1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 22, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FARO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 3829 59-3157093
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
125 TECHNOLOGY PARK
LAKE MARY, FLORIDA 32746
(407) 333-9911
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
GREGORY A. FRASER, PH.D.
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
FARO TECHNOLOGIES, INC.
125 TECHNOLOGY PARK
LAKE MARY, FLORIDA 32746
(407) 333-9911
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
MARTIN A. TRABER, ESQ.
FOLEY & LARDNER
100 N. TAMPA STREET, SUITE 2700
TAMPA, FLORIDA 33602
(813) 229-2300
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
============================================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value........... 343,750 shares $10.4065 $3,577,234 $1,056
============================================================================================================================
(1) Estimated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee based on
the average of the high and low prices of the Common Stock as reported on
the Nasdaq National Market on June 17, 1998.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED JUNE 22, 1998
343,750 SHARES
(FARO LOGO)
COMMON STOCK
---------------------
All 343,750 shares of Common Stock, par value $.001 per share (the "Common
Stock") of FARO Technologies, Inc. (the "Company") offered hereby are being
offered by certain selling shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will pay
certain of the expenses of this offering; however, the Selling Shareholders will
bear the cost of all brokerage commissions and discounts incurred in connection
with the sale of the shares to which this Prospectus relates. The Company will
not receive any of the proceeds from the sale of the Common Stock offered
hereby.
Sales may be made on one or more exchanges or in the over-the-counter
market, or otherwise at prices and at terms then prevailing or at prices related
to the then current market price, or in negotiated transactions, or to one or
more underwriters for resale to the public.
The Common Stock is listed on the Nasdaq Stock Market's National Market
under the symbol "FARO." On June 19, 1998, the last reported sale price of the
Common Stock on the Nasdaq National Market was $11.250 per share. See "Price
Range of Common Stock."
---------------------
SEE "RISK FACTORS" ON PAGES 4 THROUGH 9 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is , 1998.
3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Investors should carefully
consider the information set forth under the heading "Risk Factors." This
Prospectus contains forward-looking statements that involve risks and
uncertainties. Future events and the Company's actual results could differ
materially from the results in these forward-looking statements as a result of
certain of the factors set forth in "Risk Factors" and elsewhere in this
Prospectus. As used herein, the terms "FARO" and the "Company" refer to FARO
Technologies, Inc. and its subsidiaries, except where the context indicates
otherwise.
THE COMPANY
FARO Technologies, Inc. ("FARO" or the "Company") designs, develops,
markets and supports portable, software-driven, three-dimensional ("3-D")
measurement systems that are used in a broad range of manufacturing and
industrial applications. The Company's principal products are the FAROArm(R)
articulated measuring arm and its companion AnthroCam(R) software. Together,
these products integrate the measurement and quality inspection function with
computer-aided design ("CAD") and computer-aided manufacturing ("CAM")
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 17
patents in the United States, 12 of which also are held or pending in other
jurisdictions. The Company's products have been purchased by more than 600
customers worldwide, ranging from small machine shops to such large
manufacturing and industrial companies as General Motors, Chrysler, Ford,
Boeing, Lockheed Martin, General Electric, Westinghouse Electric, Caterpillar
and Komatsu Dresser.
The processes of product design and manufacturing have evolved rapidly
during the past decade through the adoption of 3-D software and CAD/CAM
technology. This evolution has been driven by increasing global and competitive
pressures for shorter product cycles, greater customization and higher quality
and lower cost products. Despite such technological advances in design and
manufacturing, the measurement and quality inspection function of the
manufacturing process generally remains limited to manual, analog technology or
traditional, fixed-based coordinate measurement machines ("CMMs") that are
largely restricted to a metrology laboratory and often lengthen the
manufacturing process. These global and competitive pressures have created a
significant demand for measurement systems that bridge the gap between the
virtual 3-D world of the CAD process and the physical 3-D world of the factory
floor. The Company believes that the FAROArm(R) and AnthroCam(R) provide that
bridge by integrating CAD/CAM technology into a manufacturer's design,
production and measurement and quality inspection processes, serving a much
broader range of the manufacturing process than traditional measurement tools.
The FAROArm(R) is a portable, six-axis, instrumented, articulated device
that approximates the range of motion and dexterity of the human arm.
AnthroCam(R) is the Company's proprietary companion software for the FAROArm(R).
This CAD-based measurement software provides an interface between the FAROArm(R)
and CAD technology for design, manufacturing and measurement and quality
inspection applications. The Company's products provide its customers an
affordable way to integrate CAD technology throughout the manufacturing process.
These products are based on an open architecture and are designed to be used by
shop personnel with minimal prior computer or CAD experience and to be operated
in the often harsh environments typical of manufacturing facilities.
The Company's objective is to enhance its position as a leading provider of
portable, software-driven, 3-D measurement systems. To achieve this objective,
the Company has adopted the following principal strategies: (i) focus on the
portable 3-D measurement market; (ii) increase sales force and distribution;
(iii) further penetrate its installed customer base; (iv) increase international
sales; (v) leverage its technology; and (vi) expand its product line and service
offerings.
1
4
As a result of the successful implementation of the Company's strategies,
total sales have increased from approximately $9.9 million in 1995 to $23.5
million in 1997 and $6.7 million in the three months ended March 31, 1998. The
Company's results have significantly improved from net income of $1.6 million in
1995 to $3.2 million in 1997 and $1.0 million in the three months ended March
31, 1998.
As part of the Company's strategy, on May 15, 1998, the Company acquired
the German-based company, Cats computer aided technologies, Computeranwendungen
in der Fertigungssteuerung, GmbH ("CATS"), which is engaged in the business of
developing and selling portable measurement and quality inspection systems
driven by CAD-based measurement software, primarily to the German automotive
industry. The Company believes there will be significant synergies with CATS'
CAD-based measurement software, which can be used in conjunction with
retrofitted fixed-based CMMs to bridge the gap between the metrology laboratory
and measurement and quality inspection functions on the factory floor. See
"Business -- Recent Acquisition."
The Company commenced operations in Canada in 1982 and reincorporated in
Florida in 1992. The Company's executive offices and principal operating
facilities are located at 125 Technology Park, Lake Mary, Florida 32746 and its
telephone number is (407) 333-9911.
SUMMARY CONSOLIDATED FINANCIAL DATA
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------------- ----------------------------------------------------
PRO FORMA PRO FORMA
1998 1998 1997 1997 1997 1996 1995
----------- ----------- ---------- ----------- ----------- ----------- ----------
STATEMENT OF OPERATIONS DATA:
Sales......................... $ 7,214,951 $ 6,682,201 $4,889,471 $26,859,833 $23,516,385 $14,656,337 $9,862,242
Cost of sales................. 2,851,540 2,681,762 1,948,549 10,616,624 9,610,838 6,486,268 4,987,779(1)
----------- ----------- ---------- ----------- ----------- ----------- ----------
Gross profit.................. 4,363,411 4,000,439 2,940,922 16,243,209 13,905,547 8,170,069 4,874,463
Operating expenses:
Selling..................... 1,978,708 1,583,536 1,158,559 6,887,388 5,676,113 3,731,762 2,008,301
General and
administrative............ 598,582 598,582 302,523 1,519,657 1,519,657 744,206 503,184
Depreciation and
amortization.............. 142,362 110,362 58,873 1,293,996 293,996 230,799 341,494(2)
Research and development.... 563,832 386,444 178,073 2,052,604 1,075,505 730,124 363,871
Employee stock options(3)... 43,041 43,041 3,270 408,000 408,000 23,100 106,700
----------- ----------- ---------- ----------- ----------- ----------- ----------
Total operating
expenses............ 3,326,525 2,721,965 1,701,298 12,161,645 8,973,271 5,459,991 3,323,550
----------- ----------- ---------- ----------- ----------- ----------- ----------
Income from operations........ 1,036,886 1,278,474 1,239,624 4,081,564 4,932,276 2,710,078 1,550,913
Interest and other income..... 317,273 317,273 (5,810) 499,752 499,752 25,145 62,212
Interest expense.............. (13,465) -- (34,262) (134,186) (110,768) (212,669) (355,468)
----------- ----------- ---------- ----------- ----------- ----------- ----------
Income before income taxes.... 1,340,694 1,595,747 1,199,552 4,447,130 5,321,260 2,522,554 1,257,657
Income tax expense
(benefit)................... 432,000 572,356 479,821 1,789,000 2,114,630 1,115,892 (342,000)
----------- ----------- ---------- ----------- ----------- ----------- ----------
Net income.................... 908,694 1,023,391 719,731 $ 2,658,130 $ 3,206,630 $ 1,406,662 $1,599,657
----------- ----------- ---------- =========== =========== =========== ==========
Other Comprehensive Income
Foreign Currency Translation
Adjustments............... (43,786) (43,786) --
----------- ----------- ----------
Other Comprehensive
Income.................... (43,786) (43,786) --
----------- ----------- ----------
Comprehensive Income.......... $ 864,908 $ 979,605 $ 719,731
=========== =========== ==========
Net income per common share:
Basic....................... $ 0.08 $ 0.10 $ 0.10 $ 0.30 $ 0.41 $ 0.20 $ 0.23(4)
Assuming dilution........... $ 0.08 $ 0.10 $ 0.10 $ 0.29 $ 0.39 $ 0.19 $ 0.22
Weighted-average common shares
outstanding:
Basic....................... 10,861,522(5) 9,944,855 7,000,000 8,748,382(5) 7,831,715 7,000,000 7,000,000
Assuming dilution........... 11,147,823(5) 10,231,156 7,333,290 9,105,715(5) 8,189,048 7,349,041 7,166,739
2
5
MARCH 31,
-------------------------
PRO FORMA
1998 1998
----------- -----------
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $33,073,590 $38,077,590
Total assets................................................ 42,121,558 43,072,558
Total shareholders' equity.................................. 38,301,000 40,197,796
- ---------------
(1) Includes $531,186 from a change in the estimated life of product development
costs. See Note 1 to the Company's Consolidated Financial Statements,
"Product Design Costs."
(2) Includes a charge for unamortized patent costs of $192,570 due to the
discontinuance of certain products sold in the medical field.
(3) Reflects compensation expense incurred upon the vesting of options having an
exercise price less than the fair market value of the Common Stock on the
date of grant. The weighted average exercise price of such vested options is
$0.36 per share.
(4) Includes a benefit of $0.11 per share resulting from a reduction in the
deferred tax asset valuation allowance.
(5) Includes Common Stock issued in connection with the acquisition of CATS.
3
6
RISK FACTORS
An investment in the shares offered hereby involves a high degree of risk,
including the risks described below. Prospective investors should carefully
consider the following risk factors together with the other information
contained in this Prospectus before purchasing the shares offered hereby.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have varied in the past and may
vary significantly in the future depending on many factors including, among
others, the size, timing and recognition of revenue from significant orders;
increases in operating expenses required for product development and new product
marketing; the timing and market acceptance of new products and product
enhancements; customer order deferrals in anticipation of new products and
product enhancements; the Company's success in expanding its sales and marketing
programs; and general economic conditions. Further, the Company's operating
results have been, and are expected to continue to be, highly sensitive to the
length of the Company's sales cycle, from initial contact through product
shipment. Moreover, the Company has historically incurred higher expenses
relating to marketing and production in the first and second quarters of each
year. Based upon all of the foregoing factors, the Company believes that its
quarterly revenue, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its results of
operations may not be meaningful and that, in any event, such comparisons should
not be relied upon as indications of future performance. See Note 11 to the
Company's Consolidated Financial Statements.
EMERGING MARKET; DEPENDENCE ON A SINGLE PRODUCT LINE
The products from which the Company derives substantially all of its
revenues were introduced in 1993, and the Company's future performance will
depend on market acceptance of these products. The measurement industry is
currently dominated by manufacturers of hand-measurement tools and traditional,
fixed-base coordinate measurement machines ("CMMs"). As a result, the Company's
focus on a new measurement technology requires its customers to reevaluate their
historical measurement procedures and methodologies. There can be no assurance
that the Company's products will attain broad market acceptance. The inability
of the Company's products to attain broad market acceptance would have a
material adverse effect on the Company's results of operations and financial
condition.
The Company has developed and marketed two closely interdependent products
(the FAROArm(R) and AnthroCam(R)) for use in the 3-D measurement field.
Substantially all of the Company's revenues are currently derived from sales of
these products, and the Company plans to continue its business strategy of
focusing on the portable, software-driven, 3-D measurement market for the
foreseeable future. Consequently, the Company's financial performance will
depend on continued market acceptance of these products and, to a lesser extent,
on the Company's introduction and market acceptance of related products. If the
Company's products are not widely accepted in the 3-D measurement field, the
Company will have reduced sales and will be required to make increased
expenditures on research and development for new applications in other fields or
new products. There can be no assurance that such efforts to develop new
products or diversify the Company's products into other fields would be
successful. Management believes that continued market acceptance of the
Company's products will depend largely on the Company's ability to enhance and
broaden its product line. Additionally, other factors adversely affecting sales
of the Company's products, such as delays in development, significant hardware
or software flaws, incompatibility with significant software or negative
evaluation of the Company's products, could have a material adverse effect on
the Company's results of operations and financial condition. See
"Business -- The FARO Strategy" and "Business -- FARO Products."
COMPETITION
The broad market for measurement devices for manufacturing and industrial
applications, which consists primarily of hand-measurement tools and CMMs, is
highly competitive. Manufacturers of hand-measurement tools and CMMs include a
significant number of well-established companies that are substantially larger
and
4
7
possess substantially greater financial, technical and marketing resources than
the Company. The Company's products compete on the basis of portability,
accuracy, application features, ease-of-use, quality, price and technical
support. These entities or others may develop products or technologies that will
directly compete with those of the Company. Furthermore, there can be no
assurance that the Company will have sufficient resources to make additional
investments in such products and technologies or that the Company's product
development efforts will allow the Company to compete successfully as the
industry evolves.
Based on its sales, its research and development activities and its
experience in the industry, the Company believes there is a worldwide trend
toward CAD-based factory-floor metrology, which has resulted in the introduction
of CAD-based inspection software for conventional CMMs by most of the large CMM
manufacturers. Certain CMM manufacturers also are miniaturizing, and in some
cases increasing the mobility of, their conventional CMMs. There can be no
assurance that CMM manufacturers will not alter their products to provide
functions which are competitive with those of the Company's products.
The Company also competes with a number of smaller companies that market
articulated arm measuring devices. 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. See "Business -- Competition."
INTERNATIONAL OPERATIONS
In 1995, 1996, 1997 and the three months ended March 31, 1998,
international sales accounted for $2.1 million, $3.8 million, $8.2 million and
$2.7 million, or 21.6%, 26.1%, 35.0% and 40.4%, respectively, of the Company's
total sales. The Company anticipates that international sales will account for
an increasing portion of the Company's total sales. The Company's international
business is subject to special risks, including fluctuating exchange rates,
uncertainties in patent enforcement or the protection of other proprietary
rights, changes in import and export controls and changes in tax policies, trade
policies, tariffs, product safety and other regulatory requirements, in addition
to currency controls and political and economic risks. A portion of the
Company's sales is in foreign currencies, and changes in the value of these
foreign currencies relative to the United States dollar could affect the
Company's results of operations and financial position, and gains and losses on
translation to United States dollars could contribute to fluctuations in the
Company's results of operations. 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. There can be no assurance that engaging in
hedging transactions would materially reduce the effects of fluctuations in
foreign currency exchange rates on the Company's results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
UNCERTAINTY OF PATENTS; DEPENDENCE ON PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company's success will depend in large part on the Company's ability to
obtain patent protection with respect to its products and processes, defend
patents once obtained, maintain trade secrets and operate without infringing
upon the patents and proprietary rights of others and obtain appropriate
licenses to patents or proprietary rights held by third parties, both in the
United States and in foreign countries.
There can be no assurance that the Company will develop or obtain the
rights to products or processes that are patentable, that patents will issue
from any of the pending applications or that claims allowed will be sufficient
to protect the technology developed by or licensed to the Company. In addition,
no assurance can be given that any patents issued to or licensed by the Company
will not be challenged, invalidated, infringed or circumvented, or that the
rights granted thereunder will provide competitive advantages to the Company.
The Company may be required to obtain licenses with respect to certain
technology for which it does not have patents or to develop or obtain
alternative technology. There can be no assurance that the Company will be able
to obtain any such license on acceptable terms or at all. If such licenses are
not obtained, the Company could be delayed in or prevented from pursuing the
development or commercialization of its products, which would have a material
adverse effect on the Company.
5
8
Litigation may also be necessary to enforce any patents to which the
Company has rights or to determine the scope, validity and enforceability of
other parties' proprietary rights, which may affect the Company's products or
processes. An adverse outcome in any patent litigation or interference
proceeding could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require
the Company to cease using such technology, any of which could have a material
adverse effect on the Company.
The Company also relies on unpatented trade secrets and know-how to
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with employees, consultants and others. There can be
no assurance that these agreements will not be breached or terminated, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently discovered by
competitors. The Company relies on certain technologies to which it does not
have exclusive rights or which may not be patentable or proprietary and thus may
be available to competitors.
The Company has 17 patent applications and patents in the United States, 12
of which are also held or pending in foreign countries. The Company also has 16
registered trademarks in the United States and 12 trademark applications pending
in the United States and the European Union. The laws of some foreign countries
may not protect the Company's proprietary rights to the same extent as do the
laws of the United States.
The Company is aware of certain risks involving certain patent rights of
the Company. Kosaka Laboratory, Ltd. ("Kosaka") (i) claims that the Company by
virtue of its "Leap Frog" technology used in the FAROArm(R) is infringing U.S.
Pat. No. 4,430,796 issued to Kosaka and (ii) seeks a relatively large licensing
fee. The Company believes it has identified prior art which it believes supports
the Company's use of the technology and has filed a declaratory judgment action
seeking to declare that the Company is not infringing Kosaka's patent and that
Kosaka's patent is invalid. See "Business -- Legal Proceedings."
The Company is aware that three companies have been or are infringing the
claims on the Company's U.S. Pat. Nos. 5,251,127 and 5,305,203, which are
directed to the medical field, an area in which the Company is no longer active.
The Company has granted nonexclusive license agreements to two companies which
provide for minimum annual royalty payments, one of which obligates the Company
to enforce the patents against infringers if the sales of products amount to
more than $5,000,000. The Company is currently in negotiations with two other
companies which it believes are infringing the '127 and '203 patents. If a
license agreement with either party is not executed the Company would be
obligated to enforce the patents or compromise the existing license agreements.
A German competitor previously sold a CMM similar to the FAROArm(R) that is
covered by a German form of limited patent protection and is also covered by one
or more claims of a pending German utility patent application which covers the
basic CMM technology of the Company. As a result, the German company redesigned
its arm to avoid infringement. However, the Company's patent rights in Germany
could be challenged in court and could be opposed following publication. Either
event could narrow the scope of patent protection in Germany which would have a
material adverse effect on the Company.
TECHNOLOGICAL CHANGE
The market for the Company's products has only recently emerged and is
characterized by rapid technological change. Any technology in the measurement
industry, including the Company's technology, may be rendered obsolete or
non-competitive by future discoveries and developments. As a result, the
Company's growth and future financial performance depends upon its ability to
introduce new products and enhance existing products that accommodate the latest
technological advances and customer requirements. There can be no assurance that
any such products will be successfully introduced or will achieve market
acceptance. In addition, the Company believes that a substantial amount of
capital will be required for future research and development. Any failure by the
Company to anticipate or respond adequately to changes in technology and
customer preferences, or any significant delays in product development or
introductions, could have a material adverse effect on its results of operations
and financial condition. There can be no assurance that technological
6
9
developments will not render actual and proposed products or technologies of the
Company uneconomical or obsolete.
RISKS REGARDING ACQUISITIONS
The Company has recently completed a major acquisition and may pursue other
acquisitions. There can be no assurance that the Company will be able to
successfully integrate the operations and management of its recent acquisition.
Similarly, there can be no assurance that the Company will be able to consummate
or, if consummated, successfully integrate the operations and management of
future acquisitions. Acquisitions involve significant risks which could have a
material adverse effect on the Company, including: (i) the diversion of
management's attention to the assimilation of the businesses to be acquired;
(ii) the risk that the acquired businesses will fail to maintain the quality of
products that the Company has historically provided; (iii) the need to implement
financial and other systems and add management resources; (iv) the risk that key
employees of the acquired business will leave after the acquisition; (v)
potential liabilities of the acquired business; (vi) unforeseen difficulties in
the acquired operations; (vii) adverse short-term effects on the Company's
operating results; (viii) lack of success in assimilating or integrating the
operations of acquired businesses with those of the Company; (ix) the dilutive
effect of the issuance of additional equity securities; (x) the incurrence of
additional debt; and (xi) the amortization of goodwill and other intangible
assets involved in acquisitions that are accounted for using the purchase method
of accounting. See "Business -- Recent Acquisition."
DEPENDENCE ON KEY PERSONNEL
The development of new products, enhancements to existing products, and the
success of the Company are largely dependent upon the efforts, direction and
guidance of Simon Raab and Gregory A. Fraser, the Company's founders. The
Company's continued growth and success also depends in part on its ability to
attract and retain qualified managers and on the ability of its executive
officers and key employees to manage its operations successfully. The loss of
any of the Company's senior management or key personnel, particularly Messrs.
Raab or Fraser, or its inability to attract and retain key management personnel
in the future, could have a material adverse effect on the Company's results of
operations and financial condition. The Company currently carries key man life
insurance policies on Messrs. Raab and Fraser in the amount of $3.0 million
each. See "Management."
MANAGEMENT OF GROWTH
The Company has grown rapidly in recent years, with sales increasing from
$9.9 million in 1995 to $23.5 million in 1997, and this growth has from time to
time placed burdens on the Company's managerial resources and systems. As part
of its business strategy, the Company intends to continue pursuing rapid growth,
which is likely to place substantial demands on the Company's financial,
managerial, operational and other resources. Effective management of growth will
require the addition and training of personnel throughout the Company, expanded
customer services and support, expanded operational, financial and management
information systems and the implementation of additional control procedures,
including those related to the Company's international operations. There can be
no assurance that the Company will be able to maintain its recent rate of
revenue growth, continue its profitable operations or manage future growth
successfully. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition."
