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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, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to _____________
COMMISSION FILE NUMBER 0-17869
COGNEX CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2713778
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE VISION DRIVE
NATICK, MASSACHUSETTS 01760-2059
(508) 650-3000
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates
as of March 1, 1998: $822,115,693
$.002 par value common stock outstanding as of March 1, 1998: 41,829,639 shares
Documents incorporated by reference:
Specifically identified information in the Annual Report to Stockholders for the
year ended December 31, 1997, 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 1998 Annual Meeting of Stockholders to be held on
April 21, 1998, is incorporated by reference into Part III hereof.
A list of Exhibits to this Annual Report on Form 10-K is located on pages 18 and
19.
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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 sections captioned "Liquidity and Capital
Resources" and "Forward-Looking Statements" in Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing on pages
15 through 17 of the Annual Report to Stockholders for the year ended
December 31, 1997, 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 a family of machine vision
systems that are used to replace human vision in a wide range of
manufacturing processes. These high-level systems consist of sophisticated
image analysis software and high-speed, special-purpose computers (vision
engines) which, when connected to a video camera, interpret and generate
information about video images. For example, a Cognex machine vision system
can locate an object, read alphanumeric characters, detect flaws, or measure
dimensions.
Machine vision systems are used in a variety of industries including the
semiconductor, electronics, automotive, consumer products, packaging,
pharmaceutical, 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 geometries of items being
manufactured.
WHAT IS MACHINE VISION?
In a typical machine vision application, a video camera positioned on
the production line captures an image of the part to be inspected. The
machine vision computer then uses sophisticated image analysis software to
extract information from the image and provide an answer to a question.
Cognex machine vision systems can answer four types of questions:
QUESTION DESCRIPTION EXAMPLE
-------- ----------- -------
GUIDANCE
--------
Where is it? Determining the exact physical Determining the position of a printed circuit board
location of an object. so that a robot can automatically be guided to
insert electrical components.
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IDENTIFICATION
--------------
What is it? Identifying an object by analyzing Identifying the serial number on an automotive
its shape or by reading a serial airbag so that it can be tracked and processed
number on it. correctly through manufacturing.
INSPECTION
----------
How good is it? Inspecting an object for flaws or Inspecting the quality of printing on
defects. pharmaceutical labels and packaging.
GAUGING
-------
What size is it? Determining the dimensions of an Determining the diameter of a bearing prior to
object. final assembly.
Once the machine vision system has processed the image and performed any
necessary analysis, the result is then communicated to other equipment on the
factory floor, such as an industrial controller, a robotic arm, a deflector
which removes the part from the line, a positioning table which moves the
part, or alternatively, to a computer file for analysis or subsequent process
control. This process is repeated during the manufacturing process as product
moves into position in front of the camera. Machine vision systems can
perform inspections quickly enough to keep pace with machines that process
thousands of items or material feet per minute, thus increasing both quality
and productivity.
THE MACHINE VISION MARKET
The machine vision market can be segmented into two categories: original
equipment manufacturers (OEMs) and the factory floor. The factory floor can
be further subdivided between system integrators and end users. OEMs are
companies that build standard products sold as capital equipment for 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.
System integrators are companies that create complete, automated
inspection solutions for end users on the factory floor in a variety of
industries. 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
programmable systems to application-specific solutions tailored to solve
particular manufacturing tasks.
End users are companies that manufacture products, such as radios,
telephones, ball-point pens, metals, and paper on the factory floor. 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 to solve specific applications on their
production lines. Unlike OEMs and system integrators, these customers
typically have little or no computer programming or machine vision
experience.
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 and support offerings to match the characteristics of its two major
segments: OEMs and the factory floor. Historically, the OEM segment has been
the source of the majority of the Company's sales. However, the Company
believes that the factory floor segment has the potential in the long term to
be larger than the OEM segment. Consequently, the Company has invested in
developing and acquiring products which meet the needs of the factory floor
market and in developing a strong worldwide direct sales and support
infrastructure. The Company will continue to invest in both segments of the
market, defending its strong position in the OEM segment while expanding in
the factory floor segment.
