SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2002
[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _________ to __________
Commission File Number: 0-23081
FARO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-3157093
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 Technology Park Drive, Lake Mary, Florida 32746
--------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: 407-333-9911
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class: Voting Common Stock, $.001 Par Value Outstanding at May 10, 2002:
11,900,752
1
FARO Technologies, Inc.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2002, and 2001 4
Condensed Consolidated Statements of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
2
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,476,568 $ 7,238,564
Short term investments (Note C) 4,118,528 4,744,559
Accounts receivable, net of allowance 9,033,492 9,385,568
Income taxes refundable 474,235 545,118
Inventories, net (Note D) 7,915,211 5,575,793
Prepaid expenses and other current assets 1,097,611 1,851,003
Deferred income taxes 76,418 76,418
------------ ------------
Total current assets 27,192,063 29,417,023
------------ ------------
PROPERTY AND EQUIPMENT - at cost:
Machinery and equipment 4,301,418 4,038,582
Furniture and fixtures 1,326,157 1,313,809
Leasehold improvements 280,931 139,555
------------ ------------
Total 5,908,506 5,491,946
Less accumulated depreciation and amortization (4,173,202) (3,945,247)
------------ ------------
Property and equipment, net 1,735,304 1,546,699
------------ ------------
INTANGIBLE ASSETS - net 11,606,692 2,632,791
INVESTMENTS (Note C) 508,982 2,129,679
NOTES RECEIVABLE (Note E) 1,053,420 3,927,932
------------ ------------
TOTAL ASSETS $ 42,096,461 $ 39,654,124
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 22,080 $ 25,120
Accounts payable 4,416,221 2,937,271
Accrued liabilities 2,676,540 3,064,463
Current portion of unearned service revenues 1,546,593 855,120
Customer deposits 977,756 231,845
------------ ------------
Total current liabilities 9,639,190 7,113,819
OTHER LONG-TERM LIABILITIES 140,651 203,844
------------ ------------
Total liabilities $ 9,779,841 $ 7,317,663
------------ ------------
SHAREHOLDERS' EQUITY:
Class A preferred stock - par value $.001, 10,000,000 shares
authorized, no shares issued and outstanding
Common stock - par value $.001, 50,000,000 shares
authorized, 11,925,252 and 11,075,252 issued;
11,885,252 and 11,035,252 outstanding, respectively $ 11,925 $ 11,075
Additional paid-in capital 49,517,997 47,704,087
Unearned compensation (82,863) (109,000)
Accumulated deficit (13,768,861) (12,116,098)
Other comprehenvive loss (3,210,953) (3,002,978)
Common stock in treasury, at cost - 40,000 shares (150,625) (150,625)
------------ ------------
Total shareholders' equity 32,316,620 32,336,461
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 42,096,461 $ 39,654,124
============ ============
See accompanying notes to consolidated financial statements.
3
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
----------------------------------
2002 2001
------------ -------------
SALES $ 8,589,611 $ 8,405,530
COST OF SALES 3,828,633 3,439,527
------------ -------------
Gross profit 4,760,978 4,966,003
OPERATING EXPENSES
Selling 3,226,923 3,429,125
General and administrative 1,557,681 1,383,121
Depreciation and amortization 661,359 666,937
Research and development 1,222,806 921,051
Employee stock options 13,397 -
------------ -------------
Total operating expenses 6,682,166 6,400,234
------------ -------------
LOSS FROM OPERATIONS (1,921,188) (1,434,231)
OTHER INCOME (EXPENSES)
Interest income 205,728 236,043
Other income, net 103,614 86,070
Interest expense (1,116) (354)
------------ -------------
LOSS BEFORE INCOME TAXES (1,612,962) (1,112,472)
INCOME TAX EXPENSE 39,801 14,783
------------ -------------
NET LOSS $ (1,652,763) $ (1,127,255)
============ =============
NET LOSS PER SHARE - BASIC ($0.14) $ (0.10)
============ =============
NET LOSS PER SHARE - DILUTED ($0.14) $ (0.10)
============ =============
See accompanying notes to consolidated financial statements.
