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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2006
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: 0-20206
PERCEPTRON, INC.
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2381442
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
47827 Halyard Drive
Plymouth, Michigan 48170-2461
(Address of Principal Executive Offices)
(734) 414-6100
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value The NASDAQ Stock Market LLC
Rights to Purchase Preferred Stock
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
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 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. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the voting stock held as of the registrant's most
recently completed second fiscal quarter by non-affiliates of the registrant,
based upon the closing sale price of the Common Stock on December 31, 2005, as
reported by the NASDAQ National Market System, was approximately $56,400,000
(assuming, but not admitting for any purpose, that all directors and executive
officers of the registrant are affiliates).
The number of shares of Common Stock, $0.01 par value, issued and outstanding as
of September 18, 2006, was 8,323,323.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document, to the extent specified in this report, are
incorporated by reference in Part III of this report:
Document Incorporated by reference in:
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Proxy Statement for 2006 Part III, Items 10-14
Annual Meeting of Shareholders
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PART I
ITEM 1: BUSINESS
GENERAL
Perceptron, Inc. ("Perceptron" or the "Company") designs, develops, manufactures
and markets information-based measurement and inspection solutions for process
improvement. Perceptron's product offerings are designed to improve quality,
increase productivity and decrease costs in manufacturing and product
development. Among the solutions offered by the Company are: 1) Laser-based
gauging systems that provide 100% in-line measurement for reduction of process
variation; 2) Systems that guide robots in a variety of automated assembly
applications; 3) Systems that inspect the quality of painted surfaces, and; 4)
Technology components and software for the Coordinate Measurement Machine (CMM),
portable CMM, wheel alignment, reverse engineering, digitizing, inspection and
forest products industry.
The Company's current principal products are based upon proprietary
three-dimensional image processing and AutoSolve(TM) feature extraction software
algorithms combined with the TriCam(R) three-dimensional object imaging
technology. TriCam(R) technology uses structured laser light triangulation
techniques to obtain accurate three-dimensional measurements. TriCam(R) systems
are used to measure formed parts for reduction of process variation, to provide
robot guidance sensing for automated assembly tasks and to improve the speed and
lower the cost of wheel alignment in final assembly operations.
The Company has recently announced the introduction of a new line of electronic
inspection products. This new line will be distributed through wholesale and
retail distribution networks and will target both the professional tradesmen and
the do-it-yourself homeowner. The products leverage the Company's strong
technical expertise in electronics, optics, and image processing.
The Company was incorporated in Michigan in 1981 and is headquartered at 47827
Halyard Drive, Plymouth, Michigan 48170-2461, (734) 414-6100. The Company also
has operations in Munich, Germany; Voisins le Bretonneux, France; Vitoria,
Spain; Sao Paulo, Brazil, Tokyo, Japan, and Singapore.
MARKETS
The Company services multiple markets, with the largest being the automotive
industry. The Company has product offerings encompassing virtually the entire
automobile manufacturing process, including product development, manufacturing
process development and implementation, stamping and fabrication, body shop,
paint shop, trim, chassis and final assembly. The Company has recently announced
the introduction of a new line of electronic inspection products that will be
distributed through wholesale and retail distribution networks targeting the
professional tradesmen and the do-it-yourself homeowner. The Company believes
there are applications for its three-dimensional measurement systems in other
industrial and commercial applications. The foregoing statement is a
"forward-looking statement" within the meaning of the Securities Exchange Act of
1934, as amended ("Exchange Act"). See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Safe Harbor
Statement" and Item 1A, "Risk Factors", for a discussion of a number of
uncertainties which could cause actual results to differ materially from those
set forth in the forward-looking statement.
PRODUCTS AND APPLICATIONS
AUTOMATED SYSTEMS
AutoGauge(R): These systems are used in the assembly and fabrication plants of
many of the world's leading auto manufacturers and their suppliers to contain,
correct and control the quality of body structures. AutoGauge(R) systems are
placed directly in-line to automatically measure critical dimensional
characteristics of automotive vehicles, sub-assemblies and parts using
non-contact, laser-based sensors.
AutoGauge(R) is built on a hardware, software and communications platform called
IPNet(R). The IPNet(R) platform uses Internet technology to disseminate critical
manufacturing and quality information on a real-time basis throughout a plant or
enterprise. IPNet(R) also communicates to wireless devices and web phones. Other
advantages of the IPNet(R) platform include: A Microsoft Windows(R) based
architecture allowing integration of third party hardware and software, a new
graphics based user interface, and greater flexibility to distribute sensors
throughout the manufacturing process at lower cost.
AutoGauge(R) has the ability to provide hybrid systems containing both
fixed-mounted sensors and robot-mounted sensors. This ability provides
automotive manufacturers with the flexibility to measure multiple vehicle styles
on a single assembly line while maintaining their high-speed production rates.
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AutoFit(R): These systems are used in automotive assembly plants to contain,
correct and control the fit of exterior body panels. The system automatically
measures, records and displays the gap and flushness of parts most visible to
the automobile consumer such as gaps between front and rear doors, hoods and
fenders, and deck lids and rear quarter panels. The TriCam(R) sensor has been
enhanced to enable gap and flushness to be measured in several parts of the
manufacturing process: in the body shop during assembly of non-painted vehicles,
and in the final assembly area after the vehicle has been painted. AutoFit(R)
has the ability to measure vehicles while in motion along the assembly line or
in a stationary position.
AutoScan(R): These systems provide a fast, non-contact method of gathering data
for the analysis of the surface contour of a part or product. These systems use
a robot mounted Contour Probe(R) sensor specifically designed to "scan" a part
as the robot moves throughout its path. The AutoScan(R) system measures and
collects the "point cloud data" required for contour analysis by third party
analysis software. This allows the part's shape to be automatically scanned and
compared to a computer-generated design.
AutoSpect(R): These in-line, non-contact systems are used in auto assembly
plants to monitor and measure the quality of the vehicle's paint finish. The
system measures and generates objective, repeatable, reproducible ratings of the
painted surface. AutoSpect(R) systems are fully automatic and monitor 100% of
painted vehicle production. AutoSpect(R) measures the key elements of a paint
finish most visible to the consumer: gloss, orange peel, and DORI (distinctness
of reflected image). The AutoSpect(R) system has been upgraded to the IPNet(R)
platform and shares many of the same components as the AutoGauge(R) system.
AutoGuide(R): These robot guidance systems were developed in response to the
increasing use of robots for flexible, automated assembly applications. These
systems utilize Perceptron sensors and measurement technology to improve the
accuracy of robotic assembly operations. AutoGuide(R) systems calculate the
difference between theoretical and actual relationships of a robot and the part
being assembled and send compensation data, in six axes, to the robot. Robotic
applications supported by AutoGuide(R) include windshield insertion, roof
loading, seat loading, hinge mounting, door attachment and sealant applications.
TECHNOLOGY COMPONENTS
ScanWorks(R): The Company provides ScanWorks(R) products to a variety of markets
through third party original equipment manufacturers ("OEMs"), system
integrators and value-added resellers ("VARs"). These products target the
digitizing, reverse engineering, and inspection markets.
ScanWorks(R) is a hardware/software component set that allows customers to add
digitizing capabilities to their machines or systems. The use of the
ScanWorks(R) software and the Contour Probe(R) sensor enables users to collect,
display, manipulate and export large sets of "point cloud data" from portable
CMMs.
ToolKit is a software solution enabler used by CMM manufacturers, system
integrators and application software developers. It enables the integration of
Perceptron's laser-based scanning technology into their proprietary systems.
Non-Contact Wheel Alignment Components (NCA): NCA components include
WheelWorks(R) software and sensors based upon the TriCam(R) design. These
technology components offer a fast, accurate, non-contact method of aligning
wheels during the automotive assembly process. The Company supplies NCA
components to multiple wheel alignment machine OEMs in Europe, Asia and North
America.
Forest Products: Under the terms of a Sensor Supply and Manufacturing License
Agreement between the Company and U.S. Natural Resources, Inc., (USNR), ("Sensor
Supply Agreement"), the Company continues to manufacture and supply TriCam(R)
sensors to USNR for use in various optimizing applications. In August 2003, the
Company ceased the manufacture of LASAR(R) sensors and, as required by the terms
of the Sensor Supply Agreement, the Company granted a non-exclusive, perpetual
worldwide license to USNR to manufacture LASAR(R) sensors primarily intended for
sale to operators of wood processing facilities (e.g., sawmills, planer mills,
panel mills, etc.).
VALUE ADDED SERVICES
The Company provides additional services including: training, field service,
launch support services, consulting services, maintenance agreements, repairs,
upgrades, spare part sales and software tools.
COMMERCIAL PRODUCTS
The Company has recently announced the introduction of a new line of electronic
inspection products. This new line of products will target both the professional
tradesmen and the do-it-yourself homeowner. The products leverage the Company's
strong technical expertise in electronics, optics, and image processing. The
first product in this line is at a manufacturing stage and will be supplied to
Ridge Tool Company pursuant to a long-term supply agreement. The agreement has
an initial term of three years and provides a fixed price for orders by Ridge
Tool of products covered by the agreement. As long as minimum purchase
requirements are satisfied, Ridge Tool will have exclusive rights to sell
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the covered products in its markets. Perceptron will also provide Ridge Tool
with the first opportunity to review new developments with respect to the
covered products. The products will be sold by Ridge Tool through its trade and
industrial sales network as well as through do-it-yourself (DIY) retail outlets.
SALES AND MARKETING
The Company markets its products directly to end users, and through system
integrators, VARs and OEMs.
The Company's direct sales efforts are led by the Company's account executives.
These account executives develop a close consultative selling relationship with
the Company's customers. Perceptron's senior management works in close
collaboration with customers' executives. The Company also provides technology
components to selected system integrators, OEMs and VARs that integrate the
Company's products into their systems for sales to end user customers.
The Company's principal customers have historically been automotive companies
that the Company either sells to directly or through system integrators or OEMs.
The Company's products are typically purchased for installation in connection
with re-tooling programs undertaken by these companies. The number and timing of
re-tooling programs vary from year to year and are subject to postponement by
customers due to economic conditions or otherwise. Because the Company's annual
sales are dependent on the timing of customers' re-tooling programs, annual
aggregate sales and sales by customer vary significantly from year to year, as
do the Company's largest customers. For the fiscal year ended June 30, 2006,
approximately 38% of total net sales were derived from the Company's four
largest automotive customers (General Motors, Volkswagen, BMW and Peugeot
Citroen). For the fiscal year ended June 30, 2006, approximately 9% of net sales
were to system integrators and OEMs for the benefit of the same four automotive
customers. For the fiscal years ended June 30, 2005 and 2004, approximately 40%
of total net sales were derived from the Company's four largest automotive
customers (General Motors, Ford, DaimlerChrysler and Volkswagen). For the fiscal
years ended June 30, 2005 and 2004, approximately, 13% and 12%, respectively, of
net sales were to system integrators and OEMs for the benefit of the same four
automotive customers. These numbers reflect consolidations that have occurred
within the automotive industry. During the fiscal year ended June 30, 2006,
sales to General Motors were 25.4% of the Company's total net sales.
In fiscal year 2002, the Company sold substantially all of the assets of its
Forest Products business unit. As part of the sale, the Company and USNR entered
into a Covenant Not to Compete dated March 13, 2002. The Company agreed, among
other matters, for a period of ten years not to compete with USNR in any
business in which the Forest Products business unit was engaged at any time
during the three-year period prior to the closing of the transaction, and for so
long as USNR is a customer of the Company, not to sell products or services
intended primarily for operators of wood processing facilities or license any
intellectual property to any third party primarily for use in any wood
processing facility.
The Company's commercial products will be distributed through third parties with
marketing knowledge and distribution channels in the wholesale and retail
market.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of final assembly,
testing and integration of the Company's software with individual components
such as printed circuit boards manufactured by third parties according to the
Company's designs. The Company believes a low level of vertical integration
gives it significant manufacturing flexibility and minimizes total product
costs.
The Company purchases a number of component parts and assemblies from single
source suppliers. With respect to most of its components, the Company believes
that alternate suppliers are readily available. Component supply shortages in
certain industries, including the electronics industry, have occurred in the
past and are possible in the future due to imbalances in supply and demand.
Significant delays or interruptions in the delivery of components or assemblies
by suppliers, or difficulties or delays in shifting manufacturing capacity to
new suppliers, could have a material adverse effect on the Company.
The recently announced Commercial products will be manufactured for the Company
by subcontractors located in China.
INTERNATIONAL OPERATIONS
Europe: The Company's European operations contributed approximately 33%, 36%,
and 42%, of the Company's net sales during the fiscal years ended June 30, 2006,
2005 and 2004, respectively. The Company's wholly-owned subsidiary, Perceptron
Europe B.V. ("Perceptron B.V."), formed in The Netherlands, holds a 100% equity
interest in Perceptron (Europe) GmbH ("Perceptron GmbH"). Perceptron GmbH is
located in Munich, Germany and is the operational headquarters for the European
market. Perceptron GmbH holds a 100% interest in Perceptron E.U.R.L. located in
Voisins le Bretonneux, France and a 100% interest in Perceptron Iberica SL
located in Vitoria, Spain. At June 30, 2006, the Company employed 62 people in
its European operations.
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Asia: The Company operates a direct sales, application and support office in
Tokyo, Japan to service customers in Asia. In fiscal 2006, the Company opened an
office in Singapore.
South America: The Company has a direct sales, application and support office in
Sao Paulo, Brazil to service customers in South America.
The Company's foreign operations are subject to certain risks typically
encountered in such operations, including fluctuations in foreign currency
exchange rates and controls, expropriation and other economic and local policies
of foreign governments, and the laws and policies of the U.S. and local
governments affecting foreign trade and investment. For information regarding
net sales and identifiable assets of the Company's foreign operations, see Note
11 to the Consolidated Financial Statements, "Geographic Information".
COMPETITION
The Company believes that it provides the best and most complete solutions to
its customers in terms of system capabilities and support, at a competitive
price for the value provided, which it believes are the principal competitive
factors in these markets. There are a number of companies that sell similar
and/or alternative technologies and methods into the same markets and regions as
the Company.
The Company believes that there may be other entities, some of which may be
substantially larger and have substantially greater resources than the Company,
which may be engaged in the development of technology and products, that could
prove to be competitive with those of the Company. In addition, the Company
believes that certain existing and potential customers may be capable of
internally developing their own technology. There can be no assurance that the
Company will be able to successfully compete with any such entities, or that any
competitive pressures will not result in price erosion or other factors, which
will adversely affect the Company's financial performance.
BACKLOG
As of June 30, 2006, the Company had a backlog of $18.8 million, compared to
$18.0 million at June 30, 2005. Most of the backlog is subject to cancellation
by the customer. The level of order backlog at any particular time is not
necessarily indicative of the future operating performance of the Company. The
Company expects to be able to fill substantially all of the orders in its
backlog by June 30, 2007.
RESEARCH AND DEVELOPMENT
The Company has multiple development initiatives focused on new products to:
increase penetration in existing markets; expand into new and adjacent markets;
and to diversify into new, non-adjacent markets. The Company also has multiple
development initiatives focused on the continuous improvement of our existing
products and systems to: reduce material and installation costs; to enhance
performance; to add new features and functionality; and to incorporate
appropriate new technologies as they emerge.
The Company's research, development and engineering activities are currently
focused on: high-accuracy, laser-based dimensional sensors; high-accuracy,
high-throughput scanning sensors; complex feature recognition algorithms;
specialized three-dimensional metrology software; manufacturing process display
and analysis software; control system and robotic interface software; related
cell and system hardware and new product initiatives. As of June 30, 2006, 49
persons employed by the Company were focused primarily on research, development
and engineering.
For the fiscal years ended June 30, 2006, 2005 and 2004, the Company's research,
development and engineering expenses were $7.8 million, $7.2 million and $7.0
million, respectively.
PATENTS, TRADE SECRETS AND CONFIDENTIALITY AGREEMENTS
As of June 30, 2006, the Company has been granted 27 U.S. patents and has
pending 6 U.S. patent applications, which relate to various products and
processes manufactured, used, and/or sold by the Company. The Company also has
been granted 17 foreign patents in Canada, Europe and Japan and has 23 patent
applications pending in foreign locations. The U.S. patents expire from 2007
through 2025 and the Company's existing foreign patent rights expire from 2008
through 2023. In addition, the Company holds perpetual licenses to more than 41
other U.S. patents including rights to practice 6 patents for non-forest product
related applications that were assigned to USNR in conjunction with the sale of
the Forest Products business unit in 2002. The expiration dates for these
licensed patents range from 2006 to 2020.
The Company has registered, and continues to register, various trade names and
trademarks including Perceptron(R), AutoGauge(R), IPNet(R), AutoFit(R),
AutoGuide(R), AutoScan(R), AutoSolve(R), Contour Probe(R), ScanWorks(R),
TriCam(R), WheelWorks(R), Visual Fixturing(R) and LASAR(R), among others, which
are used in connection with the conduct of its business.
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Perceptron's products include hardware (camera, lens, etc.) for scanning an
image and imbedded software (extraction software algorithms) to convey the
results of the scan to the customer. The hardware and software operate and are
sold as one product. Perceptron does not market its software algorithms as a
separate item distinct from the scanning product. The Company's software
products are copyrighted and generally licensed to customers pursuant to license
agreements that restrict the use of the products to the customer's own internal
purposes on designated Perceptron equipment. The licensing language conveys the
proprietary nature of the Company's product.
The Company also uses non-disclosure agreements with employees, consultants and
other parties.
There can be no assurance that any of the above measures will be adequate to
protect the Company's intellectual property or other proprietary rights.
Effective patent, trademark, copyright and trade secret protection may be
unavailable in certain foreign countries.
The Company has been informed that certain of its customers have received
allegations of possible patent infringement involving processes and methods used
in the Company's products. Certain of these customers, including customers who
were parties to patent infringement suits relating to this matter, have settled
such claims. Management believes that the processes used in the Company's
products were independently developed without utilizing any previously patented
process or technology. Because of the uncertainty surrounding the nature of any
possible infringement and the validity of any such claim or any possible
customer claim for indemnity relating to claims against the Company's customers,
it is not possible to estimate the ultimate effect, if any, of this matter on
the Company's financial statements.
The Company has licensed certain of the Company's patents relating to
non-contact wheel alignment systems to another company on a non-exclusive basis.
EMPLOYEES
As of June 30, 2006, the Company employed 241 persons. None of the employees is
covered by a collective bargaining agreement and the Company believes its
relations with its employees to be good.
AVAILABLE INFORMATION
The Company's Internet address is www.perceptron.com. There the Company makes
available, free of charge, its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and any amendments to those reports,
filed or furnished after the date of this Form 10-K, as soon as reasonably
practicable after the Company electronically files such material with, or
furnishes it to, the Securities and Exchange Commission ("SEC"). These reports
can be accessed through the Company section of the website. The information
found on the Company's website is not part of this or any report the Company
files with, or furnishes to, the SEC.
