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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 October 4, 1998 or
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_ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to ____________ to ____________
COMMISSION FILE NUMBER 0-17869
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COGNEX CORPORATION
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2713778
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE VISION DRIVE
NATICK, MASSACHUSETTS 01760-2059
(508) 650-3000
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(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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
--- ---
As of November 1, 1998, there were 40,046,428 shares of Common Stock, $.002
par value, of the registrant outstanding.
Total number of pages: 15
Exhibit index is located on page 14
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INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three and nine months
ended October 4, 1998 and September 28, 1997
Consolidated Balance Sheets at October 4, 1998 and December 31,
1997
Consolidated Statement of Stockholders' Equity for the nine
months ended October 4, 1998
Consolidated Statements of Cash Flows for the nine months ended
October 4, 1998 and September 28, 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 4, SEPTEMBER 28, OCTOBER 4, SEPTEMBER 28,
1998 1997 1998 1997
---------- ------------- ---------- -------------
(UNAUDITED) (UNAUDITED)
Revenue ......................................................... $ 24,659 $43,936 $96,751 $108,350
Cost of revenue ................................................. 8,277 11,460 28,678 29,095
-------- ------- ------- --------
Gross margin .................................................... 16,382 32,476 68,073 79,255
Research, development and engineering expenses .................. 6,440 5,717 18,695 16,242
Selling, general and administrative expenses .................... 8,937 9,668 28,199 26,003
Charge for acquired in-process technology ....................... 2,100 3,115 2,100 3,115
-------- ------- ------- --------
Income (loss) from operations ................................... (1,095) 13,976 19,079 33,895
Investment income ............................................... 1,598 1,573 5,117 4,150
Other income .................................................... 148 195 484 524
-------- ------- ------- --------
Income before income taxes ...................................... 651 15,744 24,680 38,569
Income tax provision (benefit) .................................. (300) 4,803 6,670 11,765
-------- ------- ------- --------
Net income ...................................................... $ 951 $10,941 $18,010 $ 26,804
======== ======= ======= ========
Net income per share:
Basic ...................................................... $ .02 $ .26 $ .44 $ .65
======== ======= ======= ========
Diluted .................................................... $ .02 $ .24 $ .42 $ .60
======== ======= ======= ========
Weighted-average common and common equivalent
shares outstanding:
Basic ...................................................... 40,559 41,489 41,269 41,191
======== ======= ======= ========
Diluted .................................................... 42,916 45,149 43,052 44,632
======== ======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
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COGNEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
OCTOBER 4, DECEMBER 31,
1998 1997
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and investments ........................................... $ 154,381 $ 178,014
Accounts receivable, less reserves of $2,495 and $1,940 in 1998
and 1997, respectively ........................................ 20,953 25,095
Revenue in excess of billings .................................. 3,305 3,723
Inventories .................................................... 11,227 7,784
Deferred income taxes .......................................... 3,996 3,453
Prepaid expenses and other ..................................... 7,337 5,937
--------- ---------
Total current assets ..................................... 201,199 224,006
Property, plant and equipment, net ................................... 34,723 32,995
Other assets ......................................................... 3,947 3,462
Deferred income taxes ................................................ 1,565 1,377
--------- ---------
$ 241,434 $ 261,840
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 2,740 $ 3,332
Accrued expenses ............................................... 10,453 13,712
Accrued income taxes ........................................... 476 2,684
Customer deposits .............................................. 3,677 3,112
Deferred revenue ............................................... 2,598 1,596
--------- ---------
Total current liabilities ................................ 19,944 24,436
--------- ---------
Other liabilities .................................................... 2,010 1,262
Stockholders' equity:
Common stock, $.002 par value -
Authorized: 120,000,000 shares, issued: 42,220,261 and
41,859,395 shares in 1998 and 1997, respectively .......... 84 84
Additional paid-in capital ..................................... 94,811 91,082
Cumulative translation adjustment .............................. (54) 44
Retained earnings .............................................. 164,378 146,368
Treasury stock, at cost 2,203,340 and 103,139 shares in 1998 and
1997, respectively
(39,739) (1,436)
--------- ---------
Total stockholders' equity ............................... 219,480 236,142
--------- ---------
$ 241,434 $ 261,840
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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COGNEX CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
COMMON STOCK ADDITIONAL CUMULATIVE TREASURY STOCK TOTAL
-------------------- PAID-IN TRANSLATION RETAINED ------------------ STOCKHOLDERS'
SHARES PAR VALUE CAPITAL ADJUSTMENT EARNINGS SHARES COST EQUITY
---------- --------- -------- ----------- -------- --------- -------- -------------
Balance at December 31, 1997 ................... 41,859,395 $84 $91,082 $ 44 $146,368 103,139 $ (1,436) $ 236,142
Issuance of common stock under stock option and