4
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additonal
------------------------- Paid-in Unearned
Shares Amounts Capital Compensation
---------- ---------- ------------ ------------
BALANCE,
JANUARY 1, 2001 11,065,225 $ 11,066 $ 47,570,059 $ -
Net loss
Currency
translation
Comprehensive loss
Options granted
subject to variable
Accounting 109,000 (109,000)
Issuance of
common stock 10,027 9 25,028
---------- ---------- ------------ -----------
BALANCE,
DECEMBER 31, 2001 11,075,252 $ 11,075 $ 47,704,087 $ (109,000)
Net loss
Currency
translation
Comprehensive loss
Amortization of
Unearned
Compensation (12,740) 26,137
Issuance of
common stock in
connection with
the acquisition of
SMX 850,000 850 1,826,650
---------- ---------- ------------ -----------
BALANCE,
MARCH 31, 2002 11,925,252 $ 11,925 $ 49,517,997 $ (82,863)
========== ========== ============ ===========
Accumulated
Other Common
Accumulated Comprehensive Stock in
Deficit Income (Loss) Treasury Total
------------- ------------- -------------
BALANCE,
JANUARY 1, 2001 $ (9,268,134) $ (2,206,913) $ (150,625) $ 35,955,453
Net loss (2,847,964) (2,847,964)
Currency
translation (796,065) (796,065)
------------
Comprehensive loss (3,644,029)
Options granted
subject to variable
accounting -
Issuance of
common stock 25,037
------------- -------------- ------------- ------------
BALANCE,
DECEMBER 31, 2001 $ (12,116,098) $ (3,002,978) $ (150,625) $ 32,336,461
Net loss (1,652,763) (1,652,763)
Currency
translation (207,975) (207,975)
------------
Comprehensive loss (1,860,738)
Amortization of
Unearned
Compensation 13,397
Issuance of
common stock in
connection with
the acquisition of
SMX 1,827,500
------------- -------------- ------------- ------------
BALANCE,
MARCH 31, 2002 (unaudited) $ (13,768,861) $ (3,210,953) $ (150,625) $ 32,316,620
============= ============== ============= ============
See accompanying notes to consolidated financial statements.
5
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------------------------
2002 2001
--------------- --------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $ (1,652,763) $ (1,127,255)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 661,359 666,937
Bad debt expense 230,819 15,000
Provision for inventory losses 118,721 30,000
Provision for deferred income taxes - 1,825
Employee stock options 13,397 -
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 2,086,718 1,025,655
Income taxes refundable (29,117) -
Inventories (958,785) (455,166)
Prepaid expenses and other assets 422,822 (97,222)
Increase (decrease) in:
Accounts payable and accrued liabilities (2,491,104) (45,907)
Income taxes payable - (614,727)
Unearned service revenues (3,856) 160,408
Customer deposits (45,926) 28,658
--------------- --------------
Net cash used in operating activities (1,647,715) (411,794)
--------------- --------------
INVESTING ACTIVITIES:
Acquisition of SMX (3,028,615) -
Purchases of investments - (1,633,879)
Proceeds from investments 2,246,729 1,000,000
Purchases of property and equipment (162,214) (200,465)
Payments for intangible assets (218,469) (138,891)
--------------- --------------
Net cash used in investing activities (1,162,569) (973,235)
--------------- --------------
FINANCING ACTIVITIES:
Payments of long-term debt, Capital lease obligations
and notes payable (8,369) (15,158)
Proceeds from issuance of common stock, net - 23,400
--------------- --------------
Net cash provided by (used in) financing activities (8,369) 8,242
--------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 56,657 (189,219)
--------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (2,761,996) (1,566,006)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,238,564 8,029,318
--------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,476,568 $ 6,463,312
=============== ==============
See accompanying notes to consolidated financial statements.
6
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2002 and 2001
(Unaudited)
NOTE A - DESCRIPTION OF BUSINESS
FARO Technologies, Inc. and subsidiaries develops, manufactures, markets
and supports Computer Aided Design (CAD)-based quality assurance products and
CAD-based inspection and statistical process control software.
The consolidated financial statements include the accounts of FARO
Technologies, Inc. and all wholly owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions and balances have been
eliminated. The financial statements of foreign subsidiaries have been
translated into U.S. dollars using the current exchange rate in effect at each
balance sheet date, for assets and liabilities, and the weighted average
exchange rates during each reporting period, for results of operations.
