SHAREHOLDERS: March 8, 1995 11 EX-10.4 5 EMPLOYMENT AGREEMENT WITH JOSEPH C. CHRISTENSON Exhibit 10.4 EMPLOYMENT AGREEMENT BETWEEN PATTERN PROCESSING TECHNOLOGIES, INC. AND JOSEPH C. CHRISTENSON THIS AGREEMENT, made and entered into in the City of Minneapolis, State of Minnesota, this 7th day of May, 1984, by and between Pattern Processing Technologies, Inc., a corporation duly organized and existing under the laws of the State of Minnesota, hereinafter sometimes referred to as "the Corporation," and Joseph C. Christenson, hereinafter sometimes referred to as "Employee"; ARTICLE 1 EMPLOYMENT 1.1) The Corporation hereby employs Employee, and Employee agrees to work for Corporation at such duties as are assigned to him from time to time by the directors and officers of the Corporation. ARTICLE 2 TERM 2.1) The term of this Agreement shall be for a period of one (1) year commencing May 7, 1984, unless sooner terminated as hereinafter provided. The Agreement shall thereafter continue in effect from year to year unless altered or terminated as hereinafter provided. ARTICLE 3 DUTIES 3.1) Employee agrees, unless otherwise specifically authorized by the Corporation, to devote his full time and effort to his duties for the profit, benefit and advantage of the business of the Corporation. ARTICLE 4 COMPENSATION 4.1) Corporation agrees to pay Employee a salary of Two Thousand Dollars ($2,000) per month payable bi-weekly. As additional consideration for Employee's covenants herein the Corporation grants Employee an option for the purchase of stock pursuant to the terms of the attached Stock Option Agreement marked Exhibit A and hereby incorporated by reference. ARTICLE 5 INSURANCE 5.1) Employee agrees that the Corporation may, from time to time, apply for and take out in its own name and at its own expense, life, health, accident, or other insurance upon Employee that the Corporation may deem necessary or advisable to protect its interests hereunder; and Employee agrees to submit to any medical or other examination necessary for such purposes and to assist and cooperate with the Corporation in preparing such insurance; and Employee agrees that he shall have no right, title, or interest in or to such insurance. ARTICLE 6 NON-COMPETITION 6.1) The Corporation and the Employee acknowledge that: 2 (01) The Corporation's business is highly competitive; (02) The essence of such business consists of confidential information and trade secrets as described in Article 7, all of which are zealously protected and kept secret by the Corporation; (03) In the course of his employment, Employee will acquire the information described in Article 7 and that the Corporation would be adversely affected if such information subsequently, and in the event of the termination of the Employee's employment, is used for the purposes of competing with the Corporation; (04) The Corporation markets its products throughout the United States; (05) For these reasons, both the Corporation and the Employee further acknowledge and agree that the restrictions contained herein are reasonable and necessary for the protection of their respective, legitimate interests. 6.2) Employee agrees that from and after the date hereof for the term of employment specified in Article 2 above and two (2) years thereafter, he will not, without the express written permission of the Corporation, directly or indirectly own, manage, operate, control, lend money to, endorse the obligations of, or participate or be connected as an officer, 5% or more stockholder of a publicly held company, stockholder of a closely held company, employee, partner or otherwise, with any enterprise or individual engaged in the business of developing, manufacturing or marketing products to persons or companies that were customers of the Corporation during the term of this agreement, or with any enterprise or individuals engaged in the business of developing, manufacturing or marketing products that have been, are being or are planned to be developed by the Corporation and will not in any manner, either directly or indirectly, compete with the Corporation in such business. It is understood and acknowledged by both parties that, inasmuch as the Corporation's products are marketed nationwide, that this covenant not to compete shall be enforced throughout the United States. 3 6.3) Employee, during the term of his employment by the Corporation, shall at all times keep the Corporation informed of any business activity and outside employment, and shall not engage in any activity or employment which may be in conflict with the corporation's interests. 6.4) If the Employee should breach any of the provisions of this Article 6, Corporation may enjoin him from continued breach, in addition to pursuing any other available legal and equitable remedies. ARTICLE 7 CONFIDENTIAL INFORMATION AND TRADE SECRETS 7.1) Employee has acquired and will acquire information and knowledge respecting the intimate and confidential affairs of the Corporation including, without limitation, confidential information with respect to the Corporation's products, packages, improvements, designs, processes, customer lists, trade secrets, business and trade practices, sales or distribution methods and other confidential information pertaining to the Corporation's business or financial affairs, which may or may not be patentable, which are developed by the Corporation at considerable time and expense, and which could be unfairly utilized in competition with the Corporation. The term "trade secret" shall be defined as follows: A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. Accordingly, Employee agrees that he shall not, during the period of his employment hereunder or thereafter, use for his own benefit such confidential information or trade secrets acquired during the term of his employment by the Corporation. Further, during the period of his employment hereunder and thereafter, the Employee shall not, without the written consent of the Board of 4 Directors of the Corporation or a person duly authorized thereby, disclose to any person, other than an employee of the Corporation or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Employee of his duties, any confidential information or trade secrets obtained by him while in the employ of the Corporation. 