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, 2001
[_] 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 August 10, 2001:
11,030,706
FARO Technologies, Inc.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000 3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 2001, and 2000 4
Condensed Consolidated Statements of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2001 and 2000 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 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2001 2000
------------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,597,553 $ 8,029,318
Short term investments - at cost (Note C) 5,415,608 6,218,636
Accounts receivable - net of allowance 7,944,442 10,352,972
Inventories (Note D) 6,131,615 6,364,290
Prepaid expenses and other assets 1,707,229 1,112,881
Deferred income taxes 254,902 203,816
------------- ------------
Total current assets 26,051,349 32,281,913
------------- ------------
PROPERTY AND EQUIPMENT - at cost:
Machinery and equipment 3,928,720 3,580,892
Furniture and fixtures 1,308,706 1,253,248
Leasehold improvements 109,049 89,171
------------- ------------
Total 5,346,475 4,923,311
Less accumulated depreciation (3,560,386) (3,121,029)
------------- ------------
Property and equipment, net 1,786,089 1,802,282
------------- ------------
INTANGIBLE ASSETS - net 3,154,691 4,055,337
INVESTMENTS - at cost (Note C) 4,206,173 4,755,572
NOTES RECEIVABLE (Note E) 2,525,258 1,128,846
DEFERRED INCOME TAXES 675,324 675,324
------------- ------------
TOTAL ASSETS $ 38,398,884 $ 44,699,274
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,394,554 $ 2,965,417
Accrued liabilities 2,813,252 4,137,801
Income tax payable 84,486 684,409
Current portion of unearned service revenues 772,034 687,566
Customer deposits 143,326 133,984
------------- ------------
Total current liabilities 6,207,652 8,609,177
OTHER LONG-TERM LIABILITIES 145,169 134,644
------------- ------------
TOTAL LIABILITIES 6,352,821 8,743,821
------------- ------------
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, 11,070,706 and 11,065,225 issued; 11,030,706 and
11,025,225 outstanding 11,071 11,066
Additional paid-in-capital 47,593,454 47,570,059
Accumulated deficit (11,978,673) (9,268,134)
Accumulated other comprehensive loss:
Cumulative translation adjustments, net of tax (3,429,164) (2,206,913)
Treasury stock (150,625) (150,625)
------------- ------------
Total shareholders' equity 32,046,063 35,955,453
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,398,884 $ 44,699,274
============= ============
See accompanying notes to condensed consolidated financial statements.
3
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 8,265,131 $ 10,923,279 $ 16,670,661 $ 20,773,046
Cost of sales 3,463,801 3,996,544 6,903,328 7,936,904
------------ ------------ ------------ ------------
Gross profit 4,801,330 6,926,735 9,767,333 12,836,142
Operating expenses:
Selling 3,764,470 3,401,020 7,193,595 7,031,161
General and administrative 1,518,664 1,348,761 2,901,785 2,643,895
Depreciation and amortization 657,541 803,316 1,324,478 1,441,415
Research and development 790,171 813,408 1,711,222 1,814,855
Employee stock options - 31,671 - 63,342
------------ ------------ ------------ ------------
Total operating expenses 6,730,846 6,398,176 13,131,080 12,994,668
------------ ------------ ------------ ------------
(Loss) income from operations (1,929,516) 528,559 (3,363,747) (158,526)
Interest income 267,975 167,545 504,018 364,794
Interest expense (412) - (766) -
Other income, net 63,886 40,431 149,956 112,697
------------ ------------ ------------ ------------
(Loss) income before income taxes (1,598,067) 736,535 (2,710,539) 318,965
Income tax benefit (expense) 14,783 (145,137) - (145,137)
------------ ------------ ------------ ------------
Net (loss) income $ (1,583,284) $ 591,398 $ (2,710,539) $ 173,828
============ ============ ============ ============
NET (LOSS) INCOME PER SHARE - BASIC ($0.14) $ 0.05 ($0.25) $ 0.02
============ ============ ============ ============
NET (LOSS) INCOME PER SHARE - DILUTED ($0.14) $ 0.05 ($0.25) $ 0.02
