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 June 30, 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, $.001 Par Value Outstanding at August 13, 1999:
11,350,499
1
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FARO Technologies Inc.
Index to Form 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998 and
June 30, 1999 3
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1998 and 1999 4
Condensed Consolidated Statement of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1999 6
Notes to Condensed 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 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1999
1998 (UNAUDITED)
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,183,656 $ 27,538
Short term investments 17,011,831 16,383,344
Accounts receivable - net of allowance 8,963,343 9,059,413
Income taxes refundable 716,048 900,411
Inventories 6,443,618 7,981,741
Prepaid expenses and other assets 155,037 461,631
Deferred income taxes 121,543 26,543
------------ ------------
Total current assets 34,595,076 34,840,621
------------ ------------
PROPERTY AND EQUIPMENT - at cost:
Machinery and equipment 1,873,146 2,311,704
Furniture and fixtures 899,616 904,390
Leasehold improvements 28,889 30,020
------------ ------------
Total 2,801,651 3,246,114
Less accumulated depreciation (1,276,459) (1,702,574)
------------ ------------
Property and equipment, net 1,525,192 1,543,540
------------ ------------
INTANGIBLE ASSETS - net 12,821,191 11,894,631
NOTES RECEIVABLE 178,688 179,431
DEFERRED INCOME TAXES -- 54,219
------------ ------------
TOTAL ASSETS $ 49,120,147 $ 48,512,442
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term notes payable to banks $ 296,230
Accounts payable and accrued liabilities 2,852,452 $ 3,999,893
Current portion of unearned service revenues 329,731 479,869
Current portion of long-term debt 4,156 6,869
Customer deposits 114,738 116,538
------------ ------------
Total current liabilities 3,597,307 4,603,169
DEFERRED INCOME TAXES 78,220 --
UNEARNED SERVICE REVENUES - less current portion 31,905 30,935
LONG-TERM DEBT - less current portion 37,324 --
------------ ------------
TOTAL LIABILITIES 3,744,756 4,634,104
------------ ------------
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 11,057
Additional paid-in-capital 47,520,732 47,553,599
Unearned compensation (292,316) (207,860)
Retained earnings (deficit) (1,912,829) (3,218,175)
Accumulated other comprehensive income:
Cumulative translation adjustments, net of tax 199,381 (109,658)
Treasury stock (150,625) (150,625)
------------ ------------
Total shareholders' equity 45,375,391 43,878,338
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 49,120,147 $ 48,512,442
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1999 1998 1999
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 7,721,808 $ 8,611,436 $ 14,404,009 $ 15,515,932
Cost of sales 2,779,843 3,447,453 5,461,605 6,186,182
------------ ------------ ------------ ------------
Gross profit 4,941,965 5,163,983 8,942,404 9,329,750
Operating expenses:
Selling 2,211,523 2,750,972 3,795,059 5,295,086
General and administrative 517,136 1,199,013 1,115,718 2,506,347
Depreciation and amortization 569,961 863,627 680,323 1,728,096
Research and development 435,534 913,301 821,978 1,687,567
Employee stock options 43,041 42,228 86,082 84,474
Purchased in-process research and development costs 3,210,000 -- 3,210,000 --
------------ ------------ ------------ ------------
Total operating expenses 6,987,195 5,769,141 9,709,160 11,301,570
------------ ------------ ------------ ------------
Loss from operations (2,045,230) (605,158) (766,756) (1,971,820)
Interest income 302,852 262,254 622,779 356,723
Other (expense) income 5,408 70,474 2,754 150,401
Interest expense (7,865) -- (7,865) --
------------ ------------ ------------ ------------
Loss before income taxes (1,744,835) (272,430) (149,088) (1,464,696)
Income tax (expense) benefit 35,119 107,875 (537,237) 159,350
------------ ------------ ------------ ------------
Net loss $ (1,709,716) $ (164,555) $ (686,325) $ (1,305,346)
============ ============ ============ ============
NET LOSS PER SHARE - BASIC $ (0.16) $ (0.01) $ (0.07) $ (0.12)
============ ============ ============ ============
NET LOSS PER SHARE - DILUTED $ (0.16) $ (0.01) $ (0.07) $ (0.12)
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
ADDITONAL RETAINED
COMMON STOCK PAID-IN UNEARNED EARNINGS
SHARES AMOUNTS CAPITAL COMPENSATION (DEFICIT)
------ ------- ------- ------------ ---------
<S> <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
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
Net loss (4,931,094)
Currency translation adjustment, 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)
Net loss (1,305,346)
Currency translation adjustment, net of tax
Comprehensive loss
Issuance of common stock 9,029 9 32,867
Amortization of unearned compensation 84,456
----------- ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1999 11,057,166 $ 11,057 $ 47,553,599 $ (207,860) $ (3,218,175)
=========== ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
INCOME STOCK TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1996 $ 3,773,699
Net income 3,206,630
Currency translation adjustment,
net of tax $(126,297) $ (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 (126,297) 0 38,939,411
Net loss (4,931,094)
Currency translation adjustment, net of tax 325,678 325,678
------------
Comprehensive loss (4,605,418)
