1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 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 0-17869 ------- COGNEX CORPORATION ------------------ (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2713778 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE VISION DRIVE NATICK, MASSACHUSETTS 01760-2059 (508) 650-3000 ------------------------------------------------------------- (Address, including zip code, and telephone number, including area code, of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting stock held by non-affiliates as of February 27, 2000: $1,911,742,000 -------------- $.002 par value common stock outstanding as of February 27, 2000: 42,542,247 shares ----------------- Documents incorporated by reference: Specifically identified information in the Annual Report to Stockholders for the year ended December 31, 1999, is incorporated by reference into Parts I and II hereof. Specifically identified information in the definitive Proxy Statement for the Special Meeting in Lieu of the 2000 Annual Meeting of Stockholders to be held on May 8, 2000, is incorporated by reference into Part III hereof. A list of Exhibits to this Annual Report on Form 10-K is located on page 18. ================================================================================ 2 COGNEX CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 INDEX PART I ITEM 1. BUSINESS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 4A. EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM OF THE REGISTRANT PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 3 PART I The Company's results are subject to certain risks and uncertainties. This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Federal Securities Laws. The Company's future results may differ materially from current results and actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors. Readers should pay particular attention to considerations described in the section captioned "Forward-Looking Statements" in Management's Discussion and Analysis of Financial Condition and Results of Operations appearing on page 14 of the Annual Report to Stockholders for the year ended December 31, 1999, which is Exhibit 13 hereto, and is incorporated herein by reference, as well as considerations included in other documents filed with the Securities and Exchange Commission. ITEM 1. BUSINESS CORPORATE PROFILE Cognex(R) Corporation ("Cognex" or the "Company," each of which term includes, unless the context indicates otherwise, Cognex Corporation and its subsidiaries) was incorporated in Massachusetts in 1981. Its principal executive offices are located at One Vision Drive, Natick, Massachusetts 01760 and its telephone number is (508) 650-3000. The Company designs, develops, manufactures, and markets machine vision systems that are used to automate a wide range of manufacturing processes where vision is required. Cognex machine vision systems consist of two primary elements: a computer, which serves as a "machine vision engine," and software that processes and analyzes images. When connected to a video camera, the machine vision system captures images and extracts information, which determines appropriate action for other equipment in the manufacturing process. Machine vision systems are used in a variety of industries including the semiconductor, electronics, automotive, consumer products, metals, plastics, and paper industries. Machine vision is important for applications in which human vision is inadequate due to fatigue, visual acuity, or speed, or in instances where substantial cost savings are obtained through the reduction of direct labor and improved product quality. Today, many types of manufacturing equipment require machine vision because of the increasing demands for speed and accuracy in manufacturing processes, as well as the decreasing size of items being manufactured. WHAT IS MACHINE VISION? In a typical machine vision application, a video camera positioned on the production line captures an image of the part to be inspected. The machine vision computer then uses sophisticated image analysis software to extract information from the image and provide an answer to a question. Cognex machine vision systems can answer four types of questions: QUESTION DESCRIPTION EXAMPLE -------- ----------- ------- GUIDANCE -------- Where is it? Determining the exact physical Determining the position of a printed circuit board location of an object. so that a robot can automatically be guided to insert electronic components. 1 4 IDENTIFICATION -------------- What is it? Identifying an object by analyzing Identifying the serial number on an automotive its shape or by reading a serial airbag so that it can be tracked and processed number. correctly through manufacturing. INSPECTION ---------- How good is it? Inspecting an object for flaws or Inspecting the quality of printing on defects. pharmaceutical labels and packaging. GAUGING ------------- What size is it? Determining the dimensions of an Determining the diameter of a bearing prior to object. final assembly. Once the machine vision system has processed the image and performed any necessary analysis, the result is then communicated to other equipment on the factory floor, such as an industrial controller, a robotic arm, a deflector which removes the part from the line, a positioning table which moves the part, or alternatively, to a computer file for analysis or subsequent process control. This process is repeated during the manufacturing process as product moves into position in front of the camera. Machine vision systems can perform inspections quickly enough to keep pace with machines that process thousands of items or material feet per minute, thus increasing both quality and productivity. THE MACHINE VISION MARKET The machine vision market consists of two customer types: Original Equipment Manufacturers (OEMs) and end users. OEMs are companies that build standard products sold as capital equipment for end users on the factory floor. These customers, most