DEPENDENCE ON KEY SUPPLIERS
The Company purchases the major component parts for the FAROArm(R) from
third parties and conducts final assembly, customization and inspection of the
FAROArm(R) at its manufacturing facility. Although there is more than one
potential supplier of each of these components, the Company currently relies on
single sources of supply for several components. Accordingly, the Company is
vulnerable to the possible business interruption of its suppliers, and the
Company could experience temporary delays or interruptions while alternative
sources of supply are secured. Any such delays or interruptions could have a
material adverse effect on the Company's results of operations and financial
condition.
7
10
In particular, the Company currently purchases the vast majority of the
transducers used in certain models of the FAROArm(R) from a single supplier
located in Europe. Although there are a number of alternative suppliers for this
class of transducers, switching to these suppliers could result in temporary
delays or interruptions. While the Company maintains supplies of such
transducers for at least several months in its inventories, any reductions or
interruptions in supply, or material increases in the price of these components,
could cause the Company to suffer disruptions in the operation of its business
or to incur higher costs, which could have a material adverse effect on the
Company's results of operations and financial condition.
CYCLICALITY OF END USER MARKETS
A significant portion of the Company's sales are to manufacturers in the
automotive, aerospace and heavy equipment industries. Each of these industries
experiences cyclicality and may be adversely affected during recessionary
periods. The cyclical nature of these industries may exert significant influence
on the Company's revenues and results of operations. The volume of orders for
and prices of the Company's products are likely to be adversely impacted by
decreases in capital spending by a significant portion of its end users during
recessionary periods. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
DEPENDENCE ON KEY CUSTOMERS
Sales to the Company's ten largest customers represented an aggregate of
28.1% and 15.0% of the Company's sales in 1996 and 1997, respectively. Sales to
Boeing represented 10.0% of the Company's sales in 1996. No customer represented
10.0% or more of the Company's sales for the year ended December 31, 1997 or the
three months ended March 31, 1998. The Company does not maintain long-term
purchase agreements with any of its customers, all of which may unilaterally
reduce or discontinue their purchases of the Company's products. The Company's
loss of, or the failure to continue to make additional sales to, any of its key
customers could have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Customers."
WARRANTY LIABILITY AND MAINTENANCE CONTRACTS
The Company provides an initial one-year basic warranty, without additional
charge, on all its products. Historically, warranty costs associated with
providing the basic warranty have not been material. Additionally, the Company
currently offers its customers one, two and three-year extended maintenance
contracts for its products. The Company recognizes the revenue from these sales
ratably over the contract term and recognizes the cost of claims as incurred.
While the Company's deferred revenues have been sufficient to cover the expenses
of such claims, there can be no assurance that such deferred revenues will be
adequate in the future. The occurrence of a significant number of extended
warranty claims could have a material adverse effect on the Company's results of
operations and financial condition.
PRODUCT LIABILITY AND INSURANCE COVERAGE
The Company licenses and supports certain specialty products based on its
articulated arm technology that are used in medical applications. The sale of
the Company's medical products entails a risk of product liability claims.
Although no claims have been asserted to date, product liability or other claims
might be asserted against the Company by persons who allege that the use of the
Company's products resulted in injury or other adverse effects, and such claims
could involve large amounts of alleged damages and significant defense costs.
Although the Company currently maintains product liability insurance, the
liability limits or scope of the Company's insurance policies could be
inadequate to protect against potential claims. In addition, the Company's
insurance policies are subject to annual renewal. Although the Company has been
able to obtain product liability insurance in the past, the cost and
availability of this insurance varies and such coverage could be difficult to
obtain in the future. A successful claim against the Company in excess of its
available insurance coverage could have a material adverse effect on the
Company's results of operations and financial condition. In addition, the
Company's business reputation could be adversely affected by product liability
claims, regardless of their merit or the eventual outcome of such claims.
8
11
CONTROL BY PRINCIPAL SHAREHOLDERS; ANTI-TAKEOVER CONSIDERATIONS
Messrs. Simon Raab and Gregory A. Fraser, in the aggregate, beneficially
own approximately 28% of the outstanding Common Stock. As a result, Messrs. Raab
and Fraser retain significant voting power with respect to the election of the
Company's directors and the outcome of other matters requiring shareholder
approval. The voting power of Messrs. Raab and Fraser, together with the
staggered Board of Directors and the anti-takeover effects of certain provisions
contained in both the Florida Business Corporation Act and in the Company's
Articles of Incorporation and Bylaws (including, without limitation, the ability
of the Board of Directors of the Company to issue shares of Preferred Stock and
to fix the rights and preferences thereof), may have the effect of delaying,
deferring or preventing an unsolicited change in the control of the Company,
which may adversely affect the market price of the Common Stock. See
"Management," "Principal and Selling Shareholders" and "Description of Capital
Stock."
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, the Company has outstanding 11,359,828
shares of Common Stock. Of these shares, 6,060,342 shares, including the 343,750
shares of Common Stock sold in this offering, will be freely tradeable by
persons other than affiliates of the Company without restriction under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining
5,299,486 shares of Common Stock are "restricted" securities within the meaning
of Rule 144 under the Securities Act and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available. All of such shares are beneficially owned by persons who are
affiliates of the Company, and the sale of a substantial number of shares of
Common Stock could adversely affect the market price of the Common Stock. See
"Shares Eligible for Future Sale."
POSSIBLE VOLATILITY OF STOCK PRICE
The Company believes that various factors such as general economic
conditions, changes or volatility in the financial markets and quarterly or
annual variations in the Company's financial results could cause the market
price of the Common Stock to fluctuate substantially.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
shares of Common Stock offered hereby. See "Principal and Selling Shareholders"
and "Plan of Distribution."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on the Nasdaq National 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, for the period indicated, the high and low sales prices of the Common
Stock.
PERIOD HIGH LOW
- ------ ---- ---
1997
Third Quarter (from September 18, 1997)..................... $18 1/8 15 3/8
Fourth Quarter.............................................. 18 9 3/8
1998
First Quarter............................................... 14 1/2 10
Second Quarter (through June 18, 1998)...................... 12 1/2 9 1/4
9
12
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently anticipates that all of its earnings will be
retained for development and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future. Any future determination to
pay cash dividends will be at the discretion of the Board of Directors and will
be dependent upon the Company's financial condition, results of operation,
capital requirements, limitations which may be included in loan and other
agreements and such other factors as the Board of Directors deems relevant.
10
13
SELECTED CONSOLIDATED FINANCIAL DATA
The historical selected data presented below are derived from the
consolidated financial statements of the Company and its subsidiaries at
December 31, 1995, 1996 and 1997 and for the years then ended, which are
included elsewhere in this Prospectus and have been audited by Deloitte & Touche
LLP, independent public accountants. The selected consolidated financial data at
December 31, 1993 and 1994 and for the years then ended have been derived from
audited consolidated financial statements not included herein. The selected
consolidated financial data for the three months ended March 31, 1997 and 1998
have been derived from the Company's unaudited consolidated financial
statements. In the opinion of management, all unaudited consolidated financial
statements used to derive the information presented have been prepared on the
same basis as the audited consolidated financial statements and include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the results for the periods presented. The information for the
three months ended March 31, 1998 is not necessarily indicative of the operating
results to be expected for any future period. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and the Consolidated
Financial Statements and related notes and other financial information included
elsewhere in this Prospectus.
The unaudited pro forma data has been derived from the Consolidated
Financial Statements of the Company and CATS as of and for the year ended
December 31, 1997 appearing elsewhere herein. The pro forma operating data is
presented as if the Company's acquisition of CATS had occurred on January 1,
1997. The pro forma balance sheet data is presented as if the acquisition had
occurred on March 31, 1998. The pro forma information incorporates certain
assumptions that are included in the notes to the Pro Forma Financial Statements
included elsewhere in this Prospectus. The pro forma information does not
purport to represent what the Company's financial position or results of
operations would actually have been if the acquisition had, in fact, occurred on
the dates indicated, or to project the Company's financial condition or results
of operations at any future date or for any future period.
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------------- ----------------------------------------
PRO PRO
FORMA FORMA
1998 1998 1997 1997 1997 1996
---------- ----------- ---------- ----------- ----------- -----------
STATEMENT OF OPERATIONS
DATA:
Sales....................... $7,214,951 $ 6,682,201 $4,889,471 $26,859,833 $23,516,385 $14,656,337
Cost of sales............... 2,851,540 2,681,762 1,948,549 10,616,624 9,610,838 6,486,268
---------- ----------- ---------- ----------- ----------- -----------
Gross profit................ 4,363,411 4,000,439 2,940,922 16,243,209 13,905,547 8,170,069
Operating expenses:
Selling.................... 1,978,708 1,583,536 1,158,559 6,887,388 5,676,113 3,731,762
General and
administrative........... 598,582 598,582 302,523 1,519,657 1,519,657 744,206
Depreciation and
amortization............. 142,362 110,362 58,873 1,293,996 293,996 230,799
Research and development... 563,832 386,444 178,073 2,052,604 1,075,505 730,124
Employee stock
options(4)............... 43,041 43,041 3,270 408,000 408,000 23,100
---------- ----------- ---------- ----------- ----------- -----------
Total operating
expenses............ 3,326,525 2,721,965 1,701,298 12,161,645 8,973,271 5,459,991
---------- ----------- ---------- ----------- ----------- -----------
Income (loss) from
operations................. 1,036,886 1,278,474 1,239,624 4,081,564 4,932,276 2,710,078
Interest and other income... 317,273 317,273 (5,810) 499,752 499,752 25,145
Interest expense............ (13,465) -- (34,262) (134,186) (110,768) (212,669)
---------- ----------- ---------- ----------- ----------- -----------
Income (loss) before income
taxes...................... 1,340,694 1,595,747 1,199,552 4,447,130 5,321,260 2,522,554
Income tax expense
(benefit).................. 432,000 572,356 479,821 1,789,000 2,114,630 1,115,892
---------- ----------- ---------- ----------- ----------- -----------
Net income (loss).... $ 908,694 $ 1,023,391 $ 719,731 $ 2,658,130 $ 3,206,630 $ 1,406,662
=========== =========== ===========
Other Comprehensive Income
Foreign Currency
Translation
Adjustments................ (43,786) (43,786) --
---------- ----------- ----------
Other Comprehensive
Income................... (43,786) (43,786) --
---------- ----------- ----------
Comprehensive Income........ $ 864,908 $ 979,605 $ 719,731
========== =========== ==========
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
STATEMENT OF OPERATIONS
DATA:
Sales....................... $9,862,242 $4,508,837 $5,106,270
Cost of sales............... 4,987,779(1) 2,222,085 2,266,296
---------- ---------- ----------
Gross profit................ 4,874,463 2,286,752 2,839,974
Operating expenses:
Selling.................... 2,008,301 1,569,014 1,971,177
General and
administrative........... 503,184 521,040(2) 424,026
Depreciation and
amortization............. 341,494(3) 270,615 211,682
Research and development... 363,871 173,400 276,489
Employee stock
options(4)............... 106,700 -- --
---------- ---------- ----------
Total operating
expenses............ 3,323,550 2,534,069 2,883,374
---------- ---------- ----------
Income (loss) from
operations................. 1,550,913 (247,317) (43,400)
Interest and other income... 62,212 11,706 12,648
Interest expense............ (355,468) (192,543) (110,504)
---------- ---------- ----------
Income (loss) before income
taxes...................... 1,257,657 (428,154) (141,256)
Income tax expense
(benefit).................. (342,000) -- --
---------- ---------- ----------
Net income (loss).... $1,599,657 $ (428,154) $ (141,256)
========== ========== ==========
Other Comprehensive Income
Foreign Currency
Translation
Adjustments................
Other Comprehensive
Income...................
Comprehensive Income........
11
14
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------------- ----------------------------------------
PRO PRO
FORMA FORMA
1998 1998 1997 1997 1997 1996
---------- ----------- ---------- ----------- ----------- -----------
Net income (loss) per common
share:
Basic...................... $ 0.08 $ 0.10 $ 0.10 $ 0.30 $ 0.41 $ 0.20
Assuming dilution.......... $ 0.08 $ 0.10 $ 0.10 $ 0.29 $ 0.39 $ 0.19
Weighted-average common
shares outstanding:
Basic...................... 10,861,522(6) 9,944,855 7,000,000 8,748,382(6) 7,831,715 7,000,000
Assuming dilution.......... 11,147,823(6) 10,231,156 7,333,290 9,105,715(6) 8,189,048 7,349,041
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
Net income (loss) per common
share:
Basic...................... $ 0.23(5) $ (0.06) $ 0.02
Assuming dilution.......... $ 0.22 $ (0.06) $ (0.02)
Weighted-average common
shares outstanding:
Basic...................... 7,000,000 7,000,000 7,000,000
Assuming dilution.......... 7,166,739 7,149,690 7,149,690
MARCH 31,
-------------------------
PRO YEAR ENDED DECEMBER 31,
FORMA ---------------------------------------------------------------
1998 1998 1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Working capital................... $33,073,590 $38,077,590 $37,277,545 $3,832,424 $1,321,517 $ (718,564) $ (109,760)
Total assets...................... 42,121,558 43,072,558 41,192,333 7,815,668 5,479,698 4,229,551 3,877,445
Total debt........................ 0 0 0 1,501,267 2,200,000 2,925,000 2,100,000
Total shareholders' equity........ 38,301,000 40,197,796 38,939,411 3,773,699 2,343,937 637,580 1,158,034
- ---------------
(1) Includes $531,186 from a change in the estimated life of product development
costs. See Note 1 to the Company's Consolidated Financial Statements,
"Product Design Costs."
(2) Includes $146,541 for costs incurred in a terminated private stock offering.
(3) Includes a charge for unamortized patent costs of $192,570 due to the
discontinuance of certain products sold in the medical field.
(4) Reflects compensation expense incurred upon the vesting of options having an
exercise price less than the fair market value of the Common Stock on the
date of grant. The weighted average exercise price of such vested options is
$0.36 per share.
(5) Includes a benefit of $0.11 per share resulting from a reduction in the
deferred tax asset valuation allowance.
(6) Includes Common Stock issued in connection with the acquisition of CATS.
12
15
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 Prospectus.
OVERVIEW
The Company designs, develops, markets and supports portable,
software-driven, 3-D measurement systems that are used in a broad range of
manufacturing and industrial applications. The Company's principal products are
the FAROArm(R) articulated measuring device and its companion AnthroCam(R)
software. Together, these products integrate measurement and quality inspection
functions with CAD and CAM technology to improve productivity, enhance product
quality and decrease rework and scrap in the manufacturing process. The
Company's products have been purchased by more than 600 customers, ranging from
small machine shops to such large manufacturing and industrial companies as
General Motors, Chrysler, Ford Motor Co., 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. Since that time, sales to the manufacturing and industrial
markets have increased to 96.5% of sales in 1996 and 98.0% of sales in 1997. 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 21.6% of sales in 1995, 26.1%
of sales in 1996 and 35.0% of sales in 1997.
The Company derives revenues primarily from the sale of the FAROArm(R), its
six-axis articulated measuring device, and AnthroCam(R), its companion 3-D
measurement software. The majority of the Company's revenues are derived from
the sale of its bundled hardware and software measurement systems. Revenue
related to these products is recognized upon shipment.
Revenue growth has resulted primarily 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
addition of new product features. Additionally, during this period, the Company
lowered its prices on its bundled products to stimulate volume. The Company
expects to continue its revenue growth through further penetration of its
installed customer base, expansion of its domestic and international sales force
and expansion of its product line and service offerings.
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.
13
16
Accounting for wholly-owned foreign subsidiaries is maintained in the
currency of the respective foreign jurisdiction and, therefore, fluctuations in
exchange rates may have an impact on intercompany accounts reflected in the
Company's Consolidated Financial Statements. Although the Company has not
historically engaged in any hedging transactions to limit risks of currency
fluctuations, it intends to do so in the future.
RESULTS OF OPERATIONS
The following table sets forth for the periods presented, the percentage of
sales represented by certain items in the Company's Consolidated Statements of
Income:
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------- ------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
Sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 40.1 39.9 40.9 44.3 50.6
----- ----- ----- ----- -----
Gross profit................................... 59.9 60.1 59.1 55.7 49.4
Operating expenses:
Selling........................................ 23.7 23.7 24.1 25.5 20.4
General and administrative..................... 9.0 6.2 6.5 5.1 5.1
Depreciation and amortization.................. 1.6 1.2 1.3 1.6 3.5
Research and development....................... 5.8 3.6 4.6 5.0 3.7
Employee stock options......................... 0.6 0.1 1.7 0.2 1.1
----- ----- ----- ----- -----
Total operating expenses............. 40.7 34.8 38.2 37.4 33.8
----- ----- ----- ----- -----
Income from operations......................... 19.2 25.4 20.9 18.3 15.6
Other income................................... 4.7 (0.1) 2.1 0.2 0.6
Interest expense............................... -- (0.7) (0.5) (1.5) (3.6)
----- ----- ----- ----- -----
Income before income taxes..................... 23.9 24.5 22.5 17.0 12.6
Income tax expense (benefit)................... 8.6 9.8 9.0 7.6 (3.5)
----- ----- ----- ----- -----
Net income..................................... 15.3% 14.7% 13.5% 9.4% 16.1%
===== ===== ===== ===== =====
Three Months ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Sales. Sales increased $1.8 million, or 36.7% from $4.9 million for the
three months ended March 31, 1997 to $6.7 million for three months ended March
31, 1998. The increase was primarily due to increased unit sales resulting from
additional sales personnel and expanded promotional efforts, especially in the
international markets. International sales increased $1.4 million or 119% from
$1.2 million for the three months ended March 31, 1997, to $2.7 million for the
three months ended March 31, 1998.
Gross Profit. Gross profit increased $1.1 million, or 36.0% from $2.9
million for the three months ended March 31, 1997 to $4.0 million for the three
months ended March 31, 1998. Gross margin was virtually unchanged at 60.1% for
the three months ended March 31, 1997 compared to 59.9% for the three months
ended March 31, 1998. Gross profit increased as a result of increased sales at
the same approximate average sale price for both periods.
Selling expenses. Selling expenses increased $425,000, or 36.7%, from $1.2
million for the three months ended March 31, 1997 to $1.6 million for the three
months ended March 31, 1998. This increase was a result of the Company's
expansion of sales and marketing staff in the United States and Europe. Selling
expenses as a percentage of sales was unchanged at 23.7% for the three months
ended March 31, 1997 and the three months ended March 31, 1998.
General and administrative expenses. General and administrative expenses
increased $296,000, or 97.8%, from $303,000 for the three months ended March 31,
1997 to $599,000 for the three months ended March 31, 1998. This increase was
due in part to an increase in the number of administration and accounting
employees to 20 in the first quarter of 1998 from nine in the first quarter of
1997, resulting in an increase of
14
17
$148,000 in salaries. Also, professional and legal expenses increased $83,000 in
the first quarter of 1998 compared to the same period in 1997, in part as a
result of costs related to SEC reporting and investor relations. General and
administrative expenses as a percentage of sales increased from 6.2% for the
three months ended March 31, 1997 to 9.0% for the three months ended March 31,
1998.
Research and development expenses. Research and development expenses
increased $208,000, or 117.0%, from $178,000 for the three months ended March
31, 1997 to $386,000 for the three months ended March 31, 1998. This increase
was a result of the Company's continued activities associated with the
development of technologies related to new products. Current R&D expenses for
materials increased $41,000 in the first quarter of 1998 compared to the same
period in 1997.
Interest Income. Interest Income increased $320,000, or 100.0%, to
$320,000 for the first three months of 1998, compared to zero in the first 3
months of 1997. This increase was attributable to interest on the $31.7 million
proceeds from the Company's initial public offering in 1997.
Interest expense. Interest expense decreased $34,000, or 100.0%, from
$34,000 for the three months ended March 31, 1997 to zero for the three months
ended March 31, 1998. This reduction was attributable to the elimination of the
Company's debt in September 1997 from use of proceeds from the Company's initial
public offering.
Income Tax Expense. Income tax expense increased $92,000 or 19.3% from
$480,000 for the three months ended March 31, 1997 to $572,000 for the three
months ended March 31, 1998. The provision for income taxes as a percentage of
income before income taxes was 40.0% for the three months ended March 31, 1997
and 35.9% for the three months ended March 31, 1998. The decrease in the tax
provision percentage was attributable to tax savings of approximately $30,000 on
$82,000 in the non-taxable interest income, and an increase of $33,000 in tax
savings derived from the Company's Foreign Sales Corporation income exemption.
Net Income. Net income increased $303,000, or 42.2% from $720,000 for the
three months ended March 31, 1997 to $1,023,000 for the three months ended March
31, 1998.
1997 Compared to 1996
Sales. Sales increased $8.9 million, or 60.5%, from $14.6 million in 1996
to $23.5 million in 1997. The increase was primarily the result of increased
unit sales due to an expanded sales effort that included the addition of sales
personnel at existing offices, and the opening of sales offices. International
sales increased to 35.0% of total sales in 1997, from 26.1% in 1996, in part
because of increased sales in the European countries in which the Company has
sales offices, and increased sales to several international distributors.
Gross profit. Gross profit increased $5.7 million, or 70.2%, from $8.2
million in 1996 to $13.9 million in 1997. Gross margin increased from 55.7% in
1996 to 59.1% in 1997. This margin increase was attributable to a reduction in
product costs as a result of technological improvements, purchasing economies
and production efficiencies.
Selling expenses. Selling expenses increased $1.9 million, or 52.1%, from
$3.7 million in 1996 to $5.7 million in 1997. This increase was a result of the
Company's expansion of sales and marketing staff in the United States and
Europe, and expanded promotional efforts. Specifically, hiring, training, and
salary expenses increased $965,000, sales commissions and bonuses increased
$378,000, and promotional expenses increased $333,000. Selling expenses as a
percentage of sales decreased from 25.5% in 1996 to 24.1% in 1997.
