10-K 1 b38122cce10-k.txt COGNEX CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ------------ ------------ COMMISSION FILE NUMBER 0-17869 COGNEX CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2713778 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE VISION DRIVE NATICK, MASSACHUSETTS 01760-2059 (508) 650-3000 (Address, including zip code, and telephone number, including area code, of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting stock held by non-affiliates as of February 25, 2001: $983,555,000 $.002 par value common stock outstanding as of February 25, 2001: 43,472,063 shares Documents incorporated by reference: Specifically identified information in the Annual Report to Stockholders for the year ended December 31, 2000, is incorporated by reference into Parts I and II hereof. Specifically identified information in the definitive Proxy Statement for the Special Meeting in Lieu of the 2000 Annual Meeting of Stockholders to be held on April 26, 2001, is incorporated by reference into Part III hereof. A list of Exhibits to this Annual Report on Form 10-K is located on page 19 2 COGNEX CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 INDEX PART I ITEM 1. BUSINESS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 4A. EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM OF THE REGISTRANT PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 3 PART I The Company's results are subject to certain risks and uncertainties. This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Federal Securities Laws. The Company's future results may differ materially from current results and actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors. Readers should pay particular attention to considerations described in the section captioned "Forward-Looking Statements" in Management's Discussion and Analysis of Financial Condition and Results of Operations appearing on page 32 of the Annual Report to Stockholders for the year ended December 31, 2000, which is Exhibit 13 hereto, and is incorporated herein by reference, as well as considerations included in other documents filed with the Securities and Exchange Commission. ITEM 1. BUSINESS CORPORATE PROFILE Cognex(R) Corporation ("Cognex" or the "Company," each of which term includes, unless the context indicates otherwise, Cognex Corporation and its subsidiaries) was incorporated in Massachusetts in 1981. Its principal executive offices are located at One Vision Drive, Natick, Massachusetts 01760 and its telephone number is (508) 650-3000. The Company designs, develops, manufactures, and markets machine vision systems that are used to automate a wide range of manufacturing processes where vision is required. Cognex machine vision systems consist of two primary elements: a computer, which serves as a "machine vision engine," and software that processes and analyzes images. When connected to a video camera, the machine vision system captures images and extracts information, which determines appropriate action for other equipment in the manufacturing process. Machine vision systems are used in a variety of industries including the semiconductor, electronics, automotive, consumer products, metals, plastics, and paper industries. Machine vision is important for applications in which human vision is inadequate due to fatigue, visual acuity, or speed, or in instances where substantial cost savings are obtained through the reduction of direct labor or improved product quality. Today, many types of manufacturing equipment require machine vision because of the increasing demands for speed and accuracy in manufacturing processes, as well as the decreasing size of items being manufactured. WHAT IS MACHINE VISION? In a typical machine vision application, a video camera positioned on the production line captures an image of the part to be inspected. The machine vision computer then uses sophisticated image analysis software to extract information from the image and provide an answer to a question. Cognex machine vision systems can answer four types of questions:
QUESTION DESCRIPTION EXAMPLE -------- ----------- ------- GUIDANCE Where is it? Determining the exact physical Determining the position of a printed circuit location of an object. board so that a robot can automatically be guided to insert electronic components.
1 4 IDENTIFICATION What is it? Identifying an object by analyzing Identifying the serial number on an automotive its shape or by reading a serial airbag so that it can be tracked and processed number. correctly through manufacturing. INSPECTION How good is it? Inspecting an object for flaws or Inspecting the quality of printing on defects. pharmaceutical labels and packaging. GAUGING What size is it? Determining the dimensions of an Determining the diameter of a bearing prior object. to final assembly.
