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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, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to ----------------------
--------------------------
COMMISSION FILE NUMBER 0-17869
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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)
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
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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 28, 1999: $1,008,663,000
$.002 par value common stock outstanding as of
February 28, 1999: 40,346,520 shares
Documents incorporated by reference:
Specifically identified information in the Annual Report to Stockholders for the
year ended December 31, 1998, 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 1999 Annual Meeting of Stockholders to be held on
April 27, 1999, 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.
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COGNEX CORPORATION ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
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
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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 18 of the Annual Report to
Stockholders for the year ended December 31, 1998, 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, 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
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GUIDANCE
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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.
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IDENTIFICATION
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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
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How good is it? Inspecting an object for flaws or Inspecting the quality of printing on
defects. pharmaceutical labels and packaging.
GAUGING
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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.
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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 which 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 sales. However, the Company believes that end users have the
potential in the long term to generate more sales than OEMs. Consequently,
the Company has invested in developing and acquiring products which 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 1998, approximately 63% 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 to date 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, 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.
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GENERAL-PURPOSE SYSTEMS
Vision Software Library
The Company offers an extensive library of machine 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 PatMaxTM, 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 PatInspectTM, 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.
MVS-8000 product family
In 1998, the Company introduced its next generation of vision systems
(programmable in C++ language), the MVS-8000 product family, which combines
Cognex's unique algorithms with Intel's new MMX instruction set. Prior to
this introduction, all of the Company's software ran only on its own
proprietary hardware which was based on the Motorola 68k line of
microprocessors. For host-based processing, 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. For embedded processing,
the MVS-8200 Series of embedded CPU 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 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 vision systems into manufacturing
equipment for the semiconductor and electronics industries. These 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
The Checkpoint(R) product family is designed for customers with little
or no computer programming or machine vision experience. Checkpoint combines
the Company's existing vision software and standard vision hardware platforms
with a unique Microsoft Windows-based graphical user interface (GUI).
Customers utilize pull-down menus and dialog boxes in the GUI to create
customized vision applications. This easy-to-use, point-and-click programming
environment enables the developer to focus on tasks associated with solving
the overall vision application, freeing the developer from the detail and
complexity of a programming language.
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. Although the
application environment is designed for customers with little or no computer
programming or machine vision experience, deployment of Checkpoint on the
factory floor requires the services of trained system integrators to
mechanically and electrically integrate Checkpoint into manufacturing lines.
Other General-Purpose Systems
The Company continues to offer vision systems (programmable in C
language) 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 run on the PC.
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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 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/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 (BGA) Inspection Package 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 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.
Fine-Line(TM) Intelligent Camera Systems are complete surface
inspection devices packaged in a compact and rugged enclosure. Each camera
contains a line-scan charge-coupled device (CCD) sensor, image digitizer,
digital signal processor (DSP), custom hardware for pixel processing, surface
inspection algorithms in firmware, and a CPU for control and communications.
In addition to the camera, the Company provides a PC-based operator
interface, specialized lighting components, supporting mechanical components,
and power supply/control boxes to provide customers with a complete solution
to their surface inspection applications. Fine-Line systems can be used in a
single-camera, "stand-alone" fashion for simple, narrow web applications, or
they can be installed in multi-camera configurations to view wider webs.
Fine-Line systems are targeted primarily at the plastics, non-wovens, and
converting markets.
SmartView(TM) Modular Camera Network (MCN), introduced in 1998, detects,
measures, and classifies defects on products made in continuous processes.
SmartView 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 Intelligent Camera System, and has enabled the Company to
expand into more complex applications, including the inspection of high-end
plastics and non-wovens.
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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, 1998, the Company employed 152 professionals in R, D &
E, most of whom are software developers. The Company's R, D & E expenses
totaled $24,662,000, $22,481,000, and $19,434,000, or 20%, 14%, and 16% of
revenue, in 1998, 1997, and 1996, respectively.
MANUFACTURING
The majority of the Company's 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 are manufactured at
its Alameda, California facility and its Fine-Line Intelligent Camera systems
and SmartView Modular Camera Network systems are manufactured at its
Montreal, Canada facility. The manufacturing processes at the Alameda and
Montreal facilities consist of systems design, configuration management and
control, component procurement, subassembly, integration and final test,
quality control, shipment, and installation. Certain products are
manufactured by third-party contractors using 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.
