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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1997 or
[] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to
_________
Commission File Number 0-23081
FARO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-3157093
- --------------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
125 Technology Park, Lake Mary, FL 32746
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(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code): (407) 333-9911
Securities to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------ -----------------------
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definite proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 13, 1998, there were outstanding 9,959,241 shares of Common
Stock. The aggregate market value of the voting stock held by nonaffiliates of
the Registrant based on the last sale price reported on the Nasdaq National
Market as of March 13, 1998 was $119,546,499.38.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
--------- -------------------
Portions of the FARO Technologies, Inc. 1997 Part I, Item 2
Annual Report to Shareholders Part II, Items 5-8
Portions of the Proxy Statement, dated March 25, Part III, Items 10-13
1998
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PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
FARO Technologies, Inc. (the "Company") has made forward-looking
statements in this document that are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future risks preceded by, following or that include the words "believes,"
"expects," "anticipates," or similar expressions. For those statements, the
Company cautions that the numerous important factors discussed elsewhere in this
document could affect the Company's actual results and could cause its actual
consolidated results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company.
ITEM 1. BUSINESS.
INDUSTRY BACKGROUND
The creation of physical products involves the processes of design,
engineering, production and measurement and quality inspection. These basic
processes have been profoundly affected by the computer hardware and software
revolution that began in the 1980s. Computer-aided design ("CAD") software was
developed to automate the design process, providing manufacturers with
computerized 3-D design capability. Today, most manufacturers use some form of
CAD software to create designs and engineering specifications for new products
and to quantify and modify designs and specifications for existing products. The
benefits of CAD are significant. The CAD process offers a three-dimensional,
highly-efficient and inherently flexible alternative to traditional design
methods. Many manufacturers have also recently adopted computer-aided
manufacturing ("CAM") technology, in which CAD data directs machines in the
manufacturing process. CAM has further improved the efficiency and quality of
the production of manufactured goods.
A significant aspect of the manufacturing process which traditionally
has not benefitted from computer-aided technology is measurement and quality
inspection. Historically, manufacturers have measured and inspected products
using hand-measurement tools such as scales, calipers, micrometers and plumb
lines for simple measuring tasks, test fixtures for certain large manufactured
products and traditional coordinate measurement machines ("CMMs") for objects
that require higher precision measurement. However, the broader utility of each
of these measurement methods is limited. Although hand-measurement tools are
often appropriate for simple measurements, their use for complex measurements is
time-consuming and limited in adaptability. Test fixtures (customized fixed
tools used to make comparative measurements of production parts to "master
parts") are relatively expensive and must be reworked or discarded each time a
dimensional change is made in the part being measured. In addition, these manual
measuring devices do not permit the manufacturer to compare the dimensions of an
object with its CAD model.
Conventional CMMs are generally large, fixed-base machines that provide
very high levels of precision but have only recently begun to provide a link to
the CAD model of the object being measured. Fixed-base CMMs require that the
object being measured be brought to the CMM and that the object fit within the
CMM's measurement grid. In addition, conventional CMMs generally operate in
metrology laboratories or environmentally-stable quality inspection departments
of manufacturing facilities rather than on the factory floor.
Isolation from the factory floor and the relatively small measurement
grids of CMMs limit their utility to small, readily portable workpieces that
require high levels of measurement precision. As manufactured subassemblies
increase in size and become integrated into even larger assemblies, they become
less transportable, thus diminishing the utility of a conventional CMM.
Consequently, manufacturers must continue to use hand-measuring tools or
expensive customized test fixtures to measure large or unconventionally shaped
objects.
An increasingly competitive global marketplace has created a demand for
higher quality products with shorter life cycles. While manufacturers previously
designed their products to be in production for longer periods of time, current
manufacturing practices must accommodate more frequent product introductions and
modifications, while satisfying more stringent quality and safety standards. In
most cases, only a relatively small percentage of the components of a
manufactured product requires highly precise measurements (less than
one-thousandth of an inch). Conventional CMMs provide manufacturers with very
precise measurement capabilities and cost up to $2 million per unit. However,
they are not responsive to manufacturers' increasing need for cost-effective
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intermediate precision measurement capabilities. The Company believes that a
greater percentage of components requires intermediate precision measurements
(between one- and twenty-thousandths of an inch). In the absence of intermediate
precision measuring systems, manufacturers often are unable to make appropriate
measurements or part-to-CAD comparisons during the manufacturing process,
resulting in decreased productivity, poor product quality and unacceptable
levels of product rework and scrap. Manufacturers increasingly require more
rapid design, greater control of the manufacturing process, tools to compare
components to their CAD specifications and the ability to measure precisely
components that cannot be measured or inspected by conventional CMMs. Moreover,
they increasingly require measurement capabilities to be integrated into the
manufacturing process and to be available on the factory floor.
FARO'S BUSINESS
The Company designs, develops, markets and supports portable,
software-driven, 3-D measurement systems that are used in a broad range of
manufacturing and industrial applications. The Company's principal products are
the FAROArm(R) articulated measuring device and its companion AnthroCam(R)
software. Together, these products integrate the measurement and quality
inspection function with CAD, CAM and computer-aided engineering ("CAE")
technology to improve productivity, enhance product quality and decrease rework
and scrap in the manufacturing process. The Company's products bring precision
measurement, quality inspection and specification conformance capabilities,
integrated with leading CAD software, to the factory floor. The Company is a
pioneer in the development and marketing of 3-D measurement technology in
manufacturing and industrial applications and currently holds or has pending 17
patents in the United States, 12 of which also are held or pending in other
jurisdictions. The Company's products have been purchased by more than 600
customers worldwide, ranging from small machine shops to such large
manufacturing and industrial companies as General Motors, Chrysler, Ford,
Boeing, Lockheed Martin, General Electric, Westinghouse Electric, Caterpillar
and Komatsu Dresser.
FARO PRODUCTS
THE FAROARM(R). The FAROArm(R) is a portable, six-axis, instrumented,
articulated device that approximates the range of motion and dexterity of the
human arm. Each articulated arm is comprised of three major joints, each of
which may consist of one, two or three axes of motion. The FAROArm(R) is
available in a variety of sizes, configurations and precision levels that are
suitable for a broad range of applications. To take a measurement, the operator
simply touches the object to be measured with a probe at the end of the arm and
presses a button. Data can be captured as either individual points or a series
of points. Digital rotational transducers located at each of the joints of the
arm measure the angles at those joints. This rotational measurement data is
transmitted to an on-board controller that converts the arm angles to precise
locations in 3-D space using "xyz" position coordinates and "ijk" orientation
coordinates.
The FAROArm(R) has been designed as an open architecture system. The
communications parameters of the on-board processors have the ability to
combine advanced sensing probes, integrate with conventional CMM software and
communicate with different CAD software packages and a variety of computer
operating systems. This open architecture is designed to provide for easy
integration of the FAROArm(R) into the manufacturing environment. The
customer's ability to use an installed base of computing hardware and software
further reduces the cost of installation and training while initiating the
transition to the Company's preferred group of CAD-based products. To encourage
integration of the FAROArm(R) into the manufacturing environment, the Company
provides a group of seamless interface drivers for leading CAD/CAM packages,
including AutoCAD(R), CADKey(R) and SURFCAM(R). The Company also provides a
full serial communication command protocol to the FAROArm(R) for customers who
write their own interfaces.
The Company offers several models of the FAROArm(R) under two product
lines: the Silver Series and the Bronze Series.
SILVER SERIES. The Silver Series models are the Company's
higher precision (P.003 to P.007 inches) measuring devices and are
available in six, eight and twelve foot measurement diameters. These
models are most frequently used for factory floor inspection and
fit-checking applications. Depending on the size, configuration and
precision level, the Silver Series models are priced between $50,000
and $70,000 when sold as a turnkey system including hardware and
AnthroCam(R) software and between $30,000 and $60,000 without
AnthroCam(R) software.
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BRONZE SERIES. The Bronze Series models are the Company's
medium precision (P.012 to P.016 inches) measuring devices and are
available in six, eight and ten foot measurement diameters. These
models are most frequently used for applications that do not require
high-level precision, such as 3-D modeling, mold production and
reverse-engineering applications. Depending on the size, configuration
and precision level, the Bronze Series models are priced between
$30,000 and $50,000 when bundled with AnthroCam(R) software and between
$14,000 and $23,000 without AnthroCam(R) software.
ANTHROCAM(R). AnthroCam(R) is the Company's proprietary measurement
software. It is built on the AutoCAD/AutoSurf software development platform,
which allows users to benefit from extensive hardware, software, interfacing
and product support libraries and teaching products. AnthroCam(R) software is
offered with the FAROArm(R) and is also offered as an unbundled product. When
unbundled from the FAROArm(R), AnthroCam(R) sells for $15,000.
AnthroCam(R) is the Company's software-based bridge to CAD and CAM; it
allows users to compare measurements of manufactured components with complex CAD
data. In conventional design applications, curved or ergonomic shapes are
typically modeled physically and then converted into data for manufacturing.
AnthroCam(R) provides an alternative to the time and expense of this physical
modeling process with a digital solution. For older parts without data files,
AnthroCam(R) enables pre-existing parts to be measured in order to adapt them to
current manufacturing technologies.
AnthroCam(R) has been designed as an open architecture system, allowing
for efficient integration into the manufacturing environment. The Company
provides a full serial communication command protocol to the AnthroCam(R)
software for customers who write interfaces to their own software. The Company
also provides comprehensive training and support for AnthroCam(R) and offers
this product in a number of international versions.
AnthroCam(R) is a Windows-based, 32-bit application written for the
most recent PC-based technology. AnthroCam(R) has been entirely designed and
programmed by the Company utilizing field input and industry wide beta site
installations. AnthroCam(R) is written as an AutoCAD runtime extension (ARX)
that is the AutoCAD(R) Application Programming Interface (API). The software is
written in the C++ development language using Microsoft Foundation Class (MFC)
standards. The software fully implements UNICODE standards for worldwide
translation allowing the Company to create foreign language versions to enter
international markets more effectively.
SPECIALTY PRODUCTS. The Company licenses and supports certain specialty
products based on its articulated arm technology that are used in medical and
multimedia applications. License and support fees from these products do not
represent a significant portion of the Company's revenues and the Company does
not intend to actively market these products.
The Company's products overcome many limitations of hand-measurement
tools, test fixtures and conventional CMMs by incorporating the following
features:
INTEGRATION WITH CAD TECHNOLOGY. The Company's products
provide a bridge between the virtual 3-D world of the CAD process and
the physical 3-D world of the factory floor. The interface to CAD
allows manufacturers to integrate design, production and measurement
and quality inspection processes on a common software platform. The
Company believes that this integration creates significant savings by
reducing the need for test fixtures and improves productivity by
reducing production set-up times. Finally, the Company's integration
with CAD technology significantly enhances product quality by
maximizing the opportunities to make precise measurements based on
engineering specifications within the manufacturing process.
SIX-AXIS ARTICULATING ARM. The FAROArm(R) incorporates a
six-axis instrumented, articulating device that approximates the range
of motion and dexterity of the human arm. The flexibility of the
FAROArm(R) enables the user to measure complex shapes and ergonomic
structures and to reach behind, underneath and into previously
inaccessible spaces, such as interior surfaces of aircraft or
automobiles. The flexibility of the FAROArm(R) allows customers to
measure more accurately and efficiently than previously possible.
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PORTABILITY AND ADAPTABILITY. The FAROArm(R) is lightweight,
portable and designed for operation in the often harsh environments
typical of manufacturing facilities. The FAROArm(R) can be moved to
multiple locations on the factory floor to measure large parts and
assemblies that cannot be easily moved to a conventional CMM. This
portability extends 3-D measurement to previously inaccessible areas of
the factory floor and eliminates the travel time to and from quality
inspection departments.
