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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 September 30, 1998
[ ] 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 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 November 12, 1998:
11,341,470
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FARO Technologies Inc.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998 3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1997 and 1998 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1997 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 28,815,069 $ 20,492,804
Accounts receivable, net of allowance 6,159,173 8,082,129
Inventories 4,275,376 5,843,376
Deferred taxes 126,572 526,572
Prepaid expenses 109,649 264,887
------------ ------------
Total current assets 39,485,839 35,209,768
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment 1,014,309 1,745,944
Furniture and fixtures 605,913 897,091
------------ ------------
Total 1,620,222 2,643,035
Less accumulated depreciation (792,442) (1,134,065)
------------ ------------
Property and equipment, net 827,780 1,508,970
------------ ------------
INTANGIBLE ASSETS, net of accumulated amortization
of $321,261 and $721,133, respectively 747,979 2,330,595
DEFERRED INCOME TAXES 130,735 1,269,910
------------ ------------
TOTAL ASSETS $ 41,192,333 $ 40,319,243
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,196,967 $ 2,002,764
Income taxes payable 413,167 --
Customer deposits 121,358 161,001
Current portion unearned service revenues 476,802 216,600
------------ ------------
Total current liabilities 2,208,294 2,380,365
UNEARNED SERVICE REVENUES, less current portion 44,628 135,774
------------ ------------
TOTAL LIABILITIES 2,252,922 2,516,139
------------ ------------
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, 9,919,000 and 11,008,138 issued and
outstanding, respectively 9,919 11,045
Additional paid-in-capital 36,502,004 47,523,065
Treasury stock -- (150,625)
Retained earnings (deficit) 3,018,265 (8,810,785)
Unearned compensation (464,480) (335,357)
Accumulated other comprehensive income:
Cumulative translation adjustments (126,297) (434,239)
------------ ------------
Total shareholders' equity 38,939,411 37,803,104
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,192,333 $ 40,319,243
============ ============
See accompanying notes to consolidated financial statements.
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---- ---- ---- ----
Sales $5,909,306 $ 4,972,182 $6,227,841 $ 19,376,191
Cost of sales 2,379,114 2,460,143 6,567,395 7,921,748
---------- ----------- ---------- ------------
Gross profit 3,530,192 2,512,039 9,660,446 11,454,443
Operating expenses:
Selling 1,432,265 2,870,373 3,955,236 6,665,432
General and administrative 310,082 851,532 916,517 1,967,250
Depreciation and amortization 79,023 399,935 204,998 772,814
Research and development 326,918 737,732 721,757 1,559,710
Employee stock options 813 43,041 364,959 129,123
Purchased in-process research and
development costs -- -- -- 14,374,000
---------- ----------- ---------- ------------
Total operating expenses 2,149,101 4,902,613 6,163,467 25,468,329
---------- ----------- ---------- ------------
Income (loss) from operations 1,381,091 (2,390,574) 3,496,979 (14,013,886)
Interest income 33,010 215,766 38,841 838,545
Other income 31,941 19,391 68,754 22,145
Interest expense (43,809) (3,234) (109,660) (11,099)
---------- ----------- ---------- ------------
Income (loss) before income taxes 1,402,233 (2,158,651) 3,494,914 (13,164,295)
Income tax expense (benefit) 573,118 (882,347) 1,410,191 (1,335,245)
---------- ----------- ---------- ------------
Net income (loss) 829,115 (1,276,304) 2,084,723 (11,829,050)
Other comprehensive expense
Foreign currency translation adjustments (59,970) (103,488) (103,955) (307,942)
---------- ----------- ---------- ------------
Other comprehensive expense (59,970) (103,488) (103,955) (307,942)
---------- ----------- ---------- ------------
Comprehensive income (loss) $ 769,145 $(1,379,792) $1,980,768 $(12,136,992)
========== =========== ========== ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.11 $ (0.12) $ 0.29 $ (1.13)
========== =========== ========== ============
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION $ 0.11 $ (0.11) $ 0.28 $ (1.10)
========== =========== ========== ============
See accompanying notes to consolidated financial statements.
