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 June 30, 1997
[ ] 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 July 31, 1997, 5,227,665 shares of the issuer's Common Stock, no par value,
were outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30,
1997 DEC. 31,
(UNAUDITED) 1996
------- -------
ASSETS
Cash and cash equivalents $ 2,922 $ 3,453
Marketable securities 20,994 21,356
Accounts receivable, net 5,725 5,031
Inventories 4,712 3,768
Other current assets 1,381 1,635
------- -------
Total current assets 35,734 35,243
Marketable securities 14,114 12,500
Equipment and furnishings, net 2,377 2,495
Capitalized patent costs, net 88 78
------- -------
Total assets $52,313 $50,316
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,270 $ 1,191
Income taxes payable 781 233
Accrued expenses 1,669 1,424
------- -------
Total current liabilities 3,720 2,848
Commitments and Contingencies
Stockholders' equity:
Preferred stock, no par value, 5,000 shares
authorized, none outstanding
Common stock, no par value, 25,000 shares
authorized, 5,224 and 5,216 shares issued
and outstanding, respectively 36,936 37,209
Retained earnings 11,657 10,259
------- -------
Total stockholders' equity 48,593 47,468
------- -------
Total liabilities and stockholders' equity $52,313 $50,316
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SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CYBEROPTICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30,
1997 1996
------- -------
Revenues $ 8,257 $ 7,812
Cost of revenues 3,855 3,895
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Gross margin 4,402 3,917
Research and development expenses 1,552 1,635
Selling, general and administrative expenses 2,195 1,880
------- -------
Income from operations 655 402
Interest income 536 611
------- -------
Income before income taxes 1,191 1,013
Provision for income taxes 382 313
======= =======
Net income $ 809 $ 700
======= =======
Net income per share $ 0.15 $ 0.12
======= =======
Weighted average common and
common equivalent shares 5,427 5,863
======= =======
SIX MONTHS ENDED JUNE 30,
1997 1996
------- -------
Revenues $15,337 $16,325
Cost of revenues 7,229 7,804
------- -------
Gross margin 8,108 8,521
Research and development expenses 2,978 2,936
Selling, general and administrative expenses 4,104 3,693
------- -------
Income from operations 1,026 1,892
Interest income 1,029 1,182
------- -------
Income before income taxes 2,055 3,074
Provision for income taxes 657 953
======= =======
Net income $ 1,398 $ 2,121
======= =======
Net income per share $ 0.26 $ 0.36
======= =======
Weighted average common and
common equivalent shares 5,417 5,849
======= =======
SEE THE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS.
<PAGE>
CYBEROPTICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS ENDED JUNE 30,
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,398 $ 2,121
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 444 336
Provision for losses on inventories 198 61
Changes in operating assets and
liabilities:
Accounts receivable (694) 1,877
Inventories (1,142) 19
Other current assets 254 (254)
Accounts payable 79 530
Income taxes payable 548 (538)
Accrued expenses 245 (79)
-------- --------
Net cash provided
by operating activities 1,330 4,073
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities 76,095 8,146
Purchases of marketable securities (77,347) (15,500)
Additions to equipment and furnishings (298) (1,624)
Additions to patents (38) (60)
-------- --------
Net cash used by investing
activities (1,588) (9,038)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 288 395
Repurchase of common stock (561) -
-------- --------
Net cash provided (used) by financing
activities (273) 395
Decrease in cash and cash equivalents (531) (4,570)
Cash and cash equivalents - beginning
of period 3,453 8,718
-------- --------
Cash and cash equivalents - end of period $ 2,922 $ 4,148
======== ========
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CYBEROPTICS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. INTERIM REPORTING:
The interim consolidated financial statements presented herein as of June 30,
1997 and for the three and six months ended June 30, 1997 and 1996 are
unaudited; however, in the opinion of management, the interim consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of financial position,
results of operations and cash flows for the periods presented.
