-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SPzlWrzsKffd81EWcQDFvokQ61FJZguX9df9PiuHy4E7LX+dWc9wAdU5kn10skBi dfBH/z+frZGJ0cqlCStNlg== 0000897101-99-001060.txt : 19991115 0000897101-99-001060.hdr.sgml : 19991115 ACCESSION NUMBER: 0000897101-99-001060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYBEROPTICS CORP CENTRAL INDEX KEY: 0000768411 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 411472057 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16577 FILM NUMBER: 99749181 BUSINESS ADDRESS: STREET 1: 5900 GOLDEN HILLS DR CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 6125425000 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Check One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT For the transition period from ___________ to ___________ Commission file number 0-16577 CYBEROPTICS CORPORATION ----------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1472057 - --------- ---------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 5900 Golden Hills Drive, Minneapolis, Minnesota 55416 ----------------------------------------------------- (Address of principal executive offices) (612) 542-5000 -------------- (Issuer's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No__ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At November 5, 1999, 5,015,941 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)
SEPT. 30, 1999 DEC. 31, 1998 (Unaudited) - -------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 4,881 $ 4,963 Marketable securities 9,714 17,142 Accounts receivable, net 6,828 6,362 Inventories 5,147 6,045 Other current assets 1,809 1,540 - -------------------------------------------------------------------------------------------------------- Total current assets 28,379 36,052 Marketable securities 8,195 16,397 Intangible assets, net 11,046 Equipment and leasehold improvements, net 2,661 2,571 Capitalized patent costs, net 135 157 - -------------------------------------------------------------------------------------------------------- Total assets $ 50,416 $ 55,177 ======================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 2,027 $ 1,215 Income taxes payable 1,166 589 Accrued expenses 1,835 1,940 - -------------------------------------------------------------------------------------------------------- Total current liabilities 5,028 3,744 Commitments and contingencies Stockholders' equity: Preferred stock, no par value, 5,000 shares authorized, none outstanding Common stock, no par value, 25,000 shares authorized, 5,012 and 4,950 shares issued and outstanding, respectively 33,364 32,735 Retained earnings 12,029 18,525 Accumulated other comprehensive income (loss) (5) 173 - -------------------------------------------------------------------------------------------------------- Total stockholders' equity 45,388 51,433 - -------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 50,416 $ 55,177 ========================================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -2- CYBEROPTICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
THREE MONTHS ENDED SEPT. 30, 1999 1998 - --------------------------------------------------------------------------------------- Revenues $ 10,418 $ 7,737 Cost of revenues 4,371 3,660 - --------------------------------------------------------------------------------------- Gross margin 6,047 4,077 Research and development expenses 2,543 1,558 Selling, general and administrative expenses 2,727 2,447 Amortization of goodwill and other intangibles 425 - --------------------------------------------------------------------------------------- Income from operations 352 72 Interest income 289 532 - --------------------------------------------------------------------------------------- Income before income taxes 641 604 Provision for income taxes 440 200 - --------------------------------------------------------------------------------------- Net income $ 201 $ 404 ======================================================================================= Net income per share - Basic $ 0.04 $ 0.08 Net income per share - Diluted $ 0.04 $ 0.08 ======================================================================================= Weighted average shares outstanding - Basic 5,000 5,057 Weighted average shares outstanding - Diluted 5,136 5,125 ======================================================================================= NINE MONTHS ENDED SEPT. 30, 1999 1998 - --------------------------------------------------------------------------------------- Revenues $ 26,934 $ 28,085 Cost of revenues 11,814 12,508 - --------------------------------------------------------------------------------------- Gross margin 15,120 15,577 Research and development expenses 6,764 5,346 Selling, general and administrative expenses 7,282 7,499 Acquired in-process research and development 7,301 Amortization of goodwill and other intangibles 783 - --------------------------------------------------------------------------------------- Income (loss) from operations (7,010) 2,732 Interest