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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM_____TO______.
COMMISSION FILE NUMBER 0-23081
FARO TECHNOLOGIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-3157093
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
125 TECHNOLOGY PARK 32746
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LAKE MARY, FLORIDA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (407) 333-9911
SECURITIES 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 definitive 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 24, 2000, there were outstanding 11,354,014 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 24, 2000 was $48,254,560.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS FORM 10-K REFERENCE
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Portions of the Proxy Statement, dated March 29, 2000 Part III, Items 10-13
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PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
FARO Technologies, Inc. (the "Company") has made forward-looking
statements in this document that are subject to risks and uncertainties. The
statements contained in this report on Form 10-K that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including statements regarding the Company's expectations, hopes, beliefs,
intentions, or strategies regarding the future. Forward looking statements
include statements regarding, among other things: (i) the potential loss of
material customers; (ii) the failure to properly manage growth and successfully
integrate acquired businesses; (iii) the Company's financing plans; (iv) trends
affecting the Company's financial condition or results of operations; (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) the declaration and payment of dividends; and (xi) the
potential for unfavorable interpretation of existing government regulations or
new government legislation. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statement. Among the
factors that could cause actual results to differ materially are the factors
detailed in Items 1 through 3 and 7 of this report and the risks discussed
under the caption "Risk Factors" included in the Company's filings under the
Securities Act of 1933. Prospective investors should also consult the risks
described from time to time in the Company's Reports on Form 10-Q, 8-K, 10-K
and Annual Reports to Shareholders.
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.
1
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 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 CMM's require that the
object being measured be brought to the CMM and that the object fit within the
CMM's 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
2
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. In May 1998 the Company acquired CATS
Computer Aided Technologies, GmbH ("CATS"), a German company which develops and
markets CAD-based inspection and statistical process control ("SPC") software.
The acquisition of CATS provides the Company with a stronger marketing presence
in Europe, as well as an expanded software product line under the Company's CAM2
(formerly AnthroCam(R))product name. 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 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 30 patents in the United States,
19 of which also are held or pending in other jurisdictions. The Company's
products have been purchased by more than 1,500 customers worldwide, ranging
from small machine shops to such large manufacturing and industrial companies as
General Motors, DaimlerChrysler, Ford, Boeing, Lockheed Martin, General
Electric, Westinghouse Electric, Caterpillar and Komatsu Dresser.
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.
3
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 Sterling 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 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.
STERLING SERIES. The Sterling 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.
4
CAM2 (FORMERLY ANTHROCAM(R)). CAM2 is the Company's 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.
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 $16,000.
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.
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 and
multimedia applications. License and support fees from these products do not
represent a significant portion of the Company's revenues and the Company does
not intend to actively market these products.
5
CUSTOMERS
The Company's products have been purchased by more than 1,500 customers
ranging from small machine shops to large manufacturing and industrial
companies. The Company's ten largest customers by revenue represented an
aggregate of 15.6% of the Company's total revenues in 1999. No customer
represented 6.0% or more of the Company's sales in 1999. The following table
illustrates, by vertical market, the Company's diverse customer base:
ELECTRIC UTILITIES
AEROSPACE AUTOMOTIVE AND MANUFACTURERS
--------- ---------- -----------------
Boeing Daimler Chrysler General Electric
Lockheed Martin General Motors Westinghouse
Northrop Grumman Ford Southern California Edison
Orbital Sciences Honda Tennessee Valley Authority
Dee Howard Toyota Abb Power Generation
Hughes Brothers Nissan Hydro Quebec
Nordam Repair Div. Porsche TurboCare
Ball Aerospace Volkswagen Potomac Electric Power
BMW Turbine Technology
International
HEAVY EQUIPMENT CONSUMER PRODUCTS MISCELLANEOUS
--------------- ----------------- -------------
John Deere Harley Davidson Bill Elliott Racing
Case Corporation Polaris American Sheet Metal
Caterpillar Bombardier Monyo Oil Field Products
Komatsu Dresser Xerox Atlas Foundry
Clark Industries Hewlett Packard Molded Fiberglass
Ingersol Rand Fountain Power Boats Creative Foam Products
AGCO Taylor Made Products Able Design Plastics
Hay and Forage Mercury Marine APW Enclosures
Melroe Company Amana Applied Composites
Volvo Construction Equipment Braun Corporation Kolenda Tool and Die
Renault Agriculture Eastman Kodak Charmalloy Castings
SALES AND MARKETING
The Company directs its sales and marketing efforts from its headquarters
in Lake Mary, Florida. At December 31, 1999, the Company employed 85
sales/application engineering professionals who operate from the Company's
headquarters, and include seven domestic regional sales representatives located
in Charlotte, Chicago, Columbus (Ohio), Dallas, Detroit, Los Angeles and
Seattle, four German regional sales offices in Stuttgart, Munich, Peine, and
Gladbeck, and sales offices located in Coventry, United Kingdom, and suburban
Paris, France. The Company also utilizes 11 domestic and 20 international
distributors in territories where the Company does not have regional sales
offices. See Footnote 14 to the Notes to Consolidated Financial Statements
incorporated by reference herein from Item 8 hereof for financial information
about the Company's foreign and domestic operations and export sales required
by this Item.
6
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 has a computerized sales and
marketing software system with telemarketing, lead tracking and analysis, as
well as customer support capabilities. 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 2000 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 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 2001, 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.
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 measurement technologies and
additional features for existing products. See "Technology".
7
At December 31, 1999, the Company employed 49 scientists and technicians
in its research and development efforts. Research and development expenses were
approximately $3.8 million in 1999 as compared to $2.6 million in 1998 and $1.1
million in 1997. 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) 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) 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.
8
ELECTRONICS. An on-board computer that is designed to handle complex
analyses of joint data as well as communications with a variety of host
computers processes the rotational information for each joint. The Company's
electronics are based on digital signal processing and surface mount
technologies. The Company's products meet all mandatory electronic safety
requirements. Advanced circuit board development, surface mount production and
automated testing methods are used to ensure low cost and high reliability.
SOFTWARE. CAM2 is a Windows-based, 32-bit application family written for
the most recent PC-based technology. CAM2 has been entirely designed and
programmed by the Company utilizing field input and industry wide beta site
installations. CAM2 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 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.
INTELLECTUAL PROPERTY
The Company holds or has pending 30 patents in the United States, 19 of
which are also held or pending in other jurisdictions. The Company also has 12
registered trademarks in the United States, 18 foreign registered trademarks,
10 trademark applications pending in the United States and 11 foreign trademark
applications pending.
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
9
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 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. Three successive 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.
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
10
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 only significant direct competitor for its FAROArm(R) and
related software is a joint venture of Romer SRL (France) and Romer, Inc.
(California). 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 negligible sales. The Company also has
an established, indirect competitor in Japan that markets a measuring device
that is mobile but not portable. 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.
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, 1999, the Company had orders representing approximately
$1.8 million in sales. Substantially all outstanding orders at December 31,
1999 were shipped by March 20, 2000.
EMPLOYEES
At December 31, 1999, the Company had 217 full-time employees, consisting
of 85 sales/application-engineering professionals, 34 production staff, 49
research and development staff, 36 administrative staff, and 13 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
the staffing requirements caused by its planned expansion over the next 12
months.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their ages, are as follows:
NAME AGE PRINCIPAL POSITION
- ---- --- ------------------
EXECUTIVE OFFICERS:
Simon Raab, Ph.D. ................ 47 Chairman of the Board, Chief Executive Officer,
and President
Gregory A. Fraser, Ph.D. ......... 45 Executive Vice President, Secretary, and
Treasurer
Stuart W. Jones .................. 43 Vice President and Chief Financial Officer
SIMON RAAB, PH.D., a co-founder of the Company, has served as the Chairman
of the Board, Chief Executive Officer and a director of the Company since its
inception in 1982 and as President since 1986. Mr. Raab holds a Ph.D. in
Mechanical Engineering from McGill University, Montreal, Canada, a Masters of
Engineering Physics from Cornell University and a Bachelor of Science in
Physics with a minor in Biophysics from the University of Waterloo, Canada.
