SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Check One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] 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
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(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
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(Address of principal executive offices)
(763) 542-5000
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(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 August 13, 2002, 8,220,716 shares of the issuer's Common Stock, no par value,
were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, 2002 DEC. 31, 2001
(Unaudited)
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ASSETS
Cash and cash equivalents $ 3,343 $12,323
Marketable securities 8,042 8,407
Accounts receivable, net 4,012 2,740
Inventories 8,723 9,667
Income tax Receivable 3,697 2,076
Other current assets 719 738
Deferred tax assets 1,884 1,684
- --------------------------------------------------------------------------------------------------
Total current assets 30,420 37,635
Marketable securities 8,161 7,830
Equipment and leasehold improvements, net 2,778 3,375
Intangible and other assets, net 6,212 6,464
Goodwill, net 5,478 5,048
Deferred tax assets 2,221 829
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Total assets $55,270 $61,181
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,474 $ 1,787
Accrued expenses 3,469 2,356
- --------------------------------------------------------------------------------------------------
Total current liabilities 4,943 4,143
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 5,000 shares
authorized, none outstanding
Common stock, no par value, 37,500 shares
authorized, 8,144 and 8,124 shares issued
and outstanding, respectively 41,451 41,176
Retained earnings 9,461 15,954
Accumulated other comprehensive income (loss) (585) (92)
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Total stockholders' equity 50,327 57,038
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Total liabilities and stockholders' equity $55,270 $61,181
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SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
2
CYBEROPTICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30,
2002 2001
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Revenues $5,912 $11,308
Cost of revenues 3,772 5,126
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Gross margin 2,140 6,182
Research and development expenses 2,261 2,221
Selling, general and administrative expenses 3,582 3,850
Restructuring and severance costs 800 250
Amortization of intangibles 281 585
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Loss from operations (4,784) (724)
Interest income and other (388) 465
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Loss before income taxes (5,172) (259)
Income tax (benefit) provision (1,880) 95
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Net loss ($3,292) ($354)
=====================================================================================
Net loss per share - Basic ($0.40) ($0.04)
Net loss per share - Diluted ($0.40) ($0.04)
=====================================================================================
Weighted average shares outstanding - Basic 8,142 7,989
Weighted average shares outstanding - Diluted 8,142 7,989
=====================================================================================
SIX MONTHS ENDED JUNE 30,
2002 2001
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Revenues $10,444 $27,971
Cost of revenues 6,705 12,100
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Gross margin 3,739 15,861
Research and development expenses 4,575 4,450
Selling, general and administrative expenses 7,266 9,028
Restructuring and severance costs 1,647 250
Amortization of goodwill and other intangibles 560 1,167
- -------------------------------------------------------------------------------------
Income (loss) from operations (10,309) 976
Interest income and other (165) 792
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Income (loss) before income taxes (10,474) 1,768
Income tax (benefit) expense (3,980) 810
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Net income (loss) ($6,494) $958
=====================================================================================
Net income (loss) per share - Basic ($0.80) $0.12
Net income (loss) per share - Diluted ($0.80) $0.12
=====================================================================================
Weighted average shares outstanding - Basic 8,134 7,975
Weighted average shares outstanding - Diluted 8,134 8,269
=====================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
CYBEROPTICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS ENDED JUNE 30,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($6,494) $958
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,468 2,206
Provision for losses on inventories 542 300
Provision for doubtful accounts 7 52
Deferred income taxes (1,592)
Amortization of restricted stock 88 20
Equity in losses of Avanti 645
Changes in operating assets and liabilities
excluding impact of acquisitions:
Accounts receivable (1,279) 5,673
Inventories 402 (780)
Other current assets (346) 797
Accounts payable (313) (2,438)
Income taxes receivable (1,621) (345)
Accrued expenses 1,113 (2,333)
- ----------------------------------------------------------------------------------------
Net cash provided
by operating activities (7,380) 4,110
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities 29,129 30,138
Purchases of marketable securities (29,095) (30,720)
Loan to related party (1,500) --
Purchases of businesses and technology, net of
cash acquired -- (164)
Additions to equipment and leasehold improvements (215) (795)
Additions to patents (106) (98)
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Net cash used in
investing activities (1,787) (1,639)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 187 360
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Net cash provided by financing
activities 187 360
Increase in cash and cash equivalents (8,980) 2,831
Cash and cash equivalents - beginning
of period 12,323 13,097
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Cash and cash equivalents - end of period $3,343 $15,928
========================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
CYBEROPTICS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
1. INTERIM REPORTING:
The interim consolidated financial statements presented herein as of June 30,
2002, and for the six and three month periods ended June 30, 2002 and 2001, are
unaudited; however, in the opinion of management, the interim consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of financial position,
results of operations and cash flows for the periods presented.
The results of operations for the six and three month periods ended June 30,
2002, do not necessarily indicate the results to be expected for the full year.
