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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X]Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2001 or
[_]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number 0-23081
FARO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-3157093
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
125 Technology Park, Lake Mary, FL 32746
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(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code): (407) 333-9911
Securities to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
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 [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
As of March 20, 2002, there were outstanding 11,420,384 shares of Common
Stock. The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the last sale price reported on the NASDAQ National
Market as of March 20, 2002 was $31,291,852.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
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Portions of the Proxy Statement, dated March 29, 2002.... Part III, Items 10-13
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PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
FARO Technologies, Inc. (the "Company") has made forward-looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995) in
this report that are subject to risks and uncertainties, such as statements
about our plans, objectives, projections, expectations, assumptions,
strategies, or future events. Other written or oral statements, which
constitute forward-looking statements, also may be made from time to time by or
on behalf of the Company. Words such as "may," "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," "will," "should,"
"could," variations of such words, and similar expressions are intended to
identify such forward-looking statements. Similarly, statements that describe
the Company's future plans, objectives, or goals also are forward-looking
statements. These statements are not guarantees of future performance and are
subject to a number of risks, uncertainties, and other factors, including those
discussed below and elsewhere in this report, that could cause actual results
to differ materially from future results, performances, or achievements
expressed or implied by such forward-looking statements. Consequently, undue
reliance should not be placed on these forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Factors that could cause actual results to differ materially from what is
expressed or forecasted in such forward-looking statements include, but are not
limited to: (i) the potential loss of material customers; (ii) the failure to
properly manage growth and successfully integrate acquired businesses such as
SpatialMetrix Corporation; (iii) inability of the Company's products to attain
broad market acceptance or increased length of the Company's sales cycle; (iv)
inability of the Company to reduce selling expenses; (v) the impact of
competitive product and pricing; (vi) delays in shipping the Company's new
laser trackers as a result of manufacturing delays; (vii) fluctuations in
quarterly operating results as a result of the size, timing and recognition of
revenue from significant orders, increases in operating expenses required for
product development and marketing, the timing and market acceptance of new
products and product enhancements; customer order deferrals in anticipation of
new products and product enhancements; the Company's success in expanding its
sales and marketing programs, and general economic conditions; (viii) the
financial condition of the Company's clients; (ix) adverse consequences of
exchange rate fluctuations; (x) inability to protect our intellectual property
and other proprietary rights; (xi) dependence on Simon Raab and Gregory A.
Fraser and other key personnel; and (xii) the cyclical nature of the industries
of the Company's customers.
ITEM 1. BUSINESS.
Industry Background
The Company believes that there are three principal forces driving the need
for its products and services: 1) the widespread use by manufacturers of
Computer-Aided Design (CAD) in product development which shortens product
cycles, 2) the adoption by manufacturers of quality standards such as Six Sigma
and ISO-9000 (and its offshoot QS-9000) which stress the measurement of every
step in a manufacturing process to reduce or eliminate defects, and 3) the
inability of traditional measurement devices to address many manufacturing
problems, especially related to large components of products such as
automobiles, aircraft, and heavy duty construction equipment.
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CAD changes the manufacturing process. The creation of physical products
involves the processes of design, engineering, production and measurement and
quality inspection. These basic processes have been profoundly affected by the
computer hardware and software revolution that began in the 1980s. CAD software
was developed to automate the design process, providing manufacturers with
computerized 3-D design capability. Today, most manufacturers use some form of
CAD software to create designs and engineering specifications for new products
and to quantify and modify designs and specifications for existing products.
Use of CAD can shorten the time between design changes. While manufacturers
previously designed their products to be in production for longer periods of
time, current manufacturing practices must accommodate more frequent product
introductions and modifications, while satisfying more stringent quality and
safety standards. Assembly fixtures and measurement tools must be figuratively
linked to the CAD design to enable production to keep up with the rate of
design change.
Quality standards dictate measurement to reduce defects. QS-9000 is the
name given to the Quality System Requirements of the automotive industry which
were developed by Chrysler, Ford, General Motors and major truck manufacturers
and issued in late 1994. Companies that become registered under QS-9000 are
considered to have higher standards and better quality products. Six Sigma
embodies principles of total quality management which focuses on measuring
results and reducing product or service failure rates to 3.4 per million. All
aspects of a Six Sigma company's infrastructure must be analyzed, and if
necessary, restructured to increase revenues and raise the level of customer
satisfaction. The all-encompassing nature of these and other quality standards
has resulted in manufacturers measuring every aspect of their process,
including stages of product assembly that may have never been measured before,
in part because of the lack of suitable measurement equipment.
Traditional products don't measure up. A significant aspect of the
manufacturing process, which traditionally has not benefited from computer-
aided technology, is measurement and quality inspection. Historically,
manufacturers have measured and inspected products using hand-measurement tools
such as scales, calipers, micrometers and plumb lines for simple measuring
tasks, test (or check) fixtures for certain large manufactured products and
traditional coordinate measurement machines ("CMMs") for objects that require
higher precision measurement. However, the broader utility of each of these
measurement methods is limited.
Although hand-measurement tools are often appropriate for simple geometric
measurements such as hole diameters or length and width of a rectangular
component, their use for complex part measurements such as the fender of a car
is limited. Also, these devices do not allow for the measurements to be
directly compared to the CAD model of the part. Test fixtures (customized fixed
tools used to make comparative measurements of complex production parts to
"master parts") are relatively expensive and must be reworked or discarded each
time a dimensional change is made in the part being measured. In addition,
these manual measuring devices do not permit the manufacturer to compare the
dimensions of an object with its CAD model.
Conventional CMMs are generally large, fixed-base machines that provide very
high levels of precision and provide a link to the CAD model of the object
being measured. However, fixed-base CMM's require that the object being
measured be brought to the CMM and that the object fit within the CMM's
measurement grid. As manufactured subassemblies increase in size and become
integrated into even larger assemblies, they become less transportable, thus
diminishing the utility of a conventional CMM. Consequently, manufacturers must
continue to use hand-measuring tools or expensive customized test fixtures to
measure large or unconventionally shaped objects. Moreover,
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some parts or assemblies cannot be measured at all using traditional devices,
because of problems of access.
An increasingly competitive global marketplace has created a demand for
higher quality products with shorter life cycles. Manufacturers increasingly
require more rapid design, greater control of the manufacturing process, tools
to compare components to their CAD specifications and the ability to measure
precisely components that cannot be measured or inspected by conventional
devices. Moreover, they increasingly require measurement capabilities to be
integrated into the manufacturing process and to be available on the factory
floor.
FARO's Business
The Company designs, develops, markets and supports portable, software-
driven, 3-D measurement systems that are used in a broad range of manufacturing
and industrial applications. The Company's principal products are the Control
Station and the Control Station Pro (formerly FAROArm) articulated measuring
devices and their companion Soft Check Tool and CAM2 software, respectively,
which provide for CAD-based inspection and factory-level statistical process
control. Together, these products integrate the measurement and quality
inspection function with CAD software to improve productivity, enhance product
quality and decrease rework and scrap in the manufacturing process. The Company
uses the acronym "CAM2" for this process, which stands for Computer-aided
manufacturing measurement. The Company's products bring precision measurement,
quality inspection and specification conformance capabilities, integrated with
leading CAD software, to the factory floor. The Company is a pioneer in the
development and marketing of 3-D measurement technology in manufacturing and
industrial applications and currently holds or has pending 29 patents in the
United States, 19 of which also are held or pending in other jurisdictions. The
Company's products have been purchased by approximately 2,900 customers
worldwide, ranging from small machine shops to such large manufacturing and
industrial companies as Audi, Bell Helicopter, Boeing, British Aerospace,
Caterpillar, DaimlerChrysler, General Electric, General Motors, Honda, Johnson
Controls, Komatsu Dresser, Lockheed Martin, Siemens and Volkswagen among many
others. See additional information about FARO's business as set forth under the
caption "Recent Developments" below.
Recent Developments
On January 16, 2002, the Company acquired SpatialMetrix Corporation ("SMX"),
a leading manufacturer and supplier of laser trackers and targets, metrology
software, and contract inspection services. In connection therewith, the
Company issued 500,000 shares of the Company's common stock to former SMX
shareholders and satisfied certain debt obligations of SMX. Additionally, in
connection with the SMX acquisition, the Company issued an additional 350,000
shares of FARO common stock and paid $2.0 million in cash to fully satisfy
SMX's obligations to its two lenders. The Company also assumed and/or satisfied
other obligations of SMX, including approximately $2.9 million in financing
provided by the Company to SMX between April 1, 2001 and the completion of the
acquisition. The acquisition will be recorded utilizing the purchase method of
accounting.
SMX is based in Kennett Square, Pennsylvania and has approximately 60
employees. The Company believes that this acquisition provides FARO an
excellent opportunity to expand its product line with a complementary
technology for its existing worldwide customer base. The SMX new generation
laser tracker is a high-accuracy, portable 3-dimensional measurement technology
with a range of over 100 feet, which when combined with the Company's Control
Station product line and their companion Soft Check Tool and CAM2 software,
results in a portable, computer-based product
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line capable of handling a much wider range of manufacturing measurement
applications.
The Company estimates that SMX has 35% of the installed laser tracker
market. The Company exercised its contractual right to acquire SMX only after
the successful design by SMX of a new generation laser tracker, which the
Company expects to sell at competitive prices compared to the previous
generation SMX tracker, and competitor's current products. SMX's previous
generation laser tracker, which was introduced in 1996, was sold until
September 2001. SMX halted production and sale of its earlier generation laser
tracker in September 2001 as part of a settlement of a patent infringement
lawsuit. The operations of SMX are expected to contribute favorably to the
Company's revenue growth and results of operations once the new generation
tracker begins to ship. The Company expects to start shipping new generation
tracker products some time in the first half of 2002. Until then, the
operations of SMX are expected to result in revenues of at least $1.0 million
per quarter resulting form the sale of parts, comprehensive support, and
technology consulting services. Operating expenses are estimated to be
approximately $1.9 million per quarter.
FARO Products
The Control Station. The Control Station is a combination of a portable, six
or seven-axis, instrumented, articulated measurement arm, a touch screen
computer, and software programs known as SoftCheck Tools.
Articulated Arm: Each articulated arm is comprised of three major
joints, each of which may consist of one, two or three axes of motion. The
articulated arm is available in a variety of sizes, configurations and
precision levels that are suitable for a broad range of applications. To
take a measurement, the operator simply touches the object to be measured
with a probe at the end of the arm and presses a button. Data can be
captured as either individual points or a series of points. Digital
rotational transducers located at each of the joints of the arm measure the
angles at those joints. This rotational measurement data is transmitted to
an on-board controller that converts the arm angles to precise locations in
3-D space using "xyz" position coordinates and "ijk" orientation
coordinates.
Touch Screen Computer: One of the main goals of the Control Station
system is to provide computer-based inspection without requiring the
operator to program the inspection software or even have to touch a
keyboard. As such the company developed software (see the following
section) which runs entirely by the operator touching simple icons on the
touch screen, not unlike how a restaurant waiter enters an order. The
computers are not manufactured by the Company, but are purchased from
various suppliers.
SoftCheck Tool Software: A SoftCheck Tool is custom software program
designed to lead an operator through the measurement process with minimal
training. The extensive use of photos of the customer's part assist in
achieving this goal. These programs are created by the Company from
specifications provided by the customer. When the customer changes its part
production it then contracts with the Company to create updated or new
SoftCheck Tool programs. The Company believes that providing this
"prefabricated" inspection software will increase acceptance of the Control
Station by new and existing customers as it significantly reduces the need
for the customer to have sophisticated programmers and inspectors on the
factory floor.
The Control Station Pro. The Control Station Pro is a combination of an
articulated arm, standard computer (with keyboard), and one of the Company's
following CAM2 Software programs: CAM2 Design, CAM2 Measure, CAM2 Automotive.
In contrast to the basic Control Station, Control
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Station Pro customers may write their own inspection programs using the
Company's CAM2 software. This product requires more sophisticated operators,
and is often used to measure multiple parts in the same day, while the basic
Control Station is often dedicated to the same part.
CAM2 Software. CAM2 is the Company's family of proprietary CAD-based
measurement and statistical process control software. The CAM2 product line
includes four software programs:
CAM2 CAD Analyzer(R) allows users to convert very large, complex CAD
files from engineering workstations into simpler graphical images which
make them available on a personal computer level for numerous applications
throughout the factory from assembly and inspection planning, to the
creation of user or service manuals.
CAM2 Measure(R) allows users to compare measurements of manufactured
components or assemblies with the corresponding CAD data for the components
or assemblies. CAM2 Measure(R) is offered with the FAROArm(R) and is also
offered as an unbundled product.
CAM2 Automotive(R) also allows users to compare measurements of
manufactured components with the corresponding CAD file. Unlike CAM2
Measure(R), CAM2 Automotive(R) is especially suited to the measurement of
very large components with large CAD files, typical of those in the
automotive industry. CAM2 Automotive(R) is offered with the FAROArm(R) and
is also offered as an unbundled product.
CAM2 SPC Process(R) allows for the collection, organization, and
presentation of measurement data factory-wide. Not limited to measurements
from the FAROArm(R), CAM2 SPC Process(R) accepts data from CMMs and other
computer-based measurement devices from many different measurement
applications along the production line.
Specialty Products. The Company licenses and supports certain specialty
products based on its articulated arm technologies that are used in medical
applications. License and support fees from these products do not represent a
significant portion of the Company's revenues. However, the Company is
maintaining an active campaign to license its formerly developed medical
intellectual property to manufacturers of computer assisted surgical products.
