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, 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 November 7, 1997, 5,316,078 shares of the issuer's Common Stock, no par
value, were outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CYBEROPTICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPT. 30, 1997 DEC. 31, 1996
(UNAUDITED)
<S> <C> <C>
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ASSETS
Cash and cash equivalents $5,456 $3,453
Marketable securities 24,541 21,356
Accounts receivable, net 5,163 5,031
Inventories 4,660 3,768
Other current assets 1,346 1,635
- --------------------------------------------------------------------------------------------------
Total current assets 41,166 35,243
Marketable securities 11,087 12,500
Equipment and furnishings, net 2,317 2,495
Capitalized patent costs, net 95 78
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Total assets $54,665 $50,316
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $1,230 $1,191
Income taxes payable 1,327 233
Accrued expenses 1,566 1,424
- --------------------------------------------------------------------------------------------------
Total current liabilities 4,123 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, 5,285 and 5,216 shares issued
and outstanding, respectively 37,398 37,209
Retained earnings 13,144 10,259
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Total stockholders' equity 50,542 47,468
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Total liabilities and stockholders' equity $54,665 $50,316
==================================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CYBEROPTICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED SEPT. 30,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------------------------
Revenues $9,249 $5,025
Cost of revenues 3,896 2,644
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Gross margin 5,353 2,381
Research and development expenses 1,588 1,474
Selling, general and administrative expenses 2,127 2,009
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Income (loss) from operations 1,638 (1,102)
Interest income 549 593
- -------------------------------------------------------------------------------------
Income (loss) before income taxes 2,187 (509)
Provision for income taxes 700 (153)
- -------------------------------------------------------------------------------------
Net income (loss) $1,487 ($356)
=====================================================================================
Net income (loss) per share $0.26 ($0.06)
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Weighted average common and
common equivalent shares 5,729 5,526
=====================================================================================
NINE MONTHS ENDED SEPT. 30,
1997 1996
- -------------------------------------------------------------------------------------
Revenues $24,586 $21,350
Cost of revenues 11,125 10,449
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Gross margin 13,461 10,901
Research and development expenses 4,566 4,410
Selling, general and administrative expenses 6,231 5,703
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Income from operations 2,664 788
Interest income 1,578 1,776
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Income before income taxes 4,242 2,564
Provision for income taxes 1,357 800
=====================================================================================
Net income $2,885 $1,764
=====================================================================================
Net income per share $0.51 $0.30
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Weighted average common and
common equivalent shares 5,712 5,790
=====================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CYBEROPTICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
NINE MONTHS ENDED SEPT. 30,
1997 1996
<S> <C> <C>
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,885 $1,764
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 676 549
Provision for losses on inventories 379 109
Changes in operating assets and
liabilities:
Accounts receivable (132) 4,207
Inventories (1,271) (460)
Other current assets 289 (119)
Accounts payable 39 319
Income taxes payable 1,094 (692)
Accrued expenses 142 (576)
- ----------------------------------------------------------------------------------------
Net cash provided
by operating activities 4,101 5,101
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities 112,778 13,146
Purchases of marketable securities (114,550) (15,500)
Additions to equipment and furnishings (455) (2,168)
Additions to patents (60) (62)
- ----------------------------------------------------------------------------------------
Net cash used by investing
activities (2,287) (4,584)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 465 418
Proceeds from issuance of common stock
under Employee Stock Purchase Plan 285 181
Repurchase of common stock (561) (3,923)
- ----------------------------------------------------------------------------------------
Net cash provided (used) by financing
activities 189 (3,324)
Increase (decrease) in cash and cash equivalents 2,003 (2,807)
Cash and cash equivalents - beginning
of period 3,453 8,718
- ----------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $5,456 $5,911
========================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
CYBEROPTICS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. INTERIM REPORTING:
The interim consolidated financial statements presented herein as of September
30, 1997, and for the three and nine months ended September 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 nine-month period ended September 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):
Sept. 30, Dec. 31,
1997 1996
(unaudited)
-------------------------
Raw materials $2,754 $2,522
Work in process 921 736
Finished goods 985 510
-------------------------
Total inventories $4,660 $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 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, marketing and
research and development expenses, taxation levels, the sufficiency of cash to
meet operating and capital 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.
