-----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, HbJX+X2KB9Qu236FcEAqYnck3K2TUUXzEqVsQKBrI51OABBLZnNi9kU2UdmIXoFh 09bNX9WHVhjNNKICt8yjug== 0000893877-99-000706.txt : 19991117 0000893877-99-000706.hdr.sgml : 19991117 ACCESSION NUMBER: 0000893877-99-000706 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-26462 FILM NUMBER: 99751560 BUSINESS ADDRESS: STREET 1: 1800 MILLRACE DRIVE CITY: EUGENE STATE: OR ZIP: 97403 BUSINESS PHONE: 5033441189 FORMER COMPANY: FORMER CONFORMED NAME: PERCON ACQUISITION INC DATE OF NAME CHANGE: 19950621 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-Q ------------ (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, 1999 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 registrant as specified in its charter) Washington 91-1486560 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 1800 Millrace Drive Eugene, OR 97403 (Address of principal executive offices) (Zip code) 541-344-1189 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether 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 [ ] ------------ The number of shares of common stock outstanding as of November 10, 1999: 3,809,111 PERCON INCORPORATED and SUBSIDIARIES FORM 10-Q September 30, 1999 INDEX Page PART I - FINANCIAL INFORMATION Reference - -------------------------------------------------------------------------------- Item 1 - Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 (unaudited). 3 Condensed Consolidated Statements of Income for the three months ended September 30, 1999 and 1998, and the nine months ended September 30, 1999 and 1998 (unaudited). 4 Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 1999 and 1998 (unaudited). 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 15 PART II - OTHER INFORMATION - --------------------------- Item 6 - Exhibits and Reports on Form 8-K 16 Signatures 16 2 Part I - Financial Information Item 1 - Financial Statements
Percon Incorporated Condensed Consolidated Balance Sheets (in thousands, except share data) September 30, December 31, 1999 1998 ------------ ------------ ASSETS (Unaudited) (1) Current assets: Cash and cash equivalents $ 7,085 $ 4,534 Accounts receivable, net 6,246 6,793 Inventories, net 3,398 3,742 Prepaid expenses and other 507 860 Deferred income tax asset 289 276 ------------ ------------ Total current assets 17,525 16,205 Property and equipment, net 2,733 2,758 Goodwill and intangibles, net 1,061 1,439 ------------ ------------ Total assets $ 21,319 $ 20,402 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 101 $ 104 Accounts payable 1,620 1,644 Accrued expenses 1,399 1,124 Deferred revenue 174 116 Income taxes payable 41 231 ------------ ------------ Total current liabilities 3,335 3,219 Deferred income taxes 387 468 Long-term debt, less current portion 554 703 Other 21 20 ------------ ------------ Total liabilities $ 4,297 $ 4,410 ------------ ------------ Commitments and Contingencies Shareholder's Equity: Preferred stock, 5,000,000 shares authorized, None issued - - Common stock, no par value, 20,000,000 shares authorized, 3,918,781 and 3,807,711 shares issued and Outstanding, respectively 9,353 9,319 Treasury stock, at cost, 210,000 at September 30, 1999 (1,517) (597) Retained earnings 9,753 7,471 Accumulated other comprehensive income / (loss) (567) (201) ------------ ------------ Total shareholders' equity 17,022 15,992 ------------ ------------ Total liabilities and shareholders' equity $ 21,319 $ 20,402 ============ ============ (1) The consolidated balance sheet as of December 31, 1998 has been taken from the audited financial statements at that date and condensed. See accompanying notes.
