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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 June 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 August 12, 1998: 11,360,413
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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
June 30, 1998 3
Consolidated Statements of Income and Comprehensive Income
for the Three and Six Months Ended June 30, 1997 and 1998 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 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 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
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, JUNE 30,
1997 1998
------------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 28,815,069 $22,396,863
Accounts receivable, net of allowance 6,159,173 10,121,298
Inventories 4,275,376 5,249,930
Deferred tax asset 126,572 526,572
Prepaid expenses 109,649 277,516
------------ -----------
Total current assets 39,485,839 38,572,179
------------ -----------
PROPERTY AND EQUIPMENT - At cost:
Machinery and equipment 1,014,309 1,564,658
Furniture and fixtures 605,913 890,067
------------ -----------
Total 1,620,222 2,454,725
Less accumulated depreciation (792,442) (1,000,294)
------------ -----------
Property and equipment - net 827,780 1,454,431
------------ -----------
INTANGIBLE ASSETS, net of accumulated amortization
of $321,261 and $471,437, respectively 747,979 2,422,562
DEFERRED TAXES 130,735 1,219,000
------------ -----------
TOTAL ASSETS $ 41,192,333 $43,668,172
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,196,967 $ 3,807,768
Income taxes payable 413,167 -
Customer deposits 121,358 185,756
Current portion unearned service revenues 476,802 272,907
------------ -----------
Total current liabilities 2,208,294 4,266,431
UNEARNED SERVICE REVENUES - less current portion 44,628 136,563
------------ -----------
TOTAL LIABILITIES 2,252,922 4,402,994
------------ -----------
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 11,027,081 issued and
outstanding, respectively 9,919 11,027
Additional paid-in-capital 36,502,004 47,497,781
Retained earnings (deficit) 3,018,265 (7,534,481)
Unearned compensation (464,480) (378,398)
Accumulated other comprehensive income:
Cumulative translation adjustments (126,297) (330,751)
------------ ----------
Total shareholders' equity 38,939,411 39,265,178
------------ ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,192,333 $43,668,172
============ ===========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
1997 1998 1997 1998
------------ ------------- ------------------------------
Sales $ 5,429,064 $ 7,721,808 $ 10,318,535 $ 14,404,009
Cost of sales 2,239,731 2,779,843 4,188,280 5,461,605
------------ ------------- ------------ -------------
Gross profit 3,189,333 4,941,965 6,130,255 8,942,404
Operating Expenses:
Selling 1,353,507 2,211,523 2,512,066 3,795,059
General and administrative 319,569 517,136 622,092 1,115,718
Depreciation and amortization 65,773 262,517 124,646 372,879
Research and development 216,766 435,534 394,839 821,978
Employee stock options 360,876 43,041 364,146 86,082
Purchased in-process research and development costs - 14,374,000 - 14,374,000
------------ ------------- ------------ -------------
Total operating expenses 2,316,491 17,843,751 4,017,789 20,565,716
------------ ------------- ------------ -------------
Income (loss) from operations 872,842 (12,901,786) 2,112,466 (11,623,312)
Interest income - 302,852 - 622,779
Other income 51,877 5,408 46,067 2,754
Interest expense (31,591) (7,865) (65,853) (7,865)
------------ ------------- ------------ -------------
Income (loss) before income taxes 893,128 (12,601,391) 2,092,680 (11,005,644)
Income tax expense (benefit) 357,251 (1,025,254) 837,072 (452,898)
------------ ------------- ------------ -------------
Net income (loss) 535,877 (11,576,137) 1,255,608 (10,552,746)
Other Comprehensive Income (Expense)
Foreign currency translation adjustments (43,985) (160,669) (43,985) (204,454)
------------ ------------- ------------ -------------
Other comprehensive income (expense) (43,985) (160,669) (43,985) (204,454)
------------ ------------- ------------ -------------
Comprehensive income (loss) $ 491,892 $ (11,736,806) $ 1,211,623 $ (10,757,200)
============ ============= ============ =============
Net Income (Loss) Per Common Share - Basic $ 0.08 $ (1.10) $ 0.18 $ (1.03)
============ ============= ============ =============
Net Income (Loss) Per Common Share -
Assuming Dilution $ 0.07 $ (1.08) $ 0.17 $ (1.01)
============ ============= ============ =============
See accompanying notes to consolidated financial statements.
