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
COVER
Exhibit 13.1
Continuing the
CAD Revolution
[PICTURE OF FARO LOGO]
1997
Annual
Report
INSIDE FRONT COVER
COMPANY PROFILE
A PIONEER IN SOFTWARE-DRIVEN, 3-D MEASUREMENT TECHNOLOGY, FARO Technologies,
Inc. designs, develops, markets and supports portable, three-dimensional
measurement systems that bring precision measurement, quality inspection and
specification conformance capabilities--integrated with leading CAD software--to
the factory floor. The Company's principal products, the FAROArm(R) articulated
measuring device and companion AnthroCam(R) software, are used worldwide by more
than 600 customers, ranging from small machine shops to the largest of
industrial companies, such as General Motors, Chrysler, Ford, Boeing, Lockheed
Martin, General Electric, Westinghouse Electric, Caterpillar and Komatsu
Dresser. Large and small alike have selected FARO to help them improve
productivity, enhance product quality and decrease rework and scrap in the
manufacturing process in an era of ever-intensifying global competition.
INTERNATIONAL
FARO products are marketed domestically through six U.S. sales offices and
overseas through a direct sales force with offices in France, Germany and the
United Kingdom and a network of distributors. In 1997, international sales
increased to $8.2 million, or 35.0% of total sales, from $3.8 million, or 26.1%,
for 1996. The Company's products are marketed in all regions of the world,
including Europe, South America, Africa and the Asia/Pacific. Its distributors
are located in Benelux, Italy, Finland, Russia, Brazil, South Africa, India,
Japan, Korea and Australia.
1
FINANCIAL HIGHLIGHTS
(In millions, except per share and ratios)
[Enlarge/Download Table]
December 31, 1997 1996 % Change
------------------------------------------------------------------------------------------------
Sales $ 23.5 $ 14.7 + 60.5
Cost of sales $ 9.6 $ 6.5 + 48.2
Gross profit $ 13.9 $ 8.2 + 70.2
Income (loss) from operations $ 4.9 $ 2.7 + 82.0
Net income $ 3.2 $ 1.4 + 128.0
OTHER DATA
------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ .41 $ .20 + 105.0
Diluted $ .39 $ .19 + 105.3
Weighted-average common
shares and common
equivalent shares:
Basic 7,831,715 7,000,000 + 11.9
Diluted 8,189,048 7,349,041 + 11.4
Working capital $ 37.3 $ 3.8 + 872.7
Total assets $ 41.2 $ 7.8 + 427.0
Total debt $ 0.0 $ 1.5 - 100.0
Total shareholders' equity $ 38.9 $ 3.8 + 931.9
Debt:Equity 0.0 0.4 - 100.0
[Download Table]
SALES OPERATING INCOME EARNINGS PER SHARE
(Dollars in millions) (Dollars in millions) (Dollars)
[GRAPH] [GRAPH] [GRAPH]
'95 9.9 '95 1.6 '95 .23
'96 14.7 '96 2.7 '96 .20
'97 23.5 '97 4.9 '97 .41
2
To Our Shareholders:
[PICTURE]
Simon Raab, Ph.D. (right)
Chairman of the Board and
Chief Executive Officer
Gregory A. Fraser, Ph.D. (left)
Chief Financial Officer and
Executive Vice President
We are pleased to announce that FARO ended its fiscal year on December 31, 1997
with record sales and earnings. Sales for 1997 increased 60% over 1996 to $23.5
million. This aggressive growth reflects the continuing acceptance of our unique
CAD-based, three-dimensional measurement hardware and software. Product sales
represented 95% of sales, Service and Warranty sales represented 3% of sales,
and Royalty revenue from patent licensing was 2% of sales.
International sales increased to 35% of total sales in 1997, up from 26% in
1996. This resulted from increased sales from our three European sales offices,
as well as our distributors and OEM customers in Europe, Asia/Pacific, and South
America. Expansion of our international sales organization remains an important
growth strategy for the Company.
Net income for 1997 was $3.2 million, up 128% from the previous year. This
growth resulted from our increased sales, as well as from improvements in gross
profit, which reflected cost savings related to design improvements in our
hardware.
As a result of our initial public offering in 1997, our financial position is
strong. Total assets increased to $41.2 million from $7.8 million in 1996. With
cash of $29 million and no long-term debt, we have the resources to implement
our corporate growth strategy, which includes both internal and external
components.
NEW MARKET
One of the most common questions we are asked is, "What is your market, and how
big is it?" This is not surprising because ours is a new market, a spin-off of
two others: the CAD/CAM software market, and the Metrology, or inspection
market. We call this new market Computer Assisted Manufacturing Measurement
(CAMM). The demand drivers for this market include both a missing link between
CAD/CAM and the manufacturing floor, and the limitations of traditional
metrology or inspection devices. Until our FAROArm(R) and AnthroCam(R) products
provided the link, manufacturers designing products with CAD software had very
limited means to check that the actual manufactured parts matched the design.
Based on the size of the CAD/CAM market ($3 billion in 1996) and its expected
continued growth, we see the growth of this new CAMM market continuing towards
the size of the traditional coordinate measuring machine market, which was $1.2
billion in 1995.
3
FARO TECHNOLOGIES
In 1997, approximately 25% of our customers were large Blue Chip companies from
a variety of vertical markets, including Aerospace, Automotive, Business and
Consumer Machines, Electric Utilities and Manufacturers, Heavy Equipment
Manufacturers and others. However, the other 75% of our over 600 customers are
smaller companies in these and many other markets, providing a balance and
diversity we will continue to seek. The common denominator among the majority of
our customers is the same; they need to inspect their assemblies on the factory
floor against the CAD model. No single customer represented 10% of sales in
1997. We believe that we are therefore not overly dependent on any one market,
or sector.
OUTLOOK
We intend to focus the Company on the Computer Assisted Manufacturing
Measurement (CAMM) market. Doing so will include the expansion of our product
line through the development and acquisition of additional software and hardware
for portable three-dimensional measurement.