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Percon Incorporated Condensed Consolidated Statements of Income, (Unaudited) (in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 - ------------------------------------------------------ ---------------------- ------------------------ Net sales $ 9,267 $ 7,818 $ 25,710 $ 21,969 Cost of goods sold 4,655 4,117 12,766 11,521 - ------------------------------------------------------ ---------------------- ------------------------ Gross profit 4,612 3,701 12,944 10,448 Operating Expenses: Selling, marketing and customer service 1,716 1,486 4,910 4,129 General and administrative 938 824 2,670 2,263 Research and product development 541 403 1,578 1,263 Charges related to terminated acquisition - - 161 - - ------------------------------------------------------ ---------------------- ------------------------ Operating income 1,417 988 3,625 2,793 Interest and other income (expense), net 62 32 82 54 - ------------------------------------------------------ ---------------------- ------------------------ Income before taxes 1,479 1,020 3,707 2,847 Provision for income taxes 567 392 1,425 1,083 - ------------------------------------------------------ ---------------------- ------------------------ Net income $ 912 $ 628 $ 2,282 $ 1,764 - ------------------------------------------------------ ---------------------- ------------------------ Net income per share: Basic $ 0.24 $ 0.16 $ 0.59 $ 0.44 - ------------------------------------------------------ ---------------------- ------------------------ Diluted $ 0.24 $ 0.16 $ 0.59 $ 0.43 - ------------------------------------------------------ ---------------------- ------------------------ Weighted average shares outstanding: Basic 3,804 4,013 3,854 4,006 Effect of dilutive securities: Warrants 11 - 1 39 Options 22 3 13 22 - ------------------------------------------------------ ---------------------- ------------------------ Diluted 3,837 4,016 3,868 4,067 - ------------------------------------------------------ ---------------------- ------------------------ See accompanying notes.
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Percon Incorporated Condensed Consolidated Statements of Cash Flows, (Unaudited) (in thousands) Nine Months Ended September 30, 1999 1998 - ----------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents: Cash flows from operating activities: Net Income $ 2,282 $ 1,764 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 884 911 Deferred income taxes (94) (94) Change in operating assets and liabilities: Accounts receivable 547 (776) Inventories 344 435 Prepaid expenses and other 354 (137) Accounts payable and accrued expenses 202 928 - ----------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,519 3,031 - ----------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (568) (995) - ----------------------------------------------------------------------------------------------------------- Net cash used in investing activities (568) (995) - ----------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Principal paid on long-term debt (148) (12) Proceeds from stock issued 30 260 Tax benefit from exercise or early disposition of certain stock options 3 77 Cash used for purchase of treasury stock (920) - - ----------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (1,035) 325 - ----------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (365) 128 - ----------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,551 2,489 Cash and cash equivalents at beginning of period 4,534 1,884 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 7,085 $ 4,373 - ----------------------------------------------------------------------------------------------------------- Supplemental disclosure: Interest paid $ 50 $ 59 Taxes paid $ 1,730 $ 1,121 See accompanying notes.
5 Percon Incorporated And Subsidiaries Notes To Condensed Consolidated Financial Statements, (Unaudited) 1. Summary Of Significant Accounting Policies Principles Of Consolidation The condensed consolidated financial statements include the accounts of Percon Incorporated ("Percon" or the "Company") and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Basis Of Reporting The accompanying unaudited condensed consolidated financial statements have been prepared by the Company and in the opinion of management contain all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. 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 nine months ended September 30, 1999, are not necessarily indicative of the results to be expected for the full year. The accompanying interim 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, 1998. Basic earnings per share are based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are based on the weighted average number of shares of common stock and potentially dilutive securities outstanding during the period, computed in accordance with the treasury stock method. 2. Inventories Inventories are stated at the lower of cost (methods which approximate the first-in, first-out method) or market. Inventory costs include materials, labor, and overhead and consist of the following:
(In thousands) September 30, 1999 December 31, 1998 ------------------ ----------------- Finished goods $ 2,173 $ 2,258 Materials 1,918 2,053 Reserve for obsolescence (693) (569) -------- -------- $ 3,398 $ 3,742 ======== ========
3. Stock Options During the first nine months of 1999, the Company granted options to purchase an aggregate of 55,000 shares of common stock at an average price of $8.48 per share. The exercise prices are greater than or equal to the Company's market price on the date of grant. 6 Percon Incorporated And Subsidiaries Notes To Condensed Consolidated Financial Statements, Continued, (Unaudited) 4. Commitments and Contingencies In December 1997, the Company signed a ten year non-cancelable lease for a new headquarters facility, which contains a five year lease extension option. The lease contains provisions for the Company to pay certain ongoing costs, such as property taxes, insurance and support costs, which are not reflected in the minimum lease payments totaling approximately $5.5 million. The Company expects to sublease certain portions of the new facility as permitted under the lease agreement. On October 8, 1998 the Company announced that its Board of Directors had authorized the repurchase of up to 250,000 shares of its common stock. The shares may be repurchased from time to time through open market transactions, and funded from existing cash balances or from borrowings under bank credit arrangements. The number of shares held as treasury stock was 210,000 and 94,400 as of September 30, 1999 and December 31, 1998, respectively. 5. Income Taxes The provision for income taxes has been recorded based on the Company's current estimate of the Company's annual effective tax rate. This rate differs from the combined federal and state statutory rate of approximately 38.5% primarily due to the benefit of the Company's foreign sales corporation and research and experimentation tax credits. 6. Comprehensive Income The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on January 1, 1998. This statement establishes standards for reporting comprehensive income and its components in the condensed consolidated financial statements. The objective of SFAS 130 is to report changes in equity that result from transactions and economic events other than transactions with owners. Comprehensive income is the total of net income and all other non-owner changes in equity.
Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 1999 1998 1999 1998 ------- ------- ------- ------- Net income $ 912 $ 628 $ 2,281 $ 1,764 Other comprehensive income net of tax - - - - Foreign currency translation adjustment 68 280 (365) 251 ------- ------- ------- ------- Comprehensive income $ 980 $ 908 $ 1,916 $ 2,015 ======= ======= ======= =======
7. Significant Customer Discussion Sales to a single customer accounted for 14.7% and 11.7% of net sales for the three and nine months ended September 30, 1999, respectively. Accounts receivable at September 30, 1999 were $624,000 related to this one customer. No other account represented more than 10% of the Company's sales for the periods mentioned. 7 Percon Incorporated And Subsidiaries Notes To Condensed Consolidated Financial Statements, Continued, (Unaudited) 8. Business Segment Information The Company operates in a single industry with two geographic operating segments - - North America and Europe. While the Company's chief operating decision maker monitors the revenue streams of the various products and geographic locations, operations are managed and financial performance is evaluated based upon the geographic locations because each operating segment represents a strategic business unit that serves different markets. The accounting policies of the operating segments are the same as those described in the summary of significant policies. The Company evaluates performance based on stand-alone operating segment net income and generally accounts for intersegment sales and transfers based upon internal transfer prices set by the Company. Revenues are attributed to geographic areas based on the location of the assets producing the revenues. Identifiable assets are those tangible and intangible assets used in operations in each geographic area. Eliminated assets primarily represent the investment in the European subsidiary and the net result of operations since that time. Summarized data of the Company's operations, by geographic area, for the three and nine months ended September 30, 1999 and 1998 are presented below (in thousands).
Three Months Ended Percon September 30, 1999 Percon US Europe Elimination Consolidated - ------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 6,633 $ 2,634 $ - $ 9,267 Intra-company transfers 739 - (739) - Gross profit 3,621 1,004 (13) 4,612 Income from operations 1,204 246 (33) 1,417 Interest & other income (expense), net 70 (8) - 62 Pretax income 1,274 238 (33) 1,479 Total assets $ 20,639 $ 5,810 $ (5,130) $ 21,319
Three Months Ended Percon September 30, 1998 Percon US Europe Elimination Consolidated - ------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 5,192 $ 2,626 $ - $ 7,818 Intra-company transfers 469 - (469) - Gross profit 2,596 1,099 6 3,701 Income from operations 831 173 (16) 988 Interest & other income (expense), net 51 (19) - 32 Pretax income 882 154 (16) 1,020 Total assets $ 18,646 $ 6,931 $ (5,120) $ 20,457
8 Percon Incorporated And Subsidiaries Notes To Condensed Consolidated Financial Statements, Continued, (Unaudited)
Nine Months Ended Percon September 30, 1999 Percon US Europe Elimination Consolidated - ------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 18,019 $ 7,691 $ - $ 25,710 Intra-company transfers 2,123 - (2,123) - Gross profit 9,996 3,006 (58) 12,944 Income from operations 3,134 611 (120) 3,625 Interest & other income (expense), net 177 (95) 82 - Pretax income 3,310 516 (119) 3,707
Nine Months Ended Percon September 30, 1998 Percon US Europe Elimination Consolidated - ------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 14,016 $ 7,953 $ - $ 21,969 Intra-company transfers 1,307 - (1,307) - Gross profit 7,116 3,360 (28) 10,448 Income from operations 2,172 711 (89) 2,793 Interest & other income (expense), net 118 (64) - 54 Pretax income 2,290 646 (89) 2,847
9. Subsequent Events On November 9, 1999 the Company entered into an Agreement and Plan of Merger with PSC Inc. ("PSC") that provides for the merger of a wholly owned subsidiary of PSC into the Company, with the Company surviving as a wholly owned subsidiary of PSC. In the merger shareholders of Percon would receive $15.00 in cash per share of Percon common stock. The merger, which was approved by the board of directors of each company, is subject to Percon shareholder and regulatory approvals. 9 Item 2 - Management's Discussion And Analysis Of Financial Condition And Results Of Operations Overview Percon Incorporated ("Percon" or the "Company") develops, assembles, and markets a complete line of data collection hardware and data management software products. The Company's product offering includes radio frequency ("RF") and batch portable data collection terminals ("PDCT"), fixed station and integrated decoders, hand-held laser scanners, data management application software, and terminal emulation software. The Company also markets bar code input devices manufactured by others for use with the Company's fixed station decoders and PDCTs. The Company's products provide a rapid, accurate, and efficient means to collect, process, transmit, record, and manage data. The Company's products are used principally in point-of-sale, point-of-service, and inventory management applications in a wide variety of industries, including manufacturing, warehousing and distribution, package delivery, retail, education, and healthcare. Percon markets its products through a network of ADC distributors, value-added resellers ("VARs"), and systems integrators, which allows the Company's products to reach small and mid-size end users cost effectively. 