The results of operations for the six-month period ended June 30, 1997 do not
necessarily indicate the results to be expected for the full year. These interim
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto, contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
The December 31, 1996 consolidated balance sheet data was derived from audited
consolidated 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 authorized the
repurchase of up to 500,000 shares of CyberOptics' common stock. In 1996, all
500,000 shares were repurchased through open market purchases, block
transactions or privately negotiated purchases. In December 1996, the Company's
Board of Directors authorized the repurchase of up to an additional 500,000
shares of common stock. During the first quarter of 1997, the Company
repurchased 41,000 shares of common stock under the second authorization.
Repurchased shares will be utilized for employee compensation plans and other
corporate purposes.
3. INVENTORIES (IN THOUSANDS):
June 30, Dec. 31,
1997 1996
------ ------
Raw materials $3,359 $2,522
Work in process 731 736
Finished goods 622 510
------ ------
Total inventories $4,712 $3,768
====== ======
4. EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share". This statement modifies the methodology for
calculating earnings per share and must be adopted in the fourth quarter of
1997. There is no significant difference between the Company's earnings per
share as presented herein and as calculated under Statement No. 128.
<PAGE>
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 earnings and financial position during
the periods included in the accompanying consolidated 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, marketing and
research and development expenses, taxation levels, the sufficiency of cash to
meet operating expenses, needs for capital expenditures 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.
<PAGE>
RESULTS OF OPERATIONS
The table below lists certain financial data expressed as a percentage of
revenues for the periods ended June 30, 1997 and 1996.
Three Months Six Months
Ended Ended
June 30, June 30,
1997 1996 1997 1996
----------------------------
Revenues 100% 100% 100% 100%
Gross margin 53% 50% 53% 52%
Research and development expenses 19% 21% 19% 18%
Selling, general and
administrative expenses 27% 24% 27% 23%
Income from operations 8% 5% 7% 12%
Net income 10% 9% 9% 13%
REVENUES
Revenues decreased 6% to $15.3 million during the six month period ended June
30, 1997 compared to $16.3 million for the comparable period in 1996. For the
second quarter of 1997, revenues increased 6% to $8.3 million from $7.8 million
in 1996. Beginning in the second quarter of 1996, the Company's revenues started
to be impacted by a slowdown in capital spending by the global surface mount
technology market (SMT), the primary market for the Company's products. Although
this reduction in capital spending by the electronics industry has had a
significant impact on the revenue levels of the Company, since the low point
during the third quarter of 1996, quarterly revenues have increased steadily. In
comparison to the first quarter of 1997, revenues for the second quarter
increased 17%. The Company anticipates the recovery of the SMT market will
continue into the second half of 1997, which should continue to have a positive
impact on the level of orders for the remainder of the year.
Sensor revenues decreased 14% to $10.0 million during the six months ended June
30, 1997 from the comparable period in 1996, and decreased 12% to $5.1 million
for the second quarter of 1997 compared to the second quarter of 1996. 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 decline in sensor revenue during 1997 reflects decreased shipments to such
OEM customers. Although some OEM customers have increased their order rates in
1997 and the level of Laser Lead Locator shipments is higher in 1997 than 1996,
overall sensor sales were down. The Company's largest customer, Juki
Corporation, accounted for approximately 25% and 26% of revenues for the six
month and three month periods ended June 30, 1997, and the five principal OEM
sensor customers accounted for approximately 52% and 53% of revenues,
respectively. In addition, following a 12 month delay in new orders, a customer
that represented 24% of revenue in the first half of 1996 began purchasing
product at reduced volume levels during the second quarter of 1997.
<PAGE>
System revenues increased 23% to $4.6 million during the six month period ended
June 30, 1997 from the comparable period in 1996, and increased 85% to $2.8
million for the second quarter of 1997 compared to the second quarter of 1996.
The increased systems revenues is primarily the result of increased shipments of
enhanced versions of the Company's solder paste inspection systems, CyberSentry
2000 and LSM2. The LSM2 started shipping in production volumes during the first
quarter of 1997, and production volumes of the CyberSentry 2000 began shipping
in the second quarter of 1997. These increases were somewhat offset by a decline
in the sales of general measurement systems during 1997, primarily as the result
of a pending changeover in the sensor line used on these systems and the delayed
introduction of a new general measurement system until early 1998.
