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 September 30, 2000
[ ] 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 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 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 November 6, 2000: 11,020,682
<PAGE>
FARO Technologies, Inc.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30,
2000 and 1999 4
Condensed Consolidated Statements of Shareholders'
Equity 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
2
<PAGE>
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note C) $ 6,617,817 $ 6,637,184
Short term investments - at cost (Note C) 6,423,850 6,494,262
Accounts receivable - net of allowance 8,633,789 9,812,838
Income taxes refundable 151,592 234,470
Inventories (Note D) 6,178,519 6,199,414
Prepaid expenses and other assets 725,781 447,894
Deferred income taxes 601,130 494,088
------------ ------------
Total current assets 29,332,478 30,320,150
------------ ------------
PROPERTY AND EQUIPMENT - at cost:
Machinery and equipment 2,911,613 2,895,706
Furniture and fixtures 1,254,278 1,094,927
Leasehold improvements 74,686 34,086
------------ ------------
Total 4,240,577 4,024,719
Less accumulated depreciation (2,580,593) (2,356,572)
------------ ------------
Property and equipment, net 1,659,984 1,668,147
------------ ------------
INTANGIBLE ASSETS - net 4,443,629 5,979,072
INVESTMENTS - at cost (Note C) 4,541,063 3,747,694
NOTES RECEIVABLE (Note E) 1,259,793 130,936
DEFERRED INCOME TAXES 258,977 257,913
------------ ------------
TOTAL ASSETS $ 41,495,924 $ 42,103,912
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,237,516 $ 2,200,408
Accrued and other current liabilities 3,376,815 2,847,076
Current portion of unearned service revenues 542,131 317,918
Customer deposits 73,470 84,904
------------ ------------
Total current liabilities 6,229,932 5,450,306
OTHER LONG-TERM LIABILITIES 165,893 54,260
------------ ------------
TOTAL LIABILITIES 6,395,825 5,504,566
------------ ------------
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, 11,394,014 and 11,392,842 issued;
11,020,682 and 11,019,510 outstanding, respectively 11,061 11,060
Additional paid-in-capital 47,549,064 47,544,844
Unearned compensation (28,391) (123,404)
Accumulated deficit (9,494,210) (9,307,651)
Accumulated other comprehensive income:
Cumulative translation adjustments, net of tax (2,786,800) (1,374,878)
Treasury stock (150,625) (150,625)
------------ ------------
Total shareholders' equity 35,100,099 36,599,346
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,495,924 $ 42,103,912
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 8,810,972 $ 7,025,005 $ 29,584,018 $ 22,540,937
Cost of sales 3,196,895 3,391,029 11,133,799 9,577,211
------------ ------------ ------------ ------------
Gross profit 5,614,077 3,633,976 18,450,219 12,963,726
Operating expenses:
Selling 3,233,294 2,824,957 10,264,455 8,120,043
General and administrative 1,481,068 1,511,350 4,124,963 4,017,697
Depreciation and amortization 626,517 879,535 2,067,932 2,607,631
Research and development 876,605 895,227 2,691,460 2,582,794
Employee stock options 31,671 42,243 95,013 126,717
------------ ------------ ------------ ------------
Total operating expenses 6,249,155 6,153,312 19,243,823 17,454,882
------------ ------------ ------------ ------------
Loss from operations (635,078) (2,519,336) (793,604) (4,491,156)
Interest income 219,810 163,448 584,604 520,171
Other income, net 139,937 230,522 252,634 380,923
------------ ------------ ------------ ------------
Income (loss) before income taxes (275,331) (2,125,366) 43,634 (3,590,062)
Income tax (expense) benefit (85,056) 461,616 (230,193) 620,966
------------ ------------ ------------ ------------
Net loss $ (360,387) $ (1,663,750) $ (186,559) $ (2,969,096)
============ ============ ============ ============
NET LOSS PER SHARE - BASIC $ (0.03) $ (0.15) $ (0.02) $ (0.27)
============ ============ ============ ============
NET LOSS PER SHARE - DILUTED $ (0.03) $ (0.15) $ (0.02) $ (0.27)
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITONAL
----------------------------- PAID-IN UNEARNED
SHARES AMOUNTS CAPITAL COMPENSATION
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 11,048,137 $ 11,048 $47,520,732 $ (292,316)
Net loss
Currency translation adjustment, net of tax
Comprehensive loss
Issuance of common stock 11,373 12 24,112
Amortization of unearned compensation 168,912
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 11,059,510 11,060 47,544,844 (123,404)
Net loss
Currency translation adjustment, net of tax
Comprehensive loss
Issuance of common stock 1,172 1 4,220
Amortization of unearned compensation 95,013
----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2000 (Unaudited) 11,060,682 $ 11,061 $47,549,064 $ (28,391)