income 1,129 1,722 - --------------------------------------------------------------------------------------- Income (loss) before income taxes (5,881) 4,454 Provision for income taxes 615 1,430 - --------------------------------------------------------------------------------------- Net income (loss) $ (6,496) $ 3,024 ======================================================================================= Net income (loss) per share - Basic $ (1.31) $ 0.57 Net income (loss) per share - Diluted $ (1.31) $ 0.55 ======================================================================================= Weighted average shares outstanding - Basic 4,975 5,273 Weighted average shares outstanding - Diluted 4,975 5,461 =======================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -3- CYBEROPTICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
NINE MONTHS ENDED SEPT. 30, 1999 1998 - -------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (6,496) $ 3,024 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Acquired in-process research and development, net of tax benefit 7,038 Depreciation and amortization 1,692 845 Provision for losses on inventories 145 285 Changes in operating assets and liabilities, excluding impact of acquisitions: Accounts receivable (123) 574 Inventories 846 (1,763) Other current assets 64 (68) Accounts payable 610 350 Income taxes payable 577 (72) Accrued expenses (190) (204) - -------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,163 2,971 CASH FLOWS FROM INVESTING ACTIVITIES: Maturities of marketable securities 19,636 26,021 Purchases of marketable securities (4,213) (19,415) Purchases of businesses and technology, net of cash acquired (17,124) -- Additions to equipment and leasehold improvements (796) (869) Additions to patents (42) (113) - -------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (2,539) 5,624 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 253 409 Proceeds from issuance of common stock under Employee Stock Purchase Plan 345 355 Repurchase of common stock (6,830) Repayment of long-term-debt (2,364) Other 60 63 - -------------------------------------------------------------------------------------------- Net cash used in financing activities (1,706) (6,003) Increase (decrease) in cash and cash equivalents (82) 2,592 Cash and cash equivalents - beginning of period 4,963 6,160 - -------------------------------------------------------------------------------------------- Cash and cash equivalents - end of period $ 4,881 $ 8,752 ============================================================================================
SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -4- CYBEROPTICS CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 1. INTERIM REPORTING: The interim consolidated financial statements presented herein as of September 30, 1999, and for the three and nine month periods ended September 30, 1999 and 1998, are unaudited; however, in the opinion of management, the interim consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. The results of operations for the three and nine month periods ended September 30, 1999, do not necessarily indicate the results to be expected for the full year. The December 31, 1998, 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, 1998. 2. PRO-FORMA INFORMATION: The following table presents unaudited pro forma consolidated results of operations as if the acquisitions of Kestra Limited (Kestra), acquired on April 6, 1999, and certain assets and liabilities of HAMA Laboratories, Inc. (HAMA), acquired on May 5, 1999, had occurred as of the beginning of each period. The unaudited pro forma consolidated results of operations have been adjusted to eliminate the effect of the non-recurring charges to operations of $7,040,000 (net of tax) for the estimated fair value of the acquired in-process research and development technology. The pro forma information includes adjustments for additional amortization of identifiable intangibles and goodwill, the reduction of historical HAMA compensation expense for executives to reflect contractual changes to the Company's compensation structure, the reduction of interest income due to the cash used for the acquisitions and the related tax impacts of these adjustments. The unaudited pro forma consolidated results of operations are presented for illustrative purposes only and are not necessarily indicative of the combined financial results that actually would have resulted had the acquisitions, in fact, occurred on those dates (In thousands): Pro Forma Nine Months Ended September 30, ------------- 1999 1998 ---- ---- Revenue $27,729 $29,879 Net income (loss) $ (345) $ 684 Net income (loss) per share - Basic $ (0.07) $ 0.13 Net income (loss) per share - Diluted $ (0.07) $ 0.13 -5- 3. INVENTORIES (IN THOUSANDS): September 30, Dec. 31, 1999 1998 (unaudited) ------------------------- Raw materials $3,518 $4,427 Work in process 714 1,045 Finished goods 915 573 ---------------------- Total inventories $5,147 $6,045 ====================== 