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 VARs in Europe, Latin America, and Asia. On November 9, 1999 the Company entered into an Agreement and Plan of Merger with PSC Inc. ("PSC") that provides for the merger of a wholly owned subsidiary of PSC into the Company, with the Company surviving as a wholly owned subsidiary of PSC. In the merger shareholders of Percon would receive $15.00 in cash per share of Percon common stock. The merger, which was approved by the board of directors of each company, is subject to Percon shareholder and regulatory approvals. The statements in this report concerning the Year 2000 issue and working capital requirements constitute forward-looking statements that are subject to risks and uncertainties. Factors that could materially affect the Year 2000 issue include, but are not limited to, unanticipated costs associated with any required modifications to the Company's information systems, its ancillary systems and associated software. Factors that could materially affect future working capital requirements include, but are not limited to, competitive market pressures (including increased competition, new product offerings by competitors and price pressures) and the availability of appropriate resources, unfavorable business conditions in the ADC industry and general economy. 10 Results of Operations The following table sets forth for the periods indicated selected statements of operations data, expressed as a percentage of sales, and the percentage change in dollar amounts of each of the items on the condensed consolidated statements of income.
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 % change 1999 1998 % change -------------------------------- ------------------------------- Net sales 100.0% 100.0% 18.5% 100.0% 100.0% 17.0% Cost of goods sold 50.2% 52.7% 13.1% 49.7% 52.4% 10.8% - --------------------------------------------------------------------- ------------------- Gross profit 49.8% 47.3% 24.6% 50.3% 47.6% 23.9% Operating Expenses: Selling, marketing and customer service 18.5% 19.0% 15.5% 19.1% 18.8% 18.9% General and administrative 10.1% 10.5% 13.8% 10.4% 10.3% 18.0% Research and product development 5.8% 5.1% 34.2% 6.1% 5.7% 24.9% Charges related to terminated acquisition 0.0% 0.0% 0.0% 0.6% 0.0% 0.0% - --------------------------------------------------------------------- ------------------- Operating income 15.3% 9.3% 43.4% 13.5% 12.7% 29.8% Interest and other income (expense), net 0.7% 0.4% 93.8% 0.3% 0.2% 51.9% - --------------------------------------------------------------------- ------------------- Income before taxes 16.0% 9.6% 45.0% 13.6% 13.0% 30.2% Provision for income taxes 6.1% 5.0% 44.6% 5.5% 4.9% 31.6% - --------------------------------------------------------------------- ------------------- Net income 9.8% 8.0% 45.2% 8.1% 8.0% 29.4% - --------------------------------------------------------------------- -------------------
Comparison of the three and nine months ended September 30, 1999 and 1998. Net Sales Net sales of $9.3 million and $25.7 million for the three and nine months ended September 30, 1999 increased 18.5% and 17.0%, respectively, over the comparable prior year periods. The increases for the three and nine months ended September 30, 1999 were due in large part to a $1.8 million and $3.4 million increase, respectively, in the sales of PDCT products over comparable prior year periods. Foreign exchange fluctuations unfavorably impacted net sales by approximately 3.3% and 2.8%, respectively, for the three and nine months ended September 30, 1999 from the effective exchange rate at December 31, 1998. Foreign exchange fluctuations did not have a material effect on net sales for the three and nine months ended September 30, 1998. Net sales attributed to Percon's U.S. operations increased 27.8% and 28.6% to $6.6 million and $18.0 million, respectively, for the three and nine months ended September 30, 1999 over the comparable prior year periods. The increase for the three month period was due to increased PDCT sales of $1.5 million. The increase for the nine month period was attributable to increased PDCT sales of $2.2 million and increased decoder sales of $1.4 million. Net sales attributed to Percon Europe were unchanged for the three months ended September 30, 1999 over the comparable prior year period. Net sales decreased 3.3% to $7.7 million for the nine months ended September 30, 1999 over the comparable prior year period. The decrease for the nine month period was attributable to decreased sales of decoder, software, and input devices of $1.5 million offset by increased sales of PDCT products of $1.2 million. 