Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Faro Technologies, Inc. Form 10-K405 15 99K
2: EX-10.11 Non Exclusive Unique Application Reseller Agmt 19 86K
3: EX-10.12 First Amendment to Business Lease 2 10K
4: EX-13.1 Faro Annual Report 27 171K
5: EX-21.1 List of Subsidaries 1 5K
6: EX-23.1 Consent 1 7K
7: EX-27.1 Financial Data Schedule 1 9K
8: EX-27.2 Financial Data Schedule 1 10K
9: EX-27.3 Financial Data Schedule 1 10K
10: EX-27.4 Financial Data Schedule 1 10K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(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
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
125 Technology Park, Lake Mary, FL 32746
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(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 5-8
Portions of the Proxy Statement, dated March 25, Part III, Items 10-13
1998
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
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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.
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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.
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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.
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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:
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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.
The Company uses a process of integrated lead qualification and sales
demonstration. Once a customer opportunity is identified, the Company employs a
team-based sales approach involving inside and outside sales personnel who are
supported by application engineers.
The Company employs a variety of marketing techniques, including direct
mail, trade shows, and advertising in trade journals, and proactively seeks
publicity opportunities for customer testimonials. Management believes that
word-of-mouth advertising from the Company's existing customers provides an
important marketing advantage. The Company also has a computerized sales and
marketing software system with telemarketing, lead tracking and analysis, as
well as customer support capabilities. Each of the Company's sales offices is
linked electronically to the Company's headquarters.
In June 1996, the Company entered into an OEM agreement with Mitutoyo
Corporation ("Mitutoyo"), a Japanese company that is the world's largest
manufacturer of metrology tools. Mitutoyo markets the FAROArm(R) in Japan under
the name SPINARM(R). The agreement, which grants Mitutoyo a non-exclusive right
to sales in Japan, expires in June 1999 and is renewable for successive one
year terms.
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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.
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
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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. The Company's facilities and
operations are in the process of completing requirements for ISO 9000
registration.
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.
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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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, as well as certain key
employees, and their ages, are as follows:
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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,
8
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.
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.
9
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.
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.
The information required by this Item is incorporated by reference from
pages 15 through 24 of the Company's 1997 Annual Report to Stockholders.
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.
10
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. The following Consolidated Financial
Statements of FARO Technologies, Inc. and Report of Deloitte & Touche LLP,
Independent Certified Public Accountants, are incorporated by reference from
pages 15 through 24 of the Registrant's 1997 Annual Report to Stockholders:
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Income for the Years Ended December 31,
1995, 1996 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years Ended December 31,
1995, 1996 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) FINANCIAL STATEMENT SCHEDULES. Schedules not listed herein 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.
11
(3) EXHIBITS.
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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. (Filed herewith)
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. (Filed
herewith)
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11.1 Statement re Computation of Per Share Earnings (Incorporated by reference from page 1 to the
Registrant's 1997 Annual Report to Stockholders filed herewith as Exhibit 13.1)
13.1 Annual Report to Stockholders for the year ended December 31, 1997 (To be deemed filed herewith
only to the extent required by the instructions to exhibits for reports on Form 10-K)
21.1 List of Subsidiaries (Filed herewith)
23.1 Consent of Deloitte & Touche LLP (Filed herewith)
24.1 Power of Attorney (Included on Page 14 of this Report)
27.1 Financial Data Schedule for year ended December 31, 1997 (Filed herewith for SEC filing purposes only)
27.2 Restated Financial Data Schedule for nine months ended December 31, 1997 (Filed herewith for SEC filing purposes
only)
27.3 Restated Financial Data Schedule for six months ended December 31, 1997 (Filed herewith for SEC filing purposes
only)
27.4 Restated Financial Data Schedule for year ended December 31, 1996 (Filed herewith for SEC filing purposes only)
(B) REPORTS ON FORM 8-K
None.
13
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: March 26, 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.
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Signature Title Date
--------- ----- ----
/s/ Simon Raab Chairman of the Board, President, March 26, 1998
----------------------------------------------- Chief Executive Officer (Principal
Simon Raab Executive Officer), and Director
/s/ Gregory A. Fraser Executive Vice President, Secretary, March 26, 1998
----------------------------------------------- Treasurer, Chief Financial Officer
Gregory A. Fraser (Principal Financial and Accounting
Officer), and Director
/s/ Hubert d'Amours Director March 26, 1998
-----------------------------------------------
Hubert d'Amours
/s/ Philip Colley Director March 26, 1998
-----------------------------------------------
Philip Colley
/s/ Alexandre Raab Director March 26, 1998
-----------------------------------------------
Alexandre Raab
/s/ Norman H. Schipper Director March 26, 1998
-----------------------------------------------
Norman H. Schipper
/s/ Andre Julien Director March 26, 1998
-----------------------------------------------
Andre Julien
14
Dates Referenced Herein and Documents Incorporated by Reference
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