Sales $ 46.2 $ 36.1 $ 40.9
Gro ss Profit $ 25.1 $ 21.8 $ 26.2
Gro ss Margin% 54.4% 60.4% 64.0%
EBITDA $ 0.1 $ (0.8 ) $ 2.5
Earnings (lo ss) per share
basic $ (0.17 ) $ (0.26 ) $ 0.00
diluted $ (0.17 ) $ (0.26 ) $ 0.00
(in millions of dollars except gross margin and earnings per share) 20 02 2001 2000
Current Assets $ 30.0 $ 29.4 $ 32.3
Current Ratio 2.6 4.1 3.8
Cash and to tal investments $ 5.9 $ 14.1 $ 19.0
Debt $ 1.5 $ 0.1 $ 0.1
As at December 31; in millions of dollars except current ratio
Financial Highlights
02 01 00
$46.2 $40.9
$36.1
Sales (in millions)
02 01 00
$25.1 $26.2
$21.8
Gross Profit (in millions)
02 01 00
$(0.17) $0.00$(0.26)
Earnings (loss) Per Share
02 01 00
2.6 3.8
4.1
Current Ratio
Dear Shareholder,
In September 2002 Faro marked its fifth year as a public company. The following is my scorecard for goals set at the time of our IPOin 1997:
• Expand Internationally: Faro has direct offices in five western European countries and in Japan. In other major industrialized countries, Faro is represented by distributors. Faro’s flagship CAM2 software is now available in eight languages including Japanese and Chinese. Our website is available in seven languages. Sales outside the United States represented 57.0%, 60.8%, and 50.6% of total sales in 2002, 2001, and 2000, respectively. A+
• Leverage Existing Customer Base: In any given quarter, 40-55% of Faro’s sales are to existing customers. However at many of our largest customers there remains much work to do. For example we may have a dozen FaroArms in one plant of a major auto manufacturer, but none in a similar plant of the same manufacturer in another state. We continue to work on ways to better grow our sales to large customers. B
• Define and Build a “Whole” CAM2 Product Line: Computer-Aided Manufacturing
Measurement (CAM2) refers to the process of inspecting parts or assemblies at any location in the production process, and referring the inspection data back to the computer-aided design (CAD), or to statistical process control (SPC) software. We added several new inspection and reporting software products to our product line through an acquisition in 1998. We added high accuracy, large distance laser tracker inspection capabilities after 1.5 years of R & D on
technology derived from the acquisition of SMX in 2002. From our own R&D efforts we released in 2002 the new generation FaroArm, which should sustain and grow our strong market share lead in the 0-12 foot measurement range. In 2003 we will launch our latest product called the Faro Gage. This product will be very accurate and will measure from 0-24 inches. This will then provide us with a complete range of products to allow computer-based inspection of parts of all sizes. A
• Commit to sustained growth: Faro had a 14.6% compounded annual growth rate in sales in the five years ending December 31, 2002. By 2000 we had created the administrative and geographic infrastructure to support $100 million in sales. However sales growth abruptly stopped in 2001 due to the cut back in capital spending by manufacturers, especially in the United States. As such our operating expenses as a percentage of sales have been higher than our target financial model, leading to losses. We made significant adjustments in the second half of 2001 to account for the reduction in sales. In 2002 the acquisition of SMX resulted in six more months of losses as shipments of the new laser tracker from that company did not begin until the second half. Once shipments began we have returned to profitability, and our goal is to remain profitable despite the uncertain economy. C
In 2003 we will introduce additional new products and accessories to solidify the “whole” product model. From an operational point of view we will begin to manufacture in Europe and to provide
enhanced worldwide technical service. This is now possible with the advanced designs characteristic of the new products and will permit us to better respond to local market demands and service needs.
To recap, 2002 was a year highlighted by record sales, a return to profitability in the second half of the year, and new product releases including the new generation FaroArm, and the Faro Laser
Tracker. Each of these products represents a new performance benchmark in the CAM2 field. These new products and associated software represent a replacement of the entire Faro 2001 product line.
have the portability, adaptability and speed that the manufacturing market requires for effective shop floor measurement.
Simon Raab
Chairman, President, and Chief Executive Officer
The forward-looking statements in this letter, such as statements about our plans, objectives, projections, expectations, assumptions, strategies, or future events are not guarantees of future performance and are subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. These factors include those discussed in the accompanying Annual Report on Form 10-K.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM10-K
(Mark One)
È Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2002 or
‘ 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 incorporation or organization)
(I.R.S. Employer Identification No.)