GREGORY A. FRASER, PH.D., a co-founder of the Company, has served as
Executive Vice President, Secretary, and Treasurer since August 1999. Prior to
that Mr. Fraser served as Chief Financial Officer and Executive Vice President
since May 1997 and as Secretary, Treasurer and a director of the Company since
its inception in 1982. Mr. Fraser holds a Ph.D. in Mechanical 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.
STUART W. JONES has served as Vice President and Chief Financial Officer
since August 1999. Prior to that Mr. Jones served as Chairman, President and
Chief Executive Officer of Metermaster Inc. since 1998, and as Executive Vice
President and Chief Financial Officer of Metermaster Inc. since 1995. Mr. Jones
holds an MBA in Finance and Marketing from the University of Illinois and a
Bachelor of Science in Accounting from the University of Virginia.
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 has
a combined sales and training facility which is located in a leased building in
Wixom, Michigan containing approximately 4,300 square feet. The Company has a
combined sales and research and development facility, which 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.
12
In addition, the Company has five sales offices in Europe. 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 1999.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, par value $.001 per share, began trading on
the NASDAQ Stock Market on September 18, 1997, under the symbol FARO. Before
that date, there was no established public trading market for the Common Stock.
The following table sets forth the high and low sale price of the Company's
Common Stock for its two most recent fiscal years:
1999
----------------
HIGH LOW
------- ------
First Quarter ............ 7 3 3/4
Second Quarter ........... 6 7/16 4 5/8
Third Quarter ............ 6 2 3/4
Fourth Quarter ........... 5 2 1/4
1998
----------------
HIGH LOW
----- -----
First Quarter ............ 14 1/2 10
Second Quarter ........... 12 1/2 9 1/4
Third Quarter ............ 11 3/8 2 3/8
Fourth Quarter ........... 4 1/16 2 3/8
The Company has not paid any cash dividends on its Common Stock to date.
The payment of dividends, if any in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition, and may be restricted by future credit
arrangements entered into by the Company. The Company expects to retain future
earnings for use in operating and expanding its business and does not
anticipate paying any cash dividends in the reasonably foreseeable future. As
of March 24, 2000, the last sale price of the Company's Common Stock was $4.25,
and there were approximately 76 holders of record of Common Stock. The Company
believes that there are approximately 1,900 beneficial owners of its Common
Stock.
On August 10, 1998 the prospectus comprising part of the Company's
Registration Statement on Form S-1, File No. 333-57395, was declared effective
by the Securities and Exchange Commission. Common Stock was the only class of
securities registered. Of the 343,750 shares registered, none had been sold as
of March 24, 2000.
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. During the
period August 26, 1998 to December 31, 1998 the Company purchased 40,000 shares
of Common Stock in the open market. During the year ended December 31, 1999 the
Company did not purchase any shares of its Common Stock in the open market.
14
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Sales ................................. $ 33,105,740 $ 27,514,699 $ 23,516,385 $14,656,337 $9,862,242
Cost of sales ......................... 14,160,938 11,291,313 9,610,838 6,486,268 4,987,779
- --------------------------------------------------------------------------------------------------------------------
Gross profit .......................... 18,944,802 16,223,386 13,905,547 8,170,069 4,874,463
Operating expenses:
Selling ............................... 12,139,567 9,960,914 5,676,113 3,731,762 2,008,301
General and administrative ............ 4,974,558 3,161,599 1,519,657 744,206 503,184
Depreciation and amortization ......... 4,465,441 2,816,135 293,996 230,799 341,494
Research and development .............. 3,828,801 2,587,181 1,075,505 730,124 363,871
Employee stock options ................ 168,912 172,164 408,000 23,100 106,700
Impairment loss on acquired
intangible assets .................... 3,073,000
In-process research and
development resulting from
acquisition .......................... 3,210,000
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses .............. 28,650,279 21,907,993 8,973,271 5,459,994 3,323,550
- --------------------------------------------------------------------------------------------------------------------
(Loss) income from operations ......... (9,705,477) (5,684,607) 4,932,276 2,710,075 1,550,913
Other income (expense):
Interest income ....................... 715,953 1,077,713 442,444
Other income .......................... 475,162 139,355 57,308 25,145 62,212
Interest expense ...................... (1,924) (13,023) (110,768) (212,669) (355,468)
- --------------------------------------------------------------------------------------------------------------------
(Loss) income before taxes ............ (8,516,286) (4,480,562) 5,321,260 2,522,554 1,257,657
Income tax (benefit) expense .......... (1,121,464) 450,532 2,114,630 1,115,892 (342,000)
- --------------------------------------------------------------------------------------------------------------------
Net (loss) income ..................... $ (7,394,822) $ (4,931,094) $ 3,206,630 $ 1,406,662 $1,599,657
- --------------------------------------------------------------------------------------------------------------------
Net (loss) income per
common share:
Basic ................................. $ (0.67) $ (0.46) $ 0.41 $ 0.20 $ 0.23
Diluted ............................... (0.67) (0.46) 0.39 0.19 0.22
Weighted average common
shares outstanding:
Basic ................................. 11,015,140 10,632,708 7,831,715 7,000,000 7,000,000
Diluted ............................... 11,015,140 10,632,708 8,189,048 7,349,041 7,166,739
AT DECEMBER 31
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
DATA:
Working capital ....................... $ 24,869,844 $ 30,997,769 $ 37,277,545 $ 3,832,424 $1,321,517
Total assets .......................... 42,103,912 49,120,147 41,192,333 7,815,668 5,479,698
Total debt ............................ 26,236 337,710 1,501,267 2,200,000
Total shareholders' equity ............ 36,599,346 45,375,391 38,939,411 3,773,699 2,343,937
15
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. In May 1998 the Company acquired CATS
Computer Aided Technologies, GmbH ("CATS"), a German company which develops and
markets CAD-based inspection and statistical process control ("SPC") software.
The Company's principal products are the FAROArm(R) articulated measuring device
and its multi-faceted CAM2 (formerly AnthroCam(R)) 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
technology in manufacturing and industrial applications and currently holds or
has pending 30 patents in the United States, 19 of which also are held or
pending in other jurisdictions. The Company's products have been purchased by
more than 1,500 customers worldwide, ranging from small machine shops to such
large manufacturing and industrial companies as General Motors,
Daimler-Chrysler, Ford, Boeing, Lockheed Martin, General Electric, Westinghouse
Electric, Caterpillar and Komatsu Dresser.
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 and Great Britain in 1997. International sales represented
34.3% of sales in 1997 and 46.4% of sales in 1998, and 46.6% of sales in 1999.
16
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 these products is recognized upon shipment.
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, expanded promotional efforts and the
acquisition of CATS. In September 1998 the Company announced the introduction
of a new product line consisting of two additional FAROArm models, and the
addition of 3 new software components to the CAM2 family, from the CATS
acquisition.
In addition to providing a one-year basic warranty without additional
charge, the Company offers its customers one, two and three-year extended
maintenance contracts, which include on-line help services, software upgrades
and hardware warranties. In addition, the Company sells training and technology
consulting services relating to its products. The Company recognizes the
revenue from extended maintenance contracts proportionately as costs are
projected to be incurred.
