-----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, KFmAWT3B9BU7PRZkNMM+tWhR9woGo5iouz8ko7rolc557Yg3Vfy+PJ4YL1XcNibH ieMa29p+Ut4YHyAZqX18Fg== 0000950135-96-001529.txt : 19960418 0000950135-96-001529.hdr.sgml : 19960418 ACCESSION NUMBER: 0000950135-96-001529 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COGNEX CORP CENTRAL INDEX KEY: 0000851205 STANDARD INDUSTRIAL CLASSIFICATION: 3845 IRS NUMBER: 042713778 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17869 FILM NUMBER: 96539963 BUSINESS ADDRESS: STREET 1: ONE VISION DR CITY: NATICK STATE: MA ZIP: 01760 BUSINESS PHONE: 5086503000 MAIL ADDRESS: STREET 1: ONE VISION DRIVE CITY: NATICK STATE: MA ZIP: 01760 10-K 1 COGNEX CORPORATION 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) for the fiscal year ended December 31, 1995 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) for the transition period from to COMMISSION FILE NUMBER 0-17869 COGNEX CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2713778 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE VISION DRIVE NATICK, MASSACHUSETTS 01760-2059 (508) 650-3000 (Address, including zip code, and telephone number, including area code, of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting stock held by non-affiliates as of February 25, 1996: $773,120,191 $.002 par value common stock outstanding as of February 25, 1996: 38,965,807 shares Documents incorporated by reference: Specifically identified information in the Annual Report to Stockholders for the year ended December 31, 1995, is incorporated by reference into Parts I and II hereof. Specifically identified information in the definitive Proxy Statement for the Special Meeting in Lieu of the 1996 Annual Meeting of Stockholders to be held on April 23, 1996, is incorporated by reference into Part III hereof. A list of Exhibits to this Annual Report on Form 10-K is located on page 19. ================================================================================ 2 COGNEX CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 INDEX PART I ITEM 1. BUSINESS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 4A. EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM OF THE REGISTRANT PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 3 PART I ITEM 1. BUSINESS GENERAL Cognex Corporation ("Cognex" or the "Company," each of which term includes, unless the context indicates otherwise, Cognex Corporation and its subsidiaries) was incorporated in Massachusetts in 1981. Its principal executive offices are located at One Vision Drive, Natick, Massachusetts 01760 and its telephone number is (508) 650-3000. The Company designs, develops, manufactures, and markets a family of machine vision systems - or computers that can "see." Cognex machine vision systems, which consist of software and hardware designed specifically for industrial machine vision, are used to replace human vision in a wide range of manufacturing processes. When connected to a video camera, a Cognex machine vision system captures an image of each object in the manufacturing process and uses sophisticated image analysis software to extract information from that image. For example, a machine vision system can locate an object, read alphanumeric characters, measure dimensions, or detect flaws. Cognex machine vision systems are used in a variety of industries including the electronics, semiconductor, consumer products, automotive, pharmaceutical, and general manufacturing industries for applications in which human vision is inadequate due to fatigue, visual acuity or speed, or in instances where substantial cost savings are obtained through the reduction of direct labor and improved product quality. The Company's business strategy is to develop and sell standard products - proprietary vision software together with vision hardware (vision engines) - which require minimal customization and support by the Company. The Company primarily markets to sophisticated customers such as original equipment manufacturers (OEMs) and system integrators who have the ability to configure their own vision solutions using the software tools and hardware platforms provided by the Company. The Company also markets "easy-to-use" machine vision systems to system integrators and end users (the "factory floor") which represents an expansion beyond its traditional OEM customer base. These machine vision systems designed for the factory floor marketplace provide an "easy-to-use" interface that allows system integrators and end users in a wide range of industries to implement vision solutions for the factory floor. This strategy has permitted the Company to focus its engineering resources on expanding its own product line and developing proprietary vision technology. The strategy of selling standard products in high volume without extensive support by the Company requires a close match between the product's usability and functionality and the customer's capabilities and needs. The Company's traditional products are "building blocks," both software and hardware, from which its customers can construct a vision solution. Although the Company's traditional products require that the customer have detailed expertise in computer porgramming, the customer need not have in-depth knowledge of image processing or image analysis since the Company's vision software products provide that expert knowledge in the form of subroutines. In addition, the Company believes that its "easy-to-use" products allow system integratores and end users without detailed experience in computer programming or knowledge of image processing or image analysis to construct a vision solution. The Company's primary customers, OEMs in the electronics and semiconductor industries, are principally located in Japan and North America. Sales to international customers represented approximately 59%, 62%, and 60% of revenue in 1995, 1994, and 1993, respectively. The Company sells through a direct sales force, consisting of approximately 30 people at December 31, 1995, and through distributors to service its OEM and factory floor customers. In addition to its headquarters in Natick, Massachusetts, the Company has sales offices in the United States, Europe, and the Far East. 1 4 RECENT DEVELOPMENTS In February 1996, the Company acquired Isys Controls, Inc., an Alameda, California-based developer of ultra-high performance vision systems that automatically detect and classify surface flaws and defects on a variety of high value-added materials. In July 1995, the Company acquired Acumen, Inc., a Portland, Oregon-based developer of machine vision systems for semiconductor wafer identification. Information with respect to the acquisitions of Isys Controls Inc. and Acumen, Inc. may be found in the Notes to Consolidated Financial Statements, appearing on pages 31 and 32 of the Annual Report to Stockholders for the year ended December 31, 1995, which is Exhibit 13 hereto, and is incorporated herein by reference. These acquisitions provide the company with an expansion beyond its traditional base of general-purpose machine vision systems. The potential market for machine vision is comprised of a number of market niches defined by application requirements, industry, and cost/performance. The Company's business strategy includes selective expansion into other industrial machine vision applications. The recent acquisitions of Isys Controls, Inc. and Acumen, Inc. gives Cognex an immediate and strong presence in the niche markets for surface inspection and semiconductor wafer identification. INDUSTRY BACKGROUND A machine vision system is a computer-based image analysis machine which replaces human vision for tasks in which human vision is inadequate due to fatigue, visual acuity or speed, or in instances where substantial cost savings are obtained through the reduction of direct labor and improved product quality. Today, many types of manufacturing equipment require machine vision because of the increasing demands for speed and accuracy in manufacturing processes. A machine vision system consists of pattern recognition software and high-speed computer hardware which is specially designed to run the software in real-time. In most machine vision applications, a camera captures an image of the object to be inspected and sends that image to the machine vision computer. The machine vision system then uses the sophisticated software and special-purpose hardware to analyze the image of the object and derive some answer. Once the machine vision system has determined the answer, it can output these results to a monitor for review by the operator or it can use these results to control other equipment. Machine vision systems can provide four types of answers:
QUESTION DESCRIPTION EXAMPLE - - -------- ----------- ------- GUIDANCE Where is it? Determining the exact physical Determining the position of a printed location of an object. circuit board so that a robot can automatically be guided to insert electrical components. IDENTIFICATION What is it? Identifying an object by analyzing Identifying the serial number on an its shape or by reading a serial automotive airbag so that it can number on it. be tracked and processed correctly through manufacturing. INSPECTION How good is it? Inspecting an object for flaws or Inspecting the quality of printing on defects. pharmaceutical labels and packaging. GAUGING What size is it? Determining the dimensions Determining the diameter of a of an object. bearing prior to final assembly.
2 5 MARKETS, CUSTOMERS, AND APPLICATIONS The Company's current products are designed for factory automation because the Company believes that this market currently offers the greatest opportunity for selling standard products in high volume. Within the factory automation marketplace, the Company has historically focused primarily on those customers who must have machine vision because of the increasing complexity of their products or manufacturing methods. The Company currently markets primarily to OEMs principally located in Japan and North America who supply automation equipment to the electronics and semiconductor industries. The value of automation is high in these industries because the products produced, such as semiconductor chips, hybrid circuits, and printed circuit boards, have high unit costs and are manufactured at speeds too fast for effective human intervention. In addition, the trend in these industries toward smaller devices with higher circuit densities and finer circuit paths require manufacturing and testing equipment capable of extremely accurate alignment and motion control which can only be achieved by using machine vision. Customers in these industries, moreover, employ knowledgeable engineers who are competent to work with computer-related equipment. The Company's business strategy is to develop and sell standard products - proprietary vision software together with vision hardware (vision engines) - which require minimal customization and support by the Company. The Company primarily markets to sophisticated customers such as OEMs and system integrators who have the ability to configure their own vision solutions using the software tools and hardware platforms provided by the Company. The Company also markets "easy-to-use" machine vision systems to system integrators and end users which represents an expansion beyond its traditional OEM customer base. These machine vision systems designed for the factory floor marketplace provide an "easy-to-use" interface that allows system integrators and end users in a wide range of industries to implement vision solutions for the factory floor. This strategy has permitted the Company to focus its engineering resources on expanding its own product line and developing proprietary vision technology. In addition to selling traditional machine vision systems to OEMs, the Company's products are also sold to system integrators and end users serving the consumer products, automotive, pharmaceutical, and general manufacturing industries. Current users of the Company's traditional products typically have extensive programming experience, therefore, programmable Cognex products are able to effectively meet their needs and requirements. The strategy of selling standard products in high volume without extensive support by the Company requires a close match between the product's usability and functionality and the customer's capabilities and needs. The Company's traditional products are "building blocks," both software and hardware, from which its customers can construct a vision solution. Although the Company's traditional products require that the customer have detailed expertise in computer programming, the customer need not have in-depth knowledge of image processing or image analysis since the Company's vision software products provide that expert knowledge in the form of subroutines. In addition, the Company believes that its "easy-to-use" products allow system integrators and end users without detailed experience in computer programming or knowledge of image processing or image analysis to construct a vision solution. 3 6 TRADITIONAL MACHINE VISION PRODUCTS Cognex machine vision systems are comprised of both machine vision software and machine vision hardware. The Company's products are "building blocks" of software and hardware that have been designed to give customers the flexibility to easily configure complete vision solutions without requiring extensive in-house expertise in image processing or image analysis. The Company offers a library of vision software tools, as well as a family of board-level vision hardware that ranges in performance and platform. The customer first chooses the most appropriate software tools from the vision software library and then selects the best vision hardware on which to run the software. All Cognex vision hardware is functionally and software compatible across product lines. Because of the Company's product strategy, its customers are given the flexibility to configure their own vision solutions to a broad range of complex vision problems without detailed support from the Company. When purchasing products from the Company, the customer pays for each vision engine as well as a license fee per engine for each software tool used in the vision solution. Because the Company's products are modular, the customer licenses only the software tools required and chooses the vision hardware with the price and performance that best meets the application's needs. The typical Cognex machine vision system, including software and hardware, ranges from $7,500 to $20,000 and the Company estimates that an aggregate of approximately 38,000 Cognex machine vision systems had been sold as of December 31, 1995. SOFTWARE PRODUCTS The complete software package which is required to solve a customer's vision problem is built from three different levels of software provided by the Company: system software, image processing software, and image analysis software. A description of the three different levels of software is as follows: System Software. The system software level provides the utilities needed to program and operate the machine vision system. The system software includes software for acquiring, storing, and displaying images, as well as Cognex's proprietary incremental C compiler with a C run-time library, interface software for communicating with other devices, and software for controlling high-speed transmission of data into and out of the machine vision system. Image Processing Software. The image processing level contains software which manipulates images (usually before they are analyzed by subsequent image analysis routines). These tools can be used to simplify raw video images or alter images to increase processing speed and image storage capacity. Image processing can correct rotation, scale, and aspect ratio of an image in order to compensate for non-uniform optics, uncertainty in part positioning, or mechanical constraints that require awkward viewing angles. In addition, the image processing functions provide several methods for reducing the effects of video noise, such as averaging images together or spatially filtering a single image. Image Analysis Software. The image analysis level embodies the Company's most important and valuable technology. These software tools extract information from either raw or processed images and make decisions regarding items in those images. By providing this high level of software, the Company has made vision solutions available to a broader range of customers. Examples of image analysis software tools include Search for locating patterns, Golden Template Comparison (GTC) for locating defects, and Optical Character Recognition (OCR) for reading characters. By writing simple C routines which interconnect various Cognex software modules from each of these three levels, the Company's customers "build" their own unique software solutions to address their particular vision problems. The Company also offers application-specific software products which are "packaged" software products designed to solve targeted problems without any customization by the Company or its customers. These software tools combine a series of system software, image processing software, and image analysis software tools to solve specific problems. For example, the Fiducial Finder tool locates fiducial, or alignment, marks on printed circuit boards and the PQI tool quickly and accurately inspects print produced by laser, pad, or offset printing equipment. 