EXHIBIT 99.2
SPATIALMETRIX CORPORATION
UNAUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
TABLE OF CONTENTS
BALANCE SHEETS
As of December 31, 2001 and 2000................. 1
STATEMENTS OF OPERATIONS
For the years ended December 31, 2001 and 2000... 2
STATEMENTS OF STOCKHOLDER'S DEFICIT
For the years ended December 31, 2001 and 2000... 3
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001 and 2000... 4
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2001 and 2000................. 5
SPATIALMETRIX CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 120,472 $ 44,480
Accounts receivable, net of reserves of $246,397 and $ 78,930 2,171,327 4,147,392
Inventories 1,268,881 2,100,237
Prepaid expenses and other 18,600 62,723
------------ ------------
Total current assets 3,579,280 6,354,832
PROPERTY AND EQUIPMENT, NET 234,716 286,351
OTHER 14,213 75,341
------------ ------------
$ 3,828,209 $ 6,716,524
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Line of credit $ 3,870,400 $ 2,250,000
Current portion of long-term debt 2,850,000 2,780,915
Accounts payable 2,467,750 2,481,654
Accrued expenses 2,167,736 2,190,347
Deferred revenues 1,337,795 763,841
------------ ------------
Total current liabilities 12,693,681 10,466,757
------------ ------------
LONG-TERM DEFERRED REVENUES -- 38,342
LONG-TERM DEBT -- 17,726
COMMITMENTS AND CONTINGENCIES (NOTE 7)
REDEEMABLE PREFERRED STOCK, $.01 PAR VALUE
Series A 4,000,000 shares authorized, issued and
outstanding (liquidation value of $1,174,966 at December 31, 2001) 1,174,966 1,054,966
Series B Convertible 650,000 shares authorized, issued and
outstanding (liquidation value of $2,296,358 at December 31, 2001) 2,296,358 2,176,355
Series C Convertible 1,009,144 shares authorized, issued and
outstanding (liquidation value of $2,930,256 at December 31, 2001) 2,930,256 2,768,793
Series D Convertible 348,000 shares authorized, issued and
outstanding (liquidation value of $2,158,934 at December 31, 2001) 2,158,934 2,033,654
Series E Convertible, $.01 par value, 550,000 shares
authorized, 516,389 shares issued and outstanding at
(liquidation value of $1,875,273 at December 31, 2001) 1,875,273 1,751,629
------------ ------------
10,435,787 9,785,397
------------ ------------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 4,997,144 shares authorized,
851,781 shares issued and outstanding. 8,518 8,518
Accumulated deficit (19,309,777) (13,600,216)
------------ ------------
Total stockholder's deficit (19,301,259) (13,591,698)
------------ ------------
$ 3,828,209 $ 6,716,524
============ ============
The accompanying notes are an integral part of these statements.
1
SPATIALMETRIX CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
REVENUES:
Product $ 7,750,539 $10,261,302
Services 3,607,510 3,683,129
----------- -----------
11,358,049 13,944,431
----------- -----------
COSTS OF REVENUES:
Cost of product 6,391,420 5,288,962
Cost of services 2,105,105 2,402,600
----------- -----------
8,496,525 7,691,562
----------- -----------
Gross profit 2,861,524 6,252,869
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 4,688,124 3,606,563
Research and development 2,348,357 1,622,596
----------- -----------
7,036,481 5,229,159
----------- -----------
Operating income (loss) (4,174,957) 1,023,710
INTEREST EXPENSE, NET 884,214 832,253
----------- -----------
Income (loss) before income taxes (5,059,171) 191,457
INCOME TAX EXPENSE -- 335,160
----------- -----------
NET LOSS $(5,059,171) $ (143,703)
=========== ===========
The accompanying notes are an integral part of these statements.