Customers
The Company's products have been purchased by approximately 2,900 customers
worldwide, ranging from small machine shops to large manufacturing and
industrial companies. The Company's ten largest customers by revenue
represented an aggregate of 7.6% of the Company's total revenues in 2001. No
customer represented more than 1.1% of the Company's sales in 2001. The
following table illustrates, by vertical market, the Company's diverse customer
base:
ELECTRIC UTILITIES AND
AEROSPACE AUTOMOTIVE MANUFACTURERS
Lear Corporation Audi General Electric
Boeing DaimlerChrysler Westinghouse
Lockheed Martin General Motors Southern California Edison
Northrop Grumman Ford Tennessee Valley Authority
GE Aerospace Honda ABB Power Generation
Orbital Sciences Hyundai Motors Hydro Quebec
Harris Corporation Toyota TurboCare
Dee Howard Nissan Potomac Electric Power
Hughes Brothers Porsche Turbine Technology International
Nordam Repair Div. Volkswagen Siemens Power Corporation
Ball Aerospace BMW
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HEAVY EQUIPMENT CONSUMER PRODUCTS MISCELLANEOUS
John Deere Harley Davidson Bill Elliot Racing
Case Corporation Polaris American Sheet Metal
Caterpillar Bombardier Monyo Oil Field Products
Komatsu Dresser Xerox Atlas Foundry
Clark Industries Hewlett Packard Molded Fiberglass
Ingersol Rand Fountain Power Boats Creative Foam Products
AGCO Taylor Made Products Able Design Plastics
Hay and Forage Mercury Marine APW Enclosures
HEAVY EQUIPMENT CONSUMER PRODUCTS MISCELLANEOUS
Melroe Company Amana Applied Composites
Volvo Construction Equipment Braun Corporation Kolenda Tool and Die
Renault Agriculture Eastman Kodak Charmalloy Castings
Sales and Marketing
The Company directs its sales and marketing efforts from its headquarters in
Lake Mary, Florida. At December 31, 2001, the Company employed 85 sales and
marketing professionals who operate from the Company's headquarters, and
include eight North American regional sales representatives located in
Charlotte, Chicago, Columbus (Ohio), Dallas, Detroit, Los Angeles, Seattle and
Toronto, three German regional sales offices in Stuttgart, Munich, and
Gladbeck, and sales offices located in Coventry, United Kingdom, suburban
Paris, France, in Barcelona, Spain, Rivoli, Italy and in Nagoya, Japan. The
Company also utilizes 12 North American and 27 international distributors
primarily in territories where the Company does not have regional sales
offices. See Footnote 15 to the Notes to Consolidated Financial Statements,
incorporated herein by reference to Item 8 hereof, for financial information
about the Company's foreign and domestic operations and export sales required
by this Item.
The Company uses a process of integrated lead qualification and sales
demonstration. Once a customer opportunity is identified, the Company employs a
team-based sales approach involving inside and outside sales personnel who are
supported by application engineers.
The Company employs a variety of marketing techniques, including direct
mail, trade shows, and advertising in trade journals, and proactively seeks
publicity opportunities for customer testimonials. Management believes that
word-of-mouth advertising from the Company's existing customers provides an
important marketing advantage. The Company also uses computerized sales and
marketing software system with telemarketing, lead tracking and analysis, as
well as customer support capabilities. Finally, the Company utilizes its state-
of-the-art web site to promote its product offerings. Each of the Company's
sales offices is linked electronically to the Company's headquarters.
In March 1999, the Company entered into an OEM agreement with Brown & Sharpe
Manufacturing Company ("Brown & Sharpe"), a unit of Hexagon, A. B. of
Stockholm, Sweden that is a world leader in the manufacture of traditional CMMs
and other metrology products. Brown & Sharpe markets the FAROArm(R) worldwide
under the name GAGE 2000 A. The agreement, which grants Brown & Sharpe non-
exclusive distribution right worldwide, expires in March 2002, and is renewable
for successive one-year terms. The Company anticipates that this agreement will
be renewed.
Research and Development
The Company believes that its future success depends on its ability to
achieve technological leadership, which will require ongoing enhancements of
its products and the development of new
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applications and products that provide 3-D measurement solutions. Accordingly,
the Company intends to continue to make substantial investments in the
development of new technologies, the commercialization of new products that
build on the Company's existing technological base and the enhancement and
development of additional applications for its products.
The Company's research and development efforts are directed primarily at
enhancing the functional adaptability of its current products and developing
new and innovative products that respond to specific requirements of the
emerging market for 3-D measurement systems. The Company's research and
development efforts have been devoted primarily to mechanical hardware,
electronics and software. The Company's engineering development efforts will
continue to focus on the FAROArm(R) and the family of CAM2 products.
Significant efforts are also being directed toward the development of new
Control Station measurement technologies and additional features for existing
products. See "Technology".
At December 31, 2001, the Company employed 31 scientists and technicians in
its research and development efforts. Research and development expenses were
approximately $3.4 million in 2001 as compared to $3.6 million in 2000 and $3.8
million in 1999. Research and development activities, especially with respect
to new products and technologies, are subject to significant risks, and there
can be no assurance that any of the Company's research and development
activities will be completed successfully or on schedule, or, if so completed,
will be commercially accepted.
Technology
The primary measurement function of the articulated arm in the Control
Station and Control Station Pro is to provide orientation and position
information with respect to the probe at the end of the arm. This information
is processed by software and can be compared to the desired dimensions
contained in the CAD data of a production part or assembly to determine whether
the measured data conforms to such dimensional specifications.
To accomplish this measurement function, the articulated arm is designed
with six or seven joints. The arm consists of aluminum links and rotating
joints that are combined in different lengths and configurations, resulting in
human armlike characteristics. Each joint is instrumented with a rotational
transducer, a device used to measure rotation, which is based on optical
digital technology. The position and orientation of the probe in three
dimensions is determined by applying trigonometric calculations at each joint.
The position of the end of a link of the arm can be determined by using the
angle measured and the known length of the link. Through a complex summation of
these calculations at each joint, the position and orientation of the probe is
determined.
The Company's products are the result of a successful integration of state-
of-the-art developments in mechanical and electronic hardware and applications
software. The unique nature of the Company's technical developments is
evidenced by its numerous U.S. and international patents. The Company maintains
low cost product design processes by retaining development responsibilities for
all electronics, hardware and software.
Mechanical Hardware. The articulated arm is designed to function in diverse
environments and under rigorous physical conditions. The arm monitors its
temperature to adjust for environments ranging from -10 degrees to +50 degrees
Celsius. The arm is constructed of pre-stressed precision bearings to resist
shock loads. Low production costs are attained by the proprietary combination
of reasonably priced electromechanical components accompanied by the
optimization and on-board storage of calibration data. Many of the Company's
innovations relate to the environmental adaptability of its products.
Significant features include integrated counter-balancing, configuration
convertibility and temperature compensation.
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Electronics. An on-board computer that is designed to handle complex
analyses of joint data as well as communications with a variety of host
computers processes the rotational information for each joint. The Company's
electronics are based on digital signal processing and surface mount
technologies. The Company's products meet all mandatory electronic safety
requirements. Advanced circuit board development, surface mount production and
automated testing methods are used to ensure low cost and high reliability.
Software. CAM2 is a Windows-based, 32-bit application family written for the
most recent PC-based technology. CAM2 has been entirely designed and programmed
by the Company utilizing field input and industry wide beta site installations.
CAM2 CADanalyser(R) is a family member for viewing, analyzing and browsing CAD
files. CAM2 Measure(R) is complete 3D measurement application written entirely
on the ACIS CAD development platform. Family member CAM2 Automotive(R) is also
a complete 3D measurement software designed for very large CAD files and for
specific Automotive applications and is written using a FARO's proprietary
graphics display engine. Family member CAM2 SPC Process(R) is designed for
plant wide dimensional data acquisition and presentation in classical SPC
(Statistical Process Control) formats for plant-wide quality control. CAM2 Open
Measure is a version of CAM2 Measure which can be adapted to any CAD platform.
This permits CAD users to have a complete 3D measurement application operating
on their native CAD platform.
All the CAM2 family members are written in the C++ development language
using Microsoft Foundation Class (MFC) standards. The software fully implements
UNICODE standards for worldwide translation allowing the Company to create
foreign language versions to enter international markets more effectively. The
software is developed with the cooperation of diverse user beta sites and a
well-developed system for tracking and implementing market demands. The
Company's software products are available in seven (7) languages worldwide.
Intellectual Property
The Company holds or has pending 29 patents in the United States, 19 of
which are also held or pending in other jurisdictions. The Company also has 12
registered trademarks in the United States, 26 foreign registered trademarks, 6
trademark applications pending in the United States and 4 foreign trademark
applications pending. The Company also has 45 URL domain names worldwide
registered.
The Company relies on a combination of contractual provisions and trade
secret laws to protect its proprietary information. There can be no assurance
that the steps taken by the Company to protect its trade secrets and
proprietary information will be sufficient to prevent misappropriation of its
proprietary information or to preclude third-party development of similar
intellectual property.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary. The
Company intends to vigorously defend its proprietary rights against
infringement by third parties. However, policing unauthorized use of the
Company's products is difficult, particularly overseas, and the Company is
unable to determine the extent to which piracy of its software products exists.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as the laws of the United States.
The Company does not believe that any of its products infringe on the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to
current or future products. Any such claims, with or without merit, could be
timeconsuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
8
Manufacturing and Assembly
The Company manufactures its products primarily at its headquarters in Lake
Mary, Florida. Manufacturing consists primarily of assembling components and
subassemblies purchased from suppliers into finished products. The primary
components, which include machined parts and electronic circuit boards, are
produced by subcontractors according to the Company's specifications. All
products are assembled, calibrated and tested for accuracy and functionality
before shipment. In limited circumstances, the Company performs in-house
circuit board assembly and part machining.
"Quality" has rapidly emerged as a new emphasis in commerce and industry,
and is a significant factor in international trade. The Company's
manufacturing, engineering and design headquarters have been registered to the
ISO 9001 standard since July 1998. Semi-annual surveillance audits have
documented continuous improvement to this multinational standard. The Company
continues to examine its scope of registration as the business evolves and has
chosen English as the standard business language for its operations. This
decision is expected to significantly influence the Company's operations and
documentation globally. This has been done in concert with the ISO Standard
Registrar, and is expected to increase customer confidence in the Company's
products and services worldwide.
The Company continues to achieve new levels of certification, achieving
Accreditation to Guide 25 in May, 2000, and Registration to ISO/IEC 17025 in
October, 2001. These global standards apply to the "Calibration and
Certification of Measuring and Test Equipment", and certify the organization's
level of training, procedures, and efficiency.
Competition
The broad market for measurement devices, which include hand-measurement
tools, test fixtures and conventional, fixed-base CMMs, is highly competitive.
Manufacturers of hand-measurement tools and traditional CMMs include a
significant number of well-established companies that are substantially larger
and possess substantially greater financial, technical and marketing resources
than the Company. There can be no assurance that these entities or others will
not succeed in developing products or technologies that will directly compete
with those of the Company. The market for measurement software to retrofit
traditional CMMs, and for statistical process control is also highly
competitive. The Company will be required to make continued investments in
technology and product development to maintain its technological advantage over
its competition. There can be no assurance that the Company will have
sufficient resources to make such investments or that the Company's product
development efforts will be sufficient to allow the Company to compete
successfully as the industry evolves. The Company's products compete on the
basis of portability, accuracy, application features, ease-of-use, quality,
price and technical support.
The Company's significant direct competitors for its Control Station and
related software are Romer SRL (France), Romer, Inc., a Cimcore Company
(California), and Kosaka Laboratory Ltd. (Japan). In addition the Company is
aware of a direct competitor in Germany, two direct competitors in Italy, and a
direct competitor in the United Kingdom, each of which the Company believes
currently has significantly less sales volume than the Company. However, there
can be no assurance that these companies or other companies will not devote
additional resources to the development and marketing of products that compete
with those of the Company. With respect to the laser tracker market, Leica
Geosystems (Switzerland) is the company's only significant direct competitor.
Leica Geosystems has the largest market share in the laser tracker market, is
well established and is substantially larger and possesses substantially
greater financial, technical, and marketing resources
9
than the Company. As the market for laser trackers and our portable coordinate
measurement machines expands, additional competition may emerge and the
Company's existing and future competitors may commit more resources to the
markets in which the Company participates.
The worldwide trend toward CAD-based factory floor metrology has resulted in
the introduction of CAD-based inspection software and statistical process
control for conventional CMMs by most of the large CMM manufacturers. Certain
CMM manufacturers are miniaturizing, and in some cases increasing the mobility
of their conventional CMMs. Nonetheless, these CMMs still have small
measurement volumes, lack the adaptability typical of portable, articulated arm
measurement devices and lose accuracy outside the controlled environment of the
metrology lab.
Backlog
At December 31, 2001, the Company had orders representing approximately
$706,000 in product sales outstanding. The majority of such orders were shipped
by March 20, 2002. Additionally, the Company had orders representing
approximately $1.0 million in warranty, training and service sales outstanding
at December 31, 2001.
Employees
At December 31, 2001, the Company had 235 full-time employees, consisting of
85 sales and marketing professionals, 29 production staff, 31 research and
development staff, 44 administrative staff, and 46 customer service/application
engineering specialists. The Company is not a party to any collective
bargaining agreements. The Company believes its employee relations are good.
Management believes that its future growth and success will depend in part on
its ability to retain and continue to attract highly skilled personnel. The
Company anticipates that it will obtain the additional personnel required to
satisfy its staffing requirements over the foreseeable future.
Management of the Registrant
The officers and key management personnel of the Company are as follows:
Name Age Principal Position
- ---- --- ------------------
Simon Raab, Ph.D. ...... 49 Chairman of the Board, Chief Executive Officer, and
President
Gregory A. Fraser,
Ph.D. ................. 47 Executive Vice President, Secretary, and Treasurer
Wendelin K.J.
Scharbach.............. 46 Managing Director of FARO Europe
Joanne M. Karimi........ 43 Vice President of Human Resources
Edward M. Pelshaw....... 43 Vice President of Manufacturing
Allen Sajedi............ 42 Vice President and Chief Technical Officer
Simon Raab, Ph.D., a co-founder of the Company, has served as the Chairman
of the Board, Chief Executive Officer and a director of the Company since its
inception in 1982 and as President since 1986. Mr. Raab holds a Ph.D. in
Mechanical Engineering from McGill University, Montreal, Canada, a Masters of
Engineering Physics from Cornell University and a Bachelor of Science in
Physics with a minor in Biophysics from the University of Waterloo, Canada.
