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: June 30, 1998 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 August 6, 1998: 4,013,181 1 PERCON INCORPORATED and SUBSIDIARIES FORM 10-QSB June 30, 1998 INDEX Page PART I - FINANCIAL INFORMATION Reference - -------------------------------------------------------------------------------- Item 1 - Financial Statements Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997. 3 Consolidated Statements of Income for the three months and six months ended June 30, 1998 and 1997. 4 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997. 5 Notes to Consolidated Financial Statements 6 - 7 Item 2 - Management's Discussion and Analysis or Plan of Operation 8 - 11 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders 12 Item 5 - Other Information 13 Item 6 - Exhibits and Reports on Form 8-K 13 Signature 14 2 PERCON INCORPORATED Consolidated Balance Sheets (Dollars in thousands) (Unaudited) (Audited) June 30, December 31, 1998 1997 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 3,313 $ 1,884 Accounts receivable, net 5,986 6,199 Inventories 4,370 4,497 Prepaid expenses and other 648 501 Income Taxes Receivable 68 Deferred income tax asset 160 174 ------------- ------------- Total current assets 14,545 13,255 Property and equipment, net 2,585 2,542 Goodwill and intangibles, net 1,391 1,557 ------------- ------------- Total assets $ 18,521 $ 17,354 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 91 $ 89 Accounts payable 1,660 1,604 Accrued expenses 826 865 Deferred revenue 88 38 Income taxes payable 207 ------------- ------------- Total current liabilities 2,665 2,803 Deferred income taxes 365 448 Long-term debt, less current portion 699 755 Other 28 24 ------------- ------------- Total liabilities 3,757 4,030 ------------- ------------- Shareholders' equity: Common stock, no par value, 20,000,000 shares authorized, 4,007,971 and 3,976,061 shares issued and outstanding, respectively 9,201 9,003 Preferred stock, 5,000,000 shares authorized, none issued Cumulative translation adjustment (329) (435) Retained earnings 5,892 4,756 ------------- ------------- Total shareholders' equity 14,764 13,324 ------------- ------------- Total liabilities and shareholders' equity $ 18,521 $ 17,354 ============= ============= See accompanying notes. 3 PERCON INCORPORATED Consolidated Statements of Income (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net sales $ 7,093 $ 6,751 $ 14,151 $ 12,784 Cost of goods sold 3,794 3,260 7,404 6,097 ------------ ------------ ------------ ------------ Gross profit 3,299 3,491 6,747 6,687 Operating Expenses: Selling, marketing and customer service 1,418 1,108 2,643 2,181 General and administrative 765 614 1,439 1,189 Research and product development 459 507 860 1,006 ------------ ------------ ------------ ------------ Operating income 657 1,262 1,805 2,311 Interest and other income (expense), net 20 (27) 22 (36) ------------ ------------ ------------ ------------ Income before taxes 677 1,235 1,827 2,275 Provision for income taxes 267 434 691 798 ------------ ------------ ------------ ------------ Net income $ 410 $ 801 $ 1,136 $ 1,477 ============ ============ ============ ============ Net income per share - Basic $ 0.10 $ 0.20 $ 0.28 $ 0.37 ============ ============ ============ ============ Net income per share - Diluted $ 0.10 $ 0.20 $ 0.28 $ 0.36 ============ ============ ============ ============ Weighted average shares outstanding - Basic 3,998 3,962 4,003 3,961 ============ ============ ============ ============ Weighted average shares outstanding - Diluted 4,062 4,064 4,099 4,090 ============ ============ ============ ============ See accompanying notes. 4 PERCON INCORPORATED Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Six Months Ended June 30, 1998 1997 ------------- ------------- Cash flows from operating activities: Net Income $ 1,136 $ 1,477 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 597 549 Deferred income taxes (69) (28) Change in operating assets and liabilities, net of effects from acquisition of business: Accounts receivable 1,509 (1,340) Inventories 109 (729) Prepaid expenses and other (104) 128 Accounts payable and accrued expenses (1,550) (671) ------------- ------------- Net cash provided by (used in) operating activities 1,628 (614) ------------- ------------- Cash flows from investing activities: Equipment purchases (477) (365) Purchase of technology (12) (46) ------------- ------------- Net cash used in investing activities (489) (411) ------------- ------------- Cash flows from financing activities: Principal paid on long-term debt (46) (46) Proceeds from stock issued 257 25 Tax benefit from exercise or early disposition of certain stock options 77 0 ------------- ------------- Net cash provided by (used in) financing activities 288 (21) ------------- ------------- Effect of exchange rate changes on cash 2 (19) ------------- ------------- Net increase (decrease) in cash and cash equivalents 1,429 (1,065) Cash and cash equivalents at beginning of period 1,884 1,601 ------------- ------------- Cash and cash equivalents at end of period $ 3,313 $ 536 ============= ============= Supplemental disclosure: Interest paid $ 39 $ 46 Taxes paid $ 1,016 $ 1,036 See accompanying notes. 