of which are in the semiconductor and electronics industries, have the technical expertise to build Cognex's programmable, board-level machine vision systems directly into their products which are then sold to end users. End users are companies that manufacture products, such as radios, telephones, ball-point pens, metals, and paper. While they may purchase capital equipment containing machine vision or hire a system integrator to build an inspection system, many end users choose to purchase machine vision directly for specific applications on their production lines. Unlike OEMs and system integrators, these customers typically have little or no computer programming or machine vision experience. System integrators are companies that create complete, automated inspection solutions for end users on the factory floor. For example, they combine lighting, conveyors, robotics, machine vision, and other components to produce custom inspection systems for various applications. Because system integrators encounter a broad range of automation problems, they purchase a variety of Cognex products, from general-purpose systems to application-specific systems tailored to solve particular manufacturing tasks. The Company includes system integrators in its definition of end users. BUSINESS STRATEGY The Company's goal is to expand its position as a leading worldwide supplier of machine vision systems for factory automation. Currently, the Company's products are designed for factory automation because the Company believes that this market offers the greatest opportunity for selling high value-added, standard products in high volume. Within the factory automation market, the Company has historically focused primarily on those customers who must have machine vision because of the increasing complexity of their products or manufacturing methods. 2 5 Emphasizing high value-added products and applications is important to the Company's strategy because not every segment of the machine vision market offers opportunity for sustained profitability. High value-added is realized in the Company's products in several ways. The primary value-added is derived from offering unique vision software algorithms that solve challenging problems better than competing products. The other major mode of realizing high value-added is by offering products which are complete solutions to known problems, incorporating all of the necessary vision software, applications software, hardware, and electro-optics. Both modes of realizing high value-added require the Company to maintain an industry-leading level of investment in research, development, and engineering. Within the factory automation market, the Company has tailored its product offerings to match the characteristics of its two customer types: OEMs and end users. Historically, OEMs have been the source of the majority of the Company's revenue. However, the Company believes that end users have the potential in the long term to generate more revenue than OEMs. Consequently, the Company has invested in developing and acquiring products that meet the needs of end users and in developing a strong worldwide direct sales and support infrastructure. The Company will continue to invest in both customer types, defending its strong position in the OEM market while expanding in the end-user market. The Company has historically pursued a global business strategy, investing in building a strong direct presence in North America, Japan, Europe, and Southeast Asia. In 1999, approximately 69% of the Company's revenue came from customers based outside of the United States. In all of these regions, the Company is acknowledged to be a leading machine vision supplier. The Company intends to continue to invest in the expansion of direct sales and support in these regions. The factory automation market for machine vision is comprised of many market niches defined by differing application requirements, industries, and cost/performance criteria. The Company's business strategy includes selective expansion into other industrial machine vision applications through the internal development of new products and the acquisition of companies and technologies. The Company's acquisitions include Acumen, Inc., a developer of machine vision systems for semiconductor wafer identification; Isys Controls, Inc., a developer of high-performance machine vision systems for high-speed surface inspection; Mayan Automation, Inc., a developer of intelligent camera-based machine vision systems for surface inspection; and certain technology of Rockwell Automation's Allen-Bradley machine vision business, which supplied machine vision systems to end users. PRODUCTS The Company designs, develops, manufactures, and markets a wide range of machine vision products. These products include modular vision systems that are used to control the manufacturing of discrete items, such as semiconductor chips, cellular phones, and automobile wheels, by locating, identifying, inspecting, and measuring them during the manufacturing process. The Company's product offerings also include surface inspection vision systems that are used to inspect surfaces of materials that are manufactured in a continuous fashion, such as plastics, metals, and paper, to ensure that there are no flaws or defects on the surfaces. Machine vision systems sold by the Company are defined as either general-purpose or application-specific products. General-purpose systems enable customers to solve a wide range of problems by selecting the tools necessary to solve their vision problem from the Company's vision software library, and then configuring their solution by utilizing a programmable language or point-and-click interface. Application-specific systems are "packaged" combinations of software and hardware that are designed to solve targeted problems without any customization by the Company or its customers. 