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 1997, approximately 62% of the Company's
revenue came from markets 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,
support, local marketing, and local engineering 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 which will be
driven both by the internal development of new products and the acquisition
of companies and technologies. In July 1995, the Company acquired Acumen,
Inc., a developer of machine vision systems for semiconductor wafer
identification. In February 1996, the Company acquired Isys Controls, Inc., a
developer of high-performance machine vision systems for high-speed surface
inspection. In July 1997, the Company acquired Mayan Automation, Inc., a
developer of intelligent camera-based machine vision systems for surface
inspection. These acquisitions gave Cognex an immediate and strong presence
in the growing niche markets for semiconductor wafer identification and
surface inspection.
PRODUCTS
The Company develops and sells a wide range of machine vision products.
These products fall into two lines: the Modular Vision System (MVS) Product
Line and the Surface Inspection System (SIS) Product Line. The Company
estimates that it had sold approximately 70,000 machine vision systems as of
December 31, 1997.
The MVS Product Line consists of an integrated family of proprietary
vision software components together with vision hardware components (embedded
vision engines and frame grabbers) which require minimal customization and
support by the Company. Modular Vision Systems sold by the Company are
defined as either general-purpose or application-specific products.
General-purpose machine vision products 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 a "point-and-click"
interface. Application-specific machine vision products are "packaged"
combinations of software and hardware that are designed to solve targeted
problems without any customization by the Company or its customers. A typical
Cognex Modular Vision System, including software and hardware, ranges in
price from $7,500 to $20,000.
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The SIS Product Line consists of a family of intelligent line-scan
cameras, high-performance image processing hardware, special-purpose
illumination systems, and proprietary defect detection and classification
software. These elements are combined into complete systems which range in
price from $25,000 to $2,500,000, depending upon the number of cameras and
the processing speed. The Company's Surface Inspection Systems are
application-specific products intended to solve surface inspection problems
within a targeted set of industries and applications without any
customization by the Company or its customers.
MODULAR VISION SYSTEM PRODUCT LINE
Programmable Vision Systems
Cognex Programmable Vision Systems (PVSs) are board-level vision systems
programmable in C-language. PVSs are comprised of software and hardware
"building blocks" that enable customers to construct solutions tailored to
their application needs. The Company offers a library of vision software
tools that locate patterns, inspect for defects, measure geometric
properties, and identify parts. The hardware is a family of embedded vision
engines and frame grabbers.
Embedded vision engines are vision computers which plug into the
backplane of a standard personal computer (PC) or VME bus architecture. Each
embedded vision engine contains an on-board central processing unit (CPU),
image capture mechanism, memory, and input/output connector, enabling the
host computer to off-load all vision tasks to the vision processor. Frame
grabbers are single-board image capture devices which capture images from
video cameras and input the images directly into the host CPU over a standard
bus, such as a PCI. In this case, the Cognex vision software tools run
directly on the PC's CPU.
Customers first choose the most appropriate software tools from the
vision software library and then select the hardware platform that satisfies
their speed and price requirements. To create a vision solution, users write
a C-language program that connects the software blocks appropriate for their
vision tasks and then run the application on the selected hardware platform.
Customers are given the flexibility to configure their own vision solutions
to a broad range of complex vision problems without detailed support from the
Company. Cognex vision hardware is functionally and software compatible
across product lines, allowing customers to readily upgrade to higher
performance systems or to change platforms as their application needs change.
In 1997, the Company introduced the Cognex MVS 8000 Series which
includes both embedded vision engines and frame grabbers, as well as new
vision software tools which offer improvements in accuracy and robustness.
The 8000 Series is designed to exploit the power of Intel MMX-based
processors, Microsoft Windows/NT operating systems, and high-speed PCI
bus-based PCs. The Company also offers the Cognex 4000 Series which plugs
directly into a VME backplane, as well as the Cognex 5000 and 6000 Series
which run on PCs.
