SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _________ to __________
Commission File Number: 0-23081
FARO TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 59-3157093
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 TECHNOLOGY PARK DRIVE, LAKE MARY, FLORIDA 32746
- --------------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: 407-333-9911
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class: Voting Common Stock, Outstanding at May 13, 1999: 11,346,975
$.001 Par Value
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FARO Technologies Inc.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1999 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1999 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,183,656 $ 1,048,555
Short term investments 17,011,831 15,588,580
Accounts receivable - net of allowance 8,963,343 8,831,775
Income taxes refundable 716,048 692,395
Inventories 6,443,618 7,618,778
Prepaid expenses and other assets 155,037 336,810
Deferred income taxes 121,543 121,543
------------ ------------
Total current assets 34,595,076 34,238,436
------------ ------------
PROPERTY AND EQUIPMENT - at cost:
Machinery and equipment 1,873,146 2,090,396
Furniture and fixtures 899,616 902,305
Leasehold improvements 28,889 30,020
------------ ------------
Total 2,801,651 3,022,721
Less accumulated depreciation (1,276,459) (1,503,898)
------------ ------------
Property and equipment, net 1,525,192 1,518,823
------------ ------------
INTANGIBLE ASSETS - net 12,821,191 12,297,269
NOTES RECEIVABLE 178,688 132,353
DEFERRED INCOME TAXES -- 51,977
------------ ------------
TOTAL ASSETS $ 49,120,147 $ 48,238,858
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term notes payable to banks $ 296,230
Accounts payable and accrued liabilities 2,852,452 $ 2,909,482
Current portion of unearned service revenues 329,731 515,296
Current portion of long-term debt 4,156 --
Customer deposits 114,738 116,538
------------ ------------
Total current liabilities 3,597,307 3,541,316
DEFERRED INCOME TAXES 78,220 --
UNEARNED SERVICE REVENUES - less current portion 31,905 36,127
LONG-TERM DEBT - less current portion 37,324 253,934
------------ ------------
TOTAL LIABILITIES 3,744,756 3,831,377
------------ ------------
SHAREHOLDERS' EQUITY:
Class A preferred stock - par value $.001,
10,000,000 shares authorized, no shares
issued and outstanding
Common stock - par value $.001, 50,000,000
shares authorized, 11,048,137 and
9,919,000 issued and outstanding,
respectively 11,048 11,050
Additional paid-in-capital 47,520,732 47,532,616
Unearned compensation (292,316) (250,088)
Retained earnings (deficit) (1,912,829) (3,053,620)
Accumulated other comprehensive income:
Cumulative translation adjustments, net of 199,381 318,148
Treasury stock (150,625) (150,625)
------------ ------------
Total shareholders' equity 45,375,391 44,407,481
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 49,120,147 $ 48,238,858
============ ============
</TABLE>
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1999
-----------------------------
Sales $ 6,682,201 $ 6,904,496
Cost of sales 2,681,762 2,738,729
----------- -----------
Gross profit 4,000,439 4,165,767
Operating expenses:
Selling 1,583,536 2,865,818
General and administrative 598,582 985,630
Depreciation and amortization . 110,362 864,469
Research and development 386,444 774,266
Employee stock options 43,041 42,246
----------- -----------
Total operating expenses 2,721,965 5,532,429
----------- -----------
Income (loss) from operations 1,278,474 (1,366,662)
Interest income 319,927 94,469
Other (expense) income (2,654) 79,927
Interest expense -- --
----------- -----------
Income (loss) before income taxes 1,595,747 (1,192,266)
Income tax (expense) benefit (572,356) 51,475
----------- -----------
Net income (loss) 1,023,391 (1,140,791)
=========== ===========
NET INCOME (LOSS) PER COMMON
SHARE- BASIC $ 0.10 $ (0.10)
=========== ===========
NET INCOME (LOSS) PER COMMON
SHARE-ASSUMING DILUTION $ 0.10 $ (0.10)
=========== ===========
See accompanying notes to consolidated financial statements.