3 6 GENERAL-PURPOSE SYSTEMS Vision Software Library The Company offers an extensive library of vision software which includes both low-level image processing software and high-level image analysis tools. The image processing software prepares the image for accurate analysis and the image analysis tools extract information about the image to locate, measure, and identify objects, characters, and codes. In 1997, the Company introduced PatMax(R), a pattern location tool that can locate with very high accuracy objects that vary in size and orientation or whose appearance is degraded. In 1998, the Company introduced PatInspect(TM), a vision software tool that combines high-accuracy part location and defect detection capabilities in a single vision operation and detects flaws along the edges or boundary regions of objects. In early 2000, the Company introduced a new tool called PatFind(TM) for the In-Sight(TM) 2000 product. PatFind is a part location tool based on the Company's industry-leading Search and PatMax software technologies. MVS-8000 product family The MVS-8000 product family of programmable machine vision systems combines Cognex's unique algorithms with Intel's new MMX instruction set. Prior to the MVS-8000 product family, all of the Company's software ran on its own proprietary hardware that was based on the Motorola 68k line of microprocessors. The MVS-8100 Series features a PCI bus-mastering frame grabber for high-speed image transfer from the video camera to the host PC for processing and display. The MVS-8200 Series of embedded CPU machine vision systems enable all vision processing to occur on-board, freeing the PC to perform other tasks. The MVS-8000 product family features Cognex's new Object Manager Interface (OMI), which provides a graphical user interface to each tool in the Cognex vision software library. The MVS-8000 product family is sold primarily to OEMs located in North America and Japan who integrate the machine vision systems into manufacturing equipment for the semiconductor and electronics industries. These machine vision systems are also sold to system integrators located principally in North America, Japan, Europe, and Southeast Asia who integrate the vision systems into manufacturing equipment for the factory floor in industries ranging from automotive to consumer products. Checkpoint product family Checkpoint(R) is a family of PC-based machine vision systems for complex precision guidance, gauging, and defect inspection applications. Although Checkpoint features a graphical user interface, it does require some knowledge of programming and machine vision to configure a vision application. Deployment of Checkpoint on the factory floor requires the services of trained system integrators to mechanically and electrically integrate Checkpoint into manufacturing lines. Checkpoint is ideal for vision applications requiring multiple cameras or color image analysis. Checkpoint is sold primarily to end users located in North America, Japan, Europe, and Southeast Asia in a wide range of general manufacturing industries, such as manufacturers of medical devices, automotive parts, disposable consumer goods, and electronic components. In-Sight 2000 In early 2000, the Company entered the fast-growing market for low-cost vision sensors with its new In-Sight 2000 product. In-Sight is an innovative, low-cost machine vision sensor that provides Cognex's industry-leading vision technology in an affordable, stand-alone package that does not require programming skills or a PC to deploy. Because In-Sight is so compact and affordable, it can be deployed in multiple points throughout the manufacturing process where value is being added. In-Sight includes a comprehensive library of Cognex vision software tools, including the new PatFind part location tool, and an easy-to-use vision spreadsheet environment enabling anyone with basic spreadsheet skills to configure a vision application. Users navigate through the spreadsheet with a hand-held control pad. In-Sight is sold primarily to end users located in North America, Japan, Europe, and Southeast Asia in similar industries to the Checkpoint product family. 4 7 Other General-Purpose Systems The Company continues to offer programmable machine vision systems that run on its own proprietary hardware including the Cognex 4000 Series which plugs directly into a VME backplane, as well as the Cognex 5000 Series which runs on the PC. APPLICATION-SPECIFIC SYSTEMS The Company also offers a variety of application-specific systems that combine Cognex hardware and software to create a solution that is tailored to the particular requirements of certain vision applications. These products are sold to OEMs and end users worldwide. A partial list of application-specific systems is as follows: Surface Mount Device Placement Guidance Package (SMD PGP), when coupled with a Cognex 4000, 5000, or 8000 Series machine vision system, quickly and accurately locates fiducial marks on printed circuit boards for alignment, inspects the quality of surface mount devices, and then guides the placement of those devices onto printed circuit boards. acuReader(TM)/Optical Character Recognition (OCR) reads degraded serial numbers from semiconductor wafers with near 100% accuracy. acuReader/2D locates and decodes two-dimensional matrix codes. The two-dimensional codes are used as alternative marks for identifying wafers, integrated circuit packages, liquid crystal display (LCD) panels, pharmaceutical packages, and for small parts tracking applications. Ball Grid Array II (BGA) inspects BGA devices for missing, misplaced, or improperly formed solder balls. Fiducial Finder II locates fiducial or alignment marks on printed circuit boards for automatic printed circuit board alignment. DisplayInspect(TM) software inspects the small, high-resolution displays commonly found on cellular phones, pagers, medical test instruments, and other electronic devices. iS High Performance Inspection Systems detect and classify defects in the most challenging surface inspection applications. iS systems are built from a family of hardware and software components which include proprietary