ITEM 1A: RISK FACTORS
An investment in our Common Stock involves numerous risks and uncertainties. You
should carefully consider the following information about these risks. Any of
the risks described below could result in a significant or material adverse
effect on our future results of operations, cash flows or financial condition.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties that we are unaware of, or that we currently
deem immaterial, also may become important factors that adversely affect our
business in the future. We believe that the most significant of the risks and
uncertainties we face are as follows:
OUR REVENUES ARE PRINCIPALLY DERIVED FROM THE SALE OF PRODUCTS FOR USE IN THE
GLOBAL AUTOMOTIVE MARKET, PARTICULARLY BY MANUFACTURERS BASED IN THE UNITED
STATES AND WESTERN EUROPE. THESE MANUFACTURERS HAVE EXPERIENCED PERIODIC
DOWNTURNS IN THEIR BUSINESSES THAT COULD ADVERSELY AFFECT THEIR LEVEL OF
PURCHASES OF OUR PRODUCTS.
Our revenues are principally derived from the sale of products for use in the
automotive industry, particularly to manufacturers based in the United States
and Western Europe. As a result, our ability to sell our systems and solutions
to automotive manufacturers and suppliers is affected by periodic downturns in
the global automotive industry.
New vehicle tooling programs are the most important selling opportunity for our
automotive related sales. The number and timing of new vehicle tooling programs
can be influenced by a number of economic factors. Our customers only launch a
limited number of new car programs in any given year because of the time and
financial resources required. From a macro perspective we continue to assess the
global economy and its likely effect on our automotive customers and markets
served. We continue to view the automotive industry's focus on introducing new
vehicles more frequently to satisfy their customers' changing requirements, as
well as their continuing focus on improved quality, as positive indicators for
new business. However, because of the current economic downturn being
experienced by our principal United States and Western Europe based customers,
those customers could determine to reduce their number of new car programs. We
are experiencing continued pricing pressures from our customers, particularly
our automotive
6
customers, because of the current economic downturns in their operations. These
pricing pressures would adversely affect the margins we realize on the sale of
our products and, ultimately, our profitability.
OUR FUTURE SUCCESS IS DEPENDENT UPON OUR ABILITY TO IMPLEMENT OUR LONG-TERM
GROWTH STRATEGY.
We realize that we are vulnerable to fluctuations in the global automotive
industry. Our future success is dependent upon our ability to implement our
long-term strategy to expand our customer base in our automotive markets and to
expand into new markets. Currently, we are focusing on the successful
introduction of our two newly released Automated Systems products, AutoFit(R)
and AutoScan(R), which are designed to expand our product offerings in our
worldwide automotive markets, and the continued development of enhanced versions
of our ScanWorks(R) product line for sale within and outside the automotive
markets. We have also initiated plans to achieve sales growth in largely
untapped geographic sales areas, including emerging automotive markets in Asia
and Eastern Europe and the expansion of our business with current customers in
Japan. We also continue to explore opportunities for expansion into
non-automotive markets. However, there are a number of uncertainties involved in
our long-term strategy over which we have no or limited control, including:
- The quality and cost of competitive products already in existence
or developed in the future.
- The level of interest existing and potential new customers may
have in our existing and new products and technologies.
- Our ability to resolve technical issues inherent in the
development of new products and technologies.
- Our ability to identify and satisfy market needs.
- Our ability to identify satisfactory distribution networks.
- General product development and commercialization difficulties.
- Rapid or unexpected technological changes.
- General product demand and market acceptance risks.
- Our ability to successfully compete with alternative and similar
technologies.
- Our ability to attract the appropriate personnel to effectively
represent, install and service our products.
- The effect of economic conditions.
Even if we are able to expand our customer base and markets, the new revenues we
derive may not offset declines in revenues from our current products, especially
our AutoGauge(R) products. We also may not be able to generate profits from
these new customers or markets at the same level as we generate from our current
business. There can be no assurance that we will be able to expand our customer
base and markets or successfully execute our strategies in a fashion to maintain
or increase our revenues and profits.
WE HAVE RECENTLY ANNOUNCED THE INTRODUCTION OF A NEW LINE OF PRODUCTS FOR SALE
IN A NEW MARKET. WE COULD EXPERIENCE UNANTICIPATED DIFFICULTIES IN BRINGING THIS
PRODUCT TO MARKET THAT WOULD ADVERSELY AFFECT OUR FINANCIAL RESULTS OF OPERATION
AND DIVERT THE ATTENTION OF OUR MANAGEMENT.
We recently announced the execution of a long term supply agreement for the sale
of a new line of electronic inspection products to retail consumers. In addition
to the uncertainties inherent in introducing new products discussed above, we
also face uncertainties resulting from the fact that this would be the first
time we have produced products for the consumer market, manufactured products in
China through subcontractors, and distributed products through a retail
distribution network. As a result, we could experience unforeseen difficulties
in bringing these products to market, including:
- Product quality problems and costs to correct those problems
resulting form design or manufacturing defects.
- Warranty claims at greater levels than anticipated.
- Product orders at significantly greater volumes than our
subcontractors' current manufacturing capabilities.
- The speed at which competitors' products will be brought to
market.
- The need and cost to revise our product offerings to respond to
competitors' product introductions or unanticipated consumer
preferences or negative reactions to our products.
Handling such unforeseen difficulties could require significant management time
and divert their attention from our core business operations. In that event,
these unforeseen difficulties and management diversions could adversely affect
our operating results.
OUR REVENUES ARE DERIVED FROM A SMALL NUMBER OF CUSTOMERS CONCENTRATED IN THE
AUTOMOTIVE INDUSTRY, SO THAT THE LOSS OF ANY ONE OF THESE CUSTOMERS COULD RESULT
IN A REDUCTION IN OUR REVENUES AND PROFITS.
We sell a majority of our systems and solutions to a small number of customers
that consist primarily of automotive manufacturers and suppliers in North
American and Western Europe.
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With such a large percentage of our revenues coming from such a small and highly
concentrated group of customers, we are susceptible to a substantial risk of
losing revenues if these customers stop purchasing our products or reduce their
purchases of our products. In addition, we have no control over whether these
customers will continue to purchase our systems and solutions in volumes or at
prices sufficient to generate profits for us.
OUR FUTURE COMMERCIAL SUCCESS DEPENDS UPON OUR ABILITY TO MAINTAIN A COMPETITIVE
TECHNOLOGICAL POSITION IN OUR MARKETS, WHICH ARE CHARACTERIZED BY CONTINUAL
TECHNOLOGICAL CHANGE.
Technology plays a key role in the systems and solutions that we produce. Our
ability to sell our products to customers is directly influenced by the
technology used in our systems and solutions. With the rapid pace at which
technology is changing, there is a possibility that our customers may require
more technologically advanced systems and solutions than what we may be capable
of producing.
Technological developments could render actual and proposed products or
technologies of ours uneconomical or obsolete.
There also is a possibility that we may not be able to keep pace with our
competitors' products. In that case, our competitors may make technological
improvements to their products that make them more desirable than our products.
Due to the evolving shift in focus from automotive end-of-line gauging to
solutions that service process centers factory-wide, we expect that sales of our
AutoGauge(R) systems, designed for end-of-line gauging, will slow. Our near-term
focus for growth has been on the successful introduction of our two newly
released automated systems products, AutoFit(R) and AutoScan(R), which are
designed to expand our product offerings in our worldwide automotive markets,
and the continued development of enhanced versions of our ScanWorks(R) product
line.
Our growth and future financial performance depend upon our ability to introduce
new products and enhance existing products that include the latest technological
advances and customer requirements. We may not be able to introduce new products
successfully or achieve market acceptance for such products. Any failure by us
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on our business. Accordingly, we believe
that our future commercial success will depend upon our ability to develop and
introduce new cost-effective products and maintain a competitive technological
position.
WE ARE DEPENDENT ON PROPRIETARY TECHNOLOGY. IF OUR COMPETITORS DEVELOP COMPETING
PRODUCTS THAT DO NOT VIOLATE OUR INTELLECTUAL PROPERTY RIGHTS OR SUCCESSFULLY
CHALLENGE THOSE RIGHTS, OUR REVENUES AND PROFITS WILL BE ADVERSELY AFFECTED.
Our products contain features that are protected by patents, trademarks, trade
secrets, copyrights, and contractual rights.
Despite these protections, there is still a chance that competitors may use
these protected features in their products as a result of our inability to keep
our trade secrets confidential, or in violation of our intellectual property
rights or following a successful challenge to those rights. The prosecution of
infringement claims against third parties and the defense of legal actions
challenging our intellectual property rights could be costly and require
significant attention from management. Because of the small size of our
management team, this could result in the diversion of management's attention
from day-to-day operations.
There also is a chance that competitors may develop technology that performs the
same functions as our products without infringing upon our exclusive rights. It
is possible that competitors may "reverse engineer" those features of our
products that are not protected by patents, trademarks and trade secrets. If a
competitor is able to "reverse engineer" an unprotected feature successfully,
the competitor may gain an understanding of how the feature works and introduce
similar products to compete with our products.
Because our new retail consumer products will be manufactured in China, we are
at a greater risk of competitors misappropriating our intellectual property
included in those products or reverse engineering those products. As a result,
we may have a more limited ability, and significantly greater costs, to enforce
our intellectual property rights in those products. Constant technological
improvement of those products will be particularly important to keep the
products competitive in their markets.
WE COULD BECOME INVOLVED IN COSTLY LITIGATION ALLEGING PATENT INFRINGEMENT.
We have been informed that certain of our customers have received allegations of
possible patent infringement involving processes and methods used in our
products. Certain of these customers, including one customer who was a party to
a patent infringement suit relating to this matter, have settled such claims. We
believe that the processes used in our products were independently developed
without utilizing any previous patented process or technology. Because of the
8
uncertainty surrounding the nature of any possible infringement and the validity
of any such claim or any possible customer claim for indemnity relaying to
claims against our customers, it is not possible to estimate the ultimate
effect, if any, of this matter on our financial position.
The defense of patent infringement litigation could be costly and require
significant attention from management. Because of the small size of our
management team, this could result in the diversion of management's attention
from day-to-day operations.
A NUMBER OF NEW COMPETITORS HAVE RECENTLY ENTERED OUR MARKETS, OR ARE DEVELOPING
PRODUCTS TO COMPETE WITH OUR PRODUCTS, WHICH COULD RESULT IN A REDUCTION IN OUR
REVENUES THROUGH LOST SALES OR A REDUCTION IN PRICES.
We are aware of a number of companies that have recently entered a number of our
markets selling products using similar or alternative technologies and methods.
We believe that there may be other companies, some of whom may be substantially
larger and have substantially greater resources than us, which may be engaged in
the development of technology and products for some of our markets that could
prove to be competitive with ours. We believe that the principal competitive
factor in our markets is the total capability that a product offers as a process
control system. In some markets, price and value added are the principal
competitive factors. While we believe that our products compete favorably, it is
possible that these new competitors could capture some of our sales
opportunities or force us to reduce prices in order to complete the sale.
We believe that certain existing and potential customers may be capable of
internally developing their own technology. This could cause a decline in sales
of our products to those customers.
OUR BUSINESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.
Our success depends in large part upon the continued service of our executives
and key employees, including those in engineering, technical, sales and
marketing positions, as well as our ability to attract additional such employees
in the future. At times and in certain geographic markets, competition for the
type of highly skilled employees we require can be intense. The loss of key
personnel or the inability to attract new qualified key employees could
adversely affect our ability to implement our long-term growth strategy and have
a material adverse effect on our business.
WE MAY NOT BE ABLE TO COMPLETE BUSINESS OPPORTUNITIES AND ACQUISITIONS AND OUR
PROFITS COULD BE NEGATIVELY AFFECTED IF WE DO NOT SUCCESSFULLY OPERATE THOSE
THAT WE DO COMPLETE.
We will evaluate from time to time business opportunities that fit our strategic
plans. There can be no assurance that we will identify any opportunities that
fit our strategic plans or will be able to enter into agreements with identified
business opportunities on terms acceptable to us.
There is also no assurance that we will be able to effectively integrate
businesses that we may acquire due to the significant challenges in
consolidating functions and integrating procedures, personnel, product lines,
technologies and operations in a timely and efficient manner. The integration
process may require significant attention from management and devotion of
resources. Because of the small size of our management team, this could result
in the diversion of management's attention from day to day operations and impair
our relationships with current employees and customers.
We intend to finance any such business opportunities from available cash on
hand, existing credit facilities, issuance of additional stock or additional
sources of financing, as circumstances warrant. The issuance of additional
equity securities could be substantially dilutive to our stockholders. In
addition, our profitability may suffer because of acquisition-related costs,
debt service requirements or amortization costs for acquired intangible assets.
If we are not successful in generating additional profits from these
transactions, this dilution and these additional costs could cause our common
stock price to drop.
WE ARE EXPANDING OUR FOREIGN OPERATIONS, INCREASING THE POSSIBILITY THAT OUR
BUSINESS COULD BE ADVERSELY AFFECTED BY RISKS OF DOING BUSINESS IN FOREIGN
COUNTRIES.
We have significant operations outside of the United States and are currently
implementing a strategy to expand our operations outside of the United States,
especially in Eastern Europe and Asia.
Our foreign operations are subject to risks customarily encountered in such
foreign operations. For instance, we may encounter fluctuations in foreign
currency exchange rates, differences in the level of protection available for
our intellectual property, the impact of differences in language and local
business and social customs on our ability to market and sell our products in
these markets and transportation delays from our Chinese subcontractors. In
addition, we may be affected by U.S. laws and policies that impact foreign trade
and investment. Finally, we may be adversely affected by laws and policies
imposed by foreign governments in the countries where we have business
operations or sell our products. These laws and policies vary from jurisdiction
to jurisdiction.
9
BECAUSE OF OUR SIGNIFICANT FOREIGN OPERATIONS, OUR REVENUES AND PROFITS CAN VARY
SIGNIFICANTLY AS A RESULT OF FLUCTUATIONS IN THE VALUE OF THE UNITED STATES
DOLLAR AGAINST FOREIGN CURRENCIES.
Products that we sell in foreign markets are sometimes priced in currency of the
country where the customer is located. To the extent that the dollar fluctuates
against these foreign currencies, the prices of our products in U.S. dollars
also will fluctuate. As a result, our return on the sale of our products may
vary based on these fluctuations. We may use, from time to time, a limited
hedging program to minimize the impact of foreign currency fluctuations. These
transactions involve the use of forward contracts, typically mature within one
year and are designed to hedge anticipated foreign currency transactions. We may
use forward exchange contracts to hedge the net assets of certain of our foreign
subsidiaries to offset the translation and economic exposures related to our
investment in these subsidiaries. There is no guarantee that these hedging
transactions will protect against the fluctuations in the value of the dollar.
BECAUSE A LARGE PORTION OF OUR REVENUES ARE GENERATED FROM A LIMITED NUMBER OF
SIZEABLE ORDERS, OUR REVENUES AND PROFITS MAY VARY WIDELY FROM QUARTER TO
QUARTER AND YEAR TO YEAR.
A large portion of our revenues are generated from a limited number of sizeable
orders that are placed by a small number of customers. If the timing of these
orders is delayed from one quarter to the next, or from one year to the next, we
may experience fluctuations in our quarterly and annual revenues and operating
results.
The amount of revenues that we earn in any given quarter may vary based in part
on the timing of new vehicle programs in the global automotive industry. In
contrast, many of our operating expenses are fixed and will not vary from
quarter to quarter. As a result, our operating results may vary significantly
from quarter to quarter and from year to year.
THE TRADING PRICE OF OUR STOCK HAS BEEN VOLATILE.
The following factors may affect the market price of our Common Stock,
which can vary widely over time:
- announcements of new commercial products by us;
- announcements of new commercial products by our competitors;
- variations in our operating results;
- market conditions in the electronic and sensing industry;
- market conditions and stock prices in general; and
- the volume of our common stock traded.
BECAUSE OF THE LIMITED TRADING IN OUR COMMON STOCK, IT MAY BE DIFFICULT FOR
SHAREHOLDERS TO DISPOSE OF A LARGE NUMBER OF SHARES OF OUR COMMON STOCK IN A
SHORT PERIOD OF TIME OR AT THEN CURRENT PRICES.
Because of the limited number of shares of our Common Stock outstanding and the
limited number of holders of our Common Stock, only a limited number of shares
of our Common Stock trade on a daily basis. This limited trading in our Common
Stock makes it difficult to dispose of a large number of shares in a short
period of time. In addition, it is likely that the sale by a shareholder of a
large number of shares of our Common Stock over an extended period would depress
the price of our Common Stock.
WE DO NOT PLAN ON PAYING DIVIDENDS AND ARE RESTRICTED UNDER OUR LOAN AGREEMENT
FROM PAYING DIVIDENDS.
Our Board of Directors does not intend to declare or pay cash dividends on our
Common Stock. Instead, the Board intends to retain future earnings to finance
the development of our business. Furthermore, cash dividends are not permitted
under our bank credit agreement.
AS PERMITTED UNDER MICHIGAN LAW, OUR DIRECTORS ARE NOT LIABLE TO PERCEPTRON FOR
MONETARY DAMAGES RESULTING FROM THEIR ACTIONS OR INACTIONS.
Under our articles of incorporation, as permitted under the Michigan Business
Corporation Act, members of our Board of Directors are not liable for monetary
damages for any negligent or grossly negligent action that the director takes,
or for any negligent or grossly negligent failure of a director to take any
action. However, a director will remain liable for:
- intentionally inflicting harm on Perceptron or its shareholders;
- distributions that the director makes in violation of the
Michigan Business Corporation Act; and
- intentional criminal acts that the director commits.
However, we or our shareholders may seek an injunction, or other appropriate
equitable relief, against a director. Finally, liability may be imposed against
members of the Board of Directors under the federal securities laws.
10
WE ARE REQUIRED TO INDEMNIFY OUR OFFICERS AND DIRECTORS IF THEY ARE INVOLVED IN
LITIGATION AS A RESULT OF THEIR SERVING AS OFFICERS OR DIRECTORS OF PERCEPTRON,
WHICH COULD REDUCE OUR PROFITS AND CASH AVAILABLE TO OPERATE OUR BUSINESS.
Our by-laws require us to indemnify our officers and directors. We may be
required to pay judgments, fines, and expenses incurred by an officer or
director, including reasonable attorneys' fees, as a result of actions or
proceedings in which such officers or directors are involved by reason of being
or having been an officer or director of Perceptron. Funds paid in satisfaction
of judgments, fines and expenses would reduce our profits and may be funds we
need for the operation of our business and the development of products. This
could cause our stock price to drop.
OUR PROFITS WILL BE REDUCED AS A RESULT OF OUR COMPLIANCE WITH NEW SEC RULES
RELATING TO OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING.
Beginning with our annual report on Form 10-K for the fiscal year ending June
30, 2008, we will be required by SEC rules to include a report of management on
Perceptron's internal control over financial reporting in our annual reports. In
addition, the independent registered public accounting firm auditing our
financial statements will be required to provide an attestation report on
management's assessment of our internal controls.
We will expend significant resources in developing the necessary documentation
and testing procedures required by these new rules, which could adversely affect
our profitability.
IF MANAGEMENT IS NOT ABLE TO PROVIDE A POSITIVE REPORT ON OUR INTERNAL CONTROLS
OVER FINANCIAL REPORTING, AND OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
IS NOT ABLE TO PROVIDE A POSITIVE ATTESTATION ON MANAGEMENT'S REPORT,
SHAREHOLDERS AND OTHERS MAY LOSE CONFIDENCE IN OUR FINANCIAL STATEMENTS, WHICH
COULD CAUSE OUR STOCK PRICE TO DROP.
Because of our relatively small size, we have a limited number of personnel in
our finance department to handle their existing responsibilities, as well as
compliance with the SEC's new rules relating to our internal controls over
financial reporting.