LEVELS OF PRECISION RESPONSIVE TO INDUSTRY NEEDS. The
Company's products respond to manufacturers' need for intermediate
levels of measurement precision. Although high levels of precision
(less than one-thousandth of an inch) are required for certain
manufacturing applications, the FAROArm(R) satisfies the greater demand
for measurements that require intermediate precision (one- to
twenty-thousandths of an inch). The Company's products meet the
precision measurement requirements of a substantial portion of products
in the manufacturing process and address the underserved market for
intermediate precision measurement systems.
BROAD AFFORDABILITY. The Company offers various models of the
FAROArm(R) ranging in price from $14,000 to $70,000, while conventional
CMMs range in price from $20,000 to $2 million. The relatively low cost
of the Company's products compared to conventional CMMs has afforded
manufacturers the opportunity to introduce cost-effective measurement
and quality inspection functions throughout the manufacturing process.
Manufacturers are able to purchase multiple units to be used at
different locations within a single manufacturing facility and to
introduce measurement and quality inspection at additional points in
the manufacturing process.
EASE OF USE. The Company's software products have been
specifically designed to be used by production line personnel with
minimal prior computer or CAD experience. The bundled hardware and
software system is designed to require minimal training for production
line personnel to reach proficiency with the product. To take a
measurement, the operator simply touches the object to be measured with
a probe at the end of the arm and presses a button. The FAROArm(R) is
also ergonomically designed to facilitate use in typical factory floor
applications.
PAPERLESS DATA COLLECTION. The FAROArm(R) allows for paperless
data collection by a connected computer hosting related CAD application
software. This function responds to current trends toward automated
statistical process controls for facilitating data analysis. Paperless
data collection improves productivity and eliminates the risk of error
in transcribing the collected information.
OPEN ARCHITECTURE. The FAROArm(R) and AnthroCam(R) have been
designed as an open architecture system, allowing the user to unbundle
the hardware and software to interface the FAROArm(R) with other
CAD-based software packages and to interface AnthroCam(R) with other
3-D measurement devices. In addition, the Company's software and
hardware are built in accordance with computer and communications
industry standards so that these products may be integrated with a
broad range of application software packages.
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CUSTOMERS
The Company's products have been purchased by more than 600 customers
ranging from small machine shops to large manufacturing and industrial
companies. The Company's ten largest customers by revenue represented an
aggregate of 15% of the Company's total revenues in 1997. No customer
represented 10.0% or more of the Company's sales in 1997. The following table
illustrates, by vertical market, the Company's diverse customer base:
<TABLE>
<CAPTION>
<S> <C> <C>
AEROSPACE APPAREL AND FOOTWEAR AUTOMOTIVE
Boeing Nike AO Smith Johnson Controls
GE Aircraft Engines Reebok Chrysler Lear Corporation
Lockheed Martin Ford Mercedes Benz
Nordam Repair Division General Motors Porsche
Northrop Grumman Honda Samsung Motors
Orbital Sciences Hyundai Toyota
Dee Howard Vehma International
BUSINESS AND CONSUMER ELECTRIC UTILITIES AND FARM/LAWN EQUIPMENT
MACHINES MANUFACTURERS New Holland North America
Corning Asahi General Electric Toro
Xerox Southern California Edison
Tennessee Valley Authority
Westinghouse Electric
HEAVY EQUIPMENT PERSONAL ROAD/ PLASTICS
MANUFACTURERS WATER/SNOW CRAFT Able Design Plastics
Caterpillar Harley Davidson Paramount Plastics
Komatsu Dresser Polaris Industries Thermoform Plastics
Champion Road Machinery
Texas Steel
</TABLE>
SALES AND MARKETING
The Company directs its sales and marketing efforts from its
headquarters in Lake Mary, Florida. At December 31, 1997, the Company employed
34 sales professionals who operate from the Company's headquarters, five
domestic regional sales offices located in Chicago, Dallas, Detroit, Los Angeles
and Seattle, and three international sales offices located in Coventry, United
Kingdom, St. Jean de Braye, France, and Ulm, Germany. The Company also utilizes
three domestic and 12 international distributors in territories where the
Company does not have regional sales offices.
The Company uses a process of integrated lead qualification and sales
demonstration. Once a customer opportunity is identified, the Company employs a
team-based sales approach involving inside and outside sales personnel who are
supported by application engineers.
The Company employs a variety of marketing techniques, including direct
mail, trade shows, and advertising in trade journals, and proactively seeks
publicity opportunities for customer testimonials. Management believes that
word-of-mouth advertising from the Company's existing customers provides an
important marketing advantage. The Company also has a computerized sales and
marketing software system with telemarketing, lead tracking and analysis, as
well as customer support capabilities. Each of the Company's sales offices is
linked electronically to the Company's headquarters.
In June 1996, the Company entered into an OEM agreement with Mitutoyo
Corporation ("Mitutoyo"), a Japanese company that is the world's largest
manufacturer of metrology tools. Mitutoyo markets the FAROArm(R) in Japan under
the name SPINARM(R). The agreement, which grants Mitutoyo a non-exclusive right
to sales in Japan, expires in June 1999 and is renewable for successive one
year terms.
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RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to
achieve technological leadership, which will require ongoing enhancements of its
products and the development of new applications and products that provide 3-D
measurement solutions. Accordingly, the Company intends to continue to make
substantial investments in the development of new technologies, the
commercialization of new products that build on the Company's existing
technological base and the enhancement and development of additional
applications for its products.
The Company's research and development efforts are directed primarily
at enhancing the technology of its current products and developing new and
innovative products that respond to specific requirements of the emerging market
for 3-D measurement systems. The Company's research and development efforts
have been devoted primarily to mechanical hardware, electronics and software.
The Company's engineering development efforts will continue to focus on the
FAROArm(R) and AnthroCam(R) products. Significant efforts are also being
directed toward the development of new measurement technologies and additional
features for existing products. See "Technology."
At December 31, 1997, the Company employed 14 scientists and
technicians in its research and development efforts. Research and development
expenses were $1,076,000 in 1997. Research and development activities,
especially with respect to new products and technologies, are subject to
significant risks, and there can be no assurance that any of the Company's
research and development activities will be completed successfully or on
schedule, or, if so completed, will be commercially accepted.
TECHNOLOGY
The primary measurement function of the FAROArm(R) is to provide
orientation and position information with respect to the probe at the end of the
FAROArm(R). This information is processed by software and can be compared to the
desired dimensions of the CAD data of a production part or assembly to determine
whether the measured data conforms to meet dimensional specifications.
To accomplish this measurement function, the FAROArm(R) is designed
as an articulated arm with six or seven joints. The arm consists of aluminum
links and rotating joints that are combined in different lengths and
configurations, resulting in human arm-like characteristics. Each joint is
instrumented with a rotational transducer, a device used to measure rotation,
which is based on optical digital technology. The position and orientation of
the probe in three dimensions is determined by applying trigonometric
calculations at each joint. The position of the end of a link of the arm can be
determined by using the angle measured and the known length of the link.
Through a complex summation of these calculations at each joint, the position
and orientation of the probe is determined.
The Company's products are the result of a successful integration of
state-of-the-art developments in mechanical and electronic hardware and
applications software. The unique nature of the Company's technical developments
is evidenced by the Company's numerous U.S. and international patents. The
Company maintains low cost product design processes by retaining development
responsibilities for all electronics, hardware and software.
MECHANICAL HARDWARE. The FAROArm(R) is designed to function in diverse
environments and under rigorous physical conditions. The arm monitors its
temperature to adjust for environments ranging from -10 degrees to +50 degrees
Celsius. The arm is constructed of pre-stressed precision bearings to resist
shock loads. Low production costs are attained by the proprietary combination of
reasonably priced electromechanical components accompanied by the optimization
and on-board storage of calibration data. Many of the Company's innovations
relate to the environmental adaptability of its products. Significant features
include integrated counter-balancing, configuration convertibility and
temperature compensation.
ELECTRONICS. The rotational information for each joint is processed by
an on-board computer that is designed to handle complex analyses of joint data
as well as communications with a variety of host computers. The Company's
electronics are based on digital signal processing and surface mount
technologies. The Company's products meet all mandatory electronic safety
requirements. Advanced circuit board development, surface mount production and
automated testing methods are used to ensure low cost and high reliability.
SOFTWARE. AnthroCam(R) is a Windows-based, 32-bit application written
for the most recent PC-based technology. AnthroCam(R) has been entirely designed
and programmed by the Company utilizing field input and
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industry wide beta site installations. AnthroCam(R) is written as an AutoCAD
runtime extension (ARX) that is the AutoCAD(R) Application Programming Interface
(API). The software is written in the C++ development language using Microsoft
Foundation Class (MFC) standards. The software fully implements UNICODE
standards for worldwide translation allowing the Company to create foreign
language versions to enter international markets more effectively. The software
is developed with the cooperation of diverse user beta sites and a well
developed system for tracking and implementing market demands.
INTELLECTUAL PROPERTY
The Company holds or has pending 17 patents in the United States, 12 of
which also are held or pending in other jurisdictions. The Company also has 16
registered trademarks in the United States and 12 trademark applications pending
in the United States and the European Union.
The Company relies on a combination of contractual provisions and trade
secret laws to protect its proprietary information. There can be no assurance
that the steps taken by the Company to protect its trade secrets and proprietary
information will be sufficient to prevent misappropriation of its proprietary
information or to preclude third-party development of similar intellectual
property.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The Company
intends to vigorously defend its proprietary rights against infringement by
third parties. However, policing unauthorized use of the Company's products is
difficult, particularly overseas, and the Company is unable to determine the
extent to which piracy of its software products exists. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as the laws of the United States.
The Company does not believe that any of its products infringe on the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to current
or future products. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
MANUFACTURING AND ASSEMBLY
The Company manufactures its products primarily at its headquarters in
Lake Mary, Florida. Manufacturing consists primarily of assembling components
and subassemblies purchased from suppliers into finished products. The primary
components, which include machined parts and electronic circuit boards, are
produced by subcontractors according to the Company's specifications. All
products are assembled, calibrated and finally tested for accuracy and
functionality before shipment. In limited circumstances, the Company performs
in-house circuit board assembly and part machining. The Company's facilities and
operations are in the process of completing requirements for ISO 9000
registration.
COMPETITION
The broad market for measurement devices, which includes
hand-measurement tools, test fixtures and conventional, fixed-base CMMs, is
highly competitive. Manufacturers of hand-measurement tools and traditional CMMs
include a significant number of well-established companies that are
substantially larger and possess substantially greater financial, technical and
marketing resources than the Company. There can be no assurance that these
entities or others will not succeed in developing products or technologies that
will directly compete with those of the Company. The Company will be required to
make continued investments in technology and product development to maintain its
technological advantage over its competition. There can be no assurance that the
Company will have sufficient resources to make such investments or that the
Company's product development efforts will be sufficient to allow the Company to
compete successfully as the industry evolves. The Company's products compete on
the basis of portability, accuracy, application features, ease-of-use, quality,
price and technical support.
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The Company's only significant direct competitor is a joint venture of
Romer SRL (France) and Romer, Inc. (California). The Company is aware of a
direct competitor in Germany and two new direct competitors in Italy, each of
which the Company believes currently has negligible sales. The Company also has
an established, indirect competitor in Japan that markets a measuring device
that is mobile but not portable. There can be no assurance that such companies
will not devote additional resources to the development and marketing of
products that compete with those of the Company.