<PAGE>
RESULTS OF OPERATIONS
The table below lists certain financial data expressed as a percentage of
revenues for the periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1997 1996 1997 1996
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Gross margin 58% 47% 55% 51%
Research and development expenses 17% 29% 19% 21%
Selling, general and
administrative expenses 23% 40% 25% 27%
Income (loss) from operations 18% (22)% 11% 4%
Net income (loss) 16% (7)% 12% 8%
</TABLE>
REVENUES
Revenues increased 15% to $24.6 million during the nine month period ended
September 30, 1997 compared to $21.3 million for the comparable period in 1996.
For the third quarter of 1997, revenues increased 84% to $9.2 million from $5.0
million in 1996. Increased revenues are primarily the result of strong demand
for surface mount technology (SMT) process control sensors reflecting continued
improvement in the global SMT market, the primary market for the Company's
products. The Company anticipates a strong SMT market for the remainder of 1997
and into 1998, which should continue to have a positive impact on the level of
orders. Revenue levels in the third quarter of 1996 were affected by a
significant slowdown in capital spending in the SMT marketplace.
Sensor revenues increased 13% to $16.9 million during the nine months ended
September 30, 1997 from the comparable period in 1996, and increased 108% to
$6.9 million for the third quarter of 1997 compared to the third quarter of
1996. Sensor revenues are generated primarily from the Company's LaserAlign and
Laser Lead Locator products, which represented 60% and 69% of total revenues for
the nine-month and three-month periods ended September 30, 1997. Sales of Laser
Lead Locator were significantly stronger than planned during the three-month
period ended September 30, 1997, contributing to a shift in the overall revenue
mix toward sensor revenues. Sensor revenues are significantly affected by the
shipment levels to several large OEM customers. The Company's largest customer,
Juki Corporation, accounted for approximately 24% and 23% of revenues during the
nine-month and three-month periods ended September 30, 1997, and the five
principal OEM sensor customers accounted for approximately 53% and 61% of
revenues, respectively.
System revenues increased 27% to $6.7 million during the nine months ended
September 30, 1997 from the comparable period in 1996, and increased 37% to $2.0
million for the third quarter of 1997 compared to the third quarter of 1996. The
increase in systems revenues is due to increased shipments of enhanced versions
of the Company's solder paste inspection systems, CyberSentry 2000 and LSM2,
which were introduced in the first half of 1997. CyberSentry revenues increased
29% and 57% during the nine-month and three-month period ended September 30,
1997, and LSM2 revenues increased 74% and 37%, respectively. Increases in solder
paste inspection system revenues 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.
<PAGE>
International revenues comprised 71% and 70% of total revenues during the nine
months ended September 30, 1997 and 1996, and 77% and 72% of total revenues
during the third quarter of 1997 and 1996. Revenues generated from products used
primarily for SMT production were approximately 90% of revenues for the
nine-month and three-month periods ended September 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
primarily from changes in the volume of 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 45% during the
nine-month period ended September 30, 1997 compared to 49% during the comparable
period in 1996. For the third quarter of 1997, cost of revenue was 42% of total
revenue compared to 53% in 1996. Cost of revenues has been positively affected
by a shift in the sensor revenue mix towards higher margin sensor products,
higher selling prices on our enhanced solder paste inspection systems introduced
during 1997 and increased revenue volume over which to spread the fixed
component of cost of revenues. During 1997, the fixed dollar level of cost of
revenues has continued to be affected by cost containment measures taken by the
Company, particularly the 12% workforce reduction instituted during the third
quarter of 1996, offset somewhat by increased fixed costs associated with
occupying its new facility since May, 1996. In addition, during 1996 cost of
revenues were increased as the result of selling inventory to a third party
manufacturer, at or about cost, as part of a program to outsource the
manufacturing of certain component parts.