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Additional Cumulative Retained
Common Stock Paid-in Unearned Translation Earnings
Shares Amounts Capital Compensation Adjustment (Deficit) Total
------------------- ------------ ------------ ----------- ----------- ------------
BALANCE, DECEMBER 31,
1997 9,919,000 $ 9,919 $ 36,502,004 $ (464,480) $ (126,297) $ 3,018,265 $ 38,939,411
Common stock issued in connection
with acquisition of business 916,668 917 10,394,083 10,395,000
Capitalization of registration
costs in connection with
acquisition of business (133,391) (133,391)
Exercise of stock options 191,413 191 70,612 70,803
Amortization of unearned
compensation 86,082 86,082
Tax benefit from exercise
of stock options 664,473 664,473
Currency translation
adjustment (204,454) (204,454)
Net loss for period (10,552,746) (10,552,746)
---------- ------- ------------ ----------- ---------- ------------ ------------
BALANCE, JUNE 30, 1998 11,027,081 $11,027 $ 47,497,781 $ (378,398) $ (330,751) $ (7,534,481) $ 39,265,178
========== ======= ============ =========== ========== ============ ============
See accompanying notes to consolidated financial statements.
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
1997 1998
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 1,255,608 $(10,552,746)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation, amortization and other 124,646 506,713
In-process research and development 14,374,000
Employee stock options 364,146 86,082
Deferred income taxes (276,302) (1,340,512)
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (1,903,666) (2,614,372)
Inventories (479,874) (944,217)
Prepaid expenses 15,744 (55,507)
Increase (decrease) in:
Accounts payable and accrued liabilities 139,856 812,071
Income taxes payable 649,090 (413,167)
Customer deposits 52,387 64,398
Unearned service revenues 326,610 (111,960)
------------ ------------
Net cash provided by (used in) operating
activities 268,245 (189,217)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (264,945) (664,596)
Payments of patent costs (148,274) (87,863)
Payments of product design costs - (311,896)
Acquisition of business, net of cash acquired - (5,306,057)
------------ ------------
Net cash used in investing activities (413,219) (6,370,412)
------------ ------------
FINANCING ACTIVITIES:
Payments on debt (831) -
Proceeds from issuance of common stock, net - 70,803
------------ ------------
Net cash (used in) provided by financing
activities (831) 70,803
------------ ------------
EFFECT OF FOREIGN CURRENCY FLUCTUATIONS - 70,620
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (145,805) (6,418,206)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 263,342 28,815,069
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 117,537 $ 22,396,863
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 19,226 $ 7,865
============ ============
Cash paid for income taxes $ 464,283 $ 74,216
============ ============
Noncash financing activities:
Net decrease in deferred tax assets and
current tax liability due to exercise of
employee stock options $ - $ 608,565
============ ============
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 SIX MONTHS ENDED JUNE 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. FARO France, s.a.s., commenced operations in July 1996.
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 six months ended JUNE 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 of 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.
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:
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Three months ended June 30, 1997 1998
- ------------------------------------------------------------------------------------------------------
Per-Share Per-Share
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------
Basic EPS
Weighted-Average Shares 7,000,000 $ .08 10,531,132 ($1.10)
Effect of Dilutive Securities
Stock Options 333,290 187,178
--------- -----------
Diluted EPS
Weighted-Average Shares and
Assumed Conversions 7,333,290 $ .07 10,718,310 ($1.08)
========= ==========
Six months ended June 30, 1997 1998
- ------------------------------------------------------------------------------------------------------
Per-Share Per-Share
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------
Basic EPS
Weighted-Average Shares 7,000,000 $ .18 10,239,613 ($1.03)
Effect of Dilutive Securities
Stock Options 333,290 218,049
---------- ----------
Diluted EPS
Weighted-Average Shares and
Assumed Conversions 7,333,290 $ .17 10,457,662 ($1.01)
========= ==========
NOTE D - Inventory
Inventories consist of the following:
DECEMBER 31, JUNE 30,
1997 1998
------------- --------------
Raw materials $ 2,432,194 $ 2,827,648
Finished goods 804,827 983,352
Sales demonstration 1,038,355 1,438,930
------------- --------------
$ 4,275,376 $ 5,249,930
============= ==============
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.
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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 Annual Report on Form 10-K dated March 13, 1998 and the Company's
Registration Statement on Form S-1, as amended, dated August 7, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Sales. Sales increased $2.3 million, or 42.2% from $5.4 million for
the three months ended June 30, 1997 to $7.7 million for three months ended
June 30, 1998. The increase was due to 1) increased FARO product sales
resulting from additional sales personnel of FARO ($1.0 million), and 2) FARO
product and CATS product sales by CATS ($1.3 million) for the period May 15 to
June 30, 1998. CATS was acquired by the Company on May 15, 1998.