The worldwide trend toward CAD-based factory floor metrology has
resulted in the introduction of CAD-based inspection software for conventional
CMMs by most of the large CMM manufacturers. Certain CMM manufacturers are
miniaturizing, and in some cases increasing the mobility of, their conventional
CMMs. Nonetheless, these CMMs still have small measurement volumes, lack the
adaptability typical of portable, articulated arm measurement devices and lose
accuracy outside the controlled environment of the metrology lab.
BACKLOG
At December 31, 1997, the Company had orders representing $1.7 million
in sales. All outstanding orders at December 31, 1997, were shipped by
February 28, 1998. The Company affords its customers the right to cancel any
order at any time before the product is shipped. Historically, the number of
canceled orders has been negligible. Nonetheless, there can be no assurance that
all orders in backlog will be shipped, and backlog may not be indicative of
future sales.
EMPLOYEES
At December 31, 1997, the Company had 111 full time employees,
consisting of 34 sales/application engineering staff, 32 production staff, 14
research and development staff, 18 administrative staff, and 13 customer service
specialists. None of the Company's employees is represented by a labor
organization, and the Company is not a party to any collective bargaining
agreements. The Company believes its employee relations are good. Management
believes that its future growth and success will depend in part on its ability
to retain and continue to attract highly skilled personnel. The Company
anticipates that it will obtain the additional personnel required to satisfy the
staffing requirements caused by its planned expansion over the next 18 months.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, as well as certain key
employees, and their ages, are as follows:
<TABLE>
<CAPTION>
Name Age Principal Position
---- --- ------------------
<S> <C> <C>
Executive Officers:
Simon Raab.......................... 44 Chairman of the Board, Chief Executive Officer, and
President
Gregory A. Fraser................... 42 Chief Financial Officer, Executive Vice President, Secretary,
and Treasurer
Key Employees:
Daniel T. Buckles................... 42 Vice President-Sales
Ali S. Sajedi....................... 37 Chief Engineer
</TABLE>
SIMON RAAB, PH.D., a co-founder of the Company, has served as the
Chairman of the Board, Chief Executive Officer and a director of the Company
since its inception in 1982 and as President since 1986. Mr. Raab holds a Ph.D.
in Mechanical Engineering from McGill University, Montreal, Canada, a Masters of
Engineering Physics from Cornell University and a Bachelor of Science in Physics
with a minor in Biophysics from the University of Waterloo, Canada.
GREGORY A. FRASER, PH.D., a co-founder of the Company, has served as
Chief Financial Officer and Executive Vice President since May 1997 and as
Secretary, Treasurer and a director of the Company since its inception in 1982.
Mr. Fraser holds a Ph.D. in Mechanical Engineering from McGill University,
Montreal, Canada,
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a Masters of Theoretical and Applied Mechanics from Northwestern University and
a Bachelor of Science and Bachelor of Mechanical Engineering from Northwestern
University.
DANIEL T. BUCKLES has been Vice President Sales for the Company since
May 1997. From 1993 to May 1997, he served as the Director of Marketing for the
Company's Industrial Products Group. From 1991 to 1993, Mr. Buckles was the
Manager of Product Assurance Technical Operations for the Aerospace and Naval
Division of Martin Marietta Corporation. From 1987 to 1991, Mr. Buckles held
program management positions for a variety of advanced development and
manufacturing programs at Martin Marietta Corporation. From 1976 to 1987, Mr.
Buckles held various program management and manufacturing positions at the
Submarine Signal Division of Raytheon Company. Mr. Buckles holds a Bachelor of
Arts in Theoretical and Quantitative Economics and a Masters of Business
Administration from the University of Massachusetts Dartmouth.
ALI S. SAJEDI has been Chief Engineer for the Company since its
inception in 1982. Mr. Sajedi has been responsible for implementation of
research and development plans and for production oversight of the Company's
self-managed production team. Mr. Sajedi holds a Bachelor of Mechanical
Engineering from McGill University.
ITEM 2. PROPERTIES.
The Company's headquarters and principal operations are located in a
leased building in Lake Mary, Florida containing approximately 35,000 square
feet. The Company believes that its current facilities will be adequate for its
foreseeable needs and that it will be able to locate suitable space for
additional regional offices as those needs develop.
In addition, the Company has five sales offices in the United States
and three sales offices in Europe. All of the offices comprising the sales
offices are leased by the Company. The information required by the remainder of
this Item is incorporated by reference from the inside back cover page of the
Company's 1997 Annual Report to Stockholders.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company may be involved in litigation incidental
to its business. Currently, the Company is not a party to any litigation, and is
not aware of any pending or threatened litigation, that is expected to have a
material adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of calendar 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The market information required by this Item is incorporated by
reference from the inside back cover page of the Company's 1997 Annual Report to
Stockholders. As of March 24, 1998, there were 9,959,241 shares of the Company's
Common Stock, par value $.001, outstanding, held by 70 shareholders of record.
The prospectus comprising part of the Company's Registration Statement
on Form S-1, File No. 333-32983, was declared effective by the Securities and
Exchange Commission on September 17, 1997. The managing underwriters were
Raymond James & Associates, Inc. and Hanifen, Imhoff, Inc. Common Stock was the
only class of securities registered. The offering closed on September 17, 1997
upon the sale by the Company of an aggregate of 2,919,000 shares of Common
Stock, including 159,000 shares sold pursuant to the over-allotment option
granted to the underwriters ("over-allotment"), and upon the sale of an
aggregate of 945,000 shares of Common Stock by selling shareholders, including
345,000 shares sold pursuant to the over-allotment.
9
<PAGE> 11
The offering price of all shares sold pursuant to the Prospectus was
$12.00 per share. Total offering proceeds derived from the sale of Common Stock
by the Company and selling shareholders aggregated $35,028,000 and $11,340,000,
respectively, including $1,908,000 and $4,140,000 attributable to the
over-allotment. Expenses incurred by the Company in connection with the
offering to December 31, 1997 include estimated offering expenses of $899,000,
and underwriters' discount of $2,452,000, including $134,000 attributable to the
over-allotment. The selling shareholders incurred underwriters' discounts
aggregating $793,000, including $289,000 attributable to the over-allotment. No
payments were made to directors, officers, or their associates, or to persons
holding 10% or more of the Company's Common Stock, or to any other affiliate of
the Company in connection with the offering.
Net offering proceeds received by the Company, after deducting its
expenses and underwriters' discounts, aggregate $31,677,000, including
$1,774,000 attributable to the over-allotment. The Company did not receive
proceeds from the shares sold by the selling shareholders.
As of December 31, 1997, none of the proceeds of the offering were used
for construction of plant, building and facilities; purchase and installation of
machinery and equipment; purchase of real estate; or acquisition of other
businesses. Approximately $600,000 was used to repay indebtedness, $2.7 million
was used as working capital, and $28 million was invested in money market
investments, obligations of the United States government and its agencies and
obligations of state and local government agencies all with maturities of less
than three months. No payments were made to directors, officers, or their
associates, to persons holding 10% or more of the Company's Common Stock, or to
any other affiliate of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is incorporated by reference from
page 9 of the Company's 1997 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information required by this Item is incorporated by reference from
pages 10 through 14 of the Company's 1997 Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is incorporated by reference from
pages 15 through 24 of the Company's 1997 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the Items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
10
<PAGE> 12
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors required by this
Item is incorporated by reference from the Company's Proxy Statement.
The information concerning the company's executive officers required by
this Item is incorporated by reference herein from the section of this Report in
Part I, Item 1, entitled "Executive Officers of the Registrant."
The information regarding compliance with Section 16 of the Securities
Exchange Act of 1934, as amended, is set forth in the Proxy Statement and is
hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference
from the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference
from the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference
from the Company's Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT. The following documents are
filed as part of this Report:
(1) FINANCIAL STATEMENTS. The following Consolidated Financial
Statements of FARO Technologies, Inc. and Report of Deloitte & Touche LLP,
Independent Certified Public Accountants, are incorporated by reference from
pages 15 through 24 of the Registrant's 1997 Annual Report to Stockholders:
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Income for the Years Ended December 31,
1995, 1996 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years Ended December 31,
1995, 1996 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) FINANCIAL STATEMENT SCHEDULES. Schedules not listed herein have
been omitted because they are not applicable or are not required or the
information required to be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.
11
<PAGE> 13
(3) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Articles of Incorporation, as amended (Filed as Exhibit 3.1 to Registrant's Registration Statement
on Form S-1, No. 333-32983, and incorporated herein by reference)
3.2 Bylaws, as amended (Filed as Exhibit 3.2 to Registrant's Registration Statement on Form S-1, No.
333-32983, and incorporated herein by reference)
4.1 Specimen Stock Certificate (Filed as Exhibit 4.1 to Registrant's Registration Statement on Form
S-1, No. 333-32983, and incorporated herein by reference)
10.1 1997 Stock Option Plan, as amended (Filed as Exhibit 10.1 to Registrant's Registration Statement
on Form S-1, No. 333-32983, and incorporated herein by reference)
10.2 1997 Employee Stock Option Plan (Filed as Exhibit 10.2 to Registrant's Registration Statement
on Form S-1, No. 333-32983, and incorporated herein by reference)
10.3 1997 Non-Employee Director Stock Option Plan (Filed as Exhibit 10.3 to Registrant's Registration
Statement on Form S-1, No. 333-32983, and incorporated herein by reference)
10.4 1997 Non-Employee Directors' Fee Plan (Filed as Exhibit 10.4 to Registrant's Registration
Statement on Form S-1, No. 333-32983, and incorporated herein by reference)
10.5 Term WCMA Loan and Security Agreement, dated September 24, 1996, between the Registrant
and Merrill Lynch Business Financial Services, Inc. (Filed as Exhibit 10.5 to Registrant's
Registration Statement on Form S-1, No. 333-32983, and incorporated herein by reference)
10.6 WCMA Note, Loan and Security Agreement, dated April 23, 1997, between the Registrant and
Merrill Lynch Business Financial Services, Inc. (Filed as Exhibit 10.6 to Registrant's Registration
Statement on Form S-1, No. 333-32983, and incorporated herein by reference)
10.7 Business Lease, dated March 1, 1991, between the Registrant (as successor-by-merger) to FARO
Medical Technologies (U.S.), Inc.) and Xenon Research, Inc. (Filed as Exhibit 10.7 to
Registrant's Registration Statement on Form S-1, No. 333-32983, and incorporated herein by
reference)
10.8 OEM Purchase Agreement, dated June 7, 1996 between the Company and Mitutoyo Corporation
(Filed as Exhibit 10.8 to Registrant's Registration Statement on Form S-1, No. 333-32983, and
incorporated herein by reference)
10.9 Nonexclusive Unique Application Reseller Agreement, dated September 9, 1996, between the
Registrant and Autodesk, Inc. (Filed as Exhibit 10.9 to Registrant's Registration Statement on
Form S-1, No. 333-32983, and incorporated herein by reference)
10.10 Form of Patent and Confidentiality Agreement between the Registrant and each of its employees
(Filed as Exhibit 10.10 to Registrant's Registration Statement on Form S-1, No. 333-32983, and
incorporated herein by reference)
10.11 Nonexclusive Unique Application Reseller Agreement, dated as of March 1, 1998, between the
Registrant and Autodesk, Inc. (Filed herewith)
10.12 First Amendment to Business Lease, dated as of January 20, 1998, between the Registrant and
Xenon Research, Inc., successor by merger to FARO Medical Technologies (US), Inc. (Filed
herewith)
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C>
11.1 Statement re Computation of Per Share Earnings (Incorporated by reference from page 1 to the
Registrant's 1997 Annual Report to Stockholders filed herewith as Exhibit 13.1)
13.1 Annual Report to Stockholders for the year ended December 31, 1997 (To be deemed filed herewith
only to the extent required by the instructions to exhibits for reports on Form 10-K)
21.1 List of Subsidiaries (Filed herewith)
23.1 Consent of Deloitte & Touche LLP (Filed herewith)
24.1 Power of Attorney (Included on Page 14 of this Report)
27.1 Financial Data Schedule for year ended December 31, 1997 (Filed herewith for SEC filing purposes only)
27.2 Restated Financial Data Schedule for nine months ended December 31, 1997 (Filed herewith for SEC filing purposes
only)
27.3 Restated Financial Data Schedule for six months ended December 31, 1997 (Filed herewith for SEC filing purposes
only)
27.4 Restated Financial Data Schedule for year ended December 31, 1996 (Filed herewith for SEC filing purposes only)
</TABLE>
(B) REPORTS ON FORM 8-K
None.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized
FARO TECHNOLOGIES, INC.