Once the machine vision system has processed the image and performed any necessary analysis, the result is then communicated to other equipment on the factory floor, such as an industrial controller, a robotic arm, a deflector that removes the part from the line, a positioning table that moves the part, or alternatively, to a computer file for analysis or subsequent process control. This process is repeated during the manufacturing process as product moves into position in front of the camera. Machine vision systems can perform inspections quickly enough to keep pace with machines that process thousands of items or material feet per minute, thus increasing both quality and productivity. THE MACHINE VISION MARKET The machine vision market consists of two customer types: Original Equipment Manufacturers (OEMs) and end users. OEMs are companies that build standard products sold as capital equipment for end users on the factory floor. These customers, most of which are in the semiconductor and electronics industries, have the technical expertise to build Cognex's programmable, board-level machine vision systems directly into their products which are then sold to end users. End users are companies that manufacture products, such as spark plugs, cellular telephones, surgical staples, metals, and paper. While they may purchase capital equipment containing machine vision or hire a system integrator to build an inspection system, many end users choose to purchase machine vision directly for specific applications on their production lines. Unlike OEMs and system integrators, these customers typically have little or no computer programming or machine vision experience. System integrators are companies that create complete, automated inspection solutions for end users on the factory floor. For example, they combine lighting, conveyors, robotics, machine vision, and other components to produce custom inspection systems for various applications. Because system integrators encounter a broad range of automation problems, they purchase a variety of Cognex products, from general-purpose systems to application-specific systems tailored to solve particular manufacturing tasks. The Company includes system integrators in its definition of end users. BUSINESS STRATEGY The Company's goal is to expand its position as a leading worldwide supplier of machine vision systems for factory automation. Currently, the Company's products are designed for factory automation because the Company believes that this market offers the greatest opportunity for selling high value-added, standard products in high volume. Within the factory automation market, the Company has historically focused primarily on those customers who must have machine vision because of the increasing complexity of their products or manufacturing methods. 2 5 Emphasizing high value-added products and applications is important to the Company's strategy because not every segment of the machine vision market offers opportunity for sustained profitability. High value-added is realized in the Company's products in several ways. The primary value-added is derived from offering unique vision software algorithms that solve challenging problems better than competing products. The other major mode of realizing high value-added is by offering products which are complete solutions to known problems, incorporating all of the necessary vision software, applications software, hardware, and electro-optics. Both modes of realizing high value-added require the Company to maintain an industry-leading level of investment in research, development, and engineering. Within the factory automation market, the Company has tailored its product offerings to match the characteristics of its two customer types: OEMs and end users. Historically, OEMs have been the source of the majority of the Company's revenue. However, the Company believes that end users have the potential in the long term to generate more revenue than OEMs. Consequently, the Company has invested in developing and acquiring products that meet the needs of end users and in developing a strong worldwide direct sales and support infrastructure. The Company will continue to invest in both customer types, defending its strong position in the OEM market while expanding in the end-user market. The Company has historically pursued a global business strategy, investing in building a strong direct presence in North America, Japan, Europe, and Southeast Asia. In all of these regions, the Company is acknowledged to be a leading machine vision supplier. The Company intends to continue to invest in the expansion of direct sales and support in these regions. In 2000, approximately 69% of the Company's revenue came from customers based outside of the United States. The factory automation market for machine vision is comprised of many market niches defined by differing application requirements, industries, and cost/performance criteria. The Company's business strategy includes selective expansion into other industrial machine vision applications through the internal development of new products, as well as the acquisition of companies and technologies. In 2000, the Company completed three acquisitions, all targeted at expanding the Company's presence in the worldwide end-user marketplace. In March, the Company acquired selected assets of the machine vision business of Komatsu Ltd., a division of Komatsu based in Japan that developed application-specific machine vision systems for end users. In April, the Company acquired all of the outstanding shares of Image Industries Ltd., a privately-held, United Kingdom-based developer of low-cost vision sensors for end users. In September, the Company acquired selected assets of the web inspection business of Honeywell International's Roibox subsidiary, a Finland-based developer of machine vision systems for inspecting paper. PRODUCTS The Company designs, develops, manufactures, and markets a wide range of machine vision products. These products include modular vision systems that are used to control the manufacturing of discrete items, such as semiconductor chips, cellular phones, and automobile wheels, by locating, identifying, inspecting, and measuring them during the manufacturing process. The Company's product offerings also include surface inspection vision systems that are used to inspect surfaces of materials that are processed in a continuous fashion, such as plastics, metals, and paper, to ensure that there are no flaws or defects on the surfaces. Machine vision systems sold by the Company are defined as either general-purpose or application-specific products. General-purpose systems enable customers to solve a wide range of problems by selecting the tools necessary to solve their vision problem from the Company's vision software library, and then configuring their solution by utilizing a programmable language or point-and-click interface. Application-specific systems are "packaged" combinations of software and hardware that are designed to solve targeted problems. 