-----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, COGWNJqhWNUR8kETahmgda1ObNoqt8Tj7MWo7IePvRrzhEAtP5jg8+SbV1Sg82c9 amk18iqC1j93ynA1BcV5Mg== 0000950135-98-001915.txt : 19980330 0000950135-98-001915.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950135-98-001915 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COGNEX CORP CENTRAL INDEX KEY: 0000851205 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 042713778 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17869 FILM NUMBER: 98576122 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 for the fiscal year ended December 31, 1997 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 March 1, 1998: $822,115,693 $.002 par value common stock outstanding as of March 1, 1998: 41,829,639 shares Documents incorporated by reference: Specifically identified information in the Annual Report to Stockholders for the year ended December 31, 1997, 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 1998 Annual Meeting of Stockholders to be held on April 21, 1998, is incorporated by reference into Part III hereof. A list of Exhibits to this Annual Report on Form 10-K is located on pages 18 and 19. 2 PART I The Company's results are subject to certain risks and uncertainties. This annual report on Form 10-K contains certain forward-looking statements within the meaning of the Federal Securities Laws. The Company's future results may differ materially from current results and actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors. Readers should pay particular attention to considerations described in the sections captioned "Liquidity and Capital Resources" and "Forward-Looking Statements" in Management's Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 15 through 17 of the Annual Report to Stockholders for the year ended December 31, 1997, which is Exhibit 13 hereto, and is incorporated herein by reference, as well as considerations included in other documents filed with the Securities and Exchange Commission. ITEM 1. BUSINESS CORPORATE PROFILE Cognex(R) 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, and markets a family of machine vision systems that are used to replace human vision in a wide range of manufacturing processes. These high-level systems consist of sophisticated image analysis software and high-speed, special-purpose computers (vision engines) which, when connected to a video camera, interpret and generate information about video images. For example, a Cognex machine vision system can locate an object, read alphanumeric characters, detect flaws, or measure dimensions. Machine vision systems are used in a variety of industries including the semiconductor, electronics, automotive, consumer products, packaging, pharmaceutical, metals, plastics, and paper industries. Machine vision is important 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. Today, many types of manufacturing equipment require machine vision because of the increasing demands for speed and accuracy in manufacturing processes, as well as the decreasing geometries of items being manufactured. WHAT IS MACHINE VISION? In a typical machine vision application, a video camera positioned on the production line captures an image of the part to be inspected. The machine vision computer then uses sophisticated image analysis software to extract information from the image and provide an answer to a question. Cognex machine vision systems can answer four types of questions:
QUESTION DESCRIPTION EXAMPLE -------- ----------- ------- GUIDANCE -------- Where is it? Determining the exact physical Determining the position of a printed circuit board location of an object. so that a robot can automatically be guided to insert electrical components.
1 3 IDENTIFICATION -------------- What is it? Identifying an object by analyzing Identifying the serial number on an automotive its shape or by reading a serial airbag so that it can be tracked and processed number on it. 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 of an Determining the diameter of a bearing prior to object. final assembly.
Once the machine vision system has processed the image and performed any necessary analysis, the result is then communicated to other equipment on the factory floor, such as an industrial controller, a robotic arm, a deflector which removes the part from the line, a positioning table which moves the part, or alternatively, to a computer file for analysis or subsequent process control. This process is repeated during the manufacturing process as product moves into position in front of the camera. Machine vision systems can perform inspections quickly enough to keep pace with machines that process thousands of items or material feet per minute, thus increasing both quality and productivity. THE MACHINE VISION MARKET The machine vision market can be segmented into two categories: original equipment manufacturers (OEMs) and the factory floor. The factory floor can be further subdivided between system integrators and end users. OEMs are companies that build standard products sold as capital equipment for the factory floor. These customers, most of which are in the semiconductor and electronics industries, have the technical expertise to build Cognex's programmable, board-level machine vision systems directly into their products which are then sold to end users. System integrators are companies that create complete, automated inspection solutions for end users on the factory floor in a variety of industries. For example, they combine lighting, conveyors, robotics, machine vision, and other components to produce custom inspection systems for various applications. Because system integrators encounter a broad range of automation problems, they purchase a variety of Cognex products, from programmable systems to application-specific solutions tailored to solve particular manufacturing tasks. End users are companies that manufacture products, such as radios, telephones, ball-point pens, metals, and paper on the factory floor. While they may purchase capital equipment containing machine vision or hire a system integrator to build an inspection system, many end users choose to purchase machine vision directly to solve specific applications on their production lines. Unlike OEMs and system integrators, these customers typically have little or no computer programming or machine vision experience. BUSINESS STRATEGY The Company's goal is to expand its position as a leading worldwide supplier of machine vision systems for factory automation. Currently, the Company's products are designed for factory automation because the Company believes that this market offers the greatest opportunity for selling high value-added, standard products in high volume. Within the factory automation market, 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. 2 4 Emphasizing high value-added products and applications is important to the Company's strategy because not every segment of the machine vision market offers opportunity for sustained profitability. High value-added is realized in the Company's products in several ways. The primary value-added is derived from offering unique vision software algorithms which solve challenging problems better than competing products. The other major mode of realizing high value-added is by offering products which are complete solutions to known problems, incorporating all of the necessary vision software, applications software, hardware, and electro-optics. Both modes of realizing high value-added require the Company to maintain an industry-leading level of investment in research, development and engineering. Within the factory automation market, the Company has tailored its product and support offerings to match the characteristics of its two major segments: OEMs and the factory floor. Historically, the OEM segment has been the source of the majority of the Company's sales. However, the Company believes that the factory floor segment has the potential in the long term to be larger than the OEM segment. Consequently, the Company has invested in developing and acquiring products which meet the needs of the factory floor market and in developing a strong worldwide direct sales and support infrastructure. The Company will continue to invest in both segments of the market, defending its strong position in the OEM segment while expanding in the factory floor segment. The Company has historically pursued a global business strategy, investing in building a strong direct presence in North America, Japan, Europe, and Southeast Asia. In 1997, approximately 62% of the Company's revenue came from markets outside of the United States. In all of these regions, the Company is acknowledged to be a leading machine vision supplier. The Company intends to continue to invest in the expansion of direct sales, support, local marketing, and local engineering in these regions. The factory automation market for machine vision is comprised of many market niches defined by differing application requirements, industries, and cost/performance criteria. The Company's business strategy includes selective expansion into other industrial machine vision applications which will be driven both by the internal development of new products and the acquisition of companies and technologies. In July 1995, the Company acquired Acumen, Inc., a developer of machine vision systems for semiconductor wafer identification. In February 1996, the Company acquired Isys Controls, Inc., a developer of high-performance machine vision systems for high-speed surface inspection. In July 1997, the Company acquired Mayan Automation, Inc., a developer of intelligent camera-based machine vision systems for surface inspection. These acquisitions gave Cognex an immediate and strong presence in the growing niche markets for semiconductor wafer identification and surface inspection. PRODUCTS The Company develops and sells a wide range of machine vision products. These products fall into two lines: the Modular Vision System (MVS) Product Line and the Surface Inspection System (SIS) Product Line. The Company estimates that it had sold approximately 70,000 machine vision systems as of December 31, 1997. The MVS Product Line consists of an integrated family of proprietary vision software components together with vision hardware components (embedded vision engines and frame grabbers) which require minimal customization and support by the Company. Modular Vision Systems sold by the Company are defined as either general-purpose or application-specific products. General-purpose machine vision products enable customers to solve a wide range of problems by selecting the tools necessary to solve their vision problem from the Company's vision software library and then configuring their solution by utilizing a programmable language or a "point-and-click" interface. Application-specific machine vision products are "packaged" combinations of software and hardware that are designed to solve targeted problems without any customization by the Company or its customers. A typical Cognex Modular Vision System, including software and hardware, ranges in price from $7,500 to $20,000. 3 5 The SIS Product Line consists of a family of intelligent line-scan cameras, high-performance image processing hardware, special-purpose illumination systems, and proprietary defect detection and classification software. These elements are combined into complete systems which range in price from $25,000 to $2,500,000, depending upon the number of cameras and the processing speed. The Company's Surface Inspection Systems are application-specific products intended to solve surface inspection problems within a targeted set of industries and applications without any customization by the Company or its customers. MODULAR VISION SYSTEM PRODUCT LINE Programmable Vision Systems Cognex Programmable Vision Systems (PVSs) are board-level vision systems programmable in C-language. PVSs are comprised of software and hardware "building blocks" that enable customers to construct solutions tailored to their application needs. The Company offers a library of vision software tools that locate patterns, inspect for defects, measure geometric properties, and identify parts. The hardware is a family of embedded vision engines and frame grabbers. Embedded vision engines are vision computers which plug into the backplane of a standard personal computer (PC) or VME bus architecture. Each embedded vision engine contains an on-board central processing unit (CPU), image capture mechanism, memory, and input/output connector, enabling the host computer to off-load all vision tasks to the vision processor. Frame grabbers are single-board image capture devices which capture images from video cameras and input the images directly into the host CPU over a standard bus, such as a PCI. In this case, the Cognex vision software tools run directly on the PC's CPU. Customers first choose the most appropriate software tools from the vision software library and then select the hardware platform that satisfies their speed and price requirements. To create a vision solution, users write a C-language program that connects the software blocks appropriate for their vision tasks and then run the application on the selected hardware platform. 