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 March 31, 1998
[ ] 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 May 6, 1998, 5,417,430 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)
<TABLE>
<CAPTION>
MARCH 31, 1998 DEC. 31, 1997
(UNAUDITED)
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<S> <C> <C>
ASSETS
Cash and cash equivalents $9,775 $6,160
Marketable securities 21,523 20,577
Accounts receivable, net 7,416 7,697
Inventories 5,781 4,611
Other current assets 1,491 1,343
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Total current assets 45,986 40,388
Marketable securities 11,112 14,290
Equipment and furnishings, net 2,858 2,661
Capitalized patent costs, net 99 106
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Total assets $60,055 $57,445
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $1,644 $1,205
Income taxes payable 1,261 661
Accrued expenses 1,884 2,286
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Total current liabilities 4,789 4,152
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, 5,409 and 5,341 shares issued
and outstanding, respectively 38,842 38,437
Retained earnings 16,424 14,856
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Total stockholders' equity 55,266 53,293
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Total liabilities and stockholders' equity $60,055 $57,445
==================================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
CYBEROPTICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31,
1998 1997
- ----------------------------------------------------------------------------
Revenues $10,630 $7,080
Cost of revenues 4,447 3,374
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Gross margin 6,183 3,706
Research and development expenses 1,845 1,426
Selling, general and administrative expenses 2,633 1,909
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Income from operations 1,705 371
Interest income 593 493
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Income before income taxes 2,298 864
Provision for income taxes 730 275
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Net income $ 1,568 $ 589
============================================================================
Net income per share - Basic $ 0.29 $ 0.11
Net income per share - Diluted $ 0.28 $ 0.11
============================================================================
Weighted average shares outstanding - Basic 5,372 5,183
Weighted average shares outstanding - Diluted 5,640 5,415
============================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS.
<PAGE>
CYBEROPTICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
THREE MONTHS ENDED MARCH 31,
1998 1997
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,568 $589
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 255 219
Provision for losses on inventories 62 32
Changes in operating assets and
liabilities:
Accounts receivable 281 193
Inventories (1,232) (788)
Other current assets (148) 420
Accounts payable 439 45
Income taxes payable 600 275
Accrued expenses (402) (177)
- --------------------------------------------------------------------------------
Net cash provided
by operating activities 1,423 808
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of marketable securities 7,674 14,987
Purchases of marketable securities (5,427) (7,480)
Additions to equipment and furnishings (436) (159)
Additions to patents (9) (16)
- --------------------------------------------------------------------------------
Net cash provided by investing
activities 1,802 7,332
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 348 173
Repurchase of common stock (561)
Other 42
- --------------------------------------------------------------------------------
Net cash provided (used) by financing
activities 390 (388)
Increase in cash and cash equivalents 3,615 7,752
Cash and cash equivalents - beginning
of period 6,160 8,953
- --------------------------------------------------------------------------------
Cash and cash equivalents - end of period $9,775 $16,705
================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CYBEROPTICS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. INTERIM REPORTING:
The interim consolidated financial statements presented herein as of March 31,
1998, and for the three months ended March 31, 1998 and 1997, 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 three month period ended March 31, 1998, 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, 1997.
The December 31, 1997, 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 December 1996, the Company's Board of Directors authorized the repurchase of
up to 500,000 shares of common stock. During the first quarter of 1997, the
Company repurchased 41,000 shares of common stock under the authorization which
expired in December 1997. In February 1998, the Board of Directors authorized
the repurchase of an additional 500,000 shares, at such times and at such prices
as a committee of the Board of Directors determines. As of May 6, 1998, no
shares have been repurchased under the February 1998 authorization. Repurchased
shares will be utilized for employee compensation plans and other corporate
purposes.