7.3) Upon termination of employment, Employee agrees to deliver to the Corporation all materials that include confidential information or trade secrets, such as customer lists, product formulations, instruction sheets drawings, manuals, letters notes, notebooks books, reports and copies thereof, and all other materials of a confidential nature which belong to or relate to the business of the Corporation. ARTICLE 8 IMPROVEMENTS AND INVENTIONS 8.1) Employee shall promptly and fully disclose to the Corporation, any and all ideas, improvements, discoveries and inventions, whether or not they are believed to be patentable (all of which are hereinafter referred to as "Inventions"), which Employee conceives or first actually reduces to practices either solely or jointly with others, during the period of Employee's employment or within two years after termination of employment, and which relate to the business now or hereafter carried on or contemplated by the Corporation or which results from any work performed by Employee for the Corporation. 8.2) All such Inventions shall be the sole and exclusive property of the Corporation, and during the term of his employment and thereafter, whenever requested to do so by the Corporation, Employee shall execute and assign any and all applications, assignments and other instruments which the Corporation shall deem necessary or convenient in order to apply for and 5 obtain Letters Patent of the United States and/or of any foreign countries for such Inventions and in order to assign and convey to the corporation or its nominee the sole and exclusive right, title and interest in and to such Inventions, and Employee will render aid and assistance in any interference or litigation pertaining thereto, all expenses reasonably incurred by Employee at the request of the Corporation shall be borne by the Corporation. 8.3) To the extent, if any, that Minnesota law in determined to apply to the enforceability of this Agreement, Minnesota Statute Section 181.78 provides that the Agreement does not apply, and written notification is hereby given to the Employee that this Agreement does not apply, to an Invention for which no equipment, supplies, facility or trade secret information of the Corporation was used and which was developed entirely on the Employee's own time, and (1) which does not relate (a) directly to the business of the Corporation, or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the Employee for the Corporation. ARTICLE 9 JUDICIAL CONSTRUCTION 9.1) The Employee believes and acknowledges that the provisions contained in this Agreement, including the covenants contained in Articles 6, 7 and 8 of this Agreement, are fair and reasonable. Nonetheless, it is agreed that if a court finds any of these provisions to be invalid in whole or in part under the laws of any state, such finding shall not invalidate the covenants, nor the Agreement in its entirety, but rather the covenants shall be construed and/or blue-lined, reformed or rewritten by the court as if the most restrictive covenants permissible under applicable law were contained herein. 6 ARTICLE 10 RIGHT TO INJUNCTIVE RELIEF 10.1) Employee acknowledges that a breach by the Employee of any of the terms of Articles 6, 7, 8 or 9 of this Agreement will render irreparable harm to the Corporation; and that the Corporation shall therefore be entitled to any and all equitable relief, including, but not limited to, injunctive relief, and to any other remedy that may be available under any applicable law or agreement between the parties, and to recover from the Employee all costs of litigation including, but not limited to, attorneys' fees and court costs. ARTICLE 11 TERMINATION 11.1) Either party shall have the right to terminate this Agreement upon sixty (60) days notice to the other, and the Corporation shall pay Employee until the date of termination, unless the Corporation terminates the Agreement because the Employee has violated either Articles 6, 7, 8 or 9, in which case no additional compensation shall be payable to Employee. ARTICLE 12 CESSATION OF CORPORATE BUSINESS 12.1) This Agreement shall cease and terminate if the Corporation shall discontinue its business, and all rights and liabilities thereunder shall cease, except as provided in Article 13. ARTICLE 13 ASSIGNMENT 7 13.1) The Corporation shall have the right to assign this contract to its successors or assigns, and all covenants or agreements hereunder shall inure to the benefit of and be enforceable by or against its successors or assigns. 13.2) The terms "successors" and "assigns" shall include any Corporation which buys all or substantially all of the Corporation's assets, or a controlling portion of its stock, or with which it merges or consolidates. ARTICLE 14 FAILURE TO DEMAND PERFORMANCE AND WAIVER 14.1) The Corporation's failure to demand strict performance and compliance with any part of this Agreement during the Employee's employment shall not be deemed to be a waiver of the Corporation's rights under this Agreement or by operation of law. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. ARTICLE 15 ENTIRE AGREEMENT 15.1) The Corporation and the Employee acknowledge that this Agreement contains the full and complete agreement between and among the parties, that there are no oral or implied agreements or other modifications not specifically set forth herein, and that this Agreement supersedes any prior agreements or understandings, if any, between the Corporation and the Employee, whether written or oral. The parties further agree that no modifications of this Agreement may be made except by means of a written agreement or memorandum signed by the parties. 