line-scan cameras with motorized camera mounts, specialized lighting systems, ultra-high performance image processing boards, Unix workstations, and intelligent defect detection and classification software algorithms. iS systems can contain from one to sixty cameras and can be used to inspect webs up to 25 feet wide at speeds of up to 5,000 feet per minute. iS systems are primarily sold to producers of metals, specialized coated paper, and high-value non-woven materials. SmartView(TM) Modular Camera Network (MCN) detects, measures, and classifies defects on products made in continuous processes. SmartView MCN systems have a drag-and-drop Windows NT-based interface with some of the features previously only associated with high-end systems. In addition to providing flexibility, the systems offers more power than its predecessor, the Fine-Line(R) Intelligent Camera System, and has enabled the Company to expand into more complex applications, including the inspection of high-end plastics and non-wovens. SmartView Imaging Camera Network (icn), introduced in early 2000, detects, measures, and classifies defects on products made in continuous processes. SmartView icn has the same basic features as SmartView MCN systems and provides grayscale imaging capability to visualize the defects and visual quality of the inspected web or surface. SmartView icn also offers more power and expandability than SmartView MCN. SmartView icn will enable the Company to expand into more complex vision applications previously only achievable with iS systems. 5 8 RESEARCH, DEVELOPMENT, AND ENGINEERING The Company engages in research, development, and engineering (R, D & E) to enhance its existing products and to develop new products and functionality to meet market opportunities. In addition to internal research and development efforts, the Company intends to continue its strategy of gaining access to new technology through strategic relationships and acquisitions where appropriate. The Company considers its on-going efforts in R, D & E to be a key component of its strategy. At December 31, 1999, the Company employed 163 professionals in R, D & E, most of whom are software developers. The Company's R, D & E expenses totaled $27,669,000, $24,662,000, and $22,481,000, or 18%, 20%, and 14% of revenue, in 1999, 1998, and 1997, respectively. MANUFACTURING The majority of the Company's machine vision systems are manufactured at its Natick, Massachusetts headquarters. The Company's Natick manufacturing organization utilizes a turnkey manufacturing operation whereby the majority of component procurement, subassembly, final assembly, and initial testing are performed under agreement by third-party contractors. After the completion of initial testing, the third-party contractors deliver the products to the Company to perform final testing and assembly. The products provided by the third-party contractors are manufactured using specified components and assembly and test documentation created and controlled by the Company. Certain components purchased by the third-party contractors are presently available from a single source. The Company's iS High Performance Inspection systems, SmartView MCN systems, and SmartView icn systems are manufactured at its Alameda, California facility. The manufacturing processes at the Alameda facility consist of systems design, configuration management and control, component procurement, subassembly, integration and final test, quality control, and shipment. System installation and commissioning are performed by either the Company, its customers, or system integrators. Certain products are manufactured by third-party contractors using documentation created and controlled by the Company. Certain components are presently available from a single source. SALES AND SUPPORT The Company markets its products through a direct sales force in North America, and through a direct sales force and distributors in Japan, Europe, and Southeast Asia. The Company's distributors do not have any rights of return and payment for products is due upon delivery. Distributors generally have non-exclusive distribution rights and there may be more than one distributor per territory. At December 31, 1999, the Company's direct sales and service force consisted of 155 professionals, including sales and application engineers. The majority of the Company's sales and service personnel have engineering or science degrees. Sales engineers call directly on targeted accounts and coordinate the activity of the application engineers. They focus on potential customers that represent possible volume purchases and long-term relationships. Opportunities that represent single-unit sales or turnkey system requirements are identified by the sales engineer and turned over to an independent system integrator or OEM that uses the Company's products. The Company sells to OEMs, many of whom have entered or are expected to enter into volume discount contracts with the Company. These contracts are typically for one year and have associated delivery schedules. Sales to international customers represented approximately 69%, 63%, and 62% of revenue in 1999, 1998, and 1997, respectively. One customer based in Japan, Fuji America Corporation, accounted for approximately 13%, 14%, and 18% of revenue in 1999, 1998, and 1997, respectively. Information about operating segments and geographic areas, as well as foreign currency and related risk may be found in the Notes to the Consolidated Financial Statements, appearing on page 31 and 6 9 pages 20 through 22 of the Annual Report to Stockholders for the year ended December 31, 1999, which is Exhibit 13 hereto, and is incorporated herein by reference. Although international sales may from time to time be subject to federal technology export regulations, the Company to date has not suffered delays or prohibitions in sales to any of its foreign customers. The Company's support offerings include vision solutions consulting services, technical support, educational services, and