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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, 2000 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, 2001, there were outstanding 11,030,706 shares of Common
Stock. The aggregate market value of the voting stock held by nonaffiliates of
the Registrant based on the last sale price reported on the NASDAQ National
Market as of March 20, 2001 was $30,665,363.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
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Portions of the Proxy Statement, dated April 2, 2001..... Part III, Items 10-13
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PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
This report contains forward-looking statements (within the meaning of the
Private Securities Litigation Reform Act of 1995) made by FARO Technologies,
Inc. (the "Company"). In addition, other written or oral statements, which
constitute forward-looking statements, 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," 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 and
uncertainties, including those discussed below and elsewhere in this report.
The Company's actual results may differ materially from what is expressed or
forecasted in such 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 the following factors: (i) loss of material customers; (ii) the
failure to properly manage growth and successfully integrate acquired
businesses; (iii) rapid technological change; (iv) an economic slowdown
affecting the manufacturing sector; (v) the Company's growth and operating
strategies; (vi) the ability to attract and retain qualified sales, information
services and management personnel; (vii) the impact of competition from new and
existing competitors; (viii) the financial condition of the Company's clients;
(ix) potential increases in the Company's costs; (x) fluctuations in the
Company's quarterly financial results; declaration and payment of dividends;
and (xi) the loss of either of the Company's executive officers. Additional
factors that could cause actual results to differ materially are the factors
detailed in Items 1 through 3 and 7 of this report.
ITEM 1. BUSINESS.
Industry Background
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. Computer-aided design ("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.
The benefits of CAD are significant. The CAD process offers a three-
dimensional, highly efficient and inherently flexible alternative to
traditional design methods. Many manufacturers have also recently adopted
computer-aided manufacturing ("CAM") technology, in which CAD data directs
machines in the manufacturing process. CAM has further improved the efficiency
and quality of the production of manufactured goods.
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 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
1
limited. Although hand-measurement tools are often appropriate for simple
measurements, their use for complex measurements is time-consuming and limited
in adaptability. Test fixtures (customized fixed tools used to make comparative
measurements of 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 but have only recently begun to provide a link to the
CAD model of the object being measured. Fixed-base CMMs require that the object
being measured be brought to the CMM and that the object fit within the CMMs
measurement grid. In addition, conventional CMMs generally operate in metrology
laboratories or environmentally stable quality inspection departments of
manufacturing facilities rather than on the factory floor.
Isolation from the factory floor and the relatively small measurement grids
of CMMs limit their utility to small, readily portable workpieces that require
high levels of measurement precision. 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.
An increasingly competitive global marketplace has created a demand for
higher quality products with shorter life cycles. 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. In most cases, only a relatively small percentage of the
components of a manufactured product require highly precise measurements (less
than one-thousandth of an inch). Conventional CMMs provide manufacturers with
very precise measurement capabilities and cost up to $2 million per unit.
However, they are not responsive to manufacturers' increasing need for cost-
effective intermediate precision measurement capabilities. The Company believes
that a greater percentage of components require intermediate precision
measurements (between one- and twenty-thousandths of an inch). In the absence
of intermediate precision measuring systems, manufacturers often are unable to
make appropriate measurements or part-to-CAD comparisons during the
manufacturing process, resulting in decreased productivity, poor product
quality and unacceptable levels of product rework and scrap. 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 CMMs. 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
FAROArm(R) articulated measuring device and its multi-faceted CAM2 software
which provides for CAD-based inspection on portable and fixed-base CMMs, and
factory-level statistical process control. Together, these products integrate
the measurement and quality inspection function with CAD, CAM and computer-
aided engineering ("CAE") technology to improve productivity, enhance product
quality and decrease rework and scrap in the manufacturing
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process. The Company uses the acronym "CAMM" 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, 17 of which also are held or
pending in other jurisdictions. The Company's products have been purchased by
more than 2,300 customers worldwide, ranging from small machine shops to such
large manufacturing and industrial companies as Audi, Boeing, British
Aerospace, Caterpillar, DaimlerChrysler, General Electric, General Motors,
Honda, Johnson Controls, Komatsu Dresser, Lockheed Martin, Siemens and
Volkswagen among many others.
FARO Products
The FAROArm(R). The FAROArm(R) is a portable, six-axis, instrumented,
articulated device that approximates the range of motion and dexterity of the
human arm. Each articulated arm is comprised of three major joints, each of
which may consist of one, two or three axes of motion. The FAROArm(R) 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.
The FAROArm(R) has been designed as an open architecture system. The
communications parameters of the on-board processors have the ability to
combine advanced sensing probes, integrate with conventional CMM software and
communicate with different CAD software packages and a variety of computer
operating systems. This open architecture is designed to provide for easy
integration of the FAROArm(R) into the manufacturing environment. The
customer's ability to use an installed base of computing hardware and software
further reduces the cost of installation and training while initiating the
transition to the Company's preferred group of CAD-based products. To encourage
integration of the FAROArm(R) into the manufacturing environment, the Company
provides a group of seamless interface drivers for leading CAD/CAM packages.
The Company also provides a full serial communication command protocol to the
FAROArm(R) for customers who write their own interfaces.
The Company offers several models of the FAROArm(R) under three product
lines: the Gold Series, Silver Series and the Bronze Millenium Series.
Gold Series. The Gold Series models are the Company's highest precision
(P.001 to P.005 inches) measuring devices and are available in four, six,
eight, ten and twelve foot measurement diameters. These models are used for
factory floor inspection and fit-checking applications requiring higher
precision than the Silver Series. Depending on the component of the CAM2
software, the Gold Series models are priced between $50,000 and $60,000
when sold as a turnkey system including hardware, computer and software and
$47,000 without computer and software.
Silver Series. The Silver Series models are the Company's intermediate
precision (P.003 to P.007 inches) measuring devices and are available in
eight and twelve foot measurement diameters. These models are most
frequently used for factory floor inspection and
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fit-checking applications. Depending on the component of the CAM2 software,
the Silver Series models are priced at $42,000 and $50,000 when sold as a
turnkey system including hardware, computer and CAM2 software and $37,000
without computer and software.
Bronze Millennium Series. The Bronze Series models are the Company's
lighter-weight, medium precision (P.002 to P.007 inches) measuring devices
and are available in four, six, eight and ten foot measurement diameters.
These models are most frequently used for applications that do not require
high-level precision, such as 3-D modeling, mold production and reverse-
engineering applications. Depending on the component of CAM2 software, the
Sterling Series models are priced between $34,000 and $42,000 when sold as
a turnkey system including hardware, computer and CAM2 software and $27,000
without computer and software.
The Control Station with SoftCheck Tools. The Control Station was introduced
in late 2000 as a practical factory based 3D measurement solution for
manufacturers with repetitive part production, minimal production engineering
staff and assembly staff, and with little or no computer, CAD or metrology
experience. The Control Station consists of a FARO Arm, a touch-screen computer
and one or more SoftCheck Tools. The Control Station can be simply viewed as a
player for custom delivered SoftCheck tools specifically developed by FARO for
the Customer's parts. A SoftCheck Tool is custom software program designed to
lead an assembler through the inspection process. The SoftCheck Tools can be
attained through the web or by direct communication with the Company's
applications engineering staff.
CAM2 Software. CAM2 is the Company's family of proprietary CAD-based
measurement and statistical process control software. The CAM2 product line
includes six (6) 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 CAD Analyzer(R) sells for $6,500.
