1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1997 or
[ ] 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
125 Technology Park, Lake Mary, FL 32746
- ---------------------------------------- --------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code): (407) 333-9911
Securities to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -------------------
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definite proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 13, 1998, there were outstanding 9,959,241 shares of Common
Stock. The aggregate market value of the voting stock held by nonaffiliates of
the Registrant based on the last sale price reported on the Nasdaq National
Market as of March 13, 1998 was $119,546,499.38.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
--------- -------------------
Portions of the FARO Technologies, Inc. 1997 Part I, Item 2
Annual Report to Shareholders Part II, Items 5-7
Portions of the Proxy Statement, dated
March 25, 1998 Part III, Items 10-13
2
PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
FARO Technologies, Inc. (the "Company") has made forward-looking
statements in this document that are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future risks preceded by, following or that include the words "believes,"
"expects," "anticipates," or similar expressions. For those statements, the
Company cautions that the numerous important factors discussed elsewhere in this
document could affect the Company's actual results and could cause its actual
consolidated results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company.
ITEM 1. BUSINESS.
INDUSTRY BACKGROUND
The creation of physical products involves the processes of design,
engineering, production and measurement and quality inspection. These basic
processes have been profoundly affected by the computer hardware and software
revolution that began in the 1980s. Computer-aided design ("CAD") software was
developed to automate the design process, providing manufacturers with
computerized 3-D design capability. Today, most manufacturers use some form of
CAD software to create designs and engineering specifications for new products
and to quantify and modify designs and specifications for existing products. The
benefits of CAD are significant. The CAD process offers a three-dimensional,
highly-efficient and inherently flexible alternative to traditional design
methods. Many manufacturers have also recently adopted computer-aided
manufacturing ("CAM") technology, in which CAD data directs machines in the
manufacturing process. CAM has further improved the efficiency and quality of
the production of manufactured goods.
A significant aspect of the manufacturing process which traditionally
has not benefitted from computer-aided technology is measurement and quality
inspection. Historically, manufacturers have measured and inspected products
using hand-measurement tools such as scales, calipers, micrometers and plumb
lines for simple measuring tasks, test fixtures for certain large manufactured
products and traditional coordinate measurement machines ("CMMs") for objects
that require higher precision measurement. However, the broader utility of each
of these measurement methods is limited. Although hand-measurement tools are
often appropriate for simple measurements, their use for complex measurements is
time-consuming and limited in adaptability. Test fixtures (customized fixed
tools used to make comparative measurements of production parts to "master
parts") are relatively expensive and must be reworked or discarded each time a
dimensional change is made in the part being measured. In addition, these manual
measuring devices do not permit the manufacturer to compare the dimensions of an
object with its CAD model.
Conventional CMMs are generally large, fixed-base machines that provide
very high levels of precision but have only recently begun to provide a link to
the CAD model of the object being measured. Fixed-base CMMs require that the
object being measured be brought to the CMM and that the object fit within the
CMM's measurement grid. In addition, conventional CMMs generally operate in
metrology laboratories or environmentally-stable quality inspection departments
of manufacturing facilities rather than on the factory floor.
Isolation from the factory floor and the relatively small measurement
grids of CMMs limit their utility to small, readily portable workpieces that
require high levels of measurement precision. As manufactured subassemblies
increase in size and become integrated into even larger assemblies, they become
less transportable, thus diminishing the utility of a conventional CMM.
Consequently, manufacturers must continue to use hand-measuring tools or
expensive customized test fixtures to measure large or unconventionally shaped
objects.
An increasingly competitive global marketplace has created a demand for
higher quality products with shorter life cycles. While manufacturers previously
designed their products to be in production for longer periods of time, current
manufacturing practices must accommodate more frequent product introductions and
modifications, while satisfying more stringent quality and safety standards. In
most cases, only a relatively small percentage of the components of a
manufactured product requires highly precise measurements (less than
one-thousandth of an inch). Conventional CMMs provide manufacturers with very
precise measurement capabilities and cost up to $2 million per unit. However,
they are not responsive to manufacturers' increasing need for cost-effective
1
3
intermediate precision measurement capabilities. The Company believes that a
greater percentage of components requires intermediate precision measurements
(between one- and twenty-thousandths of an inch). In the absence of intermediate
precision measuring systems, manufacturers often are unable to make appropriate
measurements or part-to-CAD comparisons during the manufacturing process,
resulting in decreased productivity, poor product quality and unacceptable
levels of product rework and scrap. Manufacturers increasingly require more
rapid design, greater control of the manufacturing process, tools to compare
components to their CAD specifications and the ability to measure precisely
components that cannot be measured or inspected by conventional CMMs. Moreover,
they increasingly require measurement capabilities to be integrated into the
manufacturing process and to be available on the factory floor.
FARO'S BUSINESS
The Company designs, develops, markets and supports portable,
software-driven, 3-D measurement systems that are used in a broad range of
manufacturing and industrial applications. The Company's principal products are
the FAROArm(R) articulated measuring device and its companion AnthroCam(R)
software. Together, these products integrate the measurement and quality
inspection function with CAD, CAM and computer-aided engineering ("CAE")
technology to improve productivity, enhance product quality and decrease rework
and scrap in the manufacturing process. The Company's products bring precision
measurement, quality inspection and specification conformance capabilities,
integrated with leading CAD software, to the factory floor. The Company is a
pioneer in the development and marketing of 3-D measurement technology in
manufacturing and industrial applications and currently holds or has pending 17
patents in the United States, 12 of which also are held or pending in other
jurisdictions. The Company's products have been purchased by more than 600
customers worldwide, ranging from small machine shops to such large
manufacturing and industrial companies as General Motors, Chrysler, Ford,
Boeing, Lockheed Martin, General Electric, Westinghouse Electric, Caterpillar
and Komatsu Dresser.
FARO PRODUCTS
THE FAROARM(R). The FAROArm(R) is a portable, six-axis, instrumented,
articulated device that approximates the range of motion and dexterity of the
human arm. Each articulated arm is comprised of three major joints, each of
which may consist of one, two or three axes of motion. The FAROArm(R) is
available in a variety of sizes, configurations and precision levels that are
suitable for a broad range of applications. To take a measurement, the operator
simply touches the object to be measured with a probe at the end of the arm and
presses a button. Data can be captured as either individual points or a series
of points. Digital rotational transducers located at each of the joints of the
arm measure the angles at those joints. This rotational measurement data is
transmitted to an on-board controller that converts the arm angles to precise
locations in 3-D space using "xyz" position coordinates and "ijk" orientation
coordinates.
The FAROArm(R) has been designed as an open architecture system. The
communications parameters of the on-board processors have the ability to combine
advanced sensing probes, integrate with conventional CMM software and
communicate with different CAD software packages and a variety of computer
operating systems. This open architecture is designed to provide for easy
integration of the FAROArm(R) into the manufacturing environment. The customer's
ability to use an installed base of computing hardware and software further
reduces the cost of installation and training while initiating the transition to
the Company's preferred group of CAD-based products. To encourage integration of
the FAROArm(R) into the manufacturing environment, the Company provides a group
of seamless interface drivers for leading CAD/CAM packages, including
AutoCAD(R), CADKey(R) and SURFCAM(R). The Company also provides a full serial
communication command protocol to the FAROArm(R) for customers who write their
own interfaces.
The Company offers several models of the FAROArm(R) under two product
lines: the Silver Series and the Bronze Series.
SILVER SERIES. The Silver Series models are the Company's
higher precision (P.003 to P.007 inches) measuring devices and are
available in six, eight and twelve foot measurement diameters. These
models are most frequently used for factory floor inspection and
fit-checking applications. Depending on the size, configuration and
precision level, the Silver Series models are priced between $50,000
and $70,000 when sold as a turnkey system including hardware and
AnthroCam(R) software and between $30,000 and $60,000 without
AnthroCam(R) software.
2
4
BRONZE SERIES. The Bronze Series models are the Company's
medium precision (P.012 to P.016 inches) measuring devices and are
available in six, eight and ten foot measurement diameters. These
models are most frequently used for applications that do not require
high-level precision, such as 3-D modeling, mold production and
reverse-engineering applications. Depending on the size, configuration
and precision level, the Bronze Series models are priced between
$30,000 and $50,000 when bundled with AnthroCam(R) software and between
$14,000 and $23,000 without AnthroCam(R) software.
ANTHROCAM(R). AnthroCam(R) is the Company's proprietary measurement
software. It is built on the AutoCAD/AutoSurf software development platform,
which allows users to benefit from extensive hardware, software, interfacing and
product support libraries and teaching products. AnthroCam(R) software is
offered with the FAROArm(R) and is also offered as an unbundled product. When
unbundled from the FAROArm(R), AnthroCam(R) sells for $15,000.