11 Gross Profit Gross profit of $4.6 million and $12.9 million increased 24.6% and 23.9%, respectively, for the three and nine months ended September 30, 1999 over the comparable prior year periods. As a percent of net sales, gross profit increased for the three month period to 49.8% from 47.3% for 1998, and increased for the nine month period to 50.3% from 47.6% for 1998. The increase for the three and nine months ended September 30, 1999 resulted primarily from increased sales of PDCTs and increased service revenue, each of which carry higher gross margins Gross profit for Percon U.S. operations of $3.6 million and $10.0 million increased 27.9% and 40.5%, respectively, for the three and nine months ended September 30, 1999 from the comparable periods for 1998. As a percent of net sales, gross profit for U.S. operations increased for the three month period to 54.6% from 50.0% for 1998, and increased for the nine month period to 55.5% from 50.8% for 1998. The increase in gross profit for the three months ended September 30, 1999 is primarily due to increased sales PDCTs products, which have higher gross margins. The increase in gross profit for the nine months ended September 30, 1999 is a result of increased sales of decoder and PDCT products and service revenue, each of which have higher margins. Gross profit attributed to Percon Europe of $1.0 million and $3.0 million decreased 8.7% and 10.5%, respectively, for the three and nine months ended September 30, 1999 from the same periods for 1998. As a percent of net sales, gross profit for Percon Europe decreased for the three month period to 38.1% from 41.9% for 1998, and decreased for the nine month period to 39.1% from 42.3% for 1998. The decrease in gross profit for the three months ended September 30, 1999 is attributed to decreased sales of decoder and input devices. The decrease in gross profit for the nine months ended September 30, 1999 is attributed to decreased sales of decoder, software, and input devices. Selling, Marketing and Customer Service Expenses Selling, marketing and customer service expenses of $1.7 million and $4.9 million increased from $1.5 million and $4.1 million, respectively, for the three and nine months ended September 30, 1999 over comparable prior year periods. In absolute dollars, selling, marketing and customer service expenses increased 15.5% and 18.9%, respectively, for the three and nine months ended September 30, 1999, from the prior year periods. As a percentage of net sales, these expenses decreased to 18.5% from 19.0% for the three month period, and increased to 19.1% from 18.8% for the nine month period ended September 30, 1999 from the comparable prior year periods. The increases are a result of additional wages and marketing efforts to support new advertising efforts, new product introductions, and increased sales. The percentage decrease for the three months ended September 30, 1999 is due to operating efficiencies achieved by spreading these expenses over an increased net sales base. The percentage increase for the nine months ended September 30, 1999 is due to additional wages and marketing efforts to support new advertising efforts, new product introductions, and increased sales. General and Administrative Expenses General and administrative expenses are comprised of the costs associated with finance and executive activities, and the management of information technologies and general facilities. Direct facility and information technology costs are allocated to other departments. General and administrative expenses of $0.9 million and $2.7 million increased from $0.8 million and $2.3 million, respectively, for the three and nine months ended September 30, 1999 over the comparable periods for 1998. In absolute dollars, general and administrative expenses increased 13.8% and 18.0%, respectively, for the three and nine months ended September 30, 1999, from the prior year periods. As a percentage of net sales, these expenses decreased to 10.1% from 10.5% for the three month period, and increased to 10.4% from 10.3% for the nine month period ended September 30, 1999 from the comparable prior year periods. The increases are a result of additional wages, rent expense, and professional fees. The percentage decrease for the three months ended September 30, 1999 is due to operating efficiencies achieved by 12 spreading these expenses over an increased net sales base. The percentage decrease for the nine months ended September 30, 1999 is due to increased wages, rent expense, and professional fees. Research and Product Development Expenses Research and product development expenses of $0.5 million and $1.6 million increased from $0.4 million and $1.3 million, respectively, for the three and nine months ended September 30, 1999 over the comparable periods for 1998. In absolute dollars, research and product development expenses increased 34.2% and 24.9%, respectively, for the three and nine months ended September 30, 1999, from the prior year periods. As a