3 6 GENERAL-PURPOSE SYSTEMS Vision Software Library The Company offers an extensive library of vision software that includes both low-level image processing software and high-level image analysis tools. The image processing software prepares the image for accurate analysis and the image analysis tools extract information about the image to locate, measure, and inspect objects and identify characters and codes. The library includes PatMax(R), a pattern location tool that can locate with very high accuracy objects that vary in size and orientation or whose appearance is degraded. The library also includes PatInspect(R), a vision software tool that combines high-accuracy part location and defect detection capabilities in a single vision operation and detects flaws along the edges or boundary regions of objects. In early 2000, the Company introduced a new tool called PatFind(TM) for the In-Sight(TM) product line. PatFind is a part location tool based on the Company's industry-leading Search and PatMax software technologies. MVS-8000 Product Family The MVS-8000(TM) product family of programmable machine vision systems combines Cognex's unique algorithms with Intel's MMX instruction set. The MVS-8100 Series features PCI bus-mastering frame grabbers for high-speed image transfer from the video camera to the host PC for processing and display. The MVS-8200 Series of embedded CPU machine vision systems enable all vision processing to occur on-board, freeing the PC to perform other tasks. The MVS-8000 product family is sold primarily to OEMs located in North America, Japan, Europe, and Southeast Asia who integrate the machine vision systems into manufacturing equipment for the semiconductor and electronics industries. These machine vision systems are also sold to system integrators located principally in North America, Japan, Europe, and Southeast Asia who integrate the vision systems into manufacturing equipment for the factory floor in industries ranging from automotive to consumer products. Checkpoint Product Family Checkpoint(R) is a family of PC-based machine vision systems for complex precision guidance, gauging, and defect inspection applications. Checkpoint features a graphical user interface, and requires some knowledge of programming and machine vision to configure a vision application. Deployment of Checkpoint on the factory floor requires the services of trained system integrators to mechanically and electrically integrate Checkpoint into manufacturing lines. In mid 2000, the Company introduced Checkpoint II, the next-generation version of Checkpoint designed for high-performance, multi-camera guidance, gauging, and defect inspection applications. Checkpoint II features faster vision processing and expanded camera support. Checkpoint is sold primarily to end users located in North America, Japan, Europe, and Southeast Asia in a wide range of general manufacturing industries, such as manufacturers of medical devices, automotive parts, disposable consumer goods, and electronic components. In-Sight Product Family In early 2000, the Company entered the fast-growing market for low-cost vision sensors with its new In-Sight(TM) product line, providing Cognex's industry-leading vision technology in an affordable, stand-alone package that does not require programming skills or a PC to deploy. The first product, the In-Sight 2000, is a general-purpose vision sensor designed for part location, measurement, identification, and assembly verification tasks. The Company introduced the In-Sight 3000 in late 2000 and the In-Sight 1000 in early 2001. Both products are general-purpose vision sensors with built-in Ethernet networking capability for remotely managing, monitoring, and controlling vision activity. The In-Sight 1000 combines a vision camera, 4 7 software, and processing in a single, compact unit. The In-Sight 3000 is designed for more demanding applications and features a rugged vision processing unit and separate vision camera. In-Sight vision sensors are so affordable, they can be deployed in multiple points throughout the manufacturing process where value is being added. In-Sight vision sensors include a comprehensive library of Cognex vision software tools, including the PatFind part location tool and an easy-to-use vision spreadsheet environment enabling anyone with basic spreadsheet skills to configure a vision application. In-Sight is sold primarily to end users located in North America, Japan, Europe, and Southeast Asia in similar industries to the Checkpoint product family. Other General-Purpose Systems The Company continues to offer programmable machine vision systems that run on its own proprietary hardware including the Cognex 4000 Series which plugs directly into a VME backplane, as well as the Cognex 5000 Series which plugs into a PC. APPLICATION-SPECIFIC SYSTEMS The Company also offers a variety of application-specific systems that combine Cognex hardware and software to create a solution that is tailored to the particular requirements of certain vision applications. These products are sold to OEMs and end users worldwide. A partial list of application-specific systems is as follows: In-Sight 1010(TM), introduced in late 2000, is a compact, standalone, Ethernet-ready vision sensor designed specifically for reading 2D matrix and linear bar codes on parts. In-Sight 1700(TM), introduced in early 2001, is a compact vision sensor for identifying and tracking semiconductor wafers through the manufacturing process by reading 2D matrix, alphanumeric, and bar codes on wafers. SMD 4(TM), introduced in mid 2000, is Cognex's next-generation machine vision system for guiding the placement of surface mount devices onto printed circuit boards and other assemblies. BGA II(TM) inspects ball grid array devices for missing, misplaced, or improperly formed