=========== =========== =========== ===========
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE TREASURY
DEFICIT INCOME (LOSS) STOCK TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $(1,912,829) $ 199,381 $ (150,625) $45,375,391
Net loss (7,394,822) (7,394,822)
Currency translation adjustment, net of tax (1,574,259) (1,574,259)
-----------
Comprehensive loss (8,969,081)
Issuance of common stock 24,124
Amortization of unearned compensation 168,912
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 (9,307,651) (1,374,878) (150,625) 36,599,346
Net loss (186,559) (186,559)
Currency translation adjustment, net of tax (1,411,922) (1,411,922)
-----------
Comprehensive loss (1,598,481)
Issuance of common stock 4,221
Amortization of unearned compensation 95,013
----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2000 (Unaudited) $(9,494,210) $(2,786,800) $ (150,625) $35,100,099
=========== =========== =========== ===========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (186,559) $(2,969,096)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,067,932 2,800,828
Bad debt expense, net of charge offs 95,000 130,000
Inventory reserve 355,000 --
Deferred income taxes (108,106) 42,383
Employee stock options 95,013 126,695
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 505,904 954,128
Income taxes refundable 82,878 (698,957)
Inventories (407,389) (1,846,542)
Prepaid expenses and other assets (319,976) (177,522)
Increase (decrease) in:
Accounts payable and accrued liabilities 774,103 1,638,008
Unearned service revenues 371,702 168,527
Customer deposits (5,217) (6,429)
----------- -----------
Net cash provided by operating activities 3,320,285 162,023
----------- -----------
INVESTING ACTIVITIES:
(Payments for) proceeds from investments, net (722,958) 2,073,718
Notes receivable (1,147,647) 46,491
Purchases of property and equipment (860,060) (607,354)
Payments of patent costs (114,421) (121,665)
Payments of product design costs -- (358,592)
Payments for other intangibles (131,798) (173,384)
----------- -----------
Net cash provided by (used in) investing activities (2,976,884) 859,214
----------- -----------
FINANCING ACTIVITIES:
Payments on debt (7,159) (331,435)
Proceeds from issuance of common stock, net 4,221 21,461
----------- -----------
Net cash used in financing activities (2,938) (309,974)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (359,830) (147,767)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,367) 563,496
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,637,184 1,183,656
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,617,817 $ 1,747,152
=========== ===========
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
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 CATS Computer Aided Technologies, GmbH
("CATS"), a company based in Germany that develops, markets, and supports 3-D
measurement retrofit and statistical process control software. The total
consideration was $16,069,000 consisting of $5 million in cash, 916,668 shares
of common stock and the assumption of certain outstanding liabilities of CATS.
The purchase price includes direct costs of the acquisition in the amount of
$674,000. In addition, 333,332 shares of common stock were placed in escrow to
be issued provided CATS met certain sales performance goals within an
eighteen-month period following the acquisition. These sales goals were not met
by November 15, 1999. The 90-day period for registering disputes expired on
February 13, 2000 with no claims. The 333,332 shares held by the escrow agent
will be returned to the Company once the required documentation requirements
have been met. The acquisition was treated as a purchase for accounting purposes
and, accordingly, the operating results of CATS have been included in the
Company's consolidated financial statements since May 15, 1998 (see Note E).
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 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 nine months ended September 30, 2000 are not
necessarily indicative of results that may be expected for the year ending
December 31, 2000. These condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of the
Company as of December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999 included in the Company's Annual Report to
Stockholders included by reference within the Company's Annual Report on Form
10-K.
7
<PAGE>
NOTE C - CASH AND INVESTMENTS
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 and cash equivalents. All short-term investments in
debt securities which have maturities of three months or less are included in
cash and cash equivalents and classified as trading securities, which are
carried at their fair value based upon the quoted market prices of those
investments.