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additonal
------------------------- Paid-in Unearned Accumulated
Shares Amounts Capital Compensation Deficit
------------ ---------- ----------- ------------- --------------
BALANCE, JANUARY 1, 2000 11,059,510 $ 11,060 $47,544,844 $ (123,404) $ (9,307,651)
Net income 39,517
Currency translation adjustment, net of tax
Comprehensive loss
Issuance of common stock 5,715 6 25,215
Amortization of unearned compensation 123,404
------------ ----------- ------------ ----------- --------------
BALANCE, DECEMBER 31, 2000 11,065,225 11,066 47,570,059 - (9,268,134)
Net loss (2,710,539)
Currency translation adjustment, net of tax
Comprehensive loss
Issuance of common stock 5,481 5 23,395
------------ ----------- ------------ ----------- --------------
BALANCE, JUNE 30, 2001 (Unaudited) 11,070,706 $ 11,071 $47,593,454 $ - $(11,978,673)
============ =========== ============ =========== ==============
Accumulated
Other
Comprehensive Treasury
Loss Stock Total
---------------- ------------ ------------
BALANCE, JANUARY 1, 2000 $(1,374,878) $ (150,625) $36,599,346
Net income 39,517
Currency translation adjustment, net of tax (832,035) (832,035)
------------
Comprehensive loss (792,518)
Issuance of common stock 25,221
Amortization of unearned compensation 123,404
---------------- ------------ ------------
BALANCE, DECEMBER 31, 2000 (2,206,913) (150,625) 35,955,453
Net loss (2,710,539)
Currency translation adjustment, net of tax (1,222,251) (1,222,251)
------------
Comprehensive loss (3,932,790)
Issuance of common stock 23,400
---------------- ------------ ------------
BALANCE, JUNE 30, 2001 (Unaudited) $(3,429,164) $ (150,625) $32,046,063
================ ============ ============
See accompanying notes to condensed consolidated financial statements
5
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------------------------------------
2001 2000
------------------- ------------------
OPERATING ACTIVITIES:
Net (loss) income $ (2,710,539) $ 173,828
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,324,478 1,441,415
Bad debt expense 110,333 30,000
Inventory reserve 190,000 175,000
Provision for deferred income taxes (76,362) (108,107)
Employee stock options - 63,342
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 1,745,347 (2,369,413)
Inventories (117,104) (769,634)
Prepaid expenses and other assets (613,454) (50,042)
Increase (decrease) in:
Accounts payable and accrued liabilities (1,642,770) 1,218,962
Unearned service revenues 142,610 288,103
Income tax payable (603,272) 82,878
Customer deposits 21,380 (5,111)
------------------ ----------------
Net cash (used in) provided by operating activities (2,229,353) 171,221
------------------ ----------------
INVESTING ACTIVITIES:
Proceeds from (payments for) investments, net 1,352,428 (582,153)
Purchases of property and equipment (527,736) (583,346)
Notes Receivable (1,397,445) (1,080,487)
Payments for intangibles and other (313,480) (166,393)
------------------ ----------------
Net cash used in investing activities (886,233) (2,412,379)
------------------ ----------------
FINANCING ACTIVITIES:
Payments on debt (15,394) (6,846)
Proceeds from issuance of common stock, net 23,398 4,219
------------------ ---------------
Net cash provided by (used in) financing activities 8,004 (2,627)
------------------ ----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (324,183) (396,216)
------------------ ----------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,431,765) (2,640,001)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,029,318 6,637,184
------------------ ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,597,553 $ 3,997,183
================== ===============
See accompanying notes to condensed consolidated financial statements.
6
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2001 and 2000
(Unaudited)
NOTE A - DESCRIPTION OF BUSINESS
FARO Technologies, Inc. and subsidiaries develops, manufactures, markets
and supports Computer Aided Design (CAD)-based quality assurance products and
CAD-based inspection and statistical process control software.