8 ARTICLE 16 GOVERNING LAW 16.1) The parties acknowledge that the Corporation's principal place of business is located in the State of Minnesota, that this Agreement has been entered into in the State of Minnesota and that they wish legal certainty and predictability as to the terms of their undertaking. Accordingly, the parties hereby agree that this Agreement shall be construed in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF the Corporation has hereunto signed its name and the Employee hereunder has signed his name, all as of the day and year first above written. PATTERN PROCESSING TECHNOLOGIES, INC. _____________________________ By:__________________________________________ Witness Its:___________________________ EMPLOYEE _____________________________ _____________________________________________ Witness Joseph C. Christenson 9 EX-10.5 6 EMPLOYMENT AGREEMENT WITH LARRY G. PAULSON Exhibit 10.5 EMPLOYMENT AGREEMENT BETWEEN PATTERN PROCESSING CORP. AND LARRY G. PAULSON THIS AGREEMENT, made and entered into in the City of Minneapolis, State of Minnesota, this lst day of February, 1984, by and between Pattern Processing Corp., a corporation duly organized and existing under the laws of the State of Minnesota, hereinafter sometimes referred to as "the Corporation," and Larry G. Paulson, hereinafter sometimes referred to as "Employee"; ARTICLE 1 EMPLOYMENT 1.1) The Corporation hereby employs Employee, and Employee agrees to work for Corporation at such duties as are assigned to him from time to time by the directors and officers of the Corporation. ARTICLE 2 TERM 2.1) The term of this Agreement shall be for a period of one (1) year commencing February 1, 1984, unless sooner terminated as hereinafter provided. The Agreement shall thereafter continue in effect from year to year unless altered or terminated as hereinafter provided. ARTICLE 3 DUTIES 3.1) Employee agrees, unless otherwise specifically authorized by the Corporation, to devote his full time and effort to his duties for the profit, benefit and advantage of the business of the corporation. ARTICLE 4 COMPENSATION 4.1) Corporation agrees to pay Employee a salary of Fifty Thousand Dollars ($50,000) per year payable bi-weekly. ARTICLE 5 INSURANCE 5.1) Employee agrees that the Corporation may, from time to time, apply for and take out in its own name and at its own expense, life, health, accident, or other insurance upon Employee that the Corporation may deem necessary or advisable to protect its interests hereunder; and Employee agrees to submit to any medical or other examination necessary for such purposes and to assist and cooperate with the Corporation in preparing such insurance; and Employee agrees that he shall have no right, title, or interest in or to such insurance. ARTICLE 6 NON-COMPETITION 6.1) The Corporation and the Employee acknowledge that: (01) The Corporation's business is highly competitive; 2 (02) The essence of such business consists of confidential information and trade secrets as described in Article 7, all of which are zealously protected and kept secret by the Corporation; (03) In the course of his employment, Employee will acquire the information described in Article 7 and that the Corporation would be adversely affected if such information subsequently, and in the event of the termination of the Employee's employment, is used for the purposes of competing with the Corporation; (04) The Corporation markets its products throughout the United States; (05) For these reasons, both the Corporation and the Employee further acknowledge and agree that the restrictions contained herein are reasonable and necessary for the protection of their respective, legitimate interests. 6.2) Employee agrees that from and after the date hereof for the term of employment specified in Article 2 above and two (2) years thereafter, he will not, without the express written permission of the Corporation, directly or indirectly own, manage, operate, control, lend money to, endorse the obligations of, or participate or be connected as an officer, 5% or more stockholder of a publicly held company, stockholder of a closely held company, employee, partner, or otherwise, with any enterprise or individual engaged in the business of developing, manufacturing or marketing products to persons or companies that were customers of the Corporation during the term of this agreement, or with any enterprise or individuals engaged in the business of developing, manufacturing or marketing products that have been, are being or are planned to be developed by the Corporation and will not in any manner, either directly or indirectly, compete with the Corporation in such business. It is understood and acknowledged by both parties that, inasmuch as the Corporation's products are marketed nationwide, that this covenant not to compete shall be enforced throughout the United States. 3 6.3) Employee, during the term of his employment by the Corporation, shall at all times keep the Corporation informed of any business activity and outside employment, and shall not engage in any activity or employment which may be in conflict with the Corporation's interests. 6.4) If the Employee should breach any of the provisions of this Article 6, Corporation may enjoin him from continued breach, in addition to pursuing any other available legal and equitable remedies. ARTICLE 7 CONFIDENTIAL INFORMATION AND TRADE SECRETS 7.1) Employee has acquired, and will acquire information and knowledge respecting the intimate and confidential affairs of the Corporation including, without limitation, confidential information with respect to the Corporation's products, packages, improvements, designs, processes, customer lists, trade secrets, business and trade practices, sales or distribution methods and other confidential information pertaining to the Corporation's business or financial affairs, which may or may not be patentable, which are developed by the Corporation at considerable time and expense, and which could be unfairly utilized in competition with the Corporation. The term "trade secret" shall be defined as follows: A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. Accordingly, Employee agrees that he shall not, during the period of his employment hereunder or thereafter, use for his own benefit such confidential information or trade secrets acquired during the term of his employment by the Corporation. Further, during the period of his employment hereunder and thereafter, the Employee shall not, without the written consent of the Board of 4 Directors of the Corporation or a person duly authorized thereby, disclose to any person, other than an employee of the Corporation or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Employee of his duties, any confidential information or trade secrets obtained by him while in the employ of the Corporation. 