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 199,381 (150,625) 45,375,391
Net loss (1,305,346)
Currency translation adjustment, net of tax (309,039) (309,039)
------------
Comprehensive loss $ (1,614,385)
Issuance of common stock 32,876
Amortization of unearned compensation 84,456
------------ ------------ ------------
BALANCE, JUNE 30, 1999 $ (109,658) $ (150,625) $ 43,878,338
============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1998 1999
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (686,325) $ (1,305,346)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and other 814,157 1,728,096
In-process research and development 3,210,000 --
Deferred income taxes 259,488 (37,439)
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (2,614,372) (96,070)
Income taxes refundable -- (184,363)
Inventories (944,217) (1,538,123)
Notes receivable -- (743)
Prepaid expenses and other assets (55,507) (306,594)
Increase (decrease) in:
Accounts payable and accrued liabilities 202,206 1,147,443
Income taxes payable (413,167) --
Unearned service revenues (111,960) 149,168
Customer deposits 64,398 1,800
------------ ------------
Net cash used in operating activities (275,299) (442,171)
------------ ------------
INVESTING ACTIVITIES:
Sale of short-term investments -- 628,487
Purchases of property and equipment (664,596) (444,463)
Payments of patent costs (87,863) (87,211)
Payments of product design costs (311,896) (252,527)
Payments for other intangibles -- (35,685)
Acsuisition of business, net of cash acquired (5,306,057) --
------------ ------------
Net cash used in investing activities (6,370,412) (191,399)
------------ ------------
FINANCING ACTIVITIES:
Payments on debt -- (330,841)
Proceeds from issuance of common stock, net 156,885 117,332
------------ ------------
Net cash provided by (used in) financing activities 156,885 (213,509)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 70,620 (309,039)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (6,418,206) (1,156,118)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,815,069 1,183,656
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,396,863 $ 27,538
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 7,865 $ --
============ ============
Cash paid for income taxes $ 74,216 $ --
============ ============
Noncash financing activities:
Acquisition of business:
Fair value of assets acquired $ 17,667,382
Common stock issued 10,395,000
Liabilities assumed (1,614,000)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 operating 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 condensed 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 AND SIX months ended JUNE 30, 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
7
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informational purposes assuming that the Company had acquired CATS as of January
1, 1998. The $3.2 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 ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
-------------------------------------
Revenues $ 8,004,000 $ 15,200,000
Net income 512,000 943,000
Income per share:
Basic $ .05 $ .09
Diluted $ .05 $ .08
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 1999
- ---------------------------- --------------------------- ---------------------------
PER-SHARE PER-SHARE
SHARES AMOUNT SHARES AMOUNT
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Basic EPS
Weighted-Average Shares 10,531,132 $(.16) 11,012,619 $ (.01)
Effect of Dilutive Securities
Stock Options
------------- -----------
Diluted EPS
Weighted-Average Shares and
Assumed Conversions 10,531,132 $(.16) 11,012,619 $ (.01)
============= ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 1999
- ---------------------------- --------------------------- ---------------------------
PER-SHARE PER-SHARE
SHARES AMOUNT SHARES AMOUNT
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Basic EPS
Weighted-Average Shares 10,239,613 $(.07) 11,011,943 $ (.12)
Effect of Dilutive Securities
Stock Options
------------- -----------
Diluted EPS
Weighted-Average Shares and
Assumed Conversions 10,239,613 $(.07) 11,011,943 $ (.12)
============= ==========
</TABLE>
8
<PAGE>
NOTE E - 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
SALES: 1998 1999 1998 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
United States $ 4,368,794 $ 4,532,282 $ 8,168,447 $ 8,151,822
United Kingdom 760,721 1,104,524 1,341,374
Germany 1,655,121 1,927,535 1,992,600 3,250,581
Canada 520,996 949,032
Other foreign 1,176,897 1,390,898 2,189,406 2,772,155
----------- ----------- ----------- -----------
Total $ 7,721,808 $ 8,611,436 $14,404,009 $15,515,932
=========== =========== =========== ===========
DECEMBER 31, JUNE 30,
LONG-LIVED ASSETS (NET) 1998 1999
------------------------------
United States $ 2,707,920 $ 2,995,750
Germany 11,592,360 10,401,817
Other foreign 46,103 40,604
----------- -----------
Total $14,346,383 $13,438,171
=========== ===========
</TABLE>
9
<PAGE>
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
CONDENSED 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 QUARTERLY REPORT ON FORM 10-Q DATED MAY 14, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
SALES. Sales increased $890,000, or 11.6% from $7.7 million for the
three months ended June 30, 1998 to $8.6 million for three months ended June 30,
1999. The increase was due to increases in product sales in the United States
($163,000) in the three European countries where the Company has sales offices
($716,000), and in the rest of the world of $11,000.