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITONAL RETAINED OTHER
---------------------- PAID-IN UNEARNED EARNINGS COMPREHENSIVE
SHARES AMOUNTS CAPITAL COMPENSATION (DEFICIT) INCOME
--------- ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 7,000,000 $ 7,000 $ 3,961,564 $ (6,500) $ (188,365)
Net income 3,206,630
Currency translation adjustment,
net of tax $ (126,297)
Comprehensive income
Granting of employee and
director stock options 866,793 (501,834)
Amortization of unearned compensation 43,854
Issuance of common stock 2,919,000 2,919 31,673,647
--------- ---------- ------------ ------------- ----------- --------------
BALANCE DECEMBER 31, 1997 9,919,000 9,919 36,502,004 (464,480) 3,018,265 (126,297)
Net loss (4,931,094)
Currency translation adjustment, 325,678
net of tax
Comprehensive loss
Issuance of common stock 1,129,137 1,129 10,323,564
Income tax benefit resulting from
the exercise of stock options 695,164
Amortization of unearned compensation
172,164
Acquisition of treasury stock
--------- ---------- ------------ ------------- ----------- -------------
BALANCE, DECEMBER 31, 1998 11,048,137 11,048 47,520,732 (292,316) (1,912,829) 199,381
Net loss (1,140,791)
Currency translation adjustment, net of tax 118,767
Comprehensive loss
Issuance of common stock 1,991 2 11,884
Amortization of unearned compensation 42,228
---------- ---------- ------------ ------------- ----------- -------------
BALANCE, MARCH 31, 1999 11,050,128 $ 11,050 $ 47,532,616 $ (250,088) $(3,053,620) $ 318,148
========== ========== ============ ============= =========== =============
</TABLE>
Treasury
Stock Total
--------- ------------
BALANCE DECEMBER 31, 1996 $ 3,773,699
Net income 3,206,630
Currency translation adjustment,
net of tax (126,297)
------------
Comprehensive income 3,080,333
Granting of employee and
director stock options 364,959
Amortization of unearned compensation 43,854
Issuance of common stock 31,676,566
--------- -----------
BALANCE DECEMBER 31, 1997 0 38,939,411
Net loss (4,931,094)
Currency translation adjustment, 325,678
net of tax
Comprehensive loss (4,605,416)
Issuance of common stock 10,324,693
Income tax benefit resulting from
the exercise of stock options 695,164
Amortization of unearned compensation
172,164
Acquisition of treasury stock (150,625) (150,625)
--------- -----------
BALANCE, DECEMBER 31, 1998 (150,625) 45,375,391
Net loss (1,140,791)
Currency translation adjustment, net of tax 118,767
Comprehensive loss $ (1,022,024)
Issuance of common stock 11,886
Amortization of unearned compensation 42,228
--------- -----------
BALANCE, MARCH 31, 1999 $(150,625) $44,407,481
========= ===========
See accompanying notes to consolidated financial statements.
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1998 1999
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ 1,023,391 $ (1,140,791)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities: 110,362 864,469
Depreciation, amortization and other
Deferred income taxes (130,197)
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (1,579,264) 131,568
Income taxes refundable 23,653
Inventories (330,632) (1,175,160)
Notes receivable 46,335
Prepaid expenses and other assets 70,219 (181,773)
Increase (decrease) in:
Accounts payable and accrued liabilities 705,175 57,030
Income taxes payable 221,359
Unearned service revenues (134,401) 189,787
Customer deposits 60,736 1,800
------------ ------------
Net cash provided by (used in) operating activities 146,945 (1,313,279)
------------ ------------
INVESTING ACTIVITIES:
Short-term investments 1,423,251
Purchases of property and equipment (410,121) (169,481)
Payments of patent costs (297) (34,390)
Payments of product design costs (152,358) (109,459)
Payments for other intangibles (20,848)
------------ ------------
Net cash (used in) provided by investing activities (562,776) 1,089,073
------------ ------------
FINANCING ACTIVITIES:
Repayment of related party loans
Proceeds from debt
Payments on debt (83,776)
Proceeds from issuance of common stock, net 61,848 54,114
------------ ------------
Net cash provided by (used in) financing activities 61,848 (29,662)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
118,767
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (353,983) (135,101)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,815,069 1,183,656
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,461,086 $ 1,048,555
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $- $-
============ ============
Cash paid for income taxes $ 350,997 $-
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
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7
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS
FARO Technologies Inc. and Subsidiaries (the "Company") develops, manufactures,
markets and supports Computer Aided Design (CAD)-based quality assurance
products and CAD-based inspection and statistical process control software.