AnthroCam(R) is the Company's software-based bridge to CAD and CAM; it
allows users to compare measurements of manufactured components with complex CAD
data. In conventional design applications, curved or ergonomic shapes are
typically modeled physically and then converted into data for manufacturing.
AnthroCam(R) provides an alternative to the time and expense of this physical
modeling process with a digital solution. For older parts without data files,
AnthroCam(R) enables pre-existing parts to be measured in order to adapt them to
current manufacturing technologies.
AnthroCam(R) has been designed as an open architecture system, allowing
for efficient integration into the manufacturing environment. The Company
provides a full serial communication command protocol to the AnthroCam(R)
software for customers who write interfaces to their own software. The Company
also provides comprehensive training and support for AnthroCam(R) and offers
this product in a number of international versions.
AnthroCam(R) is a Windows-based, 32-bit application written for the
most recent PC-based technology. AnthroCam(R) has been entirely designed and
programmed by the Company utilizing field input and industry wide beta site
installations. AnthroCam(R) is written as an AutoCAD runtime extension (ARX)
that is the AutoCAD(R) Application Programming Interface (API). The software is
written in the C++ development language using Microsoft Foundation Class (MFC)
standards. The software fully implements UNICODE standards for worldwide
translation allowing the Company to create foreign language versions to enter
international markets more effectively.
SPECIALTY PRODUCTS. The Company licenses and supports certain specialty
products based on its articulated arm technology that are used in medical and
multimedia applications. License and support fees from these products do not
represent a significant portion of the Company's revenues and the Company does
not intend to actively market these products.
The Company's products overcome many limitations of hand-measurement
tools, test fixtures and conventional CMMs by incorporating the following
features:
INTEGRATION WITH CAD TECHNOLOGY. The Company's products
provide a bridge between the virtual 3-D world of the CAD process and
the physical 3-D world of the factory floor. The interface to CAD
allows manufacturers to integrate design, production and measurement
and quality inspection processes on a common software platform. The
Company believes that this integration creates significant savings by
reducing the need for test fixtures and improves productivity by
reducing production set-up times. Finally, the Company's integration
with CAD technology significantly enhances product quality by
maximizing the opportunities to make precise measurements based on
engineering specifications within the manufacturing process.
SIX-AXIS ARTICULATING ARM. The FAROArm(R) incorporates a
six-axis instrumented, articulating device that approximates the range
of motion and dexterity of the human arm. The flexibility of the
FAROArm(R) enables the user to measure complex shapes and ergonomic
structures and to reach behind, underneath and into previously
inaccessible spaces, such as interior surfaces of aircraft or
automobiles. The flexibility of the FAROArm(R) allows customers to
measure more accurately and efficiently than previously possible.
3
5
PORTABILITY AND ADAPTABILITY. The FAROArm(R) is lightweight,
portable and designed for operation in the often harsh environments
typical of manufacturing facilities. The FAROArm(R) can be moved to
multiple locations on the factory floor to measure large parts and
assemblies that cannot be easily moved to a conventional CMM. This
portability extends 3-D measurement to previously inaccessible areas of
the factory floor and eliminates the travel time to and from quality
inspection departments.
LEVELS OF PRECISION RESPONSIVE TO INDUSTRY NEEDS. The
Company's products respond to manufacturers' need for intermediate
levels of measurement precision. Although high levels of precision
(less than one-thousandth of an inch) are required for certain
manufacturing applications, the FAROArm(R) satisfies the greater demand
for measurements that require intermediate precision (one- to
twenty-thousandths of an inch). The Company's products meet the
precision measurement requirements of a substantial portion of products
in the manufacturing process and address the underserved market for
intermediate precision measurement systems.
BROAD AFFORDABILITY. The Company offers various models of the
FAROArm(R) ranging in price from $14,000 to $70,000, while conventional
CMMs range in price from $20,000 to $2 million. The relatively low cost
of the Company's products compared to conventional CMMs has afforded
manufacturers the opportunity to introduce cost-effective measurement
and quality inspection functions throughout the manufacturing process.
Manufacturers are able to purchase multiple units to be used at
different locations within a single manufacturing facility and to
introduce measurement and quality inspection at additional points in
the manufacturing process.
EASE OF USE. The Company's software products have been
specifically designed to be used by production line personnel with
minimal prior computer or CAD experience. The bundled hardware and
software system is designed to require minimal training for production
line personnel to reach proficiency with the product. To take a
measurement, the operator simply touches the object to be measured with
a probe at the end of the arm and presses a button. The FAROArm(R) is
also ergonomically designed to facilitate use in typical factory floor
applications.
PAPERLESS DATA COLLECTION. The FAROArm(R) allows for paperless
data collection by a connected computer hosting related CAD application
software. This function responds to current trends toward automated
statistical process controls for facilitating data analysis. Paperless
data collection improves productivity and eliminates the risk of error
in transcribing the collected information.
OPEN ARCHITECTURE. The FAROArm(R) and AnthroCam(R) have been
designed as an open architecture system, allowing the user to unbundle
the hardware and software to interface the FAROArm(R) with other
CAD-based software packages and to interface AnthroCam(R) with other
3-D measurement devices. In addition, the Company's software and
hardware are built in accordance with computer and communications
industry standards so that these products may be integrated with a
broad range of application software packages.
4
6
CUSTOMERS
The Company's products have been purchased by more than 600 customers
ranging from small machine shops to large manufacturing and industrial
companies. The Company's ten largest customers by revenue represented an
aggregate of 15% of the Company's total revenues in 1997. No customer
represented 10.0% or more of the Company's sales in 1997. The following table
illustrates, by vertical market, the Company's diverse customer base:
AEROSPACE APPAREL AND FOOTWEAR AUTOMOTIVE
Boeing Nike AO Smith Johnson Controls
GE Aircraft Engines Reebok Chrysler Lear Corporation
Lockheed Martin Ford Mercedes Benz
Nordam Repair Division General Motors Porsche
Northrop Grumman Honda Samsung Motors
Orbital Sciences Hyundai Toyota
Dee Howard Vehma International
BUSINESS AND CONSUMER ELECTRIC UTILITIES AND FARM/LAWN EQUIPMENT
MACHINES MANUFACTURERS New Holland North America
Corning Asahi General Electric Toro
Xerox Southern California Edison
Tennessee Valley Authority
Westinghouse Electric
HEAVY EQUIPMENT PERSONAL ROAD/ PLASTICS
MANUFACTURERS WATER/SNOW CRAFT Able Design Plastics
Caterpillar Harley Davidson Paramount Plastics
Komatsu Dresser Polaris Industries Thermoform Plastics
Champion Road Machinery
Texas Steel
SALES AND MARKETING
The Company directs its sales and marketing efforts from its
headquarters in Lake Mary, Florida. At December 31, 1997, the Company employed
34 sales professionals who operate from the Company's headquarters, five
domestic regional sales offices located in Chicago, Dallas, Detroit, Los Angeles
and Seattle, and three international sales offices located in Coventry, United
Kingdom, St. Jean de Braye, France, and Ulm, Germany. The Company also utilizes
three domestic and 12 international distributors in territories where the
Company does not have regional sales offices. See Footnote 10 to the Notes to
Consolidated Financial Statements incorporated by reference from the Company's
1997 Annual Report to Stockholders for financial information about the Company's
foreign and domestic operations and export sales required by this Item.
The Company uses a process of integrated lead qualification and sales
demonstration. Once a customer opportunity is identified, the Company employs a
team-based sales approach involving inside and outside sales personnel who are
supported by application engineers.
The Company employs a variety of marketing techniques, including direct
mail, trade shows, and advertising in trade journals, and proactively seeks
publicity opportunities for customer testimonials. Management believes that
word-of-mouth advertising from the Company's existing customers provides an
important marketing advantage. The Company also has a computerized sales and
marketing software system with telemarketing, lead tracking and analysis, as
well as customer support capabilities. Each of the Company's sales offices is
linked electronically to the Company's headquarters.
In June 1996, the Company entered into an OEM agreement with Mitutoyo
Corporation ("Mitutoyo"), a Japanese company that is the world's largest
manufacturer of metrology tools. Mitutoyo markets the FAROArm(R)
5
7
in Japan under the name SPINARM(R). The agreement, which grants Mitutoyo a
non-exclusive right to sales in Japan, expires in June 1999 and is renewable for
successive one year terms.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to
achieve technological leadership, which will require ongoing enhancements of its
products and the development of new applications and products that provide 3-D
measurement solutions. Accordingly, the Company intends to continue to make
substantial investments in the development of new technologies, the
commercialization of new products that build on the Company's existing
technological base and the enhancement and development of additional
applications for its products.