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. Cognex vision hardware is functionally and software compatible across product lines, allowing customers to readily upgrade to higher performance systems or to change platforms as their application needs change. In 1997, the Company introduced the Cognex MVS 8000 Series which includes both embedded vision engines and frame grabbers, as well as new vision software tools which offer improvements in accuracy and robustness. The 8000 Series is designed to exploit the power of Intel MMX-based processors, Microsoft Windows/NT operating systems, and high-speed PCI bus-based PCs. The Company also offers the Cognex 4000 Series which plugs directly into a VME backplane, as well as the Cognex 5000 and 6000 Series which run on PCs. PVSs are sold primarily to OEMs located in North America and Japan who integrate the vision systems into manufacturing equipment for the semiconductor and electronics industries. PVSs are also sold to system integrators located principally in North America, Japan, Europe, and Southeast Asia who integrate the vision systems into manufacturing equipment for the factory floor in industries ranging from automotive to pharmaceutical. "Point-and-Click" Programmable Systems The Checkpoint(R) family of vision systems (the Checkpoint 900 which runs on a PC and the Checkpoint 800 which plugs directly into a VME backplane) is designed for manufacturing engineers who do not program in C-language and are looking for a rapid application development environment. Checkpoint combines the Company's existing vision software and standard vision hardware platforms with a unique Microsoft Windows-based graphical user interface (GUI). Manufacturing engineers utilize pull-down menus and dialog boxes in the GUI to create customized vision applications. This "point-and-click" programming environment enables the developer to focus on tasks associated with solving the overall vision application, freeing the developer from the detail and complexity of programming in C- 4 6 language. The library of vision tools currently available with Checkpoint enables users to solve a wide range of inspection, gauging, assembly verification, and defect detection problems. The Company introduced Checkpoint in 1994 for the factory floor market. Checkpoint is sold primarily to end users and system integrators located in North America, Japan, Europe, and Southeast Asia in a wide range of general manufacturing industries, such as manufacturers of medical devices, batteries, power tools, disposable consumer goods, and electronic components. Although the application environment is designed for engineers with little programming or machine vision experience, deployment of Checkpoint on the factory floor requires the services of trained system integrators to mechanically and electrically integrate Checkpoint into manufacturing lines. Application-Specific Modular Vision Systems Application-specific products are "packaged" combinations of software and hardware that are designed to solve targeted problems without any customization by the Company or its customers. The Company's application-specific products are designed to address particular requirements of certain vision applications and are sold to OEMs, system integrators, and end users worldwide. A partial list of application-specific products is as follows: Surface Mount Device Placement Guidance Package (SMD/PGP), when coupled with a Cognex 4000, 5000, or 8000 Series machine vision engine, quickly and accurately locates fiducial marks on printed circuit boards for alignment, inspects the quality of surface mount devices, and then guides the placement of those devices onto printed circuit boards. For high-performance lead inspection in time-critical applications, the SMD/PGP tools have real-time image acquisition capability, eliminating the need to stop the motion of the placement machine in order to capture an image of a moving part. Cognex acuReader/Optical Character Recognition (OCR) reads even the most degraded serial numbers from semiconductor wafers with near 100% accuracy. Cognex acuReader/2D reads automatic identification manufacturers (AIM) standard data matrix symbologies. The two-dimensional codes are used as alternative marks for identifying wafers, integrated circuit packages, liquid crystal display (LCD) panels, pharmaceutical packages, and for small parts tracking applications. Cognex acuReader/Optical Character Verification (OCV) verifies the print produced by laser, pad, or offset printing equipment. Cognex acuFinder(R) locates parts, regardless of rotation and scale, and guides robots in the assembly, sorting, and packaging of appliance, automotive, consumer, and electronics products. Ball Grid Array (BGA) Inspection Package inspects BGA devices for missing, misplaced, or improperly formed solder balls. Cognex Fiducial Finder, when coupled with a Cognex 4000, 5000, or 8000 Series machine vision engine, locates fiducial or alignment marks on printed circuit boards. Cognex Print Quality Inspection (PQI), when coupled with a Cognex 4000 or 5000 Series machine vision engine, quickly and accurately inspects print produced by laser, pad, or offset printing equipment. SURFACE INSPECTION SYSTEM PRODUCT LINE Fine-Line Intelligent Camera Systems Fine-Line Intelligent Camera Systems are complete surface inspection devices packaged in a compact and rugged enclosure. Each camera contains a line-scan charge-coupled device (CCD) sensor, image digitizer, digital signal processor (DSP), custom hardware for pixel processing, surface inspection algorithms in firmware, and a CPU for control and communications. In addition to the 5 7 camera, the Company provides a PC-based operator interface, specialized lighting components, and power supply/control boxes to provide customers with a complete solution to their surface inspection applications. Fine-Line systems can be used in a single-camera, "stand-alone" fashion for simple, narrow web applications, or they can be installed in multi-camera configurations to view wider webs. Fine-Line systems, which range in price from $25,000 to $150,000, depending upon the number of cameras, are targeted primarily at the plastics, non-wovens, and converting markets. iS High Performance Inspection Systems iS High Performance Inspection Systems are designed for the most demanding surface inspection applications. iS systems are built from a family of hardware and software components which include proprietary line-scan cameras with motorized camera mounts, specialized lighting systems, ultra-high performance image processing boards, Unix workstations, and intelligent defect detection and classification software algorithms. iS systems can contain from one to sixty cameras and can be used to inspect webs up to 25 feet wide at speeds of up to 5,000 feet per minute. iS systems, which range in price from $300,000 to $2,500,000, depending upon the number of cameras and the processing speed, are targeted primarily at metals, specialized coated paper, and high-value non-woven materials producers. 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 Company considers its on-going efforts in R,D & E to be a key component of its strategy. The MVS engineering group released the first product of the new 8000 Series during 1997, with additional products of this series planned for release during 1998. The software for this series and the family of compatible hardware, from frame grabbers to fully embedded board-level vision systems, utilize the processing capabilities of Intel MMX architecture. During 1998, the MVS engineering group will be further leveraging the technical power of PatMax, a major advance in high-accuracy rotation and scale invariant pattern recognition, introduced by the Company in 1997. Both PatMax and PatMax/Inspect, an innovative companion defect inspection technology, will substantially increase the performance and range of the Company's application-specific products, such as surface mount device and wirebonder inspection, as well as increase the capabilities of the Company's "point-and-click" vision development systems, including Checkpoint. During 1998, the MVS engineering group also plans to release new versions of PatMax and PatMax/Inspect. The SIS engineering group introduced several new products during 1997, including products for improved illumination of large web applications, high-performance line-scan cameras and controllers, and an advanced intelligent classifier. These additional capabilities will improve both the performance and range of applications serving the metals industry, as well as broaden the number of applications and industries served to include plastics and non-wovens. The SIS Product Line was further expanded through the acquisition of Mayan Automation, Inc., a developer of intelligent camera-based machine vision systems for surface inspection, in the third quarter of 1997. The combination of intelligent camera systems for smaller applications and large, integrated systems technology provides the Company with the unique ability to match a wide range of user requirements. During 1998, the SIS engineering group will further expand the capabilities of its newly-acquired intelligent camera technology to cost-effectively match higher performance requirements within the industries that it serves, while it also plans development activities in its integrated systems business to further improve performance. With the advent of as many as ten new intelligent classification systems (iLearn) coming on-line, the Company seeks to attain broad industry acceptance, as its customers find it easier to apply and benefit from surface inspection technology. iLearn automatically generates rules for classifying surface defects into user-defined categories, thereby dramatically reducing the start-up time and effort required to tune the inspection system to meet the needs of each individual production line and product type. 6 8 In addition to internal research and development efforts, the Company intends to continue its strategy of gaining access to new technology through strategic relationships and acquisitions where appropriate. At December 31, 1997, the Company employed 152 professionals in R,D & E, most of whom are software developers. The Company's R,D & E expenses totaled $22,481,000, $19,434,000, and $13,190,000, or 14%, 16%, and 13% of revenue, in 1997, 1996, and 1995, respectively. MANUFACTURING The Company's MVS Product Line is manufactured at its Natick, Massachusetts headquarters. The Company's Natick manufacturing organization has completed its transition to a turnkey manufacturing operation whereby the majority of component procurement, subassembly, final assembly, and initial testing are performed under agreement by third-party contractors. After the completion of initial testing, the third-party contractors deliver the products to the Company to perform final testing and assembly. The products provided by the third-party contractors are manufactured using specified components and assembly and test documentation created and controlled by the Company. Certain components purchased by the third-party contractors are presently available from a single source. The Company's iS products are manufactured at its Alameda, California facility and its Fine-Line products are manufactured at its Montreal, Canada facility. The manufacturing processes at the Alameda and Montreal facilities consist of systems design, configuration management and control, component procurement, subassembly, integration and final test, quality control, shipment, and installation. Certain products are manufactured by third-party contractors using assembly and test documentation created and controlled by the Company. Certain components purchased by the third-party contractors are presently available from a single source. SALES AND SERVICE The Company markets its products through a direct sales force in North America, and through a direct sales force and distributors in Japan, 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's direct sales force operates in the United States out of its Natick, Massachusetts headquarters, its Regional Technology Centers in Mountain View, California and Naperville, Illinois, and its sales offices throughout the United States; in Canada out of its Montreal, Quebec and Scarborough, Ontario offices; in Japan out of its Tokyo, Osaka, Nagoya, and Fukuoka offices; in Europe out of its France, Germany, England, Italy, Sweden, and Scotland offices; and in Southeast Asia out of its Singapore, Korea, and Taiwan offices. At December 31, 1997, the Company's direct sales and service force consisted of 134 professionals, including sales and application engineers. The majority 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 possible volume purchases and long-term relationships. Opportunities that represent single-unit sales or turnkey system requirements are identified by the sales engineer and turned over to an independent system integrator or OEM that uses the Company's products. The Company sells its MVS 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. Sales to international customers represented approximately 62%, 55%, and 59% of revenue in 1997, 1996, and 1995, respectively. One international customer based in Japan, Fuji America Corporation, accounted for approximately 18%, 11%, and 16% of revenue in 1997, 1996, and 1995, 7 9 respectively. Information about foreign and domestic operations, export sales, and significant geographic areas, as well as foreign currency and related risk may be found in the Notes to the Consolidated Financial Statements, appearing on pages 23 through 25 and 35 through 36 of the Annual Report to Stockholders for the year ended December 31, 1997, 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. The Company provides software update services and hardware maintenance on a contract basis. Software updates are provided via floppy disks and hardware maintenance is provided by repairing or 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. Product courses are provided by the Company at its headquarters in Natick, Massachusetts, at its offices in Japan, France, Germany, and England, 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. PATENTS AND LICENSES Since the Company relies on the technical expertise, creativity, and knowledge 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, suppliers, employees, and consultants. 