SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities Exchange
Act of 1934 for the Year Ended December 31, 2008.
(cid:134) TRANSITION PURSUANT TO SECTION 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to ______.
COMMISSION FILE NO. (0-16577)
CYBEROPTICS CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction of
incorporation or organization)
5900 Golden Hills Drive
MINNEAPOLIS, MINNESOTA
(Address of principal executive offices)
41-1472057
(I.R.S. Employer
Identification No.)
55416
(Zip Code)
(763) 542-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: Title of each class: Common Stock, no par value
Name of Exchange: NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES (cid:134) NO ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES (cid:134) NO ⌧
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 for 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 ⌧ NO (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company
.
Large accelerated filer (cid:134) Accelerated filer ⌧ Non-accelerated filer (cid:134) Smaller Reporting Company (cid:134)
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES (cid:134) NO ⌧
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to
the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter: $76,986,850.
As of February 28, 2009, there were 6,769,295 shares of the registrant’s Common Stock, no par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
CYBEROPTICS CORPORATION
FORM 10-K
For the Fiscal Year Ended December 31, 2008
TABLE OF CONTENTS
DESCRIPTION OF BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE MATTERS
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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60
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64
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
2
ITEM 1. DESCRIPTION OF BUSINESS
Background
PART I.
CyberOptics® Corporation was founded in 1984 by Dr. Steven K. Case (Chairman of the Board of CyberOptics and full-
time employee), a former professor at the University of Minnesota, with the goal of commercializing technology for non-contact
three-dimensional sensing. Our headquarters are located at 5900 Golden Hills Drive in Golden Valley, Minnesota. Our website
address is www.cyberoptics.com. You can access, free of charge, our filings with the Securities and Exchange Commission,
including our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and any other
amendments to those reports, at our website, or at the Commission’s website at www.sec.gov. Proxy materials for our upcoming
2009 annual shareholders meeting to be held on May 18, 2009 may be accessed electronically via the internet at the following
address: http://www.idelivercommunications.com/proxy/cybe.
We are a leading global supplier of optical process control sensors and inspection systems that are used to control the
manufacturing process and to ensure the quality of electronic circuit boards manufactured by our customers using surface mount
technology (SMT). We also manufacture and sell sensors that assist with yield improvement, and the placement and transport of
wafers during semiconductor fabrication. Our products assist the global SMT and semiconductor industries in meeting the rigorous
quality demands for printed circuit board assembly and semiconductor wafers. Using a variety of proprietary technologies such as
lasers, optics and machine vision, combined with software, electronics and mechanical design, our products enable manufacturers
to increase production volume, product yields and quality by measuring the characteristics and placement of components both
during and after the manufacturing process.
Our business is organized in two operating segments. Our Electronic Assembly segment designs, manufactures and sells
optical process control sensors and inspection systems for the electronic assembly equipment market. Our Semiconductor segment
designs, manufactures and sells optical and other process control sensors and related equipment for the semiconductor capital
equipment market.
Most of our products (88% of revenue in 2008) are developed and sold for use in SMT electronic circuit board assembly or
with equipment used in SMT electronic circuit board assembly as part of our Electronic Assembly segment. We sell products in
this market both as sensor components that are incorporated into products manufactured by other companies for sale to circuit
board assembly companies, and as more complete “systems” that are sold directly to circuit board assembly companies. Our sensor
products are sold to manufacturers of pick-and-place machines to align electronic surface mount components during placement on
the circuit board and to solder paste printer companies to align stencils with circuit boards. Our systems products are sold to
contract manufacturers and other companies with surface mount assembly lines, to control quality as in-line systems. These system
level products are used by manufacturers of circuit boards to measure screen printed solder paste, to inspect circuit boards and
components after component placement, to confirm proper placement after full assembly of circuit boards and to inspect solder
joints on printed circuit boards. Manufacturers of DRAM memory also use our system products to inspect assembly of their
memory modules.
Our Semiconductor segment develops and sells products that assist with yield improvement in semiconductor fabrication,
and for use with the robotic equipment that handles semiconductor wafers during the semiconductor fabrication process. In
addition, we sell a frame grabber product line for general industrial applications. These product lines are sold through CyberOptics
Semiconductor, Inc. which was formed from the combination of HAMA™ Sensors, Inc. and Imagenation® Corporation,
companies acquired in 1999 and 2000. Semiconductor products were 12% of total revenues in 2008.
Market Conditions–Recent Developments of the Business
Our operations are heavily influenced by market conditions in worldwide electronics markets, and particularly in the SMT
electronic assembly segment of these markets. Historically, these markets have been very cyclical, with periods of strong growth
followed by periods of excess capacity and reduced levels of capital spending.
Our results were favorably impacted in 2006 and 2007 as our markets experienced periods of strong demand, with revenue
hitting a peak in the third quarter of 2007. Following this period of strong demand, our revenue declined sequentially each quarter
throughout 2008, as our results were negatively impacted by reduced levels of capital spending for electronic manufacturing
capacity brought about by deepening weakness in the global economy. The weakness in the United States capital markets caused
by the deepening global recession, as well as our reduced level of profitability, caused a significant drop in our market
capitalization, resulting in a $3.9 million non-cash pre-tax goodwill impairment charge in the fourth quarter of 2008. We presently
anticipate that significant weakness in our markets and the global economy will continue, at least through the first half of 2009.
3
In addition to the impact of global economic conditions on our sales, we have determined not to pursue new alignment
products for use with future generations of equipment being developed by Assembleon. Sales of alignment products to
Assembleon constituted 10% of revenue in 2008. Assembleon has informed us that they currently plan to start transitioning away
from our alignment products in the third quarter of 2009, with the transition continuing into the second quarter of 2010.
In February 2008, we announced plans to move a significant portion of our systems related product development and
manufacturing for all system products to Singapore, the location of our Asian sales office. The transition of systems related
product development to Singapore was substantially complete by the end of the fourth quarter of 2008. We anticipate that the
transition of manufacturing for our system products will be complete by the middle of 2009. These moves will allow us to
become more responsive to the needs of our growing base of Asian SMT systems customers, permit our core Minneapolis based
optical engineering resources to work on future OEM opportunities, and attain significant cost savings.
In response to the significant weakness in our markets and the global economy, and also due to our transition of a
significant portion of our business to Singapore, we will have reduced our workforce by approximately 50 employees or 25% from
the start of the fourth quarter of 2008 through the end of the second quarter of 2009. Other cost saving measures include salary
reductions of 12% for all officer and internal director level positions, 10% for other employees with salaries exceeding $100,000
and a smaller percentage reduction for employees with salaries ranging between $35,000 and $100,000. In addition, we will also
reduce spending for non-labor costs such as travel, supplies and the like.
Consistent with our past practice, we continue to invest heavily in new product development for both our electronic
assembly sensor and inspection system products and our WaferSense semiconductor products. We expect this trend to continue in
2009, even given the current weak global economic conditions.
Late in 2006 we completed development of our 5th generation LaserAlign sensor for the industry leading line of pick-and-
place machines of Juki Corporation. The new sensor provides Juki with a 25% throughput improvement, alignment capability for
the smallest components, improved reliability and the lowest cost of ownership. Sales to Juki accounted for 21% of our total
revenue in 2008. We believe that the introduction of this new sensor will help ensure that Juki remains a significant customer for
the foreseeable future.
Within the last three years, we have introduced an enhanced version of our Flex series automated optical inspection (AOI)
system, the Flex Ultra. We subsequently introduced the Flex Ultra HR, a new version of our Flex Ultra system that provides
higher image resolution for the smaller component sizes used in the latest electronic devices. We have made continual
improvements to both our Flex AOI and industry leading SE 300 solder paste inspection system products to improve speed,
measurement performance, reliability and ease of use, including simplified operator interfaces with foreign language capability.
We expect to introduce our next-generation solder paste inspection system, as scheduled, in the second quarter of 2009. To
be manufactured in Singapore and based on a new cost-reduced platform, it will be the fastest and most accurate solder paste
inspection system available on the market. We believe this system will have capabilities not available on our current SE 300, thus
strengthening our competitive position in the inspection market. In early 2009, we will also start working on our next generation
automated optical inspection (AOI) system.
We are continuing to pursue several promising R&D initiatives for our inspection technology. Our efforts related to these
projects are aimed at lowering the cost of inspection, while providing faster production through-put speeds, better ease of use, and
improved resolution for inspecting progressively smaller electronic components. Reflecting our progress, we have signed an
OEM contract in third quarter of 2008 for our embedded inspection technology. We expect to generate revenue from this contract
starting in 2010. We are currently pursuing several other promising business opportunities for this technology as well.
We have introduced and continue to develop various new sensors for our WaferSense family of precision measurement
tools, including new automated leveling, gapping, teaching, vibration and particle detection sensors to assist with process
optimization and yield improvement in the semiconductor fabrication process.
4
Objective
Our objective is to develop complete surface mount technology process control solutions for our customers. We intend to
build upon our innovative products in systems for solder paste inspection, automated optical inspection and component alignment,
with new sensing products that will be embedded inside SMT production equipment. We eventually intend to tie these products
together as a full-line process control solution. We believe our new embedded process verification (EPV) sensor will eventually
gain acceptance among manufacturers of pick and place machines as a further enhancement to inspection and control. Our
research and development efforts are creating new inspection technologies for both OEM and end user markets which we believe
will lower the cost of inspection and provide faster production through-put speeds, better ease of use, and improved resolution for
inspecting progressively smaller electronic components. In addition, we expect that our research and development efforts will
have applicability to new markets, including solar wafer manufacturing and printed electronics, among others.
During the last several years, our Semiconductor segment continued to invest in our WaferSense ™ product line, a family of
wireless, wafer like precision measurement tools for in-situ setup, calibration and process optimization in semiconductor
processing equipment. Our first WaferSense product, the Automatic Leveling Sensor (ALS) was introduced late in 2004. During
2007 and 2008, we introduced several new additions to the WaferSense™ family of products, including gapping, teaching and
vibration sensors that will improve up-time and yield for semiconductor manufacturers.
We established a sales office in Singapore in 2001 and in China in 2004 to further penetrate the growing market for
manufacturing production equipment in Asia and to increase the percentage of worldwide production lines that use inspection in
their production process to improve production yields and reduce cost. In order to bring our development and manufacturing
closer to these markets, to reduce cost and to free development personnel at our home office in Minneapolis to focus on sensor
technology development, we initiated a plan in 2008 to transition a portion of our development, and all manufacturing operations
for our systems products, to Singapore. The transition of our systems related product development to Singapore was substantially
complete by the end of 2008. We anticipate that transition of manufacturing operations for all of our system products to Singapore
will be complete by the middle of 2009. During 2008 we entered into a new lease for a larger facility in Singapore to
accommodate all of our development, manufacturing and sales office activities located in that country.
Our ability to implement our strategy effectively is subject to numerous uncertainties and risks, including the risks
identified in Item 1A of this Annual Report on Form 10-K. We cannot assure you that our efforts will be successful.
OPERATIONS AND PRODUCTS
We develop, manufacture and sell intelligent, non-contact sensors and systems for process control and inspection. Our
products are used primarily in the SMT electronic assembly and semiconductor fabrication sectors of the electronics industry and
enable manufacturers to increase operating efficiencies, product yields and quality. In addition to proprietary hardware designs that
combine precision optics, various light sources and multiple detectors, our products incorporate software that controls the
hardware and filters and converts raw data into application specific information. Our product offerings are sold both to original
equipment manufacturers that supply the SMT and semiconductor fabrication industries and to end-user customers who use our
SMT systems products directly for process and quality control in the circuit board manufacturing process.
SMT Electronic Assembly Sensors
Our SMT electronic assembly sensor product line, which has generated the largest component of our sales during the past
ten years, is a family of sensors that uses similar technology, but that are customized for each customer and incorporated into the
equipment manufactured by our customers for use in SMT circuit board assembly. We work closely with our original equipment
manufacturer customers to integrate sensors into their equipment.
Sales of these products, including service repairs, to Juki Corporation accounted for approximately 21% of our revenue in
2008 and 28% of our revenue in 2007. Sales of these products, including service repairs, to Assembleon B.V., accounted for
approximately 15% of our revenue in 2008 and 20% of our revenue in 2007. Accordingly, revenues and operations are currently
heavily influenced by the level of purchases from these two customers and by the cyclical nature of the SMT production industry.
We have decided not to pursue new alignment sensor products for use with evolving pick and place technology being
developed by one of our key OEM customers, Assembleon, for future generations of its equipment. Sales of alignment sensors to
Assembleon (consisting of LaserAlign sensors and board alignment cameras) constituted 10% of revenue in 2008. Assembleon
has informed us that they currently plan to start transitioning away from our sensor products in the third quarter of 2009, with the
transition continuing into the second quarter of 2010. We anticipate that we will continue to repair older generations of our
products for Assembleon, so repair revenue will continue into the future. We will continue to work with current and prospective
new customers to integrate our new OEM inspection technologies into their platforms.
5
LaserAlign. Our LaserAlign sensor family has accounted for the vast majority of sales in the SMT electronic assembly
sensors product line. These sensors are sold for incorporation into component placement machines used in the SMT production
line that are manufactured by a number of different OEM customers.
The LaserAlign family of products aligns extremely small surface mount components, known as chip capacitors and
resistors during transport on a pick-and-place machine prior to placement on a circuit board. LaserAlign sensors are incorporated
into the placement heads of component placement machines to ensure accurate component placement at high production speeds.
Various high-speed component placement machines use between one and twenty LaserAlign sensors per machine. LaserAlign
integrates an intelligent sensor, composed of a laser, optics and detectors with a microprocessor and software for making specific
measurements. LaserAlign enables quick and accurate alignment of each component as it is being transported by the pick-and-
place arm for surface mount assembly. Using non-contact technology, LaserAlign facilitates orientation and placement of
components at higher speeds than can be achieved using conventional mechanical or machine vision component centering systems.
The LaserAlign sensor is offered in several different configurations to satisfy the requirements of the different machines on
which it is used. The latest version of the LaserAlign sensor technology was introduced in 2006 in a 5th generation sensor for Juki
Corporation. Revenue from new product shipments of LaserAlign sensors has been a principal contributor to our growth during the
past five years and accounted for 26% of our revenue in 2008, 35% in 2007 and 36% in 2006.
BoardAlign Camera (BA Camera). The BA Camera, which is incorporated directly into the placement head of component
placement machines, identifies fiducial markings on a circuit board and aligns the board in the component placement machine
prior to component placement. The BA Camera was introduced in a sensor for Assembleon B.V. during 2003 to be incorporated
into their latest version component placement machine. Revenue from shipments of BA Camera sensors to Assembleon B.V.
accounted for 6% of our revenue in 2008, 7% in 2007 and 6% in 2006.
InPrinter Inspection Camera. The InPrinter Inspection Camera, which is mounted directly in screen printers manufactured
by DEK International GmbH, identifies fiducial markings on a circuit board to ensure accurate board registration prior to
placement of solder paste, as well as to provide an upgraded capability for 2D solder paste and stencil inspection. The Inprinter
Inspection Camera was introduced for DEK International GmbH during the third quarter 2005. Revenue from shipments of the
InPrinter Inspection Camera accounted for 5% of our revenue in 2008 and 4% of our revenue in both 2007 and 2006.
SMT Systems Products
Our SMT systems product line consists of stand-alone measurement and inspection systems used in the SMT electronic
assembly industry for process control and inspection. These systems are sold directly to end-user manufacturing customers that use
them in a production line or along-side a production line to maintain process and quality control. Our products incorporate
proprietary sensors as well as substantial, off the shelf, translation or robotics hardware and complete computer systems or
processors with internally developed software.
SE 300 Ultra. We introduced the SE 300, our first in-line solder paste measurement machine, in March 2000. During 2005,
we introduced the SE 300 Ultra, an enhanced version of our SE 300 product that offers faster inspection speeds, a conveyor that
can accommodate a greater range of board sizes than the SE 300, flexible conveyor options and additional defect review options in
run-time software. In addition, we introduced a sensor upgrade for the SE 300 that will provide some of the performance
improvements that are available in the SE 300 Ultra.
The SE 300 Ultra is an in-line system that measures in three dimensions the amount of solder paste applied to the circuit
board after the first step of the SMT assembly process. Because of the small size of the components that must be placed on each
pad of solder paste and the density of components placed on the circuit board, a significant amount of SMT assembly problems are
related to the quality of solder paste deposition. Misplaced solder paste or excess or inadequate amounts of paste can lead to
improper connections or bridges between leads causing an entire circuit board to malfunction. The SE 300 Ultra inspects the
height, area and volume of 100% of a circuit board at production line speeds and with resolution that allows it to measure the
smallest chip scale packages and micro ball array component sites. The SE 300 Ultra can be integrated into most SMT production
lines, providing real time quality control immediately after a printed circuit board leaves the screen printer and before component
placement commences.
6
We have continued to enhance the SE 300 Ultra to improve speed, reliability and ease of use, including simplified operator
interfaces with foreign language capability, to provide an inspection capability for flexible circuits, and to offer a MicroPad sensor
as an option to improve inspection measurement performance for the smallest solder paste deposits. In 2007, we started work on
our next generation system product for solder paste inspection. Introduction of this machine, which incorporates a cost-reduced
platform with enhanced performance, is scheduled for introduction during the second quarter of 2009. We believe that this system
will be the fastest and most accurate solder paste inspection system available on the market and that it will strengthen our
competitive position in the inspection market.
Revenues from shipments of the SE 300, SE 300 Ultra and sensor upgrades accounted for 24% of our revenue in 2008,
23% of our revenue in 2007 and 20% in 2006.
Automated Optical Inspection (Flex Ultra and Flex Ultra HR) Products. The Flex Ultra series of Automated Optical
Inspection (AOI) products were initially introduced in the fourth quarter of 2000 and incorporate technology acquired from Kestra,
Ltd. in 1999. Our Flex Ultra products allow for a variety of machine configurations (different number of cameras based on board
size and resolution requirements) based on customer needs. These in-line products measure and inspect circuit boards after
component placement to determine whether all components are present, that all components have been placed correctly and
measure the quality of solder joints after reflow. These products incorporate high-resolution color cameras for improved imaging,
and are designed to inspect the placement of the smallest components on circuit boards. The principal advantage of the Flex Ultra
series of AOI products is the low level of false calls at in line speeds compared to other AOI machines.
We have introduced a number of versions of the Flex series AOI products since their initial introduction in 2000. The latest
Flex version introduced in 2007, the Flex Ultra HR, is capable of inspecting down to 0105 components with 5.0 megapixel camera
technology. We continue to sell both our Flex Ultra and Flex Ultra HR products. Flex Ultra HR offers improved imaging
resolution, while Flex Ultra offers faster inspection speeds than the Flex Ultra HR. In early 2009, we will also start working on
our next generation automated optical inspection (AOI) system.
Revenues from shipments of the Flex and Flex Ultra accounted for 15% of our revenue in 2008, 12% of our revenue in
2007 and 11% in 2006.
Semiconductor Products
Our principal semiconductor products, the WaferSense™ family of products, are a series of wireless sensors that provide
measurements of critical factors in the semiconductor fabrication process. Other semiconductor products include sensors that
inspect the presence and orientation of semiconductor wafers in cassettes and FOUPS during the fabrication process, and frame
grabber and machine vision subsystems that were developed and sold by Imagenation Corporation, a company we acquired in
2000. We sell our semiconductor products to both original equipment manufacturers and to end-user customers through a network
of distributors. Sales of our semiconductor products constituted 12% of our revenue in 2008, 9% of our revenue in 2007, and 10%
in 2006.
WaferSense™ Sensors. Our WaferSense™ family of sensors are intended to go where wafers go in semiconductor
fabrication and provide measurements of critical factors that are currently impossible or extremely difficult to obtain without
powering down the fabrication process equipment.
We introduced our first WaferSense™ product, the automatic leveling sensor (ALS), a level calibration tool for
semiconductor process tools, in late 2004. The WaferSense ALS is a wireless, vacuum-compatible sensor that can be placed in
cassettes, FOUPS, on end effectors, aligners, in load locks and process chambers used in semiconductor fabrication to ensure that
all stations are level and coplanar. We have continued to enhance our WaferSense ALS products and recently introduced a thinner
version of WaferSense ALS.
In 2007, we introduced three new products in the WaferSense family, the automatic gapping sensor (AGS), the automatic
teaching sensor (ATS) and the automatic vibration sensor (AVS). AGS is a gapping tool that measures the gap in three places
between the shower head and pedestal in semiconductor process equipment. The automatic teaching sensor (ATS), measures X-Y-
Z offset from robotic transfers of wafers to the pedestal in semiconductor process equipment. The amount of gap and offset after
robotic transfer of wafers to the shower pedestal can affect film thickness and uniformity when material is deposited on
semiconductor wafers, impacting quality and product yields. The automatic vibration sensor (AVS) measures X-Y-Z acceleration
for shock and vibration, which can generate wafer particles, scratches or wafer breakage, thereby reducing yield. Because the user
is not required to break down semiconductor fabrication equipment when using our WaferSense products, we believe significant
time is saved and accuracy is increased compared to the manual techniques currently used by many customers when checking the
process parameters measured by our WaferSense products. As a result, up-time, through-put and process yield for semiconductor
fabrication equipment is improved.