4 7 HARDWARE PRODUCTS The Company supplies a family of vision hardware with a wide range of price and performance levels. Customers select the Cognex vision hardware which best matches the requirements of each application. A description of the family of vision hardware products is as follows: Standard Machine Vision Platforms. The Company offers a variety of standard, programmable machine vision platforms on which to run the Cognex software tools. The Cognex 3000 Series, consisting of the 3100 and 3400, are proprietary, single-board machine vision systems that provide a range of performance levels for solving complex gauging, guidance, inspection, and identification tasks. The Cognex 4000 Series are a group of VMEbus-based, board-level machine vision systems that plug directly into a VME backplane. This family includes the low-end Cognex 4100 and 4200, as well as the high-end Cognex 4400. The Cognex 5000 Series are the first complete machine vision systems designed to plug into any ISA/ATbus personal computer. All of these machine vision systems are software compatible, allowing customers to readily upgrade to higher performance systems or to change platforms as application needs change. Application-Specific Hardware Products. The Company also offers a family of application-specific hardware products that are designed to solve specific tasks. The Cognex 1500 Simple Alignment System is an easy-to-use, low-cost machine vision system suitable for such tasks as aligning printed circuit boards prior to screen printing, drilling, or epoxy dispensing. The Cognex acuReader/OCR is a machine vision system designed to read even the most degraded serial numbers from semiconductor wafers with near 100% accuracy. Both of these machine vision systems offer simple menu interfaces that allow customers to quickly and accurately configure the systems to solve tasks without the need for C programming. Custom Vision Chips. To boost the processing power of its boards, the Company has developed the VC-2 and VC-3 custom vision chips. These chips, which can be purchased with most of Cognex's standard machine vision platforms, provide the processing power of multiple boards or chip sets. The chips enhance the price/performance of Cognex's products and currently provide a significant competitive advantage to the Company. The VC-2 chip performs image processing functions that are optimized for machine vision tasks which enables the Company's machine vision systems to address a new class of flaw and defect detection applications. The VC-3 chip is an application-specific integrated circuit designed to run image processing and image analysis algorithms at high speeds. In addition, the Company's Acumen division has developed a set of vision chips used for pattern recognition in the acuReader/OCR. CHECKPOINT In 1994, the Company introduced a new machine vision system known as Checkpoint. The Company markets Checkpoint to system integrators and end users which represents an expansion beyond its traditional OEM customer base. Checkpoint is designed for the factory floor marketplace and combines the Company's proven vision technology with a new and unique graphical user interface. The Company believes that Checkpoint allows system integrators and end users in a wide range of industries to design vision solutions for the factory floor, even if such engineers have little programming or machine vision experience. However, the deployment of Checkpoint on the factory floor requires the services of trained system integrators to mechanically and electrically integrate Checkpoint into manufacturing lines. A Checkpoint system includes pre-packaged existing software (system software, image processing software, and image analysis software), standard hardware (Checkpoint Model 400 and 800 vision processors), and Microsoft Windows-based application development software. Engineers using Checkpoint create a vision program based upon a personal computer (PC) running Checkpoint's Windows-based application builder. The PC communicates with the Checkpoint system over a serial line at development time. Then, at run-time, the system is deployed as a stand-alone unit on the factory floor utilizing a custom graphic operator interface created by the developer with Checkpoint. 5 8 The library of vision tools available with Checkpoint enables users to solve a wide range of inspection, gauging, and assembly verification problems. Checkpoint's gray-scale vision tools provide advanced object location and inspection technology and are accessed at development time via PC menus in a Microsoft Windows environment or vision system icons. Checkpoint's vision tools are supported by the Company's most powerful vision hardware platforms including Cognex's proprietary vision coprocessors. Manufacturing engineers utilize pull-down menus and dialog boxes in Checkpoint's Windows graphic user interface to create customized vision applications. This "point and click" programming environment directs engineers to construct vision routines in a new way. A developer combines Checkpoint's high-level vision, I/O, and operator interface tools with conventional programming elements such as English-language variables, expressions, and statements. This enables the developer to focus on tasks associated with solving the overall vision application, freeing the developer from the memorized detail and mechanical complexity of traditional machine vision system programming. SALES AND SERVICE The Company's business strategy is to develop and sell standard products - proprietary vision software together with vision hardware (vision engines) - which require minimal customization and support by the Company. The Company primarily markets to sophisticated customers such as OEMs and system integrators who have the ability to use the Company's traditional products to configure their own vision solutions using the software tools and hardware platforms provided by the Company. The strategy of selling standard products in high volume without extensive support by the Company requires a close match between the product's usability and functionality and the customer's capabilities and needs. The Company employs direct sales personnel for all accounts in North America and Japan, and sells through a direct sales force and through distributors in Europe and Southeast Asia. The Company's distributors do not have any rights of return and payment for products is due upon delivery. Distributors generally have non-exclusive distribution rights and there may be more than one distributor per territory. The Company markets its products in North America through a direct sales force operating out of its Natick, Massachusetts headquarters, its Regional Technology Center in Mountain View, California, and its sales offices in Illinois, Minnesota, New Jersey, and Florida. The Company markets its products in Japan through a direct sales force operating out of its wholly-owned subsidiary, Cognex K.K. The Company also has sales offices in France, Germany, England, Italy, Singapore, and Korea where the Company sells through a direct sales force and through distributors. At December 31, 1995, the Company's direct sales and service force consisted of 80 professionals, including sales and application engineers. A significant portion of the Company's sales and service personnel have engineering or science degrees. Sales engineers call directly on targeted accounts and coordinate the activity of the application engineers. They focus on potential customers that represent potential volume purchases and long-term relationships. Opportunities that represent single unit sales or turnkey system requirements are qualified by the sales engineer and turned over to an independent system integrator or OEM that uses the Company's products. Sales to international customers represented approximately 59%, 62%, and 60% of revenue in 1995, 1994, and 1993, respectively. One international customer based in Japan, Fuji America Corporation, accounted for approximately 16%, 20%, and 24% of revenue in 1995, 1994, and 1993, respectively. Information with respect to significant customers and export sales may be found in the Notes to the Consolidated Financial Statements, appearing on page 30 of the Annual Report to Stockholders for the year ended December 31, 1995, which is Exhibit 13 hereto, and is incorporated herein by reference. Although international sales may from time to time be subject to federal technology export regulations, the Company to date has not suffered delays or prohibitions in sales to any of its foreign customers. 6 9 The Company sells its products to customers that have entered or are expected to enter into volume discount contracts with the Company. These contracts are typically for one year and have associated delivery schedules. No orders are booked for delivery beyond six months. The Company provides software update services and hardware maintenance on both a contract and a time and material basis. Software updates are provided via floppy disks and hardware maintenance is provided by exchanging printed circuit boards. Programming application services for projects can be contracted with the Company on a time and material basis only when doing so enhances the sale of the Company's standard products. Training courses are provided by the Company in Natick, Massachusetts; Mountain View, California; and Tokyo, Japan, as well as at the customer site when required. These courses provide the user with both lecture and laboratory sessions covering the use of Cognex products. RESEARCH, DEVELOPMENT AND ENGINEERING The Company engages in research, development and engineering ("R, D & E") to enhance its existing products and to develop new products and functionality to meet market opportunities. The R, D & E organization consists of software engineering, research and development, hardware engineering, advanced products development, and custom products development. Software engineering is responsible for the development of image processing and image analysis tools, as well as the maintenance, quality assurance, and documentation of vision software products. The advanced end-user vision systems group, within the software group, develops Checkpoint. The research and development group focuses its energies on enhanced vision technology capabilities. Hardware engineering is responsible for the development of hardware products, primarily vision engines and vision chips. The advanced products development group is engaged in the development of the Placement Guidance Products and the VisionPro product line. The custom products development group is responsible for the development of application products used in wire bonders and other custom applications. The Company's Acumen division is responsible for the development of application-specific products for the semiconductor industry. At December 31, 1995, the Company employed 104 professionals in R, D & E, most of whom are software developers. The Company's R, D & E expenses were approximately $13,190,000, $9,933,000, and $6,205,000 in 1995, 1994, and 1993, respectively. MANUFACTURING The Company's current manufacturing process consists of final assembly, burn-in, final test, quality control, and shipment of systems and board-level products. Major components such as semiconductors, raw boards, and passive components are purchased by the Company and shipped to third parties for assembly and initial testing. Certain subassemblies are assembled in-house. Materials such as electronic components and sheet metal parts are purchased and stocked by the Company utilizing its own personnel. Some of the electronic components are tested and burned in before assembly. The Company puts together kits of components and supplies them to the third-party contractor for assembly. In some cases, components are stored and kitted by the supplier and sent directly to the third-party contractor. The third-party contractor assembles and performs initial testing of the product, using fixtures and programs owned by the Company, and returns the product to the Company for final assembly and test. The Company packages and ships its products to customers from its Natick, Massachusetts headquarters. Certain components purchased by the Company are presently available from a single source. 7 10 In 1995, the Company began the transition to a turnkey manufacturing operation whereby the majority of component purchasing, subassembly, final assembly, and testing is performed under agreement by a third-party contractor. The Company expects that the contractor will become the sole manufacturer of substantially all of the Company's products when the transition is complete in early 1997. COMPETITION The Company competes with other vendors of machine vision systems, the internal engineering efforts of the Company's current or prospective customers, and the manufacturers of image processing systems. Some or all of these competitors may have greater financial and other resources than the Company. In addition, certain application-specific machine vision products are being introduced as low-cost, software-only solutions by various companies and the Company does not currently have a significant product offering that effectively competes with respect to price against these new software-only systems. The Company considers itself to be one of the leading machine vision companies in the world. However, reliable estimates of the machine vision market and the number of competitors are almost nonexistent, primarily because of definitional confusion and a tendency toward double-counting of sales. The principal competitive factors affecting the choice of a machine vision system include product functionality and performance (e.g. speed, accuracy, and reliability) under "real-world" operating conditions, flexibility, programmability, and the availability of application support from the supplier. More recently, ease-of-use has become a competitive factor and product price has become a more significant factor with respect to the simpler guidance and gauging applications. BACKLOG At December 31, 1995 the Company's backlog was approximately $27,655,000, compared to $16,827,000 at December 31, 1994. Backlog reflects purchase orders for products scheduled for shipment within six months. The level of backlog at any particular date is not necessarily indicative of the future operating performance of the Company. Delivery schedules may be extended and orders may be canceled at any time subject to certain cancellation penalties. PATENTS AND LICENSES Since the Company relies on the technical expertise, creativity, and know-how of its personnel, it utilizes patent, copyright, and trade secret protection to safeguard its competitive position. In addition, the Company makes use of non-disclosure agreements with customers, consultants, suppliers, and employees. The Company attempts to protect its intellectual property by restricting access to its proprietary information by a combination of technical and internal security measures. However, there can be no assurance that any of the above measures will be adequate to protect the proprietary technology of the Company. The Company's software products are generally licensed to customers pursuant to a license agreement that restricts the use of the products to the customer's purposes on a designated Cognex machine vision engine. The Company has made portions of the source code available to certain customers and OEMs under very limited circumstances and for restricted uses. If source code is released to a customer or re-licenser, the customer or re-licenser is required by contract to maintain its confidentiality and, in general, to use the source code solely for internal purposes or for maintenance. Effective patent, copyright, and trade secret protection may be unavailable in certain foreign countries. 