The December 31, 2001, consolidated balance sheet data was derived from audited
consolidated financial statements, but does not include all disclosures required
by generally accepted accounting principles. These unaudited 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, 2001.
2. ACCOUNTING CHANGES:
In June 2001, the Financial Accounting Standards Board issued FAS 142, Goodwill
and Other Intangible Assets ("FAS 142"). Under FAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed at least
annually for impairment. With respect to goodwill amortization, CyberOptics
adopted FAS 142 effective January 1, 2002. Actual results of operations for the
six and three months ended June 30, 2002, and pro forma results of operations
for the six and three months ended June 30, 2001 and the three years ended
December 31, 2001, 2000 and 1999, had CyberOptics applied the non-amortization
provisions of SFAS No. 142 follow (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------- ------------- ------------- -------------
Reported net income (loss) ($354) ($6,494) $958
Add back amortization, net of tax, for:
Goodwill 301 599
--- ---
Adjusted net income (loss) ($3,292) ($50) ($6,494) $1,566
BASIC EARNINGS PER SHARE:
Reported net income (loss) ($0.40) ($0.04) ($0.80) $0.12
Add back amortization for goodwill, net of tax $0.03 $0.08
Adjusted net income (loss) ($0.40) ($0.01) ($0.80) $0.20
DILUTED EARNINGS PER SHARE:
Reported net income (loss) ($0.40) ($0.04) ($0.80) $0.12
Add back amortization for goodwill, net of tax $0.03 $0.07
Adjusted net income (loss) ($0.40) ($0.01) ($0.80) $0.19
5
12 MONTHS ENDED
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DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
Reported net income (loss) ($4,164) $7,089 ($5,496)
Add back amortization, net of tax, for:
Goodwill $1,208 $983 $696
------ ---- ----
Adjusted net income (loss) ($2,956) $8,072 ($4,800)
BASIC EARNINGS PER SHARE:
Reported net income (loss) ($0.52) $0.91 ($0.74)
Add back amortization for goodwill, net of tax $0.15 $0.13 $0.09
Adjusted net income (loss) ($0.37) $1.04) ($0.65)
DILUTED EARNINGS PER SHARE:
Reported net income (loss) ($0.52) $0.81 ($0.74)
Add back amortization for goodwill, net of tax $0.15 $0.12 $0.09
Adjusted net income (loss) ($0.37) $0.93 $0.65
At June 30, 2002, CyberOptics had net goodwill of $5.5 million. Pursuant to FAS
142, CyberOptics completed its test for goodwill impairment during the second
quarter of 2002. The Company's methodology for estimating fair value included
utilizing several valuation methodologies, including discounted cash flows, in
determining a reasonable valuation. The result of the tests performed indicates
goodwill was not impaired as of January 1, 2002. Accordingly, no impairment
charge has been recognized upon adoption. CyberOptics will perform reviews for
the possible impairment of Goodwill on an annual basis.
3. CERTAIN BALANCE SHEET COMPONENTS (IN THOUSANDS):
Inventories consisted of the following:
JUNE 30, DECEMBER 31,
2002 2001
---------------------------
Raw materials $5,918 $4,979
Work in process 561 673
Finished goods 2,244 4,015
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Total inventories $8,723 $9,667
===========================
6
Intangible and other assets include the following:
JUNE 30, DECEMBER 31,
2002 2001
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Gross intangibles:
Developed technology $ 7,275 $ 7,275
Patents and trademarks 1,322 1,226
Customer Base 280 280
Workforce -- 560
-------- --------
8,877 9,341
Accumulated amortization:
Developed technology (2,415) (1,989)
Patents and trademarks (1,054) (859)
Customer base (117) (82)
Workforce -- (130)
-------- --------
(3,586) (3,060)
Avanti note receivable, net 855
Other non-current assets 66 183
-------- --------
Total intangibles
and other assets, net $ 6,212 $ 6,464
======== ========
In connection with adopting SFAS 142, CyberOptics reassessed the useful lives
and the classification of identifiable intangible assets and determined that as
of January 1, 2002 , with the exception of reclassifying workforce into
goodwill, they continue to be appropriate. Estimated aggregate amortization
expense based on current intangibles for the next five years is as follows: $1.3
million in 2002, $1.3 million in 2003, $1.1 million in 2004, $1.0 million in
2005 and $0.6 million in 2006.
4. NET INCOME (LOSS) PER SHARE:
Basic net income per share has been computed using the weighted average number
of shares outstanding during the period presented. The diluted net income per
share includes the effect of common stock equivalents for each period. The
shares used in the basic and diluted net income per share computation for the
three and six month periods ended June 30, 2002 and the three month period ended
June 30, 2001 are the same, as additional shares in the denominator would be
anti-dilutive due to the Company's net loss. The number of shares utilized in
the denominator of the diluted net income per share computation has been
increased over the number of shares used in computing basic net income per share
by 294,000 equivalent shares for the six months ended June 30, 2001. Shares for
which the option price exceed the average market price were 930,000 and 563,000
for the three and six month periods ended June 30, 2002, respectively. Shares
excluded due to the option price exceeding the average market price were 681,000
and 372,000 for the three and six month periods ended June 30, 2001,
respectively.