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Additional
Common Stock Paid-in Unearned
Shares Amounts Capital Compensation
------ ------- ------- ------------
BALANCE, DECEMBER 31,
1997 9,919,000 $ 9,919 $36,502,004 $ (464,480)
Common stock issued in connection
with acquisition of business, net
of issuance costs 916,668 917 10,260,692
Exercise of stock options 209,470 209 77,095
Acquisition of treasury stock (40,000)
Amortization of unearned
compensation 129,123 129,123
Tax benefit from exercise
of stock options 683,274
Currency translation
adjustment
Net loss for period
---------- ------------ ----------- -----------
BALANCE, SEPTEMBER 30, 1998 11,005,138 $ 11,045 $47,523,065 $ (335,357)
========== ============ =========== ===========
Cumulative Retained
Translation Treasury Earnings
Adjustment Stock (Deficit) Total
---------- ----- --------- -----
BALANCE, DECEMBER 31,
1997 $(126,297) $ -- $ 3,018,265 $38,939,411
Common stock issued in connection
with acquisition of business, net
of issuance costs 10,261,609
Exercise of stock options 77,304
Acquisition of treasury stock (150,625) (150,625)
Amortization of unearned
compensation 129,123
Tax benefit from exercise
of stock options 683,274
Currency translation
adjustment (307,942) (307,942)
Net loss for period (11,829,050) (11,829,050)
-------- --------- ----------- -----------
BALANCE, SEPTEMBER 30, 1998 $434,239) $(150,625) $(8,810,785) $37,803,104
======== ========= =========== ===========
See accompanying notes to consolidated financial statements.
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 2,084,723 $(11,829,050)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation, amortization and other 204,998 883,399
In-process research and development 14,374,000
Employee stock options 364,959 129,123
Deferred income taxes (276,302) (1,391,422)
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (2,458,006) (575,203)
Inventories (448,739) (1,537,663)
Prepaid expenses (31,652) (42,878)
Increase (decrease) in:
Accounts payable and accrued liabilities (639,054) (992,933)
Income taxes payable (68,294) (413,167)
Customer deposits (70,345) 39,643
Unearned service revenues 486,239 (169,056)
------------ ------------
Net cash used in operating activities (851,473) (1,525,207)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (350,849) (852,906)
Payments of patent costs (157,728) (65,587)
Payments of product design costs -- (485,120)
Acquisition of business, net of cash acquired -- (5,306,057)
------------ ------------
Net cash used in investing activities (508,577) (6,709,670)
------------ ------------
FINANCING ACTIVITIES:
Payments on debt (604,806) --
Proceeds from issuance of common stock, net 32,265,217 96,105
Acquisition of treasury stock (150,625)
------------ ------------
Net cash provided by (used in) financing activities 31,660,411 (54,520)
------------ ------------
EFFECT OF FOREIGN CURRENCY FLUCTUATIONS -- (32,868)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 30,300,361 (8,322,265)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 263,342 28,815,069
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,563,703 $ 20,492,804
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 27,181 $ 11,099
============ ============
Cash paid for income taxes $ -- $ 492,749
============ ============
Translation adjustment effect on accounts receivable $ (103,955) $ --
============ ============
Noncash financing activities:
Payables recorded in connection with initial public offering $ 419,811 $ --
============ ============
Net decrease in deferred tax assets and current tax
liability due to exercise of employee stock options $ -- $ 683,274
============ ============
See accompanying notes to consolidated financial statements.
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS
FARO Technologies Inc. and Subsidiaries (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.
On May 15, 1998 the Company acquired all the stock of privately held CATS
computer aided technologies, Computeranwendungen in der Fertigungssteurung, GmbH
("CATS") of Karlsruhe, Germany for $5 million in cash, 916,668 shares of common
stock of the Company, plus the right to receive up to an additional 333,332
shares of Company common stock if CATS meets certain performance goals. In
addition, the Company assumed certain of CATS outstanding liabilities. CATS
develops, markets and supports 3-D measurement retrofit and statistical process
control software used in both main frame and PC based CAD environments. CATS is
a wholly owned subsidiary of the Company and operates as a separate entity under
the name of "CATS." The acquisition was treated as a purchase for accounting
purposes. See Note F.
