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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Check One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to ________________
COMMISSION FILE NUMBER 0-16577
CYBEROPTICS CORPORATION
-----------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1472057
- --------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5900 Golden Hills Drive, Minneapolis, Minnesota 55416
-----------------------------------------------------
(Address of principal executive offices)
(763) 542-5000
--------------
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No _X_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At May 14, 2003, there were 8,179,046 shares of the registrant's Common Stock,
no par value, issued and outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, 2003 DEC. 31, 2002
(Unaudited)
- --------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $7,108 $11,009
Marketable securities 6,593 4,086
Accounts receivable, net 3,674 3,836
Inventories 5,909 7,065
Income tax Receivable 2,630 2,560
Other current assets 465 577
- --------------------------------------------------------------------------------------------------
Total current assets 26,379 29,133
Marketable securities 7,276 5,723
Equipment and leasehold improvements, net 2,075 2,354
Intangible and other assets, net 4,577 4,882
Goodwill, net 5,785 5,835
- --------------------------------------------------------------------------------------------------
Total assets $46,092 $47,927
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $1,093 $1,251
Accrued expenses 2,427 2,614
- --------------------------------------------------------------------------------------------------
Total current liabilities 3,520 3,865
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, 8,190 and 8,190 shares issued
and outstanding, respectively 41,755 41,755
Retained earnings 917 2,399
Accumulated other comprehensive loss (100) (92)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 42,572 44,062
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $46,092 $47,927
==================================================================================================
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 MARCH 31,
2003 2002
- -------------------------------------------------------------------------------------
Revenues $6,425 $4,532
Cost of revenues 3,525 2,933
- -------------------------------------------------------------------------------------
Gross margin 2,900 1,599
Research and development expenses 1,740 2,314
Selling, general and administrative expenses 2,782 3,684
Restructuring and severance costs 170 847
Gain from technology transfer and license (645) --
Amortization of intangibles 280 279
- -------------------------------------------------------------------------------------
Loss from operations (1,427) (5,525)
Interest income and other 5 223
- -------------------------------------------------------------------------------------
Loss before income taxes (1,422) (5,302)
Income tax (benefit) provision 60 (2,100)
- -------------------------------------------------------------------------------------
Net loss ($1,482) ($3,202)
=====================================================================================
Net loss per share - Basic ($0.18) ($0.39)
Net loss per share - Diluted ($0.18) ($0.39)
=====================================================================================
Weighted average shares outstanding - Basic 8,190 8,126
Weighted average shares outstanding - Diluted 8,190 8,126
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
CYBEROPTICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
THREE MONTHS ENDED MARCH 31,
2003 2002
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($1,482) ($3,202)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 808 740
Gain from technology transfer and license (645) --
Provision for losses on inventories 105 185
Provision for doubtful accounts 25 (4)
Amortization of restricted stock and other -- 10
Changes in operating assets and liabilities:
Accounts receivable 137 46
Inventories 891 (176)
Other current assets 154 201
Accounts payable (158) (566)
Income taxes receivable (70) (1,343)
Accrued expenses (207) 642
- ----------------------------------------------------------------------------------------
Net cash provided (used)
by operating activities (442) (3,467)
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities 1,454 5,443
Purchases of marketable securities (5,514) (3,616)
Proceeds from technology transfer and license 750 --
Additions to equipment and leasehold improvements (113) (236)
Additions to patents (36) (39)
- ----------------------------------------------------------------------------------------
Net cash provided (used) in
investing activities (3,459) 1,552
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options -- 104
- ----------------------------------------------------------------------------------------
Net cash provided by financing
activities -- 104
Increase (decrease) in cash and cash equivalents (3,901) (1,811)
Cash and cash equivalents - beginning
of period 11,009 12,323
- ----------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $7,108 $10,512
========================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
CYBEROPTICS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM REPORTING:
The interim consolidated financial statements presented herein as of March 31,
2003, and for the three month periods ended March 31, 2003 and 2002, are
unaudited; however, in our opinion, the interim consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of financial position, results of
operations and cash flows for the periods presented.
The results of operations for the three month periods ended March 31, 2003, do
not necessarily indicate the results to be expected for the full year. The
December 31, 2002, 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 our
consolidated financial statements and notes thereto, contained in our Annual
Report on Form 10-K for the year ended December 31, 2002.
