ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
CyberOptics Corporation (the "Company" or "CyberOptics") designs, manufactures and markets intelligent, non-contact sensors and integrated systems that measure the minute characteristics, dimensions and distances required for process and quality control in the automated assembly of complex manufactured goods. 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 offers individual sensors that provide data in one, two or three dimensions, as well as complete, non-contact three dimensional profiling systems, that allow manufacturers to inspect product features as small as 0.1 microns.
The Company was founded in 1984 by Dr. Steven Case, a professor at the University of Minnesota, to commercialize technology for non-contact three-dimensional sensing systems. During the first year and one-half of its existence, the Company performed primarily custom contracting work through Dr. Case. In 1985, the Company received a $1.5 million development grant from the Defense Advanced Research Projects Agency to develop sensor systems. The Company introduced its first commercial product, the Point Range Sensor, in 1986 and began producing full non-contact profiling systems used in general measurement applications, CAD-CAM and electronics inspection in 1987. The Company continued to expand its line of products and sensing systems for general applications through 1991.
Beginning in 1992, the Company focused development on new technology and products designed specifically for applications in the electronics industry. Designed primarily for applications in the rapidly growing surface mount technology ("SMT") market, these products measure screen printed solder paste, align electronic components and measure electronic component lead coplanarity during automated assembly of circuit boards. The Company's revenue has been significantly affected by the timing of the introduction of these products and the acceptance and shipment of versions of these products by original equipment manufacturer ("OEM") and end user customers.
The results of the Company's operations have been particularly affected by the market acceptance of several sensors manufactured for OEMs during the past seven years. Generating $3.2 million or less than 40% of revenue in 1992, these sensors contributed over $21.1 million or almost 61% of revenue in 1997. The Company has also introduced new system products for the SMT market, including the CyberSentry system, during this period that contributed to revenue growth.
The Company's operations during the past three years have been more heavily influenced by market conditions in worldwide microelectronics markets, and particularly in the SMT segment of these markets. During the robust microelectronics market of 1995, the Company's revenue doubled and net income tripled over the previous year. In 1996, however, a significant softening in that market and lower levels of capital equipment orders in the microelectronics industry caused the level of orders to decline, particularly orders in the high end portion of the market in which revenue from one customer which constituted 30% of sales in 1995 declined to 14% in 1996. Although the Company reduced operating costs in the summer of 1996 in response to the lower level of orders, and although electronics markets began to recover in the fourth quarter of 1996, the decreased orders caused 1996 revenues to decline slightly over 1995.
The recovery of the microelectronics markets that started in the fourth quarter of 1996 continued into 1997, with order rates showing steady improvement throughout the year, and showing particularly strong growth in the fourth quarter. Sales of the Company's principal OEM products, the LaserAlign and Laser Lead Locator, increased approximately $4 million from 1996 to 1997 as several new OEM customers fully integrated the products into their
product lines, and others increased their order rates. The Company was also successful in increasing sales of its Sentry System for in-line solder paste inspection by over $1.6 million, introducing a new and higher performance version of this product in 1997. The Company also increased distribution of the laser section microscope ("LSM") during 1997, more than doubling sales volumes. Overall, the increased product sales resulted in record revenues of $35.1 million in 1997. Net income totalled $4.6 million or $.83 per share in 1997, a 111% increase over 1996.
Sales of other sensors and systems products, including products targeted for the general measurement market, were impacted by a pending change in the technology on which those products are based. The Company completed development of its new digital range sensor ("DRS") products in early 1998 and had beta versions of these products at customer sites in late 1997. This new range finding technology, and the Vantage systems products into which it is being incorporated, is expected to contribute more substantially to revenue in 1998.
PRODUCTS
CyberOptics has developed intelligent, non-contact sensors and systems for in-line process control and inspection as well as sensors and scanning stations for quality control and inspection. The Company's products enable manufacturers to increase operating efficiencies, product yields and quality in a variety of industries. Although a majority of the Company's revenue is generated through sales of its in-line process control products for SMT, the Company also offers several specialized products for through-hole process control and more generalized products for inspection and quality control.
In addition to proprietary hardware designs that combine precision optics, various light sources, and multiple detectors, the Company's products incorporate high value-added software that controls the hardware, filters and converts raw data into application specific information, and automatically communicates this information to a host processor for ultimate use in process control. Software represents a significant portion of the CyberOptics research and development effort and distinguishes CyberOptics' intelligent sensors and systems from simpler data-gathering products.
In-Line Process Control--SMT:
CYBERSENTRY. The CyberSentry system measures the deposition of solder paste after the first step of the SMT assembly process. Because of the small size of the components that must be placed on each pad of solder paste and the density of component placement on the circuit board, a significant amount of SMT assembly problems are related to the quality of solder paste deposition. Misplaced solder paste, or excess or inadequate amounts of paste can lead to improper connections or bridges between leads causing an entire circuit board to malfunction.
Introduced in a commercial format in the first quarter of 1995, the CyberSentry system is designed to be installed in existing automated production lines and to strike a balance between inspection of 100% of each circuit board and the off-line measurement devices used in quality control laboratories. The CyberSentry incorporates a sensor extended on a mechanical robot arm over the production line that measures the height, area and volume of solder paste pads. The CyberSentry can be retrofitted and integrated into most SMT production lines, providing real time process control immediately after a printed circuit board leaves the screen printer and before component placement commences. During early 1997, the Company introduced an improved version of the CyberSentry capable of performing measurement tasks at a more rapid speed.
Sales of the CyberSentry product accounted for approximately 17%, 15% and 12% of the Company's revenue for the years ended December 31, 1997, 1996 and 1995, respectively.
LASERALIGN. After solder paste has been inspected and measured, extremely small surface mount components are placed on the solder pads by component placement machines. CyberOptics' LaserAlign sensors are incorporated into the heads of component placement machines to ensure accurate component placement at high production speeds.
Various high speed component placement machine types utilize between one and sixteen LaserAlign sensors per machine.
LaserAlign integrates an intelligent sensor, composed of a laser, optics and detectors with a microprocessor and software for making specific measurements. LaserAlign quickly and accurately aligns each component as it is being transported by the pick-and-place arm for surface mount assembly. Using non-contact technology, LaserAlign facilitates orientation and placement of components at much higher speeds than can be achieved using conventional process control systems.
The LaserAlign sensor is sold to OEMs for incorporation into their component placement machines and is offered in several different configurations to satisfy the requirements of the different machines on which it is used. Revenue from sales of LaserAlign sensors has been a principal contributor to the growth of the Company during the past five years and accounted for 43%, 48% and 48% of the Company's revenue in the years ended December 31, 1997, 1996, and 1995, respectively.