3. INVENTORIES (IN THOUSANDS):
March 31, Dec. 31,
1998 1997
(unaudited)
-------------------------
Raw materials $3,716 $3,027
Work in process 1,457 1,106
Finished goods 608 478
-------------------------
Total inventories $5,781 $4,611
=========================
<PAGE>
CYBEROPTICS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
4. NET INCOME PER SHARE:
Basic net income per share has been computed using the weighted average number
of shares outstanding. The diluted net income per share includes the effect of
common stock equivalents for each period. The number of shares utilized in the
denominator of the diluted net income per share computation has been increased
by 268,000 and 232,000 shares at March 31, 1998 and 1997, respectively. Options
to purchase 14,000 and 144,000 shares of common stock at a weighted average
price of $24.50 and $16.60 were outstanding at March 31, 1998 and 1997 but were
not included in the computation of diluted net income per share as the options
exercise price was greater than the average market price of the common shares.
5. COMPREHENSIVE INCOME:
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes new rules for the reporting of comprehensive income and its
components, however, the adoption of SFAS 130 had no impact on the Company's net
income or stockholders' equity. SFAS 130 requires unrealized gains and losses on
the Company's available-for-sale securities to be included as a component of
other comprehensive income.
During the first quarters of 1998 and 1997, total comprehensive income amounted
to $1,583,000 and $589,000, respectively. Accumulated other comprehensive income
at March 31, 1998 and December 31, 1997 was $41,000 and $26,000, respectively.
6. RECLASSIFICATIONS:
Certain reclassifications have been made in the statement of cash flows for the
three month period ended March 31, 1997 to conform to the classifications used
during the three month period ended March 31, 1998. These reclassifications had
no effect on net income or stockholders equity.
<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, 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 and in the Company's filings with the
Securities and Exchange Commission.
<PAGE>
RESULTS OF OPERATIONS
The table below lists certain financial data expressed as a percentage of
revenues for the periods ended March 31, 1998 and 1997.
Three Months Ended
March 31,
1998 1997
-------------
Revenues 100% 100%
Gross margin 58% 52%
Research and development expenses 17% 20%
Selling, general and
administrative expenses 25% 27%
Income from operations 16% 5%
Net income 15% 8%
REVENUES
Revenues increased 50% to $10.6 million during the three month period ended
March 31, 1998 compared to $7.1 million for the comparable period in 1997.
Increased revenues are primarily the result of strong demand for surface mount
technology (SMT) process control sensors, primarily LaserAlign and Laser Lead
Locator, from original equipment manufacturer (OEM) customers and the resulting
change in the level of unit shipments. Revenues from SMT sensor products
contributed $8.2 million during the three months ended March 31, 1998 compared
to $4.6 million for the comparable period in 1997. The Company's two largest
customers, Juki Corporation (Juki) and Philips Electronics, N.V. (Philips),
accounted for approximately 34% and 18% of revenues for the three months ended
March 31, 1998 and Juki accounted for 24% of revenues for the comparable period
in 1997. The five principal OEM customers (including Juki and Philips) in the
aggregate accounted for 70% and 55% of revenues for the periods ended March 31,
1998 and 1997, respectively. Increased revenues from SMT sensors reflect
continued strength in the global SMT market, the primary market for the
Company's products. The Company anticipates a strong SMT market for the
remainder of 1998, which should continue to have a positive impact on the level
of orders.
SMT system revenues decreased 2% to $1.5 million during the three month period
ended March 31, 1998 from the comparable period in 1997. SMT systems revenues
represent sales of enhanced versions of the Company's CyberSentry and LSM
products, both of which were introduced during the first quarter of 1997. System
revenue levels are typically low during the first quarter of each year due to
the seasonal nature of capital equipment buying patterns and the introduction of
new products at electronics industry trade shows. The relatively flat SMT system
revenue levels discussed above reflect a continuation of this buying pattern. On
a quarterly basis, the Company anticipates SMT system revenues for the remainder
of 1998 will exceed those generated during the first quarter.
General measurement systems and sensor products revenues decreased to $212,000
during the three month period ended March 31, 1998 compared to $548,000 in the
first quarter of 1997. General measurement revenues have been declining
primarily as the result of product changeovers in both the systems and sensor
product lines. A new family of general measurement sensors was released during
the fourth quarter of 1997, and a new family of general measurement systems was
introduced late in the first quarter of 1998. As a result of these new product
introductions, the Company believes that general measurement products revenues
will make a growing contribution to revenues during the remainder of 1998.