7
5. COMPREHENSIVE INCOME (LOSS):
Statement of Financial Accounting Standards No. 130 requires that unrealized
gains and losses on the Company's available-for-sale marketable securities and
certain foreign currency translation adjustments be included as a component of
other comprehensive income.
During the six month periods ended June 30, 2002 and 2001, total comprehensive
income (loss) amounted to ($493,000) and $952,000, respectively. During the
three month periods ended June 30, 2002 and 2001, total comprehensive income
(loss) amounted to ($358,000) and ($371,000), respectively. Accumulated other
comprehensive loss at June 30, 2002 and December 31, 2001 was ($585,000) and
($92,000), respectively.
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 2001. The adoption of SFAS No. 133 did not
materially impact the Company's financial position as of June 30, 2001 or its
results of operations or cash flows for the six months then ended.
The Company enters into foreign currency swap agreements to hedge short term
inter-company financing transactions with its subsidiary in the United Kingdom.
These currency swap agreements are structured to mature on the last day of each
quarter and are designated as cash flow hedges. At June 30, 2002, the Company
did not have an open swap agreement. During the three months ended June 30,
2001, the Company recognized a loss of approximately $439,000 from settlement of
a foreign currency swap agreement which offset the $461,000 translation gain on
the underlying inter-company balance.
The Company's foreign currency swap agreements contain credit risk to the extent
that its bank counter-parties may be unable to meet the terms of the agreements.
The Company minimizes such risk by limiting its counter-parties to major
financial institutions. Management does not expect material losses as a result
of defaults by other parties.
7. RESTRUCTURING AND SEVERANCE
In January 2002, CyberOptics incurred approximately $847,000 of severance and
costs associated with cost reduction measures. Cost reduction measures included
a workforce reduction, discretionary spending reductions, and the consolidation
of semiconductor product manufacturing in Portland, Oregon. Severance costs were
associated with a workforce reduction of 22 people. Approximately $545,000 of
these costs were paid as of June 30, 2002. Facility exit and severance costs of
approximately $302,000 were accrued as of June 30, 2002, and with the exception
of facility exit costs will be substantially paid over the next six months. As
of June 30, 2002, approximately $250,000 of facility exit costs are accrued,
consisting of idle facilities for which lease obligations will continue through
September 2004, and will be paid over the term of the lease.
In June 2002, CyberOptics incurred approximately $800,000 of severance and
related costs associated with additional cost reduction measures. Cost reduction
measures included a workforce reduction, and discretionary spending reductions.
Severance costs were associated with a workforce reduction of 48 people.
Approximately $77,000 of these costs were paid as of June 30, 2002. Severance
costs of approximately $723,000 were accrued as of June 30, 2002, and will be
substantially paid over the next six months. CyberOptics anticipates that
approximately $150,000 of severance costs will be paid in he first 6 months of
2003.
In April 2001, CyberOptics incurred approximately $250,000 of severance costs
associated with workforce reduction, all of which were paid in 2001.
8
8. RELATED PARTY TRANSACTION
In May 2002, CyberOptics funded a $1.5 million term loan to Avanti Optics
Corporation ("Avanti"). The loan bears interest at three percent above the prime
over its twelve-month term and is secured by all the intellectual property
assets of Avanti. The term loan and any accrued interest will automatically
convert to the type of equity shares Avanti issues at the closing of the next
qualifying equity financing occurring on or before the maturity date of the
loan. The Conversion to equity will be at 80% of the price in that equity round,
and if there is a change of control prior to maturity, CyberOptics will receive
payment of two times the loan balance and accrued interest as payment on the
loan. As consideration for the Loan, CyberOptics received a five year warrant to
purchase the number of shares of Avanti's equity securities as is equal to
$450,000 divided by the price at which the next equity securities of Avanti are
sold, which will be exercisable at the price of that equity round. In addition,
the Company has obtained the exclusive rights to manufacture and distribute
manual and semi-automated equipment for the assembly of surface mountable
optical components being developed by Avanti. Avanti's chief executive officer
is Steven K. Case, Ph. D., who is also the chairman and founder of CyberOptics.
The transaction was approved by the Board of CyberOptics CyberOptics without the
participation of Dr. Case or any other party who had a material interest in
Avanti. CyberOptics believes the loan is on terms at least as favorable to
CyberOptics as would have been obtained from an unaffiliated party.