stock purchase plans ...................... 360,866 2,260 2,260
Tax benefit from exercise of stock options .... 1,469 1,469
Common stock received for payment of
stock option exercises .................... 2,001 (50) (50)
Repurchase of common stock .................... 2,098,200 (38,253) (38,253)
Translation adjustment ........................ (98) (98)
Net income .................................... 18,010 18,010
---------- --- ------- ---- -------- --------- -------- ---------
Balance at October 4, 1998 (unaudited) ......... 42,220,261 $84 $94,811 $(54) $164,378 2,203,340 $(39,739) $ 219,480
========== === ======= ==== ======== ========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
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COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
NINE MONTHS ENDED
OCTOBER 4, SEPTEMBER 28,
1998 1997
---------- -------------
(UNAUDITED)
Cash flows from operating activities:
Net income ................................................... $ 18,010 $ 26,804
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 6,599 5,495
Tax benefit from exercise of stock options ................ 1,469 5,940
Charge for acquired in-process technology ................. 2,100 3,115
Deferred income tax provision ............................. (731) (29)
Change in other current assets and current liabilities .... (4,914) (13,326)
Other ..................................................... 77 145
--------- ---------
Net cash provided by operating activities .................... 22,610 28,144
--------- ---------
Cash flows from investing activities:
Purchase of investments ...................................... (54,525) (59,031)
Maturity of investments ...................................... 63,075 28,019
Purchase of property, plant and equipment .................... (6,403) (8,248)
Cash paid for technology acquisitions ........................ (2,864) (2,999)
--------- ---------
Net cash used in investing activities ........................ (717) (42,259)
--------- ---------
Cash flows from financing activities:
Issuance of common stock under stock option and stock purchase
plans ....................................................... 2,210 4,112
Repurchase of common stock ................................... (38,253)
--------- ---------
Net cash provided by (used in) financing activities .......... (36,043) 4,112
Effect of exchange rate changes on cash ............................ 302 180
--------- ---------
Net decrease in cash and cash equivalents .......................... (13,848) (9,823)
Cash and cash equivalents at beginning of period ................... 38,198 48,423
--------- ---------
Cash and cash equivalents at end of period ......................... 24,350 38,600
Investments ........................................................ 130,031 115,443
--------- ---------
Cash and investments ............................................... $ 154,381 $ 154,043
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As permitted by the rules of the Securities and Exchange Commission
applicable to Quarterly Reports on Form 10-Q, these notes are
condensed and do not contain all disclosures required by generally
accepted accounting principles. Reference should be made to the
consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, as filed with the Securities and Exchange Commission on March
27, 1998.
In the opinion of the management of Cognex Corporation, the
accompanying consolidated financial statements contain all adjustments
necessary to present fairly the Company's financial position at
October 4, 1998, and the results of operations for the three and nine
months ended October 4, 1998, and changes in stockholders' equity and
cash flows for the nine months ended October 4, 1998.
The results disclosed in the Consolidated Statements of Income for the
three and nine months ended October 4, 1998 are not necessarily
indicative of the results to be expected for the full year.
Certain amounts reported in prior periods have been reclassified to be
consistent with the current period's presentation.
INVENTORIES
Inventories consist of the following:
(In thousands) OCTOBER 4, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
Raw materials................... $ 6,159 $ 4,425
Work-in-process................. 2,039 1,355
Finished goods.................. 3,029 2,004
-------- --------
$ 11,227 $ 7,784
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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET INCOME PER SHARE
Net income per share is calculated as follows:
(In thousands) THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 4, SEPTEMBER 28, OCTOBER 4, SEPTEMBER 28,
1998 1997 1998 1997
---------- ------------- ---------- -------------
(UNAUDITED) (UNAUDITED)
Net income ........................................... $ 951 $10,941 $18,010 $26,804
======= ======= ======= =======
BASIC:
Weighted-average common shares
outstanding ................................... 40,559 41,489 41,269 41,191
======= ======= ======= =======
Net income per common share ..................... $ .02 $ .26 $ .44 $ .65
======= ======= ======= =======
DILUTED:
Weighted-average common shares outstanding
40,559 41,489 41,269 41,191
Effect of dilutive securities:
Stock options ............................... 2,357 3,660 1,783 3,441
------- ------- ------- -------
Weighted-average common and common
equivalent shares outstanding ............... 42,916 45,149 43,052 44 632
======= ======= ======= =======
Net income per common and common
equivalent share ............................ $ .02 $ .24 $ .42 $ .60
======= ======= ======= =======
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," effective January 1, 1998. SFAS
No. 130 requires that all items recognized under accounting standards as
components of comprehensive income be shown in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This statement also requires that an entity classify
items of other comprehensive income by their nature in an annual financial
statement. Other comprehensive income consists of foreign currency
translation adjustments. Comprehensive income totaled $968,000 and
$17,912,000 for the three and nine months ended October 4, 1998 and
$10,961,000 and $26,791,000 for the three and nine months ended September
29, 1997.