General and administrative expenses. General and administrative expenses
increased $775,000, or 104.2%, from $774,000 in 1996 to $1.5 million in 1997.
This increase resulted primarily from the hiring of additional administrative
personnel, and increases in professional and legal expenses, in part as a result
of the Company's periodic reporting requirements with the Securities and
Exchange Commission resulting from the Company's initial public offering in
September 1997. General and administrative expenses as a percentage of sales
increased from 5.1% in 1996 to 6.5% in 1997.
Research and development expenses. Research and development expenses
increased $345,000, or 47.3%, from $730,000 in 1996 to $1.1 million in 1997.
This increase was primarily a result of a $246,000
15
18
increase in hiring, training, and salary cost related to new personnel. Research
and development expenses as a percentage of sales decreased from 5.0% in 1996 to
4.6% in 1997, as the growth in these expenses did not match the percentage
growth in sales.
Employee stock options expenses. Employee stock options expenses increased
$385,000 from $23,000 in 1996 to $408,000 in 1997. This increase was primarily
attributable to the grant of 52,733 options in May 1997, which was made at an
exercise price below the fair market value of the Common Stock on the date of
the grant.
Other income. Other income increased $475,000 from $25,000 in 1996 to
$500,000 in 1997. This increase was attributable to interest income on the $31.7
million proceeds from the Company's initial public offering in 1997.
Interest expense. Interest expense decreased $102,000, or 47.9%, from
$213,000 in 1996 to $111,000 in 1997. This reduction was attributable to the
refinancing of the Company's indebtedness at a lower interest rate, and also the
utilization of the proceeds from the Company's initial public offering to repay
all indebtedness.
Income tax expense. Income tax expense increased $999,000, or 89.5%, from
$1.1 million in 1996 to $2.1 million in 1997. The provision for income taxes as
a percentage of income before income taxes was 44.2% in the twelve months of
1996 and 39.7% in the twelve months of 1997. The lower effective tax rate in
1997 was because of a higher research and development tax credit and the
creation of a foreign sales corporation.
Net income. Net income increased $1.8 million, or 128.0%, from $1.4
million in 1996 to $3.2 million in 1997. This increase was a result of increased
sales, higher gross margin, $442,000 in interest income in 1997 versus no
interest income in 1996, and a lower tax rate.
1996 Compared to 1995
Sales. Sales increased $4.8 million, or 48.6%, from $9.9 million in 1995
to $14.7 million in 1996. This increase was attributable to a shift in product
mix to higher priced Silver Series models of the FAROArm(R) and increased unit
sales resulting from completion of the Company's shift in focus from the medical
market to the manufacturing and industrial markets.
Gross profit. Gross profit increased $3.3 million, or 67.6%, from $4.9
million in 1995 to $8.2 million in 1996. Gross margin increased from 49.4% in
1995 to 55.7% in 1996. This increase was due to a reduction in product costs as
a result of technological improvements and to an increase in sales of higher
margin Silver Series models of the FAROArm(R). In addition, gross profit for
1995 was adversely affected by a $531,000 charge to cost of sales relating to a
change in the estimated life of product design costs.
Selling expenses. Selling expenses increased $1.7 million, or 85.8%, from
$2.0 million in 1995 to $3.7 million in 1996 primarily as a result of the
Company's expansion of sales and marketing staff ($784,000), the opening of
additional sales offices in the United States and Europe in the second half of
1996 ($354,000) and increased promotional and related selling expenses
($409,000). Selling expenses as a percentage of sales increased from 20.4% in
1995 to 25.5% in 1996.
General and administrative expenses. General and administrative expenses
increased $241,000, or 47.9%, from $503,000 in 1995 to $744,000 in 1996. This
increase was primarily a result of additional accounting personnel ($105,000)
and increased cost of supplies and other expenses, including occupancy costs
($109,000). General and administrative expenses as a percentage of sales
remained unchanged at 5.1% in 1996 compared to 1995.
Research and development expenses. Research and development expenses
increased $366,000, or 100.7%, from $364,000 in 1995 to $730,000 in 1996. This
increase was a result of the hiring of additional personnel to design and
develop improved hardware, software and product functionality ($228,000) and
increased research and development materials and other expenses ($138,000).
Research and development expenses as a percentage of sales increased from 3.7%
in 1995 to 5.0% in 1996.
16
19
Employee stock options expenses. Employee stock options expenses decreased
$84,000, or 78.4%, from $107,000 in 1995 to $23,000 in 1996. The Company did not
grant options in 1996, and compensation expense relating to options granted in
1995 was significantly lower in 1996 than in 1995.
Interest expense. Interest expense decreased $143,000, or 40.2%, from
$355,000 in 1995 to $213,000 in 1996 due to a reduction in the amount of the
Company's indebtedness.
Income tax expense. Income tax expense increased $1.5 million from a
benefit of $342,000 in 1995 to an expense of $1.1 million in 1996. The provision
for income taxes as a percentage of income before income tax was 44.2% in 1996.
In 1995, the Company had an income tax benefit as a result of the reversal of a
deferred tax valuation allowance.
Net income. Net income decreased $193,000, or 12.1%, from $1.6 million in
1995 to $1.4 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed an initial public offering of
Common Stock which provided net proceeds of 31.7 million.
For the three months ended March 31, 1998, net cash provided by the
operating activities was $190,000 compared to net cash used by operating
activities of $227,000 for the same period of 1997. Net cash used in this period
decreased as a result of increases in net income ($303,000) and accounts payable
and accrued liabilities ($1,321,000), offset by an increase in accounts
receivable ($879,000) and decreases in income taxes payable ($56,000) and
deferred revenues ($295,000). For the year ended December 31, 1997, net cash
used by operating activities was $832,000 compared to net cash provided by
operating activities of $1.5 million for 1996. Net cash decreased due to an
increase in accounts receivable and a decrease in accounts payable.
Net cash used in investing activities was $563,000 for the three months
ended March 31, 1998 compared to $104,000 for the three months ended March 31,
1997. Net cash used in investing activities increased for the first three months
of 1998 due to a $307,000 increase in purchases of property and equipment, and a
$152,000 increase in product design costs. Net cash used in investing activities
was $792,000 for the year ended December 31, 1997 compared to $550,000 for 1996.
Net cash used in investing activities increased in 1997 due to a $108,000
increase in product design costs, a $70,000 increase in patent costs, and a
$64,000 increase in purchases of property and equipment.
Net cash provided by financing activities for the three months ended March
31, 1998 was $18,807 compared to $197,000 for the three months ended March 31,
1997. The decrease in net cash provided by financing activities was due
primarily to the limitation of loans payable. Net cash provided by financing
activities for the year ended December 31,1997 was $30.2 million compared to net
cash used in financing activities of $715,000 for 1996. Net cash provided by
financing activities increased due to the proceeds from the Company's initial
public offering in September 1997. 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.
The Company has a loan agreement (the "Agreement") in the form of a term
note and a line of credit. The Agreement combines the equivalent of three
successive one-year term loans, each equal to that portion of the loan that will
be fully amortized in the ensuing year, with a line of credit equal to that
portion of the loan that will not be fully amortized in the ensuing year. The
Company had available borrowings under the Agreement totaling approximately $2
million as of March 31, 1998. Interest accrues at the 30-day commercial paper
rate plus 2.7% and is paid monthly. Borrowings under the Agreement are
collateralized by the Company's accounts and notes receivable, inventory,
property and equipment, intangible assets, and deposits. The Agreement contains
restrictive covenants, including the maintenance of certain amounts of working
capital and tangible net worth and limits on loans to related parties, and
prohibits the Company from declaring dividends. There were no outstanding
borrowings under the Agreement at December 31, 1997 and March 31, 1998.
17
20
In April 1997, the Company obtained a one-year secured $1.0 million line of
credit which bears interest at the 30-day commercial paper rate plus 2.65% per
annum (8.65% at December 31, 1997). There were no outstanding borrowings under
this line of credit at December 31, 1997 and March 31, 1998.
The Company's principal commitments at March 31, 1998 were leases on its
headquarters and regional offices, and 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 1998.
The proposed expansion of the Company's sales force is anticipated to
increase the Company's selling, general and administrative expenses over the
next 12 months. The Company believes that it will have adequate capital to cover
these expenses at least through 1998.
FOREIGN EXCHANGE EXPOSURE
Sales outside the United States represent a significant portion of the
Company's total revenues. Currently, 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 may use forward 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 1998.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company is in the process of identifying all significant applications
that will require modification to ensure Year 2000 Compliance. Internal and
external resources are being used to make the required modifications and test
Year 2000 Compliance. The modification process of all significant applications
is substantially complete. The Company plans on completing the testing process
of all significant applications by December 31, 1998.
In addition, the Company is in the process of initiating formal
communications with others with whom it does significant business to determine
their Year 2000 Compliance readiness and the extent to which the Company is
vulnerable to any third party Year 2000 issues. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including
18
21
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ from those plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130). This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. 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 enterprise display an amount representing total
comprehensive income for the period in that financial statement. Additionally,
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. The Company adopted the provisions of SFAS No. 130 effective
January 1, 1998.
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management has not determined
the effect of this statement on its financial statement disclosure.
CERTAIN FORWARD-LOOKING INFORMATION
Certain matters discussed in this document are forward-looking statements
within the meaning of the federal securities laws. Although the Company believes
that the expectations reflected in such forward-looking statements are based
upon reasonable assumptions, there can be no assurance that its expectations
will be achieved. Factors that could cause actual results to differ materially
from the Company's current expectations include: market acceptance of the
Company's products, which consist of closely interdependent products; the amount
and timing of and expenses associated with the development and marketing of new
products; the Company's ability to protect and continue to develop its
proprietary technology in the face of competition and technological change;
risks associated with the Company's international operations; and general
economic conditions.
19
22
BUSINESS
GENERAL
The Company designs, develops, markets and supports portable,
software-driven, three-dimensional ("3-D") measurement systems that are used in
a broad range of manufacturing and industrial applications. The Company's
principal products are the FAROArm(R) articulated measuring arm and its
companion AnthroCam(R) software. Together, these products integrate the
measurement and quality inspection function with computer-aided design ("CAD")
and computer-aided manufacturing ("CAM") 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 17 patents in the United States,
12 of which also are held or pending in other jurisdictions. The Company's
products have been purchased by more than 600 customers worldwide, ranging from
small machine shops to such large manufacturing and industrial companies as
General Motors, Chrysler, Ford, Boeing, Lockheed Martin, General Electric,
Westinghouse Electric, Caterpillar and Komatsu Dresser.
INDUSTRY BACKGROUND
The creation of physical products involves the processes of design,
engineering, production and measurement and quality inspection. These basic
processes have been profoundly affected by the computer hardware and software
revolution that began in the 1980s. Computer-aided design ("CAD") software was
developed to automate the design process, providing manufacturers with
computerized 3-D design capability. Today, most manufacturers use some form of
CAD software to create designs and engineering specifications for new products
and to quantify and modify designs and specifications for existing products. The
benefits of CAD are significant. The CAD process offers a three-dimensional,
highly-efficient and inherently flexible alternative to traditional design
methods. Many manufacturers have also recently adopted computer-aided
manufacturing ("CAM") technology, in which CAD data directs machines in the
manufacturing process. CAM has further improved the efficiency and quality of
the production of manufactured goods.
A significant aspect of the manufacturing process which traditionally has
not benefitted 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 CMMs 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.
20
23
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 requires 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 requires intermediate precision measurements
(between one- and twenty-thousandths of an inch). In the absence of intermediate
precision measuring systems, manufacturers often are unable to make appropriate
measurements or part-to-CAD comparisons during the manufacturing process,
resulting in decreased productivity, poor product quality and unacceptable
levels of product rework and scrap. Manufacturers increasingly require more
rapid design, greater control of the manufacturing process, tools to compare
components to their CAD specifications and the ability to measure precisely
components that cannot be measured or inspected by conventional CMMs. Moreover,
they increasingly require measurement capabilities to be integrated into the
manufacturing process and to be available on the factory floor.
FARO'S BUSINESS
The Company designs, develops, markets and supports portable,
software-driven, 3-D measurement systems that are used in a broad range of
manufacturing and industrial applications. The Company's principal products are
the FAROArm(R) articulated measuring device and its companion AnthroCam(R)
software. 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 17
patents in the United States, 12 of which also are held or pending in other
jurisdictions. The Company's products have been purchased by more than 600
customers worldwide, ranging from small machine shops to such large
manufacturing and industrial companies as General Motors, Chrysler, Ford,
Boeing, Lockheed Martin, General Electric, Westinghouse Electric, Caterpillar
and Komatsu Dresser.
THE FARO STRATEGY
The Company's objective is to strengthen its position as the leading
provider of portable, software-driven, 3-D measurement systems. To achieve this
objective, the Company has adopted the following principal strategies:
Focus on the Portable 3-D Measurement Market. The Company believes it
is a pioneer in the development and marketing of portable, software-driven,
3-D measurement systems. Based on current sales of all portable 3-D
measurement systems to date, the Company believes that the market for these
products is substantial, but is currently underserved. The Company expects
its intensive efforts to document and publicize new applications to lead to
a greater market awareness of the benefits of the Company's technology.
Increase Sales Force and Distribution. The Company has implemented an
integrated team sale process and has developed strategic relationships with
third party distributors which the Company believes have increased sales
effort efficiency. The Company intends to add additional personnel to its
existing sales offices and to open additional sales offices and add
distributors to provide geographic coverage in territories with strong
manufacturing and industrial bases.
Further Penetrate its Installed Customer Base. The Company has more
than 600 customers that use its products in a broad range of manufacturing
and industrial applications. Many of these customers are large
manufacturers with multiple facilities. For many of its customers, the
Company's products are
21
24
used only at certain manufacturing facilities or by certain divisions.
Accordingly, the Company will seek to leverage successful installations of
its products to encourage adoption at additional customer sites.
Increase International Sales. The Company believes that substantial
international demand exists for portable, software-driven, 3-D measurement
systems. Therefore, the Company plans to extend its significant commitment
to international sales and support to take advantage of worldwide market
opportunities. International sales represented 26.1% of the Company's sales
for 1996 and 35.0% for 1997. The Company intends to increase international
sales by expanding its current sales organization in Europe and entering
new markets, such as the Pacific Rim and Latin America.
Leverage its Technology. The Company has made a substantial
investment in the development of its technology, employs a number of
proprietary manufacturing processes and currently holds or has pending 17
patents in the United States, 12 of which are also held or pending in other
jurisdictions. The Company believes that the foundation of its successes to
date has been the technological superiority and affordability of its
products. The Company intends to leverage its existing technology to lower
the cost of producing, and enhance the functionality of, its products.
Expand its Product Line and Service Offerings. The Company intends to
introduce new products to meet the requirements of its customers. The
Company also intends to capitalize on its experience in solving unique
production problems to increase revenues through technical service
offerings. In addition, the Company may seek to acquire complementary
businesses or technologies to expand its product and service offerings.
RECENT ACQUISITION
On May 15, 1998, the Company acquired all the outstanding equity interest
in Cats computer aided technologies, Computeranwendungen in der
Fertigungssteuerung, GmbH ("CATS"), a German limited liability company based in
Karlsruhe, Germany, which is engaged in the business of developing and selling
portable measurement and quality inspection systems driven by CAD-based
measurement software, primarily to the German automotive industry. The total
purchase price of $20 million (including earn-out) consisted of $5 million cash,
916,667 shares of Common Stock, plus the right to receive up to an additional
333,333 shares of Common Stock as contingent earn-out depending on post-closing
sales by CATS. CATS' founders and former owners, Siegfried Buss and Wendelin
Scharbach (who are the Selling Shareholders hereunder), have joined the Company
as Assistant Director of Software Development and Vice President of Sales,
respectively, and also will serve as Chief Technology Executive and President of
CATS, respectively. The 343,740 shares of Common Stock offered hereby are being
sold by Messrs. Buss and Scharbach to fund German taxes incurred by them upon
their sale of CATS to the Company.
CATS has over 120 customers, including Audi, BMW, General Motors, Porsche
and Volkswagen. Founded in 1993, CATS had total revenues of $2.1 million and
$3.3 million in 1996 and 1997, respectively. As of the date of this Prospectus,
CATS had approximately 40 employees.
The Company intends to market CATS' products to automotive manufacturers
and to other existing or potential FARO customers outside Germany, including the
aerospace industry. Additionally, the Company believes there is a large
potential market for CATS' software products among users of conventional
fixed-base CMMs, which can be retrofitted using CATS' CAD-based measurement
software and ordinary PCs on the factory floor to link measurement and quality
inspection functions on the factory floor with CMMs in the metrology laboratory.
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
22
25
measurement, the operator simply touches the object to be measured with a probe
at the end of the arm and presses a button. Data can be captured as either
individual points or a series of points. Digital rotational transducers located
at each of the joints of the arm measure the angles at those joints. This
rotational measurement data is transmitted to an on-board controller that
converts the arm angles to precise locations in 3-D space using "xyz" position
coordinates and "ijk" orientation coordinates.
The FAROArm(R) has been designed as an open architecture system. The
communications parameters of the on-board processors have the ability to combine
advanced sensing probes, integrate with conventional CMM software and
communicate with different CAD software packages and a variety of computer
operating systems. This open architecture is designed to provide for easy
integration of the FAROArm(R) into the manufacturing environment. The customer's
ability to use an installed base of computing hardware and software further
reduces the cost of installation and training while initiating the transition to
the Company's preferred group of CAD-based products. To encourage integration of
the FAROArm(R) into the manufacturing environment, the Company provides a group
of seamless interface drivers for leading CAD/CAM packages, including
AutoCAD(R), CADKey(R) and SURFCAM(R). 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 two product
lines: the Silver Series and the Bronze Series.
Silver Series. The Silver Series models are the Company's higher
precision (P.003 to P.007 inches) measuring devices and are available in
six, eight and twelve foot measurement diameters. These models are most
frequently used for factory floor inspection and fit-checking applications.
Depending on the size, configuration and precision level, the Silver Series
models are priced between $50,000 and $70,000 when sold as a turnkey system
including hardware and AnthroCam(R) software and between $30,000 and
$60,000 without AnthroCam(R) software.
Bronze Series. The Bronze Series models are the Company's medium
precision (P.012 to P.016 inches) measuring devices and are available in
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 size, configuration and precision level, the Bronze Series
models are priced between $30,000 and $50,000 when bundled with
AnthroCam(R) software and between $14,000 and $23,000 without AnthroCam(R)
software.
AnthroCam(R). AnthroCam(R) is the Company's proprietary measurement
software. It is built on the AutoCAD/AutoSurf software development platform,
which allows users to benefit from extensive hardware, software, interfacing and
product support libraries and teaching products. AnthroCam(R) software is
offered with the FAROArm(R) and is also offered as an unbundled product. When
unbundled from the FAROArm(R), AnthroCam(R) sells for $15,000.
AnthroCam(R) is the Company's software-based bridge to CAD and CAM; it
allows users to compare measurements of manufactured components with complex CAD
data. In conventional design applications, curved or ergonomic shapes are
typically modeled physically and then converted into data for manufacturing.
AnthroCam(R) provides an alternative to the time and expense of this physical
modeling process with a digital solution. For older parts without data files,
AnthroCam(R) enables pre-existing parts to be measured in order to adapt them to
current manufacturing technologies.
AnthroCam(R) has been designed as an open architecture system, allowing for
efficient integration into the manufacturing environment. The Company provides a
full serial communication command protocol to the AnthroCam(R) software for
customers who write interfaces to their own software. The Company also provides
comprehensive training and support for AnthroCam(R) and offers this product in a
number of international versions.
AnthroCam(R) is a Windows-based, 32-bit application written for the most
recent PC-based technology. AnthroCam(R) has been entirely designed and
programmed by the Company utilizing field input and industry wide beta site
installations. AnthroCam(R) is written as an AutoCAD runtime extension (ARX)
that is the AutoCAD(R) Application Programming Interface (API). The software is
written in the C++ development
23
26
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.
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.
Features of the Company's Products. The Company's products overcome many
limitations of hand-measurement tools, test fixtures and conventional CMMs by
incorporating the following features:
Integration with CAD Technology. The Company's products provide a
bridge between the virtual 3-D world of the CAD process and the physical
3-D world of the factory floor. The interface to CAD allows manufacturers
to integrate design, production and measurement and quality inspection
processes on a common software platform. The Company believes that this
integration creates significant savings by reducing the need for test
fixtures and improves productivity by reducing production set-up times.
Finally, the Company's integration with CAD technology significantly
enhances product quality by maximizing the opportunities to make precise
measurements based on engineering specifications within the manufacturing
process.
Six-Axis Articulating Arm. The FAROArm(R) incorporates a six-axis
instrumented, articulating device that approximates the range of motion and
dexterity of the human arm. The flexibility of the FAROArm(R) enables the
user to measure complex shapes and ergonomic structures and to reach
behind, underneath and into previously inaccessible spaces, such as
interior surfaces of aircraft or automobiles. The flexibility of the
FAROArm(R) allows customers to measure more accurately and efficiently than
previously possible.
Portability and Adaptability. The FAROArm(R) is lightweight, portable
and designed for operation in the often harsh environments typical of
manufacturing facilities. The FAROArm(R) can be moved to multiple locations
on the factory floor to measure large parts and assemblies that cannot be
easily moved to a conventional CMM. This portability extends 3-D
measurement to previously inaccessible areas of the factory floor and
eliminates the travel time to and from quality inspection departments.
Levels of Precision Responsive to Industry Needs. The Company's
products respond to manufacturers' need for intermediate levels of
measurement precision. Although high levels of precision (less than
one-thousandth of an inch) are required for certain manufacturing
applications, the FAROArm(R) satisfies the greater demand for measurements
that require intermediate precision (one- to twenty-thousandths of an
inch). The Company's products meet the precision measurement requirements
of a substantial portion of products in the manufacturing process and
address the underserved market for intermediate precision measurement
systems.