7
In 2008 we continued to make improvements to our existing WaferSense products and also started development of
additional products for the WaferSense family, including a particle detection sensor.
Wafer Mapping and Alignment Sensors. We manufacture and sell laser based reflective sensors that improve the
performance of robotic wafer handling equipment. During the fabrication process, semiconductor wafers are stored in slotted
cassettes during transport to various fabrication tools. Robotic equipment removes the wafers from the cassettes and inserts them
into a fabrication tool. Our wafer mapping sensors inspect for the presence of wafers in the cassettes and determine if the wafer is
properly present and located in the cassette. We introduced an improved version of the wafer mapper product, the EXQ mapper, in
late 2003, and a new smaller form factor of this product, the EXQS, in 2005.
Frame Grabber Products and Machine Vision Subsystems. Frame grabber products are a machine vision component that
captures, digitizes, and stores video images. These products are currently sold into a broad array of applications in a number of
different industries, with strategic emphasis on semiconductor customers. We offer both digital and analog versions of frame
grabbers under the Imagenation brand.
Markets and Customers
We sell the vast majority of our products into the electronics manufacturing market (88% of total revenues in 2008);
particularly the portion servicing manufacturers doing SMT circuit board assembly. The value of automation is high in this market
because the products produced have high unit costs and are manufactured at speeds too high for effective human intervention.
Moreover, the trend in these industries toward smaller devices with higher circuit densities, smaller circuit paths and extremely
small components requires manufacturing and testing equipment capable of extremely accurate alignment and multidimensional
measurement such as achieved using non-contact optical sensors. Customers in these industries also employ knowledgeable
engineers who are competent with computer-related equipment. Our LaserAlign products are sold to OEM’s serving this market
and the SE 300 Ultra, Flex Ultra and Flex Ultra HR inspection systems are sold to end-user electronic assembly manufacturers in
this market.
We sell our semiconductor products into the semiconductor capital equipment market for use in the fabrication of
semiconductor devices. This market has many of the same characteristics as the SMT electronics assembly market and requires
non-contact optical measurement tools that enable the production of more complex, higher density and smaller semiconductor
devices. We sell our wafer mapping and alignment sensors to manufacturers of equipment that transport wafers during the
semiconductor manufacturing (front-end fabrication) process. Our WaferSense™ family of precision measurement tools for
process optimization in semiconductor processing equipment is sold directly to semiconductor fabrication facilities for use by
process and equipment engineers during the production of semiconductor wafers.
A large proportion of our end-user SMT system sales are being originated in the low cost geographies of Asia where a
significant portion of the new worldwide production capacity for circuit board assembly has been added. Consequently, most
capital equipment suppliers are increasing their sales and operational capabilities in Asia to pursue sales in this market. In
response, we opened our Singapore office in 2001 to support SMT systems sales throughout Asia and opened a sales office in
China in October 2004. This market is also important to our OEM electronic assembly sensor product lines as our OEM customers
are looking to sell their pick-and-place equipment into this market.
In February 2008, in part to be more responsive to our growing base of Asian SMT systems customers, we announced plans
to move a portion of our systems related product development and all manufacturing for our system products to Singapore, the
location of our Asian sales office. The move of systems related product development to Singapore was substantially complete by
the end of 2008. We anticipate that the transition of all manufacturing operations for our system products will be complete by the
middle of 2009.
We sell our products worldwide to many of the leading manufacturers of electronic circuit board assembly equipment,
manufacturers of semiconductor DRAM memory, semiconductor capital equipment manufacturers and end-user electronic
assembly manufacturers, including Asian original design manufacturers (ODM’s) and EMS’s, who manufacture cell phones,
notebook computers and server boards, among other electronic devices. Although we maintain sales offices in the UK, Singapore
and China, all manufacturing of our products through the end of 2008 occurred in the United States and all sales originate in the
United States. Singapore based manufacturing of SMT systems is expected to commence in the first quarter of 2009 and be
completely transitioned to Singapore by the middle of 2009.
Export sales represented a large percentage of our total sales from 2006 to 2008 as the result of the majority of new
worldwide electronics and semiconductor capacity being added outside the United States. In addition, a significant portion of our
export sales to Europe are OEM electronic assembly sensors that ultimately are sold by our OEM customer into Asia.
8
The following table sets forth the percentage of total sales revenue represented by total export sales (sales for delivery to
countries other than the United States, including sales delivered through distributors) by location during the past three years:
Asia
Europe
Other (1)
2008
49%
33%
4%
Year Ended December 31,
2007
51%
34%
2%
2006
50%
33%
1%
(1) Includes export sales in the Americas, primarily export sales to Canada, Mexico and Latin America.
See Note 11 to the Company’s Consolidated Financial Statements contained in item 8 of this Form 10-K.
All export sales are negotiated, invoiced and paid in U.S. dollars. Accordingly, although changes in exchange rates do not
affect revenue and income per unit, they can influence the willingness of customers to purchase units.
Sales and Marketing
Our electronic assembly sensors are sold to large OEM customers by direct sales staff located in Minnesota. Our systems
products are primarily sold through independent representatives and distributors managed by direct sales personnel located in
Minnesota, as well as in the UK, Singapore and China. We have agreements with 14 representatives and distributors in North and
South America who focus primarily on SMT systems products sold to end-users. We make most of our sales to international end-
users of systems products through 26 representatives and distributors covering Europe (15) and the Pacific Rim (11).
We have established a worldwide sales representative organization for our WaferSense™ semiconductor products. We
currently have agreements in place or in process with sales representatives in the U.S. (3), Europe (3) and the Pacific Rim (7).
Most of these sales representatives will also be authorized to sell wafer mapping semiconductor products. Our wafer mapping
semiconductor products are sold to large OEM customers by a direct sales staff located in Oregon. We sell our semiconductor
frame grabber products through direct sales staff located in Portland, Oregon, and through 13 sales representatives throughout the
world. These representatives are not under contract, but are authorized to sell frame grabber products and in many cases act as
system integrators for our products.
We market our products through appearances at industry trade shows, advertising in industry journals, articles published in
industry and technical journals and on the Internet. In addition, we have strategic relationships with certain key customers that
serve as highly visible references.
Backlog
Our products are typically shipped two weeks to two months after the receipt of an order. Product backlog was $3.9 million
at December 31, 2008, compared to $6.1 million on December 31, 2007, and $6.9 million on December 31, 2006. Backlog at
December 31, 2008 totaling $3.3 million is deliverable in the first quarter of 2009. Sales of some surface mount technology (SMT)
products may require customer acceptance due to performance or other acceptance criteria included in the terms of sale. For these
SMT product sales, revenue is recognized at the time of customer acceptance. Although our business is generally not of a highly
seasonal nature, sales may vary based on the capital procurement practices in the electronics and semiconductor industries. For
example, production capacity expansion for anticipated holiday or back to school demands can impact our revenue. In addition,
New Year celebrations in Asia may have some impact on first quarter sales. We are not able to quantify with any level of
precision, the impact of these events on our sales in any given quarterly period. Our scheduled backlog at any time may vary
significantly based on the timing of orders from OEM customers. Accordingly, backlog may not be an accurate indicator of
performance in the future.
9
Research and Development
We differentiate our products primarily on the basis of customer benefits afforded by the use of clever and proprietary
technology and on our ability to combine several different technical disciplines to address industry and customer needs.
CyberOptics was founded by research scientists and has retained relationships with academic institutions to ensure that the most
current information on technological developments is obtained. In addition, we actively seek ongoing strategic customer
relationships with leading product innovators in our served markets and actively investigate the needs of, and seek input from,
these customers to identify opportunities to improve manufacturing processes. Our engineers have frequent interactions with our
customers to ensure adoption of current technologies. In some instances, we receive funding from these customers through
development contracts that provide the customer with an exclusive selling period but allow us to retain technology and
distribution rights.
We believe that continued and timely development of new products and enhancements to existing products is essential to
maintaining our industry leading position in the market. As a technology based company, we commit substantial resources to
research and development efforts, which play a critical role in maintaining and advancing our position as a leading provider of
optical sensors and systems. During 2006 through 2008, research and development efforts were focused on a number of
development activities, including a 5th generation LaserAlign sensor for Juki, continued development of our Embedded Process
Verification (EPV®) technology initiative, and continued development of and enhancements to the SE and Flex series inspection
systems, including our SE 300 Ultra solder paste inspection system, new Flex Ultra and Flex Ultra HR automated optical
inspection systems and a next generation system product for solder paste inspection scheduled for introduction in the second
quarter of 2009.
Throughout the last several years, we have continued to development our WaferSense™ family of precision measurement
tools, including new automated leveling, gapping, teaching and vibration sensors to assist with process automation and yield
improvement in the semiconductor fabrication process, along with development of other new planned product additions for the
WaferSense™ family.
Research and development expenses were $10.4 million in 2008, $9.8 million in 2007 and $8.1 million in 2006. These
amounts represented 23% of revenues in 2008, 17% of revenues in 2007 and 14% of revenues in 2006. Research and development
expenses consist primarily of salaries, project materials, contract labor and other costs associated with ongoing product
development and enhancement efforts. Research and development resource utilization is centrally managed based on market
opportunities and the status of individual projects. We expect research and development expenses in 2009 to decrease as our
transition of a portion of our development for systems to Singapore is now complete, eliminating further transition expense and
reducing our overall cost structure. In addition, the workforce reductions we initiated in November 2008 and February 2009 will
also reduce development costs in 2009.
Manufacturing
Much of our product manufacturing, which is primarily circuit board manufacturing, lens manufacturing and metal parts
production, is contracted with outside suppliers. Our production personnel inspect incoming parts, assemble sensor heads and
calibrate and perform final quality control testing of finished products. Our products are not well suited for the large production
runs that would justify the capital investment necessary for complete internal manufacturing.
Both our electronic assembly sensor products and SMT systems products were assembled in Minneapolis, Minnesota
through the end of 2008. Although we continue to manufacture sensor products in Minneapolis, all SMT system products will be
manufactured in Singapore by the middle of 2009. We believe that sourcing of mechanical components for our system products
in Asia and distribution of these products from Singapore to our customers, the majority of whom are located in Asia, will be less
expensive than if we continued these activities at our U.S. headquarters facility. Our semiconductor products were assembled in
Portland, Oregon through the end of 2008. We intend to transition the assembly of these products to our Minneapolis Minnesota
headquarters facility by the middle of 2009.
A variety of components used in our products are available only from single sources and involve relatively long order
cycles, in some cases over one year. We believe we have identified alternative assembly contractors for most of our subassemblies.
Use of those alternative contractors could require substantial rework of the product designs, resulting in periods during which we
could not satisfy customer orders. An actual change in such contractors would likely require a period of training and testing.
Accordingly, an interruption in a supply relationship or the production capacity of one or more of such contractors could result in
the inability to deliver one or more products for a period of several months. To help prevent delays in the shipment of our
products, we maintain in inventory, or on scheduled delivery from suppliers, what we believe to be a sufficient amount of certain
components based on forecasted demand (forecast extends a minimum of 6 months).
10
Competition
Although we believe that our products offer unique capabilities, competitors offer technologies and systems that perform
some of the visual inspection and alignment functions performed by our products. We face competition from a number of
companies in the machine vision, image processing and inspection systems market, some of which are larger and have greater
financial resources.
Our electronic assembly sensor products face competition in the market for alignment and inspection on OEM component
placement machines primarily from manufacturers of vision (camera and software based) systems. Potential competitors in these
markets include Cognex Corporation and Electro Scientific Industries, Inc. We compete in this market based on our ability to
custom design products with stringent physical form requirements, speed, flexibility, cost and ease of control. In addition, our
products compete with systems developed by OEMs using their own design staff for incorporation into their products. Our
electronic assembly sensor products have historically competed favorably on the basis of these factors, and particularly on the
basis of speed and product cost. We believe our sensor products are also better suited to align the smaller electronic component
sizes currently available in the market. Nevertheless, advances in terms of speed by vision systems have reduced some of the
advantages of our products in some configurations. We have introduced newer configurations adapted by several customers that
we believe allow our sensors, and the component placement machines in which they are incorporated, to compete favorably based
on the speed and accuracy of their performance, and their price. In addition, we are expanding our focus to incorporate additional
inspection capabilities into our sensors, including our embedded process verification (EPV) technology initiative, which could give
us a competitive advantage in this market.
The primary competition for sales of our SE 300 Ultra solder paste inspection product has been from Asian based
companies such as KohYoung Technology (Korea), and Test Research, Inc. (Taiwan). Agilent Technologies, Inc., CKD
Corporation (Japan) and Orbotech, Ltd. (Israel) have also been competitors. We believe that a few of these competing systems
have a lower price position than our SE 300 Ultra product. Although we believe our SE 300 Ultra product competes favorably
against these competitive products on the basis of performance and reliability, the introduction of lower cost competitive models
has required us to decrease the price of our SE 300 Ultra product in some markets. In addition, some manufacturers of screen
printing equipment provide optional 2-D solder paste inspection, and other machine vision companies (AOI companies) have
started offering 2-D and occasionally 3-D solder paste inspection products. In the second quarter of 2009 we will introduce our
next generation 3-D solder paste inspection system, which will replace our current SE 300 machine, and incorporate a cost-reduced
platform with enhanced performance. We believe that this system will be the fastest and most accurate solder paste inspection
system available on the market and that it will strengthen our competitive position in the inspection market.
Our AOI inspection system products (Flex Ultra and Flex Ultra HR products) face competition from a large number of AOI
companies, the most significant being Agilent (formerly MVT), MirTech, Ltd. (Korea), Viscom (Germany), Saki Corporation
(Japan) and Omron, Ltd. (Japan). We believe that the technology used in the Flex Ultra series is differentiated from the
competition and that it will compete effectively in this market based on measurement accuracy, cost, ease of use at rapid
production line speeds and the low rate of false calls.
Our WaferSense™ family of sensors is intended to go where wafers go in semiconductor fabrication and provide
measurements of critical factors that are currently impossible or extremely difficult to obtain. We believe our WaferSense™
products are unique to the marketplace and primarily face competition from the manual techniques currently used by most
customers to monitor their semiconductor fabrication equipment. Because the user is not required to break down semiconductor
fabrication equipment, or pressurize a vacuum chamber, we believe that our WaferSense products will save significant time and
increase measurement accuracy over the manual techniques currently used by customers and will improve equipment up-time,
through-put and process yield.
Our other semiconductor products face competition in the wafer mapping and alignment market primarily from
manufacturers of through-beam sensors developed by our customers using inexpensive sensors from general industrial market
suppliers like Banner Engineering Corporation, Omron, Ltd (Japan) and Keyence, Ltd (Japan). We believe that our sensors
compete favorably in this market based on performance and the unique advantages of the reflective mode of operations.
Although we believe our current products offer several advantages in terms of price and suitability for specific applications
and although we have attempted to protect the proprietary nature of such products, it is possible that any of our products could be
duplicated by other companies in the same general market.
11
Employees
As of December 31, 2008, we had 179 full-time employees worldwide, including 40 in sales, marketing and customer
support, 64 in manufacturing, purchasing and production engineering, 56 in research and development and 19 in finance,
administration and information services. Of these employees, 110 are located at our corporate headquarters in Minneapolis and 69
are located in other offices (7 in the UK, 18 in Oregon, 33 in Singapore, 10 in China and 1 in Japan). All of our employees located
in Oregon work in our Semiconductor business. In February 2009, we announced a further reduction in work force that will
decrease our aggregate work force by 24 additional employees. To date, we have been successful in attracting and retaining
qualified technical personnel, although there can be no assurance that this success will continue. None of our employees are
covered by collective bargaining agreements or are members of a union.
Proprietary Protection
We rely on the technical expertise and know-how of our personnel and trade secret protection, as well as on patents, to
maintain our competitive position. We attempt to protect intellectual property by restricting access to proprietary methods by a
combination of technical and internal security measures. In addition, we make use of non-disclosure agreements with customers,
consultants, suppliers and employees. Nevertheless, there can be no assurance that any of the above measures will be adequate to
protect our proprietary technology.
We hold 97 patents (63 U.S. and 34 foreign) on a number of technologies, including those used in the LaserAlign systems
and other products. Some of the patents relate to equipment such as pick-and-place machines, into which our sensor products are
integrated. In addition, we have 156 pending patents (41 U.S. and 115 foreign). We protect the proprietary nature of our software
primarily through copyright and license agreements, but also through close integration with our hardware offerings. We utilize 21
trademarks, 15 of which are registered trademarks, and 3 of which are foreign. We currently have 6 trademarks pending
registration. We also have 13 domain names and several common law trademarks. It is our policy to protect the proprietary nature
of our new product developments whenever they are likely to become significant sources of revenue. No guarantee can be given
that we will be able to obtain patent or other protection for other products.
As the number of our products increases and the functionality of those products expands, we may become increasingly
subject to attempts to duplicate our proprietary technology and to infringement claims. In addition, although we do not believe that
any of our products infringe the rights of others, there can be no assurance that third parties will not assert infringement claims in
the future or that any such assertion will not require us to enter into a royalty arrangement or result in litigation.
Government Regulation
Many of our products contain lasers. Products containing lasers are classified as either Class I, Class II or Class IIIb Laser
Products under applicable rules and regulations of the Center for Devices and Radiological Health (CDRH) of the Food and Drug
Administration. Such regulations generally require a self-certification procedure pursuant to which a manufacturer must file with
the CDRH with respect to each product incorporating a laser device, periodic reporting of sales and purchases and compliance with
product labeling standards. Our lasers are generally not harmful to human tissue, but could result in injury if directed into the eyes
of an individual or otherwise misused. We are not aware of any incident involving injury or a claim of injury from our laser
devices and believe that our sensors and sensor systems comply with all applicable laws for the manufacture of laser devices.
12
ITEM 1A. RISK FACTORS
Our operations are subject to a number of risks and uncertainties that may effect our financial results, our accounting,
and the accuracy of the forward looking statements we make in this Form 10-K. We make statements regarding anticipated product
introductions, changes in markets, customers and customer order rates, expenditures in research and development, growth in
revenue, taxation levels, the effects of pricing, and the ability to continue to price foreign transactions in U.S. currency, all of
which represent our expectations and beliefs about future events. 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:
• Our business has been and may continue to be significantly impacted by the recent deterioration in worldwide
economic conditions, and the current uncertainty in the outlook for the global economy makes it more likely that
our actual results will differ materially from expectations. Global credit and financial markets have been experiencing
extreme disruptions in recent months, including severely diminished liquidity and credit availability, declines in consumer
confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability.
There can be no assurance that there will not be further deterioration in credit and financial markets and confidence in
economic conditions. These economic uncertainties affect businesses such as ours in a number of ways, making it
difficult to accurately forecast and plan our future business activities. The current tightening of credit in financial markets
may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay
their existing and future orders with us. In addition, financial difficulties experienced by our suppliers or distributors
could result in product delays, increased accounts receivable defaults and inventory challenges. The original equipment
manufacturers to which we sell our sensors supply SMT manufacturers, and those manufacturers, as well as the circuit
board manufacturers that purchase our SMT systems products directly, are largely dependent on continued demand for
consumer and commercial electronics, including cell phones and computers. Demand for electronics is a function of the
health of the economies in the United States and around the world and as these economies have moved into a recession,
the demand for overall electronics has been adversely affected and therefore, demand for our products and our operating
results has been adversely affected. We cannot predict the timing, strength or duration of any economic disruption or
subsequent economic recovery, worldwide, in the United States, in our industry, or in the electronics market. These and
other economic factors have had and may continue to have a material adverse effect on demand for our products and on
our financial condition and operating results.
• Pending loss of significant customer for our electronic assembly sensors. Historically, we have been dependent on
two customers for a significant amount of our revenue. Sales to Assembleon constituted 15% of our total revenue in
2008 and 20% of our total revenue in 2007. Assembleon has informed us that they plan to start transitioning away from
our sensor products in the third quarter of 2009, with the transition continuing into the second quarter of 2010. Although
we expect to continue to generate some repair revenue from Assembleon and its customers, we expect that the 10% of our
revenue that was generated from new product sales to Assembleon will be eliminated by the end of 2010. Our results of
operations and cash flows would be further negatively impacted if Assembleon transitions away from our products sooner
than expected.