LASER LEAD LOCATOR. Following placement of the smallest leadless components, more sophisticated components, including microprocessor chips, are applied to the printed circuit boards by fine pitch component placement machines. These components have leads on all sides that are soldered to the circuit board. Since all of these surface mount leads must make contact with the solder paste, lead coplanarity is a critical quality factor. Misaligned, bent or damaged leads will result in missed connections, open circuits and ultimately a defective end product.
The Laser Lead Locator ensures the coplanarity of component leads. The Laser Lead Locator, which is incorporated directly into fine pitch component placement machines, inspects components immediately before placement on the circuit board to identify defective or damaged leads and determines if all lead tips lie within the same plane. Components meeting these parameters are placed on the printed circuit board. Parts falling outside the specified tolerances are rejected before placement, saving both time and money.
The Laser Lead Locator, like the LaserAlign, is sold to OEMs for incorporation into their product offerings. Sales of the Laser Lead Locator constituted 17%, 13% and 13% of the Company's overall revenues during the years ended December 31, 1997, 1996 and 1995, respectively.
Process Control--Through-Hole:
A substantial number of circuit boards are made with through-hole technology using high speed drills to fabricate printed circuit boards. These drills are highly automated and contain multiple drill heads that cannot be constantly monitored by attendants. CyberOptics manufactures two process control sensors for measuring characteristics of drill bits used in drilling holes in printed circuit boards. The first of these, the ADM, was completed in the third quarter of 1989 and is used to ensure that drill bits are not damaged and that holes are drilled with the proper size. The second sensor, the LTC, was completed in May 1990 and is used to detect broken drill bits so that all of the preprogrammed holes in the circuit board are properly drilled. Both sensors are sold under an exclusive arrangement to a manufacturer of drilling machines for incorporation into its products.
Off-Line Inspection Sensors and Systems:
The Company built its commercial business with laser sensors designed to precisely measure, without contact, the distance to a point on an object. These sensors have been refined and combined with software and processing capability and are sold as both single sensors for incorporation into the equipment of customers and as complete inspection systems for use in the quality control laboratory and off-line process control.
The Company's off-line sensors and systems are used in a broad array of applications in a number of different industries. Included among such applications is the measurement of the score in a beverage can lid, collection of three-dimensional digital data for use in a CAD-CAM system, measurement of the thickness of resistive inks applied in the manufacture of hybrid electronic circuits and measurement of the bend angles of suspension arms for disc drives.
RANGE SENSORS. The Company's first commercial product was a range sensor known as the point range sensor or "PRS." Over its eleven years as a commercial product, the PRS was refined and sold in seven models with varying resolutions and working ranges. Several years ago the Company commenced development of several new range sensors. The first, the CyberGage sensor, was introduced in 1995. The CyberGage incorporates a microprocessor in the sensor head and gathers data up to 40 times faster than the PRS product line and is sold with a video camera view port that allows the user to integrate laser sensing and video in the same sensor. The Company also developed and introduced in late 1997, a new generation of sensors, the digital range sensor ("DRS") family, designed to replace the PRS product line. The Company currently offers three DRS sensors that provide working ranges that cover an extent equal to the seven sensors formerly sold in the PRS line and resolution equal to the best sensors of the PRS line. The DRS is currently sold with a control board and software that is compatible with Windows 95 or Windows NT. The Company has developed, and intends to introduce, an instrument controller that will allow users to operate the sensor without a personal computer.
CYBERSCAN AND VANTAGE. CyberScan and Vantage stations are complete height profiling systems capable of producing precise, two- and three-dimensional analysis of complex surfaces. The CyberScan family of products used a PRS sensor and provided output compatible with DOS operating systems. Although the Company sold three configurations of the CyberScan products during 1997, including the CyberScan Cobra, the CyberScan CX3 and the CyberScan LV, because of the pending change in range sensor technology, it did not actively market the products during the second half of the year. The Company continues to sell the CyberScan LV, a station that incorporates the CyberGage and a video camera mounted over a computer-controlled mechanical table with a personal computer and the Company's proprietary software. The Company has rebuilt and is also marketing the CyberScan Cobra to operate with the DRS and updated Windows software. The Company also currently has in beta test at several customer sites a new version of the CX3 height profiling systems that incorporates its DRS sensors and Windows 95 screens and that will be sold under the Vantage name. The Vantage incorporates a novel drive technology, an offset camara that uses special technology to provide views that appear coaxial with the laser beam and new software that the Company believes will enhance its marketability.
LASER SECTION MICROSCOPE (LSM). The LSM is a low cost instrument for making height and registration measurement of screen printed solder paste during the assembly of electronic circuit boards. One of the principal advantages of the LSM is its ease of use--unskilled operators can make non-contact measurements with only minimal training. In February 1997, the Company introduced an updated version of the LSM, the LSM2, that has been completely redesigned to provide a Windows interface and allow multiple fields of view.
MARKETS AND CUSTOMERS
A majority of the Company's products are currently sold in the microelectronics market, particularly the portion servicing manufacturers using SMT. The value of automation is high in this market because the products produced have high unit costs and are manufactured at speeds too high for effective human intervention. Moreover, the trend in these industries toward smaller devices with higher circuit densities and smaller circuit paths requires manufacturing and testing equipment capable of extremely accurate alignment and multidimensional measurement such as achieved using non-contact optical sensors. Customers in these industries, moreover, also employ knowledgeable engineers who are competent to work with computer-related equipment. The Company's Laser Lead Locator and LaserAlign products are sold to OEMs serving this market and the CyberSentry, LSMII, DRS, and Vantage systems are, or will be, most often sold to manufacturers in this market. In addition, the Company's more
generalized products, including the DRS, Cobra and Vantage products, are used in the general measurement and gauging, precision plastic manufacturing and computer aided design and manufacturing markets.
The Company sells its products worldwide to many of the leading manufacturers of electronics and electronic equipment. The Company does not maintain foreign offices and therefore does not have sales originating from, or identifiable assets in, geographies other than the United States. The following table sets forth the percentage of the Company's total sales revenue represented by total export sales (sales for delivery to countries other than the United States, including sales delivered through distributors) by location during the past three years:
Year Ended December 31, -------------------------- 1995 1996 1997 ---- ---- ----
Asia............................. 31% 51% 50%
Europe........................... 35% 18% 17%
Other(1)......................... 1% 1% 2%
(1) Includes export sales in North America, primarily export sales to Canada and Mexico, which were less than 1% of revenue in 1995 and 1996 and approximately 1% in 1997
See Note 7 to the Company's Consolidated Financial Statements contained in Item 8 of this form 10-K. Substantially all of the Company's export sales are negotiated, invoiced and paid in United States dollars. Accordingly, although changes in exchange rates do not effect the Company's revenue and income per unit, they can influence the willingness of customers to purchase units. To date, the Company has not experienced any significant change in customer buying patterns due to fluctuating exchange rates.