7.3) Upon termination of employment, Employee agrees to deliver to the Corporation all materials that include confidential information or trade secrets, such as customer lists, product formulations, instruction sheets, drawings manuals, letters, notes, notebooks, books, reports and copies thereof, and all other materials of a confidential nature which belong to or relate to the business of the Corporation. ARTICLE 8 IMPROVEMENTS AND INVENTIONS 8.1) Employee shall promptly and fully disclose to the Corporation, any and all ideas, improvements, discoveries and inventions, whether or not they are believed to be patentable (all of which are hereinafter referred to as "Inventions"), which Employee conceives or first actually reduces to practice, either solely or jointly with others, during the period of Employee's employment or within two years after termination of employment, and which relate to the business now or hereafter carried on or contemplated by the Corporation or which results from any work performed by Employee for the Corporation. 8.2) All such Inventions shall be the sole and exclusive property of the Corporation, and during the term of his employment and thereafter, whenever requested to do so by the Corporation, Employee shall execute and assign any and all applications, assignments and other instruments which the Corporation shall deem necessary or convenient in order to apply for and 5 obtain Letters Patent of the United States and/or of any foreign countries for such Inventions and in order to assign and convey to the Corporation or its nominee the sole and exclusive right, title and interest in and to such Inventions, and Employee will render aid and assistance in any interference or litigation pertaining thereto, all expenses reasonably incurred by Employee at the request of the Corporation shall be borne by the Corporation. 8.3) To the extent, if any, that Minnesota law is determined to apply to the enforceability of this Agreement, Minnesota Statute Section 181.78 provides that the Agreement does not apply, and written notification is hereby given to the Employee that this Agreement does not apply, to an Invention for which no equipment, supplies, facility or trade secret Information of the Corporation was used and which was developed entirely on the Employee's own time, and (1) which does not relate (a) directly to the business of the Corporation, or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the Employee for the Corporation. ARTICLE 9 JUDICIAL CONSTRUCTION 9.1) The Employee believes and acknowledges that the provisions contained in this Agreement, including the covenants contained in Articles 6, 7 and 8 of this Agreement, are fair and reasonable. Nonetheless, it is agreed that if a court finds any of these provisions to be invalid in whole or in part under the laws of any state, such finding shall not invalidate the covenants, nor the Agreement in its entirety, but rather the covenants shall be construed and/or blue-lined, reformed or rewritten by the court as if the most restrictive covenants permissible under applicable law were contained herein. 6 ARTICLE 10 RIGHT TO INJUNCTIVE RELIEF 10.1) Employee acknowledges that a breach by the Employee of any of the terms of Articles 6, 7, 8 or 9 of this Agreement will render irreparable harm to the Corporation; and that the Corporation shall therefore be entitled to any and all equitable relief, including, but not limited to, injunctive relief, and to any other remedy that may be available under any applicable law or agreement between the parties, and to recover from the Employee all costs of litigation including, but not limited to attorneys' fees and court costs. ARTICLE 11 TERMINATION 11.1) Either party shall have the right to terminate this Agreement upon sixty (60) days notice to the other, and the Corporation shall pay Employee until the date of termination, unless the Corporation terminates the Agreement because the Employee has violated either Articles 6, 7, 8 or 9, in which case no additional compensation shall be payable to Employee. ARTICLE 12 CESSATION OF CORPORATE BUSINESS 12.1) This Agreement shall cease and terminate if the Corporation shall discontinue its business, and all rights and liabilities thereunder shall cease, except as provided in Article 13. 7 ARTICLE 13 ASSIGNMENT 13.1) The Corporation shall have the right to assign this contract to its successors or assigns, and all covenants or agreements hereunder shall inure to the benefit of and be enforceable by or against its successors or assigns. 13.2) The terms "successors" and "assigns" shall include any Corporation which buys all or substantially all of the Corporation's assets, or a controlling portion of its stock, or with which it merges or consolidates. ARTICLE 14 FAILURE TO DEMAND PERFORMANCE AND WAIVER 14.1) The Corporation's failure to demand strict performance and compliance with any part of this Agreement during the Employee's employment shall not be deemed to be a waiver of the Corporation's rights under this Agreement or by operation of law. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. ARTICLE 15 ENTIRE AGREEMENT 15.1) The Corporation and the Employee acknowledge that this Agreement contains the full and complete agreement between and among the parties, that there are no oral or implied agreements or other modifications not specifically set forth herein, and that this Agreement supersedes any prior agreements or understandings, if any, between the Corporation and the Employee, whether written or oral. The parties further agree that no modifications of this 8 Agreement may be made except by means of a written agreement or memorandum signed by the parties. ARTICLE 16 GOVERNING LAW 16.1) The parties acknowledge that the Corporation's principal place of business is located in the State of Minnesota, that this Agreement has been entered into in the State of Minnesota and that they wish legal certainty and predictability as to the terms of their undertaking. Accordingly, the parties hereby agree that this Agreement shall be construed in accordance with the laws of the State of Minnesota. IN WITNESS THEREOF, the Corporation has hereunto signed its name and the Employee hereunder has signed his name, all as of the day and year first above written. PATTERN PROCESSING CORP. _________________________________ By:___________________________________ Witness _________________________________ By:___________________________________ Witness Larry G. Paulson 9 EX-10.6 7 EMPLOYMENT AGREEMENT WITH TOM NORTHENSCOLD Exhibit 10.6 EMPLOYMENT AGREEMENT BETWEEN PATTERN PROCESSING TECHNOLOGIES, INC. AND TOM NORTHENSCOLD THIS AGREEMENT, made and entered into in the City of Eden Prairie, State of Minnesota, this 27th day of February, 1995, by and between Pattern Processing Technologies, Inc, a corporation duly organized and existing under the laws of