2
SPATIALMETRIX CORPORATION
STATEMENTS OF STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
STOCKHOLDER'S DEFICIT
------------------------------------------------------------------
COMMON STOCK ACCUMULATED
--------------------------- ---------------------------------
SHARES AMOUNT DEFICIT TOTAL
---------- --------- ------------- --------------
BALANCE, JANUARY 1, 2000 851,781 $8,518 $(12,806,128) $(12,797,610)
Accretion of preferred stock -- -- (650,385) (650,385)
Net loss -- -- (143,703) (143,703)
------- ------ ------------ ------------
BALANCE, DECEMBER 31, 2000 851,781 8,518 (13,600,216) (13,591,698)
Accretion of preferred stock -- -- (650,390) (650,390)
Net loss -- -- (5,059,171) (5,059,171)
------- ------ ------------ ------------
BALANCE, DECEMBER 31, 2001 851,781 $8,518 $(19,309,777) $(19,301,259)
======= ====== ============ ============
The accompanying notes are an integral part of these statements.
3
SPATIALMETRIX CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,059,171) $ (143,703)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities-
Depreciation and amortization 162,910 300,850
Non-cash interest expense 122,500 122,500
Deferred tax asset -- 314,259
Inventory write-off 598,285 --
Changes in assets and liabilities-
Decrease (increase) in:
Accounts receivable 1,976,065 (1,411,762)
Inventories 233,071 (167,465)
Prepaid expenses and other 95,251 (22,309)
Increase (decrease) in:
Accounts payable (13,904) 937,064
Accrued expenses (22,611) 239,020
Deferred revenues 535,612 136,908
----------- -----------
Net cash (used in) provided by operating activities (1,371,992) 305,362
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (111,275) (365,165)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on lines of credit 1,620,400 (50,000)
Net repayments of debt (61,141) (218,616)
----------- -----------
Net cash provided by (used in) financing
activities 1,559,259 (268,616)
----------- -----------
NET INCREASE (DECREASE) IN CASH 75,992 (328,419)
CASH AT BEGINNING OF YEAR 44,480 372,899
----------- -----------
CASH AT END OF YEAR $ 120,472 $ 44,480
============ ===========
The accompanying notes are an integral part of these statements.
4
SPATIALMETRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
SpatialMetriX Corporation (the Company) manufactures, markets and services high-
accuracy dynamic measurement devices for a variety of markets throughout the
United States, Europe and Asia.
In May 1995, the Company received its first substantial outside investment.
During subsequent years, the Company utilized these proceeds, as well as
proceeds from additional outside sources, to fund its operations.
As part of a litigation agreement (see Note 7), the Company stopped selling
their current product as of September 30, 2001. As a result, the Company did not
generate tracker revenues during the fourth quarter of the year ended
December 31, 2001. Throughout the past two years, the Company has been
developing a new substitute product, which is expected to be introduced during
the second quarter of 2002. Management believes future revenues from this
product will be sufficient to generate positive cash flows. In the event that
the Company does not generate sufficient revenues, the Company will obtain the
necessary funding from its parent company, Faro. As of December 31, 2001 the
Company had an accumulated deficit of $19,192,147.
On January 16, 2002, the Company was acquired by Faro Technologies Inc. (see
Note 14).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist of cash, accounts receivable, accounts payable,
debt instruments and certain current liabilities. These financial instruments
are recorded at cost, which approximates fair value, due to the short-term
nature of these instruments.
REVENUE RECOGNITION
Product revenue is recognized when the product is shipped to the customer
assuming no remaining obligations exist. A provision for estimated warranty
costs
5
is recorded at the time product revenue is recognized and periodically adjusted
to reflect actual experience. Service revenue consists of maintenance and
extended support, training and consulting. Service revenue is recognized over
the contractual period or as services are performed. Maintenance and extended
support revenue is recognized on a pro-rata basis over the one to three year
coverage periods resulting in both current and long-term deferred revenues. As
of December 31, 2001, all remaining extended support related to one-year
coverage periods.