We intend to continue to expand our sales force and distribution, both domestic
and overseas. We expect that international sales will reach 50% of total sales
by the year 2000. In 1998, we will also focus on deepening and broadening the
penetration of our installed customer base, especially large manufacturers with
multiple facilities.
Our recent expansion more than doubles our output capacity. We now have the
ability to respond quickly to market demands with expanded production, sales,
and service facilities. We believe that the CAD revolution is incomplete until
this virtual design information is brought to the manufacturing floor. The high
market energy in this area is palpable and our ability to respond to its demand
will determine our future success. The initial public offering in 1997 gives us
the access to capital necessary to be a player in our market's expansion and the
typical consolidation that follows. We believe we are the leader in bringing 3-D
CAD measurement to the manufacturing floor and that we have the technical and
market vision to continue without a letup in pace, to lead this new and exciting
market.
We would like to thank our shareholders, our employees, our suppliers, and of
course our customers for their support in 1997. We invite your participation in
our continued growth.
Sincerely,
/s/ Simon Raab, Ph.D. /s/ Gregory A. Fraser, Ph.D.
Simon Raab, Ph.D. Gregory A. Fraser, Ph.D.
Chairman of the Board, President and Executive Vice President, Secretary,
Chief Executive Officer Treasurer and Chief Financial Officer
March 25, 1998
4
[PICTURE OF PERSON USING FARO ARM]
DEMAND DRIVERS
Behind demand for FARO's products lie these four marketplace trends:
- Global competition: Success in world markets calls for shortened
product cycles, increased attention to quality, and advances in
productivity.
- Need for link to CAD: Companies adopting CAD/CAM soon realize they need
to verify manufactured parts against the CAD model.
- Production floor presence: Most subassemblies and components require
efficient measurement, not in a lab but on the factory floor.
- Design sophistication: Innovative designs often require taking
measurements never taken before.
5
FARO TECHNOLOGIES
[PICTURE]
BRIDGING THE VIRTUAL CAD WORLD
AND THE REAL WORLD OF
THE MANUFACTURING FLOOR
[THREE PICTURES OF PEOPLE USING FARO ARM]
Product design and manufacturing, driven by increasing global and competitive
pressures for shorter product cycles, greater customization, higher quality and
lower cost products, have evolved rapidly during the last decade. Key to that
evolution has been the widespread adoption of 3-D software and computer-aided
design (CAD) and computer-aided manufacturing (CAM) technology. The worldwide
market for CAD, CAM and related software products amounted to $3.0 billion in
1996 and is expected to grow at a rate of at least 15.5% per year, to $5.6
billion in 2000, according to International Data Corporation.
Despite such technological advances in design and manufacturing, the measurement
and quality inspection function generally remains limited to primitive
methods--slow, imprecise and not linked to the CAD design. These methods
include: manual, analog technology (scales, calipers, micrometers, plumb lines
and test fixtures). Traditional, fixed-based coordinate measurement machines
(CMMs), which offer high precision, are typically restricted to special labs off
the manufacturing floor, where they measure small, readily moved subassemblies.
Significant demand has therefore arisen for automated measurement systems for
inspection, precision fitting, reverse engineering and numerous other
uses--measurement systems that bridge the gap between the virtual 3-D world of
the CAD process and the physical 3-D world of the factory floor.
FARO Technologies' innovative software-driven, portable measurement systems
bridge the gap. The FAROArm is a portable six-axis device that approximates the
range of motion and dexterity of the human arm. Its six to seven major joints,
each with a measuring capability, enable the probe at the tip of the arm to
reach behind, underneath and into previously inaccessible spaces, touching and
measuring complex shapes and ergonomic structures. The counterbalanced arm's
complete flexibility, unrestricted positioning and ease of use allow workers to
measure more accurately and efficiently than previously possible virtually every
size, contour and angle. The simple press of a button captures reliable, instant
3-D information essential to solving quality and fit problems, pinpointing
exactly whether, where and by how much a part is out of specification.
The FAROArm is available in a variety of sizes, configurations and precision
levels. Lightweight and portable, the arm can be moved to multiple locations on
the factory floor to measure large parts and assemblies not easily transported
to a conventional CMM, eliminating travel time to and from quality inspection
departments. The arm automatically monitors and compensates for temperature
changes, enabling it to measure objects with an accuracy of up to three
one-thousandths of an inch--precision that meets the intermediate precision need
of many manufactured products.
6
AnthroCam, the Company's proprietary CAD-based measurement software, links the
FAROArm with CAD software, enabling users to compare measurements of
manufactured components with CAD data. Such comparisons are critical to
effective, ongoing quality control. Problems can be corrected immediately,
resulting in substantial cost savings while reducing production downtime.
AnthroCam can also be used for direct measurement of features not tied to CAD,
and for reverse engineering or modeling of older parts and assemblies which are
not documented in CAD drawings.
Based on an open architecture, AnthroCam is a Windows-based, 32-bit application
designed to be used with almost any CAD software and host computer. While
AnthroCam was created as an enabling software for the FAROArm, it is also sold
separately for use with laser trackers, theodolites, CMMs and other 3-D
measurement devices. The resulting integration of automated measurement and
quality inspection processes with automated design and production creates
significant savings by reducing the need for test fixtures, improves
productivity by reducing production set-up time, and enhances product quality by
maximizing the opportunities to make precise measurements based on engineering
specifications.
FAROArm and AnthroCam together bring to measurement an unmatched sophistication
necessary to link CAD with the manufactured product, meeting an expanding and as
yet unfilled need.
[PICTURE]
FARO PRODUCT FEATURES
The Company's sophisticated measurement products overcome many limitations of
hand-measurement tools, test fixtures and conventional CMMs by incorporating the
following features:
- CAD integration
- Six-axis articulating arm
- Portability and adaptability
- Precision levels responsive to industry needs
- Broad affordability
- Ease of use
- Paperless data collection
- Open architecture
7
FARO TECHNOLOGIES
MEASURING UP
Companies of all types and sizes are finding that FARO products can help them
solve difficult measurement problems resulting in improved quality, lowered cost
and greater productivity.