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. Effective patent, copyright, and trade secret protection may be unavailable in certain foreign countries. Cognex, Checkpoint, and acuFinder are registered trademarks of Cognex Corporation. Patmax, Fine-Line, iS, and iLearn are trademarks of Cognex Corporation. All other brand names, service marks and trademarks, whether or not registered, are the property of their respective owners. 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 under very limited circumstances and for restricted uses. If source code is released to a customer, the customer is required by contract to maintain its confidentiality and, in general, to use the source code solely for internal purposes or for maintenance. Several 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 infringes 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. Two users of the Company's products were engaged in litigation with Mr. Lemelson/Technivision involving certain of these patents and the validity of these patents was placed in issue. One user entered into a settlement agreement with Mr. Lemelson. The Company is not a party to that settlement and has no indemnification claims, or related obligations, with respect to that settlement. Certain products sold by the Company, as well as the products of others, were identified in connection with this litigation, which claimed an allegedly infringing use. With respect to the second user, in April 1996 the U.S. District Court of Nevada ruled in favor of summary judgment for the user, thus disposing of all actions in favor of such user. In April 1997, the same U.S. District Court of Nevada reversed its decision with respect to the April 1996 summary 8 10 judgment ruling. Subject to appeal of the reversal by the user, the case will proceed to trial. On October 1, 1997 Mr. Lemelson died; however the litigation will continue under his estate. The Company cannot predict the outcome of this litigation 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. 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. Any of these competitors may have greater financial and other resources than the Company. Although the Company considers itself to be one of the leading machine vision companies in the world, reliable estimates of the machine vision market and the number of competitors are almost non-existent, primarily because of definitional confusion and a tendency toward double-counting of sales. The primary 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 vendor. More recently, ease-of-use has become a competitive factor and product price has become a more significant factor with respect to simpler guidance and gauging applications. The Company competes with the lower-cost, software-only solutions being introduced by various competitors on the basis of superior performance and price, rather than on price alone, through its 8000 Series. In the paper industry market for high-performance surface inspection systems, the Company has faced increased competition as a result of a merger between Honeywell, a former distributor of the Company's iS products, and Measurex, a supplier of competing surface inspection systems. BACKLOG At December 31, 1997, the Company's backlog totaled $32,618,000, compared to $25,347,000 at December 31, 1996. 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 future revenue of the Company. Delivery schedules may be extended and orders may be canceled at any time subject to certain cancellation penalties. EMPLOYEES At December 31, 1997, the Company employed 529 persons, including 206 in sales, marketing and support activities; 152 in research, development and engineering; 76 in manufacturing and quality assurance; and 95 in information technology, management, administration and finance. Of the Company's 529 employees, 61 are located in Japan. 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. 9 11 ITEM 2: PROPERTIES In 1994, the Company purchased and renovated a 100,000 square-foot building located in Natick, Massachusetts. In 1997, the Company completed construction of a 50,000 square-foot addition to this building. 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 facilities in the United States in California, Illinois, and Oregon, as well as in Canada, Japan, France, Germany, England, Italy, Sweden, Scotland, Singapore, Korea, and Taiwan. 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, at which point, the Company plans to take occupancy of the building. In 1997, the Company purchased a three and one-half acre parcel of land situated on Vision Drive, adjacent to the Company's corporate headquarters in Natick, Massachusetts. This land is anticipated to be used for future expansion. 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, 1997 to a vote of security holders through solicitation of proxies or otherwise. 10 12 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, 1997:
NAME AGE TITLE ---- --- ----- Robert J. Shillman 51 President, Chief Executive Officer, and Chairman of the Board of Directors Patrick A. Alias 52 Executive Vice President, Sales and Marketing John J. Rogers, Jr. 39 Executive Vice President, Chief Financial Officer, and Treasurer Glenn Wienkoop 50 Executive Vice President, Subsidiary Operations
Messrs. Shillman, Alias, and Rogers have been employed by the Company in their present or other capacities for no less than the past five years. Mr. Wienkoop joined the Company in 1997 as Executive Vice President of Subsidiary Operations. From 1975 to 1997, he served in a number of capacities, most recently as Executive Vice President and Division President, at Measurex Corporation, a supplier of computer-integrated measurement, control, and information systems for continuous manufacturing processes. 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. OTHER MEMBERS OF THE MANAGEMENT TEAM
NAME AGE TITLE ---- --- ----- E. John McGarry 41 Vice President, Development: Application-Specific Accelerated Products William Silver 43 Chief Technology Officer
Mr. Silver has been employed by the Company in his 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. 11 13 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Certain information with respect to this item may be found in the section captioned "Selected Quarterly Financial Data," appearing on page 42, and the section captioned "Company Information," appearing on page 43 of the Annual Report to Stockholders for the year ended December 31, 1997, which is Exhibit 13 hereto, and is incorporated herein by reference. The Company has never declared or paid cash dividends on shares of its 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 Company's Board of Directors, 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 41 of the Annual Report to Stockholders for the year ended December 31, 1997, 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 17 of the Annual Report to Stockholders for the year ended December 31, 1997, 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 18 through 42 of the Annual Report to Stockholders for the year ended December 31, 1997, 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 1997 or 1996. 12 14 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 1998 Annual Meeting of Stockholders to be held on April 21, 1998. 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," appearing 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 1998 Annual Meeting of Stockholders to be held on April 21, 1998. 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 1998 Annual Meeting of Stockholders to be held on April 21, 1998. Such information is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 13 15 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, 1997, which is Exhibit 13 hereto, and is incorporated herein by reference: Report of Independent Accountants Consolidated Statements of Income for the years ended December 31, 1997, 1996, and 1995 Consolidated Balance Sheets at December 31, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 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 appearing on pages 18 and 19, immediately preceding such Exhibits. (b) Reports on Form 8-K There were no Reports on Form 8-K filed during the fourth quarter of the year ended December 31, 1997. 14 16 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, Chief Executive Officer, and Chairman of the Board of Directors) March 27, 1998 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 27, 1998 ------------------------------- and Chairman of the Board of Directors Robert J. Shillman (principal executive officer) /s/ John J. Rogers, Jr. Executive Vice President, Chief Financial March 27, 1998 ------------------------------- Officer, and Treasurer John J. Rogers, Jr. (principal financial and accounting officer) /s/ William Krivsky Director March 27, 1998 ------------------------------- William Krivsky /s/ Anthony Sun Director March 27, 1998 ------------------------------- Anthony Sun /s/ Rueben Wasserman Director March 27, 1998 ------------------------------- Rueben Wasserman
15 17 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 40 of the 1997 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, 1997 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, presents fairly, in all material respects, the information required to be included therein. Boston, Massachusetts /s/ COOPERS & LYBRAND L.L.P. January 23, 1998 16 18 SCHEDULE II COGNEX CORPORATION VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
ADDITIONS ---------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- --------- -------- -------- ---------- ------ Allowance for Doubtful Accounts 1997 $ 968 $ 1,268 -- $ (296) (a) $ 1,940 1996 709 542 -- (283) (a) 968 1995 684 25 -- -- 709 Reserve for Inventory Obsolescence 1997 $ 2,273 $ 278 -- $ (678) (b) $ 1,873 1996 541 4,361 -- (2,629) (b) 2,273 1995 599 -- -- (58) (b) 541