8 11 Some users of the Company's products have received notice of patent infringement from Technivision Corporation and Jerome H. Lemelson alleging that their use of the Company's products infringe certain patents issued to Mr. Lemelson. Certain of these users have notified the Company that, in the event it is subsequently determined that their use of the Company's products infringes any of Mr. Lemelson's patents, they may seek indemnification from the Company for damages or expenses resulting from this matter. Certain of the users of the Company's products currently are engaged in litigation with Mr. Lemelson/Technivision involving certain of these patents and the validity of these patents has been placed in issue. Although the Company has not been named in this litigation, it has entered into a joint defense agreement with a named party therein, which has recently entered into a settlement agreement with Mr. Lemelson for reasons unknown to the Company. The Company is not a party to that settlement and has no indemnification claims, nor obligations for such, with respect to the settlement. Certain products sold by the Company, as well as products of others, were identified in connection with this litigation as part of an allegedly infringing use. Litigation with respect to the Company's products at issue has been stayed for purposes of case management. Accordingly, any decision on the merits of this case regarding the Company's products is expected to be delayed at least until the litigation with respect to the products of others is settled or adjudicated. As a result, the Company's participation in this litigation may be required in the future. The Company may incur significant costs with respect to such participation or if it is required to indemnify any purchasers or users of the Company's products for damages or expenses resulting from the litigation. In June 1995, a Magistrate Judge filed a recommendation that summary judgment be entered in favor of one of the Company's users engaged in litigation with Mr. Lemelson/Technivision. If this recommendation is accepted by the applicable District Court, the summary judgment would entirely dispose of all the actions in favor of the user. Until further notice by the Court, action regarding this litigation is stayed. The Company cannot predict the outcome of this or any similar litigation which may arise in the future, or the effect of such litigation on the operating results of the Company. The Company does not believe its products infringe any valid and enforceable claims of Mr. Lemelson's patents. EMPLOYEES At December 31, 1995, the Company employed 307 persons, including 119 in sales, marketing and support activities; 104 in research, development and engineering; 36 in manufacturing and quality assurance; and 48 in management, administration and finance. None of the Company's employees are represented by a labor union and the Company has experienced no work stoppages. The Company believes that its employee relations are good. ITEM 2: PROPERTIES In 1994, the Company purchased and renovated a 100,000 square foot building located in Natick, Massachusetts. The Company's corporate headquarters, principal administrative, sales and marketing, research, development and engineering, manufacturing and quality assurance, and support personnel are located in this facility. In addition, the Company leases sales offices in the United States in California, Illinois, and Oregon, as well as in Japan, France, Germany, England, Italy, Singapore, and Korea. In June 1995, the Company purchased an 83,000 square-foot office building adjacent to its corporate headquarters. The building is currently occupied with tenants who have lease commitments that expire at various dates through the year 2000. The Company will oversee these lease commitments until it is ready to take occupancy. 9 12 ITEM 3: LEGAL PROCEEDINGS To the Company's knowledge, there are no pending legal proceedings, other than as described in "Business - Patents and Licenses," which are material to the Company to which it is a party or to which any of its property is subject. From time to time, however, the Company may be subject to various claims and lawsuits by customers and competitors arising in the normal course of business, including suits charging patent infringement. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of the year ended December 31, 1995 to a vote of security holders through solicitation of proxies or otherwise. ITEM 4A: EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM OF THE REGISTRANT The following table sets forth the names, ages, and titles of the Company's executive officers at December 31, 1995:
NAME AGE TITLE - - ---- --- ----- Robert J. Shillman 49 President, Chief Executive Officer, and Chairman of the Board of Directors Patrick A. Alias 50 Executive Vice President of Sales and Marketing John J. Rogers, Jr. 37 Executive Vice President, Chief Financial Officer, and Treasurer Richard B. Snyder 52 Executive Vice President of Operations
Mr. Shillman, founder of the Company, has served as its President, Chief Executive Officer, and Chairman since its organization in 1981. Mr. Alias joined the Company in 1991 as Executive Vice President of Sales and Marketing. From 1990 to 1991, he served as President of Gimeor SA, a manufacturer of CAD/CAM software. Mr. Rogers joined the Company in 1991 as Director of Finance and Administration and was appointed Vice President of Finance and Administration and Treasurer in 1993, Chief Financial Officer in 1994, and Executive Vice President of Finance and Administration in 1995. From 1989 to 1991, he served as Senior Manager of Financial Control and Analysis for the Waters Division of Millipore Corporation, a manufacturer of liquid chromatography equipment. Mr. Rogers is a certified public accountant. Mr. Snyder joined the Company in 1991 as Executive Vice President of Operations. From 1981 to 1991, he held various positions within Prime Computer, including President and General Manager, Computer Systems Business Unit, Vice President Engineering, Vice President Systems Marketing and Development, and Vice President Software Development. The Computer Systems Business Unit of Prime Computer manufactures minicomputers and CAD/CAM systems. Executive officers are elected annually by the Board of Directors. There are no family relationships among the directors and the executive officers of the Company. 10 13 OTHER MEMBERS OF THE MANAGEMENT TEAM
NAME AGE TITLE - - ---- --- ----- Marilyn Matz 42 Vice President of Software Engineering E. John McGarry 39 Vice President of Development: Application Specific Accelerated Products, President and Chief Technical Officer of Acumen Kris Nelson 48 Vice President of North American Sales Hironobu Ohgusu 56 President of Cognex K.K. Henk Schalke 50 Vice President of Engineering David Schatz 38 Vice President of Corporate Development William Silver 41 Vice President of Research and Development
Ms. Matz and Messrs Nelson, Schatz, and Silver have been employed by the Company in their present or other capacities for no less than the past five years. Mr. McGarry joined the Company in 1995 when the company he founded in 1991, Acumen, Inc., was acquired by Cognex. From 1991 to 1995, he served as President of Acumen, Inc., a developer of machine vision systems for semiconductor wafer identification. Mr. Ohgusu joined the Company in 1992 as President of Cognex K.K., the Company's Japanese subsidiary. From 1989 to 1992, he served as President and CEO of Lonrho International Networks, Ltd., a manufacturer of computer diagnostic software. Mr. Schalke joined the Company in 1991 as Vice President of Engineering. From 1988 to 1990, he served as Vice President and General Manager for the Small Systems product line of Concurrent Computer Corporation, a manufacturer of real-time computer systems. 11 14 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Certain information with respect to this item may be found in the section captioned "Selected Quarterly Financial Data," appearing on page 35, and the section captioned "Company Information," appearing on page 36 of the Annual Report to Stockholders for the year ended December 31, 1995, which is Exhibit 13 hereto, and is incorporated herein by reference. The Company has never declared or paid cash dividends on shares of common stock. The Company currently intends to retain all of its earnings to finance the development and expansion of its business and therefore does not intend to declare or pay cash dividends on its common stock in the foreseeable future. Any future declaration and payment of dividends will be subject to the discretion of the Board of Directors of the Company, will be subject to applicable law, and will depend upon the Company's results of operations, earnings, financial condition, contractual limitations, cash requirements, future prospects, and other factors deemed relevant by the Company's Board of Directors. ITEM 6: SELECTED FINANCIAL DATA Information with respect to this item may be found in the section captioned "Five-Year Summary of Selected Financial Data," appearing on page 34 of the Annual Report to Stockholders for the year ended December 31, 1995, which is Exhibit 13 hereto, and is incorporated herein by reference. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information with respect to this item may be found in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing on pages 12 through 16 of the Annual Report to Stockholders for the year ended December 31, 1995, which is Exhibit 13 hereto, and is incorporated herein by reference. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this item, which includes the consolidated financial statements and notes thereto, report of independent accountants, and supplementary data, may be found on pages 17 through 35 of the Annual Report to Stockholders for the year ended December 31, 1995, which is Exhibit 13 hereto, and is incorporated herein by reference. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting or financial disclosure during 1995 or 1994. 12 15 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors of the Company may be found in the section captioned "Election of Directors," appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the 1996 Annual Meeting of Stockholders to be held on April 23, 1996. Such information is incorporated herein by reference. Information with respect to Executive Officers of the Company may be found in the section captioned "Executive Officers and Other Members of the Management Team of the Registrant" in Part I of this Annual Report on Form 10-K. ITEM 11: EXECUTIVE COMPENSATION Information with respect to this item may be found in the sections captioned "Information Concerning the Board of Directors," "Compensation/Stock Option Committee Report on Executive Compensation," "Comparison of Five Year Cumulative Total Returns Performance Graph for Cognex Corporation," and "Executive Compensation," appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the 1996 Annual Meeting of Stockholders to be held on April 23, 1996. Such information is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item may be found in the sections captioned "Principal Holders of Voting Securities" and "Security Ownership of Directors and Officers," appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the 1996 Annual Meeting of Stockholders to be held on April 23, 1996. Such information is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 13 16 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements The following consolidated financial statements of Cognex Corporation and the report of independent accountants relating thereto are included in the Company's Annual Report to Stockholders for the year ended December 31, 1995, which is Exhibit 13 hereto, and is incorporated herein by reference: Report of Independent Accountants for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993 Consolidated Balance Sheets at December 31, 1995 and 1994 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements (2) Financial Statement Schedule Included at the end of this report are the following: Report of Independent Accountants on the Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. (3) Exhibits The Exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index on page 19, immediately preceding such Exhibits. 14 17 (b) Reports on Form 8-K On October 4, 1995, the Company filed a Current Report on Form 8-K for the acquisition of Acumen, Inc. as follows: Item 2. Acquisition or Disposition of Assets Item 7. Financial Statements and Exhibits (a) Financial Statements of Business Acquired Report of Independent Accountants Statements of Income for the three months ended June 30, 1995 (unaudited) and the twelve months ended March 25, 1995 Balance Sheets as of June 30, 1995 (unaudited) and March 25, 1995 Statements of Stockholders' Equity for the three months ended June 30, 1995 (unaudited) and the twelve months ended March 25, 1995 Statements of Cash Flows for the three months ended June 30, 1995 (unaudited) and the twelve months ended March 25, 1995 Notes to Financial Statements (b) Pro Forma Financial Information Introductory Information Unaudited Pro Forma Statement of Income for the six months ended July 2, 1995 Unaudited Pro Forma Statement of Income for the twelve months ended December 31, 1994 Unaudited Pro Forma Balance Sheet as of July 2, 1995 Notes to Unaudited Pro Forma Financial Information (c) Exhibits Exhibit 2 - Stock Purchase Agreement dated as of July 21, 1995 among Acumen, Inc., the Shareholders of Acumen Inc., and Cognex Corporation Exhibit 27 - Financial Data Schedules (electronic filing only) 15 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Cognex Corporation /s/ Robert J. Shillman ----------------------------- Robert J. Shillman, President March 28, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - - --------- ----- ---- /s/ Robert J. Shillman President, Chief Executive Officer, March 28, 1996 - - ----------------------- and Chairman of the Board of Directors Robert J. Shillman (principal executive officer) /s/ John J. Rogers, Jr. Executive Vice President, Chief Financial March 28, 1996 - - ----------------------- Officer, and Treasurer John J. Rogers, Jr. (principal financial and accounting officer) /s/ William Krivsky Director March 28, 1996 - - ----------------------- William Krivsky /s/ Patrick Sansonetti Director March 28, 1996 - - ----------------------- Patrick Sansonetti /s/ Anthony Sun Director March 28, 1996 - - ----------------------- Anthony Sun /s/ Rueben Wasserman Director March 28, 1996 - - ----------------------- Rueben Wasserman
16 19 REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Cognex Corporation: Our report on the consolidated financial statements of Cognex Corporation has been incorporated by reference in this Form 10-K from page 33 of the 1995 Annual Report to Stockholders of Cognex Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedule for each of the three years in the period ended December 31, 1995 listed in Item 14(a) of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Boston, Massachusetts January 26, 1996 17 20 SCHEDULE II COGNEX CORPORATION VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - - ---------------------------------- ------------ ---------- ---------- ---------- ---------- Allowance for Doubtful Accounts 1995 $684 $ 25 -- -- $709 1994 597 159 -- $ (72) (A) 684 1993 322 435 -- (160) (A) 597 Reserve for Inventory Obsolescence 1995 $599 -- -- $ (58) (B) $541 1994 251 $360 -- (12) (B) 599 1993 151 128 -- (28) (B) 251
(A) Specific write-offs (B) Specific dispositions 18 21 EXHIBIT INDEX EXHIBIT NUMBER - - -------------- 2A Stock Purchase Agreement dated as of July 21, 1995 among Acumen, Inc., the Shareholders of Acumen, Inc., and Cognex Corporation (incorporated by reference to Exhibit 2 to the Current Report on Form 8-K filed on October 4, 1995) 2B Agreement and Plan of Merger dated as of February 29, 1996 among Cognex Corporation, Cognex Software Development, Inc., Isys Controls, Inc., and Richard Rombach (incorporated by reference to Exhibit 2 to the Current Report on Form 8-K filed on March 15, 1996) 3A Articles of Organization of the Company effective January 8, 1981, as amended June 8, 1982, August 19, 1983, May 15, 1984, April 17, 1985, November 4, 1986, and January 21, 1987 (incorporated by reference to Exhibit 3A to the Registration Statement Form S-1 [Registration No. 33-29020]). 3B Restated Articles of Organization of the Company effective June 28, 1989 (incorporated by reference to Exhibit 3C to the Registration Statement Form S-1 [Registration No. 33-29020]). 3C By-laws of the Company as amended February 9, 1990 (filed as Exhibit 3C to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 4 Specimen Certificate for Shares of Common Stock (incorporated by reference to Exhibit 4 to the Registration Statement Form S-1 [Registration No. 33-29020]). 10A Cognex Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 4A to Amendment No. 1 to the Registration Statement Form S-8 [Registration No. 33-32815]). 10B Cognex Corporation 1984 Stock Option Plan, as amended (incorporated by reference to Exhibit 4B to Amendment No. 2 to the Registration Statement Form S-8 [Registration No. 33-31657]). 10C Cognex Corporation 1992 Stock Option Plan (filed as Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). 10D Cognex Corporation 1993 Director's Stock Option Plan (filed as Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10E Cognex Corporation 1993 Employee Stock Option Plan (filed as Exhibit 10K to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10F Purchase and Sale Agreement with respect to the Natick Executive Park facility dated as of October 20, 1993 (filed as Exhibit 10L to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10G Purchase and Sale Agreement with respect to the Natick Executive Park facility dated as of June 30, 1995 * 11 Statement re computation of per share earnings * 13 Annual Report to Stockholders for the year ended December 31, 1995 (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K) * 21 Subsidiaries of the registrant * 23 Consent of Coopers & Lybrand L.L.P. * 27 Financial Data Schedule * * Filed herewith 19 EX-10.