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, 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 November 10, 2001:
11,035,252
1
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, 2001 and
December 31, 2000 3
Condensed Consolidated Statements of
Operations for the Three and Nine Months Ended
September 30, 2001, and 2000 4
Condensed Consolidated Statements of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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
2
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------------- --------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 5,463,850 $ 8,029,318
Short term investments - at cost (Note C) 5,320,861 6,218,636
Accounts receivable - net of allowance 8,898,793 10,352,972
Income taxes refundable 552,413 -
Inventories (Note D) 6,252,487 6,364,290
Prepaid expenses and other assets 1,932,038 1,112,881
Deferred income taxes - 203,816
------------ -----------
Total current assets 28,420,442 32,281,913
------------ -----------
PROPERTY AND EQUIPMENT - at cost:
Machinery and equipment 4,077,035 3,580,892
Furniture and fixtures 1,314,155 1,253,248
Leasehold improvements 141,766 89,171
------------ -----------
Total 5,532,956 4,923,311
Less accumulated depreciation (3,810,126) (3,121,029)
------------ -----------
Property and equipment, net 1,722,830 1,802,282
------------ -----------
INTANGIBLE ASSETS - net 2,936,286 4,055,337
INVESTMENTS - at cost (Note C) 3,301,842 4,755,572
NOTES RECEIVABLE (Note E) 2,525,258 1,128,846
DEFERRED INCOME TAXES - 675,324
------------ -----------
TOTAL ASSETS $ 38,906,658 $44,699,274
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,196,089 $ 2,982,814
Accrued liabilities 3,425,324 4,120,404
Income tax payable - 684,409
Current portion of unearned service revenues 737,613 687,566
Customer deposits 141,334 133,984
------------ -----------
Total current liabilities 6,500,360 8,609,177
OTHER LONG-TERM LIABILITIES 420,664 134,644
------------ -----------
TOTAL LIABILITIES 6,921,024 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 issued; 11,030,706 outstanding 11,071 11,066
Additional paid-in-capital 47,593,454 47,570,059
Unearned compensation - -
Accumulated deficit (12,677,707) (9,268,134)
Accumulated other comprehensive loss:
Cumulative translation adjustments, net of tax (2,790,559) (2,206,913)
Common stock in treasury, at cost - 40,000 shares (150,625) (150,625)
------------ -----------
Total shareholders' equity 31,985,634 35,955,453
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,906,658 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ---------- ----------- -----------
Sales $ 8,416,886 $8,810,972 $25,087,547 $29,584,018
Cost of sales 3,116,386 3,196,895 10,019,714 11,133,799
----------- ---------- ----------- -----------
Gross profit 5,300,500 5,614,077 15,067,833 18,450,219
Operating expenses:
Selling 3,337,978 3,233,294 10,531,573 10,264,455
General and administrative 1,498,108 1,481,068 4,399,892 4,124,963
Depreciation and amortization 659,326 626,517 1,983,804 2,067,932
Research and development 894,422 876,605 2,605,644 2,691,460
Employee stock options - 31,671 - 95,013
----------- ---------- ----------- -----------
Total operating expenses 6,389,834 6,249,155 19,520,913 19,243,823
----------- ---------- ----------- -----------
Loss from operations (1,089,334) (635,078) (4,453,080) (793,604)
Interest income 180,730 219,810 684,748 584,604
Other Income 429,275 139,937 579,232 252,634
Interest expense 294 - (473) -
----------- ---------- ----------- -----------
(Loss) income before income taxes (479,035) (275,331) (3,189,573) 43,634
Income tax expense (220,000) (85,056) (220,000) (230,193)
----------- ---------- ----------- -----------
Net Loss $ (699,035) $ (360,387) $(3,409,573) $ (186,559)
=========== ========== =========== ===========
NET LOSS PER SHARE - BASIC ($0.06) ($0.03) ($0.31) ($0.02)
=========== ========== =========== ===========
NET LOSS PER SHARE - DILUTED ($0.06) ($0.03) ($0.31) ($0.02)
=========== ========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
-------------------- Paid-in Unearned Accumulated Comprehensive Treasury