• Sales to one customer constitute a significant portion of our revenue and loss of that customer, or a decline in the
customer’s business, would have a materially adverse impact on our results of operation. Sales to our largest
customer constituted 21% of our total revenue in 2008 and 28% of our total revenue in 2007. Although we believe our
relationship with this customer is excellent and we continue to pursue joint development projects with them, like most
suppliers to the electronics manufacturing markets, their business has been impacted by the global economic downturn
and they have advised us that their orders for additional sensor products from us during the first and second quarters of
2009 well be unusually low due to the difficult global economic conditions. If their order rate does not return to its
historical level or if they are unsuccessful in selling the products into which our sensors are incorporated, or if they design
their products to function without our sensors, purchase sensors from other suppliers, or otherwise terminate their
relationship with us, our long-term results of operations would be significantly adversely affected.
• Although our move of systems product development and manufacturing operations to Singapore is intended to
save cost, increase responsiveness to Asian systems customers and free US development staff for sensor
development, we might not achieve these objectives and the move could prove costly or result in reduced control
and efficiency of systems operations. Our move to Singapore presents a number of risks related to the retention of
personnel, management of development and manufacturing, control over administrative, manufacturing and business
processes, regulatory and legal issues we may encounter and other matters relating to foreign operations. We cannot be
certain that we will be able to retain software development personnel in Singapore of the caliber required for our
products, we will be able to retain management on whom we can rely, or that these personnel, or manufacturing
personnel, can be retained at attractive rates. Although we anticipate that components for our systems products may be
more readily available there, we cannot be certain that we will be able to import the hardware components used in our
13
systems products necessary for manufacture in Singapore at efficient rates. Our future financial performance, ability to
serve our customers and manufacture products could be negatively impacted if the move of our systems related
manufacturing operations to Singapore takes longer than intended, costs more than expected to hire experienced
employees in a timely manner, or if we are unable to locate suitable sources of supply for our products manufactured in
Asia.
• The market for capital equipment for the electronics industry in which we operate is cyclical and we cannot
predict with precision when market downturns will occur. We operate in a very cyclical market–the electronics capital
equipment market-that periodically adjusts independent of global economic conditions. We have been unable to predict
with accuracy the timing or magnitude of periodic downturns in this market. These downturns, particularly the severe
downturn in electronics production markets from 2001 through 2003, have severely affected our operations in the past
and generated several years of unprofitable operations. We are currently experiencing another significant downturn in our
markets due to the current severe global economic recession. We are presently unable to determine the duration or
severity of the downturn in our markets, and the long-term impact that it may have on our business.
• World events beyond our control may effect our operations. Our operations and markets could be negatively affected
by world events that effect economies and commerce in countries, such as China, Singapore and Japan, in which we do
business. Natural disasters, such as the SARS outbreak, have affected travel patterns and accessibility in these countries in
the past and other natural occurrences, such as a bird flu outbreak, could affect the business we do in these countries in
the future. Further, these countries may be affected by economic forces that are different from the forces that affect the
United States and change the amount of business we conduct.
• We are dependent upon a single product line in our systems business for approximately a quarter of our revenue.
During 2008, approximately 24% of our total revenue was generated by sales of a single SMT systems product line, the
SE 300 Ultra. Sales of this product have been subject to increasing competition in the Asian markets, negatively
impacting our market share and sales prices for our products. If we are not successful in continuing to sell and
differentiate this product line relative to our competition, our results of operations would be negatively affected. In
addition, we will be introducing a next generation solder paste inspection system to replace the SE 300 Ultra during the
second quarter of 2009. Our revenue could be negatively affected if we encounter unanticipated product quality or
performance issues with this new product, if we experience further delays in its introduction, or if the product is not
accepted by the marketplace in the manner we currently expect.
• We generate more than three quarters of our revenue (approximately 86% in 2008) from export sales that are
subject to risks of international operations. Our export sales are subject to many of the risks of international operations
including:
•
•
•
•
•
•
•
•
•
•
•
•
•
currency controls and fluctuations in currency exchange rates;
changes in local market business requirements and increased cost and development time required to modify and
translate our products for local markets;
inability to recruit qualified personnel in a specific country or region;
difficulty in establishing and maintaining relationships with local vendors;
differing foreign technical standards;
differing regulatory requirements;
export restrictions and controls, tariffs and other trade barriers;
difficulties in staffing and managing international operations;
reduced protection for intellectual property rights;
changes in political and economic conditions;
seasonal reductions in business activity;
potentially adverse tax assessments; and
terrorism, disease, or other events that may affect local economies and access.
• Because we price our products in US dollars, our products may have difficulty competing in periods of increasing
strength of the dollar. All of our international export sales are negotiated, invoiced and paid in U.S. dollars, and
accordingly, currency fluctuations do not affect our revenue and income per unit. However, significant fluctuations in the
value of the U.S. dollar relative to other currencies could have an impact on the price competitiveness of our products
relative to foreign competitors, which could impact the willingness of customers to purchase our products and have an
impact on our results of operations.
14
• Our products could become obsolete. 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, printed circuit
boards and memory modules. The technology for these components changes rapidly and, because it takes considerable
time to develop new products, we must anticipate technological developments in order to effectively compete. Further,
because we do not have unlimited development resources, we might choose to forgo the pursuit of what becomes a
leading technology and devote our resources to technology that is less successful. 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.
• We compete in the electronics assembly sensor market with larger companies. 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. Advances in machine vision technology in recent years have eliminated
some, but not all, of the features that have differentiated our products from some of these competitors.
• The market for surface mount capital equipment has become very price competitive. The electronics capital
equipment market for surface mount technologies is becoming more mature, resulting in increased price pressure on
suppliers of equipment. Consequently, our electronic assembly system and sensor products have become subject to
increased levels of price competition and competition from other suppliers and technologies, including suppliers in Asia
who have specifically designed their products to compete favorably against our products.
• Our systems products carry lower margins. We use a different distribution network to sell our end-user systems
products, and generate lower margins from these products, than the distribution system and margins from our electronic
assembly sensor and semiconductor products. To the extent our end-user systems constitute a larger portion of our
business, our profit margins may be affected.
• Competitors in Asia may be able to compete favorably with us based on lower production and employee costs. We
compete with large multinational systems companies in sales of end-user systems products, many of which are able to
take advantage of greater financial resources and larger sales distribution networks. We also compete with new Asian
based suppliers of end-user systems products, many of which may have lower overall production and employee costs and
are willing to offer their products at lower selling prices to customers.
• We are dependent upon outside suppliers for components of our products, and delays in or unavailability of those
components would adversely affect our results. We use outside contractors to manufacture the components used in
many of our products and some of the components we order require significant lead times that could affect our ability to
sell our products if not available. In addition, if these components do not meet stringent quality requirements or become
subject to obsolescence, there could be delays in product availability, and we could be required to make significant
investments in designing replacement components.
• Our operations could be effected by lead-free regulations. New regulations have been enacted in various countries
requiring the reduction of hazardous substances in electronics products and capital equipment in future years. New
regulations are also increasing the obligations of manufacturers of electronics products and capital equipment to ensure
proper disposal of their products when they are no longer being used by the customer. When effective, these regulations
will impact production processes of our customers and require us to incorporate lead-free components into our products.
If the production processes of our customers are interrupted, or we are not able to complete the transition to lead-free
components in our products by the effective date of these regulations, our results of operations could be negatively
affected. In addition the new regulations requiring us to ensure proper disposal of our products will increase our costs, and
our results of operations could be negatively affected.
• Our growth has been dependent on technical innovation and is affected by the timing and success of product
introductions. Although our results are cyclical, our objective is to grow revenue and profitability over the long
term. Our growth has been in the past, and we anticipate that it will be in the future, dependent upon our ability to
introduce new and innovative products. We plan to continue to introduce new products during 2009 and beyond. If
those introductions are delayed, our revenue and profitability could be negatively affected. We have devoted and continue
to devote significant resources to our SMT system products, including enhancements to SE 300 Ultra, Flex Ultra, Flex
Ultra HR, next generation system products and also our WaferSense family of products. In addition, we have devoted
and continue to devote significant resources to complete development and commence sale of our embedded process
verification (EPV) products. The introduction of these and other new products could be delayed because of economic
conditions affecting our customers, required adaptations for OEM requirements and other issues and these products have
yet to generate substantial commercial sales.
15
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease a 60,217 square foot mixed office and warehouse facility built to our specifications in Golden Valley, Minnesota,
which functions as our corporate headquarters and primary manufacturing facility for our sensor products. The lease for this space
will expire in June 2011. During 2008 we entered into a new lease for a mixed office and warehouse facility in Singapore, to serve
as a sales, development and manufacturing facility for our systems products. The lease for our new facility in Singapore expires in
May 2011. As of December 31, 2008, we also have operating leases in Oregon (for our semiconductor business), the United
Kingdom, and Shanghai, China, which expire in December 2009, June 2010 and August 2010, respectively. We believe that our
leased facilities are adequate for our anticipated needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not currently subject to any material pending or threatened legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2008.
16
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II.
Our common stock is traded on the Nasdaq Global Market. The following table sets forth, for the fiscal periods indicated,
the high and low sales prices for our common stock as reported by the Nasdaq Global Market. These prices do not reflect
adjustments for retail markups, markdowns or commissions.
Quarter
First
Second
Third
Fourth
2008
High
Low
$12.41
$11.70
$10.74
$ 9.60
$9.69
$7.88
$8.51
$4.26
2007
High
$14.60
$14.80
$13.75
$13.75
Low
$12.73
$11.73
$11.50
$10.51
As of February 28, 2009, there were approximately 200 holders of record of common stock and approximately 3,000
beneficial holders. We have never paid a dividend on our common stock. Dividends are payable at the discretion of the Board of
Directors out of funds legally available therefore. Our board has no current intention of paying dividends.
Equity Compensation Plan Information
The following table describes shares of our common stock that are available on December 31, 2008 for purchase under
outstanding stock-based awards, or reserved for issuance under stock-based awards or other rights that may be granted in the
future, under our equity compensation plans:
Plan Category
Equity compensation plans approved by security holders
Restated Stock Option Plan
1998 Stock Incentive Plan (1)
Stock Option Plan for Non Employee Directors
Stock Grant Plan for Non Employee Directors
Employee Stock Purchase Plan (2)
Equity compensation plans not approved by security
holders
Options issued to executives and certain other
employees upon initial employment (3)
(a)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(b)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding those
reflected in column (a))
80,125
503,222
125,000
N/A
N/A
$8.16
$8.79
$14.43
N/A
N/A
—
230,857
—
27,000
112,812
50,000
$11.87
—
Total
758,347
$9.85
370,669
(1) In addition to options, shares may be issued in restricted stock awards, performance awards and other stock-based awards.
(2) Shares are issued based on employees’ elections to participate in the plan.
(3) Represent options received by executives and certain other employees prior to 2003 upon their initial employment and granted
on the same terms as those options granted under equity compensation plans approved by security holders. None of these
options qualify as incentive stock options.
17
Shareholder Return
The following graph compares the cumulative total shareholder return on our common stock from January 1, 2004 through
December 31, 2008 with the cumulative total return on a broad market index (the Nasdaq US Index) and a peer group index (the
Nasdaq Computer and Data Processing Index). In each case, we have calculated the cumulative return assuming an investment of
$100 on January 1, 2004, and reinvestment of all dividends.
NASDAQ US
NASDAQ Computer & Data Processing
CyberOptics Corporation
300
250
200
150
100
50
0
12/31/2003
3/31/2004
6/30/2004
9/30/2004
12/31/2004
3/31/2005
6/30/2005
9/30/2005
12/30/2005
3/31/2006
6/30/2006
9/29/2006
12/29/2006
3/30/2007
6/29/2007
9/28/2007
12/31/2007
3/31/2008
6/30/2008
9/30/2008
12/31/2008
18
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Financial Summary
CyberOptics Corporation
(In thousands, except per share information)
Year Ended December 31
2008(1)
2007
2006
2005(2)
2004
Revenues
Income (loss) from operations
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Cash and cash equivalents
Marketable securities
Working capital
Total assets
Stockholders’ equity
$
$
$
$
$
$
45,452
$
(10,463) $
(6,671) $
(0.87) $
(0.87) $
$
4,516
25,267
30,461
58,949
50,880
$
$
$
$
$
$
58,776
5,540
5,028
0.57
0.56
18,864
33,754
47,939
87,039
78,116
$
$
$
$
$
$
57,089
7,121
6,390
0.71
0.70
30,056
18,951
55,662
82,010
73,020
$
$
$
$
$
$
42,179
3,104
7,150
0.80
0.79
19,592
21,548
48,515
73,027
66,190
58,037
12,325
10,626
1.23
1.18
25,416
14,868
38,921
65,096
57,951
(1) 2008 results include a non-cash pre-tax charge for goodwill impairment of $3.9 million, a $650,000 pre-tax charge for
inventory obsolescence, and a $770,000 pre-tax charge for severance and recruitment costs related to our move to Singapore
and November 2008 workforce reduction.
(2) 2005 results include a $3.7 million non-cash income tax benefit related to a reduction in the valuation allowance for deferred
income taxes.
19
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations for the Three Years Ended December 31, 2008:
General Overview
Our products are sold primarily into the electronics assembly, semiconductor DRAM memory, and semiconductor
fabrication capital equipment markets, where we sell products both to original equipment manufacturers of production equipment
and to end-user customers that produce circuit boards and semiconductor wafers and devices. Historically these markets have been
very cyclical, with periods of rapid growth as worldwide capacity is added to support increased consumer demand for electronic
products, and new capital equipment is purchased as a result of technology changes in electronics components, such as
miniaturization, and changing production requirements. These periods of growth have historically been followed by periods of
excess capacity and reduced capital spending.
Our results were favorably impacted in 2006 and 2007 as the worldwide demand for cell phones, laptops and other
consumer electronics remained strong, driving the need for increased production of printed circuit boards and memory modules,
and thereby increasing demand for our electronic assembly and semiconductor products. After peaking in the third quarter of
2007, our revenue declined sequentially each quarter throughout 2008, as our results were negatively impacted by reduced levels
of capital spending for electronics manufacturing capacity brought about by the deepening weakness in the global economy. New
orders dropped off particularly sharply late in the fourth quarter of 2008 as the global economy fell into a severe recession.
Reflecting the impact of the weakening economy, our consolidated revenues decreased by 23% in 2008 from 2007 levels to
$45.5 million. The decline in revenue was the principle reason for our 2008 operating loss of $10.5 million. We also continued to
experience pricing pressure for our products, particularly our SMT system products. In addition to the drop in revenue and pricing
pressure, several significant charges and strategic investments also contributed to our operating loss, including the following:
•
In February 2008, we announced plans to move a significant portion of our systems related product development
and manufacturing for all system products to Singapore, the location of our Asian sales office. The transition of
systems related product development to Singapore was substantially complete by the end of the fourth quarter of
2008. We anticipate that the transition of manufacturing for our system products will be complete by the middle
of 2009. We estimate that the transition to Singapore increased our 2008 expenses by approximately $1.5 million.
Transition costs in 2009 are not expected to be significant.
.
• The weakness in the United States capital markets caused by the deepening global recession, as well as our
reduced level of profitability, caused a significant drop in our market capitalization, resulting in a $3.9 million
non-cash pre-tax goodwill impairment charge in the fourth quarter of 2008. We presently anticipate that
significant weakness in our markets and the global economy will continue, at least through the first half of 2009.
•
•
In addition to the impact of global economic conditions on our sales, we have determined not to pursue new
alignment products for use with future generations of equipment being developed by Assembleon. Sales of
alignment products to Assembleon constituted 10% of revenue in 2008. Assembleon has informed us that they
currently plan to start transitioning away from our alignment products in the third quarter of 2009, with the
transition continuing into the second quarter of 2010. The timing of Assembleon’s transition away from our
sensor products, combined with the sharp drop-off in orders in the fourth quarter of 2008 and our expectation for
continued weakness into 2009, resulted in a $650,000 charge for excess and obsolete inventory in the fourth
quarter of 2008.
In response to the significant weakness in our markets and the global economy, we reduced our workforce by
approximately 20 employees or 10% in November 2008, resulting in a $234,000 severance charge in the fourth
quarter of 2008. Further cost savings measures were implemented in February 2009, including additional
workforce and salary reductions, consolidation of manufacturing operations for our semi-conductor products into
our Minneapolis Minnesota facility and reductions in spending for non-labor costs such as travel, supplies and the
like.
• From the start of the fourth quarter of 2008 through the end of the second quarter of 2009, we will have reduced
our workforce by 50 employees or approximately 25%, resulting from the move to Singapore, relocation of
manufacturing for our semiconductor operations, and the November 2008 and February 2009 workforce
reductions.
20
• During 2008, we invested heavily in our next-generation solder past inspection system which we expect to
introduce in the second quarter of 2009. To be manufactured in Singapore and based on a new cost-reduced
platform, we believe this machine will be the fastest and most accurate solder paste inspection system available
and that it will strengthen our competitive position in the inspection market.
During 2008 we repurchased 2.1 million shares of our common stock for $20.9 million. Our balance sheet remains strong
and we are well positioned financially. We have no debt and our cash and marketable securities of $29.8 million at December 31,
2008 are more than adequate to fund our operations and various growth opportunities for an extended period of time, even given
our expectation for weak financial results through at least the first half of 2009, due to the severe global economic recession.
We continue to pursue several promising R&D initiatives for our inspection technology. Our efforts related to these
projects are aimed at lowering the cost of inspection, while providing faster production through-put speeds, better ease of use, and
improved resolution for inspecting progressively smaller electronic components.
Segment Results
Our business consists of two operating segments, the electronic assembly and semiconductor segments. The electronic
assembly segment designs, manufactures and sells optical process control sensors and inspection systems for the electronic
assembly equipment market. The semiconductor segment designs, manufactures and sells optical and other process control
sensors and related equipment for the semiconductor capital equipment market. Segment information follows:
(In thousands)
Revenue:
Electronic assembly
Semiconductor
Total
Gross margin:
Electronic assembly
Semiconductor
Total
Operating expense:
Electronic assembly
Semiconductor
Total
Income (loss) from operations:
Electronic assembly
Semiconductor
Total income (loss) from operations
Interest income and other
Income (loss) before income taxes
Year Ended December 31,
2007
2006
2008
$
$
$
$
$
$
$
$
$
40,193 $
5,259
45,452 $
53,203 $
5,573
58,776 $
51,142
5,947
57,089
15,867 $
3,198
19,065 $
26,631 $
3,616
30,247 $
25,926
3,975
29,901
26,206 $
3,322
29,528 $
21,223 $
3,484
24,707 $
18,110
4,670
22,780
(10,339) $
(124)
(10,463) $
1,193
(9,270) $
5,408 $
132
5,540 $
2,214
7,754 $
7,816
(695)
7,121
1,943
9,064
21
Revenues
Our revenues decreased by 23% to $45.5 million in 2008 from $58.8 million in 2007 and increased by 3% in 2007 from
$57.1 million in 2006. The following table sets forth, for the years indicated, revenues by product line (in thousands):
Electronic Assembly
OEM Sensors
SMT Systems
Total Electronic Assembly
Semiconductor
Total
Electronic Assembly
2008
2007
2006
$
$
20,250 $
19,943
40,193
5,259
45,452 $
31,774 $
21,429
53,203
5,573
58,776 $
32,006
19,136
51,142
5,947
57,089
Revenue from our electronic assembly sensors was down $11.5 million or 36% in 2008 compared to 2007 due to the
negative impact of reduced levels of capital spending for electronics manufacturing capacity brought about by the weak global
economy. Revenues from our electronic assembly sensors were down approximately $200,000 or 1% in 2007 compared to 2006
and increased $10.4 million or 48 % in 2006 compared to 2005. During 2007 and 2006, revenue from electronic assembly sensors
were positively impacted by favorable worldwide demand for cell phones, laptops and other consumer electronics, driving the
need for increased production of printed circuit boards and memory modules. In addition, the economies in the countries where
most of our products are sold remained strong. In addition to the impact of the economic recession, which has caused orders of
our sensors to drop significantly, our decision not to develop sensors for the next generation of equipment for Assembleon will
adversely effect our sensor revenue in future periods.
Revenues from our SMT systems products decreased by $1.5 million or 7% in 2008, after increasing $2.3 million or 12% in
2007 and increasing $4.0 million or 27% in 2006. Revenue from our SMT system products was negatively impacted by the
deepening global recession in 2008, after being positively impacted during 2007 and 2006 by favorable worldwide demand for
electronics and favorable market conditions in the countries where most of our products are sold. Unlike our sensor revenue,
which is closely tied to the need for added production capacity for printed circuit boards, a portion of our SMT systems revenue is
derived from the retro-fit of existing production lines as companies seek to improve their production yields, thereby reducing
manufacturing costs.
We believe that increased use of outsourcing for circuit board assembly, production difficulties associated with smaller
component sizes, increased production speeds and increased cost pressure on companies manufacturing circuit boards caused
increased demand for our inspection equipment, prior to the recent global economic recession. However, our revenue has been
impacted by increasing competition and price pressure on our SMT inspection systems, particularly in Asia.