CyberOptics had acquired 19% of the outstanding capital stock of Avanti in 2000
for cash and other assets. CyberOptics carrying value for accounting purposes
for such investment had been reduced to zero in the first quarter of 2001 by its
equity in the losses of Avanti. During the three months ended June 30, 2002,
CyberOptics reduced the carrying value of the term loan by $645,000 to reflect
CyberOptics equity in the cumulative losses of Avanti since the first quarter of
2001. CyberOptics will recognize future reductions in the carrying value of the
loan by an amount equal to CyberOptics' equity interest in the losses of Avanti
or the net realizable value of the loan, whichever results in a lower carrying
value.
9. RECENT ACCOUNTING DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations" which provides accounting requirements for retirement
obligations associated with tangible long-lived assets. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. Management believes
the adoption of SFAS No. 143 will not have a material impact on CyberOptics'
financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (the
"Statement"). This Statement addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This Statement also eliminates
the exception to the consolidation for a subsidiary for which control is likely
to be temporary. CyberOptics adopted the Statement on January 1, 2002. The
adoption of the Statement did not have a material impact on either the finacial
position or operating results of CyberOptics.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 or that could have
an impact on future results. This discussion should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31, 2001
and the Company's interim consolidated financial statements and associated
notes.
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 trends in the industries in which CyberOptics functions,
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 CyberOptics, must be evaluated in the context of a
number of factors that may affect CyberOptics financial condition and results of
operations, including the following:
- -- The cyclical nature of capital expenditures in the electronics and
semiconductor industry;
- -- The affects of world events and economic conditions on CyberOptics and its
customers;
- -- The dependence of such operations on orders of one sensor product line from
large OEM's of component placement machines in the surface mount electronics
assembly industry;
- -- The dependence of such operations on orders from two OEM customers;
- -- The significant proportion of the Company's revenue that is derived from
export sales;
- -- The dependence of the Company's manufacturing on outside contractors and
suppliers, many of which require significant lead time;
- -- 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 ability of the Company to effectively integrate the operations of
acquired companies and product lines;
- -- The ability to effectively commercialize significant new products introduced
in 2000 and 2001, and those planned to be introduced in 2002;
- -- The speed of changes in technology in the microelectronics manufacturing
industry from which most of the Company's sales are derived;
- -- Competition for the functions that the Company's products perform by larger
"vision" companies, by other optical sensor companies, and by large
multinational systems companies, many of which have greater resources and larger
sales and distribution networks than CyberOptics;
- -- Movement of electronics assembly business to Asia where CyberOptics has only
recently opened a sales office.
In the preparation of the financial information contained in this 10-Q required
CyberOptics' management to make estimates and judgements that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. CyberOptics' management
evaluates these estimates on an ongoing basis, including those related to
allowances for doubtful accounts, for warranty expense, and for obsolete
inventory, the carrying value and any impairment of intangible assets, and the
valuation allowance for deferred tax assets. These critical accounting policies
are discussed in more detail in the Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in CyberOptics' Form
10-K for the year ended December 31, 2001.
10
RESULTS OF OPERATIONS
REVENUES
The following table sets forth revenues by product line for the periods
indicated (in Thousands):
Six months ended Three months ended
June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
OEM Solutions:
Electronic Assembly Sensors (EAS)
Products $ 2,729 $16,688 $ 1,515 $ 6,176
Semiconductor Products 3,216 4,149 1,768 2,095
End-User Systems Products 4,498 7,134 2,628 3,037
------- ------- ------- -------
Total $10,443 $27,971 $ 5,911 $11,308
Revenues from EAS products decreased 84% during the six months ended June 30,
2002 from the six months ended June 30, 2001, and 75% during the three months
ended June 30, 2002 from the same three months ended June 30, 2001. Decreased
revenues from 2001 during the six and three month periods reflect the continued
weak global market for electronic assembly equipment, which began to deteriorate
in early 2001. CyberOptics' two largest EAS customers either suspended, or
significantly decreased the rates of their orders beginning in the second half
of 2001, and while these customers have begun to order products again,
CyberOptics does not expect orders to reach the levels of the first half of 2001
during the second half of 2002. Revenues from EAS products did, however,
increase approximately 25% in the second quarter of 2002 compared to the first
quarter of 2002. Further, the order rates of the two largest EAS customers
increased during the second quarter as compared to the four preceding quarters.
Accordingly, CyberOptics anticipates higher EAS product revenues in the second
half of 2002 compared to the first half of 2002. The Company's two largest EAS
customers accounted for approximately 17% of total revenues for the six months
ended June 30, 2002, and 47% of revenues for the comparable period in 2001.
These customers accounted for approximately 17% of revenues in the second
quarter of 2002 compared to 45% in the second quarter of 2001.
Semiconductor product revenues decreased 22% during the six months ended June
30, 2002 from the six months ended June 30, 2001, and decreased 16% during the
three months ended June 30, 2002 from the three months ended June 30, 2001. This
decreasing revenue in 2002 from 2001 is primarily due to a weakening demand in
the semiconductor capital equipment market, which began in early 2001 and is
consistent with the decline in the overall electronics capital equipment market.