Cost of sales consists primarily of material, production overhead and
labor. Selling expenses consist primarily of salaries and commissions to sales
and marketing personnel, and promotion, advertising, travel and
telecommunications. General and administrative expenses consist primarily of
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.
17
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:
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Sales ................................................................... 100.0% 100.0% 100.0%
Cost of Sales ........................................................... 42.7% 41.0% 40.9%
----- ----- -----
Gross profit ............................................................ 57.3% 59.0% 59.1%
Operating expenses:
Selling ................................................................ 36.7% 36.2% 24.1%
General and administrative ............................................. 15.0% 11.5% 6.5%
Depreciation and amortization .......................................... 13.5% 10.2% 1.3%
Research and development ............................................... 11.6% 9.4% 4.6%
Employee stock options ................................................. 0.5% 0.6% 1.7%
Impairment loss on acquired intangible assets .......................... 9.3% 0.0% 0.0%
In-process research and development resulting from acquisition ......... 0.0% 11.7% 0.0%
----- ----- -----
Total operating expenses .............................................. 86.6% 79.6% 38.2%
----- ----- -----
(Loss) income from operations ........................................... (29.3)% (20.7)% 21.0%
Interest income ......................................................... 2.2% 3.9% 1.9%
Other income (expense) .................................................. 1.4% 0.5% 0.2%
Interest expense ........................................................ 0.0% 0.0% ( 0.5)%
----- ----- -----
Net (loss) income before income taxes ................................... (25.7)% (16.3)% 22.6%
Income tax (benefit) expense ............................................ ( 3.4)% 1.6% 9.0%
----- ----- -----
Net (loss) income ....................................................... (22.3)% (17.9)% 13.6%
===== ===== =====
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), the three
European countries with a direct Company presence ($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
18
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 credit.
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 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. 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 software
19
technology acquired with the German acquisition. Amortization expenses in 2000
will drop by approximately $850,000 at present exchange rates as a result of
the impairment loss.
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 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.
1998 COMPARED TO 1997
SALES. Sales increased $4.0 million, or 17.0%, from $23.5 million in 1997
to $27.5 million in 1998. The increase was a result of increases in sales in
Europe ($5.4 million) and Canada ($0.6 million), offset by decreases in sales
in Asia ($1.0 million) and the United States ($0.8 million).
GROSS PROFIT. Gross profit increased $2.3 million, or 16.7%, from $13.9
million in 1997 to $16.2 million in 1998. This increase was a result of a
proportional increase in sales in 1998, at a gross margin of 59.0%, virtually
unchanged from 59.1% in 1997.
SELLING EXPENSES. Selling expenses increased $4.3 million, or 75.5%, from
$5.7 million in 1997 to $10.0 million in 1998. This increase was primarily the
result of a 100% increase in the number of sales and marketing staff, and their
resulting sales activities. The number of sales and marketing employees grew
from 34 at December 31, 1997 to 68 at December 31, 1998. The cost per sales
employee was higher in 1998 in part as a result of the greater proportion
(primarily as a result of the CATS acquisition) of European employees and the
higher cost of payroll benefits and travel costs in Europe.
20
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $1.7 million, or 113.3% from $1.5 million in 1997, to $3.2 million in
1998. This increase resulted primarily from the increased number of
administrative personnel both at the Company's headquarters and from the
acquisition of CATS.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased $2.5 million or 833.3%, from $0.3 million in 1997 to $2.8
million in 1998. This increase was primarily due to $2.2 million in
amortization expenses related to the intangible assets associated with the
Company's acquisition of CATS.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $1.5 million, or 136.4%, from $1.1 million in 1997 to $2.6 million in
1998. This increase was a result of an increase in the number of research and
development employees from 14 at December 31, 1997 to 43 at December 31, 1998.
EMPLOYEE STOCK OPTIONS. Employee stock option expenses decreased $0.2
million or 50.0%, from $0.4 million in 1997 to $0.2 million in 1998. This
decrease was a result of a reduction in the amortized deferred compensation
expense relating to stock options issued in 1995 and 1997. For all options
issued in 1998, no compensation expense was recorded, as the exercise price of
the options was equal to the market price at the day of the grant.
IN-PROCESS RESEARCH AND DEVELOPMENT RESULTING FROM ACQUISITION. On May 15,
1998 the Company acquired CATS for $5 million and 916,668 shares of the
Company's Common Stock and the assumption of certain liabilities. The $3.2
million portion of the purchase price that was attributed to in-process
research and development and was expensed immediately.
INTEREST INCOME. Interest income increased $0.7 million or 175.0%, from
$0.4 million in 1997 to $1.1 million in 1998. This increase was a result of a
full year of interest in 1998 on the remaining portion of the proceeds from the
Company's initial public offering in September 1997, compared to approximately
three months of interest on the portion of these proceeds which were invested
in 1997.
INCOME TAX EXPENSE. Income tax expense decreased $1.6 million or 76.2%
from $2.1 million in 1997 to $0.5 million in 1998. The income tax provision in
1998 results primarily from the Company's U.S operations being in a taxable
position, and the deferred tax benefit of the Company's foreign loss being
offset by a $3 million valuation allowance.
NET INCOME (LOSS). The Company's net income (loss) for 1998 decreased $8.1
million, from net income of $3.2 million in 1997 to a net loss of $4.9 million
in 1998. This decrease was a result of a one-time in-process research and
development charge ($3.2 million), amortization costs related to the CATS
acquisition ($2.2 million), and higher sales, general and administrative, and
research and development expenses as a percentage of sales.
21
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, 1999 were $16.9 million, compared to $18.2 million at December
31, 1998.
For the year ended December 31, 1999, net cash provided by operating
activities was $1.5 million compared to net cash used by operating activities
of $3.1 million in 1998. Net cash provided by operating activities in 1999,
increased primarily due to non-cash depreciation and amortization ($4.5
million) and the impairment loss ($3.1 million) and increases in accounts
payable and accrued liabilities ($2.4 million), partially offset by the net
loss ($7.4 million) and increases in accounts receivable ($1.0 million).
Net cash (excluding short-term investments and investments) provided by
investing activities (primarily conversions of investments into cash and cash
equivalents, which yielded equivalent interest rates at year end) for the year
ended December 31, 1999 was $5.3 million, compared to net cash used in
investing activities of $25.2 million in 1998. Net cash provided by investing
activities increased in 1999 primarily due to decreases in investments ($6.8
million), partially offset by purchases of property and equipment ($1.1
million) and payments for intangible assets ($0.3 million).
Net cash used in financing activities for the year ended December 31, 1999
was $0.3 million, compared to net cash provided by financing activities of $0.3
million in 1998. 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.
Exchange rate changes resulted in a $1.1 million impact on the Company's
cash.
In April 1997, the Company obtained a one-year secured $1.0 million line
of credit that bears interest at the 30-day commercial paper rate plus 2.65%
per annum. The line of credit has been extended twice for additional one-year
terms. There were no outstanding borrowings under this loan agreement at
December 31, 1999.
The Company's principal commitments at December 31, 1999 were leases on
its headquarters and regional offices. There were no material commitments for
capital expenditures at that date. The Company believes that its cash,
investments, cash flows from operations and funds available from its credit
facilities will be sufficient to satisfy its working capital and capital
expenditure needs at least through 2000.
22
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, particularly its
operating margins, and could also result in exchange losses. The impact of
future exchange rate fluctuations on the results of the Company's operations
cannot be accurately predicted. Historically, the Company has not managed the
risks associated with fluctuations in exchange rates, but intends to undertake
transactions to manage such risks in the future. To the extent that the
percentage of the Company's non-U.S. dollar revenues derived from international
sales increases in the future, the risks associated with fluctuations in
foreign exchange rates will increase. The Company at present is evaluating, and
may use foreign exchange contracts with foreign currency options to hedge these
risks.