Revenue from our systems products is impacted by the timing of the introduction of new system products, including our
Flex Ultra and our Flex Ultra HR automated optical inspection (AOI) systems. Sales of our Flex AOI systems remained virtually
unchanged in 2008 at $6.9 million, after increasing $339,000 or 5% in 2007 and increasing $2.3 million or 55% in 2006. Sales of
our SE 300 Ultra solder paste inspection system decreased $1.5 million or 10% in 2008, after increasing $2.0 million or 16% in
2007 and increasing $1.7 million or 16% in 2006. We believe that the introduction of our next generation solder paste inspection
system in the second quarter of 2009, with its improved speed and other new capabilities will strengthen our competitive position
in the inspection market.
Export revenue from electronic assembly sensors and SMT systems totaled $36.7 million in 2008, $49.4 million in 2007,
and $46.5 million in 2006, comprising 91% of electronic assembly revenue in 2008, 93% of electronic assembly revenue in 2007,
and 91% of electronic assembly revenue in 2006. Sales to international customers continue to be significant, as manufacturing of
electronic components has migrated offshore, particularly to China and other areas of Asia.
We believe the market trend toward automated inspection using SMT inspection systems is continuing to grow and emerge
due to ongoing miniaturization of SMT circuit board components. Required for downsizing products, some new generation
components have become so small that it is now virtually impossible for the human eye to inspect circuit boards for defects in
solder paste quality, component placement and solder joints. For this reason, we believe automated inspection has become the only
viable means for inspecting SMT circuit boards with such tiny components, and we believe that our SMT systems products will be
one of our primary growth drivers over the next few years. We presently anticipate that significant weakness in our markets and
the global economy will have a negative impact on our sales, at least through the first half of 2009.
22
Semiconductor
Revenues from semiconductor products decreased by $314,000 or 6% in 2008 compared to 2007 and decreased by
$374,000 or 6% in 2007 compared to 2006. The decrease in revenue for both years was due to difficult conditions in the market for
semiconductor fabrication equipment and declining revenue from our older wafer mapper and frame grabber products, partially
offset by additional revenue from our new WaferSense family of products. Total WaferSense revenue increased to $1.7 million in
2008 from $1.1 million in 2007 and $517,000 in 2006.
Our wafer mapping and frame grabber products are relatively mature. We anticipate that future growth in our
semiconductor revenues, exclusive of changes related to capital procurement cycles, will come from our new WaferSense™
products. WaferSense™ is a family of wireless, wafer like precision measurement tools for in-situ setup, calibration and process
optimization in semiconductor processing equipment. We have recently introduced several new additions to the WaferSense™
product line, including additional leveling sensors, along with new gapping, teaching and vibration sensors.
Export revenue from semiconductor products totaled $2.4 million or 46% of total semiconductor revenue in 2008, $1.8
million or 32% of total semiconductor revenue in 2007 and $1.8 million or 31% of total semiconductor revenue in 2006. The level
of international sales and percentage of sales coming from international markets increased substantially in 2008 due to the large
increase in WaferSense™ sales, which have a higher concentration of international sales that our other semiconductor products. In
addition, sales of our wafer mapping products, which do not generate significant international sales, declined more in 2008 than
our frame grabber products, which do generate significant international sales.
Gross Margin
Electronic Assembly
Gross margin as a percentage of electronic assembly sales were 39% in 2008, 50% in 2007 and 51% in 2006. Significantly
lower sales of higher margin electronic assembly sensors accounted for most of the decrease in gross margin percentage in 2008.
Other factors having a negative impact on our gross margin for 2008 included Juki’s transition to our next generation LNC 60
sensor, which carries a lower gross margin than the older sensors we sell to Juki and increasing price competition for our SMT
system products. In addition, our gross margin in 2008 was negatively impacted by a $650,000 charge for excess and obsolete
inventory (2% gross margin reduction). As discussed earlier, Assembleon intends to start their transition away from our sensor
products in the third quarter of 2009. The timing of Assembleon’s transition away from our sensor products, combined with the
sharp drop-off in orders in the fourth quarter of 2008 and our expectation for continued weakness into 2009, resulted in a $650,000
charge for excess and obsolete inventory in the fourth quarter of 2008.
The decrease in gross margin as a percentage of sales in 2007 compared to 2006 was due to increasing competition
resulting in lower sales prices for our electronic assembly products, particularly our SMT system products. Increased competition
and resulting price pressure on our SMT system products reduced gross margin as a percentage of electronic assembly sales in
2007 by four percentage points, offset in part by a one percentage point improvement from cost reduction programs. Increasing
price competition for our electronic assembly sensor products also impacted our gross margin. The gross margin decrease in 2007
resulting from the increase in price competition was partially offset by a $250,000 benefit from a warranty recovery. Our gross
margin as a percentage of sales is generally lower for our system products as compared to our sensor products.
The market for automated inspection has become increasingly competitive, causing us to decrease the selling prices of our
products in some markets. With respect to our systems products, we anticipate that pricing pressures will continue in 2009 due to
the competitive nature of the marketplace for all forms of automated circuit board inspection, The severe global economic
recession may also have a further negative impact on pricing, as some competitors may be inclined to discount their prices in order
to deal with excess inventory levels.
We have implemented our own cost reduction programs to reduce the impact of these pricing pressures on our gross
margins. We expect to introduce our next-generation solder paste inspection system, as scheduled, in the second quarter of 2009.
To be manufactured in Singapore and based on a new cost-reduced platform, we believe it will be the fastest and most accurate
solder paste inspection system available on the market. We believe this system will have capabilities not available on our current
SE 300, thus strengthening our competitive position in the inspection market. Other new systems platforms we expect to introduce
in the future will be based on new technology that will allow for reduced cost and improvement in margins.
In response to significant weakness in our markets resulting from the global recession, and transition of manufacturing for
our SMT system products to Singapore, we will have reduced our manufacturing workforce by over 30 employees or 45% by the
end of the second quarter of 2009. We anticipate that transition of manufacturing for our SMT system products to Singapore will
be complete by the middle of 2009. We will also consolidate manufacturing for our semiconductor products into our Minneapolis
Minnesota headquarters facility. These actions will allow us to reduce our overall manufacturing costs and better leverage our
23
manufacturing operations, thereby favorably impacting our gross margins not only in the second half of 2009, but also in future
periods. We estimate savings by the middle of 2009 from our factory cost reduction actions and transition to Singapore of
approximately $2.0 million per year.
Semiconductor
Gross margin as a percentage of sales were 61% in 2008, 65% in 2007 and 67% in 2006. Gross margin as a percentage of
sales for the semiconductor segment is dependent on revenue mix and the level of production volume over which to spread fixed
manufacturing overhead costs. Gross margins decreased as a percentage of revenue in 2008 and 2007 due to a change in revenue
mix, with our highest margin wafer mapping sensors representing a smaller percentage of total semiconductor revenue.
We currently expect gross margins as a percentage of revenue from our semiconductor products to remain consistent or
increase slightly in 2009 from 2008 levels, due to anticipated revenue from new WaferSense product introductions as these
products have higher gross margins than our existing products. The consolidation of manufacturing for our semiconductor
products into our Minneapolis Minnesota headquarters facility will also have a favorable impact on semiconductor gross margins.
Operating Expenses
We believe continued investment in research and development of new products, coupled with continued investment in and
development of our sales channel is critical to future growth and profitability. We maintain research and development and sales
and marketing expenses at relatively high levels, even during periods of downturn in our electronic assembly and semiconductor
capital equipment markets, as we continue to fund development of important new products, and continue to invest in our sales
channels and develop new sales territories.
In February 2008, we announced plans to move a significant portion of our systems related product development and
manufacturing for all system products to Singapore, the location of our Asian sales office. The transition of systems related
product development to Singapore was substantially complete by the end of the fourth quarter of 2008. We anticipate that the
transition of manufacturing for our system products will be complete by the middle of 2009. These moves will allow us to
become more responsive to the needs of our growing base of Asian SMT systems customers, permit our core Minneapolis based
optical engineering resources to work on future OEM opportunities, and attain significant cost savings. We estimate that the
transition to Singapore increased our 2008 expenses by approximately $1.5 million. Transition costs in 2009 are not expected to
be significant.
In response to the significant weakness in our markets and the global economy, and also due to our transition of a
significant portion of our operations to Singapore, we will have reduced our workforce by 50 employees or 25% (over 30 in
manufacturing and approximately 20 in development, sales and marketing) from the start of the fourth quarter of 2008 through the
end of the second quarter of 2009. Other cost saving measures include salary reductions of 12% for all officer and internal director
level positions, 10% for other employees with salaries exceeding $100,000 and a smaller percentage reduction for employees with
salaries ranging between $35,000 and $100,000. In addition, we will also reduce spending for non-labor costs such as travel,
supplies and the like. We anticipate that the workforce reductions, salary reductions and other cost saving measures, combined
with savings from our transition to Singapore will provide annual operating expense savings by the middle of 2009 of almost $3.0
million per year. These savings are in addition to the $2.0 million of annual factory cost reductions noted above.
We are continually evaluating existing and new research and development projects, and may elect to increase or decrease
expenditures based on an assessment of the future revenue and profit potential of these projects.
Electronic Assembly
Research and development expenses for our electronic assembly segment were $8.8 million or 22% of revenue in 2008,
$8.1 million or 15% of revenue in 2007 and $6.3 million or 12% of revenue in 2006. The 7% increase in research and
development expense in 2008 compared to 2007 resulted from costs incurred to transition our systems related research and
development to Singapore. Throughout most of 2008, we maintained our Minneapolis-based systems development team while we
trained our new Singapore based team, resulting in extra costs for wages, training, travel, and other costs, during the initial start-up
and training period. Singapore transition costs totaled $1.5 million in 2008. Of this amount, transition costs included in 2008
research and development expense totaled $879,000.
The 29% increase in research and development expense in 2007 compared to 2006 was due to increased costs for contract
labor of $1.4 million, excluding customer funded expenses, $231,000 for employee compensation associated with annual wage
increases and new employees, and $73,000 for proto-type expenses and lab supplies. A significant portion of our product
development efforts in 2007 were targeted at next generation SMT inspection system products and continued enhancements to our
SE 300 Ultra solder paste inspection system and Flex Ultra and Flex Ultra HR automated optical inspection systems.
24
Selling, general and administrative expenses for our electronic assembly segment were $12.7 million or 32% of revenue in
2008, $13.0 million or 24% of revenue in 2007 and $11.7 million or 23% of revenue in 2006. The slight decrease in selling,
general and administrative expenses in 2008 compared to 2007 was due to a $178,000 reduction in wage expense resulting from
reduced incentive and stock compensation costs and a $105,000 reduction in commissions for third party sales representatives
resulting from the lower level of system sales. Selling general and administrative expense in 2007 included approximately
$200,000 of expense related to a canceled acquisition. The savings from this non-recurring activity were partially offset by
additional expense related to our Singapore transition.
The 11% increase in selling, general and administrative expenses in 2007 compared to 2006 was due to a $406,000 increase
in sales commissions to distributors and other third parties and an approximate $300,000 increase in travel. We also incurred
approximately $200,000 of expenses in 2007 from a cancelled acquisition. The remaining increase in selling, general and
administrative expense for 2007 was due to the 12% increase in SMT system sales in 2007 compared to 2006.
Semiconductor
Research and development expenses for our semiconductor segment were $1.7 million or 31% of revenue in 2008, $1.7
million or 31% of revenue in 2007 and $1.8 million or 31% of revenue in 2006. Research and development expenses for
semiconductor have remained relatively constant during the last three years, as we have continued to develop various new sensors
for our WaferSense family of precision measurement tools, including new automated leveling, gapping, teaching and vibration
sensors to assist with process optimization and yield improvement in the semiconductor fabrication process.
Selling, general and administrative expenses for our semiconductor segment were $1.5 million or 29% of revenue in 2008,
$1.7 million or 30% of revenue in 2007 and $2.3 million or 39% of revenue in 2006. The decrease in selling, general and
administrative expense for both 2008 and 2007 was due to a small workforce reduction which occurred early in 2007, and lower
costs for incentive compensation.
Severance, Recruitment and Singapore Transition
We started to incur severance costs in February 2008 in connection with our decision to move a significant portion of
development and manufacturing for our systems products to Singapore. The transition of development was substantially complete
by the fourth quarter of 2008; and transition of manufacturing is expected to be complete by the middle of 2009. Severance costs
incurred in 2008 in connection with the February 2008 decision totaled $302,000. We also incurred expenses totaling $234,000
for outside service providers to assist us with recruitment of our new Singapore based development and manufacturing team. We
maintained our Minneapolis-based systems development team while we trained our new Singapore based team, resulting in extra
costs totaling $879,000 for wages, training, travel, and other costs, during the initial start-up and training period. These costs have
been classified in our statement of operations as research and development expense. Other start-up costs totaling $112,000 have
been classified in our statement of operations as selling, general and administrative expense. Singapore transition costs totaled
approximately $1.5 million in 2008. Transition costs in 2009 are not expected to be significant.
Additional severance costs of $234,000 were incurred in November 2008 when we reduced our workforce by
approximately 10% or 20 employees in response to the weak global economic conditions. All of the aforementioned costs related
to the November 2008 workforce reduction have been classified as severance and recruitment in our statement of operations.
A summary of our severance and recruitment accruals follows:
February
2008
Singapore
Move
—
302
(95)
207
Electronic Assembly
November
Recruitment
—
234
(234)
—
$
$
$
$
2008
Workforce
Reduction
—
155
(51)
104
Total
$ —
691
(380)
311
$
$
$
Semi-
conductor
November
2008
Workforce
Reduction
—
79
(75)
4
Total
$ —
770
(455)
315
$
(in thousands)
Balance, January 1, 2008
Costs incurred
Payments made
Balance, December 31, 2008
$
$
25
In February 2009, we further reduced our workforce by 24 positions in response to weakening conditions in the global
economy and our decision to consolidate manufacturing for our semiconductor products in our Minneapolis facility. We anticipate
that all of these employees will have departed by the end of the second quarter of 2009. Severance expense related to these actions
of approximately $325,000 is expected in the first half of 2009.
Goodwill Impairment and Amortization of Intangibles
We assess our goodwill for impairment in the fourth quarter of each year, and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. For 2008, our annual impairment review coincided with a series of facts
and circumstances indicating that our goodwill might be impaired, including weakness in the United States capital markets, caused
by the deepening global recession, as well as our reduced level of profitability, causing a significant drop in our market
capitalization.
We measure for potential impairment of goodwill associated with each of our reporting units based on a projected
discounted cash flow method using a discount rate that we believe is commensurate with the risk inherent in our current business
model. The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being
evaluated. These assumptions require significant judgment and actual results may differ from assumed or estimated amounts.
Upon completion of our analysis, we concluded that the goodwill related to our electronic assembly segment was fully
impaired, resulting in a $3.9 million pre-tax impairment charge. We also concluded that the goodwill related to semiconductor
segment in the amount of $569,000 was not impaired.
No change in the amount of amortization expense related to acquired intangible assets for either our electronic assembly or
semiconductor segments is expected in 2009.
Interest Income and Other
Interest income and other includes interest earned on investments, realized gains and losses from sales of investments, gains
and losses associated with foreign current transactions and in 2008, an unrealized loss on an available for sale equity security.
Interest income and other decreased in 2008 compared to 2007 due to lower rates of interest earned on invested funds and
lower invested balances of cash and marketable securities resulting from significant repurchases of our common stock in 2008
totaling $20.9 million. We recognized a $166,000 unrealized loss on an available for sale equity security in the second quarter of
2008. The decline in market value for this security was determined to be other than temporary resulting in recognition of the
unrealized loss in our statement of operations. We also incurred net UK sterling related foreign currency losses of $176,000 in
2008, compared to net UK sterling related foreign currency gains of $38,000 in 2007.
Interest income and other increased during 2007 and 2006 as the result of additional invested funds and higher rates of
interest earned on those funds.
Income Taxes
We recorded an income tax benefit of $2.6 million in 2008, reflecting an effective income tax rate of 28.0%, compared to
an effective income tax rate of 35.2% in 2007 and 29.5% in 2006. Our effective income tax rate for 2008 was negatively impacted
by 10.5% due to the non-deductibility of a large portion of our goodwill impairment charge. A reduction in our reserve for income
tax exposures reduced our effective rate by approximately1.1% in 2008. Our effective rate was 2.3% higher in 2007 due to an
increase in our reserve for income tax exposures.
Our effective tax rate was higher in 2007 compared to 2006 due to elimination of the extra territorial income exclusion in
2007 and an approximate $200,000 income tax benefit recorded in 2006 from favorable resolution of a tax contingency accrual for
prior year’s income taxes, resulting from the closing of a domestic statute of limitations.
Our 2006 federal income tax return is currently being audited by the Internal Revenue Service. We are not able to
reasonably estimate the timing of any potential payments that may result from this audit.
26
We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax
returns and income before income taxes under U.S. generally accepted accounting principals, research and development tax credit
carry forwards and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be
received when temporary differences previously reported in our financial statements become deductible for income tax purposes,
or when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are applied
against future tax liabilities. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on
Statement of Financial Accounting Standards No. 109.
Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether
valuation allowances are required considers, among other matters, the nature, frequency and severity of current and cumulative
losses, forecasts of future profitability, the duration of statutory carry forwards periods, our experience with loss carry forwards not
expiring unused and tax planning alternatives.
Our analysis of the need for valuation allowances considered that we have positive cumulative profit over the past three
years even without the exclusion of the $2.9 million non-deductible goodwill impairment in 2008. We also considered the
forecasts of future profitability, the duration of statutory carry forward periods and tax planning alternatives. We further evaluated
our past cycles which tend to average five years in length (from peak to trough) and also considered our five year cumulative
results ended December 31, 2008 which also had strong profits. Finally, we evaluated where these cumulative three and five year
measures might be at the end of 2009 and considered other positive evidence to conclude no incremental valuation allowance was
needed at December 31, 2008.
While we have a recent history of profits, our results have been impacted by the recent global economic slowdown, and we
incurred a loss in the United States in 2008 where most of our net deferred tax assets are recorded. Therefore, achievement of
profitability in the United States will be a significant factor in determining our continuing ability to carry these deferred tax assets
without recording a valuation allowance.
If future results from our operations are less than projected, a valuation allowance may be required to reduce the deferred
tax assets. If we continue to incur losses for several more quarters, and if our operations and outlook show no sign of improvement
by as early as the second quarter of 2009, we may be required to record as much as a full valuation allowance against virtually all
of our deferred tax assets, which could have a material impact on our results of operations in the period in which it is recorded.
Liquidity and Capital Resources
Our cash and cash equivalents decreased by $14.3 million during 2008 primarily because of repurchases of $20.9 million of
common stock, and purchases of $2.2 million of capital assets, partly offset by $8.6 million of maturities and sales of marketable
securities, net of purchases, $94,000 of cash generated from operating activities and $241,000 of cash received from the exercise
of stock options and share purchases under our employee stock purchase plan. Our cash and cash equivalents fluctuate in part
because of maturities of marketable securities, and investment of cash balances in marketable securities, or from other sources of
cash, in addition to marketable securities. Accordingly, we believe the combined balances of cash and marketable securities
provide a more reliable indication of our available liquidity. Combined balances of cash and marketable securities declined by
$22.8 million to $29.8 million as of December 31, 2008 from $52.6 million as of December 31, 2007.
We generated $94,000 of cash from operations in 2008. Cash generated from operations included our net loss of $6.7
million, which included a $3.9 million non-cash goodwill impairment charge and other non-cash expenses totaling $3.1 million for
depreciation and amortization, provisions for inventory obsolescence and doubtful accounts, deferred taxes, non-cash gains and
losses from foreign currency transactions, gain and loss activity from marketable securities and stock compensation expenses.
Changes in operating assets and liabilities include a decrease in accounts receivable of $2.9 million. Cash generated from
the reduction in accounts receivable was mostly offset by an increase in inventories of $880,000, an increase in other current assets
of $1.3 million, a decrease in accounts payable of $441,000, and decreases in accrued expenses and advance customer payments of
$452,000. The reduction in accounts receivable and the increase in inventory resulted from the significant and rapid decline in our
sales during the later half of 2008. We recorded revenue of $6.7 million in the fourth quarter of 2008 compared to $14.9 million in
the fourth quarter of 2007. The increase in other current assets reflects the anticipated tax refund we expect to receive from the
carry back of our 2008 taxable loss to earlier years. The decrease in accounts payable resulted from a reduction in new inventory
purchases late in the year, in anticipation of the current global economic recession and its impact on near term sales in 2009. The
decrease in accrued expenses and advance customer payments primarily resulted from the elimination of incentive bonuses in 2008
given our financial performance.