Gross profit. Gross profit increased $1.7 million, or 55.0% from $3.2
million for the three months ended June 30, 1997 to $4.9 million for the three
months ended June 30, 1998. Gross margin increased to 64.0% for the three
months ended June 30, 1998, from 58.7% for the three months ended June 30,
1997. This margin increase was primarily a result of the higher margin CATS
software sales.
Selling expenses. Selling expenses increased $858,000, or 63.4%, from
$1.4 million for the three months ended June 30, 1997 to $2.2 million for the
three months ended June 30, 1998. This increase was a result of the Company's
continued expansion of sales and marketing staff in the United States and
Europe, and the addition of the selling expenses ($186,000) from CATS. Selling
expenses as a percentage of sales were 28.6% for the three months ended June
30, 1998, compared to 24.9% for the three months ended June 30, 1997.
General and administrative expenses. General and administrative
expenses increased $197,000, or 61.8%, from $320,000 for the three months ended
June 30, 1997 to $517,000 for the three months ended June 30, 1998. This
increase was primarily due to salaries for additional administration and
accounting employees, and the addition of general and administrative expenses
($36,000) from CATS. General and administrative expenses as a percentage of
sales increased from 5.9% for the three months ended June 30, 1997 to 6.7% for
the three months ended June 30, 1998.
Research and development expenses. Research and development expenses
increased $219,000, or 100.9%, from $217,000 for the three months ended June
30, 1997 to $436,000 for the three months ended June 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 ($112,000) from CATS.
In-process research and development resulting from acquisition.
In-process research and development resulting from acquisition represents the
allocation of purchase price to products under development by CATS which had
not achieved technological feasibility and at present have no alternative
future uses.
Interest Income. Interest income is attributable to interest on the
remaining cash proceeds (approximately $22 million at June 30) from the
Company's initial public offering in 1997.
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Interest expense. Interest expense decreased $24,000, or 75.1% from
$32,000 for the three months ended June 30, 1997 to $8,000 for the three months
ended June 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 ($8,000) from
CATS.
Income Tax Expense. The Company recorded an income tax benefit for the
three months ended June 30, 1998 as a result of the expensing of in-process
research and development costs which totaled $14,374,000. The Company recorded
a tax provision of approximately 40% for the three months ended June 30, 1997
representing estimated statutory tax rates.
Net Income. Net income decreased $12,112,000 from $536,000 for the
three months ended June 30, 1997 to a loss of $11,576,000 for the three months
ended June 30, 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 increased $661,000, or 123.5%, from $536,000 for
the three months ended June 30, 1997 to $1,198,000. Net income excluding the
in-process research and development charge increased $253,000 as a result of
the Company's operations net of CATS, and $408,000 as a result of CATS
operations.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Sales. Sales increased $4.1 million, or 39.6% from $10.3 million for
the first six months of 1997 to $14.4 million for the first six months of 1998.
The increase was the result of increased FARO product sales due to an expanded
sales effort that included the addition of sales personnel at existing offices,
the opening of sales offices ($2.9 million), and the sale of FARO products and
CATS products by CATS in the period May 15 June 30 1998 ($1.3 million).
Gross profit. Gross profit increased $2.8 million, or 45.9%, from $6.1
million for the first six months of 1997 to $8.9 million for the first six
months of 1998. Gross margin increased from 59.4% for the first six months of
1997 to 62.1% for the first six months of 1998. Gross margin increased
primarily as a result of the higher margin CATS software sales.
Selling expenses. Selling expenses increased $1.3 million, or 51.1%,
from $2.5 million for the first six months of 1997 to $3.8 million for the
first six months of 1998. 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, ($1.1 million), and the addition of CATS selling expenses
for the period May 15 - June 30, 1998 ($186,000). Selling expenses as a
percentage of sales increased from 24.3% for the first six months of 1997 to
26.3% for the first six months of 1998.
General and administrative expenses. General and administrative
expenses increased $494,000 or 79.3% from $622,000 for the first six months of
1997 to $1,116,000 for the first six months of 1998. This increase resulted
primarily from the hiring of additional administrative personnel, increases in
professional and legal expenses, and the addition of CATS general and
administrative expenses ($36,000). General and administrative expenses as a
percentage of sales increased from 6.0% for the first six months of 1997 to
7.7% for the first six months of 1998.
Research and development expenses. Research and development expenses
increased $427,000, or 108.2%, from $395,000 for the first six months of 1997
to $822,000 for the first six 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 ($112,000). Research and development expenses as a percentage of sales
increased from 3.8% for the first six months of 1997 to 5.7% for the first six
months of 1998.
In-process research and development resulting from acquisition.