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 2000.
YEAR 2000
During fiscal 1999, the Company completed its company-wide program to
prepare the Company's computer systems for year 2000 compliance. The year 2000
issue relates to computer systems that use the last two digits rather than four
to define a year and whether such systems would properly and accurately process
information when the year changed to 2000.
At the date of this report, the Company had not experienced any material
problems related to the year 2000. The Company has not become aware of any
significant year 2000 issues affecting the Company's major customers or
suppliers. The Company does not anticipate any material complaints regarding
any year 2000 issues related to its products.
Year 2000 related costs through December 31, 1999 were limited to
employees' time and were expensed as incurred. The remaining estimated cost to
address any additional year 2000 problems is deemed immaterial. No significant
information system projects were deferred to accommodate the year 2000 issues.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Independent Auditors' Report .......................................... 25
Consolidated Balance Sheets as of December 31, 1999 and 1998 .......... 26
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 ..................................... 27
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 ..................................... 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 ..................................... 29
Notes to Consolidated Financial Statements ............................ 30
24
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 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three 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 1998, and the results of their
operations and their cash flows for each of the three 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
25
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
---------------------------------
1999 1998
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 6,637,184 $ 1,183,656
Short-term investments .................................................. 6,494,262 17,011,831
Accounts receivable, less allowance
for doubtful accounts of $334,612 and $139,690 ........................ 9,812,838 8,963,343
Refundable income taxes ................................................. 234,470 716,048
Inventories ............................................................. 6,199,414 6,443,618
Prepaid expenses and other assets ....................................... 447,894 155,037
Deferred income taxes ................................................... 494,088 121,543
------------ ------------
Total current assets .................................................. 30,320,150 34,595,076
------------ ------------
PROPERTY AND EQUIPMENT -- at cost:
Machinery and equipment ................................................. 2,895,706 1,873,146
Furniture and fixtures .................................................. 1,094,927 899,616
Leasehold improvements .................................................. 34,086 28,889
------------ ------------
Total ................................................................. 4,024,719 2,801,651
Less accumulated depreciation and amortization .......................... (2,356,572) (1,276,459)
------------ ------------
Property and equipment -- net ......................................... 1,668,147 1,525,192
------------ ------------
INTANGIBLE ASSETS -- net ................................................. 5,979,072 12,821,191
INVESTMENTS .............................................................. 3,747,694
NOTES RECEIVABLE ......................................................... 130,936 178,688
DEFERRED INCOME TAXES .................................................... 257,913
------------ ------------
TOTAL ASSETS ............................................................. $ 42,103,912 $ 49,120,147
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable to banks ....................................... $ 296,230
Current portion of long-term debt ....................................... $ 8,746 4,156
Accounts payable ........................................................ 2,200,408 2,020,359
Accrued liabilities ..................................................... 2,838,330 832,093
Current portion of unearned service revenues ............................ 317,918 329,731
Customer deposits ....................................................... 84,904 114,738
------------ ------------
Total current liabilities ............................................. 5,450,306 3,597,307
DEFERRED INCOME TAXES .................................................... 78,220
OTHER LONG-TERM LIABILITIES .............................................. 54,260 69,229
------------ ------------
Total liabilities ..................................................... 5,504,566 3,744,756
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 10)
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,
11,392,842 and 11,048,137 issued; 11,019,510 and 11,008,137
outstanding ........................................................... 11,060 11,048
Additional paid-in capital .............................................. 47,544,844 47,520,732
Unearned compensation ................................................... (123,404) (292,316)
Accumulated deficit ..................................................... (9,307,651) (1,912,829)
Other comprehensive (loss) income ....................................... (1,374,878) 199,381
Common stock in treasury, at cost -- 40,000 shares in 1999 and 1998 ..... (150,625) (150,625)
------------ ------------
Total shareholders' equity ............................................ 36,599,346 45,375,391
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................... $ 42,103,912 $ 49,120,147
============ ============
See notes to consolidated financial statements.
26
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
SALES ........................................ $ 33,105,740 $ 27,514,699 $ 23,516,385
COST OF SALES ................................ 14,160,938 11,291,313 9,610,838
------------ ------------ ------------
Gross profit .............................. 18,944,802 16,223,386 13,905,547
------------ ------------ ------------
OPERATING EXPENSES:
Selling ..................................... 12,139,567 9,960,914 5,676,113
General and administrative .................. 4,974,558 3,161,599 1,519,657
Depreciation and amortization ............... 4,465,441 2,816,135 293,996
Research and development .................... 3,828,801 2,587,181 1,075,505
Employee stock options ...................... 168,912 172,164 408,000
Impairment loss on acquired intangible assets 3,073,000
In-process research and development
resulting from acquisition ................ 3,210,000
------------ ------------ ------------
Total operating expenses .................. 28,650,279 21,907,993 8,973,271
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS ................ (9,705,477) (5,684,607) 4,932,276
OTHER INCOME (EXPENSE):
Interest income ............................. 715,953 1,077,713 442,444
Other income ................................ 475,162 139,355 57,308
Interest expense ............................ (1,924) (13,023) (110,768)
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES ............ (8,516,286) (4,480,562) 5,321,260
INCOME TAX (BENEFIT) EXPENSE ................. (1,121,464) 450,532 2,114,630
------------ ------------ ------------
NET (LOSS) INCOME ............................ $ (7,394,822) $ (4,931,094) $ 3,206,630
============ ============ ============
NET (LOSS) INCOME PER COMMON
SHARE -- BASIC ............................. $ (0.67) $ (0.46) $ 0.41
============ ============ ============
NET (LOSS) INCOME PER COMMON
SHARE -- DILUTED ........................... $ (0.67) $ (0.46) $ 0.39
============ ============ ============
See notes to consolidated financial statements.
27
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
---------------------- PAID-IN UNEARNED
SHARE AMOUNTS CAPITAL COMPENSATION
------------ --------- -------------- --------------
BALANCE, JANUARY 1, 1997 ............ 7,000,000 $ 7,000 $ 3,961,564 $ (6,500)
Net income .........................
Currency translation adjustment,
net of tax ........................
Comprehensive
income ............................
Granting of employee and
director stock options ............ 866,793 (501,834)
Amortization of unearned
compensation ...................... 43,854
Issuance of common stock ........... 2,919,000 2,919 31,673,647
--------- ------- ----------- ----------
BALANCE, DECEMBER 31, 1997 9,919,000 9,919 36,502,004 (464,480)
Net loss ...........................
Currency translation adjustment,
net of tax ........................
Comprehensive loss .................
Issuance of common stock ........... 1,129,137 1,129 10,323,564
Income tax benefit resulting from
the exercise of stock options ..... 695,164
Amortization of unearned
compensation ...................... 172,164
Acquisition of treasury stock ......
---------- ------- ---------- ----------
BALANCE, DECEMBER 31, 1998 11,048,137 11,048 47,520,732 (292,316)
Net loss ...........................
Currency translation adjustment,
net of tax ........................
Comprehensive loss .................