Adjustments resulting from translation of the financial statements are reflected
as a separate component of comprehensive loss in the equity section.
NOTE B - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and footnote disclosure required by accounting principles
generally accepted in the United States for complete consolidated financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the consolidated
financial position and operating results for the interim periods have been
included. The consolidated results of operations for the three months ended
March 31, 2002 are not necessarily indicative of results that may be expected
for the year ending December 31, 2002. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements of the Company as of December 31, 2001 and 2000, and for each of the
three years in the period ended December 31, 2001 included in the Company's 2001
Annual Report to Stockholders.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142
establishes accounting and reporting standards for acquired goodwill and other
intangible assets, and supersedes APB Opinion No.17, "Intangible Assets". SFAS
No. 142 requires that goodwill no longer be amortized to earnings, but instead
be reviewed for impairment. The Company adopted this new Statement effective
January 1, 2002. The adoption of SFAS No. 142 resulted in a reduction of
amortization expense of approximately $110,000 per quarter.
In January 2001, the Company adopted Statement of Financial Accounting
Standards Statement No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, as amended. SFAS 133 requires companies to recognize all
their derivative instruments as either assets or liabilities at fair value in
the statement of financial position. The accounting for changes in the fair
value (i.e. gains and losses) of a derivative depends on whether it has been
designated and qualifies as part of a
7
hedging relationship and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument based on the exposure being
hedged. For derivative instruments that are designated and qualify as cash flow
hedges, the effective portion of the gain or loss is reported as a component of
other comprehensive income. Accounting for such instruments is referred to as
"special hedge accounting." However, SFAS 133 eliminates special hedge
accounting if the derivative instrument does not meet certain criteria.
In August 2001, the Company entered into a foreign exchange rate swap
allowing the Company the right to purchase up to $1.3 million at a base rate of
1.1049 Euros per $1.00. Under the agreement, the Company and the bank are to
compensate one another based on the exchange rate agreement differential at
specified measurement dates. This foreign exchange rate agreement expires in
September 2002 and does not qualify for special hedge accounting mentioned
above, as it did not meet the specified criteria under SFAS 133. Therefore the
changes in fair value are recorded in income.
The FASB recently issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (Statement 144). Statement 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. Statement 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of and
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, (Opinion) Reporting the Results of Operations -Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business
(previously defined in that Opinion). Statement 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The adoption of Statement 144 did not
have a material impact on the Company.
NOTE C - CASH AND CASH EQUIVALENT AND INVESTMENTS
Cash and cash equivalents - The Company considers cash on hand and amounts
on deposit with financial institutions which have original maturities of three
months or less to be cash and cash equivalents.
All short-term investments in debt securities which have maturities of
three months or less are classified as cash and equivalents, which are carried
at market value based upon the quoted market prices of those investments at each
respective balance sheet date.
Investments - Short-term investments and investments ordinarily consist of
debt securities acquired with cash not immediately needed in operations. Such
amounts have maturities not exceeding one year. Investments ordinarily consist
of debt securities acquired with cash not immediately needed for operations.
Investments consist of the following:
March 31 December 31
2002 2001
------------ -----------
Government agency securities $ 508,982 $ 2,032,679
Certificates of deposit - 97,000
------------ -----------
$ 508,982 $ 2,129,679
============ ===========
Supplemental Cash Flow Information - Selected cash payments and non cash
activities were as follows:
Three months ended March 31
-------------------------------
2002 2001
------------ -----------
Cash paid for interest $ 1,116 $ 354
Non-cash investing activities:
Issuance of common stock in
connection with acquisition of SMX $ 1,827,500 -
8
NOTE D - INVENTORIES
Inventories consist of the following:
March 31 December 31
2002 2001
------------ -----------
Raw materials $ 924,690 $ 496,298
Work-in-process 3,323,197 1,875,912
Finished goods 436,355 341,348
Sales demonstration 3,230,969 2,862,235
------------ -----------
$ 7,915,211 $ 5,575,793
============ ===========
NOTE E - NOTES RECEIVABLE
In 1998, the Company acquired CATS GmbH for total consideration of $16
million (including direct costs of the acquisition), consisting of $5 million in
cash, 916,668 shares of the Company's Common Stock and the assumption of certain
outstanding liabilities of CATS. The acquisition agreement provided that the
Company would provide a loan to each of the two former shareholders of CATS to
fund their tax liability in connection with the Company's acquisition of CATS.