Date: March 26, 1998 By: /s/ Gregory A. Fraser
-----------------------------------------------
GREGORY A. FRASER, Ph.D.
Executive Vice President, Secretary, Treasurer,
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
signature appears below constitutes and appoints SIMON RAAB and GREGORY A.
FRASER, and each of them individually, his true and lawful attorney-in-fact and
agent, with full power of substitution and revocation, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Simon Raab Chairman of the Board, President, March 26, 1998
- ----------------------------------------------- Chief Executive Officer (Principal
Simon Raab Executive Officer), and Director
/s/ Gregory A. Fraser Executive Vice President, Secretary, March 26, 1998
- ----------------------------------------------- Treasurer, Chief Financial Officer
Gregory A. Fraser (Principal Financial and Accounting
Officer), and Director
/s/ Hubert d'Amours Director March 26, 1998
- -----------------------------------------------
Hubert d'Amours
/s/ Philip Colley Director March 26, 1998
- -----------------------------------------------
Philip Colley
/s/ Alexandre Raab Director March 26, 1998
- -----------------------------------------------
Alexandre Raab
/s/ Norman H. Schipper Director March 26, 1998
- -----------------------------------------------
Norman H. Schipper
/s/ Andre Julien Director March 26, 1998
- -----------------------------------------------
Andre Julien
</TABLE>
14
<PAGE> 1
EXHIBIT 10.11
This Nonexclusive Unique Application Reseller Agreement (the "Agreement") is
entered into as of March 1, 1998 (the "Effective Date") between Autodesk, Inc.,
a Delaware corporation with principal offices at 111 McInnis Parkway San Rafael,
California 94903 ("Autodesk") and Faro Technologies, a Delaware corporation with
principal offices at 125 Technology Park Dr., Lake Mary, FL 32746 ("UAR").
THE PARTIES AGREE AS FOLLOWS:
DEFINITIONS.
"Software" shall mean the Autodesk software set forth on
Exhibit A and any subsequent release delivered to UAR by Autodesk as
mutually agreed upon by the parties in writing.
"Documentation" shall mean the reference manual customarily
supplied to Customers by Autodesk with the Autodesk retail version of
the Software.
"Customer" shall mean any third party licensee of the UAR
Product who obtains such UAR Product solely in order to fulfill its own
personal or business needs and not for further distribution or resale.
"UAR Product" shall mean the Software bundled in combination
with and accompanied by UAR's software as described in Exhibit A.
"Territory" shall mean the countries set forth in Exhibit B.
"Sales Channels" shall be those channels set forth in Exhibit
B.
"Market" shall mean the market set forth in Exhibit B.
All references in this Agreement to the "Sale" of or "selling"
or "purchase" of Software shall mean the sale of a license to use such
Software or Software Copies.
APPOINTMENT AND RESPONSIBILITIES OF UAR.
2.1 Appointment. Subject to the terms and conditions of this
Agreement, and in consideration of UAR's purchase commitment and other
obligations assumed below, Autodesk grants UAR a non-exclusive,
non-transferable license to reproduce and distribute, through UAR's
Sales Channels, promote, market and sublicense the Software, bundled
with UAR's software to form the UAR Product within the Territory and
Market as defined above. Without limitation to other remedies available
to Autodesk, in the event UAR breaches any of the provisions of this
authorization UAR shall pay to Autodesk, as liquidated damages and not
as a penalty, an amount (with respect to each such sale) equal to the
difference between the then-current Autodesk suggested retail price as
indicated on the applicable published price list in the country of sale
and the amount actually paid by UAR for each copy acquired by UAR under
this Agreement.
Autodesk reserves the unrestricted right to
distribute, promote, market and sublicense the Software and
Documentation (as provided to UAR or as distributed by Autodesk in the
Autodesk retail version of the Software) in the Territory, including
but not limited to through OEMs, VARs, and other third party resellers
(including other unique application resellers), as well as directly to
Customers.
Distribution of Software. UAR shall not distribute any
Autodesk Software or Documentation to any party separately or unbundled
from the UAR Product, or price quote or invoice the Autodesk Software
as a separate item, unless authorized by Autodesk for customer service
purposes. UAR acknowledges that
<PAGE> 2
any transfer of the Software or Documentation acquired pursuant to this
Agreement as a stand-alone product is expressly prohibited. For the
avoidance of doubt, failure of comply with this obligation shall
constitute a material breach of this Agreement and may lead to
immediate termination.
Promotion of UAR Products. UAR, shall, at its own expense,
actively promote the distribution of the UAR Product within the
Territory and shall assume all costs and obligations, including any
commissions, involved with sales and marketing of the UAR Product. UAR
shall not actively promote, advertise, market or solicit orders for UAR
Product, or open branches or maintain distribution depots for supply or
support of the UAR Product, outside the Territory.
Marketing. UAR shall, at its own expense:
(i) reference the Software as a component of the UAR
Product in UAR's brochures and feature the Software as a
component of the UAR Product in any applicable trade show that
it attends;
(ii) provide adequate contact with existing
Customers, including notifying Customers of bugs or errors in
the Software and corrections or fixes for such bugs or errors
as suggested by Autodesk to UAR;
(iii) assist Autodesk in assessing Customer
requirements for the Software as a component of the UAR
Product, including modifications and improvements thereto, in
terms of quality, design, functional capability, and other
features; and
promptly notify Autodesk of bugs or errors in the
Software discovered by UAR or reported to UAR by Customers.
End User Licensing. UAR shall deliver Software to Customers
and ensure that the standard Autodesk, Inc. Software License Agreement
accompanying the Software is provided to and complied with by each
Customer. UAR may not enter into any license agreement on behalf of
Autodesk or Autodesk Inc. UAR shall forward all Software License
Agreements acknowledgment forms or registration cards it receives to
Autodesk. Notwithstanding the foregoing, the UAR Product may contain a
separate license outlining the terms of UAR's Customer License with
respect to that portion of the UAR Product not comprising the Software.
Registration. UAR shall be responsible for Customer
registration of the UAR Product. To protect against unauthorized
copying or use of Software and to ensure compliance with the terms of
the Standard Autodesk Software License Agreement accompanying the
Software, UAR shall maintain an accurate accounting of the Autodesk
serial numbers incorporated into the UAR Product which must be
registered by UAR's Customers, and shall provide registration reports
to Autodesk as set forth in Paragraph 5.6 (Sales and Inventory
Reports). Nothing herein shall limit Autodesk's right to register
Customers directly.
3. REPRODUCTION.
3.1 Subject to the terms and conditions of this Agreement,
Autodesk grants to UAR, a limited, nonexclusive right to reproduce
copies of the Software. UAR may not sublicense its right to reproduce
such Software to any third party unless Autodesk consents in writing to
the sublicense. Such right to reproduce the Software does not include
the right to reproduce the Documentation.
3.2 UAR is solely responsible for reproduction of the Software
in accordance with industry standards of quality assurance.
<PAGE> 3
3.3 UAR may use its own company label on the UAR Product
media, provided however, that each copy of the media embodying the UAR
Product bears the Autodesk copyright notice.
3.4 UAR may, from time to time, reproduce copies of the
Software to be used for evaluation purposes so long as: (a) UAR
notifies Autodesk of its need to reproduce such evaluation copies and
the number of copies needed; and (b) the Software is destroyed and
permanently deleted from any of the test systems on which it is
installed. No royalty will be due on such evaluation copies.
RESTRICTIONS.
Modification.
For All Countries. Autodesk shall be responsible for
all reproduction of copies of the Software and Documentation
except as set forth in section 3 above. UAR shall not disable
features of the Software, modify, enhance or make derivative
works of the Software or Documentation or sublicense such
rights. UAR may, however, link its software to the Software
and revise the user interface of the Software. UAR also may
affix a label to the Software and Documentation identifying
UAR's name, address, phone number and identifying mark or
logo, provided that the label does not obscure any other
identifying mark or label of Autodesk. In no event shall UAR
alter or modify the contents of any magnetic or printed
material or offer to do so for any third party, without the
previous written consent of Autodesk. UAR agrees not to
reverse engineer, disassemble, or decompile the Software in
whole or in part. UAR acknowledges that Autodesk desires to
protect the integrity of the Software as a commercial
technology. UAR agrees that the licenses granted herein are
subject to UAR bundling the Software in its entirety, as
delivered by Autodesk to UAR and UAR specifically agrees not
to bundle a lesser subset of any Software files with the UAR
Product without Autodesk's prior written consent.
In the European Community. Notwithstanding the
foregoing, if the term Territory as defined in this Agreement
includes a country that is a member of the European Community,
UAR shall be entitled to reproduce one copy of the code of the
Software (i.e., to decompile the code) where such
decompilation is indispensable to obtain the information
necessary to achieve the interoperability of an independently
created computer program with such Software if the conditions
of Article 6.1 of the EC Council Directive 14 May 1991 on the
legal protection of computer programs (the "Directive") are
met, subject to the further condition precedent that UAR has
provided Autodesk with a written request for the information
purportedly required to achieve interoperability, and Autodesk
has been unable to provide said information within 45 days of
UAR's request. UAR hereby undertakes that no information
obtained from such decompilation shall be used in any manner
incompatible with Article 6.2 or 6.3 of the Directive.
Furthermore, UAR agrees to give at least 10 days prior written
notice to Autodesk of all decompilation permitted hereby and
to allow representatives of Autodesk to be present at all such
decompilation. UAR hereby undertakes that no decompilation
permitted in accordance with this Section 4.1 shall take place
nor shall any information obtained from any such decompilation
or resulting interoperable product be transferred outside the
member states of the European Community. Without limiting the
materiality of any other term of this Agreement, the failure
of UAR to comply with the provisions of this Section 4.1 shall
be considered a material breach of this Agreement.
Mail Order Sales.
In the United States. UAR shall not distribute the
UAR Product by Mail Order or to any Sales Channel that UAR has
reason to believe may distribute the UAR Product by Mail
Order. "Mail Order" shall be defined as invitation, through
advertising or otherwise, for orders
<PAGE> 4
by mail or telephone, where Customer service, product
demonstrations and installation services are not offered by
UAR to the Customer.
In the European Community. UAR shall not distribute
the UAR Product by Mail Order or to any Sales Channel that UAR
has reason to believe may distribute the UAR Product by Mail
Order unless it offers and makes available to Customers full
on-site service and support, and makes professional counsel,
advice and product demonstrations available to such Customers.
Software Purchases. Software for use in the UAR Product may
only be purchased under the terms of this Agreement. UAR may not
purchase Software for the UAR Product under any other agreements with
Autodesk.
TERMS OF DELIVERY OF SOFTWARE AND DOCUMENTATION
Delivery. Autodesk shall deliver to UAR copies of the Software
media (5 1/4, 3 1/2 floppy disk, CD-ROM or tape) and copies of the
necessary documentation, as ordered by UAR from time to time.