27
We generated $5.6 million of cash from operations during 2007. Cash generated from operations included net income of
$5.0 million, which included $3.5 million of net non-cash expenses for depreciation and amortization, provisions for inventory
obsolescence, doubtful accounts and deferred taxes, foreign currency transactions and stock compensation expense. Changes in
operating assets and liabilities included a decrease in accounts receivable of $592,000 and an increase in advance customer
payments of $718,000. This cash generated was offset partly by increases in inventory of $3.1 million and other assets of $484,000
and a decrease in accounts payable of $571,000. The decrease in accounts receivable was due to a heightened emphasis on
collections during the fourth quarter of 2007. The increase in advance customer payments is due to more sales to customers who
pay prior to recognition of revenue. Inventories were up due to a shift in the mix of products sold compared to our original sales
forecast. Other assets were higher because of more value added and income tax refunds due from various governmental
authorities. The decrease in accounts payable is the result of the timing of inventory purchases. Inventory purchases were down in
the fourth quarter of 2007 compared to 2006, resulting in a reduction in the accounts payable balance, as payments for inventory
exceeded new purchases.
We generated $6.4 million of cash from investing activities in 2008 compared to using $15.8 million of cash for investing
activities in 2007. Changes in the level of investment in marketable securities, resulting from the purchases, sales and maturities
of those securities provided $8.6 million of cash in 2008 and used $14.5 million of cash in 2007. We used $2.2 million of cash in
2008 and $1.3 million of cash in 2007 for the purchase of fixed asset and capitalized patent costs.
We used $20.7 million of cash for financing activities in 2008, compared to $930,000 of cash for financing activities in
2007. We spent $20.9 million in 2008 to repurchase 2.1 million shares of our common stock. Cash spent for share repurchases
totaled $1.9 million in 2007. There are currently no share repurchase authorizations in effect. Stock option exercises and issuance
of common stock under our Employee Stock Purchase Plan generated $241,000 of cash in 2008 compared to $971,000 of cash in
2007.
At December 31, 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of
establishing off-balance sheet arrangements or other contractually narrow or limited purposes. We do not believe we are exposed
to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Except for our obligations under facilities leases and purchase contracts, we had no material commitments for expenditures
as of December 31, 2008. While there were no material commitments, we evaluate investment opportunities that come to our
attention and could make a significant commitment in the future.
Our cash, cash equivalents and marketable securities totaled $29.8 million at December 31, 2008. We believe that on-hand
cash, cash equivalents and marketable securities, coupled with anticipated future cash flow from operations, will be adequate to
fund our cash flow needs for the foreseeable future, including contractual obligations discussed below.
The following summarizes our contractual obligations at December 31, 2008, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods.
December 31, 2008 (in 000’s)
Total
Less Than
1 Year
1 – 4 Years
After 4 Years
Contractual Obligations:
Non-cancelable operating lease obligations
Purchase obligations
Reserve for income taxes under FIN 48
Total contractual cash obligations
$
$
3,600 $
4,603
1,578
9,781 $
1,556 $
4,603
—
6,159 $
$
2,044
—
1,578
3,622 $
—
—
—
—
We lease a 60,217 square foot mixed office and warehouse facility built to our specifications in Golden Valley, Minnesota,
which functions as our corporate headquarters and primary manufacturing facility. The lease for this space is set to expire in
June 2011. During 2008, we entered into a new three year lease for a mixed office and warehouse facility in Singapore. The lease
provides for a 3 year term from May 15, 2008, annual rent of approximately $350,000 and a two year renewal option.
Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding.
Included in the purchase obligations category above are obligations related to purchase orders for inventory purchases under our
standard terms and conditions and under negotiated agreements with vendors and utilities. We expect to receive consideration
(products or services) for these purchase obligations. The purchase obligation amounts do not represent all anticipated purchases in
the future, but represent only those items for which we are contractually obligated. The majority of our products and services are
purchased as needed, with no contractual commitment. Consequently, these amounts will not provide a reliable indicator of our
expected future cash outflows on a stand-alone basis.
28
Our 2006 federal income tax return is currently being audited by the Internal Revenue Service. We are not able to
reasonably estimate the timing of any potential payments that may result from this audit. See Note 6 for further discussion on
income taxes.
Fair Value Measurements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value
Measurements”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 will apply whenever another standard
requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any
new circumstances, and was effective for fiscal years beginning after December 31, 2007. The FASB has provided a one year
deferral for certain non-financial assets and liabilities. We adopted SFAS No. 157, effective January 1, 2008, for all financial
assets and liabilities that were not deferred. The adoption of SFAS No. 157 for our financial assets and liabilities had no impact on
our financial position or results of operations. We do not expect the standard to have a material impact on our consolidated results
of operations and financial condition when fully adopted in 2009.
In accordance with SFAS No. 157, we value our cash equivalents and marketable securities based on a three-level fair value
hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities
(Level 1). The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for
identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2). The lowest priority is given to
unobservable inputs (Level 3).
The following table provides information regarding fair value measurements for our cash equivalents and marketable
securities as of December 31, 2008 according to the three-level fair value hierarchy:
Fair Value Measurements at Reporting Date Using
(In thousands)
Balance
December 31,
2008
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents
U.S. government and agency
obligations
Corporate debt securities
Asset backed securities
Equity securities
$
$
$
$
$
2,421 $
- $
2,421 $
21,151 $
2,527 $
1,559 $
30 $
- $
- $
- $
30 $
21,151 $
2,527 $
1,559 $
- $
-
-
-
-
Changes in the fair value of these investments for the year ended December 31, 2008 resulting from our adoption of SFAS
No. 157 had no impact on our consolidated financial statements. Our foreign currency swap agreements are structured to mature
on the last day of each quarter. As a result, the fair value associated with these agreements is inconsequential.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities,” which provides companies with an option to report selected financial assets and liabilities at fair value. This standard
was effective beginning after December 31, 2007. We elected not to adopt the provisions of SFAS No. 159 in 2008.
Related Party Transactions
We did not engage in any related party transactions during the three year period ended December 31, 2008.
Inflation and Foreign Currency Transactions
Changes in our revenues have resulted primarily because of changes in the level of unit shipments and the relative strength
of the worldwide electronics and semiconductor fabrication capital equipment markets. We believe that inflation has not had a
significant effect on our operations. All 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.
29
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 near the last day of each quarter, and
are designated as cash flow hedges. At December 31, 2008, we had one open swap agreement that was purchased on that day. As
a result, any unrealized gains or losses as of December 31, 2008 were inconsequential. During the year ended December 31, 2008,
gains from the settlement of foreign currency swap agreements totaling $277,000 partially offset non-cash transaction losses on the
underlying inter-company balance of $453,000.
We have sales offices located in the UK, Singapore, and China. We do not believe that currency fluctuations will have a
material impact on our consolidated financial statements.
Recent Accounting Developments
In December 2007, the FASB issued Statement No. 141R, “Business Combinations,” which establishes principles for how
an acquirer recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed in a business
combination, recognizes and measures the goodwill acquired in a business combination, and determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. We are
required to apply this standard prospectively to business combinations for which the acquisition date is on or after January 1, 2009.
Earlier application is not permitted.
In March 2008, the FASB issued Statement No. 161 “Disclosures about Derivative Instruments and Hedging Activities”
which amends and expands Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 161
requires disclosure of the fair value of derivative instruments and their gains or losses in tabular format, information about credit-
risk-related contingent features in derivative agreements, counterparty credit risk, along with strategies and objectives for using
derivative instruments. This standard must be applied prospectively for interim periods and fiscal years beginning after November
15, 2008. We are presently analyzing the impact of SFAS No. 161 on our financial statement disclosures.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate
these estimates, including those related to revenue recognition, bad debts, warranty obligations, inventory valuation, intangible
assets, and income taxes. We base these estimates on historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different
assumptions or conditions. The estimates and judgments that we believe have the most effect on our reported financial position and
results of operations are as follows:
Revenue Recognition.
Revenue from all customers, including distributors, is recognized when all significant contractual obligations have been
satisfied and collection of the resulting receivable is reasonably assured. Generally, revenues are recognized upon shipment under
FOB shipping point terms. Estimated returns and warranty costs are recorded at the time of sale. Sales of some surface mount
technology (SMT) products may require customer acceptance due to performance or other acceptance criteria included in the terms
of sale. For these SMT product sales, revenue is recognized at the time of customer acceptance.
When a sale involves multiple elements, revenue is allocated to each respective element in accordance with Emerging
Issues Task Force (EITF) 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables.” Allocation of revenue to
undelivered elements of the arrangement is based on fair value of the element being sold on a stand-alone basis.
Costs related to products delivered are recognized in the period revenue is recognized. Cost of goods sold consists primarily
of direct labor, allocated manufacturing overhead, raw materials and components and excludes amortization of intangible assets.
30
Allowance for Doubtful Accounts.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make
required payments. In making the determination of the appropriate allowance for doubtful accounts, we consider specific accounts,
historical write-offs, changes in customer relationships and credit worthiness and concentrations of credit risk. Specific accounts
receivable are written-off once a determination is made that the account is uncollectible. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The
allowance for doubtful accounts is $250,000 as of December 31, 2008.
Allowance for Warranty Expenses.
We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive
product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers,
warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the
estimated warranty liability would be required. The allowance for warranties is $823,000 at December 31, 2008.
Reserve for Inventory Obsolescence.
We write down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected, or if in the future we decide to discontinue sales and marketing of any of our
products, additional inventory write-downs may be required. At December 31, 2008, we had a reserve for obsolete and excess
inventory of $1.1 million.
Valuation of Intangible and Long-Lived Assets.
We assess the impairment of identifiable intangible assets, long lived assets and related goodwill whenever events or
changes in circumstances indicate the carrying value may not be recoverable. Factors we consider important, which could trigger
an impairment review include the following:
• Significant under-performance relative to expected historical or projected future operating results.
• Significant changes in the manner of our use of the acquired assets or the strategy for our overall business.
• Significant negative industry or economic trends.
• Significant decline in our stock price for a sustained period; and our market capitalization relative to net book value.
•
For intangible assets and long-lived assets, if the carrying value of the asset exceeds the undiscounted cash flows from
such asset.
When we determine that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable
based upon the existence of one or more of the above indicators of impairment, we measure any potential impairment based on a
projected discounted cash flow method using a discount rate that we believe is commensurate with the risk inherent in our current
business model. Annually, we also test for impairment of goodwill for each of our reporting units by estimating their fair value,
utilizing a discounted cash flow methodology to determine a reasonable valuation. The evaluation of asset impairment requires us
to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant
judgment and actual results may differ from assumed or estimated amounts.
In the fourth quarter of 2008, we reviewed our identifiable intangible assets, long-lived assets and goodwill for impairment
because facts and circumstances similar to those noted above indicated that the assets might be impaired, including weakness in
the United States capital markets caused by the deepening global recession, and our reduced level of profitability, causing a
significant drop in our market capitalization.
An impairment loss for our identifiable intangible and long lived assets would be recognized when future undiscounted cash
flows expected to result from use of the asset and eventual disposition are less than the carrying amount. As of December 31,
2008, we projected our future undiscounted cash flows associated with these assets and concluded that there was no impairment.
31
In evaluating whether goodwill was impaired, we compared the fair value of our two reporting units to which goodwill is
assigned to their carrying value (Step 1of the impairment test). In calculating fair value, we used the income approach. The income
approach is a valuation technique under which we estimate future cash flows using the reporting units’ financial forecasts. Future
estimated cash flows are discounted to their present value to calculate fair value. The summation of our reporting units' fair values
is compared and reconciled to our market capitalization as of the date of our impairment test. In the situation where a reporting
unit's carrying amount exceeds its fair value, the amount of the impairment loss must be measured. The measurement of the
impairment (Step 2 of the impairment test) is calculated by determining the implied fair value of a reporting unit's goodwill. In
calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of
that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and
liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying amount of
goodwill over its implied fair value.
In determining the fair value of our reporting units under the income approach, our expected cash flows are affected by
various assumptions. Fair value on a discounted cash flow basis uses forecasts over a 3 year period with an estimation of residual
growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The significant
assumptions incorporated in these forecasts for the most recent goodwill impairment tests include our expectations regarding
revenue during the 3 year period, a 7 percent terminal growth rate and a 25% discount rate for both our electronic assembly and
semiconductor reporting units. The selection of discount rates may have a significant impact on the determination of fair value.
However, for the 2008 test, an increase or decrease of one percent in the discount rate would have had no impact on the
impairment recorded for our electronic assembly reporting unit.
For purposes of our goodwill impairment test, we reconciled the fair value for each of our reporting units to our overall fair
value. The publicly traded market price of our common stock and a control premium of 30 percent was used in our determination
of fair value, which represents the value an investor would pay above minority interest transaction prices in order to obtain a
controlling interest in the company. The control premium was determined by a review of premiums paid for similar companies
over the past five years. While the control premium is a significant assumption in determining our overall fair value, it had a
minimal impact on the determination of goodwill impairment in 2008. An increase in the assumed control premium by five percent
to 35 percent would have had no impact on the impairment recorded for our electronic assembly reporting unit.
Our remaining goodwill at December 31, 2008, in the amount of $569,000 relates to our semiconductor reporting unit. Our
recent analyses indicate that this goodwill is not impaired. However, our conclusion could change in the future, if our
assumptions about future economic conditions, revenue growth or profitability change. Any resulting impairment charge could
have a material effect on our financial position and results of operations in the future.
Income Taxes.
Significant judgment is required in determining worldwide income tax expense based upon tax laws in the various
jurisdictions in which we operate. We have established reserves for uncertain tax positions by applying the “more likely than not”
criteria of FIN 48, under which the recognition threshold is met when an entity concludes that a tax position, based solely on its
technical merits, is more likely than not to be sustained upon examination by the relevant tax authority. All tax positions are
analyzed periodically and adjustments are made as events occur that warrant modification, such as the completion of audits or the
expiration of statutes of limitations, which may result in future charges or credits to income tax expense.
As part of the process of preparing consolidated financial statements, management is required to estimate income taxes in
each of the jurisdictions in which we operate. This process involves estimating the current tax liability, as well as assessing
temporary differences arising from the different treatment of items for financial statement and tax purposes. These differences
result in deferred tax assets and liabilities, which are recorded on our balance sheet.
We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax
returns and income before income taxes under U.S. generally accepted accounting principals, research and development tax credit
carry forwards and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be
received when temporary differences previously reported in our financial statements become deductible for income tax purposes,
or when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are applied
against future tax liabilities. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on
Statement of Financial Accounting Standards No. 109.
32
Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether
valuation allowances are required considers, among other matters, the nature, frequency and severity of current and cumulative
losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not
expiring unused and tax planning alternatives.
Our analysis of the need for valuation allowances considered that we have positive cumulative profit over the past three
years even without the exclusion of the $2.9 million non-deductible goodwill impairment in 2008. We also considered the
forecasts of future profitability, the duration of statutory carry forward periods and tax planning alternatives. We further evaluated
our past cycles which tend to average five years in length (from peak to trough) and also considered our five year cumulative
results ended December 31, 2008 which also had strong profits. Finally, we evaluated where these cumulative three and five year
measures might be at the end of 2009 and considered other positive evidence to conclude no incremental valuation allowance was
needed at December 31, 2008.
While we have a recent history of profits, our results have been impacted by the recent global economic slowdown, and we
incurred a loss in the United States in 2008 where most of our net deferred tax assets are recorded. Therefore, achievement of
profitability in the United States will be a significant factor in determining our continuing ability to carry these deferred tax assets
without recording a valuation allowance.
If future results from our operations are less than projected, a valuation allowance may be required to reduce the deferred
tax assets. If we continue to incur losses for several more quarters, and if our operations and outlook show no sign of improvement
by as early as the second quarter of 2009, we may be required to record as much as a full valuation allowance against virtually all
of our deferred tax assets, which could have a material impact on our results of operations in the period in which it is recorded.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest excess funds not required for current operations in marketable securities. The investment policy for these
marketable securities is approved annually by the Board of Directors and administered by management. A third party, approved by
our Board of Directors, manages the portfolio at the direction of our management. The investment policy dictates that marketable
securities consist of U.S. Government or U.S. Government agency securities, various tax exempt securities or certain approved
corporate instruments with effective maturities of five years or less and an average portfolio maturity of not more that 18 months.
The policy also provides for investment in certain specified marketable equity securities. As of December 31, 2008 our portfolio
of marketable securities had a weighted average maturity of 1.2 years. All marketable securities are classified as available for sale
and carried at fair value. We estimate that a hypothetical 1% increase in market interest rates would decrease the market value of
our marketable securities by approximately $325,000. If such a rate increase occurred, our net income would only be impacted if
securities were sold prior to maturity.
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 near the last day of each quarter, and
are designated as cash flow hedges. At December 31, 2008, we had one open swap agreement that was purchased on that day. As a
result, any unrealized gains or losses as of December 31, 2008 were inconsequential. During the year ended December 31, 2008,
gains from the settlement of foreign currency swap agreements totaling $277,000 partially offset non-cash transaction losses on the
underlying inter-company balance of $453,000.
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.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
CYBEROPTICS CORPORATION
(In thousands, except share information)
ASSETS
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowance for doubtful accounts of $250 at December 31, 2008 and
$310 at December 31, 2007
Inventories
Other current assets
Deferred tax assets, net
Total current assets
Marketable securities
Equipment and leasehold improvements, net
Intangible and other assets, net
Goodwill
Other assets
Deferred tax assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
Advance customer payments
Accrued expenses
Total current liabilities
Reserve for income taxes
Total liabilities
Commitments and contingencies (notes 7 and 14)
Stockholders’ equity:
Preferred stock, no par value, 5,000,000 shares authorized, none outstanding
Common stock, no par value, 37,500,000 shares authorized, 6,769,295 shares issued and
outstanding at December 31, 2008 and 8,793,059 shares issued and outstanding at
December 31, 2007
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
As of December 31,
2008
2007
$
4,516
10,433
$
18,864
11,953
6,951
9,869
2,579
2,604
36,952
14,834
2,615
956
569
189
2,834
58,949
2,753
684
3,054
6,491
1,578
8,069
9,781
10,640
1,466
2,575
55,279
21,801
1,944
1,069
5,207
—
1,739
87,039
3,209
794
3,337
7,340
1,583
8,923
$
$
$
$
—
—
29,156
(530)
22,254
50,880
$
58,949
$
49,303
(112)
28,925
78,116
87,039
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
35
CONSOLIDATED STATEMENTS OF OPERATIONS
CYBEROPTICS CORPORATION
(In thousands, except per share amounts)
Revenues
Cost of revenues
Gross margin
Research and development expenses
Selling, general and administrative expenses
Amortization of intangibles
Severance and recruitment
Goodwill impairment
Income (loss) from operations
Interest income and other
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Net income (loss) per share – Basic
Net income (loss) per share – Diluted
Weighted average shares outstanding – Basic
Weighted average and common equivalent shares outstanding – Diluted
$
$
$
$
2008
Year ended December 31,
2007
2006
$
58,776
28,529
$
45,452
26,387
19,065
10,406
14,229
182
770
3,941
(10,463)
1,193
(9,270)
(2,599)
(6,671) $
(0.87) $
(0.87) $
7,703
7,703
30,247
9,824
14,701
182
—
—
5,540
2,214
7,754
2,726
5,028
0.57
0.56
8,897
8,975
$
$
$
57,089
27,188
29,901
8,112
14,077
591
—
—
7,121
1,943
9,064
2,674
6,390
0.71
0.70
8,991
9,081
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
CYBEROPTICS CORPORATION
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Provision for doubtful accounts
Provision for inventory obsolescence
Deferred income tax provision (benefit)
Foreign currency transaction (gains) losses
Excess tax benefits from equity compensation plans
Stock compensation expense
Unrealized loss on available for sale equity security
Realized gains on available for sale equity security
Goodwill impairment
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other assets
Accounts payable
Advance customer payments
Accrued expenses and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available for sale marketable securities
Proceeds from sales of available for sales marketable securities
Purchases of available for sale marketable securities
Additions to equipment and leasehold improvements
Additions to patents
Net cash provided (used) by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options
Excess tax benefits from equity compensation plans
Proceeds from issuance of common stock under Employee Stock
Purchase Plan
Repurchase of common stock
Net cash used by financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents – beginning of year
2008
Year ended December 31,
2007
2006
$
(6,671) $
5,028
$
6,390
2,246
(34)
1,007
(1,349)
485
(2)
580
166
(40)
3,941
2,864
(880)
(1,326)
(441)
(110)
(342)
94
15,199
6,860
(13,502)
(1,834)
(343)
6,380
12
2
227
(20,949)
(20,708)
(114)
(14,348)
18,864
1,907
98
253
604
(22)
(33)
693
—
—
—
592
(3,115)
(484)
(571)
718
(111)
5,557
17,591
—
(32,064)
(1,017)
(279)
(15,769)
632
33
306
(1,901)
(930)
(50)
(11,192)
30,056
1,884
38
373
735
(294)
(185)
778
—
—
—
(734)
(1,573)
79
1,143
(352)
1,527
9,809
16,670
—
(13,983)
(1,131)
(266)
1,290
1,459
185
326
(2,579)
(609)
(26)
10,464
19,592
30,056
Cash and cash equivalents – end of year
$
4,516
$
18,864
$
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
CYBEROPTICS CORPORATION
(In thousands)
BALANCE, DECEMBER 31, 2005
Excess tax benefit from exercise of stock options
Exercise of stock options net of shares exchanged
Stock compensation
Issuance of common stock under Employee Stock
Purchase Plan
Repurchase of common stock
Comprehensive income:
Market value adjustments of marketable securities
Cumulative translation adjustment
Net income
Total comprehensive income
BALANCE, DECEMBER 31, 2006
Reduction in retained earnings related to the
adoption of FIN 48
Excess tax benefit from exercise of stock options
Exercise of stock options and vesting of restricted
stock units, net of shares exchanged
Stock compensation
Issuance of common stock under Employee Stock
Purchase Plan
Repurchase of common stock
Comprehensive income:
Market value adjustments of marketable securities
Cumulative translation adjustment
Net income
Total comprehensive income
BALANCE, DECEMBER 31, 2007
Excess tax benefit from exercise of stock options, net
of deferred tax shortfall related to stock options
and restricted stock units
Exercise of stock options, vesting of restricted stock
units, net of shares exchanged as payment
Share issuances to board members and officers for
compensation purposes
Stock compensation
Issuance of common stock under Employee Stock
Purchase Plan
Repurchase of common stock
Comprehensive income:
Market value adjustments of marketable securities,
net of reclassification adjustment
Cumulative translation adjustment
Net loss
Total comprehensive loss
BALANCE, DECEMBER 31, 2008
Accumulated
Other
Comprehensive
Income (Loss)
$
Retained
Earnings
(700) $ 17,539
Total
Stockholders’
Equity
$
66,190
Common Stock
Shares
Amount
8,899
$
49,351
—
144
—
29
(210)
—
—
—
—
8,862
—
—
60
—
29
(158)
—
—
—
—
8,793
—
7
23
—
$
$
185
1,459
802
326
(2,579)
—
—
—
—
49,544
—
29
632
693
306
(1,901)
—
—
—
—
49,303
(17)
12
127
453
28
(2,082)
227
(20,949)
$
$
—
—
—
—
—
—
—
—
—
—
58
189
—
—
—
—
6,390
—
(453) $ 23,929
—
—
—
—
—
—
(32)
—
—
—
—
—
268
73
—
—
—
—
5,028
—
(112) $ 28,925
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,769
—
—
—
—
29,156
$
$
120
(538)
—
—
—
—
(6,671)
—
(530) $ 22,254
$
185
1,459
802
326
(2,579)
58
189
6,390
6,637
73,020
(32)
29
632
693
306
(1,901)
268
73
5,028
5,369
78,116
(17)
12
127
453
227
(20,949)
120
(538)
(6,671)
(7,089)
50,880
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIALSTATEMENTS.