Shares Amounts Capital Compensation Deficit Loss Stock Total
--------- -------- ----------- ------------ ----------- ------------- --------- -----------
BALANCE, JANUARY 1, 2000 11,059,510 $11,060 $47,544,844 $(123,404) $ (9,307,651) $(1,374,878) $(150,625) $36,599,346
Net income 39,517 39,517
Currency translation
adjustment, net of tax (832,035) (832,035)
------------
Comprehensive loss (792,518)
Issuance of common stock 5,715 6 25,215 25,221
Amortization of unearned
compensation 123,404 123,404
---------- ------- ----------- --------- ------------ ----------- --------- -----------
BALANCE, DECEMBER 31, 2000 11,065,225 11,066 47,570,059 - (9,268,134) (2,206,913) (150,625) 35,955,453
Net loss (3,409,573) (3,409,573)
Currency translation
adjustment, net of tax (583,646) (583,646)
------------
Comprehensive loss (3,993,219)
Issuance of common stock 5,481 5 23,395 23,400
---------- ------- ----------- --------- ------------ ----------- --------- -----------
BALANCE, SEPTEMBER 30, 2001
(Unaudited) 11,070,706 $11,071 $47,593,454 $ - $(12,677,707) $(2,790,559) $(150,625) $31,985,634
========== ======= =========== ========= ============ =========== ========= ===========
See accompanying notes to condensed consolidated financial statements
5
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net loss $(3,409,573) $ (186,559)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,983,804 2,067,932
Bad debt expense 201,239 95,000
Inventory reserve 300,000 355,000
Provision for deferred income taxes 876,265 (108,106)
Employee stock options - 95,013
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 951,363 505,904
Income tax refundable (552,413) 82,878
Inventories (262,943) (407,389)
Prepaid expenses and other assets (842,820) (319,976)
Increase (decrease) in:
Accounts payable and accrued liabilities (1,359,529) 774,103
Unearned service revenues 369,805 371,702
Income tax payable (684,395) -
Customer deposits 12,409 (5,217)
----------- -----------
Net cash (used in) provided by operating activities (2,416,788) 3,320,285
----------- -----------
INVESTING ACTIVITIES:
Proceeds from (payments for) investments, net 2,351,506 (722,958)
Purchases of property and equipment (657,975) (860,060)
Payments of patent costs - (114,421)
Notes Receivable (1,396,412) (1,147,647)
Payments for intangibles and other (254,926) (131,798)
----------- -----------
Net cash provided by (used in) investing activities 42,193 (2,976,884)
----------- -----------
FINANCING ACTIVITIES:
Payments on debt (20,927) (7,159)
Proceeds from issuance of common stock, net 23,398 4,221
----------- -----------
Net cash provided by (used in) financing activities 2,471 (2,938)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (193,344) (359,830)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (2,565,468) (19,367)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,029,318 6,637,184
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,463,850 $ 6,617,817
=========== ===========
See accompanying notes to condensed consolidated financial statements.
6
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 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 nine months ended
September 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 has 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
September 30, 2001 and December 31, 2000 short-term investments of $5.3 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:
September 30, December 31,
2001 2000
---------- ----------
Government agency securities $2,039,872 $ 898,840
Certificates of deposit 339,000 240,309
Corporate notes 922,970 3,616,423
---------- ----------
Total investments $3,301,842 $4,755,572
========== ==========
NOTE D - INVENTORIES
Inventories consist of the following:
September 30, December 31,
2001 2000
------------ -----------
Raw materials $ 554,156 $ 486,002
Work-in-process 1,759,125 1,610,210
Finished goods 602,147 991,169
Sales demonstration 3,337,059 3,276,909
---------- ----------
Total inventories $6,252,487 $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.
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.