During the year ended December 31, 2001, the Company sold $644,512 of products
to customers with a provision that the product may be exchanged at the buyers'
option for the next model when available. The revenues associated with these
sales has been deferred as of December 31, 2001. Cost of goods sold of $285,000
was recorded as the products will no longer be sellable once returned to the
Company.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). The bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied. The Company adopted
SAB 101 during the year ended December 31, 2000. SAB 101 had no impact on the
Company's financial position or results of operations as the revenue recognition
policy was consistent with SAB 101.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories include cost of material, labor and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment acquired under
capital leases are recorded at the lesser of the present value of the minimum
lease payments or the fair market value of the asset. Depreciation and
amortization are provided using the straight-line method over the shorter of the
estimated useful lives of the assets or the lease term. Expenditures for repairs
and maintenance are charged to expense as incurred, while major renewals and
improvements are capitalized.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets, and for Long-lived Assets
to be Disposed of," management continually evaluates whether events and
circumstances have occurred that indicate that the remaining estimated useful
life of long-lived assets may warrant revision or that the remaining balance may
not be recoverable. Whether factors indicate that long-lived assets should be
evaluated for possible impairment, an estimate of the related undiscounted cash
flows is used in measuring whether the long-lived assets should be written down
to fair value. Measurement of the amount of the impairment is based on generally
accepted valuation methodologies, as deemed appropriate. As of December 31,
2001, management believes that no revision to the remaining useful lives or
write-down of long-lived assets is required.
6
RESEARCH AND DEVELOPMENT
Research and development includes costs related to the product design including
conceptual formulation, construction and testing of preproduction prototypes.
Such costs are charged to expense as incurred.
SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed," the Company is eligible to capitalize
certain costs incurred to internally develop software which is licensed to
customers. Capitalization of such software development costs would begin upon
the establishment of technological feasibility (typically determined to be upon
completion of a working model) and conclude when the product is ready for
general release. For the years ended December 31, 2001 and 2000, such costs were
immaterial. Costs incurred prior to the establishment of technological
feasibility are charged to research and development expense.
SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 2001 and 2000, the Company paid interest of
approximately $383,600 and $361,000, respectively. The Company paid no income
taxes during the years ended December 31, 2001 and 2000.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the liability method of
accounting for deferred income taxes. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities. Deferred tax assets or liabilities at the end of each
period are determined using the tax rate expected to be in effect when taxes are
actually paid or recovered.
2. INVENTORIES:
DECEMBER 31
-----------------------------------
2001 2000
---------- ----------
Finished product $ - $1,105,000
Purchased parts 1,268,881 995,237
---------- ----------
$1,268,881 $2,100,237
========== ==========
During 2000, the Company reclassified the net value of their used trackers out
of property and equipment and into inventory. These used trackers were sold
during 2001.
As of September 30, 2001 the Company was no longer able to sell their existing
product (see Note 7), and therefore wrote-off $598,285 of inventory, which
included both raw materials and finished goods. The write-off of inventory
included $284,000 of trackers sold to customers with a return right for future
product (see Note 1).
7
3. PROPERTY AND EQUIPMENT:
DECEMBER 31
USEFUL LIFE/ -------------------------------
LEASE TERM 2001 2000
---------------- ----------- -----------
Equipment 5-7 years $ 386,658 $ 382,734
Office furniture and fixtures 3-7 years 229,691 229,691
Leasehold improvements 2-5 years 507,403 411,413
Computers/software 3 years 611,054 599,693
Trackers/vehicles 3 years 29,968 29,968
----------- -----------
1,764,774 1,653,499
Less- Accumulated
depreciation and amortization (1,530,058) (1,367,148)
----------- -----------
$ 234,716 $ 286,351
=========== ===========
Depreciation and amortization for the years ended December 31, 2001 and 2000,
was $162,910 and $300,850, respectively.
4. LINES OF CREDIT:
In December 2000, the Company's $2,300,000 revolving line of credit was extended
to expire in February 2001. On April 13, 2001, the line of credit was increased
to $3,800,000 through a Participation Agreement between the bank and Faro
Technologies, Inc. (Faro). (See Note 14.) The line was increased to $5,300,000
on November 1, 2001 through an amended Participation Agreement between the Bank
and Faro. Interest is due monthly at the prime rate plus five percent. The line
is collateralized by all personal property of the Company. The Company had
$3,870,400 (including $2,875,000 due to Faro and $995,400 due to the bank) and
$2,250,000 outstanding on this line as of December 31, 2001 and 2000,
respectively.