GROSS PROFIT. Gross profit increased $220,000, or 4.5% from $4.9
million for the three months ended June 30, 1998 to $5.2 million for the three
months ended June 30, 1999. Gross margin decreased to 60.0% for the three months
ended June 30, 1999 from 64.0% for the three months ended June 30, 1998. The
decrease in gross margin was primarily a result of a decrease in the average
selling price of the Company's FaroArm products following the three months ended
June 30, 1998.
SELLING EXPENSES. Selling expenses increased $500,000, or 22.7%, from
$2.2 million for the three months ended June 30, 1998 to $2.7 million for the
three months ended June 30, 1999. This increase was a result of the Company's
expansion of sales and marketing staff and activities in the United States and
Europe, including those resulting from the Company's acquisition of CATS in May
1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $682,000, or 131.9%, from $517,000 for the three months ended
June 30, 1998 to $1.2 million for the three months ended June 30, 1999. The
increase was due to widespread increases across many categories related to the
company's expansion in the United States and Europe. The Company's United States
operations accounted for $475,000 of the increase, including increases in
salaries ($134,000), bonuses ($89,000), and hiring and training costs ($47,000).
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased $294,000, or 51.6%, from $570,000 for the three months ended
June 30, 1998 of 1998 to $864,000 for the first three months of 1999. This
increase was primarily due to the amortization expenses related to the
intangible assets associated with the Company's acquisition of CATS.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $478,000, or 109.7%, from $436,000 for the three months ended June 30,
1998 to $913,000 for the three months ended June 30, 1999. The increase was
primarily due to increases in salaries ($277,000) in the United States, and in
all expenses in Europe ($263,000) resulting from the Company's acquisition of
CATS.
IN-PROCESS RESEARCH AND DEVELOPMENT RESULTING FROM ACQUISITION. In
process research and development expenses of $3.2 million were recorded in the
second quarter of 1998 related to the acquisition of CATS.
INTEREST INCOME. Interest income decreased $41,000, or 13.4%, from
$303,000 for the three months ended June 30, 1998, to $262,000 for the three
months ended June 30, 1999. The decrease was primarily attributable to a
decrease in the amount of interest-earning cash, cash equivalents, and
short-term investments.
10
<PAGE>
INCOME TAX BENEFIT. Income tax benefit increased $73,000, or 208.5%
from $35,000 for the three months ended June 30, 1998, to $108,000 for the first
three months of 1999. The tax benefit in the three months ended June 30, 1999
resulted from tax benefits in the United States ($125,000) and France ($31,000),
offset by a tax expense of $48,000 in the UK.
NET LOSS. Net loss decreased $1.5 million from $1.7 million for the
three months ended June 30, 1998 to $165,000 for the three months ended June 30,
1999 due to the factors stated above.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
SALES. Sales increased $1.1 million, or 7.6% from $14.4 million for the
six months ended June 30, 1998 to $15.5 million for six months ended June 30,
1999. The increase was primarily a result of an increase in product sales in
Germany, primarily as a result of the Company's acquisition of CATS in May 1998.
GROSS PROFIT. Gross profit increased $387,000, or 4.3% from $8.9
million for the six months ended June 30, 1998 to $9.3 million for the six
months ended June 30, 1999. Gross margin decreased to 60.1% for the six months
ended June 30, 1999 from 62.1% for the six months ended June 30, 1998. The
decrease in gross margin was primarily a result of a decrease in the average
selling price of the Company's FaroArm products in the second half of 1998.
SELLING EXPENSES. Selling expenses increased $1.5 million, or 39.5%,
from $3.8 million for the six months ended June 30, 1998 to $5.3 million for the
six months ended June 30, 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.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $1.4 million, or 127.2%, from $1.1 million for the six months
ended June 30, 1998 to $2.5 million for the six months ended June 30, 1999. The
increase from the Company's United States operations was $778,000, including
increases in salaries ($122,000), subcontractor expenses ($124,000), bonuses
($109,000), and professional and legal expenses ($126,000). The increase in the
Company's European operations was $558,000 primarily from the addition of CATS
in May 1998.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased $1.0 million, or 147.1%, from $680,000 for the six months
ended June 30, 1998 of 1998 to $1.7 million for the six months ended June 30,
1999. This increase was primarily due to the amortization expenses related to
the intangible assets associated with the Company's acquisition of CATS.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $866,000, or 105.3%, from $822,000 for the six months ended June 30,
1998 to $1.7 million for the six months ended June 30, 1999. The increase was
primarily due to increases in salaries in the United States of $471,000, offset
by a reduction in other expenses in the United States of $164,000, and an
increase in all expenses in Europe of $559,000, resulting from the Company's
acquisition of CATS.