(a) Specific write-offs (b) Specific dispositions 17 19 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 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 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 27, 1989, as amended April 30, 1991, April 21, 1992, April 25, 1995, and April 23, 1996 (filed as Exhibit 3B to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 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 1992 Director's Stock Option Plan (filed as Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 10C 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) 10D Cognex Corporation 1993 Employee Stock Option Plan, as amended May 28, 1996 (incorporated by reference to Exhibit 4A to the Registration Form S-8 [Registration No. 333-4621]) 10E Cognex Corporation 1996 Long-Term Incentive Plan (incorporated by reference to Exhibit 4A to the Registration Statement Form S-8 [Registration No. 333- 2151]) 10F Purchase and Sale Agreement with respect to the Natick Executive Park facility dated as of June 30, 1995 (filed as Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10G Amendment to the Cognex Corporation 1993 Director's Stock Option Plan * 10H Amendment to the Cognex Corporation 1993 Employee Stock Option Plan * 13 Annual Report to Stockholders for the year ended December 31, 1997 (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. * 18 20 27.A Financial Data Schedule for the year ended December 31, 1997 (electronic filing only) * 27.B Restated Financial Data Schedule for the quarter ended March 30, 1997 (electronic filing only)* 27.C Restated Financial Data Schedule for the quarter ended June 29, 1997 (electronic filing only)* 27.D Restated Financial Data Schedule for the quarter ended September 28, 1997 (electronic filing only)* 27.E Restated Financial Data Schedule for the quarter ended March 31, 1996 (electronic filing only)* 27.F Restated Financial Data Schedule for the quarter ended June 30, 1996 (electronic filing only)* 27.G Restated Financial Data Schedule for the quarter ended September 29, 1996 (electronic filing only)* 27.H Restated Financial Data Schedule for the year ended December 31, 1996 (electronic filing only)* 27.I Restated Financial Data Schedule for the year ended December 31, 1995 (electronic filing only)* 27.J Restated Financial Data Schedule for the year ended December 31, 1994 (electronic filing only)* * Filed herewith 19 EX-10.G 2 AMENDMENT TO 1993 STOCK OPTION PLAN 1 EXHIBIT 10G COGNEX CORPORATION Amendment to 1993 Stock Option Plan for Non-Employee Directors The Cognex Corporation 1993 Stock Option Plan for Non-Employee Directors (the "Plan") is hereby amended as follows: 1. Section 8 of the Plan is hereby deleted in its entirety and the following is substituted therefor: "8. TRANSFERABILITY OF OPTIONS Any Option granted pursuant to this Plan shall not be assignable or transferable other than by will or the laws of descent and distribution, except that an optionee may transfer Options granted under this Plan to the optionee's spouse or children or to a trust for the benefit of the optionee or the optionee's spouse or children." 2. Except as modified hereby, the Plan is hereby ratified and confirmed in all respects. COGNEX CORPORATION By: \s\ Anthony J. Medaglia, Jr. ------------------------------- Clerk Adopted by the Board of Directors: December 16, 1997 EX-10.H 3 AMENDMENT TO 1993 STOCK OPTION PLAN 1 EXHIBIT 10H COGNEX CORPORATION Amendment to 1993 Stock Option Plan The Cognex Corporation 1993 Stock Option Plan (the "Plan") is hereby amended as follows: 1. Section 11 of the Plan is amended by adding the following after the last sentence of the paragraph: "11. TRANSFERABILITY OF OPTIONS Notwithstanding the foregoing, an optionee may transfer non-qualified Options granted under this Plan to the optionee's spouse or children or to a trust for the benefit of the optionee or the optionee's spouse or children. 2. Except as modified hereby, the Plan is hereby ratified and confirmed in all respects. COGNEX CORPORATION By: \s\ Anthony J. Medaglia, Jr. --------------------------------- Clerk Adopted by the Board of Directors: December 16, 1997 EX-13 4 PORTIONS OF ANNUAL REPORT 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY Revenue for the year ended December 31, 1997 increased 26% over 1996 and net income increased 33% over the prior year as the Company benefited from a recovery in the semiconductor and electronics industries. These markets experienced a cyclical slowdown that impacted the Company's business during 1996. The increase in revenue is due primarily to increased volume of modular vision systems sold to Original Equipment Manufacturer (OEM) customers serving these two industries. Sales to OEM customers increased 33% over 1996 and grew to 68% of revenue in 1997 from 65% of revenue in 1996. Additionally, sales to factory floor customers increased 15% over the prior year. The increase in sales to factory floor customers is primarily a result of additional sales and marketing resources dedicated to this market in 1997, as well as the third quarter acquisition of Mayan Automation, Inc. (Mayan), whose Fine-Line products are sold to factory floor customers. The Company's financial position remained strong at December 31, 1997, with $262 million in total assets and $236 million in stockholders' equity. Working capital was $200 million at December 31, 1997, representing an increase of 31% over the prior year. Cash and investments increased 33% from the prior year primarily as a result of $52 million of cash generated from operations. The following table sets forth certain consolidated financial data as a percentage of revenue:
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ----------------------------------------------------------------------------------- Revenue 100% 100% 100% Cost of revenue 27 32 22 -------------------------- Gross margin 73 68 78 Research, development and engineering expenses 14 16 13 Selling, general and administrative expenses 23 21 23 Charge for acquired in-process technology (1) 2 9 -------------------------- Income from operations 34 31 33 Investment and other income 4 5 3 -------------------------- Income before provision for income taxes 38 36 36 Provision for income taxes 12 11 14 -------------------------- Net income 26% 25% 22% ==========================
(1) Charge from the write-off of acquired in-process technology in connection with the acquisitions of Mayan Automation, Inc. in 1997 and Acumen, Inc. in 1995. 12 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996: The acquisition of Mayan, a developer of low-cost machine vision systems used for surface inspection, on July 31, 1997 was accounted for under the purchase method of accounting. The results of operations of Mayan since the acquisition date are included in the Company's results. Revenue for the year ended December 31, 1997 increased 26% to $155,340,000 from $122,843,000 for the year ended December 31, 1996. This increase in revenue over the prior year represents a recovery from the slowdown in the semiconductor and electronics industries which had previously impacted the Company's business. The increase is due primarily to increased volume from OEM customers serving these two industries. Sales to OEM customers increased $26,221,000, or 33%, over 1996, and grew to 68% of revenue in 1997 from 65% of revenue in 1996. Additionally, sales to factory floor customers increased $6,276,000, or 15%, over 1996 due primarily to increased volume resulting from additional sales and marketing resources serving customers in this market, as well as the addition of Fine-Line products from the acquisition of Mayan in the third quarter of 1997. For the year ended December 31, 1997, approximately one half of the Company's revenue was derived from customers based in Asia, primarily in Japan. During 1997, 3% of the Company's revenue was derived from Southeast Asia, with 1% representing business in Korea. The Company believes the currency and credit situation currently affecting Asia will have a limited impact on its business since a majority of its sales to customers in Asia are denominated in U.S. dollars and the Company has tightened its credit policy to customers based in Southeast Asia. However, the Company believes its growth would be hampered for a period of time if a worldwide slowdown in capital spending develops as a result of the current financial situation in Asia. Gross margin as a percentage of revenue for the year ended December 31, 1997 was 73% compared to 68% for 1996. Gross margin for 1996 included a $4,231,000 inventory charge to "Cost of revenue," which reduced the margin by approximately four percentage points. The charge reflected costs associated with excess inventories resulting from product transition plans, as well as reduced production plans caused by the slowdown in the semiconductor and electronics industries. Excluding the 1996 inventory charge, the slight improvement in gross margin as a percentage of revenue is due primarily to the Company's ability to significantly increase the number of machine vision systems manufactured with only small increases in manufacturing overhead expenses, thereby improving the absorption rate of overhead expenses. Gross margin as a percentage of revenue for 1998 is expected to remain consistent with the results experienced for the year ended December 31, 1997. Research, development and engineering expenses for the year ended December 31, 1997 increased 16% to $22,481,000 from $19,434,000 for the year ended December 31, 1996. The increase in aggregate expenses is due primarily to higher personnel-related costs to support the Company's continued investment in the research and development of new and existing products. Expenses as a percentage of revenue were 14% in 1997 compared to 16% in 1996. The decrease in expenses as a percentage of revenue results from demand from OEM customers increasing revenue at a rate that outpaced the increase in expenses associated with the addition of new engineers. The Company intends to maintain its product development schedule in 1998, irrespective of revenue trends, and therefore, the level of research, development and engineering expenses as a percentage of revenue may increase during the next few quarters. Selling, general and administrative expenses for the year ended December 31, 1997 increased 36% to $35,810,000 from $26,261,000 for the year ended December 31, 1996. The increase in aggregate expenses is due primarily to higher personnel-related costs, both domestically and internationally, to support the Company's worldwide operations, as 13 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) well as the reinstatement of company bonuses, which were eliminated as part of an effort to control costs during 1996 in light of the temporary downturn in the semiconductor and electronics industries. Expenses as a percentage of revenue were 23% in 1997 compared to 21% in 1996. Selling, general and administrative expenses are expected to continue to increase as additional resources are committed to further penetrate the factory floor market, and therefore, expenses as a percentage of revenue may increase during the next few quarters. Investment income for the year ended December 31, 1997 increased 26% to $5,947,000 from $4,726,000 for the year ended December 31, 1996. The increase in investment income is due primarily to an increase in the Company's invested cash balance during 1997. Other income for the year ended December 31, 1997 totaled $718,000 and remained fairly consistent with other income of $678,000 in 1996. Other income consists primarily of rental income, net of related expenses, from leasing the building adjacent to the Company's corporate headquarters. The Company's effective tax rate was 30.5% for each of the years ended December 31, 1997 and 1996. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995: The acquisition of Isys Controls, Inc. (Isys) in the first quarter of 1996 was accounted for as a pooling of interests. The results of operations of Isys for the full year ended December 31, 1996 are included in the Company's results. The results of operations of Isys for the year ended December 31, 1995 were not material to the Company's previously reported results, and therefore, that year has not been restated. Revenue for the year ended December 31, 1996 increased 18% to $122,843,000 from $104,543,000 for the year ended December 31, 1995. Sales to customers based in the United States, which grew to 45% of revenue in 1996 compared to 41% of revenue in 1995, increased $12,597,000, or 30%, over 1995. Sales to customers based in Japan increased $739,000, or 2%, over 1995, and sales to customers based in Europe increased $3,715,000, or 30%, over 1995. The increase in worldwide revenue for the year ended December 31, 1996 over the prior year is due primarily to increased volume from factory floor customers. Sales to factory floor customers increased $17,737,000, or 71%, over 1995, and grew to 35% of revenue in 1996 from 24% of revenue in 1995. The increased volume from factory floor customers includes sales of Isys products totaling $13,183,000, or 11% of revenue, for the year ended December 31, 1996. During the first half of 1996, sales to OEM customers increased $13,505,000, or 40%, over the comparable period in 1995, whereas during the second half of 1996, sales to OEM customers decreased $12,942,000, or 28%, over the comparable period in 1995, resulting in increased OEM sales of $563,000, or 1%, year-on-year. Gross margin for the year ended December 31, 1996 was 68% and included a $4,231,000 inventory charge to "Cost of revenue," which reduced the margin by approximately four percentage points. The charge reflected costs associated with excess inventories resulting from product transition plans, as well as reduced production plans caused by the slowdown in the semiconductor and electronics industries. Excluding the inventory charge, gross margin for the year ended December 31, 1996 was 72% compared to 78% for the year ended December 31, 1995. The decrease in gross margin excluding the inventory charge is due primarily to a shift in product mix to lower margin products including Isys products, price discounts to some of the Company's larger customers for attaining certain