The Company has four wholly-owned subsidiaries FARO FSC, Ltd.; FARO Europe
GmbH & Co. KG, a German company, FARO Japan KKK, a Japanese company, and Antares
LDA, a Portuguese company. The consolidated financial statements include the
accounts of FARO Technologies, Inc. and all wholly-owned subsidiaries
(collectively, the "Company"). All significant intercompany transactions and
balances have been eliminated. The financial statements of foreign subsidiaries
have been translated into U.S. dollars using the current exchange rate in effect
at each balance sheet date, for assets and liabilities, and the weighted average
exchange rates during each reporting period, for results of operations.
Cumulative adjustments resulting from translation of the financial statements
are reflected as a separate component of comprehensive loss in the equity
section.
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 accounting principles
generally accepted in the United States 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 six months ended June
30, 2001 are not necessarily indicative of results that may be expected for the
year ending December 31, 2001. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements of the Company as of December 31, 2000 and 1999, and for each of the
three years in the period ended December 31, 2000 included in the Company's 2000
Annual Report to Stockholders.
In June 2000, the FASB issued Statement No. 138, Accounting for Certain
Hedging Activities, which amended Statement No. 133, Accounting for Certain
Hedging Activities and required concurrent adoption with Statement No. 133. The
Company adopted these new Statements effective January 1, 2001. The Company's
adoption of these Statements did not have a significant effect on its results of
operations or financial position.
In July 2001, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142). SFAS No. 142 establishes accounting and reporting standards for
acquired goodwill and other intangible assets, and supersedes APB Opinion No.17,
"Intangible Assets". SFAS No. 142 requires that goodwill no longer be amortized
to earnings, but instead be reviewed for impairment. The provisions of this
Statement are required to be applied starting with fiscal years beginning after
December 15, 2001, and as such the company as not yet adopted SFAS No. 142.
Once adopted, operating expenses will be reduced by approximately $310,000 on a
quarterly basis for amortization and may increase for assets determined to be
impaired, if any, during a respective quarter.
7
NOTE C - CASH AND CASH EQUIVALENT 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 classified as
trading securities, which are carried at market value based upon the quoted
market prices of those investments at each respective balance sheet date.
Investments - Short-term investments and investments ordinarily consist of
debt securities acquired with cash not immediately needed in operations. At June
30, 2001 and December 31, 2000 short-term investments of $5.4 million and $6.2
million, respectively, consist of government agency securities and corporate
notes with maturities not exceeding one year. Investments have maturities of at
least one year (none have maturities exceeding two years).
Investments consist of the following:
June 30, December 31,
2001 2000
---- ----
Government agency securities $2,046,837 $ 898,840
Certificates of deposit 339,000 240,309
Corporate notes 1,820,336 3,616,423
---------- ----------
Total investments $4,206,173 $4,755,572
========== ==========
NOTE D - INVENTORIES
Inventories consist of the following:
June 30, December 31,
2001 2000
---- ----
Raw materials $ 559,277 $ 486,002
Work-in-process 1,531,203 1,610,210
Finished goods 754,326 991,169
Sales demonstration 3,286,809 3,276,909
---------- ----------
Total inventories $6,131,615 $6,364,290
========== ==========
NOTE E - NOTES RECEIVABLE
In April 2001, the Company and SpatialMetrix Corporation ("SMX") entered
into an agreement pursuant to which the Company provided to SMX $1.5 million in
financing. SMX Corp. is a manufacturer and worldwide supplier of laser trackers
and targets, as well as metrology software and contract inspection services.
FARO and SMX also have entered into two letters of intent. One of the letters
of intent outlines the terms under which FARO will provide SMX with up to an
additional $1.5 million in financing. The other letter of intent outlines the
terms pursuant to which FARO will have an option to acquire SMX. Both letters
of intent are non-binding and are subject to the negotiation and execution of
definitive agreements and the satisfaction of various conditions by SMX.