Sales to two principal customers, Juki Corporation and Philips Electronics N.V., leading manufacturers of component placement machines in Japan and the Netherlands, constituted 22% and 13%, respectively, of total sales in 1997. Although no other customer generated more than 10% of the Company's revenues, sales to the Company's five largest OEM customers in the aggregate constituted approximately 53% of such sales. The loss of any of such customers, or a substantial decrease in orders therefrom, could have a material adverse effect on the Company's results of operations.
SALES AND MARKETING
The Company sells its products through a combination of direct sales staff and independent distributors. The Company maintains a direct sales staff at its headquarters in Minneapolis, Minnesota that call on large house accounts and that sell to OEM customers. The Company also has agreements with ten stocking distributors in North America who focus primarily on products sold to end-users. Most sales to international end-users of sensors and systems are made through 17 representatives and distributors covering Western Europe and the Pacific Rim.
The Company markets its products through appearances at industry trade shows, advertising in industry journals and articles published in industry and technical journals. In addition, the Company's strategic relationships with customers serve as highly visible references.
BACKLOG
CyberOptics products are typically shipped two weeks to four months after the receipt of an order. Since 1993, however, certain OEM customers have placed orders for delivery over as many as 12 months. Product backlog was $8.7 million at December 31, 1997 compared to $4.4 million at December 31, 1996. Approximately $7.9 million of the 1997 backlog is deliverable in the first quarter of 1998 and $750,000 is deliverable in the second
quarter of 1998. Although the Company's business is generally not of a seasonal nature, its sales may vary based on the capital procurement practices in the electronics industry. Historically, the Company's quarterly revenue has been largest in the last quarter of the year. The Company's scheduled backlog at any time may vary significantly based on the timing of orders from OEM customers. Accordingly, backlog may not be an accurate indicator of the Company's performance in the future.
RESEARCH AND DEVELOPMENT
The Company distinguishes its products primarily on the basis of its unique technology and on the Company's ability to synthesize several different technical disciplines to address industry needs. CyberOptics was founded by research scientists and has retained relationships with academic institutions to ensure that the most current information on technological developments is obtained. In addition, the Company actively seeks ongoing strategic customer relationships with leading product innovators in the markets it serves and actively investigates the needs of, and seeks input from, these customers to identify opportunities to improve the manufacturing process. The Company provides direct interaction between its engineers and scientists and these key accounts to ensure adoption of current technologies. In some instances, the Company provides the outsourced research and development for these customers through funded development contracts that provide the customer with an exclusive selling period but allows the Company to retain technology and distribution rights.
CyberOptics believes that continued and timely development of new products and enhancements to existing products is essential to maintaining its competitive position. The Company has committed and expects to continue to commit substantial resources to its research and development effort, which plays a critical role in maintaining and advancing its position as a leading provider of optical sensors and systems. CyberOptics' research and development efforts during 1997 were directed to increasing performance of its LaserAlign and CyberSentry products for use in process automation in electronics circuit board assembly, development of the DRS product line, and development of the Vantage system. There can be no assurances that such efforts, or any other research and development efforts of the Company, will be successful in producing products that respond effectively to technological changes or new product announcements by others.
Research and development expenses were $6.4 million, $5.9 million and $4.1 million for the years ended December 31, 1997, 1996 and 1995, respectively. These amounts represented 18%, 21% and 14% of revenues, respectively. Research and development expenses consist primarily of salaries, project materials and other costs associated with CyberOptics' ongoing product development and enhancement efforts.
MANUFACTURING
Much of the Company's product manufacturing, consisting primarily of circuit board manufacturing, component placement and soldering, lens manufacturing and machined parts production, is contracted with outside vendors. Company personnel inspect incoming parts, assemble sensor heads, calibrate and perform final quality control testing of finished products. The Company believes that its products are not suited for the large production runs that would justify the capital investment necessary for complete internal manufacturing.
A variety of components used in the Company's products are available only from single sources and involve relatively long order cycles, in some cases over one year. Although the Company has located alternative sources for most of such components, use of those alternative components could require substantial rework of the Company's product designs, resulting in periods during which it could not satisfy customer orders. Further, although the Company believes it has identified alternative assembly contractors for most of its subassemblies, an actual change in such contractors would likely require a period of training and test. Accordingly, an interruption in a supply relationship or the production capacity of one or more of such contractors could result in the Company's inability to deliver one or more products for a period of several months. To help prevent delays in the shipment of
its products, the Company maintains in inventory, or on scheduled delivery from suppliers, what it believes to be a sufficient amount of certain components based on forecasted demand (forecast extends a minimum of 6 months).
COMPETITION
Although the Company believes that its products are unique, competitors offer technologies and systems that are capable of certain of the visual inspection and alignment functions performed by the Company's products. The Company faces competition from a number of companies in the machine vision, image processing and inspection systems market, some of which have greater manufacturing and marketing capabilities, and greater financial, technological and personnel resources. Potential competitors in these markets include Cognex Corporation, Robotic Visions Systems, Inc., View Engineering, Inc., ICOS Systems, GmbH and Keyence Incorporated. In addition, the Company may compete with the internal development efforts of its current and prospective customers. The Company believes that its sensors offer several advantages over competitive optical sensors and vision systems in terms of speed, flexibility, cost and ease of control. The Company's OEM products are typically very specialized in their applications. The Company believes that its OEM products compete favorably with other product alternatives based on the speed and accuracy of their performance, their price and certain technological advantages.
Although the Company believes its current products offer several advantages in terms of price and suitability for specific applications and although the Company has attempted to protect the proprietary nature of such products, it is possible that any of the Company's products could be duplicated by other companies in the same general market. There can be no assurances that the Company would be able to compete with similar products produced by a competitor.
EMPLOYEES
As of December 31, 1997, the Company had 190 full-time employees including 37 in sales and marketing and customer support, 72 in manufacturing, purchasing and production engineering, 60 in research, development and engineering and 21 in finance, administration and information services at its headquarters in Minneapolis. To date, the Company has been successful in attracting and retaining qualified technical personnel, although there can be no assurance that this success will continue. None of the Company's employees are covered by collective bargaining agreements or are members of a union.
PROPRIETARY PROTECTION
The Company relies on the technical expertise and know-how of its personnel and trade secret protection, as well as on patents, to maintain its competitive position. The Company attempts to protect its intellectual property by restricting access to its proprietary methods by a combination of technical and internal security measures. In addition, the Company makes use of non-disclosure agreements with customers, consultants, suppliers and employees. Nevertheless, there can be no assurance that any of the above measures will be adequate to protect the proprietary technology of the Company.