Issuance of common stock ........... 11,373 12 24,112
Amortization of unearned
compensation ...................... 168,912
---------- ------- ---------- ----------
BALANCE, DECEMBER 31, 1999 11,059,510 $11,060 $47,544,844 $ (123,404)
========== ======= =========== ==========
ACCUMULATED
RETAINED OTHER
EARNINGS COMPREHENSIVE
(ACCUMULATED (LOSS) TREASURY
DEFICIT) INCOME STOCK TOTAL
---------------- ---------------- -------------- ---------------
BALANCE, JANUARY 1, 1997 ............ $ (188,365) $ 3,773,699
-----------
Net income ......................... 3,206,630 3,206,630
Currency translation adjustment,
net of tax ........................ $ (126,297) (126,297)
-----------
Comprehensive
income ............................ 3,080,333
Granting of employee and
director stock options ............ 364,959
Amortization of unearned
compensation ...................... 43,854
Issuance of common stock ........... 31,676,566
---------- ----------- -----------
BALANCE, DECEMBER 31, 1997 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)
Issuance of common stock ........... 10,324,693
Income tax benefit resulting from
the exercise of stock options ..... 695,164
Amortization of unearned
compensation ...................... 172,164
Acquisition of treasury stock ...... $ (150,625) (150,625)
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 (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 ........... 24,124
Amortization of unearned
compensation ...................... 168,912
----------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1999 $(9,307,651) $(1,374,878) $ (150,625) $36,599,346
=========== =========== ========== ===========
See notes to consolidated financial statements.
28
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31
--------------------------------------------------------
1999 1998 1997
----------------- ----------------- ----------------
CASH FLOWS FROM:
OPERATING ACTIVITIES:
Net (loss) income .............................................. $ (7,394,822) $ (4,931,094) $ 3,206,630
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................. 4,465,441 2,858,108 293,996
Bad debt expense, net of charge offs .......................... 120,812 107,004 708
Inventory reserve ............................................. 627,411
Impairment loss on acquired intangible assets ................. 3,073,000
In-process research and development resulting from
acquisition ................................................. 3,210,000
Deferred income tax ........................................... (708,678) 361,737 (125,107)
Loss on disposal of fixed assets .............................. 5,400 10,850
Employee stock options ........................................ 168,912 172,164 408,000
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable .......................................... (1,048,086) (1,866,792) (3,167,200)
Refundable income taxes ...................................... 481,578 (716,048)
Inventories .................................................. (394,485) (2,137,905) (976,632)
Notes receivable ............................................. 47,752 124,683
Prepaid expenses and other assets ............................ (292,857) 66,972 (68,778)
Increase (decrease) in:
Accounts payable and accrued liabilities ..................... 2,380,912 (149,255) (228,896)
Unearned service revenues .................................... (5,757) (159,794) 50,151
Customer deposits ............................................ (28,458) (6,620) (109,035)
------------- ------------- ------------
Net cash provided by (used in) operating activities ......... 1,498,075 (3,066,840) (705,313)
------------- ------------- ------------
INVESTING ACTIVITIES:
Purchases of property and equipment ............................ (1,120,552) (1,001,655) (480,127)
Acquisition of business net of cash acquired ................... (5,668,382)
Short-term investments ......................................... (17,011,831)
Payment of patent costs ........................................ (105,651) (203,549)
Payment of product design costs ................................ (635,943) (108,286)
Payments for intangible assets ................................. (316,527) (754,559)
Cash received from investments ................................. 6,769,875
------------- ------------- ------------
Net cash provided by (used in) investing activities ......... 5,332,796 (25,178,021) (791,962)
------------- ------------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock -- net .................. 24,124 624,842 31,676,566
Payments on long-term debt and notes payable ................... (306,403) (186,447) (1,501,267)
Acquisition of treasury stock .................................. (150,625)
------------- ------------- ------------
Net cash (used in) provided by financing activities ......... (282,279) 287,770 30,175,299
------------- ------------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ......................... (1,095,064) 325,678 (126,297)
------------- ------------- ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................... 5,453,528 (27,631,413) 28,551,727
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .................... 1,183,656 28,815,069 263,342
------------- ------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR .......................... $ 6,637,184 $ 1,183,656 $ 28,815,069
============= ============= ============
See notes to consolidated financial statements.
29
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 three wholly-owned subsidiaries: FARO
Worldwide, Inc.; FARO Europe GmbH & Co. KG, a German 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) income.
REVENUE RECOGNITION, PRODUCT WARRANTY AND EXTENDED MAINTENANCE CONTRACTS
- -- Revenue related to the Company's 3-D measurement equipment and related
software is recognized upon shipment as the Company considers the earnings
process substantially complete as of the shipping date. Revenue from sales of
software only is recognized when no further significant production,
modification or customization of the software is required and where the
following criteria are met: persuasive evidence of a sales agreement exists,
delivery has occurred, and the sales price is fixed or determinable and
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 proportionately as
maintenance costs are projected to be incurred. Prior to November 1, 1997, such
revenues were recognized ratably over the contract term. The change in estimate
with respect to the recognition of such revenues more accurately matches
revenues with costs incurred. The Company warrants its products against defects
in design, materials and workmanship for one year. A provision for estimated
future costs relating to warranty expenses is recorded when products are
shipped. Costs relating to extended maintenance plans are recognized as
incurred.
CASH AND CASH EQUIVALENTS -- The Company considers cash on hand and
amounts on deposit with financial institutions which have original maturities
of three months or less to be cash and cash equivalents.
30
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
All short-term investments in debt securities which have maturities of
three months or less are included in cash and cash equivalents and classified
as trading securities, which are carried at their fair value based upon the
quoted market prices of those investments at December 31, 1999 and 1998.
Accordingly, net realized and unrealized gains and losses on trading securities
are included in other income in the consolidated statements of operations.
Total trading securities included in cash and cash equivalents were $4,694,451
and $145,437 at December 31, 1999 and 1998, respectively. The gross unrealized
gain or loss on all trading securities was an unrealized loss of approximately
$18,000 at December 31, 1999, and an unrealized gain of approximately $3,000 at
December 31, 1998.
INVESTMENTS -- Short-term investments ordinarily consist of short-term
debt securities acquired with cash not immediately needed in operations. Such
amounts have maturities of less than 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 eighteen months).
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 loss of approximately
$83,000 at December 31, 1999, and unrealized loss of approximately $40,000 at
December 31, 1998.
INVENTORIES -- Inventories are stated at the lower of average cost or net
realizable value. In order to achieve a better matching of production costs
with the revenues generated in production, certain fixed overhead costs and
certain general and administrative costs that are related to production are
capitalized into inventory when they are incurred and are charged to cost of
sales as product costs at the time of sale. Such amounts are not material to
the consolidated financial statements.
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.
31
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 .......... 5 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.
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 -- The Company utilizes the asset and liability method to
measure and record deferred income tax assets and liabilities. 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
32
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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, accounts payable and liabilities to banks. The carrying amount of
long-term debt to banks approximates fair value based on interest rates that
are currently available to the Company for issuance of debt with similar terms
and remaining maturities. The carrying amounts of other financial instruments
approximate their fair value because of their short-term maturities.
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 12.
CONCENTRATION OF CREDIT RISK -- Financial instruments which potentially
expose the Company to concentrations of credit risk consist principally of
operating demand deposit accounts. The Company's policy is to place its
operating demand deposit accounts with high credit quality financial
institutions.
In 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, originally expired in
June 1999 and was renewed for a successive one-year term in 1999.
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 will market the FAROArm/registered
trademark/ worldwide under the name GAGE 2000 A. The agreement, which grants
Brown & Sharpe non-exclusive distribution right worldwide, expires in March
2001, and is renewable for successive one-year terms.
No customer represented 6% or more of the Company's total sales for the
years ended December 31, 1999 and 1998.
33
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
STOCK-BASED COMPENSATION -- In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123"), the Company has elected to continue to account
for its employee stock compensation plans under Accounting Principle Board
(APB) Opinion No. 25 with pro forma disclosures of net earnings and earnings
per share, as if the fair value based method of accounting defined in SFAS No.