In October 2001, the Company and SMX entered into an additional agreement
pursuant to which the Company would provide to SMX up to an additional $1.5
million in financing. The Company amended its Participation Agreement with
SMX's bank so that the additional financing to SMX also would be made through an
additional participation with SMX's bank line of credit. Consequently, SMX's
bank line of credit can increase to a maximum of $5.3 million, of which FARO
would own up to $3 million. In October 2001, the Company provided $750,000 of
this additional financing to SMX. The Company has agreed to make additional
advances to SMX from the remaining $750,000 in financing upon the attainment by
SMX of product development benchmarks to the satisfaction of the Company.
8
In addition to the financing provided to SMX, the Company and SMX entered
into an agreement in September 2001 pursuant to which the Company has an option
to acquire SMX. The acquisition agreement is exercisable by the Company at the
end of any calendar quarter until the option expires on December 31, 2002 or
later depending on certain conditions
SMX's line of credit bears interest at a rate of 3% in excess of SMX's
bank's prime rate, which increases by an additional 5% during any default on the
line of credit. The line of credit matures on December 28, 2001, which will be
accelerated if the Company exercises its option to acquire SMX before that date.
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 September 30,
--------------------------------------------
2001 2000
--------------------- ---------------------
Per-Share Per-Share
Shares Amount Shares Amount
---------- --------- ---------- ---------
Basic EPS 11,030,706 $(.06) 11,020,682 $(.03)
Effect of dilutive securities - -
---------- ----------
Diluted EPS 11,030,706 $(.06) 11,020,682 $(.03)
========== ==========
Nine months ended September 30,
--------------------------------------------
2001 2000
--------------------- ---------------------
Per-Share Per-Share
Shares Amount Shares Amount
---------- --------- ---------- ---------
Basic EPS 11,029,321 $(.31) 11,020,174 $(.02)
Effect of dilutive securities - -
---------- ----------
Diluted EPS 11,029,321 $(.31) 11,020,174 $(.02)
========== ==========
9
NOTE G - SEGMENT GEOGRAPHIC DATA
The Company develops, manufactures, markets and supports Computer Aided
Design (CAD)-based quality assurance products and CAD-based inspection and
statistical process control software. This one line of business represents more
than 99% of consolidated sales. The Company operates through sales teams
established by geographic area. Each team is equipped to deliver the entire line
of Company products to customers within its geographic area. The Company has
aggregated the sales teams into a single operating segment as a result of the
similarities in the nature of products sold, the type of customers and the
methods used to distribute the Company's products.
The following table presents information about the Company by geographic
area:
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
SALES:
United States $3,440,390 $4,378,705 $10,095,089 $14,631,289
Germany 2,074,512 1,498,452 4,897,264 6,287,967
United Kingdom 418,826 411,703 2,187,825 1,993,141
France 785,616 717,477 2,658,487 2,134,405
Other foreign 1,697,542 1,804,635 5,248,882 4,537,216
---------- ---------- ----------- -----------
Total $8,416,886 $8,810,972 $25,087,547 $29,584,018
========== ========== =========== ===========
September 30, December 31,
2001 2000
------------ -----------
LONG-LIVED ASSETS (NET):
United States $ 2,216,706 $ 2,326,790
Germany 2,297,556 3,385,662
Other foreign 144,854 145,167
----------- -----------
Total $ 4,659,116 $ 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 to a lesser
extent. We expect that the current economic slowdown will continue to adversely
affect U. S. sales and 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 discretionary
spending, canceling certain non-strategic product development and marketing
projects, and a reduction of approximately 15% of the company's workforce, or
about 30 people, primarily in administration, research and development, and
manufacturing.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Sales. Sales decreased by $394,000, or 4.5%, from $8.8 million for the
three months ended September 30, 2000 to $8.4 million for three months ended
September 30, 2001. The decrease primarily resulted from reduction in sales in
the U.S. ($938,000); offset in part by an increase in sales in Germany of
$576,000.
Gross profit. Gross profit decreased by $314,000 or 5.6%, from $5.6 million
for the three months ended September 30, 2000 to $5.3 million for the three
months ended September 30, 2001. Gross margin decreased slightly to 63.0% for
the three months ended September 30, 2001 from 63.7% for the three months ended
September 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
September 30, 2001.