The Company provided the $1.5 million in financing to SMX by entering into
a Participation Agreement with SMX's bank pursuant to which the Company funded
and simultaneously acquired a $1.5 million interest in SMX's $3.8 million bank
line of credit. The line of credit bears interest at a rate of 2% in excess of
SMX's bank's prime rate, which increases by an additional 3% during any default
on the line of credit. Although the line of credit matured on May 31, 2001,
SMX's bank has not taken any action to seek repayment of amounts due thereunder.
The Company anticipates that the line of credit will be extended upon execution
of a definitive agreement
8
providing for an additional $1.5 million in financing.
In 1998, the Company acquired CATS GmbH for total consideration of $16
million (including direct costs of the acquisition), consisting of $5 million in
cash, 916,668 shares of the Company's Common Stock and the assumption of certain
outstanding liabilities of CATS. The acquisition agreement provided that the
Company would provide a loan to each of the two former shareholders of CATS to
fund their tax liability in connection with the Company's acquisition of CATS.
Such 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 agreed to loan to the former CATS shareholders an
amount equal to their tax obligation to the German tax authorities in connection
with the Company's acquisition of CATS. In June 2000, the German tax authorities
issued a tax assessment to each of 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
loans to the former CATS shareholders in the aggregate amount of $1.1 million
("the Loans"). The Loans 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 three years. As collateral for the Loans, the former CATS
shareholders pledged to the Company 177,074 shares of the Company's Common
Stock. The Loans are 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:
Three months ended June 30,
---------------------------
2001 2000
------------------- -------------------
Per-Share Per-Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic EPS 11,030,706 $(.14) 11,020,682 $ .05
Effect of dilutive securities - 58,716
---------- ----------
Diluted EPS 11,030,706 $(.14) 11,079,398 $ .05
========== ==========
Six months ended June 30,
------------------------------------
2001 2000
---------- -----------
Per-Share Per-Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic EPS 11,027,950 $(.25) 11,020,252 $.02
Effect of dilutive securities - 52,511
---------- ----------
Diluted EPS 11,027,950 $(.25) 11,072,763 $.02
========== ==========
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
9
teams established by geographic area. Each team is equipped to deliver the
entire line of Company products to customers within its geographic area. The
Company has aggregated the sales teams into a single operating segment as a
result of the similarities in the nature of products sold, the type of customers
and the methods used to distribute the Company's products.
The following table presents information about the Company by geographic
area:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---------- ----------- ----------- -----------
SALES:
United States $3,217,021 $ 5,595,201 $ 6,654,699 $10,252,584
Germany 1,330,723 2,723,563 2,822,752 4,789,515
United Kingdom 1,143,412 629,596 1,768,999 1,581,438
France 933,090 668,732 1,872,871 1,416,928
Other foreign 1,640,885 1,306,187 3,551,340 2,732,581
---------- ----------- ----------- -----------
Total $8,265,131 $10,923,279 $16,670,661 $20,773,046
========== =========== =========== ===========
June 30, December 31,
2001 2000
---- ----
LONG-LIVED ASSETS (NET):
United States $ 2,336,897 $ 2,326,790
Germany 2,460,941 3,385,662
Other foreign 142,942 145,167
----------- -----------
Total $ 4,940,780 $ 5,857,619
=========== ===========
The geographical information presented above represents sales to the respective
countries, whereas the long-lived assets are held in the respective countries.
10
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, 2000.