product services. The Company's vision solutions consulting group provides, for a fee, services that range from a specific piece of programmed functionality to a completely integrated machine vision application. The technical support group consists of a team of vision experts ready to respond to questions that may arise while customers are developing or deploying a Cognex machine vision application. The educational services group offers a variety of product courses that are held at its Customer Education Center in Natick, Massachusetts, and at certain of its worldwide offices, as well as at customer facilities when required. The product services group offers a variety of software and hardware maintenance programs that provide updates on the latest software releases and new software vision tools. PATENTS AND LICENSES Since the Company relies on the technical expertise, creativity, and knowledge of its personnel, it utilizes patent, trademark, copyright, and trade secret protection to safeguard its competitive position. The Company has obtained 68 patents on various innovations in the field of machine vision technology and has over 100 pending patent applications. In addition, the Company makes use of non-disclosure agreements with customers, suppliers, employees, and consultants. The Company attempts to protect its intellectual property by restricting access to its proprietary information by a combination of technical and internal security measures. However, there can be no assurance that any of the above measures will be adequate to protect the proprietary technology of the Company. Effective patent, trademark, copyright, and trade secret protection may be unavailable in certain foreign countries. The Company's trademark portfolio includes various common-law and registered marks, including but not limited to Cognex(R), acuReader(TM), Checkpoint(R), DisplayInspect(TM), Fine-Line(R), In-Sight(TM), PatMax(R), PatInspect(TM), PatFind(TM), and SmartView(TM). In addition, the Company has sought and obtained a number of trademark registrations outside of the United States. All third-party brand names, service marks, and trademarks referenced in this document are the property of their respective owners. The Company's software products are primarily licensed to customers pursuant to a license agreement that restricts the use of the products to the customer's purposes on a designated Cognex machine vision engine, as well as imposes strict limitations on the customer's use of the Company's trade secret, proprietary, and other confidential business information to which the customer may have access. The Company has made portions of the source code available to certain customers under very limited circumstances and for restricted uses. If source code is released to a customer, the customer is required by contract to maintain its confidentiality and, in general, to use the source code solely for internal purposes or for maintenance. Numerous users of the Company's products have received notice of patent infringement from the Lemelson Medical, Educational, & Research Foundation, Limited Partnership ("Partnership") alleging that their use of the Company's products infringes certain patents transferred to the Partnership by the late Jerome H. Lemelson. Certain of these users have notified the Company that, in the event it is subsequently determined that their use of the Company's products infringes any of the Partnership's patents, they may seek indemnification from the Company for damages or expenses resulting from this matter. In July 1998, the Partnership filed a lawsuit against 26 semiconductor device manufacturers asserting infringement upon numerous Lemelson patents including certain machine vision patents. Several of the defendants are users of the Company's products that were purchased primarily from the Company's OEM customers whose equipment incorporates such products. As a result of this action and the continuing assertions against other current and potential Cognex customers, the Company decided 7 10 to initiate action against the Partnership in order to preserve its right to sell machine vision products without the threat of legal action against the Company or its customers. Accordingly, on September 23, 1998, the Company filed a complaint against the Partnership seeking a declaration that Lemelson's machine vision patents are invalid, unenforceable, and not infringed by either Cognex or by any users of Cognex products. The complaint was served on the Partnership on October 14, 1998. The Company refiled the lawsuit in Reno, Nevada on September 27, 1999, after the Judge in Massachusetts ruled that Massachusetts is not the proper jurisdiction. While the Company believes that Massachusetts is an appropriate jurisdiction, it decided not to appeal the Judge's decision but rather to refile in Nevada where several other Lemelson lawsuits are in progress and where no jurisdiction controversy exists. It will likely be several years before a decision is rendered by the Court. The Company cannot predict the outcome of this litigation or any similar litigation that may arise in the future, or the effect of such litigation on the financial results of the Company. The Company does not believe its products infringe any valid and enforceable claims of Lemelson's patents. Furthermore, the Partnership has stated that it is not the Company's products that infringe Lemelson's patents, but rather the use of those products by the Company's customers. COMPETITION The Company competes with other vendors of machine vision systems, the internal engineering efforts of the Company's current or prospective customers, and the manufacturers of image processing systems. Any of these competitors may have greater financial and other resources than the Company. Although the Company considers itself to be one of the leading machine vision companies in the world, reliable estimates of the machine vision market and the number of competitors are almost non-existent, primarily because of definitional