the State of Minnesota, hereinafter sometimes referred to as "the Corporation", and Tom Northenscold hereinafter sometimes referred to as "Employee"; ARTICLE 1 EMPLOYMENT 1.1) The Corporation hereby employs Employee, and Employee agrees to work for Corporation at such duties as are assigned to him/her from time to time by the directors and officers of the Corporation. ARTICLE 2 TERM 2.1) The term of this Agreement shall be for a period of one (1) year commencing February 27, 1995, unless sooner terminated as hereinafter provided. The Agreement shall thereafter continue in effect from year to year unless altered or terminated as hereinafter provided. ARTICLE 3 DUTIES 3.1) Employee agrees, unless otherwise specifically authorized by the Corporation, to devote his/her full time and effort to his/her duties for the profit, benefit and advantage of the business of the Corporation. ARTICLE 4 COMPENSATION 4.1) Corporation agrees to pay Employee a base salary of $72,000 per year, payable bimonthly. ARTICLE 5 INSURANCE 5.1) Employee agrees that the Corporation may, from time to time, apply for and take out in its own name and at its own expense, life, health, accident, or other insurance upon employee that the Corporation may deem necessary or advisable to protect its interest hereunder; and Employee agrees to submit to any medical or other examination necessary for such purposes and to assist and cooperate with the Corporation in preparing such insurance, and Employee agrees that he/she shall have no right, title, or interest in or to such insurance. ARTICLE 6 NON-COMPETITION 6.1) The Corporation and the Employee acknowledge that: 01) The Corporation's business is highly competitive; 02) The essence of such business consists of confidential information and trade secrets as described in Article 7, all of which are zealously protected and kept secret by the Corporation; 03) In the course of his/her employment, Employee will acquire the information described in Article 7 and that the Corporation would be adversely affected if such information subsequently, and in the event of the termination of the Employee's employment, is used for the purposes of competing with the Corporation; 04) The Corporation markets its products throughout the United States; 05) For these reasons, both the Corporation and the Employee further acknowledge and agree that the restrictions contained herein are reasonable and necessary for the protection of their respective, legitimate interests. 6.2) Employee agrees that from and after the date hereof for the term of employment specified in Article 2 above and one (1) year thereafter, he/she, will not, without the express written permission of the Corporation, directly or indirectly own, manage, operate, control, lend money to, endorse the obligations of, or participate or be connected as an officer, 5 % or more stockholder of a publicly held company, stockholder of a closely held company, employee, partner, or otherwise with any enterprise or individual engaged in the business of developing, manufacturing or marketing products to persons or companies that were customers of the Corporation during the term of this agreement, or with any enterprise or individuals engaged in the business of developing, manufacturing or marketing products that have been, are being or are planned to be developed by the Corporation and will not in any manner, either directly or indirectly, compete with the Corporation in such business. It is understood and acknowledged by 2 both parties that, inasmuch as the Corporation's products are marketed nationwide, that this covenant not to compete shall be enforced throughout the United States. 6.3) Employee, during the term of his/her employment by the Corporation, shall at all times keep the Corporation informed of any business activity and outside employment, and shall not engage in any activity or employment which may be in conflict with the Corporation's interests. 6.4) If the Employee shall breach any of the provisions of this Article 6, Corporation may enjoin him/her from continued breach, in addition to pursuing any other available legal and equitable remedies. ARTICLE 7 CONFIDENTIAL INFORMATION AND TRADE SECRETS 7.1) Employee has acquired and will acquire information and knowledge respecting the intimate and confidential affairs of the Corporation including, without limitation, confidential information with respect to the Corporation's products, packages, improvements, designs, processes, customer lists, trade secrets, business and trade practices, sales or distribution methods and other confidential information pertaining to the Corporation's business or financial affairs, which may or may not be patentable, which are developed by the Corporation at considerable time and expense, and which could be unfairly utilized in competition with the Corporation. The term "trade secret" shall be defined as follows: A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him/her an opportunity to obtain an advantage over competitors who do not know or use it. Accordingly, Employee agrees that he/she shall not, during the period of his/her employment hereunder or thereafter, use for his/her own benefit such confidential information or trade secrets acquired during the term of his/her employment by the Corporation. Further, during the period of his/her employment hereunder and thereafter, the Employee shall not, without the written consent of the Board of Directors of the Corporation or a person duly authorized thereby, disclose to any person, other than an employee of the Corporation nor a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Employee of his/her duties, any confidential information or trade secrets obtained by him/her while in the employ of the Corporation. 7.3) Upon termination of employment, Employee agrees to deliver to the Corporation all materials that include confidential information or trade secrets, such as customer lists, product formulations, instruction sheets, drawings, manuals, letters, notes, notebooks, books, reports and copies thereof, and all other materials of a confidential nature which belong to or relate to the business of the Corporation. 