Such former CATS shareholders remain key employees of the Company.
The acquisition agreement provided that the Company would provide a loan to
each of the two former shareholders of CATS, who remain key employees of the
Company, to fund their tax liability in connection with the Company's
acquisition of CATS. In connection therewith, in June 2000 the Company and each
of the former CATS shareholders entered into an Amended and Restated Loan
Agreement and the Company granted loans to the former CATS shareholders in the
aggregate amount of $1.1 million ("the Loans"). The Loans are for a term of
three years, at an interest rate of approximately 4.7%, and grant the borrowers
an option to extend the term for an additional three years. As collateral for
the Loans, the former CATS shareholders pledged to the Company 177,074 shares of
the Company's Common Stock. The Loans are a non-recourse obligation of the
former CATS shareholders.
NOTE F - ACQUISITION OF SMX
On January 16, 2002, the Company acquired SpatialMetriX Corporation ("SMX")
in exchange for 500,000 shares of FARO common stock and the satisfaction by the
Company of certain obligations of SMX. In connection therewith, the Company
issued an additional 350,000 shares of FARO common stock and paid $2.0 million
in cash to fully satisfy SMX's obligations to its two lenders. The Company also
assumed and/or satisfied other obligations of SMX. The transaction was recorded
utilizing the purchase method of accounting in accordance with Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets."
SMX is a leading manufacturer and supplier of laser trackers and targets,
metrology software, and contract inspection services.
9
The operating results of SMX have been included in the consolidated
statements of operations since the date of acquisition. The following unaudited
pro forma results of operations for the three months ended March 31, 2002 and
2001 are presented for informational purposes assuming that the Company had
acquired SMX as of January 1, 2001. These pro forma results of operations have
been prepared for comparative purposes only and do not purport to be indicative
of the results of operations which actually would have resulted had the
acquisition occurred on the date indicated, or the results of operations which
may result in the future.
Three months ended March 31
-------------------------------
2002 2001
------------- ------------
Revenues $ 8,717,315 $ 11,715,855
Net loss $ (2,276,362) $ (1,467,614)
Loss per share:
Basic $ (0.19) $ (0.12)
Diluted $ (0.19) $ (0.12)
NOTE G - EARNINGS PER SHARE
A reconciliation of the number of common shares used in the calculation of
basic and diluted earnings per share ("EPS") is presented below:
Three months ended March 31,
------------------------------------------------------
2001 2002
------------------------ ------------------------
Per-Share Per-Share
Shares Amount Shares Amount
---------- --------- ---------- ---------
Basic EPS 11,744,252 $ (0.14) 11,030,706 $ (.10)
Effect of dilutive securities - -
---------- ----------
Diluted EPS 11,744,252 $ (0.14) 11,030,706 $ (.10)
========== ==========
NOTE H - SEGMENT GEOGRAPHIC DATA
The Company develops, manufactures, markets and supports Computer Aided
Design (CAD)-based quality assurance products and CAD-based inspection and
statistical process control software. This one line of business represents more
than 99% of consolidated sales. The Company operates through sales teams
established by geographic area. Each team is equipped to deliver the entire line
of Company products to customers within its geographic area. The Company has
aggregated the sales teams into a single operating segment as a result of the
similarities in the nature of products sold, the type of customers and the
methods used to distribute the Company's products.
10
The following table presents information about the Company by geographic
area:
Three months ended March 31,
------------------------------------
2002 2001
---- ----
SALES:
United States $ 3,870,204 $ 3,437,678
Germany 1,729,826 1,492,030
United Kingdom 726,378 625,587
France 440,773 939,781
Other foreign 1,822,430 1,910,454
------------ -------------
Total $ 8,589,611 $ 8,405,530
============ =============
March 31, December 31,
2002 2001
---- ----
LONG-LIVED ASSETS (NET):
United States $ 11,359,060 $ 2,058,163
Germany 1,782,333 1,944,642
Other foreign 200,603 176,685
------------ -------------
Total $ 13,341,996 $ 4,179,490
============ =============
The geographical information presented above represents sales to the respective
countries, whereas the long-lived assets are held in the respective countries.
