SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Check One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from ________________ to ________________
Commission file number 0-16577
CYBEROPTICS CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1472057
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5900 Golden Hills Drive, Minneapolis, Minnesota 55416
(Address of principal executive offices)
(612) 542-5000
(Issuer's telephone number)
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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At September 30, 1996, 5,381,505 shares of the issuer's Common Stock, no par
value, were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION
BALANCE SHEETS
(In thousands)
SEPT. 30, DEC. 31,
1996 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 5,911 $ 8,718
Marketable securities, at cost 10,000 10,146
Accounts receivable, net 4,307 8,514
Inventories 4,225 3,874
Other current assets 1,592 1,473
------- -------
Total current assets 26,035 32,725
Marketable securities, at cost 23,500 21,000
Equipment and furnishings, net 2,610 943
Capitalized patent costs, net 86 72
------- -------
Total assets $52,231 $54,740
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,056 $ 737
Income taxes payable 206 898
Accrued expenses 1,792 2,368
------- -------
Total current liabilities 3,054 4,003
Commitments and Contingency
Stockholders' equity:
Preferred stock, no par value, 5,000 shares
authorized, none outstanding
Common stock, no par value, 10,000 shares
authorized at December 31,1995 and 25,000
at Sept. 30, 1996, 5,382 and 5,612 shares issued
and outstanding, respectively 39,334 42,658
Retained earnings 9,843 8,079
------- -------
Total stockholders' equity 49,177 50,737
------- -------
Total liabilities and stockholders' equity $52,231 $54,740
================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS.
CYBEROPTICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED SEPT. 30,
1996 1995
- --------------------------------------------------------------------------------
Revenues $ 5,025 $ 8,196
Cost of revenues 2,644 3,821
-------- --------
Gross margin 2,381 4,375
Research and development expenses 1,474 1,016
Selling, general and administrative expenses 2,009 1,439
-------- --------
Income (loss) from operations (1,102) 1,920
Interest income 593 58
-------- --------
Income (loss) before income taxes (509) 1,978
Provision for income taxes (153) 671
======== ========
Net income (loss) ($ 356) $ 1,307
======== ========
Net income (loss) per share ($ 0.06) $ 0.27
======== ========
Weighted average common and
common equivalent shares 5,526 4,863
================================================================================
NINE MONTHS ENDED SEPT. 30,
1996 1995
- --------------------------------------------------------------------------------
Revenues $ 21,350 $ 19,991
Cost of revenues 10,448 9,256
-------- --------
Gross margin 10,902 10,735
Research and development expenses 4,410 2,786
Selling, general and administrative expenses 5,703 3,781
-------- --------
Income from operations 789 4,168
Interest income 1,775 116
-------- --------
Income before income taxes 2,564 4,284
Provision for income taxes 800 1,380
-------- --------
Net income $ 1,764 $ 2,904
======== ========
Net income per share $ 0.30 $ 0.61
======== ========
Weighted average common and
common equivalent shares 5,790 4,788
================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS.
CYBEROPTICS CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
NINE MONTHS ENDED SEPT. 30,
1996 1995
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,764 $ 2,904
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization 549 294
Provision for losses on accounts receivable 8 22
Provision for losses on inventories 109 176
Changes in operating assets and
liabilities:
Accounts receivable 4,199 (2,903)
Inventories (460) (3,109)
Other current assets (119) (374)
Accounts payable 319 292
Income taxes payable (692) 565
Accrued expenses (576) 1,167
-------- --------
Net cash provided (used)
by operating activities 5,101 (966)
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities 13,146 1,357
Purchases of marketable securities (15,500) (15,769)
Additions to equipment and furnishings (2,168) (648)
Additions to patents (62) (13)
-------- --------
Net cash used by investing
activities (4,584) (15,073)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net
of offering costs 37,391
Proceeds from exercise of stock options 418 326
Proceeds from issuance of common stock
under Employee Stock Purchase Plan 181 148
Repurchase of common stock (3,923)
-------- --------
Net cash provided (used) by financing
activities (3,324) 37,865
Increase (Decrease) in cash and cash equivalents (2,807) 21,826
Cash and cash equivalents - beginning
of period 8,718 1,428
-------- --------
Cash and cash equivalents - end of period $ 5,911 $ 23,254
===============================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS.
CYBEROPTICS CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. INTERIM REPORTING:
The interim financial statements are unaudited; however, in the opinion of
management, the interim statements include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair statement of the results
and balances for the interim periods.