2. ACCOUNTING FOR STOCK-BASED COMPENSATION:
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123". We intend to continue to account for
stock-based compensation to our employees and directors using the intrinsic
value method prescribed by APB Opinion No. 25. We have adopted the disclosure
requirements of SFAS No. 148 in these notes to the consolidated financial
statements.
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation", we
continue to measure compensation cost for our stock incentive and option plans
using the intrinsic value method of accounting. Had we used the fair value
method of accounting for our stock option and incentive plans and charged
compensation costs against income over the vesting period, net income and net
income per share for the three months ended March 31, 2003 and 2002 would have
been reduced to the following pro forma amounts:
- -------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------
Net Income (loss) as reported $(1,482) $(3,202)
Add: Stock-based compensation
expense included in net income,
net of related tax effects -- --
Deduct: Total stock-based compensation
expense determined under fair value,
net of related tax effects (568) (441)
- ------------------------------------------------------------------------
Net income (loss) - Pro forma $(2,050) $(3,643)
========================================================================
Net income (loss) per share:
As reported - Basic $(0.18) $(0.39)
Pro forma - Basic $(0.25) $ (0.45)
As reported - Diluted $(0.18) $ (0.39)
Pro forma - Diluted $(0.25) $ (0.45)
In 2003, no tax benefit provision was applied to the fair value expense
calculated under SFAS No. 123 due to establishing valuation allowances on
deferred tax assets during the three month period ended September 30, 2002. In
the three month period ended March 31, 2002 the tax benefit provision applied to
fair value expense is consistent with the tax provision in our Statement of
Operations. The assumptions used to calculate the fair value of options granted
are evaluated and revised, as necessary, to reflect market conditions and our
experience.
5
3. CERTAIN BALANCE SHEET COMPONENTS (IN THOUSANDS):
Inventories consisted of the following:
March 31, December 31,
2003 2002
---------------------------
Raw materials $4,886 $5,190
Work in process 639 896
Finished goods 2,795 3,456
---------------------------
Allowance for obsolescence (2,411) (2,477)
---------------------------
Total inventories $5,909 $7,065
===========================
Intangible and other assets include the following:
March 31, December 31,
2003 2002
---------------------------
Gross intangibles:
Developed technology $ 7,275 $ 7,275
Patents and trademarks 1,576 1,540
Customer Base 280 280
Other 50 50
--------------------------
9,181 9,145
--------------------------
Accumulated amortization (4,604) (4,263)
--------------------------
Total intangibles
and other assets, net $ 4,577 $ 4,882
==========================
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 month periods ended March 31, 2003 and 2002 are the same, as additional
shares in the denominator would be anti-dilutive due to our net loss. Weighted
average shares for which the option price exceeds the average market price
were1,572,000 and 560,000 for the three month periods ended March 31, 2003 and
2002, respectively.
6
5. COMPREHENSIVE INCOME (LOSS):
Statement of Financial Accounting Standards No. 130 requires that unrealized
gains and losses on our available-for-sale marketable securities and certain
foreign currency translation adjustments be included as a component of other
comprehensive income.
During the three month periods ended March 31, 2003 and 2002, total
comprehensive income (loss) amounted to ($8,000) and ($135,000), respectively.
Accumulated other comprehensive loss at March 31, 2003 and December 31, 2002 was
($100,000) and ($92,000), respectively.
6. INCOME TAXES:
During the third quarter of 2002, we concluded that a valuation allowance
against all of our deferred tax assets was appropriate. A deferred tax asset
generally represents future tax benefits to be received when certain expenses
and losses previously recognized in our U.S. GAAP-based financial statements
become deductible under applicable income tax laws. Consequently, realization of
a deferred tax asset is dependent on future taxable income against which these
deductions can be applied. In accordance with Statement of Financial Accounting
Standards No. 109, as the result of cumulative U.S. based operating losses
incurred over the past three years and continued weakness in the markets we
serve and the resulting impact on order rates, we reduced our effective tax rate
in the year ended December 31, 2002 to reflect only a current benefit resulting
from the ability to carry-back U.S. based operating losses to prior periods and
recorded a valuation allowance against deferred tax assets.
During the three months ended March 31, 2003, we did not record a tax benefit on
U.S. based operating losses, and do not expect to record tax expense or benefits
on U.S. based operating results until we are consistently profitable on a
quarterly basis. At that time, the valuation allowance will be reassessed and
could be eliminated, resulting in the recognition of the deferred tax assets.