(G) 2 BUILDING PURCHASE AND SALE AGREEMENT 1 EXHIBIT 10G BUILDING PURCHASE AND SALE AGREEMENT Dated as of June 30, 1995 Arturo J. Gutierrez and Helen T. Sellew, as they are Trustees of Natick Executive Park Trust No. 2 under Declaration of Trust dated October 17, 1981 and recorded with Middlesex South District Deeds in Book 14474, at Page 129 with an address of c/o The Gutierrez Company, One Wall Street, Burlington, Massachusetts 01803 (the "Seller") agrees to SELL and Vision Drive, Inc., a Delaware corporation, having an address c/o Cognex Corporation, One Vision Drive, Natick, Massachusetts 01760 (the "Buyer") agrees to BUY, upon the terms hereinafter set forth, the improved premises located in Natick, Middlesex County, Massachusetts, all as more particularly described in Exhibit A attached hereto, together with the buildings and improvements located thereon, including without limitation: the building (the "Building"), together with all rights, privileges and easements appurtenant to the premises, including, without limitation, all minerals, oil or gas on or under such premises, development rights, air rights, water rights and any easements, rights of way or other interests in, on, or under any land, highway, alley, street or right of way abutting or adjoining such premises, and the fixtures and articles of personal property that are attached, appurtenant to, or used in connection with the said premises, including without limitation any and all windows, doors, furnaces, heaters, heating equipment, and fixtures appurtenant thereto, hot water heaters, partitions, plumbing and bathroom fixtures, electric and other lighting fixtures, security and alarm system, fences, gates, generators, ventilators and any intangible property now or hereafter owned by Seller and used in the ownership or operation of the premises including, without limitation, any permits, licenses, approvals, guaranties, warranties, contracts, lease agreements, utility contracts or other rights relating to the ownership, use or operation of the premises to the extent applicable to the premises. (The aforesaid premises and real property to be sold by Seller, including the Building, are herein collectively called, together with all appurtenant easements and real property rights, the "Premises"). 1. Title. The Premises are to be conveyed by good and sufficient quitclaim deed (the "Deed") running to Buyer or to the nominee designated by the Buyer by written notice to the Seller as herein provided. The Deed shall convey a good and clear record and marketable title to the Premises, insurable at standard rates and free from encumbrances and encroachments from or on the Premises, except: (i) existing building, zoning, health, environmental and similar land use laws, rules and regulations; and (ii) easements, restrictions, covenants, encumbrances and other matters of record more particularly described in Exhibit B; and (iii) unpaid sewer and water bills and real estate taxes, penalties, interest, demand 1 2 and other charges as of the date of closing; and (iv) the first mortgage held by Teachers' Insurance and Annuity Association of America dated August 11, 1982 and recorded with said Deeds in Book 14694, Page 436 (the "Mortgage"), with an unpaid principal balance as of the date hereof of approximately $7,566,826.00. The items set forth in (i), (ii), (iii) and (iv) shall be collectively, the "Permitted Encumbrances." 2. Purchase Price. Buyer shall pay Seller the sum of FIFTY THOUSAND DOLLARS ($50,000.00)(the "Purchase Price") for Seller's interest in the Premises. The Purchase Price shall be paid by certified or bank check or wire transfer at the time of delivery of the Deed. 3. Time of Closing; Delivery of Deed. The Deed is to be delivered at 10:00 a.m., on the date designated by Buyer by not less than two (2) business days notice to Seller, which date shall not be earlier than June 10, 1995 or later than August 10, 1995. Such time, as the same may be extended pursuant to Paragraph 5 hereof, hereinafter is referred to as the "Time of Closing." It is agreed that time is of the essence of this Agreement. 4. Condition of the Premises. Full possession of the Premises, (i) free of all tenants and occupants except for tenants under the leases referred to in Exhibit C attached hereto (collectively, the "Leases"); (ii) including such personal property as Seller may leave on the Premises; (iii) in broom-clean condition and (iv) as represented and warranted by Seller in Paragraph 16 hereby is to be delivered at the Time of Closing, the Premises to be then in the same condition they are in now, reasonable wear and tear and casualty excepted. Notwithstanding Buyer's right to inspect the Premises as set forth in Paragraph 18 hereof, Buyer and its agents shall be entitled to an inspection of the Premises prior to the Time of Closing in order to determine whether the condition thereof complies with the terms of this Paragraph 4. 5. Extension to Perfect Title or Make Premises Conform. If, at the Time of Closing, Seller shall be unable to give title or to make conveyance, or to deliver possession of the Premises all as herein stipulated, then Seller shall use reasonable efforts to remove all encumbrances, if any, which secure the payment of money including, but not limited to, attachments, liens, and mortgages (other than the Mortgage), and shall use best efforts to remove all other defects in title and to deliver possession as provided herein, and the Time of 2 3 Closing shall be extended for one period of thirty (30) days or such shorter time as needed for Seller to so perform. In the exercise of the removal of such other defects pursuant to this Paragraph, Seller shall not be required to expend more than an aggregate total of THREE THOUSAND DOLLARS ($3,000). If, at the expiration of the extended time, Seller shall have failed so to remove any encumbrances or defects in title or deliver possession of the Premises as the case may be, all as herein agreed, then any payments made under this Agreement shall be refunded forthwith and all other obligations of the parties hereto other than those arising under Paragraph 18 shall cease and this Agreement shall be void and without recourse to the parties hereto; provided that Buyer shall have the election, at either the original or extended Time of Closing, to accept such title as the Seller can deliver to the Premises in their then condition and to pay therefor the Purchase Price without deduction, in which case the Seller shall convey such title. If the Premises shall have been damaged by fire or casualty, then the Buyer shall have the right either (a) to terminate this Agreement by written notice to the Seller and Seller shall promptly return any deposit to the Buyer and this Agreement shall be rendered null and void; or (b) to receive from Seller, on delivery of the Deed, all amounts recovered or recoverable on account of such insurance less any amounts reasonably expended by Seller for partial restoration, subject to the rights of the holder of the Mortgage. 6. Acceptance of the Deed. The acceptance of the Deed shall be deemed to be a full performance and discharge of every agreement and obligation herein contained or expressed, except as otherwise expressly set forth herein. 7. Use of Purchase Money to Clear Title. To enable Seller to make the conveyance as herein provided, Seller may at the Time of Closing use the purchase money or any portion thereof, subject to the limitation in Paragraph 5 hereof, to clear the title of any or all encumbrances or interests other than the Permitted Encumbrances, provided that all instruments so procured are recorded simultaneously with the delivery of the Deed, or reasonably soon thereafter. 8. Insurance. Until the Closing, the Seller shall maintain insurance on the Premises as follows: Type of Insurance ) Amount of Coverage ) (a) Fire ) $7.5 Million ) (b) Extended Coverage ) As presently insured ) (c) Liability ) $1 Million (per occurrence) ) $2 Million (aggregate) 3 4 9. Adjustments. Rents shall be credited to Buyer for the period after the Closing Date, subject to prior rights of the holder of the Mortgage, and the amount of such credit shall be shall be apportioned as of the Time of Closing. 10. Broker. Buyer and Seller hereby mutually represent and warrant that they have dealt with no broker or agent in connection with this transaction or the Premises, and each party covenants and agrees to defend, indemnify and hold harmless the other party from and against any and all damages, claims, losses and liabilities, including attorney's reasonable fees, incurred by the other, arising out of or resulting from the failure of this representation and warranty. This representation and warranty shall survive the Time of Closing, or if the closing does not occur, the termination of this Agreement. 11. Deposits and Liquidated Damages. All deposits made hereunder shall be held by Hinckley, Allen and Snyder ("Escrow Agent"), in escrow and shall be duly accounted for at the Time of Closing. All deposits shall be placed in a non-interest bearing account. Buyer and Seller each respectively indemnify and hold harmless Escrow Agent from all liability, cost or damage, including attorneys' reasonable fees, Escrow Agent sustains as a result of service as escrow agent hereunder, and agrees that Escrow Agent shall only be liable to Buyer or Seller in the event of gross negligence or willful misconduct. If Buyer shall fail to fulfill Buyer's obligations hereunder, all deposits made hereunder by Buyer shall be retained by Seller as its full and liquidated damages in lieu of all the rights and remedies which Seller may have against Buyer in law or in equity for such failure, other than for Buyer's obligations under Paragraphs 10 and 18 of this Agreement, the amount of such deposits being agreed to by the parties hereto as a reasonable forecast of the damages that would be sustained by Seller in such an event. Nothing herein shall prevent Escrow Agent from fully representing Seller in connection with the transaction described herein. 12. Notice. All notices required or permitted to be given hereunder shall be in writing and delivered by hand or mailed postage prepaid, by registered or certified mail, or sent by Federal Express, addressed in the case of Buyer to the address set forth above with a simultaneous copy to Michael H. Glazer, P.C., Goodwin, Procter & Hoar, Exchange Place, Boston, Massachusetts 02109 and in the case of Seller, to the address set forth above with a simultaneous copy to Alan P. Gottlieb, Esq., Hinckley, Allen and Snyder, One Financial Center, Boston, Massachusetts 02111, or in the case of either party or their counsel to such other address as shall be designated by written notice given to the other party. Notices shall be effective on the earlier of (a) the date when delivered, (b) two business days after the date when so mailed or sent or (c) the date received in case of Federal Express. 13. OMITTED. 4 5 14. Delivery of Documents. At the Time of Closing, Seller shall deliver the following documents, satisfactory in form and substance to Buyer and Buyer's counsel, properly executed and acknowledged as required: (i) The Deed; and (ii) An assignment and assumption of leases in the form attached hereto as Exhibit D (the "Assignment"); and (iii) A counterpart of a Designation of Person Responsible for Tax Reporting under Code Paragraph 6045 (the "6045 Designation") in the form attached and marked Exhibit 6045; and (iv) The affidavit required under Code Paragraph 1445(b)(2) described in Paragraph 16(ii) below; and (v) A certificate from Seller that all warranties and representations set forth in Paragraph 16 are true and correct in all material respects as of the Time of Closing; and (vi) A persons in possession and mechanics lien indemnity addressed to Buyer's title insurer on such terms and conditions as such title insurer may reasonably require in order to delete the standard title insurance exceptions for parties in possession and mechanics liens exceptions; and (vii) The originals of all Leases; and (viii) Any plans and/or specifications relating to the Building or the Premises in Seller's possession, without representation or warranty as to the accuracy or completeness thereof. (b) The Buyer shall deliver: (i) The balance of the Purchase Price, adjusted as herein provided; and (ii) Counterpart copies of the Assignment; and (iii) Executed counterpart copies of the 6045 Designation. 15. Offer to Purchase. Any memoranda or prior offer, letter or agreements executed by the parties hereto in connection with the purchase and sale of the Premises as contemplated hereunder are hereby superseded and shall have no further force and effect. 5 6 16. Representations and Warranties of Seller. (a) Seller hereby represents and warrants to Buyer as of the date of this Agreement and as of the Time of Closing as follows: (i) Any contract or agreement, including, without limitation, equipment leases or service or maintenance contracts or similar agreements, or brokerage, leasing or similar agreements with respect to the Property other than the Leases and the Permitted Encumbrances (collectively, the "Contracts") shall be terminated as of the Time of Closing unless otherwise agreed by the parties. Neither Seller nor, to the best of Seller's knowledge, any other party to any Contract is in default thereunder and, to the best of Seller's knowledge, there exists no state of facts which, with notice and/or the passage of time, would ripen into a default under any such Contract. (ii) Seller is not a "foreign person" as defined by the Internal Revenue Code of 1986, as amended (the "Code"), Paragraph 1445. The United States Taxpayer Identification Number of Seller is 04-2752438, and Seller shall execute and deliver to Buyer at the Closing an affidavit or certificate in compliance with Code Paragraph 1445(b)(2) and the applicable regulations thereunder. (iii) The execution, delivery and performance of this Agreement and the transactions contemplated hereby will not cause or result in a breach of any of the terms and conditions of, or constitute a default under, any mortgage, note, bond, debenture, indenture, agreement, contract, license or other instrument, obligation or understanding (whether written or otherwise) to which the Seller is now a party other than the Mortgage. (iv) Seller is a nominee trust created under the laws of the Commonwealth of Massachusetts and the Trustees thereof shall have all necessary power and authority to enter into and carry out its obligations under this Agreement. Seller is and at the Time of Closing shall be a trust duly and validly organized and existing under the laws of the Commonwealth of Massachusetts. This Agreement and the other agreements and all documents that are to be executed by Seller and delivered to Buyer at the Closing are or at the Time of Closing will be duly authorized, executed and delivered by Seller and all consents required under Seller's organizational documents or by law shall have been obtained. (v) Except as noted below, there is no existing or, to the best of Seller's knowledge, threatened legal action of any kind involving Seller or the Premises, which if determined adversely to the Premises or Seller would have a material adverse effect on the Premises or would interfere with Seller's ability to consummate the transactions contemplated by this Agreement. Buyer acknowledges that it has been notified that Teachers' Insurance and Annuity Association of America ("Teachers") has put Seller 6 7 into default and has begun foreclosure of the Mortgage and other security documents which Teachers holds as security for payment of a loan from Teachers to Seller. (vi) Seller has delivered to Buyer a true and complete copy of the Leases and all extensions, renewals and amendments thereto. The Leases are in full force and effect and Seller is not in default thereunder, except that (x) the Leases have not been approved by Teachers, and (y), McDonough & Scully, a tenant in the Building, is currently in default under its Lease. No brokerage commission or compensation are payable in respect of these leases, except for commissions due (x) on the SystemSoft lease or (y) in the event of an extension or expansion by Aspect Medical as set forth on Exhibit E. For purposes of clauses (v), the term "knowledge" shall mean the actual knowledge of Arthur J. Gutierrez or Keith Taylor or George Place only. No claim on account of any breach of any of the foregoing warranties and representations shall be made later than six (6) months from the Time of Closing and any such claim must be in writing, shall state in reasonable detail the nature of the claim and shall be delivered in the manner in which notices are to be given under the Agreement. Notwithstanding anything to the contrary contained herein, in no event shall Seller's liability for any breach of any warranty or representation exceed $40,000 in the aggregate and only as to an amount in excess of $5,000 for any occurrence. (b) Seller shall not lease, voluntarily convey or otherwise voluntarily transfer Seller's interest, or any portion thereof, in the Premises prior to the Time of Closing and Seller shall not contract or consent to do any of the foregoing, other than in case of foreclosure of the Mortgage, without prior written approval of Buyer. (c) Subject to the last paragraph in Paragraph 16(a) and Paragraph 25, Seller shall indemnify and defend Buyer against and hold Buyer harmless from any and all losses, costs, damages, liabilities and expenses (including without limitation attorneys' fees and court costs) arising out of any breach by Seller of its representations and warranties hereunder or as a result of any claim against Buyer based on Seller not having paid all amounts due under any Contract. (d) All representations and warranties by the Seller are intended to be and shall remain true and correct as of the Time of Closing, shall be deemed material and shall survive the execution and delivery of this Agreement and the Deed for six (6) months. 