Accordingly, there can be no positive assurance that management will provide a
positive report on our internal controls or that we will receive a positive
attestation on that report from our independent registered public accounting
firm. In the event we identify significant deficiencies or material weaknesses
in our internal controls that we cannot remediate in a timely manner or we are
unable to receive a positive attestation from our independent auditors with
respect to our internal controls, investors and others may lose confidence in
the reliability of our financial statements. This could cause our stock price to
drop.
IF THE SUBCONTRACTORS WE RELY ON FOR COMPONENT PARTS DELAYED DELIVERIES OR
FAILED TO DELIVER PARTS MEETING OUR REQUIREMENTS, WE WOULD NOT BE ABLE TO
DELIVER PRODUCTS TO OUR CUSTOMERS IN A TIMELY FASHION AND OUR REVENUES AND
PROFITS WOULD BE REDUCED.
We rely on subcontractors for certain components of our products, including
outside subcontracting assembly houses to produce the circuit boards that we use
in our products. As a result, we have limited control over the quality and the
delivery schedules of components purchased from third parties. In addition, we
purchase a number of component parts from single source suppliers. If our
supplies of component parts meeting our requirements are significantly delayed
or interrupted, we would not be able to deliver products to our customers in a
timely fashion. This would result in a reduction in revenues and profits for
these periods. It is also possible, if our delay in delivering products to our
customer is too long, the customer will cancel its order, resulting in a
permanent loss of revenue and profit from that sale. From time to time, we have
experienced significant delays in the receipt of certain components, most
recently for our ScanWorks(R) systems.
Finally, although we believe that alternative suppliers are available,
difficulties or delays may arise if we shift manufacturing capacity to new
suppliers.
THE BOARD OF DIRECTORS HAS THE RIGHT TO ISSUE UP TO 1,000,000 SHARES OF
PREFERRED STOCK WITHOUT FURTHER ACTION BY SHAREHOLDERS. THE ISSUANCE OF THOSE
SHARES COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY
AND COULD BE USED TO PREVENT OR FRUSTRATE SHAREHOLDERS' ATTEMPTS TO REPLACE OR
REMOVE CURRENT MANAGEMENT.
Although no preferred stock currently is outstanding, we are authorized to issue
up to 1,000,000 shares of preferred stock. Preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the Board of Directors, without further action by shareholders, and may include
voting rights (including the right to vote as a series on particular matters),
the dividends payable thereon, liquidation payments, preferences as to
11
dividends and liquidation, conversion rights and redemption rights. In the event
that preferred stock is issued, the rights of the common stockholders may be
adversely affected. This could result in a reduction in the value of our Common
Stock.
The preferred stock could be issued to discourage, delay or prevent a change in
control of Perceptron. This may be beneficial to our management or Board of
Directors in a hostile tender offer or other takeover attempt and may have an
adverse impact on shareholders who may want to participate in the tender offer
or who favor the takeover attempt.
OUR COMMON STOCK RIGHTS PLAN COULD BE USED TO PREVENT OR FRUSTRATE HOSTILE
TENDER OFFERS.
We maintain a common stock rights plan. Under the plan, if any person acquires
15% or more our outstanding Common Stock, our shareholders, other than the
acquirer, will have the right to purchase shares of our Common Stock at half
their market price. The common stock rights plan discourages potential acquirers
from initiating tender offers for our Common Stock without the approval of the
Board of Directors. This may be beneficial to Perceptron's management or Board
of Directors in a hostile tender offer or other takeover attempt and may have an
adverse impact on shareholders who may want to participate in the tender offer
or who favor the takeover attempt.
ITEM 1B: UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2: PROPERTIES
Perceptron's principal domestic facilities consist of a 70,000 square foot
building located in Plymouth, Michigan, owned by the Company. In addition, the
Company leases a 1,500 square meter facility in Munich, Germany and leases
office space in Voisins le Bretonneux, France, Sao Paulo, Brazil, Tokyo, Japan
and Singapore. The Company believes that its current facilities are sufficient
to accommodate its requirements through fiscal year 2007.
ITEM 3: LEGAL PROCEEDINGS
The Company is a party to a suit filed by Industries GDS, Inc., Bois Granval GDS
Inc., and Centre de Preparation GDS, Inc. (collectively, "GDS") on or about
November 21, 2002 in the Superior Court of the Judicial District of Quebec,
Canada against the Company, Carbotech, Inc. ("Carbotech"), and U.S. Natural
Resources, Inc. ("USNR"), among others. The suit alleges that the Company
breached its contractual and warranty obligations as a manufacturer in
connection with the sale and installation of three systems for trimming and
edging wood products. The suit also alleges that Carbotech breached its
contractual obligations in connection with the sale of equipment and the
installation of two trimmer lines, of which the Company's systems were a part,
and that USNR, which acquired substantially all of the assets of the Forest
Products business unit from the Company, was liable for GDS' damages. USNR has
sought indemnification from the Company under the terms of existing contracts
between the Company and USNR. GDS seeks compensatory damages against the
Company, Carbotech and USNR of approximately $6.0 million using a June 30, 2006
exchange rate. GDS and Carbotech have filed for bankruptcy protection in Canada.
The Company intends to vigorously defend GDS' claims.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies - Litigation and Other
Contingencies" for a discussion of the Company's accounting policies regarding
legal proceedings and other contingencies.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2006.
12
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Perceptron's Common Stock is traded on The NASDAQ Stock Market's National Market
under the symbol "PRCP". The following table shows the reported high and low
sales prices of Perceptron's Common Stock for fiscal 2006 and 2005:
PRICES
-------------
LOW HIGH
----- -----
FISCAL 2006
Quarter through September 30, 2005 $6.18 $7.21
Quarter through December 31, 2005 $6.35 $7.52
Quarter through March 31, 2006 $6.90 $8.55
Quarter through June 30, 2006 $7.47 $8.66
FISCAL 2005
Quarter through September 30, 2004 $6.26 $7.43
Quarter through December 31, 2004 $6.37 $7.40
Quarter through March 31, 2005 $6.51 $8.40
Quarter through June 30, 2005 $6.37 $8.31
No cash dividends or distribution on Perceptron's Common Stock have been paid in
the past and it is not anticipated that any will be paid in the foreseeable
future. In addition, the payment of cash dividends or other distributions is
prohibited under the terms of Perceptron's revolving credit agreement with its
bank. See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources", for a discussion
of other restrictions on the payment of dividends.
The approximate number of shareholders of record on September 18, 2006, was 208.
The information pertaining to the securities the Company has authorized for
issuance under equity plans is hereby incorporated by reference to Item 12,
"Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters - Equity Compensation Plan Information". For more
information about the Company's equity compensation plans, see Note 9 of Notes
to the Consolidated Financial Statements, "Stock Incentive Plans", included in
Item 8 of this report.
The following table sets forth information concerning the Company's repurchases
of its Common Stock during the quarter ended June 30, 2006. All shares were
purchased pursuant to the Company's stock repurchase program described below.
(C) TOTAL NUMBER OF (D) APPROXIMATE DOLLAR
(A) TOTAL NUMBER SHARES PURCHASED AS PART VALUE OF SHARES THAT MAY
OF SHARES (B) AVERAGE PRICE OF PUBLICLY ANNOUNCED YET BE PURCHASED
PERIOD PURCHASED PAID PER SHARE PROGRAM UNDER THE PROGRAM
------ ---------------- ----------------- ------------------------ ------------------------
April 1-30, 2006 41,700 $8.24 41,700 $695,179
May 1-31, 2006 44,300 $8.03 44,300 $339,411
June 1-30, 2006 22,400 $7.96 22,400 $161,213
------- -------
Total 108,400 $8.09 108,400 $161,213
======= =======
On September 9, 2005, the Company's Board of Directors approved a stock
repurchase program authorizing the Company to repurchase up to $5.0 million of
the Company's Common Stock. The Company was authorized to buy shares of its
Common Stock on the open market or in privately negotiated transactions from
time to time, based on market prices. Pursuant to the authorization, the Company
repurchased 667,300 shares of Common Stock at an average price of $7.25 per
share during the fiscal year ended June 30, 2006. In July 2006, the Company
completed its fiscal 2006 stock repurchase program.
On August 7, 2006, the Company's Board of Directors approved a stock repurchase
program authorizing the Company to repurchase up to $3.0 million of the
Company's Common Stock through August 2007. The Company may buy shares of its
Common Stock on the open market or in privately negotiated transactions from
time to time, based on market prices. The program may be discontinued at any
time. The Company also announced that it has entered into a Rule 10b5-1 trading
plan ("Repurchase Plan") with Barrington Research Associates, Inc. to purchase
up to $3.0 million of the Company's Common Stock through August 2007 (less the
dollar amount of purchases by the Company outside the Repurchase Plan), in open
market or privately negotiated transactions, in accordance with the requirements
of Rule 10b-18.
13
ITEM 6: SELECTED FINANCIAL DATA
The selected statement of operations and balance sheet data presented below are
derived from the Company's consolidated financial statements and should be read
in conjunction with the Company's consolidated financial statements and notes
thereto and Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this report.
PERCEPTRON, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEARS ENDED
JUNE 30,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA: (1, 2)
Net sales $57,875 $54,892 $53,393 $54,679 $43,943
Gross profit 27,287 25,907 25,100 27,534 19,641
Operating income (loss) 4,368 4,695 5,630 8,548 1,170
Income (loss) before income taxes 4,927 5,186 6,653 6,124 759
Income (loss) from continuing operations 3,239 3,282 3,987 3,582 942
Discontinued operations -- -- -- -- (4,644)
Net income (loss) 3,239 3,282 3,987 3,582 (3,702)
Earnings (loss) per basic share:
Continuing operations $ 0.38 $ 0.37 $ 0.46 $ 0.43 $ 0.11
Discontinued operations -- -- -- -- (0.56)
Net income (loss) 0.38 0.37 0.46 0.43 (0.45)
Earnings (loss) per diluted share:
Continuing operations $ 0.35 $ 0.35 $ 0.43 $ 0.42 $ 0.11
Discontinued operations -- -- -- -- (0.56)
Net income (loss) 0.35 0.35 0.43 0.42 (0.45)
Weighted average common shares outstanding:
Basic 8,582 8,766 8,593 8,284 8,209
Diluted 9,200 9,437 9,327 8,622 8,213
AS OF JUNE 30,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital $42,652 $41,100 $36,777 $30,405 $24,824
Total assets 62,395 63,390 62,924 59,414 54,693
Long-term liabilities -- -- -- -- 1,040
Shareholders' equity 54,230 53,992 50,360 44,945 39,211
----------
(1) No cash dividends have been declared or paid during the periods presented.
(2) In fiscal 2002, the Company sold substantially all of the assets of its
Forest Products business unit. Accordingly, historical financial
information has been restated to present the Forest Products business unit
as a discontinued operation.
14
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Perceptron, Inc. ("Perceptron" or the "Company") designs, develops, manufactures
and markets information-based measurement and inspection solutions for process
improvement. Perceptron's product offerings are designed to improve quality,
increase productivity and decrease costs in manufacturing and product
development. The solutions offered by the Company are divided into three groups:
1) The Automated Systems Group made up of AutoGauge(R), AutoFit(R), AutoScan(R),
AutoSpect(R) and AutoGuide(R) products; 2) The Technology Components Group made
up of ScanWorks(R), Non-Contact Wheel Alignment and TriCam(R) sensors for the
forest products industry; and 3) The Value Added Services Group providing
consulting, training and non-warranty support services. The Company services
multiple markets, with the largest being the automotive industry. The Company's
primary operations are in North America, Europe and Asia.
The Company's financial base is very good, with no debt and approximately $25.2
million of cash at June 30, 2006, compared with $20.4 million of cash at June
30, 2005. In September 2005 the Company's Board of Directors authorized a stock
repurchase program of $5.0 million that was successful and resulted in the
repurchase of 687,300 shares by July 2006. At the Company's August board meeting
the Board of Directors approved a new program to purchase up to $3.0 million of
the Company's stock through August 2007.
During fiscal 2006 the Company implemented its plan to establish an office in
Singapore, relocate an experienced manager from North America, and add
application engineers in Singapore and Japan to execute the Company's growth
strategies in Asia. The sales growth initiatives in this region began to show
success during fiscal 2006 as evidenced by the sale of Automated Systems to
Japanese and Korean customers. The Company continues to believe that the
potential for sales growth in Japan, Korea, and China is very good, and as a
result additional personnel will be hired during fiscal 2007 to support sales
opportunities in this region.
In light of the weak European economy through the first three quarters of fiscal
2006, the Company partially completed its plan to hire sales personnel,
application engineers and trainers to support growth opportunities in Europe.
Personnel additions were primarily to support sale of the ScanWorks(R) product
line that has good growth potential in Europe.
The Company has recently announced the introduction of a new line of electronic
inspection products. This new line of products will target both the professional
tradesmen and the do-it-yourself homeowner. The products leverage the Company's
strong technical expertise in electronics, optics, and image processing. The
first product in this line is at a manufacturing stage and will be distributed
through a partner with marketing knowledge and distribution channels in the
wholesale and retail markets. The Company expects to realize sales of this
product during fiscal 2007.
The Company's sales are principally derived from the sale of products for use in
the automotive industry. New vehicle tooling programs are the most important
selling opportunity for the Company's automotive related sales. The number and
timing of new vehicle tooling programs can be influenced by the state of the
economy. Therefore, from a macro perspective the Company continues to assess the
global economy and its likely effect on the Company's automotive customers and
markets served. The Company is continuing its efforts to expand its
opportunities outside the automotive industry, principally through its
Technology Components Group and new product development efforts.
The foregoing statements in this "Overview" section are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" and Item 1A, "Risk Factors",
for a discussion of a number of uncertainties which could cause actual results
to differ materially from those set forth in the forward-looking statements.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2006, COMPARED TO FISCAL YEAR ENDED JUNE 30, 2005
Overview - The Company reported net income of $3.2 million or $0.35 per diluted
share, for the fiscal year ended June 30, 2006 compared with net income of $3.3
million, or $0.35 per diluted share, for the fiscal year ended June 30, 2005.
Specific line item results are described below.
15
Sales - Net sales of $57.9 million for fiscal 2006 were up $3.0 million, or
5.5%, compared with the same period one year ago. The following tables set forth
comparison data for the Company's net sales by product groups and geographic
location.
SALES (BY GROUP)
(in millions) 2006 2005 INCREASE/(DECREASE)
------------- ------------- -------------------
Automated Systems $43.3 74.8% $39.0 71.0% $ 4.3 11.0%
Technology Components 10.9 18.8% 11.2 20.4% (0.3) (2.7)%
Value Added Services 3.7 6.4% 4.7 8.6% (1.0) (21.3)%
----- ----- ----- ----- -----
Totals $57.9 100.0% $54.9 100.0% $ 3.0 5.5%
===== ===== ===== ===== =====
SALES (BY LOCATION)
(in millions) 2006 2005 INCREASE/(DECREASE)
------------- ------------- -------------------
North America $37.4 64.6% $33.1 60.3% $ 4.3 13.0%
Europe 18.9 32.6% 19.9 36.2% (1.0) (5.0)%
Asia 1.6 2.8% 1.9 3.5% (0.3) (15.8)%
----- ----- ----- ----- -----
Totals $57.9 100.0% $54.9 100.0% $ 3.0 5.5%
===== ===== ===== ===== =====
The higher level of sales in North America was primarily due to increased sales
of the Automated Systems product group and primarily reflected the number of new
vehicle programs and associated tooling requirements of customers in this
region. The sales decrease in Europe was impacted by a generally declining Euro
that based on conversion rates in effect during fiscal 2006, generated sales
that were approximately $0.7 million less than the comparable rates in fiscal
2005 would have yielded. Weak economic conditions in Europe also caused
customers to delay capital appropriation decisions that resulted in sales for
the Company's European subsidiary to decline slightly compared to one year ago.
The Company believes that the decline in sales of Value Added Services was a
function of customer requirements and did not represent a trend of lower sales
for this product group. The foregoing statements are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" and Item 1A, "Risk Factors",
for a discussion of a number of uncertainties which could cause actual results
to differ materially from those set forth in the forward-looking statements.
Bookings - The Company had new order bookings during fiscal 2006 of $58.7
million compared with new order bookings of $53.9 million during fiscal 2005.
The amount of new order bookings during any particular period is not necessarily
indicative of the future operating performance of the Company. The following
tables set forth comparison data for the Company's bookings by product groups
and geographic location.
BOOKINGS (BY GROUP)
(in millions) 2006 2005 INCREASE/(DECREASE)
------------- ------------- -------------------
Automated Systems $44.3 75.5% $39.1 72.5% $ 5.2 13.3%
Technology Components 10.0 17.0% 11.4 21.2% (1.4) (12.3)%
Value Added Services 4.4 7.5% 3.4 6.3% 1.0 29.4%
----- ----- ----- ----- -----
Totals $58.7 100.0% $53.9 100.0% $ 4.8 8.9%
===== ===== ===== ===== =====
BOOKINGS (BY LOCATION)
(in millions) 2006 2005 INCREASE/(DECREASE)
------------- ------------- -------------------
North America $36.5 62.2% $30.6 56.8% $ 5.9 19.3%
Europe 20.7 35.3% 21.6 40.1% (0.9) (4.2)%
Asia 1.5 2.5% 1.7 3.1% (0.2) (11.8)%
----- ----- ----- ----- -----
Totals $58.7 100.0% $53.9 100.0% $ 4.8 8.9%
===== ===== ===== ===== =====
16
The Automated Systems product group benefited from the number of new vehicle
programs and associated tooling requirements of customers in North America while
weak economic conditions in Europe caused customers to delay capital
appropriation decisions. The Company believes that the rate of new orders during
the year primarily reflected the timing of customer requirements. This was also
true for Technology Components, the only product group that experienced a
reduction in the level of new order bookings compared to last year. There was no
discernible change in Technology Component customers' purchasing decisions
during the year. The foregoing statements are "forward-looking statements"
within the meaning of the Securities Exchange Act of 1934, as amended. See Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Safe Harbor Statement" and Item 1A, "Risk Factors" for a discussion
of a number of uncertainties which could cause actual results to differ
materially from those set forth in the forward-looking statements.
Backlog - The Company's backlog was $18.8 million as of June 30, 2006 compared
with $18.0 million as of June 30, 2005. The following tables set forth
comparison data for the Company's backlog by product groups and geographic
location.
BACKLOG (BY GROUP)
(in millions) 2006 2005 INCREASE/(DECREASE)
------------- ------------- -------------------
Automated Systems $15.2 80.9% $14.0 77.8% $ 1.2 8.6%
Technology Components 1.7 9.0% 2.7 15.0% (1.0) (37.0)%
Value Added Services 1.9 10.1% 1.3 7.2% 0.6 46.2%
----- ----- ----- ----- -----
Totals $18.8 100.0% $18.0 100.0% $ 0.8 4.4%
===== ===== ===== ===== =====
BACKLOG (BY LOCATION)
(in millions) 2006 2005 INCREASE/(DECREASE)
------------- ------------- -------------------
North America $ 8.1 43.1% $ 9.0 50.0% $(0.9) (10.0)%
Europe 10.4 55.3% 8.6 47.8% 1.8 20.9%
Asia 0.3 1.6% 0.4 2.2% (0.1) (25.0)%
----- ----- ----- ----- -----
Totals $18.8 100.0% $18.0 100.0% $ 0.8 4.4%
===== ===== ===== ===== =====
The Company expects to be able to fill substantially all of the orders in
backlog during the next twelve months. The level of backlog during any
particular period is not necessarily indicative of the future operating
performance of the Company. Most of the backlog is subject to cancellation by
the customer.