Tax expense of $60,000 recorded during the three months ended March 31, 2003
relates to income generated by foreign subsidiaries. During the three months
ended March 31, 2002, we recorded a tax benefit of $2.1 million, reflecting the
estimated annual effective tax rate at that time.
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
We enter into foreign currency swap agreements to hedge short term inter-company
financing transactions with our 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 March 31, 2003, CyberOptics had one open swap
agreement that was purchased on that date. As a result, there were no material
unrealized gains or losses as of March 31, 2003. During the three months ended
March 31, 2003 we recognized a gain of approximately $18,000 from the settlement
of foreign currency swap agreements which offset the $78,000 translation loss on
the underlying inter-company balance.
Our foreign currency swap agreements contain credit risk to the extent that our
bank counter-parties may be unable to meet the terms of the agreements. We
minimize such risk by limiting our counter-parties to major financial
institutions. We do not expect material losses as a result of defaults by other
parties.
8. RESTRUCTURING AND SEVERANCE:
In January 2003, we incurred approximately $170,000 of severance costs and
facility costs associated with further consolidation of our semiconductor
product group from Redwood City, California to Portland, Oregon. Severance costs
were associated with a workforce reduction of 5 people. Substantially all of
these costs were paid as of March 31, 2003.
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. Substantially all of these
costs were paid as of March 31, 2003.
7
9. TECHNOLOGY TRANSFER AND LICENSE AGREEMENT:
In March 2003, we transferred to the Optical Gaging Products Division of Quality
Vision International, Inc. (QVI) the rights and technology necessary to
manufacture our Digital Range Sensors (DRS). In addition, we granted QVI a
non-exclusive license to the intellectual property associated with this product
line and sold a portion of our inventory as part of this transaction. QVI had
been the primary customer for DRS sensors prior to this agreement as part of a
separate 1999 agreement. As part of the agreement, QVI paid a one-time
technology transfer fee and a pre-paid non-refundable royalty fee covering a
specified number of sensors built by OGP for a period of five years from the
effective date of the contract. As a result of this transaction, we recorded a
$645,000 gain in the three month period ended March 31, 2003.
10. 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. The adoption of SFAS
No. 143 did not have a material impact on our financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition Disclosure - an amendment of FAS 123" (SFAS No. 148).
This statement amends SFAS 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both the annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The provisions of SFAS
No. 148 are effective for financial statements for fiscal years ending after
December 15, 2002, and disclosure requirements are effective for interim periods
beginning after December 31, 2002. We intend to continue to account for
stock-based compensation to our employees and directors using the intrinsic
value method prescribed by APB Opinion No. 25, and related interpretations. We
have made certain disclosures required by SFAS No. 148 in the first quarter of
2003. Accordingly, adoption of SFAS No. 148 did not have a material impact on
our results of operations.
In November 2002, the FASB issued Interpretation No. 45, " Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation elaborates on the
disclosure requirements in the financial statements concerning obligations under
certain guarantees. It also clarifies the requirements related to the
recognition of liabilities by a guarantor at the inception of certain
guarantees. The disclosure requirements of this interpretation were effective
for us on December 31, 2002 but did not require any additional disclosure. The
recognition provisions of the interpretation are applicable only to guarantees
issued or modified after December 31, 2002. Adoption of these recognition
provisions did not have a material impact on our financial position or results
of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". This interpretation addresses the requirements for
business enterprises to consolidate related entities in which they are
determined to be the primary beneficiary as a result of their variable economic
interests. The interpretation is intended to provide guidance in judging
multiple economic interests in an entity and in determining the primary
beneficiary. The interpretation outlines disclosure requirements for Variable
Interest Entities in existence prior to January 31, 2003 and outlines
consolidation requirements for Variable Interest Entities created after January
31, 2003. Adoption of these consolidation provisions did not have a material
impact on our financial position or results of operations.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS:
The following is management's discussion and analysis of certain significant
factors that have affected our 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 our Annual
Report on Form 10-K for the year ended December 31, 2002 and our 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 our
expectations or beliefs relating to future events, including statements
regarding trends in the industries in which we function, 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. Our actual results may vary from these
expectations because of a number of factors that affect our business, the most
important of which include the following:
o We operate in a very cyclical market--the electronics capital
equipment market--that is currently in one of the most severe
downturns in its history. We have been unable to predict when this
downturn will end and if it continues, we likely will not achieve our
operating objectives and may need to make further adjustments to our
expenses and operations to retain adequate cash to finance operations
for the long term.