17. Buyer hereby represents and warrants to Seller as follows: (i) The execution, delivery and performance of this Agreement and the transactions contemplated hereby will not cause or result in a breach of any of the 7 8 terms and conditions of, or constitute a default under, any mortgage, note, bond, debenture, indenture, agreement, contract, license or other instrument, obligation or understanding (whether written or otherwise) to which Buyer is now a party; (ii) Buyer is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts, with full power and authority to enter into and carry out all of its obligations under this Agreement. The execution of this Agreement by Buyer has been duly authorized by all appropriate votes of the Board of Directors of Buyer and, if necessary, the shareholders of Buyer. 18. Contingency Period (a) Buyer undertakes to inspect the Premises and make such further investigations as it deems necessary or appropriate during the period (the "Contingency Period") from the date of this Agreement to August 8, 1995 to determine whether Buyer is or is not satisfied, in Buyer's sole discretion, with the following listed matters (collectively the "Contingencies"): (i) the physical condition of the Premises; (ii) the Premises' compliance with all building, land use, environmental, safety, zoning and other applicable codes, regulations, rules and laws of the Town of Natick, the Commonwealth of Massachusetts, or the United States of America; (iii) the availability of satisfactory permits, licenses and approvals for Buyer's intended use of the Premises, including without limitation, the existence of access and egress to and from the Premises via public ways or by valid easements over the land of others which easements are affirmatively insured by Buyer's title company; (iv) the availability of utilities required for Buyer's intended use and operation of the Premises; and (v) the state of record title to the Premises as of June 5, 1995. (b) During the Contingency Period, Seller will afford Buyer and/or its agents access at any time to the Premises and will make available to Buyer and its agents such further information concerning the Premises as is requested by Buyer to complete its investigation concerning the Contingencies at no cost to Seller; provided that: (i) Each and all of such entries and examinations shall be at Buyer's sole risk and expense, Buyer agreeing to indemnify and save Seller harmless from and against any and all claims, cost, loss, damage, liability or expense arising out of or in connection with any work performed by or on behalf of Buyer pursuant to the provisions hereof or any such entry by Buyer or anyone authorized by, 8 9 representing or purporting to be representing Buyer, Buyer shall not, however, have any liability for any condition or state of facts discovered in respect of the Premises as long as Buyer promptly notifies Seller of the same and otherwise exercises reasonable care in the manner in which Buyer or its agents or its contractors exercise Buyer's rights of entry under this Paragraph 18; (ii) All of the aforesaid activities and any activities undertaken pursuant to subparagraph (iii) next below shall be undertaken in such a manner as to reduce to an absolute minimum the interference with the conduct of business by Seller and tenants and other occupants of the Premises; and (iii) Buyer shall repair and/or restore any damage or disturbance to the Premises caused by Buyer in performing any of said activities promptly after the completion of them or, if this Agreement shall sooner terminate, promptly upon such termination. Any claims for recovery pursuant to the provisions of this subparagraph 18(b) must be made within six (6) months of termination of this Agreement and any such claim must be in writing, shall state in reasonable detail the nature of the claim and shall be delivered in the manner in which notices are to be given under this Agreement. (c) On or before the expiration of the Contingency Period, Buyer shall notify Seller in writing whether or not Buyer is satisfied as to the Contingencies. If, prior to the expiration of the Contingency Period, Buyer notifies Seller in writing that it is dissatisfied with the Contingencies, as Buyer may determine in its sole discretion, then Buyer shall thereby terminate this Agreement, all deposits made hereunder shall be returned to Buyer, and except as provided in Paragraphs 10 and 18(b), there shall be no further liability hereunder by either party against the other. 19. Payments under Leases. Seller shall forward any and all amounts paid pursuant to the Leases which are received by Seller on or after the Time of Closing immediately to Buyer. 20. OMITTED 21. OMITTED 22. OMITTED 23. Construction of Agreement. This instrument is to be construed as a Massachusetts contract, is to take effect as a sealed instrument, sets forth the entire contract 9 10 between the parties, is binding upon and inures to the benefit of the parties hereto and their respective heirs, devisee, executors, administrators, successors and assigns, and may be cancelled, modified or amended only by a written instrument executed by both the Seller and the Buyer. The captions and marginal notes are used only as a matter of convenience and are not to be considered a part of this agreement or to be used in determining the intent of the parties to it. 24. MCA Practice Standards. Any matter or practice arising under or relating to this Agreement which is the subject of a practice standard of the Massachusetts Conveyancers Association shall be governed by such standard to the extent applicable. 25. No Personal Liability. If the Seller or the Buyer executes this Agreement in a representative or fiduciary capacity only the principal or the estate represented shall be bound, and neither the Seller or Buyer so executing, nor any shareholder or beneficiary of any trust, shall be personally liable for any obligation, express or implied, hereunder. 26. OMITTED This Agreement may be signed in one or more counterparts each of which shall have the effect of an original instrument when counterparts have been signed by all of the parties hereto. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first set forth above. BUYER: VISION DRIVE, INC. By: /s/ Robert J. Shillman ------------------------------ Its duly authorized: President ------------- 10 11 SELLER: /s/ Arturo J. Gutierrez ---------------------------------- Arturo J. Gutierrez /s/ Helen T. Sellew ---------------------------------- Helen T. Sellew Each as Trustee of Natick Executive Park Trust No. 2 and not individually 11 12 EXHIBIT A Those certain premises in Natick, Middlesex County, Massachusetts, being located on the northerly side of Worcester Street (Route 9) and being Lot 2A as shown on a certain plan of land entitled "Natick Executive Park - Lot Line Adjustment; Lots 1A, 2, 4, 6, & 7" dated September 8, 1993, revised December 3, 1993, prepared by The Gutierrez Company, based on a survey by MacCarthy & Sullivan Engineering Inc., (the "Plan") recorded as Plan 71 of 1994 in Book 24219, Page 453. Together with all rights and easements appurtenant thereto, insofar as the same are in force and applicable. 13 EXHIBIT B -- SCHEDULE OF ENCUMBRANCES 1. Rights or claims of the following tenants in possession under unrecorded leases: (a) North American Society for Pacing Electrophysiology (b) McDonough & Scully, Inc. (c) NEC Business Communication Systems (East), Inc. 2. Such state of facts as is shown on survey entitled, "Natick Executive Park" prepared by the Gutierrez Company dated September 8, 1993 and recorded as Plan No. 71 of 1994 in Book 24129, Page 453. 3. Terms and provisions of takings by the Commonwealth of Massachusetts for Route 9 and conveyances to the Commonwealth recorded in Book 5607, Page 1; Book 5713, Page 440; Book 5699, Page 370 and Book 5670, Page 244. 4. Rights and easements granted to New England Telephone and Telegraph Company by instrument dated July 29, 1981, recorded in Book 14370, Page 324. 5. Rights of the Town of Natick and others under Municipal Easement No. I dated November 19, 1981 granted by George P. Sellew, Jr., and Helen T. Sellew, Trustees of 721 Worcester Street Trust to the Town of Natick recorded in Book 14474, Page 122, as shown on survey entitled "Plan of Land in Natick, Mass. Owned by Natick Executive Park Trust No. 2" Scale 1" equals 40' dated June 25, 1982 made by MacCarthy & Sullivan Engineering, Inc. 6. Rights of the Town of Natick and others under Municipal Easement No. II dated November 17, 1981 granted by George P. Sellew, Jr. and Arturo J. Gutierrez, Trustees of Natick Executive Park Trust No. 1 to the Town of Natick recorded on November 24, 1981 in Book 14474, Page 126. NOTE: The rights described in Permitted Exceptions No. 3, 4 and 6 affect only certain appurtenant rights benefitting the real property described in Exhibit A. 7. Rights and easements of said Trustees of Natick Executive Park Trust No. 1 and Trustees of 721 Worcester Street Trust as set forth in Mutual Grant of Easements dated March 31, 1982 by and among Trustees of Natick Executive Park Trust No. 1, said Trustees of Natick Executive Park Trust No. 2 and Trustees of 721 Worcester Street Trust recorded in Book 14584, Page 229. 8. Rights and easements of the Trustees of 721 Worcester Street Trust as set forth in Grant of Easements No. II dated June 18, 1982 by and among the Trustees of Natick Executive Park Trust No. 2 and the Trustees of 721 Worcester Street Trust, recorded on August 12, 1982 as Instrument No. 111. 14 9. Mortgage Deed recorded on April 14, 1982 with said Deeds in Book 14584, Page 253. NOTE: Permitted encumbrance No. 9 affects only certain appurtenant rights benefitting the real property described in Exhibit A. 10. Grant of Drainage Easement from Arturo J. Gutierrez and Helen T. Sellew, Trustees of Natick Executive Park Trust No. 2 to Helen T. Sellew and Arturo J. Gutierrez, Trustees of Natick Executive Park Trust No. 3 dated January 10, 1994 and recorded January 31, 1994 as Instrument No. 406. 11. Grant of Parking Easement from Arturo J. Gutierrez and Helen T. Sellew, Trustees of Natick Executive Park Trust No. 2 to Cognex Corporation dated January 10, 1994 and recorded on January 31, 1994 as Instrument No. 407. 12. Grant of Easement and Maintenance Agreement by and among Cognex Corporation; Natick Executive Park Retail Limited Partnership; Arturo J. Gutierrez and Helen T. Sellew, Trustees of Natick Executive Park Trust No. 2; Arturo J. Gutierrez and Helen T. Sellew, Trustees of Natick Executive Park Trust No. 3 and Helen T. Sellew, Trustee of 721 Worcester Street dated January 10, 1994 and recorded in Book 24219, Page 524, as affected by Amendment to Grant of Easement and Maintenance Agreement dated March 29, 1995, recorded in Book 25292, Page 298. 13. Mortgage Deed from George P. Sellew, Jr., and Arturo J. Gutierrez, Trustees of Natick Executive Park Trust No. 2 and George P. Sellew, Jr., and Arturo J. Gutierrez, Trustees of Natick Executive Park Trust No. 1, to Teachers Insurance and Annuity Association of America ("TIAA") dated August 11, 1982 and recorded in Book 14694, Page 436, as modified by First Supplement to Mortgage Deed by and among George P. Sellew, Jr., Arturo J. Gutierrez and John A. Cataldo, Trustees of Natick Executive Park Trust No. 2 and George P. Sellew, Jr., Arturo J. Gutierrez and John A. Cataldo, Trustees of Natick Executive Park Trust No. 1 and TIAA dated October 12, 1983 and recorded in Book 15283, Page 484 and further modified by Second Supplement to Mortgage Deed between Trustees of Natick Executive Park Trust No. 2 and TIAA dated February 14, 1989 and recorded in Book 19660, Page 26 and further amended by Mortgage Spreader and Modification Agreement by and between Trustees of Natick Executive Park Trust No. 2 and TIAA dated January 10, 1994 and recorded January 31, 1994 as Instrument No. 394. 14. Assignment of Leases and Rents from Trustees of Natick Executive Park Trust No. 2 to TIAA recorded on August 12, 1982 in Book 14694, Page 473. 15. U.C.C. Financing Statement naming George P. Sellew, Jr., and Arturo J. Gutierrez, Trustees as Debtors and TIAA as Secured Party recorded August 12, 1982 in Book 14694, Page 479 as affected by U.C.C.-3 Financing Statement recorded January 31, 1994 as Instrument No. 414. 15 16. Assignment of Lessor's Interest in Lease(s) from Trustees of Natick Executive Park Trust No. 2 to TIAA recorded February 22, 1989 in Book 19660, Page 39. 17. U.C.C. Financing Statement naming Helen T. Sellew and Arturo J. Gutierrez, Trustees as Debtors and TIAA as Secured Party recorded March 24, 1994 in Book 24386, Page 534. 18. Lease to Aspect Medical Systems, Inc., dated September 8, 1994, Notice of which was recorded October 11, 1994 in Book 24921, Page 476. 19. Notice of Foreclosure recorded in Book 25195, Page 443. EX-11 3 STATEMENT RE COMPUTATION OF PER SHARE 1 EXHIBIT 11 COGNEX CORPORATION COMPUTATION OF PER SHARE EARNINGS Weighted average common and common share equivalents were computed as follows (a):
DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- Weighted average common shares outstanding ... 38,175,461 34,559,556 33,632,452 Weighted average options outstanding ......... 7,448,296 7,621,584 4,577,520 Shares assumed to be purchased ............... (3,672,012) (5,031,566) (2,541,990) ---------- ---------- ---------- Primary weighted average common and common equivalent shares outstanding ............... 41,951,745 37,149,574 35,667,982 Dilutive effect of weighted average options .. 656,725 774,920 5,740 ---------- ---------- ---------- Fully diluted weighted average common and common equivalent shares outstanding ........ 42,608,470 37,924,494 35,673,722 ========== ========== ==========
(a) Adjusted for the two-for-one stock splits effective December 18, 1995 and September 30, 1993. EX-13 4 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY All of the Company's major geographic areas grew in excess of 55% to contribute to a 67% increase in worldwide revenue for the year ended December 31, 1995 over the year ended December 31, 1994. Net income, excluding the impact of a charge for acquired in-process technology in the third quarter of 1995, increased 107% over the prior year. Sales to international customers continued to be a significant portion of the Company's business, representing 59% of revenue in 1995 and increasing 61% over the prior year. Sales to domestic customers increased 77% over the prior year. The Company's financial position remained strong at December 31, 1995, with working capital growing to $119,402,000, an increase of $30,783,000 from the working capital balance at December 31, 1994. In 1995, the Company purchased an 83,000 square-foot building adjacent to its corporate headquarters and began work on a planned 50,000 square-foot addition to its existing headquarters building to accommodate anticipated growth. Also in 1995, the Company acquired Acumen, Inc., a developer of machine vision systems for semiconductor wafer identification. On February 29, 1996, the Company acquired Isys Controls, Inc., a developer of ultra-high performance systems that automatically detect and classify surface flaws and defects on a variety of high value-added materials. Under the terms of the acquisition, to be accounted for as a pooling of interests, the Company exchanged 1.4 million common shares for all of the outstanding common stock of Isys. Isys' historical financial position and results of operations are not significant compared to the Company's financial position and results of operations. The following table sets forth certain consolidated financial data as a percentage of revenue for the years ended December 31, 1995, 1994, and 1993:
YEAR ENDED DECEMBER 31, 1995 1994 1993 ---------------------- Revenue 100% 100% 100% Cost of revenue 22 22 24 --------------------- Gross margin 78 78 76 Research, development and engineering expenses 13 16 14 Selling, general and administrative expenses 23 27 28 Charge for acquired in-process technology(1) 9 -- -- --------------------- Income from operations 33 35 34 Interest income 3 2 3 --------------------- Income before provision for income taxes 36 37 37 Provision for income taxes 14 11 11 --------------------- Net income 22% 26% 26% --------------------- (1) Charge from the write-off of acquired in-process technology in connection with the acquisition of Acumen, Inc.