The Company's research and development efforts are directed primarily
at enhancing the technology of its current products and developing new and
innovative products that respond to specific requirements of the emerging market
for 3-D measurement systems. The Company's research and development efforts have
been devoted primarily to mechanical hardware, electronics and software. The
Company's engineering development efforts will continue to focus on the
FAROArm(R) and AnthroCam(R) products. Significant efforts are also being
directed toward the development of new measurement technologies and additional
features for existing products. See "Technology."
At December 31, 1997, the Company employed 14 scientists and
technicians in its research and development efforts. Research and development
expenses were $1,076,000 in 1997. Research and development activities,
especially with respect to new products and technologies, are subject to
significant risks, and there can be no assurance that any of the Company's
research and development activities will be completed successfully or on
schedule, or, if so completed, will be commercially accepted.
TECHNOLOGY
The primary measurement function of the FAROArm(R) is to provide
orientation and position information with respect to the probe at the end of the
FAROArm(R). This information is processed by software and can be compared to the
desired dimensions of the CAD data of a production part or assembly to determine
whether the measured data conforms to meet dimensional specifications.
To accomplish this measurement function, the FAROArm(R) is designed as
an articulated arm with six or seven joints. The arm consists of aluminum links
and rotating joints that are combined in different lengths and configurations,
resulting in human arm-like characteristics. Each joint is instrumented with a
rotational transducer, a device used to measure rotation, which is based on
optical digital technology. The position and orientation of the probe in three
dimensions is determined by applying trigonometric calculations at each joint.
The position of the end of a link of the arm can be determined by using the
angle measured and the known length of the link. Through a complex summation of
these calculations at each joint, the position and orientation of the probe is
determined.
The Company's products are the result of a successful integration of
state-of-the-art developments in mechanical and electronic hardware and
applications software. The unique nature of the Company's technical developments
is evidenced by the Company's numerous U.S. and international patents. The
Company maintains low cost product design processes by retaining development
responsibilities for all electronics, hardware and software.
MECHANICAL HARDWARE. The FAROArm(R) is designed to function in diverse
environments and under rigorous physical conditions. The arm monitors its
temperature to adjust for environments ranging from -10 degrees to +50 degrees
Celsius. The arm is constructed of pre-stressed precision bearings to resist
shock loads. Low production costs are attained by the proprietary combination of
reasonably priced electromechanical components accompanied by the optimization
and on-board storage of calibration data. Many of the Company's innovations
relate to the environmental adaptability of its products. Significant features
include integrated counter-balancing, configuration convertibility and
temperature compensation.
ELECTRONICS. The rotational information for each joint is processed by
an on-board computer that is designed to handle complex analyses of joint data
as well as communications with a variety of host computers. The Company's
electronics are based on digital signal processing and surface mount
technologies. The Company's products meet all mandatory electronic safety
requirements. Advanced circuit board development, surface mount production and
automated testing methods are used to ensure low cost and high reliability.
6
8
SOFTWARE. AnthroCam(R) is a Windows-based, 32-bit application written
for the most recent PC-based technology. AnthroCam(R) has been entirely designed
and programmed by the Company utilizing field input and industry wide beta site
installations. AnthroCam(R) is written as an AutoCAD runtime extension (ARX)
that is the AutoCAD(R) Application Programming Interface (API). The software is
written in the C++ development language using Microsoft Foundation Class (MFC)
standards. The software fully implements UNICODE standards for worldwide
translation allowing the Company to create foreign language versions to enter
international markets more effectively. The software is developed with the
cooperation of diverse user beta sites and a well developed system for tracking
and implementing market demands.
INTELLECTUAL PROPERTY
The Company holds or has pending 17 patents in the United States, 12 of
which also are held or pending in other jurisdictions. The Company also has 16
registered trademarks in the United States and 12 trademark applications pending
in the United States and the European Union.
The Company relies on a combination of contractual provisions and trade
secret laws to protect its proprietary information. There can be no assurance
that the steps taken by the Company to protect its trade secrets and proprietary
information will be sufficient to prevent misappropriation of its proprietary
information or to preclude third-party development of similar intellectual
property.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The Company
intends to vigorously defend its proprietary rights against infringement by
third parties. However, policing unauthorized use of the Company's products is
difficult, particularly overseas, and the Company is unable to determine the
extent to which piracy of its software products exists. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as the laws of the United States.
The Company does not believe that any of its products infringe on the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to current
or future products. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
MANUFACTURING AND ASSEMBLY
The Company manufactures its products primarily at its headquarters in
Lake Mary, Florida. Manufacturing consists primarily of assembling components
and subassemblies purchased from suppliers into finished products. The primary
components, which include machined parts and electronic circuit boards, are
produced by subcontractors according to the Company's specifications. All
products are assembled, calibrated and finally tested for accuracy and
functionality before shipment. In limited circumstances, the Company performs
in-house circuit board assembly and part machining.
"Quality" has rapidly emerged as a new emphasis in commerce and
industry, and is a significant factor in international trade. Various national
and multinational standards have been developed in the quality systems arena for
commercial and industrial use. The ISO 9000 series of quality assurance
standards ("ISO 9000"), which is administered by the American National Standards
Institute, was developed to bring together existing multinational standards and
to provide consistence in quality and terminology. ISO 9000 Certification
demonstrates that a company has implemented an adequate quality system for
products and services it offers. By this, better internal commitment, as well as
enhanced purchaser confidence, may be achieved. The Company's facilities and
operations are in the process of completing requirements for ISO 9000
registration, and management anticipates that the Company's ISO 9000
certification will be completed in 1998.
7
9
COMPETITION
The broad market for measurement devices, which includes
hand-measurement tools, test fixtures and conventional, fixed-base CMMs, is
highly competitive. Manufacturers of hand-measurement tools and traditional CMMs
include a significant number of well-established companies that are
substantially larger and possess substantially greater financial, technical and
marketing resources than the Company. There can be no assurance that these
entities or others will not succeed in developing products or technologies that
will directly compete with those of the Company. The Company will be required to
make continued investments in technology and product development to maintain its
technological advantage over its competition. There can be no assurance that the
Company will have sufficient resources to make such investments or that the
Company's product development efforts will be sufficient to allow the Company to
compete successfully as the industry evolves. The Company's products compete on
the basis of portability, accuracy, application features, ease-of-use, quality,
price and technical support.
The Company's only significant direct competitor is a joint venture of
Romer SRL (France) and Romer, Inc. (California). The Company is aware of a
direct competitor in Germany and two new direct competitors in Italy, each of
which the Company believes currently has negligible sales. The Company also has
an established, indirect competitor in Japan that markets a measuring device
that is mobile but not portable. There can be no assurance that such companies
will not devote additional resources to the development and marketing of
products that compete with those of the Company.
The worldwide trend toward CAD-based factory floor metrology has
resulted in the introduction of CAD-based inspection software for conventional
CMMs by most of the large CMM manufacturers. Certain CMM manufacturers are
miniaturizing, and in some cases increasing the mobility of, their conventional
CMMs. Nonetheless, these CMMs still have small measurement volumes, lack the
adaptability typical of portable, articulated arm measurement devices and lose
accuracy outside the controlled environment of the metrology lab.
BACKLOG
At December 31, 1997, the Company had orders representing $1.7 million
in sales. All outstanding orders at December 31, 1997, were shipped by February
28, 1998. The Company affords its customers the right to cancel any order at any
time before the product is shipped. Historically, the number of canceled orders
has been negligible. Nonetheless, there can be no assurance that all orders in
backlog will be shipped, and backlog may not be indicative of future sales.
EMPLOYEES
At December 31, 1997, the Company had 111 full time employees,
consisting of 34 sales/application engineering staff, 32 production staff, 14
research and development staff, 18 administrative staff, and 13 customer service
specialists. None of the Company's employees is represented by a labor
organization, and the Company is not a party to any collective bargaining
agreements. The Company believes its employee relations are good. Management
believes that its future growth and success will depend in part on its ability
to retain and continue to attract highly skilled personnel. The Company
anticipates that it will obtain the additional personnel required to satisfy the
staffing requirements caused by its planned expansion over the next 18 months.