The Company holds ten United States patents on a number of its technologies, including those used in its Laser Lead Locator, LaserAlign and PRS. In addition, the Company protects the proprietary nature of its software primarily through copyright and license agreements, but also through close integration with its hardware offerings. It is the Company's policy to protect the proprietary nature of its new product developments whenever they are likely to become significant sources of revenue. No guarantee can be given that the Company will be able to obtain patent or other protection for other products.
As the number of its products increases and the functionality of those products expands, the Company believes that it may become increasingly subject to attempts to duplicate its proprietary technology and to
infringement claims. In some geographic markets, it is the practice of companies to engage in "patent flooding" by seeking patent protection for multiple functional applications that are incremental rather than technological advances. The Company has recently settled litigation relating to such practices. See "Legal Proceedings" below. In addition, although the Company does not believe that any of its products infringe the rights of others, there can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertion will not require the Company to enter into a royalty arrangement or result in litigation.
GOVERNMENT REGULATION
All of the Company's products which contain lasers are classified as either Class I, Class II or Class IIIb Laser Products under applicable rules and regulations of the Center for Devices and Radiological Health ("CDRH") of the Food and Drug Administration. Such regulations generally require a self-certification procedure pursuant to which a manufacturer must file with the CDRH with respect to each product incorporating a laser device, periodic reporting of sales and purchases and compliance with product labeling standards. The Company's lasers are generally not harmful to human tissue, but could result in injury if directed into the eyes of an individual or otherwise misused. The Company is not aware of any incident involving injury or a claim of injury from its laser devices and believes that its sensors and sensor systems comply with all applicable laws for the manufacture of laser devices.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases a 70,000 square foot mixed office and warehouse facility built to its specifications in Golden Valley, Minnesota. The lease, which is on a triple net basis for a ten year term (from May 1996) with two three year renewal options, provides for rental payments at approximately $7.50 per square foot initially, increasing to $8.50 per square foot (currently approximately $605,000 per year). The Company, which holds an option to lease adjoining space, anticipates that the property will be adequate for its needs for the foreseeable future.
The Company has sublet its former facility, which is under lease to the Company through October 1999, for the remaining term of the lease. The Company charged the difference between the sublease rentals and lease payments ($160,000) to expense during 1996.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In March 1998, the Company settled litigation it had filed in federal court in Minnesota against Yamaha Motor Company, Ltd. of Japan and a countersuit Yamaha had filed against the Company in Japan . As part of the settlement, which ended a dispute regarding ownership of certain intellectual property, Yamaha agreed to license certain patent rights to CyberOptics and CyberOptics agreed to license certain patent rights to Yamaha. The Company believes its relationship with Yamaha has been repaired and expects Yamaha to be a significant customer over the next few years.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market. The following table sets forth, for the fiscal periods indicated, the high and low quotations for the Company's common stock as reported by the Nasdaq National Market. These prices do not reflect adjustments for retail markups, markdowns or commissions.
1997 1996 --------------- --------------- Quarter High Low High Low ---- --- ---- ---
First $21.63 $12.75 $40.00 $27.25 Second 19.25 15.63 28.75 14.45 Third 34.13 15.00 15.75 10.00 Fourth 37.63 19.38 14.63 9.88
As of February 27, 1998, there were 245 holders of record of the Company's common stock and the Company estimates that there were approximately 4,000 beneficial holders. The Company has never paid a dividend on its common stock. Dividends are payable at the discretion of the Board of Directors out of funds legally available therefor. The board has no current intention of paying dividends, although it may pay dividends in the future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Financial Summary:
(In thousands, except per share amounts)
YEAR ENDED DECEMBER 31 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Revenues $35,120 $28,062 $30,518 $15,276 $11,621 Income from operations 4,588 885 6,457 2,042 1,080 Net income 4,597 2,180 4,831 1,524 943 Net income per share--Basic 0.88 0.39 1.04 0.36 0.22 Net income per share--Diluted 0.83 0.38 0.95 0.35 0.22
Working capital $36,236 $32,395 $28,722 $6,902 $5,548 Total assets 57,445 50,316 54,740 8,823 6,901 Stockholders' equity 53,293 47,468 50,737 7,478 6,073
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Statements in this management discussion and analysis of financial condition and results of operations and elsewhere in this Form 10-K that are not based on historical fact are forward looking and involve certain risks and uncertainties, including but not limited to the factors set forth in Exhibit 99 to this Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain financial data derived from the Company's statements of income expressed as a percentage of revenue, and expressed as a percentage increase from the previous period's results:
Percentage of Revenues Percentage Change ---------------------- -----------------
Year Ended Years Ended December 31, December 31. ------------------------ ------------------- 1997 1996 1997 1996 1995 to 1996 to 1995 ---- ---- ---- -------- -------
Revenues 100% 100% 100% 25% (8)% Gross margin 55 51 53 36 (11) Research and development expenses 18 21 14 7 43 Selling, general and administrative expenses 24 27 18 14 38 Income from operations 13 3 21 418 (86) Net income 13 8 16 111 (55)
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997
Revenues increased 25% to $35.1 million in 1997 from $28.1 million in 1996, following an 8% decrease in 1996 from 1995 revenues of $30.5 million. Changes in revenue levels are primarily the result of fluctuations in the level of demand for our SMT sensor products, primarily LaserAlign and Laser Lead Locator, from OEM customers and the resulting change in the level of unit shipments. Revenues from SMT sensor products increased $4.5 million or 25% during 1997 compared to 1996, and decreased $2.8 million or 15% during 1996 compared to 1995. The Company's LaserAlign and Laser Lead Locator sensors contributed $21.1 million in revenue in 1997 compared to $17.2 million in 1996 and $18.6 million in 1995. During 1997, increased revenues from SMT sensors reflect continued improvement in the global SMT market, the primary market for the Company's products. The Company has seen the highest growth rates in shipments to OEM customers manufacturing mid-range capacity pick and place equipment, which has become the largest segment of the SMT market utilizing the Company's SMT sensors. During 1996, SMT sensor revenues decreased due to a decline in shipments to OEM's of high-end capacity pick and place equipment, the market segment that represented the largest growth area for SMT sensor sales during 1995. The decrease in 1996 SMT sensor revenues was partially offset by increased shipments to OEM's of mid-range capacity equipment. SMT sensor revenues represented 65% of revenues in 1997 and 1996, and 69% of revenues in 1995.
SMT system revenues increased $2.9 million or 52% during 1997 compared to 1996, and $500,000 or 11% during 1996 compared to 1995. During 1997, increased SMT systems revenues are primarily the result of 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. To a lesser extent, increased revenues are due to a higher average selling price on SMT system sales in 1997 achieved as the result of enhancements made to the systems. CyberSentry revenues increased 39% during 1997 as compared to 1996, and LSM2 revenues increased 92% during the same period. These increases are primarily the result of strong market acceptance of the enhanced versions of these products. Increased revenues in 1996 are primarily the result of growing revenue levels of CyberSentry, which was originally released during 1995. SMT systems revenues represented 24%, 20% and 16% of total revenues during 1997, 1996 and 1995, respectively.
