-----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, DHBM5gvSe/tBWvnjeNYYbILPooorhh43y/zhE0L28BM+S63TyztnUksGiKb7kHDp TVEFfGFXcXDp9jYs5kF6tg== 0000893877-96-000370.txt : 19961115 0000893877-96-000370.hdr.sgml : 19961115 ACCESSION NUMBER: 0000893877-96-000370 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERCON INC CENTRAL INDEX KEY: 0000876573 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 911486560 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-26462 FILM NUMBER: 96661955 BUSINESS ADDRESS: STREET 1: 1720 WILLOW CREEK CIRCLE STREET 2: STE 530 CITY: EUGENE STATE: OR ZIP: 97402 BUSINESS PHONE: 5033441189 FORMER COMPANY: FORMER CONFORMED NAME: PERCON ACQUISITION INC DATE OF NAME CHANGE: 19950621 10QSB 1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-QSB ------------ (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: SEPTEMBER 30, 1996 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: 0-26462 ------------ PERCON INCORPORATED (Exact name of small business issuer as specified in its charter) 91-1486560 Washington (IRS Employer (State of Incorporation) Identification No.) 1720 Willow Creek Circle, Suite 530 Eugene, OR 97402-9171 (Address of principal executive offices) Registrant's telephone number, including area code (541) 344-1189 Not Applicable (former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 --- --- The number of shares of common stock outstanding as of November 12, 1996: 3,954,173 PERCON INCORPORATED AND SUBSIDIARIES FORM 10-QSB SEPTEMBER 30, 1996 INDEX Page PART I - FINANCIAL INFORMATION Reference - ------------------------------ --------- Item 1 - Financial Statements Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995. 3 Consolidated Statements of Income for the three months and nine months ended September 30, 1996 and 1995. 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995. 5 Notes to Consolidated Financial Statements 6-11 Item 2 - Management's Discussion and Analysis or Plan of Operation 12-16 PART II - OTHER INFORMATION - --------------------------- Signature 17 2
PERCON INCORPORATED Consolidated Balance Sheets (Dollars in thousands) September 30, December 31, 1996 1995 ------------ ----------- ASSETS Current assets: Cash and cash equivalents $482 $4,007 Investments held to maturity 998 Accounts receivable, net 4,037 1,876 Inventories 3,831 1,884 Prepaid expenses and other 410 201 Deferred income tax asset 156 110 ------------ ----------- Total current assets 8,916 9,076 Property and equipment, net 2,787 680 Goodwill and intangibles, net 2,003 1,698 ------------ ----------- Total assets $13,706 $11,454 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $85 Accounts payable and accrued expenses 2,452 $1,039 Income taxes payable 179 28 ------------ ------------ Total current liabilities 2,716 1,067 Deferred income taxes 607 595 Long-term debt, less current portion 1,010 Other 20 ------------ ------------ Total liabilities 4,353 1,662 ------------ ------------ Shareholders' equity: Common stock, 20,000,000 shares authorized, 3,953,853 and 3,921,167 shares issued and outstanding, respectively 8,813 8,699 Preferred stock, 5,000,000 shares authorized, none issued Cumulative translation adjustment (34) Retained earnings 574 1,093 ------------ ------------ Total shareholders' equity 9,353 9,792 ------------ ------------ Total liabilities and shareholders' equity $13,706 $11,454 ============ ============ The accompanying notes are an integral part of these financial statements.