The Company has two other 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.
NOTE B - BASIS OF PRESENTATION
The accompanying 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 generally accepted accounting
principles 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 and nine months ended September 30, 1998 are
not necessarily indicative of results that may be expected for the year ending
December 31, 1998. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company as
of December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997 included in the Company's Annual Report to Stockholders
included by reference within the Company's Annual Report on Form 10-K and in
conjunction with the Form S-1, as amended, dated August 7, 1998.
Effective January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). 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. Prior year financial statements have been restated for comparative
purposes to conform with this new standard.
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NOTE C - 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 September 30, 1997 1998
----------------------- -----------------------
Per-Share Per-Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic EPS
Weighted-Average Shares 7,384,923 $ .11 11,028,890 ($.12)
Effect of Dilutive Securities
Stock Options 365,139 102,787
--------- ----------
Diluted EPS
Weighted-Average Shares and
Assumed Conversions 7,750,062 $ .11 11,131,677 ($.11)
========== ==========
Nine months ended September 30, 1997 1998
-------------------- --------------------------
Per-Share Per-Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic EPS
Weighted-Average Shares 7,129,733 $ .29 10,506,189 ($1.13)
Effect of Dilutive Securities
Stock Options 350,529 213,102
--------- ----------
Diluted EPS
Weighted-Average Shares and
Assumed Conversions 7,480,262 $ .28 10,719,291 ($1.10)
========= ==========
NOTE D - Inventory
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1997 1998
---- ----
Raw materials $2,432,194 $3,182,831
Finished goods 804,827 965,134
Sales demonstration 1,038,355 1,664,702
---------- ----------
$4,275,376 $5,812,667
========== ==========
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NOTE E - INTANGIBLE ASSETS
Intangible assets include patents, product design costs, and the value assigned
to the work force in place in connection with the acquisition of CATS (Note A).
Patents are amortized on a straight-line basis over the lives of the patents (17
years). 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 value assigned to the work force in place in connection with
the acquisition of CATS is being amortized over five years. Management evaluates
the recoverability of these assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
NOTE F - PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS
In connection with the purchase of CATS (Note A), the Company obtained a
valuation study from a third-party valuation/financial advisory service to
assist the Company in appropriately allocating the purchase price. As a result,
the Company expensed approximately $14.4 million related to in-process research
and development costs in the second quarter. In-process research and development
relates to technology that has not yet established technological feasibility and
at present has no alternative future uses. In-process research and development
was valued by discounting forecasted cash flow directly related to the products
expecting to result from the research and development. Due to the development
efforts required to make these products technologically feasible, management
anticipates that these projects will be released over the next six months to two
years at an additional cost to the Company of approximately $1.8 million.
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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
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 Quarterly Report on Form 10-Q dated August 12, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Sales. Sales decreased $0.9 million, or 15.3% from $5.9 million for the
three months ended September 30, 1997 to $5.0 million for three months ended
September 30, 1998. The decrease was primarily due to a 35.5% reduction in
average sale price of the Company's traditional products from $46,000 in the
third quarter of 1997 to $30,000 in the third quarter of 1998, which offset a
15.8% increase in unit sales of these products, from 114 units in the third
quarter of 1997 to 132 units in the third quarter of 1998, and the addition of
sales from CATS GmbH, which the company acquired on May 15,1998. The Company's
price reduction was related to disposal of inventory of its traditional product
line as part of a transition to a new generation product line.
Gross profit. Gross profit decreased $1.0 million, or 28.8% from $3.5
million for the three months ended September 30, 1997 to $2.5 million for the
three months ended September 30, 1998. Gross margin decreased to 50.5% for the
three months ended September 30, 1998, from 59.7% for the three months ended
September 30, 1997. The decrease in gross profit percentage was primarily
related to the unit price reduction on the Company's traditional product line as
it began transition to its new generation products.