12 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994: Revenue for the year ended December 31, 1995 increased 67% to $104,543,000 from $62,484,000 for the year ended December 31, 1994. Contributing to the revenue increase, each of the Company's major geographic areas, the United States, Japan, and Europe, grew in excess of 55% from the prior year. Revenue from international customers amounted to $61,924,000 in 1995, compared to $38,451,000 in 1994, an increase of 61%. Revenue from domestic customers increased 77% over the prior year. The increase in worldwide revenue is due primarily to increased volume generated from Original Equipment Manufacturer (OEM) customers. Sales to OEM customers increased $29,792,000, or 60%, from the prior year and over 50 new OEM customers were added worldwide in 1995. OEM relationships typically take two to five years to reach significant sales and volume levels. In addition, sales to factory floor customers increased $12,267,000, or 96%, from the prior year and grew to 24% of revenue in 1995 from 20% of revenue in 1994. Over 140 new factory floor customers were added worldwide in 1995. The combined sales of the Cognex 2000 and 3000 Series vision systems increased $5,450,000, yet decreased as a percentage of revenue to 21% for the year ended December 31, 1995 from 27% for the year ended December 31, 1994. Sales of the Cognex 4000 Series vision system increased $12,580,000, yet decreased as a percentage of revenue to 38% in 1995 from 44% in 1994. Sales of the Cognex 5000 Series vision system increased $14,720,000 and grew to 28% of revenue in 1995 from 23% of revenue in 1994. The decline in sales as a percentage of revenue of the Cognex 2000, 3000, and 4000 products and the increase in sales as a percentage of revenue of the Cognex 5000 products reflects the transition to newer products. Checkpoint, the Company's "easy-to-use" vision system designed for the factory floor marketplace which was introduced in 1994, grew to 5% of the Company's revenue in 1995. Gross margin as a percentage of revenue was consistent for the year ended December 31, 1995 compared to the year ended December 31, 1994, representing 78% of revenue in both years. Research, development and engineering expenses increased to $13,190,000 for the year ended December 31, 1995 from $9,933,000 for the year ended December 31, 1994. Expenses as a percentage of revenue were 13% in 1995 compared to 16% in 1994. The increase in aggregate costs is due primarily to higher personnel-related costs to support the Company's investment in the research and development of new and existing products. In 1995, the number of employees engaged in research, development and engineering activities increased by 39% over the prior year. The decrease in expenses as a percentage of revenue is due to revenue growth outpacing the investment in research and development. Selling, general and administrative expenses increased to $23,973,000 for the year ended December 31, 1995 from $16,847,000 for the year ended December 31, 1994. Expenses as a percentage of revenue were 23% in 1995 compared to 27% in 1994. The increase in aggregate costs is due primarily to higher personnel-related costs, both domestically and internationally, to support the Company's worldwide sales 13 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) effort, in addition to costs related to fluctuations in foreign currency exchange rates. In 1995, the number of employees engaged in sales, marketing, and support activities increased by 36% over the prior year. As discussed in the Notes to Consolidated Financial Statements, on July 21, 1995, the Company acquired Acumen, Inc. for approximately $14,000,000. $10,189,000 of the purchase price was allocated to in-process technology, which was charged to expense in the third quarter of 1995. This charge is not deductible for tax purposes. The Company expects to invest considerable additional development efforts related to the in-process technology to add functionality, increase hardware performance, and conform and integrate the technology to the Company's product standards. These expenditures are expected to be paid out through 1996 with anticipated funding from cash flow generated from operations and are not expected to significantly impact the planned level of research and development expenditures. Interest income increased to $2,965,000 for the year ended December 31, 1995 from $1,462,000 for the year ended December 31, 1994. The increase in interest income is due primarily to an increased investment base. The Company's effective tax rate for the year ended December 31, 1995 was 39%, compared to 31% for the year ended December 31, 1994. The increase in the effective tax rate is due primarily to the impact of a $10,189,000 charge for acquired in-process technology which had no associated tax benefit. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993: Revenue for the year ended December 31, 1994 increased 44% to $62,484,000 from $43,371,000 for the year ended December 31, 1993. Revenue from international customers amounted to $38,451,000 in 1994, compared to $25,927,000 in 1993, an increase of 48%. Revenue from domestic customers increased 38% over the prior year. The increase in worldwide revenue is due primarily to the growth of the Company's existing customer base in Japan and the United States, as well as an expanded customer base in Europe. Much of the increased business in Japan results from those customers who export their products, which incorporate Cognex machine vision, to countries in the Pacific Rim, Europe, and the United States. One customer, based in Japan, represented 20% and 24% of revenue for the years ended December 31, 1994 and December 31, 1993, respectively. In addition, over 40 new Original Equipment Manufacturer (OEM) customers and over 65 new factory floor customers were added worldwide in 1994. No significant revenues from these new customers are expected until late 1995 or 1996. The combined sales of the Cognex 2000 and 3000 Series vision systems increased $1,603,000, yet decreased as a percentage of revenue to 27% for the year ended December 31, 1994 from 35% for the year ended December 31, 1993 as a result of the increase in revenue associated with newer products. Sales of the Cognex 4000 Series vision system increased $5,772,000 over the prior year, yet declined as a percentage of revenue to 44% from 50%. Sales of the Cognex 5000 Series vision system represented 23% of revenue in 1994 and 9% of revenue in 1993. Revenue from the 5000 products for the year ended December 31, 1994 increased $10,229,000 over the year ended December 31, 1993. 14 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Gross margin for the year ended December 31, 1994 increased to $48,600,000, or 78% of revenue, from $33,091,000, or 76% of revenue, for the year ended December 31, 1993. The gross margin percentage for the year ended December 31, 1993 reflects a reduction of three percentage points due to certain research and development contracts that were entered into in 1992 and completed in 1993. Gross margin, excluding the impact in 1993 of the research and development contracts, declined to 78% for the year ended December 31, 1994 from 79% for the year ended December 31, 1993. This change is primarily due to higher product sales discounts for volume shipments to certain customers in 1994 and the shift in product sales as a percentage of revenue from the 2000 and 3000 Series vision systems to the 5000 Series vision systems which carry lower unit margins. Research, development and engineering expenses increased to $9,933,000 for the year ended December 31, 1994 from $6,205,000 for the year ended December 31, 1993. Research, development and engineering expenses as a percentage of revenue were 16% in 1994 compared to 14% in 1993. In 1993, a portion of aggregate research, development and engineering costs were incurred to support research and development contracts that were completed by December 31, 1993. These costs were classified as "Cost of revenue." No such contract activities were in place in 1994. Aggregate costs increased 19% for the year ended December 31, 1994 over the year ended December 31, 1993. The increase in aggregate costs is due primarily to higher personnel costs to support the Company's investment in the research and development of new and existing products. Selling, general and administrative expenses increased to $16,847,000 for the year ended December 31, 1994 from $12,183,000 for the year ended December 31, 1993. Selling, general and administrative expenses as a percentage of revenue decreased to 27% in 1994 from 28% in 1993. The increase in absolute dollars is primarily due to higher personnel costs, both domestically and internationally, to support the Company's increased revenue and customer base, combined with promotional costs related to the introduction of new products. In addition, strengthening foreign currencies during 1994, primarily in Japan and France, added to the cost of the Company's foreign operations. Interest income increased to $1,462,000 for the year ended December 31, 1994 from $1,316,000 for the year ended December 31, 1993. The increase in interest income is due primarily to an increased investment base. The Company's effective tax rate for the year ended December 31, 1994 was 31%, compared to 30% for the year ended December 31, 1993. The increase in the effective tax rate is primarily due to the higher federal statutory rate. LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements during the year ended December 31, 1995 were met through cash flow generated from operations. Working capital at December 31, 1995 was $119,402,000, an increase of $30,783,000 from the working capital balance at December 31, 1994. Cash and investments increased 15 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) $9,145,000 from December 31, 1994 primarily as a result of $21,835,000 of cash generated from operations and $4,430,000 of proceeds from the issuance of stock under stock option and stock purchase plans, offset by $10,503,000 of capital expenditures and $6,654,000 in cash paid as part of the cost to acquire Acumen, Inc. Cash generated from operations includes net income adjusted primarily for the effects of the charge for acquired in-process technology, the tax benefit from the exercise of stock options, and depreciation and amortization, offset by increases in current assets, primarily accounts receivable and inventories. As discussed in the Notes to Consolidated Financial Statements, the Company is transitioning to a third-party contractor for the majority of its manufacturing operations. As a result, the Company's inventory levels may decline in 1996. At December 31, 1995, the Company had unconditional obligations to purchase approximately $2,317,000 of inventory from the third-party contractor within 60 days. At December 31, 1995, the Company had no outstanding short-term or long-term debt. The Company has a $1,000,000 unsecured demand line of credit with a bank which is available through November 15, 1996. There have been no borrowings under the line of credit. Capital requirements consist primarily of expenditures for computer hardware and software equipment, along with expenditures related to the expansion of the Company's office space to accommodate anticipated growth. Capital expenditures for the year ended December 31, 1995 amounted to $10,503,000, all of which were funded out of current operations. Included in these capital expenditures was the purchase of an 83,000 square-foot office building adjacent to the Company's corporate headquarters for $5,300,000 in cash. The building is occupied with tenants who have lease commitments that expire at various dates through the year 2000. The Company will oversee these lease commitments until it is ready to take occupancy. Also in 1995, the Company began work on a planned 50,000 square-foot addition to its headquarters building. Future cash requirements related to the addition are anticipated to approximate between $5,000,000 and $6,000,000 and are expected to be paid out through the first quarter of 1997 with anticipated funding from cash generated from operations. On July 21, 1995, the Company acquired Acumen, Inc. for approximately $14,000,000. The purchase price includes $8,452,000 in cash, $6,654,000 of which was paid out in 1995, with the remaining balance to be paid out through the year 2000. The Company believes that the existing cash and investment balances, together with cash generated from operations, will be sufficient to meet the Company's planned working capital and capital expenditure requirements through 1996, including potential business acquisitions. In November 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation." The Company intends to adopt the disclosure requirements of SFASNo. 123 for the year ended December 31, 1996; therefore, the adoption will have no impact on the Company's financial position or results of operations. 16 6 COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, (Dollars in thousands, except per share amounts) 1995 1994 1993 - - --------------------------------------------------------------------------------- Revenue $104,543 $ 62,484 $ 43,371 Cost of revenue 22,543 13,884 10,280 ------------------------------ Gross margin 82,000 48,600 33,091 Research, development and engineering expenses 13,190 9,933 6,205 Selling, general and administrative expenses 23,973 16,847 12,183 Charge for acquired in-process technology 10,189 ------------------------------ Income from operations 34,648 21,820 14,703 Interest income 2,965 1,462 1,316 ------------------------------ Income before provision for income taxes 37,613 23,282 16,019 Provision for income taxes 14,579 7,210 4,871 ------------------------------ Net income $ 23,034 $ 16,072 $ 11,148 ============================== Net income per common and common equivalent share: Primary $ .55 $ .43 $ .31 ============================== Fully diluted $ .54 $ .42 $ .31 ============================== Weighted average common and common equivalent shares outstanding: Primary 41,952 37,150 35,668 ============================== Fully diluted 42,608 37,924 35,674 ==============================
The accompanying notes are an integral part of these consolidated financial statements. 17 7 COGNEX CORPORATION - CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (Dollars in thousands) 1995 1994 - - ----------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 23,911 $ 56,326 Investments 66,729 25,169 Accounts receivable, less reserves of $709 and $684 in 1995 and 1994, respectively 24,312 9,082 Inventories 12,567 4,439 Deferred income taxes 1,811 1,570 Prepaid expenses and other 6,463 1,264 -------------------- Total current assets 135,793 97,850 -------------------- Property, plant and equipment, net 22,133 14,503 Other assets 4,169 593 Deferred income taxes 77 -------------------- $162,172 $112,946 ==================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,775 $ 1,284 Accrued expenses 9,333 5,135 Accrued income taxes 3,111 1,674 Customer deposits 867 744 Deferred revenue 305 394 -------------------- Total current liabilities 16,391 9,231 -------------------- Other liabilities 1,865 Deferred income taxes 107 Commitments (see Notes to Consolidated Financial Statements) Stockholders' equity: Common stock, $.002 par value - Authorized: 120,000,000 shares, issued: 39,039,675 and 37,503,870 shares in 1995 and 1994, respectively 78 38 Additional paid-in capital 71,171 53,633 Cumulative translation adjustment 40 (53) Retained earnings 73,516 50,482 Treasury stock, at cost, 80,918 and 61,756 shares in 1995 and 1994, respectively (889) (492) -------------------- Total stockholders' equity 143,916 103,608 -------------------- $162,172 $112,946 ====================