11
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the Condensed
Consolidated Financial Statements of the Company, including the notes thereto,
included elsewhere in this Form 10-Q, and the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
The Company has made forward-looking statements (within the meaning of the
Private Securities Litigation Reform Act of 1995) in this report that are
subject to risks and uncertainties, such as statements about our plans,
objectives, projections, expectations, assumptions, strategies, or future
events. Other written or oral statements, which constitute forward-looking
statements, also may be made from time to time by or on behalf of the Company.
Words such as "may," "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," "will," "should," "could," variations of such words, and
similar expressions are intended to identify such forward-looking statements.
Similarly, statements that describe the Company's future plans, objectives, or
goals also are forward-looking statements. These statements are not guarantees
of future performance and are subject to a number of risks, uncertainties, and
other factors, including those discussed below and elsewhere in this report,
that could cause actual results to differ materially from future results,
performances, or achievements expressed or implied by such forward-looking
statements. Consequently, undue reliance should not be placed on these forward-
looking statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Factors that could cause actual results to differ materially from what is
expressed or forecasted in such forward-looking statements include, but are not
limited to: (i) the potential loss of material customers; (ii) the failure to
properly manage growth and successfully integrate acquired businesses such as
SpatialMetriX Corporation; (iii) inability of the Company's products to attain
broad market acceptance or increased length of the Company's sales cycle; (iv)
inability of the Company to reduce selling expenses; (v) the impact of
competitive product and pricing; (vi) delays in shipping the Company's new laser
trackers as a result of manufacturing delays; (vii) fluctuations in quarterly
operating results as a result of the size, timing and recognition of revenue
from significant orders, increases in operating expenses required for product
development and marketing, the timing and market acceptance of new products and
product enhancements; customer order deferrals in anticipation of new products
and product enhancements; the Company's success in expanding its sales and
marketing programs, and general economic conditions; (viii) the financial
condition of the Company's clients; (ix) adverse consequences of exchange rate
fluctuations; (x) inability to protect our intellectual property and other
proprietary rights; (xi) dependence on Simon Raab and Gregory A. Fraser and
other key personnel; and (xii) the cyclical nature of the industries of the
Company's customers.
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 Control
Station and the Control Station Pro (formerly FAROArm(R)) articulated measuring
devices and their companion Soft Check Tool and CAM2 software, respectively,
which provide for CAD-based inspection and factory-level statistical process
control. Together, these products integrate the measurement and quality
inspection function with CAD software to improve
12
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. Historically, the Company's revenue
growth has resulted from increased unit sales due to an expanded sales effort
that included the addition of sales personnel at existing offices, the opening
of new sales offices (including offices in international markets) and expanded
promotional efforts which include a multilingual web site and Company demo CD.
During 2001 and 2002, the Company's sales growth has been adversely
affected by the economic slowdown currently affecting the United States and
Europe to a lesser extent. We expect that the current economic slowdown will
continue to adversely affect U. S. sales and the Company's growth rate in other
geographic markets during the first half of 2002. Accordingly, the Company
adopted a cost reduction plan during the third quarter of 2001. This plan
included reducing discretionary spending, canceling certain non-strategic
product development and marketing projects, and a reduction of approximately 15%
of the company's workforce, or about 30 people, primarily in administration,
research and development, and manufacturing.
The consolidated financial statements include the accounts of FARO
Technologies, Inc. and all majority-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions and balances have been
eliminated. The financial statements of the foreign subsidiaries are translated
into U.S. dollars using exchange rates in effect at period-end for assets and
liabilities and average exchange rates during each reporting period for results
of operations. Adjustments resulting from translation of financial statements
are reflected as a separate component of comprehensive loss in the equity
section.