STOCK REPURCHASE PROGRAM
On April 21, 1998, the Company's Board of Directors authorized the
repurchase of up to $20,000,000 of the Company's common stock. A total of
882,000 shares were repurchased through May 27, 1998 amounting to
$19,936,694 which completed the Company's repurchases under this program.
On June 3, 1998, the Board authorized the repurchase of up to an additional
1,500,000 shares of the Company's common stock. As of October 4, 1998,
1,216,200 shares have been repurchased under this second program amounting
to $18,316,708. Such repurchases are part of the Company's ongoing program
to replenish shares used for the granting of stock options and are made
from time to time in the open market or in private transactions depending
upon acceptable price levels and the availability of shares. Funds for the
repurchases come from the Company's existing cash and investment balances
along with cash generated from operations.
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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACQUISITION OF ALLEN BRADLEY TECHNOLOGY
On July 28, 1998, the Company signed a definitive agreement to form a
global relationship with Rockwell Automation. Under the agreement, the
Company paid cash for certain technologies of Rockwell Automation's Allen
Bradley machine vision business and became the preferred supplier of
machine vision products to Rockwell Automation's customers worldwide.
The acquired technology was valued using a risk-adjusted cash flow model,
under which future cash flows were discounted taking into account risks
related to existing markets, the technology's life expectancy, future
target markets and potential changes thereto, and the competitive outlook
for the technology. This analysis resulted in an allocation of $2,100,000
to in-process technology which had not reached technological feasibility
and had no alternative future use, and accordingly, was expensed
immediately.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the three-month and nine-month periods ended October 4, 1998
totaled $24,659,000 and $96,751,000, respectively, compared to $43,936,000
and $108,350,000 for the same periods in 1997, representing a 44% decrease
for the three-month period and an 11% decrease for the nine-month period.
The Company's results continue to be impacted by a worldwide slowdown in
the semiconductor and electronics industries. This slowdown has resulted in
a reduction in capital spending by manufacturers in these industries which
is an important source of revenue for the Company.
The decrease in revenue of $19,277,000, or 44%, for the three-month period
is due to decreased volume from both the Company's Original Equipment
Manufacturer (OEM) customers and end user customers. Sales to OEM
customers, most of whom make capital equipment used by manufacturers in the
semiconductor and electronics industries, decreased $16,894,000, or 56%,
from the third quarter of 1997. In addition, sales to end user customers,
some of whom manufacture products in the semiconductor and electronics
industries, decreased $2,383,000, or 17%, from the third quarter of 1997.
The decrease in revenue of $11,599,000, or 11%, for the nine-month period
is due primarily to decreased volume from the Company's OEM customers.
Sales to OEM customers decreased $16,420,000, or 22%, from the prior year.
Sales to end user customers, however, increased $4,821,000, or 14%, from
the prior year as a result of additional sales and marketing resources
serving customers in this market, as well as sales of Fine-Line products
which the Company acquired from Mayan Automation, Inc. in a purchase
transaction on July 31, 1997. However, the increased end user sales
achieved in the first two quarters of 1998 was partially offset by
decreased volume to end user customers in the semiconductor and electronics
industries in the third quarter.
The Company anticipates that its results for the next several quarters will
continue to be impacted by the worldwide slowdown in the semiconductor and
electronics industries. Accordingly, the Company anticipates that revenue
may be sequentially flat over the next several quarters.
Gross margin as a percentage of revenue for the three-month and nine-month
periods ended October 4, 1998 was 66% and 70%, respectively, compared to
74% and 73% for the same periods in 1997. The decrease in gross margin as a
percentage of revenue is due primarily to the impact of lower sales volume
in 1998, as well as higher service costs as the Company builds its
worldwide service and support team. Gross margin as a percentage of revenue
is expected to remain at its current level for the next several quarters.