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PERCON INCORPORATED Consolidated Statements of Income (In thousands, except share and per share data) Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ============== ============== ============== ============== (Audited) (Audited) Net sales $5,525 $3,171 $15,683 $8,409 Cost of goods sold 2,785 1,523 7,824 4,225 -------------- -------------- -------------- -------------- Gross profit 2,740 1,648 7,859 4,184 Operating Expenses: Selling, marketing and customer service 937 478 2,538 1,519 General and administrative 548 358 1,524 939 Research and product development 466 165 1,273 434 Acquired in-process research and product development 2,091 -------------- -------------- -------------- -------------- Operating income (loss) 789 647 433 1,292 Interest income (expense), net (14) 43 9 24 Other income (expense), net (3) 2 -------------- -------------- -------------- -------------- Income (loss) before taxes 772 690 444 1,316 Provision for income taxes 292 170 963 170 -------------- -------------- -------------- -------------- Net income (loss) $480 $520 ($519) $1,146 ============== ============== ============== ============== Net income (loss) per share $0.12 $0.14 ($0.13) $0.38 ============== ============== ============== ============== Weighted average shares outstanding 4,078 3,632 4,108 3,036 ============== ============== ============== ============== Pro forma data (1): Income before provision for income taxes $690 $1,316 Pro forma provision for income taxes 262 490 -------------- -------------- Pro forma net income $428 $826 ============== ============== Pro forma net income per share $0.12 $0.27 ============== ============== Shares used in pro forma per share calculation 3,632 3,036 ============== ============== (1) As if the company had been a C corporation for the period. The accompanying notes are an integral part of these financial statements.
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PERCON INCORPORATED Consolidated Statements of Cash Flows (Dollars in thousands) Nine Months Ended September 30, 1996 1995 ----------------- ----------------- Cash flows from operating activities: Net Income (loss) ($519) $1,146 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 683 192 Loss on sale of equipment Acquired in-process research and product development 2091 Deferred income taxes (167) Change in operating assets and liabilities, net of effects from acquistion of business: Accounts receivable (529) (661) Inventories (632) (700) Prepaid expenses and other (99) (147) Accounts payable and accrued expenses 76 832 ----------------- ------------------ Net cash provided by operating activities 904 662 ----------------- ------------------ Cash flows from investing activities: Equipment purchases (812) (338) Purchase of technology (58) Purchased investments (977) Proceeds on maturity of short-term investments 998 Purchase of business and technology (4,616) ----------------- ------------------ Net cash used in investing activities (4,488) (1,315) ----------------- ------------------ Cash flows from financing activities: Principal paid on long-term debt (50) (446) Proceeds from stock issued 92 7,176 Distributions to shareholders (1,446) Tax benefit from exercise or early disposition of certain stock options 21 ----------------- ------------------ Net cash provided by financing activities 63 5,284 ----------------- ------------------ Effect of exchange rate changes on cash (4) ----------------- ------------------ Net decrease in cash and cash equivalents (3,525) 4,631 Cash and cash equivalents at beginning of period 4,007 47 ----------------- ------------------ Cash and cash equivalents at end of period $482 $4,678 ================= ================== Supplemental disclosure (See Note 2): Interest paid $63 $22 Taxes paid $778 The accompanying notes are an integral part of these financial statements.