Gregory A. Fraser, Ph.D., a co-founder of the Company, has served as
Executive Vice President, Secretary, and Treasurer since August 1999. Prior to
that Mr. Fraser served as Chief Financial Officer and Executive Vice President
since May 1997 and as Secretary, Treasurer and a director of the Company since
its inception in 1982. Mr. Fraser holds a Ph.D. in Mechanical
10
Engineering from McGill University, Montreal, Canada, a Masters of Theoretical
and Applied Mechanics from Northwestern University and a Bachelor of Science
and Bachelor of Mechanical Engineering from Northwestern University.
Wendelin K.J. Scharbach, a co-founder of CATS GmbH, a predecessor of FARO
Europe, the Company's principal subsidiary in Europe, has served as Managing
Director of FARO Europe since May 1998. Prior to that Mr. Scharbach was
Managing Director of CATS GmbH.
Joanne M. Karimi., has served as Vice President of Human Resources of the
Company since July 2001 and as Director of Human Resource Systems since
October 1998. Prior to that, Ms. Karimi served as Director of Human Resources
of the Disney Vacation Club, a unit of The World Disney Company. Ms. Karimi
holds a MBA and a Bachelor's Degree in Business Management from the University
of West Florida.
Edward M. Pelshaw has served as Vice President of Manufacturing of the
Company since January 2000. Prior to that Mr. Pelshaw served as Director of
Manufacturing of the Company since 1997, and as Purchasing Manager since 1996.
Prior to that, Mr. Pelshaw served as Senior Supply and Logistic Officer with
the U.S. Army. Mr. Pelshaw holds an MBA from the Webster University and a
Bachelor of Science degree from Hawaii Pacific University.
Allen Sajedi has served as Vice President and Chief Technical Officer since
2002 and as Chief Engineer of the Company since 1990. Mr. Sajedi holds a
Bachelor's Degree in Mechanical Engineering from McGill University, Montreal,
Canada.
ITEM 2. PROPERTIES.
The Company's headquarters and principal operations are located in a leased
building in Lake Mary, Florida containing approximately 35,000 square feet.
The Company's European headquarters are located in a leased building in
Stuttgart, Germany containing approximately 14,000 square feet. The Company
also has a combined sales and research and development facility that is
located in a leased building in Aveiro, Portugal containing approximately
2,800 square feet. The Company believes that its current facilities will be
adequate for its foreseeable needs and that it will be able to locate suitable
space for additional regional offices as those needs develop.
In addition, the Company has seven sales offices in Europe, a sales office
in each Canada and Japan. The Company leases all of the sales offices. The
information required by the remainder of this Item is incorporated herein by
reference to Exhibit 99.1 attached hereto.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
routine litigation arising in the ordinary course of business. The Company
does not believe that the results of such litigation, even if the outcome were
unfavorable to the Company, would have a material adverse effect on the
Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of calendar 2001.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, par value $.001 per share, began trading on the
NASDAQ Stock Market in September 1997 under the symbol FARO. Before that date,
there was no established public trading market for the Common Stock. The
following table sets forth the high and low sale price of the Company's Common
Stock for its two most recent fiscal years:
2001 2000
--------------- ---------------
High Low High Low
------- ------- ------- -------
First Quarter................................ 4 3/8 2 3/16 5 7/8 2 3/8
Second Quarter............................... 2 7/8 1 13/32 3 29/32 2 3/8
Third Quarter................................ 2 63/64 1 19/32 5 1/2 3
Fourth Quarter............................... 2 31/64 1 19/64 4 15/16 2 25/32
The Company has not paid any cash dividends on its Common Stock to date. The
payment of dividends, if any in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition, and may be restricted by future credit
arrangements entered into by the Company. The Company expects to retain future
earnings for use in operating and expanding its business and does not
anticipate paying any cash dividends in the reasonably foreseeable future. As
of March 20, 2002, the last sale price of the Company's Common Stock was $2.74,
and there were approximately 81 holders of record of Common Stock. The Company
believes that there are approximately 1,394 beneficial owners of its Common
Stock.
On August 26, 1998 the Board of Directors authorized the officers of the
Company, without further approval of the Board, to purchase in the open market
up to a maximum of one million shares of the Company's Common Stock. In the
fiscal year 1998, the Company purchased 40,000 shares of its Common Stock in
the open market under such stock repurchase plan. During the three years in the
period ended December 31, 2001 the Company did not purchase any shares of its
Common Stock in the open market.
12
ITEM 6. SELECTED FINANCIAL DATA.
The operating results of SMX will be included in the consolidated statements
effective at the date of acquisition. The pro forma selected financial data is
presented for informational purposes assuming that the Company had acquired SMX
as of January 1, 2001. The pro forma selected financial data has been prepared
for comparative purposes only and do not purport to be indicative of the
results of operations and financial position which actually would have resulted
had the acquisition occurred on the date indicated, or which may result in the
future.
Years Ended December 31
-----------------------------------------------------------------------------------
Pro Forma(1) Historical
------------ ---------------------------------------------------------------------
2001 2001 2000 1999 1998 1997
------------ ----------- ----------- ----------- ----------- -----------
Statement of Operations
Data:
Sales................... $46,400,491 $35,113,596 $40,452,913 $33,105,740 $27,514,699 $23,516,385
Gross profit............ 23,617,844 20,809,513 25,704,285 18,944,802 16,223,386 13,905,547
Income (loss) from
operations............. (10,261,433) (4,369,710) (697,100) (9,705,477)(2) (5,684,607)(3) 4,932,276
Income (loss) before
income taxes........... (8,416,101) (2,506,226) 464,198 (8,516,286) (4,480,562) 5,321,260
Net income (loss)....... (8,757,839) (2,847,964) 39,517 (7,394,822) (4,931,094) 3,206,630
Net income (loss) per
common share:
Basic.................. $ (0.74) $ (0.26) $ -- $ (0.67) $ (0.46) $ 0.41
Diluted................ $ (0.74) $ (0.26) -- (0.67) (0.46) 0.39
Weighted average common
shares Outstanding:
Basic.................. 11,882,449 11,032,449 11,021,606 11,015,140 10,632,708 7,831,715
Diluted................ 11,882,449 11,032,449 11,094,144 11,015,140 10,632,708 8,189,048
At December 31,
------------------------------------------------------------------------
Pro Forma(1) Historical
------------ -----------------------------------------------------------
2001 2001 2000 1999 1998 1997
------------ ----------- ----------- ----------- ----------- -----------
Consolidated Balance Sheet Data:
Working capital......... 18,143,563 $22,303,204 $23,672,736 $24,869,844 $30,997,769 $37,277,545
Total assets............ 44,441,451 39,654,124 44,699,274 42,103,912 49,120,147 41,192,333
Total debt.............. 55,506 55,506 49,260 26,236 337,710 --
Total shareholders'
equity................. 32,488,788 32,336,461 35,955,453 36,599,346 45,375,391 38,939,411
- --------
(1) The pro forma statement of operations and balance sheet data reflects a
change to operations of $1.7 million to record amortization of intangible
assets acquired (including $1.2 million for amortization of goodwill) and
an adjustment to reduce interest expense (and accrued liabilities) of
$866,000 related to SMX bank debt paid-off upon completion of the
acquisition.
(2) Includes a charge to write down development and core technology in the
amount of $3.1 million.
(3) Includes a charge for in-process research and development in connection
with the German acquisition in the amount of $3.2 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following information should be read in conjunction with the
Consolidated Financial Statements of the Company, including the notes thereto,
included elsewhere in this document.
Overview
The Company designs, develops, markets and supports portable, software-
driven, 3D measurement systems that are used in a broad range of manufacturing
and industrial applications. The Company's principal products are the Control
Station and the Control Station Pro (formerly FAROArm(R)) articulated measuring
devices and their companion Soft Check Tool and CAM2 software, respectively,
which provide for CAD-based inspection and factory-level statistical process
control. Together, these products integrate the measurement and quality
inspection function with CAD software to improve productivity, enhance product
quality and decrease rework and scrap in the
13
manufacturing process. The Company's products bring precision measurement,
quality inspection and specification conformance capabilities, integrated with
leading CAD software, to the factory floor. The Company is a pioneer in the
development and marketing of 3-D measurement technology in manufacturing and
industrial applications and currently holds or has pending 29 patents in the
United States, 19 of which also are held or pending in other jurisdictions. The
Company's products have been purchased by approximately 2,900 customers
worldwide, ranging from small machine shops to such large manufacturing and
industrial companies as Audi, Bell Helicopter, Boeing, British Aerospace,
Caterpillar, DaimlerChrysler, General Electric, General Motors, Honda, Johnson
Controls, Komatsu Dresser, Lockheed Martin, Siemens and Volkswagen among many
others.
From its inception in 1982 through 1992, the Company focused on providing
computerized, 3-D measurement devices to the orthopedic and neurosurgical
markets. During this period, the company introduced a knee laxity measurement
device, a diagnostic tool for measuring posture, scoliosis and back
flexibility, and a surgical guidance device utilizing a six-axis articulated
arm.
In 1992, in an effort to capitalize on a demand for 3-D portable measurement
tools for the factory floor, the Company made a strategic decision to target
its core measurement technology to the manufacturing and industrial markets. In
order to focus on manufacturing and industrial applications of its technology,
the Company phased out the direct sale of its medical products and entered into
licensing agreements with two major neurosurgical companies for its medical
technology. Since 1992, the Company has entered into additional licensing
agreements for the use of its technology for medical applications. In 1995, the
Company made a strategic decision to target international markets. The Company
established sales offices in France and Germany in 1996, Great Britain in 1997,
Japan and Spain in 2000 and Italy in 2001. International sales represented
60.8%, 50.6% and 46.6% of sales in 2001, 2000 and 1999, respectively.
The Company derives revenues primarily from the sale of its 3-D measurement
equipment, and its related multi-faceted Soft Check Tool and CAM2 software.
Revenue related to these products is recognized upon shipment. Going forward,
the Company also expects to generate revenue from the sale of its laser tracker
product.
Revenue growth has historically resulted from increased unit sales due to an
expanded sales effort that included the addition of sales personnel at existing
offices, the opening of new sales offices and expanded promotional efforts
which include a multilingual web site and Company demo CD. In 2000 the Company
introduced The Control Station with SoftCheck Tools, new accessory items such
as The FARO Rail, the FARO Powerhouse and new versions of all the members of
the CAM2 software family. In January 2001, the Company acquired SpatialMetrix
Corporation ("SMX"), a leading manufacturer and supplier of laser trackers and
targets, metrology software, and contract inspection services. The SMX new
generation laser tracker is a high-accuracy, portable 3-dimensional measurement
technology. The Company expects to begin shipments of this laser tracker in the
second quarter of 2002.
In addition to providing a one-year basic warranty without additional
charge, the Company offers its customers one, two and three-year extended
maintenance contracts, which include on-line help services, software upgrades
and hardware warranties. In addition, the Company sells training and technology
consulting services relating to its products. The Company recognizes the
revenue from extended maintenance contracts proportionately as costs are
projected to be incurred.
Cost of sales consists primarily of material, production overhead and labor.
Selling expenses consist primarily of salaries and commissions to sales and
marketing personnel, and promotion, advertising, travel and telecommunications.
General and administrative expenses consist primarily of
14
salaries for administrative personnel, rent, utilities and professional and
legal expenses. Research and development expenses represent salaries, equipment
and third-party services.
Accounting for wholly owned foreign subsidiaries is maintained in the
currency of the respective foreign jurisdiction and, therefore, fluctuations in
exchange rates may have an impact on intercompany accounts reflected in the
Company's consolidated financial statements. In the normal course of business,
the Company from time to time employs off-balance sheet financial instruments
to hedge its exposure to foreign currency exchange rates, including cross-
currency swaps, forward contracts, and foreign currency options (see Foreign
Exchange Exposure below).
During 2001, the Company's sales growth has been adversely affected by the
economic slowdown currently affecting the United States and Europe to a lesser
extent. We expect that the current economic slowdown will continue to adversely
affect U. S. sales and the Company's growth rate in other geographic markets
during the first half of 2002. Accordingly, the Company adopted a cost
reduction plan during the third quarter of 2001. This plan includes reducing
discretionary spending, canceling certain non-strategic product development and
marketing projects, and a reduction of approximately 15% of the company's U.S.
workforce, or about 30 people, primarily in administration, research and
development, and manufacturing.
Results of Operations
The following table sets forth for the periods presented, the percentage of
sales represented by certain items in the Company's consolidated statements of
operations:
Year Ended
December 31,
---------------------
2001 2000 1999
----- ----- -----
Statement of Operations Data:
Sales................................................... 100.0 % 100.0 % 100.0 %
Cost of Sales........................................... 40.7 % 36.5 % 42.7 %
----- ----- -----
Gross profit............................................ 59.3 % 63.5 % 57.3 %
Operating expenses:
Selling............................................... 38.3 % 34.7 % 36.7 %
General and administrative............................ 16.5 % 14.2 % 15.0 %
Depreciation and amortization......................... 7.3 % 7.2 % 13.5 %
Research and development.............................. 9.6 % 8.8 % 11.6 %
Employee stock options................................ -- .3 % 0.5 %
Impairment loss on acquired intangible assets......... -- -- 9.3 %
----- ----- -----
Total operating expenses............................ 71.7 % 65.3 % 86.6 %
----- ----- -----
Loss from operations.................................... (12.4)% (1.7)% (29.3)%
Interest income......................................... 2.6 % 2.1 % 2.2 %
Other income, net....................................... 2.7 % .7 % 1.4 %
Interest expense........................................ -- -- --
----- ----- -----
Net income (loss) before income taxes................... (7.1)% 1.1 % (25.7)%
Income tax expense (benefit)............................ 1.0 % 1.0 % (3.4)%
----- ----- -----
Net income (loss)....................................... (8.1)% 0.1 % (22.3)%
===== ===== =====
2001 Compared to 2000
Sales. Sales decreased $5.3 million, or 13.2%, from $40.5 million in 2000 to
$35.1 million in 2001. The decrease resulted from lower sales in the U.S. ($6.2
million, or 31.2%, from $20.0 million
15
to $13.8 million) and Germany ($1.6 million, or 18.9%, from $8.6 million to
$6.9 million), partially offset by increased sales in the remainder of the
world (an increase of $2.5 million, or 21.2%, from $11.9 million to $14.4
million). The decrease in the U.S. primarily resulted from lower product unit
sales resulting mainly from the slowing U.S. economy throughout 2001. The
decrease in Germany reflects the adverse translation effect (approximately
$700,000) of the stronger U.S. dollar in 2001.