o Our operations and markets could be further negatively affected by
world events, including the impact of SARS on the Asian electronic
market, that effect economies and commerce in countries, such as China
and Japan, in which we do business.
o We have been dependent on two original equipment manufacturer
customers for a large portion of our revenue that have significantly
decreased their order rates during the past 18 months. If those
customers are unsuccessful selling the products into which our sensors
are incorporated, design their products to function without our
sensors, purchase sensors from other suppliers, or otherwise terminate
their relationships with us, our results of operations would be
significantly negatively affected.
o During the first quarter of 2003 approximately 24% (27% in fiscal
2002) of our total revenue was generated by sales of a single SMT
Systems product line, the SE 300. If we are not successful in
continuing to sell and differentiate this product line relative to our
competition, our results of operations would be significantly
negatively affected.
o We generate more than half of our revenue (approximately 75% in the
first quarter of 2003 and 67% in fiscal 2002) from export sales. Our
export sales are subject to many of the risks of international
operations, including changes in economic and business climate in
foreign countries that affect the business health of our customers,
changes in exchange rates that affect the willingness of customers to
purchase our products, different laws that may affect our ability to
protect our intellectual property, and the expense of long-distance
commerce.
o Our current products, as well as the products we have under
development, are designed to operate with the technology we believe
currently exists or may exist for electronic components and printed
circuit boards. The technology for these components changes rapidly
and if we incorrectly anticipate technology developments, or have
inadequate resources to develop our products to deal with changes in
technology, our products could become obsolete.
o Our electronic assembly sensor products compete with products made by
larger machine vision companies, other optical sensor companies, and
by solutions internally developed by our customers.
o The electronics capital equipment market is currently depressed and
becoming more mature, resulting in increased price pressure on
suppliers of equipment. Consequently, our electronic assembly system
and sensor products may become subject to increased levels of price
competition and competition from other technologies.
o Our surface mount technology systems product group uses a different
distribution network and has different margins than our electronic
assembly sensor product group and, to the extent it constitutes a
larger portion of our business, our profitability may be affected.
o We compete with large multinational systems companies in sales of our
surface mount technology systems products, many of which are able to
take advantage of greater financial resources and larger sales
distribution networks.
o We compete in large part based on the technology we have developed and
our success in competing will depend in part on the degree to which we
are successful in protecting that technology and enforcing our
technology rights in the United States and other countries.
o We use outside contractors to manufacture the components used in some
of our products and some of the components we order require
significant lead times that could effect our ability to sell our
products if not available.
o We plan to introduce a number of new products during fiscal 2003 and
if those introductions are delayed, our revenue and profitability
could be negatively affected.
9
GENERAL OVERVIEW
Our operations during the past three fiscal years, and extending into the first
quarter of 2003, have been most significantly influenced by market conditions in
the electronics and semiconductor fabrication capital equipment markets. These
markets have historically been very cyclical with periods of strong growth
followed by periods of excess capacity and reduced capital spending. During
2000, these markets experienced high growth rates and reached record volume
levels. However, in early 2001 the electronics capital equipment markets
experienced a significant decline that has continued through the first quarter
of 2003. Our operating results have been heavily impacted by these market
conditions, particularly our Electronic Assembly Sensor (EAS) and Semiconductor
product lines. During the second half of 2002, revenues began to increase
moderately from the levels experienced in late 2001 and early 2002, as our two
largest EAS customers increased their order rates, and revenues from
Semiconductor products increased. Although our revenues declined moderately in
the first quarter of 2003 compared to the second half of 2002, because of the
mild recovery in late 2002, our revenue for the first quarter of 2003 was 42%
higher than our revenue in the first quarter of 2002.
In response to declining revenues, we have taken aggressive cost reduction
actions during 2001, 2002 and 2003, including reducing our worldwide employment
by over 40% from 2001 peaks, and closing or downsizing facilities. Nevertheless,
in order to continue new product development initiatives required to maintain
our competitive position in the marketplace, as well as to continue to support
existing products, we were not able to reduce our expense structure to keep pace
with the dramatic reduction in revenue levels. In addition, during 2002 we
determined that based on accounting guidance we were required to record a
valuation allowance against our deferred tax assets, eliminating a significant
portion of the tax benefit that would be recorded against pre-tax losses. These
events contributed to a net loss of $1.5 million for the first quarter of 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The preparation of the financial information contained in this 10-Q requires us
to make certain estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. We evaluate 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 our Form 10-K for the year ended December 31, 2002.