The accompanying notes are an integral part of these consolidated financial statements. 18 8 COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, (Dollars in thousands) 1995 1994 1993 - - ------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $23,034 $16,072 $11,148 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 2,845 1,754 1,272 Amortization of intangible assets 355 Loss on disposition of property, plant and equipment 56 Charge for acquired in-process technology 10,189 Tax benefit from exercise of stock options 8,581 1,192 1,152 Deferred income tax provision (1,326) (444) 70 Changes in other current assets and current liabilities: Accounts receivable (14,705) (1,986) (3,635) Inventories (7,678) (1,458) (1,341) Prepaid expenses and other (5,189) 426 (370) Accounts payable 1,361 833 172 Accrued expenses 2,867 1,508 643 Accrued income taxes 1,411 707 (159) Customer deposits 123 67 (1,353) Deferred revenue (89) 308 (443) -------------------------- Net cash provided by operating activities 21,835 18,979 7,156 -------------------------- Cash flows from investing activities: Purchase of investments (75,758) (19,504) (17,966) Maturities of investments 34,198 17,098 18,300 Purchase of property, plant and equipment (10,503) (13,119) (1,765) Purchase of Acumen, Inc., net of $200 cash acquired (6,454) (Increase) decrease in other assets (294) (199) 82 -------------------------- Net cash used in investing activities (58,811)( 15,724) (1,349) -------------------------- Cash flows from financing activities: Net proceeds from secondary public offering of common stock 29,837 Proceeds from issuance of stock under stock option and stock purchase plans 4,430 1,529 1,621 -------------------------- Net cash provided by financing activities 4,430 31,366 1,621 -------------------------- Effect of exchange rate changes on cash 131 (128) (18) -------------------------- Net increase (decrease) in cash and cash equivalents (32,415) 34,493 7,410 Cash and cash equivalents at beginning of year 56,326 21,833 14,423 --------------------------- Cash and cash equivalents at end of year $23,911 $56,326 $21,833 ==========================
The accompanying notes are an integral part of these consolidated financial statements. 19 9 COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK ADDITIONAL CUMULATIVE TREASURY STOCK TOTAL ----------------- PAID-IN TRANSLATION RETAINED -------------- STOCKHOLDERS' (Dollars in thousands) SHARES PAR VALUE CAPITAL ADJUSTMENT EARNINGS SHARES COST EQUITY - - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1992 8,314,709 $17 $17,831 $23,262 $ 41,110 ================================================================================= Issuance of stock under stock option and stock purchase plans 209,262 1,921 1,921 Tax benefit from exercise of stock options 1,152 1,152 Common stock received for payment of stock option exercises 20,946 $(300) (300) Stock issued to effect stock split 8,488,734 17 (17) Translation adjustment $30 30 Net income 11,148 11,148 --------------------------------------------------------------------------------- Balance at December 31, 1993 17,012,705 34 20,887 30 34,410 20,946 (300) 55,061 ================================================================================= Secondary public offering of common stock, net of offering costs of $299 1,429,608 3 29,834 29,837 Issuance of stock under stock option and stock purchase plans 309,622 1 1,720 1,721 Tax benefit from exercise of stock options 1,192 1,192 Common stock received for payment of stock option exercises 9,932 (192) (192) Translation adjustment (83) (83) Net income 16,072 16,072 --------------------------------------------------------------------------------- Balance at December 31, 1994 18,751,935 38 53,633 (53) 50,482 30,878 (492) 103,608 ================================================================================= Common stock issued to acquire Acumen, Inc. 96,140 4,170 4,170 Issuance of stock under stock option and stock purchase plans 683,079 1 4,826 4,827 Tax benefit from exercise of stock options 8,581 8,581 Common stock received for payment of stock option exercises 9,581 (397) (397) Stock issued to effect stock split 19,508,521 39 (39) 40,459 Translation adjustment 93 93 Net income 23,034 23,034 --------------------------------------------------------------------------------- Balance at December 31, 1995 39,039,675 $78 $71,171 $40 $73,516 80,918 $(889) $143,916 =================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 20-21 10 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements reflect the application of certain accounting policies described in this and other notes to the consolidated financial statements. NATURE OF OPERATIONS Cognex Corporation (the "Company") designs, develops, and markets machine vision systems, or computers that can "see." The Company's products are used to automate a wide range of manufacturing processes where vision is required. The Company's primary customers, Original Equipment Manufacturers (OEMs) in the electronics and semiconductor industries, are principally located in Japan and North America. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS 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 at the balance sheet date and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Cognex Corporation and its subsidiaries (the "Company"), all of which are wholly-owned. All intercompany accounts and transactions have been eliminated. Certain amounts reported in prior years have been reclassified to be consistent with the current year's presentation. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's foreign subsidiaries, where the local currency is the functional currency, are translated using exchange rates in effect at the end of the year for assets and liabilities and average exchange rates during the year for results of operations. The resulting foreign currency translation adjustments are reported as a separate component of stockholders' equity. The Company enters into transactions denominated in foreign currencies and includes the exchange gain or loss arising from such transactions in current operations. CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Investments are those with maturities in excess of three months and are stated at amortized cost which approximates fair value. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. 22 11 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated using the straight-line method over the assets' estimated useful lives. Buildings' useful lives are 39 years, building improvements' useful lives are ten years, and the useful lives of computer hardware, computer software, and furniture and fixtures range from two to five years. Leasehold improvements are amortized over the shorter of the estimated useful lives or the remaining terms of the leases. Maintenance and repairs are charged to expense when incurred; additions and improvements are capitalized. Upon retirement or sale, the cost of the assets are disposed of and the related accumulated depreciation is removed from the accounts, with any resulting gain or loss included in the determination of net income. INTANGIBLE ASSETS Intangible assets are stated at cost and amortized using the straight-line method over the assets' estimated useful lives which range from five to eight years. The Company will evaluate the possible impairment of long-lived assets, including intangible assets, whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. WARRANTY OBLIGATIONS The Company provides its Checkpoint systems with a one-year warranty from the date of shipment and all other systems with a 90-day warranty from the date of shipment. Estimated warranty obligations are evaluated and provided at the time of sale. REVENUE RECOGNITION Revenue from product sales and software licenses is recognized upon shipment. Revenue for research and development contracts is recognized on the percentage-of-completion method. Losses on contracts, if any, are provided for in the period in which the loss is determined. Deferred revenue and customer deposits arise from billings in advance of performance and are recognized as revenue during the period in which performance occurs. Service and maintenance revenue is recognized as earned. RESEARCH AND DEVELOPMENT Research and development costs for internally-developed products are charged to expense when incurred until technological feasibility has been established for the product. Thereafter, all software costs are capitalized until the product is available for general release to customers. The cost of purchased software is capitalized for products determined to have reached technological feasibility, otherwise the cost is charged to expense. Capitalized software costs are amortized using the straight-line method over the economic life of the product, typically three to five years, or based upon the anticipated revenues of the product. 23 12 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company accounts for income taxes according to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the liability method specified by SFAS No. 109, a deferred tax asset or liability is determined based on the differences between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Tax credits are recorded as a reduction in income taxes. NET INCOME PER SHARE Primary and fully diluted net income per share are calculated based on the weighted average number of common and dilutive common equivalent shares outstanding during the year. Dilutive common equivalent shares consist of stock options, calculated using the treasury stock method. FINANCIAL INSTRUMENTS FAIR VALUE The Company's financial instruments consist primarily of cash and cash equivalents, investments, trade receivables, trade payables, and forward exchange contracts. The carrying amounts of cash and cash equivalents, investments, trade receivables, and trade payables approximates fair value due to the short maturity of these instruments. Based on year-end exchange rates and the various maturity dates of the forward exchange contracts, the Company estimates the aggregate contract value to be representative of the fair values of these instruments at December 31, 1995 and 1994. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments, and trade receivables. The Company invests its excess cash in commercial paper and debt instruments of U.S. and state government entities. The Company has established guidelines relative to credit ratings, diversification, and maturities that maintain safety and liquidity. The Company has not experienced any significant losses on its cash equivalents and investments. A significant portion of the Company's sales and receivables are from customers in the electronics and semiconductor industries. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The Company has not experienced any significant losses related to the collection of accounts receivable. 24 13 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL INSTRUMENTS (CONTINUED) OFF-BALANCE SHEET RISK In certain instances, the Company enters into forward exchange contracts to hedge specific commitments against foreign currency fluctuations. The forward exchange contracts are for periods consistent with its committed exposure and require the Company to exchange foreign currencies for U.S. dollars at maturity, at rates agreed to at the inception of the contracts. The Company had approximately $1,079,000 and $1,269,000 of foreign exchange contracts outstanding, all of which were in Japanese yen, at December 31, 1995 and 1994, respectively. INVESTMENTS At December 31, 1995 and 1994, investments available for sale consisted primarily of municipal obligations stated at amortized cost which approximates fair value. Municipal obligations at December 31, 1995 amounted to $66,729,000, of which $34,635,000 have a contractual maturity of one year or less and $32,094,000 have a contractual maturity greater than one year. The municipal obligations with contractual maturities greater than one year are classified as current assets because the Company has options to liquidate these investments in the short term without penalty. INVENTORIES Inventories consist of the following:
DECEMBER 31, (In thousands) 1995 1994 ============================================================ Raw materials $ 6,340 $2,476 Work-in-process 4,468 1,604 Finished goods 1,759 359 ------------------ $12,567 $4,439 ==================
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, (In thousands) 1995 1994 ============================================================= Land $ 1,150 $ 800 Building 12,963 7,836 Building improvements 1,842 1,107 Construction-in-process 183 Computer hardware and software 9,556 8,772 Furniture and fixtures 1,544 1,298 Leasehold improvements 250 250 -------------------- 27,488 20,063 Less: accumulated depreciation (5,355) (5,560) -------------------- $22,133 $14,503 ====================
25 14 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, (In thousands) 1995 1994 ============================================================= Bonus $2,477 $1,730 Payroll and related costs 1,932 1,180 Warranty 1,311 796 Accrued acquisition costs 1,260 Professional fees 868 764 Other 1,485 665 ------------------- $9,333 $5,135 ===================
INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, (In thousands) 1995 1994 1993 =========================================================================== Current: Federal $14,083 $6,960 $3,935 State 1,572 452 704 Foreign 249 243 162 ---------------------------------- 15,904 7,655 4,801 Deferred: Federal (28) (365) 15 State (1,297) (80) 55 ---------------------------------- $14,579 $7,210 $4,871 ==================================
A reconciliation of the provision for income taxes at the federal statutory rate is as follows:
YEAR ENDED DECEMBER 31, (In thousands) 1995 1994 1993 ====================================================================================== Provision for income taxes at federal statutory rate 35% 35% 34% Non-deductible charge for acquired in-process technology 9 State income taxes, net of federal benefit 2 2 2 Foreign Sales Corporation benefit (4) (3) (3) Tax-exempt investment income (2) (2) (2) Tax credit utilization (1) (1) (2) Excess foreign tax rates 1 ------------------------ Provision for income taxes 39% 31% 30% ========================
26 15 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES (CONTINUED) Deferred income taxes reflect the tax impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The tax effects of the principal items making up deferred income taxes are as follows:
DECEMBER 31, (In thousands) 1995 1994 ========================================================================== Current deferred tax assets (liabilities): Vacation, bad debt and other $ 797 $ 970 Inventory and warranty 795 633 Other 219 (33) ------------------ Total net current deferred tax asset $1,811 $1,570 ================= Noncurrent deferred tax assets (liabilities): State net operating loss and credit carryforwards $1,292 Acquired complete technology (900) Depreciation (315) $(107) ----------------- Total net noncurrent deferred tax asset (liability) $ 77 $(107) =================
The Company believes that it is more likely than not that the deferred tax assets above will be recognized; therefore, no valuation allowance is considered necessary at December 31, 1995 and 1994. The Company's net operating loss carryforward of $681,000 will expire in five years, while the credit carryforwards of $611,000 are available indefinitely. LINE OF CREDIT At December 31, 1995, the Company had a line of credit with a bank providing for borrowings up to $1,000,000 through November 15, 1996. Borrowings under the line bear interest at the prime rate (8.5% at December 31, 1995) and are unsecured. There have been no borrowings under the line of credit. LEASES The Company conducts some of its operations in leased facilities. These lease agreements expire at various dates through the year 2002 and are accounted for as operating leases. Annual rent expense approximated $996,000 in 1995, $1,378,000 in 1994, and $1,440,000 in 1993. Future minimum rental payments under these agreements are as follows at December 31, 1995 (in thousands):
Year Amount ================================================== 1996 $ 825 1997 424 1998 99 1999 52 2000 51 Thereafter 103 ------ $1,554 ======
27 16 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LEASES (CONTINUED) In 1995, the Company purchased an 83,000 square-foot office building adjacent to its corporate headquarters. The building is currently occupied with tenants who have lease agreements that expire at various dates through the year 2000. Future minimum rental receipts under noncancelable lease agreements are as follows at December 31, 1995 (in thousands):
Year Amount ================================================== 1996 $1,270 1997 1,140 1998 773 1999 746 2000 126 ------ $4,055 ======