CAM2 Design(R) allows users to measure older parts without data files,
or models of potential products and convert them into CAD files for
manufacturing. It is built on the AutoCAD(R) software development platform,
which allows users to benefit from extensive hardware, software,
interfacing and software support libraries and teaching products. CAM2
Design(R) is offered with the FAROArm(R) and is also offered as an
unbundled product. When unbundled from the FAROArm(R), CAM2 Design(R) sells
for $26,000. As part of a product rationalization effort in 2000, CAM2
Design was discontinued. The increased performance of the CAM2 Measure
product and the diminishing reverse engineering markets were contributing
factors to this decision.
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. When unbundled from the FAROArm(R), CAM2
Measure(R) sells for $10,000.
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. When unbundled from the
FAROArm(R), CAM2 Automotive(R) sells for $20,000.
4
CAM2 SPC Graph(R) allows the user to organize and compare measurement
results from the FAROArm(R) in the form of pictures, tables, and charts,
for the purpose of statistical process control. CAM2 SPC Graph(R) is
tailored to an individual user. CAM2 SPC Graph(R) sells for $1,000.
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. CAM2 SPC Process(R) sells for
$90,000 per assembly line.
Specialty Products. The Company licenses and supports certain specialty
products based on its articulated arm technology 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 more than 2,300 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 14.0% of the Company's total revenues in 2000. No
customer represented 4.0% or more of the Company's sales in 2000. The following
table illustrates, by vertical market, the Company's diverse customer base:
AEROSPACE AUTOMOTIVE ELECTRIC UTILITIES AND
MANUFACTURERS
Boeing DaimlerChrysler
Lockheed Martin General Motors General Electric
Northrop Grumman Ford Westinghouse
GE Aerospace Honda Southern California Edison
Orbital Sciences Toyota Tennessee Valley Authority
Dee Howard Nissan ABB Power Generation
Hughes Brothers Porsche Hydro Quebec
Nordam Repair Div. Volkswagen TurboCare
Ball Aerospace BMW Potomac Electric Power
Turbine Technology
International
HEAVY EQUIPMENT CONSUMER PRODUCTS MISCELLANEOUS
John Deere Harley Davidson Bill Elliot Racing
Case Corporation Polaris American Sheet Metal
Caterpillar Bombardier Monyo Oil Field
Komatsu Dresser Xerox Products
Clark Industries Hewlett Packard Atlas Foundry
Ingersoll Rand Fountain Power Boats Molded Fiberglass
AGCO Taylor Made Products Creative Foam
Hay and Forage Mercury Marine Products
Melroe Company Amana Able Design Plastics
Volvo Construction Braun Corporation APW Enclosures
Equipment Eastman Kodak Applied Composites
Renault Agriculture Kolenda Tool and Die
Charmalloy Castings
5
Sales and Marketing
The Company directs its sales and marketing efforts from its headquarters in
Lake Mary, Florida. At December 31, 2000, the Company employed 101
sales/application engineering 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 and in Nagoya, Japan. The Company also
utilizes 14 North American and 24 international distributors primarily in
territories where the Company does not have regional sales offices. See
Footnote 15 of 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 a 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 June 1996, the Company entered into an Original Equipment Manufacturer
(OEM) agreement with Mitutoyo Corporation ("Mitutoyo"), a Japanese company that
is the world's largest manufacturer of metrology tools. Mitutoyo markets the
FAROArm(R) in Japan under the name SPINARM(R). The agreement, which grants
Mitutoyo non-exclusive distribution right in Japan, expires in June 2001 and is
renewable for successive one-year terms.
In March 1999, the Company entered into an OEM agreement with Brown & Sharpe
Manufacturing Company ("Brown & Sharpe"), a North Kingstown, Rhode Island
company 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.
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 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.
6
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, 2000, the Company employed 37 scientists and technicians in
its research and development efforts. Research and development expenses were
approximately $3.6 million in 2000 as compared to $3.8 million in 1999 and $2.6
million in 1998. 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 FAROArm(R) and The Control Station
is to provide orientation and position information with respect to the probe at
the end of the FAROArm(R). 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 FAROArm(R) and The Control
Station is designed as an articulated arm 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 arm-like 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 the Company's 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 FAROArm(R) 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.
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
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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 CAD analyser(R) is a family member for viewing, analyzing and browsing CAD
files. CAM2 Design(R) is a family member primarily used for reverse engineering
and is written as an AutoCAD runtime extension (ARX) that is the AutoCAD
Application Programming Interface (API). Family member CAM2 Measure(R) is a
simplified version of Design for pure measurement applications written entirely
on the ACIS CAD development platform. Family member CAM2 Automotive(R) is a
measurement software designed for large CAD files and specific Automotive
applications and is written using a 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.
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, 17 of
which are also held or pending in other jurisdictions. The Company also has 13
registered trademarks in the United States, 25 foreign registered trademarks, 8
trademark applications pending in the United States and
3 foreign trademark applications pending. The Company also has internet domain
names registered worldwide.
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
time-consuming, 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
8
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.
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. Yearly 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.
In May 2000, the Company received Accreditation to ISO/IEC Guide 25, which
is a standard for Calibration and Testing Laboratories. The Company's Scope of
Supply for this accreditation is: "Calibration and Certification of Measuring
and Test Equipment."
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 FAROArm(R) and related
software are Romer SRL (France) and Romer, Inc., a Cimcore Company
(California). Prior to 2000 these two companies were a joint venture. 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. The
Company also has an established, competitor in Japan that markets a portable
measuring device. There can be no assurance that such companies will not devote
additional resources to the development and marketing of products that compete
with those of the Company.
9
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, 2000, the Company had orders representing approximately $1.0
million in product sales outstanding. The majority of such orders were shipped
by March 20, 2001. Additionally, the Company had orders representing
approximately $1.3 million in warranty, training and service sales outstanding
at December 31, 2000.
Employees
At December 31, 2000, the Company had 232 full-time employees, consisting of
101 sales/application-engineering professionals, 37 production staff, 37
research and development staff, 40 administrative staff, and 17 customer
service 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 for 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........ 48 Chairman of the Board, Chief Executive Officer, and President
Gregory A. Fraser,
Ph.D................... 46 Executive Vice President, Secretary, and Treasurer
Wendelin K.J.
Scharbach.............. 45 Managing Director of FARO Europe
Edward M. Pelshaw....... 42 Vice President of Manufacturing
Allen Sajedi............ 41 Chief Engineer
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 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.
10
Wendelin K.J. Scharbach a co-founder of 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. Mr. Scharbach holds a Bachelors Degree in Mechanical Engineering
from University of Karlsruhe in Germany.
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 joining the Company in 1996, 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 Chief Engineer of the Company since 1990. Mr.
Sajedi holds a Bachelor of 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
leases and operates a combined sales and training facility located in Wixom,
Michigan containing approximately 4,300 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, and 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 2000.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock began trading on the NASDAQ Stock Market in
September 1997 under the symbol FARO. The following table sets forth the high
and low sale price of the Company's Common Stock for its two most recent fiscal
years:
2000 1999
--------------- ------------
High Low High Low
------- ------- ------ -----
First Quarter...................................... 5 7/8 2 3/8 7 3 3/4
Second Quarter..................................... 3 29/32 2 3/8 6 7/16 4 5/8
Third Quarter...................................... 5 1/2 3 6 2 3/4
Fourth Quarter..................................... 4 15/16 2 25/32 5 2 1/4
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.
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, 2001, the last sale price of the
Company's Common Stock was $2.63, and there were approximately 76 holders of
record of Common Stock. The Company believes that there are approximately 1,550
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 repurchased plan. During the two years in the
period ended December 31, 2000 the Company did not purchase any shares of its
Common Stock in the open market.
12
ITEM 6. SELECTED FINANCIAL DATA.