Selling expenses. Selling expenses increased $1.4 million, or 100.4%,
from $1.4 million for the three months ended September 30, 1997 to $2.9 million
for the three months ended September 30, 1998. This increase was a result of the
Company's expansion of sales and marketing staff in the United States and
Europe, the addition of the selling expenses ($428,000) from CATS, and increased
promotion related to the Company's introduction of its new generation of
products. Excluding CATS, the number of sales and marketing employees increased
from 40 at September 30, 1997 to 60 at September 30, 1998.
General and administrative expenses. General and administrative
expenses increased $541,000, or 174.6%, from $310,000 for the three months ended
September 30, 1997 to $852,000 for the three months ended September 30, 1998.
This increase was due to salaries for additional administration and accounting
employees to support the increased sales effort, the addition of general and
administrative expenses ($81,000) from CATS, and increased professional and
legal expenses related to investor relations and public company reporting
requirements. Excluding CATS, the number of administrative and accounting
employees has increased from 13 at September 30, 1997 to 25 at September 30,
1998. Five of these new employees are in network systems, and two new employees
were added to each of the accounting, total quality, and human resources
departments.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased $321,000, or 406.1% from $79,000 for the three months ended
September 30, 1997 to $400,000 for the three months ended September 30, 1998.
This increase was due primarily to the amortization of the value assigned to
work force in place in connection with the Company's acquisition of CATS on May
15, 1998. The value assigned to work force in place is being amortized over five
years.
Research and development expenses. Research and development expenses
increased $411,000, or 125.7%, from $327,000 for the three months ended
September 30, 1997 to $738,000 for the three
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months ended September 30, 1998. This increase was a result of the Company's
continued activities associated with the development of technologies related to
new products, and research and development costs ($260,000) from CATS.
Interest Income. Interest income is attributable to interest on the
remaining cash proceeds (approximately $20 million at September 30) from the
Company's initial public offering in 1997.
Interest expense. Interest expense decreased $41,000, or 92.6% from
$44,000 for the three months ended September 30, 1997 to $3,000 for the three
months ended September 30, 1998. This reduction was attributable to the
repayment of the Company's debt in September 1997 from use of proceeds from the
Company's initial public offering, and the addition of interest expense ($3,000)
from CATS.
Income Tax Expense. Income tax expense decreased $1.5 million from an
expense of $573,000 for the three months ended September 30, 1997 to a benefit
of $882,000 for the three months ended September 30, 1998 as a result of the net
loss from operations. The provision for income taxes as a percentage of income
before income tax was 40.9% for the three months ended September 30, 1998
representing estimated statutory tax rates.
Net Income. Net income decreased $2,105,000 from $829,000 for the three
months ended September 30, 1997 to a loss of $1,276,000 for the three months
ended September 30, 1998. The decrease was primarily due to a loss from
operations in the three months ended September 30, 1998 of $2.4 million. The
loss from operations is due primarily to lower gross margin resulting from a
decrease in average sales price of the Company's traditional products.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Sales. Sales increased $3.1 million, or 19.4% from $16.2 million for
the first nine months of 1997 to $19.4 million for the first nine months of
1998. The increase was the result of increased product sales due to an expanded
sales effort that included the addition of sales personnel at existing offices,
the opening of sales offices, and the acquisition of CATS.
Gross profit. Gross profit increased $1.8 million, or 18.6%, from $9.7
million for the first nine months of 1997 to $11.5 million for the first nine
months of 1998. Gross margin decreased from 59.5% for the first nine months of
1997 to 59.1% for the first nine months of 1998. Gross margin decreased as a
result of sales of traditional Faro products at reduced selling prices in the
third quarter, offset by higher margin software sales in the second and third
quarters.
Selling expenses. Selling expenses increased $2.7 million, or 68.5%,
from $4.0 million for the first nine months of 1997 to $6.7 million for the
first nine months of 1998. This increase was a result of the Company's increased
sales and promotion activities related to its expansion of sales and marketing
staff in the United States and in Europe, including CATS. Selling expenses as a
percentage of sales increased from 24.4% for the first nine months of 1997 to
34.4% for the first nine months of 1998.