PVSs are sold primarily to OEMs located in North America and Japan who
integrate the vision systems into manufacturing equipment for the
semiconductor and electronics industries. PVSs 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
pharmaceutical.
"Point-and-Click" Programmable Systems
The Checkpoint(R) family of vision systems (the Checkpoint 900 which
runs on a PC and the Checkpoint 800 which plugs directly into a VME
backplane) is designed for manufacturing engineers who do not program in
C-language and are looking for a rapid application development environment.
Checkpoint combines the Company's existing vision software and standard
vision hardware platforms with a unique Microsoft Windows-based graphical
user interface (GUI). Manufacturing engineers utilize pull-down menus and
dialog boxes in the GUI to create customized vision applications. This
"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 programming in C-
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language. The library of vision tools currently available with Checkpoint
enables users to solve a wide range of inspection, gauging, assembly
verification, and defect detection problems.
The Company introduced Checkpoint in 1994 for the factory floor market.
Checkpoint is sold primarily to end users and system integrators located in
North America, Japan, Europe, and Southeast Asia in a wide range of general
manufacturing industries, such as manufacturers of medical devices,
batteries, power tools, disposable consumer goods, and electronic components.
Although the application environment is designed for engineers with little
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.
Application-Specific Modular Vision Systems
Application-specific products are "packaged" combinations of software
and hardware that are designed to solve targeted problems without any
customization by the Company or its customers. The Company's
application-specific products are designed to address particular requirements
of certain vision applications and are sold to OEMs, system integrators, and
end users worldwide. A partial list of application-specific products is as
follows:
Surface Mount Device Placement Guidance Package (SMD/PGP), when
coupled with a Cognex 4000, 5000, or 8000 Series machine vision engine,
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. For
high-performance lead inspection in time-critical applications, the
SMD/PGP tools have real-time image acquisition capability, eliminating
the need to stop the motion of the placement machine in order to capture
an image of a moving part.
Cognex acuReader/Optical Character Recognition (OCR) reads even the
most degraded serial numbers from semiconductor wafers with near 100%
accuracy.
Cognex acuReader/2D reads automatic identification manufacturers
(AIM) standard data matrix symbologies. 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.
Cognex acuReader/Optical Character Verification (OCV) verifies the
print produced by laser, pad, or offset printing equipment.
Cognex acuFinder(R) locates parts, regardless of rotation and
scale, and guides robots in the assembly, sorting, and packaging of
appliance, automotive, consumer, and electronics products.
Ball Grid Array (BGA) Inspection Package inspects BGA devices for
missing, misplaced, or improperly formed solder balls.
Cognex Fiducial Finder, when coupled with a Cognex 4000, 5000, or
8000 Series machine vision engine, locates fiducial or alignment marks on
printed circuit boards.
Cognex Print Quality Inspection (PQI), when coupled with a Cognex
4000 or 5000 Series machine vision engine, quickly and accurately
inspects print produced by laser, pad, or offset printing equipment.
SURFACE INSPECTION SYSTEM PRODUCT LINE
Fine-Line Intelligent Camera Systems
Fine-Line 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
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camera, the Company provides a PC-based operator interface, specialized
lighting 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, which range in price
from $25,000 to $150,000, depending upon the number of cameras, are targeted
primarily at the plastics, non-wovens, and converting markets.
iS High Performance Inspection Systems
iS High Performance Inspection Systems are designed for the most
demanding 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,
which range in price from $300,000 to $2,500,000, depending upon the number
of cameras and the processing speed, are targeted primarily at metals,
specialized coated paper, and high-value non-woven materials producers.
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. The Company considers its
on-going efforts in R,D & E to be a key component of its strategy.
The MVS engineering group released the first product of the new 8000
Series during 1997, with additional products of this series planned for
release during 1998. The software for this series and the family of
compatible hardware, from frame grabbers to fully embedded board-level
vision systems, utilize the processing capabilities of Intel MMX
architecture. During 1998, the MVS engineering group will be further
leveraging the technical power of PatMax, a major advance in high-accuracy
rotation and scale invariant pattern recognition, introduced by the Company
in 1997. Both PatMax and PatMax/Inspect, an innovative companion defect
inspection technology, will substantially increase the performance and range
of the Company's application-specific products, such as surface mount device
and wirebonder inspection, as well as increase the capabilities of the
Company's "point-and-click" vision development systems, including Checkpoint.