Research, development and engineering expenses for the three-month and
nine-month periods ended October 4, 1998 totaled $6,440,000 and
$18,695,000, respectively, compared to $5,717,000 and $16,242,000 for the
same periods in 1997, representing a 13% increase for the three-month
period and a 15% increase for the nine-month period. The increase in
aggregate expenses is due primarily to higher personnel-related costs, as
well as higher outside service costs, to support the Company's continued
investment in the research and development of new and existing products.
Expenses as a percentage of revenue were 26% and 19% for the three-month
and nine-month periods in 1998, compared to 13% and 15% for the same
periods in 1997. The increase in expenses as a percentage of revenue is due
primarily to the lower revenue base in 1998. The Company intends to
continue its product development efforts, and therefore, the level of
research, development and engineering expenses as a percentage of revenue
is expected to remain at its current level for the next several quarters.
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RESULTS OF OPERATIONS, CONTINUED
Selling, general and administrative expenses for the three-month and
nine-month periods ended October 4, 1998 totaled $8,937,000 and
$28,199,000, respectively, compared to $9,668,000 and $26,003,000 for the
same periods in 1997, representing an 8% decrease for the three-month
period and an 8% increase for the nine-month period. The decrease in
aggregate expenses for the three-month period is due primarily to the
cost-containment measures the Company has taken during the third quarter of
1998 which include the elimination of employee bonuses and a reduction in
certain employee benefit expenses. The increase in aggregate expenses for
the nine-month period is due primarily to higher personnel-related costs in
the first two quarters of 1998, both domestically and internationally, to
support the Company's expanding worldwide operations. Expenses as a
percentage of revenue were 36% and 29% for the three-month and nine-month
periods in 1998, compared to 22% and 24% for the same periods in 1997. The
increase in expenses as a percentage of revenue is due primarily to the
lower revenue base in 1998. Certain cost-containment measures implemented
during the third quarter of 1998, including the elimination of employee
bonuses, will not have as significant an impact on the Company's future
results as they did in the third quarter, and therefore, the level of
selling, general and administrative expenses as a percentage of revenue may
increase in the fourth quarter of 1998.
On July 28, 1998, the Company signed a definitive agreement to form a
global relationship with Rockwell Automation. Under the agreement, the
Company paid cash for certain technologies of Rockwell Automation's Allen
Bradley machine vision business and became the preferred supplier of
machine vision products to Rockwell Automation's customers worldwide.
The acquired technology was valued using a risk-adjusted cash flow model,
under which future cash flows were discounted taking into account risks
related to existing markets, the technology's life expectancy, future
target markets and potential changes thereto, and the competitive outlook
for the technology. This analysis resulted in an allocation of $2,100,000
to in-process technology which had not reached technological feasibility
and had no alternative future use, and accordingly, was expensed
immediately.
The Company expects to invest additional development efforts related to the
in-process technology to add or improve functionality, increase hardware
performance, and conform and integrate the technology to the Company's
product standards. These expenditures are expected to be paid out through
1999 with anticipated funding from cash flow generated from operations and
are not expected to significantly impact the planned level of research and
development expenditures.
Investment income for the three-month and nine-month periods ended October
4, 1998 totaled $1,598,000 and $5,117,000, respectively, compared to
$1,573,000 and $4,150,000 for the same periods in 1997, representing a 2%
increase for the three-month period and a 23% increase for the nine-month
period. The increase in investment income is due primarily to a higher
average invested cash balance in 1998.
The Company's use of tax-free investments reduced its effective tax rate
for 1998 to 27.0%. The year-to-date benefit of this reduced rate was
recorded during the third quarter of 1998. The Company's effective tax rate
was 30.5% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements during the nine-month period ended October
4, 1998 were met through cash generated from operations along with existing
cash and investments balances. Cash and investments decreased $23,633,000
from December 31, 1997 primarily as a result of $38,253,000 of cash used to
repurchase the Company's common stock and $6,403,000 of capital
expenditures, partially offset by $22,610,000 of cash generated from
operations.
Capital expenditures for the nine-month period ended October 4, 1998
totaled $6,403,000 and consisted primarily of expenditures for computer
hardware and software, as well as expenditures for furniture and fixtures
primarily related to the occupancy of the 50,000 square-foot expansion of
the Company's corporate headquarters and expenditures for leasehold
improvements related to a new office in Japan.