Gross Profit - Gross profit was $27.3 million, or 47.1% of sales, in the fiscal
year ended June 30, 2006, as compared to $25.9 million, or 47.2% of sales, in
the fiscal year ended June 30, 2005. The declining Euro through the first nine
months of fiscal 2006 had the effect of reducing margins by approximately
$400,000, or 0.7% of sales, in fiscal 2006 compared to fiscal 2005. Installation
and manufacturing costs were 25.3% of sales this year compared to 26.6% of sales
last year when unfavorable inventory adjustments were approximately $400,000
higher than in fiscal 2006. Product mix accounted for the balance of the change
in gross profit as a percent of sales.
Selling, General and Administrative (SG&A) Expenses - SG&A expenses during
fiscal 2006 were $15.2 million, compared with $14.0 million during fiscal 2005.
The increase primarily reflected higher salary and benefit expenses of
approximately $440,000 for merit and healthcare cost increases, costs of
additional personnel to support sales growth plans in Asia and Europe of
approximately $385,000, travel expenses of $375,000, non-cash stock-based
compensation expense of $244,000, contract services of $170,000 to support sales
growth initiatives, and employee profit sharing of approximately $130,000 that
were partially offset by lower bad debt expense of approximately $400,000
compared with fiscal 2005 when a significant customer bankruptcy occurred, lower
legal expense of approximately $290,000 and lower SG&A expense in Europe of
$230,000 that primarily resulted from the lower value of the Euro compared to
fiscal 2005.
Engineering, Research and Development (R&D) Expenses - Engineering and R&D
expenses were $7.8 million for the fiscal year ended June 30, 2006, compared
with $7.2 million for fiscal 2005. The increase was primarily due to incremental
salary and benefit expenses of approximately $290,000 for merit and healthcare
cost increases, non-cash stock-based compensation expense of $227,000,
engineering materials of $165,000, and higher employee profit sharing of
approximately $130,000 that were partially offset by lower spending for contract
services of $360,000.
17
Interest Income, net - Net interest income was $722,000 in fiscal 2006, compared
with $492,000 in fiscal 2005. The increase in interest income reflected higher
average cash balances invested in short term securities at higher average
interest rates during fiscal 2006.
Foreign Currency Gain Loss - There was a net foreign currency loss of $21,000 in
fiscal 2006 compared with a net foreign currency loss of $49,000 in fiscal 2005.
The loss in both years was primarily due to the change in foreign exchange rates
between the time that the Company's foreign subsidiaries, principally in Europe
and Japan, received material denominated in U.S. dollars and when funds were
converted to pay for the material received.
Other Income and Expense - Other expense of $142,000 in fiscal 2006 reflected
the recognition of a $311,000 foreign currency translation adjustment related to
closing Perceptron Canada, Inc. that was partially offset by the market value of
$160,000 of stock received by the Company when a mutual life insurance company
was demutualized. Other income in fiscal 2005 of $48,000 was primarily due to
receipt of an insurance claim.
Income Taxes - Income tax for fiscal 2006 included the recognition of a $725,000
tax benefit associated with reversing a valuation allowance related to net
operating losses in North America that the Company now believes will be
utilized, a $290,000 tax expense related to the repatriation of $6.3 million of
unremitted earnings of certain of the Company's European subsidiaries under the
provisions of the American Jobs Creation Act of 2004, and income tax expense of
$211,000 related to a tax audit of prior years in the Company's German
operations. The effective tax rate for fiscal 2006 excluding these items was
38.8% compared with 36.7% for fiscal year 2005. In addition, the Company is not
able to record a tax benefit for non-cash stock-based compensation expense
related to incentive stock options and the Company's Employee Stock Purchase
Plan, which had the effect of increasing the effective tax rate in fiscal 2006
by 2.0%. The balance of the change in the effective tax rate reflected the
effect of the mix of operating profit and loss among the Company's various
operating entities and their respective tax rates. See Note 10 of the Notes to
the Consolidated Financial Statements, "Income Taxes".
Outlook - Based on the backlog as of June 30, 2006 and new vehicle tooling
programs being considered by customers in the Company's North American and
European automotive markets, the Company expects new orders and sales for its
core Automated Systems products in its existing markets in fiscal 2007 to be
comparable to fiscal 2006. Sales of Automated Systems products in North America,
which were very good in fiscal 2006, are expected to be lower in fiscal 2007
while sales of Automated Systems products in Europe are expected to strengthen
in fiscal 2007 compared with fiscal 2006 and offset the expected sales decline
in North America. The Company's sales forecast is based on an assessment of the
probable size, system content, and timing of each of the programs being
considered by its customers. These factors are difficult to quantify accurately
because over time the Company's customers weigh changes in the economy and the
probable effect of these changes on their business, and adjust the number and
timing of their new vehicle programs to reflect the changing business
conditions. The Company continues to view the automotive industry's focus on
introducing new vehicles more frequently to satisfy their customers' changing
requirements, as well as their continuing focus on improved quality, as positive
indicators for new business.
The Company expects to achieve sales growth above its base business in North
America and Europe during fiscal 2007 due to higher sales of its AutoScan(R)
system that began to gain customer acceptance during fiscal 2006 and the latest
generation of its ScanWorks(R) product that was well received by its customer
base. The Company also expects to achieve higher sales in Asia related to its
investments, largely in personnel, and the initial success of several automated
systems that were sold in this region during fiscal 2006. The Company expects to
realize sales of its new electronic inspection products in fiscal 2007. The
Company has plans to add personnel, primarily in Asia, and to a lesser extent in
North America, to support its growth plans in Asia and the introduction of its
new product line outside of the Automotive market.
As a result of the foregoing, the Company expects both sales and net income
levels for fiscal 2007 to be higher than those of fiscal 2006, although the
magnitude of the increase is difficult to project at this time.
The foregoing statements in this "Outlook" section are "forward-looking
statements" within the meaning of the Securities Act of 1934, as amended. Actual
results could differ materially from those in the forward-looking statements due
to a number of uncertainties, including those described under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Safe Harbor Statement", below, and Item 1A, "Risk Factors".
FISCAL YEAR ENDED JUNE 30, 2005, COMPARED TO FISCAL YEAR ENDED JUNE 30, 2004
Overview - The Company reported net income of $3.3 million or $0.35 per diluted
share, for the fiscal year ended June 30, 2005 compared with net income of $4.0
million, or $0.43 per diluted share, for the fiscal year ended June 30, 2004.
Specific line item results are described below.
18
Sales - Net sales of $54.9 million for fiscal 2005 were up $1.5 million, or
2.8%, compared with the same period one year ago. The following tables set forth
comparison data for the Company's net sales by product groups and geographic
location.
SALES (BY GROUP)
(in millions) 2005 2004 INCREASE/(DECREASE)
------------- ------------- -------------------
Automated Systems $39.0 71.0% $38.2 71.5% $0.8 2.1%
Technology Components 11.2 20.4% 10.5 19.7% 0.7 6.7%
Value Added Services 4.7 8.6% 4.7 8.8% 0.0 0.0%
----- ----- ----- ----- ----
Totals $54.9 100.0% $53.4 100.0% $1.5 2.8%
===== ===== ===== ===== ====
SALES (BY LOCATION)
(in millions) 2005 2004 INCREASE/(DECREASE)
------------- ------------- -------------------
North America $33.1 60.3% $29.2 54.7% $ 3.9 13.4%
Europe 19.9 36.2% 22.5 42.1% (2.6) (11.6)%
Asia 1.9 3.5% 1.7 3.2% 0.2 11.8%
----- ----- ----- ----- -----
Totals $54.9 100.0% $53.4 100.0% $ 1.5 2.8%
===== ===== ===== ===== =====
Sales of each of the Company's product groups in fiscal 2005 were comparable to
fiscal 2004. The higher level of sales in North America that offset lower sales
in Europe during fiscal 2005 compared to fiscal 2004 primarily reflected the
number of new vehicle programs and associated tooling requirements as well as
economic conditions in the two geographic regions. The sales decrease in Europe
was partially offset by the benefit from the strong Euro that based on
conversion rates in effect during fiscal 2005, added approximately $1.2 million
more in sales than the comparable rates in fiscal 2004 would have yielded
Bookings - The Company had new order bookings during fiscal 2005 of $53.9
million compared with new order bookings of $54.3 million during fiscal 2004.
The amount of new order bookings during any particular period is not necessarily
indicative of the future operating performance of the Company. The following
tables set forth comparison data for the Company's bookings by product groups
and geographic location.
BOOKINGS (BY GROUP)
(in millions) 2005 2004 INCREASE/(DECREASE)
------------- ------------- -------------------
Automated Systems $39.1 72.5% $39.5 72.8% $(0.4) (1.0)%
Technology Components 11.4 21.2% 10.5 19.3% 0.9 8.6%
Value Added Services 3.4 6.3% 4.3 7.9% (0.9) (20.9)%
----- ----- ----- ----- -----
Totals $53.9 100.0% $54.3 100.0% $(0.4) (0.7)%
===== ===== ===== ===== =====
BOOKINGS (BY LOCATION)
(in millions) 2005 2004 INCREASE/(DECREASE)
------------- ------------- -------------------
North America $30.6 56.8% $30.5 56.2% $ 0.1 0.3%
Europe 21.6 40.1% 22.2 40.9% (0.6) (2.7)%
Asia 1.7 3.1% 1.6 2.9% 0.1 6.2%
----- ----- ----- ----- -----
Totals $53.9 100.0% $54.3 100.0% $(0.4) (0.7)%
===== ===== ===== ===== =====
New order bookings among the Company's product lines during fiscal 2005 were
generally consistent with new order bookings received during fiscal 2004. The
Company believes that the rate of new orders during the year continued to
reflect the timing of customer requirements. This was also true for Value Added
Services, the only product group that experienced a significant percentage
change in the level of new order bookings compared to last year. There was no
discernible change in customers' purchasing decisions during the year. The
foregoing statements are "forward-looking statements" within the meaning of the
Securities Exchange Act of 1934, as amended. See Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Safe Harbor
Statement" and Item 1A, "Risk Factors", for a discussion of a number of
uncertainties which could cause actual results to differ materially from those
set forth in the forward-looking statements.
19
Backlog - The Company's backlog was $18.0 million as of June 30, 2005 compared
with $19.1 million as of June 30, 2004. The following tables set forth
comparison data for the Company's backlog by product groups and geographic
location.
Backlog (by group)
(in millions) 2005 2004 Increase/(Decrease)
------------- ------------- -------------------
Automated Systems $14.0 77.8% $15.3 80.1% $(1.3) (8.5)%
Technology Components 2.7 15.0% 2.7 14.1% 0.0 0.0%
Value Added Services 1.3 7.2% 1.1 5.8% 0.2 18.2%
----- ----- ----- ----- -----
Totals $18.0 100.0% $19.1 100.0% $(1.1) (5.8)%
===== ===== ===== ===== =====
Backlog (by location)
(in millions) 2005 2004 Increase/(Decrease)
------------- ------------- -------------------
North America $ 9.0 50.0% $11.5 60.2% $(2.5) (21.7)%
Europe 8.6 47.8% 7.0 36.7% 1.6 22.9%
Asia 0.4 2.2% 0.6 3.1% (0.2) (33.3)%
----- ----- ----- ----- -----
Totals $18.0 100.0% $19.1 100.0% $(1.1) (5.8)%
===== ===== ===== ===== =====
The Company expects to be able to fill substantially all of the orders in
backlog during the next twelve months. The level of backlog during any
particular period is not necessarily indicative of the future operating
performance of the Company. Most of the backlog is subject to cancellation by
the customer.
Gross Profit - Gross profit was $25.9 million, or 47.2% of sales, in the fiscal
year ended June 30, 2005, as compared to $25.1 million, or 47.0% of sales, in
the fiscal year ended June 30, 2004. The strong Euro had the effect of
increasing margins by approximately $770,000, or 1.4% of sales, in fiscal 2005
compared to fiscal 2004. Installation and manufacturing costs were 25.9% of
sales this year compared to 25.7% of sales last year. Unfavorable inventory
adjustments related to obsolescence reserves were approximately $260,000 higher
than in fiscal 2004. Product mix accounted for the balance of the change in
gross profit as a percent of sales.
Selling, General and Administrative (SG&A) Expenses - SG&A expenses during
fiscal 2005 were $14.0 million, compared with $12.2 million during fiscal 2004.
The increase primarily reflected higher bad debt expense of $500,000 related to
a customer bankruptcy, Michigan single business tax expense of $410,000 because
of a $300,000 credit in fiscal 2004, salary and benefit expenses of
approximately $400,000 related to merit increases and healthcare cost increases,
selling expenses of $350,000 in Brazil and Japan related to increased activity
in those areas, contract services of $260,000 primarily related to process
improvement initiatives, the impact due to the strong Euro of $240,000, legal
expense of $220,000, and commission expense of $180,000 reflecting a change to a
team selling commission structure, that were partially offset by lower employee
profit sharing of $800,000.
Engineering, Research and Development (R&D) Expenses - Engineering and R&D
expenses were $7.2 million for the fiscal year ended June 30, 2005, compared
with $7.0 million for fiscal 2004. The increase was primarily due to a higher
level of spending for contract services and engineering materials of $320,000 to
support new product development and salary and benefit increases of
approximately $230,000 that were partially offset by lower employee profit
sharing of $400,000.
Other Operating Expense - Other operating expense of $319,000 in fiscal 2004
represented a loss on the disposition of machinery and equipment and a provision
for property held for sale.
Interest Income, net - Net interest income was $492,000 in fiscal 2005, compared
with $290,000 in fiscal 2004. The increase in interest income reflected higher
average cash balances invested in short term securities at higher average
interest rates during fiscal 2005.
Foreign Currency - There was a net foreign currency loss of $49,000 in fiscal
2005 compared with a net foreign currency gain of $556,000 in fiscal 2004 when
the Euro appreciation versus the US dollar was greater.
Other Income and Expenses - Other income was $48,000 in fiscal 2005 compared to
other income of $177,000 in fiscal 2004. Other income in fiscal 2004 primarily
represented the reversal of costs previously expensed that were not required to
be paid in the final settlement of an arbitration award.
Income Taxes - The effective income tax rates of 36.7% and 40.1% for fiscal
years 2005 and 2004, respectively, reflected the effect of the mix of operating
profit and loss among the Company's various operating entities and their
countries' respective tax rates. See Note 10 of the Notes to the Consolidated
Financial Statements, "Income Taxes".
20
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $25.2 million at June 30, 2006
compared to $20.4 million at June 30, 2005. The cash increase of $4.8 million
for the fiscal year ended June 30, 2006, resulted primarily from $10.0 million
of cash generated from operations, and $542,000 from proceeds received under the
Company's stock plans, that were mitigated by $4.9 million used to buy back
company stock and $1.1 million for capital expenditures.
The $10.0 million of cash provided from operations was primarily generated from
net working capital changes of $4.0 million, net income of $3.2 million, the add
back of non-cash items such as depreciation and amortization expense of $1.3
million, deferred income taxes of $753,000 and stock compensation expense of
$667,000. Net working capital is defined as changes in assets and liabilities,
exclusive of changes shown separately on the Consolidated Statements of Cash
Flow. The cash provided from net working capital resulted primarily from a $5.6
million reduction in net receivables due to more timely payments by customers
mitigated by the use of cash of $550,000 for inventory required to fill customer
orders, $187,000 for accounts payable and $869,000 for current assets and
liabilities. The $869,000 use of cash for other current assets and liabilities
primarily represents reductions of $900,000 in deferred revenues as a result of
customer buy-offs and $600,000 in accrued liabilities, offset by increased
accruals for accrued payroll of $400,000 and reduced prepaid expenses of
$200,000.
The Company provides a reserve for obsolescence to recognize the effects of
engineering change orders and other matters that affect the value of the
inventory. A detailed review of the inventory is performed yearly with quarterly
updates for known changes that have occurred since the annual review. When
inventory is deemed to have no further use or value, the Company disposes of the
inventory and the reserve for obsolescence is reduced. During fiscal year 2006,
the Company increased its reserve for inventory obsolescence by a net $34,000,
which resulted from the disposal of $159,000 of inventory that had been reserved
for at June 30, 2005 and additional reserves for obsolescence of approximately
$193,000.
The Company determines its allowance for doubtful accounts by considering a
number of factors, including the length of time trade accounts receivable are
past due, the Company's previous loss history, the customer's current ability to
pay its obligation to the Company, and the condition of the general economy and
the industry as a whole. The Company writes-off accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. During fiscal year 2006, the
Company wrote off $17,000 of receivables and reduced its provision for bad debts
by $22,000.
Financing activities during fiscal year 2006 primarily reflected $4.9 million
used to repurchase company stock and $542,000 received under the Company's stock
plans.
The Company had no debt outstanding at June 30, 2006. The Company has a $7.5
million secured Credit Agreement with Comerica Bank, which expires on November
1, 2007. Proceeds under the Credit Agreement may be used for working capital and
capital expenditures. The security for the loan is substantially all assets of
the Company held in the United States. Borrowings are designated as a
Prime-based Advance or as a Eurodollar-based Advance. Interest on Prime-based
Advances is payable on the last day of each month and is calculated daily at a
rate that ranges from a 1/2% below to a 1/4% above the bank's prime rate (8.25%
as of June 30, 2006) dependent upon the Company's ratio of funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA").
Interest on Eurodollar-based Advances is calculated at a specific margin above
the Eurodollar Rate offered at the time and for the period chosen (approximately
7.39% as of June 30, 2006) dependent upon the Company's ratio of funded debt to
EBITDA and is payable on the last day of the applicable period. Quarterly, the
Company pays a commitment fee on the daily unused portion of the Credit
Agreement based on a percentage dependent upon the Company's ratio of funded
debt to EBITDA. The Credit Agreement prohibits the Company from paying
dividends. In addition, the Credit Agreement requires the Company to maintain a
Tangible Net Worth, as defined in the Credit Agreement, of not less than $35.9
million as of June 30, 2006 and to have no advances outstanding for 30
consecutive days each calendar year.
At June 30, 2006, the Company's German subsidiary (GmbH) had an unsecured credit
facility totaling 500,000 Euros (equivalent to approximately $628,000 at June
30, 2006). The facility may be used to finance working capital needs and
equipment purchases or capital leases. Any borrowings for working capital needs
will bear interest at 9.0% on the first 100,000 Euros of borrowings and 2.0% for
borrowings over 100,000 Euros. The German credit facility is cancelable at any
time by either GmbH or the bank and any amounts then outstanding would become
immediately due and payable. At June 30, 2006, GmbH had no borrowings
outstanding. The facility supported outstanding letters of credit totaling
100,000 Euros (equivalent to approximately $125,000 at June 30, 2006).
On August 7, 2006, the Company's Board of Directors approved a stock repurchase
program authorizing the Company to repurchase up to $3.0 million of the
Company's common stock through August 2007. The Company may buy shares of its
common stock on the open market or in privately negotiated transactions from
time to time, based on market prices. The program may be discontinued at any
time. The Company also announced that it has entered into a Rule 10b5-1
21
trading plan ("Repurchase Plan") with Barrington Research Associates, Inc. to
purchase up to $3.0 million of the Company's common stock through August 2007
(less the dollar amount of purchases by the Company outside the Repurchase
Plan), in open market or privately negotiated transactions, in accordance with
the requirements of Rule 10b-18.