Gross profit. Gross profit decreased by $4.9 million, or 19.0%, from $25.7
million in 2000 to $20.8 million in 2001. Gross margin decreased to 59.3% in
2001 from 63.5% in 2000. The decrease in gross margin resulted primarily from
downward pressure on unit prices in the U.S. and Europe and the translation
effect of the stronger U.S. dollar on international sales.
Selling expenses. Selling expenses decreased $598,000, or 4.3%, from $14.0
million in 2000 to $13.4 million in 2001. This decrease was primarily a result
of lower selling expenses in the United States ($1.3 million) resulting from
cost reduction efforts in the second half of 2001 and lower sales commissions
on lower U.S. sales in 2001 and the translation effect of the stronger U.S.
dollar in 2001 on the European selling expenses (approximately $275,000),
offset in part by higher selling expenses in Europe ($670,000) and in Japan
($282,000), principally as a result of higher compensation and marketing
expenses, offset in part by.
General and administrative expenses. General and administrative expenses
increased by $50,000, or 1.0%, from $5,763,000 in 2000 to $5,813,000 in 2001.
The increase was due to new operations in Japan ($188,000), offset in part by
lower expenses in the U.S. ($53,000) and Europe ($15,000) and the effect of the
stronger U.S. dollar in 2001 (approximately $70,000).
Depreciation and amortization expenses. Depreciation and amortization
expenses decreased by $372,000, or 12.7%, from $2.9 million in 2000 to $2.6
million in 2001 primarily as a result of assets becoming fully amortized in
2001.
Research and development expenses. Research and development expenses
decreased by $178,000, or 5.0%, from $3.5 million in 2000 to $3.4 million in
2001. The decrease was due to decline across many expense categories in Europe
($286,000) and the translation effect of the stronger U.S. dollar in 2001
($50,000) on the European R&D expenses, offset in part by increase across many
expense categories in the United States ($157,000).
Interest income. Interest income increased by $40,000, from $860,000 in 2000
to $900,000 in 2001 primarily as a result of higher average principal amounts
invested in 2001, including loans to SMX (see Liquidity and Capital Resources
below).
Other income, net. Other income, net increased by $663,000, from $302,000 in
2000 to $965,000 in 2001. The increase resulted principally from higher royalty
income in 2001 and lower foreign exchange losses in Europe in 2001.
Income tax expense. Income tax expense decreased by $83,000, from $425,000
in 2000 to $342,000 in 2001. The net tax expense resulted from an increase in
the valuation allowance for the Company's US deferred income tax assets offset
by benefits realized by the utilization of German net operating loss
carryforwards which were previously reserved. At December 31, 2001 the Company
16
has deferred income tax assets of approximately $7.7 million (including $1.4
million related to the U.S. operations and $6.3 million related to foreign
operations) which are offset by a valuation allowance of approximately $7.6
million. These deferred income tax assets are primarily attributable to net
operating loss carryforwards and intangible assets for which future income tax
benefits may be realized.
Net income (loss). The Company's net income (loss) decreased by $2,888,000,
from net income of $40,000 in 2000 to a loss of $2,848,000 in 2001 to due to
the factors mentioned above.
2000 Compared to 1999
Sales. Sales increased $7.3 million, or 22.2%, from $33.1 million in 1999 to
$40.5 million in 2000. The increase resulted from increases in the U.S. ($2.3
million, or 13.1%, from $17.7 million to $20.0 million), Europe ($3.5 million,
or 32.8%, from $10.6 million to $14.1 million) and the remainder of the world
(an increase of $1.6 million, or 32.3%, from $4.8 million to $6.4 million). The
increase primarily resulted from higher product unit sales in all geographic
regions, partially offset by the effect of the stronger U.S. Dollar in 2000
(approximately $1.8 million).
Gross profit. Gross profit increased by $6.8 million, or 35.7%, from $18.9
million in 1999 to $25.7 million in 2000. Gross margin increased to 63.5% in
2000 from 57.3% in 1999. The increase in gross margin was primarily a result of
cost reductions for computer hardware and software products in 2000, partially
offset by the effect of the stronger U.S. dollar.
Selling expenses. Selling expenses increased $1.9 million, or 15.6%, from
$12.1 million in 1999 to $14.0 million in 2000. This increase was primarily a
result of higher selling expenses in the United States ($1.1 million) and in
Europe ($1.2 million), principally as a result of higher compensation and
marketing expenses, offset in part by the effect of the stronger U.S. dollar in
2000 (approximately $550,000).
General and administrative expenses. General and administrative expenses
increased by $800,000, or 15.9%, from $5.0 million in 1999 to $5.8 million in
2000. The increase was due to increases across many categories in the U.S.
($720,000) and in Europe ($80,000), offset in part by the effect of the
stronger U.S. dollar in 2000 (approximately $150,000).
Depreciation and amortization expenses. Depreciation and amortization
expenses decreased by $1.5 million, or 34.4%, from $4.5 million in 1999 to $2.9
million in 2000. The decrease primarily resulted from the $3,073,000 impairment
loss on acquired intangible assets at the end of 1999, which reduced the amount
of acquired intangible assets to be amortized, offset in part by depreciation
on assets acquired in 2000.
Research and development expenses. Research and development expenses
decreased by $300,000, or 7.3%, from $3.8 million in 1999 to $3.5 million in
2000. The decrease was due to decreases across many expense categories in the
United States ($234,000), and to by the effect of the stronger U.S. dollar in
2000 ($130,000) on European expenses, offset in part by increase, in local
currency, across many categories in Europe ($85,000).
Employee stock option expenses. Employee stock option expenses decreased by
$46,000, or 26.9%, from $169,000 in 1999 to $123,000 in 2000. This decrease was
a result of a reduction in the amortized deferred compensation expense related
to stock options issued in 1995 and 1997. For all options issued in 2000 and
1999, no compensation expense was recorded, as the exercise price of the
options was equal to the market price on the day of the grant.
17
Impairment loss on acquired intangible assets. An unusual impairment loss of
$3.1 million was recorded in 1999 to reflect an impairment of the intangible
assets resulting from the German acquisition on May 15, 1998. The impairment
resulted from the Company's revised forecast of the cash flows expected from
the developed and core technology acquired with the German acquisition.
Interest income. Interest income increased by $144,000, from $716,000 in
1999 to $860,000 in 2000. The increase was primarily attributable to higher
average yields of interest-earning cash, cash equivalents, and investments held
and higher average principal amounts invested in 2000 (see Liquidity and
Capital Resources below).
Other income. Other income decreased by $173,000, from $475,000 in 1999 to
$302,000 in 2000. The decrease resulted principally from foreign exchange
losses in 2000.
Income tax expense (benefit). Income tax expense (benefit) increased by $1.5
million, from a benefit of $1.1 million in 1999 to expense of $425,000 in 2000.
The tax expense resulted from the Company's U.S. operation's taxable earnings
in 2000. The Company has deferred income tax assets related to it's German
operations which are fully offset against a valuation allowance. At December
31, 2000, the Company's foreign subsidiaries had deferred income tax assets
relating to net operating loss carryforwards, which do not expire, and
intangible assets of $3,360,729 and $3,131,325, respectively.
Net income (loss). The Company's net income (loss) increased by $7.4
million, from a loss of $7.4 million in 1999 to net income of $40,000 in 2000
due to the factors mentioned above.
Recent Developments
On January 16, 2002, the Company acquired SpatialMetrix Corporation ("SMX")
in exchange for 500,000 shares of FARO common stock and the satisfaction by the
Company of certain obligations of SMX. In connection therewith, the Company
issued an additional 350,000 shares of FARO common stock and paid $2.0 million
in cash to fully satisfy SMX's obligations to its two lenders. The Company also
assumed and/or satisfied other obligations of SMX, including approximately $2.9
million in financing provided by the Company to SMX between April 1, 2001 and
the completion of the acquisition. The acquisition will be recorded utilizing
the purchase method of accounting in accordance with SFAS No. 142, "Goodwill
and Other Intangible Assets." The Company estimates that SMX has 35% of the
installed laser tracker market. The Company exercised its contractual right to
acquire SMX only after the successful design by SMX of a new generation laser
tracker, which the Company expects to sell at competitive prices compared to
the previous generation SMX tracker, and competitor's current products. SMX's
previous generation laser tracker, which was introduced in 1996, was sold until
September 2001. SMX halted production and sale of its earlier generation laser
tracker in September 2001 as part of a settlement of a patent infringement
lawsuit. The operations of SMX are expected to contribute favorably to the
Company's revenue growth and results of operations once the new generation
tracker begins to ship. The Company expects to start shipping new generation
tracker some time in the first half of 2002. Until then, the operations of SMX
are expected to result in revenues of at least $1.0 million per quarter
resulting from the sale of parts, comprehensive support, and technology
consulting services and in additional operating expenses in the amount of
approximately $1.9 million per quarter.
Liquidity and Capital Resources
Since 1997, the Company has financed its operations primarily from cash
provided by operating activities and from the proceeds of its 1997 initial
public offering of Common Stock (approximately
18
$31.7 million). Total marketable securities (cash and cash equivalents, short-
term investments and investments) at December 31, 2001 were $14.1 million,
compared to $19.0 million at December 31, 2000.
For the year ended December 31, 2001, net cash used in operating activities
was $842,000 compared to net cash provided by operating activities of $4.7
million in 2000. Net cash used in operating activities increased primarily due
to the operational loss in 2001. Net cash (excluding short-term investments and
investments) provided by investing activities for the year ended December 31,
2001 was $267,000, compared to cash used in investing activities of $3.1
million in 2000. The increase in net cash provided by investing activities in
2001 was primarily due to net decreases in short-term investments and
investments in 2001 of $4.1 million, offset primarily by loans to SMX $2.9
million (see Note 16 of Notes to Consolidated Financial Statements contained in
Item 8 herein) and purchases of property and equipment of $788,000. Net cash
provided in financing activities for the year ended December 31, 2001 was
$9,000, compared to $11,000 in 2000. The Company invests excess cash balances
in short-term investment grade securities, such as money market investments,
obligations of the U.S. government and its agencies, and obligations of state
and local government agencies. Currency exchange rate changes resulted in a
$224,000 reduction in the Company's reported cash at December 31, 2001.
On January 16, 2002, in connection with its acquisition of SMX, the Company
issued 500,000 shares of FARO common stock and satisfied certain obligations of
SMX. Additionally, the Company issued an additional 350,000 shares of FARO
common stock and paid $2.0 million in cash to fully satisfy SMX's obligations
to its two lenders. The Company also assumed and/or settled other obligations
of SMX. The operations of SMX are expected to contribute favorably to the
Company's liquidity after the new generation tracker has been introduced. The
Company expects to start shipping the new generation tracker some time in the
first half of 2002. Until then, the operations of SMX are expected to result in
revenues of at least $1.0 million per quarter resulting from the sale of parts,
comprehensive support, and technology consulting services and in additional
operating expenses in the amount of approximately $1.9 million per quarter. See
Recent Developments above.
The Company's principal commitments at December 31, 2001 consisted of leases
on its headquarters and regional and sales offices (see Contractual Obligations
and Commercial Commitments below). There were no material commitments for
capital expenditures at that date. The Company believes that its cash,
investments and cash flows from operations will be sufficient to satisfy its
working capital and capital expenditure needs at least through 2002.
Contractual Obligations and Commercial Commitments
The Company was a party to a term loan that expires in 2003, capital leases
for automotive and other equipment with an initial term of 36 to 60 months and
non-cancelable operating leases, including leases with related parties (see
Note 8 of Notes to Consolidated Financial Statements) that expire on or before
2006.
Commitments under these agreements are as follows at December 31, 2001:
Payments due under:
--------------------------
Term Capital Operating
Year Loan Leases Leases Total
---- ------- ------- ---------- ----------
2002................................... $ 3,025 $22,095 $1,110,636 $1,135,756
2003................................... 9,862 27,005 929,274 966,141
2004................................... -- 15,045 607,222 622,267
2005................................... -- 2,601 381,176 383,777
2006 and thereafter.................... -- 993 95,756 96,749
------- ------- ---------- ----------
Total................................ $12,887 $67,739 $3,124,064 $3,204,690
======= ======= ========== ==========
19
SMX's principal commitments consist of a lease on its headquarters. The
lease expires in August 2003. Minimum lease payments required under the lease
are $129,372 and $86,248 in 2002 and 2003, respectively.
Critical Accounting Policies
In response to the SEC'S financial reporting release, FR-60, Cautionary
Advice Regarding Disclosure About Critical Accounting Policies, we have
selected our most subjective accounting estimation processes for purposes of
explaining the methodology used in calculating the estimate in addition to any
inherent uncertainties pertaining to the estimate and the possible effects on
the Company's financial condition. The two accounting estimation processes
discussed below are the Company's process of recognizing research and
development expenditures, and the allowance for obsolete and slow-moving
inventory. These estimation processes affect current assets and operating
results and are therefore critical in assessing the financial and operating
status of the Company. These estimates involve certain assumptions that if
incorrect could create an adverse impact on the Company's operations and
financial position.