125 Technology Park, Lake Mary, FL 32746
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number, Including Area Code): (407) 333-9911 Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange On Which Registered
None None
Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001
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 È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ‘ No È
As of March 11, 2003, there were outstanding 11,891,726 shares of Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the last sale price reported on the NASDAQ National Market as of June 28, 2002 was $13,049,034.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Portions of the Proxy Statement, for the 2003 Annual Meeting of
Shareholders . . . Part III, Items 10-13
PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION FAROTechnologies, Inc. (the Company) has made forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) in this report that are subject to risks and uncertainties, such as statements about our plans, objectives, projections, expectations,
assumptions, strategies, or future events. Other written or oral statements, which constitute forward- looking statements, also may be made from time to time by or on behalf of the Company. Words such as “may,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “should,”
“could,” variations of such words, and similar expressions are intended to identify such forward-looking statements. Statements that are not historical facts or that describe the Company’s future plans, objectives, or goals also are forward-looking statements. These statements are not guarantees of future performance and are subject to a number of known and unknown risks, uncertainties, and other factors, including those discussed below and elsewhere in this report, that could cause actual results to differ materially from future results, performances, or achievements expressed or implied by such forward-looking statements. Consequently, undue reliance should not be placed on these forward- looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Factors that could cause actual results to differ materially from what is expressed or forecasted in such forward-looking statements include, but are not limited to: (i) the potential loss of material customers; (ii) the failure to properly manage growth and successfully integrate acquired businesses such as SpatialMetriX(SMX) Corporation; (iii) inability of the Company’s products to attain broad market acceptance or increased length of the Company’s sales cycle; (iv) inability of the Company to maintain or reduce operating expenses; (v) the impact of competitive product and pricing; (vi) inability of the Company to ramp-up shipments of its new laser trackers and new generation portable measure arm products as a result of manufacturing delays; (vii) fluctuations in quarterly operating results as a result of the size, timing and recognition of revenue from significant orders, increases in operating expenses required for product development and marketing, the timing and market acceptance of new products and product enhancements; customer order deferrals in anticipation of new products and product enhancements; the Company’s success in expanding its sales and marketing programs, and general economic conditions; (viii) the financial condition of the Company’s clients; (ix) adverse consequences of exchange rate fluctuations; (x) inability to protect our intellectual property and other proprietary rights; (xi) dependence on Simon Raab and Gregory A. Fraser and other key personnel; and (xii) the cyclical nature of the industries of the Company’s customers.
ITEM1. BUSINESS Industry Background
The Company believes that there are three principal forces driving the need for its products and services: 1) the widespread use by manufacturers of Computer-Aided Design (CAD) in product development which shortens product cycles; 2) the adoption by manufacturers of quality standards such as Six Sigma and ISO-9000 (and its offshoot QS-9000), which stress the measurement of every
CAD changes the manufacturing process. The creation of physical products involves the processes of design, engineering, production and measurement and quality inspection. These basic processes have been profoundly affected by the computer hardware and software revolution that began in the 1980s. CAD software was developed to automate the design process, providing
manufacturers with computerized 3-D design capability. Today, most manufacturers use some form of CAD software to create designs and engineering specifications for new products and to quantify and modify designs and specifications for existing products. Use of CAD can shorten the time between design changes. While manufacturers previously designed their products to be in production for longer periods of time, current manufacturing practices must accommodate more frequent product
introductions and modifications, while satisfying more stringent quality and safety standards. Assembly fixtures and measurement tools must be figuratively linked to the CAD design to enable production to keep up with the rate of design change.
Quality standards dictate measurement to reduce defects. QS-9000 is the name given to the Quality System Requirements of the automotive industry that were developed by Chrysler, Ford, General Motors and major truck manufacturers and issued in late 1994. Companies that become registered under QS-9000 are considered to have higher standards and better quality products. Six Sigma embodies the principles of total quality management that focus on measuring results and reducing product or service failure rates to 3.4 per million. All aspects of a Six Sigma company’s infrastructure must be analyzed, and if necessary, restructured to increase revenues and raise customer satisfaction levels. The all-encompassing nature of these and other quality standards has resulted in manufacturers measuring every aspect of their process, including stages of product assembly that may have never been measured before, in part because of the lack of suitable measurement equipment.
Traditional products don’t measure up. A significant aspect of the manufacturing process, which traditionally has not benefited from computer-aided technology, is measurement and quality inspection. Historically, manufacturers have measured and inspected products using hand-
measurement tools such as scales, calipers, micrometers and plumb lines for simple measuring tasks, test (or check) fixtures for certain large manufactured products and traditional coordinate measurement machines (“CMMs”) for objects that require higher precision measurement. However, the broader utility of each of these measurement methods is limited.
Although hand-measurement tools are often appropriate for simple geometric measurements, including hole diameters or length and width of a rectangular component, their use for complex part measurements, such as the fender of a car, is limited Also, these devices do not allow for the measurements to be directly compared to the CAD model of the part. Test fixtures (customized fixed tools used to make comparative measurements of complex production parts to “master parts”) are relatively expensive and must be reworked or discarded each time a dimensional change is made in the part being measured. In addition, these manual measuring devices do not permit the manufacturer to compare the dimensions of an object with its CAD model.
Conventional CMMs are generally large, fixed-base machines that provide very high levels of precision and provide a link to the CAD model of the object being measured. However, fixed-base CMM’s require the object being measured be brought to the CMM and the object fit within the CMM’s measurement grid. As manufactured subassemblies increase in size and become integrated into even larger assemblies, they become less transportable, thus diminishing the utility of a conventional CMM. Consequently, manufacturers must continue to use hand-measuring tools, or expensive customized
test fixtures, in order to measure large or unconventionally shaped objects. Some parts or assemblies are not easily accessible and cannot be measured at all using traditional devices.