Broad Affordability. The Company offers various models of the
FAROArm(R) ranging in price from $14,000 to $70,000, while conventional
CMMs range in price from $20,000 to $2 million. The relatively low cost of
the Company's products compared to conventional CMMs has afforded
manufacturers the opportunity to introduce cost-effective measurement and
quality inspection functions throughout the manufacturing process.
Manufacturers are able to purchase multiple units to be used at different
locations within a single manufacturing facility and to introduce
measurement and quality inspection at additional points in the
manufacturing process.
Ease of Use. The Company's software products have been specifically
designed to be used by production line personnel with minimal prior
computer or CAD experience. The bundled hardware and software system is
designed to require minimal training for production line personnel to reach
proficiency with the product. 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. The FAROArm(R) is also ergonomically designed to
facilitate use in typical factory floor applications.
24
27
Paperless Data Collection. The FAROArm(R) allows for paperless data
collection by a connected computer hosting related CAD application
software. This function responds to current trends toward automated
statistical process controls for facilitating data analysis. Paperless data
collection improves productivity and eliminates the risk of error in
transcribing the collected information.
Open Architecture. The FAROArm(R) and AnthroCam(R) have been designed
as an open architecture system, allowing the user to unbundle the hardware
and software to interface the FAROArm(R) with other CAD-based software
packages and to interface AnthroCam(R) with other 3-D measurement devices.
In addition, the Company's software and hardware are built in accordance
with computer and communications industry standards so that these products
may be integrated with a broad range of application software packages.
CUSTOMERS
The Company's products have been purchased by more than 600 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% of the Company's total revenues in 1997. No customer
represented 10.0% or more of the Company's sales in 1997 or the three months
ended March 31, 1998. The following table illustrates, by vertical market, the
Company's diverse customer base:
AEROSPACE APPAREL AND FOOTWEAR AUTOMOTIVE
- --------- -------------------- ----------
Boeing Nike AO Smith
GE Aircraft Engines Reebok Chrysler
Lockheed Martin Ford
Nordam Repair Division General Motors
Northrop Grumman Honda
Orbital Sciences Hyundai
Dee Howard Johnson Controls
Lear Corporation
Mercedes Benz
Porsche
Samsung Motors
Toyota
Vehma International
BUSINESS AND CONSUMER ELECTRIC UTILITIES AND
MACHINES MANUFACTURERS FARM/ LAWN EQUIPMENT
- --------------------- ---------------------- --------------------
Corning Asahi General Electric New Holland North America
Xerox Southern California Edison Toro
Tennessee Valley Authority
Westinghouse Electric
HEAVY EQUIPMENT PERSONAL ROAD/ WATER/ SNOW
MANUFACTURERS CRAFT PLASTICS
- --------------- -------------------------- --------
Caterpillar Harley Davidson Able Design Plastics
Komatsu Dresser Polaris Industries Paramount Plastics
Champion Road Machinery Thermoform Plastics
Texas Steel
CUSTOMER CASE STUDIES
The following case studies illustrate the use of the Company's products and
services by its customers:
Chrysler Canada Corporation. Chrysler Canada Corporation ("Chrysler")
manufactures the Dodge Ram truck, van and wagon at its Windsor, Ontario
plant. This plant builds approximately 420
25
28
vehicles per shift, with two shifts per day. Chrysler discovered certain
fit problems with its large panels and bodyside assemblies. Previous
inspection tools, such as test fixtures, templates and patterns, could not
meet Chrysler's requirements for on-site product measurement. The
FAROArm(R) was originally introduced as an interim solution. Chrysler
identified one of its three production lines as its "ideal" or "good" line
and used the FAROArm(R) to compare the products produced by the lines and
adjust the two "bad" lines. Within two weeks, Chrysler experienced
significantly improved product quality. The Company's "interim" solution
resulted in measurable production improvements for the plant, together with
significant capital savings as custom test fixtures were replaced with the
FAROArm(R).
Champion Road Machinery. Champion Road Machinery ("Champion") is a
worldwide manufacturer of road graders. Similar to a snow plow, road
graders are essential for shaping and smoothing new roadbeds, and are also
used in surface mining, dam work and land reclamation. Champion identified
the need to reduce the number of "reworks" or the custom fit of
subassemblies to its frames because of dimensional variations.
Historically, each time component parts did not fit together, Champion
corrected the deviations on a case-by-case basis by custom-fitting the
parts. With the FAROArm(R) and its companion AnthroCam(R) software,
Champion was able to capture measurement data from the parts and identify
the origin of the variations, which allowed it to address the source of the
problems rather than continue to make individual adjustments. Champion's
use of the FAROArm(R) resulted in a systematic solution for a recurring and
expensive manufacturing problem.
Southern California Edison. Southern California Edison ("SCE") is a
large public utility company. Like other utilities, SCE experienced
significant expense and customer dissatisfaction as a result of lengthy
downtimes. During routine turbine overhauls, scheduled and unscheduled
maintenance and forced outage conditions, SCE typically made numerous
repairs and modifications to make its equipment functional. Common problems
encountered by SCE included obsolete parts, long turnaround times for
replacement parts and difficulty in returning damaged parts to full
functionality. Using the FAROArm(R), SCE was able to measure large damaged
blades and create CAD drawings for quick manufacture of replacements. This
allowed SCE to bring its power generation units online without undue delay
and expense.
Texas Steel. Texas Steel is a foundry that produces steel castings
for off-road, mining, oil field and construction equipment. Its castings
weigh as much as 25,000 pounds and have diameters as large as twelve feet.
Texas Steel used the FAROArm(R) to improve the accuracy of dimensional
checks of these large castings, and found it to be safer, faster and more
efficient than its previous measurement methods. Texas Steel reported a 75%
time-savings in making these checks by using the FAROArm(R). In addition,
the FAROArm(R) allowed Texas Steel to measure exceptionally large parts
where such measurements were not possible with previous methods. The ease
of use of the FAROArm(R) and AnthroCam(R) also encouraged Texas Steel to
expand the range of parts checked, further increasing production quality.
Polaris Industries, Inc. Polaris Industries, Inc. ("Polaris") is a
leading manufacturer of all-terrain vehicles ("ATVs"). To satisfy its own
stringent quality standards, Polaris engineers routinely check all ATV
subassemblies and weldments to ensure quality and reduce the number of
reworks caused by dimensional variations. Before Polaris began using the
FAROArm(R), measuring the subassemblies took approximately 2.5 hours.
Polaris' engineers would manually measure various points on the
subassemblies to ensure that they matched blueprint specifications. These
measurements were difficult to make because of the complex size and shape
of the subassemblies. Using the FAROArm(R), Polaris reduced the measurement
time for subassemblies to approximately 15 minutes. Polaris reports that
its use of the FAROArm(R) has resulted in a significant increase in
productivity.
SALES AND MARKETING
The Company directs its sales and marketing efforts from its headquarters
in Lake Mary, Florida. At March 31, 1998, the Company employed 45 sales
professionals who operate from the Company's headquarters, five domestic
regional sales offices located in Chicago, Dallas, Detroit, Los Angeles and
Seattle, and three international sales offices located in Coventry, United
Kingdom, St. Jean de Braye, France, and
26
29
Ulm, Germany. The Company also utilizes three domestic and 12 international
distributors in territories where the Company does not have regional sales
offices.
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 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 a non-exclusive right
to sales in Japan, expires in June 1999 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 technology 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 AnthroCam(R) products. Significant efforts are also being
directed toward the development of new measurement technologies and additional
features for existing products. See "Technology."
At March 31, 1998, the Company employed 14 scientists and technicians in
its research and development efforts. Research and development expenses were
$1,076,000 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 of the CAD data of a production part or assembly to determine
whether the measured data conforms to meet 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.
27
30
The Company's products are the result of a successful integration of
state-of-the-art developments in mechanical and electronic hardware and
applications software. The unique nature of the Company's technical developments
is evidenced by the Company's numerous U.S. and international patents. The
Company maintains low cost product design processes by retaining development
responsibilities for all electronics, hardware and software.
Mechanical Hardware. The FAROArm(R) is designed to function in diverse
environments and under rigorous physical conditions. The arm monitors its
temperature to adjust for environments ranging from -10 degrees to +50 degrees
Celsius. The arm is constructed of pre-stressed precision bearings to resist
shock loads. Low production costs are attained by the proprietary combination of
reasonably priced electromechanical components accompanied by the optimization
and on-board storage of calibration data. Many of the Company's innovations
relate to the environmental adaptability of its products. Significant features
include integrated counter-balancing, configuration convertibility and
temperature compensation.
Electronics. The rotational information for each joint is processed by an
on-board computer that is designed to handle complex analyses of joint data as
well as communications with a variety of host computers. 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. AnthroCam(R) is a Windows-based, 32-bit application written for
the most recent PC-based technology. AnthroCam(R) has been entirely designed and
programmed by the Company utilizing field input and industry wide beta site
installations. AnthroCam(R) is written as an AutoCAD runtime extension (ARX)
that is the AutoCAD(R) Application Programming Interface (API). The software is
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 17 patents in the United States, 12 of
which also are held or pending in other jurisdictions. The Company also has 16
registered trademarks in the United States and 12 trademark applications pending
in the United States and the European Union.
The Company relies on a combination of contractual provisions and trade
secret laws to protect its proprietary information. There can be no assurance
that the steps taken by the Company to protect its trade secrets and proprietary
information will be sufficient to prevent misappropriation of its proprietary
information or to preclude third-party development of similar intellectual
property.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The Company
intends to vigorously defend its proprietary rights against infringement by
third parties. However, policing unauthorized use of the Company's products is
difficult, particularly overseas, and the Company is unable to determine the
extent to which piracy of its software products exists. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as the laws of the United States.
The Company does not believe that any of its products infringe on the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to current
or future products. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not 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. See "Risk
Factors -- Uncertainty of Patents; Dependence on Patents, Licenses and
Proprietary Rights.
28
31
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 finally 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. Various national and
multinational standards have been developed in the quality systems arena for
commercial and industrial use. The ISO 9000 series of quality assurance
standards ("ISO 9000"), which is administered by the American National Standards
Institute, was developed to bring together existing multinational standards and
to provide consistence in quality and terminology. ISO 9000 Certification
demonstrates that a company has implemented an adequate quality system for
products and services it offers. By this, better internal commitment, as well as
enhanced purchaser confidence, may be achieved. The Company's facilities and
operations are in the process of completing requirements for ISO 9000
registration, and management anticipates that the Company's ISO 9000
certification will be completed in 1998.
COMPETITION
The broad market for measurement devices, which includes 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 Company will be required to make continued
investments in technology and product development to maintain its technological
advantage over its competition. There can be no assurance that the Company will
have sufficient resources to make such investments or that the Company's product
development efforts will be sufficient to allow the Company to compete
successfully as the industry evolves. The Company's products compete on the
basis of portability, accuracy, application features, ease-of-use, quality,
price and technical support.
The Company's only significant direct competitor is a joint venture of
Romer SRL (France) and Romer, Inc. (California). The Company is aware of a
direct competitor in Germany and two new direct competitors in Italy, 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 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 March 31, 1998, the Company had orders representing $985,000 in sales.
The Company expects to ship all such outstanding orders by June 30, 1998. The
Company affords its customers the right to cancel any order at any time before
the product is shipped. Historically, the number of canceled orders has been
negligible. Nonetheless, there can be no assurance that all orders in backlog
will be shipped, and backlog may not be indicative of future sales.
29
32
EMPLOYEES
At March 31, 1998, the Company had 130 full time employees, consisting of
45 sales/application engineering staff, 35 production staff, 14 research and
development staff, 22 administrative staff, and 14 customer service specialists.
None of the Company's employees is represented by a labor organization, and 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 18 months.
FACILITIES
The Company's headquarters and principal operations are located in a leased
building in Lake Mary, Florida, containing approximately 36,000 square feet. In
additional, the Company has U.S. sales offices in Chicago, Dallas, Detroit, Los
Angeles and Seattle and foreign sales offices in Coventry, United Kingdom, St.
Jean de Braye, France and Ulm, Germany. The Company acquired additional offices
in Karlsruhe and Stuttgart, Germany through its acquisition of CATS.
LEGAL PROCEEDINGS
On April 2, 1998 the Company filed an action for declaratory judgement
action against Kosaka Laboratory Ltd. of Tokyo, Japan (Civil Action No.
98-381-CIV-ORL-19A in the Federal Court for the Middle District of Florida). The
Company seeks to have the Court declare its rights with regard to Kosaka's U.S.
Patent number 4,430,796 regarding a method of measuring an object using, for
example, a coordinate measuring machine (CMM), when an object is larger than the
coordinate system physically measurable by the CMM. Over the past one to two
years, the Company and Kosaka have sought to resolve this matter in an amicable
manner. However, Kosaka has persisted in its erroneous claims that its patent is
infringed by the Company, and has threatened to file suit if the Company did not
pay a relatively large licensing fee. In order to make it clear to the market
that the Company does not infringe the patent, the Company decided to file the
above mentioned action. The Company strongly believes that the outcome to this
declaratory judgement action will be favorable. It is expected that Kosaka will
file a counterclaim for patent infringement; however, the Company does not
believe that Kosaka's patent infringement claim will be meritorious.
30
33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company, as well as certain key
employees, and their ages as of the date of this Prospectus are as follows:
TERM AS
DIRECTOR
NAME AGE POSITION EXPIRES
- ---- --- -------- --------
EXECUTIVE OFFICERS AND DIRECTORS:
Simon Raab, Ph.D................... 44 Chairman of the Board, President, Chief
Executive Officer and Director 2000
Gregory A. Fraser, Ph.D............ 42 Chief Financial Officer, Executive Vice
President, Secretary, Treasurer and
Director 1999
Hubert d'Amours.................... 58 Director 2000
Philip R. Colley................... 59 Director 1999
Andre Julien....................... 54 Director 2000
Alexandre Raab..................... 72 Director 1998
Norman H. Schipper, Q.C............ 67 Director 1998
KEY EMPLOYEES:
Daniel T. Buckles.................. 42 Vice President -- Sales
Ali S. Sajedi...................... 37 Chief Engineer
Simon Raab, Ph.D., a co-founder of the Company, has served as the Chairman
of the Board, Chief Executive Officer and a director of the Company since its
inception in 1982 and as President since 1986. Mr. Raab holds a Ph.D. in
Mechanical Engineering from McGill University, Montreal, Canada, a Masters of
Engineering Physics from Cornell University and a Bachelor of Science in Physics
with a minor in Biophysics from the University of Waterloo, Canada.
Gregory A. Fraser, Ph.D., a co-founder of the Company, has served as 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.
Hubert d'Amours has been a director since 1990. Mr. d'Amours has served as
president of Montroyal Capital Inc. and Capimont Inc., two venture capital
investment firms, since 1990. Mr. d'Amours also serves as a director of a number
of privately held companies.
Philip R. Colley has been a director since 1984. Mr. Colley has been the
President of Colley, Borland and Vale Insurance Brokers Ltd. in Ontario, Canada,
since 1967.
Andre Julien has been a director since 1986. Mr. Julien was a co-founder in
1970 and a major shareholder until 1977 of Performance Sail Craft, Inc., a
Montreal-based sailboat manufacturer which produces the Laser(TM) sailboat. From
1969 until his retirement in 1994, Mr. Julien was president and the owner of
Chateau Paints, Inc., a coatings and paint manufacturer in Montreal Canada.
Since his retirement in 1994, Mr. Julien has sat on boards of directors of, and
provided consulting services to, a number of private companies.
Alexandre Raab has been a director since the Company's inception in 1982.
Mr. Raab has served as the Chairman of the Board of Advanced Agro Enterprises, a
privately held company in Ontario, Canada, since
31
34
1991. From 1953 through 1990, Mr. Raab was the principal shareholder and Chief
Executive Officer of White Rose Nurseries, Ltd., a privately held horticultural
firm. Mr. Raab is the father of Simon Raab.
Norman H. Schipper, Q.C. has been a director since the Company's inception
in 1982. Mr. Schipper was a partner in the Toronto office of the law firm of
Goodman, Phillips & Vineberg from 1962 until his retirement at year-end 1997,
and he currently serves of counsel to the firm.
Daniel T. Buckles has been Vice President -- Sales for the Company since
May 1997. From 1993 to May 1997, he served as the Director of Marketing for the
Company's Industrial Products Group. From 1991 to 1993, Mr. Buckles was the
Manager of Product Assurance Technical Operations for the Aerospace and Naval
Division of Martin Marietta Corporation. From 1987 to 1991, Mr. Buckles held
program management positions for a variety of advanced development and
manufacturing programs at Martin Marietta Corporation. From 1976 to 1987, Mr.
Buckles held various program management and manufacturing positions at the
Submarine Signal Division of Raytheon Company. Mr. Buckles holds a Bachelor of
Arts in Theoretical and Quantitative Economics and a Masters of Business
Administration from the University of Massachusetts -- Dartmouth.
Ali S. Sajedi has been Chief Engineer for the Company since its inception
in 1982. Mr. Sajedi has been responsible for implementation of research and
development plans and for production oversight of the Company's self-managed
production team. Mr. Sajedi holds a Bachelor of Mechanical Engineering from
McGill University.
COMMITTEES OF THE BOARD
The Board has an Audit Committee, the members of which are Messrs.
d'Amours, Julien and Simon Raab. There is no formal Chairman of the Audit
Committee; however, Mr. Raab has served as its ad hoc Chairman for purposes of
the orderly conduct of its meetings. The Audit Committee is responsible for
reviewing the independence, qualifications and activities of the Company's
independent certified accountants and the Company's financial policies, control
procedures and accounting staff. The Audit Committee recommends to the Board the
appointment of the independent certified public accountants and reviews and
approves the Company's financial statements. The Audit Committee also reviews
transactions between the Company and any officer or director or any entity in
which an officer or director of the Company has a material interest.
The Board has a Compensation Committee, the members of which are Messrs.
d'Amours and Julien. During 1997, Martin Koshar, a former director, served on
the Compensation Committee and presided as its Chairman. Mr. Julien currently
serves as Chairman of the Compensation Committee. The Compensation Committee is
responsible for establishing the compensation of the Company's directors,
officers and other managerial personnel, including salaries, bonuses,
termination arrangements and other benefits. In addition, the Compensation
Committee administers the Company's 1993 Stock Option Plan, 1997 Employee Stock
Option Plan, and 1997 Nonemployee Director Stock Option Plan.
The Board does not have a Nominating Committee.
32
35
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid to the Company's President and Chief Executive Officer and each of the
Company's other most highly compensated executive officers (the "Named
Executives") who earned more than $100,000 in salary and bonus for the year
ended December 31, 1997.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS
--------------------------------- --------------------- PAYOUTS
OTHER RESTRICTED -------
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- --------------------------- ---- -------- ------- ------------ ---------- -------- ------- ------------
Simon Raab, Ph.D.......... 1997 $160,000 $30,063 80,000
President, Chairman and 1996 130,000 0
Chief Executive Officer 1995 100,000 0
Gregory A. Fraser, Ph.D... 1997 116,083 0 60,000
Executive Vice President, 1996 111,467 11,643
Chief Financial Officer, 1995 91,980 4,191
Secretary and Treasurer
The following table sets forth information concerning options granted to
the Named Executives in 1997:
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SHARES OPTIONS/SARS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
- ---- ------------ ------------ ---------- ---------- ---------- ----------
Simon Raab(1)............. 80,000 18.1% $13.20 9/13/2007 $1,108,800 $1,161,600
Gregory A. Fraser(2)...... 60,000 13.6% 12.00 9/13/2007 756,000 792,000
- ---------------
(1) Exercisable 26,666 shares on or after September 13, 1998, and 26,667 shares
on or after each of September 13, 1999 and 2000. Mr. Raab's options were
granted at 110% of the public offering price in order to qualify for
treatment as incentive stock options.
(2) Exercisable 20,000 shares on or after each of September 13, 1998, 1999, and
2000.
The following table sets forth information concerning options held by the
Named Executives as of December 31, 1997:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS/SAR VALUE TABLE
VALUE OF
UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISABLE OPTIONS/SARS AT
OPTIONS/SARS FY-END($)*
SHARES ACQUIRED AT FY- ----------------------------
NAME ON EXERCISE VALUE REALIZED($) END(#) EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------------- ------------- ------------ -------------
Simon Raab(1).................... 80,000 $0 $945,000
Gregory A. Fraser(2)............. 60,000 0 708,750
- ---------------
* Based on the average high and low sales prices of the Company's Common Stock
on December 31, 1997 as quoted on The Nasdaq Stock Market.
(1) Of the 80,000 stock options held by Mr. Raab, all were granted on September
13, 1997, expire on September 13, 2007, and are exercisable as to 26,666
shares on September 13, 1998, and as to 26,667 shares on each of September
13, 1999 and 2000.
33
36
(2) Of the 60,000 stock options held by Mr. Fraser at December 31, 1997, all
were granted on September 13, 1997, expire on September 13, 2007, and are
exercisable as to 20,000 shares on each of September 13, 1998, 1999, and
2000.
STOCK OPTION PLANS
The Company maintains three stock option plans to attract, motivate and
retain key employees and members of the Board of Directors who are not employees
of the Company: the 1993 Stock Option Plan (the "1993 Plan"), the 1997 Employee
Stock Option Plan (the "1997 Plan"), and 1997 Nonemployee Director Stock Option
Plan (the "Nonemployee Director Plan") (the 1993 Plan, 1997 Plan, and
Nonemployee Director Plan are collectively referred to as the "Plans").
The 1993 Plan provides for the grant of "incentive stock options," within
the meaning of Section 422 of the Internal Revenue Code, and nonqualified stock
options, for federal income tax purposes, to officers and other key employees of
the Company, and nonqualified stock options to nonemployee directors of the
Company. The 1997 Plan provides for the grant of incentive stock options and
nonqualified stock options to officers and key employees of the Company. The
Nonemployee Director Plan provides for the grant of nonqualified stock options
and formula options to nonemployee directors. Grants to executives under the
Company's 1993 Plan and 1997 Plan are determined by the Compensation Committee
and are designed to align a portion of the executive compensation package with
the long-term interests of the Company's shareholders by providing an incentive
that focuses attention on managing the Company from the perspective of an owner
with an equity stake in the business.