volume thresholds, and underabsorbed manufacturing costs resulting from reduced production plans. Research, development and engineering expenses for the year ended December 31, 1996 increased 47% to $19,434,000 from $13,190,000 for the year ended December 31, 1995. Expenses as a percentage of revenue were 16% in 1996 compared to 13% in 1995. The increase in aggregate expenses is due primarily to higher personnel-related 14 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) costs to support the Company's continued investment in the research and development of new and existing products. These higher costs reflect the hiring of additional personnel at the Company's corporate headquarters, and Japanese and Acumen subsidiaries, as well as the addition of Isys engineers to the Company's talent pool. The increase in expenses as a percentage of revenue is due primarily to the investment in research and development outpacing the growth in revenue. Selling, general and administrative expenses for the year ended December 31, 1996 increased 10% to $26,261,000 from $23,973,000 for the year ended December 31, 1995. Expenses as a percentage of revenue were 21% in 1996 compared to 23% in 1995. The increase in aggregate expenses is due primarily to higher personnel-related costs, both domestically and internationally, to support the Company's worldwide operations and further penetrate the factory floor market. These higher costs reflect the hiring of additional personnel at the Company's corporate headquarters, and Japanese and European subsidiaries, as well as the addition of Isys employees resulting from the acquisition. The decrease in expenses as a percentage of revenue is due primarily to the Company's efforts to control costs during the second half of 1996, which included the elimination of substantially all company bonuses. Investment income for the year ended December 31, 1996 increased 50% to $4,726,000 from $3,147,000 for the year ended December 31, 1995. The increase in investment income is due primarily to an increased investment base, as well as higher returns on invested balances. Other income for the year ended December 31, 1996 totaled $678,000, compared to other expense of $182,000 for the year ended December 31, 1995. Other income (expense) consists primarily of rental income and related expenses from leasing the building adjacent to the Company's corporate headquarters, which was purchased in June 1995. The increase in other income is due primarily to the collection of rental income for a full year in 1996, compared to only a half year in 1995. The Company's effective tax rate was 30.5% for each of the years ended December 31, 1996 and 1995, excluding the impact of a $10,189,000 charge for acquired in-process technology in the third quarter of 1995, which had no associated tax benefit. LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements during the year ended December 31, 1997 were met through cash generated from operations. Cash and investments increased $44,014,000 from December 31, 1996 primarily as a result of $52,493,000 of cash generated from operations, offset by $10,852,000 of capital expenditures. Cash generated from operations consists of net income, adjusted for non-cash charges and changes in current assets and current liabilities, most notably a decrease in accounts receivable resulting from the timing of cash receipts at year end. 15 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As discussed in the Notes to Consolidated Financial Statements, at December 31, 1997, the Company had unconditional obligations to purchase $5,570,000 of inventory from third-party contractors within 60 days. Capital expenditures for the year ended December 31, 1997 totaled $10,852,000 and consisted primarily of expenditures related to the implementation of new computer information systems and expenditures for computer hardware, as well as the cash purchase of land adjacent to the Company's corporate headquarters which is anticipated to be used for future expansion. On July 31, 1997, the Company acquired selected assets and assumed selected liabilities of Mayan Automation, Inc. for $4,800,000 in cash, $1,800,000 of which, at December 31, 1997, remained to be paid through the year 1999. Of the $1,800,000 of future cash payments, $900,000 represents payments contingent upon the attainment of certain performance milestones. In July 1995, the Company acquired Acumen, Inc. for approximately $14,000,000. The purchase price included $8,452,000 in cash, $566,000 of which, at December 31, 1997, remained to be paid through the year 2000. Based on a recent assessment, the Company has determined that its internal computer systems are capable of processing transactions relating to the year 2000 and beyond, and, to the best of its knowledge, the Company does not have any material exposure to contingencies related to year 2000 issues for its products. Additionally, the Company has initiated formal communications with its significant suppliers and customers to determine the extent to which the Company is vulnerable to those third parties' failures to remediate their own year 2000 issues. Although the Company is only in the preliminary stages of assessing the impact of year 2000 issues and no assurances can be given, the Company does not believe that year 2000 expenses will have a material impact on its business. The Company believes that the existing cash and investments balance, together with cash generated from operations, will be sufficient to meet the Company's planned working capital and capital expenditure requirements through 1998, including potential business acquisitions. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. SFAS No.130 requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The Company will adopt the provisions of this statement, which include the reclassification of prior periods presented for comparative purposes, in 1998. The Company is currently evaluating the impact that this statement will have on its financial statements; however, because the statement requires only additional disclosure, the Company does not expect the statement to have a material impact on its financial position or results of operations. The additional disclosure will include comprehensive income, which will differ from historical net income by the amount of the translation adjustments and unrealized gain (loss) on investments included as separate components of stockholders' equity. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 requires companies to report selected segment information quarterly and entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenue. In 1998, the Company will adopt the provisions of this statement, which include the reclassification of prior periods presented, unless impracticable, for comparative purposes. The Company is currently evaluating the impact that this statement will have on its financial statements; however, because the statement requires only 16 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) additional disclosure, the Company does not expect the statement to have a material impact on its financial position or results of operations. FORWARD-LOOKING STATEMENTS Certain statements made in this report, as well as oral statements made by the Company from time to time, which are prefaced with words such as "expects," "anticipates," "believes," and similar words and other statements of similar sense, are forward-looking statements. These statements are based on the Company's current expectations and estimates as to prospective events and circumstances, which may or may not be in the Company's control and as to which there can be no firm assurances given. These forward-looking statements, like any other forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include: (1) capital spending trends by manufacturing companies; (2) the cyclicality of the semiconductor industry; (3) the Company's continued ability to achieve significant international revenue; (4) the loss of, or a significant curtailment of purchases by, any one or more principal customers; (5) inability to protect the Company's proprietary technology and intellectual property; (6) inability to attract or retain skilled employees; (7) technological obsolescence of current products and the inability to develop new products; (8) inability to respond to competitive technology and pricing pressures; and (9) reliance upon certain sole source suppliers to manufacture or deliver critical components of the Company's products. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Further discussions of risk factors are also available in the Company's registration statements filed with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. 17 7 COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, (In thousands, except per share amounts) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Revenue $ 155,340 $ 122,843 $ 104,543 Cost of revenue 42,273 38,855 22,543 ----------------------------------------------- Gross margin 113,067 83,988 82,000 Research, development and engineering expenses 22,481 19,434 13,190 Selling, general and administrative expenses 35,810 26,261 23,973 Charge for acquired in-process technology 3,115 10,189 ----------------------------------------------- Income from operations 51,661 38,293 34,648 Investment income 5,947 4,726 3,147 Other income (expense) 718 678 (182) ----------------------------------------------- Income before provision for income taxes 58,326 43,697 37,613 Provision for income taxes 17,790 13,328 14,579 ----------------------------------------------- Net income $ 40,536 $ 30,369 $ 23,034 =============================================== Net income per common and common equivalent share: Basic $ .98 $ .75 $ .60 =============================================== Diluted $ .91 $ .69 $ .55 =============================================== Weighted-average common and common equivalent shares outstanding: Basic 41,322 40,594 38,175 =============================================== Diluted 44,702 43,814 41,952 ===============================================
The accompanying notes are an integral part of these consolidated financial statements. 18 8 COGNEX CORPORATION - CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (Dollars in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and investments $ 178,014 $ 134,000 Accounts receivable, less reserves of $1,940 and $968 in 1997 and 1996, respectively 25,095 18,809 Revenue in excess of billings 3,723 3,379 Inventories 7,784 7,013 Deferred income taxes 3,453 2,642 Prepaid expenses and other 5,937 3,545 --------------------------- Total current assets 224,006 169,388 --------------------------- Property, plant and equipment, net 32,995 28,331 Other assets 3,462 3,534 Deferred income taxes 1,377 --------------------------- $ 261,840 $ 201,253 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,332 $ 3,652 Accrued expenses 13,712 7,007 Accrued income taxes 2,684 2,029 Customer deposits 3,112 2,596 Deferred revenue 1,596 1,287 --------------------------- Total current liabilities 24,436 16,571 --------------------------- Other liabilities 1,262 1,600 Deferred income taxes 393 Commitments (see Notes to Consolidated Financial Statements) Stockholders' equity: Common stock, $.002 par value Authorized: 120,000,000 shares, issued: 41,859,395 and 40,914,166 shares in 1997 and 1996, respectively 84 82 Additional paid-in capital 91,082 77,569 Cumulative translation adjustment 44 95 Retained earnings 146,368 105,832 Treasury stock, at cost, 103,139 and 80,918 shares in 1997 and 1996, respectively (1,436) (889) --------------------------- Total stockholders' equity 236,142 182,689 --------------------------- $ 261,840 $ 201,253 ===========================