4. NET INCOME (LOSS) PER SHARE: Basic net income per share has been computed using the weighted average number of shares outstanding. The diluted net income per share includes the effect of common stock equivalents for each period. The number of shares utilized in the denominator of the diluted net income per share computation as compared to the basic net income per share computation has been increased by 188,000 and 68,000 equivalent shares for the nine and three month periods ended September 30, 1998, and by 136,000 equivalent shares for the three month period ended September 30, 1999. The shares used in the basic and diluted net income per share computation for the nine month period ended September 30, 1999 are the same as additional shares in the denominator would be antidilutive due to the Company's net loss reported for that period. Options to purchase 212,000 and 530,000 shares of common stock at a weighted average price of $21.00 and $18.00 were outstanding but not included in the computation of diluted net income per share for the nine and three month periods ended September 30, 1998 as the exercise price was greater than the average market price of the common shares for these periods. For the three month period ended September 30, 1999, options to purchase 326,000 shares of common stock at a weighted average exercise price of $19.80 were outstanding but not included in the computation of diluted net income per share as the exercise price was greater than the average market price of the common shares for the period. 5. COMPREHENSIVE INCOME (LOSS): Statement of Financial Accounting Standards 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 (loss). During the nine months ended September 30, 1999 and 1998, total comprehensive income (loss) amounted to ($6,674,000) and $3,249,000, respectively. During the three month periods ended September 30, 1999 and 1998, total comprehensive income amounted to $237,000 and $613,000, respectively. Accumulated other comprehensive income (loss) at September 30, 1999 and December 31, 1998 was ($5,000) and $173,000, respectively. -6- 6. BUSINESS SEGMENTS (IN THOUSANDS): The Company's business is organized, managed, and internally reported as four segments. Management of these segments, with the exception of the Research and Development segment, are responsible for different product lines and services and are responsible for managing, on a worldwide basis, revenues as well as sales and marketing costs. Management does not represent that these segments, if operated independently, would report the operating income and other financial information shown below. The table below presents information about revenues and income from operations for reportable segments for the nine and three month periods ended September 30, 1999 and 1998, and identifiable assets as of September 30, 1999 and December 31, 1998.
Industrial OEM SMT Measurement Research and Corporate Total Sensors Systems & Semiconductor Development Administration(1) Company - --------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, Revenues 1999 $ 17,672 $ 6,469 $ 2,793 $ 26,934 1998 20,224 6,230 1,631 28,085 Income (loss) from Operations 1999 $ 9,075 $ 1,665 $ 747 $ (6,764) $(11,733) $ (7,010) 1998 10,294 2,107 (288) (5,346) (4,035) 2,732 Three Months Ended September 30, Revenues 1999 $ 6,565 $ 2,675 $ 1,178 $ 10,418 1998 3,960 3,100 677 7,737 Income from Operations 1999 $ 3,427 $ 793 $ 464 $ (2,543) $ (1,789) $ 352 1998 1,489 1,413 (25) (1,558) (1,247) 72 Identifiable Assets(2) 1999 $ 6,180 $ 3,593 $ 2,202 $ 38,441 $ 50,416 1998 7,617 2,644 2,146 42,770 55,177
(1) Loss from operations consists of unallocated corporate administrative expenses. The nine months ended September 30, 1999 includes a $7,301 million charge for purchased in-process research and development. (2) Segment assets include accounts receivable and inventories. Assets included in Corporate Administration primarily include cash and marketable securities, equipment and leasehold improvements, capitalized patent costs, intangible assets, deferred income taxes, accrued interest receivable and certain prepaid expenses. -7- ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CyberOptics Corporation designs and manufactures intelligent sensors and systems for high-precision, non-contact dimensional measurement and process control. Utilizing proprietary laser and optics technology combined with advanced software and electronics, the Company's products enable manufacturers to increase operating efficiencies, product yields and quality by measuring the characteristics and placement of components both during and after the manufacturing process. The Company sells its products worldwide through a combination of direct sales staff and independent distributors. The following is management's discussion and analysis of certain significant factors which have affected the Company's results and financial position during the periods included in the accompanying financial statements. This discussion should be read in conjunction with the interim consolidated financial statements and associated notes. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The following Management's Discussion and Analysis contains "forward looking statements" within the meaning of federal securities laws which represent management's expectations or beliefs relating to future events, including statements regarding trends in the industries in which the Company 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 the Company, must be evaluated in the context of a number of factors that may affect the Company's financial condition and results of operations, including the following: -- The cyclical nature of capital expenditures in the electronics industry; -- The dependence of such operations on orders of two sensor product lines from several large OEM's of component placement machines in the surface mount industry; -- The significant proportion of the Company's revenue that is derived from export sales, including Asia where poor economic conditions have continued; -- The dependence of the Company's manufacturing on outside contractors and suppliers, many of which require significant lead time; -- The ability of the Company to produce products that do not experience significant quality errors; -- 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 Kestra and HAMA so as to introduce new products on schedule and effectively market and sell new and existing products. -- 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 and by other optical sensor companies; -- The ability of the Company to successfully develop in-process technology acquired from Kesta and HAMA into viable products. -8- RESULTS OF OPERATIONS PERFORMANCE BY BUSINESS SEGMENT Financial information and other disclosures relating to the Company's four business segments are provided in this Form 10-Q. In the discussion of results of operations, certain reclassifications have been made to revenues in order to include all revenue in segment disclosures. In quarterly filings prior to 1999, certain revenues, primarily service revenues and sales of miscellaneous inventory, had not been assigned to a business segment. These reclassifications had no effect on net income or stockholders' equity. REVENUES Revenues decreased 4% to $26.9 million during the nine month period ended September 30, 1999 compared to $28.1 million for the same period in 1998. For the third quarter of 1999, revenues increased 35% to $10.4 million from $7.7 million in the third quarter of 1998. Revenues for the nine and three month periods ended September 30, 1999 include $1.0 million and $644,000, respectively, of revenues from HAMA since the Company's acquisition on May 5, 1999. Kestra, which was also acquired during the second quarter, is in the development stage with no revenues. Excluding the effect of acquisitions, revenues decreased 8% during the nine month period ended September 30, 1999 and increased 26% in the third quarter of 1999 compared to the same periods in 1998. The decrease in revenues for the nine months ended September 30, 1999 relative to the comparable period in 1998 is primarily the result of reduced demand for surface mount technology (SMT) process control sensors, primarily LaserAlign and Laser Lead Locator, from original equipment manufacturer (OEM) customers during the first and second quarters of 1999. Revenues are heavily dependant on the level of capital spending in the global SMT assembly market, as the Company generates approximately 90% of its revenues from the sales and service of sensors and system products used primarily in SMT production. Increased revenues in the third quarter of 1999 are the result of strong demand for SMT sensors, as it appears that worldwide demand for SMT capital equipment, which has been depressed since early 1998, may be in the early stages of a recovery. The table below sets forth revenues by business segment for the three and nine month periods ended September 30: Nine months ended Three months ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- OEM Sensors $ 17,672 $ 20,224 $ 6,565 $ 3,960 SMT Systems 6,469 6,230 2,675 3,100 Industrial Measurement & Semiconductor 2,793 1,631 1,178 677 ------ ------ ------ ------ Total $ 26,934 $ 28,085 $ 10,418 $ 7,737 -9- Revenues from the OEM sensor segment decreased 13% to $17.7 million during the nine months ended September 30, 1999 compared to $20.2 million for the comparable period in 1998. The decrease is primarily due to a slowdown in worldwide demand for SMT production equipment. In addition, revenues from the Company's largest customer in 1998 have decreased in 1999 due to weakness in the Asian economy and a product transition at this Asian manufacturer. During the third quarter of 1999, OEM sensor revenues increased 66% relative to the third quarter of 1998, due primarily to strengthening demand from the Company's two largest OEM customers. The Company's two largest OEM customers accounted for approximately 48% of total revenues for the nine months ended September 30, 1999, and 