5 PERCON INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Percon Incorporated and its wholly-owned subsidiaries ("the Company" - See Note 2). The activity of STI S.A. ("STI"), a wholly-owned subsidiary, is consolidated from March 7, 1996, the date of acquisition. All significant intercompany transactions and balances have been eliminated in consolidation. BASIS OF REPORTING The accompanying consolidated financial statements have been prepared by the Company and in the opinion of management contain all adjustments necessary to present fairly the Company's financial position as of September 30, 1996 and December 31, 1995, and the results of operations for the three and nine months ended September 30, 1996 and 1995 and cash flows for the nine months ended September 30, 1996 and 1995. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the three months and nine months ended September 30, 1996 are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 1995. GOODWILL AND INTANGIBLES Goodwill resulting from business acquisitions (the excess cost of acquired subsidiaries over the fair value of net assets acquired) is amortized using the straight-line method over seven years, the current estimated useful life. Intangibles include the cost of software, technologies acquired in connection with business combinations, and certain non-compete agreements. Amortization of capitalized software cost, which is included in cost of goods sold, is provided on a product-by-product basis at the greater of (a) the ratio the current gross revenues for a product bears to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product, including the period being reported on, which approximates five years. It is reasonably possible that those estimates of anticipated future gross revenues, the remaining estimated economic life of the products, or both may be reduced significantly due to competitive pressures or other factors. Amortization of capitalized technologies cost, which is included in cost of goods sold, is provided on the straight-line method over the estimated economic life of the technologies (one to two years). Non-compete agreements are stated at cost. These agreements are amortized on a straight-line basis over the terms of the agreements (three to five years). 6 PERCON INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACQUIRED IN-PROCESS RESEARCH AND PRODUCT DEVELOPMENT Acquired in-process research and product development for which technological feasibility has not been achieved is expensed at the date of purchase. INCOME TAXES Prior to July 31, 1995, Percon Incorporated was treated for federal income tax purposes as an S corporation under Subchapter S of the Internal Revenue Code of 1986, as amended, and has been treated as an S corporation for state income tax purposes under comparable state tax laws. As a result, Percon's earnings through the day preceding the termination of the Percon's S corporation status (the Termination Date) had been, for federal and state income tax purposes, taxed directly to Percon's shareholders, at their individual federal and state income tax rates, rather than to Percon. Subsequent to the Termination Date, Percon is no longer treated as an S corporation and, accordingly, is subject to federal and state income taxes on its earnings. Pro forma provision for income taxes included in the statement of income for the three and nine months ended September 30, 1995 reflects the expected federal and state income tax expense as if the Company had been subject to income tax as a C corporation for the period presented, at the prevailing tax rates. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares (stock options and warrants determined under the treasury stock method) outstanding during the period. FOREIGN CURRENCY TRANSLATION The financial statements of foreign operations are translated into U.S. dollars in accordance with Financial Accounting Standards Board Statement No. 52. Accordingly, all assets and liabilities are translated at end of the period exchange rates. The gains and losses that result from this process are shown in the cumulative translation adjustment account in the shareholders' equity section of the balance sheet. Operating transactions are translated at weighted average rates during the period. Transaction gains and losses are reflected in net income. 7 PERCON INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACQUISITIONS On March 7, 1996, the Company purchased all of the outstanding stock of STI for approximately $4.6 million in cash. STI, located near Paris, France, is a leading manufacturer of fixed-station and integrated decoders. The purchase price was allocated to the assets and in-process research and product development acquired and the liabilities assumed on the basis of fair values at March 7, 1996 as follows (In thousands): Accounts receivable, net $1,665 Inventories 1,310 Prepaid expenses and other 85 Deposits 28 Property and equipment, net 1,638 Intangible assets, net 83 Goodwill 545 In-process research and product development 2,091 ------ Total assets acquired $7,445 ------ Cash paid for STI: Capital stock $4,500 Acquisition costs 124 Deferred tax liability resulting from 28 acquisition Current liabilities assumed 1,594 Long-term liabilities assumed 1,199 ------ Total cash paid and liabilities assumed $7,445 ------ Additionally, in consideration for continuing employment, the Company issued options to purchase 60,000 shares of the Company's common stock at an exercise price of $13.125 per share, the market price of the Company's stock on the date of grant, to STI's founder who was to remain president and managing director of STI. The options were exercisable if the founder remained with STI for one full year. The founder retired in August 1996; therefore, these options have expired unexercised. 8 PERCON INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated results of operations presents information as if the acquisition had occurred as of the beginning of each period presented and, with respect to the three and nine month periods ended September 30, 1995, as if the Company had been subject to tax. The pro forma information is presented after giving effect to certain adjustments for amortization and interest expense. STI's expenses for the interim periods presented were estimated based on annual amounts incurred. Management believes the estimates provide a reasonable approximation of actual results. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results of operations that would have occurred nor is it necessarily indicative of future results of operations.