[PICTURE]
CHAMPION ROAD MACHINERY: ADDRESSING THE SOURCE OF THE PROBLEM
To reduce the number of "reworks," or the custom-fitting of subassemblies to the
frames of its road graders, Champion employed the FAROArm and AnthroCam
software. Historically, each time component parts did not fit together, Champion
had corrected the deviations on a case-by-case basis by custom-fitting the
parts--adjusting each part so that it would fit--an expensive solution for a
recurring problem. With FARO, Champion can now capture measurement data from the
parts and identify the origin of variations. It can address the source of the
problems and eliminate them before a fit is attempted, rather than continue to
make individual adjustments. Reduced dimensional variation and improved process
capability have been the result. Champion has estimated annual savings of $5-$10
million.
[PICTURE]
SOUTHERN CALIFORNIA EDISON: CUTTING "DOWN" TIME
Like other large public utility companies, Southern California Edison (SCE)
experienced significant expense and customer dissatisfaction as a result of
lengthy downtimes. During routine turbine overhauls, scheduled and unscheduled
maintenance and forced outage conditions, SCE typically made numerous repairs
and modifications to its equipment. Common problems encountered by SCE during
down-time included: obsolete parts, long waits for replacement parts and
difficulty in regaining the full use of damaged parts. Using the FAROArm and
AnthroCam, SCE was able to measure large damaged blades and create CAD drawings
for quick manufacture of replacements. FARO enabled SCE to bring its power
generation units on-line without undue delay and expense.
8
TEXAS STEEL: REACHING THE UNMEASURABLE
Texas Steel is a foundry that produces steel castings for off-road, mining, oil
field and construction equipment. Its castings weigh as much as 25,000 pounds
and have diameters as large as twelve feet. Texas Steel not only used the
FAROArm to improve the accuracy of dimensional checks of these large castings
but also found FARO methods to be safer, faster and more efficient than its
previous measurement methods. Texas Steel reported a 75% time savings. It also
could measure exceptionally large parts previously unreachable with previous
methods. The arm's ease of use encouraged Texas Steel to expand the range of
parts checked, further increasing production quality.
[PICTURE]
[PICTURE]
CHRYSLER CANADA CORPORATION: IMPROVING QUALITY
At its Windsor, Ontario plant, Chrysler Canada Corporation manufactures Dodge
Ram trucks, vans and wagons. The plant turns out some 420 vehicles per shift,
two shifts a day. Chrysler discovered certain fit problems with its large panels
and sub-assemblies--vehicle doors were not closing tightly. The automaker also
discovered that previous inspection tools--such as test fixtures, templates and
patterns--could not meet its requirements for on-site product measurement.
Chrysler turned to the FAROArm as an interim solution. Chrysler identified one
of its three production lines as its "ideal" or "good" line and used the FAROArm
to compare the products produced by the lines and adjust the two "bad" lines.
Within two weeks, Chrysler experienced significantly improved product quality.
Significant capital savings resulted as well. Overall, there was a 33%
improvement in process control for large auto body panels and finished
assemblies in less than two years for the entire plant. At the Windsor plant,
the FAROArm is now a permanent addition to the factory floor.
BREADTH OF APPEAL
FARO products have been purchased by more than 600 customers worldwide.
Representative industries and customers include:
AEROSPACE
Boeing
GE Aircraft Engines
Lockheed Martin
Nordam Repair Division
Northrop Grumman
Orbital Sciences
Dee Howard
APPAREL & FOOTWEAR
Nike
Reebok
AUTOMOTIVE
AO Smith
Chrysler
Ford
General Motors
Honda
Hyundai
Johnson Controls
Lear Corporation
Mercedes Benz
Porsche
Samsung Motors
Toyota
Vehma International
BUSINESS & CONSUMER MACHINES
Corning Asahi
Xerox
ELECTRIC POWER
General Electric
Southern California Edison
Tennessee Valley Authority
Westinghouse Electric
FARM/LAWN EQUIPMENT
New Holland North America
Toro
HEAVY EQUIPMENT MANUFACTURERS
Caterpillar
Komatsu Dresser
Champion Road Machinery
Texas Steel
PERSONAL ROAD/WATER/SNOW CRAFT
Harley Davidson
Polaris Industries
PLASTICS
Able Design Plastics
Paramount Plastics
Thermoform Plastics
9
FARO TECHNOLOGIES
Selected Consolidated Financial Data
The following is a summary of selected financial data of the Company and its
subsidiaries as of and for each of the five years ended December 31, 1997. The
historical consolidated financial data has been derived from the historical
financial statements of the Company. These data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements appearing
elsewhere in this document.