Orders. All orders for copies of Software and Documentation
shipped to UAR by Autodesk shall be in writing (including by
facsimile),shall indicate the geographic region where the UAR Product
is to be shipped to Customer, and shall be subject to the terms and
conditions of this Agreement. Any purchase order which purports to
supersede or otherwise modify this Agreement shall be of no force or
effect. Each copy of Software and Documentation shall be deemed
accepted by UAR upon receipt.
Shipping. All Software and Documentation delivered by Autodesk
shall be FCA Autodesk's manufacturing plant. All shipping charges,
special packing expenses, (including income, stamp, turnover, value
added taxes and/or withholding taxes related to any payments made to
Autodesk under this Agreement), duties, fees, insurance, charges, or
assessments of any nature levied by any governmental authority other
than U.S. in connection with this Agreement, whether levied against UAR
or Autodesk, shall be the responsibility of UAR and shall be paid
directly by UAR to the governmental authority concerned. Claims for
missing or damaged items shall not be reviewed by Autodesk unless
notified in detail and in writing to Autodesk within 10 business days
of the delivery noted on the carrier's invoice. If at any time UAR is
not in conformance with its obligations under the terms of this
Agreement, Autodesk reserves the right to cease delivering Software and
Documentation to UAR until such time as UAR is in compliance with such
obligations.
Payment. The price to UAR for each copy of the Software and
related Documentation shall be the then-current Price List price for
the appropriate geographic region within the Territory, for the
Autodesk version of the Software less the discount rate ("Discount
Rate") set forth in Exhibit C. UAR's Discount Rate is dependent upon
UAR's quarterly purchases (revenues) to Autodesk. Such Discount Rate
shall be adjusted quarterly based on UAR's previous quarter revenues.
Autodesk shall submit an invoice to UAR upon each shipment. In the
event that UAR Product is shipped to a geographic region different from
the geographic region indicated on the initial order, UAR's invoice
shall be adjusted accordingly. Upon approval of UAR's credit standing
by Autodesk, payment terms shall be thirty (30) days from the date of
the invoice. Pending such approval, payment shall be due immediately
upon delivery. Any invoiced amount not received within thirty (30) days
of the date of invoice shall be subject to a service charge of one and
one-half percent (1.5%) per month (or, if less, the maximum allowable
by applicable law). UAR shall pay all sales, property, excise, duties,
and other federal and local taxes (other than those based on Autodesk's
net income).
Initial Purchase. Upon execution of this Agreement, UAR shall
purchase the quantity of Software Copies set forth in Exhibit C. Such
initial purchase shall determine UAR's Discount Rate for the first
quarter of this Agreement.
<PAGE> 5
Sales and Inventory Reports and Audit Rights. UAR shall
provide Autodesk with a quarterly point-of-sale report for each of the
Sales Channels set forth in Exhibit B, showing, at a minimum, date
shipped, quantity of UAR Product sold and used internally, the Autodesk
serial numbers and the corresponding UAR serial numbers, the Customers'
names and addresses, quantities sold to such Customers (if any), as
well as the quarter-end inventory position on hand for the UAR Product.
This report must be forwarded within fifteen (15) days of the close of
each quarter. Within the first five (5) days of every quarter, UAR
shall provide Autodesk with a ninety (90) day rolling forecast showing
prospective orders for each Sales Channel and intended date when such
orders shall be submitted to Autodesk. UAR shall maintain complete and
accurate records of the information required by this section. Autodesk
shall be entitled, at any time during the term of this Agreement, to
audit the books and records of UAR for purposes of compliance with the
terms of this Agreement and verifying such sales and inventory reports.
Any such audit shall be conducted by Autodesk or its representatives
during normal business hours, and UAR shall cooperate fully with
Autodesk or its representatives in any such audit. In the event such
inspection or audit discloses any underpayment, UAR shall promptly pay
Autodesk such amount, together with interest accrued daily at a rate
per annum equal to the highest allowable rate under California law on
the unpaid balance until paid in full.
Software Purchases from Authorized Resellers in the European
Community. Software for use in the UAR Product may be purchased from
Autodesk Authorized Dealers ("AAD's"), Autodesk Authorized Systems
Centres ("ASC's") and other Authorized Resellers within the European
Community which are authorized by Autodesk to offer the Software
product versions specified in this Agreement in the Territory, at
independently set prices, but always subject to the resale requirements
specified in this Agreement. For the avoidance of doubt, the parties
acknowledge that AADs, ASCs and other Authorized Resellers are free to
set their own Software prices. UAR may not purchase Software for the
UAR Product under any other agreements with Autodesk.
If at any time UAR is not in conformance with its obligations
under the terms of this Agreement, Autodesk reserves the right to cease
delivering Software and Documentation to UAR until such time as UAR is
in compliance with such obligations.
6. CUSTOMER SERVICE.
Customer Support. UAR shall provide direct on-site Customer
pre-sale and post sale service and support for the UAR Product and the
Software as a component of the UAR Product. However, UAR may contract
with its Sales Channel to provide on-site installation and support
services solely through sales, installation and support personnel
employed directly by UAR or its Sales Channel. UAR shall maintain
adequate facilities and on staff full time sales and technical support
personnel sufficiently knowledgeable with respect to the Software such
that UAR shall be capable of fully supporting the Software as a
component of the UAR Product. At no time during the term of this
Agreement, shall UAR represent to any Customer that Autodesk is
available to directly answer questions about the Software as a
component of the UAR Product.
Autodesk Support to UAR. Autodesk shall, during normal
business hours, provide to UAR telephone assistance and response to
written requests received by telecopy concerning Software errors and
possible work arounds for the Software. Such support is specifically
designed to assist UAR as a reseller of the Software and UAR is not to
make such UAR support accessible to its Customers at any time.
Error Notifications. UAR shall promptly notify Autodesk of
bugs or errors in the Software or Documentation. Autodesk shall not be
obligated to correct any such errors discovered by UAR or reported to
UAR by Customers.
Autodesk Developer Support. UAR shall register with Autodesk
Developer Marketing to
<PAGE> 6
participate in the Autodesk Developer Network Program at the then
current fees.
UPGRADES BY UAR.
In the event Autodesk creates bug fixes or New Releases
("Upgrades") of the Software, Autodesk will notify UAR in writing
(including through CompuServe) and UAR will advise Autodesk as to
whether UAR wishes to receive such Upgrade. Once any such Upgrade is
made available to UAR, if UAR decides to integrate the Upgrade into the
UAR Product, UAR shall be responsible for providing such Upgrade as a
component of the revised UAR Product to its Customers. UAR will ensure
that the copy of the Software as a component of the UAR Product is
destroyed either by UAR or by Customer at the time the Upgrade is
installed. Any such Upgrade shall be subject to the terms of this
Agreement. Unless other arrangements are made with Autodesk in writing,
such Upgrade will not be delivered to Customers as stand-alone product
but rather will be integrated into the new version of the UAR Product
and delivered as an upgrade to the UAR Product already in the
possession of UAR's installed base of Customers.
WARRANTIES.
Standard Limited Warranty. Autodesk will provide no warranty
or continuing support for the Software to Customers or the Sales
Channel and UAR agrees that UAR shall be solely responsible for
providing warranty and continuing support to UAR's Customers and Sales
Channel. Autodesk warrants to UAR, for a period of ninety (90) days
from delivery by Autodesk to UAR, that the copies of the Software
delivered to UAR (as a standalone product) will perform substantially
in accordance with the Documentation. As Autodesk's entire liability
and UAR's exclusive remedy under this warranty, Autodesk shall replace
free of charge any defective diskette, hardware lock or manual which is
returned to Autodesk within 90 days after delivery and which is
accepted by Autodesk as defective and may at its discretion make
reasonable efforts to correct any demonstrated error in the Software.
UAR shall honor and shall require its Customers to honor the warranty
against defective media, documentation and hardware locks indicated
above and shall return any such defective items to Autodesk for credit
or exchange pursuant to the return policies established by Autodesk
from time to time. UAR SHALL NOT MAKE OR PASS ON TO ANY PARTY ANY
WARRANTY OR REPRESENTATION CONCERNING THE SOFTWARE AND DOCUMENTATION ON
BEHALF OF AUTODESK.
No Other Warranty. EXCEPT FOR THE LIMITED WARRANTY TO UAR
DESCRIBED IN SUBPARAGRAPH 8.1 ("STANDARD LIMITED WARRANTY"), AUTODESK
GRANTS NO OTHER WARRANTIES, EXPRESS OR IMPLIED, BY STATUTE OR OTHERWISE
REGARDING SOFTWARE AND DOCUMENTATION. AUTODESK DOES NOT WARRANT THE
PERFORMANCE OF THE SOFTWARE WHEN USED IN CONJUNCTION WITH THE UAR
PRODUCT. FURTHERMORE, AUTODESK EXPRESSLY EXCLUDES ANY IMPLIED WARRANTY
OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR
NON-INFRINGEMENT.
CONTACT PERSONS.
The contact persons for the parties shall be:
Autodesk: Randy Crothers
312 Dover Point Rd.
Dover, NH 03820
tel: 603-749-0851
fax: 603-749-0908
UAR: Greg Fraser
Faro Technologies
125 Technology Park Dr.
Lake Mary, FL 32746
<PAGE> 7
tel: 407-333-9911
fax: 407-333-4181
OWNERSHIP OF PROPRIETARY RIGHTS.
UAR acknowledges that the Software and Documentation are
proprietary to Autodesk and that Autodesk retains exclusive ownership
of the Software and Documentation and all proprietary rights associated
with the Software and Documentation. UAR shall take all reasonable
measures to protect Autodesk's proprietary rights in the Software and
Documentation. Except as provided herein, UAR is not granted any other
rights or license to patents, copyrights, trade secrets or trademarks
with respect to the Software and Documentation. UAR shall promptly
notify Autodesk in writing upon its discovery of any unauthorized use
or infringement of the Software and Documentation or Autodesk's patent,
copyright, trade secret, trademark or other intellectual property
rights. UAR shall not (and shall require that its Customers do not)
remove, alter, or cover any copyright notices or other proprietary
rights notices placed on or in any copy of the Software or
Documentation by Autodesk. UAR shall not sell to any Customer if UAR
has notified Autodesk that such Customer may be involved in potential
unauthorized use of Software or Documentation or other infringement of
Autodesk's proprietary rights.
CONFIDENTIALITY.
Confidentiality Required. Through its relationship with
Autodesk UAR shall have access to certain information and materials
concerning Autodesk's business, plans, Customers, technology, and
products that are confidential and of substantial value to Autodesk,
which value would be impaired if such information were disclosed to
third parties ("Confidential Information"). UAR shall not disclose any
such Confidential Information to any third party and shall take every
reasonable precaution to protect such information. UAR shall not
publish any technical description of Software and Documentation beyond
the description published by Autodesk. In the event of termination of
this Agreement, there shall be no use or disclosure by UAR of any
confidential information of Autodesk.
Exceptions to Confidentiality. UAR's confidentiality
obligations do not extend to Confidential Information which (i) becomes
publicly available without the fault of UAR; (ii) is rightfully
obtained by UAR from a third party with the right to transfer such
information; or (iii) is independently developed by UAR and without
reference to Autodesk's Confidential Information. UAR shall have the
burden of proving the existence of any condition in this Paragraph.
12. CONFLICTS OF INTEREST.
Within the European Community.