percentage of net sales, these expenses increased to 5.8% from 5.1% for the three month period, and increased to 6.1% from 5.7% for the nine month period ended September 30, 1999 from the comparable prior year periods. These increases resulted from additional efforts to support new product development. Charges Related to Terminated Acquisition The Company incurred charges related to a terminated acquisition of $0.2 million for the nine months ended September 30, 1999, representing 0.6% of net sales, with no comparable charge for the nine months ended September 30, 1998. This charge is related to acquisitions which were pursued but were terminated during the first quarter of 1999. Interest and Other Income Interest and other income for the three months ended September 30 ,1999 increased to $62,000 from $32,000 for the prior year period, due to increased interest earned on larger cash balances during the period. Interest and other income for the nine months ended September 30 ,1999 increased to $82,000 from $54,000 for the prior year period due to increased interest earned on larger cash balances during the period. Provision for Income Taxes The provision for income taxes for the three months ended September 30, 1999 was $0.6 million, which represents an effective tax rate of 38.3%. The provision for income taxes for the nine months ended September 30, 1999 was $1.4 million, which represents an effective tax rate of 38.4%. Items which cause these rates to differ from the U.S. federal statutory rate of 34% include state and international taxes and benefits from domestic and foreign research credits and the Company's foreign sales corporation. The provision for income taxes for the three months ended September 30, 1998 was $0.4 million, which represents an effective tax rate of 38.4%. The provision for income taxes for the nine months ended September 30, 1998 was $1.1 million, which represents an effective tax rate of 38.0%. The increase in the effective tax rate is primarily related to increased foreign taxes. Net Income Net income of $0.9 million and $2.3 million for the three and nine months ended September 30, 1999 increased 45.2% and 29.4%, respectively, over the comparable prior year periods. The increase was due to increased sales of the Company's products and operational efficiencies. 13 Year 2000 Computer System Impact The Year 2000 issue relates to the inability of some computers and computer software programs to accurately recognize dates after 1999 expressed as a two-digit number. The inability to recognize date information accurately could affect computer operations and calculations or cause computer systems and computer-dependent mechanical systems not to operate properly. The Company's assessment of the potential impact of the Year 2000 problem consisted of two phases. The detection phase identified and catalogued all mechanical and operational systems owned or operated by the Company that rely on date related information to function properly. The Company completed this phase for its domestic operations in May 1999. A similar assessment of its European operations was completed April 1999. The remediation phase repaired, replaced, or retired any non-compliant systems. This phase began early in 1999 and was completed July 30, 1999. The detection phase for domestic operations revealed that only minor upgrades and replacements are required to achieve full Year 2000 compliance. Specifically, software upgrades were required to bring the Company's general ledger, payroll, and fixed asset systems into compliance. The Company discovered that the remainder of the domestic non-compliant systems required only incremental software upgrades or were non-critical in nature. Based upon the Company's current estimates, total incremental out-of-pocket costs of its Year 2000 program are expected to be approximately $25,000. These costs are primarily related to remediation of computer software. These costs do not include internal management time and the deferral of other projects, the effects of which are not expected to be material to the Company's results of operations or financial condition. The Company believes that modification to its product offering will not be required in order for its products to function properly with respect to dates in the Year 2000. The Company has undertaken measures to inform customers of Year 2000 related issues via its web site. However, it is not possible to anticipate all end user situations and/or Year 2000 related issues, particularly those involving third party products. At this stage of the process, the Company believes it is difficult to specifically identify the cause of the most reasonable worst case Year 2000 scenario. A reasonable worst case scenario would be the failure of the Company's products to operate properly through the interaction with third party products causing customers' systems and/or operations that are dependent upon such products to fail or be disrupted. In case of such failures, customers may commence legal action against the Company or otherwise seek compensation for