The accompanying notes are an integral part of these consolidated financial statements. 19 9 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK CUMULATIVE TREASURY STOCK TOTAL --------------------- ADDITIONAL TRANSLATION RETAINED ------------------ STOCKHOLDERS' (Dollars in thousands) SHARES PAR VALUE PAID-IN CAPITAL ADJUSTMENT EARNINGS SHARES COST EQUITY - ----------------------------------------------------------------------------------------------------------------------------------- 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 9,508,521 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 ----------------------------------------------------------------------------------------------------- Common stock issued to acquire Isys Controls, Inc. 1,331,927 3 2,469 1,947 4,419 Issuance of stock under stock option, stock purchase, and bonus plans 542,564 1 2,495 2,496 Tax benefit from exercise of stock options 1,434 1,434 Translation adjustment 55 55 Net income 30,369 30,369 ----------------------------------------------------------------------------------------------------- Balance at December 31, 1996 40,914,166 82 77,569 95 105,832 80,918 (889) 182,689 ----------------------------------------------------------------------------------------------------- Issuance of stock under stock option, stock purchase, and bonus plans 945,229 2 5,504 5,506 Tax benefit from exercise of stock options 8,009 8,009 Common stock received for payment of stock option exercises 22,221 (547) (547) Translation adjustment (51) (51) Net income 40,536 40,536 ----------------------------------------------------------------------------------------------------- Balance at December 31, 1997 41,859,395 $ 84 $ 91,082 $ 44 $ 146,368 103,139 $(1,436) $ 236,142 -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 20 10 COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 40,536 $ 30,369 $ 23,034 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 4,870 4,352 2,845 Amortization of intangible assets 938 735 355 Loss on disposition of property, plant and equipment 470 99 56 Charge for acquired in-process technology 3,115 10,189 Tax benefit from exercise of stock options 8,009 1,434 8,581 Inventory provision 4,231 Deferred income tax provision (2,581) (385) (1,326) Changes in other current assets and current liabilities: Accounts receivable (6,603) 6,276 (14,705) Inventories (920) 2,523 (7,678) Accounts payable (421) 519 1,361 Accrued expenses 6,403 (1,768) 2,867 Other (1,323) 2,724 (3,744) ----------------------------------------------- Net cash provided by operating activities 52,493 51,109 21,835 ----------------------------------------------- Cash flows from investing activities: Purchase of investments (94,707) (63,067) (75,758) Maturities of investments 40,468 44,219 34,198 Purchase of property, plant and equipment (10,852) (10,154) (10,503) Cash paid related to acquisition of Mayan Automation, Inc., net of $51 cash assumed (2,862) Cash paid related to acquisition of Acumen, Inc., net of $200 cash assumed in 1995 (137) (1,277) (6,454) Cash assumed in acquisition of Isys Controls, Inc. 918 Other (156) (71) (294) ----------------------------------------------- Net cash used in investing activities (68,246) (29,432) (58,811) ----------------------------------------------- Cash flows from financing activities: Proceeds from issuance of stock under stock option, stock purchase, and bonus plans 4,959 2,496 4,430 ----------------------------------------------- Net cash provided by financing activities 4,959 2,496 4,430 ----------------------------------------------- Effect of exchange rate changes on cash 569 339 131 ----------------------------------------------- Net increase (decrease) in cash and cash equivalents (10,225) 24,512 (32,415) Cash and cash equivalents at beginning of year 48,423 23,911 56,326 ----------------------------------------------- Cash and cash equivalents at end of year 38,198 48,423 23,911 Investments 139,816 85,577 66,729 ----------------------------------------------- Cash and investments $ 178,014 $ 134,000 $ 90,640 ===============================================
The accompanying notes are an integral part of these consolidated financial statements. 21 11 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 semiconductor and electronics industries, are principally located in Japan and the United States. 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. BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of Cognex Corporation and its subsidiaries, 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 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. CASH AND INVESTMENTS Cash and investments include cash equivalents, which the Company considers to be all investments purchased with original maturities of three months or less. Investments having original maturities in excess of three months are stated at amortized cost, which approximates fair value, and are classified as available-for-sale. The Company considers all of its investments to be available for current operations and maintains its investments in securities which are highly liquid and would not result in significant losses if sold prior to maturity. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. 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 10 years, and the useful lives of computer hardware, computer software, and furniture and fixtures range from two to seven years. Leasehold improvements are depreciated over the shorter of the estimated useful lives or the remaining terms of the leases. Maintenance and repairs 22 12 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT (CONTINUED) are expensed when incurred; additions and improvements are capitalized. Upon retirement or disposition, the cost and related accumulated depreciation of the assets disposed of are removed from the accounts, with any resulting gain or loss included in current operations. 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 evaluates 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 warranties for its products for periods ranging from six months to one year from the date of shipment, based upon the product being purchased and the terms of the customer's contract. Estimated warranty obligations are evaluated and recorded at the time of sale. REVENUE RECOGNITION Revenue from product sales and software licenses is recognized upon shipment. Revenue from construction-type projects, which include research and development contracts, is recognized using the percentage-of-completion method. Losses on projects, if any, are recognized when identified. Service and maintenance revenue is recognized as earned. RESEARCH AND DEVELOPMENT Research and development costs for internally-developed products are expensed 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 acquired software is capitalized for products determined to have reached technological feasibility; otherwise, the cost is expensed. 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. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the liability method prescribed 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. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. NET INCOME PER SHARE The Company has adopted SFAS No. 128, "Earnings per Share," for the year ended December 31, 1997, which included retroactively restating all prior periods for which earnings per share (EPS) data is presented. SFAS No. 128 requires the presentation of basic and diluted EPS. Basic EPS, which replaces primary EPS, excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exer- 23 13 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER SHARE (CONTINUED) cised or converted into common stock or resulted in the issuance of common stock that then participates in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS under the previous rules. 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 approximate 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. 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 in 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 semiconductor and electronics 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 its accounts receivable. 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 upon at the inception of the contracts. For contracts that are designated and effective as hedges, the gain or loss on the forward exchange contract is deferred and included in the measurement of the related foreign currency transaction. The Company had $7,900,000 of foreign exchange contracts outstanding, all of which were in Japanese yen, at December 31, 1997. The Company had no foreign exchange contracts outstanding at December 31, 1996. FOREIGN CURRENCY RISK The Company enters into transactions denominated in foreign currencies and includes the exchange rate gain or loss arising from such transactions in current operations. The Company recorded exchange rate losses of $155,000 in 1997, $1,027,000 in 1996, and $573,000 in 1995. 24 14 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH AND INVESTMENTS Cash and investments consist of the following:
DECEMBER 31, (In thousands) 1997 1996 - ------------------------------------------------------------------------------------------------- Cash $ 19,868 $ 25,905 Municipal obligations with contractual maturities: Less than three months 18,330 22,518 ------------------------------ Total cash and cash equivalents 38,198 48,423 Greater than three months and less than one year 49,216 30,025 Greater than one year 90,600 55,552 ------------------------------ $ 178,014 $ 134,000 ==============================
INVENTORIES Inventories consist of the following:
DECEMBER 31, (In thousands) 1997 1996 - ----------------------------------------------------------------------------------------------- Raw materials $ 4,425 $ 5,058 Work-in-process 1,355 513 Finished goods 2,004 1,442 -------------------------- $ 7,784 $ 7,013 ==========================
In the third quarter of 1996, the Company recorded a $4,231,000 inventory charge to "Cost of revenue." The charge reflected costs associated with excess inventories resulting from product transition plans, as well as reduced production plans caused by the slowdown in the semiconductor and electronics industries. 25 15 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, (In thousands) 1997 1996 - ---------------------------------------------------------------------------------- Land $ 3,051 $ 1,150 Buildings 17,563 12,963 Building improvements 2,725 1,883 Construction-in-process 5,943 Computer hardware and software 19,553 13,921 Furniture and fixtures 2,429 1,713 Leasehold improvements 661 477 -------------------------------- 45,982 38,050 Less: accumulated depreciation (12,987) (9,719) -------------------------------- $ 32,995 $ 28,331 ================================
In December 1997, approximately $8,100,000 of expenditures related to new computer information systems and a building addition, that had previously been recorded in construction-in-process, were transferred to buildings, building improvements, and computer hardware and software when they were placed in service. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, (In thousands) 1997 1996 - ------------------------------------------------------------------------------- Bonus $ 3,055 $ 559 Payroll and related costs 3,020 2,066 Warranty 2,407 1,284 Accrued acquisition costs 1,237 337 Professional fees 1,027 938 Other 2,966 1,823 ---------------------------------- $ 13,712 $ 7,007 ==================================
26 16 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, (In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------- Current: Federal $ 17,048 $ 13,169 $ 14,083 State 2,850 128 1,572 Foreign 473 392 249 -------------------------------------------- 20,371 13,689 15,904 Deferred: Federal (1,552) (902) (28) State (1,029) 541 (1,297) -------------------------------------------- $ 17,790 $ 13,328 $ 14,579 ============================================
A reconciliation of the provision for income taxes at the federal statutory rate is as follows:
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------ Provision for income taxes at federal statutory rate 35% 35% 35% Non-deductible charge for acquired in-process technology 9 State income taxes, net of federal benefit 2 2.5 2 Foreign Sales Corporation benefit (3) (3) (4) Tax-exempt investment income (3) (3) (2) Tax credit utilization (1) (1) (1) Other 0.5 --------------------------- Provision for income taxes 30.5% 30.5% 39% ===========================
27 17 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) 1997 1996 - ----------------------------------------------------------------------------------------- Current deferred tax assets: Vacation, bad debt and other $ 1,296 $ 936 Inventory, warranty and other 1,833 1,461 Other 324 245 ----------------------- Total net current deferred tax asset $ 3,453 $ 2,642 ======================= Noncurrent deferred tax assets (liabilities): State net operating loss and credit carryforwards $ 888 $ 574 Acquired complete technology (376) (630) Acquired incomplete technology 1,099 Depreciation (234) (337) ----------------------- Total net noncurrent deferred tax asset (liability) $ 1,377 $ (393) =======================
The Company's state credit carryforwards, net of federal tax impact, are approximately $888,000, a portion of which will begin to expire in the year 2010. LEASES The Company conducts certain 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 totaled $1,637,000 in 1997, $1,324,000 in 1996, and $996,000 in 1995. Future minimum rental payments under these agreements are as follows at December 31, 1997 (in thousands):
YEAR AMOUNT ---------------------- 1998 $ 985 1999 815 2000 712 2001 210 2002 152 -------- $ 2,874 ========
28 18 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LEASES (CONTINUED) 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 agreements that expire at various dates through the year 2000. Annual rental income totaled $1,428,000 in 1997, $1,326,000 in 1996, and $536,000 in 1995. Rental income and related expenses are presented on the Consolidated Statements of Income as "Other income (expense)." Future minimum rental receipts under non-cancelable lease agreements are as follows at December 31, 1997 (in thousands):