INVESTMENTS - Short-term investments and Investments ordinarily consist of debt
securities acquired with cash not immediately needed in operations. Short-term
investments have maturities of less than one year. Investments have maturities
of at least one year (none have maturities exceeding two years).
At September 30, 2000 and December 31, 1999, cash and investments consisted of
the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
Cash and cash equivalents $ 6,617,817 $ 6,637,184
Short-term investments 6,423,850 6,494,262
Investments 4,541,063 3,747,694
----------- -----------
Total cash and investments $17,582,730 $16,879,140
=========== ===========
NOTE D - INVENTORIES
At September 30, 2000 and December 31, 1999, inventories consist of the
following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
Raw materials $ 1,779,612 $ 1,914,543
Finished goods 1,483,142 1,191,977
Sales demonstration 2,915,765 3,092,894
----------- -----------
Total inventories $ 6,178,519 $ 6,199,414
=========== ===========
NOTE E - NOTES RECEIVABLE
The CATS acquisition agreement provided that the Company would provide a loan to
the two former shareholders of CATS to fund their tax liability in connection
with the shares of FARO common stock that they received in the acquisition. The
former CATS shareholders remain key employees of the Company.
Pursuant to a Loan Agreement dated August 2, 1999 with each of the former CATS
shareholders, the Company has agreed to loan to the former CATS shareholders an
amount equal to their tax obligation to the German tax authorities in connection
with the acquisition of CATS. The maximum aggregate amount of the loans is
estimated to be approximately $2 million. The Company was not obligated to
provide the loans until the German tax authorities issue an assessment of the
tax to the former CATS shareholders and the ultimate amount of the loans depends
on the issuance by such authorities of a final tax assessment. Moreover, the
loan commitment would cease if the Company's share price rises to $11.34 per
share (the price establishing the tax liability) for five or more consecutive
days.
In June 2000, the German tax authorities issued a preliminary tax assessment to
the former CATS shareholders. In connection therewith, on June 20, 2000 the
Company and each of the former CATS shareholders entered into an Amended and
Restated Loan Agreement and the Company granted initial loans to the former CATS
shareholders in the aggregate amount of $1.1 million ("the Initial Loans"). The
Initial Loans, recorded net of an unamortized discount of $68,000, are for a
term of three years, at an interest rate of approximately 4.3%, and grant the
borrowers an option to extend the term for an additional
8
<PAGE>
three years. As collateral for the loans, each of the former CATS shareholders
has pledged to the Company the number of shares of Company common stock equal to
the amount of the Initial Loan divided by $6.375. If the maximum amount of the
loans is granted pursuant to the loan agreements, as amended and restated, the
loans will be secured by 313,725 shares. All loans granted will be a
non-recourse obligation of the former CATS shareholders.
NOTE F - 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 SEPTEMBER 30,
------------------------------------------------------
2000 1999
------------------------ ------------------------
PER-SHARE PER-SHARE
SHARES Amount SHARES AMOUNT
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Basic EPS 11,020,682 $ (.03) 11,017,810 $ (.15)
Effect of dilutive securities -- --
---------- ----------
Diluted EPS 11,020,682 $ (.03) 11,017,810 $ (.15)
========== ==========
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999
------------------------ ------------------------
PER-SHARE PER-SHARE
SHARES Amount SHARES AMOUNT
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Basic EPS 11,020,174 $ (.02) 11,013,885 $ (.27)
Effect of dilutive securities -- --
---------- ----------
Diluted EPS 11,020,174 $ (.02) 11,013,885 $ (.27)
=========== ==========
</TABLE>
9
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------------
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
SALES:
United States $ 4,378,705 $ 2,297,742 $14,631,289 $10,449,564
Germany 1,498,452 1,849,935 6,287,967 5,100,516
United Kingdom 411,703 450,032 1,993,141 1,791,406
France 717,477 390,001 2,134,405 812,609
Other foreign 1,804,635 2,037,295 4,537,216 4,386,842
----------- ----------- ----------- -----------
Total $ 8,810,972 $ 7,025,005 $29,584,018 $22,540,937
=========== =========== =========== ===========
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
LONG-LIVED ASSETS (NET):
United States $ 2,612,794 $ 2,522,654
Germany 3,455,609 5,083,420
Other foreign 35,210 41,145
----------- -----------
Total $ 6,103,613 $ 7,647,219
=========== ===========
</TABLE>
10
<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 ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
SALES. Sales increased $1.8 million, or 25.4%, from $7.0 million for
the three months ended September 30, 1999 to $8.8 million for three months ended
September 30, 2000. The increase primarily resulted from increases in product
unit sales in all geographic regions, partially offset by the effect of the
stronger U.S. dollar in the second quarter of 2000 (approximately $400,000).