Acquisition of SMX
On January 16, 2002, the Company acquired SpatialMetriX Corporation ("SMX")
in exchange for 500,000 shares of FARO common stock and the satisfaction by the
Company of certain obligations of SMX. In connection therewith, the Company
issued an additional 350,000 shares of FARO common stock and paid $2.0 million
in cash to fully satisfy SMX's obligations to its two lenders. The Company also
assumed and/or satisfied other obligations of SMX, including approximately $2.9
million in financing provided by the Company to SMX between April 1, 2001 and
the completion of the acquisition. The acquisition was recorded utilizing the
purchasing method of accounting. The Company estimates that SMX has 35% of the
installed laser tracker market. The Company exercised its contractual right to
acquire SMX only after the successful design by SMX of a new generation laser
tracker, which the Company expects to sell at competitive prices compared to the
previous generation SMX tracker, and competitor's current products. SMX's
previous generation laser tracker, which was introduced in 1996, was sold until
September 2001. SMX halted production and sale of its earlier generation laser
tracker in September 2001. The operations of SMX are expected to contribute
favorably to the Company's revenue growth and results of operations once the new
generation tracker begins to ship. The Company expects to start shipping new
generation tracker in the second quarter of 2002. Until then, the operations of
SMX are expected to result in revenues of approximately $1.0 million per quarter
resulting from the sale of parts, comprehensive support, and technology
consulting services and in additional operating expenses in the amount of
approximately $1.5 million per quarter.
13
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Sales. Sales increased by $184,000 or 2.2%, from $8.4 million for the three
months ended March 31, 2001 to $8.6 million for three months ended March 31,
2002. The increase primarily resulted from the sales of parts and service by SMX
in 2002 ($829,000) and higher sales in Japan ($170,000); offset in part by
reduction in sales in Europe ($655,000) and the U.S. ($160,000).
Gross profit. Gross profit decreased by $205,000 or 4.1%, from $5.0 million
for the three months ended March 31, 2001 to $4.8 million for the three months
ended March 31, 2002. Gross margin decreased to 55.4% for the three months ended
March 31, 2002 from 59.1% for the three months ended March 31, 2001. The
decrease in gross margin was primarily a result of downward pressure on unit
prices in the U.S. and Europe in 2002 and the low-margin parts and service sales
of the SMX unit acquired in January 2002 (see Acquisition of SMX above).
Excluding the effect of SMX, gross margin was 57.8% for the three months ended
March 31, 2002.
Selling expenses. Selling expenses decreased by $202,000 or 5.9%, from $3.4
million for the three months ended March 31, 2001 to $3.2 million for the three
months ended March 31, 2002. This decrease was primarily a result of lower
expenses in the U.S. ($514,000 - resulting from cost reduction measures
implemented in the second half of 2001 and lower commissions on lower U.S. sales
in 2002) and Europe ($212,000 - resulting from decrease in headcount and sales
commissions); offset in part by selling expenses of SMX in 2002 ($444,000) and
higher expenses in Japan ($80,000).
General and administrative expenses. General and administrative expenses
increased by $175,000 or 12.5%, to $1.6 million for the three months ended March
31, 2002. The increase was due to administrative expenses of SMX in 2002
($119,000) and higher expenses in Europe principally in connection with
upgrading of the accounting systems.
Depreciation and amortization expenses. Depreciation and amortization
expenses decreased slightly from $667,000 for the three months ended March 31,
2001 to $661,000 for the three months ended March 31, 2002 due to the effect
(approximately $110,000) of the adoption, effective January 1, 2002, of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142) and a reduction in depreciation resulting from assets becoming
fully depreciated in late 2001; offset in part by depreciation and amortization
expenses of SMX in 2002 ($135,000).
Research and development expenses. Research and development expenses
increased by $302,000, or 32.8%, from $921,000 for the three months ended March
31, 2001 to $1.2 million for the three months ended March 31, 2002 principally
as a result of research and development expenses of SMX in 2002 ($564,000);
offset in part by lower research and development expenses in the U.S. ($122,000)
and Europe ($140,000).
Interest income. Interest income decreased by $30,000, or 12.7%, from
$236,000 for the three months ended March 31, 2001, to $206,000 for the three
months ended March 31, 2002. The decrease was primarily attributable to lower
interest bearing cash balances (see Liquidity and Capital Resources below) in
2002.