123 has been applied. Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at the grant
date or other measurement date over the amount an employee must pay to acquire
the stock. Under the fair value based method, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period.
LONG-LIVED ASSETS -- Long-lived assets, including property and equipment
and certain intangible assets to be held and used by the Company are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. Impairment losses are
recognized if expected future 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.
RECENTLY ADOPTED ACCOUNTING STANDARDS -- In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 does not require a
specific format for that financial statement but requires that an entity
display an amount representing total comprehensive income for the period in
that statement. SFAS No. 130 requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive (loss) income may include foreign currency and unrealized
gains and losses on certain investments in debt and equity securities. In
addition, the accumulated balance of other comprehensive income must be
34
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
displayed separately from retained earnings and additional paid in capital in
the equity section of a statement of financial position. The Company adopted
this accounting standard on January 1, 1998, as required. Prior year financial
statements have been restated for comparative purposes.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information" ("SFAS No. 131"), effective for fiscal
years beginning after December 15, 1997. SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 requires reporting segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segments profit or loss, total
segment assets, and other amounts disclosed for segments to corresponding
amounts reported in the financial statements.
In October 1997 the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 provides guidance on applying generally accepted accounting principles
in recognizing revenue on software transactions and is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
The Company adopted SOP 97-2 on January 1, 1998, as required. Adoption of this
SOP 97-2 did not have a material effect on the financial statements.
NEW ACCOUNTING STANDARDS -- The FASB recently issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137 defers
for one year the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The rule now will apply
to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 137 permits early adoption as of the beginning of any fiscal quarter after
its issuance. SFAS No. 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings.
35
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not completed its
evaluation of the impact of SFAS No. 133 on the financial statements.
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform to current year presentation.
2. ACQUISITION OF CATS
On May 15, 1998, the Company acquired CATS GmbH ("CATS") for total
consideration of $16,069,000 consisting of $5 million in cash, 916,668 shares
of Common Stock and the assumption of certain outstanding liabilities of CATS.
The purchase price includes direct costs of the acquisition in the amount of
$674,000.
In addition, 333,332 shares of Common Stock were placed in escrow to be
issued provided CATS met certain sales performance goals within an
eighteen-month period following the acquisition. These sales goals were not met
by November 15, 1999. The 90-day period for registering disputes expired on
February 13, 2000 with no claims. The 333,332 shares held by the escrow agent
are being returned to the Company.
The acquisition agreement provided that the Company would provide a loan
to the two former shareholders of CATS to fund their tax liability in
connection with the shares of FARO Common Stock that they received in the
acquisition. The former CATS shareholders remain key employees of the Company.
Pursuant to a Loan Agreement dated August 2, 1999 with each of the former CATS
shareholders, the Company has agreed to loan to the former CATS shareholders an
amount equal to their tax obligation to the German tax authorities in
connection with the acquisition of CATS. The aggregate amount of the loans is
estimated to be approximately $2 million. The Company is not obligated to
provide the loans until the German tax authorities request payment for the tax
from the former CATS shareholders, which has not yet occurred. Moreover, the
loan commitment will cease if the Company's share price rises to $11.34 per
share (the price establishing the tax liability) for several consecutive days.
If the loans are made, they will be for a term of three years, at an interest
rate of approximately 4.3%, with an option for the borrower to extend the term
for an additional three years. As collateral for the loans, the former CATS
shareholders will pledge to the Company the number of shares of Company Common
Stock equal to the amount of the loan divided by 6.375. If the amount of the
loans is $2 million, the loans will be secured by 313,725 shares. The loans
will be a non-recourse obligation of the former CATS shareholders.
36
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION OF CATS--(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") recent 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 that 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 $3,073,000 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.
37
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION OF CATS--(CONTINUED)
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 are presented for informational purposes
assuming that the Company had acquired CATS as of January 1, 1997. 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 unusual charge.
YEARS ENDED DECEMBER 31
------------------------------
1998 1997
----------- -----------
Revenues .................. $28,357,000 $26,860,000
Net (loss) income ......... (1,215,000) 1,369,000
(Loss) income per share:
Basic .................... $ (0.11) $ 0.16
Diluted .................. $ (0.11) $ 0.15
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:
YEARS ENDED DECEMBER 31
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash paid for interest ....................... $ 3,237 $ 13,023 $ 110,768
Cash paid for income taxes ................... 24,392 569,481 1,951,286
Non cash investing and financing activities:
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
38
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVENTORIES
Inventories consist of the following:
DECEMBER 31
----------------------------
1999 1998
------------ -----------
Raw materials ............................. $ 1,914,543 $ 2,778,081
Finished goods ............................ 1,191,977 1,486,572
Sales demonstration ....................... 3,092,894 2,178,965
------------ -----------
$ 6,199,414 $ 6,443,618
============ ===========
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31
----------------------------
1999 1998
------------ -----------
Goodwill .................................. $ 2,695,632 $ 3,033,767
Existing product technology ............... 5,320,924 9,446,839
Work force in place ....................... 516,405 581,181
Customer relationships .................... 553,961 623,449
Product design costs ...................... 886,897 744,229
Patents ................................... 1,102,821 956,439
Other ..................................... 283,067 130,639
------------ -----------
11,359,707 15,516,543
Accumulated amortization .................. (5,380,635) (2,695,352)
------------ -----------
Intangible assets -- net .................. $ 5,979,072 $12,821,191
============ ===========
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31
----------------------------
1999 1998
------------ -----------
Accrued compensation and benefits ......... $ 1,334,675 $ 221,105
Accrued royalties and warranties .......... 227,486
Other accrued liabilities ................. 1,276,169 610,988
------------ -----------
$ 2,838,330 $ 832,093
============ ===========
39
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. NOTES PAYABLE AND DEBT
Long-term debt consists of the following:
DECEMBER 31
----------------------
1999 1998
-------- --------
5.8% secured note ...................... $ 5,424 $ 10,092
4-year, 5.9% automobile loan ........... 20,812
Unsecured note to shareholders ......... 31,388
-------- --------
26,236 41,480
Less current portion ................... (8,746) (4,156)
-------- --------
$ 17,490 $ 37,324
======== ========
Long-term debt of $17,490 and $37,324 is included in other long-term
liabilities in the accompanying consolidated balance sheets as of December 31,
1999 and 1998, respectively.
The secured note is collateralized by a telephone system and was repaid in
full in January 2000. In November 1999, a subsidiary acquired a company vehicle
through a financing medium payable in 4 years to expire in 2003. The loan was
originally financed for approximately $22,000.
In April 1997, the Company obtained a one-year unsecured $1.0 million line
of credit which bears interest at the 30-day commercial paper rate plus 2.65%
per annum. The line of credit was extended in 1998 and 1999 and expires on
March 31, 2000. No borrowings were outstanding under this line of credit as of
December 31, 1999 and 1998.
A subsidiary has a standby line of credit for $20,000 with a German bank
to secure the remaining lease obligation on the former German headquarters. A
3% fee is charged annually on the amount of the line of credit.
In December 1998, the Company had available with two financial
institutions short-term revolving lines of credit aggregating $445,000. Under
these lines, a subsidiary could borrow funds for operations. These lines of
credit were personally guaranteed by certain shareholders. The total amount
outstanding on these lines at December 31, 1998 was approximately $296,000. The
average interest rates in such borrowings at December 31, 1998 was 9%. The
entire balance was repaid in 1999 and the line of credit was not renewed.