General measurement systems and sensor products revenues decreased 9% in 1997 compared to 1996, and 19% during 1996 compared to 1995. 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 general measurement system will be introduced during the first half of 1998.
International revenue totaled $24.2 million in 1997, $19.6 million in 1996 and $20.7 million in 1995, comprising 69%, 70% and 68% of total revenue, respectively. Sales of the Company's products in Western Europe, Japan and the rest of the Far East have increased significantly during the three year period. 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 and CyberSentry products. Revenues generated from products used primarily for SMT production were approximately 89%, 85% and 80% of revenues for 1997, 1996 and 1995, respectively.
GROSS MARGIN
Gross margin for 1997 was 55%, compared to 51% in 1996 and 53% in 1995. During 1997, gross margin was positively impacted 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 a new facility since May, 1996. In addition, increased revenue levels over which to spread the fixed component of production and production support, along with a shift in the revenue mix towards higher margin sensor and system products contributed to improved gross margins in 1997. The reduction in gross margin from 1995 to 1996 was primarily due to reduced revenue levels and additional costs associated with the Company's new facility. In addition, changes in the revenue mix between customers also had an impact on gross margin in 1996. These reductions were partially offset by cost containment measures instituted by the Company during the second half of 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 7% to $6.4 million in 1997 compared to $5.9 million in 1996 and $4.1 million in 1995. As a percentage of revenues, research and development expenses were 18% in 1997, compared to 21% and 14% in 1996 and 1995, respectively. The increase in research and development expenses as a percentage of revenues in 1996, reflects the Company's commitment to investment in research and development through periods of cyclical revenues. 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 1997, 1996 and 1995, customer funded research and development recognized as a reduction of research and development expense totaled $166,000, $890,000 and $444,000, respectively.
During 1997, research and development expenses were primarily focused on developing a new sensor and system product for the general measurement market, completion of the CyberSentry 2000 and the LSM2 and continuing development work on the LaserAlign and Laser Lead Locator technology. In addition to the product lines discussed above, 1996 research and development costs focused on completion of the CyberScan Cobra, which was introduced in late 1996. The Company anticipates that development expenses will remain stable as a percentage of revenues in future periods, which it believes is required to support the development of new products and continued enhancement of existing product offerings.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 14% to $8.5 million in 1997 compared to $7.5 million in 1996 and $5.4 million in 1995. As a percentage of revenue, selling, general and administrative expenses were 24% in 1997 compared to 27% in 1996 and 18% in 1995. During 1997, the dollar increase in selling, general and administrative expenses was 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 systems 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. These increases in 1997 were somewhat offset by reduced legal expenses related to the Yamaha litigation. Increased selling, general and administrative expenses in 1996 compared to 1995 are primarily the result of increased facility costs, increased marketing costs associated with new product introductions and increased legal expenses associated with the Yamaha litigation, offset by the effects of the workforce reduction implemented in the third quarter.
EFFECTIVE TAX RATE
The Company's effective tax rate was 32%, 31% and 32% in 1997, 1996 and 1995, respectively. Benefits from the Company's foreign sales corporation and the use of the research and development tax credit were primarily responsible for reducing the effective tax rate below the statutory federal rate.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and marketable securities increased to $41.0 million as of December 31, 1997 from $37.3 million as of December 31, 1996, primarily as the result of $3.6 million in cash generated from operations and $1.1 million in cash provided by common stock related financing activities. These increases in cash were partially offset by $1.1 million in fixed asset and patent additions. Marketable securities generally consist of U.S. Government or U.S. Government backed obligations and state municipal instruments. All marketable securities have a maturity of three years or less.
The Company generated $3.6 million from operations during 1997, primarily due to net income of $4.6 million, including $1.4 million of non-cash expenses for depreciation and amortization and the provision for inventory obsolesence. Reducing cash from operations were increases in accounts receivable of $2.7 million and inventories of $1.3 million. The increase in accounts receivable is primarily due to the timing of revenues, as the fourth quarter of 1997 was the largest revenue quarter in the Company's history. During the fourth quarter of 1997, revenues were $3.8 million higher than the fourth quarter of 1996. Increased inventory balances are primarily due to the need to support a growing revenue base and to build inventories for new products being introduced during the fourth quarter of 1997 and the first half of 1998. During 1996, the Company generated $5.2 million of cash from operations, primarily due to net income of $2.2 million, including $1.1 million of non-cash expenses, and a decrease in accounts receivable of $3.5 million.
The Company used $7.5 million of cash in investing activities in 1997 compared to $365,000 in 1996. The majority of the use of cash is the result of the timing of purchases and sales of marketable securities, which provided $2.7 million of cash in 1996 and used $6.4 million in 1997. The Company used $2.3 million of cash in 1996 for additional equipment and leasehold improvements, as it moved into its new office and manufacturing facility, as compared to $1.0 million in 1997.
The Company generated $1.1 million of cash from financing activities in 1997 and used $5.4 million of cash in financing activities in 1996. During 1996, the board of directors of the Company authorized the repurchase of up to 1,000,000 shares of common stock on the open market for the purpose of providing the necessary common stock for the Company's stock option and employee stock purchase plans, 541,000 shares of which had been purchased when the authorization expired in 1997. The majority of the repurchases were completed during 1996, using $6.3 million of cash. 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.
During the fourth quarter of 1997 and the first half of 1998, the Company is 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. As of December 31, 1997, the Company has recorded costs of approximately $315,000 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 needs.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, a new standard for reporting information about operating or business segments in financial statements. The new standard will be effective for the Company's annual financial statements in 1998. Management is in the process of evaluating this standard and has not yet determined its impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, which establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general purpose financial statements. The Company will adopt SFAS 130 for its year ending December 31, 1998.
The Company capitalizes certain costs of computer software developed or obtained for internal use. The Company's policy for capitalization of these costs is consistent with the guidelines included in the American Institute of Certified Public Accountants recent Statement of Position for accounting for costs of computer software developed or obtained for internal use.
OTHER FACTORS
Changes in revenues have resulted primarily from changes in the level of unit shipments and new product introductions. The Company believes that inflation has had no appreciable 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.