General and administrative expenses. General and administrative
expenses increased $1.1 million or 114.6% from $917,000 for the first nine
months of 1997 to $1,967,000 for the first nine months of 1998. This increase
resulted primarily from the hiring of additional administrative personnel to
support staff increases in sales and marketing and increased transactional
volume resulting from increased sales and increases in professional and legal
expenses associated with investor relations and public reporting requirements.
General and administrative expenses as a percentage of sales increased from 5.6%
for the first nine months of 1997 to 10.2% for the first nine months of 1998.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased $568,000, or 277.0% from $205,000 for the nine months ended
September 30, 1997 to $773,000 for the nine months ended September 30, 1998.
This increase was due primarily to amortization of the value assigned to work
force in place in connection with the Company's acquisition of CATS on May 15,
1998. The value assigned to work force in place is being amortized over five
years.
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Research and development expenses. Research and development expenses
increased $838,000, or 116.1%, from $722,000 for the first nine months of 1997
to $1,560,000 for the first nine months of 1998. This increase was a result of
the Company's continued activities associated with the development of
technologies related to new products, and the addition of CATS research and
development expenses ($371,000). Research and development expenses as a
percentage of sales increased from 4.4% for the first nine months of 1997 to
8.0% for the first nine months of 1998.
In-process research and development resulting from acquisition.
In-process research and development resulting from the acquisition of CATS
represents the allocation of purchase price to products under development by
CATS which had not achieved technological feasibility.
Employee stock options expenses. Employee stock options expenses
decreased $236,000 or 64.6% from $365,000 for the first nine months of 1997 to
$129,000 for the first nine months of 1998. The higher expense in 1997 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.
Interest Income. Interest income increased $800,000 to $839,000 for the
nine months ended September 30 1998, compared to $39,000 in the nine months
ended September 30 1997. The increase was attributable to interest on the
remaining cash proceeds (approximately $20 million at September 30, 1998) from
the Company's initial public offering in 1997.
Interest expense. Interest expense decreased $99,000, or 89.9%, from
$110,000 for the first nine months of 1997 to $11,000 for the first nine months
of 1998. This reduction was primarily attributable to the elimination of the
Company's debt in September, 1997 from use of proceeds from the Company's
initial public offering, offset by $11,000 in interest expense paid by CATS in
the period since the acquisition.
Income tax expense. Income tax expense decreased $2,745,000, or 194.7%,
from $1,335,000 for the first nine months of 1997 to a benefit of $1,410,000 for
the first nine months of 1998. The income tax reduction was primarily a result
of a tax benefit of $1.6 million resulting from the $14,374,000 charge for
in-process research and development associated with the Company's acquisition of
CATS on May 15, 1998, and a tax benefit of $882,000 from a $2.4 million loss
from operations in the three months ended September 30, 1998.
Net Income. Net income decreased $13.9 million, from $2.1 million for
the first nine months of 1997 to a loss of $11.8 million for the first nine
months of 1998. The decrease was primarily due to the $14,374,000 charge for
in-process research and development associated with the Company's acquisition of
CATS on May 15, 1998. Exclusive of the in-process research and development
charge, net income decreased $1,140,000, or 54.7%, from $2,085,000 for the nine
months ended September 30, 1997 to $945,000.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed an initial public offering of
stock which provided net cash after offering expenses, of $31.8 million.
For the nine months ended September 30, 1998, net cash used in
operating activities was $1,525,000 compared to $851,000 for the same period of
1997. Net cash used in this period increased as a result of decreases in net
income of $13,914,000, accounts receivable of $1,882,000, unearned service
revenues of $655,000, accounts payable of $354,000 and income taxes payable of
$345,000 offset by increases in in-process research and development expense of
$14,374,000, deferred income taxes of $1,115,000 and inventories of $1,089,000.
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Net cash used in investing activities was $6,710,000 for the nine
months ended September 30, 1998 compared to $509,000 for the nine months ended
September 30, 1997. Net cash used in investing activities increased for the
first nine months of 1998 primarily due to the acquisition of CATS for
$5,306,000.