On May 15, 1998 the Company acquired all the stock of privately held CATS
Computer Aided Technologies, Computeranwendungen in der Fertigungssteurung, GmbH
("CATS") of Karlsruhe, Germany for $5 million in cash, 916,668 shares of common
stock of the Company, plus the right to receive up to an additional 333,332
shares of Company common stock if CATS meets certain performance goals. In
addition, the Company assumed certain of CATS outstanding liabilities. CATS
develops, markets and supports 3-D measurement retrofit and statistical process
control software used in both main frame and PC based CAD environments. The
acquisition was treated as a purchase for accounting purposes.
The Company has three wholly-owned subsidiaries, FARO Worldwide, Inc., Faro
Europe GmbH and Co. KG, a German company, and Antares LDA, a Portuguese company.
In connection with a restructuring of legal entities in Europe, effective
January 1, 1999 CATS was consolidated under the name of Faro Europe GmbH and Co.
KG.
NOTE B - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and footnote disclosure required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position and
operating results for the interim periods have been included. The consolidated
results of operations for the three months ended MARCH 31, 1999 are not
necessarily indicative of results that may be expected for the year ending
December 31, 1999. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company as
of December 31, 1997 and 1998, and for each of the three years in the period
ended December 31, 1998 included in the Company's Annual Report to Stockholders
included by reference within the Company's Annual Report on Form 10-K and in
conjunction with the Form S-1, as amended, dated August 7, 1998.
Effective January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Prior year financial statements have been restated for comparative
purposes to conform with this new standard.
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE C - ACQUISITION OF CATS
The operating results of CATS have been included in the consolidated statements
since May 15, 1998, the date of the acquisition. The following unaudited pro
forma results of operations are presented for informational purposes assuming
that the Company had acquired CATS as of January 1, 1998. The $3.2
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million charge off for in process research and development has been excluded
from the pro forma results as it represents a material non-recurring charge.
THREE MONTHS ENDING
MARCH 31, 1998 MARCH 31, 1999
-------------- --------------
Revenues $ 7,215,000 $ 6,904,000
Net income (loss) 403,000 (1,140,791)
Income (loss) per share:
Basic $ .04 $ (.10)
Diluted $ .04 $ (.10)
The pro forma results of operations have been provided for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the acquisition occurred on the date indicated,
or which may result in the future.
NOTE D - Earnings Per Share
A reconciliation of the number of common shares used in the calculation of basic
and diluted earnings per share ("EPS") is presented below:
THREE MONTHS ENDED MARCH 31, 1998 1999
------------------ -----------------
PER-SHARE PER-SHARE
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------
Basic EPS
Weighted-Average Shares 9,944,855 $ .10 11,009,247 $ (.10)
Effect of Dilutive Securities
Stock Options 286,301 77,821
---------- ----------
Diluted EPS
Weighted-Average Shares and
Assumed Conversions 10,231,156 $ .10 11,087,068 $ (.10)
========== ==========
NOTE E - Inventory
Inventories consist of the following:
DECEMBER 31, MARCH 31,
1998 1999
------------ -------------
Raw materials $ 2,778,081 $ 3,724,990
Finished goods 1,486,572 1,504,814
Sales demonstration 2,178,965 2,388,974
------------ ------------
$ 6,443,618 $ 7,618,778
============ ============
NOTE F - INTANGIBLE ASSETS
Intangible assets include patents, product design costs, and the value assigned
to the work force in place in connection with the acquisition of CATS (Note A).