During 1998, the MVS engineering group also plans to release new versions of
PatMax and PatMax/Inspect.
The SIS engineering group introduced several new products during 1997,
including products for improved illumination of large web applications,
high-performance line-scan cameras and controllers, and an advanced
intelligent classifier. These additional capabilities will improve both the
performance and range of applications serving the metals industry, as well as
broaden the number of applications and industries served to include plastics
and non-wovens. The SIS Product Line was further expanded through the
acquisition of Mayan Automation, Inc., a developer of intelligent
camera-based machine vision systems for surface inspection, in the third
quarter of 1997. The combination of intelligent camera systems for smaller
applications and large, integrated systems technology provides the Company
with the unique ability to match a wide range of user requirements. During
1998, the SIS engineering group will further expand the capabilities of its
newly-acquired intelligent camera technology to cost-effectively match higher
performance requirements within the industries that it serves, while it also
plans development activities in its integrated systems business to further
improve performance. With the advent of as many as ten new intelligent
classification systems (iLearn) coming on-line, the Company seeks to attain
broad industry acceptance, as its customers find it easier to apply and
benefit from surface inspection technology. iLearn automatically generates
rules for classifying surface defects into user-defined categories, thereby
dramatically reducing the start-up time and effort required to tune the
inspection system to meet the needs of each individual production line and
product type.
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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.
At December 31, 1997, the Company employed 152 professionals in R,D &
E, most of whom are software developers. The Company's R,D & E expenses
totaled $22,481,000, $19,434,000, and $13,190,000, or 14%, 16%, and 13% of
revenue, in 1997, 1996, and 1995, respectively.
MANUFACTURING
The Company's MVS Product Line is manufactured at its Natick,
Massachusetts headquarters. The Company's Natick manufacturing organization
has completed its transition to 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 products are manufactured at its Alameda, California
facility and its Fine-Line products 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 SERVICE
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.
The Company's direct sales force operates in the United States out of
its Natick, Massachusetts headquarters, its Regional Technology Centers in
Mountain View, California and Naperville, Illinois, and its sales offices
throughout the United States; in Canada out of its Montreal, Quebec and
Scarborough, Ontario offices; in Japan out of its Tokyo, Osaka, Nagoya, and
Fukuoka offices; in Europe out of its France, Germany, England, Italy,
Sweden, and Scotland offices; and in Southeast Asia out of its Singapore,
Korea, and Taiwan offices.
At December 31, 1997, the Company's direct sales and service force
consisted of 134 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 its MVS products to customers that 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 62%, 55%, and
59% of revenue in 1997, 1996, and 1995, respectively. One international
customer based in Japan, Fuji America Corporation, accounted for
approximately 18%, 11%, and 16% of revenue in 1997, 1996, and 1995,
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respectively. Information about foreign and domestic operations, export
sales, and significant geographic areas, as well as foreign currency and
related risk may be found in the Notes to the Consolidated Financial
Statements, appearing on pages 23 through 25 and 35 through 36 of the Annual
Report to Stockholders for the year ended December 31, 1997, 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 provides software update services and hardware maintenance
on a contract basis. Software updates are provided via floppy disks and
hardware maintenance is provided by repairing or exchanging printed circuit
boards. Programming application services for projects can be contracted with
the Company on a time-and-material basis only when doing so enhances the sale
of the Company's standard products. Product courses are provided by the
Company at its headquarters in Natick, Massachusetts, at its offices in
Japan, France, Germany, and England, as well as at the customer site when
required. These courses provide the user with both lecture and laboratory
sessions covering the use of Cognex products.
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. 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.
Cognex, Checkpoint, and acuFinder are registered trademarks of Cognex
Corporation. Patmax, Fine-Line, iS, and iLearn are trademarks of Cognex
Corporation. All other brand names, service marks and trademarks, whether or
not registered, are the property of their respective owners.