See Item 3, "Legal Proceedings" and Note 6 to the Consolidated Financial
Statements, "Contingencies", for a discussion of certain contingencies relating
to the Company's liquidity, financial position and results of operations. See
also, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies - Litigation and Other
Contingencies".
The Company expects to spend approximately $1.5 million during fiscal year 2007
for capital equipment, although there is no binding commitment to do so. Based
on the Company's current business plan, including the introduction of its new
line of electronic inspection products, the Company believes that available cash
on hand and existing credit facilities will be sufficient to fund anticipated
fiscal year 2007 cash flow requirements, except to the extent that the Company
implements new business development opportunities, which would be financed as
discussed below. The Company does not believe that inflation has significantly
impacted historical operations and does not expect any significant near-term
inflationary impact. The foregoing statements are "forward-looking statements"
within the meaning of the Securities Act of 1934, as amended. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Safe Harbor Statement" and Item 1A, "Risk Factors", for a
discussion of a number of uncertainties which could cause actual results to
differ materially from those set forth in the forward-looking statement.
The Company will consider evaluating business opportunities that fit its
strategic plans. There can be no assurance that the Company will identify any
opportunities that fit its strategic plans or will be able to enter into
agreements with identified business opportunities on terms acceptable to the
Company. The Company intends to finance any such business opportunities from
available cash on hand, existing credit facilities, issuance of additional
shares of its stock or additional sources of financing, as circumstances
warrant.
CONTRACTUAL OBLIGATIONS
The following summarizes the Company's contractual obligations at June 30, 2006,
and the effect such obligations are expected to have on its liquidity and cash
flow in future periods (in thousands):
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1 - 3 YEARS 3 - 5 YEARS YEARS
------ --------- ----------- ----------- -----------
Purchase Obligations $3,026 $3,026 $ 0 $0 $0
Operating Leases $1,521 $ 862 $656 $3 $0
A purchase obligation is defined as an agreement to purchase goods or services
that is enforceable and legally binding. Included in the purchase obligations
category above are obligations related to purchase orders for inventory
purchases under the Company's standard terms and conditions and under negotiated
agreements with vendors. The Company expects to receive consideration (products
or services) for these purchase obligations. The purchase obligation amounts do
not represent all anticipated purchases in the future, but represent only those
items for which the Company was contractually obligated at June 30, 2006.
Operating leases represent commitments to lease building space, office equipment
and motor vehicles.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements and accompanying
notes, which have been prepared in accordance with accounting principles
generally accepted in the United States (U.S. GAAP). The Company's significant
accounting policies are discussed in Note 1 of the Notes to Consolidated
Financial Statements, "Summary of Significant Accounting Policies". Certain of
the Company's significant accounting policies are subject to judgments and
uncertainties, which affect the application of these policies and require the
Company to make estimates based on assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. The Company bases its estimates
on historical experience and on various assumptions that are believed to be
reasonable under the circumstances. On an on-going basis, the Company evaluates
its estimates and underlying assumptions. In the event estimates or underlying
assumptions prove to be different from actual amounts, adjustments are made in
the subsequent period to reflect more current information. The Company believes
that the following significant accounting policies involve management's most
difficult, subjective or complex judgments or involve the greatest uncertainty.
22
Revenue Recognition. Revenue related to products is recognized upon shipment
when title and risk of loss has passed to the customer, there is persuasive
evidence of an arrangement, the sales price is fixed or determinable, collection
of the related receivable is reasonably assured and customer acceptance criteria
have been successfully demonstrated. The Company also has multiple element
arrangements that may include purchase of equipment, labor support and/or
training. Each element has value on a stand-alone basis. For multiple element
arrangements, the Company defers from revenue recognition the greater of the
fair value of any undelivered elements of the contract or the portion of the
sales price of the contract that is not payable until the undelivered elements
are completed. Delivered items are not contingent upon the delivery of any
undelivered items nor do the delivered items include general rights of return.
The Company does not have price protection agreements or requirements to buy
back inventory. The Company's systems are made to order systems that are
designed and configured to meet each customer's specific requirements. As a
result, the Company has virtually no history of returns.
Stock-Based Compensation. The Company accounts for non-cash stock-based
compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the
fair value recognition provisions of this statement, share-based compensation
cost is measured at the grant date based on the value of the award and is
recognized as expense over the vesting period. Determining the fair value of
share-based awards at the grant date requires judgment, including estimating the
amount of share-based awards that are expected to be forfeited. The estimated
forfeiture rate may change from time to time based upon the Company's actual
experience. An increase in the forfeiture rate would require the Company to
reverse a portion of its prior expense for non-cash stock-based compensation,
which would positively impact the Company's results of operations. Because the
Company currently experiences a low forfeiture rate, a reduction in the
estimated forfeiture rate would not have a material impact on the Company's
results of operations.
Accounts Receivable. The Company monitors its accounts receivable and charges to
expense an amount equal to its estimate of potential credit losses. The Company
considers a number of factors in determining its estimates, including, the
length of time trade accounts receivable are past due, the Company's previous
loss history, the customer's current ability to pay its obligation and the
condition of the general economy and the industry as a whole. The use of
different estimates for future credit losses would result in different charges
to selling, general and administrative expense in each period presented and
could negatively affect the Company's results of operations for the period. In
addition, if actual experience differs materially from the Company's estimates,
such as was the case in fiscal year 2005, described in "Selling, General and
Administrative (SG&A) Expenses" with the unexpected bankruptcy of a large
customer, the Company could be required to record large credit losses that could
negatively affect the Company's results of operations for the period.
Inventories. Inventories are valued at the lower of cost or market; cost being
determined under the first in, first out method. Provision is made to reduce
inventories to net realizable value for excess and/or obsolete inventory. The
Company periodically reviews its inventory levels in order to identify obsolete
and slow-moving inventory. The Company estimates excess or obsolete inventory
based principally upon contemplated future customer demand for the Company's
products and the timing of product upgrades. The use of different assumptions in
determining slow-moving and obsolete inventories would result in different
charges to cost of sales in each period presented and could negatively affect
the Company's results of operations for the period. In addition, if actual
experience differs materially from the Company's estimates, such as was the case
in fiscal 2005, described in "Gross Profit", the Company could be required to
record large losses that could negatively affect the Company's results of
operations for the period.
Deferred Income Taxes. Deferred income tax assets and liabilities represent the
future income tax effect of temporary differences between the book and tax basis
of the Company's assets and liabilities, assuming they will be realized and
settled at the amounts reported in the Company's financial statements. The
Company records a valuation allowance to reduce its deferred tax assets to the
amount that it believes is more likely than not to be realized. This assessment
includes consideration for the scheduled reversal of temporary taxable
differences, projected future taxable income and the impact of tax planning. The
Company adjusts this valuation allowance periodically based upon changes in
these considerations. In fiscal 2006 the Company reduced the valuation
allowance, described in "Income Taxes" and Note 10 of the Notes to the
Consolidated Financial Statements, "Income Taxes", based on the past few years
of taxable income and projected future taxable income. If actual long-term
future taxable income is lower than the Company's estimate, the Company may be
required to record material adjustments to the deferred tax assets, resulting in
a charge to income in the period of determination and negatively impacting the
Company's results of operations and financial position for the period.
Litigation and Other Contingencies. The Company is subject to various legal
proceedings and other contingencies, the outcomes of which are subject to
significant uncertainty. The Company accrues for estimated losses if it is
probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated. The Company uses judgment
and evaluates, with the assistance of legal counsel, whether a loss contingency
arising from litigation should be disclosed or recorded. The outcome of legal
proceedings is inherently uncertain and so typically a loss cannot be reasonably
estimated. Accordingly, if the outcome of legal proceedings are different than
is anticipated by the Company, the Company would have to record a charge for the
matter, generally in the full amount at which it was resolved, in the period
resolved, negatively impacting the Company's results of operations and financial
position for the period.
23
MARKET RISK INFORMATION
Perceptron's primary market risk is related to foreign exchange rates. The
foreign exchange risk is derived from the operations of its international
subsidiaries, which are primarily located in Germany and for which products are
produced in the U.S. The Company may from time to time have interest rate risk
in connection with its borrowings.
FOREIGN CURRENCY RISK
The Company has foreign currency exchange risk in its international operations
arising from the time period between sales commitment and delivery for contracts
in non-U.S. currencies. For sales commitments entered into in the non-United
States currencies, the currency rate risk exposure is predominantly less than
one year with the majority in the 120 to 150 day range. At June 30, 2006, the
Company's percentage of sales commitments in non-United States currencies was
approximately 58.7% or $11.0 million, compared to 54.2% or $9.8 million at June
30, 2005.
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. These transactions involve the use
of forward contracts, typically mature within one year and are designed to hedge
anticipated foreign currency transactions. The Company may use forward exchange
contracts to hedge the net assets of certain of its foreign subsidiaries to
offset the translation and economic exposures related to the Company's
investment in these subsidiaries.
At June 30, 2006, the Company had forward exchange contracts to sell 4.0 million
Euros ($5.0 million equivalent) at a weighted average settlement rate of 1.25
Euros to the United States Dollar. The contracts outstanding at June 30, 2006,
mature through January 31, 2007. The objective of the hedge transactions is to
protect designated portions of the Company's net investment in its foreign
subsidiary against adverse changes in the Euro/U.S. Dollar exchange rate. The
Company assesses hedge effectiveness based on overall changes in fair value of
the forward contract. Since the critical risks of the forward contract and the
net investment coincide, there was no ineffectiveness. The accounting for the
hedges is consistent with translation adjustments where any gains and losses are
recorded to other comprehensive income. The Company recognized a loss of $38,000
in other comprehensive income (loss) for the unrealized and realized change in
value of the forward exchange contracts during the fiscal year ended June 30,
2006. Offsetting this amount in other comprehensive income (loss) was the
translation effect of the Company's foreign subsidiary. Because the forward
contracts were effective, there was no gain or loss recognized in earnings. The
Company's forward exchange contracts do not subject it to material risk due to
exchange rate movements because gains and losses on these contracts offset
losses and gains on the assets, liabilities, and transactions being hedged.
For fiscal years ended June 30, 2005 and 2004, the Company had approximately
$3.0 million and $8.4 million, respectively, of forward exchange contracts
between the United States Dollar and the Euro with weighted average settlement
prices of 1.30 and 1.21 Euro to each United States Dollar, respectively. The
Company recognized income of approximately $168,000 and a charge of
approximately $642,000 in other comprehensive income (loss) for the unrealized
and realized change in value of forward exchange contracts during the fiscal
years ended June 30, 2005 and June 30, 2004, respectively.
The Company's potential loss in earnings that would have resulted from a
hypothetical 10% adverse change in quoted foreign currency exchange rates
related to the translation of foreign denominated revenues and expenses into
U.S. dollars for the fiscal years ended June 30, 2006, 2005 and 2004, would have
been approximately $2,000, $114,000 and $232,000, respectively.
INTEREST RATE RISK
The Company invests its cash and cash equivalents in high quality, short-term
investments with primarily a term of three months or less. Given the short
maturities and investment grade quality of the Company's investment holdings at
June 30, 2006, a 100 basis point rise in interest rates would not be expected to
have a material adverse impact on the fair value of the Company's cash and cash
equivalents. As a result, the Company does not currently hedge these interest
rate exposures.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 1 to the
Consolidated Financial Statements, "Summary of Significant Accounting
Policies-New Accounting Pronouncements".
24
SAFE HARBOR STATEMENT
We make statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that may be "forward-looking statements"
within the meaning of the Securities Exchange Act of 1934, including the
Company's expectation as to fiscal 2007 and future new order bookings, revenue,
expenses, net income and backlog levels, trends affecting its future revenue
levels, the rate of new orders, the timing of revenue and net income increases
from new products which we have recently released or have not yet released and
from our plans to make important new investments, largely for personnel, for
newly introduced products and geographic growth opportunities in the U.S.,
Europe, Eastern Europe, Asia, our ability to fund our fiscal year 2007 cash flow
requirements and customers' current and future interest in our Value Added
Services. We may also make forward-looking statements in our press releases or
other public or shareholder communications. When we use words such as "will,"
"should," "believes," "expects," "anticipates," "estimates" or similar
expressions, we are making forward-looking statements. We claim the protection
of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 for all of our forward-looking
statements. While we believe that our forward-looking statements are reasonable,
you should not place undue reliance on any such forward-looking statements,
which speak only as of the date made. Because these forward-looking statements
are based on estimates and assumptions that are subject to significant business,
economic and competitive uncertainties, many of which are beyond our control or
are subject to change, actual results could be materially different. Factors
that might cause such a difference include, without limitation, the risks and
uncertainties discussed from time to time in our reports filed with the
Securities and Exchange Commission, including those listed in "Item 1A - Risk
Factors" in this report. Other factors not currently anticipated by management
may also materially and adversely affect our financial condition, liquidity or
results of operations. Except as required by applicable law, we do not
undertake, and expressly disclaim, any obligation to publicly update or alter
our statements whether as a result of new information, events or circumstances
occurring after the date of this report or otherwise. The Company's expectations
regarding future bookings and revenues are projections developed by the Company
based upon information from a number of sources, including, but not limited to,
customer data and discussions. These projections are subject to change based
upon a wide variety of factors, a number of which are discussed above. Certain
of these new orders have been delayed in the past and could be delayed in the
future. Because the Company's products are typically integrated into larger
systems or lines, the timing of new orders is dependent on the timing of
completion of the overall system or line. In addition, because the Company's
products have shorter lead times than other components and are required later in
the process, orders for the Company's products tend to be given later in the
integration process. A significant portion of the Company's projected revenues
and net income depends upon the Company's ability to successfully develop and
introduce new products and expand into new geographic markets. Because a
significant portion of the Company's revenues are denominated in foreign
currencies and are translated for financial reporting purposes into U.S.
Dollars, the level of the Company's reported net sales, operating profits and
net income are affected by changes in currency exchange rates, principally
between U.S. Dollars and Euros. Currency exchange rates are subject to
significant fluctuations, due to a number of factors beyond the control of the
Company, including general economic conditions in the United States and other
countries. Because the Company's expectations regarding future revenues, order
bookings, backlog and operating results are based upon assumptions as to the
levels of such currency exchange rates, actual results could differ materially
from the Company's expectations.
ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information required pursuant to this item is incorporated by reference herein
from Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk Information".
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Report of Independent Registered Public Accounting Firm 26
Consolidated Financial Statements:
Balance Sheets - June 30, 2006 and 2005 27
Statements of Income for the fiscal years ended June 30, 2006,
2005 and 2004 28
Statements of Cash Flows for the fiscal years ended June 30, 2006,
2005 and 2004 29
Statements of Shareholders' Equity for the fiscal years ended
June 30, 2006, 2005 and 2004 30
Notes to Consolidated Financial Statements 31
25
[GRANT THORNTON LETTERHEAD]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Perceptron, Inc.
We have audited the accompanying consolidated balance sheets of Perceptron, Inc.
and Subsidiaries as of June 30, 2006 and 2005 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended June 30, 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Perceptron, Inc. and Subsidiaries as of June 30, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2006, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 123(R), "Share Based
Payments," effective July 1, 2005.
/S/ Grant Thornton LLP
Southfield, Michigan
September 14, 2006
26
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Amount)
AS OF JUNE 30, 2006 2005
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 25,188 $ 20,374
Receivables:
Billed receivables, net of allowance for doubtful accounts
of $352 and $391, respectively 15,623 19,413
Unbilled receivables 994 1,888
Other receivables 577 1,004
Inventories, net of reserves of $554 and $520, respectively 6,433 5,884
Deferred taxes 1,481 1,199
Other current assets 521 736
-------- --------
Total current assets 50,817 50,498
PROPERTY AND EQUIPMENT
Building and land 6,013 6,013
Machinery and equipment 11,566 10,653
Furniture and fixtures 1,093 1,059
-------- --------
18,672 17,725
Less - Accumulated depreciation and amortization (11,264) (10,038)
-------- --------
Net property and equipment 7,408 7,687
DEFERRED TAX ASSET 4,170 5,205
-------- --------
TOTAL ASSETS $ 62,395 $ 63,390
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,667 $ 1,854
Accrued liabilities and expenses 2,277 2,807
Accrued compensation 1,740 1,359
Income taxes payable 145 130
Deferred revenue 2,336 3,248
-------- --------
Total current liabilities 8,165 9,398
SHAREHOLDERS' EQUITY
Preferred stock - no par value, authorized 1,000 shares, issued none -- --
Common stock, $0.01 par value, authorized 19,000 shares, issued
and outstanding 8,352 and 8,822, respectively 84 88
Accumulated other comprehensive loss (15) (677)
Additional paid-in capital 39,111 42,770
Retained earnings 15,050 11,811
-------- --------
Total shareholders' equity 54,230 53,992
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 62,395 $ 63,390
======== ========
The notes to the consolidated financial statements are an integral part of these
statements.
27
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
YEARS ENDED JUNE 30, 2006 2005 2004
------- ------- -------
NET SALES $57,875 $54,892 $53,393
COST OF SALES 30,588 28,985 28,293
------- ------- -------
GROSS PROFIT 27,287 25,907 25,100
OPERATING EXPENSES
Selling, general and administrative 15,155 13,970 12,195
Engineering, research and development 7,764 7,242 6,956
Other operating expense -- -- 319
------- ------- -------
Total operating expenses 22,919 21,212 19,470
------- ------- -------
OPERATING INCOME 4,368 4,695 5,630
OTHER INCOME AND (EXPENSES)
Interest income, net 722 492 290
Foreign currency gain (loss) (21) (49) 556
Other (142) 48 177
------- ------- -------
Total other income 559 491 1,023
------- ------- -------
INCOME BEFORE INCOME TAXES 4,927 5,186 6,653
INCOME TAX EXPENSE 1,688 1,904 2,666
------- ------- -------
NET INCOME $ 3,239 $ 3,282 $ 3,987
======= ======= =======
EARNINGS PER COMMON SHARE
Basic $ 0.38 $ 0.37 $ 0.46
Diluted $ 0.35 $ 0.35 $ 0.43
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,582 8,766 8,593
Dilutive effect of stock options 618 671 734
------- ------- -------
Diluted 9,200 9,437 9,327
======= ======= =======
The notes to the consolidated financial statements are an integral part of these
statements.
28
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands)
YEARS ENDED JUNE 30, 2006 2005 2004
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,239 $ 3,282 $ 3,987
Adjustments to reconcile net income to net
cash provided from (used for) operating
activities:
Depreciation and amortization 1,345 1,326 1,504
Stock compensation expense 667 -- --
Deferred income taxes 753 775 252
Stock option income tax benefit -- 142 371
Other (11) (85) 176
Changes in assets and liabilities,
exclusive of changes shown separately 3,976 (3,412) 2,227
------- ------- -------
Net cash provided from operating
activities 9,969 2,028 8,517
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings 797 608 --
Revolving credit repayments (797) (608) --
Proceeds from stock plans 542 407 854
Repurchase of company stock (4,872) (279) --
------- ------- -------
Net cash provided from (used for)
financing activities (4,330) 128 854
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,093) (1,449) (1,153)
------- ------- -------
Net cash used for investing activities (1,093) (1,449) (1,153)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 268 (12) 360
------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,814 695 8,578
CASH AND CASH EQUIVALENTS, JULY 1 20,374 19,679 11,101
------- ------- -------
CASH AND CASH EQUIVALENTS, JUNE 30 $25,188 $20,374 $19,679
======= ======= =======
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF
CHANGES SHOWN SEPARATELY
Receivables, net $ 5,582 $ (3) $ 3,990
Inventories (550) (196) 881
Accounts payable (187) 410 (311)
Other current assets and liabilities (869) (3,623) (2,333)
------- ------- -------
$ 3,976 $(3,412) $ 2,227
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 10 $ 1 $ 1
Cash paid during the year for income taxes 1,393 3,816 494
The notes to the consolidated financial statements are an integral part of these
statements.