The highest aggregate outstanding balance on the line of credit during the years
ended December 31, 2001 and 2000, was $3,925,400 and $2,300,000, respectively.
The weighted average interest rates for the years ended December 31, 2001 and
2000 was approximately 9.00 percent and 11.24 percent, respectively.
8
5. LONG-TERM DEBT:
DECEMBER 31
--------------------------------------
2001 2000
----------------- -----------
Note payable to venture fund, payable in 16
quarterly principal installments of $187,500
beginning on April 30, 1999, presented net of
unamortized discount of $150,000 and $262,500,
respectively. No principal or interest has been
paid; $2,062,500 (11 principal payments) is due
in arrears as of December 31, 2001 and the note
is in default. A waiver has been obtained
through December 31, 2001 and the note was
repaid in January 2002. (See Note 14). Interest
of 12% is due quarterly in arrears. $ 2,850,000 $ 2,737,500
Pennsylvania Capital Loan Fund Note, payable in
60 equal monthly installments of $2,359 through
April 30, 2001, including interest at 5%. The
note is guaranteed by the principal common
stockholder and collateralized by machinery and
equipment and furniture and fixtures. -- 9,339
Pennsylvania Capital Loan Fund Note, payable in
95 equal monthly installments of $1,277 through
April 1, 2002, including interest at 5%. The
note is collateralized by machinery and
equipment, real estate owned by a stockholder, a
$40,400 certificate of deposit, and a life
insurance policy on the principal common
stockholder. Amount was fully paid on
April 15, 2001. -- 18,527
Equipment loans due to finance company at
various rates from 10% to 18% with varying
maturities through December 2001.
-- 33,275
----------------- -----------
2,850,000 2,798,641
Less- Current maturities (2,850,000) (2,780,915)
----------------- -----------
$ -- $ 17,726
================= ===========
In April 1997, the Company borrowed $3,000,000 from a venture fund. In
conjunction with this note, the venture fund received 300,000 warrants to
purchase the Company's common stock at $.01 per share. The warrants are
exercisable for ten years and have been valued at $675,000 using the Black-
Scholes option-pricing model. The warrant valuation has been recorded as a
discount on the note payable and is being amortized over the six-year term of
the note. The valuation less offering expenses of $52,867 has been reflected as
additional paid-in capital. The Company also paid a 2 percent loan origination
fee of $60,000. Included in prepaids on the accompanying December 31, 2001 and
2000 balance sheets is $10,000 of the unamortized fee. Included in other assets
on the accompanying December 31, 2001 and 2000 balance sheets is $3,832 and
$13,832, respectively, of the unamortized fee. Amortization expense of $112,500
and $10,000 on the note discount and loan originator fee, respectively has been
included in interest expense for the years ended December 31, 2001 and 2000.
9
6. ACCRUED EXPENSES:
DECEMBER 31
------------------------------
2001 2000
---------- ----------
Accrued interest $ 990,000 $ 630,000
Accrued (litigation) settlement (see Note 7) 648,000 1,230,000
Other 529,736 330,347
---------- ----------
$2,167,736 $2,190,347
---------- ----------
7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases office and warehouse space under two noncancellable operating
lease agreements that expire in August and September 2003, respectively. Minimum
future payments under the operating leases are $128,748 for 2002 and $85,832 in
2003.
Rent expense from operating leases was approximately $133,000 and $122,000 for
the years ended December 31, 2001 and 2000, respectively.
EMPLOYEE STAY BONUS PLAN
On January 2001, the Company's Board of Directors approved a "Stay Bonus" plan.
If the Company was sold before December 31, 2002, 10.5 percent of the first $10
million and 17.5 percent of all amounts above $10 million in purchase price
would be reserved for employees and paid as a bonus at the time of closing. The
bonus would be paid only to employees with the Company at the inception of the
program (January 1, 2001) who were also with the Company at the time of sale.
The bonus could be paid in cash or stock of the acquiring company at the
Company's option.
As part of the acquisition by Faro (see Note 14), the Stay Bonus obligation was
satisfied by 65,000 shares of Faro common stock given to eight key employees and
a cash payment of $46,000 to all other remaining employees.