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION
NOTE 1 – BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
We are a leading global supplier of optical process control sensors and inspection systems that are used to control the
manufacturing process and to ensure the quality of electronic circuit boards manufactured by our customers using surface mount
technology (SMT). We also manufacture and sell sensors that assist with yield improvement, and the placement and transport of
wafers during semiconductor fabrication.
Principles of Consolidation
The consolidated financial statements include the accounts of CyberOptics Corporation and its wholly-owned subsidiaries. In these
Notes to the Consolidated Financial Statements, these companies are collectively referred to as “CyberOptics,” “we,” “us,” or
“our.” All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash and
cash equivalents consist of funds maintained in demand deposit accounts, money market accounts, corporate debt instruments and
U.S. government backed obligations.
Marketable Securities
All marketable securities are classified as available for sale and consist of U.S. government backed obligations, corporate debt
instruments, asset backed securities or equity securities. Marketable securities are classified as short-term or long-term in the
balance sheet based on their maturity date and expectations regarding sales.
Available for sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of
stockholders’ equity until realized, or an other-than temporary impairment is recognized in current operations. These fair values
are primarily determined using quoted market prices. The carrying amounts of securities, for purposes of computing unrealized
gains and losses, are determined by specific identification. The cost of securities sold is also determined by specific identification.
We monitor the carrying value of our investments compared to their fair value to determine whether an other-than-temporary
impairment has occurred. If a decline in fair value is determined to be other-than-temporary, an impairment charge related to that
specific investment is recorded in current operations.
Inventories
Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out (FIFO) method. Appropriate
consideration is given to deterioration, obsolescence, and other factors in evaluating net realizable value.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are maintained for estimated losses resulting from the inability of our customers to make
required payments. In making the determination of the appropriate allowance for doubtful accounts, we consider specific accounts,
historical write-offs, changes in customer relationships and credit worthiness and concentrations of credit risk. Specific accounts
receivable are written-off once a determination is made that the account is uncollectible.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Significant additions or improvements extending asset lives are
capitalized, while repairs and maintenance are charged to expense as incurred. In progress costs are capitalized with depreciation
beginning when assets are placed in service. Depreciation is recorded using the straight-line method over the estimated useful lives
of the assets, ranging from three to ten years. Leasehold improvements are depreciated using the straight-line method over the
shorter of the asset useful life or the underlying lease term. Gains or losses on dispositions are included in current operations.
39
Intangible Assets and Goodwill
Identified intangible assets (excluding goodwill) primarily developed technology and trademarks are being amortized on a straight-
line basis over periods ranging from four to ten years, based upon their estimated life. The straight-line method of amortization
reflects an appropriate allocation of the cost of intangible assets to earnings in proportion to the economic benefits obtained by us
in each reporting period.
Intangible and other long lived assets are reviewed for impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. An impairment loss would be recognized when future undiscounted cash
flows expected to result from use of the asset and eventual disposition are less than the carrying amount. We periodically assess
the potential impairment of our intangible and other long-lived assets based on anticipated undiscounted cash flows.
Goodwill represents the excess of purchase price over the fair value of net assets acquired in a business combination. We evaluate
the carrying value of goodwill for our reporting units during the fourth quarter of each year and between annual evaluations if
events occur or circumstances change that indicate goodwill might be impaired. Goodwill is tested by comparing the fair value of
each reporting unit, as determined based on their future estimated discounted cash flows, to the carrying value for each
reporting unit.
Patents
Patents consist of legal and patent registration costs for protection of our proprietary sensor technology. We amortize patent costs
on a straight-line basis over a three year period, based upon their estimated life.
Revenue Recognition
Revenue from all customers, including distributors, is recognized when all significant contractual obligations have been satisfied
and collection of the resulting receivable is reasonably assured. Generally, revenues are recognized upon shipment under FOB
shipping point terms. Estimated returns and warranty costs are recorded at the time of sale. Sales of some surface mount
technology (SMT) products may require customer acceptance due to performance or other acceptance criteria included in the terms
of sale. For these SMT product sales, revenue is recognized at the time of customer acceptance.
When a sale involves multiple elements revenue is allocated to each respective element in accordance with Emerging Issues Task
Force (EITF) 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables.” Allocation of revenue to undelivered
elements of the arrangement is based on fair value of the element being sold on a stand-alone basis.
Costs related to products delivered are recognized in the period revenue is recognized. Cost of goods sold consists primarily of
direct labor, manufacturing overhead, raw materials and components and excludes amortization of intangible assets.
Foreign Currency Translation
Financial position and results of operations of our international subsidiaries are measured using local currency as the functional
currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year-end. Statements
of operations accounts are translated at the average rates of exchange prevailing during the year. Translation adjustments arising
from the use of differing exchange rates from period to period are included as a cumulative translation adjustment in stockholders’
equity. Foreign currency transaction gains and losses are included as a component of net income (loss).
Research and Development
Research and development (R&D) costs, including software development, are expensed when incurred. Software development
costs are required to be expensed until the point that technological feasibility and proven marketability of the product are
established; costs otherwise capitalizable after such point also are expensed because they are insignificant. All other R&D costs are
expensed as incurred. Research and development expenses consist primarily of salaries, project materials, contract labor and other
costs associated with ongoing product development and enhancement efforts.
Advertising Costs
We expense all advertising costs as incurred, and the amounts were not material for all periods presented.
40
Income Taxes
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. FIN 48 supersedes SFAS
No. 5, “Accounting for Contingencies,” as it relates to income tax liabilities and lowers the minimum threshold a tax position is
required to meet before being recognized in the financial statements from “probable” to “more likely than not” (i.e., a likelihood of
occurrence greater than fifty percent). Under FIN 48, the recognition threshold is met when an entity concludes that a tax position,
based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant taxing authority.
Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more
likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute
of limitations. De-recognition of a tax position that was previously recognized occurs when an entity subsequently determines that
a tax position no longer meets the more likely than not threshold of being sustained.
We adopted FIN 48 on January 1, 2007, at which time differences between the amounts recognized in the financial statements
prior to the adoption of FIN 48 and the amounts recognized after adoption were accounted for as a cumulative effect adjustment
recorded to the beginning balance of retained earnings. Under FIN 48, only the portion of the liability that is expected to be paid
within one year is classified as a current liability. As a result, liabilities expected to be resolved without the payment of cash (e.g.
resolution due to the expiration of the statute of limitations) or are not expected to be paid within one year are not classified as
current. It is our policy to record estimated interest and penalties as income tax expense and tax credits as a reduction in income
tax expense.
Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the financial reporting
and tax bases of assets and liabilities. Income tax expense is the sum of the tax currently payable and the change in the deferred tax
assets and liabilities during the period, excluding changes in deferred tax assets recorded to equity and goodwill. Valuation
allowances are established when, in the opinion of management, there is uncertainty that some portion or all of the deferred tax
assets will not be realized. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on
Statement of Financial Accounting Standards No. 109.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Net income per diluted share is computed by dividing net income by the weighted average number
of common and common equivalent shares outstanding during the period. Common equivalent shares consist of common shares to
be issued upon exercise of stock options, restricted stock units and from participation in our employee stock purchase plan, as
calculated using the treasury stock method.
No common equivalent shares were included in the calculation of net loss per diluted share for the year ended December 31, 2008
due to their anti-dilutive effect. The calculation of net income per diluted share includes 78,000 common equivalents for the year
ended December 31, 2007 and 90,000 common equivalents for the year ended December 31, 2006. The calculation of net income
(loss) per diluted share excludes potentially dilutive shares of 813,000 for the year ended December 31, 2008, 304,000 for the year
ended December 31, 2007 and 260,000 for the year ended December 31, 2006, because their effect would be anti-dilutive.
Stock-Based Compensation
Effective January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” applying the modified prospective method.
This statement requires all equity-based payments to employees, including grants of employee stock options, to be recognized in
the consolidated statement of operations based on the grant date fair value of the award.
Under the modified prospective method, we are required to record equity-based compensation expense for all awards granted after
the date of adoption, and for all unvested shares granted prior to the date of adoption. We utilize the straight-line method of
expense recognition over the award’s service period for our graded vesting options. The fair values of stock options granted before
and after adoption of SFAS No. 123(R) have been determined using the Black-Scholes model. The compensation expense
recognized for all equity based awards is net of estimated forfeitures. We have classified equity based compensation within our
statement of operations in the same manner as our cash based employee compensation costs. We elected to use the alternative
transition guidance known as the “short-cut method” provided by FASB Staff Position No. FAS 123(R)-3 to determine our pool of
windfall tax benefits at adoption of SFAS No. 123(R).
See Note 3 to the Consolidated Financial Statements for additional information on stock-based compensation under SFAS No.
123(R).
41
Recent Accounting Developments
In December 2007, the FASB issued Statement No. 141R, “Business Combinations,” which establishes principles for how an
acquirer recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed in a business
combination, recognizes and measures the goodwill acquired in a business combination, and determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. We are
required to apply this standard prospectively to business combinations for which the acquisition date is on or after January 1, 2009.
Earlier application is not permitted.
In March 2008, the FASB issued Statement No. 161 “Disclosures about Derivative Instruments and Hedging Activities” which
amends and expands Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 161 requires
disclosure of the fair value of derivative instruments and their gains or losses in tabular format, information about credit-risk-
related contingent features in derivative agreements, counterparty credit risk, along with strategies and objectives for using
derivative instruments. This standard must be applied prospectively for interim periods and fiscal years beginning after November
15, 2008. We are presently analyzing the impact of SFAS No. 161 on our financial statement disclosures.
Comprehensive Income (Loss)
Components of comprehensive income (loss) include net income (loss), foreign-currency translation adjustments, unrealized gains
on available-for-sale securities and reclassification adjustments. At December 31, 2008 and 2007, components of accumulated
other comprehensive loss is as follows:
(In thousands)
Foreign
Currency
Translation
Net
Unrealized
Gains on
Securities
Accumulated
Other
Comprehensive
Loss
Balance December 31, 2007
Unrealized gains on investments, net of tax of $20
Reclassification adjustment for realized gains and
impairment losses on securities, net of tax of $44
Translation adjustments
Other comprehensive loss
$
(368) $
—
—
(538)
(538)
256 $
38
82
—
120
Balance December 31, 2008
$
(906) $
376 $
(112)
38
82
(538)
(418)
(530)
Net unrealized gains on securities include deferred tax liabilities of $205,000 at December 31, 2008 and $141,000 at
December 31, 2007.
NOTE 2 – MARKETABLE SECURITIES
Investments in marketable securities classified as available for sale with a carrying amount of $25,267,000 at December 31, 2008
and $33,754,000 at December 31, 2007 consist of the following:
(In thousands)
Cost
Unrealized
Gains
Unrealized
Losses
Recorded
Basis
December 31, 2008
U.S. government and agency obligations
Corporate debt securities and certificates of
deposit
Marketable securities – short term
U.S. government and agency obligations
Corporate debt securities
Asset backed securities
Equity securities
Marketable securities – long term
$
$
$
$
8,793
1,500
10,293
11,739
1,010
1,560
84
14,393
42
130 —
10
140
489
9
9
—
507
—
—
—
(2)
(10)
(54)
(66)
8,923
1,510
10,433
12,228
1,017
1,559
30
14,834
December 31, 2007
(In thousands)
Cost
Unrealized
Gains
Unrealized
Losses
Recorded
Basis
U.S. government and agency obligations
Corporate debt securities and certificates of
deposit
Marketable securities – short term
U.S. government and agency obligations
Corporate debt securities
Asset backed securities
Equity securities
Marketable securities – long term
$
11,114
44 —
795
11,909
14,655
3,008
3,535
250
21,448
$
$
$
—
44
342
38
43
—
423
—
—
—
—
—
(70)
(70)
11,158
795
11,953
14,997
3,046
3,578
180
21,801
Our long term investments in marketable debt securities all had maturities of less than five years. As of December 31, 2008, our
investment in equity securities was in a $54,000 unrealized loss position due to weak economic and stock market conditions. In
2008 we recognized a $166,000 impairment charge for this security resulting from a decline in market value which we determined
to be other than temporary. We intend to hold this security indefinitely. No other impairment charges were recognized for
marketable securities in 2008, 2007 or 2006. At December 31, 2008, marketable debt securities valued at $1,592,000 were in an
unrealized loss position totaling $12,000 (all had been in an unrealized loss position for less than twelve months). All remaining
marketable debt securities valued at $23,645,000 were in an unrealized gain position totaling $647,000.
Net pre-tax unrealized gains of $581,000 at December 31, 2008 and $397,000 at December 31, 2007 were recorded as a
component of accumulated other comprehensive income (loss) in stockholders equity. In 2008, we recognized a gain of $40,000
from the sale of marketable securities and received sale proceeds totaling $6,860,000. There were no sales of marketable securities
in 2007 or 2006.
NOTE 3 – ACCOUNTING FOR STOCK BASED COMPENSATION
Share Based Compensation Information under SFAS No. 123R
The following is a summary of pre-tax equity based compensation expense for the three year period ended December 31, 2008:
(In thousands)
2008
2007
2006
Pre-tax equity compensation expense
Income tax benefits related to equity based compensation
$
$
580 $
144 $
$
693
132 $
778
123
Pre-tax equity compensation expense for 2008 includes $366,000 for stock options and restricted stock units, $87,000 for our
employee stock purchase plan and $127,000 for 23,040 shares issued to board members and officers for compensation purposes
(weighted average grant date fair value of $5.49). Inventory balances include capitalized equity compensation costs totaling
$21,000 at December 31, 2008 and $24,000 at December 31, 2007.
We use historical data to estimate pre-vesting forfeitures. At December 31, 2008, the total unrecognized compensation cost related
to non vested equity based compensation arrangements was $956,000 and the related weighted average period over which it is
expected to be recognized is 2.3 years. The total fair value of shares vested was $393,000 in 2008, $758,000 in 2007 and
$1,089,000 in 2006.
The fair values of the options granted to our employees were estimated on the date of grant using the Black-Scholes model. The
Black Scholes valuation model incorporates ranges of assumptions that are disclosed in the table below. The risk-free interest rate
is based on the United States Treasury yield curve at the time of grant with a remaining term equal to the expected life of the
awards. We estimated the expected term for our graded vesting options, representing the length of time in years that the options are
expected to be outstanding, using the simplified method as specified in Staff Accounting Bulletin No. 107, “Valuation of Share-
Based Payment Arrangements for Public Companies.” We continued to use the simplified method in 2008 because our historical
exercise experience is not expected to be representative of exercise patterns in the future, due to our recent restructuring activities.
For immediate vesting options granted to our outside directors in 2007 and 2006, the expected life representing the length of time
in years that the options are expected to be outstanding was calculated using historical exercise data. No stock options were
granted to our outside directors in 2008. Instead, each of our three outside directors received 1,000 shares of our common stock
43
and an increase in their annual cash retainer for service on our board. Expected volatility was computed based on historical
fluctuations in the daily price of our common stock.
For stock options granted during the three year period ended December 31, 2008, we utilized the fair value of our common stock
on the date of grant and employed the following key assumptions in computing fair value using the Black-Scholes option-
pricing model:
Risk-free interest rates
Expected life in years
Expected volatility
Expected dividends
Weighted average fair value on grant date
Stock Options
2008
1.67%
4.75
44%
None
$1.95
2007
2006
3.51% - 4.73% 4.0% - 5.04%
4.75 - 6.33
48% - 60%
None
$6.65
4.75 - 6.86
43% - 52%
None
$5.99
We have three stock incentive plans that are administered under the supervision of the Compensation Committee of the Board of
Directors which have 989,204 shares of common stock reserved in the aggregate for issuance of options and other stock based
benefits, including restricted stock units, to employees, officers and others. Reserved shares underlying canceled options are
available for future grant under our active plans. Options are granted at an option price per share equal to or greater than the
market value at the date of grant. Generally, options granted to employees vest over a four-year period and expire five, seven or
ten years after the date of grant. The plans allow for option holders to tender shares of our common stock as consideration for the
option price provided that the tendered shares have been held by the option holder at least six months. In anticipation of adopting
SFAS No. 123(R), we did not modify the terms of any previously granted options. As of December 31, 2008, there are 230,857
shares of common stock available for future issuance under these plans. In addition, there are 50,000 shares reserved and included
in the plan summaries below that are not part of the three stock incentive plans.
The following is a summary of stock option activity for each of the years in the three year period ended December 31, 2008:
Shares
Outstanding, beginning of year
Granted
Exercised
Expired
Forfeited
Outstanding, end of year
2008
Year ended December 31
2007
2006
607,346
133,900
(2,250)
(20,150)
(3,200)
715,646
763,721
48,800
(57,625)
(145,300)
(2,250)
607,346
901,176
55,970
(148,500)
(38,875)
(6,050)
763,721
Exercisable
515,134
491,543
601,851
Weighted average exercise price per share
2008
2007
2006
Outstanding, beginning of year
Granted
Exercised
Expired
Forfeited
Outstanding, end of year
Exercisable
11.71 $
4.99 $
5.20 $
12.57
$
14.06 $
10.44 $
12.11 $
12.54 $
11.11 $
14.32
$
11.88 $
11.71 $
11.56 $
11.45 $
11.96
13.23
10.26
17.31
12.64
12.11
12.15
$
$
$
$
$
$
$
44
The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. For
options outstanding at December 31, 2008, the weighted average remaining contractual term was 3.75 years and the aggregate
intrinsic value was $43,000. For options exercisable at December 31, 2008, the weighted average remaining contractual term was
2.80 years and the aggregate intrinsic value was $15,000. The aggregate intrinsic value of stock options exercised was $12,000 in
2008, $132,000 in 2007 and $631,000 in 2006. We received proceeds of $12,000 and realized an income tax benefit of $2,000
from the exercise of stock options in 2008. New shares are issued for all option exercises, upon vesting of restricted stock units,
for share issuances to board members and officers or for share issuances under our Employee Stock Purchase Plan.