The results of operations for the nine-month period ended September 30, 1996 do
not necessarily indicate the results to be expected for the full year. These
statements should be read in conjunction with the Company's financial statements
and notes thereto, contained in the Company's Annual Report to Stockholders for
the year ended December 31, 1995.
The year-end balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
2. STOCK REPURCHASE:
In June 1996, the Company announced that its board of directors approved the
repurchase of up to 500,000 shares of CyberOptics' common stock. The shares will
be repurchased from time to time in the open market or through negotiated
transactions. Repurchased shares will be utilized for employee compensation
plans and other corporate purposes.
3. INVENTORIES (IN THOUSANDS):
Sept. 30, Dec. 31,
1996 1995
(unaudited)
--------------------------
Raw materials $ 3,144 $ 3,172
Work in process 570 608
Finished goods 511 94
-------- --------
Total inventories $ 4,225 $ 3,874
======== ========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CyberOptics Corporation designs and manufactures intelligent sensors and systems
for high-precision, non-contact dimensional measurement and process control.
Utilizing proprietary laser and optics technology combined with advanced
software and electronics, the Company's products enable manufacturers to
increase operating efficiencies, product yields and quality by measuring the
characteristics and placement of components both during and after the
manufacturing process. The Company sells its products worldwide through a
combination of direct sales staff and independent distributors.
The following is management's discussion and analysis of certain significant
factors that have affected the Company's results and financial position during
the periods included in the accompanying financial statements. This discussion
should be read in conjunction with the financial statements and associated
notes.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. The following Management's Discussion
and Analysis contains "forward looking statements" within the meaning of federal
securities laws which represent management's expectations or beliefs relating to
future events, including statements regarding levels of orders, cost of revenues
as a percent of revenues, marketing and research and development expenses,
taxation levels, the sufficiency of cash to meet operating expenses and the
ability to continue to price foreign transactions in U.S. currency. These, and
other forward looking statements made by the Company, must be evaluated in the
context of a number of factors that may affect the Company's financial condition
and results of operations, including the following:
-- The cyclical nature of capital expenditures in the electronics
industry;
-- The dependence of such operations on orders from several large OEM
customers;
-- The dependence of the Company's manufacturing on outside
contractors and suppliers;
-- The degree to which the Company is successful in protecting its
technology and enforcing its technology rights in the United States
and other countries;
-- The dependence of the Company's operations on several key
personnel;
-- The speed of changes in technology in the microelectronics
manufacturing industry from which most of the Company's sales are
derived;
-- The significant proportion of the Company's revenue that is
derived from export sales;
-- Competition for the functions that the Company's products perform
by larger "vision" companies and by other optical sensor companies;
-- Quarterly fluctuations in operating results caused by the timing of
shipments and other factors not entirely within the Company's
control.
These and other factors that may affect future operations are discussed in more
detail in Exhibit 99 to this Form 10-Q.
RESULTS OF OPERATIONS
The table below lists certain financial data expressed as a percentage of
revenues for the periods ended September 30, 1996 and 1995.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1996 1995 1996 1995
---------------------------------------
Revenues 100% 100% 100% 100%
Gross margin 47% 53% 51% 54%
Research and development expenses 29% 12% 21% 14%
Selling, general and
administrative expenses 40% 18% 26% 19%
Income (loss) from operations (22)% 23% 4% 21%
Net income (loss) (7)% 16% 8% 15%
REVENUES
Revenues increased 7% to $21.3 million during the nine month period ended
September 30, 1996 compared to $20.0 million for the comparable period in 1995.
For the third quarter of 1996, revenues decreased 39% to $5.0 million from $8.2
million in 1995. The increase in revenue for the nine month period in 1996
compared to 1995 reflects primarily lower levels of revenue during the first
half of 1995 as the CyberSentry was newly introduced in its commercial form and
prior to record purchases of the Company's LaserAlign product by OEMs in the
second half of 1995. The decrease in third quarter revenue relative to 1995 is
primarily a result of considerable weakness in the electronics industry in 1996,
the principal market for the Company's products.
Sensor revenues increased 6% to $14.9 million during the nine months ended
September 30, 1996 from the comparable period in 1995, but decreased 45% to $3.3
million for the third quarter of 1996 compared to the third quarter of 1995.