International revenues comprised 66% and 70% of total revenues during the six
months ended June 30, 1997 and 1996, and 61% and 73% of total revenues during
the second quarter of 1997 and 1996. Revenue generated from products used
primarily for SMT production were approximately 85% of revenues for the three
month and six month periods ended June 30, 1997.
Substantially all of the Company's international export sales are negotiated,
invoiced and paid in U.S. dollars. Changes in the revenue levels have resulted
from changes in units shipped and new product introductions. The Company
believes that inflation has had no significant impact on operations.
COST OF REVENUES
Cost of revenues decreased as a percent of total revenues to 47% during the six
month period ended June 30, 1997 compared to 48% during the comparable period in
1996. For the second quarter of 1997, cost of revenue was 47% of total revenue
compared to 50% in 1996. During the first half of 1996, the Company was
expanding its program of using third party manufacturers for the production of
certain component parts. As part of this program, the Company sold portions of
its existing inventory at or about cost, which had the effect of increasing cost
of revenues during the first two quarters of 1996. In addition, higher selling
prices on newly introduced solder paste inspection systems and changes in the
sensor revenue mix towards higher margin products have had a positive impact on
reducing cost of revenues as a percent of total revenues during 1997. These
reductions in cost of revenue as a percent of total revenues were offset
somewhat by an increased fixed component of cost of revenues, primarily
associated with the Company occupying its new facility since May, 1996.
RESEARCH AND DEVELOPMENT
Net research and development expenses increased slightly to $3.0 million during
the six month period ended June 30, 1997 compared to $2.9 million during the
comparable period in 1996. For the second quarter of 1997, research and
development expenses decreased 5% to $1.5 million from the comparable period in
1996. As a percentage of revenue, expenses have increased from 18% in 1996 to
19% in 1997 during the six months ended June 30, and for the second quarter have
decreased from 21% in 1996 to 19% in 1997. Payments to the Company for customer
funded research and development are deferred and recognized as a reduction of
research and development expenses as costs are incurred. During the six months
ended June 30, 1997 and 1996, $166,000 and $475,000 of customer funded research
and development was recognized as a reduction of research and development
expense. During the second quarter of 1997 and 1996, no funded research and
development was recognized. As of June 30, 1997, all deferred research and
development has been recognized.
Research and development expenses during the first quarter of 1997 were
primarily focused on completion of the CyberSentry 2000 and the LSM2, which were
introduced in the first half of 1997, continuing development work on the
LaserAlign technology and developing a new sensor and systems product for the
general measurement market to be introduced early in 1998. The Company
anticipates that expense levels in research and development will remain fairly
flat for the remainder of 1997.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 11% to $4.1 million
during the six month period ended June 30, 1997 compared to $3.7 million during
the comparable period in 1996. For the second quarter of 1997, selling, general
and administrative expenses increased 17% to $2.2 million compared to $1.9
million in 1996. As a percentage of revenues, selling, general and
administrative expenses have increased from 23% in 1996 to 27% in 1997 for the
six months ended June 30, and from 24% in 1996 to 27% in 1997 for the second
quarter. The increase in selling, general and administrative expenses is
primarily due to increased personnel and related costs required to support the
sales and service of the Company's product offerings. The Company has added
sales and service resources to support its end-user systems business, an area
management believes will be a source of growth in 1997. In addition, resources
have been added to the product marketing department, an area of focus for the
Company during 1997, and there are additional fixed costs associated with
occupying a new facility since May 1996. The Company anticipates that selling,
general and administrative expenses will remain relatively flat, including legal
costs associated with the suit against Yamaha Motor Company, Ltd., for the
remainder of 1997.
EFFECTIVE TAX RATE
The Company applied an effective tax rate of approximately 32% during the six
months ended June 30, 1997 and 31% during the same period in 1996. Benefits from
the Company's foreign sales corporation and the use of the research and
experimentation tax credit were primarily responsible for reducing the effective
tax rate below the statutory federal rate.