In-process research and development resulting from acquisition represents the
allocation of purchase price to products under
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development by CATS which had not achieved technological feasibility and at
present have no alternative future uses.
Employee stock options expenses. Employee stock options expenses
decreased $278,000 from $364,000 for the first six months of 1997 to $86,000
for the first six 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 is attributable to interest on the
remaining cash proceeds (approximately $22 million at June 30) from the
Company's initial public offering in 1997.
Interest expense. Interest expense decreased $58,000, or 88.1%, from
$66,000 for the first six months of 1997 to $8,000 for the first six 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, and $8,000 in interest expense paid by CATS in the
period May 15 - June 30, 1998.
Income tax expense. Income tax expense decreased $1,290,000, or
154.1%, from $837,000 for the first six months of 1997 to a benefit of $453,000
for the first six months of 1998. The income tax reduction was primarily a
result of a net 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.
Net Income. Net income decreased $11,808,000 or 940.4%, from $1.3
million for the first six months of 1997 to a loss of $10,553,000 for the first
six 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 increased $965,000, or 76.8%, from $1,256,000 for
the six months ended June 30, 1997 to $2,221,000. Net income excluding the
in-process research and development charge increased $557,000 as a result of
the Company's operations net of CATS, and $408,000 as a result of CATS
operations.
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.
The acquisition of CATS was completed for $20 million, consisting of
$5,000,000 in cash, $10,395,000 in common stock (916,668 shares), plus the
right to receive up to an additional 333,332 shares in common stock that the
Company deposited in escrow. In addition, the Company assumed certain of CATS
outstanding liabilities. The shares in escrow will be issued to the sellers of
CATS if CATS meets certain performance goals.
As of June 30, 1998, the Company recorded an expense of $14.4 million
related to purchased in-process research and development expenditures.
In-process research and development relates to technology that has not yet
established technological feasibility and at present has no alternative future
uses. CATS' core business strategy focuses on the design of software which
enables manufacturers to measure and check the quality of machined parts.
Toward this end, CATS is currently developing several entirely new versions of
some of its existing products, and several new software and electronics
products. Current products will be compatible with new computer operating
systems. This process has required re-programming hardware product designs. 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.
For the six months ended June 30, 1998, net cash used in operating
activities was $189,000 compared to net cash provided by operating activities
of $268,000 for the same period of 1997. Net cash used in this period increased
as a result of decreases in net income of $11,808,000 (due primarily to the
in-
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process research and development expense of $14,374,000), offset by increases
in accounts receivable of $2,614,000, deferred income taxes of $1,340,000,
inventories of $944,000 and accounts payable of $812,000 and decreases in
income taxes payable of $413,000.
Net cash used in investing activities was $6,370,000 for the six
months ended June 30, 1998 compared to $413,000 for the six months ended June
30, 1997. Net cash used in investing activities increased for the first six
months of 1998 primarily due to the acquisition of CATS for $5,306,000.
Net cash provided by financing activities for the six months ended
June 30, 1998 was $71,000 compared to net cash used in financing activities of
$831 for the six months ended June 30, 1997. The increase in net cash provided
by financing activities was due primarily to the exercise of employee stock
options.
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 June 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 June 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 loan agreement at
June 30, 1998.
The Company's principal commitments at June 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.
The 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 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.
13
14
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 June 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.
In addition, in connection with the acquisition of CATS, the Company
issued 916,668 shares of common stock to the former CATS shareholders plus the
right to receive 333,332 shares of common stock as contingent earn-out depending
on post-closing sales by CATS.
ITEM 5. OTHER INFORMATION
The deadline for submission of shareholder proposals pursuant to Rule
14a-8 under the Securities Exchange Act of 1934, as amended ("Rule 14a-8), for
inclusion in the Company's proxy statement for its 1999 Annual Meeting of
Shareholders is November 25, 1998. After February 9, 1999, notice to the
Company of a shareholder proposal submitted otherwise than pursuant to Rule
14a-8 will be considered untimely, and the persons named in proxies solicited
by the Board of Directors of the Company for its 1999 Annual Meeting of
Shareholders may exercise discretionary voting power with respect to any such
proposal as to which the Company receives after February 9, 1999.
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
14
15
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: August 12, 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
6-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
22,396,863
0
10,121,298
0
5,249,930
38,572,179
2,454,725
1,000,294
43,668,172
4,266,431
0
0
0
11,027
39,254,151
43,668,172
14,404,009
14,404,009
5,461,605
9,256,664
16,770,657
0
7,865
(11,005,644)
(452,898)
(10,552,746)
0
0
0
(10,552,746)
(1.03)
(1.01)