The Company has analyzed the potential affect of the year 2000 issue on both the system software included in the Company's equipment and on application software licensed or purchased by the Company and used in its internal operations. The Company has tested all of the system software included in its products and determined that it is year 2000 compliant. In addition, the Company has requested and received documentation from vendors supplying software for its primary business applications addressing year 2000 compliance. In all cases, vendor responses indicated that their applications were either currently year 2000 compliant or that they would be compliant by the end of 1998, although the Company has not independently tested these applications for compliance. Based on this analysis, the Company does not anticipate a material cost associated with its systems relative to the year 2000 issue.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS CYBEROPTICS CORPORATION
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF INCOME CYBEROPTICS CORPORATION
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS CYBEROPTICS CORPORATION
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CYBEROPTICS CORPORATION
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CYBEROPTICS CORPORATION (In thousands, except share and per share amounts)
NOTE 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION CyberOptics Corporation (the Company) 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.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned Foreign Sales Corporation (FSC).
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant areas which require the use of management's estimates relate to the determination of the allowances for inventory obsolesence and doubtful accounts and accrued warranty costs.
CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Conpany's cash and cash equivalents consist of funds maintained in money market accounts, U.S. Government backed obligations and state municipal instruments with a long-term credit rating of AAA.
MARKETABLE SECURITIES Marketable securities generally consist of U.S. Government or U.S. Government backed obligations and state municipal instruments with long-term credit ratings of AAA. Marketable securities are classified as short-term or long-term in the balance sheet based on their maturity date and expectations regarding sales. All marketable securities have maturities of three years or less. Certain marketable securities held by the Company are subject to call provisions prior to their maturity date.
At December 31, 1996, the Company had marketable securities classified as held to maturity with an amortized cost of $8,000. As of December 31, 1997 and 1996, the carrying amount of securities classified as available for sale was $34,867 and $20,356, respectively. Available for sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity until realized. These fair values are determined using quoted market prices. The carrying amounts of securities, for purposes of computing unrealized gains and losses, are determined by specific identification. The cost of securities sold is determined by specific identification. Net unrealized holding gains and losses and realized gains and losses were not significant at December 31, 1997 and 1996 or during the years ended December 31, 1997 and 1996.
INVENTORIES Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out (FIFO) method. Appropriate consideration is given to deterioration, obsolescence, and other factors in evaluating net realizable value.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Significant additions or improvements extending asset lives are capitalized, while repairs and maintenance are charged to expense as incurred. In progress costs are capitalized with depreciation beginning when assets are placed in service. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the assets or the lease term, ranging from three to ten years. Gains or losses on dispositions are included in current operations.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CYBEROPTICS CORPORATION (In thousands, except share and per share amounts)
PATENTS Patents consist of legal and patent registration costs for protection of the Company's proprietary sensor technology. The Company amortizes such expenditures over a three-year period on a straight-line basis commencing upon issuance of the patent.
REVENUE RECOGNITION Revenues are recognized upon shipment. Estimated warranty costs are recorded at the time of sale.
RESEARCH AND DEVELOPMENT Research and development (R&D) costs, including software development, are expensed when incurred. Software development costs are required to be expensed until the point that technological feasibility and proven marketability of the product are established; costs otherwise capitalized after such point also are expensed because they are insignificant. Customer-funded R&D is deferred and recognized as a reduction of R&D expenses as costs are incurred in the accompanying statements of income. Customer-funded R&D totaled $166, $890 and $444 during 1997, 1996 and 1995, respectively.
INCOME TAXES Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the financial reporting and tax bases of assets and liabilities. Income tax expense is the sum of the tax currently payable and the change in the deferred tax assets and liabilities during the period.
NET INCOME PER SHARE Effective with year-end 1997, the Company adopted Statement of Financial Accounting Standards No. 128, a new standard of computing and presenting both basic and diluted net income per share amounts. 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. All prior periods have been changed to conform with the new presentation. However, basic and diluted net income per share amounts are generally consistent with net income per share amounts previously reported.
The number of shares utilized in the denominator of the diluted net income per share computation has been increased by 309,000, 207,000 and 446,000 shares of common stock equivalents at December 31, 1997, 1996 and 1995, respectively. Options to purchase 94,000 and 53,000 shares of common stock at a weighted average price of $22.63 and $27.50 were outstanding at December 31, 1997 and 1995 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.
RECLASSIFICATIONS Certain reclassifications have been made in the 1996 balance sheet and statement of cash flows to conform to the classifications used in 1997. These reclassifications had no effect on net income or stockholders' equity.
NOTE 2 - OTHER FINANCIAL STATEMENT DATA
INVENTORIES CONSIST OF THE FOLLOWING:
- ----------------------------------------------------------- December 31, 1997 1996 - -----------------------------------------------------------
Raw materials and purchased parts $ 3,702 $ 2,997 Work in process 1,106 736 Finished goods 478 510 - ----------------------------------------------------------- 5,286 4,243
Allowance for obsolesence (675) (475) - ----------------------------------------------------------- $ 4,611 $ 3,768 ===========================================================
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET CONSIST OF THE FOLLOWING:
- ----------------------------------------------------------- December 31, 1997 1996 - -----------------------------------------------------------
Equipment $ 3,083 $ 3,713 Leasehold improvements 986 974 In progress 315 - ----------------------------------------------------------- 4,384 4,687 Less accumulated depreciation and amortization (1,723) (2,192) - ----------------------------------------------------------- $ 2,661 $ 2,495 ===========================================================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CYBEROPTICS CORPORATION (In thousands, except share and per share amounts)
OTHER ACCRUED EXPENSES CONSIST OF THE FOLLOWING:
- ----------------------------------------------------------- 1997 1996 - -----------------------------------------------------------
Wages and benefits $ 1,247 $ 667 Warranty costs 350 250 Other 689 341 Deferred R&D reimbursement 166 - ----------------------------------------------------------- $ 2,286 $ 1,424 ===========================================================
NOTE 3 - INCOME TAXES
THE PROVISION FOR INCOME TAXES CONSISTS OF THE FOLLOWING:
- ----------------------------------------------------------- 1997 1996 1995 - -----------------------------------------------------------
Current: Federal $ 2,061 $ 872 $ 2,523 State 76 6 225 Deferred 20 102 (498) - ----------------------------------------------------------- $ 2,157 $ 980 $ 2,250 ===========================================================
DEFERRED TAX ASSETS CONSIST OF THE FOLLOWING:
- ----------------------------------------------------------- December 31, 1997 1996 1995 - -----------------------------------------------------------
Inventory allowances $ 300 $ 238 $ 218 Vacation accrual 70 71 67 Accounts receivable allowances 45 45 37 Warranty accrual 126 90 55 Deferred R&D reimbursement 60 204 Other, net (11) 46 71 - -----------------------------------------------------------
Net deferred tax asset included in other current assets $ 530 $ 550 $ 652 ===========================================================
A RECONCILIATION OF THE STATUTORY RATE TO THE EFFECTIVE INCOME TAX RATE IS AS FOLLOWS:
- ----------------------------------------------------------- 1997 1996 1995 - -----------------------------------------------------------
Federal statutory rate 34.0% 34.0% 34.0% Increase (decrease) resulting from: State income taxes, net of federal benefit 1.2 0.1 2.1 FSC benefit, net of FSC taxes (1.8) (1.0) (3.2) R&E credit (4.6) (4.4) (1.5) Other, net 3.1 2.3 0.4 - ----------------------------------------------------------- Effective rate 31.9% 31.0% 31.8% ===========================================================
The 1995 and 1996 tax provisions include only 6 months of research and experimentation tax credits, as the credit expired as of June 30, 1995 and was not reinstated until July 1, 1996. Cash payments of income taxes for the years ended December 31, 1997, 1996 and 1995, were approximately $1,033, $1,491 and $1,518 respectively.