COMMITMENTS In 1995, the Company began the transition to a turnkey manufacturing operation whereby the majority of component purchasing, subassembly, final assembly, and testing is performed under agreement by a third-party contractor. The Company expects that the contractor will become the sole manufacturer of substantially all of the Company's products when the transition is complete. At December 31, 1995, the Company had unconditional obligations to purchase approximately $2,317,000 of inventory from the third-p arty contractor within 60 days. These purchase commitments relate to expected sales in 1996. STOCKHOLDERS' EQUITY COMMON AND PREFERRED STOCK On August 30, 1993, the Company announced a two-for-one stock split, effected in the form of a stock dividend, payable September 30, 1993 to stockholders of record at the close of business September 13, 1993. Accordingly, $17,000 representing the par value of the additional shares issued was transferred from additional paid-in capital to common stock. On November 14, 1995, the Company announced a two-for-one stock split, effected in the form of a stock dividend, payable December 18, 1995 to stockholders of record at the close of business December 1, 1995. Accordingly, $39,000 representing the par value of the additional shares issued was transferred from additional paid-in capital to common stock. These financial statements and related notes have be en retroactively adjusted, as appropriate, to reflect these two-for-one stock splits. In December 1994, the Company completed a secondary public offering for the sale of 2,859,216 shares of common stock. The Company has 400,000 shares of authorized but unissued $.01 par value preferred stock. 28 17 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS At December 31, 1995, the Company had 15,672,000 shares approved by the Board of Directors and stockholders for grant under the following stock option plans: the 1992 Director plan, 352,000; the 1993 Director plan, 320,000; and the 1993 plan, 5,000,000. The 1984 plan, which expired on April 18, 1994, had 10,000,000 shares approved and granted. During 1995, there were no additions or amendments to these plans. All options granted in 1995, 1994, and 1993 were at fair market value on the dates of grant except for the 1993 Director plan and certain other grants in December 1993, in which options were granted above the fair market value. Options vest over various periods, not exceeding six and one quarter years, and expire no later than fifteen years from the date of grant. Information concerning stock options for the three years ended December 31, 1995 is as follows:
OPTION NUMBER OF SHARES PRICE PER SHARE ================================================================================================ Outstanding at December 31, 1992 4,538,612 $ .23 - $ 7.02 1993 Activity: Options granted 4,228,600 4.69 - 8.13 Options exercised (734,580) .23 - 6.63 Options cancelled (215,000) 1.85 - 7.07 ----------------------------------- Outstanding at December 31, 1993 7,817,632 .50 - 8.13 =================================== 1994 Activity: Options granted 788,100 6.69 - 12.82 Options exercised (587,100) .50 - 7.99 Options cancelled (135,800) 3.00 - 9.63 ----------------------------------- Outstanding at December 31, 1994 7,882,832 .50 - 12.82 =================================== 1995 Activity: Options granted 1,468,874 2.07 - 34.13 Options exercised (1,312,392) .50 - 12.50 Options cancelled (339,488) 2.84 - 22.31 ----------------------------------- Outstanding at December 31, 1995 7,699,826 $ .50 - $34.13 ===================================
There were 1,389,164 exercisable options at December 31, 1995. In November 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation." The Company intends to adopt the disclosure requirements of SFAS No. 123 for the year ended December 31, 1996; therefore, the adoption will have no impact on the Company's financial position or results of operations. 29 18 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCKHOLDERS' EQUITY (CONTINUED) EMPLOYEE STOCK PURCHASE PLAN Under the Company's Employee Stock Purchase Plan (ESPP), all employees who have completed six months of continuous employment with the Company may purchase common stock semi-annually at the lower of 85% of fair market value of the stock at the beginning or end of the six-month payment period, through accumulation of payroll deductions. Employees are required to hold stock purchased through the ESPP for a period of one year from the date of exercise. Common stock reserved for future sales totaled 513,185 shares at December 31, 1995. There were 9,300 shares sold at $11.27 per share in June 1995 and 6,833 shares sold at $16.89 per share in December 1995. EMPLOYEE SAVINGS PLAN The Company's Employee Savings Plan (the 401(k) Plan), a defined contribution plan, is available to all employees who have attained age 21. Eligible employees may contribute from 1% to 15% of their salary on a pre-tax basis. Employer contributions are at the discretion of management and vest after five years of continuous employment with the Company. The Company made no contributions to the 401(k) Plan in 1993. In December 1994, the Company approved a $150,000 contribution to the 401(k) Plan which was distributed in February 1995 to all full-time employees in the employ of the Company at December 31, 1994. In December 1995, the Company approved a $200,000 contribution to the 401(k) Plan to be distributed in February 1996 to all full-time employees in the employ of the Company at December 31, 1995. SIGNIFICANT CUSTOMERS AND EXPORT SALES During the years ended December 31, 1995, 1994, and 1993, one customer accounted for approximately $17,237,000, $12,655,000, and $10,340,000, or 16%, 20%, and 24%, respectively, of revenue. The following summarizes export sales:
YEAR ENDED DECEMBER 31, (In thousands) 1995 1994 1993 =========================================================================== United States $42,619 $24,033 $17,444 Export: Japan 48,466 30,919 22,133 Europe 12,243 7,011 3,325 All other 1,215 521 469 -------------------------------- $104,543 $62,484 $43,371 ================================
30 19 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCKHOLDERS' EQUITY (CONTINUED) ACQUISITION OF ACUMEN, INC. On July 21, 1995, the Company acquired all of the outstanding shares of Acumen, Inc., a privately-held developer of machine vision systems for semiconductor wafer identification. The purchase price of $13,950,000 includes $8,452,000 in cash, 96,140 shares of Cognex stock with a fair value of $4,170,000, and stock options valued at $1,328,000 million. At December 31, 1995, $3,125,000 of the purchase price remained to be paid out in cash or in stock options that vest through the year 2001. The acquisition is accounted for under the purchase method of accounting. Accordingly, Acumen's results of operations have been included in the Company's consolidated results of operations since the date of acquisition. The purchase price was allocated among the identifiable assets of Acumen. After allocating the purchase price to the net tangible assets and to deferred compensation costs, which are amortized over eight years, acquired technology was valued using a risk-adjusted cash flow model, under which future expected cash flows were discounted taking into account risks related to existing markets, the technology's life expectancy, future target markets and potential changes thereto, and the competitive outlook for the technology. This analysis resulted in an allocation of $2,369,000 to completed technology, to be amortized over five years, and $10,189,000 to in-process technology which had not reached technological feasibility and had no alternative future use, and accordingly, was charged to expense. Goodwill associated with the purchase is being amortized over five years. At December 31, 1995, unamortized costs associated with the complete technology amounted to $2,132,000. The following summarized, pro forma results of operations assume the acquisition took place at the beginning of the respective periods and exclude the $10,189,000 charge for acquired in-process technology.
YEAR ENDED DECEMBER 31, (In thousands, except per share amounts) 1995 1994 ============================================================================ Revenue $107,572 $65,125 Net income 33,694 15,846 Net income per share .80 .42
SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE Cash paid for income taxes approximated $7,982,000 in 1995, $5,844,000 in 1994, and $3,570,000 in 1993. In 1995, the Company retired certain fully-depreciated property, plant and equipment amounting to $3,049,000. In 1994, the Company retired certain fully-amortized leasehold improvements amounting to $211,000 in connection with leases which expired during the year. Common stock received as payment for stock option exercises approximated $397,000 in 1995, $192,000 in 1994, and $300,000 in 1993. 31 20 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE (CONTINUED) In 1995, the Company paid $6,454,000 in cash, net of cash acquired, as part of the cost to acquire Acumen, Inc. as follows (in thousands):
Fair value of tangible assets acquired $ 1,026 Liabilities assumed (1,122) Acquired technology 12,558 Goodwill and other intangible assets 1,288 Issuance of stock and stock options (5,498) Other liabilities (1,798) ------- Cash paid to acquire Acumen, Inc. $(6,454) =======
SUBSEQUENT EVENT On February 29, 1996, the Company acquired Isys Controls, Inc., a developer of ultra-high performance systems that automatically detect and classify surface flaws and defects on a variety of high value-added materials. Under the terms of the acquisition, to be accounted for as a pooling of interests, the Company exchanged 1.4 million common shares for all of the outstanding common stock of Isys. The impact of Isys on the revenue, net income, and net income per share of the combined entity for each of the three years in the period ended December 31, 1995 is not material, and therefore, pro forma information has not been disclosed. 32 21 COGNEX CORPORATION - REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF COGNEX CORPORATION: We have audited the accompanying consolidated balance sheets of Cognex Corporation as of December 31, 1995 and 1994 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cognex Corporation at December 31, 1995 and 1994 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Boston, Massachusetts January 26, 1996, except as to the information in the Subsequent Event note for which the date is February 29, 1996 33 22 COGNEX CORPORATION -- FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, (In thousands, except per share amounts) 1995 1994 1993 1992(1) 1991 ================================================================================================= Statements of Income Data: Revenue $104,543 $ 62,484 $43,371 $28,642 $31,548 Cost of revenue 22,543 13,884 10,280 6,488 5,879 --------------------------------------------------- Gross margin 82,000 48,600 33,091 22,154 25,669 Research, development and engineering expenses 13,190 9,933 6,205 5,622 4,362 Selling, general and administrative expenses 23,973 16,847 12,183 9,565 8,694 Charge for acquired in-process technology 10,189 --------------------------------------------------- Income from operations 34,648 21,820 14,703 6,967 12,613 Interest income 2,965 1,462 1,316 1,437 1,399 --------------------------------------------------- Income before provision for income taxes 37,613 23,282 16,019 8,404 14,012 Provision for income taxes 14,579 7,210 4,871 2,311 4,520 --------------------------------------------------- Net income $23,034 $ 16,072 $11,148 $ 6,093 $ 9,492 =================================================== Net income per share(2) $ .55 $ .43 $ .31 $ .18 $ .27 =================================================== Weighted average common shares outstanding(2) 41,952 37,150 35,668 34,812 35,294 =================================================== DECEMBER 31, (In thousands) 1995 1994 1993 1992(1) 1991 ================================================================================================= Balance Sheet Data: Working capital $119,402 $ 88,619 $51,605 $38,123 $34,206 Total assets 162,172 112,946 60,810 47,987 42,529 Long-term debt -- -- -- -- -- Stockholders' equity 143,916 103,608 55,061 41,110 36,454 (1) Cost of revenue includes $719,000 of estimated costs in excess of revenue on certain research and development contracts, and selling, general and administrative expenses include lease termination costs of $344,000. (2) Adjusted for the 2-for-1 stock splits effective December 18, 1995, September 30, 1993, and February 14, 1992.
34 23 COGNEX CORPORATION -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED APRIL 2, JULY 2, OCTOBER 1, DECEMBER 31, (In thousands, except per share amounts) 1995 1995 1995 1995 ====================================================================================================== Revenue $19,437 $23,722 $29,784 $31,600 Gross margin 15,485 18,486 23,249 24,780 Charge for acquired in-process technology -- -- 10,189 -- Income from operations 7,698 9,603 3,230 14,117 Net income 5,873 7,241 (633) 10,553 Net income per share(1) .14 .18 (.02) .25 Common stock prices:(1) High 14 3/4 20 1/4 27 5/8 38 1/2 Low 10 1/2 13 1/4 18 1/4 19 1/4 QUARTER ENDED APRIL 3, JULY 3, OCTOBER 2, DECEMBER 31, (In thousands, except per share amounts) 1994 1994 1994 1994 ====================================================================================================== Revenue $12,838 $14,950 $16,592 $18,104 Gross margin 10,028 11,616 12,761 14,195 Income from operations 4,240 4,995 5,875 6,710 Net income 3,197 3,680 4,290 4,905 Net income per share(1) .09 .10 .12 .13 Common stock prices:(1) High 14 11 1/8 11 1/8 13 11/16 Low 6 3/4 5 7/8 6 7/8 8 1/4 (1) Adjusted for the 2-for-1 stock split effective December 18, 1995.
35 24 COGNEX CORPORATION -- COMPANY INFORMATION TRANSFER AGENT The First National Bank of Boston c/o Boston EquiServe, L.P. -- Boston, Massachusetts Telephone (617) 575-3100 GENERAL COUNSEL Hutchins, Wheeler & Dittmar -- Boston, Massachusetts INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P. -- Boston, Massachusetts FORM 10-K A copy of the annual report filed with the Securities and Exchange Commission on Form 10-K is available to stockholders, without charge, upon written request to: Department of Investor Relations Cognex Corporation One Vision Drive Natick, Massachusetts 01760 The Company's common stock is traded on The NASDAQ Stock Market, under the symbol CGNX. As of February 16, 1996, there were approximately 18,000 registered and non-registered holders of the Company's common stock. No dividends on the Company's common stock were paid during 1995 and 1994. 36 EX-21 5 SUBISIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 COGNEX CORPORATION SUBSIDIARIES OF THE REGISTRANT The registrant has the following subsidiaries, the financial statements of which are all included in the consolidated financial statements of the registrant:
NAME OF STATE/COUNTRY OF PERCENT SUBSIDIARY INCORPORATION OWNERSHIP ---------- ---------------- --------- Cognex Technology and Investment Corporation California 100% Cognex Foreign Sales Corporation U.S. Virgin Islands 100 Cognex K.K. Japan 100 Cognex International, Inc. Delaware 100 Cognex Germany, Inc. Massachusetts 100 Cognex Singapore, Inc. Delaware 100 Cognex Korea, Inc. Delaware 100 Vision Drive, Inc. Delaware 100 VDI Mortgage Corporation Delaware 100 Vision Max, Inc. Delaware 100 Cognex/Acumen, Inc. Delaware 100
EX-23 6 CONSENT OF COOPERS & LYBRAND LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Cognex Corporation on Form S-8 (File Nos. 33- 31657, 33-32815, 33-36263, 33-72636, 33-72638, 33-81150, and 33-81152) of our reports dated January 26, 1996, except as to the information in the Subsequent Event note for which the date is February 29, 1996, on our audits of the consolidated financial statements and financial statement schedule of Cognex Corporation as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which reports are incorporated by reference or included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 26, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF COGNEX CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 23,911,000 66,729,000 25,021,000 709,000 12,567,000 135,793,000 27,488,000 5,355,000 162,172,000 16,391,000 0 0 0 78,000 143,838,000 162,172,000 104,543,000 104,543,000 22,543,000 22,543,000 0 0 0 37,613,000 14,579,000 23,034,000 0 0 0 23,034,000 .55 .54
-----END PRIVACY-ENHANCED MESSAGE-----