Notice and Managing Confidential Information. UAR
shall not promote the products of other companies if it will
create a conflict of interest in handling Autodesk's
confidential or proprietary information. In the event UAR
begins to distribute one or more competing software programs,
UAR shall immediately notify Autodesk and take the following
steps to ensure that Confidential Information shall not be
misused or misappropriated for the purpose of promoting,
marketing or benefiting the competing software program(s):
UAR shall establish and maintain at all
times a separate teams of sales and technical
personnel dedicated exclusively to the promotion,
marketing and support of Software whose names shall
be furnished to Autodesk, each of whom shall have
signed a non-disclosure agreement in substantially
the same form as one provided by Autodesk upon
request for this purpose.
UAR shall establish and maintain at all
times such procedures as may be necessary to ensure
that no personnel other than those whose names have
been
<PAGE> 8
communicated to Autodesk pursuant to 12.1.1., and in
particular no personnel responsible for promotion,
marketing, sales and support of competing software
programs have access to Confidential Information for
any purpose.
UAR shall not reassign personnel dedicated
to Software to any position in which they have
responsibility for marketing, promotion or support of
competing software programs unless Autodesk is
notified of each such intended reassignment at least
three (3) months in advance. From the date of such
notice, UAR undertakes to withhold all Confidential
Information from the personnel to be reassigned
unless disclosure is expressly approved by Autodesk.
In handling and distributing Confidential
Information, UAR shall ensure that each copy of
Confidential Information is marked according to
guidelines furnished by Autodesk, that no unnecessary
copies of Confidential Information are made or
disseminated, and that all copies of Confidential
Information are retrieved and destroyed promptly when
the purpose for which they were provided has been
fulfilled.
Outside the European Community. UAR shall not promote
the products of other companies if it will create a conflict
of interest in handling Autodesk's confidential or proprietary
information.
13. TRADEMARKS.
During the term of this Agreement, UAR shall have a
non-exclusive, non-transferable right to indicate to the public that it
is an authorized UAR of Autodesk's Software and Documentation as a
component of the UAR Product and to advertise such Software and
Documentation as a component of the UAR Product within the Territory
under the Autodesk trademarks and slogans adopted by Autodesk from time
to time ("Trademarks"). UAR shall include the Autodesk Trademarks in
any literature, promotion or advertising concerning the UAR Product.
UAR shall not affix any Autodesk Trademark to products other than the
UAR Product. UAR shall not contest, oppose or challenge Autodesk's
ownership of the Trademarks. All representations of Autodesk Trademarks
that UAR intends to use shall be exact copies of those used by
Autodesk, or shall first be submitted to the appropriate Autodesk
personnel for approval of design, color, and other details and such
approval shall not be unreasonably withheld. If any of the Autodesk
Trademarks are to be used in conjunction with another trademark on or
in relation to the UAR Product, then the Autodesk Trademarks shall be
presented equally legibly, equally prominently, but nevertheless
separated from the other so that each appears to be a trademark in its
own right, distinct from the other mark. Effective upon the termination
of this Agreement, UAR shall cease to use all Autodesk Trademarks.
PROPRIETARY RIGHTS INDEMNITY.
Autodesk shall defend, at its expense, any action brought
against UAR which alleges that the Software or Documentation infringes
a United States copyright or patent, provided that UAR promptly
notifies Autodesk in writing of any claim, gives Autodesk sole control
of the defense and settlement thereof, and provides all reasonable
assistance in connection therewith. If the Software and Documentation
is finally adjudged to so infringe, Autodesk shall, at its option, (a)
procure for UAR the right to continue using the Software and
Documentation as a component of the UAR Product; (b) modify or replace
the Software and Documentation so there is no infringement; or (c)
accept return of the copies of the Documentation in UAR's inventory and
refund the purchase price. Autodesk shall have no liability regarding
any claim arising out of the use of the Software and Documentation in
combination with other products, including the UAR Product, if the
infringement would not occur but for such combination. THE FOREGOING
STATES UAR'S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO CLAIMS OF
INFRINGEMENT OF THIRD PARTY PROPRIETARY RIGHTS OF ANY KIND.
<PAGE> 9
UAR shall defend, at its expense, any action brought against
Autodesk for any claim which alleges the UAR Product infringes a United
States copyright or patent. Autodesk shall provide all reasonable
assistance in connection with any claim therewith.
TERM AND TERMINATION.
Term. The term of this Agreement shall be effective as of the
Effective Date, set forth above, and shall continue until October 1,
1998 unless terminated earlier as set forth herein. The term shall be
automatically renewed for one (1) year periods, thereafter, unless
thirty (30) days prior to any October 1, anniversary date, either party
notifies the other in writing of their intention not to renew the
relationship.
Termination for Cause. Autodesk may terminate this Agreement
upon thirty (30) days written notice of a material breach.
Termination for Convenience. This Agreement may be terminated
without administrative or judicial resolution by either party for any
reason or no reason, by giving the other party written notice sixty
(60) days in advance.
Termination for Insolvency. Either party may terminate this
Agreement immediately, upon written notice, (i) upon the institution by
or against the other of insolvency, receivership or bankruptcy
proceedings or any other proceedings for the settlement of the other's
debts, (ii) upon the other's making an assignment for the benefit of
creditors or (iii) upon the other's dissolution or ceasing to conduct
business in the normal course.
Fulfillment of Orders Upon Notice of Termination. Upon
delivery of notice of termination pursuant to this Paragraph 15 ("Term
and Termination"), Autodesk shall not be obligated to fulfill any
unfulfilled orders or any orders received by Autodesk subsequent to the
date of delivery of notice of termination. In Autodesk's sole
discretion Autodesk may continue to fulfill orders if UAR (i) submits
prepayments for any such order and (ii) pays all credit balances then
outstanding prior to any shipment of Software or Documentation by
Autodesk.
Return of Materials. All Autodesk Confidential Information,
data, photographs, samples, literature, and sales aids of every kind
shall remain the property of Autodesk. Within thirty (30) days after
the termination of this Agreement, UAR shall return all such items as
Autodesk may direct, at Autodesk's shipping expense.
Survival of Certain Terms. The provisions of Paragraph 5.4
("Payment"), Paragraph 6.1 ("Customer Support"), Paragraph 8
("Warranties"), Paragraph 10 ("Ownership of Proprietary Rights"),
Paragraph 11 ("Confidentiality"), Paragraph 13 ("Trademarks"),
Paragraph 14 ("Proprietary Rights Indemnity"), Paragraph 15 ("Term and
Termination"), Paragraph 16 ("Consequential Damages Waiver") and
Paragraph 17 ("Limitation of Liability") shall survive the termination
of this Agreement for any reason. All other rights and obligations of
the parties shall cease upon termination of this Agreement.
CONSEQUENTIAL DAMAGES WAIVER.
THE PARTIES AGREE THAT IN NO EVENT WILL AUTODESK BE LIABLE TO
UAR OR ANY OTHER PARTY, UNDER ANY THEORY OF LIABILITY, WHETHER IN AN
ACTION BASED ON A CONTRACT, TORT (INCLUDING NEGLIGENCE) OR ANY OTHER
LEGAL THEORY, HOWEVER ARISING, FOR ANY COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS OR SERVICES BY UAR OR FOR ANY LOSS OF USE,
INTERRUPTION OF BUSINESS, OR INDIRECT, SPECIAL, INCIDENTAL, OR
CONSEQUENTIAL DAMAGES OF ANY KIND, WHETHER OR NOT AUTODESK HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH
<PAGE> 10
DAMAGE. THIS LIMITATION SHALL APPLY NOTWITHSTANDING ANY FAILURE OF
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
17. LIMITATION OF LIABILITY.
AUTODESK'S AGGREGATE LIABILITY UNDER THE TERMS OF THIS
AGREEMENT SHALL BE LIMITED TO THE TOTAL PAYMENTS MADE BY UAR TO
AUTODESK FOR THE SOFTWARE AND DOCUMENTATION SHIPPED BY AUTODESK TO UAR
FOR INCLUSION IN THE UAR PRODUCT IN THE MOST RECENT FULL CALENDAR YEAR
PRECEDING IMPOSITION OF SUCH LIABILITY. THIS LIMITATION SHALL APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
AUTODESK DOES NOT EXCLUDE LIABILITY FOR DEATH OR PERSONAL INJURY
ARISING FROM ITS NEGLIGENCE EXCEPT THE TO THE EXTENT PERMISSIBLE BY
APPLICABLE LAW.
GENERAL PROVISIONS.
Assignment. UAR shall not assign this Agreement, in whole or
in part, without the prior written approval of Autodesk. To obtain
prior written approval to assign this Agreement in the case of a change
of ownership, UAR must submit information regarding the proposed
assignee, as specified by Autodesk, at least thirty (30) days prior to
the proposed date of assignment. Autodesk will review the information
and accept or reject the proposed assignment, in writing, in Autodesk's
sole discretion. For the purposes of this Paragraph, a change in the
persons or entities who control 50% or more of the equity securities or
voting interest of UAR shall be considered an assignment of this
Agreement. Notwithstanding the foregoing, Autodesk's rights and
obligations under this Agreement, in whole or in part, may be assigned
by Autodesk and Autodesk may sell, pledge or otherwise transfer its
right to receive payments under this Agreement.
Injunctive Relief. It is expressly agreed that a material
breach of this Agreement by UAR shall cause irreparable harm and a
remedy at law would be inadequate. In addition to any and all remedies
available at law, Autodesk shall be entitled to an injunction or other
equitable remedies in all legal proceedings in the event of any
threatened or actual violation of any or all of the provisions of this
Agreement.
Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California. The parties hereby
submit to the exclusive personal jurisdiction of and venue in the
Superior Court of the State of California, County of Marin, and the
United States District Court for the Northern District of California in
San Francisco.
Legal Expenses. The prevailing party in any legal action
brought by one party against the other arising out of this Agreement
shall be entitled, in addition to any other rights and remedies it may
have, to reimbursement for its expenses, including court costs, expert
witness fees and reasonable attorney's fees.
Independent Contractors. The relationship of Autodesk and UAR
established by this Agreement is that of independent contractors, and
nothing contained in this Agreement shall be construed to create an
agency relationship between the parties or to allow UAR to create or
assume any obligation on behalf of Autodesk for any purpose whatsoever.
Severability. In the event that any provision of this
Agreement shall be unenforceable or invalid under any applicable law or
be so held by applicable court decision, such unenforceability or
invalidity shall not render this Agreement unenforceable or invalid as
a whole.
Waiver. The failure of either party to require performance by
the other party of any provision hereof shall not affect the full
right to require such performance at any time thereafter; nor shall the
<PAGE> 11
waiver by either party of a breach of any provision hereof be taken or
held to be a waiver of the provision itself.
Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of
which together shall constitute one instrument.
Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties relating to the subject
matter herein. This Agreement merges and supersedes all prior or
contemporaneous agreements, discussions and understandings between the
parties, oral or written, regarding such subject matter. No
modification to, or amendment of, this Agreement, shall be effective
unless in writing and signed by the party to be bound.
19. COMPLIANCE WITH LAWS
UAR shall comply with all laws and regulations of the
Territory applicable to the marketing, license and support of the
Software, execution or performance of this Agreement, as well as with
all export laws, regulations and controls of the Territory and of the
United States of America.
Foreign Corrupt Practices Act. In conformity with the United
States Foreign Corrupt Practices Act and with Autodesk's established
corporate policies regarding foreign business practices, UAR and its
employees and agents shall not directly or indirectly make an offer,
payment, promise to pay, or authorize payment, or offer a gift, promise
to give, or authorize the giving of anything of value for the purpose
of influencing an act or decision of an official of any government
(including a decision not to act) or inducing such a person to use his
influence to affect any such governmental act or decision in order to
assist UAR in obtaining, retaining or directing any business.