GROSS PROFIT. Gross profit increased $2.0 million, or 54.5%, from $3.6
million for the three months ended September 30, 1999 to $5.6 million for the
three months ended September 30, 2000. Gross margin increased, to 63.7% for the
three months ended September 30, 2000 from 51.7% for the three months ended
September 30, 1999. The increase in gross margin was primarily a result of cost
reductions for computer hardware and software products in the three months ended
September 30, 2000, partially offset by the effect of the stronger U.S. dollar.
SELLING EXPENSES. Selling expenses increased $408,000, or 14.5%, from
$2.8 million for the three months ended September 30, 1999 to $3.2 million for
the three months ended September 30, 2000. This increase was primarily a result
of higher selling expenses in the United States, principally composed of higher
compensation and marketing expenses ($332,000), and Europe ($178,000) offset in
part by the effect of the stronger U.S. dollar in 2000 (approximately $145,000).
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased $30,000, or 2.0%, from $1.5 million for the three months
ended September 30, 1999 to $1.4 million for the three months ended September
30, 2000. The decrease was due to decreases across many expense categories in
the United States ($111,000), offset by increase in expenses in Europe ($81,000,
net of the effect of the stronger U.S. dollar in 2000).
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses decreased $253,000, or 28.8%, from $880,000 for the three months ended
September 30, 1999 to $627,000 for the three months ended September 30, 2000.
This decrease was primarily due to the $3,073,000 impairment loss on acquired
intangibles at the end of 1999, which reduced the amount of remaining acquired
intangibles to be amortized, offset in part by depreciation on assets added in
the second half of 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased $19,000, or 2.1%, from $895,000 for the three months ended September
30, 1999 to $877,000 million for the three months ended September 30, 2000
principally as a result of the effect of the stronger U.S. dollar in 2000.
INTEREST INCOME. Interest income increased $56,000, or 34.5%, from
$163,000 for the three months ended September 30, 1999, to $220,000 for the
three months ended September 30, 2000. The increase was primarily attributable
to an increase in the average amount of interest-earning cash, cash equivalents,
and investments held through the third quarter of 2000 (see Liquidity and
Capital Resources below).
INCOME TAX EXPENSE. Income tax expense increased $547,000 from, an
income tax benefit of $462,000 for the three months ended September 30, 1999, to
an $85,000 expense for the three months
11
<PAGE>
ended September 30, 2000, principally as a result of the increase in U.S. income
before income taxes during the third quarter of 2000.
NET INCOME. Net loss decreased $1.3 million from $1.7 million for the
three months ended September 30, 1999 to $360,000 for the three months ended
September 30, 2000 due to the factors stated above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
SALES. Sales increased $7.1 million, or 31.2%, from $22.5 million for
the nine months ended September 30, 1999 to $29.6 million for nine months ended
September 30, 2000. The increase primarily resulted from increases in product
unit sales in all geographic regions, partially offset by the effect of the
stronger U.S. dollar in the first half of 2000 (approximately $1.1 million).
GROSS PROFIT. Gross profit increased $5.4 million, or 42.3%, from $13.0
million for the nine months ended September 30, 1999 to $18.4 million for the
nine months ended September 30, 2000. Gross margin increased to 62.4% for the
nine months ended September 30, 2000 from 57.5% for the nine months ended
September 30, 1999. The increase in gross margin was primarily a result of cost
reductions for computer hardware and software products in the nine months ended
September 30, 2000, partially offset by the effect of the stronger U.S. dollar.
SELLING EXPENSES. Selling expenses increased $2.2 million, or 26.4%,
from $8.1 million for the nine months ended September 30, 1999 to $10.3 million
for the nine months ended September 30, 2000. This increase was primarily a
result of higher selling expenses in the United States ($1.4 million),
principally composed of higher compensation and marketing, and in Europe ($1.0
million), offset in part by the effect of the stronger U.S. dollar in 2000
(approximately $250,000).