RESULTS OF OPERATIONS:
REVENUES
The following table sets forth revenues by product line for the periods
indicated (in Thousands):
Three months ended
March 31,
2003 2002
------- -------
OEM Solutions:
Electronic Assembly Sensors (EAS)
Products $2,550 $1,214
Semiconductor Products 1,394 1,448
End-User Systems Products 2,481 1,870
------- -------
Total $6,425 $4,532
10
Our revenues from EAS products increased 110% during the three months ended
March 31, 2003 from the three months ended March 31, 2002. These increased
revenues reflect increased order rates from our two largest EAS customers.
Although these order rates have not retuned to rates in place prior to the time
these customers suspended or significantly decreased their purchases in the
second half of 2001, we believe they represent some improvement in the market
for pick and place machines. The Company's two largest EAS customers accounted
for approximately 33% of total revenues for the three months ended March 31,
2003, and 21% of revenues for the comparable period in 2002.
Our revenues from sales of semiconductor product decreased 4% during the three
months ended March 31, 2003 from the three months ended March 31, 2002. This
decreasing revenue in 2003 from 2002 is primarily due to the continuation of
weak 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
Our revenues from sale of end-user systems increased 33% during the three months
ended March 31, 2003 from the three months ended March 31, 2002. These revenue
improvements are the result of several new inspection systems and enhancements
that we have released over the past 24 to 36 months and increased sales of
products to Electronic Manufacturing Services (EMS) and Original Design
Manufacturing Services (ODM) customers located in Asia - the largest market for
new circuit board assembly production capacity. The SARS outbreak did not impact
our sales during the three months ended March 31, 2003. Although we are hopeful
that the outbreak will be contained before it causes any decrease in those
sales, if there is a long-term impediment on travel to the Hong Kong and
Shanghai areas, our ability to better establish a permanent sales office and to
interact with the customers there may be impaired.
International revenues comprised approximately 75% and 56% of total revenues
during the three month periods ended March 31, 2003 and 2002, respectively. The
international markets in Asia, Japan and Europe account for a significant
portion of the capital equipment market for the manufacture of electronics, the
primary market for our EAS sensors and End-User systems product lines. Revenues
generated from products used primarily for SMT electronic assembly production
(revenues from OEM sensors and End-User systems) were approximately 78% and 68%
of revenues for the three month periods ended March 31, 2003 and 2002,
respectively, reflecting the level of orders from our two largest EAS customers
and growth in SMT Systems revenues.
GROSS MARGIN
Gross margin for the three months ended March 31, 2003 increased as a percent of
revenues to 45% compared to 35% during the three months ended March 31, 2002.
Gross margin is highly dependent on the level of revenues and resulting
production levels over which to spread fixed manufacturing costs such as
facilities and other compensation and non-compensation expenses that do not vary
with activity levels. In addition, with higher production volumes, manufacturing
processes become more efficient and reduce the overall cost of producing
products for sale. Revenue levels were 42% higher in the three month period
ended March 31, 2003 than during the same period in 2002, and consequently,
gross margins were favorably impacted. In addition, increased revenues from EAS
sensors as a percentage of total revenues and reduced obsolete inventory expense
in the three months ended March 31, 2003 compared to the year earlier period
contributed to higher gross margins.
Price pressure on both SMT systems and EAS sensor products has had a negative
impact on gross margins in the three months ended March 31, 2003 compared to the
same period in 2002. This price pressure is the result of weak market conditions
in the SMT electronic assembly capital equipment market resulting in many
equipment suppliers competing for fewer sales opportunities. There can be no
assurance that selling prices will fully recover when the electronic assembly
market improves.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 25% to $1.7 million during the three
months ended March 31, 2003 from the three months ended March 31, 2002. As a
percentage of revenue, research and development expenses decreased to 27% during
the three months ended March 31, 2003 from 51% during the comparable period in
2002. Research and development expenses were maintained at relatively high
levels during the first half of 2002 as we continued to fund new product
development on important new products even as revenues levels declined. During
the three month period ended September 30, 2002, cost reduction measures
initiated in the second quarter of 2002 enabled us to significantly reduce
research and development expenses to approximately current levels.