confusion and a tendency toward double-counting of sales. The primary competitive factors affecting the choice of a machine vision system include product functionality and performance (e.g. speed, accuracy, and reliability) under real-world operating conditions, flexibility, programmability, and the availability of application support from the vendor. More recently, ease-of-use has become a competitive factor and product price has become a more significant factor with respect to simpler guidance and gauging applications. The Company competes with the low-cost smart camera and image sensor solutions being introduced by various competitors on the basis of superior performance and price, rather than on price alone, through its In-Sight 2000 product. BACKLOG At December 31, 1999, the Company's backlog totaled $36,788,000, compared to $17,216,000 at December 31, 1998. Backlog reflects purchase orders for products scheduled for shipment within three months. The level of backlog at any particular date is not necessarily indicative of future revenue of the Company. Delivery schedules may be extended and orders may be canceled at any time subject to certain cancellation penalties. EMPLOYEES At December 31, 1999, the Company employed 608 persons, including 272 in sales, marketing, and support activities; 163 in research, development, and engineering; 60 in manufacturing and quality assurance; and 113 in information technology, finance, and administration. Of the Company's 608 employees, 183 are located outside of the United States. None of the Company's employees are represented by a labor union and the Company has experienced no work stoppages. The Company believes that its employee relations are good. 8 11 ITEM 2: PROPERTIES In 1994, the Company purchased and renovated a 100,000 square-foot building located in Natick, Massachusetts that serves as it's corporate headquarters. In 1997, the Company completed construction of a 50,000 square-foot addition to this building. In 1995, the Company purchased an 83,000 square-foot office building adjacent to its corporate headquarters. The building is currently occupied with tenants who have lease agreements that expire at various dates through 2001, at which point, the Company may take occupancy of the building. In 1997, the Company purchased a three and one-half acre parcel of land situated on Vision Drive, adjacent to the Company's corporate headquarters. This land is anticipated to be used for future expansion. ITEM 3: LEGAL PROCEEDINGS To the Company's knowledge, there are no pending legal proceedings, other than as described in "Business - Patents and Licenses," which are material to the Company to which it is a party or to which any of its property is subject. From time to time, however, the Company may be subject to various claims and lawsuits by customers and competitors arising in the normal course of business, including suits charging patent infringement. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of the year ended December 31, 1999 to a vote of security holders through solicitation of proxies or otherwise. 9 12 ITEM 4A: EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM OF THE REGISTRANT The following table sets forth the names, ages, and titles of the Company's executive officers at December 31, 1999: NAME AGE TITLE - ---- --- ----- Robert J. Shillman 53 President, Chief Executive Officer, and Chairman of the Board of Directors Patrick Alias 54 Executive Vice President, Worldwide Sales and Marketing Glenn Wienkoop 52 Executive Vice President and Chief Operating Officer Messrs. Shillman and Alias have been employed by the Company in their present or other capacities for no less than the past five years. Mr. Wienkoop joined the Company in 1997 as Executive Vice President of Subsidiary Operations and was promoted to Executive Vice President and Chief Operating Officer in January 1999. From 1975 to 1997, he served in a number of capacities, most recently as Executive Vice President and Division President at Measurex Corporation, a supplier of computer-integrated measurement, control, and information systems for continuous manufacturing processes. Executive officers are elected annually by the Board of Directors. There are no family relationships among the directors and the executive officers of the Company. OTHER MEMBERS OF THE MANAGEMENT TEAM NAME AGE TITLE - ---- --- ----- E. John McGarry 43 Vice President and General Manager - Portland Operations Richard Morin 50 Vice President of Finance, Chief Financial Officer, and Treasurer William Silver 46 Senior Vice President and Chief Technology Officer Mr. Silver has been employed by the Company in his present or other capacities for no less than the past five years. Mr. Morin joined the Company in 1999 after ten years as Chief Financial Officer for C&K Components, Inc., an international manufacturer of electronic components and security systems. Mr. Morin also served as Corporate Controller and Vice President of Finance for the Jamesbury Corporation. Mr. Morin is a Certified Public Accountant. Mr. McGarry joined the Company in 1995 when the company he founded in 1991, Acumen, Inc., was acquired by Cognex. From 1991 to 1995, he served as President of Acumen, Inc., a developer of machine vision systems for semiconductor wafer identification. 10 13 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Certain information with respect to this item may be found in the section captioned "Selected Quarterly Financial Data," appearing on page 34, and the section captioned "Company Information," appearing on page 35 of the Annual Report to Stockholders for the year ended December 31, 1999, which is Exhibit 13 hereto, and is incorporated herein by reference. The Company has never declared or paid cash dividends on shares of its common stock. The Company currently intends to retain all of its earnings to finance the development and expansion of its business and therefore does not intend to declare or pay cash dividends on its common stock in the foreseeable future. Any future declaration and payment of dividends will be subject to the discretion of the Company's Board of Directors, will be subject to applicable law, and will depend upon the Company's results of operations, earnings, financial condition, contractual limitations, cash requirements, future prospects, and other factors deemed relevant by the Company's Board of Directors. ITEM 6: SELECTED FINANCIAL DATA Information with respect to this item may be found in the section captioned "Five-Year Summary of Selected Financial Data," appearing on page 15 of the Annual Report to Stockholders for the year ended December 31, 1999, which is Exhibit 13 hereto, and is incorporated herein by reference. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information with respect to this item may be found in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing on pages 10 through 14 of the Annual Report to Stockholders for the year ended December 31, 1999, which is Exhibit 13 hereto, and is incorporated herein by reference. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company faces exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company's financial results. The Company's primary exposure has been related to local currency revenue and operating expenses in Japan, Europe, and Southeast Asia. Historically, the Company has hedged currency exposures associated with certain intercompany payables denominated in local currencies and certain foreign currency revenue transactions. The goal of the Company's hedging activity is to offset the impact of currency fluctuations on certain local currency intercompany payables and foreign currency revenue transactions. The success of this activity depends upon forecasts of transaction activity denominated in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. Outstanding forward foreign exchange contracts in Japanese yen at December 31, 1999 mature within six months. Indicators as of February 18, 2000, show that the dollar is expected to strengthen 11 14 against the yen by June 30, 2000, to approximately 116 yen/USD. The hypothetical gain in cash flows of these yen forward contracts is estimated to be $2,345,000 using these assumptions. The carrying amounts reflected in the consolidated balance sheets of cash and cash equivalents, trade receivables, and trade payables approximate fair value at December 31, 1999 due to the short maturities of these instruments. The Company maintains investment portfolio holdings of various issuers, types, and maturities. The Company's cash and investments include cash equivalents, which the Company considers to be investments purchased with original maturities of three months or less. Investments having original maturities in excess of three months are stated at amortized cost, which approximates fair value, and are classified as available-for-sale. Given the short maturities and investment grade quality of the portfolio holdings at December 31, 1999, a sharp rise in interest rates should not have a material adverse impact on the fair value of the Company's investment portfolio. As a result, the Company does not currently hedge these interest rate exposures. The following table (dollars in thousands) presents hypothetical changes in fair value in the Company's financial instruments at December 31, 1999 that are sensitive to changes in interest rates. The modeling technique measures the change in fair value arising from selected potential changes in interest rates. Movements in interest rates of plus or minus 50 basis points ("BP") and 100 BP reflect immediate hypothetical shifts in the fair value of these investments. Fair value represents the market value of the principal plus accrued interest and dividends of certain interest-rate-sensitive securities at December 31, 1999. Valuation of securities given No change in Valuation of securities given an Type of security an interest rate decrease interest rates interest rate increase - ------------------------------------------------------------------------------------------------------------------------ (100 BP) (50 BP) 50 BP 100 BP - ------------------------------------------------------------------------------------------------------------------------ Municipal obligations with contractual $ 202,881 $ 201,862 $ 200,608 $ 199,471 $ 198,335 maturities no greater than 3 years A 50 BP move in the Federal Funds Rate has occurred in nine of the last 40 quarters. There has not been a 100 BP movement in the Federal Funds Rate in any of the last 40 quarters. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this item, which includes the consolidated financial statements and notes thereto, report of independent accountants, and supplementary data, may be found on pages 15 through 34 of the Annual Report to Stockholders for the year ended December 31, 1999, which is Exhibit 13 hereto, and is incorporated herein by reference. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting or financial disclosure during 1999 or 1998. 12 15 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors of the Company may be found in the section captioned "Election of Directors," appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the 2000 Annual Meeting of Stockholders to be held on May 8, 2000. Such information is incorporated herein by reference. Information with respect to Executive Officers of the Company may be found in the section captioned "Executive Officers and Other Members of the Management Team of the Registrant," appearing in Part I of this Annual Report on Form 10-K. ITEM 11: EXECUTIVE COMPENSATION Information with respect to this item may be found in the sections captioned "Information Concerning the Board of Directors," "Compensation/Stock Option Committee Report on Executive Compensation," "Comparison of Five Year Cumulative Total Returns Performance Graph for Cognex Corporation," and "Executive Compensation," appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the 2000 Annual Meeting of Stockholders to be held on May 8, 2000. Such