3 ARTICLE 8 IMPROVEMENTS AND INVENTIONS 8.1) Employee shall promptly and fully disclose to the Corporation, any and all ideas, improvements, discoveries and inventions, whether or not they are believed to be patentable (all of which are hereinafter referred to as "Inventions"), which Employee conceives or first actually reduces to practice, either solely or jointly with others, during the period of Employee's employment or within two years after termination of employment, and which relate to the business now or hereafter carried on or contemplated by the Corporation or which results from any work performed by Employee for the Corporation. 8.2) All such Inventions shall be the sole and exclusive property of the Corporation, and during the term of his/her employment and thereafter, whenever requested to do so by the Corporation, Employee shall execute and assign any and all applications, assignments and other instruments which the Corporation shall deem necessary or convenient in order to apply for and obtain Letters Patent of the United States and/or of any foreign countries for such Inventions and in order to assign and convey to the Corporation or its nominee the sole and exclusive right, title and interest in and to such Inventions, and Employee shall render aid and assistance in any interference or litigation pertaining thereto, all expenses reasonably incurred by Employee at the request of the Corporation shall be borne by the Corporation. 8.3) To the extent, if any, that Minnesota law is determined to apply to the enforceability of this Agreement, Minnesota Statute Section 181.78 provides that the Agreement does not apply, and written notification is hereby given to the Employee that this Agreement does not apply, to an Invention for which no equipment, supplies, facility or trade secret information of the Corporation was used and which was developed entirely on the Employee's own time, and (1) which does not relate (a) directly to the business of the Corporation, or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the Employee for the Corporation. ARTICLE 9 JUDICIAL CONSTRUCTION 9.1) The Employee believes and acknowledges that the provisions contained in this Agreement, including the covenants contained in Articles 6, 7 and 8 of this Agreement, are fair and reasonable. Nonetheless, it is agreed that if a court finds any of these provisions to be invalid in whole or in part under the laws of any state, such finding shall not invalidate the covenants, nor the Agreement in its entirety, but rather the covenants shall be construed and/or blue-lined, reformed or rewritten by the court as if the most restrictive covenants permissible under applicable law were contained herein. ARTICLE 10 RIGHT TO INJUNCTIVE RELIEF 4 10.1) Employee acknowledges that a breach by the Employee of any of the terms of Articles 6, 7, 8 or 9 of this Agreement will render irreparable harm to the Corporation; and that the Corporation shall therefore be entitled to any and all equitable relief, including, but not limited to, injunctive relief, and to any other remedy that may be available under any applicable law or agreement between the parties, and to recover from the Employee all costs of litigation including, but not limited to, attorney's fees and court costs. ARTICLE 11 TERMINATION 11.1) Either party shall have the right to the this Agreement upon fourteen (14) days notice to the other, and the Corporation shall pay Employee until the date of termination, unless the Corporation terminates the Agreement because the Employee has violated either Articles 6, 7, 8 or 9, in which case no additional compensation shall be payable to Employee. ARTICLE 12 CESSATION OF CORPORATE BUSINESS 12.1) This Agreement shall cease and terminate if the Corporation shall discontinue its business, and all rights and liabilities thereunder shall cease, except as provided in Article 13. ARTICLE 13 ASSIGNMENT 13.1) The Corporation shall have the right to assign this contract to its successors or assigns, and all covenants or agreements hereunder shall inure to the benefit of and be enforceable by or against its successors or assigns. 13.2) The terms "successors" and "assigns" shall include any Corporation which buys all or substantially all of the Corporation's assets, or a controlling portion of its stock, or with which it merges or consolidates. ARTICLE 14 FAILURE TO DEMAND PERFORMANCE AND WAIVER 14.1) The Corporation's failure to demand strict performance and compliance with any part of this Agreement during the Employee's employment shall not be deemed to be a waiver of the Corporation's rights under this Agreement or by operation of law. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. 5 ARTICLE 15 ENTIRE AGREEMENT 15.1) The Corporation and the Employee acknowledge that this Agreement contains the full and complete agreement between and among the parties, that there are no oral or implied agreements or other modifications not specifically set forth herein, and that this Agreement supersedes any prior agreements or understandings, if any, between the Corporation and Employee, whether written or oral. The parties further agree that no modifications of this Agreement may be made except by means of a written agreement or memorandum signed by the parties. ARTICLE 16 GOVERNING LAW 16.1) The parties acknowledge that the Corporation's principal place of business is located in the State of Minnesota, that this Agreement has been entered into in the State of Minnesota and that they wish legal certainty and predictability as to the terms of their undertaking. Accordingly, the parties hereby agree that this Agreement shall be construed in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF, the Corporation has hereunto signed its name and the Employee hereunder as signed his/her name, all as of the day and year first above written. PATTERN PROCESSING TECHNOLOGIES, INC. _____________________________ By:_______________________________________ Witness Its:______________________________________ EMPLOYEE _____________________________ __________________________________________ Witness 6 EX-10.7 8 EMPLOYMENT AGREEMENT WITH ARYE MALEK Exhibit 10.7 EMPLOYMENT AGREEMENT BETWEEN PATTERN PROCESSING TECHNOLOGIES, INC. AND ARYE MALEK THIS AGREEMENT, made and entered into in the City of Eden Prairie, State of Minnesota, this 1st day of May, 1990, by and between Pattern Processing Technologies, Inc., a corporation duly organized and existing under the laws of the State of Minnesota, hereinafter sometimes referred to as "the Corporation", and Arye Malek hereinafter sometimes referred to as "Employee"; ARTICLE 1 EMPLOYMENT 1.1) The Corporation hereby employs