RESEARCH AND DEVELOPMENT
Net research and development expenses increased 4% to $4.6 million during the
nine-month period ended September 30, 1997 compared to $4.4 million during the
comparable period in 1996. For the third quarter of 1997, net expenses have
increased 8% to $1.6 million from the comparable period in 1996. As a percentage
of revenue, expenses have decreased to 19% during the nine months ended
September 30, 1997 from 21% during the comparable period in 1996, and decreased
to 17% in the third quarter compared to 29% in 1996. 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
nine months ended September 30, 1997 and 1996, $166,000 and $740,000 of customer
funded research and development was recognized as a reduction of research and
development expense. As of September 30, 1997, all deferred research and
development had been recognized.
Research and development expenses during the nine months ended September 30,
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 and Laser Lead Locator technology and developing a new sensor and
systems product for the general measurement market to be introduced in late 1997
and early 1998. The Company anticipates that expense levels in research and
development will remain fairly flat as a percentage of revenues for the next
several quarters.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 9% to $6.2 million during
the nine-month period ended September 30, 1997 compared to $5.7 million during
the comparable period in 1996. For the third quarter of 1997, selling, general
and administrative expenses increased 6% to $2.1 million compared to $2.0
million in 1996. As a percentage of revenue, expenses have decreased from 27% in
1996 to 25% in 1997 for the nine months ended September 30, and from 40% in 1996
to 23% in 1997 for the third quarter. The dollar increase in selling, general
and administrative expenses is primarily due to increased personnel and related
costs added to support the sales and service of the Company's product offerings.
The Company has added sales, service and other support resources primarily to
provide support to its end-user system business, but also to support a growing
OEM revenue base. In addition, resources have been added to the product
marketing department, an area of focus for the Company in 1997, and there are
additional fixed costs associated with occupying a new facility since May 1996.
EFFECTIVE TAX RATE
The Company applied an effective rate of 32% during the nine months ended
September 30, 1997 and 31% during the same period in 1996. Benefits from the
Company's foreign sales corporation and 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 $27.3 million during the nine months ended
September 30, 1997 compared to $18.3 million during the same period in 1996. For
the third quarter of 1997, the order rate totaled $11.0 million compared to $5.2
million in 1996. Backlog totaled $7.1 million and $3.9 million at September 30,
1997 and 1996, respectively. The scheduled shipment of the September 30, 1997
backlog is as follows (In thousands):
4th Quarter 1997 $6,072
1st Quarter 1998 971
After 1st Quarter 1998 53
---------
Total backlog $7,096
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and marketable securities increased to $41.1 million
as of September 30, 1997 from $37.3 million as of December 31, 1996, primarily
as the result of cash provided by operations of $4.1 million. The cash provided
by operations was partially offset by $561,000 used to repurchase common stock
and $455,000 used to purchase equipment and furnishings 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 increased
to $37.0 million as of September 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 less than one year.
The Company generated $4.1 million in cash from operations during the first nine
months of 1997, primarily due to net income of $2.9 million, depreciation and
amortization of $676,000 and an increase in income taxes payable of $1.1
million. These amounts were partially offset by an increase in inventory of $1.3
million as the result of inventory purchases to support a growing revenue base
and new product introductions during 1997. Investing activities used $2.3
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 November 10, no additional shares have been
repurchased.
During the fourth quarter of 1997 and the first half of 1998, the Company will
be in the process of purchasing and implementing a new enterprise business
system. Total external cost of implementation is anticipated to be approximately
$1.0 million. The Company believes current working capital and anticipated funds
from operations will be adequate for anticipated operating and capital needs.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON 8-K
a. Exhibits
Exhibit 27--Financial Data Schedule (For EDGAR filing 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,
1997, or during the period from September 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 acting CFO
(Principal Financial Officer and
Duly Authorized Officer)
Dated: November 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 nine months ended September 30, 1997, sales of the Company's
products to customers outside the United States accounted for approximately 57%,
68%, 70% and 71%, 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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