Years Ended December 31
--------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Statement of Operations
Data:
Sales................... $40,452,913 $33,105,740 $27,514,699 $23,516,385 $14,656,337
Gross profit............ 25,704,285 18,944,802 16,223,386 13,905,547 8,170,069
Income (loss) from
operations............. (697,100) (9,705,477)(1) (5,684,607)(2) 4,932,276 2,710,075
Income (loss) before
income taxes........... 464,198 (8,516,286) (4,480,562) 5,321,260 2,522,554
Net income (loss)....... 39,517 (7,394,822) (4,931,094) 3,206,630 1,406,662
Net income (loss) per
common share:
Basic................... $ -- $ (0.67) $ (0.46) $ 0.41 $ 0.20
Diluted................. -- (0.67) (0.46) 0.39 0.19
Weighted average common
shares Outstanding:
Basic................... 11,021,606 11,015,140 10,632,708 7,831,715 7,000,000
Diluted................. 11,094,144 11,015,140 10,632,708 8,189,048 7,349,041
At December 31
----------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------
Consolidated Balance
Sheet Data:
Working capital......... $23,672,736 $24,869,844 $30,997,769 $37,277,545 $3,832,424
Total assets............ 44,699,274 42,103,912 49,120,147 41,192,333 7,815,668
Total debt.............. 49,260 26,236 337,710 -- 1,501,267
Total shareholders'
equity................. 35,955,453 36,599,346 45,375,391 38,939,411 3,773,699
- --------
(1) Includes a charge to write down development and core technology in the
amount of $3.1 million.
(2) 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, 3-D measurement systems that are used in a broad range of manufacturing
and industrial applications. The Company's principal products are the
FAROArm(R) articulated measuring device, the Control Station and its multi-
faceted CAM2 software which provides for CAD-based inspection on portable and
fixed-base CMMs, and factory-level statistical process control. Together, these
products integrate the measurement and quality inspection function with CAD,
CAM and computer-aided engineering ("CAE") technology to improve productivity,
enhance product quality and decrease rework and scrap in the 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
13
technology in manufacturing and industrial applications and currently holds or
has pending 29 patents in the United States, 17 of which also are held or
pending in other jurisdictions. The Company's products have been purchased by
more than 2,300 customers worldwide, ranging from small machine shops to such
large manufacturing and industrial companies as Audi, Boeing, British
Aerospace, Caterpillar, DaimlerChrysler, General Electric, General Motors,
Honda, Johnson Controls, Komatsu Dresser, Lockheed Martin, Siemens and
Volkswagen.
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. 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 and Japan and Spain in 2000.
International sales represented 50.6%, 46.6% and 46.4% of sales in 2000, 1999
and 1998, respectively.
The Company derives revenues primarily from the sale of the FAROArm(R), its
six-axis articulated measuring device, and its multi-faceted CAM2 software.
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 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 summarizing its views of applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company's policy of revenue recognition is consistent with this bulletin.
Revenue growth has 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 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
14
services, software upgrades and hardware warranties. In addition, the Company
sells training and technology consulting services relating to its products.
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 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. Although the Company has not
historically engaged in any hedging transactions to limit risks of currency
fluctuations, it intends to do so in the future.
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
---------------------
2000 1999 1998
----- ----- -----
Statement of Operations Data:
Sales................................................... 100.0 % 100.0 % 100.0 %
Cost of Sales........................................... 36.5 % 42.7 % 41.0 %
----- ----- -----
Gross profit............................................ 63.5 % 57.3 % 59.0 %
Operating expenses:
Selling............................................... 34.7 % 36.7 % 36.2 %
General and administrative............................ 14.2 % 15.0 % 11.5 %
Depreciation and amortization......................... 7.2 % 13.5 % 10.2 %
Research and development.............................. 8.8 % 11.6 % 9.4 %
Employee stock options................................ .3 % 0.5 % 0.6 %
Impairment loss on acquired intangible assets......... -- 9.3 % --
In-process research and development................... -- -- 11.7 %
----- ----- -----
Total operating expenses............................ 65.2 % 86.6 % 79.6 %
----- ----- -----
Loss from operations.................................... (1.7)% (29.3)% (20.7)%
Interest income......................................... 2.1 % 2.2 % 3.9 %
Other income, net....................................... .7 % 1.4 % 0.5 %
Interest expense........................................ -- -- --
----- ----- -----
Net income (loss) before income taxes................... 1.1 % (25.7)% (16.3)%
Income tax expense (benefit)............................ 1.0 % (3.4)% 1.6 %
----- ----- -----
Net income (loss)....................................... .1 % (22.3)% (17.9)%
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).
15
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 57.2% 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 $.8 million, 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.
($0.7) million and in Europe ($0.1) million, 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 $3.1 million
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 ($0.2) million, and to the effect of the stronger U.S. dollar in
2000 ($0.1) million on European expenses, offset in part by increase, in local
currency, across many categories in Europe ($0.1) million.
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.
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 $0.4 million in
2000. The tax expense resulted from the Company's U.S. operation's taxable
earnings in 2000. A German federal tax benefit of $6.5 million
16
was offset in 2000 against a valuation allowance related to the German
acquisition of 1998. At December 31, 2000, the Company's foreign subsidiaries
had deferred tax assets relating to net operating loss carryforwards, which do
not expire, and intangible assets of $3.4 million and $3.1 million,
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.
1999 Compared to 1998
Sales. Sales increased $5.6 million, or 20.4%, from $27.5 million in 1998 to
$33.1 million in 1999. The increase resulted from increases in the U.S. ($3.0
million, or 20.4%, from $14.7 million to $17.7 million), Europe ($2.1 million,
or 24.7%, from $8.5 million to $10.6 million) and the remainder of the world
(an increase of $0.5 million, or 11.6%, from $4.3 million to $4.8 million).
Gross profit. Gross profit increased by $2.7 million, or 16.7%, from $16.2
million in 1998 to $18.9 million in 1999. The increase resulted from the
increase in sales, partially offset by unusual charges of $0.6 million related
to excess and obsolete inventory ($0.5 million) and warranties ($0.1 million).
Excluding the unusual charges, gross profit was $19.5 million, or 58.9%, the
same gross margin percentage as 1998.
Selling expenses. Selling expenses increased $2.1 million, or 21.0%, from
$10.0 million in 1998 to $12.1 million in 1999. The increase primarily resulted
from selling expenses in Germany, which increased by $1.4 million, with a full
year of expenses in 1999 from the German acquisition, compared to seven and a
half months in 1998, and an increase in the number of sales and marketing
employees in Europe. Selling expenses also increased by $0.4 million, resulting
from an unusual write-down of demonstration inventory, which was identified
during a thorough worldwide physical inventory. U.S. salaries, commissions,
advertising and trade shows also increased and were partially offset by lower
spending on other promotions.
General and administrative expenses. General and administrative expenses
increased by $1.8 million, or 56.3%, from $3.2 million in 1998 to $5.0 million
in 1999. The increase primarily resulted from general and administrative
expenses in Germany, which increased by $1.1 million, with a full year of
expenses in 1999 compared to seven and a half months in 1998. General and
administrative expenses also increased due to higher salaries, outside
services, and professional and legal expenses, and unusual third quarter
charges ($0.2 million, primarily for write-offs of doubtful accounts and
residual costs related to the German acquisition), partially offset by lower
bonuses and a $0.1 million unusual adjustments.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased by $1.7 million, or 60.7%, from $2.8 million in 1998 to $4.5
million in 1999. The increase primarily resulted from $1.0 million of unusual
expenses ($0.7 million of amortization of software development costs, $0.2
million of depreciation of property and equipment and $0.1 million of
amortization of patents with no remaining economic value). These unusual
expenses resulted from a review of the Company's assets, which determined that
certain patents and capitalized research and development costs should be
written off due to changes in technology. Additionally, a full year of
amortization of the intangible assets resulting from the German acquisition
increased amortization expense in 1999 by $0.3 million.