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LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
On April 21, 1998, the Company's Board of Directors authorized the
repurchase of up to $20,000,000 of the Company's common stock. A total of
882,000 shares were repurchased through May 27, 1998 amounting to
$19,937,000 which completed the Company's repurchases under this program.
On June 3, 1998, the Board authorized the repurchase of up to an additional
1,500,000 shares of the Company's common stock. As of October 4, 1998,
1,216,200 shares have been repurchased under this second program amounting
to $18,317,000. Funds for the repurchases come from the Company's existing
cash and investment balances along with cash generated from operations.
The Company believes that its existing cash and investments balance,
together with cash generated from operations, will be sufficient to meet
the Company's planned working capital and capital expenditure requirements
through 1999, including the Company's stock repurchase program and
potential business acquisitions.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999.
SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company
anticipates that, due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a significant effect on the
Company's results of operations or its financial position.
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their
existing sovereign currencies and the euro, making the euro their common
legal currency on that date. Following the introduction of the euro, the
legacy currencies are scheduled to remain legal tender in the participating
countries as denominations of the euro between January 1, 1999 and January
1, 2002 (the "transition period"). During the transition period, public and
private parties may pay for goods and services using either the euro or the
participating country's legacy currency on a "no compulsion, no
prohibition" basis. However, conversion rates no longer will be computed
directly from one legacy currency to another. Instead, a triangular process
will apply whereby an amount denominated in one currency will first be
converted into the euro. The resultant euro-denominated amount will then be
converted into the second legacy currency.
The Company is currently evaluating the business implications of conversion
to the euro, including technical adaption of the information technology and
other systems to accommodate euro-denominated transactions, long-term
competitive implications of the conversions, and the effect on market risk
with respect to financial instruments. At this time, the Company has not
completed its assessment of the impact of the conversion.
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YEAR 2000 UPDATE
The Company is aware of the potential for industry wide business disruption
which could occur due to problems related to the "Year 2000 issue." It is
the belief of management that we have a prudent plan in place to address
these issues within our Company and our supply chain. The components of our
plan include: an assessment of internal systems for modification and/or
replacement; communication with external vendors to determine their state
of readiness to maintain an uninterrupted supply of goods and services to
the Company; and an evaluation of product sold by the Company to customers
as to the ability of the product to work properly after the turn of the
century.
INTERNAL SYSTEMS
The process the Company is following to achieve Year 2000 compliance for
internal systems is as follows:
1. Develop an inventory of all internal systems
2. Determine the Year 2000 compliance status of each internal system
3. Prioritize the importance of Year 2000 compliance for each internal
system
4. Determine the method to be used to achieve compliance (modify,
replace, cease use)
5. Complete the planned action
6. Test the system
The initial inventory, compliance status, and prioritization of all
internal systems in use throughout the Company has been completed. We have
identified five internal systems that are used for business transaction
processing as being critical to the uninterrupted operation of the
business. Of these five systems, our initial assessment indicates that
three are Year 2000 compliant. We are on schedule to have the remaining two
systems Year 2000 compliant by June 30, 1999 through vendor-provided
upgrades and enhancements. In addition, we have completed an initial
assessment of our technology infrastructure (servers, networks, phone
systems) and plan to have all items remediated, replaced, or decommissioned
by June 30, 1999.
VENDORS
The Company has initiated a program to survey the Year 2000 readiness of
its major vendors. We have sent letters to over 250 vendors outlining our
approach towards the Year 2000 issue and asking for either their
certification that their product is Year 2000 compliant or their commitment
to resolve any issues they may have. We have identified vendors we view as
critical to our business. We have defined a critical vendor as one who's
inability to continue to provide goods and services would have a serious
adverse impact on the Company's ability to produce, deliver, and collect
payment for our product. To date, we have received responses from
approximately 150 vendors who have either certified that their product is
Year 2000 compliant or have provided a compliance plan. The remaining
critical vendors will be contacted by the senior management member
responsible for the business relationship and will be requested to respond
to the Company's Year 2000 letter. The majority of the vendors who have not
yet responded to the Company's letter are considered non-critical vendors.
PRODUCTS
The Company is in the process of testing all Cognex vision hardware and
software products for Year 2000 compliance. Based on its current level of
analysis and testing, the Company believes it is unlikely that a Year 2000
problem will occur because Cognex boards do not provide hardware support
for tracking calendar dates. In addition, none of the Company's core vision
functionality is date sensitive or dependent. However, customer developed
application code built on top of Cognex vision tools, such as results
logging, may be vulnerable to a Year 2000 problem. Upon completion of
product testing, remediation will be implemented, if necessary, to meet the
requirements of the Year 2000 transition.