29
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
COMMON STOCK ACCUMULATED OTHER ADDITIONAL TOTAL
--------------- COMPREHENSIVE PAID-IN RETAINED SHAREHOLDERS
SHARES AMOUNT INCOME (LOSS) CAPITAL EARNINGS EQUITY
------ ------ ----------------- ---------- -------- ------------
BALANCES, JUNE 30, 2003 8,342 $83 $(961) $41,281 $ 4,542 $44,945
Comprehensive income (loss)
Net income 3,987 3,987
Other comprehensive income
Foreign currency translation adjustments 845 845
Hedging (642) (642)
-------
Total comprehensive income 4,190
Stock plans 374 4 1,221 1,225
----- --- ----- ------- ------- -------
BALANCES, JUNE 30, 2004 8,716 $87 $(758) $42,502 $ 8,529 $50,360
===== === ===== ======= ======= =======
Comprehensive income (loss)
Net income 3,282 3,282
Other comprehensive income
Foreign currency translation adjustments (87) (87)
Hedging 168 168
-------
Total comprehensive income 3,363
Stock plans 145 1 547 548
Stock repurchase (39) (279) (279)
----- --- ----- ------- ------- -------
BALANCES, JUNE 30, 2005 8,822 $88 $(677) $42,770 $11,811 $53,992
===== === ===== ======= ======= =======
Comprehensive income (loss)
Net income 3,239 3,239
Other comprehensive income
Foreign currency translation adjustments 700 700
Hedging (38) (38)
-------
Total comprehensive income 3,901
Stock-based compensation 667 667
Stock plans 197 2 540 542
Stock repurchase (667) (6) (4,866) (4,872)
----- --- ----- ------- ------- -------
BALANCES, JUNE 30, 2006 8,352 $84 $ (15) $39,111 $15,050 $54,230
===== === ===== ======= ======= =======
The notes to the consolidated financial statements are an integral part of these
statements.
30
PERCEPTRON, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Perceptron, Inc. and its wholly-owned subsidiaries (collectively, the "Company")
are involved in the design, development, manufacture, and marketing of
information-based measurement and inspection solutions for process improvements
primarily for the automotive industry.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain amounts for prior
periods have been reclassified to conform to the current period presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue related to products is recognized upon shipment when title and risk of
loss has passed to the customer, there is persuasive evidence of an arrangement,
the sales price is fixed or determinable, collection of the related receivable
is reasonably assured and customer acceptance criteria have been successfully
demonstrated. The Company also has multiple element arrangements that may
include purchase of equipment, labor support and/or training. Each element has
value on a stand-alone basis. For multiple element arrangements, the Company
defers from revenue recognition the greater of the fair value of any undelivered
elements of the contract or the portion of the sales price of the contract that
is not payable until the undelivered elements are completed. Delivered items are
not contingent upon the delivery of any undelivered items nor do the delivered
items include general rights of return. The Company does not have price
protection agreements or requirements to buy back inventory. The Company's
systems are made to order systems that are designed and configured to meet each
customer's specific requirements. As a result, the Company has virtually no
history of returns.
RESEARCH AND DEVELOPMENT
Research and development costs, including software development costs, are
expensed as incurred.
FOREIGN CURRENCY
The financial statements of the Company's wholly-owned foreign subsidiaries have
been translated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, with the functional currency being the local currency in the
foreign country. Under this standard, translation adjustments are accumulated in
a separate component of shareholders' equity until the subsidiary is disposed
of. During the fourth quarter of fiscal 2006, the Company liquidated Perceptron
Canada, Inc., an inactive subsidiary, and recognized as expense accumulated
translation adjustments of $311,000. Gains and losses on foreign currency
transactions are included in the consolidated statement of income under "Other
Income and Expenses".
EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Other
obligations, such as stock options, are considered to be potentially dilutive
common shares. Diluted EPS assumes the issuance of potential dilutive common
shares outstanding during the period and adjusts for any changes in income and
the repurchase of common shares that would have occurred from the assumed
issuance, unless such effect is anti-dilutive. Effective with the adoption of
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123R), the calculation of diluted shares also takes into effect
the average unrecognized non-cash stock-based compensation expense and
additional adjustments for tax benefits related to non-cash stock-based
compensation expense.
Options to purchase 480,000, 580,000, and 556,000 shares of common stock
outstanding in the fiscal years ended June 30, 2006, 2005 and 2004,
respectively, were not included in the computation of diluted EPS because the
effect would have been anti-dilutive.
31
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with maturities of
three months or less to be cash equivalents. Fair value approximates carrying
value because of the short maturity of the cash equivalents. Those with a
greater life are recorded as marketable securities.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
The Company markets and sells its products primarily to automotive assembly
companies and to system integrators or original equipment manufacturers
("OEMs"), that in turn sell to automotive assembly companies. The Company's
accounts receivable are principally from a small number of large customers. The
Company performs ongoing credit evaluations of its customers. Accounts
receivable are generally due within 30 days and are stated at amounts due from
customers net of an allowance for doubtful accounts. Accounts outstanding longer
than the contractual payment terms are considered past due. The Company
determines its allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, the Company's previous
loss history, the customer's current ability to pay its obligation to the
Company, and the condition of the general economy and the industry as a whole.
The Company writes-off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts. Changes in the Company's allowance for doubtful accounts
are as follows (in thousands):
BEGINNING COSTS AND LESS ENDING
BALANCE EXPENSES CHARGE-OFFS BALANCE
--------- --------- ----------- --------
Fiscal year ended June 30, 2006 $391 $(22) $ 17 $352
Fiscal year ended June 30, 2005 $625 $387 $621 $391
Fiscal year ended June 30, 2004 $674 $ 38 $ 87 $625
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation related to machinery
and equipment and furniture and fixtures is primarily computed on a
straight-line basis over estimated useful lives ranging from 3 to 13 years.
Depreciation on buildings is computed on a straight-line basis over 40 years.
When assets are retired, the costs of such assets and related accumulated
depreciation or amortization are eliminated from the respective accounts, and
the resulting gain or loss is reflected in the consolidated statement of income.
INVENTORY
Inventory is stated at the lower of cost or market. The cost of inventory is
determined by the first-in, first-out ("FIFO") method. The Company provides a
reserve for obsolescence to recognize the effects of engineering change orders,
age and use of inventory that affect the value of the inventory. When the
related inventory is disposed of, the obsolescence reserve is reduced. A
detailed review of the inventory is performed yearly with quarterly updates for
known changes that have occurred since the annual review. Inventory, net of
reserves, is comprised of the following (in thousands):
AT JUNE 30,
---------------
2006 2005
------ ------
Component parts $3,038 $2,799
Work in process 309 407
Finished goods 3,086 2,678
------ ------
Total $6,433 $5,884
====== ======
Changes in the Company's reserves for obsolescence are as follows (in
thousands):
BEGINNING COSTS AND LESS ENDING
BALANCE EXPENSES CHARGE-OFFS BALANCE
--------- --------- ----------- --------
Fiscal year ended June 30, 2006 $520 $193 $159 $554
Fiscal year ended June 30, 2005 $510 $230 $220 $520
Fiscal year ended June 30, 2004 $569 $100 $159 $510
32
DEFERRED INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis, and the effects of operating losses and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided for
deferred tax assets if it is more likely than not that these items will either
expire before the Company is able to realize their benefit, or future
deductibility is uncertain.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, which include cash,
accounts receivable, accounts payable, forward exchange contracts and amounts
due to banks or other lenders, approximate their fair values at June 30, 2006
and 2005. Fair values have been determined through information obtained from
market sources and management estimates.
In the normal course of business, the Company may employ forward exchange
contracts to manage its exposure to fluctuations in foreign currency exchange
rates. Forward contracts for forecasted transactions are designated as cash flow
hedges and recorded as assets or liabilities on the balance sheet at their fair
value. Changes in the contract's fair value are recognized in accumulated other
comprehensive income until they are recognized in earnings at the time the
forecasted transaction occurs. If the forecasted transaction does not occur, or
it becomes probable that it will not occur, the gain or loss on the related cash
flow hedge is recognized in earnings at that time. For forward exchange
contracts designated as hedging the net assets of the Company's foreign
subsidiaries, changes in the contract's fair value are offset against the
translation reflected in shareholders' equity to the extent effective. The
Company does not enter into any derivative transactions for speculative
purposes.
WARRANTY
Automotive industry systems carry a three-year warranty for parts and a one-year
warranty for labor and travel related to warranty. Components sales to the
forest products industry carry a three-year warranty for TriCam(R) sensors.
Component sales of ScanWorks(R) and ScanWorks(R) ToolKit have a one-year
warranty for parts; sales of NCA products have a two-year warranty for parts.
The Company provides a reserve for warranty based on its experience. Factors
affecting the Company's warranty liability include the number of units in
service and historical and anticipated rates of claims and cost per claim. The
Company periodically assesses the adequacy of its warranty liability based on
changes in these factors. If a special circumstance arises requiring a higher
level of warranty, the Company would make a special warranty provision
commensurate with the facts.
STOCK-BASED COMPENSATION
The Company has stock plans, which are described more fully in Notes 8 and 9.
The Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment ("SFAS 123R"), effective July 1, 2005. SFAS 123R
requires the recognition of the fair value of stock-based compensation in the
Company's financial statements. Prior to July 1, 2005, the Company applied the
requirements of APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based plans.
Under APB 25, generally no stock-based compensation expense was recognized for
the Company's stock-based plans since the exercise price of granted employee
stock options was greater than or equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the pro forma
effect on net income and earnings per share for the periods indicated as if the
Company had applied the fair value recognition provisions of SFAS 123R to its
stock-based employee compensation plans (in thousands except per share amounts):
2005 2004
------ ------
NET INCOME
AS REPORTED $3,282 $3,987
EFFECT OF STOCK-BASED COMPENSATION
EXPENSE - NET OF TAX (521) (495)
------ ------
PRO FORMA $2,761 $3,492
====== ======
EARNINGS PER SHARE
BASIC - AS REPORTED $ 0.37 $ 0.46
BASIC - PRO FORMA $ 0.31 $ 0.41
DILUTED - AS REPORTED $ 0.35 $ 0.43
DILUTED - PRO FORMA $ 0.29 $ 0.37
33
SELF -INSURANCE
Perceptron is self-insured for health, vision and short term disability costs up
to a certain stop loss level per claim and on an aggregate basis of a percentage
of estimated annual costs. The estimated liability is based upon review by
Management and an independent insurance consultant of claims filed and claims
incurred but not reported.
NEW ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 155, "Accounting for
Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133
and 140". This Statement amends FASB Statements No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
to resolve issues addressed in SFAS No. 133 implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets". This Statement is effective for fiscal years beginning after September
15, 2006 and is not expected to have a material impact on the Company's
financial statements.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109". This Interpretation prescribes a
recognition threshold and a measurement attribute for the financial statement
reporting of tax positions taken in tax returns. The Interpretation is effective
for fiscal years beginning after December 15, 2006. The impact of adopting this
Statement on the Company's financial statements has not yet been evaluated.
2. LEASES
The Company leases building space, office equipment and motor vehicles under
operating leases. Lease terms generally cover periods from two to five years and
may contain renewal options. The following is a summary, as of June 30, 2006, of
the future minimum annual lease payments required under the Company's operating
leases having initial or remaining non-cancelable terms in excess of one year
(in thousands):
MINIMUM
YEAR RENTALS
---- -------
2007 $ 862
2008 547
2009 88
2010 21
2011 and beyond 3
------
Total minimum lease payments $1,521
======
Rental expenses for operating leases in the fiscal years ended June 30, 2006,
2005 and 2004 were $1,105,000, $908,000 and $989,000, respectively.
3. SHORT-TERM AND LONG-TERM NOTES PAYABLE
The Company had no debt outstanding at June 30, 2006.
The Company has a $7.5 million secured Credit Agreement with Comerica Bank,
which expires on November 1, 2007. Proceeds under the Credit Agreement may be
used for working capital and capital expenditures. The security for the loan is
substantially all assets of the Company held in the United States. Borrowings
are designated as a Prime-based Advance or as a Eurodollar-based Advance.
Interest on Prime-based Advances is payable on the last day of each month and is
calculated daily at a rate that ranges from a 1/2% below to a 1/4% above the
bank's prime rate (8.25% as of June 30, 2006) dependent upon the Company's ratio
of funded debt to earnings before interest, taxes, depreciation and amortization
("EBITDA"). Interest on Eurodollar-based Advances is calculated at a specific
margin above the Eurodollar Rate offered at the time and for the period chosen
(approximately 7.39% as of June 30, 2006) dependent upon the Company's ratio of
funded debt to EBITDA and is payable on the last day of the applicable period.
Quarterly, the Company pays a commitment fee on the daily unused portion of the
Credit Agreement based on a percentage dependent upon the Company's ratio of
funded debt to EBITDA. The Credit Agreement prohibits the Company from paying
dividends. In addition, the Credit Agreement requires the Company to maintain a
Tangible Net Worth, as defined in the Credit Agreement, of not less than $35.9
million as of June 30, 2006 and to have no advances outstanding for 30
consecutive days each calendar year.
At June 30, 2006, the Company's German subsidiary (GmbH) had an unsecured credit
facility totaling 500,000 Euros (equivalent to approximately $628,000 at June
30, 2006). The facility may be used to finance working capital needs and
equipment purchases or capital leases. Any borrowings for working capital needs
will bear interest at 9.0% on the first 100,000 Euros of borrowings and 2.0% for
borrowings over 100,000 Euros. The German credit facility is cancelable at any
time by either GmbH or the bank and any amounts then outstanding would become
immediately due and payable.
34
At June 30, 2006, GmbH had no borrowings outstanding. The facility supported
outstanding letters of credit totaling 100,000 Euros (equivalent to
approximately $125,000 at June 30, 2006).
4. FOREIGN EXCHANGE CONTRACTS
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. These transactions involve the use
of forward contracts, typically mature within one year and are designed to hedge
anticipated foreign currency transactions. The Company may use forward exchange
contracts to hedge the net assets of certain of its foreign subsidiaries to
offset the translation and economic exposures related to the Company's
investment in these subsidiaries.
At June 30, 2006, the Company had forward exchange contracts to sell 4.0 million
Euros ($5.0 million equivalent) at a weighted average settlement rate of 1.25
Euros to the United States Dollar. The contracts outstanding at June 30, 2006,
mature through January 31, 2007. The objective of the hedge transactions is to
protect designated portions of the Company's net investment in its foreign
European subsidiary against adverse changes in the Euro/U.S. Dollar exchange
rate. The Company assesses hedge effectiveness based on overall changes in fair
value of the forward contract. Since the critical risks of the forward contract
and the net investment coincide, there was no ineffectiveness. The accounting
for the hedges is consistent with translation adjustments where any gains and
losses are recorded to other comprehensive income. The Company recognized a loss
of $38,000 in other comprehensive income (loss) for the unrealized and realized
change in value of the forward exchange contracts during the fiscal year ended
June 30, 2006. Offsetting this amount in other comprehensive income (loss) was
the translation effect of the Company's foreign subsidiary. Because the forward
contracts were effective, there was no gain or loss recognized in earnings. The
Company's forward exchange contracts do not subject it to material risk due to
exchange rate movements because gains and losses on these contracts offset
losses and gains on the assets, liabilities, and transactions being hedged.
For fiscal years ended June 30, 2005 and 2004, the Company had approximately
$3.0 million and $8.4 million, respectively, of forward exchange contracts
between the United States Dollar and the Euro with weighted average settlement
prices of 1.30 and 1.21 Euro to each United States Dollar, respectively. The
Company recognized income of approximately $168,000 and a charge of
approximately $642,000 in other comprehensive income (loss) for the unrealized
and realized change in value of forward exchange contracts during the fiscal
years ended June 30, 2005 and June 30, 2004, respectively.
5. INFORMATION ABOUT MAJOR CUSTOMERS
The Company sells its products directly to both domestic and international
automotive assembly companies. The Company's products are typically purchased
for installation in connection with new model retooling programs undertaken by
these companies. Because sales are dependent on the timing of customers'
re-tooling programs, sales by customer vary significantly from year to year, as
do the Company's largest customers. For the fiscal year ended June 30, 2006,
approximately 38% of total net sales were derived from the Company's four
largest automotive customers (General Motors, Volkswagen, BMW and Peugeot
Citroen). The Company also sells to system integrators or OEMs, who in turn sell
to these same automotive companies. For the fiscal year ended June 30, 2006,
approximately, 9%, of net sales were to system integrators and OEMs for the
benefit of the same four automotive companies. For the fiscal years ended June
30, 2005 and 2004, approximately 40% of total net sales were derived from the
Company's four largest automotive customers (General Motors, DaimlerChrysler,
Volkswagen and Ford). The Company also sells to system integrators or OEMs, who
in turn sell to these same automotive companies. For the fiscal years ended June
30, 2005 and 2004, approximately, 13% and 12%, respectively, of net sales, were
to system integrators and OEMs for the benefit of the same four automotive
companies. These numbers reflect consolidations that have occurred within the
Company's four largest automotive customers. During the fiscal year ended June
30, 2006, sales to General Motors were 25.4% of the Company's total net sales.
At June 30, 2006, accounts receivable from General Motors totaled approximately
$2.0 million.
6. CONTINGENCIES
Management is currently unaware of any significant pending litigation affecting
the Company, other than the matters set forth below.
The Company is a party to a suit filed by Industries GDS, Inc., Bois Granval GDS
Inc., and Centre de Preparation GDS, Inc. (collectively, "GDS") on or about
November 21, 2002 in the Superior Court of the Judicial District of Quebec,
Canada against the Company, Carbotech, Inc. ("Carbotech"), and U.S. Natural
Resources, Inc. ("USNR"), among others. The suit alleges that the Company
breached its contractual and warranty obligations as a manufacturer in
connection with the sale and installation of three systems for trimming and
edging wood products. The suit also alleges that Carbotech breached its
contractual obligations in connection with the sale of equipment and the
installation of two trimmer lines, of which the Company's systems were a part,
and that USNR, which acquired substantially all of the assets of the Forest
Products business unit from the Company, was liable for GDS' damages. USNR has
sought indemnification from the Company under the terms of existing contracts
between the Company and USNR. GDS seeks compensatory damages
35
against the Company, Carbotech and USNR of approximately $6.0 million using a
June 30, 2006 exchange rate. GDS and Carbotech have filed for bankruptcy
protection in Canada. The Company intends to vigorously defend GDS' claims.