Pro forma: (In thousands, except Three Months Ended Nine Months Ended Nine Months Ended per share data) September 30, 1995 September 30, 1996 September 30, 1995 ------------------ ------------------ ------------------ Net sales $4,655 $16,835 $13,043 Net income (loss) 578 (499) a 1,297 b Net income (loss) per share $.16 ($.12) a $.43 b ------ ------- ------- Weighted average shares 3,632 4,108 3,036 ------ ------- -------
a-Includes a one time charge of $2,091,000 associated with expensing of acquired in-process research and product development. Without this charge, pro forma net income and pro forma net income per share at September 30, 1996 would have been $1,592,000 and $.39 respectively. The charge for acquired in-process research and product development expense did not have a tax benefit and reduced income per share by $.51. b-Excludes a one time charge of $2,091,000 associated with expensing of acquired in-process research and product development. With this charge, pro forma net loss and pro forma net loss per share at September 30, 1995 would have been $794,000 and $.26 respectively. INVENTORIES Inventories are stated at the lower of cost (methods which approximate the first-in, first-out method) or market. Elements of cost include materials, labor, and overhead and consist of the following: (In thousands) September 30, 1996 December 31, 1995 ------------------ ----------------- Materials $2,564 $1,225 Finished goods 1,267 659 ------ ------ $3,831 $1,884 ------ ------ 9 PERCON INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following: (In thousands) September 30, 1996 December 31, 1995 ------------------ ----------------- Building on land owned by others $ 1,454 Equipment 1,795 $ 816 Tooling 624 260 Leasehold improvements 93 19 ------- ------ 3,966 1,095 Less accumulated depreciation and (1,179) (415) amortization ------- ------ $ 2,787 $ 680 ------- ------ The building on land owned by others was purchased by STI in December 1994. Under terms of the lease agreement for the underlying land, the Company pays lease payments of approximately $20,000 per year. The Company does not have an option to purchase the land or extend the lease, and ownership of the building will pass to the land owner at the end of the lease term on December 31, 2010. Accordingly, the cost of the building is being amortized over the 16-year term of the lease. GOODWILL AND INTANGIBLES, NET Goodwill and intangibles consist of the following: (In thousands) September 30, 1996 December 31, 1995 ------------------ ----------------- Acquired software and technology $1,785 $1,637 Non-compete agreements 832 832 Goodwill and other 578 32 --- -- 3,195 2,501 Less accumulated amortization (1,192) (803) ------ ------ $2,003 $1,698 ------ ------ SHORT-TERM BORROWINGS The Company has a revolving line of credit with one domestic bank of up to $1,000,000 collateralized by accounts receivable and inventories. The interest rate is the bank's prime rate (8.25% at September 30, 1996). No amounts were outstanding as of September 30, 1996 and December 31, 1995. The Company has overdraft and line of credit facilities with a foreign bank for up to $60,000 at the bank's current overdraft interest rate (8.55% at September 30, 1996). No amounts were outstanding at September 30, 1996. The Company also has a credit facility with a foreign bank to borrow up to $200,000, collateralized by accounts receivable. Borrowings under the facility bear interest at the bank's current interest rate (8.55% at September 30, 1996). No amounts were outstanding as of September 30, 1996. 10 PERCON INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts Payable and Accrued Expenses consist of the following: (In thousands) September 30, 1996 December 31, 1995 ------------------ ------------------ Accounts payable $1,742 $735 Accrued payroll and payroll liabilities 494 208 Other accruals 216 96 ------ ------ $2,452 $1,039 ====== ====== LONG-TERM DEBT September 30, 1996 ------------------ (In thousands) Bank loan, monthly payments of $17,000 $1,095 including interest at 9.6%, maturing 12/31/04 Less current portion (85) ------ $1,010 ------ The bank loan is collateralized by a building and matures as follows (in thousands): 1997 $ 98 1998 108 1999 119 2000 131 2001-2004 554 ------ $1,010 ------ COMMITMENTS AND CONTINGENCIES The Company has entered into a five year purchase agreement expiring December 31, 1997 with the supplier of a principal component of its products. At September 30, 1996, the Company has committed to make approximately $157,000 of purchases before the expiration of the agreement. The Company expects this purchase commitment to be fulfilled in the normal course of operations. The Company is a party to claims and matters of litigation incidental to the normal course of its business. The ultimate outcome of these matters cannot presently be determined; however, in the opinion of management of the Company, the resolution of these matters will not have a material adverse effect on the Company's results of operations or cash flows. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION GENERAL Percon develops, manufactures and markets bar code reading products, including fixed station and integrated decoders, portable data terminals and data management application software, for the worldwide automatic identification and data collection ("Auto ID") market. The Company also markets bar code input devices manufactured by others for use with the Company's fixed station decoders and portable data terminals. The Company's products provide a rapid, accurate and efficient means to collect, process, transmit and record data. The Company's products are used principally in point-of-sale and point-of-service applications in a wide variety of industries, including retail, education, manufacturing, health care and package delivery. The Company markets its products through a network of Auto ID distributors, value-added resellers ("VAR's") and systems integrators, which allows the Company's products to reach efficiently small and mid-size end users. In addition, Percon markets its products to mid-size and large end users through its strategic relationships as an original equipment manufacturer ("OEM") with other sales organizations. The Company also distributes its products internationally primarily through distributors in Europe, Latin America and Asia. From time to time the Company may issue forward-looking statements that involve a number of risks and uncertainties. The following factors could cause actual results to differ materially from the forward-looking statements: business conditions and growth in the electronics industry and general economies, both domestic and international; lower than expected customer orders; competitive factors, including increased competition, new product offerings by competitors and price pressures; the availability of third party parts and supplies at reasonable prices; changes in product mix and the mix between products manufactured by the Company compared to products sold by the Company that are manufactured by others; receipt of a significant portion of customer orders and product shipments in the last month of each quarter; technological difficulties and resource constraints encountered in developing new products; and product shipment interruptions due to manufacturing difficulties. The forward looking statements contained in this document regarding purchase commitments, product development and introduction, liquidity and future business activities should be considered in light of these factors. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements of the Company's annual report on Form 10-KSB for the year ended December 31, 1995. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, Continued RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 NET SALES Net sales for the three months ended September 30, 1996 increased $2.4 million (74%) to $5.5 million from $3.2 million for the three months ended September 30, 1995. Net sales for the nine months ended September 30, 1996 increased $7.3 million (87%) to $15.7 million from $8.4 million for the nine months ended September 30, 1995. These increases were primarily due to increased unit sales volume of the Company's portable data terminals and the inclusion of the operations of STI, acquired on March 7, 1996. International sales represented approximately 39% of net sales in the third quarter of 1996 compared to 11% of net sales in the third quarter of 1995. For the nine months ended September 30, 1996 and 1995, international sales represented approximately 32% and 8% of net sales, respectively. GROSS PROFIT Gross profit for the three months ended September 30, 1996 increased $1.1 million (66%) to $2.7 million from $1.6 million for the three months ended September 30, 1995, representing 49.6% and 52.0% of net sales, respectively. The increase in gross profit was primarily due to the increase in net sales. The decrease in gross profit margin was primarily due to decreases in sales of high-end fixed station decoders and the increased mix of products sold by STI which traditionally have lower gross margin percentages. Gross profit for the nine months ended September 30, 1996 increased $3.7 million (88%) to $7.9 million from $4.2 million for the nine months ended September 30, 1995, representing 50.1% and 49.8% of net sales, respectively. The increase in gross profit was primarily due to the increase in net sales. The increase in gross profit margin was primarily due to the increase in the percentage of Company manufactured products. Company manufactured products generally carry higher gross profit margins than products manufactured by others. SELLING, MARKETING AND CUSTOMER SERVICE EXPENSES Selling, marketing and customer service expenses for the three months ended September 30, 1996 increased $459,000 (96%) to $937,000 from $478,000 for the three months ended September 30, 1995, representing 17.0% and 15.1% of