Research and development expenses. Research and development expenses
increased by $1.2 million, or 46.2%, from $2.6 million in 1998 to $3.8 million
in 1999. The increase primarily
17
resulted from an increase in the number of U.S. research and development
employees ($0.6 million), a full year of research and development expenses in
Germany in 1999, compared to seven and a half months of expenses in 1998 ($0.4
million), and an unusual charge ($0.2 million) to write off capitalized
research and development costs for products no longer sold by the Company.
Employee stock option expenses. Employee stock option expenses decreased by
$3,000, or 1.7%, from $172,000 in 1998 to $169,000 in 1999. 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 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.
Impairment loss on acquired intangible assets. A 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.
Other income. Other income increased by $0.4 million, or 400.0%, from $0.1
million in 1998 to $0.5 million in 1999. The increase resulted principally from
an increase in royalty income and from an increase in licensing fees for the
Company's medical technologies in 1999.
Interest income. Interest income decreased by $0.4 million, or 36.4%, from
$1.1 million in 1998 to $0.7 million in 1999. The decrease primarily resulted
from a reduction in the Company's cash invested after the acquisition of the
German company, which reduced the Company's cash invested for twelve months in
1999, but only seven and a half months in 1998. In addition, more cash was
invested in lower-yielding tax exempt municipal bonds during 1999.
Income tax (benefit) expense. Income tax benefit increased by $1.6 million,
from a $0.5 million expense in 1998 to a $1.1 million benefit in 1999. The
benefit resulted from the Company's U.S. operation's taxable loss. The deferred
tax benefit on the Company's foreign loss, including the impairment loss, was
offset by a $3.1 million valuation allowance.
Net loss. The Company's net loss increased by $2.5 million, or 51.0%, from
$4.9 million in 1998 to $7.4 million in 1999. The increase resulted primarily
from the unusual impairment loss on acquired intangible assets ($3.1 million,
with no offsetting tax benefit) on the intangible assets resulting from the
acquisition in Germany. Other unusual operating charges ($2.3 million) and
higher recurring general and administrative and research and development
expenses as a percentage of sales also contributed to the higher net loss,
partially offset by a $1.6 million increase in the income tax benefit. The net
loss includes $2.5 million of amortization of intangibles related to the German
acquisition, an increase of $0.3 million from 1998.
Liquidity and Capital Resources
In September 1997, the Company completed an initial public offering of
Common Stock that provided net proceeds of $31.7 million. Total marketable
securities (cash and cash equivalents, short-term investments and investments)
at December 31, 2000 were $19.0 million, compared to $16.7 million at December
31, 1999.
For the year ended December 31, 2000, net cash provided by operating
activities was $4.7 million compared to $1.4 million in 1999. Net cash provided
by operating activities, net of foreign exchange effects, increased primarily
due to improved operational results in 2000.
18
Net cash (excluding short-term investments and investments) used in
investing activities for the year ended December 31, 2000 was $3.1 million,
compared to net cash provided by investing activities of $5.3 million in 1999.
Net cash used in investing activities in 2000 was primarily due to net increase
in short-term investments and investments in 2000 of $732,000, increases in
notes receivable of $1.0 million (see Note 2 of Notes to Consolidated Financial
Statements contained in Item 8 herein) and purchases of property and equipment
of $1.2 million.
Net cash provided by financing activities for the year ended December 31,
2000 was $11,000, compared to net cash used of $282,000 in 1999. 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 $161,000 reduction on the
Company's reported cash at December 31, 2000.
The Company's principal commitments at December 31, 2000 consisted of leases
on its headquarters and regional and sales offices. 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
2001.
Foreign Exchange Exposure
Sales outside the United States represent a significant portion of the
Company's total revenues. At present, the majority of the Company's revenues
and expenses are invoiced and paid in U.S. dollars. In the future, the Company
expects a greater portion of its revenues to be denominated 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 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. Historically, the Company has not hedged against the risks
associated with fluctuations in exchange rates. The Company at present is
evaluating its exposure, and may use foreign exchange contracts and/or foreign
currency options to hedge these risks in the future.
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 2001.
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 (Euro). The transition period for the
introduction of the Euro ends June 30, 2002. After the transition period
certain member countries of the European Union are expected to adopt 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 Euro to have a material effect
on the Company's financial condition or results of operations.
Implementation of SAB 101
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
During the fourth quarter of 2000, the Company performed a comprehensive review
of its revenue recognition policies and determined that it is in compliance
with SAB 101.
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" and "Inflation" above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
----
Independent Auditors' Reports............................................ 21
Consolidated Balance Sheets as of December 31, 2000 and 1999............. 22
Consolidated Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998..................................................... 23
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000, and 1999 and 1998.................................... 24
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998..................................................... 25
Notes to Consolidated Financial Statements............................... 26
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of FARO Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of FARO
Technologies, Inc. and subsidiaries as of December 31, 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. 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. 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, 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, 2000 and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Orlando, Florida
March 8, 2001
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, 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period 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 audits.
We conducted our audits 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
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of FARO Technologies, Inc. and
subsidiaries as of December 31, 1999, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States
of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
March 17, 2000
21
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
------------------------
2000 1999
ASSETS ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 8,029,318 $ 6,507,962
Short-term investments............................. 6,218,636 6,494,262
Accounts receivable (Note 4)....................... 10,352,972 9,812,838
Refundable income taxes............................ -- 234,470
Inventories, net................................... 6,364,290 6,199,414
Prepaid expenses and other current assets.......... 1,112,881 577,116
Deferred income taxes.............................. 203,816 494,088
----------- -----------
Total current assets............................. 32,281,913 30,320,150
----------- -----------
PROPERTY AND EQUIPMENT--at cost:
Machinery and equipment............................ 3,580,892 2,895,706
Furniture and fixtures............................. 1,253,248 1,094,927
Leasehold improvements............................. 89,171 34,086
----------- -----------
Total............................................ 4,923,311 4,024,719
Less accumulated depreciation and amortization..... (3,121,029) (2,356,572)
----------- -----------
Property and equipment--net...................... 1,802,282 1,668,147
----------- -----------
INTANGIBLE ASSETS--net............................... 4,055,337 5,979,072
INVESTMENTS.......................................... 4,755,572 3,747,694
NOTES RECEIVABLE (Note 2)............................ 1,128,846 130,936
DEFERRED INCOME TAXES................................ 675,324 257,913
----------- -----------
TOTAL ASSETS......................................... $44,699,274 $42,103,912
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................. $ 17,397 $ 8,746
Accounts payable................................... 2,965,417 2,200,408
Accrued liabilities................................ 4,120,404 2,838,330
Income taxes payable............................... 684,409 --
Current portion of unearned service revenues....... 687,566 317,918
Customer deposits.................................. 133,984 84,904
----------- -----------
Total current liabilities........................ 8,609,177 5,450,306
OTHER LONG-TERM LIABILITIES.......................... 134,644 54,260
----------- -----------
Total liabilities................................ 8,743,821 5,504,566
----------- -----------
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, 11,065,225 and 11,392,842 issued;
11,025,225 and 11,019,510 outstanding............. 11,066 11,060
Additional paid-in capital......................... 47,570,059 47,544,844
Unearned compensation.............................. (123,404)
Accumulated deficit................................ (9,268,134) (9,307,651)
Other comprehensive loss........................... (2,206,913) (1,374,878)
Common stock in treasury, at cost--40,000 shares in
2000 and 1999..................................... (150,625) (150,625)
----------- -----------
Total shareholders' equity....................... 35,955,453 36,599,346
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $44,699,274 $42,103,912
=========== ===========
See notes to consolidated financial statements.