[Enlarge/Download Table]
Year ended December 31, 1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Sales $23,516,385 $14,656,337 $9,862,242 $4,508,837 $5,106,270
Cost of sales 9,610,838 6,486,268 4,987,779 2,222,085 2,266,296
---------------------------------------------------------------------------------------------------------------------------
Gross profit 13,905,547 8,170,069 4,874,463 2,286,752 2,839,974
Operating expenses:
Selling 5,676,113 3,731,762 2,008,301 1,569,014 1,971,177
General and administrative 1,519,657 744,206 503,184 521,040 424,026
Depreciation and amortization 293,996 230,799 341,494 270,615 211,682
Research and development 1,075,505 730,124 363,871 173,400 276,489
Employee stock options 408,000 23,100 106,700 -- --
---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 8,973,271 5,459,991 3,323,550 2,534,069 2,883,374
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 4,932,276 2,710,078 1,550,913 (247,317) (43,400)
Other income 499,752 25,145 62,212 11,706 12,648
Interest expense (110,768) (212,669) (355,468) (192,543) (110,504)
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 5,321,260 2,522,554 1,257,657 (428,154) (141,256)
Income tax expense (benefit) 2,114,630 1,115,892 (342,000) -- --
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,206,630 $ 1,406,662 $1,599,657 $ (428,154) $ (141,256)
===========================================================================================================================
Net income (loss) per common share:
Basic $ 0.41 $ 0.20 $ 0.23 $ (0.06) $ 0.02
Assuming dilution $ 0.39 $ 0.19 $ 0.22 $ (0.06) $ (0.02)
Weighted-average common
shares outstanding:
Basic 7,831,715 7,000,000 7,000,000 7,000,000 7,000,000
Assuming dilution 8,189,048 7,349,041 7,166,739 7,149,690 7,149,690
[Enlarge/Download Table]
At December 31, 1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital $37,277,545 $3,832,424 $1,321,517 $ (718,564) $ (109,760)
Total assets 41,192,333 7,815,668 5,479,698 4,229,551 3,877,445
Total debt -- 1,501,267 2,200,000 2,925,000 2,100,000
Total shareholders' equity 38,939,411 3,773,699 2,343,937 637,580 1,158,034
10
FARO TECHNOLOGIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements of the Company, including the notes thereto,
included elsewhere in this document.
OVERVIEW
The Company designs, develops, markets and supports portable,
software-driven, 3-D measurement systems that are used in a broad range of
manufacturing and industrial applications. The Company's principal products are
the FAROArm(R) articulated measuring device and its companion AnthroCam(R)
software. Together, these products integrate measurement and quality inspection
functions with CAD and CAM technology to improve productivity, enhance product
quality and decrease rework and scrap in the manufacturing process. The
Company's products have been purchased by more than 600 customers, ranging from
small machine shops to such large manufacturing and industrial companies as
General Motors, Chrysler, Ford Motor Co., Boeing, Lockheed Martin, General
Electric, Westinghouse Electric, Caterpillar and Komatsu Dresser.
From its inception in 1982 through 1992, the Company focused on providing
computerized, 3-D measurement devices to the orthopedic and neurosurgical
markets. During this period, the Company introduced a knee laxity measurement
device, a diagnostic tool for measuring posture, scoliosis and back flexibility,
and a surgical guidance device utilizing a six-axis articulated arm.
In 1992, in an effort to capitalize on a demand for 3-D portable
measurement tools for the factory floor, the Company made a strategic decision
to target its core measurement technology to the manufacturing and industrial
markets. In order to focus on manufacturing and industrial applications of its
technology, the Company phased out the direct sale of its medical products and
entered into licensing agreements with two major neurosurgical companies for its
medical technology. Since that time, sales to the manufacturing and industrial
markets have increased to 96.5% of sales in 1996 and 98.0% of sales in 1997. In
1995, the Company made a strategic decision to target international markets. The
Company established sales offices in France and Germany in 1996 and Great
Britain in 1997. International sales represented 21.6% of sales in 1995, 26.1%
of sales in 1996 and 35.0% of sales in 1997.
The Company derives revenues primarily from the sale of the FAROArm(R), its
six-axis articulated measuring device, and AnthroCam(R), its companion 3-D
measurement software. The majority of the Company's revenues are derived from
the sale of its bundled hardware and software measurement systems. Revenue
related to these products is recognized upon shipment.
Revenue growth has resulted primarily from increased unit sales due to an
expanded sales effort that included the addition of sales personnel at existing
offices, the opening of new sales offices, expanded promotional efforts and the
addition of new product features. Additionally, during this period, the Company
lowered its prices on its bundled products to stimulate volume. The Company
expects to continue its revenue growth through further penetration of its
installed customer base, expansion of its domestic and international sales force
and expansion of its product line and service offerings.
In addition to providing a one-year basic warranty without additional
charge, the Company offers its customers one, two and three-year extended
maintenance contracts, which include on-line help services, software upgrades
and hardware warranties. In addition, the Company sells training and technology
consulting services relating to its products. The Company recognizes the revenue
from extended maintenance contracts proportionately as costs are projected to be
incurred.
Cost of sales consists primarily of material, production overhead and
labor. Selling expenses consist primarily of salaries and commissions to sales
and marketing personnel, and promotion, advertising, travel and
telecommunications. General and administrative expenses consist primarily of
salaries for administrative personnel, rent, utilities and professional and
legal expenses. Research and development expenses represent salaries, equipment
and third-party services.
Accounting for wholly-owned foreign subsidiaries is maintained in the
currency of the respective foreign jurisdiction and, therefore, fluctuations in
exchange rates may have an impact on intercompany accounts reflected in the
Company's Consolidated Financial Statements. Although the Company has not
historically engaged in any hedging transactions to limit risks of currency
fluctuations, it intends to do so in the future.
11
FARO TECHNOLOGIES
RESULTS OF OPERATIONS
The following table sets forth for the periods presented, the percentage of
sales represented by certain items in the Company's Consolidated Statements of
Operations:
[Download Table]
Year Ended December 31, 1997 1996 1995
---------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Sales 100.0% 100.0% 100.0%
Cost of sales 40.9 44.3 50.6
---------------------------------------------------------------
Gross profit 59.1 55.7 49.4
Operating expenses:
Selling 24.1 25.5 20.4
General and administrative 6.5 5.1 5.1
Depreciation and amortization 1.3 1.6 3.5
Research and development 4.6 5.0 3.7
Employee stock options 1.7 0.2 1.1
---------------------------------------------------------------
Total operating expenses 38.2 37.4 33.8
---------------------------------------------------------------
Income (loss) from operations 20.9 18.3 15.6
Other income 2.1 0.2 0.6
Interest expense (0.5) (1.5) (3.6)
---------------------------------------------------------------
Income (loss) before
income taxes 22.5 17.0 12.6
Income tax expense (benefit) 9.0 7.6 (3.5)
---------------------------------------------------------------
Net income (loss) 13.5% 9.4% 16.1%
===============================================================
1997 COMPARED TO 1996
Sales. Sales increased $8.9 million, or 60.5%, from $14.6 million in 1996
to $23.5 million in 1997. The increase was primarily the result of increased
unit sales due to an expanded sales effort that included the addition of sales
personnel at existing offices, and the opening of sales offices. International
sales increased to 35.0% of total sales in 1997, from 26.1% in 1996, in part
because of increased sales in the European countries in which the Company has
sales offices, and increased sales to several international distributors.