Other Income. Other income increased by $18,000 or 20.9%, from $86,000 for
the three months ended March 31, 2001 to $104,000 for the three months ended
March 31, 2002 primarily due to foreign currency gains during the current
period.
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Net Loss. Net loss increased by $525,000 from $1.1 million for the three
months ended March 31, 2001 to $1.7 million for the three months ended March 31,
2002 primarily due to the lower gross profit ($205,000) and increase in
operating expenses ($282,000). Excluding the results of operations of SMX, net
loss for the three months ended March 31, 2002 was $666,000.
Liquidity and Capital Resources
Since 1997, the Company has financed its operations primarily from cash
provided by operating activities and from the proceeds of its 1997 initial
public offering of Common Stock (approximately $31.7 million). Total marketable
securities (cash and cash equivalents, short-term investments and investments)
at March 31, 2002 were $10.7 million, compared to $14.1 million at December 31,
2001.
For the three months ended March 31, 2002, net cash used in operating
activities was $1.6 million compared to $412,000 in 2001. Net cash used in
operating activities increased primarily due to the operational loss in 2002.
Net cash (excluding short-term investments and investments) used in investing
activities for the three months ended March 31, 2002 was $1.2 million, compared
to $973,000 in 2001. The decrease in net cash used in investing activities in
2002 was primarily due to cash used in the acquisition of SMX of $3.0 million
(see Note F of Notes to Consolidated Financial Statements contained herein);
offset in part by proceeds from short-term investments and investments in 2002
of $2.2 million compared to net purchases of short- investments and investments
in 2001 of $633,000. 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.
On January 16, 2002, in connection with its acquisition of SMX, the Company
issued 500,000 shares of FARO common stock and satisfied certain obligations of
SMX. Additionally, the Company issued an additional 350,000 shares of FARO
common stock and paid $2.0 million in cash to fully satisfy SMX's obligations to
its two lenders (see Acquisition of SMX above). The Company also assumed and/or
settled other obligations of SMX. The operations of SMX are expected to
contribute favorably to the Company's liquidity after the new generation tracker
has been introduced. The Company expects to start shipping new generation
tracker in the second quarter of 2002. Until then, the operations of SMX are
expected to result in revenues of approximately $1.0 million per quarter
resulting from the sale of parts, comprehensive support, and technology
consulting services and in additional operating expenses in the amount of
approximately $1.5 million per quarter.
The Company's principal commitments at March 31, 2002 consisted of leases
on its headquarters and regional and sales offices. There were no material
commitments for capital expenditures at that date. The Company believes that its
cash, investments and cash flows from operations will be sufficient to satisfy
its working capital and capital expenditure needs in the foreseeable future.
Critical Accounting Policies
In response to the SEC'S financial reporting release, FR-60, Cautionary
Advice Regarding Disclosure About Critical Accounting Policies, we have selected
our most subjective accounting estimation processes for purposes of explaining
the methodology used in calculating the estimate in addition to any inherent
uncertainties pertaining to the estimate and the possible effects on the
Company's financial condition. The two accounting estimation processes discussed
below are the Company's process of recognizing research and development
expenditures, and the allowance for
15
obsolete and slow-moving inventory. These estimation processes affect current
assets and operating results and are therefore critical in assessing the
financial and operating status of the Company. These estimates involve certain
assumptions that if incorrect could create an adverse impact on the Company's
operations and financial position.
Research and development costs incurred in the discovery of new knowledge
and the resulting translation of this new knowledge into plans and designs for
new products, prior to the attainment of the related products' technological
feasibility, are recorded as expenses in the period incurred. Product design
costs incurred in the development of products after technological feasibility is
attained are capitalized and amortized using the straight-line method over the
estimated economic lives of the related products, not to exceed 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. The Company periodically assesses the value of
capitalized product design costs and records a reserve for obsolescence or
impairment when, in the circumstances (including the discontinuance or probable
discontinuance of the related products from the market), it deems the asset to
be obsolete or impaired.