22
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31
-------------------------------------
2000 1999 1998
----------- ----------- -----------
SALES................................... $40,452,913 $33,105,740 $27,514,699
COST OF SALES........................... 14,748,628 14,160,938 11,291,313
----------- ----------- -----------
Gross profit.......................... 25,704,285 18,944,802 16,223,386
----------- ----------- -----------
OPERATING EXPENSES:
Selling............................... 14,033,725 12,139,567 9,960,914
General and administrative............ 5,763,040 4,974,558 3,161,599
Depreciation and amortization......... 2,931,546 4,465,441 2,816,135
Research and development.............. 3,549,670 3,828,801 2,587,181
Employee stock options................ 123,404 168,912 172,164
Impairment loss on acquired intangible
assets............................... -- 3,073,000 --
In-process research and development
resulting from acquisition........... -- -- 3,210,000
----------- ----------- -----------
Total operating expenses............ 26,401,385 28,650,279 21,907,993
----------- ----------- -----------
LOSS FROM OPERATIONS.................... (697,100) (9,705,477) (5,684,607)
OTHER INCOME (EXPENSE):
Interest income....................... 860,254 715,953 1,077,713
Other income.......................... 302,378 475,162 139,355
Interest expense...................... (1,334) (1,924) (13,023)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....... 464,198 (8,516,286) (4,480,562)
INCOME TAX EXPENSE (BENEFIT)............ 424,681 (1,121,464) 450,532
----------- ----------- -----------
NET INCOME (LOSS)....................... $ 39,517 $(7,394,822) $(4,931,094)
=========== =========== ===========
NET LOSS PER COMMON SHARE--BASIC........ $ -- $ (0.67) $ (0.46)
=========== =========== ===========
NET LOSS PER COMMON SHARE--DILUTED...... $ -- $ (0.67) $ (0.46)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
23
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additonal Other
------------------ Paid-in Unearned Accumulated Comprehensive Treasury
Shares Amounts Capital Compensation Deficit Income (Loss) Stock Total
---------- ------- ----------- ------------ ----------- ------------- --------- -----------
BALANCE,
JANUARY 1, 1998........ 9,919,000 $ 9,919 $36,502,004 $(464,480) $ 3,018,265 $ (126,297) $ -- $38,939,411
Net loss............... (4,931,094) (4,931,094)
Currency translation
adjustment, net of
tax................... 325,678 325,678
-----------
Comprehensive loss..... (4,605,416)
Income tax benefit
resulting from
excercise of stock
options............... 695,164 695,164
Issuance of common
stock................. 1,129,137 1,129 10,323,564 10,324,693
Amortization of
unearned
compensation.......... 172,164 172,164
Acquisition of treasury
stock................. (150,625) (150,625)
---------- ------- ----------- --------- ----------- ----------- --------- -----------
BALANCE,
DECEMBER 31, 1998...... 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
adjustment, net of
tax................... (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
adjustment, net of
tax................... (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
========== ======= =========== ========= =========== =========== ========= ===========
See accompanying notes to consolidated financial statements.
24
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------------
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM:
OPERATING ACTIVITIES:
Net income (loss)....................... $ 39,517 $(7,394,822) $(4,931,094)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........... 2,931,546 4,465,441 2,858,108
Bad debt expense........................ 30,271 169,144 107,004
Inventory reserve....................... 300,955 1,027,186 100,000
Impairment loss on acquired intangible
assets................................. -- 3,073,000 --
In process research and development
costs.................................. -- -- 3,210,000
Provision for deferred income taxes..... (127,139) (708,678) 361,737
Loss on disposal of fixed assets........ -- 5,400 --
Employee stock options.................. 123,404 168,912 172,164
Change in operating assets and
liabilities:
Decrease (increase) in:
Accounts receivable................... (946,693) (1,096,418) (1,866,792)
Refundable income taxes .............. 234,470 481,578 (716,048)
Inventories........................... (549,516) (794,260) (2,237,905)
Notes receivable...................... -- 47,752 124,683
Prepaid expenses and other assets..... (586,176) (422,079) 66,972
Increase (decrease) in:
Accounts payable and accrued
liabilities.......................... 2,095,884 2,380,514 263,912
Income taxes payable.................. 684,409 398 (413,167)
Unearned service revenues............. 436,132 (5,757) (159,794)
Customer deposits..................... 55,817 (28,458) (6,620)
----------- ----------- -----------
Net cash provided by (used in)
operating activities................ 4,722,881 1,368,853 (3,066,840)
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment..... (1,197,532) (1,120,552) (1,001,655)
Notes receivable........................ (1,001,593) -- --
Acquisition of business net of cash
acquired............................... -- -- (5,668,382)
Purchases of investments................ (7,422,252) (15,012,556) (17,011,831)
Payment of patent costs................. -- -- (105,651)
Payment of product design costs......... -- -- (635,943)
Payments for intangible assets.......... (120,264) (316,527) (754,559)
Proceeds from investments............... 6,690,000 21,782,431 --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.................. (3,051,641) 5,332,796 (25,178,021)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock--
net.................................... 25,221 24,124 624,842
Payments for long-term debt, capital
lease obligations and notes payable.... (14,070) (306,403) (186,447)
Acquisition of treasury stock........... -- -- (150,625)
----------- ----------- -----------
Net cash provided by (used in)
financing activities.................. 11,151 (282,279) 287,770
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.. (161,035) (1,095,064) 325,678
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. 1,521,356 5,324,306 (27,631,413)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR.................................... 6,507,962 1,183,656 28,815,069
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR... $ 8,029,318 $ 6,507,962 $ 1,183,656
=========== =========== ===========
See notes to consolidated financial statements.
25
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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. The Company has four wholly-owned subsidiaries FARO FSC, Ltd.; FARO
Europe GmbH & Co. KG, a German company, FARO Japan KKK, a Japanese company, and
Antares LDA, a Portuguese company.
Principles of Consolidation--The consolidated financial statements include
the accounts of FARO Technologies, Inc. and all wholly-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.
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 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 summarizing its views of applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company's policy of revenue recognition is consistent with this bulletin.
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 trading securities, which are carried at
market value based upon the quoted market prices of those investments at the
respective balance sheet date. Accordingly, net realized and unrealized gains
and losses on trading securities are included in other income in the
consolidated statements of operations. At December 31, 2000, cash and cash
equivalents consisted only of cash on hand and overnight investments. The gross
unrealized gain or loss on all trading securities was an unrealized loss of
approximately $18,000 in 1999 and an unrealized gain of approximately $3,000 in
1998.
26
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments--Short-term investments ordinarily consist of short-term debt
securities acquired with cash not immediately needed in operations. At December
31, 2000 and 1999, such amounts consisted of government agency securities with
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).
At December 31, 2000 and 1999, investments consisted of the following:
2000 1999
---------- ----------
Government agency securities........................... $ 898,840 $3,747,694
Certificates of deposit................................ 240,309 --
Corporate notes........................................ 3,616,423 --
---------- ----------
$4,755,572 $3,747,694
========== ==========
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 or loss on all
held to maturity debt securities was an unrealized gain of approximately
$65,000 at December 31, 2000, and unrealized loss of approximately $83,000 at
December 31, 1999.
Inventories--Inventories are stated at the lower of average cost or market.
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.
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 10 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.