YEAR AMOUNT --------------------------- 1998 $ 1,343 1999 1,181 2000 994 --------- $ 3,518 =========
COMMITMENTS The Company has agreements with third-party contractors to perform the majority of component procurement, subassembly, final assembly, and initial testing for the hardware portion of its vision systems. After the completion of initial testing, the third-party contractors deliver the products to the Company to perform final testing and assembly. At December 31, 1997, the Company had unconditional obligations to purchase $5,570,000 of inventory from third-party contractors within 60 days. These purchase commitments relate to expected sales in 1998. STOCKHOLDERS' EQUITY COMMON AND PREFERRED 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 consolidated financial statements and related notes have been retroactively adjusted, as appropriate, to reflect this two-for-one stock split. In April 1996, an amendment to the Company's Articles of Organization was adopted to increase the number of authorized shares of common stock from 60,000,000 shares to 120,000,000 shares. The Company has 400,000 shares of authorized but unissued $.01 par value preferred stock. STOCK-BASED COMPENSATION PLANS The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company continues to recognize compensation costs using the intrinsic value based method described in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." No compensation costs were recognized in 1997, 1996, and 1995. 29 19 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCKHOLDERS' EQUITY (CONTINUED) STOCK-BASED COMPENSATION PLANS (CONTINUED) Net income and net income per share as reported in these consolidated financial statements and on a pro forma basis, as if the fair value based method described in SFAS No. 123 had been adopted, are as follows:
YEAR ENDED DECEMBER 31, (In thousands, except per share amounts) 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Net income As reported $ 40,536 $ 30,369 $ 23,034 Pro forma 34,380 25,204 21,652 Basic net income per share As reported .98 .75 .60 Pro forma .83 .62 .57 Diluted net income per share As reported .91 .69 .55 Pro forma .74 .59 .52
The effects of applying SFAS No. 123 for the purpose of providing pro forma disclosures may not be indicative of the effects on reported net income and net income per share for future years, as the pro forma disclosures include the effects of only those awards granted after January 1, 1995. STOCK OPTION PLANS At December 31, 1997, the Company had 8,672,000 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 Employee plan, 8,000,000. In April 1996, an amendment was adopted to increase the number of shares of common stock reserved for issuance under the 1993 Employee plan from 5,000,000 shares to 8,000,000 shares. In connection with the acquisition of Isys Controls, Inc. in February 1996, the Company adopted the 1996 Long-Term Incentive Plan. This plan provided for the grant of 321,589 shares of either restricted common stock or options to purchase restricted stock. Other than restrictions that limit the sale and transfer of the restricted stock within 20 years from the date of grant, participants are entitled to all of the rights of a stockholder. Options vest over various periods, not exceeding 10 years, and expire no later than 20 years from the date of grant. On July 30, 1996, the Company granted 1,177,830 options at the current fair market value with similar terms and conditions to previously issued but unexercised grants. In exchange for the new grants, employees agreed to forfeit their prior options. 30 20 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS (CONTINUED) The following table summarizes the status of the Company's stock option plans at December 31, 1997, 1996, and 1995, and changes during the years then ended:
1997 1996 1995 ------------------------ -------------------------- --------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 8,014,386 $ 8.34 7,699,826 $ 9.10 7,882,832 $ 5.69 Granted at fair market value 1,450,521 24.55 933,915 16.80 1,397,874 21.74 Granted above fair market value 91,500 26.41 1,807,583 16.18 71,000 26.39 Exercised (996,965) 4.87 (518,925) 3.18 (1,312,392) 3.36 Forfeited (794,535) 10.05 (1,908,013) 24.39 (339,488) 7.73 ---------- ---------- ---------- Outstanding at end of year 7,764,907 11.85 8,014,386 8.34 7,699,826 9.10 ========== ========== ========== Options exercisable at year-end 2,140,956 6.14 2,128,058 4.40 1,389,164 3.17 Weighted-average grant-date fair value of options granted during the year at fair market value $ 12.48 $ 11.78 $ 11.19 Weighted-average grant-date fair value of options granted during the year above fair market value $ 11.50 $ 4.46 $ 10.17
31 21 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ---------------------------- WEIGHTED-AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE - ----------------------------------------------------------------------------------------------------------- $ .50 - 6.00 1,445,405 5.3 $ 3.28 1,251,686 $ 3.08 6.06 - 7.00 169,913 7.0 6.82 100,455 6.85 7.12 - 7.50 2,516,800 10.7 7.50 289,800 7.49 7.94 - 14.19 727,790 6.9 11.57 302,938 11.25 14.50 - 14.50 1,105,863 8.4 14.50 151,150 14.50 14.56 - 23.44 1,091,570 9.5 19.80 34,142 16.84 24.00 - 36.31 707,566 9.6 29.91 10,785 22.89 --------- --------- .50 - 36.31 7,764,907 8.7 11.85 2,140,956 6.14 ========= =========
For the purpose of providing pro forma disclosures, the fair values of options granted were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996, and 1995, respectively: a risk-free interest rate of 6.3%, 6.3%, and 5.9%; an expected life of 5.1, 4.4, and 4.5 years; expected volatility of 50%; and no expected dividends. EMPLOYEE STOCK PURCHASE PLAN Under the Company's Employee Stock Purchase Plan (ESPP), employees who have completed six months of continuous employment with the Company may purchase common stock semi-annually at the lower of 85% of the 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 under the ESPP for a period of one year from the date of purchase. Common stock reserved for future sales totaled 463,534 shares at December 31, 1997. Shares purchased under the ESPP totaled 22,436 in 1997, 27,215 in 1996, and 16,133 in 1995. The weighted-average fair value of shares purchased under the ESPP was $5.08 in 1997, $6.82 in 1996, and $3.74 in 1995. For the purpose of providing pro forma disclosures, the fair values of shares purchased were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for purchases in 1997, 1996, and 1995: a risk-free interest rate of 5.3%, 5.3%, and 6.1%, respectively; an expected life of six months; expected volatility of 50%; and no expected dividends. EMPLOYEE SAVINGS PLAN Under the Company's Employee Savings Plan, a defined contribution plan, employees who have attained age 21 may contribute 1% to 15% of their salary on a pre-tax basis. Employer contributions are made at the discretion of management and vest after five years of continuous employment with the Company. Employer contributions approximated $400,000 in 1997, $300,000 in 1996, and $200,000 in 1995. 32 22 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NET INCOME PER SHARE Net income per share is calculated as follows:
YEAR ENDED DECEMBER 31, (In thousands, except per share amounts) 1997 1996 1995 - --------------------------------------------------------------------------------------------------- Net income $ 40,536 $ 30,369 $ 23,034 ======== ======== ======== Basic: Weighted-average common shares outstanding 41,322 40,594 38,175 ======== ======== ======== Net income per common share $ .98 $ .75 $ .60 ======== ======== ======== Diluted: Weighted-average common shares outstanding 41,322 40,594 38,175 Effect of dilutive securities: Stock options 3,380 3,220 3,777 -------- -------- -------- Weighted-average common and common equivalent shares outstanding 44,702 43,814 41,952 ======== ======== ======== Net income per common and common equivalent share $ .91 $ .69 $ .55 ======== ======== ========
Stock options to purchase 545,386 and 66,500 shares of common stock were outstanding during the years ended December 31, 1997 and 1996, respectively, but were not included in the calculations of diluted EPS because the option's exercise price was greater than the average market price of the Company's common shares during those years. Although these options were antidilutive in 1997 and 1996, because they were still outstanding at December 31, 1997, they may be dilutive in future years' calculations. There were no options that were antidilutive in the 1995 calculation of diluted EPS that were still outstanding at December 31, 1997. The 545,386 options consisted of the following grants: 2,000 at $26.50 granted March 1996; 60,000 at $26.50 granted July 1996; 50,000 at $30.00, 56,370 at $32.63, and 180,936 at $32.81 granted July 1997; 45,820 at $36.31 granted August 1997; 20,500 at $35.25 granted September 1997; 55,400 at $32.00 granted October 1997; 53,360 at $28.56 granted November 1997; and 21,000 at $27.00 granted December 1997. The 66,500 options outstanding at December 31, 1996 consisted of the following grants: 2,000 at $26.50 granted March 1996; 4,500 at $24.00 granted June 1996; and 60,000 at $26.50 granted July 1996. All of the options listed above expire 10 years from the date of grant. 33 23 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEGMENT INFORMATION During the years ended December 31, 1997, 1996, and 1995, one customer accounted for $27,292,000, $13,765,000, and $17,237,000, or 18%, 11%, and 16%, respectively, of revenue. The following table summarizes domestic and foreign sales:
YEAR ENDED DECEMBER 31, 1997 (In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Domestic: United States $ 59,723 $ 55,216 $ 42,619 Export Japan 51,453 33,988 48,466 Europe 22,177 15,958 12,243 Rest of world 4,534 2,464 1,215 Foreign: Japan 17,453 15,217 -------- -------- -------- $155,340 $122,843 $104,543 ======== ======== ========
34 24 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEGMENT INFORMATION (CONTINUED) The following table summarizes information about the Company's 1997 and 1996 operations in significant geographic areas (in thousands). Operations in geographic areas other than the United States were not material prior to 1996.
YEAR ENDED DECEMBER 31, 1997 UNITED STATES JAPAN ELIMINATIONS CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------- Revenue: Unaffiliated customers $ 137,887 $ 17,453 $ 155,340 Intercompany 10,336 $(10,336) --------- -------- -------- --------- Total revenue 148,223 17,453 (10,336) 155,340 Income (loss) from operations 51,682 (21) 51,661 Identifiable assets 259,608 10,562 (8,330) 261,840
YEAR ENDED DECEMBER 31, 1996 UNITED STATES JAPAN ELIMINATIONS CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------- Revenue: Unaffiliated customers $ 107,626 $ 15,217 $ 122,843 Intercompany 9,755 $ (9,755) --------- -------- -------- --------- Total revenue 117,381 15,217 (9,755) 122,843 Income (loss) from operations 39,162 (869) 38,293 Identifiable assets 200,425 6,801 (5,973) 201,253