Export Controls. In conformity with laws and regulations of
the United States relating to international trade, UAR and its
employees, agents or third parties shall not disclose, export or
reexport, directly or indirectly, any Software, documentation, or
technical data provided under this Agreement to any country or party
which Autodesk has advised is ineligible to receive such items under
U.S. laws and regulations. Until otherwise advised by Autodesk, the
following countries and parties are embargoed:
Cuba, Iran, Iraq, Libya, North Korea, Sudan, and
Syria;
Any party controlled by or acting for the governments
of any of the countries listed in "a" above, or any other
party identified on the U.S. Treasury Department's listing of
"Specially Designated Nationals and Blocked Persons";
Any party on the U.S. Commerce Department's Table of
Denial Orders;
Any party engaged in the design, development,
production, stockpiling or use of nuclear weapons; missiles;
chemical or biological weapons, agents, or precursors; or
conventional weapons (including any party identified by the
U.S. State Department or the U.S. Commerce Department's Entity
List.)
Any other party, if the circumstances indicate the
likelihood of further transfer to or for the benefit of any of
the above embargoed countries or parties.
Restricted Rights. The Software shall not be exported from the
United States contrary to the regulations of the United States
Government. The Software is provided with RESTRICTED RIGHTS. Use,
duplication, or disclosure by the Government is subject to restrictions
as set forth in subparagraph (c)(1)(ii) of the Rights in Technical Data
and Computer Software clause at DFARS 252.227-7018, and
<PAGE> 12
in subparagraphs (a) through (d) of the Commercial Computer-Restricted
Rights clause at FAR 52.227-19, and in similar clauses in the NASA FAR
Supplement, when applicable.
Indemnification. UAR agrees to indemnify Autodesk against any
claim demand, action, proceeding, investigation, loss, liability, cost
and expense, including attorney's fees, suffered or incurred by
Autodesk and arising out of or related to any violation (whether
intentional or non-intentional) by UAR, its employees, agents,
representatives, dealers of this Section 19.
<TABLE>
<CAPTION>
"Autodesk" "UAR"
AUTODESK, INC. FARO TECHNOLOGIES
<S> <C>
By:/s/ Gary Kuhn By:/s/ Gregory A. Fraser
- ---------------------------------------------------- -------------------------------------------------
Gary Kuhn Gregory A. Fraser
- ---------------------------------------------------- -------------------------------------------------
Printed Name Printed Name
Manager of Autodesk Developer Channel Executive Vice President
- ---------------------------------------------------- -------------------------------------------------
Title Title
- ---------------------------------------------------- -------------------------------------------------
Date Date
</TABLE>
<PAGE> 13
EXHIBIT A
SOFTWARE AND UAR PRODUCT
1. THE SOFTWARE:
AutoCAD, AutoSurf, 3D Studio Max, Mechanical Desktop
NOTE: ALL COPIES OF SOFTWARE FOR SALES OUTSIDE OF THE U.S AND CANADA MUST
BE THE INTERNATIONAL HARDWARE LOCKED VERSIONS.
UAR PRODUCT:
AnthroCAM
AnthroCAM provides "all in one" 3D CAD and Inspection software
program. It is a solution which combines CAD files with prismatic
part measurement. It combines the ability of FaroArm 3D digitizer
to (1) reverse engineer parts into AutoCAD, using a seamless
driver directly into the AutoCAD database to create a CAD file and
design; and, once the parts have been manufactured, (2) inspect
(quality control), and the (3) compare the measurements against
the CAD design file. Whereas a manufacturer typically uses one
system to reverse engineer a manufactured part and then a
different system to inspect and measure the part, AnthroCAM
enables a manufacturer to use the same FaroArm 3D digitizer
software for both processes and provides the additional capability
to compare the information from the inspection process with the
original design information. Inspection software tends to use
menus of prismatic parts, whereas AnthroCAM, while it does offer
that facility, enables the user to pull in an AutoCAD with
AutoSurf drawing and use the drawing as a template for inspection.
By using AutoCAD with AutoSurf, it enables full curve and
surfacing capabilities. The AnthroCAM software solution is used in
conjunction with Faro Technologies Inc.'s line of protable 3D
Digitizers as well as other Coordinate Measuring Machines (CCM)
manufactured by independent CMM suppliers.
NOTE: Bundling of AutoCAD or AutoCAD modules with hardware requires prior
approval of European Channels Manager, European Market Group Manager and Vice
President, European Operations.
<PAGE> 14
EXHIBIT B
AUTHORIZED SALES CHANNELS, MARKET AND TERRITORY
A. SALES CHANNELS
UAR IS AUTHORIZED TO DISTRIBUTE THE UAR PRODUCT DIRECTLY TO CUSTOMERS.
IN THE EVENT THE TERM "TERRITORY" AS DEFINED BELOW INCLUDES THE EUROPEAN
COMMUNITY, UAR IS AUTHORIZED TO DISTRIBUTE THE UAR PRODUCT THROUGH THE
AUTODESK AUTHORIZED DEALERS AND AUTODESK AUTHORIZED SYSTEMS CENTERS WHICH
ARE ACCREDITED IN THE EUROPEAN COMMUNITY TO SELL THE SOFTWARE IDENTIFIED IN
EXHIBIT A.
UAR MAY SELL THE SOFTWARE THROUGH THE FOLLOWING SALES CHANNEL PROVIDED EACH
RESELLER IN SAID SALES CHANNEL AGREES TO COMPLY WITH THE QUALITATIVE
OBLIGATIONS CONTAINED IN THIS AGREEMENT, INCLUDING THOSE RELATED TO AND PRE
AND POST SALE CUSTOMER SERVICE AND SUPPORT.
RESELLERS:
(IF APPLICABLE, PLEASE ATTACH A LIST OF RESELLERS TO THIS EXHIBIT B)
THE FOREGOING LIST OF RESELLERS MAY NOT BE MODIFIED WITHOUT AUTODESK's
WRITTEN CONSENT. FURTHERMORE, UPON AUTODESK's REQUEST, UAR AGREES TO CEASE
DISTRIBUTION OF THE UAR PRODUCT THROUGH ANY OR ALL OF THE FOREGOING
RESELLERS IF AUTODESK CONCLUDES, AT ITS SOLE REASONABLE DISCRETION, THAT
THE AFFECTED RESELLERS ARE NOT MEETING AUTODESK's QUALITATIVE STANDARDS.
B. MARKET
Departments within manufacturing facilities which are performing inspection
and quality control of manufactured parts.
C. TERRITORY-
Worldwide
*UAR's authorized Sales Channels market and territory may be modified from
time to time upon written agreement between the parties.
<PAGE> 15
EXHIBIT B-1
FARO TECHNOLOGIES, INC.
NORTH AMERICAN DISTRIBUTOR LIST
(FOR GENERAL RELEASE)
<TABLE>
<S> <C>
Faro Technologies Great Lakes Metrology
125 Technology Park Drive 2710 Towering Oaks Dr.
Lake Mary, FL 32746 White Lake, MI 48383
contact: Greg Fraser tel: 810-684-2568
tel: 407-333-9911 fax: 810-684-2194
fax: ###-##-####
Mr. Joe LeDoux
OEM Partners: Great Lakes Metrology
7435 North Lafayette
Mr. Ken Susnjara, President Dearborn Heights, MI 48127
Thermwood Corporation tel: 313-561-7752
P.O. Box 436 fax: 313-561-6167
Dale, Indiana 47523
tel: 812-937-4476 Mr. Gary Lane
fax: 812-937-2956 QC Inspection Services, Inc.
11975 Portland Ave., Ste. 10
Mr. Jeff Zobrist, Marketing Coordinator Burnsville, MN 55337
Zonic Corporation tel: 612-895-1150
25 Whitney Drive fax: 612-895-1152
Milford, OH 45150
tel: 513-248-1911 Mr. Ray Burleson
fax: 513-248-1589 The Tool & Gage House
538 Hebron St.
Charlotte, NC 28273
Distributors: tel: 704-552-8444
USA fax: 704-552-6869
Mr. Don McKillop
CADcad Technologies CANADA
890 Northern Way. Ste. A-2
Winter Springs, FL 32708 Mr. Rene Desjean
tel: 407-359-0063 AD3R Technologies, Inc.
fax: 407-359-5887 1055 Pierre-Dupuy, B40
Longueuil, Quebec J4K 1A1
Mr. Jim Caliguri, President Canada
Design and Software Int'l tel: 514-670-7876
526 Niles Rd., Ste. 2 fax: 514-670-6202
Fairfield, OH 45014
tel: 513-939-1800
fax: 513-939-1212
MEXICO
Mr. Richard Lee, President
Direct Dimensions, Inc.
549 Ritchie Highway, Ste. 159
Severna Park, MD 21146
tel: 410-654-0555
</TABLE>
<PAGE> 16
EXHIBIT B-1 (CONT.)
FARO TECHNOLOGIES, INC.
INTERNATIONAL DISTIBUTOR LIST
(FOR GENERAL RELEASE)
<TABLE>
<S> <C>
European Sales Offices: Territory: India
Nicolas Tanala
Faro France
117 av Pierre et Marie Curie
45800 St. Jean de Braye
France
tel: 011-33-38-70-02-55
fax: 011-33-38-70-05-77
Christian Baugut
Faro Duetschland
Karlstr. 31
89073 Ulm
Germany
tel: 011-49-7-31-14-10-130
fax: 011-49-7-31-14-10-129
Mr. Vladimir Avdiisky
Faro Moscow
Ibragimov Str. 21
Moscow
Russian Federation
tel: 7095-369-7433
fax: 7095-373-4021
Territory: Russia
Distributors:
AFRICA
Mr. Ron Elvin
CAD/CAM Systems
P.O. Box 782318
Sandton, 2146
Johannesburg, South Africa
tel: 27-11-444-4620
fax: 27-11-444-1728
Territory: South Africa
ASIA
Mr. P. Ramesh Chandra
EDS Technologies Pvt. Ltd.
IAT Building, III Floor
15, Queens Rd.
Bangalore, 560 052 India
tel: 91-80-220-4224
fax: 91-80-226-0745
</TABLE>
16
<PAGE> 17
AUSTRALIA
Mr. Ray Smith
CAD Australia
832 High St.
East Kew, Victoria 3102
Australia
tel: 011 61 3 9810 9509
fax: 011 61 3 9859 6622
Territory: Australia
EUROPE
Mr. Janne Linden
Bergman & Beving Energi AB
Department Inspect
Jagerhornsvag 8
S-141 05 Huddinge, Sweden
tel: 46-8-680-6850
fax: 46-8-680-0390
Territory: Sweden
Mr. Daniel Russo
Sidca Quality
Mentana 9b
Torino 10133, Italy
tel: 339-11-473-3411
fax: 39-11-473-2783
Territory: Italy
Mr. Roger Steenacker
Steen Metrology Systems
Rue T. Gerkens, 74
B-4052 Chaudfontaine, Belgium
tel: 32-41-687080
fax: 32-41-687560
Territories: Belgium, Netherlands &
Luxembourg
Mr. James Carne
Ultra Fast Machining, Ltd.
416-418 London Rd.
Isleworth, Middlesex, TW7 58E,
England
tel: 44-181-560-1182
fax: 44-181-568-6882
Territory: UK
EXHIBIT B-1 (CONT.)
FARO TECHNOLOGIES, INC.
INTERNATIONAL DISTIBUTOR LIST (CONT.)
17
<PAGE> 18
(FOR GENERAL RELEASE)
PACIFIC RIM
Mr. K.M. Kwak
BBN Tektrade
1552-10 Seocho-Dong Seocho-ku
Seoul, Korea 137-070
tel: 82-2-587-4900
fax: 82-2-586-3603
Mr. Hiroshi Tsujii
ITT
2 Banchi Ohama-nishimachi
Sakai, Osaka, Japan
tel: 81-722-235974
fax: 81-722-235962
Territory: Japan
Mr. Gotaro Gamo
Sumisho Electronics Co. Ltd.