Gross profit. Gross profit increased $5.7 million, or 70.2%, from $8.2
million in 1996 to $13.9 million in 1997. Gross margin increased from 55.7% in
1996 to 59.1% in 1997. This margin increase was attributable to a reduction in
product costs as a result of technological improvements, purchasing economies
and production efficiencies.
Selling expenses. Selling expenses increased $1.9 million, or 52.1%, from
$3.7 million in 1996 to $5.7 million in 1997. This increase was a result of the
Company's expansion of sales and marketing staff in the United States and
Europe, and expanded promotional efforts. Specifically, hiring, training, and
salary expenses increased $965,000, sales commissions and bonuses increased
$378,000, and promotional expenses increased $333,000. Selling expenses as a
percentage of sales decreased from 25.5% in 1996 to 24.1% in 1997.
General and administrative expenses. General and administrative expenses
increased $775,000, or 104.2%, from $774,000 in 1996 to $1.5 million in 1997.
This increase resulted primarily from the hiring of additional administrative
personnel, and increases in professional and legal expenses, in part as a result
of the Company's periodic reporting requirements with the Securities and
Exchange Commission resulting from the Company's initial public offering in
September 1997. General and administrative expenses as a percentage of sales
increased from 5.1% in 1996 to 6.5% in 1997.
Research and development expenses. Research and development expenses
increased $345,000, or 47.3%, from $730,000 in 1996 to $1.1 million in 1997.
This increase was primarily a result of a $246,000 increase in hiring, training,
and salary cost related to new personnel. Research and development expenses as a
percentage of sales decreased from 5.0% in 1996 to 4.6% in 1997, as the growth
in these expenses did not match the percentage growth in sales.
Employee stock options expenses. Employee stock options expenses increased
$385,000 from $23,000 in 1996 to $408,000 in 1997. This increase was primarily
attributable to the grant of 52,733 options in May 1997, which was made at an
exercise price below the fair market value of the Common Stock on the date of
the grant.
Other income. Other income increased $475,000 from $25,000 in 1996 to
$500,000 in 1997. This increase was attributable to interest income on the $30
million proceeds from the Company's initial public offering in 1997.
Interest expense. Interest expense decreased $102,000, or 47.9%, from
$213,000 in 1996 to $111,000 in 1997. This reduction was attributable to the
refinancing of the Company's indebtedness at a lower interest rate, and also the
utilization of the proceeds from the Company's initial public offering to repay
all indebtedness.
Income tax expense. Income tax expense increased $999,000, or 89.5%, from
$1.1 million in 1996 to $2.1 million in 1997. The provision for income taxes as
a percentage of income before income taxes was 44.2% in the twelve months of
1996 and 39.7% in the twelve months of 1997. The lower effective tax rate in
1997 was because of a higher Research and Development tax credit and the
creation of a Foreign Sales Corporation.
Net income. Net income increased $1.8 million, or 128.0%, from $1.4 million
in 1996 to $3.2 million in 1997. This increase was a result of increased sales,
higher gross margin, $442,000 in interest income in 1997 which was zero in 1996,
and a lower tax rate.
12
FARO TECHNOLOGIES
1996 COMPARED TO 1995
Sales. Sales increased $4.8 million, or 48.6%, from $9.9 million in 1995 to
$14.7 million in 1996. This increase was attributable to a shift in product mix
to higher priced Silver Series models of the FAROArm(R) and increased unit sales
resulting from completion of the Company's shift in focus from the medical
market to the manufacturing and industrial markets.
Gross profit. Gross profit increased $3.3 million, or 67.6%, from $4.9
million in 1995 to $8.2 million in 1996. Gross margin increased from 49.4% in
1995 to 55.7% in 1996. This increase was due to a reduction in product costs as
a result of technological improvements and to an increase in sales of higher
margin Silver Series models of the FAROArm(R). In addition, gross profit for
1995 was adversely affected by a $531,000 charge to cost of sales relating to a
charge in the estimated life of product design costs.
Selling expenses. Selling expenses increased $1.7 million, or 85.8%, from
$2.0 million in 1995 to $3.7 million in 1996 primarily as a result of the
Company's expansion of sales and marketing staff ($784,000), the opening of
additional sales offices in the United States and Europe in the second half of
1996 ($354,000) and increased promotional and related selling expenses
($409,000). Selling expenses as a percentage of sales increased from 20.4% in
1995 to 25.5% in 1996.
General and administrative expenses. General and administrative expenses
increased $241,000, or 47.9%, from $503,000 in 1995 to $744,000 in 1996. This
increase was primarily a result of additional accounting personnel ($105,000)
and increased cost of supplies and other expenses, including occupancy costs
($109,000). General and administrative expenses as a percentage of sales
remained unchanged at 5.1% in 1996 compared to 1995.
Research and development expenses. Research and development expenses
increased $366,000, or 100.7%, from $364,000 in 1995 to $730,000 in 1996. This
increase was a result of the hiring of additional personnel to design and
develop improved hardware, software and product functionality ($228,000) and
increased research and development materials and other expenses ($138,000).
Research and development expenses as a percentage of sales increased from 3.7%
in 1995 to 5.0% in 1996.
Employee stock options expenses. Employee stock options expenses decreased
$84,000, or 78.4%, from $107,000 in 1995 to $23,000 in 1996. The Company did not
grant options in 1996, and compensation expense relating to options granted in
1995 was significantly lower in 1996 than in 1995.