Selling expenses. Selling expenses increased by $105,000 or 3.2%, from
$3.2 million for the three months ended September 30, 2000 to $3.3 million for
the three months ended September 30, 2001. This increase was primarily a result
of higher expenses in Europe (resulting from increase in headcount and marketing
efforts to develop new geographic markets) and costs associated with
restructuring of the Company's domestic sales force, offset in part by lower
marketing expenses in the US.
General and administrative expenses. General and administrative expenses
increased by $17,000 or 1.2%, to $1.5 million for the three months ended
September 30, 2001. The increase was due to
11
additional administrative expenses to support geographic growth in Japan,
offset in part by lower expenses in U.S. as a result of cost cutting initiatives
implemented early in the third quarter.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased slightly by $33,000 or 5.2%, from $627,000 for the three
months ended September 30, 2000 to $659,000 for the three months ended September
30, 2001 due to normal additions to fixed assets during the year.
Research and development expenses. Research and development expenses
increased by $18,000, or 2.0%, from $877,000 for the three months ended
September 30, 2000 to $894,000 for the three months ended September 30, 2001
principally as a result of higher compensation costs in the U.S.
Interest income. Interest income decreased by $39,000, or 17.8%, from
$220,000 for the three months ended September 30, 2000, to $181,000 for the
three months ended September 30, 2001. The decrease was primarily attributable
to lower interest bearing cash balances (see Liquidity and Capital Resources
below).
Other Income. Other income increased by $289,000 or 207%, from $140,000
for the three months ended September 30, 2000 to $429,000 for the three months
ended September 30, 2001 primarily due to higher royalty income and foreign
currency gains during the current period.
Income tax expense. In the third quarter of 2001, the Company recorded a
valuation allowance against certain deferred tax assets in the amount of
$879,000. Additionally, the Company recorded a current income tax benefit in the
amount of $659,000 in connection with the Company's income tax loss for U.S.
federal purposes in 2001 which can be carried back to prior years. In the
comparable period in 2000, the Company recorded a provision for income tax in
connection with the Company's U.S. income before income taxes.
Net Loss. Net loss increased by $339,000 from $360,000 for the three months
ended September 30, 2000 to $699,000 for the three months ended September 30,
2001 due to the factors stated above.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Sales. Sales decreased by $4.5 million, or 15.2%, from $29.6 million for
the nine months ended September 30, 2000 to $25.1 million for nine months ended
September 30, 2001. The decrease primarily resulted from reduction in product
sales in the U.S. ($4.5 million) and Germany ($1.4 million), offset in part by
increase in sales in other foreign locations ($712,000).
Gross profit. Gross profit decreased by $3.4 million or 18.3%, from $18.5
million for the nine months ended September 30, 2000 to $15.1 million for the
nine months ended September 30, 2001. Gross margin decreased to 60.1% for the
nine months ended September 30, 2001 from 62.4% for the nine months ended
September 30, 2000 primarily a result of more aggressive sales discounts in the
nine months ended September 30, 2001.
Selling expenses. Selling expenses increased by $267,000, or 2.6%, from
$10.3 million for the nine months ended September 30, 2000 to $10.5 million for
the nine months ended September 30, 2001. This increase was primarily a result
of higher selling expenses in Europe and U.S. (resulting from increase in
headcount and marketing efforts to develop new geographic markets) and costs
associated with restructuring of the Company's domestic sales force.
General and administrative expenses. General and administrative expenses
increased by $275,000 or 6.7%, from $4.1 million for the nine months ended
September 30, 2000 to $4.4 million for the nine months ended September 30, 2001.
The increase was primarily due to a one-time consulting fee and additional
administrative expenses to support geographic growth in Europe and Japan,
partially offset by lower expenses in U.S. as a result of cost cutting
initiatives implemented early in the third quarter.