Overview
The Company designs, develops, markets and supports portable, software-
driven, 3-D measurement systems that are used in a broad range of manufacturing
and industrial applications. The Company's principal products are the FAROArm(R)
articulated measuring device, the Control Station and its multi-faceted CAM2
software which provides for CAD-based inspection on portable and fixed-base
CMMs, and factory-level statistical process control. Together, these products
integrate the measurement and quality inspection function with CAD, CAM and
computer-aided engineering ("CAE") technology to improve productivity, enhance
product quality and decrease rework and scrap in the manufacturing process. The
Company's products bring precision measurement, quality inspection and
specification conformance capabilities, integrated with leading CAD software, to
the factory floor. Historically, the Company's revenue growth has resulted from
increased unit sales due to an expanded sales effort that included the addition
of sales personnel at existing offices, the opening of new sales offices
(including offices in international markets) and expanded promotional efforts
which include a multilingual web site and Company demo CD.
During 2001, the Company's sales growth has been adversely affected by the
economic slowdown currently affecting the United States and Europe. We expect
that the current economic slowdown will continue to adversely affect U. S. and
German sales and may adversely affect the Company's growth rate in other
geographic markets during the balance of 2001. Accordingly, the Company adopted
a cost reduction plan during the third quarter of 2001. This plan includes
reducing the workforce by approximately 15%, reducing discretionary spending
and canceling certain non-strategic product development and marketing projects.
Severance payments and other costs of implementing these measures, recorded in
July 2001, were not material to the Company's results of operations aggregated
approximately $90,000.
Results of Operations
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Sales. Sales decreased by $2.6 million, or 23.9%, from $10.9 million for
the three months ended June 30, 2000 to $8.3 million for three months ended June
30, 2001. The decrease primarily resulted from reduction in product unit sales
in the U.S. ($2.4 million) and Germany ($850,000) and the effect of the stronger
U.S. dollar in the second quarter of 2001 (approximately $500,000). This
decrease was offset in part by an increase in sales in other international
locations ($764,000).
Gross profit. Gross profit decreased by $2.1 million or 30.4%, from $6.9
million for the three months ended June 30, 2000 to $4.8 million for the three
months ended June 30, 2001. Gross margin decreased to 58.1% for the three
months ended June 30, 2001 from 63.4% for the three months ended June 30, 2000.
The decrease in gross margin was primarily a result of more aggressive sales
discounts and a shift in product mix in the three months ended June 30, 2001.
Selling expenses. Selling expenses increased by $363,000 or 10.7%, from
$3.4 million for the three months ended June 30, 2000 to $3.8 million for the
three months ended June 30, 2001. This increase was primarily a result of higher
expenses in Europe and Japan (resulting from increase in headcount and marketing
efforts to develop new geographic markets) and restructuring of the Company's
domestic sales force. This increase was partially offset by the effect of the
stronger U.S. dollar in the second quarter of 2001.
11
General and administrative expenses. General and administrative expenses
increased by $170,000 or 13.1%, from $1.3 million for the three months ended
June 30, 2000 to $1.5 million for the three months ended June 30, 2001. The
increase was due to additional administrative expenses in Europe ($107,000) and
Japan ($72,000), partially offset by the effect of the stronger U.S. dollar in
2001.
Depreciation and amortization expenses. Depreciation and amortization
expenses decreased by $145,000 or 18.1%, from $803,000 for the three months
ended June 30, 2000 to $658,000 for the three months ended June 30, 2001. This
decrease was primarily due to the effect of the stronger U.S. dollar in 2001 in
connection with assets of the Company's European operations.
Research and development expenses. Research and development expenses
decreased by $23,000, or 2.8%, from $813,000 for the three months ended June
30, 2000 to $790,000 for the three months ended June 30, 2001 principally as a
result of the effect of the stronger U.S. dollar in 2001.
Interest income. Interest income increased by $100,000, or 59.5%, from
$168,000 for the three months ended June 30, 2000, to $268,000 for the three
months ended June 30, 2001. The increase was primarily attributable to efforts
to invest in higher yielding cash equivalents and investments during the second
quarter of 2001 (see Liquidity and Capital Resources below).