solder balls. Fiducial Finder II(TM) locates fiducial or alignment marks on printed circuit boards for automatic printed circuit board alignment. DisplayInspect(TM) software inspects the small, high-resolution displays commonly found on cellular phones, pagers, medical test instruments, and other electronic devices. iS(TM) High Performance Inspection Systems detect and classify defects in the most challenging surface inspection applications. iS systems are built from a family of hardware and software components which include proprietary line-scan cameras with motorized camera mounts, specialized lighting systems, ultra-high performance image processing boards, Unix workstations, and intelligent defect detection and classification software algorithms. iS systems can contain from one to sixty cameras and can be used to inspect webs up to 25 feet wide at speeds of up to 5,000 feet per minute. iS systems are primarily sold to producers of metals, specialized coated paper, and high-value non-woven materials. SmartView(TM) Imaging Camera Network (ICN), introduced in early 2000, detects, identifies, and presents an image of defects on products made in continuous processes. SmartView ICN provides greyscale imaging capability to visualize the defects as well as a visual quality snapshot of the inspected web or surface. SmartView ICN is a modular and scalable system on an open Microsoft NT platform that enables the Company to expand into more complex vision applications in paper, nonwovens, and metals previously only achievable with iS systems. 5 8 RESEARCH, DEVELOPMENT, AND ENGINEERING The Company engages in research, development, and engineering (R, D & E) to enhance its existing products and to develop new products and functionality to meet market opportunities. In addition to internal research and development efforts, the Company intends to continue its strategy of gaining access to new technology through strategic relationships and acquisitions where appropriate. The Company considers its on-going efforts in R, D & E to be a key component of its strategy. At December 31, 2000, the Company employed 195 professionals in R, D & E, most of whom are software developers. The Company's R, D & E expenses totaled $33,341,000, $27,536,000, and $24,535,000, or 13%, 18%, and 20% of revenue, in 2000, 1999, and 1998, respectively. MANUFACTURING The majority of the Company's machine vision systems are manufactured at its Natick, Massachusetts headquarters. The Company's Natick manufacturing organization utilizes a turnkey manufacturing operation whereby the majority of component procurement, subassembly, final assembly, and initial testing are performed under agreement by third-party contractors. After the completion of initial testing, the third-party contractors deliver the products to the Company to perform final testing and assembly. The products provided by the third-party contractors are manufactured using specified components and assembly and test documentation created and controlled by the Company. Certain components purchased by the third-party contractors are presently available from a single source. The Company's SmartView ICN and iS Inspection systems are manufactured at its Alameda, California facility. The manufacturing processes at the Alameda facility consists of systems design, configuration management and control, component procurement, subassembly, system integration, final test, quality control, and shipment. System installation and commissioning are performed by either the Company or its customers. Certain products are manufactured by third-party contractors using documentation created and controlled by the Company. Certain components are presently available from a single source. SALES AND SUPPORT The Company primarily markets its products through a direct sales force in North America, Japan, Europe, and Southeast Asia. At December 31, 2000, the Company's direct sales and service force consisted of 225 professionals, including sales and application engineers. The majority of the Company's sales and service personnel have engineering or science degrees. Sales engineers call directly on targeted accounts and coordinate the activity of the application engineers. They focus on potential customers that represent possible volume purchases and long-term relationships. Opportunities that represent single-unit sales or turnkey system requirements are identified by the sales engineer and turned over to an independent system integrator that uses the Company's products. The Company sells to OEMs, many of whom have entered or are expected to enter into volume discount contracts with the Company. These contracts are typically for one year and have associated delivery schedules. Sales to international customers represented approximately 69% of revenue in 2000 and 1999 and 63% of revenue in 1998. One customer based in Japan, Fuji America Corporation, accounted for approximately 10%, 13%, and 14% of revenue in 2000, 1999, and 1998, respectively. Information about operating segments and geographic areas, as well as foreign currency and related risk may be found in the Notes to the Consolidated Financial Statements, appearing on pages 53 through 54 and pages 40 through 44 of the Annual Report to Stockholders for the year ended December 31, 2000, which is Exhibit 13 hereto, and is incorporated herein by reference. Although international sales may from time to time be subject 6 9 to federal technology export regulations, the Company to date has not suffered delays or prohibitions in sales to any of its foreign customers. The Company's support offerings include vision solutions consulting services, technical support, educational services, and product services. The Company's vision solutions consulting group provides, for a fee, services that range from a specific piece of programmed functionality to a completely integrated machine vision application. The technical support group consists of a team of vision experts ready to respond to questions that may arise while customers are developing or deploying a Cognex machine vision application. The educational services group offers a variety of product courses that are held at its Customer Education Center in Natick, Massachusetts, and at certain of its worldwide offices, as well as at customer facilities when required. The product services group offers a variety of software and hardware maintenance programs that provide updates on