LITIGATION SETTLEMENT
In May 2000, the Company settled a patent infringement lawsuit with a
competitor. The Company was required to pay an aggregate of $626,000 in three
installments in 2000 and an aggregate of $624,000 in three installments in 2001.
Actual payments were $748,765 and $20,000 in 2001 and 2000, respectively. The
Company incurred additional legal and late payment fees of $166,765 in 2001 that
were payable to the competitor, due to various disputes and delayed payments by
the Company. The Company paid the remaining balance of $648,000 on January 15,
2002 immediately prior to the acquisition by Faro Technologies (Note 14).
LITIGATION
The Company is subject to various claims and legal proceedings that arise in the
ordinary course of its business activities. Although the ultimate liability from
these
10
potential claims cannot be ascertained, management does not anticipate that any
related settlement, after consideration of potential insurance recovery, would
have a material adverse affect on the Company's financial position.
8. REDEEMABLE PREFERRED STOCK:
The holders of Series A preferred stock (Series A) are entitled to receive
cumulative quarterly dividends at an annual rate of $.01 per share. Each holder
of Series A shares is also entitled to 1/20th of a vote per share. Upon
liquidation or redemption, the holders are entitled to $.10 per share plus $.03
per share for each year the shares were outstanding less the cumulative amount
of paid dividends. The Company has the option to redeem the Series A shares
beginning on or after January 1, 1996, with the consent of 66-2/3 percent of the
holders of the Series B and the Series C. The Series A stockholders have the
option to redeem the shares beginning on or after January 1, 2000.
The holders of Series B, Series C, Series D and Series E convertible preferred
stock are entitled to receive cumulative annual dividends of $.18462, $.16, $.36
and $.24 per share, respectively, for each of the first four years subsequent to
the date of issuance, payable upon liquidation or redemption. For each year
thereafter, the holders of the Series B, Series C, Series D and Series E shares
are entitled to cumulative annual dividends of $.18462, $.16, $.36 and $.24 per
share, respectively, payable quarterly. Each holder of Series B, Series C,
Series D and Series E shares is also entitled to one vote for each share of
common stock into which a Series B, Series C, Series D and Series E share could
currently be converted. The Series B, Series C, Series D and Series E shares are
convertible at the stockholder's option, at any time, into shares of common
stock equal to the number of Series B, Series C, Series D or Series E shares
outstanding divided by the conversion ratio, as defined. At December 31, 2001,
the conversion ratio is 1 share of common stock for each share of Series B,
Series C, Series D or Series E. The Series B, Series C, Series D and Series E
shares are redeemable upon written request of not less than 51 percent of the
Series B, Series C, Series D or Series E stockholders any time on or after the
sixth anniversary of the issuance of the first share of Series B, Series C,
Series D or Series E. The initial redemption dates are as follows: Series B -
May 12, 2001, Series C - March 31, 2002, Series D - March 5, 2003, Series E -
April 30, 2005. The Series B, Series C, Series D and Series E redemption price
is the greater of the determined fair market value, as defined, or the
liquidation price.
In the event of liquidation, Series A, Series B, Series C, Series D and Series E
shares have senior preference equal to the aggregate original issue prices of
$.10, $2.3077, $2, $4.50 and $3.00 respectively, per share plus accrued
dividends not yet paid. Liquidation payment deficiencies will be allocated on a
pro rata basis in proportion to the full preferential amount each class would be
entitled to receive.
Common stock dividends require consent of 66-2/3 percent of the holders of the
Series B, Series C, Series D and Series E shares outstanding. Series B, Series
C, Series D and Series E shares participate in common stock dividends based on
the aggregate number of shares of common stock, assuming conversion of the
Series B, Series C, Series D and Series E shares.
9. STOCK OPTION PLAN
The 1993 Stock Option Plan (1993 Plan), as amended, was established for
employees, directors and certain other individuals. In January 2000, the Board
of
11
Directors cancelled the Option Plan and implemented a new 2000 Incentive Stock
Option Plan (2000 Plan), which provides for the grant of stock options to
employees, directors and certain other individuals. The Company cancelled all
options issued under the 1993 Plan and issued employees new options under the
2000 Plan. This event was deemed a repricing for accounting purposes and
therefore the new options are accounted for using variable plan accounting. As
of December 31, 2001 and 2000, no charge was recorded due to the decrease in the
fair market value of the Company's common stock from the repricing date.