5 PERCON INCORPORATED and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles Of Consolidation The 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 interim 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 to present fairly the Company's financial position as of June 30, 1998, the results of operations for the three and six months ended June 30, 1998 and 1997, and cash flows for the six months ended June 30, 1998 and 1997. 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 six months ended June 30,1998 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, 1997. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes requirements for disclosure of comprehensive income and becomes effective for the Company's year ending December 31, 1998. Comprehensive income includes such items as foreign currency translation adjustments and unrealized gains and losses on securities available-for-sale that are currently included as a component of stockholder's equity. The following table presents the unaudited pro forma comprehensive income amounts under the new standard: Three Months Ended Six Months Ended (In thousands) June 30, June 30, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net Income $ 410 $ 801 $ 1,136 $ 1,477 Other Comprehensive Income Net of Tax Foreign Currency Translation Adjustment 121 (75) 65 (216) ---------- ---------- ---------- ---------- Comprehensive Income $ 531 $ 726 $ 1,201 $ 1,261 ========== ========== ========== ========== In June 1997 FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which requires disclosure of information and key revenue producing segments of an entity. The Company believes that SFAS No. 131 will not affect financial reporting because the Company and its wholly owned subsidiary's products, services, and customer base are fundamentally similar in nature and disaggregation would not be an accurate indication as to how the Company makes management decisions. 6 PERCON INCORPORATED and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) In February 1998 FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" which revises employers' disclosures about pension and other postretirement benefit plans. Management believes they are in compliance with the new standard. Reclassifications Certain prior-period amounts have been reclassified to conform with the June 30, 1998 presentation. Such reclassifications did not affect previously reported net income or cash flows. 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) June 30, 1998 December 31, 1997 ------------- ----------------- Materials $ 2,400 $ 2,548 Finished goods 1,970 1,949 --------- --------- $ 4,370 $ 4,497 ========= ========= 3. STOCK OPTIONS During the first six months of 1998, the Company granted options to purchase an aggregate of 89,000 shares of common stock at an average price of $11.61 per share. The exercise prices are equal to the Company's market price on the date of grant. 4. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities and land under non-cancelable operating leases. The lease for the Company's headquarters expires in September 1998. 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 beginning of the new lease coincides with the termination of the existing lease. 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. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (Unaudited) Percon develops, manufactures and markets bar code reading products, including radio frequency (RF) and batch portable data terminals, fixed station and integrated decoders, hand-held laser scanners, 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 in a variety of industries including education, retail, warehousing and distribution, package delivery, manufacturing, healthcare and other point-of-service applications. The Company markets its products through a network of Auto ID 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. The statements in this report concerning research and product development, future staffing, the Year 2000 issue and working capital requirements constitute forward-looking statements that are subject to risks and uncertainties. Factors that could materially increase the Company's research and development expense and affect the Company's planned development of new products 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, the availability of third party parts and supplies at reasonable prices, changes in proposed product mix, and technological difficulties and resource constraints encountered in developing new products, as well as unfavorable business conditions and disruptions in the Auto ID industry and general economy. Factors that could materially affect the Company's plans to hire additional personnel include, but are not limited to, competition for such personnel and the Company's ability to hire and retain qualified personnel. 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, the industry factors and general business conditions noted above. 