54% of revenues for the comparable period in 1998. These customers accounted for approximately 49% of revenues for the third quarter of 1999 compared to 45% in the third quarter of 1998. SMT system segment revenues increased 4% to $6.5 million during the nine month period ended September 30, 1999 from the comparable period in 1998, and decreased 14% to $2.7 million for the third quarter of 1999 compared to the same period in 1998. SMT systems revenues reflect sales of enhanced versions of the Company's CyberSentry and LSM products. During the first quarter of 1999, the Company introduced its new automated LSM product, the AutoLSM, which was made available for shipment in the second quarter of 1999. Increased SMT system revenue levels during the nine month period ended September 30, 1999 are primarily the result of strong demand for the CyberSentry product from electronic manufacturing services (EMS) customers. The decrease in third quarter 1999 SMT systems revenues compared to the same period in 1998, reflects record revenue levels in 1998 not being achieved. Industrial measurement and semiconductor segment revenues increased 71% to $2.8 million during the nine month period ended September 30, 1999 from the comparable period in 1998, and increased 74% to $1.2 million for the third quarter of 1999 compared to the same period in 1998. Industrial measurement segment revenues include revenues of HAMA Sensors, Inc. (HSI) from May 5, 1999 (the date of acquisition). Excluding the effect of the HSI revenues, the dollar level of revenues from the industrial measurement and semiconductor segment have remained relatively flat over the nine and three month periods ended September 30, 1999 and 1998. There have been new system and sensor products introduced over the last several quarters, including a new thickness measurement product for the semiconductor wafer fabrication market introduced during the second quarter of 1999. Future revenue growth in the industrial measurement and semiconductor segment will be dependent on market acceptance of these and other new product offerings, the ability of HSI to continue to grow revenues from its existing products at historical rates and the Company's ability to complete development and bring to market products derived from in-process research and development acquired from HAMA. International revenues comprised approximately 81% of total revenues during the nine month periods ended September 30 1999 and 1998, and approximately 77% and 78% of revenues for the third quarter of 1999 and 1998, respectively. Sales of the Company's products, primarily OEM sensors, in Western Europe, Japan and the rest of the Far East have continued to represent the majority of the Company's revenues. These international markets account for a significant portion of the production capability of capital equipment for the manufacture of electronics, the primary market for the LaserAlign, Laser Lead Locator, CyberSentry and LSM2 products. Revenues generated from products used primarily for SMT production (revenues from OEM sensors and SMT systems) were approximately 90% and 94% of revenues for the nine month periods ended September 30, 1999 and 1998, and approximately 89% and 91% for the third quarter of 1999 and 1998. -10- GROSS MARGIN Gross margin was unchanged as a percent of total revenues at 56% during the nine month periods ended September 30, 1999 and 1998. For the third quarter of 1999, gross margin increased to 58% of total revenues compared to 53% during the comparable period in 1998. Excluding the gross profit generated by HSI, gross margin would have been 55% for the nine months ended September 30, 1999 and 57% for the third quarter of 1999. Gross margin as a percentage of total revenues is heavily dependent on the level of revenues over which to spread the fixed component of cost of revenues. During 1999, gross margin has been impacted by increased warranty costs, offset by a shift in the revenue mix towards higher margin sensor products. RESEARCH AND DEVELOPMENT Research and development expenses increased 27% to $6.8 million during the nine month period ended September 30, 1999 compared to the same period in 1998. For the third quarter of 1999, research and development expenses increased 63% to $2.5 million from the comparable period in 1998. As a percentage of revenue, research and development expenses have increased to 25% during the nine months ended September 30, 1999 from 19% during the comparable period in 1998, and for the third quarter increased to 24% of revenues in 1999 from 20% in the comparable period of 1998. Research and development expenses, excluding Kestra and HAMA during the nine months ended September 30, 1999, were primarily focused on development of new solder paste inspection product offerings, including the AutoLSM released in the second quarter of 1999, development of the first article inspection product, development of the next generation of the LaserAlign family and development of the semiconductor wafer thickness measurement system. In