11
Research and development expenses during the three months ended March 31, 2003
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, on-head linescan cameras, enhancements to
the semiconductor wafer mapping sensor product family and other new sensors for
the SMT and Semiconductor markets. Customer funded research and development is
recognized as a reduction of research and development expense. During the three
months ended March 31, 2003, customer funded research and development recognized
as a reduction of research and development expense totaled approximately $14,000
compared to $28,000 during the three months ended March 31, 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 24% to $2.8 million
during the three month period ended March 31, 2003 compared to $3.7 million
during the three months ended March 31, 2002. As a percentage of revenue,
selling, general and administrative expenses decreased to 43% during the three
month period ended March 31, 2003 from 81% in 2002. Decreased selling, general
and administrative expenses in 2003 are primarily the result of cost reduction
measures implemented in early 2002, which primarily included workforce
reductions and related costs and reductions in other discretionary spending.
RESTRUCTURING AND SEVERANCE COSTS
We have implemented a series of workforce reductions, closed our facility in
California, downsized other facilities and made other reductions in
discretionary spending designed to reduce the losses and negative cash flow
resulting from the severe decline in our 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 2003, we incurred approximately $170,000 of severance costs and
facility closure costs associated with further consolidation of our
semiconductor product group from Redwood City, California to Portland, Oregon.
Severance costs were associated with a workforce reduction of 5 people.
Substantially all of these costs were paid as of March 31, 2003.
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. Substantially all of these
costs were paid as of March 31, 2003.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
Amortization of acquired intangible assets was approximately $280,000 for the
three month periods ended March 31, 2003 and 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.
12
INTEREST AND OTHER
Interest income and other primarily includes interest earned on investments.
Interest income declined during the three month period ended March 31, 2003
compared to the same period in 2002 as a result of a lower investment balance
and declining interest rates. In addition, during the three months ended March
31, 2003 we also incurred foreign currency translation charges and certain other
expenses.
PROVISION FOR INCOME TAXES AND EFFECTIVE INCOME TAX RATE
During the third quarter of 2002, we concluded that a valuation allowance
against all of our deferred tax assets was appropriate. A deferred tax asset
generally represents future tax benefits to be received when expenses and losses
previously recognized with respect to our US operations become deductible under
applicable income tax laws. Realization of a deferred tax asset is dependent on
future taxable income against which these deductions can be applied. In
accordance with Statement of Financial Accounting Standards No. 109, as the
result of cumulative U.S. based operating losses incurred over the past three
years and continued weakness in the markets we serve and the resulting impact on
order rates, we reduced our effective tax rate in the year ended December 31,
2002 to reflect only a current benefit resulting from the ability to carry-back
U.S. based operating losses to prior periods and recorded during the third
quarter of 2002 a valuation allowance equal to the entire balance of our
deferred tax assets. Because we had no ability to carry-back losses generated
after December 31, 2002 , during the three months ended March 31, 2003, we did
not record a tax benefit on U.S. based operating losses, and do not expect to
record tax expense or benefits on U.S. based operating results until we are
consistently profitable on a quarterly basis. At that time, the valuation
allowance will be reassessed and could be eliminated, resulting in the
recognition of the deferred tax assets as income during the period the allowance
is eliminated.
We recorded tax expense (provision) of $60,000 during the three month period
ended March 31, 2003 compared to a tax benefit of $2.1 million for the same
period in 2002. Tax expense of $60,000 recorded during the three months ended
March 31, 2003 relates to income generated by foreign subsidiaries. During the
three months ended March 31, 2002, we recorded a tax benefit of $2.1 million,
reflecting the estimated annual effective tax rate at that time including the
effect of benefits from our foreign sales corporation and research and
development tax credits.
ORDER RATE AND BACKLOG
Our orders totaled $6.3 million during the three month period ended March 31,
2003 compared to $4.2 million during the three month period ended March 31,
2002. Backlog totaled $2.6 million and $2.7 million at March 31, 2003 and 2002,
respectively. The scheduled shipment of the March 31, 2003 backlog is as follows
(in thousands):
2nd Quarter 2003 $ 2,045
3rd Quarter 2003 and after 595
-------
Total backlog $ 2,640
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents declined by $3.9 million during the quarter ended
March 31, 2003, primarily because of the purchase of $4.1 million of marketable
securities, net of maturities of marketable securities during the quarter. Our
cash and cash equivalents fluctuate on a quarterly basis because of maturities
of marketable securities and investment of cash balances resulting from those
maturities, or from other sources of cash, in additional marketable securities.