<PAGE>
International revenues comprised 79% and 74% of total revenues during the three
months ended March 31, 1998 and 1997, respectively. Sales of the Company's
products in Western Europe, Japan and the rest of the Far East have increased
significantly over each of the last six quarters. These international markets
account for a significant portion of the production capability of capital
equipment for the manufacture of electronics, the primary market for the
LaserAlign, Laser Lead Locator, CyberSentry and LSM2 products. Revenues
generated from products used primarily for SMT production were approximately 91%
and 86% of revenues for the three month periods ended March 31, 1998 and 1997,
respectively.
GROSS MARGIN
Gross margin increased as a percent of total revenues to 58% during the three
month period ended March 31, 1998 compared to 52% during the comparable period
in 1997. The increase in gross margin is primarily the result of increased
revenue volume over which to spread the fixed component of cost of revenues as
well as manufacturing efficiencies. In addition, a shift in revenue mix towards
higher margin sensor products and reduced warranty costs also had a positive
impact on gross margin during the first quarter of 1998 compared to the same
period in 1997.
RESEARCH AND DEVELOPMENT
Net research and development expenses increased 29% to $1.8 million during the
three month period ended March 31, 1998 compared to $1.4 million during the
comparable period in 1997. As a percentage of revenue, expenses have decreased
to 17% during the three months ended March 31, 1998 from 20% during the
comparable period 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. There was no customer funded
research and development recognized during 1998. During the three months ended
March 31, 1997, $166,000 of customer funded research and development was
recognized as a reduction of research and development expense.
Research and development expenses during the three months ended March 31, 1998
were primarily focused on completion of the new family of general measurement
scan stations and sensors, introduced during the fourth quarter of 1997 and the
first quarter of 1998, continuing development work on the LaserAlign technology
and the development of additional future product offerings for solder paste
inspection. The Company anticipates that expense levels in research and
development will remain consistent with first quarter of 1998 as a percentage of
revenues over the next several quarters.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 38% to $2.6 million
during the three month period ended March 31, 1998 compared to $1.9 million
during the comparable period in 1997. As a percentage of revenue, selling,
general and administrative expenses have decreased from 27% in 1997 to 25% in
1998. The dollar increase in selling, general and administrative expenses is
primarily due to increased legal expense related to settlement of the Yamaha
litigation, increased personnel costs added to support the sales and service of
the Company's product offerings and personnel costs associated with the hiring
of a new President. The Company has added sales, service and other support
resources primarily to provide support to its SMT systems and general
measurement businesses, but also to support a growing OEM revenue base. In
addition, there were increases in trade show costs during the first quarter of
1998 as the Company continues to expand its presence at major electronics
industry events.
<PAGE>
EFFECTIVE INCOME TAX RATE
The Company's effective income tax rate was approximately 32% during the three
months ended March 31, 1998 and 1997. Benefits from the Company's foreign sales
corporation and 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 $8.8 million during the three month period ended
March 31, 1998 compared to $8.3 million during the same period in 1997. Backlog
totaled $6.8 million and $5.6 million at March 31, 1998 and 1997, respectively.
The scheduled shipment of the March 31, 1998 backlog is as follows (In
thousands):
2nd Quarter 1998 $6,542
3rd Quarter 1998 254
After 3rd Quarter 1998 23
------
Total backlog $6,819
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and marketable securities increased to $42.4 million
as of March 31, 1998 from $41.0 million as of December 31, 1997, primarily as
the result of $1.4 million in cash provided by operations and $390,000 in cash
provided by common stock related financing activities. These increases in cash
were partially offset by $445,000 in fixed asset and patent additions.
Marketable securities generally consist of U.S. Government or U.S. Government
agency obligations with maturities of three years or less.