40
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. RELATED PARTY TRANSACTIONS
LEASES -- The Company leases its plant and office building from Xenon
Research, Inc. ("Xenon"), a 26% shareholder. The lease, which was amended in
1997 to provide for additional premises and an increase in base rent of
approximately $150,000, expires on February 28, 2001. The Company has two
five-year renewal options. 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 $358,000 in
1999, $300,000 for 1998 and $150,000 for 1997.
9. INCOME TAXES
(Loss) income before taxes consisted of the following:
YEARS ENDED DECEMBER 31
-------------------------------------------
1999 1998 1997
------------ ------------ ----------
Domestic .................................. $ (2,508,948) $ 712,795 $5,584,295
Foreign ................................... (6,007,338) (5,193,357) (263,035)
------------ ------------ ----------
(Loss) income before income taxes ......... $ (8,516,286) $ (4,480,562) $5,321,260
============ ============ ==========
The components of the income tax (benefit) expense for income taxes are as
follows:
DECEMBER 31
-------------------------------------------
1999 1998 1997
------------ ------------ ----------
Current:
Federal ................................. $ (357,453) $ 75,174 $1,945,035
State ................................... (55,333) 13,621 294,702
------------ ------------ ----------
(412,786) 88,795 2,239,737
------------ ------------ ----------
Deferred:
Federal ................................. (585,932) 107,597 (108,646)
State ................................... 10,174 10,666 (16,461)
Foreign ................................. (132,920) 243,474
------------ ------------ ----------
(708,678) 361,737 (125,107)
------------ ------------ ----------
$ (1,121,464) $ 450,532 $2,114,630
============ ============ ==========
41
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
Income tax (benefit) expense for the years ended December 31, 1999, 1998
and 1997 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
-----------------------------------------------
1999 1998 1997
------------ ------------ ----------
Tax (benefit) expense at statutory rate ............ $ (2,895,537) $ (1,523,391) $1,809,228
State income taxes, net of federal benefit ......... (109,543) 46,719 181,713
Nontaxable interest income ......................... (141,180) (121,442)
Foreign tax rate difference ........................ (986,167) (943,551)
Research and development credit .................... (171,059) (103,309) (64,893)
Nondeductible items ................................ 42,530 22,831 159,198
Change in deferred tax asset
valuation allowance ............................... 3,028,662 3,033,000
Other .............................................. 110,830 39,675 29,384
------------ ------------ ----------
Total income tax (benefit) expense ................. $ (1,121,464) $ 450,532 $2,114,630
============ ============ ==========
The components of the Company's net deferred tax asset at December 31,
1999 and 1998 are as follows:
DECEMBER 31
----------------------------
1999 1998
------------ ----------
Net deferred tax asset/(liability) -- current
Unearned service revenue ................................. $ 6,780 $ 98,230
Product design costs ..................................... (124,303) (272,631)
Tax credits and carryforwards ............................ 2,686 234,970
Other .................................................... 608,925 60,974
------------ ----------
Net deferred tax asset -- current ......................... $ 494,088 $ 121,543
============ ==========
Net deferred tax asset/(liability) -- non-current
Depreciation ............................................. $ 49,618 $ (22,979)
Employee stock options ................................... 150,363 87,347
Unearned service revenue ................................. 106,305 52,082
Patent amortization ...................................... (48,373) (72,963)
Intangible assets ........................................ 3,762,451 2,089,000
Foreign currency translation adjustment .................. (132,920)
Tax credits and carryforwards ............................ 2,299,211 944,000
Other .................................................... 11,213
Valuation allowance ...................................... (6,061,662) (3,033,000)
------------ ----------
Net deferred tax asset/(liability) -- non-current ......... $ 257,913 $ (78,220)
============ ==========
42
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
At December 31, 1999, the Company's foreign subsidiaries had deferred tax
assets relating to net operating loss carryforwards, which do not expire, and
intangible assets of $2,299,211 and $3,762,451, respectively. For financial
reporting purposes, a valuation allowance of $6,061,662 has been recognized to
offset the deferred tax assets relating to the net operating losses and
intangible assets.
10. 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 8), in effect at December 31, 1999:
YEAR ENDING DECEMBER 31 AMOUNT
----------------------- ----------
2000 ......................................... $ 964,000
2001 ......................................... 536,000
2002 ......................................... 334,000
2003 ......................................... 292,000
2004 ......................................... 283,000
----------
Total future minimum lease payments .......... $2,409,000
==========
Rent expense for 1999, 1998 and 1997 was approximately $973,000, $641,000
and $236,000, respectively.
LITIGATION -- In the normal course of business, the Company is subject to
various proceedings, lawsuits and other claims. Such matters are subject to
many uncertainties, and outcomes are not predictable with assurance. While
these uncertainties could affect future operations, the Company believes that
after final disposition, any monetary liability or financial impact would not
be expected to have a materially adverse effect on the Company's Consolidated
Financial Statements.
11. STOCK OPTION PLANS
The Company has three stock option plans that provide for the granting of
stock options to key employees and non-employee members of the Board of
Directors. The 1993 Stock Option Plan ("1993 Plan") and the Amended and
Restated 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 Non-Employee Director Plan provides for granting
nonqualified stock options and formula options to non-employee directors.
43
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. STOCK OPTION PLANS--(CONTINUED)
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 $0.36 and $3.60, respectively. These options
vest over primarily 3 and 4 year periods.
The Company is authorized to grant options for up to 1,400,000 shares of
Common Stock under the 1997 Plan, of which 857,594 options have been granted at
exercise prices between $3.31 and $14.30 (for those meant to qualify for
treatment as incentive stock options). These options vest over a three-year
period. Subsequent to December 31, 1999, an additional 218,550 options were
granted.
The Company is authorized to grant up to 250,000 shares of Common Stock
under the Non-Employee Director Plan. Each non-employee director is granted
3,000 options upon election or reelection to the Board of Directors (formula
options). Formula options granted to directors are generally granted upon the
same terms and conditions as options granted to officers and employees. These
options vest over a three-year period. Additionally in 1997, certain
non-employee directors were granted options to purchase 160,000 of Common Stock
in consideration for their prior service on the Board of Directors. These
options vested upon grant at an exercise price of $12.
Additionally, the Company's 1997 Non-Employee Directors' Fee Plan 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 $168,912, $172,164 and $408,000 in 1999, 1998 and 1997,
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.