Grants of stock options generally are limited to officers and other key
employees and managers, of the Company who are in a position to contribute
substantially to the growth and success of the Company and its subsidiaries.
Incentive stock options and nonqualified stock options are granted for terms up
to ten years, and are designed to reward exceptional performance with a
long-term benefit, facilitate stock ownership, and deter recruitment of key
Company personnel by competitors and others.
DIRECTOR COMPENSATION
Directors of the Company who are not executive officers receive fees of
$1,000 for each Board meeting attended, and $500 per committee meeting attended,
plus the expenses of attending meetings. During 1997, Messrs. d'Amours, Colley,
Julien, Alexandre Raab, and Schipper earned directors' fees of $2,000, $2,000,
$2,000, $1,000, and $2,000, respectively.
Generally, upon election to the Board, each director who is not an
executive officer is granted a stock option to acquire 3,000 shares of Common
Stock. The exercise price for such shares is equal to the closing sale price of
the Common Stock as reported on The Nasdaq Stock Market on the date the director
is elected or reelected to the Board. Options granted to Directors generally are
granted upon the same terms and conditions as options granted to executive
officers and key employees. Additionally, the Company's 1997 Nonemployee
Directors' Fee Plan permits nonemployee 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 are 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. Directors may defer the receipt of fees for federal
income tax purposes, whether payable in cash or in Common Stock. During the year
ended December 31, 1997, all nonemployee directors' fees were paid in cash.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Hubert d'Amours
and Andre Julien. Prior to his resignation as a director of the Company on March
9, 1998, Mr. Martin Koshar also served on the Compensation Committee as its
Chairman. Currently, Mr. Julien serves as Chairman of the Committee. There were
no transactions during the year ended December 31, 1997 between the Company and
members of the Compensation Committee or entities in which they own an interest.
34
37
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of the date of this Prospectus, and as adjusted to
reflect the sale of Common Stock offered hereby, with respect to: (i) each of
the Company's directors and the executive officers named in the Summary
Compensation Table; (ii) all directors and officers of the Company as a group;
(iii) the Selling Shareholders; and (iv) each person known by the Company to own
beneficially more than 5% of the Common Stock. The Selling Shareholders acquired
their shares as partial consideration for their interest in CATS and are selling
shares hereunder in order to fund German taxes incurred as a result of their
sale of CATS to the Company. See "Business -- Recent Acquisition."
SHARES OWNED
BEFORE THE SHARES OWNED
OFFERING(1) SHARES AFTER THE OFFERING
------------------- BEING -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------ --------- ------- ------- --------- -------
Simon Raab, Ph.D.(2)(3)........................ 2,865,795 25.0% -- 2,865,795 25.0%
Gregory A. Fraser, Ph.D.(2)(4)................. 502,275 4.4 -- 502,275 4.4
Hubert d'Amours(5)............................. 68,521 * -- 68,521 *
Philip R. Cooley(6)............................ 157,325 1.4 -- 157,325 1.4
Andre Julien(7)................................ 450,508 4.0 -- 450,508 4.0
Alexandre Raab(8).............................. 498,158 4.4 -- 498,158 4.4
Norman H. Schipper(9).......................... 169,654 1.5 -- 169,654 1.5
All directors and officers as a group
(7 persons).................................. 4,712,236 40.9 -- 4,712,236 40.9
SELLING SHAREHOLDERS:
Siegfried Buss(10)............................. 625,000 5.5 171,875 453,125 4.0
Wendelin Scharbach(11)......................... 625,000 5.5 171,875 453,125 4.0
- ---------------
* Less than 1%
(1) The named stockholders have sole voting and dispositive power with respect
to all shares shown as being beneficially owned by them, except as
otherwise indicated.
(2) The business address for Simon Raab, Gregory A. Fraser and Xenon Research,
Inc. is 125 Technology Park, Lake Mary, Florida 32746.
(3) Held by Xenon Research, Inc. ("Xenon"). Simon Raab and Diana Raab, his
spouse, own all of the outstanding capital stock of Xenon. The number of
shares includes 100,000 shares which Mr. Raab has the right to acquire
pursuant to currently exercisable stock options at an exercise price of
$12.75 per share. The number of shares does not include 80,000 shares which
Mr. Raab has the right to acquire at an exercise price of $13.20 per share
pursuant to options which currently are not exercisable. Of such options,
26,666 become exercisable on September 18, 1998.
(4) The number of shares includes 60,000 shares which Mr. Fraser has the right
to acquire pursuant to currently exercisable stock options at an exercise
price of $11.50 per share. The number of shares does not include 60,000
shares which Mr. Fraser has the right to acquire pursuant to options at an
exercise price of $12.00 per share which currently are not exercisable. Of
such options, 20,000 become exercisable on September 18, 1998.
(5) Includes 24,261 shares owned by Mr. d'Amours spouse, and includes 20,000
shares which Mr. d'Amours has the right to acquire pursuant to currently
exercisable stock options at an exercise price of $12.00 per share. The
number of shares reflected does not include 3,000 shares which Mr. d'Amours
has the right to acquire pursuant to options at an exercise price of $12.00
per share which currently are not exercisable. Of such options, 1,000
become exercisable on September 23, 1998.
(6) Represents 41,982 shares and 80,343 shares owned by 483663 Ontario, Ltd.
and C-Green Enterprises, Inc., respectively, in which Mr. Colley has a
controlling interest, and 35,000 shares which Mr. Colley has the right to
acquire pursuant to currently exercisable stock options at an exercise
price of
35
38
$12.00 per share. The number of shares reflected does not include 3,000
shares which Mr. Colley has the right to acquire pursuant to options at an
exercise price of $12.00 per share which currently are not exercisable. Of
such options, 1,000 become exercisable on September 23, 1998.
(7) Represents 357,282 shares owned by Philanderer Tree, Inc., 58,226 shares
owned by Philanderer Six, Inc., in which Mr. Julien is a shareholder and
serves as an executive officer and 35,000 shares which Mr. Julien has the
right to acquire pursuant to currently exercisable stock options at an
exercise price of $12.00 per share. The number of shares reflected does not
include 3,000 shares which Mr. Julien has the right to acquire pursuant to
options at an exercise price of $12.00 per share which currently are not
exercisable. Of such options, 1,000 become exercisable on September 23,
1998. Mr. Julien is a shareholder and serves as an executive officer and
director of Philanderer Tree, Inc. and Philanderer Six, Inc. and shares
voting and dispositive power of the shares owned by Philanderer Tree, Inc.
and Philanderer Six, Inc., each of which is a private investment company.
(8) Represents shares owned by Geanal Holding, Inc., all of the capital stock
of which is owned by Mr. Raab, and includes 35,000 shares which Mr. Raab
has the right to acquire pursuant to currently exercisable stock options at
an exercise price of $12.00 per share. The number of shares reflected does
not include 3,000 shares which Mr. Raab has the right to acquire pursuant
to options at an exercise price of $12.00 per share which currently are not
exercisable. Of such options, 1,000 become exercisable on September 23,
1998.
(9) Represents 134,654 shares owned by Shanklin Investments, Limited, in which
Mr. Schipper has a controlling interest, and includes 35,000 shares which
Mr. Schipper has the right to acquire pursuant to currently exercisable
stock options at an exercise price of $12.00 per share. The number of
shares reflected does not include 3,000 shares which Mr. Shipper has the
right to acquire pursuant to options at an exercise price of $12.00 per
share which currently are not exercisable. Of such options, 1,000 become
exercisable on September 23, 1998.
(10) Siegfried Buss is Assistant Director of Software Development of the Company
and Chief Technology Executive of the Company's newly acquired subsidiary,
CATS. The business address of Mr. Buss is Erbprinzenstr, 31 Karlsruhe,
Deutschland.
(11) Wendelin Scharbach is Vice President of Sales of the Company and President
of the Company's newly acquired subsidiary, CATS. The business address of
Mr. Scharbach is Erbprinzenstr, 31 Karlsruhe, Deutschland.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its headquarters from Xenon Research, Inc. ("Xenon"),
all of the issued and outstanding capital stock of which is owned by Simon Raab,
the Company's President and Chief Executive Officer, and Diana Raab, his spouse.
The term of the lease expires on February 28, 2001, and the Company has two
five-year renewal options. Base rent under the lease was $148,000 for 1995 and
$150,000 for each of 1996 and 1997. Upon completion of the expansion of the
leased facility, base rent increased to $300,000 per annum, beginning February
1, 1998. Base rent during renewal periods will reflect changes in the U.S.
Bureau of Labor statistics Consumer Price Index for all Urban Consumers. The
terms of the lease were approved by an independent committee of the Company's
Board of Directors upon review of an independent market study of comparable
rental rates and such terms are, in the opinion of the Board of Directors, no
less favorable than those that could be obtained on an arm's-length basis.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $0.001 per share, and 10,000,000 shares of Preferred
Stock, par value $0.001 per share. As of the date of this
36
39
Prospectus, 11,359,828 shares of Common Stock held by 55 holders of record and
no shares of Preferred Stock were issued and outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted upon by the shareholders. The Company's
Articles of Incorporation do not provide for cumulative voting. Subject to
preferences that might be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. Holders of
Common Stock have no conversion, preemptive or other rights to subscribe for
additional shares or other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. The issued and outstanding shares of
Common Stock, including the shares offered hereby, are fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without shareholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Company's Common Stock and,
in certain instances, could adversely affect the market price of such stock. In
the event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. No shares of Preferred Stock are outstanding and the
Company has no present intention to issue any shares of its Preferred Stock.
CERTAIN STATUTORY AND OTHER PROVISIONS
Statutory Provisions. The Company is subject to several anti-takeover
provisions under Florida law that apply to public corporations organized under
Florida law unless the corporation has elected to opt out of those provisions in
its Articles of Incorporation or (depending on the provision in question) its
Bylaws. The Company has not elected to opt out of these provisions. The Florida
Business Corporation Act (the "Florida Act") prohibits the voting of shares in a
publicly held Florida corporation that are acquired in a "control share
acquisition" unless the board of directors approves the control share
acquisition or the holders of a majority of the corporation's voting shares
(exclusive of shares held by officers of the corporation, inside directors or
the acquiring party) approve the granting of voting rights as to the shares
acquired in the control share acquisition. A "control share acquisition" is
defined as an acquisition that immediately thereafter entitles the acquiring
party to, directly or indirectly, exercise voting power in the election of
directors within any of the following ranges: (i) one-fifth or more but less
than one-third of such voting power, (ii) one-third or more but less than a
majority of such voting power and (iii) a majority or more of such voting power.
This statutory voting restriction is not applicable in certain circumstances set
forth in the Florida Act.
The Florida Act also contains an "affiliated transaction" provision that
prohibits a publicly-held Florida corporation from engaging in a broad range of
business combinations or other extraordinary corporate transactions with an
"interested shareholder" unless (i) the transaction is approved by a majority of
disinterested directors, (ii) the Company has not had more than 300 shareholders
of record during the past three years, (iii) the interested shareholder has
owned at least 80% of the Company's outstanding voting shares for at least five
years, (iv) the interested shareholder is the beneficial owner of at least 90%
of the voting shares (excluding shares acquired directly from the Company in a
transaction not approved by a majority of the disinterested directors), (v)
consideration is paid to the holders of the Company's shares equal to the
highest amount per share paid by the interested shareholder for the acquisition
of Company shares in the last two years or fair market value and certain other
conditions are met or (vi) the transaction is approved by the holders of
two-thirds of the Company's voting shares other than those owned by the
interested shareholder. An
37
40
interested shareholder is defined as a person who, together with affiliates and
associates, beneficially owns (as defined in Section 607.0901(1) (e) of the
Florida Act) more than 10% of the Company's outstanding voting shares.
Classified Board of Directors. The Company's Articles of Incorporation and
Bylaws provide that the Board of Directors of the Company will be divided into
three classes, with staggered terms of three years for each class. The term of
one class expires each year. The Company's Articles of Incorporation provide
that any vacancies on the Board of Directors will be filled only by the
affirmative vote of a majority of the directors then in office, even if less
than a quorum. The Articles of Incorporation of the Company also provide that
any director may be removed from office, but only for cause and only upon the
affirmative vote of the holders of at least two-thirds of the Common Stock.
Special Voting Requirements. The Company's Articles of Incorporation
provide that all actions taken by the shareholders must be taken at an annual or
special meeting of the shareholders or by written consent of the holders of not
less than two-thirds of the Company's outstanding voting shares. The Articles of
Incorporation provide that special meetings of the shareholders may be called
only by the President, the Chairman of the Board, a majority of the members of
the Board of Directors, or the holders of not less than 50% of the Company's
outstanding voting shares. Under the Company's Bylaws, shareholders will be
required to comply with advance notice provisions with respect to any proposal
submitted for shareholder vote, including nominations for elections to the Board
of Directors. The Articles of Incorporation and Bylaws of the Company contain
provisions requiring the affirmative vote of the holders of at least two-thirds
of the Common Stock to amend certain provisions of the Company's Articles of
Incorporation and Bylaws.
Stock Option Plans. The 1997 Plan and the Nonemployee Director Plan each
provides that in the event of (i) the adoption of a plan of reorganization,
merger, share exchange or consolidation of the Company with one or more other
entities as a result of which the holders of the outstanding shares of Common
Stock would receive less than 50% of the voting power of the capital stock or
other interests of the surviving or resulting corporation or entity; (ii) the
adoption of a plan of liquidation or the approval of the dissolution of the
Company; (iii) the approval by the board of directors of an agreement providing
for the sale or transfer of substantially all of the assets of the Company; or
(iv) the acquisition of more than 20% of the outstanding shares of Common Stock
by any person within the meaning of Rule 13(d)(3) of the Securities Exchange Act
of 1934, as amended, if such acquisition is not preceded by a prior expression
of approval by the board of directors, then in each such case the options
granted thereunder shall become immediately exercisable in full. Notwithstanding
the foregoing, if a successor corporation or other entity as contemplated above
agrees to assume the outstanding options or to substitute substantially
equivalent options, the options issued thereunder shall not be immediately
exercisable but shall remain exercisable in accordance with the terms of the
1997 Plan or the Nonemployee Director Plan, as applicable, and the applicable
stock option agreements.
Indemnification and Limitation of Liability. The Florida Act authorizes
Florida corporations to indemnify any person who was or is a party to any
proceeding (other than an action by, or in the right of, the corporation), by
reason of the fact that he or she is or was a director, officer, employee, or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation or other
entity, against liability incurred in connection with such proceeding, including
any appeal thereof, if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or on behalf of a corporation, indemnification may not be made if the
person seeking indemnification is adjudged liable, unless the court in which
such action was brought determines such person is fairly and reasonably entitled
to indemnification. The indemnification provisions of the Florida Act require
indemnification if a director or officer has been successful on the merits or
otherwise in defense of any action, suit or proceeding to which he or she was a
party by reason of the fact that he or she is or was a director or officer of
the corporation. The indemnification authorized under Florida law is not
exclusive and is in addition to any other rights granted to officers and
directors under the Articles of Incorporation or Bylaws of the corporation or
any agreement between officers and directors and the corporation. A corporation
may purchase and maintain insurance or furnish similar protection on behalf of
any officer or director against any liability asserted against the officer or
38
41
director and incurred by the officer or director in such capacity, or arising
out of the status, as an officer or director, whether or not the corporation
would have the power to indemnify him or her against such liability under the
Florida Act.
The Company's Articles of Incorporation provide for the indemnification of
directors and executive officers of the Company to the maximum extent permitted
by Florida law and for the advancement of expenses incurred in connection with
the defense of any action, suit or proceeding that the director or executive
officer was a party to by reason of the fact that he or she is or was a director
or executive officer of the Company.
Under the Florida Act, a director is not personally liable for monetary
damages to the Company or any other person for acts or omissions in his or her
capacity as a director except in certain limited circumstances such as certain
violations of criminal law and transactions in which the director derived an
improper personal benefit. As a result, shareholders may be unable to recover
monetary damages against directors for actions taken by them which constitute
negligence or gross negligence or which are in violation of their fiduciary
duties, although injunctive or other equitable relief may be available.
The foregoing provisions of the Florida Act and the Company's Articles of
Incorporation and Bylaws could have the effect of preventing or delaying a
person from acquiring or seeking to acquire a substantial equity interest in, or
control of, the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Firstar Trust
Company, Milwaukee, Wisconsin.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, the Company has outstanding 11,359,828
shares of Common Stock. Of these shares, 6,060,342 shares, including the 343,750
shares of Common Stock sold in this offering, will be freely tradeable by
persons other than affiliates of the Company without restriction under the
Securities Act. The remaining 5,299,486 shares of Common Stock are "restricted"
securities within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available. All of such shares are beneficially
owned by persons who are affiliates of the Company, and the sale of a
substantial number of shares of Common Stock could adversely affect the market
price of the Common Stock.
In general, Rule 144, as currently in effect, allows a shareholder
(including persons who are deemed "affiliates" of the Company) who has
beneficially owned restricted shares for at least one year (including the prior
holding period of any prior owner other than an affiliate) to sell within any
three-month period that number of shares which does not exceed the greater of
(i) 1% of the outstanding shares of the Common Stock or (ii) the average weekly
trading volume during the four calendar weeks preceding such sale. Sales under
Rule 144 also are subject to certain manner of sale and notice requirements and
the availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not an "affiliate" of the Company at
any time during the 90 days immediately preceding the sale and who has
beneficially owned shares for at least two years (including the holding period
of any prior owner other than an affiliate) is entitled to sell such shares
under Rule 144 without regard to the limitations described above. Shares
properly sold in reliance on Rule 144 to persons who are not "affiliates'
thereafter are freely tradeable without restriction or registration under the
Securities Act.
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
39
42
PLAN OF DISTRIBUTION
The Selling Shareholders have informed the Company that they have entered
into an arrangement with Hanifen, Imhoff, Inc. ("Hanifen, Imhoff") to act as the
broker for the Selling Shareholders. Pursuant to the arrangement, Hanifen,
Imhoff intends to effect a sale of the shares of Common Stock offered hereby
pursuant to a block trade transaction as soon as feasible following the
effectiveness of this Registration Statement. The Selling Shareholders will pay
to Hanifen, Imhoff a commission for their services which will fall within
customary parameters for transactions of this nature.
If Hanifen, Imhoff does not effect the sale of the shares of Common Stock
through such a block trade, the Shares offered hereby may be sold from time to
time by the Selling Shareholders. Such sales may be made on the Nasdaq National
Market, or in the over-the-counter market, or otherwise at prices and at terms
then prevailing or at prices related to the then current market price, or in
negotiated transactions, or to one or more underwriters for resale to the
public. The shares sold may be sold by one or more of the following: (a) a block
trade in which the broker or dealer so engaged will attempt to sell the shares
as agent but may position and resell a portion of the block as principal to
facilitate the transaction; (b) purchases by a broker or dealer as principal and
resale by such broker or dealer for its account pursuant to this Prospectus; (c)
an exchange distribution in accordance with the rules of such exchange; (d)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; or (e) an underwritten public offering. In effecting sales, brokers
or dealers engaged by the Selling Shareholders may arrange for other brokers or
dealers to participate. Brokers or dealers will receive commissions or discounts
from the Selling Shareholders in amounts to be negotiated immediately prior to
the sale. Such brokers or dealers and any other participating brokers or dealers
may be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In addition, any securities covered by this
Prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule
144 rather than pursuant to this Prospectus.
Brokers or dealer may be entitled to indemnification by the Company and the
Selling Shareholders against certain liabilities, including liabilities under
the Securities Act of 1933.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company and the Selling Shareholders by Foley &
Lardner, Tampa, Florida.
EXPERTS
The Consolidated Financial Statements of the Company at December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997
included in the Prospectus and in the registration statement, have been audited
by Deloitte & Touche LLP, independent auditors, as set forth in their report
appearing herein and in the registration statement, and have been so included
herein in reliance upon the report of said firm given upon their authority as
experts in accounting and auditing. The Financial Statements of CATS at December
31, 1996 and 1997 and for the years then ended included in this Prospectus and
in the registration statement, have been audited by Deloitte & Touche GmbH,
independent auditors, as set forth in their report appearing herein and in the
registration statement, and have been so included herein in reliance upon the
report of said firm given upon their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information concerning the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: New York Office, Seven World Trade Center, 13th Floor, New York, New
York
40
43
10048 and Chicago Office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material may also be
obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission. The address of such Web site is
http://www.sec.gov. In addition, the Common Stock is quoted on the Nasdaq
National Market and reports, proxy statements and other information filed by the
Company with the Nasdaq National Market may be inspected at the offices of The
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus does not contain all the information set forth in the
Registration Statement and exhibits thereto which the Company has filed with the
Commission under the Securities Act, to which reference is hereby made.
41
44
INDEX TO FINANCIAL STATEMENTS
PAGE
----
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Pro Forma Consolidated Balance Sheet as of March 31, 1998
(unaudited)............................................... F-3
Pro Forma Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 (unaudited)............. F-4
Pro Forma Consolidated Statements of Operations for the Year
Ended December 31, 1997 (unaudited)....................... F-5
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-6
Consolidated Balance Sheets as of December 31, 1997 and
1996, and March 31, 1998 (unaudited)...................... F-7
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995, and the three months
ended March 31, 1998 and 1997 (unaudited)................. F-8
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995, and the
three months ended March 31, 1998 (unaudited)............. F-9
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995, and the three months
ended March 31, 1998 and 1997 (unaudited)................. F-10
Notes to Consolidated Financial Statements.................. F-11
CATS GMBH
Independent Auditors' Report................................ F-20
Balance Sheets as of December 31, 1997 and 1996, and March
31, 1998 (unaudited)...................................... F-21
Statements of Operations for the Years Ended December 31,
1997 and 1996, and the three months ended March 31, 1998
(unaudited)............................................... F-22
Statements of Cash Flow for the Years Ended December 31,
1997 and 1996 and the three months ended March 31, 1998
(unaudited)............................................... F-23
Notes to Financial Statements............................... F-24
F-1
45
FARO TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma consolidated financial statements give
effect to the acquisition by the Company of the outstanding common stock of
CATS. The business combination will be accounted for using the purchase method
of accounting. Accordingly, tangible and intangible assets acquired and
liabilities assumed will be recorded at estimated fair values.