addition, the Company's research and development expenses related to continued development of in-process projects acquired from Kestra and HAMA were approximately $893,000 and $528,000 during the nine and three month periods ended September 30, 1999. The Company anticipates that research and development expense levels for the remainder of 1999 will be relatively constant with the third quarter of 1999, as it continues development of in-process projects acquired and works to complete development on a number of important new products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased 3% to $7.3 million during the nine month period ended September 30, 1999 compared to $7.5 million during the comparable period in 1998. For the third quarter of 1999, selling, general and administrative expenses increased 11% to $2.7 million compared to the same period in 1998. As a percentage of revenue, selling, general and administrative expenses have remained constant at 27% during the nine month periods ended September 30, 1999 and 1998, and for the third quarter decreased to 26% in 1999 from 32% in 1998. Selling, general and administrative expenses of Kestra and HSI were approximately $461,000 and $256,000 for the nine and three month periods ended September 30, 1999. The dollar decrease in selling, general and administrative expenses during 1999, excluding the impact of Kestra and HAMA, is primarily due to reduced legal expenses related to the Yamaha litigation which was settled during the first quarter of 1998. To a lesser extent, reduced selling, general and administrative costs are a result of a cost containment program initiated by the Company in response to lower revenues. -11- ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT On April 6, 1999, the Company completed the acquisition of Kestra. At the time of the acquisition, Kestra had under development technologies using a statistical technique, Principal Component Analysis (PCA), for the application of Automated Optical Inspection (AOI) in the pre-oven and post-over reflow stages of electronic circuit board production. At the time of acquisition the Company was uncertain whether the technology being developed for either application would ultimately meet the technical specifications required for circuit board production or be commercially acceptable. As a result, the Company recorded a $6.5 million charge to operations for the estimated fair value of the acquired in-process research and development. This charge is not deductible for tax purposes. The Company is continuing development of the acquired in-process pre-oven and post-reflow technologies and currently believes that its development efforts are on schedule to meet the anticipated product release schedule without any significant changes in its research and development costs. However, these expectations are subject to change, given uncertainties of the development process and potential changes in market expectations. On May 5, 1999, the Company acquired substantially all of the operating assets and assumed certain liabilities of HAMA through HAMA Sensors, Inc., a newly formed, wholly-owned subsidiary of the Company. At the time of the acquisition, HAMA had under development technology to develop laser-based proximity sensors for robotic semiconductor wafer handling, which can potentially be used in a vacuum environment, and laser micrometers that will potentially determine the orientation and alignment of semiconductor wafers during the production process and other potential applications. At the time of acquisition the Company was uncertain whether the technology being developed for either the proximity sensors or the laser micrometers would ultimately meet the technical specifications required for semiconductor wafer handling, or other applications, or be commercially acceptable. As a result, the Company recorded a $771,000 charge to operations for the estimated fair value of the acquired in-process research and development. This charge will be deductible in future income tax reporting periods. The Company is continuing development of the acquired in-process technologies described above, except for the six-inch laser micrometer technology for which further development efforts have been put on hold due to manufacturability issues that have been encountered. Development efforts have been focused on completion of the vacuum sensor, which is currently being tested in the field. In addition, development efforts on the other micrometer projects have been slowed due to limited resources and the need to address integration issues that have arisen. These factors could impact the product development and release schedule. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS Amortization of acquired intangible assets was approximately $783,000 and $425,000 for the nine and three month periods ended September 30, 1999. The amortization is attributable to identifiable intangible assets and goodwill resulting from the Company's acquisition of certain technology and other assets of Electronic Packaging Company (EPC) during the first quarter of 1999 and the Company's acquisition of Kestra and HAMA during the second quarter of 1999. Amortization of these intangible assets is expected to remain constant at approximately $425,000 per quarter over the remaining life of the intangible assets and goodwill. -12- PROVISION FOR INCOME TAXES AND EFFECTIVE INCOME TAX RATE The Company recorded a tax provision of $615,000 and $440,000 for the nine and three month periods ended September 30, 1999. The tax provision during 1999 has been adjusted to reflect both the non-deductible acquired in-process research and development charge resulting from the Kestra acquisition and valuation allowances established to eliminate the possible future tax benefit of net operating losses generated by Kestra (due to uncertainty about realization). For the nine and three months ended September 30, 1998, the Company recorded a tax provision of $1.4 million and $200,000, respectively. During 1998, benefits from the Company's foreign sales corporation and the research and experimentation tax credit were primarily responsible for reducing the tax provision below the statutory federal level. The Internal Revenue Service has concluded their audit of the Company's 1995 and 1996 federal tax returns. Tentative results of that audit would not have a material impact on the financial position, net income or cash flows of the Company. ORDER RATE AND BACKLOG CyberOptics' order rate totaled $29.0 million during the nine month period ended September 30, 1999 compared to $26.1 million during the same period in 1998. For the third quarter of 1999, the order rate totaled $13.2 million compared to $9.5 million in 1998. Backlog totaled $7.8 million and $6.7 million at September 30, 1999 and 1998, respectively. The scheduled shipment of the September 30, 1999 backlog is as follows (in thousands): 4th Quarter 1999 $7,220 1st Quarter 2000 and after 598 ------ Total backlog $7,818 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and marketable securities decreased $15.7 million to $22.8 million as of September 30, 1999 from $38.5 million as of December 31, 1998, primarily due to $19.5 million of cash used to acquire businesses and technology and $838,000 of cash used to purchase fixed assets and other intangibles. Decreases in cash were partially offset by $4.2 million of cash provided by operations. The Company generated $4.2 million of cash from operations during the first nine months of 1999, primarily due to a net loss of $6.5 million, of which $7.0 million related to non-cash charges for acquired in-process research and development (net of tax), and $1.8 million related to non-cash expenses for depreciation and amortization and the provision for inventory obsolescence. The cash generated from operations also included a decrease of $846,000 in inventory, an increase of $610,000 in accounts payable and an increase of $577,000 in income taxes payable. The decrease in inventory is primarily due to management initiatives in 1999 focused on inventory reduction. The increase in accounts payable is primarily due to increased activity levels related to revenue growth, and increased taxes payable are the result of timing of quarterly tax payments. During 1998, the Company generated $3.0 million of cash from operations, primarily due to net income of $3.0 million, including $1.1 million of non-cash expenses, offset by a $1.8 million increase in inventory. -13- The Company used $2.5 million of cash in investing activities during the nine month period ended September 30, 1999 compared to the $5.6 million provided during the same period in 1998. The primary reason for the use of cash is $17.1 million used to purchase businesses and technology. This use was offset by the change in cash from investing activities related to changes in the level of investment in marketable securities resulting from the purchases and maturities of those securities, which provided $15.4 million of cash in 1999 and $6.6 million in 1998. The Company used approximately $796,000 and $869,000 of cash for the purchase of fixed assets during the nine months ended September 30, 1999 and 1998, respectively. The Company used $1.7 million of cash from financing activities during the nine months ended September 30, 1999 and used $6.0 million in the same period during 1998. During 1999, cash used primarily represents the repayment of $2.4 million of debt of Kestra following the acquisition, offset by cash generated from stock option exercises and the issuance of stock under the Employee Stock Purchase Plan (ESPP). In 1998, $764,000 of cash generated from stock option exercises and the issuance of stock under the ESPP was offset by $6.8 million of cash used to repurchase common stock of the Company. As of September 30, 1999, the Company has no material capital commitments except for the funding of working capital requirements of Kestra during its product development and early product introduction period. The Company believes working capital and