CAE Division #1, Sales Dept. #2
Tsuruya Bldg.
2-23 Shimomiyabi-cho, Shinjuku-ku
Tokyo, 162 Japan
tel: 81-03-5228-5668
fax: 81-03-5228-5682
Mr. Katsuhito Numata
Trilux Corporation/Anzen
Tohin-Nihonbashihoneho 2-Chrome
Chuo-ku Tokyo 103
Japan
tel: 81-33-66-17-741
fax: 81-33-66-67-288
Territory: Japan
SOUTH AMERICA
Mr. Francisco Saldanha
Grupo J
TBA
TBA
Territory: Brazil
18
<PAGE> 19
EXHIBIT C
DISCOUNT RATES
THE DISCOUNTS INDICATED BELOW SHALL BE DEDUCTED FROM THE APPLICABLE PUBLISHED
AUTODESK SUGGESTED RETAIL PRICE FOR THE RELEVANT SOFTWARE PRODUCT IN EFFECT AT
THE TIME AUTODESK ACCEPTS UAR'S ORDER, AND IS APPLICABLE ONLY FOR ORDERS
SUBMITTED DIRECTLY TO AUTODESK. ATTACHED FOR YOUR INFORMATION IS THE AUTODESK
PRICE LIST APPLICABLE AT THE TIME OF CONTRACT SIGNATURE. AUTODESK RESERVES THE
RIGHT TO CHANGE THE PUBLISHED SUGGESTED RETAIL PRICE FOR ITS SOFTWARE WITHOUT
NOTICE TO UAR.
1. DISCOUNT. Based on UAR's Quarterly Purchase Commitment the price to UAR for
each copy of the Software shall be the then-current suggested retail price
of the Software for the appropriate geographic region within the Territory,
less the discount per the schedule below:
<TABLE>
<CAPTION>
Quarterly UAR Discount Rate
Purchase
Commitment
---------------------------------------------
<S> <C>
$0 - $25,000 35%
---------------------------------------------
$25,001 - 40%
---------------------------------------------
$100,001 - 42%
---------------------------------------------
$250,000 + 44%
---------------------------------------------
</TABLE>
UAR'S DISCOUNT RATE SHALL BE ADJUSTED QUARTERLY BASED ON UAR'S
PURCHASES DURING THE PRECEDING FISCAL QUARTER.* SHOULD UAR FAIL TO
MEET THE MINIMUM QUARTERLY PURCHASE COMMITMENT FOR A SPECIFIED UAR
DISCOUNT RATE THE FOLLOWING QUARTER, UAR'S DISCOUNT RATE WILL BE
LOWERED ONE DISCOUNT LEVEL.
* Autodesk's fiscal quarters are as follows:
February- April
May- July
August- October
November- January
INITIAL PURCHASE. Upon execution of this Agreement, UAR shall purchase zero (0)
Software copies ($5,000 minimum) from Autodesk. Such purchase shall
establish UAR's Discount Rate for the first fiscal quarter of this
Agreement.
19
<PAGE> 1
EXHIBIT 10.12
FIRST AMENDMENT TO BUSINESS LEASE
THIS FIRST AMENDMENT TO BUSINESS LEASE dated as of January 20th, 1998,
is entered into between XENON RESEARCH INC., a Florida corporation, herein the
Landllord, and FARO TECHNOLOGIES, INC., a Florida corporation, successor by
merger to FARO Medical Technologies (US), Inc., a Delaware corporation, herein
the Tenant. It witnesses as follows:
WHEREAS, SIRDAN RESEARCH LIMITED, INC., (Sirdan), and FARO MEDICAL
TECHNOLOGIES (US), INC. (FARO), collectively, as Landlord, and Tenant, are
parties to that certain Business Lease dated March 1, 1991 (the Lease), for the
lease office space located at 125 Technology Park, Lake Mary, Florida, (the
Leased Premises), and
WHEREAS, SIRDAN RESEARCH LIMITED, INC., assigned all of its right,
title and interest in the Lease to XENON RESEARCH INC. by Assignment of Lease
dated October 25, 1991 is not he Landlord thereunder, and
WHEREAS, the parties desire to extend the term of the Lease and to
expand the Leased Premises; capitalized terms used herein have the same meanings
as used in the Lease unless redefined herein; this First Amendment will control
over any provisions to the contrary in the Business Lease.
NOW, THEREFORE, in consideration of TEN AND NO/100 DOLLARS ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, it is understood and agreed as follows:
Recitals. The Foregoing recitals are acknowledged as true and
correct and are incorporated herein by reference.
Term. The term of the Lease is hereby extended an additional Five (5)
year(s), such extension which began on March 1, 1996, (term to commence on
February 1, 1997) and terminate on February 28, 20001 (the Extended Term). Such
extension shall be on the same terms and conditions as currently exist for
rental which is provided for hereafter.
Leased Premises. The Lease Premise is expanded to include the space set
forth on Exhibit A hereto (the Expansion Premises) consisting of 18,000 square
feet of air conditioned space. Thereafter, the total space rented under the
Lease shall be 35,000 square feet.
Rent. Rent for the Expansion Premises shall be the amount of
$170,640. Rent payments for the Expansion Premises shall commence on the earlier
of (a) the date that Landlord obtains a certificate of occupancy for the
Expansion Premises or (b) Tenant
<PAGE> 2
takes occupancy of the Expansion Premises. If rent commences on any day other
than the first of the month, rent for the first partial month shall be prorated.
Thereafter, rent payments shall be made concurrently with existing rental
payments, in the total amount of $331,747, together with applicable sales taxes
and other sums required to be paid under the Lease.
Ratification. Except as modified hereby, the Business Lease remains
in full force and effect and is unchanged.
IN WITNESS WHEREOF, the Landlord and Tenant have affixed their hands
and seals effective as of the day and year first above written.
Signed, sealed and delivered
In the presence of: XENON RESEARCH, INC.
(two are required for each party) a Florida Corporation
/s/ Simon Raab
----------------------------------
SIMON RAAB
Its President
FARO TECHNOLOGIES, INC.
a Florida Corporation
/s/ Gregory A. Fraser
----------------------------------
GREGORY A. FRASER
Its Executive Vice President
<PAGE> COVER
Exhibit 13.1
Continuing the
CAD Revolution
[PICTURE OF FARO LOGO]
1997
Annual
Report
<PAGE> 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.
<PAGE> 1
FINANCIAL HIGHLIGHTS
(In millions, except per share and ratios)
<TABLE>
<CAPTION>
December 31, 1997 1996 % Change
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
SALES OPERATING INCOME EARNINGS PER SHARE
(Dollars in millions) (Dollars in millions) (Dollars)
[GRAPH] [GRAPH] [GRAPH]
<S> <C> <C> <C> <C> <C>
'95 9.9 '95 1.6 '95 .23
'96 14.7 '96 2.7 '96 .20
'97 23.5 '97 4.9 '97 .41
</TABLE>
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE> 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.
<PAGE> 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:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
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%
===============================================================
</TABLE>
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.
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 15
FARO TECHNOLOGIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
==========================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 16
FARO TECHNOLOGIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
<PAGE> 17
FARO TECHNOLOGIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Unearned Cumulative
------------------- Paid-in (Accumulated) Compen- Translation
Share Amounts Capital Deficit) sation Adjustment Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 18
FARO TECHNOLOGIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 $ --
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 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:
<TABLE>
<S> <C>
Machinery and equipment 5 years
Furniture and fixtures 5 years
Computer equipment 2 years
</TABLE>
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.
<PAGE> 20
FARO TECHNOLOGIES
A reconciliation of the number of common shares used in calculation of basic and
diluted EPS is presented below:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Per-Share Per-Share Per-Share
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
=============================== ========= ========= =========
</TABLE>
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.
<PAGE> 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:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
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
============================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
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)
===========================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
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)
====================================================================
</TABLE>
<PAGE> 22
FARO TECHNOLOGIES
The components of the Company's net deferred tax asset at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------
<S> <C> <C>
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
============================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
- ------------------------------------------------------------
<S> <C>
1998 $ 395,000
1999 342,500
2000 337,600
2001 55,300
- ------------------------------------------------------------
Total future minimum lease payments $1,130,400
============================================================
</TABLE>
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.
<PAGE> 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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted-
Average
Exercised
1997 Options Price
- ------------------------------------------------------------
<S> <C> <C>
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 --
</TABLE>
The following table summarizes information about the outstanding grants at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted-
Average
Remaining
Exercise Options Contractual Options
Price Outstanding Life Exercisable
- -----------------------------------------------------------
<S> <C> <C> <C>
$ 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
===========================================================
</TABLE>
Remaining non-exercisable options as of December 31, 1997 become
exercisable as follows:
<TABLE>
<S> <C>
1998 155,390
1999 150,826
2000 150,827
- ------------------------------------------------------------
457,043
============================================================
</TABLE>
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.
<PAGE> 24
FARO TECHNOLOGIES
10. SEGMENT INFORMATION
Revenues are segmented according to the country in which the customer is
located.
<TABLE>
<CAPTION>
United Other
States Asia Europe Canada Foreign Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
Quarter Ended 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
Quarter Ended 1996 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
Period High Low
- -------------------------------------------
<S> <C> <C>
September 18, 1997 -
December 31, 1997 $18 1/8 $9 3/8
</TABLE>
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.
<PAGE> 1
EXHIBIT 21.1
FARO TECHNOLOGIES, INC.
a Florida corporation
Subsidiaries
1. FARO Worldwide, Inc.
a Florida corporation
2. FARO France SAS
a French corporation
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Annual Report of
FARO Technologies, Inc. on Form 10-K of our report dated February 13, 1998,
appearing in the 1997 Annual Report to Shareholders of FARO Technologies, Inc.
We also consent to the incorporation by reference in Registration
Statements Nos. 333-41115, 333-41125, 333-41131, and 333-41135 of FARO
Technologies, Inc. on Form S-8 of our report dated February 13, 1998,
incorporated by reference in this Annual Report on Form 10-K of FARO
Technologies, Inc. for the year ended December 31, 1997.
Jacksonville, Florida
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FILING ON FORM 10-K FOR THE ANNUAL PERIOD
ENDED DECEMBER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 28,815,069
<SECURITIES> 0
<RECEIVABLES> 6,168,707
<ALLOWANCES> 9,534
<INVENTORY> 4,275,376
<CURRENT-ASSETS> 39,485,839
<PP&E> 1,620,222
<DEPRECIATION> 792,442
<TOTAL-ASSETS> 41,192,333
<CURRENT-LIABILITIES> 2,208,294
<BONDS> 0
0
0
<COMMON> 9,919
<OTHER-SE> 38,929,492
<TOTAL-LIABILITY-AND-EQUITY> 41,192,333
<SALES> 23,516,385
<TOTAL-REVENUES> 24,016,137
<CGS> 9,610,838
<TOTAL-COSTS> 8,973,271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,768
<INCOME-PRETAX> 5,321,260
<INCOME-TAX> 2,114,630
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,206,630
<EPS-PRIMARY> .41
<EPS-DILUTED> .39
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONSOLIDATED
BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE CONSOLIDATE STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FILING ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1997.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> .29
<EPS-DILUTED> .28
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FILING ON FORM S-1 FOR THE QUARTERLY PERIOD ENDED JUNE 30,
1997.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FILING ON FORM S-1 FOR THE ANNUAL PERIOD ENDED
DECEMBER 31, 1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
</TABLE>