The following is a summary of outstanding options as of December 31, 2008:
Exercise Price
Options
Outstanding
Weighted
Average
Remaining Life
(in years)
Weighted
Average
Exercise Price
Options
Exercisable
Weighted
Average
Remaining Life
(in years)
Weighted
Average
Exercise Price
Less than $6.22
$6.22 to $9.45
$9.45 to $14.99
$14.99 to $19.01
Over $19.01
Total
Restricted Stock Units
223,150
1,000
455,096
4,500
31,900
715,646
4.71
1.75
3.30
2.50
3.64
3.75
$
$
$
$
$
$
5.28
9.45
12.04
18.55
22.53
10.44
89,250
1,000
388,484
4,500
31,900
515,134
1.37
1.75
3.06
2.50
3.64
2.80
$
$
$
$
$
$
5.73
9.45
11.93
18.55
22.53
11.56
Our 1998 Stock Incentive Plan also permits our Compensation Committee to grant other stock-based benefits, including restricted
stock units. Restricted stock units are valued at a price equal to the fair market value of our common stock on the date of grant,
vest over a four year period and entitle the holders to one share of our common stock for each restricted unit. The weighted
average grant date fair value for each restricted stock unit was $4.99 in 2008, $12.34 in 2007 and $12.95 in 2006. The aggregate
fair value of outstanding restricted stock units based on the closing share price of our common stock as of December 31, 2008 was
$222,000. The aggregate fair value of restricted stock units that vested, based on the closing share price of our common stock on
the vesting date, was $25,000 for the year ended December 31, 2008 and $36,000 for the year ended December 31, 2007. No
restricted stock units vested during the year ended December 31, 2006.
A summary of activity in non vested restricted stock units for the year ended December 31, 2008 follows:
Non vested restricted stock units
Non vested at December 31, 2007
Granted
Vested
Forfeited
Non vested at December 31, 2008
Employee Stock Purchase Plan
Shares
Weighted – Average
Grant Date Fair
Value
17,120 $
31,219 $
(4,938) $
(700) $
42,701 $
12.65
4.99
12.70
12.65
7.05
We have an Employee Stock Purchase Plan available to eligible U.S. employees. Under terms of the plan, eligible employees may
designate from 1% to 10% of their compensation to be withheld through payroll deductions, up to a maximum of $6,500 in each
plan year, for the purchase of common stock at 85% of the lower of the market price on the first or last day of the offering period.
Under the plan, 800,000 shares of common stock have been reserved for issuance. Share issuances under the Employee Stock
Purchase Plan were 28,505 for the year ended December 31, 2008, 28,859 for the year ended December 31, 2007 and 29,398 for
the year ended December 31, 2006. As of December 31, 2008, 112,812 shares remain available for issuance under this plan.
45
Stock Grant Plan for Non-Employee Directors
In 2008, our shareholders approved a stock grant plan for our non-employees directors. The plan provides for automatic grants of
1,000 shares of our common stock to each of our non-employee directors upon their re-election to the board of directors. The plan
took the place of our stock option plan for non-employee directors, under which each director received a stock option to purchase
4,500 shares of common stock exercisable at market value on the date of their re-election.
The plan provides for a total of 30,000 shares of our common stock for issuance to directors and will expire on May 19, 2018. We
issued 3,000 shares under this plan in 2008 to non-employee directors, and 27,000 shares remain available at December 31, 2008
for future issuance. The shares issued in 2008 had a fair market value on the date of grant equal to $27,000.
NOTE 4 – OTHER FINANCIAL STATEMENT DATA
Inventories consist of the following:
(In thousands)
Raw materials and purchased parts
Work in process
Finished goods
Equipment and Leasehold Improvements consist of the following:
(In thousands)
Equipment
Leasehold improvements
Accumulated depreciation and amortization
December 31,
2007
2008
3,442 $
724
5,703
9,869 $
4,563
1,280
4,797
10,640
December 31,
2007
2008
10,657 $
1,487
12,144
(9,529)
2,615 $
9,823
1,328
11,151
(9,207)
1,944
$
$
$
$
Total depreciation expense related to equipment and leasehold improvements was $1,147,000 for the year ended December 31,
2008, $901,000 for the year ended December 31, 2007 and $716,000 for the year ended December 31, 2006.
Intangible and Other Assets consist of the following:
(In thousands)
Developed
technology
Patents and
trademarks
Gross Carrying
Amount
December 31, 2008
Accumulated
Amortization
Net
Gross Carrying
Amount
December 31, 2007
Accumulated
Amortization
Net
$
$
7,775
$
(7,304) $
471
$
7,775
$
(7,122) $
2,730
(2,245)
485
2,562
(2,146)
653
416
10,505
$
(9,549) $
956
$
10,337
$
(9,268) $
1,069
Amortization expense for the three years ended December 31, 2008, 2007 and 2006 is as follows:
(In thousands)
Developed technology
Patents and trademarks
Year ended December 31
2007
2006
2008
$
$
182 $
274
456 $
182 $
243
425 $
582
207
789
46
As of December 31, 2008, the weighted average remaining life of our intangible assets was approximately 2.7 years for developed
technology and 1.8 years for patents and trademarks. Estimated aggregate amortization expense based on current intangibles for
the next three years is expected to be as follows: $455,000 in 2009, $343,000 in 2010 and $158,000 in 2011.
In the fourth quarter of 2008, we reviewed our identifiable intangible and long lived assets for impairment because a series of facts
and circumstances indicated that the assets might be impaired, including weakness in the United States capital markets caused by
the deepening global recession, and our reduced level of profitability, causing a significant drop in our market capitalization.
An impairment loss for our identifiable intangible and long lived assets would be recognized when future undiscounted cash flows
expected to result from use of the asset and eventual disposition are less than the carrying amount. As of December 31, 2008, we
projected our future undiscounted cash flows associated with these assets and concluded that there was no impairment.
Accrued Expenses consist of the following:
(In thousands)
Wages and benefits
Warranty costs
Severance
Income taxes payable
Other
December 31
2007
2008
1,429 $
823
315
45
442
3,054 $
1,977
819
—
59
482
3,337
$
$
We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product
quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, warranty
obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure.
Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated
warranty liability would be required. At the end of each reporting period we revise our estimated warranty liability based on
these factors.
A reconciliation of the changes in our estimated warranty liability is as follows:
(In thousands)
Balance at the beginning of period
Accruals for warranties
Settlements made during the period
Balance at the end of period
NOTE 5 – GOODWILL
Year ended December 31
2008
2007
$
$
819 $
1,084
(1,080)
823 $
796
961
(938)
819
During the fourth quarter of 2005, we reorganized our business into two operating segments, the electronic assembly and
semiconductor segments, in order to increase focus and management attention on growth opportunities in our markets. As required
by SFAS No. 142, when an entity reorganizes its reporting structure in a manner that changes the composition of one or more of its
reporting units, goodwill is reassigned to the affected reporting units using a relative fair value allocation approach. The fair value
of each segment (reporting unit) is compared to the fair value of the business immediately prior to the reorganization. The fair
value for our segments was determined using a discounted cash flow methodology.
We assess our goodwill for impairment in the fourth quarter of each year, and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. For 2008, our annual impairment review coincided with a series of facts
and circumstances indicating that our goodwill might be impaired, including weakness in the United States capital markets, caused
by the deepening global recession, as well as our reduced level of profitability, causing a significant drop in our market
capitalization.
47
In evaluating whether goodwill was impaired, we compared the fair value of our two reporting units to which goodwill is assigned
to their carrying value (Step 1of the impairment test). In calculating fair value, we used the income approach. The income
approach is a valuation technique under which we estimate future cash flows using the reporting units’ financial forecasts. Future
estimated cash flows are discounted to their present value to calculate fair value. The summation of our reporting units' fair values
is compared and reconciled to our market capitalization as of the date of our impairment test. In the situation where a reporting
unit's carrying amount exceeds its fair value, the amount of the impairment loss must be measured. The measurement of the
impairment (Step 2 of the impairment test) is calculated by determining the implied fair value of a reporting unit's goodwill. In
calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of
that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and
liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying amount of
goodwill over its implied fair value.
In determining the fair value of our reporting units under the income approach, our expected cash flows are affected by various
assumptions. Fair value on a discounted cash flow basis uses forecasts over a 3 year period with an estimation of residual growth
rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The significant assumptions
incorporated in these forecasts for the most recent goodwill impairment tests include our expectations regarding revenue during the
3 year period, a 7 percent terminal growth rate and a 25% discount rate for both our electronic assembly and semiconductor
reporting units. The selection of discount rates may have a significant impact on the determination of fair value. However, for the
2008 test, an increase or decrease of one percent in the discount rate would have had no impact on the impairment recorded for our
electronic assembly reporting unit.
For purposes of our goodwill impairment test, we reconciled the fair value for each of our reporting units to our overall fair value.
The publicly traded market price of our common stock and a control premium of 30 percent was used in our determination of fair
value, which represents the value an investor would pay above minority interest transaction prices in order to obtain a controlling
interest in the company. The control premium was determined by a review of premiums paid for similar companies over the past
five years. While the control premium is a significant assumption in determining our overall fair value, it had a minimal impact on
the determination of goodwill impairment in 2008. An increase in the assumed control premium by five percent to 35 percent
would have had no impact on the impairment recorded for our electronic assembly reporting unit.
Upon completion of our analysis, we concluded that the goodwill related to our electronic assembly reporting unit was fully
impaired, resulting in a $3,941,000 impairment charge. Our remaining goodwill at December 31, 2008, in the amount of $569,000
relates to our semiconductor reporting unit. Our recent analyses indicate that this goodwill is not impaired. However, our
conclusion could change in the future, if our assumptions about future economic conditions, revenue growth or profitability
change. Any resulting impairment charge could have a material effect on our financial position and results of operations in the
future.
Changes to our goodwill balance include the following:
(In thousands)
Goodwill, December 31, 2006
Translation adjustment
Goodwill, December 31, 2007
Translation adjustment
Impairment
Goodwill, December 31, 2008
Electronic
Assembly
Segment
Semiconductor
Segment
Total
4,591 $
47
4,638 $
(697)
569
$
5,160
—
47
569
$
5,207
—
(697)
(3,941)
—
(3,941)
— $
569
$
569
$
$
$
Goodwill translation adjustments on foreign denominated goodwill balances relate to our wholly owned subsidiary in the UK,
CyberOptics Holdings Ltd.
48
NOTE 6 – INCOME TAXES
Income (loss) before income taxes consists of the following:
(In thousands)
Sources of income (loss) before income taxes:
United States
Foreign
Total income (loss) before income taxes
The provision (benefit) for income taxes consists of the following:
(In thousands)
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Total provision (benefit) for income taxes
Year ended December 31,
2007
2006
2008
$
$
(6,881) $
(2,389)
(9,270) $
6,403 $
1,351
7,754 $
7,708
1,356
9,064
Year ended December 31,
2007
2008
2006
$
$
$
$
$
(1,196) $
(78)
24
(1,250) $
(1,431) $
(80)
162
(1,349) $
(2,599) $
2,025 $
69
28
2,122 $
311 $
(2)
295
604 $
2,726 $
1,795
102
42
1,939
214
86
435
735
2,674
A reconciliation of the statutory rate to the effective income tax rate is as follows:
2008
Year ended December 31,
2007
2006
Federal statutory rate
(34.0)%
34.0 %
34.0%
State income taxes, net of federal benefit
Non-deductible goodwill impairment charge
ETI and manufacturing tax incentives
U.S. Subpart F income
Stock based compensation
Research and experimentation credit
Foreign rate difference
Reserve for income taxes under FIN 48
Valuation allowance
Other, net
(2.0)
10.5
—
0.4
0.7
(3.1)
(1.2)
(1.1)
1.5
0.3
(0.1 )
—
(1.5 )
2.1
1.4
(3.9 )
0.1
2.3
0.7
0.1
0.5
—
(4.3)
0.7
1.6
(3.2)
0.2
—
0.9
(0.9)
Effective tax rate
(28.0)%
35.2 %
29.5%
We recorded a $3,941,000 non-cash goodwill impairment charge in 2008, of which $2,860,000 is not tax deductible, resulting in a
10.5% increase in our effective income tax rate for 2008.
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 supersedes
SFAS No. 5, “Accounting for Contingencies,” as it relates to income tax liabilities and lowers the minimum threshold a tax
position is required to meet before being recognized in the financial statements from “probable” to “more likely than not” (i.e. a
likelihood of occurrence greater than fifty percent). Under FIN 48, the recognition threshold is met when an entity concludes that a
tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant taxing
authority.
49
Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more
likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute
of limitations. De-recognition of a tax position that was previously recognized occurs when an entity subsequently determines that
a tax position no longer meets the more likely than not threshold of being sustained. Differences between the amounts recognized
in the financial statements prior to the adoption of FIN 48 and the amounts recognized after adoption are accounted for as a
cumulative effect adjustment recorded to the beginning balance of retained earnings. Under FIN 48, only the portion of the
liability that is expected to be paid within one year is classified as a current liability. As a result, liabilities expected to be resolved
without the payment of cash (e.g., resolution due to the expiration of the statute of limitations) or are not expected to be paid
within one year are not classified as current. Accordingly, our liability for uncertain tax positions has been classified as non-
current at both December 31, 2008 and 2007.
We adopted the provisions of FIN 48 on January 1, 2007. As a result of our implementation of FIN 48, we recognized a $32,000
increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of
retained earnings. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows:
(In thousands)
2008
2007
Gross UTB balance at beginning of year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Reductions due to lapse of applicable statute of limitations
Gross UTB balance at end of year
Net UTB impacting the effective tax rate at end of year
$
$
$
2,381 $
306
—
—
—
(216)
2,471 $
1,578 $
2,148
233
—
—
—
—
2,381
1,583
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1,578,000 as of
December 31, 2008, $1,583,000 as of December 31, 2007 and $1,246,000 as of January 1, 2007. The ending net UTB results from
adjusting the gross balance for items such as Federal, State, and non-U.S. deferred items, interest and penalties, and deductible
taxes. The net UTB is a long term income tax reserve within our Consolidated Balance Sheet. We recognize interest and penalties
accrued related to unrecognized tax benefits in tax expense. Accrued interest and penalties on a gross basis were $167,000 as of
December 31, 2008, $192,000 as of December 31, 2007 and $143,000 as of January 1, 2007.
During the year ended December 31, 2008, we recorded a $98,000 decrease in liabilities, net of deferred taxes, for uncertain tax
positions that were recorded as an income tax benefit. The estimated gross reduction in interest and penalties included in this
amount total $25,000. During the year ended December 31, 2007, we recorded a $182,000 increase in liabilities, net of deferred tax
benefit, for uncertain tax positions that was recorded as income tax expense. Estimated gross interest and penalties included in this
amount total $49,000.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. We are no longer subject to
U.S. federal, state and local income tax examinations by tax authorities for years before 2005. Our 2006 federal income tax return
is currently being audited by the Internal Revenue Service. We are not able to reasonably estimate the timing of any potential
payments that may result from this audit. Our liability for unrecognized tax benefits could decline by $200,000 during the next 12
months due to expiration of domestic statute of limitations.
50
Deferred tax assets consist of the following:
(In thousands)
Fixed asset and intangible amortization, net
Inventory allowances
Accrued liabilities
Warranty accrual
Deferred revenue
Accounts receivable allowance
Federal and state tax credits
Foreign net operating loss carry forwards
Stock based compensation
Other, net
Sub-total
Valuation allowance
$
Total net deferred tax assets
$
December 31,
2007
2008
1,422 $
986
244
290
525
88
1,491
587
295
150
6,078
(640)
5,438 $
1,073
768
212
292
470
113
673
984
232
96
4,913
(599)
4,314
We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns
and income before income taxes under U.S. generally accepted accounting principals, research and development tax credit carry
forwards and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received
when temporary differences previously reported in our financial statements become deductible for income tax purposes, or when
net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are applied against
future tax liabilities. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on
Statement of Financial Accounting Standards No. 109.
Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation
allowances are required considers, among other matters, the nature, frequency and severity of current and cumulative losses,
forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not
expiring unused and tax planning alternatives.
Our analysis of the need for valuation allowances considered that we have positive cumulative profit over the past three years even
without the exclusion of the $2.9 million non-deductible goodwill impairment in 2008. We also considered the forecasts of future
profitability, the duration of statutory carry forward periods and tax planning alternatives. We further evaluated our past cycles
which tend to average five years in length (from peak to trough) and also considered our five year cumulative results ended
December 31, 2008 which also had strong profits. Finally, we evaluated where these cumulative three and five year measures
might be at the end of 2009 and considered other positive evidence to conclude no incremental valuation allowance was needed at
December 31, 2008.
While we have a recent history of profits, our results have been impacted by the recent global economic slowdown, and we
incurred a loss in the United States in 2008 where most of our net deferred tax assets are recorded. Therefore, achievement of
profitability in the United States will be a significant factor in determining our continuing ability to carry these deferred tax assets
without recording a valuation allowance.
If future results from our operations are less than projected, a valuation allowance may be required to reduce the deferred tax
assets. If we continue to incur losses for several more quarters, and if our operations and outlook show no sign of improvement by
as early as the second quarter of 2009, we may be required to record as much as a full valuation allowance against virtually all of
our deferred tax assets, which could have a material impact on our results of operations in the period in which it is recorded.
Deferred tax assets at December 31, 2008, include $587,000 of net operating loss carry forwards incurred in the UK by
CyberOptics Ltd., which was acquired in 1999. The utilization of these net operating loss carry forwards is dependent on
CyberOptics Ltd.’s ability to generate sufficient UK taxable income during the carry forward period. We reduced our deferred tax
asset for UK net operating loss carry forwards by $64,000 in 2007 due to a reduction in the future UK income tax rate. Deferred
tax assets at December 31, 2008 also include $739,000 of federal R&D tax credits that will begin to expire in 2026 if unused.
51
The valuation allowances at December 31, 2008 and 2007 are needed for various state tax credit carry forwards, state operating
loss carry forwards and capital losses for which recovery is not deemed to be more likely than not. The valuation allowance was
increased in 2008 for additional state tax credit carry forwards, and an unrealized capital loss that failed to satisfy the more likely
than not criteria for recovery.
Cash payments for income taxes, net of refunds received, were $100,000 for the year ended December 31, 2008, $1,979,000 for
the year ended December 31, 2007, and $1,779,000 for the year ended December 31, 2006.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004. The Act provides a deduction for income from
qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a
two-year phase-out of the extraterritorial income exclusion (ETI) for foreign sales. Our 2006 effective tax rate includes a benefit
from the ETI. No benefit from the ETI was available starting in 2007 due to the phase-out.
It is the intention of management to permanently reinvest all undistributed earnings of international subsidiaries, and accordingly,
we have not provided United States taxes on such earnings. These earnings relate to ongoing operations and were not significant
as of December 31, 2008. It is not practicable to determine the income tax liability that would be payable if such earnings were not
indefinitely reinvested.
NOTE 7 – OPERATING LEASES
On March 27, 2006 we signed a new lease for our primary office space consisting of 60,217 square feet. The lease has a term of 61
months and began on June 1, 2006. The lease also provides for one month of free rent, other lease incentives and escalating rents
over the lease term. Rental expense, including the effects of lease incentives, will be recognized on a straight-line basis over the
term of the lease. We are also required to pay insurance, property taxes and other operating expenses related to the leased facility.
Future minimum lease payments under this lease due within one year from December 31, 2008 are $1,032,000 and due from one to
three years are $1,539,000. We have two consecutive options to renew the lease, each for an additional term of 3 years, at then
current fair market rent as defined in the lease.
During 2008, we entered into a new three year lease for a mixed office and warehouse facility in Singapore. The lease provides for
a 3 year term from May 15, 2008, annual rent of approximately $350,000 and a two year renewal option. We also lease other
facilities for the operations of our subsidiaries under operating leases that expire from December 2009 through August 2010.
Total rent expense was $1,423,000 for the year ended December 31, 2008, $1,141,000 for the year ended December 31, 2007 and
$1,057,000 for the year ended December 31, 2006. At December 31, 2008, the future minimum lease payments required under
non-cancelable operating lease agreements, are as follows:
Year ending December 31,
2009
2010
2011
Total
(In thousands)
1,556
1,435
609
3,600
$
$
NOTE 8 – 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 UK. These currency swap agreements are structured to mature on or about the last day of each quarter and are designated as
cash flow hedges. At December 31, 2008, the Company had one open swap agreement that was purchased on December 31, 2008.
As a result, any unrealized gains or losses as of December 31, 2008 were inconsequential. We recognized net gains (losses) from
settlement of foreign currency swap agreements of $277,000 for the year ended December 31, 2008, ($61,000) for the year ended
December 31, 2007, and ($346,000) for the year ended December 31, 2006, that offset foreign currency transaction gains (losses)
on the underlying inter-company balance of ($453,000) for the year ended December 31, 2008, $22,000 for the year ended
December 31, 2007 and $294,000 for the year ended December 31, 2006. These gains and losses are recognized in interest income
and other in our statement of operations.