the latest software releases and new software vision tools. INTELLECTUAL PROPERTY Since the Company relies on the technical expertise, creativity, and knowledge of its personnel, it utilizes patent, trademark, copyright, and trade secret protection to safeguard its competitive position. At December 31, 2000, the Company had obtained 99 patents on various innovations in the field of machine vision technology and had over 140 pending patent applications. In addition, the Company makes use of non-disclosure agreements with customers, suppliers, employees, and consultants. The Company attempts to protect its intellectual property by restricting access to its proprietary information by a combination of technical and internal security measures. There can be no assurance however, that any of the above measures will be adequate to protect the proprietary technology of the Company. Effective patent, trademark, copyright, and trade secret protection may be unavailable in certain foreign countries. The Company's trademark and servicemark portfolio includes various registered marks, including but not limited to Cognex(R), Checkpoint(R), PatMax(R), and PasteInspect(R), as well as many common-law marks, including but not limited to, acuReader(TM), DisplayInspect(TM), PatFind(TM), and SmartView(TM). In addition, the Company has sought and obtained a number of trademark registrations outside of the United States. All third-party brand names, service marks, and trademarks referenced in this document are the property of their respective owners. The Company's software products are protected by various security schemes and are primarily licensed to customers pursuant to a license agreement that restricts the use of the products to the customer's purposes, as well as imposes strict limitations on the customer's use of the Company's trade secret, proprietary, and other confidential business information to which the customer may have access. The Company has made portions of the source code available to certain customers under very limited circumstances and for restricted uses. If source code is released to a customer, the customer is required by contract to maintain its confidentiality and, in general, to use the source code solely for internal purposes or for maintenance. Numerous users of the Company's products have received notice of patent infringement from the Lemelson Medical, Educational, & Research Foundation, Limited Partnership ("Partnership") alleging that their use of the Company's products infringes certain patents transferred to the Partnership by the late Jerome H. Lemelson. Certain of these users have notified the Company that, in the event it is subsequently determined that their use of the Company's products infringes any of the Partnership's patents, they may seek indemnification from the Company for damages or expenses resulting from this matter. Cognex disclaims liability with respect to such indemnification requests. In July 1998, the Partnership filed a lawsuit against 26 semiconductor device manufacturers asserting infringement upon numerous Lemelson patents including certain machine vision patents. Several of the defendants are users of the Company's products that were purchased primarily from the Company's OEM customers whose equipment incorporates such products. As a result of this action and the continuing assertions against other current and potential Cognex customers, the Company decided 7 10 to initiate action against the Partnership in order to preserve its right to sell machine vision products without the threat of legal action against the Company or its customers. Accordingly, on September 23, 1998, the Company filed a complaint against the Partnership seeking a declaration that Lemelson's machine vision patents are invalid, unenforceable, and not infringed by either Cognex or by any users of Cognex products. The complaint was served on the Partnership on October 14, 1998. The Company refiled the lawsuit in Reno, Nevada on September 27, 1999 after the Judge in Massachusetts ruled that Massachusetts was not the proper jurisdiction. The Company refiled in Nevada where several other Lemelson lawsuits are in progress and where no jurisdiction controversy exists. It will likely be at least two years from the date of this filing before a decision is rendered by the Court. The Company does not believe its products infringe any valid and enforceable claims of Lemelson's patents. Furthermore, the Partnership has stated that it is not the Company's products that infringe Lemelson's patents, but rather the use of those products by the Company's customers. On May 2, 2000, Cognex filed a complaint in the Federal District Court in Wilmington, Delaware against National Instruments Corporation. The lawsuit includes claims of infringement of certain Cognex patents, copyrights, and trademarks, as well as a claim of unfair competition. Based on the current Court ordered schedule, trial is expected to begin in approximately one year from the date of this filing. On February 14, 2001, Cognex filed a complaint in the Federal District Court in Boston, Massachusetts against Electro Scientific Industries, Inc ("ESI"). The lawsuit claims that ESI infringes certain Cognex patent rights. At the date of this filing, a scheduling order has not been issued by the Court, and therefore, the trial date cannot be reasonably predicted. The Company cannot predict the outcome of the Lemelson, National Instruments, ESI, or any similar litigation that may arise in the future, or the effect of such litigation on the financial results of the Company. COMPETITION The Company competes with other vendors of machine vision systems, the internal engineering efforts of the Company's current or prospective customers, and the manufacturers of image processing systems. Any of these competitors may have greater financial and other resources than the Company. Although the Company considers itself to be one of the leading machine vision companies in the world, reliable estimates of the machine vision market and the number of competitors are almost non-existent, primarily because of definitional confusion and a tendency toward double-counting of sales. The primary competitive factors affecting the choice of a machine vision system include product functionality and performance (e.g. speed, accuracy, and reliability) under real-world operating conditions, flexibility, programmability, and the availability of application support from the vendor. More recently, ease-of-use has become a competitive factor and product price has become a more significant factor with respect to simpler guidance and gauging applications. The Company competes with the low-cost smart camera and vision sensor solutions being introduced by various competitors on the basis of superior performance and price, rather than on price alone, through its In-Sight products. BACKLOG At December 31, 2000, the Company's backlog totaled $41,797,000 compared to $36,788,000 at December 31, 1999. Backlog reflects purchase orders for products scheduled for shipment within three months. The level of backlog at any particular date is not necessarily indicative of future revenue of the Company. Delivery schedules may be extended and orders may be canceled at any time subject to certain cancellation penalties. 