NOTE 4 - OPERATING LEASES
In May 1996, the Company moved into a new office, warehouse and manufacturing facility. The new facility is leased under a 10 year operating lease that expires in April 2006. The Company has the option to extend the lease for two additional three year periods. The lease requires the Company to pay insurance, property taxes and other operating expenses related to the leased facility.
The facility previously occupied by the Company prior to its moving is leased under an operating lease that expires in October 1999. The Company has subleased this facility for the remaining term of the lease. The difference between the future lease obligation of the Company and the anticipated sublease payments over the remaining term of the lease of $160 was charged to rental expense during 1996. Total rental expense for the years ended December 31, 1997, 1996 and 1995, were approximately, $659, $695 and $241, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CYBEROPTICS CORPORATION (In thousands, except share and per share amounts)
At December 31, 1997, the future minimum lease payments required under lease agreements, net of $156 and $130 in 1998 and 1999 of sublease payments, are as follows:
Year ending December 31, 1998 $ 605 1999 608 2000 564 2001 588 2002 600 Thereafter 1,998 - ------------------------------------ Total $ 4,963 ====================================
NOTE 5 - STOCKHOLDERS' EQUITY
In 1996, the stockholders of the Company approved an amendment to the Articles of Incorporation that increases the number of authorized shares of common stock from 10,000,000 shares to 25,000,000 shares. In June 1996, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of common stock for the purpose of providing the necessary common stock for the Company's stock option and employee stock purchase plans. 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. At December 31, 1997, 41,000 shares had been purchased under the second authorization, which expired in December 1997.
NOTE 6 - BENEFIT PLANS
STOCK OPTION PLAN The Company has two stock option plans that reserve 894,298 shares of common stock in the aggregate for issuance to employees, directors, officers and others. Canceled options are available for future grant under both plans. Options are granted at an option price per share equal to or greater than the market value at the date of grant. Generally, options granted to employees vest over a four-year period and expire five years after the date of grant. The plans allow for option holders to tender shares of the Company's common stock as consideration for the option price. Options exercised by tendering shares are shown at the net amount.
In 1996, the Company canceled and reissued, at the then current market price, 257,800 options to purchase the same number or less shares to those employees that received stock option grants between May 19, 1995 and August 2, 1996.
THE FOLLOWING IS A SUMMARY OF STOCK OPTION PLAN ACTIVITY:
- ------------------------------------------------------------------------ Shares 1997 1996 1995 - ------------------------------------------------------------------------
Granted 258,900 590,050 144,150 Exercised (142,495) (90,212) (155,452) Canceled (34,650) (339,443) (4,425)
December 31: Outstanding 720,250 638,495 478,100
Exercisable 182,162 181,570 172,239
Weighted average exercise price per share 1997 1996 1995 - ------------------------------------------------------------------------
Granted $ 18.31 $ 16.58 $ 16.55 Exercised 6.67 6.66 3.88 Canceled 14.67 20.67 5.57
December 31: Outstanding 13.79 10.35 9.10
Exercisable $ 9.54 $ 5.97 $ 5.89 ========================================================================
Stock options outstanding at December 31, 1997, had a range of exercise prices of $3.79 to $25.50 and a weighted average remaining contractual life of approximately 5 years.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CYBEROPTICS CORPORATION (In thousands, except share and per share amounts)
THE FOLLOWING IS A SUMMARY OF OUTSTANDING OPTIONS AS OF DECEMBER 31, 1997:
Weighted Exercise Options Options Average Price Outstanding Exercisable Remaining Life - -----------------------------------------------------------
Less than $10.00 152,855 109,450 4.2 years $10.00 to $14.99 257,845 44,799 4.0 years Over $15.00 309,550 27,913 5.6 years ===========================================================
The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation" in 1996. The Company continued to measure compensation cost for its stock incentive and option plans using the intrinsic value method of accounting it has historically used and, therefore, the new standard had no effect on the Company's operating results.
Had the Company used the fair value method of accounting for its stock option and incentive plans beginning in 1995 and charged compensation costs against income over the vesting period, net income and net income per share for 1997, 1996 and 1995 would have been reduced to the following pro forma amounts:
- ------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------
Net Income: As reported $ 4,597 $ 2,180 $ 4,831 Pro forma $ 3,591 $ 1,564 $ 4,635
Net income per share: As reported - Basic $ 0.88 $ 0.39 $ 1.04 Pro forma - Basic $ 0.68 $ 0.28 $ 0.99
As reported - Diluted $ 0.83 $ 0.38 $ 0.95 Pro forma - Diluted $ 0.65 $ 0.27 $ 0.91
The pro forma information above only includes stock options granted in 1995, 1996 and 1997. Compensation expense under the fair value method of accounting will increase over the next few years as additional stock option grants are considered. The weighted-average grant-date fair value of options granted during 1997, 1996 and 1995 was $11.22, $10.58 and $10.94, respectively. The weighted-average grant-date fair value of options was determined by using the fair value of each option grant on the date of grant, utilizing the Black-Scholes option-pricing model and the following key assumptions:
- --------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------
Risk-free interest rates 6.39% 5.90% 6.80% Expected life 4 YEARS 4 years 4 years Expected volatility 63.97% 57.40% 61.40% Expected dividends NONE None None
EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan available to eligible employees. Under terms of the plan, eligible employees may designate from 1 to 10% of their compensation to be withheld through payroll deductions for the purchase of common stock at 85% of the lower of the market price on the first or last day of the offering period. Under the plan, 200,000 shares of common stock have been reserved for issuance. As of December 31, 1997, 111,606 shares have been issued under this plan.