Accordingly, we believe the combined balances of cash and marketable securities
provide a more reliable indication of our available liquidity. Our combined
balances of cash and marketable securities increased $159,000 to $21.0 million
as of March 31, 2003 from $20.8 million as of December 31, 2002.
13
We used $442,000 of cash from operations during the first three months of 2003.
Cash used from operations included a net loss of $1.5 million, which included a
$645,000 gain from a technology transfer and license agreement and $938,000 of
non-cash expenses for depreciation and amortization, provision for inventory
obsolescence and other non-cash items. The cash generated by operations included
a $891,000 reduction in inventory and a $291,000 reduction in accounts
receivable and other current assets. These items were offset somewhat by a
$70,000 increase in income taxes receivable and $365,000 of reductions in
accounts payable and accrued expenses. During the first three months of 2002, we
used $3.5 million of cash from operations, primarily due to a net loss of $3.2
million, which included $931,000 of non-cash expenses. The first three months of
2002 also included a $1.2 net use of cash from changes in operating assets.
We used $3.5 million of cash in investing activities during the three months
ended March 31, 2003 compared to generating $1.6 million during the same period
in 2002. Changes in the level of investment in marketable securities resulting
from the purchases and maturities of those securities used $4.1 million of cash
in 2003 and generated $1.8 million of cash in 2002. We generated $750,000 of
cash from a technology transfer and license agreement and used approximately
$149,000 and $275,000 of cash for the purchase of fixed assets and the
acquisition of technology and other intangible assets during the three months
ended March 31, 2003 and 2002, respectively.
There was no financing activity in the three months ended March 31, 2003. We
generated $104,000 of cash from financing activities during the three months
ended March 31, 2002. Cash generated from financing activities represents cash
from stock option exercises.
In October 2002, our Board of Directors authorized the repurchase of up to
1,000,000 shares of our common stock. The shares will be repurchased from time
to time in the open market or through negotiated transactions. Shares
repurchased will be used for employee compensation plans and other corporate
purposes.
Except for the share repurchase program discussed above, we had no material
commitments for capital expenditures as of March 31, 2003. While there were no
material commitments, we routinely evaluate investment opportunities that come
to our attention and could make a significant commitment in the future. Our cash
and cash equivalents and investments totaled $21.0 million at March 31, 2003.
With this level of cash and cash equivalents and investments, and the reduced
level of cash expenditures resulting from cost reduction actions over the past
two years, management believes that our cash and cash equivalents and
investments will 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 or worsening over the next year, we may seek bank financing or make
other adjustments in expense levels.
At March 31, 2003, we 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, we are not materially
exposed to any financing, liquidity, market or credit risk that could arise if
we had engaged in such relationships.
OTHER FACTORS
Changes in revenues have resulted primarily from changes in the level of unit
shipments and new product introductions. We believe that inflation has not had
any significant effect on operations. Most of our international export sales are
negotiated, invoiced and paid in U.S. dollars. Accordingly, although currency
fluctuations do not significantly affect our revenue and income per unit, they
can influence the price competitiveness of our products and the willingness of
existing and potential customers to purchase units.
As a result of the Kestra Ltd. acquisition we have a sales and software
development office located in the UK. We also have a sales office in Singapore.
We do not believe that currency fluctuations will have a material impact on our
consolidated financial statements.
14
PART II. OTHER INFORMATION
ITEM 4 - CONTROLS AND PROCEDURES
a. Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective in timely alerting them to the material information
relating to us (or our consolidated subsidiaries) required to be included in our
periodic SEC filings.
b. Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
ITEM 6 - EXHIBITS AND REPORTS ON 8-K
a. Exhibits
10.1 Fixture Purchase and Technology Transfer Agreement between CyberOptics and
OGP
99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.1 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended March 31,
2003, or during the period from March 31, 2003 to the date of this quarterly
report on Form 10-Q
-Form 8-K - CyberOptics Corporation published press release reporting
first quarter 2003 operating results (4/29/03)
15
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/ KATHLEEN P. IVERSON
----------------------
KATHLEEN P. IVERSON, 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: May 14, 2003
16
CERTIFICATION
I, Kathleen P. Iverson, Chief Executive Officer of CyberOptics Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of CyberOptics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Kathleen P. Iverson
------------------------
Kathleen P. Iverson
17
CERTIFICATION
I, Scott G. Larson, Chief Financial Officer of CyberOptics Corporation, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of CyberOptics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
s/ Scott G. Larson
------------------
Scott G. Larson