Research and development costs incurred in the discovery of new knowledge
and the resulting translation of this new knowledge into plans and designs for
new products, prior to the attainment of the related products' technological
feasibility, are recorded as expenses in the period incurred. Product design
costs incurred in the development of products after technological feasibility
is attained are capitalized and amortized using the straight-line method over
the estimated economic lives of the related products, not to exceed 3 years.
The Company considers technological feasibility to be established when the
Company has completed all planning, designing, coding and testing activities
that are necessary to establish design specifications including function,
features and technical performance requirements. Capitalization of product
design costs ceases and amortization of such costs begins when the product is
available for general release to customers. The Company periodically assesses
the value of capitalized product design costs and records a reserve for
obsolescence or impairment when, in certain circumstances (including the
discontinuance or probable discontinuance of the related products from the
market), it deems the asset to be obsolete or impaired.
The reserve for obsolete and slow-moving inventory was $297,500 and $417,900
at December 31, 2001 and 2000, respectively. The reserve for obsolete and slow-
moving inventory is used to state the Company's inventories at the lower of
average cost or net realizable value. Since the amount of inventoriable cost
that the Company will truly recoup through sales cannot be known with exact
certainty, the Company relies on past sales experience and future sales
forecasts. Inventory is considered as obsolete if the Company has withdrawn it
from the market or if the Company has had no sales of the product for the past
12 months nor sales forecasted for the next 12 months, therefore a reserve in
an amount equal to 100% of the average cost of such inventory is recorded. The
Company classifies as slow-moving inventory with quantities of on hand greater
than the amounts we have sold in the past 12 months or have forecasted to sell
in the next 12 months, and reserve such amount as is adequate to reduce the
carrying value to net realizable value. During 2001, 2000 and 1999, the
provision for obsolete and slow-moving inventory was $856,600, $300,955 and
$1,027,200, respectively.
Transactions with Related and Other Parties
The Company leases its headquarters from Xenon Research, Inc. ("Xenon"), all
of the issued and outstanding capital stock of which is owned by Simon Raab,
the Company's President and Chief Executive Officer, and Diana Raab, his
spouse. The term of the lease expires on February 28, 2006, and the Company has
two five-year renewal options. Base rent under the lease was $391,000 for 2001.
Base rent during renewal periods will reflect changes in the U.S. Bureau of
Labor statistics consumer Price Index for all Urban Consumers.
20
In June 2000, the Company and each of the former CATS shareholders entered
into an Amended and Restated Loan Agreement pursuant to which the Company
granted loans to the former CATS shareholders in the aggregate amount of $1.1
million ("the Loans"). The Loans are for a term of three years, at an interest
rate of approximately 4.7%, and grant the borrowers an option to extend the
term for an additional three years. As collateral for the Loans, the former
CATS shareholders pledged to the Company 177,074 shares of the Company's Common
Stock. The Loans are a non-recourse obligation of the former CATS shareholders.
The Company engaged Cole & Partners, a mergers and acquisition and corporate
finance advisory service firm, to serve as the Company's financial advisor in
connection with the Company's acquisition in January, 2002 of SpatialMetrix,
Inc. ("SMX"). Stephen R. Cole, one of the Company's directors and member of the
Audit Committee, is the founding Partner and President of Cole & Partners. The
Company paid to Cole & Partners total fees of approximately $440,000 by early
2002 for its services in the SMX acquisition.
Foreign Exchange Exposure
The Company conducts a significant portion of its business outside the
United States. At present, the majority of the Company's revenues are invoiced,
and a significant portion of its operating expenses paid, in foreign
currencies. Fluctuations in exchange rates between the U.S. dollar and such
foreign currencies may have a material adverse effect on the Company's
business, results of operations and financial condition, and could specifically
result in foreign exchange gains and losses. The impact of future exchange rate
fluctuations on the results of the Company's operations cannot be accurately
predicted. To the extent that the percentage of the Company's non-U.S. dollar
revenues derived from international sales increases in the future, the
Company's exposure to risks associated with fluctuations in foreign exchange
rates will increase further. See additional discussion under Impact of Recently
Issued Accounting Standards below.
Inflation
The Company believes that inflation has not had a material impact on its
results of operations in recent years and does not expect inflation to have a
material impact on its operations in 2002.
Conversion to the Euro Currency
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (the Euro). The transition period for the
introduction of the Euro ends June 30, 2002. In connection therewith, in
January 2002 certain member countries of the European Union adopted the Euro as
their national currency. Issues facing the Company as a result of the
introduction of the Euro include converting information technology systems,
reassessing currency risk, amending lease agreements and other contracts, and
processing tax and accounting records. The Company is addressing these issues
and does not expect the adoption of the Euro to have a material effect on the
Company's financial condition or results of operations.
Impact of Recently Issued Accounting Standards
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," (SFAS No. 144) which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. SFAS No. 144 supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
(SFAS No. 121) but retains many
21
of the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes APB
Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 144 retains the
requirement in Opinion 30 to report separately discontinued operations and
extends this reporting requirement to a component of an entity that either has
been disposed of or is classified as held for sale. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. Early application is permitted. The Company does not expect
the adoption of SFAS No. 144 to have a material impact on its financial
statements or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. The Company adopted this new Statement effective
January 1, 2002. Upon adoption of SFAS No. 142, operating expenses will be
reduced by approximately $480,000 on an annual basis for amortization and may
increase for assets determined to be impaired, if any, during a respective
year.
In January 2001, the Company adopted FASB Statement No. 133 (SFAS No. 133),
Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS
133 requires companies to recognize all their derivative instruments as either
assets or liabilities at fair value in the statement of position. In August
2001, the Company entered into a foreign exchange rate swap allowing the
Company the right to purchase up to $1.3 million at a base rate of 1.1049 Euros
per $1.00. Under the agreement, the Company and the bank are to compensate one
another based on the exchange rate agreement differential at specified
measurement dates. This foreign exchange rate agreement does not qualify for
special hedge accounting treatment, as it does not meet the specified criteria
under SFAS 133. Therefore the changes in fair value are included in the
determination of earnings.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143) which
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. The standard applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development, and (or) normal use of the asset. The Company believes that the
adoption of SFAS No. 143 will not have a material effect in its financial
position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is incorporated by reference herein
from the section of this Report in Part II, Item 7, under the captions "Foreign
Exchange Exposure", "Inflation" and "Conversion to the Euro Currency" above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
----
Independent Auditors' Reports............................................ 23
Consolidated Balance Sheets as of December 31, 2001 and 2000............. 24
Consolidated Statements of Operations for the Years Ended December 31,
2001, 2000 and 1999..................................................... 25
Consolidated Statements of Shareholders' Equity for the years Ended
December 31, 2001, 2000 and 1999........................................ 26
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999..................................................... 27
Notes to Consolidated Financial Statements............................... 28
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of FARO Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of FARO
Technologies, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FARO
Technologies, Inc. and subsidiaries at December 31, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Orlando, Florida
March 1, 2002
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of FARO Technologies, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of FARO Technologies, Inc. and subsidiaries
for the year ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of FARO
Technologies, Inc. and subsidiaries for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States
of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
March 17, 2000
23
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
2001 2000
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 7,238,564 $ 8,029,318
Short term investments............................ 4,744,559 6,218,636
Accounts receivable (Note 4)...................... 9,385,568 10,352,972
Income taxes refundable........................... 545,118 --
Inventories, net (Note 5)......................... 5,575,793 6,364,290
Prepaid expenses and other current assets......... 1,851,003 1,112,881
Deferred income taxes............................. 76,418 203,816
------------ -----------
Total current assets............................ 29,417,023 32,281,913
------------ -----------
PROPERTY AND EQUIPMENT--at cost:
Machinery and equipment........................... 4,038,582 3,580,892
Furniture and fixtures............................ 1,313,809 1,253,248
Leasehold improvements............................ 139,555 89,171
------------ -----------
Total........................................... 5,491,946 4,923,311
Less accumulated depreciation and amortization.... (3,945,247) (3,121,029)
------------ -----------
Property and equipment, net..................... 1,546,699 1,802,282
------------ -----------
INTANGIBLE ASSETS--net.............................. 2,632,791 4,055,337
INVESTMENTS......................................... 2,129,679 4,755,572
NOTES RECEIVABLE (Notes 2 and 16)................... 3,927,932 1,128,846
DEFERRED INCOME TAXES............................... -- 675,324
------------ -----------
TOTAL ASSETS........................................ $ 39,654,124 $44,699,274
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ................ $ 25,120 $ 17,397
Accounts payable.................................. 2,937,271 2,965,417
Accrued liabilities............................... 3,064,463 4,120,404
Income taxes payable.............................. -- 684,409
Current portion of unearned service revenues...... 855,120 687,566
Customer deposits................................. 231,845 133,984
------------ -----------
Total current liabilities....................... 7,113,819 8,609,177
OTHER LONG-TERM LIABILITIES......................... 203,844 134,644
------------ -----------
Total liabilities............................... 7,317,663 8,743,821
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Class A preferred stock--par value $.001,
10,000,000 shares authorized, no shares issued
and outstanding
Common stock--par value $.001, 50,000,000 shares
authorized, 11,075,252 and 11,065,225 issued,
11,035,252 and 11,025,225 outstanding,
respectively..................................... 11,075 11,066
Additional paid-in capital........................ 47,704,087 47,570,059
Unearned compensation............................. (109,000) --
Accumulated deficit............................... (12,116,098) (9,268,134)
Other comprehensive loss.......................... (3,002,978) (2,206,913)
Common stock in treasury, at cost--40,000 shares
in 2001 and 2000................................. (150,625) (150,625)
------------ -----------
Total shareholders' equity...................... 32,336,461 35,955,453
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $ 39,654,124 $44,699,274
============ ===========
See accompanying notes to consolidated financial statements.
24
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31
-------------------------------------
2001 2000 1999
----------- ----------- -----------
SALES................................... $35,113,596 $40,452,913 $33,105,740
COST OF SALES........................... 14,304,083 14,748,628 14,160,938
----------- ----------- -----------
Gross profit.......................... 20,809,513 25,704,285 18,944,802
----------- ----------- -----------
OPERATING EXPENSES
Selling............................... 13,436,209 14,033,725 12,139,567
General and administrative............ 5,812,803 5,763,040 4,974,558
Depreciation and amortization......... 2,559,495 2,931,546 4,465,441
Research and development.............. 3,370,716 3,549,670 3,828,801
Employee stock options................ -- 123,404 168,912
Impairment loss on acquired intangible
assets............................... -- -- 3,073,000
----------- ----------- -----------
Total operating expenses............ 25,179,223 26,401,385 28,650,279
----------- ----------- -----------
LOSS FROM OPERATIONS.................... (4,369,710) (697,100) (9,705,477)
OTHER INCOME (EXPENSES)
Interest income....................... 900,281 860,254 715,953
Other income, net..................... 964,950 302,378 475,162
Interest expense...................... (1,747) (1,334) (1,924)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....... (2,506,226) 464,198 (8,516,286)
INCOME TAX EXPENSE (BENEFIT)............ 341,738 424,681 (1,121,464)
----------- ----------- -----------
NET INCOME (LOSS)....................... $(2,847,964) $ 39,517 $(7,394,822)
=========== =========== ===========
NET LOSS PER SHARE--BASIC............... $ (0.26) $ 0.00 $ (0.67)
=========== =========== ===========
NET LOSS PER SHARE--DILUTED............. $ (0.26) $ 0.00 $ (0.67)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
25
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Common
------------------ Paid-in Unearned Accumulated Comprehensive Stock in
Shares Amounts Capital Compensation Deficit Income (Loss) Treasury Total
---------- ------- ----------- ------------ ------------ ------------- --------- -----------
BALANCE,
JANUARY 1, 1999........ 11,048,137 $11,048 $47,520,732 $(292,316) $ (1,912,829) $ 199,381 $(150,625) $45,375,391
Net loss............... (7,394,822) (7,394,822)
Currency translation... (1,574,259) (1,574,259)
-----------
Comprehensive loss..... (8,969,081)
Issuance of common
stock................. 11,373 12 24,112 24,124
Amortization of
unearned
compensation.......... 168,912 168,912
---------- ------- ----------- --------- ------------ ----------- --------- -----------
BALANCE,
DECEMBER 31, 1999...... 11,059,510 $11,060 $47,544,844 $(123,404) $ (9,307,651) $(1,374,878) $(150,625) $36,599,346
Net Income............. 39,517 39,517
Currency translation... (832,035) (832,035)
-----------
Comprehensive loss..... (792,518)
Issuance of common
stock................. 5,715 6 25,215 25,221
Amortization of
unearned
compensation.......... 123,404 123,404
---------- ------- ----------- --------- ------------ ----------- --------- -----------
BALANCE,
DECEMBER 31, 2000...... 11,065,225 $11,066 $47,570,059 $ -- $ (9,268,134) $(2,206,913) $(150,625) $35,955,453
Net loss............... (2,847,964) (2,847,964)
Currency translation... (796,065) (796,065)
-----------
Comprehensive loss..... (3,644,029)
Options granted subject
to variable
accounting............ 109,000 (109,000)
Issuance of common
stock................. 10,027 9 25,028 25,037
---------- ------- ----------- --------- ------------ ----------- --------- -----------
BALANCE,
DECEMBER 31, 2001...... 11,075,252 $11,075 $47,704,087 $(109,000) $(12,116,098) $(3,002,978) $(150,625) $32,336,461
========== ======= =========== ========= ============ =========== ========= ===========
See accompanying notes to consolidated financial statements.