The Company has been informed that certain of its customers have received
allegations of possible patent infringement involving processes and methods used
in the Company's products. Certain of these customers, including one customer
who was a party to a patent infringement suit relating to this matter, have
settled such claims. Management believes that the processes used in the
Company's products were independently developed without utilizing any previously
patented process or technology. Because of the uncertainty surrounding the
nature of any possible infringement and the validity of any such claim or any
possible customer claim for indemnity relating to claims against the Company's
customers, it is not possible to estimate the ultimate effect, if any, of this
matter on the Company's financial statements.
The Company may, from time to time, be subject to other claims and suits in the
ordinary course of its business. To estimate whether a loss contingency should
be accrued by a charge to income, the Company evaluates, among other factors,
the degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of the loss. Since the outcome of litigation
is subject to significant uncertainty, changes in these factors could materially
impact the Company's financial position or results of operations.
7. 401(K) PLAN
The Company has a 401(k) tax deferred savings plan that covers all eligible
employees. The Company may make discretionary contributions to the plan. The
Company's contributions during the fiscal years ended June 30, 2006, 2005 and
2004, were $437,000, $453,000 and $392,000, respectively.
8. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan for all employees meeting
certain eligibility criteria. Under the Plan, eligible employees may purchase
shares of the Company's common stock at 85% of its market value at the beginning
of the six-month election period. Purchases are limited to 10% of an employee's
eligible compensation and the shares purchased are restricted from being sold
for one year from the purchase date. At June 30, 2006, 143,560 shares remained
available under the Plan. During fiscal years 2006, 2005 and 2004, 11,854, 9,299
and 30,422 shares, respectively, were issued to employees. The average purchase
price per share was $5.87, $6.08 and $2.56 in fiscal years 2006, 2005 and 2004,
respectively. In fiscal 2006 the Company adopted SFAS 123R and recorded non-cash
stock based compensation expense of $29,000 related to this plan. No
compensation expense was recognized in fiscal years 2005 and 2004 for this plan.
9. STOCK INCENTIVE PLANS
The Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment ("SFAS 123R"), effective July 1, 2005. SFAS 123R
requires the recognition of the fair value of stock-based compensation in the
Company's financial statements. Prior to July 1, 2005, the Company applied the
requirements of APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based plans.
Under APB 25, generally no compensation expense was recognized for the Company's
stock-based plans since the exercise price of granted employee stock options was
greater than or equal to the market value of the underlying common stock on the
date of grant.
The Company elected the modified prospective transition method for adopting SFAS
123R. Under this method, the provisions of SFAS 123R apply to all awards granted
or modified after the date of adoption. The Company continues to use the Black
Scholes model for determining stock option valuations. The provisions of SFAS
123R also apply to awards granted prior to July 1, 2005 that did not vest before
July 1, 2005 (transition awards). The compensation cost for the portion of the
transition awards that had not vested by July 1, 2005 is based on the grant-date
fair value of these transition awards as calculated for pro forma disclosures
under the provisions of SFAS 123. Compensation cost for these transition awards
are attributed to periods beginning July 1, 2005 and use the Black Scholes
method used under SFAS 123, except that an estimate of expected forfeitures is
used rather than actual forfeitures.
The Company recognized operating expense for non-cash stock-based compensation
costs in the amount of $667,000 for the fiscal year ended June 30, 2006, which
includes the Employee Stock Purchase Plan discussed above. This had the effect
of decreasing net income by $537,000, or $0.06 per diluted share for the fiscal
year ended June 30, 2006. As of June 30, 2006, the total remaining unrecognized
compensation cost related to non-vested stock options amounted to $1.3 million.
The Company expects to recognize this cost over a weighted average vesting
period of 1.26 years.
The Company received $368,000 in cash from option exercises under all
share-based payment arrangements for the twelve months ended June 30, 2006. The
actual tax benefit realized related to tax deductions for non-qualified options
exercised and disqualifying dispositions under all share-based payment
arrangements totaled $665,000 for fiscal 2006.
36
The Company maintains a 1992 Stock Option Plan ("1992 Plan") and 1998 Global
Team Member Stock Option Plan ("1998 Plan") covering substantially all company
employees and certain other key persons and a Directors Stock Option Plan
("Directors Plan") covering all non-employee directors. During fiscal 2005,
shareholders approved a new 2004 Stock Incentive Plan that replaced the 1992 and
Directors Plans as to future grants. Options previously granted under the 1992
and Directors Plans will continue to be maintained until all options are
exercised, cancelled or expire. The 2004, 1992 and Directors Plans are
administered by a committee of the Board of Directors, the Management
Development, Compensation and Stock Option Committee. The 1998 Plan is
administered by the President of the Company.
Awards under the 2004 Stock Incentive Plan may be in the form of stock options,
stock appreciation rights, restricted stock or restricted stock units,
performance share awards, director stock purchase rights and deferred stock
units; or any combination thereof. The terms of the awards will be determined by
the Management Development, Compensation and Stock Option Committee, unless
specified in the 2004 Stock Incentive Plan. As of June 30, 2006, the Company has
only issued awards in the form of stock options. Options outstanding under the
2004 Stock Incentive Plan and the 1992 and 1998 Plans generally become
exercisable at 25% per year beginning one year after the date of grant and
expire ten years after the date of grant. Options outstanding under the
Directors Plan are either an initial option or an annual option. Prior to
December 7, 2004, initial options of 15,000 shares were granted as of the date
the non-employee director was first elected to the Board of Directors and became
exercisable in full on the first anniversary of the date of grant. Prior to
December 7, 2004, annual options of 3,000 shares were granted as of the date of
the respective annual meeting to each non-employee director serving at least six
months prior to the annual meeting and become exercisable in three annual
increments of 33 1/3% after the date of grant. Options under the Directors Plan
expire ten years from the date of grant. Option prices for options granted under
these plans must not be less than fair market value of the Company's stock on
the date of grant.
Activity under these Plans is shown in the following tables:
FISCAL YEAR 2006 FISCAL YEAR 2005
-------------------------------- --------------------------------
Weighted Aggregate Weighted Aggregate
Average Intrinsic Average Intrinsic
Exercise Value(1) Exercise Value(1)
Shares subject to option Shares Price ($000) Shares Price ($000)
--------- -------- --------- --------- -------- ---------
Outstanding at beginning of period 2,204,007 $ 7.56 2,182,882 $ 8.06
New Grants (based on fair value of
common stock at dates of grant) 243,675 $ 6.72 401,350 $ 6.75
Exercised (170,699) $ 2.16 (122,247) $ 2.13
Expired (234,001) $23.17 (95,809) $24.09
Forfeited (57,535) $ 6.62 (162,169) $ 6.60
--------- ---------
Outstanding at end of period 1,985,447 $ 6.13 $6,557 2,204,007 $ 7.56 $5,039
Exercisable at end of period 1,337,246 $ 6.08 $5,352 1,435,874 $ 8.80 $3,814
FISCAL YEAR 2004
---------------------------------
Weighted Aggregate
Average Intrinsic
Exercise Value(1)
Shares subject to option Shares Price ($000)
--------- -------- ----------
Outstanding at beginning of period 2,176,286 $ 7.37
New Grants (based on fair value of
common stock at dates of grant) 423,600 $ 6.65
Exercised (328,561) $ 2.18
Expired (74,296) $ 9.26
Forfeited (14,147) $ 2.40
---------
Outstanding at end of period 2,182,882 $ 8.06 $6,134
Exercisable at end of period 1,242,243 $11.24 $3,078
(1) The intrinsic value of a stock option is the amount by which the current
market value of the underlying stock exceeds the exercise price of the
option.
37
The total intrinsic value of stock options exercised during the fiscal years
ended June 30, 2006, 2005 and 2004, were $571,000, $553,000 and $1,062,000,
respectively.
The total fair value of shares vested during the fiscal years ended June 30,
2006, 2005 and 2004, were $746,000, $1,076,000 and $1,106,000, respectively.
The estimated fair value as of the date options were granted during the periods
presented using the Black Scholes option-pricing model, was as follows:
2006 2005 2004
------ ------ ------
Weighted Average Estimated Fair Value Per Share
Of Options Granted During The Period $ 2.28 $ 2.12 $ 4.40
Assumptions:
Amortized Dividend Yield -- -- --
Common Stock Price Volatility 30.16% 28.40% 79.58%
Risk Free Rate Of Return 4.02% 3.38% 3.17%
Expected Option Term (in years) 5 5 5
The following table summarizes information about stock options at June 30, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
----------------- --------- ----------- -------- --------- --------
$1.21 to $ 1.53 531,720 5.28 $ 1.39 496,283 $ 1.38
1.72 to 6.45 539,921 5.45 $ 4.36 380,803 $ 3.82
6.47 to 6.85 505,730 7.14 $ 6.61 231,218 $ 6.61
6.87 to 31.78 408,076 5.54 $14.03 228,942 $19.50
--------- ---------
$1.21 to $31.78 1,985,447 5.86 $ 6.13 1,337,246 $ 6.08
========= =========
At June 30, 2006, options covering 589,429 shares were available for future
grants under the 2004 and 1998 Plans.
10. INCOME TAXES
Income from continuing operations before income taxes for U.S. and foreign
operations was as follows (in thousands):
2006 2005 2004
------ ------ ------
U.S. $1,096 $3,289 $2,586
Foreign 3,831 1,897 4,067
------ ------ ------
Total $4,927 $5,186 $6,653
====== ====== ======
During fiscal 2006, the Company recorded $290,000 of tax expense related to the
repatriation of $6.3 million of un-remitted earnings of certain of the Company's
European subsidiaries under the provisions of the American Jobs Creation Act of
2004. The income tax provision (benefit) reflected in the statement of income
consists of the following (in thousands):
2006 2005 2004
------ ------ ------
Current provision (benefit):
U.S. Federal & State $ 420 $ (8) $ 92
Foreign 537 606 1,917
Deferred taxes
U.S. 757 1,154 826
Foreign (26) 152 (169)
------ ------ -----
Total provision (benefit) $1,688 $1,904 $2,666
====== ====== ======
38
The Company's deferred tax assets are substantially represented by the tax
benefit of net operating losses and the tax benefit of future deductions
represented by allowance for bad debts, warranty expenses and inventory
obsolescence and tax credit carry-forwards. The Company established in fiscal
2002 a valuation allowance for tax credit carry forwards and other items where
it was more likely than not that these items would expire or not be deductible
before the Company was able to realize their benefit. Based on the past few
years of taxable income in the United States and expected taxable income in the
United States in the future, the Company believes there is positive evidence
that it is more likely than not that the tax benefits associated with the
valuation allowance on the net operating loss carry-forwards will now be
utilized. As a result, in the second quarter of fiscal 2006, the Company
recognized a $725,000 tax benefit associated with reversing the valuation
allowance related to net operating losses in the United States. In the fourth
quarter of fiscal 2006, the Company increased its valuation allowance primarily
due to the liquidation of its Canadian subsidiary. The Company continues to have
a valuation allowance for tax credit carry-forwards that it still expects will
more likely than not expire prior to the tax benefit being realized. The
components of deferred tax assets were as follows (in thousands):
2006 2005 2004
------- ------- -------
Benefit of net operating losses $ 4,399 $ 5,947 $ 6,413
Tax credit carry forwards 3,571 2,967 2,797
Other, principally reserves 1,405 1,182 1,516
------- ------- -------
Deferred tax asset 9,375 10,096 10,726
Valuation allowance (3,724) (3,692) (3,547)
------- ------- -------
Net deferred tax asset $ 5,651 $ 6,404 $ 7,179
======= ======= =======
Rate reconciliation:
Provision at U.S. statutory rate 34.0% 34.0% 34.0%
Net effect of taxes on foreign activities (13.5)% 2.2% 5.5%
Tax effect of U.S. permanent differences 8.6% -- --
State taxes and other, net 0.1% 0.5% 0.6%
Adjustment of federal/foreign income taxes
provided for in prior years 4.5% (2.8)% 14.7%
Valuation allowance 0.6% 2.8% (14.7)%
------- ------- -------
Effective tax rate 34.3% 36.7% 40.1%
======= ======= =======
No provision was made with respect to earnings as of June 30, 2006 that have
been retained for use by foreign subsidiaries. It is not practicable to estimate
the amount of unrecognized deferred tax liability for the undistributed foreign
earnings. At June 30, 2006, the Company had net operating loss carry-forwards
for Federal income tax purposes of $12.9 million that expire in the years 2020
through 2023 and tax credit carry forwards of $3.6 million that expire in the
years 2007 through 2020. The net change in the total valuation allowance for the
years ended June 30, 2006, 2005, and 2004 was an increase of $32,000, $145,000
and a decrease of $977,000, respectively.
11. GEOGRAPHIC INFORMATION
The Company's business is substantially all in the global automotive market and
its business segment is the automotive industry. The Company primarily accounts
for geographic sales based on the country from which the sale is invoiced rather
than the country where the product is shipped to. The Company operates in two
primary geographic areas: Domestic (United States) and International (primarily
Europe, with limited operations in Canada, Asia and South America).
GEOGRAPHICAL REGIONS (000'S) DOMESTIC INTERNATIONAL(1) CONSOLIDATED
---------------------------- -------- ---------------- ------------
FISCAL YEAR ENDED JUNE 30, 2006
Net external sales $36,443 $21,432 $57,875
Long-lived assets 6,718 690 7,408
FISCAL YEAR ENDED JUNE 30, 2005
Net external sales $32,343 $22,549 $54,892
Long-lived assets 7,094 593 7,687
FISCAL YEAR ENDED JUNE 30, 2004
Net external sales $29,163 $24,230 $53,393
Long-lived assets 7,261 453 7,714
(1) The Company's German subsidiary had net external sales of $18.9 million,
$19.9 million and $22.5 million in the fiscal years ended June 30, 2006,
2005 and 2004, respectively. Long-lived assets of the Company's German
subsidiary were $514,000, $505,000 and $379,000 as of June 30, 2006, 2005
and 2004, respectively.
39
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data for the fiscal years ended June 30,
2006 and 2005 are as follows (in thousands, except per share amounts):
QUARTER ENDED
-----------------------------------------
FISCAL YEAR 2006 09/30/05 12/31/05 03/31/06 06/30/06
-------- -------- -------- --------
Net sales $12,760 $17,188 $13,447 $14,480
Gross profit 5,583 8,298 7,149 6,257
Net income 269 2,194 1,048 (272)
Earnings per share
Basic 0.03 0.25 0.12 (0.03)
Diluted 0.03 0.24 0.12 (0.03)
FISCAL YEAR 2005 09/30/04 12/31/04 03/31/05 06/30/05
-------- -------- -------- --------
Net sales $12,244 $14,812 $12,879 $14,957
Gross profit 6,028 7,418 6,580 5,881
Net income 965 1,467 744 106
Earnings per share
Basic 0.11 0.17 0.08 0.01
Diluted 0.10 0.16 0.08 0.01
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A: CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that, as of June 30,
2006, the Company's disclosure controls and procedures were effective in causing
the material information required to be disclosed in the reports that it files
or submits under the Securities Exchange Act of 1934 to be recorded, processed,
summarized and reported, to the extent applicable, within the time periods
required for the Company to meet the SEC filing deadlines for these reports
specified in the SEC's rules and forms. There have been no changes in the
Company's internal controls over financial reporting during the quarter ended
June 30, 2006 identified in connection with the Company's evaluation that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
ITEM 9B: OTHER INFORMATION
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions "Matters to Come before the Meeting
- Proposal 1: Election of Directors", "Further Information - Executive
Officers", and "Further Information - Share Ownership of Management and Certain
Shareholders - Section 16 (a) Beneficial Ownership Reporting Compliance" of the
registrant's proxy statement for 2006 Annual Meeting of Shareholders (the "Proxy
Statement") is incorporated herein by reference.
The information required by Part III, Item 10 with respect to the Company's
audit committee and the audit committee's financial expert is set forth in the
Proxy Statement under the caption "Board of Directors and Committees - Audit
Committee," which paragraph is incorporated herein by reference.
The Company has adopted a Code of Business Conduct and Ethics that applies to
all of the Company's directors, executive and financial officers and employees.
The Code of Business Conduct and Ethics has been posted to the Company's website
at www.perceptron.com in the Company section under "Financials" and is available
free of charge through the Company's website. The Company will post information
regarding any amendment to, or waiver from, the Company's Code of Business
Conduct and Ethics for executive and financial officers and directors on the
Company's website in the Company section under "Financials".
40
ITEM 11: EXECUTIVE COMPENSATION
The information contained under the caption "Further Information - Compensation
of Directors and Executive Officers" of the Proxy Statement is incorporated
herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained under the captions "Further Information - Share
Ownership of Management and Certain Shareholders - Principal Shareholders",
"Further Information - Share Ownership of Management and Certain Shareholders -
Beneficial Ownership by Directors and Executive Officers", and "Further
Information - Compensation of Directors and Executive Officers - Termination of
Employment and Change in Control Arrangements" of the Proxy Statement is
incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about the Company's Common Stock that may
be issued upon the exercise of options, warrants and rights under all of the
Company's existing equity compensation plans as of June 30, 2006, including the
2004 Stock Incentive Plan, the 1992 Stock Option Plan, the Directors Stock
Option Plan, the 1998 Global Team Member Stock Option Plan, and the Employee
Stock Purchase Plan (together, the "Option Plans"):
NUMBER OF SECURITIES
NUMBER OF SECURITIES WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
TO BE ISSUED UPON EXERCISE PRICE OF FUTURE ISSUANCE UNDER
EXERCISE OF OUTSTANDING EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A))
------------- -------------------- ----------------- -------------------------
(A) (B) (C)
Equity compensation plans approved by
shareholders:
2004 Stock Incentive Plan 92,500(1) $7.01 500,709
1992 Stock Option Plan 1,126,630(2) $6.91 --
Directors Stock Option Plan 139,000(2) $4.83 --
Employee Stock Purchase Plan 6,227(3) $5.93 137,333
--------- -------
Total of equity compensation plans
approved by shareholders 1,364,357 $6.70 638,042
Equity compensation plans not approved by
shareholders: 1998 Global Team Member
Stock Option Plan 627,317 $4.88 88,720
--------- -------
Total: 1,991,674 $6.12 726,762
========= =======
(1) Awards under the 2004 Stock Incentive Plan may be in the form of stock
options, stock appreciation rights, restricted stock or restricted stock
units, performance share awards, director stock purchase rights and
deferred stock units; or any combination thereof.
(2) The 2004 Stock Incentive Plan replaced the 1992 Stock Option Plan and
Directors Stock Option Plan effective December 7, 2004. Further grants
under these plans have been cancelled.
(3) Does not include an undeterminable number of shares subject to a payroll
deduction election under the Employee Stock Purchase Plan for the period
from July 1, 2006 until December 31, 2006, which will not be issued until
January 2007.
1998 GLOBAL TEAM MEMBER STOCK OPTION PLAN
On February 26, 1998, the Company's Board approved the 1998 Global Team Member
Stock Option Plan (the "1998 Plan"), pursuant to which non-qualified stock
options may be granted to employees who are not officers or directors or subject
to Section 16 of the Exchange Act. The 1998 Plan has been amended by the Board
on several occasions thereafter.