Net (loss) income. Net (loss) income decreased by $2.2 million from net
income of $591,000 for the three months ended June 30, 2000 to a net loss of
$1.6 million for the three months ended June 30, 2001 due to the factors stated
above.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Sales. Sales decreased by $4.1 million, or 19.7%, from $20.8 million for
the six months ended June 30, 2000 to $16.7 million for six months ended June
30, 2001. The decrease primarily resulted from reduction in product unit sales
in the U.S. ($3.6 million) and Germany ($1.3 million) and the effect of the
stronger U.S. dollar in the first half of 2001 (approximately $700,000). This
decrease was offset in part by increase in sales in other international
locations ($1.5 million).
Gross profit. Gross profit decreased by $3.0 million or 23.4%, from $12.8
million for the six months ended June 30, 2000 to $9.8 million for the six
months ended June 30, 2001. Gross margin decreased, to 58.6% for the six months
ended June 30, 2001 from 61.8% for the six months ended June 30, 2000 primarily
a result of more aggressive sales discounts and a shift in product mix in the
six months ended June 30, 2001.
Selling expenses. Selling expenses increased by $162,000, or 2.3%, from
$7.0 million for the six months ended June 30, 2000 to $7.2 million for the six
months ended June 30, 2001. This increase was primarily a result of higher
selling expenses in Europe (Italy and Spain) and Japan (resulting from increase
in headcount and marketing efforts to develop new geographic markets) and
restructuring of the Company's domestic sales force in the first quarter of
2001. This increase was offset in part by lower selling expenses in the United
States particularly sales commissions due to lower sales volume and the effect
of the stronger U.S. dollar in the first half of 2001.
General and administrative expenses. General and administrative expenses
increased by $258,000 or 9.9%, from $2.6 million for the six months ended June
30, 2000 to $2.9 million for the six months ended June 30, 2001. The increase
was primarily due to additional administrative expenses to support geographic
growth in Europe and Japan, partially offset by the effect of the stronger U.S.
dollar in 2001.
Depreciation and amortization expenses. Depreciation and amortization
expenses decreased by $117,000 or 8.4%, from $1.4 million for the six months
ended June 30, 2000 to $1.3 million for the six months ended June 30, 2001.
This decrease was primarily due to the effect of the stronger U.S. dollar in
2001, partially offset by depreciation on normal fixed asset additions since the
first half of 2000.
12
Research and development expenses. Research and development expenses
decreased by $104,000, or 5.8%, from $1.8 million, for the six months ended
June 30, 2000 to $1.7 million for the six months ended June 30, 2001 principally
as a result of lower R&D activities in Europe and the effect of the stronger
U.S. dollar in 2001, offset in part by slightly higher R&D activity in the U.S.
in 2001.
Interest income. Interest income increased by $139,000, or 38.1%, from
$365,000 for the six months ended June 30, 2000, to $504,000 for the six months
ended June 30, 2001. The increase was primarily attributable to efforts to
invest in higher yielding cash equivalents, and investments during 2001 (see
Liquidity and Capital Resources below).
Net (loss) income. Net (loss) income decreased by $2.9 million from net
income of $174,000 for the six months ended June 30, 2000 to a net loss of $2.7
million for the six months ended June 30, 2001 due to the factors stated above.
Liquidity and Capital Resources
During the six months ended June 30, 2001, cash decreased by $3.4 million
from $8.0 million at December 31, 2000 to $4.6 million at June 30, 2001. For the
six months ended June 30, 2001, net cash used in operating activities was $2.2
million compared to cash provided by operating activities of $171,000 for the
six months ended June 30, 2000. The increase was principally due to the
operating loss in 2001. Net cash used in investing activities was $886,000 for
the six months ended June 30, 2001, compared to $2.4 million for the six months
ended June 30, 2000. The decrease in net cash used in investing activities is
primarily attributable to proceeds from investments ($1.4 million) in 2001
versus payments for investments ($582,000) in 2000. Currency exchange rate
changes resulted in a $324,000 reduction on the Company's reported cash at June
30, 2001.