Under the 2000 Plan, the Company may grant either nonqualified or incentive
stock options. An aggregate of 1,043,000 shares of common stock have been
reserved for the 2000 Plan as of December 31, 2001 and 2000. A committee of the
Board of Directors (the Committee) administers the Plan and determines the terms
of the grants. Under the terms of the 2000 Plan, the exercise price per share of
each option granted will not be less than 110 percent of the fair market value
of the stock for employees owning 10 percent or more of the voting power of the
Company, as defined, and no less than 100 percent of the fair market value for
all other individuals. Under the 2000 Plan, options vest over a four-year
period; 25 percent at the end of each anniversary date of the grant. The
exercise periods, which are determined by the Committee, are not more than four
years from the date of grant for employees owning 10 percent or more of the
voting power of the Company and not more than ten years for all other
individuals. Each option entitles the holder to purchase one share of common
stock at the indicated exercise price.
The Company accounts for its option plan under APB Opinion No. 25, which values
options at their intrinsic value. No compensation cost has been recognized under
the APB Opinion No. 25 methodology. Had compensation cost for the Option Plan
been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," a fair value valuation method, the Company's net loss would have
been $4,953,341 and $152,298 for the years ended December 31, 2001 and 2000,
respectively. The fair value of options granted at market during the years ended
December 31, 2001 and 2000, was estimated as $0.01 and $0.03, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: risk-free interest rate of 6.67 percent, an expected life of six
years; dividend yield of zero; and volatility of zero.
13
The following table summarizes the option activity under the Option Plan:
OPTIONS OUTSTANDING
--------------------------------------------------
SHARES EXERCISE
AVAILABLE NUMBER OF PRICE AGGREGATE
FOR GRANT SHARES PER SHARE PRICE
---------------- ------------- ------------ ---------------
BALANCE, JANUARY 1, 2000 594,500 534,750 $.143-$3.150 $ 983,979
Cancelled 534,750 (534,750) 3.150 (983,979)
Plan termination (1,129,250) -- -- --
Authorized 1,043,000 -- -- --
Granted (1,043,000) 1,043,000 .10 104,300
---------- --------- ------------ ---------
BALANCE, DECEMBER 31, 2000 -- 1,043,000 .10 104,300
Cancelled 30,000 (30,000) .10 3,000
---------- --------- ------------ ---------
BALANCE, DECEMBER 31, 2001 30,000 1,013,000 $ .10 $ 101,300
========== ========= ============ =========
As of December 31, 2001, 253,250 options were exercisable at a price of $0.10
per share.
10. INCOME TAXES:
DECEMBER 31
--------------------------
2001 2000
----------- --------
Current $ - $ 20,903
Deferred (2,338,217) 29,560
----------- --------
(2,338,217) 50,462
Increase in valuation allowance provision 2,338,217 284,698
----------- --------
$ - $335,160
=========== ========
The difference between the Company's federal statutory income tax rate and its
effective income tax rate is primarily due to state income taxes and the
valuation allowance.
As of December 31, 2001 and 2000, the Company had federal and state net
operating loss carryforwards of approximately $6,904,000 and $3,952,000,
respectively, which began to expire during 1997. The net operating loss
carryforwards differ from the accumulated deficit principally due to the timing
of the recognition of certain accrued expenses. In accordance with the Tax
Reform Act of 1986, the net operating loss carryforwards could be subject to
certain limitations. For the year ended December 31, 2000, the Company was
subject to alternative minimum tax of approximately $21,000.
14
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2001 and 2000 are as follows:
DECEMBER 31
--------------------------------
2001 2000
----------- -----------
GROSS DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 6,951,656 $ 3,952,139
Accrued expenses not currently deductible 157,149 895,730
Research credits not currently deductible 639,987 514,146
Depreciation and amortization 43,544 43,544
Other 60,643 109,203
----------- -----------
7,852,979 5,514,762
----------- -----------
VALUATION ALLOWANCE (7,852,979) (5,514,762)
----------- -----------
NET DEFERRED TAX ASSETS $ -- $ --
=========== ===========
A valuation allowance was established for 100 percent of the net deferred tax
asset, as the Company does not believe the realization of the tax benefits is
more likely than not.