Inventories are transferred to the Company's Japanese subsidiary at previously established transfer prices, resulting in intercompany revenue, as well as intercompany receivables for the United States operation. All intercompany transactions are eliminated in consolidation. 35 25 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACQUISITION OF MAYAN AUTOMATION, INC. On July 31, 1997, the Company acquired selected assets and assumed selected liabilities of Mayan Automation, Inc. (Mayan), a developer of low-cost machine vision systems used for surface inspection, for $4,800,000 in cash, of which $1,800,000 will be paid through the year 1999. Of the $1,800,000 of future cash payments, $900,000 represents payments contingent upon the attainment of certain performance milestones. The acquisition was accounted for under the purchase method of accounting. Accordingly, Mayan's results of operations have been included in the Company's consolidated results of operations since the date of acquisition. Mayan's historical results of operations were not material compared to the Company's consolidated results of operations, and therefore, pro forma results are not presented. The purchase price was allocated among the identifiable assets of Mayan. After allocating the purchase price to the net tangible assets, acquired technology was valued using a risk-adjusted cash flow model, under which future 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 $400,000 to complete technology, to be amortized over five years, and $3,115,000 to in-process technology which had not reached technological feasibility and had no alternative future use, and accordingly, was expensed immediately. Up to an additional $900,000 of contingent consideration will be recorded as purchase price when paid and will be allocated to goodwill to be amortized over the remaining period of expected benefit. 36 26 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACQUISITION OF ISYS CONTROLS, INC. On February 29, 1996, the Company acquired Isys Controls, Inc. (Isys), a developer of machine vision systems for high-speed surface inspection. The acquisition was accounted for as a pooling of interests, and therefore, the results of operations of Isys for the full year are included in the consolidated financial statements of the Company for the year ended December 31, 1996. For years presented prior to the acquisition, the financial position and results of operations of Isys were not material to the previously reported financial position and results of operations of the Company, and therefore, these years have not been restated. ACQUISITION OF ACUMEN, INC. On July 21, 1995, the Company acquired all of the outstanding shares of Acumen, Inc. (Acumen), a developer of machine vision systems for semiconductor wafer identification. The purchase price of $13,950,000 included $8,452,000 in cash, 96,140 shares of Cognex common stock with a fair value of $4,170,000, and Cognex stock options valued at $1,328,000. At December 31, 1997, 1996, and 1995, $1,598,000, $1,935,000, and $3,125,000, respectively, of the purchase price remained to be paid in cash and stock options through the year 2001. The acquisition was 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. 37 27 COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE Cash paid for income taxes totaled $12,564,000 in 1997, $11,218,000 in 1996, and $7,982,000 in 1995. Common stock received as payment for stock option exercises totaled $547,000 in 1997 and $397,000 in 1995. The Company retired certain fully-depreciated property, plant and equipment totaling $1,056,000 in 1997 and $3,049,000 in 1995. In 1996, the Company exchanged 1,078,380 shares of Cognex common stock for Isys common shares, and 253,547 shares of Cognex common stock for Isys restricted common shares, with similar restrictions, in connection with the acquisition of Isys. 38 28 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, 1997 and 1996 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Boston, Massachusetts /s/ COOPERS & LYBRAND L.L.P. January 23, 1998 39 29 COGNEX CORPORATION FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, (In thousands, except per share amounts) 1997 1996(1)(2) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Statement of Income Data: Revenue $ 155,340 $ 122,843 $ 104,543 $ 62,484 $ 43,371 Cost of revenue 42,273 38,855 22,543 13,884 10,280 ------------------------------------------------------------------- Gross margin 113,067 83,988 82,000 48,600 33,091 Research, development and engineering expenses 22,481 19,434 13,190 9,933 6,205 Selling, general and administrative expenses 35,810 26,261 23,973 16,847 12,183 Charge for acquired in-process technology 3,115 10,189 ------------------------------------------------------------------- Income from operations 51,661 38,293 34,648 21,820 14,703 Investment and other income 6,665 5,404 2,965 1,462 1,316 ------------------------------------------------------------------- Income before provision for income taxes 58,326 43,697 37,613 23,282 16,019 Provision for income taxes 17,790 13,328 14,579 7,210 4,871 ------------------------------------------------------------------- Net income $ 40,536 $ 30,369 $ 23,034 $ 16,072 $ 11,148 =================================================================== Basic net income per share (3) $ .98 $ .75 $ .60 $ .47 $ .33 =================================================================== Diluted net income per share (3) $ .91 $ .69 $ .55 $ .43 $ .31 =================================================================== Basic weighted-average common shares outstanding (3) 41,322 40,594 38,175 34,560 33,632 =================================================================== Diluted weighted-average common shares outstanding (3) 44,702 43,814 41,952 37,150 35,668 ===================================================================
DECEMBER 31, (In thousands) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data: Working capital $ 199,570 $ 152,817 $ 119,402 $ 88,619 $ 51,605 Total assets 261,840 201,253 162,172 112,946 60,810 Long-term debt -- -- -- -- -- Stockholders' equity 236,142 182,689 143,916 103,608 55,061
(1) 1996 results include the full year results of Isys Controls, Inc. (Isys), a developer of machine vision systems for high-speed surface inspection acquired in February 1996. The Isys acquisition was accounted for as a pooling of interests; however, because the results of Isys for prior years were not material to the Company's previously reported results, prior years have not been restated. (2) Cost of revenue includes a $4,231,000 inventory charge for costs associated with excess inventories resulting from product transition plans, as well as reduced production plans. (3) Adjusted for the 2-for-1 stock splits effective December 18, 1995 and September 30, 1993. 40 30 COGNEX CORPORATION SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED ----------------------------------------------------------------- MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 31, (In thousands, except per share amounts) 1997 1997 1997 1997 - ----------------------------------------------------------------------------------------------------------------------------- Revenue $ 28,143 $ 36,271 $ 43,936 $ 46,990 Gross margin 20,448 26,331 32,476 33,812 Charge for acquired in-process technology 3,115 Income from operations 7,850 12,069 13,976 17,766 Net income 6,491 9,372 10,941 13,732 Basic net income per share .16 .23 .26 .33 Diluted net income per share .15 .21 .24 .31 Common stock prices: High 21.750 27.500 38.500 34.375 Low 17.500 19.000 26.375 22.250
QUARTER ENDED -------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 29, DECEMBER 31, (In thousands, except per share amounts) 1996 1996 1996(1) 1996 - -------------------------------------------------------------------------------------------------------------------------- Revenue $ 34,887 $ 34,949 $ 26,540 $ 26,467 Gross margin 25,681 25,358 14,243 18,706 Income from operations 14,570 13,690 2,913 7,120 Net income 10,829 10,134 3,244 6,162 Basic net income per share .27 .25 .08 .15 Diluted net income per share .25 .23 .08 .14 Common stock prices: High 35.000 29.000 17.250 21.250 Low 18.000 15.750 11.750 12.250
(1)Cost of revenue includes a $4,231,000 inventory charge for costs associated with excess inventories resulting from product transition plans, as well as reduced production plans. 41 31 COGNEX CORPORATION - COMPANY INFORMATION TRANSFER AGENT BankBoston, N.A. c/o Boston EquiServe, L.P. P.O. Box 8040 Boston, Massachusetts 02266-8040 Telephone (781) 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 request to: Department of Investor Relations Cognex Corporation One Vision Drive Natick, MA 01760 Additional copies of this annual report are also available, without charge, upon request to the above address. The Company's common stock is traded on The NASDAQ Stock Market, under the symbol CGNX. As of February 12, 1998, there were approximately 17,000 registered and non-registered holders of the Company's common stock. No dividends on the Company's common stock were paid during 1997 and 1996. 42 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 COGNEX CORPORATION SUBSIDIARIES OF THE REGISTRANT At December 31, 1997, the registrant had the following subsidiaries, the financial statements of which are all included in the consolidated financial statements of the registrant:
NAME OF SUBSIDIARY STATE/COUNTRY OF INCORPORATION PERCENT OWNERSHIP ------------------ ------------------------------ ----------------- Cognex Technology and Investment Corporation California 100% Cognex Canada Technology, Inc. California 100% Vision Drive, Inc. Delaware 100% Isys Controls, Inc. California 100% Cognex Foreign Sales Corporation Barbados 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% Cognex Taiwan, Inc. Delaware 100% Cognex Canada, Inc. Delaware 100%
EX-23 6 CONSENT OF COOPERS & LYBRAND L.L.P. 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, 33-36262, 33-36263, 33-72636, 33-72638, 33-81150, 33-81152, 333-2151, and 333-4621) of our reports dated January 23, 1998 on our audits of the consolidated financial statements and financial statement schedule of Cognex Corporation as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which reports are incorporated by reference or included in this Annual Report on Form 10-K. Boston, Massachusetts /s/ COOPERS & LYBRAND L.L.P. March 27, 1998 EX-27.A 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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 38,198,000 139,816,000 27,035,000 1,940,000 7,784,000 224,006,000 45,982,000 12,987,000 261,840,000 24,436,000 0 0 0 84,000 236,058,000 261,840,000 155,340,000 155,340,000 42,273,000 42,273,000 0 0 0 58,326,000 17,790,000 40,536,000 0 0 0 40,536,000 .98 .91
EX-27.B 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF COGNEX CORPORATION FOR THE QUARTER ENDED MARCH 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1 US DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-30-1997 1 55,814,000 86,020,000 18,892,000 989,000 7,968,000 179,061,000 39,715,000 10,791,000 211,293,000 18,653,000 0 0 0 82,000 190,619,000 211,293,000 28,143,000 28,143,000 7,695,000 7,695,000 0 0 0 9,340,000 2,849,000 6,491,000 0 0 0 6,491,000 .16 .15
EX-27.C 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF COGNEX CORPORATION FOR THE QUARTER ENDED JUNE 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1 US DOLLARS 3-MOS DEC-31-1997 MAR-31-1997 JUN-29-1997 1 44,803,000 96,695,000 27,318,000 1,296,000 6,645,000 188,848,000 42,979,000 12,047,000 222,992,000 18,889,000 0 0 0 83,000 202,241,000 222,992,000 36,271,000 36,271,000 9,940,000 9,940,000 0 0 0 13,485,000 4,113,000 9,372,000 0 0 0 9,372,000 .23 .21
EX-27.D 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF COGNEX CORPORATION FOR THE QUARTER ENDED SEPTEMBER 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1 US DOLLARS 3-MOS DEC-31-1997 JUN-30-1997 SEP-28-1997 1 38,600,000 115,443,000 33,180,000 1,618,000 8,158,000 207,808,000 43,708,000 11,861,000 243,322,000 22,232,000 0 0 0 83,000 219,611,000 243,322,000 43,936,000 43,936,000 11,460,000 11,460,000 0 0 0 15,744,000 4,803,000 10,941,000 0 0 0 10,941,000 .26 .24
EX-27.E 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF COGNEX CORPORATION FOR THE QUARTER ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1 US DOLLARS 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 1 40,989,000 68,264,000 22,628,000 553,000 12,610,000 154,574,000 30,471,000 6,653,000 182,368,000 20,332,000 0 0 0 81,000 160,008,000 182,368,000 34,887,000 34,887,000 9,206,000 9,206,000 0 0 0 15,581,000 4,752,000 10,829,000 0 0 0 0 .27 .25
EX-27.F 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF COGNEX CORPORATION FOR THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1 US DOLLARS 3-MOS DEC-31-1996 APR-01-1996 JUN-30-1996 1 37,193,000 76,818,000 22,537,000 583,000 12,800,000 161,188,000 32,270,000 7,565,000 189,846,000 15,036,000 0 0 0 81,000 172,812,000 189,846,000 34,949,000 34,949,000 9,591,000 9,591,000 0 0 0 15,022,000 4,888,000 10,134,000 0 0 0 0 .25 .23
EX-27.G 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF COGNEX CORPORATION FOR THE QUARTER ENDED SEPTEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1 U.S. DOLLARS 3-MOS DEC-31-1996 JUL-01-1996 SEP-29-1996 1 44,420,000 81,395,000 17,836,000 928,000 8,251,000 162,873,000 34,889,000 8,629,000 192,936,000 15,240,000 0 0 0 82,000 175,968,000 192,936,000 26,540,000 26,540,000 12,297,000 12,297,000 0 0 0 4,227,000 983,000 3,244,000 0 0 0 3,244,000 .08 .08
EX-27.H 14 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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 48,423,000 85,577,000 19,777,000 968,000 7,013,000 169,388,000 38,050,000 9,719,000 201,253,000 16,571,000 0 0 0 82,000 182,607,000 201,253,000 122,843,000 122,843,000 38,855,000 38,855,000 0 0 0 43,697,000 13,328,000 30,369,000 0 0 0 0 .75 .69
EX-27.I 15 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. 1 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 23,911,000 66,729,000 25,021,000 709,000 12,567,000 135,793,000 27,488,000 5,355,000 162,712,000 16,391,000 0 0 0 78,000 143,838,000 162,712,000 104,543,000 104,543,000 22,543,000 22,543,000 0 0 0 37,613,000 14,579,000 23,034,000 0 0 0 0 .60 .55
EX-27.J 16 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, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1 US DOLLARS 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 1 56,326,000 25,169,000 9,835,000 684,000 4,439,000 97,743,000 20,063,000 5,560,000 112,839,000 9,231,000 0 0 0 38,000 103,570,000 112,839,000 62,484,000 62,484,000 13,884,000 13,884,000 0 0 0 23,282,000 7,210,000 16,072,000 0 0 0 16,072,000 .47 .43
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