In April 2001, the Company and SpatialMetrix Corporation ("SMX") entered into an
agreement pursuant to which the Company provided to SMX $1.5 million in
financing. SMX Corp. is a manufacturer and worldwide supplier of laser trackers
and targets, as well as metrology software and contract inspection services.
FARO and SMX also have entered into two letters of intent. One of the letters
of intent outlines the terms under which FARO will provide SMX with up to an
additional $1.5 million in financing. The other letter of intent outlines the
terms pursuant to which FARO will have an option to acquire SMX. Both letters
of intent are non-binding and are subject to the negotiation and execution of
definitive agreements and the satisfaction of various conditions by SMX.
The Company provided the $1.5 million in financing to SMX by entering into
a Participation Agreement with SMX's bank pursuant to which the Company funded
and simultaneously acquired a $1.5 million interest in SMX's $3.8 million bank
line of credit. The line of credit bears interest at a rate of 2% in excess of
SMX's bank's prime rate, which increases by an additional 3% during any default
on the line of credit. Although the line of credit matured on May 31, 2001,
SMX's bank has not taken any action to seek repayment of amounts due thereunder.
The Company anticipates that the line of credit will be extended upon execution
of a definitive agreement providing for an additional $1.5 million in financing.
Additionally, the Company's has commitments at June 30, 2001 resulting from
leases on its headquarters and regional offices and from leases on motor
vehicles and office equipment. There were no other material commitments for
capital expenditures at that date, although the Company anticipates amending its
agreement with SMX to provide to SMX an additional $1.5 million in financing.
The Company believes that its cash, investments, cash flows from operations and
funds available from its credit facility will be sufficient to satisfy its
working capital, loan commitment and capital expenditure needs through the
foreseeable future.
13
Foreign Exchange Exposure
Sales outside the United States represent a significant portion of the
Company's total revenues. At present, the majority of the Company's revenues
and expenses are invoiced and paid in U.S. dollars. In the future, the Company
expects a greater portion of its revenues to be denominated in foreign
currencies. Fluctuations in exchange rates between the U.S. dollar and such
foreign currencies may have a material adverse effect on the Company's business,
results of operations and financial condition, and could specifically result in
foreign exchange losses. The impact of future exchange rate fluctuations on the
results of 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 Company's exposure to risks associated with
fluctuations in foreign exchange rates will increase. Historically, the Company
has not hedged against the risks associated with fluctuations in exchange rates.
The Company at present is evaluating its exposure, and may use foreign exchange
contracts and/or foreign currency options to hedge these risks in the future.
Inflation
The Company believes that inflation has not had a material impact on its
results of operations in recent years and it does not expect inflation to have a
material impact on its operations in 2001.
Conversion to the Euro
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (Euro). The transition period for the
introduction of the Euro ends June 30, 2002. After the transition period certain
member countries of the European Union are expected to adopt the Euro as their
national currency. Issues facing the Company as a result of the introduction of
the Euro include converting information technology systems, reassessing currency
risk, amending lease agreements and other contracts, and processing tax and
accounting records. The Company is addressing these issues and does not expect
the Euro to have a material effect on the Company's financial condition or
results of operations.
14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference herein
to the information contained in this report in Part I, Item 2, under the
captions "Foreign Exchange Exposure" and "Inflation."
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine litigation arising in the ordinary course of business. The Company does
not believe that the results of such litigation, even if the outcome were
unfavorable to the Company, would have a material adverse effect on the
Company's business, financial condition or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
10.17 Loan Participation Agreement, dated April 13, 2001, between the
Registrant and PNC Bank, National Association. (Filed herewith).
10.18 Loan Agreement, dated April 13, 2001, between the Registrant and
SpatialMetrix Corporation. (Filed herewith).
10.19 WCMA Loan Agreement, dated as of May 10, 2001, between the
Registrant and Merrill Lynch Business Financial Services, Inc.
(Filed herewith).
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 16, 2001 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)
15