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $107,000, or 2.7%, from $4.0 million for the nine months
ended September 30, 1999 to $4.1 million for the nine months ended September 30,
2000. The increase was due to increases across many categories related to the
company's expansion in Europe ($140,000) and in the U.S. ($42,000), offset in
part by the effect of the stronger U.S. dollar in 2000 (approximately $75,000).
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses decreased $540,000, or 20.7%, from $2.6 million for the nine months
ended September 30, 1999 to $2.1 million for the nine months ended September 30,
2000. This decrease was principally due to the $3,073,000 impairment loss on
acquired intangibles recorded at the end of 1999, which reduced the amount of
remaining acquired intangibles to be amortized.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $109,000, or 4.2%, from $2.6 million for the nine months ended
September 30, 1999 to $2.7 million for the nine months ended September 30, 2000.
The change was due principally to increase in expenses in the United States
($198,000), primarily compensation, offset in part by the effect of the stronger
U.S. dollar in 2000 ($75,000) on European expenses.
INTEREST INCOME. Interest income increased $65,000, or 12.4%, from
$520,000 for the nine months ended September 30, 1999, to $585,000 for the nine
months ended September 30, 2000. The increase was primarily attributable to
higher average yields of interest-earning cash, cash equivalents, and
investments held in 2000 (see Liquidity and Capital Resources below).
INCOME TAX EXPENSE. Income tax expense increased $851,000 from an
income tax benefit of $621,000 for the nine months ended September 30, 1999, to
income tax expense of $230,000 for the nine months ended September 30, 2000. The
income tax provision for the nine months ended September 30, 2000 resulted from
the generation of earnings before income taxes by he Company's U.S. operations
during the first nine months of 2000.
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NET INCOME. Net loss decreased $2.8 million from $3.0 million for the
nine months ended September 30, 1999 to $186,000 for the nine months ended
September 30, 2000 due to the factors stated above.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2000, net cash provided by
operating activities was $3.3 million compared to $162,000 for the nine months
ended September 30, 1999. The increase was principally due to improved earnings
and a net decrease in operating assets, in 2000. Net cash used in investing
activities was $3.0 million for the nine months ended September 30, 2000,
compared to net cash provided from investing activities of $859,000 for the nine
months ended September 30, 1999. The increase in net cash used in investing
activities is primarily attributable a loan granted to each of two former
shareholders of CATS pursuant to the CATS acquisition agreement ($1.1 million),
purchases of property and equipment ($860,000) and a net increase in investments
($723,000). Net cash used in financing activities for the nine months ended
September 30, 2000 decreased to $3,000, compared to $310,000 for the nine months
ended September 30, 1999.
The Company's principal commitments at September 30, 2000 were leases
on its headquarters and regional offices and a loan commitment, to the two
former shareholders of CATS, in the maximum amount of $2.0 million (of which
$1.1 million has been loaned at September 30, 2000). 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, loan
commitment and capital expenditure needs at least through 2000.
FOREIGN EXCHANGE EXPOSURE
Sales denominated in foreign currencies represent 47% of the Company's
total revenues. Fluctuations in exchange rates between the U.S. dollar and the
currencies where the Company conducts such business 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. 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. 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 using forward foreign exchange
contracts, foreign currency options or other instruments to hedge these risks.
YEAR 2000
During fiscal 1999, the Company completed a company-wide program to
prepare the Company's computer systems for year 2000 compliance. The year 2000
issue relates to computer systems that use the last two digits rather than all
four to define a year and whether such systems would properly and accurately
process information when the year changed to 2000. No significant information
system projects were deferred to accommodate the year 2000 issues.
At the date of this report, the Company had not experienced any
material problems related to the year 2000 nor has it become aware of any
significant year 2000 issues affecting the Company's major customers or
suppliers. The Company also has not received any material complaints regarding
any year 2000 issues related to its products.
Year 2000 related costs through September 30, 2000 were limited to
employees' time and were expensed as incurred. The remaining estimated cost to
address any additional year 2000 problems is deemed immaterial.
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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 nine 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 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
On August 25, 2000, the Registrant filed a Current Report on Form 8-K
in connection with a Change in the Registrant's Certifying Accountant.
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: November 13, 2000 FARO TECHNOLOGIES, INC.
(Registrant)
By: /s/ GREGORY A. FRASER
---------------------------------------------
Gregory A. Fraser
Executive Vice President, Secretary and Treasurer
(Duly Authorized Officer and Principal Financial
Officer)
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