net sales, respectively. This dollar increase primarily resulted from activities to support the growth in net sales. The percentage increase primarily resulted from increases in sales personnel and commission expenses. Selling, marketing and customer service expenses for the nine months ended September 30, 1996 increased $1 million (67%) to $2.5 million from $1.5 million for the nine months ended September 30, 1995, representing 16.2% and 18.1% of net sales, respectively. This dollar increase primarily resulted from activities to support the growth in net sales. The percentage decrease primarily resulted from planned increases in marketing activities in the first and second quarters of 1995 which were not repeated in the first half of 1996 and economies gained in larger sales volumes. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, Continued GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the three months ended September 30, 1996 increased $190,000 (53%) to $548,000 from $358,000 for the three months ended September 30, 1995, representing 9.9% and 11.3% of net sales, respectively. General and administrative expenses for the nine months ended September 30, 1996 increased $585,000 (62%) to $1.5 million from $939,000 for the nine months ended September 30, 1995, representing 9.7% and 11.2% of net sales, respectively. These dollar increases were primarily due to additional costs to support the increase in net sales and increases in business insurance and other costs associated with being a public company. The percentage decreases primarily resulted from operating efficiencies achieved by spreading fixed costs over a greater net sales base. RESEARCH AND PRODUCT DEVELOPMENT EXPENSES Research and product development expenses for the three months ended September 30, 1996 increased $301,000 (182%) to $466,000 from $165,000 for the three months ended September 30, 1995, representing 8.4% and 5.2% of net sales, respectively. Research and product development expenses for the nine months ended September 30, 1996 increased $839,000 (193%) to $1.3 million from $434,000 for the nine months ended September 30, 1995, representing 8.1% and 5.2% of net sales, respectively. These dollar and percentage increases were primarily due to the inclusion of STI and planned increases in personnel and prototyping expenses to support 1996 research and product development projects. The Company expects these expenditures, as a percentage of net sales, to remain higher than historical percentages through the end of the fourth quarter of 1996 when several new products will be introduced. ACQUIRED IN-PROCESS RESEARCH AND PRODUCT DEVELOPMENT A portion ($2.1 million) of the purchase price for the acquisition of STI was allocated to acquired in-process research and product development and accordingly was expensed as of the acquisition date (March 7, 1996). The amount allocated to in-process research and development represents the estimated fair values related to these projects. Current valuation procedures and techniques were utilized by management in determining the respective fair market values. The development technologies were evaluated to determine that there were no alternative future uses. Such evaluation consisted of a specific review of the efforts, including the overall objectives of the projects, progress toward the objectives and uniqueness of developments to these objectives. To bring these projects to fruition, high risk developmental issues need to be resolved which will require substantial additional effort and testing. Therefore, technological feasibility of these new products has not yet been achieved. As these projects have not reached technological feasibility and alternative future use of these developmental technologies, apart from the objectives of the individual projects, do not exist, these costs were expensed as of the acquisition date. These costs reduced net income and fully diluted net income per share for the nine months ended September 30, 1996 by $2.1 million and $.51, respectively. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, Continued PROVISION FOR INCOME TAXES The provision for income taxes for the three months ended September 30, 1996 was $292,000 which represents an effective tax rate of 37.8%. Items which cause this rate to differ from the U.S. Federal statutory rate of 34% include state and international taxes and benefits from the research credit and the Percon Incorporated Foreign Sales Corporation. The provision for income taxes for the nine months ended September 30, 1996 was $963,000 which represents an effective tax rate of 216.9%. The most significant reason for the difference from the statutory rate was that no tax benefit was realized from the amortization of goodwill or the acquired in-process research and product development expense. Prior to August 1995, the Company had operated as an S corporation not subject to federal and state income taxes. Pro forma provision for income taxes for the three months and nine months ended September 30, 1995 reflects federal and state income taxes as if the Company had been a C corporation, based on the rates that would have been in effect during the period reported. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, Continued LIQUIDITY AND CAPITAL RESOURCES The Company primarily financed its operations during the nine months ended September 30, 1996 through net cash provided by operations and proceeds from its initial public offering. The Company's domestic line of credit permits it to borrow up to 80% of eligible accounts receivable and 25% of eligible inventory (as defined by the banking agreement) to a maximum of $1.0 million. Outstanding principal amounts thereunder bear interest at the Bank's prime rate, which was 8.25% at September 30, 1996. No amounts were outstanding under the line of credit at September 30, 1996. With the acquisition of STI on March 7, 1996, the Company also has line of credit and short-term borrowing arrangements with two other banks which allow for additional borrowing up to an aggregate of approximately $260,000. These facilities bear interest at the banks' current rates, which are 8.55% at September 30, 1996. No amounts were outstanding under either of these facilities at September 30, 1996. Net cash provided by operations was $904,000 for the nine months ended September 30, 1996 as compared to $662,000 for the nine months ended September 30, 1995. Significant changes for the nine months ended September 30, 1996 included increases in accounts receivable and inventories and non-cash changes for amortization and acquired in-process research and product development. Significant changes for the nine months ended September 30, 1995 included increases in accounts receivable, inventories, accounts payable and accrued expenses. For the nine months ended September 30, 1996, net cash used in investing activities totaled $4.5 million as compared to $1.3 million for the nine months ended September 30, 1995. In March 1996 the Company increased its in-process research and product development and expanded its product line and distribution channels by purchasing all of the outstanding common stock of STI, in a transaction accounted for as a purchase for financial reporting purposes. Percon paid approximately $4.6 million in cash for STI. Cash provided by investing activities of $998,000 for the nine months ended September 30, 1996 was the result of the sale of short-term commercial paper which matured during the period. The Company made capital expenditures of $812,000 for the nine months ended September 30, 1996 as compared to $338,000 for the nine months ended September 30, 1995. During the nine months ended September 30, 1996, net cash provided by financing activities totaled $63,000. Cash from financing activities was primarily provided through proceeds from stock issued upon exercise of stock options. Cash used in financing activities was primarily related to the repayment of bank debt. During the nine months ended September 30, 1995, net cash provided by financing activities totaled $5.3 million. Cash from financing activities was provided by the sale of 1,273,000 shares of the Company's Common Stock in its initial public offering which generated net proceeds of approximately $7.2 million. Cash of $446,000 was used to repay bank debt. The Company paid cash dividends to its shareholders in the aggregate amounts of $1,446,000, of which $446,000 was paid for the payment of shareholders' income tax liabilities and $1.0 million was paid to the shareholders of record prior to the Company's initial public offering of previously taxes S corporation earnings. The Company's cash on hand, together with the borrowings available under its line of credit agreements and cash generated from operations, are expected to be sufficient to meet the Company's working capital requirements for at least the next 12 months. 16 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PERCON INCORPORATED by: G. SCOTT PURCELL ----------------------------------- G. Scott Purcell Chief Financial Officer (Principal Financial and Accounting Officer) Dated: November 13, 1996 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF PERCON INCORPORATED AND SUBSIDIARIES AS OF SEPTEMBER 30, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS IN THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 482 0 4,162 125 3,831 8,916 3,966 1,179 13,706 2,716 1,010 0 0 8,813 540 13,706 15,683 15,683 7,824 7,824 0 (31) 9 444 963 (519) 0 0 0 (519) (0.13) (0.13) Represents retained earnings of $574 and cumulative translation adjustment of ($34). Includes the one time charge to earnings of $2,091 ($.51 per share) for the portion of the purchase price allocated to STI in-process research and product development expense. Excluding this charge, net income for the nine months ended September 30, 1996 would have been $1,572 ($.38 per share).
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