information is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item may be found in the sections captioned "Principal Holders of Voting Securities" and "Security Ownership of Directors and Officers," appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the 2000 Annual Meeting of Stockholders to be held on May 8, 2000. Such information is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 13 16 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements The following consolidated financial statements of Cognex Corporation and the report of independent accountants relating thereto are included in the Company's Annual Report to Stockholders for the year ended December 31, 1999, which is Exhibit 13 hereto, and is incorporated herein by reference: Report of Independent Accountants Consolidated Statements of Income for the years ended December 31, 1999, 1998, and 1997 Consolidated Balance Sheets at December 31, 1999 and 1998 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements (2) Financial Statement Schedule Included at the end of this report are the following: Report of Independent Accountants on the Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. (3) Exhibits The Exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index appearing on page 18, immediately preceding such Exhibits. (b) Reports on Form 8-K There were no Reports on Form 8-K filed during the fourth quarter of the year ended December 31, 1999. 14 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COGNEX CORPORATION /s/ Robert J. Shillman ---------------------- Robert J. Shillman (President, Chief Executive Officer, and Chairman of the Board of Directors) March 24, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Robert J. Shillman President, Chief Executive Officer, March 24, 2000 - -------------------------- and Chairman of the Board of Directors Robert J. Shillman (principal executive officer) /s/ Richard Morin Vice President of Finance, Chief Financial March 24, 2000 - -------------------------- Officer, and Treasurer Richard Morin (principal financial and accounting officer) /s/ Jerald Fishman Director March 24, 2000 - -------------------------- Jerald Fishman /s/ William Krivsky Director March 24, 2000 - -------------------------- William Krivsky /s/ Anthony Sun Director March 24, 2000 - -------------------------- Anthony Sun /s/ Reuben Wasserman Director March 24, 2000 - -------------------------- Reuben Wasserman 15 18 REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Cognex Corporation: Our audits of the consolidated financial statements referred to in our report dated January 27, 2000 in the 1999 Annual Report to Stockholders of Cognex Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14 (a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Boston, Massachusetts /s/ PricewaterhouseCoopers LLP January 27, 2000 16 19 SCHEDULE II COGNEX CORPORATION VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) ADDITIONS ------------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ------------------------------------- ------------- ------------- --------------- -------------- ------------ - Allowance for Doubtful Accounts - ------------------------------- 1999 $2,583 $ 1,050 - $ (797) (a) $2,836 1998 1,940 1,245 - (602) (a) 2,583 1997 968 1,268 - (296) (a) 1,940 Reserve for Inventory Obsolescence - ---------------------------------- 1999 $2,860 $ 1,545 - $ (450) (b) $3,955 1998 1,873 992 - (5) (b) 2,860 1997 2,273 278 - (678) (b) 1,873 (a) Specific write-offs (b) Specific dispositions 17 20 EXHIBIT INDEX EXHIBIT NUMBER - -------------- 3A Articles of Organization of the Company effective January 8, 1981, as amended June 8, 1982, August 19, 1983, May 15, 1984, April 17, 1985, November 4, 1986, and January 21, 1987 (incorporated by reference to Exhibit 3A to the Registration Statement Form S-1 [Registration No. 33-29020]) 3B Restated Articles of Organization of the Company effective June 27, 1989, as amended April 30, 1991, April 21, 1992, April 25, 1995, and April 23, 1996 (filed as Exhibit 3B to the Company's Annual Report of Form 10-K for the year ended December 31, 1996) 3C By-laws of the Company as amended February 9, 1990 (filed as Exhibit 3C to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 4 Specimen Certificate for Shares of Common Stock (incorporated by reference to Exhibit 4 to the Registration Statement Form S-1 [Registration No. 33-29020]) 10A Cognex Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 4A to Amendment No. 1 to the Registration Statement Form S-8 [Registration No. 33-32815]) 10B Cognex Corporation 1992 Director Stock Option Plan (filed as Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 10C Cognex Corporation 1993 Director Stock Option Plan (filed as Exhibit 10J to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10D Cognex Corporation 1993 Employee Stock Option Plan, as amended May 28, 1996 (incorporated by reference to Exhibit 4A to the Registration Form S-8 [Registration No. 333-4621]) 10E Cognex Corporation 1996 Long-Term Incentive Plan (incorporated by reference to Exhibit 4A to the Registration Statement Form S-8 [Registration No. 333-2151]) 10F Amendment to the Cognex Corporation 1993 Director Stock Option Plan (filed as Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 10G Amendment to the Cognex Corporation 1993 Employee Stock Option Plan (filed as Exhibit 10H to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 10H Cognex Corporation 1998 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registration Form S-8 [Registration No. 333-60807]) 10I Cognex Corporation 1998 Stock Incentive Plan (incorporated by reference to Exhibit 4.2 to the Registration Form S-8 [Registration No. 333-60807]) 13 Annual Report to Stockholders for the year ended December 31, 1999 (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K) * 21 Subsidiaries of the registrant * 23 Consent of PricewaterhouseCoopers LLP * 27 Financial Data Schedule for the year ended December 31, 1999 (electronic filing only) * * Filed herewith 18