27
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangibles--Goodwill represents the excess of purchase price over the fair
value of businesses acquired and is amortized on a straight-line basis over 5
years.
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 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, and accounts payable. The carrying amounts of such financial
instruments approximate their fair value due to the short term nature of such
instruments.
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.
28
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1996, the Company entered into an Original Equipment Manufacturer
(OEM) agreement with Mitutoyo Corporation ("Mitutoyo"), a Japanese company
which manufactures and markets metrology tools. Under the agreement, Mitutoyo
sells the Company's products under the name SPINARM. The agreement, which
grants Mitutoyo a nonexclusive right to sales in Japan, expired in June 2000
and was renewed for a successive one-year term in 2000.
In 1999, the Company entered into an OEM agreement with Brown & Sharpe
Manufacturing Company ("Brown & Sharpe"), a North Kingstown, Rhode Island
company that is a world leader in the manufacture of traditional 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.
No customer represented 10% or more of the Company's total sales for the
years ended December 31, 2000, 1999 and 1998.
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.
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 the carrying
value of the assets may not be recoverable. Impairment losses are recognized if
expected future 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
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impact of Recently Issued Accounting Pronouncements--In June 2000, the FASB
issued Statement No. 138, Accounting for Certain Hedging Activities, which
amended Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. Statement No. 138 must be adopted concurrently with the adoption of
Statement 133. The Company adopted these new Statements effective January 1,
2001.
29
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These statements will require the Company to recognize all derivatives on
the balance sheet at fair value. The Company's adoption of these Statements did
not have a significant effect on its results of operations or financial
position.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25." Among other issues,
that interpretation clarifies the definition of employees for purposes of
applying Opinion No. 25, the criteria for determining whether a plan qualifies
as a non-compensatory plan, the accounting consequence of various modifications
to the terms of a previously fixed stock option or award and the accounting for
an exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in the
interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 31, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effect of applying this
interpretation is recognized on a prospective basis from July 1, 2000. The
implementation of this interpretation does not have a material impact on the
Company's financial statements.
Reclassifications--Certain prior year amounts have been reclassified to
conform to current year financial statement presentation.
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. In addition, 333,332 shares of Common
Stock were placed in escrow to be issued provided CATS met certain performance
criteria within a specified timeframe. Subsequently, the escrow shares were re-
issued to the Company in February 2000 in accordance with the agreement.
The acquisition agreement provided that the Company provide a loan to each
of the two former shareholders of CATS to fund their tax liability in
connection with the Company's acquisition of CATS. Such former CATS
shareholders remain key employees of the Company. On August 2, 1999, the
Company and each of the former CATS shareholders entered into a loan agreement
pursuant to which the Company agreed to loan to the former CATS shareholders an
amount equal to their German tax obligation in connection with the Company's
acquisition of CATS. In June 2000, the German tax authorities issued a tax
assessment to each of the former CATS shareholders. In connection therewith, on
June 20, 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 outstanding for a term of three years, at an interest rate of
approximately 4.3%, 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.
30
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquisition was recorded under the purchase method of accounting and the
final allocation among tangible and intangible assets and liabilities is as
follows:
Tangible assets (including cash of $5,618)...................... $ 1,522,000
Intangible assets:
Developed and core technology................................. 8,940,000
Workforce in place............................................ 550,000
Customer relations............................................ 590,000
Goodwill...................................................... 2,871,000
In-process technology......................................... 3,210,000
Liabilities assumed............................................. (1,614,000)
-----------
$16,069,000
===========
The valuation of CATS was based on management's estimates of after tax net
cash flows and gives explicit consideration to the Security and Exchange
Commission's ("SEC") views on in-process research and development in purchase
transactions. In making the allocation of purchase price, the Company
considered the present value of cash flows and income, the status of projects,
completion costs and project risk. Specifically, the Company considered (1) the
value of core technology and ensured the relative allocations to core
technology and in-process technology were consistent with the relative
contributions of each of the final products and (2) the stage of completion of
the individual projects and ensured that the value considered only the efforts
completed as of the transaction date.
The amount allocated to in-process research and development of $3.2 million
was expensed upon acquisition, as it was determined that the underlying
projects had not reached technological feasibility, had no alternative future
use and successful future development was uncertain.
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 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.
The operating results of CATS have been included in the consolidated
statements of operations since the date of acquisition. The following unaudited
pro forma results of operations for the year ended December 31, 1998 is
presented for informational purposes assuming that the Company had acquired
CATS as of January 1, 1998. The $3.2 million charge off for in-process research
and development has been excluded from the pro forma results as it represents a
material non-recurring charge.
Revenues........................................................ $28,357,000
Net loss........................................................ (1,215,000)
Loss per share:
Basic......................................................... $ (0.11)
Diluted....................................................... $ (0.11)
31
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Selected cash payments and non cash activities were as follows:
December 31
---------------------------
2000 1999 1998
------- ------- -----------
Cash paid for interest............................ $ 1,334 $ 3,237 $ 13,023
Cash paid for income taxes........................ 54,000 24,392 569,481
Non cash investing and financing activities:
Fixed assets acquired under capital lease
obligations.................................... 55,795 -- --
Business acquired:
Fair market value of assets acquired, net of
cash acquired................................ -- -- 17,677,382
Liabilities assumed........................... -- -- (1,614,000)
Common stock issued........................... -- -- 10,395,015
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is as follows:
Year ended December 31
---------------------------
2000 1999 1998
-------- -------- --------
Balance, beginning of year......................... $334,612 $139,690 $ 9,534
Provision.......................................... 30,271 169,144 107,004
(Amounts written off) recoveries................... (11,369) 25,778 23,152
-------- -------- --------
Balance, end of year............................... $353,514 $334,612 $139,690
======== ======== ========
5. INVENTORIES
Inventories, net, consist of the following:
December 31
---------------------
2000 1999
---------- ----------
Raw materials............................................. $ 486,002 $ 652,241
Work-in-process........................................... 1,610,210 1,396,793
Finished goods............................................ 991,169 1,158,785
Sales demonstration....................................... 3,276,909 2,991,595
---------- ----------
$6,364,290 $6,199,414
========== ==========
32
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The allowance for obsolete and slow-moving inventory is as follows:
Year ended December 31
--------------------------------
2000 1999 1998
---------- ---------- --------
Balance, beginning of year.................... $1,080,815 $ 54,728 $ --
Charges to Cost of Sales...................... 300,955 1,027,186 100,000
Amounts written off........................... (963,840) (1,099) (45,272)
---------- ---------- --------
Balance, end of year.......................... $ 417,930 $1,080,815 $ 54,728
========== ========== ========
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31
------------------------
2000 1999
----------- -----------
Goodwill.............................................. $ 2,456,913 $ 2,695,632
Existing product technology........................... 4,849,715 5,320,924
Work force in place................................... 470,673 516,405
Customer relationships................................ 504,904 553,961
Product design costs.................................. 861,367 886,897
Patents............................................... 1,235,300 1,102,821
Other................................................. 277,253 283,067
----------- -----------
Total............................................... 10,656,125 11,359,707
Accumulated amortization.............................. (6,600,788) (5,380,635)
----------- -----------
Intangible assets--net................................ $ 4,055,337 $ 5,979,072
=========== ===========
Amortization expense was $2,062,293, $3,625,045 and $2,630,671 in 2000, 1999
and 1998, respectively.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31
------------------------
2000 1999
----------- -----------
Accrued compensation and benefits..................... $ 2,185,314 $ 1,334,675
Accrued royalties and warranties...................... 183,385 227,486
Other accrued liabilities............................. 1,751,705 1,276,169
----------- -----------
$ 4,120,404 $ 2,838,330
=========== ===========
8. NOTES PAYABLE AND DEBT
The Company has an available line of credit of $1,000,000. Drawings under
the line of credit bear interest equivalent to a 30-day commercial paper rate
plus 2.65%. No amounts were outstanding on the line of credit at December 31,
2000 and 1999.