8
10
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, as well as certain key
employees, and their ages, are as follows:
Name Age Principal Position
---- --- ------------------
Executive Officers:
Simon Raab.......................... 44 Chairman of the Board, Chief Executive Officer, and
President
Gregory A. Fraser................... 42 Chief Financial Officer, Executive Vice President, Secretary,
and Treasurer
Key Employees:
Daniel T. Buckles................... 42 Vice President--Sales
Ali S. Sajedi....................... 37 Chief Engineer
SIMON RAAB, PH.D., a co-founder of the Company, has served as the
Chairman of the Board, Chief Executive Officer and a director of the Company
since its inception in 1982 and as President since 1986. Mr. Raab holds a Ph.D.
in Mechanical Engineering from McGill University, Montreal, Canada, a Masters of
Engineering Physics from Cornell University and a Bachelor of Science in Physics
with a minor in Biophysics from the University of Waterloo, Canada.
GREGORY A. FRASER, PH.D., a co-founder of the Company, has served as
Chief Financial Officer and Executive Vice President since May 1997 and as
Secretary, Treasurer and a director of the Company since its inception in 1982.
Mr. Fraser holds a Ph.D. in Mechanical Engineering from McGill University,
Montreal, Canada, a Masters of Theoretical and Applied Mechanics from
Northwestern University and a Bachelor of Science and Bachelor of Mechanical
Engineering from Northwestern University.
DANIEL T. BUCKLES has been Vice President--Sales for the Company since
May 1997. From 1993 to May 1997, he served as the Director of Marketing for the
Company's Industrial Products Group. From 1991 to 1993, Mr. Buckles was the
Manager of Product Assurance Technical Operations for the Aerospace and Naval
Division of Martin Marietta Corporation. From 1987 to 1991, Mr. Buckles held
program management positions for a variety of advanced development and
manufacturing programs at Martin Marietta Corporation. From 1976 to 1987, Mr.
Buckles held various program management and manufacturing positions at the
Submarine Signal Division of Raytheon Company. Mr. Buckles holds a Bachelor of
Arts in Theoretical and Quantitative Economics and a Masters of Business
Administration from the University of Massachusetts--Dartmouth.
ALI S. SAJEDI has been Chief Engineer for the Company since its
inception in 1982. Mr. Sajedi has been responsible for implementation of
research and development plans and for production oversight of the Company's
self-managed production team. Mr. Sajedi holds a Bachelor of Mechanical
Engineering from McGill University.
ITEM 2. PROPERTIES.
The Company's headquarters and principal operations are located in a
leased building in Lake Mary, Florida containing approximately 35,000 square
feet. The Company believes that its current facilities will be adequate for its
foreseeable needs and that it will be able to locate suitable space for
additional regional offices as those needs develop.
In addition, the Company has five sales offices in the United States
and three sales offices in Europe. All of the offices comprising the sales
offices are leased by the Company. The information required by the remainder of
this Item is incorporated by reference from the inside back cover page of the
Company's 1997 Annual Report to Stockholders.
9
11
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company may be involved in litigation incidental
to its business. Currently, the Company is not a party to any litigation, and is
not aware of any pending or threatened litigation, that is expected to have a
material adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of calendar 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The market information required by this Item is incorporated by
reference from the inside back cover page of the Company's 1997 Annual Report to
Stockholders. As of March 24, 1998, there were 9,959,241 shares of the Company's
Common Stock, par value $.001, outstanding, held by 70 shareholders of record.
The prospectus comprising part of the Company's Registration Statement
on Form S-1, File No. 333-32983, was declared effective by the Securities and
Exchange Commission on September 17, 1997. The managing underwriters were
Raymond James & Associates, Inc. and Hanifen, Imhoff, Inc. Common Stock was the
only class of securities registered. The offering closed on September 17, 1997
upon the sale by the Company of an aggregate of 2,919,000 shares of Common
Stock, including 159,000 shares sold pursuant to the over-allotment option
granted to the underwriters ("over-allotment"), and upon the sale of an
aggregate of 945,000 shares of Common Stock by selling shareholders, including
345,000 shares sold pursuant to the over-allotment.
The offering price of all shares sold pursuant to the Prospectus was
$12.00 per share. Total offering proceeds derived from the sale of Common Stock
by the Company and selling shareholders aggregated $35,028,000 and $11,340,000,
respectively, including $1,908,000 and $4,140,000 attributable to the
over-allotment. Expenses incurred by the Company in connection with the offering
to December 31, 1997 include estimated offering expenses of $899,000, and
underwriters' discount of $2,452,000, including $134,000 attributable to the
over-allotment. The selling shareholders incurred underwriters' discounts
aggregating $793,000, including $289,000 attributable to the over-allotment. No
payments were made to directors, officers, or their associates, or to persons
holding 10% or more of the Company's Common Stock, or to any other affiliate of
the Company in connection with the offering.
Net offering proceeds received by the Company, after deducting its
expenses and underwriters' discounts, aggregate $31,677,000, including
$1,774,000 attributable to the over-allotment. The Company did not receive
proceeds from the shares sold by the selling shareholders.
As of December 31, 1997, none of the proceeds of the offering were used
for construction of plant, building and facilities; purchase and installation of
machinery and equipment; purchase of real estate; or acquisition of other
businesses. Approximately $600,000 was used to repay indebtedness, $2.7 million
was used as working capital, and $28 million was invested in money market
investments, obligations of the United States government and its agencies and
obligations of state and local government agencies, all with maturities of less
than three months. No payments were made to directors, officers, or their
associates, to persons holding 10% or more of the Company's Common Stock, or to
any other affiliate of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is incorporated by reference from
page 9 of the Company's 1997 Annual Report to Stockholders.
10
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information required by this Item is incorporated by reference from
pages 10 through 14 of the Company's 1997 Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
----
Independent Auditors' Report.............................................................................. 12
Consolidated Balance Sheets as of December 31, 1996 and 1997.............................................. 13
Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997.................... 14
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997....................................................................... 15
Consolidated Statements of Cash Flows for the years Ended
December 31, 1995, 1996 and 1997....................................................................... 16
Notes to Consolidated Financial Statements................................................................ 17
11
13
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of FARO Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of FARO
Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of FARO Technologies, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Jacksonville, Florida
February 13, 1998
12
14
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
------------------------
1997 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $28,815,069 $ 263,342
Accounts receivable - net of allowance 6,159,173 2,992,681
Inventories 4,275,376 3,298,744
Prepaid expenses 109,649 40,871
Deferred taxes 126,572 102,500
----------- ----------
Total current assets 39,485,839 6,698,138
----------- ----------
PROPERTY AND EQUIPMENT - At cost:
Leasehold improvements 14,938
Machinery and equipment 1,014,309 700,799
Furniture and fixtures 605,913 453,892
----------- ----------
Total 1,620,222 1,169,629
Less accumulated depreciation 792,442 568,279
----------- ----------
Property and equipment - net 827,780 601,350
----------- ----------
PATENTS AND LICENSES - net of accumulated amortization of
$321,261 and $270,925, respectively 639,693 486,480
PRODUCT DESIGN COSTS 108,286
DEFERRED TAXES 130,735 29,700
----------- ----------
TOTAL ASSETS $41,192,333 $7,815,668
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ $ 611,111
Accounts payable and accrued liabilities 1,196,967 1,710,814
Income taxes payable 413,167 128,216
Current portion unearned service revenues 476,802 185,180
Customer deposits 121,358 230,393
----------- ----------
Total current liabilities 2,208,294 2,865,714
----------- ----------
UNEARNED SERVICE REVENUES - less current portion 44,628 286,099
LONG-TERM DEBT - less current portion 890,156
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY:
Class A preferred stock - par value $.001, 10,000,000
shares authorized, no shares issued and outstanding
Common stock - par value $.001, 20,000,000 shares
authorized, 9,919,000 and 7,000,000 issued and
outstanding, respectively 9,919 7,000
Additional paid-in capital 36,502,004 3,961,564
Retained earnings (accumulated deficit) 3,018,265 (188,365)
Unearned compensation (464,480) (6,500)
Cumulative translation adjustments (126,297)
----------- ----------
Total shareholders' equity 38,939,411 3,773,699
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $41,192,333 $7,815,668
=========== ==========
See notes to consolidated financial statements.