8 11 EMPLOYEES At December 31, 2000, the Company employed 781 persons, including 375 in sales, marketing, and support activities; 195 in research, development, and engineering; 70 in manufacturing and quality assurance; and 141 in information technology, finance, and administration. Of the Company's 781 employees, 275 are located outside of the United States. None of the Company's employees are represented by a labor union and the Company has experienced no work stoppages. The Company believes that its employee relations are good. ITEM 2: PROPERTIES In 1994, the Company purchased and renovated a 100,000 square-foot building located in Natick, Massachusetts that serves as it's corporate headquarters. In 1997, the Company completed construction of a 50,000 square-foot addition to this building. In 1995, the Company purchased an 83,000 square-foot office building adjacent to its corporate headquarters. The building is currently largely occupied with tenants who have lease agreements that expire at various dates through 2002, at which point, the Company may take occupancy of the building. The Company uses a small portion of the space for storage of inventory. In 1997, the Company purchased a three and one-half acre parcel of land situated on Vision Drive, adjacent to the Company's corporate headquarters. This land is anticipated to be used for future expansion. ITEM 3: LEGAL PROCEEDINGS To the Company's knowledge, there are no pending legal proceedings, other than as described in "Business - Patents and Licenses," which are material to the Company to which it is a party or to which any of its property is subject. From time to time, however, the Company may be subject to various claims and lawsuits by customers and competitors arising in the normal course of business, including suits charging patent infringement. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of the year ended December 31, 2000 to a vote of security holders through solicitation of proxies or otherwise. 9 12 ITEM 4A: EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM OF THE REGISTRANT The following table sets forth the names, ages, and titles of the Company's executive officers at December 31, 2000:
NAME AGE TITLE ---- --- ----- Robert J. Shillman 54 President, Chief Executive Officer, and Chairman of the Board of Directors Patrick Alias 55 Executive Vice President, Worldwide Sales and Marketing
Messrs. Shillman and Alias have been employed by the Company in their present or other capacities for no less than the past five years. Executive officers are elected annually by the Board of Directors. There are no family relationships among the directors and the executive officers of the Company. OTHER MEMBERS OF THE MANAGEMENT TEAM
NAME AGE TITLE ---- --- ----- Markku Jaaskelainen 46 Corporate Vice President and General Manager, SISD Marilyn Matz 47 Senior Vice President - Software Development E. John McGarry 44 Senior Vice President Richard Morin 51 Vice President of Finance, Chief Financial Officer, and Treasurer William Silver 47 Senior Vice President and Chief Technology Officer Justin Testa 48 Senior Vice President - Marketing
Messrs. Silver, McGarry, and Testa and Ms. Matz have been employed by the Company in their present or other capacities for no less than the past five years. Mr. Jaaskelainen joined the Company in 1999. Prior to joining the Company, Mr. Jaaskelainen served as Vice President of Systems Strategy for Honeywell-Measurex Corporation, where he was responsible for overseeing and coordinating all new product development. Mr. Morin joined the Company in 1999 after ten years as Chief Financial Officer for C&K Components, Inc., an international manufacturer of electronic components and security systems. Mr. Morin also served as Corporate Controller and Vice President of Finance for the Jamesbury Corporation. Mr. Morin is a Certified Public Accountant. 10 13 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Certain information with respect to this item may be found in the section captioned "Selected Quarterly Financial Data," appearing on page 60, and the section captioned "Company Information," appearing on page 61 of the Annual Report to Stockholders for the year ended December 31, 2000 which is Exhibit 13 hereto, and is incorporated herein by reference. On April 20, 2000, the Company acquired all of the outstanding shares of Image Industries, Ltd., a privately-held manufacturer of low-cost machine vision systems located in the United Kingdom. The purchase price of $2,706,000 included $876,000 in cash at closing, $878,000 in cash to be paid through 2002, and 17,619 shares of Cognex common stock, issued from treasury, with a fair value of $952,000. The shares were issued to three persons in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. The Company has never declared or paid cash dividends on shares of its common stock. The Company currently intends to retain all of its earnings to finance the development and expansion of its business and therefore does not intend to declare or pay cash dividends on its common stock in the foreseeable future. Any future declaration and payment of dividends will be subject to the discretion of the Company's Board of Directors, will be subject to applicable law, and will depend upon the Company's results of operations, earnings, financial condition, contractual limitations, cash requirements, future prospects, and other factors deemed relevant by the Company's Board of Directors. ITEM 6: SELECTED FINANCIAL DATA Information with respect to this item may be found in the section captioned "Five-Year Summary of Selected Financial Data," appearing on page 59 of the Annual Report to Stockholders for the year ended December 31, 2000, which is Exhibit 13 hereto, and is incorporated herein by reference. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information with respect to this item may be found in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing on pages 26 through 32 of the Annual Report to Stockholders for the year ended December 31, 2000, which is Exhibit 13 hereto, and is incorporated herein by reference. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company maintains investment portfolio holdings of various issuers, types, and maturities. The Company's cash and investments include cash equivalents, which the Company considers to be investments purchased with original maturities of three months or less. Investments having original maturities in excess of three months are stated at amortized cost, which approximates fair value, and are classified as available-for-sale. Given the short maturities and investment grade quality of the portfolio holdings at December 31, 2000, a sharp rise in interest rates should not have a material adverse impact on the fair value of the Company's investment portfolio. As a result, the Company does not currently hedge these interest rate exposures. 11 14 The Company faces exposure to financial market risks, including adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company's financial results. The Company's primary exposure has been related to local currency revenue and operating expenses in Japan, Europe, and Southeast Asia. Historically, the Company has hedged currency exposures associated with certain intercompany payables denominated in local currencies and certain foreign currency revenue transactions. The goal of the Company's hedging activity is to offset the impact of currency fluctuations on certain local currency intercompany payables and foreign currency revenue transactions. The success of this activity depends upon forecasts of transaction activity denominated in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. Outstanding forward foreign exchange contracts in Japanese yen at December 31, 2000 mature within 6 months. Indicators as of March 5, 2001, show that the dollar is expected to strengthen against the yen by June 30, 2001, to approximately 120 yen/USD. The hypothetical gain in cash flows of these yen forward contracts is estimated to be $481,287 using these assumptions. Outstanding forward foreign exchange contracts in the Euro dollar at December 31, 2000 mature within approximately 2 years. Indicators as of March 5, 2001, show that the dollar is expected to strengthen against the Euro dollar by September 30, 2002, to approximately .8500 Euro/USD. The hypothetical gain in cash flows of these Euro forward contracts is estimated to be $74,844 using these assumptions. The following table (dollars in thousands) presents hypothetical changes in fair value in the Company's financial instruments at December 31, 2000 that are sensitive to changes in interest rates. The modeling technique measures the change in fair value arising from selected potential changes in interest rates. Movements in interest rates of plus or minus 50 basis points ("BP") and 100 BP reflect immediate hypothetical shifts in the fair value of these investments. Fair value represents the market value of the principal plus accrued interest and dividends of certain interest-rate-sensitive securities at December 31, 2000.
Valuation of securities given an No change in Valuation of securities given an Type of security interest rate decrease interest rates interest rate increase --------------------------------------------------------------------------------------------------------------------- (100 BP) (50 BP) 50 BP 100 BP --------------------------------------------------------------------------------------------------------------------- Municipal obligations with contractual maturities no greater than 3 years $253,417,528 $252,252,551 $251,002,367 $249,843,477 $248,689,454
A 50 BP move in the Federal Funds Rate has occurred in 8 of the last 40 quarters. There has not been a 100 BP movement in the Federal Funds Rate in any of the last 40 quarters. The Company has equity securities purchased in the Japanese market with a fair value of approximately $5,571,000 and an unrealized loss of $1,891,000 at December 31, 2000. The unrealized gain (loss) recorded as other comprehensive income (loss) is made up of two components - the yen strengthening (weakening) against the dollar and the appreciation (depreciation) of the stock price. Indicators as of March 5, 2001, show that the dollar is expected to strengthen against the yen by December 31, 2001, to approximately 128 yen/USD. Based on these indicators, a hypothetical change in the fair value due to a weakening yen would be a $594,000 unrealized gain. The potential change in the fair value due to a hypothetical 10% increase or decrease in the stock price would be a $557,000 change in the unrealized gain (loss). 12 15 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this item, which includes the consolidated financial statements and notes thereto, report of independent accountants, and supplementary data, may be found on pages 33 through 60 of the Annual Report to Stockholders for the year ended December 31, 2000, which is Exhibit 13 hereto, and is incorporated herein by reference. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting or financial disclosure during 2000 or 1999. 13 16 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors of the Company may be found in the section captioned "Election of Directors," appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the 2001 Annual Meeting of Stockholders to be held on April 26, 2001. Such information is incorporated herein by reference. Information with respect to Executive Officers of the Company may be found in the section captioned "Executive Officers and Other Members of the Management Team of the Registrant," appearing in Part I of this Annual Report on Form 10-K. ITEM 11: EXECUTIVE COMPENSATION Information with respect to this item may be found in the sections captioned "Information Concerning the Board of Directors," "Compensation/Stock Option Committee Report on Executive Compensation," "Comparison of Five Year Cumulative Total Returns Performance Graph for Cognex Corporation," and "Executive Compensation," appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the 2001 Annual Meeting of Stockholders to be held on April 26, 2001. Such information is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item may be found in the sections captioned "Principal Holders of Voting Securities" and "Security Ownership of Directors and Officers," appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the 2001 Annual Meeting of Stockholders to be held on April 26, 2001. Such information is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item may be found in the section captioned "Compensation Committee Interlocks and Insider Participation," appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the 2001 Annual Meeting of Stockholders to be held on April 26, 2001. Such information is incorporated herein by reference. 