The Company generated $1.4 million in cash from operations during the first
three months of 1998, primarily due to net income of $1.6 million, including
$317,000 of non-cash expenses for depreciation and amortization and the
provision for inventory obsolescence, a $600,000 increase in income taxes
payable and a $439,000 increase in accounts payable. These increases in cash
from operations were partially offset by an increase in inventory of $1.2
million as the result of inventory purchases to support a growing revenue base
and new product introductions, and a $402,000 reduction in accrued expenses
primarily due to payment of the 1997 employee incentive bonus in the first
quarter of 1998. During the three months ended March 31 1997, the Company
generated $808,000 of cash from operations, primarily due to net income of
$589,000, including $251,000 of non-cash expenses, a $420,000 decrease in other
current assets and an increase in income taxes payable of $275,000. These
increases in cash were offset primarily by a $788,000 increase in inventories.
The Company generated $1.8 million of cash from investing activities during the
three month period ended March 31, 1998 and $7.3 million in the comparable
period in 1997. The majority of the increase in cash is the result of the timing
of purchases and sales of marketable securities, which provided $2.2 million of
cash in 1998 and $7.5 million in 1997. The Company used $436,000 and $159,000 of
cash during 1998 and 1997 to purchase additional equipment and leasehold
improvements
<PAGE>
The Company generated $390,000 of cash from financing activities in the three
month period ended March 31, 1998 and used $388,000 of cash during the
comparable period in 1997. During 1998, cash was generated primarily as the
result of proceeds from the exercise of stock options. During 1997, cash was
used primarily for the repurchase of 41,000 shares of the Company's common
stock.
During the fourth quarter of 1997 and the first half of 1998, the Company will
implement a new enterprise business system. Total external cost of
implementation is anticipated to be approximately $1.0 million, the majority of
which will be capitalized and depreciated beginning on the date of
implementation. As of March 31, 1998, the Company has capitalized costs of
approximately $400,000 for the new system. Other than discussed above, the
Company has no material capital commitments. The Company believes current
working capital and anticipated funds from operations will be adequate for
anticipated operating and capital needs.
OTHER
Changes in revenue levels have resulted primarily from changes in the level of
unit shipments and new product introductions. The Company believes that
inflation has had no significant effect on operations. Substantially all of the
Company's international export sales are negotiated, invoiced and paid in U.S.
dollars. Because many of the OEM sensor products the Company manufactures for
foreign consumption are incorporated into products of our OEM customers that are
re-exported to North America and Europe, the Company does not believe that
foreign currency fluctuations have a significant impact on its revenues.
<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 March 31,
1998, or during the period from March 31, 1998 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: May 14, 1998
<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
--------------------
John D. Beagan, V.P. Operation and acting CFO
(Principal Financial Officer and
Duly Authorized Officer)
Dated: May 14, 1998
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. Several of the Company's customers have recently reported that the
market for capital goods in the electronics industry has softened, which could
effect the Company's order rate in the next few quarters. 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 three months ended March 31, 1998, two of the Company's customers, Juki
Corporation and Philips Electronics N.V. , accounted for 52% of the Company's
revenues. In addition, the Company's five principal customers (including Juki
and Philips), in aggregate accounted for approximately 70% of the Company's
revenues for such period. Although the Company believes that orders from other
new OEM customers may compensate for a decrease, if any, in orders from existing
OEM customers, it can give no assurances that historical rates of OEM sales will
increase or be maintained. 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.
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, Chairman
and director of the Company and Steven M. Quist, President and 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, it has no such insurance on Mr. Quist, and the loss
of the services of Dr. Case, Mr. Quist or other key personnel could 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. Technologies
employed in the circuit board production industry, particularly the surface
mount portion of the industry, continue to change rapidly and new technology
could cause a portion of the Company's products to become obsolete at any time.
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, 1995, 1996, and
1997 and the three months ended March 31, 1998, sales of the Company's products
to customers outside the United States accounted for approximately 69%, 70%, 68%
and 79%, 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. Although the Company's operations have not
been significantly affected by the economic downturn in Asia, there can be no
assurances that such operations would not be adversely affected by a more severe
economic crisis. 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.
<PAGE>
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 in
general, 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 in
general 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.
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