Employee, and Employee agrees to work for Corporation at such duties as are assigned to him/her from time to time by the directors and officers of the Corporation. ARTICLE 2 TERM 2.1) The term of this Agreement shall be for a period of one (1) year commencing May 1, 1890, unless sooner terminated as hereinafter provided. The Agreement shall thereafter continue in effect from year to year unless altered or terminated as hereinafter provided. ARTICLE 3 DUTIES 3.1) Employee agrees, unless otherwise specifically authorized by the Corporation, to devote his/her full time and effort to his/her duties for the profit, benefit and advantage of the business of the Corporation. ARTICLE 4 COMPENSATION 4.1) Corporation agrees to pay Employed a base salary of $1,875.00 semimonthly. ARTICLE 5 INSURANCE 5.1) Employee agrees that the Corporation may, from time to time, apply for and take out in its own name and at its own expense, life, health, accident, or other insurance upon Employee that the Corporation may deem necessary or advisable to protect its interest hereunder; and Employee agrees to submit to any medical or other examination necessary for such purposes and to assist and cooperate with the Corporation in preparing such insurance; and Employee agrees that he/she shall have no right, title, or interest in or to such insurance. ARTICLE 6 NON-COMPETITION 6.1) The Corporation and the Employee acknowledge that: (01) The Corporation's business is highly competitive; (02) The essence of such business consists of confidential information and trade secrets as described in Article 7, all of which are zealously protected and kept secret by the Corporation; 2 (03) In the course of his/her employment. Employee will acquire the information described in Article 7 and that the Corporation would be adversely affected if such information subsequently, and in the event of the termination of the Employee's employment, is used for the purposes of competing with the Corporation; (04) The Corporation markets its products throughout the United States; (05) For those reasons, both the Corporation and the Employee further acknowledge and agree that the restrictions contained herein are reasonable and necessary for the protection of their respective, legitimate interests. 6.2) Employee agrees that from and after the date hereof for the term of employment specified in Article 2 above and one (1) year thereafter, he/she will not, without the express written permission of the Corporation, directly or indirectly own, manage, operate, control, land money to, endorse the obligations of, or participate or be connected as an officer, 5% or more stockholder of a publicly hold company, stockholder of a closely held company, employee, partner, or otherwise, with any enterprise or individual engaged in the business of developing, manufacturing or marketing products to persons or companies that were customers of the Corporation during the term of this agreement, or with any enterprise or individuals engaged in the business of developing, manufacturing or marketing products that have been, are being or are planned to be developed by the Corporation and will not in any manner, either directly or indirectly, compete with the Corporation in such business, it is understood and acknowledged by both parties that, inasmuch as the Corporation's products are marketed nationwide, that this covenant not to compete shall be enforced throughout the United States. 6.3) Employee, during the term of his/her employment by the Corporation, shall at all times keep the Corporation informed of any business activity and outside employment, and shall 3 not engage in any activity or employment which may be in conflict with the Corporation's interests. 6.4) If the Employee shall breach any of the provisions of this Article 5, Corporation may enjoin him/her from continued breach, in addition to pursuing any other available legal and equitable remedies. ARTICLE 7 CONFIDENTIAL INFORMATION AND TRADE SECRETS 7.1) Employee has acquired and will acquire information and knowledge respecting the intimate and confidential affairs of the Corporation including, without limitation, confidential information with respect to the Corporation's products, packages, improvements, designs, processes, customer lists, trade secrets, business and trade practices, sales or distribution methods and other confidential information pertaining to the Corporation's business or financial affairs, which may or may not be patentable, which are developed by the Corporation at considerable time and expense, and which could be unfairly utilized in competition with the Corporation. The term "trade secret" shall be defined as follows: A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him/her an opportunity to obtain an advantage over competitors who do not know or use it. Accordingly, Employee agrees that he/she shall not, during the period of his/her employment hereunder or thereafter, use for his/her own benefit such confidential information or trade secrets acquired during the term of his/her employment by the Corporation. Further, during the period of his/her employment hereunder and thereafter, the Employee shall not, without the written consent of the Board of Directors of the Corporation or a person duly authorized thereby, disclose to any 4 person, other than an employee of the Corporation nor a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Employee of his/her duties, any confidential information or trade secrets obtained by him/her while in the employ of the Corporation. 7.3) Upon termination of employment, Employee agrees to deliver to the Corporation all materials that include confidential information or trade secrets, such as customer lists, product formulations, instruction sheets, drawings, manuals, letters, notes, notebooks, books, reports and copies thereof, and all other materials of a confidential nature which belong to or relate to the business of the Corporation. ARTICLE 8 IMPROVEMENTS AND INVENTIONS 8.1) Employee shall promptly and fully disclose to the Corporation, any and all ideas, improvements, discoveries and inventions, whether or not they are believed to be patentable (all of which are hereinafter referred to as "Inventions"), which Employee conceives or first actually reduces to practice, either solely or jointly with others, during the period of Employee's employment or within two years after termination of employment, and which relate to the business now or hereafter carried on or contemplated by the Corporation or which results from any work performed by Employee for the Corporation. 