33
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt consists of the following:
December 31
-----------------
2000 1999
-------- -------
5.8% secured note............................................ $ -- $ 5,424
4-year, 5.9% automobile loan................................. 16,635 20,812
Obligations under capital leases............................. 50,022 --
-------- -------
66,657 26,236
Less current portion......................................... (17,397) (8,746)
-------- -------
$ 49,260 $17,490
======== =======
Long-term debt of $49,260 and $17,490 is included in other long-term
liabilities in the accompanying consolidated balance sheet as of December 31,
2000 and 1999, respectively. Long-term debt at December 31, 2000 is due as
follows: 2001--$17,397; 2002--$17,834; 2003--$16,264; 2004--$6,403 and 2005--
$5,996 and thereafter--$2,762.
The secured note was collateralized by a telephone system and was repaid in
full in 2000. In 1999, a subsidiary financed the purchase of a motor vehicle
with a term loan that expires in 2003. In 2000, a 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 at December 31, 2000.
9. RELATED PARTY TRANSACTIONS
Leases--The Company leases its plant and office building from Xenon
Research, Inc. ("Xenon"), a 26% 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 $355,000 in 2000, $358,000 in 1999, and
$300,000 in 1998.
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 4.3%, 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.
10. INCOME TAXES
Income (loss) before income taxes consisted of the following:
Years ended December 31
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Domestic................................ $ 1,814,032 $(2,508,948) $ 712,795
Foreign................................. (1,349,874) (6,007,338) (5,193,357)
----------- ----------- -----------
Income (loss) before income taxes....... $ 464,198 $(8,516,286) $(4,480,562)
=========== =========== ===========
34
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the income tax expense (benefit) are as follows:
Years ended December 31
----------------------------------
2000 1999 1998
-------- ----------- -----------
Current:
Federal................................. $503,000 $ (357,453) $ 75,174
State................................... 48,820 (55,333) 13,621
-------- ----------- -----------
551,820 (412,786) 88,795
-------- ----------- -----------
Deferred:
Federal................................. (115,891) (585,932) 107,597
State................................... (11,248) 10,174 10,666
Foreign................................. -- (132,920) 243,474
-------- ----------- -----------
(127,139) (708,678) 361,737
-------- ----------- -----------
Total income tax expense (benefit)........ $424,681 $(1,121,464) $ 450,532
======== =========== ===========
Income tax expense (benefit) for the years ended December 31, 2000, 1999 and
1998 differ from the amount computed by applying the federal statutory
corporate rate to income before income taxes. The differences are reconciled as
follows:
Years ended December 31
----------------------------------
2000 1999 1998
-------- ----------- -----------
Tax expense (benefit) at statutory rate... $157,827 $(2,895,537) $(1,523,391)
State income taxes, net of federal
benefit.................................. 55,155 (109,543) 46,719
Nontaxable interest income................ -- (141,180) (121,442)
Foreign tax rate difference............... 28,551 (986,167) (943,551)
Research and development credit........... (134,638) (171,059) (103,309)
Nondeductible items....................... 36,684 42,530 22,831
Change in deferred tax asset valuation
allowance................................ 430,392 3,028,662 3,033,000
Benefit of foreign sales corporation...... (85,188) -- --
Other..................................... (64,102) 110,830 39,675
-------- ----------- -----------
Total income tax expense (benefit)........ $424,681 $(1,121,464) $ 450,532
======== =========== ===========
35
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the Company's net deferred tax asset at December 31, 2000
and 1999 are as follows:
December 31
------------------------
2000 1999
----------- -----------
Net deferred tax asset--Current
Unearned service revenue............................ $ -- $ 6,780
Product design costs................................ (113,519) (124,303)
Tax credits and carryforwards....................... 36,839 2,686
Other............................................... 280,496 608,925
----------- -----------
Net deferred tax asset--Current................... $ 203,816 $ 494,088
=========== ===========
Net deferred tax asset--Non-current
Depreciation........................................ $ 291,145 $ 49,618
Employee stock options.............................. 183,986 150,363
Unearned service revenue............................ 200,193 106,305
Patent amortization................................. -- (48,373)
Intangible assets................................... 3,131,325 3,762,451
Tax credits and carryforwards....................... 3,360,729 2,299,211
Valuation allowance................................. (6,492,054) (6,061,662)
----------- -----------
Net deferred tax asset--Non current............... $ 675,324 $ 257,913
=========== ===========
At December 31, 2000, the Company's foreign subsidiaries had deferred tax
assets relating to net operating loss carryforwards, which do not expire, and
intangible assets of $3,360,729 and $3,131,325, respectively. For financial
reporting purposes, a valuation allowance of $6,492,054 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 noncancelable operating leases, including leases with related
parties (see Note 9), in effect at December 31, 2000:
Year Ending December 31 Amount
----------------------- ----------
2001............................................................. $1,082,222
2002............................................................. 858,093
2003............................................................. 745,367
2004............................................................. 643,290
2005............................................................. 398,281
----------
Total future minimum lease payments............................ $3,727,253
==========
Rent expense for 2000, 1999 and 1998 was approximately $1,100,000, $973,000,
and $641,000, respectively.
36
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 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.
12. STOCK OPTION PLANS AND STOCK WARRANTS
The Company has three stock option plans that provide for the granting of
stock options to key employees and nonemployee 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
Nonemployee Director Plan provides for granting nonqualified stock options and
formula options to nonemployee 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 133,218 options have
been granted at exercise prices of $.36 and $3.60, respectively. These options
vest primarily over 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 1,099,644 options have been granted
at exercise prices between $2.63 and $14.30 (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 Nonemployee Director Plan. Each nonemployee director is granted 3,000
options upon election to the Board of Directors (formula options). Formula
options granted 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 nonemployee 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.
Additionally, the Company's 1997 Non-Employee Directors' Fee Plan, which 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.
Compensation cost charged to operations associated with the Company's stock
option plans was $123,404, $168,912, and $172,164, in 2000, 1999 and 1998,
respectively. 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.