Depreciation and amortization expenses. Depreciation and amortization
expenses decreased by $84,000 or 4.1%, from $2.1 million for the nine months
ended September 30, 2000 to $2.0 million for the nine months ended September 30,
2001 due in part to fully amortized intangible assets in the U.S.
Research and development expenses. Research and development expenses
decreased by $86,000, or 3.2%, from $2.7 million, for the nine months ended
September 30, 2000 to $2.6 million for the nine months ended September 30, 2001
principally as a result of lower R&D activities in Europe.
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Interest income. Interest income increased by $100,000, or 17.1%, from
$585,000 for the nine months ended September 30, 2000, to $685,000 for the nine
months ended September 30, 2001. The increase was primarily attributable to
efforts to invest in higher yielding cash equivalents, and investments during
the first six months in 2001 (see Liquidity and Capital Resources below).
Other Income. Other income increased by $327,000 or 129%, from $253,000
for the nine months ended September 30, 2000 to $579,000 for the nine months
ended September 30, 2001 primarily due to higher royalty income during the year.
Income tax expense. In the third quarter of 2001, the Company recorded a
valuation allowance against certain deferred tax assets in the amount of
$879,000. Additionally, the Company recorded a current income tax benefit in the
amount of $659,000 in connection with the Company's income tax loss for U.S.
federal purposes in 2001 which can be carried back to prior years. In the
comparable period in 2000, the Company recorded a provision for income tax in
connection with the Company's U.S. income before income taxes.
Net Loss. Net loss increased by $3.2 million from $187,000 for the nine
months ended September 30, 2000 to $3.4 million for the nine months ended
September 30, 2001 due to the factors stated above.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2001, cash decreased by $2.6
million from $8.0 million at December 31, 2000 to $5.5 million at September 30,
2001. For the nine months ended September 30, 2001, net cash used in operating
activities was $2.4 million compared to cash provided by operating activities
of $3.3 million for the nine months ended September 30, 2000. The decrease was
principally due to the net operating loss in 2001. Net cash provided by
investing activities was $42,000 for the nine months ended September 30, 2001,
compared to cash used in investing activities of $3.0 million for the nine
months ended September 30, 2000. The increase in net cash provided by investing
activities is primarily attributable to proceeds from investments of $2.4
million in 2001 versus payments for investments of $723,000 in 2000. Currency
exchange rate changes resulted in a $193,000 reduction on the Company's reported
cash at September 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.
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.
In October 2001, the Company and SMX entered into an additional agreement
pursuant to which the Company would provide to SMX up to an additional $1.5
million in financing. The Company amended its Participation Agreement with
SMX's bank so that the additional financing to SMX also would be made through an
additional participation with SMX's bank line of credit. Consequently, SMX's
bank line of credit can increase to a maximum of $5.3 million, of which FARO
would own up to $3 million. In October 2001, the Company provided $750,000 of
this additional financing to SMX. The Company has agreed to make additional
advances to SMX from the remaining $750,000 in financing upon the attainment by
SMX of product development benchmarks to the satisfaction of the Company.
In addition to the financing provided to SMX, the Company and SMX entered
into an agreement in September 2001 pursuant to which the Company has an option
to acquire SMX. The acquisition agreement is exercisable by the Company at the
end of any calendar quarter until the option expires on December 31, 2002 or
later depending on certain conditions
SMX's line of credit bears interest at a rate of 3% in excess of SMX's
bank's prime rate, which increases by an additional 5% during any default on the
line of credit. The line of credit matures on December 28, 2001, which will be
accelerated if the Company exercises its option to acquire SMX before that date.
Additionally, the Company has commitments at September 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.
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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.
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 adoption
of the Euro to have a material effect on the Company's financial condition or
results of operations.
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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 Amended Participation Agreement, dated October 31, 2001, between the
Registrant and PNC Bank, National Association relating to the loan
to SpatialMetrix Corporation. (Filed herewith)
10.20 Agreement Regarding Additional Advances, dated October 31, 2001,
between the Registrant and SpatialMetrix Corporation. (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: November 13, 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)
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