401(k) PLAN The Company has a savings plan pursuant to Section 401(k) of the Internal Revenue Code ("the Code"), whereby eligible employees may contribute up to 15% of their earnings, not to exceed annual amounts allowed under the Code. In addition, the Company may also make contributions at the discretion of the Board of Directors. In 1997, 1996 and 1995, the Company provided for matching contributions totaling $144, $96, and $67, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CYBEROPTICS CORPORATION (In thousands, except share and per share amounts)
NOTE 7 - MAJOR CUSTOMER AND EXPORT SALES
THE FOLLOWING SUMMARIZES SIGNIFICANT CUSTOMERS:
Significant Percentage Customer Revenues of Revenues - ----------------------------------------------------------
Year ended December 31, 1997 A $ 4,420 13% B $ 7,704 22% C $ 3,246 9% Year ended December 31, 1996 A $ 3,855 14% B $ 7,863 28% C $ 2,834 10% Year ended December 31, 1995 A $ 9,052 30% B $ 3,979 13%
As of December 31, 1997, accounts receivable from significant customers A, B and C were $1,484, $952, and $367, respectively. As of December 31, 1996, accounts receivable from significant customers A, B and C were $567, $1,332 and $400, respectively.
Export sales amounted to 69%, 70% and 68% of revenues for 1997, 1996 and 1995, respectively. Substantially all of the Company's export sales are negotiated, invoiced and paid in U.S. dollars. Export sales by geographic area are summarized as follows:
- ---------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------
North America $ 393 $ 143 $ 117 Europe 5,964 4,964 10,762 Asia 17,504 14,279 9,596 Other 298 169 233 - ---------------------------------------------------------- $ 24,159 $ 19,555 $ 20,708 ==========================================================
NOTE 8 - CONTINGENCIES
In January 1996, the Company filed suit against Yamaha Motor Company, Ltd. (Yamaha) alleging fraud and theft of technology related to the LaserAlign sensor and its applications. Yamaha has denied the Company's claims and filed counterclaims against the Company on March 3, 1997 seeking unspecified damages. The Company intends to protect its intellectual property rights and pursue its remedies.
On March 9, 1998, the Company and Yamaha announced that all disputes between them had been settled. As a result of the settlement, both parties' lawsuits will be dismissed. Under the terms of the settlement, Yamaha has granted the Company a license under certain of its worldwide patents and the Company has granted Yamaha a license under certain of its worldwide patents.
In the ordinary course of business, the Company is a defendant in other claims and disputes. While the outcome of these matters cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect on the financial position, results of operations or cash flows of the Company.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of CyberOptics Corporation
We have audited the accompanying consolidated balance sheets of CyberOptics Corporation as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statments. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CyberOptics Corporation as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P. Minneapolis, Minnesota January 30, 1998, except for the second paragraph of Note 8, as to which the date is March 9, 1998
Quarterly Financial Information:
(In thousands, except per share amounts)
QUARTER ENDED MAR 31 JUN 30 SEP 30 DEC 31 - --------------------------------------------------------------------------------
1997 (UNAUDITED)
Revenues $7,080 $8,257 $9,249 $10,534 Gross margin 3,706 4,402 5,353 6,030 Income from operations 371 655 1,638 1,924 Net income 589 809 1,487 1,712 Net income per share-Basic 0.11 0.16 0.28 0.32 Net income per share-Diluted 0.11 0.15 0.27 0.30
1996 (UNAUDITED AND NOT REVIEWED)
Revenues $8,513 $7,812 $5,025 $6,712 Gross margin 4,604 3,917 2,380 3,422 Income (loss) from operations 1,490 402 (1,102) 95 Net income (loss) 1,421 700 (356) 415 Net income (loss) per share-Basic 0.25 0.12 (0.06) 0.08 Net income (loss) per share-Diluted 0.24 0.12 (0.06) 0.08
The summation of quarterly net income per share may not equate to the year-end calculation as quarterly calculations are performed on a discrete basis.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the heading "Election of Directors--Nominees and --Executive Officers" and "Shares Outstanding" of the Company's definitive proxy statement for its annual meeting of shareholders to be held May 18, 1998 (hereafter, the "Proxy Statement"), is hereby incorporated by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information under the heading "Election of Directors--Compensation of Directors," and "Executive Compensation" of the Proxy Statement is hereby incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Shares Outstanding" of the Proxy Statement is hereby incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Election of Directors--Compensation of Directors," of the Proxy Statement is hereby incorporated by reference.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements: See Item 8 to this Form 10-K.
(a)(2) Financial Statement Schedule: Schedule II, Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995, and the report of Coopers & Lybrand L.L.P. thereon are attached as Item 14(d).
(a)(3) LIST OF EXHIBITS
Exhibit Number Description - -------------- -----------
3.1 Articles of Incorporation of Company, as amended
3.2 Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-18 (Registration No. 33-17628C) (the "Registration Statement")
4.1 Restated Stock Option Plan of the Company, as amended (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 filed October 30, 1997 (file no 33-39091).
4.2 CyberOptics Corporation Stock Option Plan for Non-Employee Directors, as amended (Incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-8 filed October 30, 1997 (file no 33-39091)
4.3 CyberOptics Corporation Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4.7 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1992).
10.4 Lease Agreement between MEPC American Properties, Inc. and the Company dated September 15, 1995 (Incorporated by reference to Exhibit 10 of the Company's Form 10-QSB for the quarter ended September 30, 1995).
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule--Restatement of selected 1995 and 1996 data due to SFAS 128 (for electronic filing purposes only).
27.2 Financial Data Schedule--Restatement of selected 1997 data due to SFAS 128 (for electronic filing purposes only).
27.3 Financial Data Schedule (for electronic filing purposes only).
99.0 Forward Looking Statements--Cautionary Statement
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed for the quarter ended December 31, 1997.
(d) FINANCIAL STATEMENT SCHEDULES:
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of CyberOptics Corporation
Our report on the consolidated financial statements of CyberOptics Corporation has been included in this Annual Report on Form 10-K under Item 8. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in item 14 of this Annual Report on Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota January 30, 1998
SCHEDULE II
CYBEROPTICS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYBEROPTICS CORPORATION
Dated: March 23, 1998 By /s/ STEVEN M. QUIST ------------------------ Steven M. Quist, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date - ---- ----- ----
/s/ Steven K. Case Chairman and Director (Principal March 23, 1998 - ------------------------ Executive Officer) Steven K. Case
/s/ Steven M. Quist Director and President March 23, 1998 - ------------------------ Steven M. Quist
/s/ Alex B. Cimochowski Director March 23, 1998 - ------------------------ Alex B. Cimochowski
/s/ George E. Kline Director March 23, 1998 - ------------------------ George E. Kline
Director March __, 1998 - ------------------------ P. June Min
/s/ Erwin Kelen Director March 18, 1998 - ------------------------ Erwin Kelen
/s/ John D. Beagan Vice President--Operations March 23, 1998 - ------------------------ (acting Principal Financial Officer) John D. Beagan
/s/ Scott Larson Controller March 23, 1998 - ------------------------ (Principal Accounting Officer) Scott Larson