their losses associated with such failures. An additional worst case Year 2000 scenario would be the failure of key vendors and/or suppliers to have corrected their own Year 2000 issues which could cause disruption of the Company's operations and have a material adverse effect on the Company's financial condition. In a survey of major suppliers, no immediate problems in the delivery of materials required for the Company to sustain operations were discovered. Discussions with these key business partners will continue and contingency plans developed as needed based on assessments of their exposure and remediation plans. If major suppliers, customers, or economic conditions are negatively affected by the Year 2000, there may be a negative impact on the Company's performance and operational results. Disclosure Regarding Euro Conversion On January 1, 1999, eleven member countries of the European Community began a process to convert their existing sovereign currencies to a single common denomination, the euro. The process of conversion is gradual over the next three years, culminating in the eventual removal from circulation of all existing domestic currency of the participating countries. 14 The Company's French subsidiary, Percon Europe, is located in a member country, France, and transacts business in all European countries. Before the January 1, 1999 conversion, new accounting and sales systems that allow for euro denominated transactions were successfully installed. To date the Company has experienced no difficulty in adopting the new currency, nor are any future problems anticipated. The full impact of this currency transition on Company profitability, competitive position, and future prospects is still under investigation. Liquidity and Capital Resources The Company's line of credit with a domestic bank permits it to borrow up to 80% of eligible accounts receivable and 25% of eligible inventory (as defined by the bank agreement) to a maximum of $1.0 million. Outstanding principal amounts thereunder bear interest at the bank's prime rate, which was 7.75% at September 30, 1999. The Company also has a line of credit and short-term borrowing arrangements with two foreign banks that allow it to borrow up to an aggregate of 2,000,000 French francs (approximately $312,000), collateralized by accounts receivable. Borrowings under these facilities bear interest at the banks' current interest rates, which was 8.09% at September 30, 1999. No amounts were outstanding under any of these arrangements at September 30,1999. Assets and liabilities are translated at the rate of exchange in effect as of the balance sheet date. The gains and losses that result from this process are shown as accumulated other comprehensive income 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. Net cash provided by operations was $4.5 million for the nine months ended September 30, 1999 compared to cash provided by operations of $3.0 million for the nine months ended September 30, 1998. Significant changes for the nine months ended September 30, 1999 relate to decreases in inventories, accounts receivable, and prepaid expenses. For the nine months ended September 30, 1999, net cash used in investing activities for capital expenditures totaled $0.6 million compared to $1.0 million for the nine months ended September 30, 1998. During the nine months ended September 30, 1999, net cash used in financing activities totaled $1.0 million. Cash used in financing activities was related to the repayment of foreign long-term bank debt and the repurchase of the Company's common stock in open market transactions. During the nine months ended September 30, 1998, net cash provided by financing activities totaled $0.3 million. Cash generated by financing activities was primarily related to the sale of the Company's common stock. The Company's current cash balances, 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 liquidity requirements for at least the next 12 months. There is no assurance that additional financing will be available if required or on terms deemed favorable by the Company. 15 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (27) Financial Data Schedule (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements 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. PERCON INCORPORATED by: /s/ JASON DAVIS ------------------------------------------------ Jason Davis Chief Financial Officer (Principal Financial and Accounting Officer) Dated: November 12, 1999 16 EX-27 2 FDS
5 This schedule contains summary financial information extracted from the condensed consolidated balance sheet of Percon Incorporated and Subsidiaries as of September 30, 1999 and the related condensed consolidated statements of income and cash flows for the nine months in the period ended September 30, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 7,085 0 6,438 (192) 3,398 17,525 5,454 (2,721) 21,319 3,335 554 0 0 7,836 9,186 21,319 25,710 25,710 12,766 12,766 9,319 0 50 3,707 1,425 2,282 0 0 0 2,282 0.59 0.59
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