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, 1997. Results of Operations Comparison of the Three Months and Six Months Ended June 30, 1998 and 1997 Net Sales Net sales for the three months ended June 30, 1998 increased $342,000 (5.1%) to $7.1 million from $6.8 million for the three months ended June 30, 1997. Net sales for the six months ended June 30, 1998 increased $1.4 million (10.7%) to $14.2 million from $12.8 million for the six months ended June 30, 1997. These increases were primarily due to increased sales volume of the Company's portable products. International sales represented approximately 37% of net sales for the three months ended June 30, 1998 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, Continued (Unaudited) and for the same period in 1997. International sales represented approximately 43% of net sales for the six months ended June 30, 1998 compared to 37% of net sales for the same period in 1997. Gross Profit Gross profit for the three months ended June 30, 1998 decreased $192,000 (5.5%) to $3.3 million from $3.5 million for the three months ended June 30, 1997, representing 46.5% and 51.7% of net sales, respectively. Gross profit for the six months ended June 30, 1998 increased $60,000 (.9%) for the six months ended June 30, 1997, representing 47.7% and 52.3% of net sales, respectively. The decrease in gross profit for the three months and six months ended June 30, 1998 was primarily due to the product mix change toward increased portable sales which have lower gross margin than decoder and software products. Selling, Marketing and Customer Service Expenses Selling, marketing and customer service expenses for the three months ended June 30, 1998 increased $310,000 (28.0%) to $1.4 million from $1.1 million for the three months ended June 30, 1997, representing 20.0% and 16.4% of net sales, respectively. Selling, marketing and customer service expenses for the six months ended June 30, 1998 increased $462,000 (21.2%) to $2.6 million from $2.2 million for the six months ended June 30, 1997, representing 18.7% and 17.1% of net sales, respectively. These increases primarily resulted from increases in sales and marketing personnel and activities to support growth in net sales. General and Administrative Expenses General and administrative expenses for the three months ended June 30, 1998 increased $151,000 (24.6%) to $765,000 from $614,000 for the three months ended June 30, 1997, representing 10.8% and 9.1% of net sales, respectively. General and administrative expenses for the six months ended June 30, 1998 increased $250,000 (21.0%) to $1.4 million from $1.2 million for the six months ended June 30, 1997, representing 10.2% and 9.3% of net sales, respectively. These increases were primarily due to increased building rental expense, legal fees associated with reducing manufacturing staff in Europe and U.S. trademark filings. Research and Product Development Expenses Research and product development expenses for the three months ended June 30, 1998 decreased $48,000 (9.5%) to $459,000 from $507,000 for the three months ended June 30, 1997, representing 6.5% and 7.5% of net sales, respectively. Research and product development expenses for the six months ended June 30, 1998 decreased $146,000 (14.5%) to $860,000 from $1.0 million for the six months ended June 30, 1997, representing 6.1% and 7.9% of net sales, respectively. The decreases were a result of reorganization within the engineering group. This reorganization allowed the Company to focus additional resources on development of new portable data terminal (PDT) products. These expenses are expected to remain relatively stable for the remainder of the year. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, Continued (Unaudited) Provision for Income Taxes The provision for income taxes for the three months ended June 30, 1998 was $267,000, which represents an effective tax rate of 39.4%. The provision for income taxes for the six months ended June 30, 1998 was $691,000, which represents an effective tax rate of 37.8%. 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 June 30, 1997 was $434,000, which represents an effective tax rate of 35.1%. The provision for income taxes for the six months ended June 30, 1997 was $798,000, which represents an effective tax rate of 35.1%. These increases in the effective tax rate are primarily related to increased foreign tax rates. Year 2000 Compliance The Company has completed a preliminary analysis of the impact of the Year 2000 issue on its information systems. At this stage, the Company believes its enterprise management information system addresses the Year 2000 issues on all core Company business systems. The Company has other ancillary systems, however, that may require modification to address the Year 2000 issue. In place is a plan to comprehensively evaluate the entire information infrastructure of the Company by year end 1998. It is the goal of this plan to quantify and qualify the level of actual exposure present, the associated costs, and the timeline needed for complete inoculation. The Company has not thoroughly analyzed the impact of other parties' computer system failures, but the objective evaluation of key suppliers and customers is present in the existing evaluation plan yet to be completed. The Company believes costs incurred in responding to other parties' Year 2000 computer system failures, together with the cost of any required modifications to the Company's ancillary systems, will not have a material impact on the Company's business, results of operations or financial condition. Liquidity and Capital Resources The Company primarily financed its operations during the six months ended June 30, 1998 through cash from operations and current cash balances. 