Sensor revenues are primarily dependent on the shipment levels of the Company's
LaserAlign and Laser Lead Locator products to several large OEM customers, and
the significant decline in revenue in the third quarter reflects decreased
purchases by such OEM customers. The customer whose purchases constituted 28.9%
of the Company's revenue in the third quarter of 1995 purchased no product in
the third quarter of 1996. Although some OEM customers have increased their
order rates in 1996, overall sensor sales were down. The Company's five
principal OEM sensor customers accounted for approximately 62% of revenue for
the nine months ended September 30, 1996 and 55% for the third quarter 1996.
System revenues increased 2% to $5.3 million during the nine months ended
September 30, 1996 from the comparable period in 1995, but decreased 10% to $1.5
million for the third quarter of 1996 compared to the third quarter of 1995. The
decrease in systems revenue during the third quarter is due to a decline in the
level of revenue from both the CyberSentry and other systems manufactured by the
Company.
The Company believes that third quarter revenue levels and the decrease in
backlog at September 30, 1996 as compared to the year earlier period are the
result of weakness in capital expenditures in the electronics industry. This
weakness appears to be due in part to the utilization of excess capacity and
inventory accumulated during the industry expansion of the past two years, as
worldwide demand for electronic components expanded. Industry conditions have
had a more significant effect on the level of sensor shipments and orders, as
volume levels from several OEM customers, including Philips, are down
significantly. The Company also believes that these conditions are having a
negative effect on system revenue levels. Although the Company expects to see
some improvement in the level of shipments in the fourth quarter of 1996 as
compared to the third quarter, revenues are expected to be significantly lower
than the record levels achieved in the fourth quarter of 1995. In addition, the
effect of this industry weakness on CyberOptics will be significant and will
affect its business and order rates for the next several quarters.
International revenues comprised 70% and 66% of total revenues during the nine
months ended September 30, 1996 and 1995, and 72% and 75% of total revenues
during the third quarter of 1996 and 1995. Substantially all of the Company's
international export sales are negotiated, invoiced and paid in U.S. dollars.
COST OF REVENUES
Cost of revenues increased as a percent of total revenues to 49% during the nine
month period ended September 30, 1996 compared to 46% during the comparable
period in 1995. For the third quarter of 1996, cost of revenue was 53% of total
revenue compared to 47 % in 1995. The increase in cost of revenues during the
third quarter is primarily due to reduced revenues levels, and the resulting
lower base over which to spread the fixed component of cost of revenues. The
increase for the nine month period is due primarily to revenue levels and the
Company's program of using third party manufacturers for the production of
certain component parts. As part of this program, the Company has sold portions
of its existing inventory to third party manufacturers at or about cost, which
had the effect of increasing cost of revenues during the first three quarters of
1996.
During the third quarter the Company made a significant effort to reduce costs
and bring its cost structure more in line with current and anticipated revenue
levels by implementing a 12% workforce reduction. The production areas were
significantly effected by this reduction which will reduce the fixed dollar
level of costs of revenue in future quarters. However, even with these
reductions, the Company does not anticipate the gross margin percentage
returning to levels reported in prior periods until revenue levels show
significant improvement.
RESEARCH AND DEVELOPMENT
Net research and development expenses increased 58% to $4.4 million during the
nine month period ended September 30, 1996 compared to $2.8 million during the
comparable period in 1995. For the third quarter of 1996, expenses have
increased 45% to $1.5 million from the comparable period in 1995. As a
percentage of revenue, expenses have increased to 21% during the nine months
ended September 30, 1996 from 14% during the comparable period in 1995 and to
29% in the quarter ended September 30, 1996 from 12% in the comparable period in
1995. Research and development expenses during the nine month period ended
September 30, 1996 focused primarily on development of a new HiVision sensor for
measurement of three dimensional objects such as Flip Chip and BGA components,
completion of CyberScan Cobra, introduced commercially in the third quarter of
1996, and enhancements to existing product lines such as CyberSentry and
LaserAlign. Although the Company has reduced research and development expenses
from planned levels, it believes that expenditures in this area will continue to
be necessary to maintain its market position. The Company anticipates that the
dollar level of expenditures in research and development will remain fairly flat
for the remainder of 1996.