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, 1998, the Company's direct sales and service force
consisted of 130 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 63%, 62%, and
55% of revenue in 1998, 1997, and 1996, respectively. One customer based in
Japan, Fuji America Corporation, accounted for approximately 14%, 18%, and
11% of revenue in 1998, 1997, and 1996, respectively. Information about
operating segments and geographic areas, as well as foreign currency and
related
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risk may be found in the Notes to the Consolidated Financial Statements,
appearing on page 37 and pages 24 through 26 of the Annual Report to
Stockholders for the year ended December 31, 1998, 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 services provides, for a fee, services
which 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 more than 50 different
product courses which 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, copyright, and trade secret
protection to safeguard its competitive position. The Company has obtained 39
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, 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) , Checkpoint(R) ,
PatMax(TM), PatInspect(TM), Fine-Line(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. 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 incorporate such products. As a result of this
action and the continuing assertions against other current and potential
Cognex customers, the Company decided to initiate action against the
Partnership in order to preserve its right to sell machine vision products
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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. 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 lower-cost, software-only
solutions being introduced by various competitors on the basis of superior
performance and price, rather than on price alone, through its MVS-8000
product family.
BACKLOG
At December 31, 1998, the Company's backlog totaled $17,216,000,
compared to $32,618,000 at December 31, 1997. 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, 1998, the Company employed 575 persons, including 237 in
sales, marketing, and support activities; 152 in research, development, and
engineering; 73 in manufacturing and quality assurance; and 113 in
information technology, finance, and administration. Of the Company's 575
employees, 168 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.
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ITEM 2: PROPERTIES
In 1994, the Company purchased and renovated a 100,000 square-foot
building located in Natick, Massachusetts which serves as its 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
the year 2000, 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, 1998 to a vote of security holders through solicitation of
proxies or otherwise.
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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, 1998:
NAME AGE TITLE
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Robert J. Shillman 52 President, Chief Executive Officer, and Chairman of the
Board of Directors
Patrick Alias 53 Executive Vice President, Worldwide Sales and Marketing
Glenn Wienkoop 51 Executive Vice President, 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 42 Vice President and General Manager - Portland Operations
William Silver 45 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. 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 42,
and the section captioned "Company Information," appearing on page 43 of the
Annual Report to Stockholders for the year ended December 31, 1998, 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
19 of the Annual Report to Stockholders for the year ended December 31, 1998,
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 12 through 18 of the Annual Report
to Stockholders for the year ended December 31, 1998, 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, 1998 mature within six months. Indicators as of February 1,
1999, show that the dollar is expected to strengthen
11
14
against the yen by June 30, 1999, to approximately 128 yen/USD. The
hypothetical gain in cash flows of these yen forward contracts is estimated
to be $976,000 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, 1998 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, 1998, 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, 1998
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 principal plus accrued
interest and dividends of certain interest-rate-sensitive securities at
December 31, 1998.
------------------------- ------------------------------- ---------------- ----------------------------------------
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 $ 154,998 $ 156,016 $ 157,035 $ 158,054 $ 159,072
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 19 through 42 of the Annual
Report to Stockholders for the year ended December 31, 1998, 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 1998 or 1997.
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 1999 Annual Meeting of
Stockholders to be held on April 27, 1999. 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 1999 Annual
Meeting of Stockholders to be held on April 27, 1999. 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 1999 Annual Meeting of Stockholders to be held
on April 27, 1999. 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, 1998, 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, 1998, 1997, and 1996
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996
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, 1998.
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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 26, 1999
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 26, 1999
------------------------------- and Chairman of the Board of Directors
Robert J. Shillman (principal executive and financial and
accounting officer)
/s/ Jerald Fishman Director March 26, 1999
-------------------------------
Jerald Fishman
/s/ William Krivsky Director March 26, 1999
-------------------------------
William Krivsky
/s/ Anthony Sun Director March 26, 1999
-------------------------------
Anthony Sun
/s/ Rueben Wasserman Director March 26, 1999
-------------------------------
Rueben 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 26, 1999 in the 1998 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.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 26, 1999
16
19
SCHEDULE II
COGNEX CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
DESCRIPTION BEGINNING COSTS AND OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ---------------------------------------------- --------- -------- -------- ----------------- ---------
Allowance for Doubtful Accounts
- ----------------------------------------------
1998 $1,940 $ 1,245 - $ (602)(a) $ 2,583
1997 968 1,268 - (296)(a) 1,940
1996 709 542 - (283)(a) 968
Reserve for Inventory Obsolescence
- ----------------------------------------------
1998 $1,873 $ 992 - $ (5)(b) $ 2,860
1997 2,273 278 (678)(b) 1,873
1996 541 4,361 - (2,629)(b) 2,273
(a) Specific write-offs
(b) Specific dispositions
17
20
EXHIBIT INDEX
EXHIBIT
NUMBER
=======
2 Agreement and Plan of Merger dated as of February 29, 1996 among
Cognex Corporation, Cognex Software Development, Inc., Isys
Controls, Inc., and Richard Rombach (incorporated by reference
to Exhibit 2 to the Report on Form 8-K filed on March 15, 1996)
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) Cognex Corporation 1993 Director
Stock Option Plan (filed as Exhibit 10J to the Company's Annual
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,
1998 (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, 1998
(electronic filing only) *
* Filed herewith
18