11. MAJOR CUSTOMERS AND CONCENTRATIONS:
For the years ended December 31, 2001 and 2000, the Company did not have any
customers that accounted for 10 percent or more of the Company's revenues.
12. EMPLOYEE SAVINGS PLAN:
The Company provides a 401(k) savings plan that covers all qualified employees.
Under the terms of the savings plan, the Company makes a matching contribution
of 50 percent of pretax deferrals by eligible employees up to a maximum of 6
percent of the employees' annual compensation, subject to certain IRS
limitations. The Company's matching contributions for the years ended
December 31, 2001 and 2000, were approximately $111,300 and $90,000,
respectively.
13. RELATED PARTY TRANSACTIONS:
Effective September 30, 1999, the services of the Company's former president and
majority stockholder were terminated though he remains on the Company's board of
directors. The Company paid $14,313 in 2000, related to severance for the
individual. In addition, 153,750 vested incentive stock options were converted
to non-qualified stock options with a ten-year expiration period. No
compensation was recorded in conjunction with this new measurement date as the
fair market value of the stock was less than the exercise price as of
September 30, 1999.
14
14. SUBSEQUENT EVENT:
On January 16, 2002, The Company was acquired by Faro Technologies (Faro) for
the following considerations:
PAYEE CONSIDERATION
- -------------------------- ----------------------------------------------------
Preferred stockholder 400,000 shares of Faro common stock
Common stockholders 35,000 shares of Faro common stock
Key employees 65,000 shares of Faro common stock
Litigation settlement $648,000
Line of credit with bank $995,400
Note Payable $1,000,000 and 350,000 shares of Faro common stock
The total consideration given a Faro common stock price of $2.25 on January 16,
2002 was $4,555,900. A gain of $4,927,500 was recognized by the Company on the
forgiveness of the line of credit with Faro and a portion of the note payable.
15
The operating results of SpatialMetrix Corporation ("SMX") will be included
in the consolidated statements effective January 16, 2002, the date of
acquisition. The pro forma selected financial data is presented for
informational purposes assuming that the Company had acquired SMX as of January
1, 2001. The pro forma selected financial data has been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
and financial position which actually would have resulted had the acquisition
occurred on the date indicated, or which may result in the future.
FARO TECHNOLOGIES, INC. and Subsidiaries
CONSOLIDATED PRO-FORMA BALANCE SHEET
As of December 31, 2001
CONSOLIDATION
AND
FARO SpatialMetrix PRO FORMA CONSOLIDATED
Technologies, Inc. Corporation ADJUSTMENTS PRO FORMA
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,238,564 ($1,000,000) A $ 6,238,564
Short term investments 4,744,559 (1,629,458) A 3,115,101
Accounts receivable 9,385,568 2,171,000 11,556,568
Income taxes refundable 545,118 545,118
Inventories, net 5,575,793 1,287,000 6,862,793
Prepaid expenses and other current assets 1,851,003 30,000 (383,183) B 1,497,820
Deferred income taxes 76,418 76,418
-------------------------------------------------------------------
Total current assets 29,417,023 3,488,000 (3,012,641) 29,892,382
-------------------------------------------------------------------
PROPERTY AND EQUIPMENT - at cost:
Machinery and equipment 4,038,582 200,000 4,238,582
Furniture and fixtures 1,313,809 100,000 1,413,809
Leasehold improvements 139,555 139,555
-------------------------------------------------------------------
Total 5,491,946 300,000 - 5,791,946
Less accumulated depreciation and amortization (3,945,247) (3,945,247)
-------------------------------------------------------------------
Property and equipment, net 1,546,699 300,000 - 1,846,699
-------------------------------------------------------------------
INTANGIBLE ASSETS - net 2,632,791 6,886,968 E/G 9,519,759
INVESTMENTS 2,129,679 2,129,679