Interest expense. Interest expense decreased $143,000, or 40.2%, from
$355,000 in 1995 to $213,000 in 1996 due to a reduction in the amount of the
Company's indebtedness.
Income tax expense. Income tax expense increased $1.5 million from a
benefit of $342,000 in 1995 to an expense of $1.1 million in 1996. The provision
for income taxes as a percentage of income before income tax was 44.2% in 1996.
In 1995, the Company had an income tax benefit as a result of the reversal of a
deferred tax valuation allowance.
Net income. Net income decreased $193,000, or 12.1%, from $1.6 million in
1995 to $1.4 million in 1996.
1995 COMPARED TO 1994
Sales. Sales increased $5.4 million, or 118.7%, from $4.5 million in 1994
to $9.9 million in 1995. The increase was due to increased unit sales resulting
from a shift in focus from the medical market to the manufacturing and
industrial markets and the Company's release of its AnthroCam(R) software in
late 1994. The release of AnthroCam(R) led to increased sales of the Company's
FAROArm(R) products, particularly of higher priced Silver Series models.
Gross profit. Gross profit increased $2.6 million, or 113.2%, from $2.3
million in 1994 to $4.9 million in 1995 due to an increase in 1995 in sales of
Silver Series models of the FAROArm(R) and AnthroCam(R) software, compared to
Bronze Series models and the Company's medical and surgical products. Gross
margins as a percentage of sales declined from 50.7% in 1994 to 49.4% in 1995,
primarily because of price reductions made to increase sales volume and a
$531,000 charge to cost of sales relating to a change in the estimated life of
product design costs.
Selling expenses. Selling expenses increased $439,000, or 28.0%, from $1.6
million in 1994 to $2.0 million in 1995. This increase was primarily a result of
the hiring of additional personnel related to the Company's continued expansion
of sales to manufacturing and industrial markets ($281,000) and related
marketing activities ($158,000). Selling expenses as a percentage of sales
decreased from 34.8% in 1994 to 20.4% in 1995. This decrease was due to an
increase in sales without a commensurate increase in selling expenses.
General and administrative expenses. General and administrative expenses
decreased $18,000, or 3.4%, from $521,000 in 1994 to $503,000 in 1995. General
and administrative expenses as a percentage of sales decreased from 11.6% in
1994 to 5.1% in 1995. This decrease reflects a one-time expense of $147,000 in
1994 related to a terminated private stock offering. Net of this one-time
expense, general and administrative expenses increased $129,000, or 34.4%, from
$374,000 in 1994 due to increases in legal fees ($39,000) and administrative
salaries and insurance associated with the Company's growth and increased
occupancy costs ($113,000). However, general and administrative expenses
decreased as a percentage of sales from 8.3% in 1994 to 5.1% in 1995.
13
FARO TECHNOLOGIES
Research and development expenses. Research and development expenses
increased $190,000, or 109.8%, from $173,000 in 1994 to $364,000 in 1995. This
increase was attributable to an accounting change relating to production design
costs ($260,000), which was partially offset by a decrease in personnel costs
($70,000). Research and development expenses as a percentage of sales decreased
from 3.8% in 1994 to 3.7% in 1995.
Employee stock options expenses. The Company granted stock options for the
first time in 1995 under its 1993 Stock Option Plan. As a result, the Company
recognized employee stock options expenses of $107,000 in 1995 compared to none
in 1994.
Interest expense. Interest expense increased $163,000, or 84.6%, from
$193,000 in 1994 to $355,000 in 1995. This increase was due to new borrowings
that were obtained to finance additional working capital needs to complete the
transition from the medical market to the manufacturing and industrial markets.
Income tax expense. The Company recognized an income tax benefit of
$342,000 in 1995 compared to no provision for income taxes in 1994. In 1994, the
deferred income tax benefit of $146,000 was offset by a valuation allowance due
to the Company's history of operating losses. In 1995, the Company's income tax
provision was offset by a corresponding reduction in its deferred tax valuation
allowance. In addition, the remaining deferred tax asset valuation allowance was
reversed because the Company had commenced profitable operations.
Net income (loss). The Company's net income (loss) for 1995 increased $2.0
million from a net loss of $428,000 in 1994 to net income of $1.6 million in
1995.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed an initial public offering of
common stock which provided net proceeds of $31.7 million.
For the year ended December 31, 1997, net cash used by operating activities
was $832,000 compared to net cash provided by operating activities of $1.5
million for 1996. Net cash decreased due to an increase in accounts receivable
and a decrease in accounts payable.
Net cash used in investing activities was $792,000 for the year ended
December 31, 1997 compared to $550,000 for 1996. Net cash used in investing
activities increased in 1997 due to a $108,000 increase in product design costs,
a $70,000 increase in patent costs, and a $64,000 increase in purchases of
property and equipment.
Net cash provided by financing activities for the year ended December
31,1997 was $30.2 million compared to net cash used in financing activities of
$715,000 for 1996. Net cash provided by financing activities increased due to
the proceeds from the Company's initial public offering in September 1997. The
Company invests excess cash balances in short-term investment grade securities,
such as money market investments, obligations of the U.S. government and its
agencies, and obligations of state and local government agencies.
The Company has a loan agreement (the "Agreement") in the form of a term
note and a line of credit. The Agreement combines the equivalent of three
successive one-year term loans, each equal to that portion of the loan that will
be fully amortized in the ensuing year, with a line of credit equal to that
portion of the loan that will not be fully amortized in the ensuing year. The
Company had available borrowings under the Agreement totaling approximately $2
million as of December 31, 1997. Interest accrues at the 30-day commercial paper
rate plus 2.7% and is paid monthly. Borrowings under the Agreement are
collateralized by the Company's accounts and notes receivable, inventory,
property and equipment, intangible assets, and deposits. The Agreement contains
restrictive covenants, including the maintenance of certain amounts of working
capital and tangible net worth and limits on loans to related parties, and
prohibits the Company from declaring dividends. There were no outstanding
borrowings under this loan agreement at December 31, 1997.