Patents are amortized on a straight-line basis over the
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lives of the patents (17 years). Costs incurred in the development of products
after technological feasibility is attained are capitalized and amortized using
the straight-line method over the estimated economic lives of the related
products, not to exceed three years. The value assigned to the work force in
place in connection with the acquisition of CATS is being amortized over five
years. Management evaluates the recoverability of these assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
Intangible assets consist of the following:
MARCH 31,
------------------------------
1998 1999
----------- ------------
Goodwill $ 3,033,767
Existing product technology 9,446,839
Work force in place 581,181
Customer relationships 623,449
Product design costs $ 238,664 885,858
Patents 855,251 990,829
Other 127,980 106,000
------------ ------------
1,221,895 $ 15,667,923
Accumulated amortization (334,368) (3,370,654)
------------ ------------
Intangible assets - net $ 887,527 $ 12,297,269
============ ============
NOTE G - SEGMENT GEOGRAPHIC DATA
The Company develops, manufactures, markets and supports Computer Aided Design
(CAD)-based quality assurance products and CAD-based inspection and statistical
process control software. This one line of business represents more than 99% of
consolidated sales. The Company operates through sales teams established by
geographic area. Each team is equipped to deliver the entire line of Company
products to customers within its geographic area. The Company has aggregated the
sales teams into a single operating segment as a result of the similarities in
the nature of products sold, the type of customers and the methods used to
distribute the Company's products. The following table presents information
about the Company by geographic area:
THREE MONTHS ENDED MARCH 31.
----------------------------
1998 1999
---- ----
LONG-LIVED LONG-LIVED
SALES: SALES ASSETS SALES ASSETS
----------- ----------- ----------- -----------
United States $ 3,799,653 $ 1,975,043 $ 3,619,540 $ 2,838,955
United Kingdom 793,327 580,653
Germany 337,479 1,323,046 10,930,644
Canada 428,036
Other foreign 1,323,706 53,130 1,381,257 46,493
----------- ----------- ----------- -----------
Total $ 6,682,201 $ 2,028,173 $ 6,904,496 $13,816,092
=========== =========== =========== ===========
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO,
INCLUDED ELSEWHERE IN THIS FORM 10-Q, AND THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDED IN THE
COMPANY'S 1998 ANNUAL REPORT ON FORM 10-K.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
SALES. Sales increased $222,000, or 3.3% from $6.7 million for the
three months ended March 31, 1998 to $6.9 million for three months ended March
31, 1999. The increase was due to increases in product sales in the USA
($142,000) and outside the USA ($80,000).
GROSS PROFIT. Gross profit increased $165,000, or 4.1% from $4.0
million for the three months ended March 31, 1998 to $4.2 million for the three
months ended March 31, 1999. Gross margin increased to 60.3% for the three
months ended March 31, 1999 compared to 59.9% for the three months ended March
31, 1999.
SELLING EXPENSES. Selling expenses increased $1.3 million, or 81.0%,
from $1.6 million for the three months ended March 31, 1998 to $2.9 million for
the three months ended March 31, 1999. This increase was a result of the
Company's expansion of sales and marketing staff and activities, including those
resulting from the Company's acquisition of CATS in May 1998. The number of
sales and marketing employees grew 69.8% from 43 at March 31, 1998 to 73 at
March 31, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $387,000, or 64.7%, from $599,000 for the three months ended
March 31, 1998 to $986,000 for the three months ended March 31, 1999. The
increase was due to increases in numerous categories related to the Company's
expanded operations, with the largest individual increase being in salaries and
benefits to full and part-time employees ($181,000).
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased $754,000, or 683.3%, from $110,000 for the first three months
of 1998 to $864,000 for the first three months of 1999. This increase was
primarily due to $667,000 in amortization expenses related to the intangible
assets associated with the Company's acquisition of CATS.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $388,000, or 100.4%, from $386,000 for the three months ended March
31, 1998 to $774,000 for the three months ended March 31, 1999. This increase
was primarily a result of an increase in the number of research and development
employees, including those of CATS. The number of research and development
employees grew from 15 at March 31, 1998, to 41 at March 31, 1999.