13
15
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
---------------------------------------------
1997 1996 1995
SALES $23,516,385 $14,656,337 $9,862,242
COST OF SALES 9,610,838 6,486,268 4,987,779
----------- ----------- ----------
Gross profit 13,905,547 8,170,069 4,874,463
----------- ----------- ----------
OPERATING EXPENSES:
Selling 5,676,113 3,731,762 2,008,301
General and administrative 1,519,657 744,206 503,184
Depreciation and amortization 293,996 230,799 341,494
Research and development 1,075,505 730,124 363,871
Employee stock options 408,000 23,100 106,700
----------- ----------- ----------
Total operating expenses 8,973,271 5,459,991 3,323,550
----------- ----------- ----------
INCOME FROM OPERATIONS 4,932,276 2,710,078 1,550,913
----------- ----------- ----------
OTHER INCOME (EXPENSE):
Other income 499,752 25,145 62,212
Interest expense (110,768) (212,669) (355,468)
----------- ----------- ----------
INCOME BEFORE INCOME TAXES 5,321,260 2,522,554 1,257,657
INCOME TAX EXPENSE (BENEFIT) 2,114,630 1,115,892 (342,000)
----------- ----------- ----------
NET INCOME $ 3,206,630 $ 1,406,662 $1,599,657
=========== =========== ==========
NET INCOME PER COMMON SHARE - BASIC $ 0.41 $ 0.20 $ 0.23
NET INCOME PER COMMON SHARE - ASSUMING DILUTION $ 0.39 $ 0.19 $ 0.22
See notes to consolidated financial statements.
14
16
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
RETAINED
COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE
-------------------- PAID-IN (ACCUMULATED UNEARNED TRANSLATION
SHARE AMOUNTS CAPITAL DEFICIT) COMPENSATION ADJUSTMENT TOTAL
BALANCE, JANUARY 1, 1995 7,000,000 $ 7,000 $ 3,825,264 $ (3,194,684) $ 637,580
Granting of employee and
director stock options 146,500 $ (39,800) 106,700
Net income 1,599,657 1,599,657
--------- ------- ----------- ------------ ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1995 7,000,000 7,000 3,971,764 (1,595,027) (39,800) 2,343,937
Employee stock options,
forfeitures and amortization
of unearned compensation (10,200) 33,300 23,100
Net income 1,406,662 1,406,662
--------- ------- ----------- ------------ ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1996 7,000,000 7,000 3,961,564 (188,365) 6,500 3,773,699
Granting of employee and
director stock options 866,793 (501,834) 364,959
Amortization of unearned
compensation 43,854 43,854
Issuance of common stock 2,919,000 2,919 31,673,647 31,676,566
Currency translation
adjustment $ (126,297) (126,297)
Net income 3,206,630 3,206,630
--------- ------- ----------- ------------ ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1997 9,919,000 $ 9,919 $36,502,004 $ 3,018,265 $ (464,480) $ (126,297) $38,939,411
========= ======= =========== ============ ============ ========== ===========
See notes to consolidated financial statements.
15
17
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
------------------------------------------
1997 1996 1995
OPERATING ACTIVITIES:
Net Income $ 3,206,630 $ 1,406,662 $ 1,599,657
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 293,996 230,799 341,494
Product design costs 531,186
Employee stock options 408,000 23,100 106,700
Provision for bad debts 28,432 24,806
Provision for obsolete inventory 27,629
Deferred income taxes (125,107) 232,800 (365,000)
Loss on the sale of fixed assets 10,850
Changes in operating assets and liabilities:
Decrease (Increase) in:
Accounts receivable (3,292,789) (843,349) (1,147,174)
Notes receivable 47,947
Inventory (976,632) (1,230,457) (453,120)
Prepaid expenses and other assets (68,778) 55,435 (47,193)
Increase (Decrease) in:
Accounts payable and accrued liabilities (513,847) 990,993 126,925
Income taxes payable 284,951 105,216 23,000
Unearned service revenues 50,151 471,278
Customer deposits (109,035) 53,460 118,865
------------ ----------- -----------
Net cash (used in) provided by operating activities (831,610) 1,524,369 935,722
------------ ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (480,127) (416,162) (210,868)
Payments of patent costs (203,549) (134,046) (74,088)
Payments for product design costs (108,286)
------------ ----------- -----------
Net cash used in investing activities (791,962) (550,208) (284,956)
------------ ----------- -----------
FINANCING ACTIVITIES:
Repayment of related party loans (2,200,000) (725,000)
Proceeds from debt 1,625,816
Payments on debt (1,501,267) (140,556)
Proceeds from issuance of common stock, net 31,676,566
------------ ----------- -----------
Net cash provided by (used in) financing activities 30,175,299 (714,740) (725,000)
INCREASE (DECREASE) IN CASH 28,551,727 259,421 (74,234)
CASH, BEGINNING YEAR 263,342 3,921 78,155
------------ ----------- -----------
CASH, END OF YEAR $ 28,815,069 $ 263,342 $ 3,921
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 110,768 $ 256,654 $ 352,987
============ =========== ===========
Cash paid for income taxes $ 1,951,286 $ 777,876 $
============ =========== ===========
See notes to consolidated financial statements.
16
18
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - FARO Technologies, Inc. (the "Company") develops,
manufactures, markets and supports portable, software-driven, 3-D measurement
systems that are used in a broad range of manufacturing and industrial
applications. The Company has two wholly-owned subsidiaries, FARO Worldwide,
Inc. and FARO FRANCE, s.a.s., which distribute the Company's 3-D measurement
equipment throughout Europe through three primary offices located in France,
Germany and the United Kingdom, Faro France, s.a.s. commenced operations in
July 1996.
PRINCIPLES OF CONSOLIDATION - The Company has one foreign subsidiary located in
France. The financial statements of this subsidiary are translated from French
francs into US dollars using exchange rates in effect at period end for assets
and liabilities and average exchange rates during each reporting period for
results of operations. Adjustments resulting from translation of financial
statements are reflected as a separate component of shareholders equity.
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
REVENUE RECOGNITION, PRODUCT WARRANTY AND EXTENDED MAINTENANCE CONTRACTS -
Revenue related to the Company's 3-D measurement equipment is recognized upon
shipments as the Company considers the earnings process substantially complete
as of the shipping date. Revenue from sales of software only is not recognized
unless remaining obligations under the sales agreement are insignificant.
Revenues resulting from sales of comprehensive support, training and technology
consulting services are recognized as such services are performed. Extended
maintenance plan revenues are recognized proportionately as maintenance costs
are projected to be incurred. Prior to November 1, 1997 such revenues were
recognized ratable over the contract term. The change in estimate with respect
to the recognition of such revenues more accurately matches revenues with costs
incurred. The Company warrants its products against defects in design,
materials and workmanship for one year. A provision for estimated future costs
relating to warranty expenses is recorded when products are shipped.
Costs relating to extended maintenance plans are recognized as incurred.
In June 1996, the Company entered into an OEM agreement with Mitutoyo
Corporation, a Japanese company which manufactures and markets metrology tools.
Under the agreement, Mitutoyo sells the Company's products under the name
SPINARM. The agreement, which grants Mitutoyo a nonexclusive right to sales in
Japan expires in June 1999, and is renewable for successive one year terms.
One customer accounted for approximately 10% for total sales for the year ended
December 31, 1996.
CASH AND CASH EQUIVALENTS - The Company considers cash on hand and amount on
deposit with financial institutions which have original maturities of three
months or less to be cash.
INVENTORIES - Inventories are stated at the lower of average cost or market
value. For 1996, inventories are stated at the lower of cost (determined on the
first-in, first-out method) or market value. The change from the first-in,
first-out method to the average cost method of inventory valuation did not have
a material effect on the Company's consolidated financial statements Such
change was made due to potentially significant price variances that result from
factors such as rush orders and technological
17
19
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
improvements relating to components. Accordingly, the Company believes
average cost more accurately reflect the value of its inventory. In order
to achieve a better matching of production costs with the revenues
generated in production, certain fixed overhead costs and certain general
and administrative costs that are related to production are capitalized
into inventory when they are incurred and are charged to cost of sales as
product costs at the time of sale. Such amounts are not material to the
consolidated financial statements.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is computed using the straight-line and declining-balance
methods over the estimated useful lives of the various classes of assets
as follows:
Machinery and equipment 5 years
Furniture and fixtures 5 years
computer equipment 2 years
Leasehold improvements are amortized on the straight-line basis over the
lesser of the life of the asset or the term of the lease.
PATENTS - Patents are recorded at cost. Amortization is computed using the
straight-line method over the lives of the patents, which is 17 years. In
addition, unamortized patents of $192,570 relating to certain products
sold in the medical field were charged to amortization expense in 1995 due
to the discontinuance of those products.
RESEARCH AND DEVELOPMENT - Research and development costs incurred in the
discovery of new knowledge and the resulting translation of this new
knowledge into plans and designs for new products, prior to the attainment
of the related products' technological feasibility, are recorded as
expenses in the period incurred.
PRODUCT DESIGN COSTS - Costs incurred in the development of products after
technological feasibility is attained are capitalized and amortized using
the straight-line method over the estimated economic lives of the related
products, not to exceed three years. The Company considers technological
feasibility to be established when the Company has completed all planning,
designing, coding, and testing activities that are necessary to establish
that a product's software and hardware components can be produced to meet
design specifications including function, features, and technical
performance requirements. Capitalization of Product Design Costs ceases
and amortization of such costs begins when the product is available for
general release to customers. During 1996 and 1995 the Company's products
had an economic life of less than one year due to the rate of
technological development. As a result, $531,186 of unamortized product
design costs at January 1, 1995 were charged to cost of sales in 1995.