37
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of stock option activity and weighted average exercise prices
follows:
Years Ended December 31
-----------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning
of year................ 1,140,686 $ 9.79 1,194,165 $ 9.73 955,723 $ 8.00
Granted............... 260,050 2.70 66,000 4.76 535,381 8.64
Forfeited............. (108,249) 6.63 (108,106) 7.76 (84,470) 8.22
Exercised............. (1,172) 3.60 (11,373) 2.60 (212,469) 1.17
---------- ---------- ----------
Outstanding at end of
year................... 1,291,315 8.61 1,140,686 9.79 1,194,165 9.73
========== ========== ==========
Outstanding exercisable
at year-end............ 881,640 $10.23 659,275 $10.49 417,780 $10.78
Weighted-average fair
value of options
granted during the
year................... $ 1.63 $ 3.75 $ 5.26
A summary of stock options outstanding and exercisable as of December 31,
2000 follows:
Weighted-Average
Options Remaining Options
Exercise Price Outstanding Contractual Life (Years) Exercisable
- -------------- ----------- ------------------------ -----------
$0.36.......................... 27,859 4.97 27,859
$2.63-3.00..................... 219,550 9.13 0
$3.13-3.63..................... 240,060 7.75 167,726
$3.75-5.62..................... 34,000 8.47 10,999
$10.34-11.35................... 124,346 7.52 82,890
$12.00......................... 305,500 6.72 305,500
$13.00-13.20................... 240,000 4.74 220,000
$14.30......................... 100,000 7.16 66,666
--------- -------
1,291,315 881,640
========= =======
Remaining non-exercisable options as of December 31, 2000 become
exercisable as follows:
Year Ending
December 31 Amount
----------- -------
2001................................................................. 238,971
2002................................................................. 90,852
2003................................................................. 79,852
-------
409,675
=======
38
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
Year Ended December 31
-----------------------------------
2000 1999 1998
--------- ----------- -----------
Net income (loss)
As reported.............................. $ 39,517 $(7,394,822) $(4,931,094)
Pro forma................................ (943,306) (8,531,554) (5,720,379)
Loss per share--Basic
As reported.............................. $ -- $ (0.67) $ (0.46)
Pro forma................................ (0.09) (0.77) (0.54)
Loss per share--Diluted
As reported.............................. $ -- $ (0.67) $ (0.46)
Pro forma................................ (0.08) (0.77) (0.54)
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:
Year Ended December 31
---------------------------------------
2000 1999 1998
-------------- ---------- -------------
Risk-free interest rate................. 4.44% to 6.72% 5.50% 4.86 to 5.83%
Expected dividend yield................. 0% 0% 0%
Expected option life.................... 3-10 years 3-10 years 3-10 years
Stock price volatility.................. 65.30% 105.21% 91.32%
The effects of applying SFAS No. 123 for the pro forma disclosures are not
representative of the effects expected on reported net income (loss) and income
per share in future years since the disclosures do not reflect compensation
expense for options granted prior to 1996.
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:
Year Ended December
--------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
Per-Share Per-Share Per-Share
Shares Amount Shares Amount Shares Amount
---------- --------- ---------- --------- ---------- ---------
Basic EPS............... 11,021,606 $0.00 11,015,140 ($0.67) 10,632,708 ($0.46)
Effect of Dilutive
Securities:
Stock Options......... 72,538
---------- ---------- ----------
Diluted EPS............. 11,094,144 $0.00 11,015,140 ($0.67) 10,632,708 ($0.46)
========== ========== ==========
14. BENEFIT 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
39
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Directors. Discretionary contributions or employer matches can be made to the
participant's account but cannot exceed 6% of compensation. The Company
contribution (expense) during 2000 was approximately $35,000. 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
---------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- -----------------------
Long-lived Long-lived Long-lived
Sales Assets Sales Assets Sales Assets
----------- ---------- ----------- ---------- ----------- -----------
United States........... $19,997,884 $2,326,790 $17,687,875 $2,522,654 $14,740,829 $ 2,707,921
Germany................. 8,557,809 3,385,662 6,321,760 5,083,420 4,920,197 11,592,359
United Kingdom.......... 2,603,297 -- 2,568,020 -- 1,916,115 --
France.................. 2,927,787 9,136 1,716,031 41,145 1,647,798 --
Other Foreign........... 6,366,136 136,031 4,812,054 -- 4,289,760 46,103
----------- ---------- ----------- ---------- ----------- -----------
$40,452,913 $5,857,619 $33,105,740 $7,647,219 $27,514,699 $14,346,383
=========== ========== =========== ========== =========== ===========
The above geographical information represents sales to the respective
countries, whereas long-lived assets are held in the respective countries.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
March 31, June 30, September 30, December 31,
Quarter Ended 2000 2000 2000 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
March 31, June 30, September 30, December 31,
Quarter Ended 1999 1999 1999 1999
- ------------- ----------- ---------- ------------- ------------
Sales...................... $ 6,904,496 $8,611,436 $ 7,025,005 $10,564,803
Gross profit............... 4,165,767 5,163,983 3,633,976 5,981,076
Net loss................... (1,140,791) (164,555) (1,663,750) (4,425,726)
Net loss per share:
Basic.................... (0.10) (0.01) (0.15) (0.40)
Diluted.................. (0.10) (0.01) (0.15) (0.40)
40
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fourth quarter of 1999 includes unusual charges of approximately
$3,073,000 related to the impairment of existing developed and core software
technology acquired from CATS GmbH; unusual charges of approximately $900,000
related to obsolete inventory and a write-down of demonstration inventory,
which was identified during a worldwide physical inventory; and unusual charges
of approximately $1,200,000 related to the write-off of certain patents and
capitalized research and development costs due to changes in technology.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information contained in the Company's report on Form 8-K dated August
21, 2000 is incorporated herein by reference.
41
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 "Compensation Committee Report 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 "Beneficial Owners and Management" 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.
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
(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.
42
(3) Exhibits.
Exhibit No. Description
----------- -----------
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 Term WCMA Loan and Security Agreement, dated September 24, 1996,
between the Registrant and Merrill Lynch Business Financial
Services, Inc. (Filed as Exhibit 10.5 to Registrant's Registration
Statement on Form S-1, No. 333-32983, and incorporated herein by
reference)
10.6 WCMA Note, Loan and Security Agreement, dated April 23, 1997,
between the Registrant and Merrill Lynch Business Financial
Services, Inc. (Filed as Exhibit 10.6 to Registrant's Registration
Statement on Form S-1, No. 333-32983, and incorporated herein by
reference)
10.7 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)
10.8 OEM Purchase Agreement, dated June 7, 1996 between the Company and
Mitutoyo Corporation (Filed as Exhibit 10.8 to Registrant's
Registration Statement on Form S-1, No. 333-32983, and
incorporated herein by reference)
10.9 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)
10.10 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)
10.11 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, 0-
23081, and incorporated herein by reference)
10.12 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)
10.13 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. 000-23081 and incorporated herein by reference)
43
Exhibit No. Description
----------- -----------
10.14 Extension of WCMA Line of Credit No. 740-07K27 dated March 31,
1999 between the registrant and Merrill Lynch Business Financial
Services, Inc. (Filed as Exhibit 10.15 to Registrant's Form 10-K
for calendar year 1999, No. 0-23081 and incorporated herein by
reference)
10.15 OEM Contract (1) year extension, signed March 1, 2001,
respectively, between the Registrant and Brown & Sharpe
Manufacturing Company. (Filed herewith)
10.16 Extension of WCMA Line of Credit No. 740-07K27 dated March 30,
2000 between the Registrant and Merrill Lynch Business Financial
Services, Inc. (Filed herewith)
11.1 Statement regarding Computation of Per Share Earnings
(Incorporated by reference from page 1 to the Registrant's 2000
Annual Report to Stockholders filed as Exhibit 13.1)
13.1 Annual Report to Stockholders for the year ended December 31, 2000
(To be deemed filed herewith only to the extent required by the
instructions to exhibits for reports on Form 10-K)
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 45 of this Report)
99.1 Properties (Filed herewith)
(b) Reports on Form 8-K
Change in Registrant's Certifying Accountants, filed August 21, 2000 with
SEC.
44
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 30, 2001
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 30, 2001
______________________________________ President, Chief
Simon Raab Executive Officer
(Principal Executive
Officer), and Director
/s/ Gregory A. Fraser Executive Vice President, March 30, 2001
______________________________________ Secretary, Treasurer, and
Gregory A. Fraser Director
/s/ Hubert d'Amours Director March 30, 2001
______________________________________
Hubert d'Amours
/s/ Stephen R. Cole Director March 30, 2001
______________________________________
Stephen R. Cole
/s/ Alexandre Raab Director March 30, 2001
______________________________________
Alexandre Raab
/s/ Norman H. Schipper Director March 30, 2001
______________________________________
Norman H. Schipper
/s/ Andre Julien Director March 30, 2001
______________________________________
Andre Julien
45