INTEREST INCOME. Interest income decreased $225,000, or 70.5%, from
$320,000 for the first three months of 1998, to $94,000 for the first 3 months
of 1998. The decrease was primarily attributable to a decrease in the amount of
interest-earning cash, cash equivalents, and short-term investments from $28.5
million at March 31, 1998 to $16.6 million at March 31, 1999.
INCOME TAX EXPENSE (BENEFIT). Income tax expense decreased $624,000
from $572,000 for the three months ended March 31, 1998, to a benefit of $51,475
for the first three months of 1999.
NET INCOME (LOSS). Net income decreased $2.2 million from $1.0 million
for the three months ended March 31, 1998 to a loss of $1.1 million for the
three months ended March 31, 1999. This
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decrease was primarily a result of a $2.6 million increase in operating
expenses, including an increase of $754,000 in depreciation and amortization
expenses primarily related to the Company's acquisition of CATS (see
DEPRECIATION AND AMORTIZATION EXPENSES herein). The increase in operating
expenses was offset by a $624,000 decrease in income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed an initial public offering of
stock which provided net cash after offering expenses, of $31.7 million.
For the three months ended March 31, 1999, net cash used by operating
activities was $1.3 million compared to net cash provided by operating
activities of $147,000 for the same period of 1998. Net cash decreased due to an
increase in inventories. Net cash provided by investing activities was $1.1
million for the three months ended March 31, 1999, compared to net cash used by
investing activities of $563,000 for the three months ended March 31, 1998. Net
cash increased primarily as a result of an increase in short-term investments.
Net cash used in financing activities for the three months ended March 31, 1999
was $30,000 compared to net cash provided by financing activities of $62,000 for
the three months ended March 31, 1998. Net cash decreased due to payments on
debt.
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. There were no outstanding borrowings under this loan agreement
at March 31, 1999.
The Company has available with two financial institutions short-term,
revolving lines of credit aggregating $445,000. Under these lines, a subsidiary
may borrow funds for operations. These lines of credit are personally guaranteed
by certain shareholders. There were no outstanding borrowings under these lines
of credit at March 31, 1999.
The Company's principal commitments at March 31, 1999 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 1999.
FOREIGN EXCHANGE EXPOSURE
Sales outside the United States represent a significant portion of the
Company's total revenues. Currently, the majority of the Company's revenues and
expenses are invoiced and paid in U.S. dollars. In the future, the Company
expects a greater portion of its revenues to be denominated in foreign
currencies. Fluctuations in exchange rates between the U.S. dollar and such
foreign currencies may have a material adverse effect on the Company's business,
results of operation and financial condition, particularly its operating
margins, and could also result in exchange losses. The impact of future exchange
rate fluctuations on the results of the Company's operations cannot be
accurately predicted. Historically, the Company has not managed the risks
associated with fluctuations in exchange rates but may undertake transactions to
manage such risks in the future. To the extent that the percentage of the
Company's non-U.S. dollar revenues derived from international sales increases in
the future, the risks associated with fluctuations in foreign exchange rates
will increase. The Company may use forward foreign exchange contracts with
foreign currency options to hedge these risks. .
YEAR 2000
The Company has invested significant resources in the latest
information technologies over the past five years and therefore has minimized
the effect of Year 2000 issues. Management initiated a program to evaluate all
internal computer systems and applications, and products with computer systems
and determined the adjustments necessary to become Year 2000 compliant.
Management is confident that existing internal resources are sufficient to
correct any internal systems deficiencies that have or may be
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determined. The Company has set a target date of September 30, 1999 for complete
compliance of internal computer systems, applications, and products. The Company
has also made inquiries of its major suppliers, customers and other third-party
entities with which it has business relations to obtain assurances of their Year
2000 compliance. However, there can be no assurance that the systems of other
companies on which the Company relies will be timely corrected, or that any
failure by another company to correct such systems would not have a material
adverse effect on the Company. Contingency plans are currently being developed
to be implemented in the event any information technology system,
non-information technology system, third party or supplier is not Year 2000
compliant in a timely manner.