The Company's software products are generally 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.
Several users of the Company's products have received notice of patent
infringement from Technivision Corporation and Jerome H. Lemelson alleging
that their use of the Company's products infringes certain patents issued to
Mr. 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 Mr. Lemelson's patents, they may seek indemnification from
the Company for damages or expenses resulting from this matter.
Two users of the Company's products were engaged in litigation with Mr.
Lemelson/Technivision involving certain of these patents and the validity of
these patents was placed in issue. One user entered into a settlement
agreement with Mr. Lemelson. The Company is not a party to that settlement
and has no indemnification claims, or related obligations, with respect to
that settlement. Certain products sold by the Company, as well as the
products of others, were identified in connection with this litigation, which
claimed an allegedly infringing use.
With respect to the second user, in April 1996 the U.S. District Court
of Nevada ruled in favor of summary judgment for the user, thus disposing of
all actions in favor of such user. In April 1997, the same U.S. District
Court of Nevada reversed its decision with respect to the April 1996 summary
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judgment ruling. Subject to appeal of the reversal by the user, the case will
proceed to trial. On October 1, 1997 Mr. Lemelson died; however the
litigation will continue under his estate. The Company cannot predict the
outcome of this litigation or any similar litigation which may arise in the
future, or the effect of such litigation on the operating results of the
Company. The Company does not believe its products infringe any valid and
enforceable claims of Mr. Lemelson's patents.
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 8000 Series.
In the paper industry market for high-performance surface inspection systems,
the Company has faced increased competition as a result of a merger between
Honeywell, a former distributor of the Company's iS products, and Measurex, a
supplier of competing surface inspection systems.
BACKLOG
At December 31, 1997, the Company's backlog totaled $32,618,000,
compared to $25,347,000 at December 31, 1996. Backlog reflects purchase
orders for products scheduled for shipment within six 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, 1997, the Company employed 529 persons, including 206 in
sales, marketing and support activities; 152 in research, development and
engineering; 76 in manufacturing and quality assurance; and 95 in information
technology, management, administration and finance. Of the Company's 529
employees, 61 are located in Japan. 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.
9
11
ITEM 2: PROPERTIES
In 1994, the Company purchased and renovated a 100,000 square-foot
building located in Natick, Massachusetts. In 1997, the Company completed
construction of a 50,000 square-foot addition to this building. The Company's
corporate headquarters, principal administrative, sales and marketing,
research, development and engineering, manufacturing and quality assurance,
and support personnel are located in this facility. In addition, the Company
leases facilities in the United States in California, Illinois, and Oregon,
as well as in Canada, Japan, France, Germany, England, Italy, Sweden,
Scotland, Singapore, Korea, and Taiwan.
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 plans to 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 in
Natick, Massachusetts. 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, 1997 to a vote of security holders through solicitation of
proxies or otherwise.
10
12
ITEM 4A: EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM OF THE
REGISTRANT
The following table sets forth the names, ages, and titles of the
Company's executive officers at December 31, 1997:
NAME AGE TITLE
---- --- -----
Robert J. Shillman 51 President, Chief Executive Officer, and Chairman of the Board
of Directors
Patrick A. Alias 52 Executive Vice President, Sales and Marketing
John J. Rogers, Jr. 39 Executive Vice President, Chief Financial Officer, and Treasurer
Glenn Wienkoop 50 Executive Vice President, Subsidiary Operations
Messrs. Shillman, Alias, and Rogers 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. 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 41 Vice President, Development: Application-Specific
Accelerated Products
William Silver 43 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.
11
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, 1997, 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
41 of the Annual Report to Stockholders for the year ended December 31, 1997,
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 17 of the Annual Report
to Stockholders for the year ended December 31, 1997, which is Exhibit 13
hereto, and is incorporated herein by reference.
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 18 through 42 of the Annual
Report to Stockholders for the year ended December 31, 1997, 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 1997 or 1996.