The reserve for obsolete and slow-moving inventory was $412,000 and
$297,500 at March 31, 2002 and December 31, 2001, respectively. The reserve for
obsolete and slow-moving inventory is used to state the Company's inventories at
the lower of average cost or net realizable value. Since the amount of
inventoriable cost that the Company will truly recoup through sales cannot be
known with exact certainty, the Company relies on past sales experience and
future sales forecasts. Inventory is considered as obsolete if the Company has
withdrawn it from the market or if the Company has had no sales of the product
for the past 12 months and has no sales forecasted for the next 12 months.
Accordingly, an allowance in an amount equal to 100% of the average cost of such
inventory is recorded. The Company classifies as "slow-moving", inventory with
on-hand quantities greater than the amounts sold in the past 12 months or which
have been forecasted to sell in the next 12 months, and reserves such an amount
adequate to reduce the carrying value to net realizable value. During the three
months ended March 31, 2002 and 2001, the provision for obsolete and slow-moving
inventory was $119,000 and $115,000, respectively.
Transactions with Related and Other Parties
The Company leases its headquarters from Xenon Research, Inc. ("Xenon"),
all of the issued and outstanding capital stock of which is owned by Simon Raab,
the Company's President and Chief Executive Officer, and Diana Raab, his spouse.
The term of the lease expires on February 28, 2006, and the Company has two
five-year renewal options.
In June 2000, the Company and each of the former CATS shareholders entered
into an Amended and Restated Loan Agreement pursuant to which the Company
granted loans to the former CATS shareholders in the aggregate amount of $1.1
million ("the Loans"). The Loans are for a term of three years, at an interest
rate of approximately 4.7%, and grant the borrowers an option to extend the term
for an additional three years. As collateral for the Loans, the former CATS
shareholders pledged to the Company 177,074 shares of the Company's Common
Stock. The Loans are a non-recourse obligation of the former CATS shareholders.
The company engaged Cole and Partners, a mergers and acquisition and
corporate finance advisory service firm, to serve as the Company's financial
advisor in connection with the Company's acquisition in January, 2002 of SMX.
Stephen R. Cole, one of the Company's directors and member of
16
the Audit Committee, is the founding Partner and President of Cole & Partners.
The Company paid to Cole & Partners total fees of approximately $440,000 by
early 2002 for its services in the SMX acquisition.
Foreign Exchange Exposure
The Company conducts a significant portion of its business outside the
United States. At present, the majority of the Company's revenues are invoiced,
and a significant portion of its operating expenses paid, in foreign currencies.
Fluctuations in exchange rates between the U.S. dollar and such foreign
currencies may have a material adverse effect on the Company's business, results
of operations and financial condition, and could specifically result in foreign
exchange gains and losses. The impact of future exchange rate fluctuations on
the results of the Company's operations cannot be accurately predicted. To the
extent that the percentage of the Company's non-U.S. dollar revenues derived
from international sales increases in the future, the Company's exposure to
risks associated with fluctuations in foreign exchange rates will increase
further.
Inflation
The Company believes that inflation has not had a material impact on its
results of operations in recent years and it does not expect inflation to have a
material impact on its operations in 2002.
Conversion to the Euro
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (the Euro). The transition period for the
introduction of the Euro ends June 30, 2002. In connection therewith, in January
2002 certain member countries of the European Union adopted the Euro as their
national currency. Issues facing the Company as a result of the introduction of
the Euro include converting information technology systems, reassessing currency
risk, amending lease agreements and other contracts, and processing tax and
accounting records. The Company has substantially completed addressing these
issues and does not expect the adoption of the Euro to have a material effect on
the Company's financial condition or results of operations.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference
herein to the information contained in this report in Part I, Item 2, under the
captions "Foreign Exchange Exposure" and "Inflation."
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine litigation arising in the ordinary course of business. The Company does
not believe that the results of such litigation, even if the outcome were
unfavorable to the Company, would have a material adverse effect on the
Company's business, financial condition or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
None
b.) Reports on Form 8-K
On January 31, 2002, the Registrant filed a Current Report on Form 8-K
in connection with its acquisition of SpatialMetriX Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2002 FARO TECHNOLOGIES, INC.
(Registrant)
By: /s/ Gregory A. Fraser
---------------------------------
Gregory A. Fraser
Executive Vice President, Secretary and
Treasurer (Duly Authorized Officer and
Principal Financial Officer)
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