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 a given year. The Company has a provision of $12,500
per quarter in 1999 to cover the cost of any unexpected corrections to any
internal sysytems or product deficiencies. These costs 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference
herein from the section of this report in Part I, Item 2, under the caption
"Foreign Exchange Exposure."
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 2, 1998 the Company filed an action for declaratory judgement
action against Kosaka Laboratory Ltd. of Tokyo, Japan (Civil Action No.
98-381-CIV-ORL-19A in the Federal Court for the Middle District of Florida). The
Company seeks to have the Court declare its rights with regard to Kosaka's U.S.
Patent number 4,430,796 regarding a method of measuring an object using, for
example, a coordinate measuring machine (CMM), when an object is larger than the
coordinate system physically measurable by the CMM. Over the past one to two
years, the Company and Kosaka have sought to resolve this matter in an amicable
manner. However, Kosaka has persisted in its erroneous claims that its patent is
infringed by the Company, and has threatened to file suit if the Company did not
pay a relatively large licensing fee. In order to make it clear to the market
that the Company does not infringe the patent, the Company decided to file the
above mentioned action. The Company strongly believes that the outcome to this
declaratory judgement action will be favorable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's first registration statement filed
under the Securities Act was September 17, 1997.
From the effective date of such registration statement to March 31,
1999 none of the net proceeds from the Company's initial public offering were
used for construction of plant, building and facilities; purchase and
installation of machinery and equipment or the purchase of real estate. The
Company used $5 million of such proceeds to acquire CATS and $7.4 million as
working capital.
ITEM 5. OTHER INFORMATION
The Company held an Annual Meeting of Stockholders on Wednesday, April
28, 1999. The Matters submitted for vote and the related election results are as
follows:
1. To elect Philip R. Colley and Gregory A. Fraser as directors of the
Company, each for a three-year term. The results of proxies voted for the
election of directors are as follows:
12
<PAGE>
Philip R. Colley % Gregory A. Fraser %
For 8,422,926 74.25 8,422,726 74.25
Withheld 6,500 0.06 6,700 0.06
Total 8,429,426 74.31 8,429,426 74.31
========== ====== ========== ======
Eligible 11,343,461 100.00 11,343,461 100.00
No other matters were submitted to vote by the stockholders.
Five additional persons who did not stand for election at the Annual Meeting
continue to serve as members of the Board of Directors. These members include
Simon Raab, Hubert d'Amours and Andre Julien, whose terms expire in 2000, and
Alexander Raab and Norman Schipper, whose terms expire in 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
27.7 Financial Data Schedule (FOR SEC USE ONLY)
b.) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1999 FARO TECHNOLOGIES, INC.
(Registrant)
By: /s/ GREGORY A. FRASER
-----------------------------------
Gregory A. Fraser
Executive Vice President and Chief
Financial Officer Duly Authorized
Officer and Principal Financial
Officer)
13
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,048,555
<SECURITIES> 15,588,580
<RECEIVABLES> 8,831,775
<ALLOWANCES> 149,224
<INVENTORY> 7,618,778
<CURRENT-ASSETS> 34,238,436
<PP&E> 3,022,721
<DEPRECIATION> 1,508,898
<TOTAL-ASSETS> 48,238,858
<CURRENT-LIABILITIES> 3,541,316
<BONDS> 0
0
0
<COMMON> 11,050
<OTHER-SE> 44,396,431
<TOTAL-LIABILITY-AND-EQUITY> 48,238,858
<SALES> 6,904,496
<TOTAL-REVENUES> 6,904,496
<CGS> 2,738,729
<TOTAL-COSTS> 5,532,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,192,266)
<INCOME-TAX> (51,475)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,140,791)
<EPS-PRIMARY> (.10)
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