18
20
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
INCOME TAXES - The Company utilizes the asset and liability method to
measure and record deferred income tax assets and liabilities. Under the
asset and liability method, deferred tax assets and liabilities are
recognized for the future consequences attributed to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
EARNINGS PER SHARE - During the year ended December 31, 1997, the Company
adopted SFAS No. 128, "Earnings per Share" (SFAS 128). This Statement
establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicity held common stock or
potential common stock. This Statement replaces the presentation of
primary EPS and fully diluted EPS with a presentation of basic EPS and
diluted EPS, respectively. Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the weighted-average
number of common shares outstanding for the period. Similar to fully
diluted EPS, diluted EPS reflects the potential dilution of securities
that could share in the earnings. All EPS data presented has been restated
to conform with the requirements of SFAS 128. A reconciliation of the
number of common shares used in calculation of basic and diluted EPS is
presented below:
Years Ended December 31
------------------------------------------------------------------
1997 1996 1995
PER-SHARE PER-SHARE PRE-SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
Basic EPS
Weighted-Average Shares 7,831,715 $ 0.41 7,000,000 $ 0.20 7,000,000 $ 0.23
Effect of Dilutive Securities
Stock Options 355,495 349,041 166,739
Warrants 1,838
--------- --------- ---------
Diluted EPS
Weighted-Average Shares
Assumed Conversions 8,189,048 $ 0.39 7,349,041 $ 0.19 7,166,739 $ 0.22
--------- ------- --------- ---------
Earnings per share for the years ended December 31, 1995 and 1996 were
computed as follows: (1) 7,000,000 common shares issued and outstanding
each year, plus (ii) 149,690 common shares issuable under the 1997 stock
option grants based on the treasury stock method assuming an initial
public offering price of $11.00 per share, plus (iii) common shares
issuable under the 1995 stock options granted under the 1993 stock option
plan of 17,050 in 1995 and 199,352 in 1996, respectively, based on the
treasury stock method assuming an initial public offering price of $11.00
per share.
REVERSE STOCK SPLIT - All per share amounts, number of common shares and
capital accounts in the accompanying financial statements have been
restated to give retroactive effect for all periods presented for a 1 for
1.422272107 reverse stock split effective June 30, 1997. The par value of
the common stock was not change. As a result $2,956 representing the
reduction in par value for the shares no longer issued was transferred to
additional paid-in capital from common stock.
CONCENTRATION OF CREDIT RICK - Financial instruments which potentially
expose the Company to concentrations of credit risk consist principally of
operating demand deposit accounts. The Company's policy is to place its
operating demand deposit accounts with high credit quality financial
institutions.
19
21
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
RECENTLY ADOPTED ACCOUNTING STANDARDS - Effective January 1, 1996, the
Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" (SFAS No. 121) which requires that
long-lived assets and certain intangibles to be held and used by the
Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS No. 121 did not have a material impact on
the Company.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 establishes a
fair value based method of accounting for stock-based employee compensation
plans; however, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Under the fair value based
method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually
the vesting period. The Company has elected to continue to account for its
employee stock compensation plans under APB Opinion No. 25 with pro forma
disclosures of net earnings and earnings per share, as if the fair value
based method of accounting defined in SFAS No. 123 has been applied. See
Note 8.
NEW ACCOUNTING STANDARDS - In June, 1997 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS No. 130). This statement establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130
does not require a specific format for that financial statement but
requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
Additionally, SFAS 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. This Statement is effective for
fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes
is required. Management has not determined the effect of this statement on
its financial statement disclosure.
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of Enterprise and Related Information." This statement establishes
additional standards for segment reporting in the financial statements and
is effective for fiscal years beginning after December 15, 1997. Management
has not determined the effect of this statement on its financial statement
disclosure.
20
22
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
On October 27, 1997 the American Institute of Certified Public Accountants
issued Statement of Position 97-2, Software Revenue Recognition (SOP
97-2). SOP 97-2 provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions and
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. Management does not believe the adoption of SOP 97-2
will have a material effect on the Company's consolidated financial
statements.
2. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable are net of an allowance for doubtful
accounts of $9,534 for the years ended December 31, 1997 and 1996.
3. INVENTORIES
Inventories consist of the following:
December 31
------------------------
1997 1996
Raw materials $2,432,194 $1,888,227
Finished goods 804,827 472,408
Sales demonstration 1,038,355 938,109
---------- ----------
$4,275,376 $3,298,744
========== ==========
Sales demonstration inventory is comprised of measuring devices utilized
by sales representatives to present the Company's products to customers.
The products remain in sales demonstration inventory for up to six months
and are subsequently sold at prices that produce slightly reduced gross
margins.
4. LONG-TERM DEBT
The company has a loan agreement (the "Agreement") in the form of a term
note and a line of credit. The Agreement combines the equivalent of three
successive one-year term loans, each equal to that portion of the loan
that will be fully amortized in the ensuing year with a line of credit
equal to that portion of the loan that will not be amortized in the
ensuing year. The Company has available borrowings under the Agreement
totaling approximately $2 million as of December 31, 1997. Interest
accrues at the 30-day commercial paper rate plus 2.7% and is payable
monthly. Borrowings under the Agreement are collateralized by the
Company's accounts and notes receivable, inventory, property and
equipment, intangible assets, and deposits. The Agreement contains
restrictive covenants, including the maintenance of certain amounts of
working capital and tangible net worth and limits on loans to related
parties, and prohibits the Company from declaring dividends. No
borrowings were outstanding under this line of credit as of December 31,
1997.
In April 1997, the Company obtained a one-year unsecured $1.0 million line
of credit which bears interest at the 30-day commercial paper rate plus
2.65% per annum. No borrowings were outstanding under this line of credit
as of December 31, 1997.
21
23
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5. RELATED PARTY TRANSACTIONS
LEASES - The Company leases its plant and office building from Xenon
Research, Inc. ("Xenon"), a 27.9% shareholder. The lease expires on
February 28, 2001, and the Company has two five-year renewal options. The
base rent during renewal periods will reflect changes in the U.S. Bureau of
Labor Statistics, Consumer Price Index for all Urban Consumers. Rent
expense under this lease was approximately $150,000 for both 1997 and 1996,
and $148,000 for 1995.
During the year ended December 31, 1997, the Company's board of directors
gave approval to the Company to amend the existing lease agreement with
Xenon to include additions to the existing premises which are being
constructed by Xenon. Upon completion of the expansion premises, rent under
the lease will increase approximately $150,000 per year. Increased payments
under the lease are scheduled to commence on the earlier of (a) the date
Xenon obtains a certificate of occupancy of (b) the Company takes
occupancy. The Company expects to take occupancy or the expansion premises
during the first quarter of 1998.
NOTES - Xenon Research, Inc. - Revolving line of credit, which was repaid
and terminated in 1996. Interest was at prime plus 5% (13.5% at December
31, 1995) and amounted to $355,468 in 1995 and $185,585 in 1996.