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YEAR 2000 UPDATE, CONTINUED
COSTS
Costs incurred in the Company's Year 2000 compliance effort are expensed as
incurred and funded with cash generated from operations. In total, these
costs are not expected to be substantially different from the normal,
recurring costs that are incurred for product development and systems
maintenance.
RISKS AND CONTINGENCY PLAN
Although we believe we are taking prudent action related to the
identification and resolution of issues related to the Year 2000, our
assessment is still in progress. We may never be able to know with
certainty whether certain critical vendors are compliant, especially those
outside the United States. Failure of critical vendors to make their
computer systems Year 2000 compliant could result in delaying deliveries of
products and services to the Company. If such delays are extended, they
could have a material adverse effect on the Company's business.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities. Such
failures could materially and adversely affect the Company's results of
operations, liquidity, and financial condition. Due to the general
uncertainty inherent in the Year 2000 issue, resulting in part from the
uncertainty of the Year 2000 readiness of third-party vendors, the Company
is unable to determine at this time whether the consequences of Year 2000
failures will have material impact of the Company's result of operations,
liquidity, or financial condition. The Year 2000 compliance project is
expected to significantly reduce the Company's level of uncertainty about
the Year 2000 issue and, in particular, about the Year 2000 compliance and
readiness of its critical vendors. The Company believes that, with the
completion of the Year 2000 compliance project as scheduled, the
possibility of significant interruptions of normal operations should be
reduced.
The Company continues to evaluate the risks associated with potential Year
2000 related failures. As we better understand the risks within our unique
set of internal systems, business partners, and products, we will develop a
formal contingency plan to alleviate the impact of high potential or
serious failures. We anticipate having this contingency plan outlined by
June 30, 1999. The components of this plan will likely include raw material
and finished goods inventory levels, alternative vendors, and backup
systems. Until the contingency plan is completed, the Company does not
possess the information necessary to estimate the potential impact of Year
2000 compliance issues related to internal systems, its vendors, its
customers, and other parties.
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FORWARD-LOOKING STATEMENTS
Certain statements made in this report (including statements made
regarding the Year 2000 issue), as well as oral statements made by the
Company from time to time, which are prefaced with words such as "expects,"
"anticipates," "believes," and similar words and other statements of
similar sense, are forward-looking statements. These statements are based
on the Company's current expectations and estimates as to prospective
events and circumstances, which may or may not be in the Company's control
and as to which there can be no firm assurances given. These
forward-looking statements, like any other forward-looking statements,
involve risks and uncertainties that could cause actual results to differ
materially from those projected or anticipated. Such risks and
uncertainties include (1) the loss of, or a significant curtailment of
purchases by, any one or more principal customers; (2) the cyclicality of
the semiconductor and electronics industries; (3) the Company's continued
ability to achieve significant international revenue; (4) capital spending
trends by manufacturing companies; (5) inability to protect the Company's
proprietary technology and intellectual property; (6) inability to attract
or retain skilled employees; (7) technological obsolescence of current
products and the inability to develop new products; (8) inability to
respond to competitive technology and pricing pressures; and (9) reliance
upon certain sole source suppliers to manufacture or deliver critical
components of the Company's products. The foregoing list should not be
construed as exhaustive and the Company disclaims any obligation to
subsequently revise forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events. Further discussions of
risk factors are also available in the Company's registration statements
filed with the Securities and Exchange Commission. The Company wishes to
caution readers not to place undue reliance upon any such forward-looking
statements, which speak only as of the date made.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has filed a complaint in the United States District Court
in Massachusetts against the Lemelson Medical, Education, and Research
Foundation, Limited Partnership. The Company is seeking a declaration
that various patents which are claimed to cover "machine vision" and
which were assigned to the Lemelson Foundation by the late Jerome H.
Lemelson, are invalid, are unenforceable, and are not infringed by
either Cognex or by any users of Cognex products. In addition, the
Company is seeking recovery of attorney's fees.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
None
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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.
DATE: November 13, 1998 COGNEX CORPORATION
/s/ John J. Rogers, Jr.
---------------------------
John J. Rogers, Jr.
Executive Vice President, Chief Financial
Officer, and Treasurer (duly authorized officer,
principal financial and accounting officer)
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