The unaudited pro forma consolidated balance sheet gives effect to the
acquisition by the Company of the outstanding common stock of CATS as if such
transaction had occurred on March 31, 1998. The unaudited pro forma consolidated
statements of operations gives effect to the transaction as if such transaction
occurred on January 1, 1997. The Company anticipates approximately $16 million
of the purchase price for CATS will be allocated to in process research and
development costs. Such amount will be expensed in the Company's second quarter.
The unaudited consolidated statements of operation do not reflect the allocation
of purchase price to in process research and development costs as such amount is
not considered to have reoccurring impact on the operations of the Company.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that Company management deems appropriate
and may be revised as additional information becomes available. The pro forma
financial data do not purport to represent what the Company's consolidated
financial position or results of operations would actually have been if such
transaction in fact had occurred on those dates and are not necessarily
representative of the Company's consolidated financial position or results of
operations for any future period. Since the Company and CATS were not
consolidated or under common control, historical combined results may not be
comparable to, or indicative of, future performance. The unaudited pro forma
consolidated financial statements should be read in conjunction with the
historical financial statements and notes thereto included elsewhere in this
Prospectus. See also "Risk Factors" included elsewhere herein.
F-2
46
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
FARO PRO FORMA PRO FORMA
CONSOLIDATED CATS GMBH(7) COMBINED ADJUSTMENTS CONSOLIDATED
------------ ------------ -------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $28,461 $ 4 $28,465 $ (5,653)(2) $ 22,812
Accounts receivable -- net of allowance..... 7,695 965 8,660 8,660
Inventories................................. 4,606 29 4,635 4,635
Prepaid expenses............................ 39 109 148 148
Deferred taxes.............................. 127 88 215 400(6) 615
------- ------ ------- -------- --------
Total current assets................. 40,928 1,195 42,123 (5,253) 36,870
------- ------ ------- -------- --------
PROPERTY AND EQUIPMENT -- At cost:
Machinery and equipment..................... 1,158 1,158 1,158
Furniture and fixtures...................... 865 168 1,033 1,033
------- ------ ------- -------- --------
Total................................ 2,023 168 2,191 -- 2,191
Less accumulated depreciation............... (882) (882) (882)
------- ------ ------- -------- --------
Property and equipment -- net............. 1,141 168 1,309 -- 1,309
------- ------ ------- -------- --------
PATENTS AND LICENSES -- net of accumulated
amortization................................ 627 627 627
OTHER INTANGIBLE ASSETS....................... 1,512(1) 1,512
PRODUCT DESIGN COSTS.......................... 261 261 261
LONG-TERM RECEIVABLES FROM RELATED PARTIES.... 227 227 227
DEFERRED TAXES................................ 116 116 1,200(6) 1,316
------- ------ ------- -------- --------
TOTAL ASSETS......................... $43,073 $1,590 $44,663 $ (2,541) $ 42,122
======= ====== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........... $ 653 $ 653 $ (653) $
Accounts payable and accrued liabilities.... $ 1,902 664 2,566 2,566
Income taxes payable........................ 403 403 403
Current portion unearned service revenues... 362 362 362
Customer deposits........................... 182 182 182
Other liabilities and other accruals........ 283 283 283
------- ------ ------- -------- --------
Total current liabilities............ 2,849 1,600 4,449 (653) 3,796
------- ------ ------- -------- --------
UNEARNED SERVICE REVENUES -- less current
portion..................................... 25 25 25
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, 10,887,908 issued and
outstanding............................... 10 10 1(2) 11
Additional paid-in capital.................. 36,738 26 36,764 12,593(2) 49,357
Retained earnings (accumulated deficit)..... 4,042 (36) 4,006 (14,482)(1) (10,476)
Unearned compensation....................... (421) (421) (421)
Cumulative translation adjustments.......... (170) (170) (170)
------- ------ ------- -------- --------
Total shareholders' equity........... 40,199 (10) 40,189 (1,888) 38,301
------- ------ ------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................. $43,073 $1,590 $44,663 $ (2,541) $ 42,122
======= ====== ======= ======== ========
F-3
47
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
FARO PRO FORMA PRO FORMA
CONSOLIDATED CATS GMBH(7) COMBINED ADJUSTMENTS CONSOLIDATED
------------ ------------ -------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SALES........................... $6,682 $ 533 $7,215 $ 7,215
COST OF SALES................... 2,682 170 2,852 2,852
------ ----- ------ ---- -----------
Gross Profit.................. 4,000 363 4,363 -- 4,363
------ ----- ------ ---- -----------
OPERATING EXPENSES:
Selling....................... 1,584 395 1,979 1,979
General & Administrative...... 599 599 599
Depreciation and
Amortization............... 110 110 $ 32(3) 142
Research and Development...... 386 177 563 563
Employee Stock Options........ 43 43 43
------ ----- ------ ---- -----------
Total Operating
Expenses............ 2,722 572 3,294 32 3,326
------ ----- ------ ---- -----------
INCOME FROM OPERATIONS.......... 1,278 (209) 1,069 (32) 1,037
------ ----- ------ ---- -----------
OTHER INCOME (EXPENSE):
Other Income.................. 317 317 317
Interest Expense.............. (13) (13) (13)
------ ----- ------ ---- -----------
INCOME BEFORE INCOME TAXES...... 1,595 (222) 1,373 (32) 1,341
INCOME TAX EXPENSE (BENEFIT).... 572 (128) 444 (12)(6) 432
====== ===== ====== ==== ===========
NET INCOME............ $1,023 $ (94) 929 $(20) 909
===== ====
OTHER COMPREHENSIVE INCOME:
Foreign Currency Translation
Adjustments................ (44) (44) (44)
------ ------ -----------
COMPREHENSIVE INCOME............ $ 979 $ 885 $ 865
====== ====== ===========
Basic Net Income per
Share............... $ 0.08
===========
10,861,522(5)
===========
F-4
48
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 1997
FARO PRO FORMA PRO FORMA
CONSOLIDATED CATS GMBH(7) COMBINED ADJUSTMENTS CONSOLIDATED
------------ ------------ -------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SALES............................ $23,516 $ 3,344 $26,860 $ 26,860
COST OF SALES.................... 9,611 1,006 10,617 10,617
------- ------- ------- -----------
Gross Profit..................... 13,905 2,338 16,243 16,243
------- ------- ------- -----------
OPERATING EXPENSES:
Selling........................ 5,676 1,211 6,887 6,887
General & Administrative....... 1,520 1,520 1,520
Depreciation and
Amortization................ 294 294 $ 1,000(4) 1,294
Research and Development....... 1,076 977 2,053 2,053
Employee Stock Options......... 408 408 408
------- ------- ------- ------- -----------
Total Operating
Expenses............. 8,974 2,188 11,162 1,000 12,162
------- ------- ------- ------- -----------
INCOME FROM OPERATIONS........... 4,931 150 5,081 (1,000) 4,081
------- ------- ------- ------- -----------
OTHER INCOME (EXPENSES):
Other Income................... 500 500 500
Interest Expense............... (111) (23) (134) (134)
------- ------- ------- ------- -----------
INCOME BEFORE INCOME TAXES....... 5,320 127 5,447 (1,000) 4,447
INCOME TAX EXPENSE (BENEFIT)..... 2,115 74 2,189 (400)(6) 1,789
------- ------- ------- ------- -----------
NET INCOME (LOSS)...... $ 3,205 $ 53 $ 3,258 $ (600) $ 2,658
======= ======= ======= ======= ===========
Basic Net Income Per
Share................ $ 0.30
===========
8,748,382(5)
===========
- ---------------
(1) To record identifiable intangible assets resulting from the acquisition of
the common stock of CATS consisting of the following: (in thousands)
AMOUNT LIFE
------- -------
Assembled workforce.................................... $ 552 5 years
Existing product technologies.......................... 872 1 year
Other intangible assets in the nature of goodwill...... 88 5 years
-------
$ 1,512
In-process research and development.................... $16,082 0 years
(2) To record common stock issued in connection with the acquisition of CATS and
subsequent payment of debt.
(3) To record amortization of intangible assets for the three months ended March
31, 1998.
(4) To record amortization of intangible assets for the year ended December 31,
1997.
(5) Weighted average common shares outstanding include shares issued in
connection with the acquisition of CATS.
(6) To record tax effects of pro forma adjustments relating to CATS acquisition.
(7) Amounts have been converted from DM to US dollars using exchange rates in
effect at period end for assets and liabilities and average exchange rates
during each period for results of operations.
F-5
49
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
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, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
February 13, 1998
F-6
50
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
----------- -------------------------
1998 1997 1996
----------- ----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $28,461,086 $28,815,069 $ 263,342
Accounts receivable--net of allowance..................... 7,694,649 6,159,173 2,992,681
Inventories............................................... 4,606,008 4,275,376 3,298,744
Prepaid expenses.......................................... 39,430 109,649 40,871
Deferred taxes............................................ 126,572 126,572 102,500
----------- ----------- -----------
Total current assets............................... 40,927,745 39,485,839 6,698,138
----------- ----------- -----------
PROPERTY AND EQUIPMENT -- At cost:
Leasehold improvements.................................... -- -- 14,938
Machinery and equipment................................... 1,157,961 1,014,309 700,799
Furniture and fixtures.................................... 864,846 605,913 453,892
----------- ----------- -----------
Total.............................................. 2,022,807 1,620,222 1,169,629
Less accumulated depreciation............................. (882,161) (792,442) (568,279)
----------- ----------- -----------
Property and equipment--net............................. 1,140,646 827,780 601,350
----------- ----------- -----------
PATENTS AND LICENSES--net of accumulated amortization of
334,368 (unaudited), $321,261 and $270,925,
respectively.............................................. 626,883 639,693 486,480
PRODUCT DESIGN COSTS........................................ 116,640 108,286 --
DEFERRED TAXES.............................................. 260,644 130,735 29,700
----------- ----------- -----------
TOTAL ASSETS....................................... $43,072,558 $41,192,333 $ 7,815,668
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ -- $ -- $ 611,111
Accounts payable and accrued liabilities.................. 1,902,142 1,196,967 1,710,814
Income taxes payable...................................... 403,497 413,167 128,216
Current portion unearned service revenues................. 362,422 476,802 185,180
Customer deposits......................................... 182,094 121,358 230,393
----------- ----------- -----------
Total current liabilities.......................... 2,850,155 2,208,294 2,865,714
----------- ----------- -----------
UNEARNED SERVICE REVENUES--
less current portion...................................... 24,607 44,628 286,099
LONG TERM DEBT-- less current portion....................... -- 890,156
COMMITMENTS (Note 7)
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 9,971,241, 9,919,000 and 7,000,000 issued and
outstanding, respectively............................... 9,971 9,919 7,000
Additional paid-in capital................................ 36,737,691 36,502,004 3,961,564
Retained earnings (accumulated deficit)................... 4,041,656 3,018,265 (188,365)
Unearned compensation..................................... (421,439) (464,480) (6,500)
Cumulative translation adjustments........................ (170,083) (126,297) --
----------- ----------- -----------
Total shareholders' equity......................... 40,197,796 38,939,411 3,773,699
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $43,072,558 $41,192,323 $ 7,815,668
=========== =========== ===========
See notes to consolidated financial statements.
F-7
51
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ----------- ----------
(UNAUDITED)
SALES.............................. $6,682,201 $4,889,471 $23,516,385 $14,656,337 $9,862,242
COST OF SALES...................... 2,681,762 1,948,549 9,610,838 6,486,268 4,987,779
---------- ---------- ----------- ----------- ----------
Gross profit....................... 4,000,439 2,940,922 13,905,547 8,170,069 4,874,463
---------- ---------- ----------- ----------- ----------
OPERATING EXPENSES:
Selling.......................... 1,583,536 1,158,559 5,676,113 3,731,762 2,008,301
General and administrative....... 598,582 302,523 1,519,657 744,206 503,184
Depreciation and amortization.... 110,362 58,873 293,996 230,799 341,494
Research and development......... 386,444 178,073 1,075,505 730,124 363,871
Employee stock options........... 43,041 3,270 408,000 23,100 106,700
---------- ---------- ----------- ----------- ----------
Total operating
expenses............... 2,721,965 1,701,298 8,973,271 5,459,991 3,323,550
---------- ---------- ----------- ----------- ----------
INCOME FROM OPERATIONS............. 1,278,474 1,239,624 4,932,276 2,710,078 1,550,913
---------- ---------- ----------- ----------- ----------
OTHER INCOME (EXPENSE):
Other income..................... 317,273 (5,810) 499,752 25,145 62,212
Interest expense................. (34,262) (110,768) (212,669) (355,468)
---------- ---------- ----------- ----------- ----------
INCOME BEFORE INCOME TAXES......... 1,595,747 1,199,552 5,321,260 2,522,554 1,257,657
INCOME TAX EXPENSE (BENEFIT)....... 572,356 479,821 2,114,630 1,115,892 (342,000)
---------- ---------- ----------- ----------- ----------
NET INCOME............... 1,023,391 719,731 $ 3,206,630 $ 1,406,662 $1,599,657
========== ========== =========== =========== ==========
OTHER COMPREHENSIVE INCOME
Foreign currency translation
adjustments................... (43,786)
---------- ----------
Other comprehensive income....... (43,786)
---------- ----------
Comprehensive income............... $ 979,605 $ 719,731
========== ==========
NET INCOME PER COMMON SHARE --
BASIC............................ $ 0.10 $ 0.10 $ 0.41 $ 0.20 $ 0.23
NET INCOME PER COMMON SHARE --
ASSUMING DILUTION................ $ 0.10 $ 0.10 $ 0.39 $ 0.19 $ 0.22
See notes to consolidated financial statements.
F-8
52
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RETAINED
COMMON STOCK ADDITIONAL EARNINGS UNEARNED CUMULATIVE
------------------- PAID-IN (ACCUMULATED COMPENSA- TRANSLATION
SHARE AMOUNTS CAPITAL DEFICIT) TION ADJUSTMENT TOTAL
--------- ------- ----------- ------------- --------- ----------- -----------
BALANCE, JANUARY 1, 1995... 7,000,000 $7,000 $ 3,825,264 $(3,194,684) $ -- $ -- $ 637,580
Granting of employee and
director of stock
options................ 146,500 -- (39,800) -- 106,700
Net income........ -- 1,599,657 -- -- 1,599,657
--------- ------ ----------- ----------- --------- --------- -----------
BALANCE, DECEMBER 31,
1995..................... 7,000,000 7,000 3,971,764 (1,595,027) (39,800) -- 2,343,937
Employee stock options,
forfeitures and
amortization of
unearned
compensation........... (10,200) -- 33,300 -- 23,100
Net income........ -- 1,406,662 -- -- 1,406,662
--------- ------ ----------- ----------- --------- --------- -----------
BALANCE, DECEMBER 31,
1996..................... 7,000,000 7,000 3,961,564 (188,365) (6,500) -- 3,773,699
Granting of employee and
director stock
options................ 866,793 -- (501,834) -- 364,959
Amortization of unearned
compensation........... -- -- 43,854 -- 43,854
Issuance of common
stock.................. 2,919,000 2,919 31,673,647 -- -- -- 31,676,566
Currency translation
adjustment............. -- -- -- (126,297) (126,297)
Net income........ -- 3,206,630 -- -- 3,206,630
--------- ------ ----------- ----------- --------- --------- -----------
BALANCE, DECEMBER 31,
1997..................... 9,919,000 9,919 36,502,004 3,018,265 (464,480) (126,297) 38,939,411
Issuance of common stock
(unaudited)............ 52,241 52 235,687 -- -- -- 235,739
Amortization of unearned
compensation
(unaudited)............ -- -- 43,041 -- 43,041
Currency translation
adjustment
(unaudited)............ -- -- -- (43,786) (43,786)
Net income
(unaudited)..... -- 1,023,391 -- -- 1,023,391
BALANCE,
MARCH 31, 1998
(unaudited).............. 9,971,241 $9,971 $36,737,691 $ 4,041,656 $(421,439) $(170,083) $40,197,796
========= ====== =========== =========== ========= ========= ===========
See notes to consolidated financial statements.
F-9
53
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- ---------------------------------------
1998 1997 1997 1996 1995
----------- --------- ----------- ----------- -----------
(UNAUDITED)
OPERATING ACTIVITIES:
Net Income............................ $ 1,023,391 $ 719,731 $ 3,206,630 $ 1,406,662 $ 1,599,657
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization....... 110,362 58,873 293,996 230,799 341,494
Product design costs................ -- -- 531,186
Employee stock options.............. 43,041 3,270 408,000 23,100 106,700
Provision for bad debts............. -- 28,432 24,806
Provision for obsolete inventory.... -- -- 27,629
Deferred income taxes............... (125,107) 232,800 (365,000)
Loss on the sale of fixed assets.... 10,850 -- --
Changes in operating assets and
liabilities:
Decrease (Increase) in:
Accounts receivable............... (1,579,264) (700,404) (3,292,789) (843,349) (1,147,174)
Notes receivable.................. -- -- 47,947
Inventory......................... (330,632) (246,720) (976,632) (1,230,457) (453,120)
Prepaid expenses and other
assets......................... 70,219 (7,155) (68,778) 55,435 (47,193)
Increase (Decrease) in:
Accounts payable and accrued
liabilities.................... 705,175 (615,828) (513,847) 990,993 126,925
Income taxes payable.............. 221,359 277,620 284,951 105,216 23,000
Unearned service revenues......... (134,401) 124,721 50,151 471,278 --
Customer deposits................. 60,736 160,170 (109,035) 53,460 118,865
----------- --------- ----------- ----------- -----------
Net cash (used in) provided
by operating activities.... 189,986 (225,722) (831,610) 1,524,369 935,722
----------- --------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment... (410,121) (102,971) (480,127) (416,162) (210,868)
Payment of patent costs............... (297) (987) (203,549) (134,046) (74,088)
Payments for product design costs..... (152,358) (108,286) -- --
----------- --------- ----------- ----------- -----------
Net cash used in investing
activities.......................... (562,776) (103,958) (791,962) (550,208) (284,956)
----------- --------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Repayment of related party loans...... -- (2,200,000) (725,000)
Proceeds from debt.................... 197,071 -- 1,625,816 --
Payments on debt...................... (1,501,267) (140,556) --
Proceeds from issuance of common
stock, net.......................... 18,807 31,676,566 -- --
----------- --------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities... 18,807 197,071 30,175,299 (714,740) (725,000)
INCREASE (DECREASE) IN CASH........... (353,983) (132,609) 28,551,727 259,421 (74,234)
CASH, BEGINNING OF YEAR............... 28,815,069 263,342 263,342 3,921 78,155
----------- --------- ----------- ----------- -----------
CASH, END OF YEAR..................... $28,461,086 $ 130,733 $28,815,069 $ 263,342 $ 3,921
=========== ========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest................ $ 34,262 $ 110,768 $ 256,654 $ 352,987
=========== ========= =========== =========== ===========
Cash paid for income taxes............ $ 350,997 $ 202,201 $ 1,951,286 $ 777,876 $ --
=========== ========= =========== =========== ===========
NONCASH FINANCING ACTIVITIES
Net decrease in deferred tax assets
and current tax liability due to
exercise of employee stock
options........................... $ 216,934 $ $ $ $
=========== ========= =========== =========== ===========
See notes to consolidated financial statements.
F-10
54
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AND THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- FARO Technologies, Inc. (the "Company")
develops, manufactures, markets and supports portable, software-driven, 3-D
measurement systems that are used in a broad range of manufacturing and
industrial applications. The Company has two wholly-owned subsidiaries, FARO
Worldwide, Inc. and FARO FRANCE, s.a.s., which distribute the Company's 3-D
measurement equipment throughout Europe through three primary offices located in
France, Germany and the United Kingdom, Faro France, s.a.s. commenced operations
in July 1996.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and all wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
The Company has one foreign subsidiary located in France. The financial
statements of this subsidiary are translated from French francs into US 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 shareholders equity.
Revenue Recognition, Product Warranty and Extended Maintenance
Contracts -- Revenue related to the Company's 3-D measurement equipment 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 not recognized unless remaining obligations under the sales agreement
are insignificant. 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. The Company warrants its
products against defects in design, materials and workmanship for one year. A
provision for estimated future costs relating to warranty expenses is recorded
when products are shipped. Costs relating to extended maintenance plans are
recognized as incurred.
In June 1996, the Company entered into an OEM agreement with Mitutoyo
Corporation, 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 expires in June 1999, and is renewable for successive one year terms.
One customer accounted for approximately 10% of total sales for the year
ended December 31, 1996.
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.
Inventories -- Inventories are stated at the lower of average cost or
market value. For 1996, inventories are stated at the lower of cost (determined
on the first-in, first-out method) or market value. Such change was made due to
potentially significant price variances that result from factors such as rush
orders and technological improvements relating to components. Accordingly, the
Company believes average cost more accurately reflect the value of its
inventory. The change from the first-in, first-out method to the average cost
method of inventory valuation did not have a material effect on the Company's
consolidated financial statements. 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.
F-11
55
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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..................................... 5 years
Furniture and fixtures...................................... 5 years
Computer equipment.......................................... 2 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.
Patents -- Patents are recorded at cost. Amortization is computed using the
straight-line method over the lives of the patents, which is 17 years. In
addition, unamortized patents of $192,570 relating to certain products sold in
the medical field were charged to amortization expense in 1995 due to the
discontinuance of those products.
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.
Product Design Costs -- 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 three 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. During
1996 and 1995, the Company's products had an economic life of less than one
year, due to the rate of technological development. As a result, $531,186 of
unamortized product design costs at January 1, 1995 were charged to cost of
sales in 1995.