6. INCOME TAXES
The components of the expense (benefit) for income taxes is comprised of
the following as of December 31:
1997 1996 1995
Current:
Federal $1,945,035 $ 721,700 $ 23,000
State 294,702 161,392
---------- ---------- ---------
2,239,737 883,092 23,000
---------- ---------- ---------
Deferred:
Federal (108,646) 221,100 (334,000)
State (16,461) 11,700 (31,000)
---------- ---------- ---------
(125,107) 232,800 (365,000)
---------- ---------- ---------
$2,114,630 $1,115,892 $(342,000)
========== ========== =========
22
24
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Income taxes for the years ended December 31, 1997 and 1996 differ from the
amount computed by applying the federal statutory corporate rate to income
before income taxes. The differences are reconciled as follows:
1997 1996 1995
Tax expense at statutory rate $1,809,228 $ 857,700 $ 428,000
State income taxes, net of federal benefit 181,713 114,200 46,000
Research and development credit (64,893) (30,000)
Nondeductible items 159,198 61,000
Other 29,384 82,992
Change in deferred tax asset valuation allowance (786,000)
---------- ---------- ---------
Total income tax expense (benefit) $2,114,630 $1,115,892 $(342,000)
========== ========== =========
The components of the Company's net deferred tax asset at December 31, 1997 and
1996 are as follows:
1997 1996
Deferred tax assets:
Employee stock option $200,599 $ 51,300
Unearned service revenue 178,271 186,200
Other 14,770 9,400
-------- --------
Gross deferred assets 393,640 246,900
-------- --------
Deferred tax liabilities:
Patent amortization 72,963 88,200
Depreciation 22,979 26,500
Product design costs 40,391
-------- --------
Gross deferred tax liabilities 136,333 114,700
-------- --------
Net deferred tax asset $257,307 $132,200
======== ========
23
25
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
7. COMMITMENTS
The following is a schedule of future minimum lease payments required under
noncancelable leases, including leases with related parties (see Note 5), in
effect at December 31, 1997:
YEAR ENDING
DECEMBER 31, AMOUNT
1998 $ 395,000
1999 342,500
2000 337,600
2001 55,300
----------
Total future minimum lease payments $1,130,400
----------
8. STOCK OPTION PLANS
In 1993, the Company adopted the employee Stock Option Plan (the "1993
Plan"). The Company reserved 1,000,000 shares of common stock for issuance to
eligible employees under the Plan. On December 19, 1995, the Company granted
243,265 options to purchase shares of common stock of the Company to certain
employees at exercise prices of $0.36. These options vested over four years
from January 1, 1992 or the date of the optionee's employment, whichever was
later, and became exercisable to the extent vested upon completion of the
company's initial public offering in September 1997. at December 31, 1995, the
value of one share of common stock was determined to be $1.07, based on a
third-party offer for Company stock.
On January 1, 1997, the Company granted options to purchase 133,218 shares of
common stock of the Company pursuant to the 1993 Plan at an exercise price of
$3.60 per share. These options vest over a period of three years beginning
September 23, 1998, and are exercisable upon vesting.
On May 1, 1997, as consideration for his serving on the Board of Directors, a
director was granted options for 52,732 shares of common stock at $0.36 per
share. Such options became exercisable upon completion of the Company's initial
public offering, in September 1997; consequently, the associated compensation
expense has been recorded during the year ended December 31, 1997.
In July 1997, the Company adopted the 1997 Employee Stock Option Plan (the
"1997 Plan") that provides for the grant to key employees of the Company of
incentive or nonqualified stock options. An aggregate of 750,000 shares of
common stock are reserved for issuance pursuant to the 1997 Plan. The 1997 Plan
is administered by the Compensation committee of the Board of Directors, which
has broad discretion in the granting of awards. The exercise price of all
options granted under the 1997 Plan must be at least equal to the fair market
value of the common stock on the date of grant. During the year ended December
31, 1997, Simon Raab, President and Chief Executive Officer and Gregory A.
Fraser, Chief Financial Officer were granted 80,000 and 60,000 options
respectively under the 1997 Plan. Also, 74
24
26
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
other employees were granted options to purchase a total of 188,000 shares of
common stock at the exercise price of $12.00 per share which represented the
fair value of such shares (except for options granted at an exercise price of
$13.20 per share to qualify for treatment as incentive stock options). All
options issued under the 1997 Plan will become exercisable in one-third
increments on each anniversary of the date of grant, commencing in 1998.
In July 1997, the Company adopted the 1997 Non-Employee Director Stock Option
Plan (the "Non-employee Director Plan") which provides for the grant of
nonqualified stock options to members of the Board of Directors who are not
employees of the Company. Although adopted in July 1997, the Non-Employee
Director Plan was not effective until September 18, 1997, upon completion of the
Company's initial public offering. An aggregate of 250,000 shares of Common
Stock of the Company have been reserved for issuance under the Non-Employee
Director Plan. Under the Non-Employee Director Plan, each nonemployee director
shall automatically be granted options to purchase 3,000 shares of the Company's
common stock (i) on the effective date of the Non-Employee Director Plan if
serving on the Board as of such date, or (ii) on the date on which he or she is
first elected or appointed, if he or she is subsequently elected or appointed to
the Board. Additionally, the Non-Employee Director Plan provides that each
nonemployee director shall automatically be granted options to purchase 3,000
shares of common stock of the Company on the day following the annual meeting of
shareholders at which he or she is reelected to the Board. Formula grants under
the Non-Employee Director Plan become exercisable in one-third increments on the
first, second and third anniversary of the date of grant. The exercise price of
options granted under the Non-Employee Director Plan is equal to the fair
market value of the Company's common stock as defined in the Plan. Options
granted under the Non-Employee Director Plan, other than pursuant to the above
formula, may only be granted upon specific approval of each grant by the Board,
which has the discretion to establish a vesting schedule different than the
established vesting schedule of formula options.
On September 18, 1997, the effective date of the Non-Employee Director Plan,
each nonemployee Director was granted options to purchase 3,000 shares of
common stock at exercise prices of $12.00 per share. Additionally, pursuant to
the Non-Employee Director Plan on September 18, 1997, outside Directors, other
than Martin Koshar, were granted options to purchase an aggregate of 160,000
shares of common stock of the Company at exercise prices of $12.00 per share in
consideration for their prior service on the Board. The nonformula options
grants were immediately vested.
Compensation cost charged to operations associated with the Company's stock
option plans was $408,000, $23,100 and $106,700 in 1997, 1996 and 1995,
respectively. Compensation cost was based on the difference between the value
of the stock and its exercise price, multiplied by the number of shares vested
in each year.
25
27
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SFAS NO. 123 REQUIRED DISCLOSURE
If compensation cost for stock options was determined based on the fair
value at the grant dates for 1997, 1996, and 1995 consistent with the
method prescribed by SFAS No. 123, the Company's net income and income per
share would have been adjusted to the pro forma amounts indicated below:
1997 1996 1995
Net income As reported $3,206,630 $1,406,662 $1,599,657
Pro forma 2,345,551 1,382,140 1,572,628
Income per share - Basic As reported $ 0.41 $ 0.20 $ 0.23
Pro forma 0.30 0.19 0.22
Income per share - Assumming dilution As reported $ 0.39 $ 0.19 $ 0.22
Pro forma 0.29 0.19 0.22
Under SFAS No. 123, the fair value of each option is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for options granted in 1997 and 1995;
dividend yield of 0 percent, expected volatility of 46.33% and 90% for 1997
and 1995 respectively, risk-free interest rate of 5.63%, and expected life
ranging from 3 to 10 years. There were no stock options granted in 1996.
A summary of the status of options under the Company's stock-based
compensation plans as of December 31, 1997 and 1996, and changes during the
years ending on those dates is as follows:
1997 1996 1995
---------------------- --------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
Outstanding at beginning of year 190,512 $0.36 210,902 $0.36
Granted 797,001 9.90 210,902 $0.36
Forfeited (31,790) 9.67 (20,390) 0.36
-------- ------- -------
Outstanding at end of year 955,723 8.00 190,512 0.36 210,902 0.36
-------- ------- -------
Grants exercisable at year-end 498,680
Weighted-average fair value of
options granted during the year $ 4.82 $1.00
26
28
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following table summarizes information about the outstanding grants at
December 31, 1997:
WEIGHTED-AVERAGE
EXERCISE OPTIONS REMAINING OPTIONS
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------- ----------- ---------------- -----------
$ 0.36 243,244 4.75 238,680
3.57 131,479 6.75
12.00 481,000 9.75 160,000
13.20 100,000 4.75 100,000
------- -------
955,723 498,680
======= =======
Remaining non-exercisable options as of December 31, 1997 become
exercisable as follows:
1998 155,390
1999 150,826
2000 150,827
-------
457,043
=======
9. BENEFIT PLAN
During 1996, the Company established a defined contribution retirement plan
(401(k)) for its employees, which provides benefits for all employees
meeting certain age and service requirements. The Company may make a
discretionary contribution each Plan year as determined by its Board of
Directors. Discretionary contributions or employer matches can be made to
the participant's account but cannot exceed 4% of compensation. The Company
made no contribution to the Plan in 1996 or 1997.
10. SEGMENT INFORMATION AND EXPORT SALES
Sales to unaffiliated customers, loss from operations and identifiable
assets relating to the Company's French subsidiary totaled $3,267,690,
$(275,864), and $2,992,832, respectively. Such amounts were not material
for the years ended December 31, 1996 and 1995.
The following table includes export sales according to the country in which
the customer is located.