Beginning in 2002, demand for products in the semiconductor capital equipment
market has shown modest recovery, as revenues increased 22% in the second
quarter of 2002 compared to the three month perod ended March 31, 2002. This
improvement is expected to continue with modest growth anticipated in the second
half of 2002 compared to the first half of 2002.
End-User Systems product revenues decreased 37% during the six months ended June
30, 2002 from the six months ended June 30, 2001, and decreased 13% during the
three months ended June 30, 2002 from the thee months ended June 30, 2001. The
sales decreases in 2002 from 2001 for both the six and three month periods were
due to weakening demand in the electronic assembly market, which began in early
2001 and continued through the second quarter of 2002. The weakened electronic
assembly market has negatively effected capital spending by electronic
manufacturing services (EMS) customers and other manufacturers of printed
circuit board assemblies. However, the decrease in capital spending for
inspection equipment has been less pronounced than for production equipment.
CyberOptics believes that production difficulties associated with smaller and
more complex components and increased production speeds will drive an investment
in inspection equipment on production lines currently using manual inspection or
no inspection at all. In addition, CyberOptics has introduced several new
inspection systems and is beginning to make proportionately more sales of
End-User Systems products to EMS customers located in Asian - the largest market
for new circuit board assembly production capacity. Consequently, End-User
systems revenues are expected to increase in the second half of 2002 compared to
the first half of the year.
11
International revenues comprised approximately 60% and 72% of total revenues
during the six month periods ended June 30, 2002 and 2001, respectively, and
approximately 64% and 68% of revenues during the second quarter of 2002 and
2001, respectively. The international markets in Europe, Japan and the rest of
Asia account for a significant portion of the capital equipment market for the
manufacture of electronics, the primary market for the Company's EAS sensors and
End-User systems product lines. The decrease in the proportion of total revenues
attributable to international sources from 2001 to 2002 is almost entirely
attributable to the suspension, and then lower rate, of orders from CyberOptics'
two principal EAS customers.
Revenues generated from products used primarily for SMT electronic assembly
production (revenues from OEM sensors and End-User systems) were approximately
69% and 85% of revenues for the six month periods ended June 30, 2002 and 2001,
respectively, again reflecting the level of orders from CyberOptics' two largest
EAS customers.
GROSS MARGIN
Gross margin for the six months ended June 30, 2002 decreased as a percent of
revenues to 36% compared to 57% during the same period in 2001. For the second
quarter of 2002, gross margin decreased to 36% of revenues compared to 55%
during the comparable period in 2001. Gross margin is highly dependent on the
level of revenues over which to spread the fixed component of cost of sales and
the related realization of manufacturing efficiencies and the product mix of
revenues. Revenue levels were 63% and 48% lower in six and three month periods
ended June 30, 2002, respectively, than during the same periods in 2001, and
although CyberOptics has reduced fixed costs as part its cost reduction actions,
the magnitude of the revenue decline had a significant impact on gross margin.
During 2002, gross margin was also negatively impacted by the increase in
new-generation End-User Systems product revenues as a percentage of total sales
and increased expense for obsolete inventory. End-User System product gross
margins have been negatively impacted by higher production costs associated with
new product introductions and by significant price pressure being experienced as
several equipment suppliers compete for fewer sales opportunities. There can be
no assurance that selling prices for End-User System products will fully recover
when the electronic assembly market improves. In addition, CyberOptics is
beginning to experience price pressure in its other product lines, as production
equipment suppliers to the electronic assemble market (primary customers for EAS
sensors) come under competitive price pressure and attempt to reduce the cost of
their machines. CyberOptics does expect to see modest improvement in gross
margin in the second half of 2002 as revenue levels increase.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 3% to $4.6 million during the six
months ended June 30, 2002 from the six months ended June 30, 2001, and
increased 2% to $2.3 million in the three months ended June 30, 2002 from the
three months ended June 30, 2001. As a percentage of revenue, research and
development expenses increased to 44% during the six months ended June 30, 2002
from 16% during the comparable period in 2001, and increased to 38% in the
second quarter of 2002 compared to 20% in the same period in 2001, primarily as
the result of decreased revenue in 2002 compared to 2001. Increased research and
development expenses in 2002 were primarily the result of the company continuing
to fund new product development on important new products even as revenues
declined. Due to cost reduction measures initiated in the second quarter of
2002, CyberOptics anticipates research and development expense will decrease in
the second half of 2002 compared to the first half of 2002.