ORDER RATE AND BACKLOG
CyberOptics' order rate totaled $16.3 million during the six months ended June
30, 1997 compared to $13.0 million during the same period in 1996. For the
second quarter of 1997, the order rate totaled $8.0 million compared to $5.4
million in 1996. Backlog totaled $5.4 million and $3.6 million at June 30, 1997
and 1996, respectively. The scheduled shipment of the June 30, 1997 backlog is
as follows (In thousands):
3rd Quarter 1997 $5,143
4th Quarter 1997 228
------
Total backlog $5,371
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and marketable securities increased to $38.0 million
as of June 30, 1997 from $37.3 million as of December 31, 1996, primarily as the
result of cash provided by operations of $1.3 million. The cash provided by
operations was partially offset by $561,000 used to repurchase common stock
during 1997. Marketable securities generally consist of U.S. Government or U.S.
Government agency obligations, with maturities of three years or less. Working
capital decreased to $32.0 million as of June 30, 1997 from $32.4 million as of
December 31, 1996, primarily as the result of a greater portion invested in
marketable securities with maturities of over one year.
<PAGE>
The Company generated $1.3 million in cash from operations during the first six
months of 1997, primarily due to net income of $1.4 million, depreciation and
amortization of $444,000 and an increase in income taxes payable of $548,000.
These amounts were partially offset by an increase in inventory of $1.1 million
as the result of inventory purchases to support new product introductions during
the first half of 1997 and an increase in accounts receivable of $694,000 caused
by increased revenue levels. Investing activities used $1.6 million of cash
primarily due to the purchase of marketable securities, net of maturities.
In June 1996, the Company announced that its Board of Directors authorized the
repurchase of up to 500,000 shares of CyberOptics' common stock for the purposes
of providing the necessary common stock for the Company's stock option and
employee stock purchase plans. During 1996, the Company repurchased all 500,000
shares at a cost of approximately $6.3 million. In December 1996, the Company's
Board of Directors authorized the repurchase of up to an additional 500,000
shares of CyberOptics common stock. During 1997, 41,000 shares were repurchased
at a cost of $561,000. As of August 5, no additional shares have been
repurchased.
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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of CyberOptics Corporation was held at 3:30
p.m. on Thursday, May 8, 1997. Shareholders holding 3,543,156 shares, or
approximately 67.6% of the outstanding shares, were represented at the meeting
by proxy or in person. Matters submitted at the meeting for vote by the
shareholders were as follows:
a. Election of Directors
The following nominees were elected to serve as members of the Board of
Directors until the annual meeting of shareholders in 1998 or until
such time as a successor may be elected:
TABULATION OF VOTES
-------------------
FOR WITHHELD
--- --------
Steve K. Case 3,515,153 28,003
Alex B. Cimochowski 3,500,409 42,747
George E. Kline 3,520,872 22,284
Steven M. Quist 3,515,153 28,003
P. June Min 3,350,441 192,715
Erwin A. Kelen 3,500,309 42,847
b. Approval of amendment to Stock Option Plan for Nonemployee Directors
Shareholders approved an amendment to the Company's Stock Option Plan
for Nonemployee Directors to provide for a one-time grant to each
director who is not also an employee of an option to purchase 12,000
shares and to increase by 80,000 shares the number of shares reserved
for issuance under the Plan to accommodate such grants by a vote of
3,363,563 shares in favor, 150,741 shares against and 28,852 shares
abstained.
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 June 30,
1997 or during the period from June 30, 1997 to the date of this
quarterly report on Form 10-Q.
<PAGE>
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 CFO
(Principal Financial Officer and
Duly Authorized Officer)
Dated: August 13, 1997
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.
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 six months, 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.
<PAGE>
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 known 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.
<PAGE>
INTERNATIONAL REVENUE. In the years ended December 31, 1994, 1995, and
1996 and the six months ended June 30, 1997, sales of the Company's products to
customers outside the United States accounted for approximately 57%, 68%, 70%
and 66%, 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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