In April 1997, the Company obtained a one-year secured $1.0 million line of
credit which bears interest at the 30-day commercial paper rate plus 2.65% per
annum (8.65% at December 31, 1997). There were no outstanding borrowings under
this loan agreement at December 31, 1997.
The Company's principal commitments at December 31, 1997 were leases on its
headquarters and regional offices, and there were no material commitments for
capital expenditures at that date. The Company believes that its cash,
investments, cash flows from operations and funds available from its credit
facilities will be sufficient to satisfy its working capital and capital
expenditure needs at least through 1998.
The proposed expansion of the Company's sales force is anticipated to
increase the Company's selling, general and administrative expenses over the
next 12 months. The Company believes that it will have adequate capital to cover
these expenses at least through 1998.
FOREIGN EXCHANGE EXPOSURE
Sales outside the United States represent a significant portion of the
Company's total revenues. Currently, the majority of the Company's revenues and
expenses are invoiced and paid in U.S. dollars. In the future, the Company
expects a greater portion of its revenues to be denominated in foreign
currencies. Fluctuations in exchange rates between the U.S. dollar and such
foreign currencies may have a material adverse effect on the Company's business,
results of operations and financial condition, particularly its operating
margins, and could also result in exchange losses. The impact of future exchange
rate fluctuations on the results of the Company's operations cannot be
accurately predicted. Historically, the Company has not managed the risks
associated with fluctuations in exchange rates but intends to undertake
transactions to manage such risks in the future. To the extent that the
percentage of the
14
FARO TECHNOLOGIES
Company's non-U.S. dollar revenues derived from international sales increases in
the future, the risks associated with fluctuations in foreign exchange rates
will increase. The Company may use forward foreign exchange contracts with
foreign currency options to hedge these risks.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations in recent years and does not expect inflation to have a
material impact on its operations in 1998.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company is in the process of identifying all significant applications
that will require modification to ensure Year 2000 Compliance. Internal and
external resources are being used to make the required modifications and test
Year 2000 Compliance. The modification process of all significant applications
is substantially complete. The Company plans on completing the testing process
of all significant applications by December 31, 1998.
In addition, the Company is in the process of initiating formal
communications with others with whom it does significant business to determine
their Year 2000 Compliance readiness and the extent to which the Company is
vulnerable to any third party Year 2000 issues. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on Management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.
RECENT ACCOUNTING PRONOUNCEMENTS
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 No.130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No.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 No.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.
CERTAIN FORWARD-LOOKING INFORMATION
Certain matters discussed in this document are forward-looking statements
within the meaning of the federal securities laws. Although the Company believes
that the expectations reflected in such forward-looking statements are based
upon reasonable assumptions, there can be no assurance that its expectations
will be achieved. Factors that could cause actual results to differ materially
from the Company's current expectations include: market acceptance of the
Company's products, which consist of two closely interdependent products; the
amount and timing of and expenses associated with the development and marketing
of new products; the Company's ability to protect and continue to develop its
proprietary technology in the face of competition and technological change;
risks associated with the Company's international operations; and general
economic conditions.
15
FARO TECHNOLOGIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
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.
16
FARO TECHNOLOGIES
CONSOLIDATED STATEMENTS OF INCOME
[Enlarge/Download Table]
Year 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.
17
FARO TECHNOLOGIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
[Enlarge/Download Table]
Retained
Common Stock Additional Earnings Unearned Cumulative
------------------- Paid-in (Accumulated) Compen- Translation
Share Amounts Capital Deficit) sation 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.
18
FARO TECHNOLOGIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Year 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)
Payment 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 OF 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.
19
FARO TECHNOLOGIES
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 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
shipment. Extended maintenance plan revenues are recognized proportionately as
maintenance costs are projected to be 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.
One customer accounted for approximately 10% of total sales for the year
ended December 31, 1996.
Cash and Cash Equivalents -- The Company considers cash on hand and amounts
on deposit with financial institutions which have original maturities of three
months or less to be cash.
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.
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.
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:
[Download Table]
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. 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.
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 No. 128). This Statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to all entities with publicly-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 No. 128.
20
FARO TECHNOLOGIES
A reconciliation of the number of common shares used in calculation of basic and
diluted EPS is presented below:
[Enlarge/Download Table]
Years Ended December 31, 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------
Per-Share Per-Share Per-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
and 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: (i) 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 changed. 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 Risk -- 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.
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 No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 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 No. 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.
21
FARO TECHNOLOGIES
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.
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:
[Download Table]
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
============================================================
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.
5. RELATED PARTY TRANSACTIONS
Leases -- The Company leases its plant and office building from Xenon
Research, Inc. ("Xenon"). All of the outstanding capital stock of Xenon is owned
by Simon Raab and his spouse. Simon Raab is the Chairman of the Board, President
and Chief Executive Officer of the Company. 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 or (b) the Company takes occupancy. The Company expects to take
occupancy of 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:
[Download Table]
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)
===========================================================
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:
[Download Table]
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)
====================================================================
22
FARO TECHNOLOGIES
The components of the Company's net deferred tax asset at December 31, 1997
and 1996 are as follows:
[Download Table]
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
============================================================
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:
[Download Table]
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 an exercise
price of $0.36 per share. Such options were immediately vested and 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 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 to Simon Raab 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.
23
FARO TECHNOLOGIES
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 option 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.