anticipated funds from operations will be adequate for anticipated operating needs. OTHER FACTORS Changes in revenues have resulted primarily from changes in the level of unit shipments and new product introductions. The Company believes that inflation has not had any significant effect on operations. Substantially all of the Company's international export sales are negotiated, invoiced and paid in U.S. dollars. Accordingly, although currency fluctuations do not effect the Company's revenue and income per unit, they can influence the price competitiveness of the Company's products relative to other technologies and the willingness of existing and potential customers to purchase units. In addition, although many of the OEM sensor products the Company manufactures for foreign consumption are incorporated into products of our OEM customers that are re-exported worldwide, the Company's operations have been effected by general economic conditions associated with currency devaluations in Asia. YEAR 2000 STATUS The Securities and Exchange Commission and other regulatory bodies have identified the potential failure of many computer systems to properly recognize and process date specific information on and after January 1, 2000 as a significant risk to companies. The Company has implemented a comprehensive program to address this issue. The components of the program include: an assessment of internal systems vulnerability; a close examination of all production equipment that contains microprocessors; a survey of suppliers to determine their ability to maintain an uninterrupted supply of goods and services; and an evaluation of the year 2000 issue on Company products. -14- All internal automated systems have been identified and their Year 2000 risk assessed. Such systems include the hardware and software in the company-wide network as well as personal computers located on desks or in labs. All central hardware compliance has been confirmed. Needed software "patches" have been installed. All desk mounted computer hardware has been made compliant as needed. Software patches for common applications have been installed. Production equipment surveys found 83 separate machines or fixtures with computing capability. Year 2000 vulnerability was limited and corrected manually where needed. Software on equipment was individually tested. Where the tests discovered problems, the need for correction was assessed and necessary changes made. The Company is highly dependent on suppliers to continue operations. The most critical 38 material suppliers were individually surveyed and the risk potential of each determined. Nine were identified for follow-up. Each of them has confirmed their systems are compliant. Production orders for circuit boards have been increased to ensure contract manufacturers will have sufficient electronic components at year- end should Y2K issues arise. Non-material vendors (e.g. electricity, banking) have provided statements of compliance. Several older company products are affected by Year 2000. Methods for customers to use in evaluating the Year 2000 impact were established and corrective procedures documented. All customers potentially impacted were notified in writing and referred to the Year 2000 section of the Company's web site, where questions were answered and corrective actions outlined. Over 100 of those accessing the Year 2000 section have registered to get periodic updates on Year 2000 status. After an initial assessment, recent acquisitions are believed to present minimal risk due to their size, their limited dependence on automated systems, the number of products being sold and because all in-process technologies are being developed with year 2000 compliance considered. Costs to date have been minimal and the majority of the planned effort has been completed. Despite a comprehensive review of potential risks, there is no assurance that problems will not still arise. The Company believes that manual intervention, the existence of multiple sources for key components, and use of available inventory will provide adequate time for corrective actions to be determined and implemented. -15- PART II. OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON 8-K a. Exhibits Exhibit 27--Financial Data Schedule (For EDGAR filing only) b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1999, or during the period from September 30, 1999 to the date of this quarterly report on Form 10-Q. -16- 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 (Principal Executive Officer and Duly Authorized Officer) /s/ Richard G. Ballintine ------------------------- Richard G. Ballintine, Vice President - Finance (Principal Accounting Officer and Duly Authorized Officer) Dated: November 12, 1999 -17- EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 SEP-30-1999 4,881 9,714 6,953 125 5,147 28,379 6,303 3,642 50,416 5,028 0 0 0 33,364 12,024 50,416 26,934 26,934 11,814 11,814 0 0 0 (5,881) 615 (6,496) 0 0 0 (6,496) (1.31) (1.31)
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