44
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. STOCK OPTION PLANS--(CONTINUED)
A summary of stock option activity and weighted average exercise prices
follows:
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------ ----------- ------------ ----------- ------------ ----------
Outstanding at beginning of
year .......................... 1,194,165 $ 9.73 955,723 $ 8.00 190,512 $ 0.36
Granted ........................ 66,000 4.76 535,381 8.64 797,001 9.90
Forfeited ...................... (108,106) 7.76 (84,470) 8.22 (31,790) 9.67
Exercised ...................... (11,373) 2.60 (212,469) 1.17
--------- -------- -------
Outstanding at year-end ......... 1,140,686 9.79 1,194,165 9.73 955,723 8.00
========= ========= =======
Outstanding exercisable at
year-end ...................... 659,275 $ 10.49 417,780 $ 10.78 498,680 $ 6.67
Weighted-average fair value
of options granted during
the year ...................... $ 3.75 $ 5.26 $ 4.82
A summary of stock options outstanding and exercisable as of December 31,
1999 follows:
WEIGHTED-AVERAGE
EXERCISE OPTIONS REMAINING OPTIONS
PRICE OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISABLE
--------------------- ------------- -------------------------- ------------
$ 0.36 27,859 5.97 27,859
$ 3.31-3.64 243,366 8.59 103,914
$ 4.16-5.62 60,000 9.52 0
$10.34-11.35 137,461 8.52 45,817
$ 12.00 332,000 7.72 275,018
$13.00-13.20 240,000 5.74 173,334
$ 14.30 100,000 8.16 33,333
------- -------
1,140,686 659,275
========= =======
45
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. STOCK OPTION PLANS--(CONTINUED)
Remaining non-exercisable options as of December 31, 1999 become
exercisable as follows:
YEAR ENDING
DECEMBER 31 AMOUNT
------------ --------
2000 283,918
2001 175,825
2002 21,668
-------
481,411
=======
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net earnings and
earnings per share would have been as follows:
YEARS ENDED IN DECEMBER 31
-----------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
Net (loss) income ......... As reported $ (7,394,822) $ (4,931,094) $ 3,206,630
Pro forma (8,531,554) (5,720,379) 2,345,551
(Loss) income per share --
Basic .................... As reported $ (0.67) $ (0.46) $ 0.41
Pro forma (0.77) (0.54) 0.30
(Loss) income per share --
Diluted .................. As reported $ (0.67) $ (0.46) $ 0.39
Pro forma (0.77) (0.54) 0.29
The Company used the Black-Scholes option-pricing model to determine the
fair value of grants made. The following assumptions were applied in
determining the pro forma compensation cost:
YEARS ENDED IN DECEMBER 31
-----------------------------------------
1999 1998 1997
---------- ------------- -----------
Risk-free interest rate ......... 5.50% 4.86 to 5.83% 5.63%
Expected dividend yield ......... 0% 0% 0%
Expected option life ............ 3-10 years 3-10 years 3-10 years
Stock price volatility .......... 105.21% 91.32% 46.33%
The effects of applying SFAS No. 123 for the pro forma disclosures are not
representative of the effects expected on reported net (loss) income and (loss)
income per share in future years since the disclosures do not reflect
compensation expense for options granted prior to 1996.
46
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. EARNINGS PER SHARE
A reconciliation of the number of common shares used in calculation of
basic and diluted earnings per share ("EPS") is presented below:
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ----------------------
PER-SHARE PER-SHARE PER-SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ----------- ------------ ----------- ----------- ----------
Basic EPS ............ 11,015,140 $ (0.67) 10,632,708 $ (0.46) 7,831,715 $ 0.41
Effect of dilutive
securities:
Stock options ....... 355,495
Warrants ............ 1,838
---------- ---------- ---------
Diluted EPS .......... 11,015,140 $ (0.67) 10,632,708 $ (0.46) 8,189,048 $ 0.39
========== ========== =========
13. BENEFIT PLAN
During 1996, the Company established a defined contribution retirement
401k plan for its employees, which provides benefits for all employees meeting
certain age and service requirements. The Company may make a discretionary
contribution each Plan year as determined by its Board of Directors.
Discretionary contributions or employer matches can be made to the
participant's account but cannot exceed 4% of compensation. The Company made no
contributions to the Plan during the three years ending December 31, 1999.
14. 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
47
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SEGMENT GEOGRAPHIC DATA--(CONTINUED)
methods used to distribute the Company's products. The following table presents
information about the Company by geographic area:
DECEMBER 31
--------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ----------------------------- ----------------------------
LONG-LIVED LONG-LIVED LONG-LIVED
SALES ASSETS SALES ASSETS SALES ASSETS
-------------- ------------ -------------- -------------- -------------- -------------
United States .......... $17,687,875 $2,522,654 $14,740,829 $ 2,707,921 $15,439,776 $1,522,627
Germany ................ 6,321,760 5,083,420 4,920,197 11,592,359 1,235,066
United Kingdom ......... 2,568,020 1,916,115 1,263,294
France ................. 1,716,031 41,145 1,647,798
Canada ................. 1,286,501 1,283,834 1,252,423
Other foreign .......... 3,525,553 3,005,926 46,103 4,325,826 53,132
----------- ---------- ----------- ----------- ----------- ----------
Total ................. $33,105,740 $7,647,219 $27,514,699 $14,346,383 $23,516,385 $1,575,759
=========== ========== =========== =========== =========== ==========
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
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)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
QUARTER ENDED 1998 1998 1998 1998
- ------------- ---------------- --------------- --------------- ---------------
Sales ...................... $ 6,682,201 $ 7,721,808 $ 4,972,182 $ 8,138,508
Gross profit ............... 4,000,439 4,941,965 2,512,039 4,768,943
Net income (loss) .......... 1,023,391 (1,709,731) (2,740,809) (1,503,945)
Net income (loss) per share:
Basic ..................... $ 0.10 $ (0.16) $ (0.25) $ (0.13)
Diluted ................... 0.10 (0.16) (0.25) (0.13)
48
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)--(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, primarily related to the write-off of certain
patents and capitalized research and development costs due to changes in
technology.
The second quarter of 1998 includes unusual charges of $3,210,000 related
to the portion of the CATS purchase price attributed to in-process research and
development that was expensed immediately.
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 "Executive Officers 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.
50
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
Deloitte & Touche 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.
(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 1997 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 Amended and Restated 1997 Employee Stock Option Plan (FILED AS ANNEX A TO REGISTRANT'S
PROXY STATEMENT DATED MARCH 29, 2000, 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)
51
EXHIBIT
NO. DESCRIPTION
- ---------- -----------------------------------------------------------------------------------------------
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
and Xenon Research, Inc., successor by merger to FARO Medical Technologies (US), 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)
10.14 Offer Letter to Stuart W. Jones, dated August 9, 1999 (FILED HEREWITH)
10.15 Extension of WCMA Line of Credit No. 740-07K27 dated March 31, 1999 between the
registrant and Merrill Lynch Business Financial Services, Inc. (FILED HEREWITH)
10.16 OEM Contract (1) year extension, signed March 8 and 11, 2000, respectively, between the
Registrant and Brown & Sharpe Manufacturing Company. (FILED HEREWITH)
11.1 Statement re Computation of Per Share Earnings (INCORPORATED BY REFERENCE FROM PAGE 1 TO
THE REGISTRANT'S 1999 ANNUAL REPORT TO STOCKHOLDERS FILED AS EXHIBIT 13.1)
13.1 Annual Report to Stockholders for the year ended December 31, 1999 (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 Deloitte & Touche LLP (FILED HEREWITH)
24.1 Power of Attorney (INCLUDED ON PAGE 54 OF THIS REPORT)
27.1 Financial Data Schedule for the year ended December 31, 1999 (FILED HEREWITH FOR SEC
FILING PURPOSES ONLY)
99.1 Properties (FILED HEREWITH)
(b) REPORTS ON FORM 8-K
None.
52
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.
By: /s/ STUART W. JONES
-----------------------------------------------
Stuart W. Jones
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 29, 2000
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, Ph.D., GREGORY A.
FRASER, Ph.D. and STUART W. JONES 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.
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
/s/ SIMON RAAB Chairman of the Board, President, March 29, 2000
- ----------------------------- Chief Executive Officer
Simon Raab, Ph.D. (Principal Executive Officer),
and Director
/s/ GREGORY A. FRASER Executive Vice President, Secretary, March 29, 2000
- ----------------------------- Treasurer, and Director
Gregory A. Fraser, Ph.D.
/s/ HUBERT D'AMOURS Director March 29, 2000
- -----------------------------
Hubert d' Amours
/s/ PHILIP COLLEY Director March 29, 2000
- -----------------------------
Philip Colley
/s/ ALEXANDRE RAAB Director March 29, 2000
- -----------------------------
Alexandre Raab
/s/ NORMAN H. SCHIPPER Director March 29, 2000
- -----------------------------
Norman H. Schipper
/s/ ANDRE JULIEN Director March 29, 2000
- ----------------------------
Andre Julien
53