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 8.5% at June 30, 1998. No amounts were outstanding under the line of credit at June 30, 1998. The Company also has line of credit and short-term borrowing arrangements with two foreign banks that permit additional borrowing up to an aggregate of 1,300,000 French Francs (approximately $220,000 at June 30, 1998). These facilities bear interest at the banks' current rates, which were 8.1% and 10.1%, respectively, at June 30, 1998. No amounts were outstanding under either of these facilities at June 30, 1998. Net cash provided by operations was $1.6 million for the six months ended June 30, 1998 compared to cash used in operations of $614,000 for the six months ended June 30, 1997. Significant changes for the six months ended June 30, 1998 included non-cash charges for amortization and depreciation along with decreases in accounts receivable, accounts payable and accrued expenses. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, Continued (Unaudited) For the six months ended June 30, 1998, net cash used in investing activities totaled $489,000 compared to $411,000 for the six months ended June 30, 1997. The Company made capital expenditures of $477,000 for the six months ended June 30, 1998 compared to $365,000 for the six months ended June 30, 1997. During the six months ended June 30, 1998, net cash provided by financing activities totaled $288,000. Cash from financing activities was primarily provided through proceeds from stock issued upon exercise of stock options and tax benefits from disqualifying dispositions of incentive stock options. During the six months ended June 30, 1997, net cash used in financing activities totaled $21,000. Cash used in financing activities was primarily related to the repayment of foreign long-term bank debt. 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. 11 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders On May 22, 1998 at the Company's Annual Meeting, the holders of the Company's outstanding Common Stock took the action described below. At May 22, 1998, 4,012,271 shares of Common Stock were outstanding and eligible to vote at the Annual Meeting. 1. The shareholders elected each of Michael P. Coughlin, Andy J. Storment, Arlen I. Prentice, Donald K. Skinner, and Dana E. Siebert to the Company's Board of Directors, by the votes indicated below, to serve for the ensuing year. Michael P. Coughlin ------------------- 3,411,513 shares in favor 134,480 shares against or withheld 0 abstentions 0 broker non-votes Andy J. Storment ---------------- 3,412,543 shares in favor 133,450 shares against or withheld 0 abstentions 0 broker non-votes Arlen I. Prentice ----------------- 3,413,543 shares in favor 132,450 shares against or withheld 0 abstentions 0 broker non-votes Donald K. Skinner ----------------- 3,412,543 shares in favor 133,450 shares against or withheld 0 abstentions 0 broker non-votes Dana E. Siebert --------------- 3,413,543 shares in favor 132,450 shares against or withheld 0 abstentions 0 broker non-votes 2. The shareholders approved, by the vote indicated below, an amendment to the Company's 1995 Stock Incentive Plan (the "Plan") to increase the number of authorized shares of Common Stock available under the Plan from 500,000 shares to 600,000 shares. 3,314,898 shares in favor 216,734 shares against or withheld 14,361 abstentions 0 broker non-votes 12 Item 5. Other Information In accordance with amendments adopted on May 21, 1998 to Rule 14a-4 under the Securities Exchange Act of 1934, if notice of a shareholder proposal to be raised at the annual meeting of shareholders is received at the principal executive offices of the Company after February 27, 1999 (45 days prior to the month and date in 1999 corresponding to the date on which the Company mailed its proxy materials for the 1998 annual meeting), proxy voting on that proposal when and if raised at the 1999 annual meeting will be subject to the discretionary voting authority of the designated proxy holders. Any shareholder proposal to be considered for inclusion in proxy materials for the Company's 1999 annual meeting must be received at the principal executive offices of the Company no later than December 14, 1998. Item 6. Exhibits and Reports on Form 8-K Exhibits 27.1 Financial Data Schedule Reports on Form 8-K None 13 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: /s/ JASON DAVIS ------------------------------ Jason Davis Chief Financial Officer (Principal Financial and Accounting Officer) Dated: August 12, 1998 14