26
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
--------------------------------------
2001 2000 1999
----------- ----------- ------------
CASH FLOWS FROM:
OPERATING ACTIVITIES:
Net income (loss)...................... $(2,847,964) $ 39,517 $ (7,394,822)
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization.......... 2,559,495 2,931,546 4,465,441
Bad debt expense....................... 310,981 30,271 169,144
Provision for inventory losses......... 856,551 300,955 1,027,186
Impairment loss on acquired intangible
assets................................ -- -- 3,073,000
Provision for deferred income taxes.... 802,722 (127,139) (708,678)
Loss on disposals of fixed assets...... 5,400
Employee stock options................. -- 123,404 168,912
Change in operating assets and
liabilities:
Decrease (increase) in:
Accounts receivable.................. 197,437 (946,693) (1,096,418)
Income taxes refundable.............. (545,118) 234,470 481,578
Inventories.......................... (178,323) (549,516) (794,260)
Notes receivable..................... 47,752
Prepaid expenses and other assets.... (796,145) (586,176) (422,079)
Increase (decrease) in:
Accounts payable and accrued
liabilities......................... (894,764) 2,095,884 2,380,514
Income taxes payable................. (684,409) 684,409 398
Unearned service revenues............ 268,794 436,132 (5,757)
Customer deposits.................... 108,249 55,817 (28,458)
----------- ----------- ------------
Net cash (used in) provided by
operating activities............... (842,494) 4,722,881 1,368,853
----------- ----------- ------------
INVESTING ACTIVITIES:
Proceeds from investments.............. 6,250,000 6,690,000 21,782,431
Purchases of investments............... (2,150,029) (7,422,252) (15,012,556)
Notes receivable....................... (2,799,086) (1,001,593) --
Purchases of property and equipment.... (788,168) (1,197,532) (1,120,552)
Payments for intangible assets......... (245,694) (120,264) (316,527)
----------- ----------- ------------
Net cash provided by (used in)
investing activities............... 267,023 (3,051,641) 5,332,796
----------- ----------- ------------
FINANCING ACTIVITIES:
Payments of long-term debt, Capital
lease obligations and notes payable... (16,497) (14,070) (306,403)
Proceeds from issuance of common stock,
net................................... 25,037 25,221 24,124
----------- ----------- ------------
Net cash provided by (used in)
financing activities............... 8,540 11,151 (282,279)
----------- ----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH................................... (223,823) (161,035) (1,095,064)
----------- ----------- ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................ (790,754) 1,521,356 5,324,306
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................. 8,029,318 6,507,962 1,183,656
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................. $ 7,238,564 $ 8,029,318 $ 6,507,962
=========== =========== ============
See accompanying notes to consolidated financial statements.
27
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business--FARO Technologies, Inc. and subsidiaries develops,
manufactures, markets and supports Computer Aided Design (CAD)-based quality
assurance products and CAD-based inspection and statistical process control
software.
Principles of Consolidation--The consolidated financial statements include
the accounts of FARO Technologies, Inc. and all majority-owned subsidiaries
(collectively, the "Company"). All significant intercompany transactions and
balances have been eliminated. The financial statements of the foreign
subsidiaries are translated into U.S. dollars using exchange rates in effect at
period-end for assets and liabilities and average exchange rates during each
reporting period for results of operations. Adjustments resulting from
translation of financial statements are reflected as a separate component of
comprehensive (loss) income.
Revenue Recognition, Product Warranty and Extended Maintenance Contracts--
Revenue related to the Company's 3-D measurement equipment and related software
is recognized upon shipment as the Company considers the earnings process
substantially complete as of the shipping date. Revenue from sales of software
only is recognized when no further significant production, modification or
customization of the software is required and where the following criteria are
met: persuasive evidence of a sales agreement exists, delivery has occurred,
and the sales price is fixed or determinable and deemed collectible. Revenues
resulting from sales of comprehensive support, training and technology
consulting services are recognized as such services are performed. Extended
maintenance plan revenues are recognized in proportion to maintenance costs
projected to be incurred. The Company warrants its products against defects in
design, materials and workmanship for one year. A provision for estimated
future costs relating to warranty expenses is recorded when products are
shipped. Costs relating to extended maintenance plans are recognized as
incurred.
Cash and Cash Equivalents--The Company considers cash on hand and amounts on
deposit with financial institutions which have original maturities of three
months or less to be cash and cash equivalents.
All short-term investments in debt securities which have maturities of three
months or less are classified as cash and equivalents, which are carried at
market value based upon the quoted market prices of those investments at each
respective balance sheet date.
Investments--Short-term investments ordinarily consist of short-term debt
securities acquired with cash not immediately needed in operations. Such
amounts have maturities not exceeding one year. Investments ordinarily consist
of debt securities acquired with cash not immediately needed in operations.
Such amounts have maturities of at least one year (none have maturities
exceeding two years).
Investments consisted of the following:
December 31
---------------------
2001 2000
---------- ----------
Government agency securities.......................... $2,032,679 $ 898,840
Certificates of deposit............................... 97,000 240,309
Corporate notes....................................... -- 3,616,423
---------- ----------
$2,129,679 $4,755,572
========== ==========
28
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management determines the appropriate classification of its short term
investments and investments in debt securities at the time of the purchase and
reevaluates such determinations at each balance sheet date. All investments in
debt securities are classified as held to maturity as the company has the
positive intent and ability to hold the securities to maturity. Held to
maturity securities are stated at amortized cost. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and interest are included in other income in the
consolidated statements of operations. The Company's investments in debt
securities are diversified among high credit quality securities in accordance
with the Company's investment policy. The gross unrealized gain on all held to
maturity debt securities was approximately $123,000 and $65,000 at December 31,
2001 and 2000, respectively.
Inventories--Inventories are stated at the lower of average cost or net
realizable value. In order to achieve a better matching of production costs
with the revenues generated in production, certain fixed overhead costs and
certain general and administrative costs that are related to production are
capitalized into inventory when they are incurred and are charged to cost of
sales as product costs at the time of sale. Shipping and handling costs are
classified as a component of Cost of Sales in the Consolidated Statement of
Operations.
Sales demonstration inventory is comprised of measuring devices utilized by
sales representatives to present the Company's products to customers. These
products remain in sales demonstration inventory for six to twelve months and
are subsequently sold at prices that produce slightly reduced gross margins.
Property and Equipment--Property and equipment are recorded at cost.
Depreciation is computed using the straight-line and declining-balance methods
over the estimated useful lives of the various classes of assets as follows:
Machinery and equipment........................................ 2 to 10 years
Furniture and fixtures......................................... 3 to 5 years
Leasehold improvements are amortized on the straight-line basis over the
lesser of the life of the asset or the term of the lease.
Intangibles--Goodwill represents the excess of purchase price over the fair
value of businesses acquired and was amortized on a straight-line basis over 5
years through December 31, 2001. Effective January 1, 2002, the Company ceased
to amortize goodwill in accordance with the provisions of SFAS No. 142 (see
Recently Adopted Accounting Standards below).
Other acquired intangibles principally include core technology, existing
product technology, workforce in place and customer relationships that arose in
connection with the acquisition of CATS. Other acquired intangibles are
recorded at fair value at the date of acquisition and are amortized over their
estimated useful lives of primarily 3 to 5 years.
Product design costs incurred in the development of products after
technological feasibility is attained are capitalized and amortized using the
straight-line method over the estimated economic lives of the related products,
not to exceed 3 years. The Company considers technological feasibility to be
established when the Company has completed all planning, designing, coding and
testing activities that are necessary to establish design specifications
including function, features and
29
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
technical performance requirements. Capitalization of product design costs
ceases and amortization of such costs begins when the product is available for
general release to customers.
Patents are recorded at cost. Amortization is computed using the straight-
line method over the lives of the patents, which is 17 years. Other intangibles
are amortized over periods ranging from 3 to 5 years.
Research and Development--Research and development costs incurred in the
discovery of new knowledge and the resulting translation of this new knowledge
into plans and designs for new products, prior to the attainment of the related
products' technological feasibility, are recorded as expenses in the period
incurred.
Income Taxes--Deferred tax assets and liabilities reflect the future income
tax effects of temporary differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and are measured using enacted tax rates that apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Fair Value of Financial Instruments--The Company's financial instruments
include cash and cash equivalents, short-term investments, accounts receivable,
investments, foreign exchange rate agreements, and accounts payable. The
carrying amounts of such financial instruments approximate their fair value.
Earnings Per Share--Basic earnings per share ("EPS") is computed by dividing
earnings available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings. A reconciliation of
the number of common shares used in calculation of basic and diluted EPS is
presented in Note 13.
Concentration of Credit Risk--Financial instruments which potentially expose
the Company to concentrations of credit risk consist principally of operating
demand deposit accounts. The Company's policy is to place its operating demand
deposit accounts with high credit quality financial institutions.
In 1999, the Company entered into an OEM agreement with Brown & Sharpe
Manufacturing Company ("Brown & Sharpe"), a unit of Hexagon, A. B. of
Stockholm, Sweden that is a world leader in the manufacture of traditional
coordinate measurement machines (CMMs) and other metrology products. Brown &
Sharpe will market the FAROArm(R) worldwide under the name GAGE 2000 A. The
agreement, which grants Brown & Sharpe non-exclusive distribution right
worldwide, expires in March 2002, and is renewable for successive one-year
terms. The Company anticipates that this agreement will be renewed.
No customer represented more than 6% of the Company's total sales for the
years ended December 31, 2001, 2000 and 1999.
30
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation--In accordance with Statement of Financial
Accounting Standards ("SFAS" No. 123), "Accounting for Stock-Based
Compensation," ("SFAS No. 123"), the Company has elected to continue to account
for its employee stock compensation plans under Accounting Principle Board
(APB) Opinion No. 25 with pro-forma disclosures of net earnings and earnings
per share, as if the fair value based method of accounting defined in SFAS No.
123 has been applied. Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at the grant
date or other measurement date over the amount an employee must pay to acquire
the stock. Under the fair value based method, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period.
In April 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
and modifies APB Opinion No. 25, Accounting for Stock Issued to Employees.
During 2001, certain options to purchase common stock were effectively re-
priced and will be accounted for as variable plan options. Such accounting
could result in future charges to earnings (see Note 12).
Long-Lived Assets--Long-lived assets, including property and equipment and
certain intangible assets to be held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. Impairment losses are
recognized if expected future discounted or undiscounted cash flows of the
related assets are less than their carrying values. Measurement of an
impairment loss is based on the fair value of the asset. Long-lived assets and
certain identifiable intangibles to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell. See Note 2 regarding the
impairment of certain developed and core technology.
Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. 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.
Impact of Recently Issued Accounting Standards--In July 2001, the FASB
issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). SFAS No. 142 establishes accounting and
reporting standards for acquired goodwill and other intangible assets, and
supersedes APB Opinion No.17, "Intangible Assets". SFAS No. 142 requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. The Company adopted this new Statement effective January 1, 2002.
Upon adoption of SFAS No. 142, operating expenses will be reduced by
approximately $480,000 on an annual basis for amortization and may increase for
assets determined to be impaired, if any, during a respective year.
In January 2001, the Company adopted Statement of Financial Accounting
Standards Statement No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, as amended. SFAS 133 requires companies to recognize
all their derivative instruments as either assets or liabilities at fair value
in the statement of financial position. The accounting for changes in the fair
31
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value (i.e. gains and losses) of a derivative depends on whether it has been
designated and qualifies as part of a hedging relationship and further, on the
type of hedging relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company must designate the
hedging instrument based on the exposure being hedged. For derivative
instruments that are designated and qualify as cash flow hedges, the effective
portion of the gain or loss is reported as a component of other comprehensive
income. Accounting for such instruments is referred to as "special hedge
accounting." However, SFAS 133 eliminates special hedge accounting if the
derivative instrument does not meet certain criteria.
In August 2001, the Company entered into a foreign exchange rate swap
allowing the Company the right to purchase up to $1.3 million at a base rate of
1.1049 Euros per $1.00. Under the agreement, the Company and the bank are to
compensate one another based on the exchange rate agreement differential at
specified measurement dates. This foreign exchange rate agreement expires in
September 2002 and does not qualify for special hedge accounting mentioned
above, as it did not meet the specified criteria under SFAS 133. Therefore the
changes in fair value are recorded in income.
During the year ended December 31, 2001, the Company recognized a gain of
$37,000 related to the change in fair value of the foreign exchange rate
agreement in the Statement of Operations. The asset of $37,000 is recorded in
other assets on the balance sheet.
2. ACQUISITION OF CATS
In 1998, the Company acquired CATS GmbH for total consideration of $16
million (including direct costs of the acquisition), consisting of $5 million
in cash, 916,668 shares of the Company's Common Stock and the assumption of
certain outstanding liabilities of CATS. The acquisition was recorded under the
purchase method of accounting.
The acquisition agreement provided that the Company would provide a loan to
each of the two former shareholders of CATS, who remain key employees of the
Company, to fund their tax liability in connection with the Company's
acquisition of CATS. In connection therewith, in June 2000 the Company and each
of the former CATS shareholders entered into an Amended and Restated Loan
Agreement and the Company granted loans to the former CATS shareholders in the
aggregate amount of $1.1 million ("the Loans"). The Loans are for a term of
three years, at an interest rate of approximately 4.7%, and grant the borrowers
an option to extend the term for an additional three years. As collateral for
the Loans, the former CATS shareholders pledged to the Company 177,074 shares
of the Company's Common Stock. The Loans are a non-recourse obligation of the
former CATS shareholders.