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. Management does
not expect material losses as a result of defaults by other parties.
52
NOTE 9 – COMMON STOCK REPURCHASES
We spent $20,949,000 to repurchase a total 2,082,000 shares of our common stock in 2008. These repurchases were accomplished
through of series of repurchase programs and a modified dutch auction tender approved by our board of directors. The modified
dutch auction tender offer closed on July 29, 2008, with the purchase of 1,499,996 shares of our common stock at a price of $10.00
per share. We spent $1,901,000 to repurchase a total of 158,000 shares of our common stock in 2007 through a series of
repurchase programs approved by our board of directors.
All common share repurchase programs have been canceled and we presently have no authorization from our board of directors to
repurchase shares of our common stock.
NOTE 10 – 401(K) PLAN
We have a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code (the Code), whereby eligible
employees may contribute a portion of their earnings, not to exceed annual amounts allowed under the Code. In addition, we may
also make contributions at the discretion of the Board of Directors. We provided matching contributions to employees totaling
$301,000 in 2008, $297,000 in 2007 and $274,000 in 2006.
NOTE 11 – BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS
Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosure about Segments of an Enterprise and Related
Information” requires the management approach in determining business segments. The management approach designates the
internal organization that is used by management for making operating decisions and assessing performance as the source of our
reportable segments. We have determined that our business operates as two reportable segments. Balance sheet and income
statement information for all periods presented has been allocated to our two segments. The electronic assembly segment is the
design, manufacture and sale of optical process control sensors and inspection systems for the electronic assembly equipment
market. The semiconductor segment is the design, manufacture and sale of optical and other process control sensors and related
equipment for the semiconductor capital equipment market.
53
Information regarding our segments is as follows:
(In thousands)
Revenue:
Electronic assembly
OEM Sensors
SMT Systems
Total electronic assembly
Semiconductor
Total
Income (loss) from operations:
Electronic assembly
Semiconductor
Total income (loss) from operations
Interest income and other
Income (loss) before income taxes
Depreciation and amortization:
Electronic assembly
Semiconductor
Total
Expenditures for long-lived assets:
Electronic assembly
Semiconductor
Total
Total assets (end of year):
Electronic assembly
Semiconductor
Corporate
Total
$
$
$
$
$
$
$
$
$
Year Ended December 31,
2007
2006
2008
20,250 $
19,943
40,193
5,259
45,452 $
31,774 $
21,429
53,203
5,573
58,776 $
32,006
19,136
51,142
5,947
57,089
(10,339) $
(124)
(10,463) $
1,193
(9,270) $
5,408 $
132
5,540 $
2,214
7,754 $
1,978 $
268
2,246 $
1,680 $
227
1,907 $
1,998 $
179
2,177 $
1,088 $
208
1,296 $
$
27,563 $
3,698
27,688
31,326 $
3,658
52,055
$
58,949 $
87,039 $
7,816
(695)
7,121
1,943
9,064
1,280
604
1,884
1,262
135
1,397
30,976
3,453
47,581
82,010
The following summarizes certain significant customer information:
(In thousands)
Year ended December 31, 2008
Year ended December 31, 2007
Year ended December 31, 2006
Significant
Customer
Revenues
Percentage
of Revenues
A
B
A
B
A
B
$
$
$
$
$
$
9,592
6,672
16,213
11,661
16,683
11,196
21%
15%
28%
20%
29%
20%
54
The significant customers listed above are related to our electronic assembly segment. As of December 31, 2008, accounts
receivable from significant customer A were $723,000 and accounts receivable from significant customer B were $376,000. As of
December 31, 2007, accounts receivable from significant customer A were $1,313,000 and accounts receivable from significant
customer B were $1,363,000. Our LaserAlign sensor family has accounted for a significant portion of our electronic assembly
sales. Revenue from new product shipments of LaserAlign sensors accounted for 26% of our revenue in 2008, 35% in 2007 and
36% in 2006.
We have determined not to pursue new alignment products for use with future generations of equipment being developed by
Assembleon (significant customer B above). Assembleon has informed us that they currently plan to start transitioning away from
our alignment products in the third quarter of 2009, with the transition continuing into the second quarter of 2010. Our revenue,
results of operations and cash flows would be further negatively impacted if our other LaserAlign 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.
Export sales as a percentage of total sales were 86% for the year ended December 31, 2008, 87% for the year ended December 31,
2007, and 85% for the year ended December 31, 2006. Export sales are attributed to the country where the product is shipped. All
export sales are negotiated, invoiced and paid in U.S. dollars.
Export sales by geographic area are summarized as follows:
(In thousands)
Americas
Netherlands
Other Europe
China
Japan
Other Asia
Other
$
2008
2007
2006
1,740 $
6,338
8,871
7,176
10,066
4,901
10
927 $
10,717
9,508
6,038
16,901
7,077
—
381
10,285
8,813
5,231
16,746
6,847
3
$
39,102 $
51,168 $
48,306
Long-lived assets include equipment and leasehold improvements attributable to each geographic area’s operations. Long-lived
assets at December 31, 2008, 2007 and 2006 are as follows:
(In thousands)
Long-lived assets:
United States
Europe
Asia and other
Total long-lived assets
2008
2007
2006
$
1,798 $
5
812
1,906 $
10
28
1,772
12
30
$
2,615 $
1,944 $
1,814
NOTE 12 – SEVERANCE, RECRUITMENT AND SINGAPORE TRANSITION
We started to incur severance costs in February 2008 in connection with our decision to move a significant portion of development
and manufacturing for our systems products to Singapore. The transition of development was substantially complete by the fourth
quarter of 2008; transition of manufacturing is expected to be complete by the middle of 2009. Severance costs incurred in 2008
in connection with the February 2008 decision totaled $302,000. We also incurred expenses totaling $234,000 for outside service
providers to assist us with recruitment of our new Singapore based development and manufacturing team. We maintained our
Minneapolis-based systems development team while we trained our new Singapore based team, resulting in extra costs totaling
$879,000 for wages, training, travel, and other costs, during the initial start-up and training period. These costs have been
classified in our statement of operations as research and development expense. Other start-up costs totaling $112,000 have been
classified in our statement of operations as selling, general and administrative expense. Singapore transition costs totaled
approximately $1.5 million in 2008. Transition costs in 2009 are not expected to be significant.
55
Additional severance costs of $234,000 were incurred in November 2008 when we reduced our workforce by approximately 10%
or 20 employees in response to the weak global economic conditions. All of the aforementioned costs related to the November
2008 workforce reduction have been classified as severance and recruitment in our statement of operations.
A summary of our severance and recruitment accruals follows:
February
2008
Singapore
Move
—
302
(95)
207
Electronic Assembly
November
Recruitment
—
234
(234)
—
$
$
$
$
2008
Workforce
Reduction
—
155
(51)
104
Total
$ —
691
(380)
311
$
$
$
Semi-
conductor
November
2008
Workforce
Reduction
—
79
(75)
4
Total
$ —
770
(455)
315
$
(in thousands)
Balance, January 1, 2008
Costs incurred
Payments made
Balance, December 31, 2008
$
$
In February 2009, we further reduced our workforce by 24 positions in response to weakening conditions in the global economy,
our transition to Singapore and our decision to consolidate manufacturing for our semiconductor products in our Minneapolis
facility. We anticipate that all of these employees will have departed by the end of the second quarter of 2009. Severance expense
related to these actions of approximately $325,000 is expected in the first half of 2009.
NOTE 13 –FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements”,
which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP),
and expands disclosures about fair value measurements. SFAS No. 157 will apply whenever another standard requires (or permits)
assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances, and
was effective for fiscal years beginning after December 31, 2007. The FASB has provided a one year deferral for certain non-
financial assets and liabilities. We adopted SFAS No. 157, effective January 1, 2008, for all financial assets and liabilities that
were not deferred. The adoption of SFAS No. 157 for our financial assets and liabilities had no impact on our financial position or
results of operations. We do not expect the standard to have a material impact on our consolidated results of operations and
financial condition when fully adopted in 2009.
In accordance with SFAS No. 157, we value our cash equivalents and marketable securities based on a three-level fair value
hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities
(Level 1). The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for
identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2). The lowest priority is given to
unobservable inputs (Level 3).
The following table provides information regarding fair value measurements for our cash equivalents and marketable securities as
of December 31, 2008 according to the three-level fair value hierarchy:
Fair Value Measurements at Reporting Date Using
(In thousands)
Balance
December 31,
2008
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents
U.S. government and agency
obligations
Corporate debt securities
Asset backed securities
Equity securities
$
$
$
$
$
2,421 $
- $
2,421 $
21,151 $
2,527 $
1,559 $
30 $
- $
- $
- $
30 $
21,151 $
2,527 $
1,559 $
- $
-
-
-
-
56
Changes in the fair value of these investments for the year ended December 31, 2008 resulting from our adoption of SFAS No. 157
had no impact on our consolidated financial statements. Our foreign currency swap agreements are structured to mature on the last
day of each quarter. As a result, the fair value associated with these agreements is inconsequential.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,”
which provides companies with an option to report selected financial assets and liabilities at fair value. This standard was effective
beginning after December 31, 2007. We elected not to adopt the provisions of SFAS No. 159 in 2008.
NOTE 14 – CONTINGENCIES
In the ordinary course of business, we are a defendant in miscellaneous claims and disputes. While the outcome of these matters
cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect
on our financial position, results of operations or cash flows.
In the normal course of business to facilitate sales of our products and services, we at times indemnify other parties, including
customers, with respect to certain matters. In these instances, we have agreed to hold the other parties harmless against losses
arising out of intellectual property infringement or other types of claims. These agreements may limit the time within which
indemnification claims can be made and almost always limit the amount of the claim. It is not possible to determine the maximum
potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique
facts and circumstances involved in each particular agreement. Historically, payments made, if any, under these agreements have
not had a material impact on our operating results, financial position or cash flows.
NOTE 15 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share amounts)
2008
Revenues
Gross margin
Income (loss) from operations
Net income (loss)
Net income (loss) per share – Basic (1)
Net income (loss) per share – Diluted (1)
2007
Revenues
Gross margin
Income from operations
Net income
Net income per share – Basic (1)
Net income per share – Diluted (1)
March 31 (2)
June 30 (2)
Sept. 30 (2)
Dec. 31 (3)
$
$
$
$
13,807
6,439
159
427
0.05
0.05
March 31
13,741
7,132
1,174
1,153
0.13
0.13
$
$
$
13,391
5,922
(733)
(269)
(0.03)
(0.03)
11,570
4,992
(1,716)
(772)
(0.11)
(0.11)
June 30
Sept. 30
$
13,974
7,094
1,274
1,198
0.13
0.13
16,173
8,263
1,806
1,473
0.17
0.16
6,684
1,712
(8,173)
(6,057)
(0.90)
(0.90)
Dec. 31
14,888
7,758
1,286
1,204
0.14
0.13
(1) The summation of quarterly per share amounts may not equal the calculation for the full year, as each quarterly calculation is
performed discretely.
(2) Severance and recruitment costs related to our move to Singapore in 2008 were $193,000 in the first quarter, $185,000 in the
second quarter and $98,000 in the third quarter.
(3) 2008 fourth quarter results include a non-cash pre-tax charge for goodwill impairment of $3.9 million, a $650,000 pre-tax
charge for inventory obsolescence and $294,000 pre-tax charge for severance and recruitment costs related to our move to
Singapore and a November 2008 workforce reduction.
57
Report of Independent Registered Public Accounting Firm
To Stockholders and the Board of Directors of CyberOptics Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, consolidated
statements of cash flows and consolidated statements of stockholders' equity and comprehensive income present fairly, in all
material respects, the financial position of CyberOptics Corporation and its subsidiaries at December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
"Management's Report on Internal Control over Financial Reporting" appearing under Item 9A(i). Our responsibility is to express
opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
As described in Note 6 to the consolidated financial statements, the Company changed the manner in which it accounts for
uncertain tax positions effective January 1, 2007.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 9, 2009
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NONE.
ITEM 9A. 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-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and
procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and
that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, in a manner that allows timely decisions regarding required disclosure.
(i). MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
the Securities Exchange Act of 1934 Rule 13a-15(f), and for performing an assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2008. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 based upon criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that the Company’s
internal control over financial reporting was effective as of December 31, 2008 based on the criteria in Internal Control-Integrated
Framework issued by the COSO.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
(ii). During the quarter ended December 31, 2008, there has been no change in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
NONE.
59
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information contained under the headings “Proposal I–Election of Directors,” “Information About our Board of
Directors and its Committees and Other Corporate Governance Matters” and “Section 16(a) Beneficial Ownership Reporting
Compliance” of the Company’s definitive proxy statement for its annual meeting of shareholders to be held May 18, 2009
(hereafter, the Proxy Statement), is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the headings “Information About our Board of Directors and its Committees and Other Corporate
Governance Matters–Compensation of Directors,” and “Executive Compensation” of the Proxy Statement is hereby incorporated
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information contained under the headings “Executive Compensation–Equity Compensation Plan Information,” and
“Shares Outstanding” of the Proxy Statement is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information under the headings “Election of Directors–Compensation of Directors” of the Proxy Statement is hereby
incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the heading “Relationship with Independent Accountants” of the Proxy Statement is hereby
incorporated by reference.
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements: The Consolidated Financial Statements included in Item 8 to this Form 10-K consist of
the following:
Consolidated Balance Sheets as of December 31, 2008 and 2007.
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006.
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006.
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31,
2008, 2007 and 2006.
Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedule:
Schedule II, Valuation and Qualifying Accounts for the years ended December 31, 2008, 2007 and 2006, is
attached as Item 15(c).
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule, is attached as Item
15(c).
60
(b)
LIST OF EXHIBITS
Exhibit Number
3.1
Description
Articles of Incorporation of Company, as amended (incorporated by reference to Exhibit 3.1 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997).
3.2
4.1
4.2
4.3
4.4
4.5
*10.1
*10.2
10.3
*10.4
*10.5
*10.6
10.7
21.0
23.1
31.1
Bylaws of the Company (incorporated by reference to Exhibit 3ii to the current report on Form 8-K
dated November 9, 2007).
Restated Stock Option Plan of the Company, as amended (incorporated by reference to Exhibit 4.1 of
the Company’s Registration Statement on Form S-8 filed August 18, 1998 (file no 333-61711)).
CyberOptics Corporation Stock Option Plan for Non-Employee Directors, as amended (incorporated
by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-8 filed August 10,
2006 (file no 333-136500)).
CyberOptics Corporation 1998 Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed December 4, 2000 (file no.
333-51200)).
CyberOptics Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 of
the Company’s Registration Statement on Form S-8 filed August 10, 2006 (file no 333-136500)).
CyberOptics Corporation Stock Grant Plan for Non-Employee Directors (incorporated by reference to
Exhibit 4.1 of the Company’s Registration Statement on Form S-8 filed August 14, 2008 (file no 333-
153015)).
Letter of engagement dated September 13, 2002 between Kathleen Iverson and the Company
(incorporated by reference to Exhibit 10.5 to the Company’s annual report on Form 10-K for the year
ended December 31, 2002).
Offer of employment between Steven J. DiMarco and the Company (incorporated by reference to
Exhibit 10.2 to the Company’s annual report on Form 10-K for the year ended December 31, 2005).
Lease Agreement between FirstCal Industrial 2 Acquisitions LLC and the Company dated March 27,
2006 (incorporated by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for
the quarter ended March 31, 2006).
Severance Pay Agreement with Steven K. Case (incorporated by reference to Exhibit 10.1 to the
current report on Form 8-K dated June 23, 2008)
Severance Pay Agreement with Kathleen P. Iverson (incorporated by reference to Exhibit 10.2 to the
current report on Form 8-K dated June 23, 2008)
Severance Pay Agreement with Jeffrey A. Bertelsen (incorporated by reference to Exhibit 10.3 to the
current report on Form 8-K dated June 23, 2008)
Tenancy Agreement between Brilliant Manufacturing LTD and CyberOptics PTE LTD (Singapore)
Term 15 May 2008 to 14 May 2011. (incorporated by reference to Exhibit 10.1 to the Company’s
quarterly report on Form 10-Q for the quarter ended March 31, 2008).
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
61
31.2
32.0
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Management Contract or Compensatory Plan or Arrangement
62
(c)
FINANCIAL STATEMENT SCHEDULES:
SCHEDULE II
CYBEROPTICS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
Description
Allowance for doubtful accounts:
Year ended December 31, 2008
Year ended December 31, 2007
Year ended December 31, 2006
Description
Allowance for obsolete inventory:
Year ended December 31, 2008
Year ended December 31, 2007
Year ended December 31, 2006
Description
Allowance for deferred tax assets:
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Deductions
Balance
at end of
Period
$
$
$
$
$
$
310,000
221,000
$
$
(34,000)
$
(26,000)
$
250,000
98,000
$
(9,000)
$
310,000
286,000
$
38,000
$
(103,000) $
221,000
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Deductions
Balance
at end of
Period
520,000
$
1,007,000
$
(442,000) $ 1,085,000
882,000
$
253,000
$
(615,000) $
520,000
802,000
$
373,000
$
(293,000) $
882,000
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Other Increases
(Deductions)
Balance
at end of
Period
Year ended December 31, 2008
$
599,000
$
135,000
$
(94,000)
$
640,000
Year ended December 31, 2007
$
451,000
$
54,000
$
94,000
$
599,000
Year ended December 31, 2006
$
371,000
$
80,000
$
—
$
451,000
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANACIAL STATEMENT SCHEDULE
To the Stockholders and the Board of Directors of CyberOptics Corporation:
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report
dated March 9, 2009 appearing in Item 8 of this Form 10-K also included an audit of the financial statement schedule listed in Item 15(a)(2) of
this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 9, 2009
63
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CYBEROPTICS CORPORATION
/s/ KATHLEEN P. IVERSON
By Kathleen P. Iverson, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
/s/ KATHLEEN P. IVERSON
Kathleen P. Iverson
Director and CEO
(Principal Executive Officer)
Date
March 4, 2009
/s/ STEVEN K. CASE
Steven K. Case
/s/ ALEX B. CIMOCHOWSKI
Alex B. Cimochowski
/s/ MICHAEL M. SELZER, JR.
Michael M. Selzer, Jr.
/s/ IRENE M. QUALTERS
Irene M. Qualters
/s/ JEFFREY A. BERTELSEN
Jeffrey A. Bertelsen
Chairman and Director
March 4, 2009
Director
Director
Director
Vice President and CFO
(Principal Financial Officer
and Principal Accounting Officer)
March 4, 2009
March 4, 2009
March 4, 2009
March 4, 2009
64
SUBSIDIARIES
EXHIBIT 21.0
Name
CyberOptics Ltd.
CyberOptics Holdings Ltd.
CyberOptics (Singapore) Pte. Ltd
CyberOptics Semiconductor, Inc.
CyberOptics (China) Co., Ltd.
Jurisdiction of Formation
United Kingdom
United Kingdom
Singapore
Minnesota
People’s Republic of China
65
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-136500, 333-115973,
333-103310, 333-85321, 333-51200, 33-80838, 33-50510, 33-41515, 33-41509, 33-39091, 33-21092, 333-153015) of CyberOptics
Corporation of our report dated March 9, 2009 relating to the financial statements, financial statement schedules and the
effectiveness of internal control over financial reporting, which appears in this Form 10-K.
EXHIBIT 23.1
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 9, 2009
66
EXHIBIT 31.1
I, Kathleen P. Iverson, certify that:
1.
I have reviewed this Annual Report on Form 10-K of CyberOptics Corporation.
2.
Based on my knowledge, this 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 report;
3.
Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, 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 report is
being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 4, 2009
/s/ Kathleen P. Iverson
Signature
Name:
Title:
Kathleen P. Iverson
Chief Executive Officer
67
EXHIBIT 31.2
I, Jeffrey A. Bertelsen, certify that:
1.
I have reviewed this Annual Report on Form 10-K of CyberOptics Corporation.
2.
Based on my knowledge, this 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 report;
3.
Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, 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 report is
being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 4, 2009
/s/ Jeffrey A. Bertelsen
Signature
Name:
Title:
Jeffrey A. Bertelsen
Chief Financial Officer
68
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32
In connection with the Annual Report of CyberOptics Corporation (the “Company”) on Form 10-K for the year ended
December 31, 2008 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), the
undersigned, Kathleen P. Iverson, Chief Executive Officer, and Jeffrey A. Bertelsen, the Chief Financial Officer of the Company,
each certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Kathleen P. Iverson
Kathleen P. Iverson
Chief Executive Officer
March 4, 2009
/s/ Jeffrey A. Bertelsen
Jeffrey A. Bertelsen
Chief Financial Officer
March 4, 2009
69