Research and development expenses during the first and second quarters of 2002
were primarily focused on continued engineering development of the new high
speed solder paste inspection system, the SE 300, and KS series AOI systems,
next generation LaserAlign products, board alignment and on-head linescan
cameras and enhancements to the semiconductor wafer mapping sensor product
family. Customer funded research and development is recognized as a reduction of
research and development expense. During the six months ended June 30, 2002,
customer funded research and development recognized as a reduction of research
and development expense totaled $311,000 compared to $97,000 during the first
half of 2001.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 20% to $7.3 million
during the six month period ended June 30, 2002 compared to $9.0 million during
the six months ended June 30, 2001, and decreased 7% to $3.6 million during the
three months ended June 30, 2002 from the three months ended June 30, 2001. As a
percentage of revenue, selling, general and administrative expenses increased to
70% during the six month period ended June 30, 2002 from 32% in 2001, and for
the second quarter increased to 61% in 2002 from 34% in 2001. Decreased selling,
general and administrative expenses in 2002 are primarily the result of cost
reduction measures implemented throughout 2001 and early 2002 and reduced sales
commission and other incentive compensation as the result of lower revenue
levels.
RESTRUCTURING AND SEVERANCE COSTS
As of July 30, 2002, CyberOptics has implemented four workforce reductions
designed to reduce the losses and negative cash flow resulting from the severe
decline in its revenues caused by the depressed capital equipment markets for
suppliers to electronics manufacturing. Two of those workforce reductions were
completed during the year ended December 31, 2001.
In January 2002, CyberOptics incurred approximately $847,000 of severance and
costs associated with cost reduction measures. Cost reduction measures included
a workforce reduction, discretionary spending reductions, and the consolidation
of semiconductor product manufacturing in Portland, Oregon. Severance costs were
associated with a workforce reduction of 22 people. Approximately $545,000 of
these costs were paid as of June 30, 2002. Facility exit and severance costs of
approximately $302,000 were accrued as of June 30, 2002, and with the exception
of facility exit costs will be substantially paid over the next six months. As
of June 30, 2002, approximately $250,000 of facility exit costs are accrued,
consisting of idle facilities for which lease obligations will continue through
September 2004, and will be paid over the term of the lease.
In June 2002, CyberOptics incurred approximately $800,000 of severance and
related costs associated with cost reduction measures. Cost reduction measures
included a workforce reduction, and discretionary spending reductions. Severance
costs were associated with a workforce reduction of 48 people. Approximately
$77,000 of these costs were paid as of June 30, 2002. Severance costs of
approximately $723,000 were accrued as of June 30, 2002, and will be
substantially paid over the next six months. CyberOptics anticipates that
approximately $150,000 of severance costs will be paid in he first 6 months of
2003.
In April 2001, CyberOptics incurred approximately $250,000 of severance costs
associated with workforce reduction, all of which were paid in 2001.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
Amortization of acquired intangible assets was approximately $560,000 and
$281,000 for the six and three month periods ended June 30, 2002 compared to
$1,167,000 and $585,000 during the comparable periods of 2001. The decrease in
amortization for the six and three month periods ending June 30, 2002 is
attributed to the adoption of the goodwill non-amortization provisions of FAS
142. Without the impact of adoption of FAS 142, amortization of intangible
assets would have been approximately $1,226,000 and $616,000 for the six and
three month periods ended June 30, 2002, respectively. Amortization is primarily
attributable to developed technology, patents and trademarks resulting from
CyberOptics' acquisition of technology and other assets of Kestra Ltd. and HAMA
Laboratories, Inc. during the second quarter of 1999 and CyberOptics'
acquisition of Imagenation Corporation during the fourth quarter of 2000.
Amortization of these intangible assets is expected to approximate $280,000 per
quarter over the remaining life of the intangible assets.
13
INTEREST AND OTHER
Interest income and other primarily includes interest earned on investments.
Interest income declined for the six and three month periods ended June 30, 2002
compared to the same period in 2001 as a result of a lower investment balance
and declining interest rates. In addition, CyberOptics reduced the carrying
value of the $1.5 million loan to Avanti described below under "Transactions
with Interested Parties" by its ownership percentage in the cumulative losses of
Avanti which resulted in a charge of $645,000 in the three month period ended
June 30, 2002. Avanti is a development stage company and is projecting
continuing losses. Consequently, it is likely that the $855,000 carrying value
of the Avanti loan will be required to be reduced in future periods to reflect
CyberOptics' share of Avanti's losses and be further reduced to the extent that
the liquidation value of Avanti (consisting primarily of cash balances) declines
below the carrying value of CyberOptics' loan.
PROVISION FOR INCOME TAXES AND EFFECTIVE INCOME TAX RATE
CyberOptics recorded a tax benefit of approximately $4.0 million and $1.9
million for the six and three month periods ended June 30, 2002. The tax benefit
during 2002 reflects the expected annual effective rate, including the effect of
benefits from CyberOptics foreign sales corporation and research and development
tax credits. CyberOptics has recorded taxes receivable based on its ability to
carry back current tax losses for a refund of taxes paid in prior years.