The valuation of CATS was based on management's estimates of after tax net
cash flows for certain intangible assets. The actual after tax net cash flows
may vary from management's original estimates. In the fourth quarter of 1999,
the Company recorded a write-down of developed and core technology of
approximately $3.1 million in the consolidated statement of operations. This
write-down was in accordance with SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets" ("SFAS No. 121"). Developed and core technology was
determined to have been impaired because the anticipated future cash flows
resulting from the software products acquired from CATS GmbH
32
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
indicate that the recoverability of a portion of the developed and core
technology is not reasonably assured. The estimated fair value of the developed
and core technology was determined by calculating the present value of the
estimated future cash flows.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Selected cash payments and non cash activities were as follows:
Years ended December 31
------------------------
2001 2000 1999
-------- ------- -------
Cash paid for interest............................. $ 1,747 $ 1,334 $ 3,237
Cash paid for income taxes......................... 673,787 54,000 24,392
Non cash investing and financing activities:
Fixed assets acquired under capital lease
obligations..................................... 33,041 55,795 --
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is as follows:
Years ended December 31
-----------------------------
2001 2000 1999
--------- -------- --------
Balance, beginning of year.................... $ 353,514 $334,612 $139,690
Provision..................................... 310,981 30,271 169,144
(Amounts written off) recoveries.............. (324,780) (11,369) 25,778
--------- -------- --------
Balance, end of year.......................... $ 339,715 $353,514 $334,612
========= ======== ========
5. INVENTORIES
Inventories, net consist of the following:
December 31
---------------------
2001 2000
---------- ----------
Raw materials.......................................... $ 496,298 $ 486,002
Work-in-process........................................ 1,875,912 1,610,210
Finished goods......................................... 341,348 991,169
Sales demonstration.................................... 2,862,235 3,276,909
---------- ----------
$5,575,793 $6,364,290
========== ==========
The allowance for obsolete and slow-moving inventory is as follows:
Years ended December 31
---------------------------------
2001 2000 1999
--------- ---------- ----------
Balance, beginning of year................ $ 417,930 $1,080,815 $ 54,728
Charges to Cost of Sales.................. 856,551 300,955 1,027,186
Amounts written off....................... (976,973) (963,840) (1,099)
--------- ---------- ----------
Balance, end of year...................... $ 297,508 $ 417,930 $1,080,815
========= ========== ==========
33
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31
------------------------
2001 2000
----------- -----------
Goodwill........................................... $ 2,325,225 $ 2,456,913
Existing product technology........................ 4,589,775 4,849,715
Work force in place................................ 445,445 470,673
Customer relationships............................. 477,842 504,904
Product design costs............................... 341,948 861,367
Patents............................................ 1,225,815 1,235,300
Other.............................................. 131,033 277,253
----------- -----------
Total............................................ 9,537,083 10,656,125
Accumulated amortization........................... (6,904,292) (6,600,788)
----------- -----------
Intangible assets--net............................. $ 2,632,791 $ 4,055,337
=========== ===========
Amortization expense was $1,557,819, $2,062,293 and $3,625,045 in 2001, 2000
and 1999, respectively.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31
---------------------
2001 2000
---------- ----------
Accrued compensation and benefits..................... $1,060,378 $2,185,314
Accrued royalties and warranties...................... 138,200 183,385
Other accrued liabilities............................. 1,865,885 1,751,705
---------- ----------
$3,064,463 $4,120,404
========== ==========
8. NOTES PAYABLE AND DEBT
The Company has an available line of credit of $1,500,000. Drawings under
the line of credit bear interest at a rate equivalent to a 30-day commercial
paper plus 2.75%. There were no amounts outstanding under the line of credit at
December 31, 2001 and 2000.
Long-term debt consists of the following:
December 31
------------------
2001 2000
-------- --------
4-year, 5.9% automobile loan............................. $ 12,887 $ 16,635
Obligations under capital leases......................... 67,739 50,022
-------- --------
Total.................................................. 80,626 66,657
Less current portion..................................... (25,120) (17,397)
-------- --------
$ 55,506 $ 49,260
======== ========
Long-term debt of $55,506 and $49,260 is included in other long-term
liabilities in the accompanying consolidated balance sheet as of December 31,
2001 and 2000, respectively. Long-
34
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
term debt at December 31, 2001 is due as follows: 2002--$25,120; 2003--$36,867;
2004--$15,045; 2005--$2,601 and thereafter--$993.
In 1999, a subsidiary financed the purchase of a motor vehicle with a term
loan that expires in 2003. Additionally, in 2000 the Company's Japanese
subsidiary entered into capital leases for automotive and other equipment with
an initial term of 36 to 60 months. The present value of the minimum lease
payments due under the lease agreements is included in Long-term debt.
9. RELATED PARTY TRANSACTIONS
Related Party Lease--The Company leases its plant and office building from
Xenon Research, Inc. ("Xenon"), a 29.7% shareholder. Pursuant to the terms of
the lease agreement, which expires in 2006, the Company has a five-year renewal
option. The base rent during renewal periods will reflect changes in the U.S.
Bureau of Labor Statistics, Consumer Price Index for all Urban Consumers. Rent
expense under this lease was approximately $391,000 in 2001, $355,000 in 2000,
and $358,000 in 1999.
Related Party Loans--On June 20, 2000 the Company and each of the former
CATS shareholders entered into an Amended and Restated Loan Agreement pursuant
to which the Company granted loans to the former CATS shareholders in the
aggregate amount of $1.1 million ("the Loans"). The Loans outstanding are for a
term of three years, at an interest rate of approximately 4.7%, and grant the
borrowers an option to extend the term for an additional three years. See Note
2 of Notes to Consolidated Financial Statements above.
Related Party Consulting Services--The Company engaged Cole & Partners, a
mergers and acquisition and corporate finance advisory service firm, to serve
as the Company's financial advisor in connection with the Company's acquisition
in January, 2002 of SpatialMetrix, Inc. ("SMX"). Stephen R. Cole, one of the
Company's directors and member of the Audit Committee, is the founding Partner
and President of Cole & Partners. The Company paid to Cole & Partners total
fees of approximately $440,000 by early 2002 for its services in the SMX
acquisition.
10. INCOME TAXES
(Loss) income before taxes consisted of the following:
Years ended December 31
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Domestic............................. $(2,229,358) $ 1,814,032 $(2,508,948)
Foreign.............................. (276,868) (1,349,834) (6,007,338)
----------- ----------- -----------
(Loss) income before income taxes.... $(2,506,226) $ 464,198 $(8,516,286)
=========== =========== ===========
35
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the income tax expense (benefit) for income taxes are as
follows:
Years ended December 31
---------------------------------
2001 2000 1999
--------- --------- -----------
Current:
Federal................................. $(460,984) $ 503,000 $ (357,453)
State................................... -- 48,820 (55,333)
--------- --------- -----------
(460,984) 551,820 (412,786)
--------- --------- -----------
Deferred:
Federal................................. 731,704 (115,891) (585,932)
State................................... 71,018 (11,248) 10,174
Foreign................................. -- -- (132,920)
--------- --------- -----------
802,722 (127,139) (708,678)
--------- --------- -----------
$ 341,738 $ 424,681 $(1,121,464)
========= ========= ===========
Income tax expense (benefit) for the years ended December 31, 2001, 2000,
and 1999 differ from the amount computed by applying the federal statutory
corporate rate to (loss) income before income taxes. The differences are
reconciled as follows:
Years ended December 31
----------------------------------
2001 2000 1999
---------- --------- -----------
Tax (benefit) expense at statutory rate... $ (775,605) $ 157,827 $(2,895,537)
State income taxes, net of federal
benefit.................................. (73,568) 55,155 (109,543)
Nontaxable interest income................ -- -- (141,180)
Foreign tax rate difference............... 194,430 28,551 (986,167)
Research and development credit........... (159,160) (134,638) (171,059)
Nondeductible items....................... 33,356 36,684 42,530
Change in deferred tax asset valuation
allowance................................ 1,092,132 430,392 3,028,662
Other..................................... 30,153 (149,290) 110,830
---------- --------- -----------
Total income tax expense (benefit)........ $ 341,738 $ 424,681 $(1,121,464)
========== ========= ===========
36
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the Company's net deferred income tax asset are as
follows:
December 31,
------------------------
2001 2000
----------- -----------
Net deferred income tax asset--Current
Product design costs............................... $ (41,880) $ (113,519)
Tax credits........................................ 382,315 36,839
Other.............................................. 240,408 280,496
Valuation allowance................................ (504,425) --
----------- -----------
Net deferred income tax asset--Current........... $ 76,418 $ 203,816
=========== ===========
Net deferred income tax asset--Non-current
Depreciation....................................... $ 411,803 $ 291,145
Employee stock options............................. 183,348 183,986
Unearned service revenue........................... 169,362 200,193
Intangible assets.................................. 3,227,871 3,131,325
Carryforwards...................................... 3,087,378 3,360,729
Valuation allowance................................ (7,079,762) (6,492,054)
----------- -----------
Net deferred income tax asset--Non current....... $ -- $ 675,324
=========== ===========
At December 31, 2001, the Company's domestic entities had deferred income
tax assets in the amount of $1,345,356. For financial reporting purposes a
valuation allowance of $1,268,938 was set up during the year to appropriately
reflect the portion of the deferred tax asset that is more likely than not to
be realized.
At December 31, 2001, the Company's foreign subsidiaries had deferred income
tax assets relating to net operating loss carry-forwards, which do not expire,
and intangible assets of $3,087,378 and $3,227,871, respectively. For financial
reporting purposes, a valuation allowance of $6,315,249 has been recognized to
offset the deferred tax assets relating to the net operating losses and
intangible assets.
11. COMMITMENTS AND CONTINGENCIES
Leases--The following is a schedule of future minimum lease payments
required under non-cancelable operating leases, including leases with related
parties (see Note 8), in effect at December 31, 2001:
Year Ending December 31 Amount
----------------------- ----------
2002............................................................. $1,110,636
2003............................................................. 929,274
2004............................................................. 607,222
2005............................................................. 381,176
2006 and thereafter.............................................. 95,756
----------
Total future minimum lease payments.............................. $3,124,064
==========
Rent expense for 2001, 2000, and 1999 was approximately $1,101,000,
$1,120,000, and $973,000, respectively.
37
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation--The Company is not involved in any pending legal proceedings
other than routine litigation arising in the normal course of business. The
Company does not believe the results of such litigation, even if the outcome
were unfavorable to the Company, would have a material adverse effect on the
Company's business, financial condition or results of operations.
12. STOCK OPTION PLANS
The Company has three stock option plans that provide for the granting of
stock options to key employees and non-employee members of the Board of
Directors. The 1993 Stock Option Plan ("1993 Plan") and the 1997 Employee Stock
Option Plan ("1997 Plan") provide for granting incentive stock options and
nonqualified stock options to officers and key employees of the Company. The
1997 Non-employee Director Plan provides for granting nonqualified stock
options and formula options to non-employee directors. Additionally, in
connection with its initial public offering in 1997, the Company issued
warrants to purchase 100,000 shares of its Common Stock at $13.20 per share.
Such warrants expire in 2002.
The Company is authorized to grant options for up to 1,000,000 shares of
Common Stock under the 1993 Plan, of which 295,997 and 123,372 options have
been granted at exercise prices of $.36 and $3.60, respectively. These options
vest over primarily 3 and 4-year periods. The Company is authorized to grant
options for up to 1,400,000 shares of Common Stock under the 1997 Plan, of
which 916,219 options have been granted at exercise prices between $1.50 and
$12.00 (for those meant to qualify for treatment as incentive stock options).
These options vest over a three-year period. The Company is authorized to grant
up to 250,000 shares of Common Stock under the 1997 Non-employee Director Plan.
Each non-employee director is granted 3,000 options upon election to the Board
of Directors and then annually upon attending the annual meeting of
shareholders (formula options). Formula options granted to directors are
generally granted upon the same terms and conditions as options granted to
officers and employees. These options vest over a three-year period.
Additionally in 1997, certain non-employee directors were granted options to
purchase 160,000 of Common Stock in consideration for their prior service on
the Board of Directors. These options vested upon grant at an exercise price of
$12.
The Company's 1997 Non-Employee Directors' Fee Plan, under which the Company
is authorized to issue up to 250,000 shares of Common Stock, permits non-
employee directors to elect to receive directors' fees in the form of Common
Stock rather than cash. Common Stock issued in lieu of cash directors' fees is
issued at the end of the quarter in which the fees are earned, with the number
of shares being based on the fair market value of the Common Stock for the five
trading days immediately preceding the last business day of the quarter.
In the fourth quarter of 2001, the Company cancelled approximately 548,000
"out of the money" options, including approximately 440,000 options issued
under the 1997 Plan and approximately 108,000 options issued under the 1997
Non-employee Director Plan. As a result, 91,000 options granted in 2001, under
the 1997 Plan, were subjected to variable accounting treatment. Under FIN No.
44, stock options issued within six months of a cancellation must be accounted
for as variable under certain circumstances. Variable accounting requires
companies to re-measure compensation costs for the variable options until the
options are exercised, cancelled, or forfeited without replacement.
Compensation is dependent on fluctuations in the quoted stock prices for the
38
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's common stock. Such compensation costs will be recognized over a
three-year vesting schedule until the options are fully vested, exercised,
cancelled, or forfeited, after which time the compensation will be recognized
immediately at each reporting period.
Compensation costs charged to operations associated with the Company's stock
option plans was $123,404 and $168,912, in 2000, and 1999, respectively. There
was no charge to operations in 2001 in connection with these plans.
Compensation cost was based on the difference between the value of the stock,
at date of grant, and its exercise price multiplied by the number of shares
vested in each year.