Income Taxes -- The Company utilizes the asset and liability method to
measure and record deferred income tax assets and liabilities. Under the asset
and liability method, deferred tax assets and liabilities are recognized for the
future consequences attributed to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
F-12
56
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share -- During the year ended December 31, 1997, the Company
adopted SFAS No. 128, "Earnings per Share" (SFAS No. 128). This Statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to all entities with publicly-held common stock or potential common
stock. This Statement replaces the presentation of primary EPS and fully-diluted
EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS
excludes dilution and is computed by dividing earnings available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Similar to fully diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the earnings. All EPS data presented
has been restated to conform with the requirements of SFAS No. 128. A
reconciliation of the number of common shares used in calculation of basic and
diluted EPS is presented below:
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------------------------------- ------------------------------------------------------------
1998 1997 1997 1996 1995
------------------- ------------------ ------------------ ------------------ ------------------
PER- PER- PER- PER- PER-
SHARE SHARE SHARE SHARE SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ --------- ------ --------- ------ --------- ------ --------- ------
(UNAUDITED)
Basic EPS
Weighted-Average
Shares............. 9,944,855 $.10 7,000,000 $.10 7,831,715 $0.41 7,000,000 $0.20 7,000,000 $0.23
Effect of Dilutive
Securities Stock
Options............
Options.............. 286,301 333,290 355,495 349,041 166,739
Warrants............. -- -- 1,838
Diluted EPS
Weighted-Average
Shares and Assumed
Conversions........ 10,231,156 $.10 7,333,290 $.10 8,189,048 $0.39 7,349,041 $0.19 7,166,739 $0.22
Earnings per share for the years ended December 31, 1995 and 1996 were
computed as follows: (i) 7,000,000 common shares issued and outstanding each
year, plus (ii) 149,690 common shares issuable under the 1997 stock option
grants based on the treasury stock method assuming an initial public offering
price of $11.00 per share, plus (iii) common shares issuable under the 1995
stock options granted under the 1993 stock option plan of 17,050 in 1995 and
199,352 in 1996, respectively, based on the treasury stock method assuming an
initial public offering price of $11.00 per share.
Reverse Stock Split -- All per share amounts, number of common shares and
capital accounts in the accompanying financial statements have been restated to
give retroactive effect for all periods presented for a 1-for-1.422272107
reverse stock split effective June 30, 1997. The par value of the common stock
was not changed. As a result, $2,956 representing the reduction in par value for
the shares no longer issued was transferred to additional paid-in capital from
common stock.
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.
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 -- Effective January 1, 1996, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS No. 121) which requires that long-
F-13
57
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lived assets and certain intangibles to be held and used by the Company be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The adoption of
SFAS No. 121 did not have a material impact on the Company.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 establishes a fair
value-based method of accounting for stock-based employee compensation plans;
however, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." 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. The Company has elected to
continue to account for its employee stock compensation plans under 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. See Note 8.
New Accounting Standards -- In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS No. 130). This statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. 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 enterprise display an amount
representing total comprehensive income for the period in that financial
statement. Additionally, SFAS No. 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. This Statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods, provided for comparative purposes, is required. Management has
not determined the effect of this statement on its financial statement
disclosure.
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management has not determined
the effect of this statement on its financial statement disclosure.
On October 27, 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. Management does
not believe the adoption of SOP 97-2 will have a material effect on the
Company's consolidated financial statements.
Interim Financial Information -- Interim Financial Information at March 31,
1998 and for the three months ended March 31, 1998 and 1997 is unaudited. The
unaudited interim financial statements reflect all adjustments, consisting of
only normal recurring adjustments which are, in the opinion of management
necessary to a fair statement of the results for the interim periods.
Information for the interim periods is not necessarily indicative of results to
be achieved for the full year.
2. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable are net of an allowance for doubtful accounts
of $9,534 for the years ended December 31, 1997 and 1996.
F-14
58
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
MARCH 31, -----------------------
1998 1997 1996
----------- ---------- ----------
(UNAUDITED)
Raw materials...................................... $2,524,558 $2,432,194 $1,888,227
Finished goods..................................... 990,193 804,827 472,408
Sales demonstration................................ 1,091,257 1,038,355 938,109
---------- ---------- ----------
$4,606,008 $4,275,376 $3,298,744
========== ========== ==========
Sales demonstration inventory is comprised of measuring devices utilized by
sales representatives to present the Company's products to customers. The
products remain in sales demonstration inventory for up to six months and are
subsequently sold at prices that produce slightly reduced gross margins.
4. LONG-TERM DEBT
The Company has a loan agreement (the "Agreement") in the form of a term
note and a line of credit. The Agreement combines the equivalent of three
successive one-year term loans, each equal to that portion of the loan that will
be fully amortized in the ensuing year, with a line of credit equal to that
portion of the loan that will not be amortized in the ensuing year. The Company
has available borrowings under the Agreement totaling approximately $2 million
as of December 31, 1997. Interest accrues at the 30-day commercial paper rate
plus 2.7% and is payable monthly. Borrowings under the Agreement are
collateralized by the Company's accounts and notes receivable, inventory,
property and equipment, intangible assets and deposits. The Agreement contains
restrictive covenants, including the maintenance of certain amounts of working
capital and tangible net worth and limits on loans to related parties, and
prohibits the Company from declaring dividends. No borrowings were outstanding
under this line of credit as of December 31, 1997.
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. No borrowings were outstanding under this line of credit as of
December 31, 1997.
5. RELATED PARTY TRANSACTIONS
Leases -- The Company leases its plant and office building from Xenon
Research, Inc. ("Xenon"). All of the outstanding capital stock of Xenon is owned
by Simon Raab and his spouse. Simon Raab is the Chairman of the Board, President
and Chief Executive Officer of the Company. The lease expires on February 28,
2001, and 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 $150,000 for both 1997 and 1996, and $148,000 for 1995.
During the year ended December 31, 1997, the Company's Board of Directors
gave approval to the Company to amend the existing lease agreement with Xenon to
include additions to the existing premises which are being constructed by Xenon.
Upon completion of the expansion premises, rent under the lease will increase
approximately $150,000 per year. Increased payments under the lease are
scheduled to commence on the earlier of (a) the date Xenon obtains a certificate
of occupancy or (b) the Company takes occupancy. The Company expects to take
occupancy of the expansion premises during the first quarter of 1998.
Notes -- Xenon Research, Inc. -- Revolving line of credit, which was repaid
and terminated in 1996. Interest was at prime plus 5% (13.5% at December 31,
1995) and amounted to $355,468 in 1995 and $185,585 in 1996.
F-15
59
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The components of the expense (benefit) for income taxes is comprised of
the following as of December 31:
1997 1996 1995
---------- ---------- ---------
Current:
Federal.......................................... $1,945,035 $ 721,700 $ 23,000
State............................................ 294,702 161,392 --
---------- ---------- ---------
2,239,737 883,092 23,000
---------- ---------- ---------
Deferred:
Federal.......................................... (108,646) 221,100 (334,000)
State............................................ (16,461) 11,700 (31,000)
---------- ---------- ---------
(125,107) 232,800 (365,000)
---------- ---------- ---------
$2,114,630 $1,115,892 $(342,000)
========== ========== =========
Income taxes for the years ended December 31, 1997 and 1996 differ from the
amount computed by applying the federal statutory corporate rate to income
before income taxes. The differences are reconciled as follows:
1997 1996 1995
---------- ---------- ---------
Tax expense at statutory rate...................... $1,809,228 $ 857,700 $ 428,000
State income taxes, net of federal benefit......... 181,713 114,200 46,000
Research and development credit.................... (64,893) -- (30,000)
Nondeductible items................................ 159,198 61,000 --
Other.............................................. 29,384 82,992 --
Change in deferred tax asset valuation allowance... -- -- (786,000)
---------- ---------- ---------
Total income tax expense (benefit)....... $2,114,630 $1,115,892 $(342,000)
========== ========== =========
The components of the Company's net deferred tax asset at December 31, 1997
and 1996 are as follows:
1997 1996
-------- --------
Deferred tax assets:
Employee stock option..................................... $200,599 $ 51,300
Unearned service revenue.................................. 178,271 186,200
Other..................................................... 14,770 9,400
-------- --------
Gross deferred assets....................................... 393,640 246,900
-------- --------
Deferred tax liabilities:
Patent amortization....................................... 72,963 88,200
Depreciation.............................................. 22,979 26,500
Product design costs...................................... 40,391 --
-------- --------
Gross deferred tax liabilities.............................. 136,333 114,700
-------- --------
Net deferred tax asset...................................... $257,307 $132,200
======== ========
F-16
60
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS
The following is a schedule of future minimum lease payments required under
noncancelable leases, including leases with related parties (see Note 5), in
effect at December 31, 1997:
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ ----------
1998........................................................ $ 395,000
1999........................................................ 342,500
2000........................................................ 337,600
2001........................................................ 55,300
----------
Total future minimum lease payments............... $1,130,400
==========
8. STOCK OPTION PLANS
In 1993, the Company adopted the Employee Stock Option Plan (the "1993
Plan"). The Company reserved 1,000,000 shares of common stock for issuance to
eligible employees under the Plan. On December 19, 1995, the Company granted
243,265 options to purchase shares of common stock of the Company to certain
employees at exercise prices of $0.36. These options vested over four years from
January 1, 1992 or the date of the optionee's employment, whichever was later,
and became exercisable to the extent vested upon completion of the Company's
initial public offering in September 1997. At December 31, 1995, the value of
one share of common stock was determined to be $1.07, based on a third-party
offer for Company stock.
On January 1, 1997, the Company granted options to purchase 133,218 shares
of common stock of the Company pursuant to the 1993 Plan at an exercise price of
$3.60 per share. These options vest over a period of three years beginning
September 23, 1998, and are exercisable upon vesting.
On May 1, 1997, as consideration for his serving on the Board of Directors,
a director was granted options for 52,732 shares of common stock at an exercise
price of $0.36 per share. Such options were immediately vested and became
exercisable upon completion of the Company's initial public offering in
September 1997; consequently, the associated compensation expense has been
recorded during the year ended December 31, 1997.
In July 1997, the Company adopted the 1997 Employee Stock Option Plan (the
"1997 Plan") that provides for the grant to key employees of the Company of
incentive or nonqualified stock options. An aggregate of 750,000 shares of
common stock are reserved for issuance pursuant to the 1997 Plan. The 1997 Plan
is administered by the Compensation committee of the Board of Directors, which
has broad discretion in the granting of awards. The exercise price of all
options granted under the 1997 Plan must be at least equal to the fair market
value of the common stock on the date of grant. During the year ended December
31, 1997, Simon Raab, President and Chief Executive Officer and Gregory A.
Fraser, Chief Financial Officer were granted 80,000 and 60,000 options,
respectively, under the 1997 Plan. Also, 74 other employees were granted options
to purchase a total of 188,000 shares of common stock at the exercise price of
$12.00 per share, which represented the fair value of such shares (except for
options granted to Simon Raab at an exercise price of $13.20 per share to
qualify for treatment as incentive stock options). All options issued under the
1997 Plan will become exercisable in one-third increments on each anniversary of
the date of grant, commencing in 1998.
In July 1997, the Company adopted the 1997 Non-Employee Director Stock
Option Plan (the "Non-Employee Director Plan") which provides for the grant of
nonqualified stock options to members of the Board of Directors who are not
employees of the Company. Although adopted in July 1997, the Non-Employee
Director Plan was not effective until September 18, 1997, upon completion of the
Company's initial public offering. An aggregate of 250,000 shares of Common
Stock of the Company have been reserved for issuance under the Non-Employee
Director Plan. Under the Non-Employee Director Plan, each nonemployee director
F-17
61
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shall automatically be granted options to purchase 3,000 shares of the Company's
common stock (i) on the effective date of the Non-Employee Director Plan if
serving on the Board as of such date, or (ii) on the date on which he or she is
first elected or appointed, if he or she is subsequently elected or appointed to
the Board. Additionally, the Non-Employee Director Plan provides that each
nonemployee director shall automatically be granted options to purchase 3,000
shares of common stock of the Company on the day following the annual meeting of
shareholders at which he or she is reelected to the Board. Formula grants under
the Non-Employee Director Plan become exercisable in one-third increments on the
first, second and third anniversary of the date of grant. The exercise price of
options granted under the Non-Employee Director Plan is equal to the fair market
value of the Company's common stock as defined in the Plan. Options granted
under the Non-Employee Director Plan, other than pursuant to the above formula,
may only be granted upon specific approval of each grant by the Board, which has
the discretion to establish a vesting schedule different than the established
vesting schedule of formula options.
On September 18, 1997, the effective date of the Non-Employee Director
Plan, each nonemployee Director was granted options to purchase 3,000 shares of
common stock at exercise prices of $12.00 per share. Additionally, pursuant to
the Non-Employee Director Plan on September 18, 1997, outside Directors, other
than Martin Koshar, were granted options to purchase an aggregate of 160,000
shares of common stock of the Company at exercise prices of $12.00 per share in
consideration for their prior service on the Board. The nonformula option grants
were immediately vested.
Compensation cost charged to operations associated with the Company's stock
option plans was $408,000, $23,100 and $106,700 in 1997, 1996 and 1995,
respectively. Compensation cost was based on the difference between the value of
the stock and its exercise price, multiplied by the number of shares vested in
each year.
SFAS NO. 123 REQUIRED DISCLOSURE
If compensation cost for stock options was determined based on the fair
value at the grant dates for 1997, 1996 and 1995, consistent with the method
prescribed by SFAS No. 123, the Company's net income and income per share would
have been adjusted to the pro forma amounts indicated below:
1997 1996 1995
---------- ---------- ----------
Net income as reported............................. $3,206,630 $1,406,662 $1,599,657
Pro forma.......................................... 2,345,551 1,382,140 1,572,628
Income per share -- Basic as reported.............. 0.41 0.20 0.23
Pro forma.......................................... 0.30 0.19 0.22
Income per share -- Assuming dilution
As reported...................................... 0.39 0.19 0.22
Pro forma........................................ 0.29 0.19 0.22
Under SFAS No. 123, the fair value of each option is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for options granted in 1997 and 1995: dividend
yield of 0%, expected volatility of 46.33% and 90% for 1997 and 1995,
respectively, risk-free interest rate of 5.63%, and expected life ranging from 3
to 10 years. There were no stock options granted in 1996.
F-18
62
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of options under the Company's stock-based
compensation plans as of December 31, 1997 and 1996, and changes during the
years ending on those dates is as follows:
WEIGHTED-AVERAGE EXERCISED OPTIONS PRICE
- -------------------------- -------- -----
1997
Outstanding at beginning of year............................ 190,512 $0.36
Granted................................................... 797,001 9.90
Forfeited................................................. (31,790) 9.67
-------- -----
Outstanding at end of year.................................. 955,723 $8.00
======== =====
Grants exercisable at year-end.............................. 498,680 $ --
Weighted-average fair value of options granted during the
year...................................................... $ 4.82 --
1996
Outstanding at beginning of year............................ 210,902 $0.36
Granted................................................... -- --
Forfeited................................................. (20,390) 0.36
-------- -----
Outstanding at end of year.................................. 190,512 $0.36
======== =====
Grants exercisable at year-end.............................. -- --
Weighted-average fair value of options granted during the
year...................................................... -- --
1995
Outstanding at beginning of year............................ -- --
Granted................................................... 210,902 $0.36
Forfeited................................................. -- --
-------- -----
Outstanding at end of year.................................. 210,902 $0.36
======== =====
Grants exercisable at year-end.............................. -- --
Weighted-average fair value of options granted during the
year...................................................... $ 1.00 --
The following table summarizes information about the outstanding grants at
December 31, 1997:
WEIGHTED-
AVERAGE
REMAINING
EXERCISE OPTIONS CONTRACTUAL OPTIONS
PRICE OUTSTANDING LIFE EXERCISABLE
- ----------------------------------------------------- ----------- ----------- -----------
$ 0.36............................................... 243,244 4.75 238,680
3.57............................................... 131,479 6.75 --
12.00............................................... 481,000 9.75 160,000
13.20............................................... 100,000 4.75 100,000
------- ---- -------
955,723 498,680
======= =======
Remaining non-exercisable options as of December 31, 1997 become
exercisable as follows:
1998........................................................ 155,390
1999........................................................ 150,826
2000........................................................ 150,827
-------
457,043
=======
F-19
63
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. BENEFIT PLAN
During 1996, the Company established a defined contribution retirement plan
(401(k)) 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 contribution
to the Plan in 1996 or 1997.
10. SEGMENT INFORMATION
Sales to unaffiliated customers, loss from operations and identifiable
assets relating to the Company's French subsidiary totaled $3,267,690,
$(275,864), and $2,992,832, respectively. Such amounts were not material for the
years ended December 31, 1996 and 1995.
The following table includes export sales according to the country in which
the customer is located.
UNITED OTHER
STATES ASIA EUROPE CANADA FOREIGN TOTAL
----------- ---------- ---------- -------- ---------- -----------
Year Ended December 31,
1997................... $15,599,150 $2,201,848 $4,135,982 $560,872 $1,018,533 $23,516,385
Year Ended December 31,
1996................... 10,829,543 1,606,916 1,292,592 715,728 211,558 14,656,337
Year Ended December 31,
1995................... 7,727,400 385,361 625,730 850,271 273,480 9,862,242
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
QUARTER ENDED 1997 1997 1997 1997
- ------------- ------------ ------------- ---------- ----------
Sales.......................................... $7,288,544 $5,909,306 $5,429,064 $4,889,471
Gross Profit................................... 4,245,100 3,530,192 3,189,333 2,940,922
Net income..................................... 1,121,907 829,115 535,877 719,731
Net income per share:
Basic.......................................... 0.11 0.11 0.07 0.09
Assuming dilution.............................. 0.11 0.11 0.07 0.09
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
QUARTER ENDED 1996 1996 1996 1996
- ------------- ------------ ------------- ---------- ----------
Sales.......................................... $4,113,031 $4,083,193 $3,422,503 $3,037,610
Gross profit................................... 2,127,877 2,327,073 1,864,175 1,850,944
Net income..................................... 220,513 503,989 285,099 397,061
Net income per share:
Basic.......................................... 0.03 0.07 0.04 0.06
Assuming dilution.............................. 0.03 0.07 0.04 0.05
F-20
64
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of CATS computer aided
technologies, Computeranwendungen in der Fertigungssteuerung GmbH, Karlsruhe, as
of December 31, 1997 and 1996, and the related statements of income and cash
flows for each of the two years in the period ended December 31, 1997. 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 generally accepted auditing
standards in the United States of America and Germany. 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 financial statements present fairly, in all material
respects, the financial position of CATS computer aided technologies,
Computeranwendungen in der Fertigungssteuerung GmbH, Karlsruhe, as of December
31, 1997 and 1996, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles in the United States of America.
Deloitte & Touche GmbH
Wirtschaftsprufungsgesellschaft
/s/ Dr. KAMM /s/ KOMPENHANS
(Dr. Kamm) (Kompenhans)
Wirtschafsprufer Wirtschaftsprufer
Mannheim, May 26, 1998
Kom/Pf
F-21
65
CATS COMPUTER AIDED TECHNOLOGIES,
COMPUTERANWENDUNGEN IN DER FERTIGUNGSSTEUERUNG GMBH
BALANCE SHEETS
MARCH 31 DECEMBER 31,
1998 1997 1996
----------- ------ ------
(UNAUDITED)
(IN THOUSANDS OF DM)
ASSETS
Current Assets
Cash and cash equivalents.............................. 7 5 6
Accounts receivable.................................... 1,783 2,154 569
(net of allowance for doubtful accounts of DM 16 in
1998 (unaudited)
DM 21 in 1997 and DM 6 in 1996)
Inventories............................................ 54 54 32
Other current assets and prepaid expenses.............. 201
Deferred tax assets.................................... 163 154 34
------ ------ ------
2,208 2,367 641
EDP equipment and office furniture (net) 311 360 96
Long-term receivables from related parties 418 328 143
------ ------ ------
2,937 3,055 880
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Liabilities to banks................................... 1,205 1,092 121
Accounts payable....................................... 1,227 1,227 260
Other liabilities and other accruals................... 521 534 433
Deferred tax liabilities............................... 56 8
------ ------ ------
2,953 2,909 822
Stockholder's Equity
Registered capital..................................... 50 50 50
Retained earnings...................................... (66) 96 8
------ ------ ------
(16) 146 58
------ ------ ------
2,937 3,055 880
====== ====== ======
See Notes to the Financial Statements.
F-22
66
CATS COMPUTER AIDED TECHNOLOGIES,
COMPUTERANWENDUNGEN IN DER FERTIGUNGSSTEUERUNG GMBH
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DM)
YEARS ENDED
DECEMBER 31,
THREE MONTHS ENDED --------------
MARCH 31, 1998 1997 1996
------------------ ----- -----
(UNAUDITED)
Net sales................................................... 910 5,711 3,116
Cost of sales............................................... 290 1,718 928
----- ----- -----
Gross profit................................................ 620 3,993 2,188
Selling and administrative.................................. 675 2,069 1,439
Research and development.................................... 303 1,669 712
----- ----- -----
(Loss) Income from operations............................... (358) 255 37
Net interest...................................... (23) 40 21
----- ----- -----
(Loss) Income before income taxes........................... (381) 215 16
Income taxes (benefit) expense.............................. (219) 127 13
----- ----- -----
Net (loss) income................................. (162) 88 3
===== ===== =====
See Notes to the Financial Statements.
F-23
67
CATS COMPUTER AIDED TECHNOLOGIES,
COMPUTERANWENDUNGEN IN DER FERTIGUNGSSTEUERUNG GMBH
STATEMENTS OF CASH FLOW
THREE MONTHS YEARS ENDED
ENDED DECEMBER 31,
MARCH 31, ---------------
1998 1997 1996
------------ ------- -----
(UNAUDITED)
(IN THOUSANDS OF DM)
Operating activities
Net (loss) income........................................... (162) 68 3
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Deferred income taxes..................................... (219) 48 (7)
Depreciation.............................................. 32 92 62
Changes in assets and liabilities that provided (used) cash
Inventories............................................... 0 (22) (31)
Accounts payable and accrued charges...................... (13) 1,068 274
Accounts receivables and other assets..................... 234 (1,890) (257)
---- ------- -----
Cash (used) provided by operating activities................ (128) (616) 44
---- ------- -----
Investing activities
Purchase of EDP-equipment and office furniture............ (103) (356) (84)
Sale of EDP-equipment and office furniture................ 120
---- ------- -----
Cash provided by (used in) investing activities............. 17 (356) (84)
---- ------- -----
Financing activities
Increase of bank liabilities, net........................... 113 971 44
---- ------- -----
Cash provided by financing activities....................... 113 971 44
---- ------- -----
Net change in cash and cash equivalents..................... 2 (1) 4
Cash and cash equivalents, beginning of year................ 5 6 2
---- ------- -----
Cash and cash equivalents, end of year...................... 7 5 6
==== ======= =====
See Notes to the Financial Statements.