8.2) All such Inventions shall be the sole and exclusive property of the Corporation, and during the term of his/her employment and thereafter, whenever requested to do so by the Corporation, Employee shall execute and assign any and all applications, assignments and other instruments which the Corporation shall deem necessary or convenient in order to apply for and 5 obtain Letters Patent of the United States and/or of any foreign countries for such Inventions and in order to assign and convey to the Corporation or its nominee the sale and exclusive right, title and interest in and to such Inventions, and Employee shall render aid and assistance in any interference or litigation pertaining thereto, all expenses reasonably incurred by Employee at the request of the Corporation shall be borne by the Corporation. 8.3) To the extent, if any, that Minnesota law is determined to apply to the enforceability of this Agreement, Minnesota Statute Section 181.78 provides that the Agreement does not apply, and written notification is hereby given to the Employee that this Agreement does not apply, to an Invention for which no equipment, supplies, facility or trade secret information of the Corporation was used and which was developed entirely on the Employee's own time, and (1) which does not relate (a) directly to the business of the Corporation, or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the Employee for the Corporation. ARTICLE 9 JUDICIAL CONSTRUCTION 9.1) The Employee believes and acknowledges that the provisions contained in this Agreement, including the covenants contained in Articles 6, 7 and 8 of this Agreement, are fair and reasonable. Nonetheless, it is agreed that if a court finds any of these provisions to be invalid in whole or in part under the laws of any state, such finding shall not invalidate the covenants, nor the Agreement in its entirety, but rather the covenants shall be construed and/or blue-line, reformed or rewritten by the court as if the most restrictive covenants permissible under applicable law were contained herein. 6 ARTICLE 10 RIGHT TO INJUNCTIVE RELIEF 10.1) Employee acknowledges that a breach by the Employee of any of the terms of Articles 6, 7, 8 or 9 of this Agreement will render irreparable harm to the Corporation; and that the Corporation shall therefore be entitled to any and all equitable relief, including, but not limited to, injunctive relief, and to any other remedy that may be available under any applicable law or agreement between the parties, and to recover from the Employee all costs of litigation including, but not limited to, attorneys' fees and court costs. ARTICLE 11 TERMINATION 11.1) Either party shall have the right to terminate this Agreement upon fourteen (14) days notice to the other, and the Corporation shall pay Employee until the date of termination, unless the Corporation terminates the Agreement because the Employee has violated either Articles 6, 7, 8 or 9,. in which case no additional compensation shall be payable to Employee. ARTICLE 12 CESSATION OF CORPORATE BUSINESS 12.1) This Agreement shall cease and terminate if the Corporation shall discontinue its business, and all rights and liabilities thereunder shall cease, except as provided in Article 13. 7 ARTICLE 13 ASSIGNMENT 13.1) The Corporation shall have the right to assign this contract to its successors or assigns, and all covenants or agreements hereunder shall inure to the benefit of and be enforceable by or against its successors or assigns. 13.2) The terms "successors" and "assigns" shall include any Corporation which buys all or substantially all of the Corporation's assets, or a controlling portion of its stock, or with which it merges or consolidates. ARTICLE 14 FAILURE TO DEMAND PERFORMANCE AND WAIVER 14.1) The Corporation's failure to demand strict performance and compliance with any part of this Agreement during the Employee's employment shall not be deemed to be a waiver of the Corporation's rights under this Agreement or by operation of law. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. ARTICLE 15 ENTIRE AGREEMENT 15.1) The Corporation and the Employee acknowledge that this Agreement contains the full and complete agreement between and among the parties, that there are no oral or implied agreements or other modifications not specifically set forth herein, and that this Agreement supersedes any prior agreements or understandings, if any, between the Corporation and Employee, whether written or oral. The parties further agree that no modifications of this 8 Agreement may be made except by means of a written agreement or memorandum signed by the parties. ARTICLE 16 GOVERNING LAW 16.1) The parties acknowledge that the Corporation's principal place of business is located in the State of Minnesota, that this Agreement has been entered into in the State of Minnesota and that they wish legal certainty and predictability as to the terms of their undertaking. Accordingly, the parties hereby agree that this Agreement shall be construed in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF, the Corporation has hereunto signed its name and the Employee hereunder has signed his/her name, all as of the day and year first above written. PATTERN PROCESSING TECHNOLOGIES, INC. ____________________________ By:______________________________________ Witness Its:__________________________ EMPLOYEE ____________________________ _________________________________________ Witness Arye Malek 9 EX-23.1 9 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-2 of our report dated November 22, 1995 (except as to Note 12, which is as of April 5, 1996) relating to the financial statements of PPT VISION, Inc., which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedules for the three years ended October 31, 1995 listed under Item 14(a) of the PPT VISION, Inc. Annual Report on Form 10-K for the year ended October 31, 1995, which is incorporated by reference in this Registration Statement, when such schedules are read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included these Financial Statement Schedules. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Financial Data." Price Waterhouse LLP Minneapolis, Minnesota May 14, 1996 -----END PRIVACY-ENHANCED MESSAGE-----