A summary of stock option activity and weighted average exercise prices
follows:
Years Ended December 31,
--------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- --------- ---------
Outstanding at beginning
of year................ 1,291,315 $ 8.61 1,140,686 $ 9.79 1,194,165 $ 9.73
Granted............... 334,000 1.77 260,050 2.70 66,000 4.76
Cancelled............. (548,074) 12.45 -- --
Forfeited............. (123,197) 7.60 (108,249) 6.63 (108,106) 7.76
Exercised............. (4,546) 0.36 (1,172) 3.60 (11,373) 2.60
--------- --------- ---------
Outstanding at end of
year................... 949,498 4.19 1,291,315 8.61 1,140,686 9.79
========= ========= =========
Outstanding exercisable
at year-end............ 474,464 $ 6.32 881,640 $10.23 659,275 $10.49
Weighted-average fair
value of options
granted during the
year................... $1.00 $1.63 $3.75
A summary of stock options outstanding and exercisable as of December 31,
2001 follows:
Weighted-Average
Options Remaining Options
Exercise Price Outstanding Contractual Life (Years) Exercisable
-------------- ----------- ------------------------ -----------
$ 0.36...................... 23,312 3.97 23,312
$ 1.50...................... 265,700 9.84 0
$ 2.56-2.94................. 256,100 8.43 65,934
$ 3.13-3.75................. 226,715 6.63 213,881
$ 4.13-5.12................. 18,000 7.39 11,666
$10.34-12.00................ 59,671 6.01 59,671
$13.20...................... 100,000 0.71 100,000
------- -------
949,498 474,464
======= =======
39
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Remaining non-exercisable options as of December 31, 2001 become
exercisable as follows:
Years Ending December 31 Amount
------------------------ -------
2002............................................................... 185,101
2003............................................................... 179,433
2004............................................................... 110,500
-------
475,034
=======
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net earnings and
earnings per share would have been as follows:
Years Ended December 31,
-----------------------------------
2001 2000 1999
----------- --------- -----------
Net (loss) income
As reported.......................... $(2,847,964) $ 39,517 $(7,394,822)
Pro forma............................ (3,173,944) (943,306) (8,531,554)
(Loss) income per share--Basic
As reported.......................... $ (0.26) $ -- $ (0.67)
Pro forma............................ (0.29) (0.09) (0.77)
(Loss) income per share--Diluted
As reported.......................... $ (0.26) $ -- $ (0.67)
Pro forma............................ (0.29) (0.09) (0.77)
The Company used the Black-Scholes option-pricing model to determine the
fair value of grants made. The following assumptions were applied in
determining the pro forma compensation cost:
Years Ended December 31,
----------------------------------------
2001 2000 1999
-------------- -------------- ----------
Risk-free interest rate............. 3.60% to 6.72% 4.44% to 6.72% 5.50%
Expected dividend yield............. 0% 0% 0%
Expected option life................ 1-10 years 3-10 years 3-10 years
Stock price volatility.............. 62.50% 65.30% 105.21%
The effects of applying SFAS No. 123 for the pro forma disclosures are not
representative of the effects expected on reported net (loss) income and
income per share in future years since the disclosures do not reflect
compensation expense for options granted prior to 1996.
40
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. EARNINGS PER SHARE
A reconciliation of the number of common shares used in calculation of basic
and diluted earnings per share ("EPS") is presented below:
Years Ended December 31,
--------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
Per-Share Per-Share Per-Share
Shares Amount Shares Amount Shares Amount
---------- --------- ---------- --------- ---------- ---------
Basic EPS............... 11,032,449 $(0.26) 11,021,606 $0.00 11,015,140 $(0.67)
Effect of Dilutive
Securities:
Stock Options......... 72,538
---------- ---------- ----------
Diluted EPS............. 11,032,449 $(0.26) 11,094,144 $0.00 11,015,140 $(0.67)
========== ========== ==========
14. EMPLOYEE RETIREMENT BENEFITS PLAN
The Company maintains a 401(k) defined contribution retirement plan for its
U.S. employees, which provides benefits for all employees meeting certain age
and service requirements. The Company may make a discretionary contribution
each Plan year, as determined by its Board of Directors. Discretionary
contributions or employer matches can be made to the participant's account but
cannot exceed 6% of compensation. Costs charged to operations in connection
with the Plan during 2001 and 2000 aggregated $83,400 and $35,000,
respectively. The Company made no contributions to the Plan prior to 2000.
15. SEGMENT GEOGRAPHIC DATA
The Company develops, manufactures, markets and supports Computer Aided
Design (CAD)-based quality assurance products and CAD-based inspection and
statistical process control software. This one line of business represents more
than 99% of consolidated sales. The Company operates through sales teams
established by geographic area. Each team is equipped to deliver the entire
line of Company products to customers within its geographic area. The Company
has aggregated the sales teams into a single operating segment as a result of
the similarities in the nature of products sold, the type of customers and the
methods used to distribute the Company's products.
The following table presents information about the Company by geographic
area:
December 31,
--------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
Long-lived Long-lived Long-lived
Sales Assets Sales Assets Sales Assets
----------- ---------- ----------- ---------- ----------- ----------
United States........... $13,755,991 $2,058,163 $19,997,884 $2,326,790 $17,687,875 $2,522,654
Germany................. 6,936,796 1,944,642 8,557,809 3,385,662 6,321,760 5,083,420
France.................. 3,128,551 6,842 2,927,787 9,136 1,716,031 41,145
United Kingdom.......... 2,973,442 2,603,297 2,568,020
Other Foreign........... 8,318,816 169,843 6,366,136 136,031 4,812,054
----------- ---------- ----------- ---------- ----------- ----------
$35,113,596 $4,179,490 $40,452,913 $5,857,619 $33,105,740 $7,647,219
=========== ========== =========== ========== =========== ==========
The geographical sales information presented above represents sales to
customers located in each respective country whereas the long-lived assets
information represents assets held in the respective countries.
41
16. SUBSEQUENT EVENT
On January 16, 2002, the Company acquired SpatialMetrix Corporation ("SMX")
in exchange for 500,000 shares of FARO common stock and the satisfaction by the
Company of certain obligations of SMX. In connection therewith, the Company
issued an additional 350,000 shares of FARO common stock and paid $2.0 million
in cash to fully satisfy SMX's obligations to its two lenders. The Company also
assumed and/or satisfied other obligations of SMX. The transaction will be
recorded utilizing the purchase method of accounting in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets." SMX Corp. is a leading
manufacturer and supplier of laser trackers and targets, metrology software,
and contract inspection services.
In April 2001, the Company provided $1.5 million in financing to SMX by
entering into a Participation Agreement with SMX's bank pursuant to which the
Company funded and simultaneously acquired a $1.5 million interest in SMX's
then outstanding $3.8 million bank line of credit. In October 2001, the Company
and SMX entered into an additional agreement pursuant to which the Company
would provide to SMX up to an additional $1.5 million in financing. The Company
and SMX's bank amended the Participation Agreement so that such additional
financing to SMX also would be made through participation in SMX's bank line of
credit. Consequently, SMX's bank line of credit could increase to a maximum of
$5.3 million, of which FARO would own up to $3.0 million. Prior to closing, the
Company had provided $2.9 million of aggregate financing to SMX pursuant to the
Participation Agreement.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
March 31, June 30, September 30, December
Quarter Ended 2001 2001 2001 31, 2001
------------- ----------- ----------- ------------- -----------
Sales................... $ 8,405,530 $ 8,265,131 $8,416,886 $10,026,049
Gross profit............ 4,966,003 4,801,330 5,300,500 5,741,680
Net income (loss)....... (1,127,255) (1,583,284) (699,035) 561,610
Net income (loss) per
share:
Basic................. (0.10) (0.14) (0.06) 0.05
Diluted............... (0.10) (0.14) (0.06) 0.05
March 31, June 30, September 30, December
Quarter Ended 2000 2000 2000 31, 2000
------------- ---------- ----------- ------------- -----------
Sales.................... $9,849,767 $10,923,279 $8,810,972 $10,868,895
Gross profit............. 5,909,407 6,926,735 5,614,077 7,254,066
Net income (loss)........ (417,570) 591,398 (360,387) 226,076
Net income (loss) per
share:
Basic.................. (0.04) 0.05 (0.03) 0.02
Diluted................ (0.04) 0.05 (0.03) 0.02
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information contained in the Company's current report on Form 8-K dated
August 21, 2000 is incorporated herein by reference.
42
PART III
Certain information required by Part III is omitted from this Report in that
the Registrant will file a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this Report and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the Items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee
Report or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information to be set forth under the captions "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement is incorporated herein by reference.
The information concerning the Company's executive officers required by this
Item is incorporated by reference herein from the section of this Report in
Part I, Item 1, entitled "Management of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information to be set forth under the caption "Executive Compensation"
in the Proxy Statement is incorporated herein by reference; provided, however
that the Company specifically excludes from such incorporation by reference any
information set forth under the caption Report by the "Compensation Committee
on Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security ownership of certain beneficial owners and management to be set
forth under the caption "Principal Shareholders" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information to be set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Report. The following documents are
filed as part of this Report:
(1) Financial Statements. Included in Part II, Item 8 is an index to the
Consolidated Financial Statements of FARO Technologies, Inc. and Report of
Ernst & Young LLP, Independent Certified Public Accountants, filed as part
of this Form 10-K. Additionally, included as Exhibit 99.2 are the unaudited
financial statements of SpatialMetrix Corporation ("SMX") for each of the
two years in the period ended December 31, 2001 and unaudited pro forma
financial information pertaining to the acquisition of SMX.
(2) Financial Statement Schedules. Schedules not listed in the index to
the Consolidated Financial Statements included in Part II, Item 8, have
been omitted because they are not applicable or are not required or the
information required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto.
43
(3) Exhibits.
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger dated September 14, 2001, as amended,
between the Registrant and Spatialmetrix Corporation (Filed as
Exhibit 2.1 to Registrant's Current Report on Form 8-K dated
January 16, 2002 and incorporated herein by reference)
3.1 Articles of Incorporation, as amended (Filed as Exhibit 3.1 to
Registrant's Registration Statement on Form S-1, No. 333-32983,
and incorporated herein by reference)
3.2 Bylaws, as amended (Filed as Exhibit 3.2 to Registrant's
Registration Statement on Form
S-1, No. 333-32983, and incorporated herein by reference)
4.1 Specimen Stock Certificate (Filed as Exhibit 4.1 to Registrant's
Registration Statement on Form S-1, No. 333-32983, and
incorporated herein by reference)
10.1 1993 Stock Option Plan, as amended (Filed as Exhibit 10.1 to
Registrant's Registration Statement on Form S-1, No. 333-32983,
and incorporated herein by reference)
10.2 1997 Employee Stock Option Plan (Filed as Exhibit 10.2 to
Registrant's Registration Statement on Form S-1, No. 333-32983,
and incorporated herein by reference)
10.3 1997 Non-Employee Director Stock Option Plan (Filed as Exhibit
10.3 to Registrant's Registration Statement on Form S-1, No. 333-
32983, and incorporated herein by reference)
10.4 1997 Non-Employee Directors' Fee Plan (Filed as Exhibit 10.4 to
Registrant's Registration Statement on Form S-1, No. 333-32983,
and incorporated herein by reference)
10.5 Business Lease, dated March 1, 1991, between the Registrant (as
successor-by-merger to FARO Medical Technologies (U.S.), Inc.) and
Xenon Research, Inc. (Filed as Exhibit 10.7 to Registrant's
Registration Statement on Form S-1, No. 333-32983, and
incorporated herein by reference)
10.6 Nonexclusive Unique Application Reseller Agreement, dated
September 9, 1996, between the Registrant and Autodesk, Inc.
(Filed as Exhibit 10.9 to Registrant's Registration Statement on
Form S-1, No. 333-32983, and incorporated herein by reference)
10.7 Form of Patent and Confidentiality Agreement between the
Registrant and each of its employees (Filed as Exhibit 10.10 to
Registrant's Registration Statement on Form S-1, No. 333-32983,
and incorporated herein by reference)
10.8 Nonexclusive Unique Application Reseller Agreement, dated as of
March 1, 1998, between the Registrant and Autodesk, Inc. (Filed as
Exhibit 10.11 to Registrant's Form 10-K for calendar year 1997,
No. 0-23081, and incorporated herein by reference)
10.9 First Amendment to Business Lease, dated as of January 20, 1998,
between the Registrant (as successor by merger to FARO Medical
Technologies (US), Inc.) and Xenon Research, Inc., (Filed as
Exhibit 10.12 to Registrant's Form 10-K for calendar year 1997,
No. 0-23081 and incorporated herein by reference)
10.10 FARO OEM Purchase Agreement, dated March 12, 1999 between the
Company and Brown & Sharpe Manufacturing Company. (Filed as
Exhibit 10.13 to Registrant's Form 10-K for calendar year 1998,
No. 0-23081 and incorporated herein by reference)
44
Exhibit No. Description
----------- -----------
10.11 OEM Contract (1) year extension, signed March 1, 2001 between the
Registrant and Brown & Sharpe Manufacturing Company. (Filed as
Exhibit 10.15 to Registrant's Form 10-K for calendar year 2000,
No. 000-23081 and incorporated herein by reference)
10.12 WCMA Line of Credit No. 740-07K27 dated May 10, 2001 between the
Registrant and Merrill Lynch Business Financial Services, Inc.
(Filed herewith)
21.1 List of Subsidiaries (Filed herewith)
23.1 Consent of Ernst & Young LLP (Filed herewith)
23.2 Consent of Deloitte & Touche LLP (Filed herewith)
24.1 Power of Attorney (Included on Page 46 of this Report)
99.1 Properties (Filed herewith)
99.2 Unaudited Financial Statements of SpatialMetrix Corporation for
the two years in the period ended December, 31, 2001 and unaudited
pro forma financial information pertaining to the acquisition of
SMX (Filed herewith)
(b) Reports on Form 8-K
None.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FARO TECHNOLOGIES, INC.
/s/ Gregory A. Fraser
By: _________________________________
Gregory A. Fraser
Executive Vice President,
Secretary and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Date: March 27, 2002
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. Each person whose
signature appears below constitutes and appoints SIMON RAAB, and GREGORY A.
FRASER, and each of them individually, his true and lawful attorney-in-fact and
agent, with full power of substitution and revocation, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Simon Raab Chairman of the Board, March 27, 2002
______________________________________ President, Chief
Simon Raab Executive Officer
(Principal Executive
Officer), and Director
/s/ Gregory A. Fraser Executive Vice President, March 27, 2002
______________________________________ Secretary, Treasurer, and
Gregory A. Fraser Director
/s/ Hubert d'Amours Director March 27, 2002
______________________________________
Hubert d'Amours
/s/ Stephen R. Cole Director March 27, 2002
______________________________________
Stephen R. Cole
/s/ Norman H. Schipper Director March 27, 2002
______________________________________
Norman H. Schipper
/s/ Andre Julien Director March 27, 2002
______________________________________
Andre Julien
46