Net cash used in financing activities for the nine months ended
September 30, 1998 was $55,000 compared to net cash provided by financing
activities of $31.7 million for the nine months ended September 30, 1997, as a
result of the initial public offering.
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 September 30, 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 this loan agreement at September 30, 1998.
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. The line of credit was extended in 1998 and expires on March
31, 1999. There were no outstanding borrowings under this line of credit
agreement at September 30, 1998.
The Company's principal commitments at September 30, 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.
NEW PRODUCT LINES
On September 1, 1998, the Company announced plans to introduce a new,
completely redesigned generation of its FAROArm products featuring higher
accuracy and reliability at lower cost than the previous generation. The Company
expected to replace the previous Bronze and Silver Series product lines with two
new product lines: the Sterling Series and the Gold Series. Based on customer
demand since the new product announcement, the Company has elected to retain the
Silver Series product line, and position it between the lower priced Sterling
Series and higher priced Gold Series lines.
To clear the way for the new product lines, the Company has sold for the
quarter ended September 30, and will continue to sell for the fourth quarter its
Bronze Series products at discount to reduce inventory. The Company will also
continue to sell the Silver Series product line at discount to traditional price
levels, to fit between the new Sterling and Gold Product lines. The Company
plans to offset Silver Series product gross margin reductions from lower selling
price by applying cost saving features of the new product lines to the Silver
Series. This is expected to be complete for Silver Series products shipped in
the second quarter of 1999.
The Company expects certain delays in shipments of Sterling and Gold Series
products to customers, as a result of converting its production to the new
product lines, and until it has completely supplied models of these new products
to its sales force for demonstration. This is expected to be complete by
December 31, 1998.
The Company expects the transition from the previous product lines to the
new product lines to have material negative impact on the Company's results of
operations until the third quarter of 1999.
13
14
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 operation 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.
IMPACT OF YEAR 2000
The Company has invested significant resources in the latest
information technologies over the past five years and therefore has minimized
the effect of Year 2000 issues. Management initiated a program to evaluate all
computer systems and applications and determined the adjustments necessary to
become Year 2000 compliant. Management is confident that existing internal
resources are sufficient to correct any internal systems deficiencies that may
be determined. The Company is currently making inquiries of its major suppliers
and other third-party entities with which it has business relations to obtain
assurances of their Year 2000 compliance. However, there can be no assurance
that the systems of other companies on which the Company relies will be timely
corrected, or that any failure by another company to correct such systems would
not have a material adverse effect on the Company. Contingency plans are
currently being developed to be implemented in the event any information
technology system, non-information technology system, third party or supplier is
not Year 2000 compliant in a timely manner.
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 a given year. These costs are based on Management's
best estimates, which were derived utilizing numerous assumptions of future
events including 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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's registration statement filed under
the Securities Act in connection with its initial public offering was September
17, 1997.
From the effective date of such registration statement to September 30, 1998
none of the net proceeds from the Company's initial public offering were used
for construction of plant, building and facilities; purchase and installation of
machinery and equipment or the purchase of real estate. The Company used $5
million of such net proceeds to acquire CATS and $3 million as working capital.
14
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Description
27.1.1 Financial Data Schedule (for SEC use only)
b) Reports on Form 8-K
None
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: November 13, 1998 FARO TECHNOLOGIES, INC.
(Registrant)
By: /s/Gregory A. Fraser
--------------------
Gregory A. Fraser
Executive Vice President and Chief Financial
Officer
(Duly Authorized Officer and Principal
Financial Officer)
15
5
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
20,492,804
0
8,082,129
0
5,843,376
35,209,768
2,643,035
1,134,065
40,319,243
2,380,365
0
0
0
11,045
0
40,319,243
19,376,191
19,376,191
7,921,748
6,665,432
18,802,897
0
11,099
(13,164,295)
(1,335,245)
(11,829,050)
0
0
0
(11,829,050)
(1.13)
(1.10)