Customer funded research and development is deferred and recognized as a
reduction in research and development expenses as costs are incurred. During the
nine months ended September 30, 1996, $740,000 of customer funded research and
development was recognized as a reduction of research and development expense.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 51% to $5.7 million
during the nine month period ended September 30, 1996 compared to $3.8 million
during the comparable period in 1995. For the third quarter of 1996, selling,
general and administrative expenses increased 40% to $2.0 million compared to
$1.4 million in 1995. As a percentage of revenue, expenses have increased from
19% in 1995 to 27% in 1996 for the nine months ended September 30, and from 18%
in 1995 to 40% in 1996 for the third quarter. The increase in selling, general
and administrative expenses is primarily the result of legal costs related to
the suit against Yamaha Motor Company, Ltd., additional costs associated with
moving to the Company's new operating facility, reserves established to cover
the estimated loss relating to subleasing the Company's old facility and
severance costs incurred in the third quarter relating to the workforce
reduction. The workforce reduction included selling, general and administrative
resources, and will result in reduced expense levels in future periods.
EFFECTIVE TAX RATE
The Company applied an effective rate of 31% during the nine months ended
September 30, 1996 and 32% during the same period in 1995. Benefits from the
Company's foreign sales corporation were primarily responsible for reducing the
effective tax rate below the statutory federal rate in 1996.
ORDER RATE AND BACKLOG
CyberOptics' order rate totaled $18.3 million during the nine months ended
September 30, 1996 compared to $24.7 million during the same period in 1995. For
the third quarter of 1996, the order rate totaled $5.2 million compared to $9.0
million in 1995. Backlog totaled $3.9 million and $6.9 million at September 30,
1996 and 1995, respectively. The scheduled shipment of the September 30, 1996
backlog is as follows (In thousands):
4th Quarter 1996 $2,816
1st Quarter 1997 169
2nd Quarter 1997 880
------
Total backlog $3,865
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased from $28.7 million as of December 31, 1995 to $23.0
million as of September 30, 1996, primarily as the result of the Company
purchasing long-term marketable securities, repurchasing common stock and
investing in fixed assets additions for its new operating facility and other
strategic needs. Funds used were generated from operations and from the
secondary public offering completed in 1995. Marketable securities generally
consist of U.S. Government or U.S. Government backed obligations with maturities
of 3 years or less. Included in working capital is cash and cash equivalents and
short-term marketable securities of $15.9 million and $18.9 million as of
September 30, 1996 and December 31, 1995, respectively. Additionally, at
September 30, 1996, the Company had long-term marketable securities (those with
maturities greater than one year) of $23.5 million.
The Company generated $5.1 million in cash from operations during the first nine
months of 1996, primarily due to net income of $1.8 million and a decrease in
accounts receivable of $4.2 million. The reduction in accounts receivable was
primarily due to the timing of customer payments from sales recorded during the
fourth quarter of 1995, and reduced revenue levels in the third quarter of 1996.
Investing activities used $4.6 million primarily due to the purchase of
marketable securities and $2.2 million in additions to equipment and
furnishings.
In June 1996, the Company announced that its board of directors approved the
repurchase of up to 500,000 shares of CyberOptics' common stock. The shares were
repurchased from time to time in the open market or through negotiated
transactions. Repurchased shares will be utilized for employee compensation
plans and other corporate purposes. As of November 8, 1996 the Company had
repurchased all 500,000 shares, at a cost of approximately $6.3 million.
At the present time the Company has no material capital commitments. The Company
believes current working capital and anticipated funds from operations will be
adequate for anticipated operating needs.
OTHER
Changes in revenue levels have resulted from changes in units shipped and new
product introductions. The Company believes that inflation has had no
appreciable effect on operations. Substantially all of the Company's
international sales are negotiated, invoiced and paid in U.S. dollars.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In January 1996, the Company filed suit in federal court in Minnesota against
Yamaha Motor Company, Ltd. of Japan for fraud and theft of technology related to
the LaserAlign sensor and its applications. The Company is asking the federal
court to reassign or to invalidate two United States patents that Yamaha
obtained by falsely claiming to be the inventor of CyberOptics' technology, to
award CyberOptics damages for the harm Yamaha's patents have already done, and
to order Yamaha to stop filing additional patents relating to CyberOptics'
inventions. CyberOptics indicated that it will seek expedited proceedings. No
trial date has been set.