IN-PROCESS RESEARCH AND DEVELOPMENT RESULTING FROM ACQUISITION. In
process research and development expenses of $3.2 million were recorded in the
second quarter of 1998 related to the acquisition of CATS.
INTEREST INCOME. Interest income decreased $266,000, or 42.7%, from
$623,000 for the six months ended June 30, 1998, to $357,000 for the six months
ended June 30, 1999. The decrease was primarily attributable to a decrease in
the amount of interest-earning cash, cash equivalents, and short-term
investments.
11
<PAGE>
INCOME TAX EXPENSE (BENEFIT). Income tax expense (benefit) decreased
$697,000, or 129.7% from an expense of $537,000 for the six months ended June
30, 1998, to a benefit of $159,000 for the six months ended June 30, 1999.
Income tax expense decreased as a result of an increase in net loss before
income taxes.
NET LOSS. Net loss increased $619,000 from $686,000 for the six months
ended June 30, 1998 to $1.3 million for the six months ended June 30, 1999 due
to the factors stated above.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed an initial public offering of
stock which provided net cash after offering expenses, of $31.8 million.
For the six months ended June 30, 1999, net cash used in operating
activities was $442,000 compared to $275,000 for the six months ended June 30,
1998. This increase was due to increases in inventories, prepaid expenses, and
accounts payable. Net cash used in investing activities was $191,000 for the six
months ended June 30, 1999, compared to net cash used by investing activities of
$6.4 million for the six months ended June 30, 1998. This decrease was due to
the acquisition of CATS during the six months ended June 30, 1998 decreases in
payments of product design costs. Net cash used in financing activities for the
six months ended June 30, 1999 was $213,000 compared to net cash provided by
financing activities of $157,000 for the six months ended June 30, 1998. This
change was due to payments on debt during the six months ended June 30, 1999.
In April 1997, the Company obtained an 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 June
30, 1999.
In May 1999, the Company cancelled two revolving lines of credit
aggregating $445,000 under which a subsidiary could borrow funds for operations.
This cancellation resulted in the elimination of related fees, and the Company
believes that it has sufficient liquidity at the corporate level to fund the
subsidiary's operating needs.
The Company's principal commitments at June 30, 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
12
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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 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 received
positive responses from its major customers and approximately 50 per cent of its
suppliers regarding their Year 2000 readiness. The Company continues to make
inquiries of major suppliers which have not yet provided assurances of their
Year 2000 compliance. For these suppliers the Company has either identified
alternative suppliers, or has plans to increase its stock of the goods supplied
by such suppliers to cover the first few months of the year 2000. 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. This is 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. The Company does not separately track the internal costs incurred on Year
2000 Compliance activities, and such costs are principally the payroll costs of
employees participating in these activities.
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the cost of
labor, equipment and raw materials. The Company does not believe that inflation
has had any material effect on the Company's business over the last three years.
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 seeked 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. Preceding the filing of the
declaratory judgement action, the Company and Kosaka had sought to resolve this
matter in an amicable manner. However, Kosaka has persisted in its erroneous
claims that its patent was infringed by the Company, and 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 did not infringe the patent, the Company
filed the above mentioned action.
On June 30, 1999 the Company settled its dispute with Kosaka. As a
result of the settlement, Kosaka agreed that the Company did not infringe the
asserted claims of the patent, and each company agreed to pay its own legal fees
in the matter.
13
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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: August 13, 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)
14
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.7 Financial Data Schedule (For SEC Use Only)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 27,538
<SECURITIES> 16,383,344
<RECEIVABLES> 9,059,413
<ALLOWANCES> 116,538
<INVENTORY> 7,981,741
<CURRENT-ASSETS> 34,840,621
<PP&E> 3,246,114
<DEPRECIATION> 1,702,574
<TOTAL-ASSETS> 48,512,442
<CURRENT-LIABILITIES> 4,603,169
<BONDS> 0
0
0
<COMMON> 11,057
<OTHER-SE> 43,867,281
<TOTAL-LIABILITY-AND-EQUITY> 48,512,442
<SALES> 15,515,932
<TOTAL-REVENUES> 15,515,932
<CGS> 6,186,182
<TOTAL-COSTS> 9,329,750
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,464,696)
<INCOME-TAX> (159,350)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,305,346)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