UNITED OTHER
STATES ASIA EUROPE CANADA FOREIGN TOTAL
----------- ---------- ---------- -------- ---------- -----------
Year ended December 31, 1997 $15,599,150 $2,201,848 $4,135,982 $560,872 $1,018,533 $23,516,385
Year ended December 31, 1996 10,829,543 1,606,916 1,292,592 715,728 211,558 14,656,337
Year ended December 31, 1995 7,727,400 385,361 625,730 850,271 273,480 9,862,242
27
29
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
11. QUARTERLY RESULTS OF OPERATION (UNAUDITED)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
QUARTER ENDED 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------
Sales $4,889,471 $5,429,064 $5,909,306 $7,288,544
Gross profit 2,940,922 3,189,333 3,530,192 4,245,100
Net income 719,731 535,877 829,115 1,121,907
Net income per share:
Basic 0.09 0.07 0.11 0.11
Assuming dilution 0.09 0.07 0.11 0.11
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
QUARTER ENDED 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------
Sales $3,037,610 $3,422,503 $4,083,193 $4,113,031
Gross profit 1,850,944 1,864,175 2,327,073 2,127,877
Net income 397,061 285,099 503,989 220,513
Net income per share:
Basic 0.06 0.04 0.07 0.03
Assuming dilution 0.05 0.04 0.07 0.03
28
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the Items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors required by this
Item is incorporated by reference from the Company's Proxy Statement.
The information concerning the company's executive officers required by
this Item is incorporated by reference herein from the section of this Report in
Part I, Item 1, entitled "Executive Officers of the Registrant."
The information regarding compliance with Section 16 of the Securities
Exchange Act of 1934, as amended, is set forth in the Proxy Statement and is
hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference from
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference from
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from
the Company's Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT. The following documents
are filed as part of this Report:
(1) FINANCIAL STATEMENTS. Included in Part II, Item 8 is an index to
the Consolidated Financial Statements of FARO Technologies, Inc. and Report of
Deloitte & Touche LLP, Independent Certified Public Accountants filed as part of
this Form 10-K/A
(2) FINANCIAL STATEMENT SCHEDULES. Schedules not listed in the index to
the Consolidated Financial Statements included in Part II, Item 8, have been
omitted because they are not applicable or are not required or the information
required to be set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
29
31
(3) EXHIBITS.
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation, as amended (Filed as Exhibit 3.1 to Registrant's Registration Statement
on Form S-1, No. 333-32983, and incorporated herein by reference)
3.2 Bylaws, as amended (Filed as Exhibit 3.2 to Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
4.1 Specimen Stock Certificate (Filed as Exhibit 4.1 to Registrant's Registration Statement on Form
S-1, No. 333-32983, and incorporated herein by reference)
10.1 1997 Stock Option Plan, as amended (Filed as Exhibit 10.1 to Registrant's Registration Statement
on Form S-1, No. 333-32983, and incorporated herein by reference)
10.2 1997 Employee Stock Option Plan (Filed as Exhibit 10.2 to Registrant's Registration Statement
on Form S-1, No. 333-32983, and incorporated herein by reference)
10.3 1997 Non-Employee Director Stock Option Plan (Filed as Exhibit 10.3 to Registrant's Registration
Statement on Form S-1, No. 333-32983, and incorporated herein by reference)
10.4 1997 Non-Employee Directors' Fee Plan (Filed as Exhibit 10.4 to Registrant's Registration
Statement on Form S-1, No. 333-32983, and incorporated herein by reference)
10.5 Term WCMA Loan and Security Agreement, dated September 24, 1996, between the Registrant and Merrill
Lynch Business Financial Services, Inc. (Filed as Exhibit 10.5 to Registrant's Registration Statement
on Form S-1, No. 333-32983, and incorporated herein by reference)
10.6 WCMA Note, Loan and Security Agreement, dated April 23, 1997, between the Registrant and Merrill Lynch
Business Financial Services, Inc. (Filed as Exhibit 10.6 to Registrant's Registration Statement on
Form S-1, No. 333-32983, and incorporated herein by reference)
10.7 Business Lease, dated March 1, 1991, between the Registrant (as successor-by-merger) to FARO
Medical Technologies (U.S.), Inc.) and Xenon Research, Inc. (Filed as Exhibit 10.7 to
Registrant's Registration Statement on Form S-1, No. 333-32983, and incorporated herein by
reference)
10.8 OEM Purchase Agreement, dated June 7, 1996 between the Company and Mitutoyo Corporation
(Filed as Exhibit 10.8 to Registrant's Registration Statement on Form S-1, No. 333-32983, and incorporated
herein by reference)
10.9 Nonexclusive Unique Application Reseller Agreement, dated September 9, 1996, between the
Registrant and Autodesk, Inc. (Filed as Exhibit 10.9 to Registrant's Registration Statement on
Form S-1, No. 333-32983, and incorporated herein by reference)
10.10 Form of Patent and Confidentiality Agreement between the Registrant and each of its employees
(Filed as Exhibit 10.10 to Registrant's Registration Statement on Form S-1, No. 333-32983, and
incorporated herein by reference)
10.11 Nonexclusive Unique Application Reseller Agreement, dated as of March 1, 1998, between the
Registrant and Autodesk, Inc. (Previously filed)
10.12 First Amendment to Business Lease, dated as of January 20, 1998, between the Registrant and
Xenon Research, Inc., successor by merger to FARO Medical Technologies (US), Inc.
(Previously filed)
30
32
11.1 Statement re Computation of Per Share Earnings (Incorporated by reference from page 1 to the
Registrant's 1997 Annual Report to Stockholders previously filed as Exhibit 13.1)
13.1 Annual Report to Stockholders for the year ended December 31, 1997 (To be deemed previously
filed only to the extent required by the instructions to exhibits for reports on Form 10-K)
18.1 Letter re changes in accounting principales (Filed herewith)
21.1 List of Subsidiaries (Previously filed)
23.1 Consent of Deloitte & Touche LLP (Filed herewith)
24.1 Power of Attorney (Included on Page 14 of this Report)
27.1 Financial Data Schedule for the year ended December 31, 1997 (Previously filed for SEC filing
purposes only)
27.2 Financial Data Schedule for the nine months ended September 30, 1996 (Previously filed for SEC
filing purposes only)
27.3 Financial Data Schedule for the six months ended June 30, 1996 (Previously filed for SEC filing
purposes only)
27.4 Financial Data Schedule for the year ended December 31, 1996 (Previously filed for SEC filing
purposes only)
(B) REPORTS ON FORM 8-K
None.
31
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized
FARO TECHNOLOGIES, INC.
Date: June 11, 1998 By: /s/ Gregory A. Fraser
--------------------------------------
GREGORY A. FRASER, Ph.D.
Executive Vice President, Secretary,
Treasurer, and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
signature appears below constitutes and appoints SIMON RAAB and GREGORY A.
FRASER, and each of them individually, his true and lawful attorney-in-fact and
agent, with full power of substitution and revocation, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Simon Raab Chairman of the Board, President, June 11, 1998
- ----------------------------------------------- Chief Executive Officer (Principal
Simon Raab Executive Officer), and Director
/s/ Gregory A. Fraser Executive Vice President, Secretary, June 11, 1998
- ----------------------------------------------- Treasurer, Chief Financial Officer
Gregory A. Fraser (Principal Financial and Accounting
Officer), and Director
/s/ Gregory A. Fraser, attorney-in-fact Director June 11, 1998
- -----------------------------------------------
Hubert d'Amours
/s/ *Gregory A. Fraser, attorney-in-fact Director June 11, 1998
- -----------------------------------------------
Philip Colley
/s/ *Gregory A. Fraser, attorney-in-fact Director June 11, 1998
- -----------------------------------------------
Alexandre Raab
/s/ *Gregory A. Fraser, attorney-in-fact Director June 11, 1998
- -----------------------------------------------
Norman H. Schipper
/s/ *Gregory A. Fraser, attorney-in-fact Director June 11, 1998
- -----------------------------------------------
Andre Julien
32
1
FARO Technologies, Inc.
125 Technology Park
Lake Mary, Florida 32746
Dear Sirs:
We have audited the consolidated financial statements of FARO Technologies,
Inc. as of December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997, included in your Annual Report on Form 10-K to
the Securities and Exchange Commission and have issued our report thereon dated
February 13, 1998. Note 1 to such financial statements contains a description
of your adoption during the year ended December 31, 1997 of a change in the
method of valuing inventories from the lower of cost (determined on the
first-in, first-out method) or market value to the lower of average cost or
market value. In our judgment, such change is to an alternative accounting
principle that is preferable under the circumstances.
Yours truly,
DELOITTE & TOUCHE LLP
Jacksonville, Florida
May 15, 1998
1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 333-41115, 333-41125, 333-41131, and 333-41135 of FARO Technologies, Inc.
on Form S- 8 of our report dated February 13, 1998, appearing in this Annual
Report on Form 10-K/A of FARO Technologies, Inc. for the year ended December 31,
1997.
Deloitte & Touche LLP
Jacksonville, Florida
June 11, 1998