F-24
68
CATS
COMPUTER AIDED TECHNOLOGIES, COMPUTERANWENDUNGEN
IN DER FERTIGUNGSSTEUERUNG GMBH
NOTES TO THE FINANCIAL STATEMENTS
(DEUTSCHE MARK IN THOUSANDS)
1. DESCRIPTION OF BUSINESS
CATS computer aided technologies, Computeranwendungen in der
Fertigungssteuerung GmbH ("CATS") is engaged in the production and marketing of
software and computer applications used in managing and controlling computer
integrated manufacturing applications as well as in the related training.
Offered are modules for CAD/CAM-technologies (computer aided design, computer
aided manufacturing), CAQ-technologies (computer aided quality control) and
manufacturing, planning and control systems. Workstations can be delivered ready
for operation including hardware, software and other services.
The company operates in one segment providing customer oriented development
of overall concepts relating to computer aided manufacturing in Germany. The
main customers are large German car manufacturers and component suppliers for
the car industry.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The company's accounting policies are in accordance with accounting
policies generally accepted in the United States of America. 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
the revenue and expenses during the reporting period. Actual results could
differ from those estimates. The following policies are considered to be
significant.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and amounts on deposit with
financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and liabilities to banks. The carrying
amounts of the financial instruments approximate their fair value because of
their short term maturities.
INVENTORIES
Inventories include raw materials and are stated at the lower of average
cost or market.
EDP-EQUIPMENT AND OFFICE FURNITURE
Property, plant and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the various classes of assets as follows:
Office furniture............................................ 5 - 10 years
EDP-equipment............................................... 3 - 4 years
F-25
69
CATS
COMPUTER AIDED TECHNOLOGIES, COMPUTERANWENDUNGEN
IN DER FERTIGUNGSSTEUERUNG GMBH
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs incurred in the discovery of new knowledge
and the resulting translation of this knowledge into plans and new products,
prior to the attainment of the related products' feasibility, are recorded as
expenses in the period incurred.
Costs incurred in the development of products, after technological
feasibility is attained, are principally to be capitalized and amortized over
the estimated economic lives of the related products. According to the
assessment of the management the company's products have an economic life of
less than one year, due to the fast rate of technological development. As a
result, all product design costs are charged to income.
REVENUE RECOGNITION
The company recognizes revenue at the date of shipment.
INCOME TAXES
Income taxes have been provided for in accordance with the asset and
liability methodology of Statement for Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
EARNINGS PER SHARE
Earnings per share are not calculated because the company has two
shareholders with ownership of 50% each.
INTERIM FINANCIAL INFORMATION
Interim Financial Information at March 31, 1998 and for the three months
ended March 31, 1998 is unaudited. The unaudited interim financial statements
reflect all adjustments, consisting of only normal recurring adjustments which
are, in the opinion of management, necessary to a fair statement of the results
for the interim periods. Information for the interim periods is not necessarily
indicative of results to be achieved for the full year.
3. OTHER CURRENT ASSETS AND PREPAID EXPENSES
The balances were as follows:
1997 1996
---- ----
(DM) (DM)
Tax receivables............................................. 108 0
Receivables from employees.................................. 33 18
Prepaid expenses............................................ 2 10
Other....................................................... 11 6
--- --
154 34
=== ==
F-26
70
CATS
COMPUTER AIDED TECHNOLOGIES, COMPUTERANWENDUNGEN
IN DER FERTIGUNGSSTEUERUNG GMBH
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4. EDP-EQUIPMENT AND OFFICE FURNITURE
Cost and accumulated depreciation were as follows:
1997 1996
---- ----
(DM) (DM)
EDP-equipment and office furniture.......................... 613 257
Less accumulated depreciation............................... 253 161
--- ---
360 96
=== ===
5. LONG-TERM RECEIVABLES FROM RELATED PARTIES
1997 1996
---- ----
(DM) (DM)
Argus Q GmbH, Germany (former AC-Tech GmbH)................. 215 143
Antares Ltd., Portugal...................................... 113 0
--- ---
328 143
=== ===
- ---------------
The receivables from Argus Q GmbH and Antares Ltd. have a residual term in
excess of one year. They are bearing interest with a rate of 4.5%.
6. LIABILITIES TO BANKS
The average interest rate of the short-term borrowings outstanding at
year-end was approx. 10.0%.
Cash payment for interest amounted to DM 37 in 1997 and DM 25 in 1996.
The bank loans are secured by guarantees given by the company's
shareholders. Furthermore, accounts receivable and the company's telephone
system serve as collateral.
There are no significant credit lines available in addition to the drawings
on short-term credit lines shown on the balance sheet.
7. OTHER LIABILITIES AND OTHER ACCRUALS
The balances were as follows:
1997 1996
----- -----
(DM) (DM)
Accrued warranty expenses................................... 57 31
Accrued vacation expenses................................... 112 89
Other accruals.............................................. 143 14
Payables to related parties................................. 52 43
Witholding tax liabilities.................................. 126 199
Other liabilities........................................... 44 57
--- ---
534 433
=== ===
8. LEASE COMMITMENTS
The Company has operating lease agreements for the rental of cars and
office space.
Expenses for operating leases were DM 289 in 1997 and DM 124 in 1996
respectively.
F-27
71
CATS
COMPUTER AIDED TECHNOLOGIES, COMPUTERANWENDUNGEN
IN DER FERTIGUNGSSTEUERUNG GMBH
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments, which have initial or remaining non
cancelable terms in excess of one year at December 31, 1997, were as follows:
(DM)
-----
1998........................................................ 337
1999........................................................ 327
2000........................................................ 256
2001........................................................ 70
2002........................................................ 35
-----
1,025
=====
9. SHAREHOLDERS' EQUITY
The registered capital of the Company is DM 50, which has been paid in by
the company's two shareholders. Such ownership shares are not negotiable.
The following table presents the changes in retained earnings for the
period from January 1, 1996, to December 31, 1997:
(DM)
----
Balance -- January 1, 1996.................................. 5
Net Income 1996........................................... 3
--
Balance -- December 31, 1996................................ 8
Net Income 1997........................................... 88
--
Balance -- December 31, 1997................................ 96
--
10. INCOME TAXES
The components of income taxes are as follows:
1997 1996
---- ----
(DM) (DM)
Current Taxes............................................... 79 20
Deferred Taxes.............................................. 48 (7)
--- --
127 13
=== ==
The provision for income taxes differed from the statutory rate (45%) for
the following reasons:
1997 1996
---- ----
DM DM
Corporate income tax at statutory rate...................... 99 8
Municipal trade tax, net of corporation income tax effect... 18 1
Corporate income tax surcharge.............................. 7 0
Non-deductible expenses..................................... 5 3
Other....................................................... (2) 1
--- --
127 13
=== ==
Corporate income taxes and municipal trade taxes paid amounted to DM 206 in
1997 and DM 0 in 1996.
F-28
72
CATS
COMPUTER AIDED TECHNOLOGIES, COMPUTERANWENDUNGEN
IN DER FERTIGUNGSSTEUERUNG GMBH
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The components of the recorded deferred tax liabilities are:
1997 1996
---- ----
(DM) (DM)
Accounts receivable and other current assets................ 10 (28)
Accounts payable and accrued charges........................ 46 36
-- ---
56 8
== ===
11. RELATED PARTY TRANSACTIONS
The company's operations include transactions with companies that are owned
by the stockholders of CATS GmbH. The material transactions are as follows:
1997 1996
---- ----
(DM) (DM)
Argus Q GmbH, Germany
Net sales................................................. 320 0
Antares Ltd., Portugal
Net sales................................................. 533 0
Purchased services........................................ 537 0
Antares Ltd. is developing software for the company. The business of Argus
Q GmbH is the quality control for the automotive and aircraft industry.
Amounts due from these companies are included in trade accounts receivable.
The balances outstanding were:
1997 1996
---- ----
(DM) (DM)
Argus Q GmbH, Germany....................................... 368 0
Antares Ltd., Portugal...................................... 533 0
Long-term receivables from related parties:
1997 1996
---- ----
(DM) (DM)
Argus Q. GmbH, Germany 215 143
Antares Ltd., Portugal 113 0
---- ----
328 143
==== ====
The accounts payable include liabilities to related parties.
1997 1996
---- ----
(DM) (DM)
Argus Q. GmbH, Germany 280 0
Antares Ltd., Portugal 537 0
The short term payables to related parties include the advance accounts of
the stockholders.
F-29
73
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER TO SELL IS NOT AUTHORIZED OR IN WHICH THE PERSON IS NOT AUTHORIZED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 1
Risk Factors.......................... 4
Use of Proceeds....................... 9
Price Range of Common Stock........... 9
Dividend Policy....................... 10
Selected Consolidated Financial
Data................................ 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 20
Management............................ 31
Principal and Selling Shareholders.... 35
Certain Relationships and Related
Transactions........................ 36
Description of Capital Stock.......... 36
Shares Eligible for Future Sale....... 39
Plan of Distribution.................. 40
Legal Matters......................... 40
Experts............................... 40
Available Information................. 40
Index to Consolidated Financial
Statements.......................... F-1
======================================================
======================================================
343,750 SHARES
[FARO LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
, 1998
======================================================
74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission filing fee............... $ 1,056
Printing and engraving...................................... 30,000
Accountants' fees and expenses.............................. 50,000
Legal fees and expenses..................................... 50,000
Miscellaneous............................................... 18,944
--------
Total............................................. $150,000
========
- ---------------
* All of the above fees, costs and expenses above will be paid by the Company.
Other than the SEC filing fee, all fees and expenses are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act (the "Florida Act") permits a Florida
corporation to indemnify a present or former director or officer of the
corporation (and certain other persons serving at the request of the corporation
in related capacities) for liabilities, including legal expenses, arising by
reason of service in such capacity if such person shall have acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and in any criminal proceeding if such person had
no reasonable cause to believe his conduct was unlawful. However, in the case of
actions brought by or in the right of the corporation, no indemnification may be
made with respect to any matter as to which such director or officer shall have
been adjudged liable, except in certain limited circumstances.
The Company's Articles of Incorporation and Bylaws provide that the Company
shall indemnify directors and executive officers to the fullest extent now or
hereafter permitted by the Florida Act. In addition, the Company may enter into
Indemnification Agreements with its directors and executive officers in which
the Registrant has agreed to indemnify such persons to the fullest extent now or
hereafter permitted by the Florida Act.
The indemnification provided by the Florida Act and the Company's Bylaws is
not exclusive of any other rights to which a director or officer may be
entitled. The general effect of the foregoing provisions may be to reduce the
circumstances which an officer or director may be required to bear the economic
burden of the foregoing liabilities and expense.
The Company may obtain a liability insurance policy for its directors and
officers as permitted by the Florida Act which may extend to, among other
things, liability arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On May 15, 1998, the Company issued an aggregate of 1,250,000 shares of
Common Stock to Siegfried Buss and Wendelin Scharbach, the Selling Shareholders
in this offering, as partial consideration for all the equity interests in CATS.
The shares were sold to Messrs. Buss and Scharbach, the founders, executive
officers, and sole shareholders of CATS, in a private offering pursuant to
Section 4(2) of the Securities Act and in reliance on Regulation S under the
Securities Act.
II-1
75
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 -- Acquisition Agreement among the Registrant, FARO
Technologies Inc., TSP Auriga Vermogensverwaltungs GmbH,
Siegfried Buss, and Wendelin Scharbach dated as of May 15,
1998 (filed as Exhibit 2.1 to Registrant's Form 8-K dated
May 22, 1998 and incorporated herein by reference)
3.1 -- Articles of Incorporation, as amended (Filed as Exhibit 3.1
to Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
3.2 -- Bylaws, as amended (Filed as Exhibit 3.2 to Registrant's
Registration Statement on Form S-1, No. 333-32983, and
incorporated herein by reference)
4.1 -- Specimen Stock Certificate (Filed as Exhibit 4.1 to
Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
5.1 -- Opinion of Foley & Lardner (Filed herewith)
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 -- 1997 Employee Stock Option Plan (Filed as Exhibit 10.2 to
Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.3 -- 1997 Non-Employee Director Stock Option Plan (Filed as
Exhibit 10.3 to Registrant's Registration Statement on Form
S-1, No. 333-32983, and incorporated herein by reference)
10.4 -- 1997 Non-Employee Directors' Fee Plan (Filed as Exhibit 10.4
to Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.5 -- Term WCMA Loan and Security Agreement, dated September 24,
1996, between the Registrant and Merrill Lynch Business
Financial Services, Inc. (Filed as Exhibit 10.5 to
Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.6 -- WCMA Note, Loan and Security Agreement, dated April 23,
1997, between the Registrant and Merrill Lynch Business
Financial Services, Inc. (Filed as Exhibit 10.6 to
Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.7 -- Business Lease, dated March 1, 1991, between the Registrant
(as successor-by-merger) to FARO Medical Technologies
(U.S.), Inc.) and Xenon Research, Inc. (Filed as Exhibit
10.7 to Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.8 -- OEM Purchase Agreement, dated June 7, 1996 between the
Company and Mitutoyo Corporation (Filed as Exhibit 10.8 to
Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.9 -- Nonexclusive Unique Application Reseller Agreement, dated
September 9, 1996, between the Registrant and Autodesk, Inc.
(Filed as Exhibit 10.9 to Registrant's Registration
Statement on Form S-1, No. 333-32983, and incorporated
herein by reference)
10.10 -- Form of Patent and Confidentiality Agreement between the
Registrant and each of its employees (Filed as Exhibit 10.10
to Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.11 -- Nonexclusive Unique Application Reseller Agreement, dated as
of March 1, 1998, between the Registrant and Autodesk, Inc.
(Filed as Exhibit 10.11 to Registrant's Form 10-K for the
year ended December 31, 1997 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 (U.S.),
Inc. (Filed as Exhibit 10.12 to Registrant's Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference)
II-2
76
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11.1 -- Statement re Computation of Per Share Earnings (Incorporated
by reference from page 1 to the Registrant's 1997 Annual
Report to Stockholders filed herewith as Exhibit 13.1)
13.1 -- Annual Report to Stockholders for the year ended December
31, 1997 (Filed as Exhibit 13.1 to Registrant's Form 10-K
for the year ended December 31, 1997 and incorporated herein
by reference 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)
23.2 -- Consent of Deloitte & Touche GmbH (Filed herewith)
24.1 -- Power of Attorney (Included on the signature page of this
Registration Statement)
(b) Financial Statement Schedules
Financial statement schedules have been omitted either because they are not
applicable or because the information that would be included in such schedules
is included elsewhere in this Registration Statement.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lake Mary, and State of
Florida, on this 19th day of June, 1998.
FARO TECHNOLOGIES, INC.
By: /s/ SIMON RAAB
------------------------------------
Simon Raab
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Simon Raab and Gregory A. Fraser, and each of them
individually, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him or her and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and any Rule 462(b)
Registration Statement 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, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ SIMON RAAB Chairman of the Board June 19, 1998
- ----------------------------------------------------- of Directors, President
Simon Raab and Chief Executive
Officer
/s/ GREGORY A. FRASER Director, Executive Vice June 19, 1998
- ----------------------------------------------------- President, Secretary,
Gregory A. Fraser Treasurer, Chief Financial
Officer
/s/ HUBERT d'AMOURS Director June 19, 1998
- -----------------------------------------------------
Hubert d'Amours
/s/ PHILIP COLLEY Director June 19, 1998
- -----------------------------------------------------
Philip Colley
/s/ ANDRE JULIEN Director June 19, 1998
- -----------------------------------------------------
Andre Julien
/s/ ALEXANDRE RAAB Director June 19, 1998
- -----------------------------------------------------
Alexandre Raab
/s/ NORMAN H. SCHIPPER Director June 19, 1998
- -----------------------------------------------------
Norman H. Schipper
II-4
78
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 -- Acquisition Agreement among the Registrant, FARO
Technologies Inc., TSP Auriga Vermogensverwaltungs GmbH,
Siegfried Buss, and Wendelin Scharbach dated as of May 15,
1998 (filed as Exhibit 2.1 to Registrant's Form 8-K dated
May 22, 1998 and incorporated herein by reference)
3.1 -- Articles of Incorporation, as amended (Filed as Exhibit 3.1
to Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
3.2 -- Bylaws, as amended (Filed as Exhibit 3.2 to Registrant's
Registration Statement on Form S-1, No. 333-32983, and
incorporated herein by reference)
4.1 -- Specimen Stock Certificate (Filed as Exhibit 4.1 to
Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
5.1 -- Opinion of Foley & Lardner (Filed herewith)
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 -- 1997 Employee Stock Option Plan (Filed as Exhibit 10.2 to
Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.3 -- 1997 Non-Employee Director Stock Option Plan (Filed as
Exhibit 10.3 to Registrant's Registration Statement on Form
S-1, No. 333-32983, and incorporated herein by reference)
10.4 -- 1997 Non-Employee Directors' Fee Plan (Filed as Exhibit 10.4
to Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.5 -- Term WCMA Loan and Security Agreement, dated September 24,
1996, between the Registrant and Merrill Lynch Business
Financial Services, Inc. (Filed as Exhibit 10.5 to
Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.6 -- WCMA Note, Loan and Security Agreement, dated April 23,
1997, between the Registrant and Merrill Lynch Business
Financial Services, Inc. (Filed as Exhibit 10.6 to
Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.7 -- Business Lease, dated March 1, 1991, between the Registrant
(as successor-by-merger) to FARO Medical Technologies
(U.S.), Inc.) and Xenon Research, Inc. (Filed as Exhibit
10.7 to Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.8 -- OEM Purchase Agreement, dated June 7, 1996 between the
Company and Mitutoyo Corporation (Filed as Exhibit 10.8 to
Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.9 -- Nonexclusive Unique Application Reseller Agreement, dated
September 9, 1996, between the Registrant and Autodesk, Inc.
(Filed as Exhibit 10.9 to Registrant's Registration
Statement on Form S-1, No. 333-32983, and incorporated
herein by reference)
10.10 -- Form of Patent and Confidentiality Agreement between the
Registrant and each of its employees (Filed as Exhibit 10.10
to Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
10.11 -- Nonexclusive Unique Application Reseller Agreement, dated as
of March 1, 1998, between the Registrant and Autodesk, Inc.
(Filed as Exhibit 10.11 to Registrant's Form 10-K for the
year ended December 31, 1997 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 (U.S.),
Inc. (Filed as Exhibit 10.12 to Registrant's Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference)
79
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11.1 -- Statement re Computation of Per Share Earnings (Incorporated
by reference from page 1 to the Registrant's 1997 Annual
Report to Stockholders filed herewith as Exhibit 13.1)
13.1 -- Annual Report to Stockholders for the year ended December
31, 1997 (Filed as Exhibit 13.1 to Registrant's Form 10-K
for the year ended December 31, 1997 and incorporated herein
by reference 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)
23.2 -- Consent of Deloitte & Touche GmbH (Filed herewith)
24.1 -- Power of Attorney (Included on the signature page of this
Registration Statement)
1
EXHIBIT 5.1
FOLEY & LARDNER
ATTORNEYS AT LAW
POST OFFICE BOX 3391
TAMPA, FLORIDA 33601-3391
100 NORTH TAMPA STREET, SUITE 2700 33602-5804
TELEPHONE (813) 229-2300
FACSIMILE (813) 221-4210
June 19, 1998
FARO Technologies, Incorporated
125 Technology Park
Lake Mary, Florida 32746
RE: Registration Statement on Form S-1
Ladies and Gentlemen:
This opinion is being furnished in connection with the Registration
Statement on Form S-1 (the "Registration Statement"), of FARO Technologies,
Incorporated (the "Company"), under the Securities Act of 1933, as amended (the
"Act"), for the registration of 343,750 shares of common stock, par value $.001
the "Shares").
As counsel for the Company, we have examined and are familiar with the
Articles of Incorporation and Bylaws of the Company; (a) the proceedings of the
Board of Directors of the Company relating to the issuance of the Shares; and
(b) such other Company records, documents and matters of law as we have deemed
to be pertinent.
Based upon our examination of such documents and our familiarity with such
proceedings, it is our opinion that:
1. The Company has been duly incorporated and is validly existing and in
good standing under the laws of the State of Florida.
2. The Shares are duly authorized, validly issued, fully paid and
nonassessable.
We hereby consent to the inclusion of this opinion as Exhibit 5.1 in the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus. In giving this consent, we do not thereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Act or the rules or regulations of the Securities and
Exchange Commission promulgated thereunder.
FOLEY & LARDNER
By: /s/ Martin A. Traber
--------------------------
MARTIN A. TRABER
1
EXHIBIT 21.1
FARO TECHNOLOGIES, INC.
a Florida corporation
Subsidiaries
------------
1. FARO Worldwide, Inc.
a Florida corporation
2. FARO France SAS
a French corporation
3. Computer Aided Technologies, Computeranwendungen in der
Fertigungssteuerung, GmbH
a German corporation
1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of FARO Technologies, Inc.
on Form S-1 of our report dated February 13, 1998, appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
June 19, 1998
1
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of FARO Technologies, Inc.
on Form S-1 of our report dated May 26, 1998, (relating to the financial
statements of CATS computer aided technologies, Computeranwendungen in der
Fertigungssteuerung GmbH, Karlsruhe, as of and for the years ended December 31,
1997 and 1996, presented separately herein), appearing in the Prospectus, which
is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE GmbH June 18, 1998
Wirtschaftsprufungsgesellschaft