NOTES RECEIVABLE 3,927,932 (2,875,000) A 1,052,932
DEFERRED INCOME TAXES - 0 0
-------------------------------------------------------------------
TOTAL ASSETS $ 39,654,124 $ 3,788,000 $ 999,327 $ 44,441,451
===================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 25,120 $ 995,000 $ (995,000) C $ 25,120
Accounts payable 2,937,271 2,444,000 5,381,271
Accrued liabilities 3,064,463 887,000 (148,000) A/C 3,803,463
Income taxes payable - 100,000 A 100,000
Current portion of unearned service revenues 855,120 1,352,000 2,207,120
Customer deposits 231,845 231,845
-------------------------------------------------------------------
Total current liabilities 7,113,819 5,678,000 (1,043,000) 11,748,819
OTHER LONG-TERM LIABILITIES 203,844 203,844
-------------------------------------------------------------------
Total liabilities 7,317,663 5,678,000 (1,043,000) 11,952,663
-------------------------------------------------------------------
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, 11,075,252 issued; 11,035,252 outstanding 11,075 850 A 11,925
Additional paid-in capital 47,595,087 1,826,650 A 49,421,737
Accumulated deficit (12,116,098) (1,890,000) 214,827 E/G (13,791,271)
Other comprehenvive loss (3,002,978) (3,002,978)
Common stock in treasury, at cost - 40,000 shares (150,625) (150,625)
-------------------------------------------------------------------
Total shareholders' equity 32,336,461 (1,890,000) 2,042,327 32,488,788
-------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 39,654,124 $ 3,788,000 $ 999,327 $ 44,441,451
===================================================================
FARO TECHNOLOGIES, INC. and Subsidiaries
CONSOLIDATED PRO-FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
CONSOLIDATION
AND
FARO SpatialMetrix PRO FORMA CONSOLIDATED
Technologies, Inc. Corporation ADJUSTMENTS PRO FORMA
- ---------------------------------------------------------------------------------------------------------------------------------
SALES $ 35,113,596 $11,286,895 $46,400,491
COST OF SALES 14,304,083 8,478,564 22,782,647
-----------------------------------------------------------------------------
Gross profit 20,809,513 2,808,331 - 23,617,844
OPERATING EXPENSES
Selling 13,436,209 3,125,857 16,562,066
General and administrative 5,812,803 1,475,246 7,288,049
Depreciation and amortization 2,559,495 112,193 1,675,173 G 4,346,861
Research and development 3,370,716 2,311,585 5,682,301
-----------------------------------------------------------------------------
Total operating expenses 25,179,223 7,024,881 1,675,173 33,879,277
LOSS FROM OPERATIONS (4,369,710) (4,216,550) (1,675,173) (10,261,433)
OTHER INCOME (EXPENSES)
Interest income 900,281 900,281
Other income 964,950 964,950
Interest expense (1,747) (884,214) 866,062 F (19,899)
-----------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (2,506,226) (5,100,764) (809,111) (8,416,101)
INCOME TAX EXPENSE (BENEFIT) 341,738 - 341,738
-----------------------------------------------------------------------------
NET INCOME (LOSS) $(2,847,964) $(5,100,764) $ (809,111) $(8,757,839)
=============================================================================
NET LOSS PER SHARE - BASIC $ (0.26) $ (0.74)
NET LOSS PER SHARE - DILUTED $ (0.26) $ (0.74)
Shares Outstanding - Basic 11,032,449 850,000 11,882,449
Shares Outstanding - Diluted 11,032,449 850,000 11,882,449
Notes:
A - Represents entry to record consideration given upon closing of the purchase
of SMX ($7,931,958).
B - Represents entry to record additional acquisition costs incurred prior to
closing ($383,183).
C - Represents adjustment to purchase price for liabilities paid at closing but
previously recorded by SMX ($1,643,000).
D - Entry intentionally not used.
E - Represents entry to eliminate Investment in SMX in consolidation.
F - Represents entry to reverse interest expense recorded by SMX on bank loans
paid upon closing ($866,062).
G - Represents entry to record amortization of intangible assets acquired
(including $1,200,000 of amortization of goodwill).