At June 30, 2002, CyberOptics has net deferred tax assets of approximately $4.1
million. The ultimate realization of these assets is dependent upon CyberOptics
returning to profitability. CyberOptics business is subject to cyclical changes
in the electronics assembly markets and CyberOptics management believes that it
will return to profitability with the next increase in these markets and that
CyberOptics will be able to fully utilize the deferred tax assets. Nevertheless,
accounting principals require that, if a company has recorded a cumulative loss
in the jurisdiction that generated the deferred tax assets over a 36 month
period, the tax asset is presumed uncollectible unless there are compelling
reasons why it should be collected. If CyberOptics records net losses during the
next quarter or next two quarters, depending upon the magnitude of the loss,
CyberOptics may be required, absent other compelling factors existing at the
time that would indicate that CyberOptics will be able to utilize the asset, to
record a valuation allowance to reduce the carrying value to zero, resulting in
a net charge to earnings of up to approximately $4.1 million. In addition,
CyberOptics would not be able to record additional tax asset until such time as
evidence exists that future utilization is sustainable.
ORDER RATE AND BACKLOG
CyberOptics' orders totaled $12.2 million during the six month period ended June
30, 2002 compared to $20.5 million during the six month period ended June 30,
2001. For the thee month period ended June 30, 2002, orders totaled $8.0 million
compared to $7.0 million for the three months ended June 30, 2001 and $4.2
million in the three months ended March 31, 2002. Backlog totaled $4.8 million
and $4.3 million at June 30, 2002 and 2001, respectively, and $2.7 million at
March 31, 2002. The scheduled shipment of the June 30, 2002 backlog is as
follows (in thousands):
3rd Quarter 2002 $ 3,166
4th Quarter 2001 and after 1,620
-------
Total backlog $ 4,786
14
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and marketable securities decreased $9.0 million to
$19.5 million as of June 30, 2002 from $28.6 million as of December 31, 2001,
primarily due to $7.4 million of cash used by operations.
CyberOptics used $7.4 million of cash in operations during the first six months
of 2002, primarily due to a net loss of $6.5 million, which included $2.8
million of non-cash expenses for depreciation and amortization, provision for
inventory obsolescence, equity in losses of Avanti and other non-cash items and
non-cash income of $1.6 million from the recording of deferred tax assets
previously described under "Provision for Income Taxes and Effective Income Tax
Rate". The cash used by operations included a $1.6 increase in taxes receivable,
a $1.3 million increase in accounts receivable, a $313,000 decrease in accounts
payable, and a $346,000 increase in other assets. The increase in taxes
receivable were a result of estimated tax losses for the period which are
expected to be collected as a refund from taxes paid in previous years offset by
tax refunds of approximately $1.0 million received in the six months ended June
30, 2002. The increase in accounts receivable is the result of growing revenues,
and the decrease in accounts payable are primarily the result of the continued
reduced activity level of CyberOptics and the reduction in inventory purchases.
These items were offset somewhat by an increase in accrued expenses of $1.1
million and a decrease in inventory of $402,000. Increased accrued expenses are
primarily due to approximately $1.0 million of facilities and severance costs
associated with the workforce reductions and other cost reduction measures
implemented during 2002. The reduction in inventory is the result of increasing
revenue and order rates in the second quarter of 2002. During the first six
months of 2001, CyberOptics generated $4.1 million of cash from operations,
primarily due to net income of $958,000, $2.6 million of non-cash expenses and a
$5.7 million reduction in accounts receivable. This increase was partially
offset by a $5.9 million net use of cash from changes in operating assets.
CyberOptics used $1.8 million of cash in investing activities during the six
months ended June 30, 2002 compared to using $1.6 million during the same period
in 2001. The majority of the change in cash from investing activities is due to
the loan to Avanti. In addition, changes in the level of investment in
marketable securities resulting from the purchases and maturities of those
securities, provided $100,000 of cash in 2002 and used $582,000 in 2001, net of
maturities. CyberOptics used approximately $321,000 and $1.1million of cash for
the purchase of fixed assets, and the acquisition of technology and other
intangible assets during the six months ended June 30, 2002 and 2001,
respectively.
CyberOptics generated $187,000 of cash from financing activities during the six
months ended June 30, 2002 and $360,000 in the same period during 2001. Cash
generated from financing activities represents cash from stock option exercises.
As of June 30, 2002, CyberOptics had no material commitments for capital
expenditures. While there were no material commitments, CyberOptics routinely
evaluates investment opportunities that come to its attention and could make a
significant commitment in the future. Cyber Optics cash and equivalent and
investments totaled $19.5 million at June 30, 2002. With this level of cash and
cash equivalents, and the reduced level of cash expenditures resulting from the
last workforce reduction in July 2002, management believes that CyberOptics'
cash and equivalents would be adequate to fund cash flow needs for at least 24
months, even if the severity of the downturn in the electronics capital
equipment industries continues unabated. If the economic conditions appear to be
continuing over the next year, management would make other adjustments in
expense levels.
In May 2002, CyberOptics expended $1.5 million by making a term loan to Avanti
Optics Corporation. CyberOptics has no further commitment to fund the operations
of Avanti and does not have any current intention of making any additional
contributions, as loans or equity, to Avanti.