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:
[Download Table]
--------------------------------------------------------------------
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 --
Assuming 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%, 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:
[Download Table]
Weighted-
Average
Exercised
1997 Options Price
------------------------------------------------------------
Outstanding at beginning of year 190,512 $0.36
Granted 797,001 9.90
Forfeited (31,790) 9.67
---------------------------------- --------
Outstanding at end of year 955,723 8.00
================================== ========
Grants exercisable at year-end 498,680 --
Weighted-average fair value of
options granted during the year $ 4.82 --
1996
------------------------------------------------------------
Outstanding at beginning of year 210,902 $0.36
Granted -- --
Forfeited (20,390) 0.36
---------------------------------- --------
Outstanding at end of year 190,512 0.36
================================== ========
Grants exercisable at year-end -- --
Weighted-average fair value of
options granted during the year -- --
1995
------------------------------------------------------------
Outstanding at beginning of year -- --
Granted 210,902 $0.36
Forfeited -- --
---------------------------------- --------
Outstanding at end of year 210,902 0.36
================================== ========
Grants exercisable at year-end -- --
Weighted-average fair value of
options granted during the year $ 1.00 --
The following table summarizes information about the outstanding grants at
December 31, 1997:
[Download Table]
Weighted-
Average
Remaining
Exercise Options Contractual Options
Price Outstanding 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:
[Download Table]
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.
24
FARO TECHNOLOGIES
10. SEGMENT INFORMATION
Revenues are segmented according to the country in which the customer is
located.
[Enlarge/Download Table]
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
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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
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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit 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.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
February 13, 1998
INSIDE BACK COVER
FARO TECHNOLOGIES
CORPORATE INFORMATION
EXECUTIVE OFFICERS
Simon Raab (44)
Chairman of the Board, President and
Chief Executive Officer
Gregory A. Fraser (42)
Chief Financial Officer and
Executive Vice President
SENIOR MANAGEMENT
Daniel T. Buckles (42)
Vice President -- Sales
Ali S. Sajedi (37)
Chief Engineer
DIRECTORS
Simon Raab (1) (44)
Chairman of the Board, President and
Chief Executive Officer; Co-founder; Director since 1982
Gregory A. Fraser (42)
Chief Financial Officer, Executive Vice President, Secretary and Treasurer;
Co-founder; Director since 1982
Hubert d'Amours (1,2) (58)
President, Montroyal Capital Inc. and Capimont Inc. both Montreal, Canada
(venture capital investment); Director, FARO Technologies, Inc. since 1990
Philip R. Colley (59)
President, Colley, Borland and Vale Insurance Brokers Ltd., Ontario, Canada;
Director, FARO Technologies, Inc. since 1984
Andre Julien (1,2) (54)
Private consultant, retired co-founder of Performance Sail Craft, Inc.,
Montreal, Canada, and retired President and owner of Chateau Paints, Inc.,
Montreal, Canada; Director, FARO Technologies, Inc. since 1986
Alexandre Raab (72)
Chairman, privately-held Advanced Agro Enterprises, Ontario, Canada, and former
Chief Executive Officer, privately-held White Rose Nurseries, Ltd., Markham,
Ontario, Canada; Director, FARO Technologies, Inc. since 1982
Norman H. Schipper, Q.C. (67)
Partner, Goodman, Phillips & Vineberg, Toronto, Canada (law firm); Director,
FARO Technologies, Inc. since 1982
1) Member, Audit Committee
2) Member, Compensation Committee
( ) Age
TRANSFER AGENT & REGISTRAR
Firstar Trust Company
Milwaukee, Wisconsin
AUDITORS
Deloitte & Touche LLP
Jacksonville, Florida
LEGAL COUNSEL
Foley & Lardner
Tampa, Florida
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's Common Stock, par value $.01 per share, began trading
on the NASDAQ Stock Market on September 18, 1997, under the symbol FARO. Before
that date, there was no established public trading market for the Common Stock.
The following table sets forth, for the period indicated, the high and low sales
prices of the Common Stock.
[Download Table]
Period High Low
-------------------------------------------
September 18, 1997 -
December 31, 1997 $18 1/8 $9 3/8
The Company has not paid any cash dividends on its Common Stock to date. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition, and may be restricted by future credit
arrangements entered into by the Company. The Company expects to retain any
future earnings for use in operating and expanding its business and does not
anticipate paying any cash dividends in the reasonably foreseeable future.
10-K REPORT
FARO Technologies, Inc.'s annual report to the Securities and Exchange
Commission on Form 10-K will be provided to holders of the Company's securities
at no charge when available. Contact: Investor Relations at 800-736-0234.
ANNUAL STOCKHOLDERS' MEETING
Date: April 27, 1998
Time: 10 A.M.
Location: 125 Technology Park Drive
Lake Mary, FL 32746
FARO USA
CORPORATE HEADQUARTERS -- FLORIDA
FARO Technologies, Inc.
125 Technology Park
Lake Mary, FL 32746-6204
Phone: 407-333-9911
Facsimile: 407-333-4181
KANSAS
1133 S. Rock Road
Suite 3-361
Wichita, KS 67207
Phone: 316-523-1504
Facsimile: 316-526-8535
ILLINOIS
1415 West 22nd Street
Tower Floor
Oak Brook, IL 60523
Phone: 630-571-3400
Facsimile: 630-571-3401
CALIFORNIA
5230 Pacific Concourse Drive
Suite 226
Los Angeles, CA 90045
Phone: 310-536-7001
Facsimile: 310-536-7003
MICHIGAN
39111 West Six Mile Road
Suite 101
Livonia, MI 48152
Phone: 734-591-6742
Facsimile: 734-591-6753
WASHINGTON
500 108th Avenue NE
Suite 800
Bellevue, WA 98004
Phone: 425-688-3533
Facsimile: 425-688-3534
FARO EUROPE
FARO FRANCE
117 Av. Pierre et Marie Curie
45800 St. Jean de Braye
France
Phone: 011-33-2-38-70-02-55
Facsimile: 011-33-2-38-70-05-77
FARO DEUTSCHLAND
Karistr. 31
89073 Ulm
Germany
Phone: 011-49-731-141-0130
Facsimile: 011-49-731-141-0129
FARO UK
42 Warwick Road
Kenilworth
Warwickshire, C8V 1HE England
Phone: 011-44-1926-863-036
Facsimile: 011-44-1926-851-238
Printed on recycled paper.
Dates Referenced Herein and Documents Incorporated by Reference
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