ITEM 6 - EXHIBITS AND REPORTS ON 8-K
a. Exhibits
Exhibit 27--Financial Data Schedule (For SEC use only)
Exhibit 99--Forward Looking Statements Cautionary Statement
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CyberOptics Corporation
/s/ John D. Beagan
-------------------
John D. Beagan, V.P. Operations and acting CFO
(Principal Financial Officer and
Duly Authorized Officer)
Dated: November 13, 1996
EXHIBIT 99
FORWARD LOOKING STATEMENTS
CAUTIONARY STATEMENT
Statements regarding the future prospects of the Company must be
evaluated in the context of a number of factors that may materially affect its
financial condition and results of operations. Disclosure of these factors is
intended to permit the Company to take advantage of the safe harbor provisions
of the PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Most of these factors
have been discussed in prior filings by the Company with the Securities and
Exchange Commission. Although the Company has attempted to list the factors that
it is currently aware may have an impact on its operations, other factors may in
the future prove to be important and the following list should not necessarily
be considered comprehensive.
INDUSTRY CONCENTRATION AND CYCLICALITY. Substantially all of the
Company's revenue is directly or indirectly related to capital expenditures in
the electronics industry. This industry is highly cyclical and has historically
experienced periodic downturns which often have had a severe effect on capital
expenditures. For the foreseeable future, the Company's operations will continue
to be dependent on the capital expenditures in this industry which, in turn, is
largely dependent on the market demand for products containing integrated
circuits. Although the Company's products have been, and continue to be, used in
a variety of industries outside the electronics industry, the Company's current
product development and marketing is focused on electronics and its business and
results of operations would be significantly and adversely affected by a
slowdown in this industry.
DEPENDENCE UPON PRINCIPAL OEM CUSTOMERS. The Company's revenue levels
continue to be largely dependent on the order rates of its large OEM customers.
For the year ended December 31, 1995 and the nine month period ended September
30, 1996, the Company's five principal customers accounted for approximately 58%
and 62%, respectively, of the Company's revenue for such periods. Several of
such customers have reduced their order rates during the third quarter of 1996
and indicated to the Company that they may not be able to sustain historical
order rates during the next few quarters. The loss of, or a significant
curtailment of purchases by, any one or more of these OEM customers would have a
material adverse effect on the Company's results of operations.
DEPENDENCE ON OUTSIDE CONTRACTORS AND SUPPLIERS. The Company currently
contracts with third party assembly houses for a substantial portion of the
purchase and assembly of components of its products. Although the Company
endeavors to inspect and internally test most components prior to final
assembly, reliance on outside contractors reduces its control over quality and
delivery schedules. The failure by one or more of these subcontractors to
deliver quality components in a timely manner could have a material adverse
effect on the Company's results of operations. In addition, a number of the
components used in the Company's products are available from only a single
supplier or from a limited number of suppliers. Some of these components have
relatively long order cycles, in some cases over one year, and the timely
availability of these components to the Company is dependent on the Company's
ability to develop accurate forecasts of customer volume requirements. Any
interruption in or termination of supply of these components, or material change
in the purchase terms, including pricing, of any of these components, or a
reduction in their quality or reliability, could have a material adverse effect
on the Company's business and results of operations.
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY. The Company relies
heavily on its proprietary hardware designs and software technology. Although
the Company uses a variety of methods to protect its technology, it relies most
heavily on patents and trade secrets. There can be no assurance that the steps
taken by the Company will be adequate to deter misappropriation of its
technology, that any patents issued to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
a competitive advantage to the Company. In addition, there remains the
possibility that others will "reverse engineer" the Company's products in order
to determine their method of operation and introduce competing products or that
others will develop competing technology independently. Any such adverse
circumstances could have a material adverse effect on the Company's results of
operations.
One of the Company's OEM customers, Yamaha Motor Company, Ltd., has
filed patent applications in Japan, the United States and several other foreign
jurisdictions on technology proprietary to the Company, or on applications of
such technology that the Company believes are incremental or obvious in a
practice know as "patent flooding." Several United States patents have been
issued to Yamaha on such technology. The Company has filed suit against Yamaha
in United States District Court for the District of Minnesota for theft of its
trade secrets, breach of contract and to transfer ownership of several of such
patents. The Company intends to vigorously pursue such litigation, but the costs
of this, and other action to protect its intellectual property, could have an
adverse effect on the Company's results of operations.
As the number of its products increases, the markets in which its
products are sold expands, and the functionality of those products grows and
overlaps with products offered by competitors, the Company believes that it may
become increasingly subject to infringement claims. Although the Company does
not believe any of its products or proprietary rights infringe the rights of
third parties, there can be no assurances that infringement claims will not be
asserted against the Company in the future or that any such claims will not
require the Company to enter into royalty arrangements or result in costly
litigation.
DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent upon the
technical expertise, management and leadership of Dr. Steven K. Case, President,
Chief Executive Officer and a director of the Company, as well as other members
of the Company's senior management team, many of whom would be difficult to
replace. Although the Company has a $5,000,000 key-man insurance policy on Dr.
Case and has retained other experienced and qualified senior managers, the loss
of the services Dr. Case or other key personnel would have a material adverse
effect on the Company.
TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT. The market for the
Company's products is characterized by rapidly changing technology. Accordingly,
the Company believes that its future success will depend upon its ability to
continue to develop and introduce new products with improved price and
performance. In order to develop such new products successfully, the Company is
dependent upon close relationships with its customers and their willingness to
share information about their requirements and participate in joint development
efforts with the Company. There can be no assurance that the Company's customers
will continue to provide it with timely access to such information or that the
Company will be able to develop and market such new products successfully and
respond effectively to technological changes or new product announcements by
others.
INTERNATIONAL REVENUE. In the years ended December 31, 1993, 1994, and
1995 and the nine months ended September 30, 1996, sales of the Company's
products to customers outside the United States accounted for approximately 39%,
57%, 68% and 70%, respectively, of the Company's revenue. The Company
anticipates that international revenue will continue to account for a
significant portion of its revenues. The Company's operating results are subject
to the risks inherent in international sales, including, but not limited to,
various regulatory requirements, political and economic changes and disruptions,
transportation delays, difficulties in staffing and managing foreign sales
operations, and potentially adverse tax consequences. In addition, fluctuations
in exchange rates may render the Company's products less competitive relative to
local product offerings. There can be no assurance that these factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's operating results.
COMPETITION. The Company competes with other vendors of optical
sensors, with vendors of machine vision systems, and with the internal
engineering efforts of the Company's current or prospective customers, many of
which may have greater financial and other resources than the Company. There can
be no assurance that the Company will be able to compete successfully in the
future or that the Company will not be required to incur significant costs in
connection with its engineering research, development, marketing and customer
service efforts to remain competitive. Moreover, the Company's principal
customers operate within the electronics industry, which is highly competitive
and highly dependent upon its suppliers' ability to provide high quality, cost
efficient products. Competitive pressures may result in price erosion or other
factors which will adversely affect the Company's financial performance.
QUARTERLY FLUCTUATIONS. The Company has experienced quarterly
fluctuations in operating results and anticipates that these fluctuations will
continue. These fluctuations have been caused by various factors, including the
capital procurement practices of its customers and the electronics industry
generally, the timing and acceptance of new product introductions and
enhancements, and the timing of product shipments and marketing. Future
operating results may fluctuate as a result of these and other factors,
including the Company's ability to continue to develop innovative products, the
introduction of new products by the Company's competitors, the Company's product
and customer mix, the level of competition and overall trends in the economy.
POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes that factors
such as the announcement of new products by the Company or its competitors,
market conditions in the electronics and precision measurement industries
generally and quarterly fluctuations in financial results could cause the market
price of the Common Stock to vary substantially. In recent years, the stock
market has experienced price and volume fluctuations that have particularly
affected the market prices for many high technology companies and which often
have been unrelated to the operating performance of such companies. The market
volatility may adversely affect the market price of the Company's Common Stock.
LITIGATION AND LITIGATION COSTS. The Company is currently engaged as
plaintiff in a lawsuit it filed in the Federal District Court in the State of
Minnesota against Yamaha Motor Company, Ltd. for fraud and theft of technology
related to its LaserAlign sensor and its applications. The Company is asking the
court to reassign several United States Patents that Yamaha obtained by falsely
claiming to be inventor, to award the Company damages for the harm Yamaha's
patents have already done and to order Yamaha to stop filing patents relating to
the Company's inventions. In response, Yamaha filed suit against the Company in
Japan claiming defamation and infringement of certain patents filed by Yamaha in
Japan.
The Company believes that the LaserAlign technology is central to its
business operations and intends to pursue its claims against Yamaha until it is
clear that the Company will be able to continue to utilize the technology that
the Company has created and market its products on the basis of such technology.
Such litigation is costly and will likely have an adverse impact on the
Company's results of operations during its pendency. Further, although the
Company believes that it has basis for collection of damages and its costs in
instituting such litigation, their can be no assurances that it will be awarded
such damages or costs or that it will be able to collect the same.
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