At June 30, 2002, CyberOptics did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance of special purpose entities, which would have been
established for the purpose of establishing off-balance sheet arrangements or
other contractually narrow or limited purposes. As such, CyberOptics is not
materially exposed to any financing, liquidity, market or credit risk that could
arise if CyberOptics had engaged in such relationships.
15
OTHER FACTORS
Changes in revenues have resulted primarily from changes in the level of unit
shipments and new product introductions. CyberOptics believes that inflation has
not had any significant effect on operations. Most of CyberOptics' international
export sales are negotiated, invoiced and paid in U.S. dollars. Accordingly,
although currency fluctuations do not have a significant effect CyberOptics'
revenue and income per unit, they can influence the price competitiveness of
CyberOptics' products relative to other technologies and the willingness of
existing and potential customers to purchase products and services.
As a result of the Kestra Ltd. acquisition CyberOptics has an operating unit
located in the UK. CyberOptics does not believe that currency fluctuations will
have a material impact on its consolidated financial statements.
TRANSACTIONS WITH INTERESTED PARTIES
On April 30, 2002, CyberOptics loaned $1.5 million to Avanti Optics Corporation
("Avanti"), a company founded by Steven K. Case, the Chairman, founder and a
significant shareholder of CyberOptics. Erwin Kelen, a director of CyberOptics,
also serves as director of Avanti, is a shareholder in Avanti, and is a
representative of one of the principal venture capital investors in Avanti.
CyberOptics held approximately 12% of the outstanding capital stock of Avanti
prior to the loan, which it had acquired in consideration of the contribution of
$190,000 cash and intellectual property to Avanti when it was formed. The loan
transaction was approved by the Board of Directors of CyberOptics without the
participation of Dr. Case or Mr. Kelen and only after a determination that the
loan was in the best interests of CyberOptics.
The loan is represented by a convertible promissory note that bears interest at
3% above the prime rate of interest and is repayable on April 30, 2003, or upon
an earlier event of default. The loan is secured by all of the intellectual
property of Avanti (consisting primarily of rights in United States patents and
patent applications in the area of photonics component manufacture). The loan
and any accrued interest will automatically convert to the type of equity shares
Avanti issues at the closing of the next qualifying equity financing occurring
on or before the maturity date of the loan. The conversion to equity will be at
80% of the price in that equity round, and if there is a change of control prior
to conversion, CyberOptics is entitled to receive twice the principal and
interest then outstanding on the loan.
In consideration of the loan, CyberOptics also received a five-year warrant to
purchase the number of shares of Avanti equity securities as is equal to
$450,000 (30% warrant coverage) divided by the price per share in the next
equity financing of Avanti. The exercise price of the warrant will be equal to
the price in such next equity financing.
The loan was made in part to acquire the exclusive rights to manufacture and
distribute manual and semi-automated equipment for the assembly of surface
mountable optical components that are currently under development by Avanti.
Although there is a high degree of risk involved in the completion of Avanti's
development of this technology, the Board of CyberOptics concluded that there is
substantial potential for these manual and semi-automated assembly machines.
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PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of CyberOptics Corporation was held at
3:30p.m. on Friday May 17, 2002. Shareholders holding 7,026,233 shares, or
approximately 86.37% of the outstanding shares, were represented at the meeting
by proxy or in person. Matters submitted at the meeting for vote by the
shareholders were as follows:
a. Election of Directors
The following nominees were elected to serve as members of the Board of
Directors until the annual meeting of shareholders in 2003 or until such time as
a successor may be elected:
TABULATION OF VOTES
-------------------
FOR WITHHELD
--- --------
Steven K. Case 6,429,679 596,554
Steven M. Quist 6,562,214 464,019
Alex. B. Cimochowski 6,656,548 369,685
Kathleen P. Iverson 6,337,914 688,319
Erwin A. Kelen 6,656,643 369,590
Irene M. Qualters 6,656,448 369,785
Michael M. Selzer, Jr. 6,656,543 369,690
b. Approval of amendment to the 1998 Stock Incentive Plan
Shareholders approved an amendment to the 1998 Stock Incentive Plan to increase
the number of shares of common stock reserved for issuance by 375,000 by a vote
of 6,257,714 shares in favor, 723,848 shares against, and 44,671 shares
abstained.
ITEM 6 - EXHIBITS AND REPORTS ON 8-K
a. Exhibits
99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2001, or
during the period from June 30, 2001 to the date of this quarterly report on
Form 10-Q.
17
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/ STEVEN M. QUIST
-------------------
STEVEN M. QUIST, PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER AND
DULY AUTHORIZED OFFICER)
/s/ SCOTT G. LARSON
-------------------
SCOTT G. LARSON, CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER AND
DULY AUTHORIZED OFFICER)
Dated: August 13, 2002
18