The purpose of the 1998 Plan is to promote the Company's success by linking the
personal interests of non-executive employees to those of the Company's
shareholders and by providing participants with an incentive for outstanding
performance. The 1998 Plan authorizes the granting of non-qualified stock
options only. The President of the Company
41
administers the 1998 Plan and has the power to set the terms of any grants under
the 1998 Plan. The exercise price of an option may not be less than the fair
market value of the underlying stock on the date of grant and no option may have
a term of more than ten years. All of the options that are currently outstanding
under the 1998 Plan become exercisable ratably over a four-year period beginning
at the grant date and expire ten years from the date of grant. If, for any
reason, an option lapses, expires or terminates without having been exercised in
full, the unpurchased shares covered thereby are again available for grants of
options under the 1998 Plan. In addition, if the option is exercised by delivery
to the Company of shares previously acquired pursuant to options granted under
the 1998 Plan, then shares of Common Stock delivered in payment of the exercise
price of an option will again be available for grants of options under the 1998
Plan.
The exercise price is payable in full in cash at the time of exercise; or in
shares of Common Stock, (but generally, only if such shares have been owned for
at least six months or, if they have not been owned by the optionee for at least
six months, the optionee then owns, and has owned for at least six months, at
least an equal number of shares of Common Stock as the option shares being
delivered); or the exercise price may be paid by delivery to the Company of a
properly executed exercise notice, together with irrevocable instructions to the
participant's broker to deliver to the Company sufficient cash to pay the
exercise price and any applicable income and employment withholding taxes, in
accordance with a written agreement between the Company and the brokerage firm
("cashless exercise" procedure).
Generally, if the employment by the Company of any optionee who is an employee
terminates for any reason, other than by death or total and permanent
disability, any option which the optionee is entitled to exercise on the date of
employment termination may be exercised by the optionee at any time on or before
the earlier of the expiration date of the option or three months after the date
of employment termination, but only to the extent of the accrued right to
purchase at the date of such termination. In addition, the President of the
Company has the discretionary power to extend the date to exercise beyond three
months after the date of employment termination. If the employment of any
optionee who is an employee is terminated because of total and permanent
disability, the option may be exercised by the optionee at any time on or before
the earlier of the expiration date of the option or one year after the date of
termination of employment, but only to the extent of the accrued right to
purchase at the date of such termination. If any optionee dies while employed by
the Company and, if at the date of death, the optionee is entitled to exercise
an option, such option may be exercised by any person who acquires the option by
bequest or inheritance or by reason of the death of the optionee, or by the
executor or administrator of the estate of the optionee, at any time before the
earlier of the expiration date of the option or one year after the date of death
of the optionee, but only to the extent of the accrued right to purchase at the
date of death.
The 1998 Plan provides for acceleration of vesting of awards in the event of a
change in control of the Company. See "Further Information - Compensation of
Directors and Executive Officers - Termination of Employment and Change in
Control Arrangements" of the Proxy Statement for a definition of change in
control. The 1998 Plan will terminate automatically on February 25, 2008.
However, the Board may amend or terminate the 1998 Plan at any time without
shareholder approval, but no amendment or termination of the 1998 Plan or any
award agreement may adversely affect any award previously granted under the 1998
Plan without the consent of the participant. The NASDAQ listing requirements
prohibit the Company from amending the 1998 Plan to add additional shares of
Common Stock without shareholder approval.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the captions "Independent Accountants - Policy
for Pre-Approval of Audit and Non Audit Services" and "Independent Accountants -
Fees Paid to Independent Auditors" of the Proxy Statement is incorporated herein
by reference.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
A. Financial Statements and Schedules Filed
Financial Statements - see Item 8 of this report. Financial statement
schedules have been omitted since they are either not required, not
applicable, or the information is otherwise included.
B. Exhibits:
Exhibits - the exhibits filed in response to Item 601 of Regulation
S-K with this report are listed on pages 44 through 47. The Exhibit
List is incorporated herein by reference.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
PERCEPTRON, INC.
(Registrant)
By: /S/ Alfred A. Pease
------------------------------------
Alfred A. Pease, Chairman of the
Board, President and Chief Executive
Officer (Principal Executive
Officer)
Date: September 27, 2006
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.
Signatures Title Date
---------- ----- ----
/S/ Alfred A. Pease Chairman of the Board, President, September 27, 2006
--------------------------- Chief Executive Officer and Director
Alfred A. Pease (Principal Executive Officer)
/S/ John J. Garber Vice President and Chief Financial Officer September 27, 2006
--------------------------- (Principal Financial Officer)
John J. Garber
/S/ Sylvia M. Smith Controller (Principal Accounting Officer) September 27, 2006
---------------------------
Sylvia M. Smith
/S/ David J. Beattie Director September 27, 2006
---------------------------
David J. Beattie
/S/ Kenneth R. Dabrowski Director September 27, 2006
---------------------------
Kenneth R. Dabrowski
/S/ W. Richard Marz Director September 27, 2006
---------------------------
W. Richard Marz
/S/ James A. Ratigan Director September 27, 2006
---------------------------
James A. Ratigan
/S/ Terryll R. Smith Director September 27, 2006
---------------------------
Terryll R. Smith
43
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession.
2.1 Asset Purchase Agreement by and among U.S. Natural Resources, Inc.,
Nanoose Systems Corporation, Trident Systems, Inc., and Perceptron,
Inc., dated March 13, 2002, is incorporated by reference to Exhibit
2.1 of the Company's Report on Form 8-K filed March 29, 2002.
3. Restated Articles of Incorporation and Bylaws.
3.1 Restated Articles of Incorporation, as amended to date, are
incorporated herein by reference to Exhibit 3.1 of the Company's
Report on Form 10-Q for the Quarter Ended March 31, 1998.
3.2 Amended and Restated Bylaws, as amended to date, are incorporated
herein by reference to Exhibit 3.2 of the Company's Form S-8
Registration Statement No. 333-55164.
4. Instruments Defining the Rights of Securities Holders.
4.1 Articles IV, V and VI of the Company's Restated Articles of
Incorporation are incorporated herein by reference to Exhibit 3.1 of
the Company's Report on Form 10-Q for the Quarter Ended March 31,
1998.
4.2 Articles I, II, III, VI, VII, X and XI of the Company's Amended and
Restated Bylaws are incorporated herein by reference to Exhibit 3.2 of
the Company's Form S-8 Registration Statement No. 333-55164.
4.3 Credit Agreement dated October 24, 2002, between Perceptron, Inc. and
Comerica Bank is incorporated by reference to Exhibit 4.9 of the
Company's Report on Form 10-Q for the Quarter Ended September 30,
2002.
4.4 Form of certificate representing Rights (included as Exhibit B to the
Rights Agreement filed as Exhibit 4.5) is incorporated herein by
reference to Exhibit 2 of the Company's Report on Form 8-K filed March
24, 1998. Pursuant to the Rights Agreement, Rights Certificates will
not be mailed until after the earlier of (i) the tenth business day
after the Shares Acquisition Date (or, if the tenth day after the
Shares Acquisition Date occurs before the Record Date, the close of
business on the Record Date) (or, if such Shares Acquisition Date
results from the consummation of a Permitted Offer, such later date as
may be determined before the Distribution Date, by action of the Board
of Directors, with the concurrence of a majority of the Continuing
Directors), or (ii) the tenth business day (or such later date as may
be determined by the Board of Directors, with the concurrence of a
majority of the Continuing Directors, prior to such time as any person
becomes an Acquiring Person) after the date of the commencement of, or
first public announcement of the intent to commence, a tender or
exchange offer by any person or group of affiliated or associated
persons (other than the Company or certain entities affiliated with or
associated with the Company), other than a tender or exchange offer
that is determined before the Distribution Date to be a Permitted
Offer, if, upon consummation thereof, such person or group of
affiliated or associated persons would be the beneficial owner of 15%
or more of such outstanding shares of Common Stock.
4.5 Rights Agreement, dated as of March 24, 1998, between Perceptron, Inc.
and American Stock Transfer & Trust Company, as Rights Agent, is
incorporated herein by reference to Exhibit 2 of the Company's Report
on Form 8-K filed March 24, 1998.
4.6 First Amendment to Credit Agreement dated October 24, 2002, between
Perceptron, Inc. and Comerica Bank is incorporated by reference to
Exhibit 4.6 of the Company's Report on Form 10-Q for the Quarter Ended
September 30, 2003.
4.7 Second Amendment to Credit Agreement dated October 24, 2002, between
Perceptron, Inc. and Comerica Bank is incorporated by reference to
Exhibit 4.7 of the Company's Report on Form 10-Q for the Quarter Ended
September 30, 2003.
4.8 Third Amendment to Credit Agreement dated October 24, 2002, between
Perceptron, Inc. and Comerica Bank is incorporated by reference to
Exhibit 4.8 of the Company's Report on Form 10-K for the Year Ended
June 30, 2004.
4.9 Fourth Amendment to Credit Agreement dated October 24, 2002, between
Perceptron, Inc. and Comerica Bank is incorporated by reference to
Exhibit 10.1 of the Company's Report on Form 8-K filed January 5,
2005.
44
4.10 Fifth Amendment to Credit Agreement dated October 24, 2002, between
Perceptron, Inc. and Comerica Bank, is incorporated by reference to
Exhibit 4.10 of the Company's Report on Form 10-Q for the Quarter
ended September 30, 2005.
Other instruments, notes or extracts from agreements defining the
rights of holders of long-term debt of the Company or its subsidiaries
have not been filed because (i) in each case the total amount of
long-term debt permitted thereunder does not exceed 10% of the
Company's consolidated assets, and (ii) the Company hereby agrees that
it will furnish such instruments, notes and extracts to the Securities
and Exchange Commission upon its request.
10. Material Contracts.
10.1 Registration Agreement, dated as of June 13, 1985, as amended, among
the Company and the Purchasers identified therein, is incorporated by
reference to Exhibit 10.3 of the Company's Form S-1 Registration
Statement (amended by Exhibit 10.2) No. 33-47463.
10.2 Patent License Agreement, dated as of August 23, 1990, between the
Company and Diffracto Limited, is incorporated herein by reference to
Exhibit 10.10 of the Company's Report on Form S-1 Registration
Statement No. 33-47463.
10.3 Form of Proprietary Information and Inventions Agreement between the
Company and all of the employees of the Company is incorporated herein
by reference to Exhibit 10.11 of the Company's Form S-1 Registration
Statement No. 33-47463.
10.4 Form of Confidentiality and Non-Disclosure Agreement between the
Company and certain vendors and customers of the Company is
incorporated herein by reference to Exhibit 10.12 of the Company's
Form S-1 Registration Statement No. 33-47463.
10.5 Form of Executive Agreement Not to Compete between the Company and
certain officers of the Company is incorporated herein by reference to
Exhibit 10.5 of the Company's Annual Report on Form 10-K for the Year
Ended June 30, 2005.
10.6@ Perceptron, Inc. 2004 Stock Incentive Plan is incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 8-K filed
December 10, 2004.
10.7@ Form of Incentive Stock Option Agreement Terms for Officers under the
Perceptron, Inc. 2004 Stock Incentive Plan is incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 8-K filed
January 5, 2005.
10.8@ Form of Nonqualified Stock Option Agreement Terms for Officers under
the Perceptron, Inc. 2004 Stock Incentive Plan is incorporated by
reference to Exhibit 10.3 of the Company's Report on Form 8-K filed
January 5, 2005.
10.9@ Form of Incentive Stock Option Agreement Terms for Officers under the
Perceptron, Inc. 2004 Stock Incentive Plan is incorporated by
reference to Exhibit 10.3 of the Company's Report on Form 8-K filed
December 27, 2005.
10.10@ Form of Nonqualified Stock Option Agreement Terms for Officers under
the Perceptron, Inc. 2004 Stock Incentive Plan is incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 8-K filed
December 27, 2005.
10.11@ Form of Nonqualified Stock Option Agreement Terms - Board of Directors
under the Perceptron, Inc. 2004 Stock Incentive Plan is incorporated
by reference to Exhibit 10.1 of the Company's Report on Form 8-K filed
August 10, 2006.
10.12@ 1998 Global Team Member Stock Option Plan and Form of Non-Qualified
Stock Option Agreements under such Plan is incorporated herein by
reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K
for the Year Ended December 31, 1997.
10.13@ First Amendment to the 1998 Global Team Member Stock Option Plan is
incorporated by reference to Exhibit 10.28 of the Company's Report on
Form 10-K for the Transition Period Ended June 30, 1999.
10.14@ Second Amendment to the 1998 Global Team Member Stock Option Plan is
incorporated by reference to Exhibit 10.29 of the Company's Report on
Form 10-K for the Transition Period Ended June 30, 1999.
10.15@ Third Amendment to the 1998 Global Team Member Stock Option Plan is
incorporated by reference to Exhibit 99.6 of the Company's Form S-8
Registration Statement No. 333-55164.
45
10.16@ Fourth Amendment to the 1998 Global Team Member Stock Option Plan is
incorporated by reference to Exhibit 99.7 of the Company's S-8
Registration Statement No. 333-76194.
10.17@ Form of Non-Qualified Stock Option Agreements under 1998 Global Team
Member Stock Option Plan after September 1, 1998 is incorporated by
reference to Exhibit 10.6 of the Company's Report on Form 10-K for the
Year Ended December 31, 1998.
10.18@ Forms of Non-Qualified Stock Option Agreements under 1998 Global Team
Member Stock Option Plan after September 1, 1999 is incorporated by
reference to Exhibit 10.31 of the Company's Report on Form 10-Q for
the Quarter Ended September 30, 1999.
10.19@ Form of Non-Qualified Stock Option Agreements under 1998 Global Team
Member Stock Option Plan after January 1, 2006 is incorporated by
reference to Exhibit 10.47 of the Company's Report on Form 10-Q for
the Quarter Ended March 31, 2006.
10.20@ Perceptron, Inc. Employee Stock Purchase Plan, as amended and restated
as of October 22, 2004, is incorporated by reference to Exhibit 10.2
of the Company's Report on Form 8-K filed December 10, 2004.
10.21@ Amended and Restated 1992 Stock Option Plan is incorporated herein by
reference to Exhibit 10.53 of the Company's Report on Form 10-Q for
the Quarter Ended September 30, 1996.
10.22@ First Amendment to Amended and Restated 1992 Stock Plan is
incorporated by reference to Exhibit 10.39 of the Company's Report on
Form 10-Q for the Quarter Ended March 31, 1997.
10.23@ Second Amendment to Amended and Restated 1992 Stock Option Plan is
incorporated by reference to Exhibit 10.26 of the Company's Report on
Form 10-Q for the Quarter Ended March 31, 1999.
10.24@ Third Amendment to Amended and Restated 1992 Stock Option Plan is
incorporated by reference to Exhibit 10.35 of the Company's Report on
Form 10-K for the Year Ended June 30, 2001.
10.25@ Fourth Amendment to Amended and Restated 1992 Stock Option Plan is
incorporated by reference to Exhibit 10.37 of the Company's Report on
Form 10-K for the Year Ended June 30, 2002.
10.26@ Forms of Incentive Stock Option Agreements (Team Members and Officers)
under 1992 Stock Option Plan after February 9, 1995 is incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K
for the Year Ended December 31, 1994.
10.27@ Forms of Incentive Stock Option Agreements (Team Members and Officers)
and Non-Qualified Stock Option Agreements under 1992 Stock Option Plan
after January 1, 1997, and Amendments to existing Stock Option
Agreements under the 1992 Stock Option Plan is incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K
for the Year Ended December 31, 1996.
10.28@ Forms of Incentive Stock Option Agreements (Officers) and
Non-Qualified Stock Option Agreements (Officers) under 1992 Stock
Option Plan after September 1, 1998 is incorporated by reference to
Exhibit 10.25 of the Company's Report on Form 10-K for the Year Ended
December 31, 1998.
10.29@ Forms of Incentive Stock Option Agreements (Officers) and
Non-Qualified Stock Option Agreements (Officers) under 1992 Stock
Option Plan after September 1, 1999 is incorporated by reference to
Exhibit 10.30 of the Company's Report on Form 10-Q for the Quarter
Ended September 30, 1999.
10.30@ Amended and Restated Directors Stock Option Plan is incorporated by
reference to Exhibit 10.56 to the Company's Report on Form 10-Q for
the Quarter Ended September 30, 1996.
10.31@ First Amendment to Amended and Restated Directors Stock Option Plan is
incorporated by reference to Exhibit 10.27 of the Company's Report on
Form 10-Q for the Quarter Ended March 31, 1999.
10.32@ Second Amendment to the Perceptron, Inc. Directors Stock Option Plan
(Amended and Restated October 31, 1996) is incorporated by reference
to Exhibit 10.33 of the Company's Report on Form 10-Q for the Quarter
Ended March 31, 2000.
10.33@ Form of Non-Qualified Stock Option Agreements and Amendments under the
Director Stock Option Plan is incorporated by reference to Exhibit
10.27 to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1996.
10.34@ Forms of Non-Qualified Stock Option Agreements under the Directors
Stock Option Plan after September 1, 1999 is incorporated by reference
to Exhibit 10.32 of the Company's Report on Form 10-Q for the Quarter
Ended December 31, 1999.
46
10.35@ Letter Agreement, dated February 14, 1996, between the Company and
Alfred A. Pease is incorporated herein by reference to Exhibit 10.36
to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1996.
10.36 Covenant Not to Compete between U.S. Natural Resources, Inc., and
Perceptron, Inc., dated March 13, 2002 is incorporated by reference to
Exhibit 2.1 of the Company's Report on Form 8-K filed March 29, 2002.
10.37@ Summary of 2004 Team Member Profit Sharing Plan is incorporated by
reference to Exhibit 10.39 of the Company's Report on Form 10-Q for
the Quarter Ended December 31, 2003.
10.38@ Written Description of 2005 Team Member Profit Sharing Plan is
incorporated by reference to Exhibit 10.37 of the Company's Report on
Form 10-Q for the Quarter Ended September 30, 2004.
10.39@ Written Description of 2006 Team Member Profit Sharing Plan is
incorporated by reference to Exhibit 10.1 of the Company's Report on
Form 8-K filed December 27, 2005.
10.40@ Severance Agreement, dated September 7, 2005, between the Company and
Alfred A. Pease is incorporated by reference to Exhibit 10.1 of the
Company's Report on Form 8-K filed September 12, 2005.
10.41@ Severance Agreement, dated September 7, 2005, between the Company and
Harry T. Rittenour is incorporated by reference to Exhibit 10.2 of the
Company's Report on Form 8-K filed September 12, 2005.
10.42@ Severance Agreement, dated September 8, 2005, between the Company and
Wilfred J. Corriveau is incorporated by reference to Exhibit 10.3 of
the Company's Report on Form 8-K filed September 12, 2005.
10.43@ Severance Agreement, dated September 7, 2005, between the Company and
John J. Garber is incorporated by reference to Exhibit 10.4 of the
Company's Report on Form 8-K filed September 12, 2005.
21. A list of subsidiaries of the Company is incorporated by reference to
Exhibit 21 of the Company's Report on Form 10-K for the Year Ended
June 30, 2002.
23.* Consent of Experts and Counsel.
31. Rule 13a-14(a)/15d-14(a) Certifications
31.1* Certification by the Chief Executive Officer of the Company pursuant
to Rule 13a-14(a) and Rule 15d-14(a).
31.2* Certification by the Chief Financial Officer of the Company pursuant
to Rule 13a-14(a) and Rule 15d-14(a).
32. Section 1350 Certifications
32.1* Certification by the Chief Executive Officer of the Company pursuant
to Rule 13a-14(a) and Rule 15d-14(a).
32.2* Certification by the Chief Financial Officer of the Company pursuant
to Rule 13a-14(a) and Rule 15d-14(a).
----------
* Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2006.
@ Indicates a management contract, compensatory plan or arrangement.
47