12
14
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 1998 Annual Meeting of
Stockholders to be held on April 21, 1998. 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 1998 Annual
Meeting of Stockholders to be held on April 21, 1998. 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 1998 Annual Meeting of Stockholders to be held
on April 21, 1998. Such information is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
13
15
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, 1997, 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, 1997, 1996, and 1995
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995
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 pages 18 and 19,
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, 1997.
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16
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 27, 1998
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 27, 1998
------------------------------- and Chairman of the Board of Directors
Robert J. Shillman (principal executive officer)
/s/ John J. Rogers, Jr. Executive Vice President, Chief Financial March 27, 1998
------------------------------- Officer, and Treasurer
John J. Rogers, Jr. (principal financial and accounting officer)
/s/ William Krivsky Director March 27, 1998
-------------------------------
William Krivsky
/s/ Anthony Sun Director March 27, 1998
-------------------------------
Anthony Sun
/s/ Rueben Wasserman Director March 27, 1998
-------------------------------
Rueben Wasserman
15
17
REPORT OF INDEPENDENT ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Cognex Corporation:
Our report on the consolidated financial statements of Cognex
Corporation has been incorporated by reference in this Form 10-K from page 40 of
the 1997 Annual Report to Stockholders of Cognex Corporation. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedule for each of the three years in the period ended
December 31, 1997 listed in Item 14(a) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Boston, Massachusetts /s/ COOPERS & LYBRAND L.L.P.
January 23, 1998
16
18
SCHEDULE II
COGNEX CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- -------- -------- ---------- ------
Allowance for Doubtful Accounts
1997 $ 968 $ 1,268 -- $ (296) (a) $ 1,940
1996 709 542 -- (283) (a) 968
1995 684 25 -- -- 709
Reserve for Inventory Obsolescence
1997 $ 2,273 $ 278 -- $ (678) (b) $ 1,873
1996 541 4,361 -- (2,629) (b) 2,273
1995 599 -- -- (58) (b) 541
(a) Specific write-offs
(b) Specific dispositions
17
19
EXHIBIT INDEX
EXHIBIT NUMBER
2A Stock Purchase Agreement dated as of July 21, 1995 among
Acumen, Inc., the Shareholders of Acumen, Inc., and
Cognex Corporation (incorporated by reference to Exhibit
2 to the Report on Form 8-K filed on October 4, 1995)
2B 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 on 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's Stock Option Plan
(filed as Exhibit 10I to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992)
10C Cognex Corporation 1993 Director's 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 Purchase and Sale Agreement with respect to the Natick
Executive Park facility dated as of June 30, 1995 (filed
as Exhibit 10G to the Company's Annual Report on Form
10-K for the year ended December 31, 1995)
10G Amendment to the Cognex Corporation 1993 Director's Stock
Option Plan *
10H Amendment to the Cognex Corporation 1993 Employee Stock
Option Plan *
13 Annual Report to Stockholders for the year ended December
31, 1997 (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 Coopers & Lybrand L.L.P. *
18
20
27.A Financial Data Schedule for the year ended December 31,
1997 (electronic filing only) *
27.B Restated Financial Data Schedule for the quarter ended
March 30, 1997 (electronic filing only)*
27.C Restated Financial Data Schedule for the quarter ended
June 29, 1997 (electronic filing only)*
27.D Restated Financial Data Schedule for the quarter ended
September 28, 1997 (electronic filing only)*
27.E Restated Financial Data Schedule for the quarter ended
March 31, 1996 (electronic filing only)*
27.F Restated Financial Data Schedule for the quarter ended
June 30, 1996 (electronic filing only)*
27.G Restated Financial Data Schedule for the quarter ended
September 29, 1996 (electronic filing only)*
27.H Restated Financial Data Schedule for the year ended
December 31, 1996 (electronic filing only)*
27.I Restated Financial Data Schedule for the year ended
December 31, 1995 (electronic filing only)*
27.J Restated Financial Data Schedule for the year ended
December 31, 1994 (electronic filing only)*
* Filed herewith
19