14 17 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements The following consolidated financial statements of Cognex Corporation and the report of independent accountants relating thereto are included in the Company's Annual Report to Stockholders for the year ended December 31, 2000, which is Exhibit 13 hereto, and is incorporated herein by reference: Report of Independent Accountants Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998 Consolidated Balance Sheets at December 31, 2000 and 1999 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (2) Financial Statement Schedule Included at the end of this report are the following: Report of Independent Accountants on the Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. (3) Exhibits The Exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index appearing on page 18, immediately preceding such Exhibits. (b) Reports on Form 8-K There were no Reports on Form 8-K filed during the fourth quarter of the year ended December 31, 2000. 15 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COGNEX CORPORATION /s/ Robert J. Shillman ------------------------------------ Robert J. Shillman (President, Chief Executive Officer, and Chairman of the Board of Directors) March 26, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Robert J. Shillman President, Chief Executive Officer, March 26, 2001 -------------------------- and Chairman of the Board of Directors Robert J. Shillman (principal executive officer) /s/ Richard Morin Vice President of Finance, Chief Financial March 26, 2001 -------------------------- Officer, and Treasurer Richard Morin (principal financial and accounting officer) /s/ Jerald Fishman Director March 26, 2001 -------------------------- Jerald Fishman /s/ William Krivsky Director March 26, 2001 -------------------------- William Krivsky /s/ Anthony Sun Director March 26, 2001 -------------------------- Anthony Sun /s/ Reuben Wasserman Director March 26, 2001 -------------------------- Reuben Wasserman
16 19 REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Cognex Corporation: Our audits of the consolidated financial statements referred to in our report dated January 22, 2001 appearing in the 2000 Annual Report to Stockholders of Cognex Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14 (a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Boston, Massachusetts /s/ PricewaterhouseCoopers LLP January 22, 2001 17 20 SCHEDULE II COGNEX CORPORATION VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
ADDITIONS ---------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OTHER PERIOD ---------------------------------------------------------------------------------------------------------- Allowance for Doubtful Accounts ---------------------- 2000 $2,836 $ 275 - $ (624)(a) $(337)(c) $2,150 1999 2,583 1,050 - (797)(a) $2,836 1998 1,940 1,245 - (602)(a) 2,583 Reserve for Inventory Obsolescence ---------------------- 2000 $3,955 $ 785 - $(1,031)(b) $3,709 1999 2,860 $1,545 - (450)(b) $3,955 1998 1,873 992 - (5)(b) 2,860
(a) Specific write-offs (b) Specific dispositions (c) Reversal of specific write-offs due to collection 18 21 EXHIBIT INDEX
EXHIBIT NUMBER -------------- 3A Articles of Organization of the Company effective January 8, 1981, as amended June 8, 1982, August 19, 1983, May 15, 1984, April 17, 1985, November 4, 1986, and January 21, 1987 (incorporated by reference to Exhibit 3A to the Registration Statement Form S-1 [Registration No. 33-29020]) 3B Restated Articles of Organization of the Company effective June 27, 1989, as amended April 30, 1991, April 21, 1992, April 25, 1995, and April 23, 1996 (filed as Exhibit 3B to the Company's Annual Report of Form 10-K for the year ended December 31, 1996) 3C By-laws of the Company as amended February 9, 1990 (filed as Exhibit 3C to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 4 Specimen Certificate for Shares of Common Stock (incorporated by reference to Exhibit 4 to the Registration Statement Form S-1 [Registration No. 33-29020]) 10A Cognex Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 4A to Amendment No. 1 to the Registration Statement Form S-8 [Registration No. 33-32815]) 10B Cognex Corporation 1992 Director Stock Option Plan (filed as Exhibit 10I to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) Cognex Corporation 1993 Director Stock Option Plan (filed as Exhibit 10J to the Company's Annual Report on Form 10C 10-K for the year ended December 31, 1993) 10D Cognex Corporation 1993 Employee Stock Option Plan, as amended May 28, 1996 (incorporated by reference to Exhibit 4A to the Registration Form S-8 [Registration No. 333-4621]) 10E Cognex Corporation 1996 Long-Term Incentive Plan (incorporated by reference to Exhibit 4A to the Registration Statement Form S-8 [Registration No. 333-2151]) 10F Amendment to the Cognex Corporation 1993 Director Stock Option Plan (filed as Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 10G Amendment to the Cognex Corporation 1993 Employee Stock Option Plan (filed as Exhibit 10H to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 10H Cognex Corporation 1998 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registration Form S-8 [Registration No. 333-60807]) 10I Cognex Corporation 1998 Stock Incentive Plan (incorporated by reference to Exhibit 4.2 to the Registration Form S-8 [Registration No. 333-60807]) 13 Annual Report to Stockholders for the year ended December 31, 2000 (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K) * 21 Subsidiaries of the registrant * 23 Consent of PricewaterhouseCoopers LLP *
* Filed herewith 19