Escalating global competition has created a demand for higher quality products with shorter life cycles. Manufacturers require more rapid design, greater control of the manufacturing process, tools to compare components to their CAD specifications and the ability to precisely measure components that cannot be measured or inspected by conventional devices. Moreover, they increasingly require measurement capabilities to be integrated into the manufacturing process and to be available on the factory floor.
FARO’s Business
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 Faro-Arm Control Station and Control Station Pro (articulated measuring devices), the Faro Laser Tracker and Laser Control Station; and their companion Soft Check Tool and CAM2 software, respectively, which provide for CAD-based inspection and factory- level statistical process control. Together, these products integrate the measurement and quality inspection function with CAD software to improve productivity, enhance product quality and decrease rework and scrap in the manufacturing process. The Company uses the acronym “CAM2” for this process, which stands for Computer-aided manufacturing measurement. The Company’s products bring precision measurement, quality inspection and specification conformance capabilities, integrated with leading CAD software, to the factory floor. The Company is a pioneer in the development and marketing of 3-D measurement technology in manufacturing and industrial applications and currently holds 29 patents. The Company’s products have been purchased by approximately 2,900 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as Audi, Bell Helicopter, Boeing, British Aerospace, Caterpillar, DaimlerChrysler, General Electric,
General Motors, Honda, Johnson Controls, Komatsu Dresser, Lockheed Martin, Nissan, Siemens, Volkswagen among many others.
Acquisition of SMX
On January 16, 2002, the Company acquired SpatialMetriX Corporation (“SMX”), a leading manufacturer and supplier of laser trackers and targets, metrology software in exchange for 500,000 shares of FAROcommon stock (50,000 shares of which are being held in escrow) and the satisfaction by the Company of certain obligations of SMX. In connection therewith, the Company issued an additional 350,000 shares of FAROcommon stock and paid $2.0 million in cash to fully satisfy SMX’s obligations to its two lenders. The Company also assumed and/or satisfied other obligations of SMX, including approximately $2.9 million in financing provided by the Company to SMX prior to January 16, 2002.
The Company estimates that SMX had 35% of the installed laser tracker market. The Company exercised its contractual right to acquire SMX only after the successful design by SMX of a new generation laser tracker, which the Company sells at competitive prices compared to both the previous generation SMX tracker, and competitor’s current products. SMX’s previous generation laser tracker, which was introduced in 1996, was sold until September 2001. SMX halted production and sale of its earlier generation laser tracker in September 2001. The operations of the new laser product line are contributing favorably to the Company’s revenue growth and, beginning in the third quarter of 2002, to the results of operations. The Company has sold approximately $8.8 million in laser products in 2002
FARO Products
The FARO Arm Control Station. The FAROArm Control Station is a combination of a portable, six or seven-axis, instrumented articulated measurement arm, a touch screen computer, and software programs known as SoftCheck Tools.
• Articulated Arm—Each articulated arm is comprised of three major joints, each of which may consist of one, two or three axes of motion. The articulated arm is available in a variety of sizes, configurations and precision levels that are suitable for a broad range of applications. To take a measurement, the operator simply touches the object to be measured with a probe at the end of the arm and presses a button. Data can be captured at either individual points or a series of points. Digital rotational transducers located at each of the joints of the arm measure the angles at those joints. This rotational measurement data is transmitted to an on-board controller that converts the arm angles to precise locations in 3-D space using “xyz” position coordinates and
“ijk” orientation coordinates.
• Touch Screen Computer—One of the main goals of the Control Station system is to provide computer-based inspection without requiring the operator to program the inspection software or even have to touch a keyboard. As such the company developed software (see the following section) which runs entirely by the operator touching simple icons on the touch screen, not unlike how a restaurant waiter enters an order. The computers are not manufactured by the Company, but are purchased from various suppliers.
• SoftCheck Tool Software—SoftCheck Tool is a custom software program designed to lead an operator through the measurement process with minimal training. The extensive use of photos of the customer’s part assist in achieving this goal. These programs are created by the
Company from specifications provided by the customer.
The FARO Arm Control Station Pro. In contrast to the basic FAROArm Control Station, the Control Station Pro customers may write their own inspection programs using the Company’s CAM2 software. This product requires more sophisticated operators, and is often used to measure multiple parts in the same day, while the basic FAROArm Control Station is often dedicated to the same part. The FAROArm Control Station Pro is a combination of an articulated arm, standard computer (with keyboard), and one of the Company’s following CAM2 Software programs: CAM2 Design, CAM2 Measure or CAM2 Automotive.
The FARO Laser Tracker Control Station. A combination of a portable, large volume laser measurement tool, a touch screen computer, and software programs known as SoftCheck Tools.
• Laser Tracker—The FAROLaser Tracker®utilizes an ultra-precise laser beam to measure objects of up to 230 feet. It enables manufacturing, engineering, and quality control
professionals to measure and inspect large parts, machine tools and other large objects on-site and/or in-process. With its greater angular resolution, repeatability, and accuracy, the FARO Laser Tracker advances already-proven tracker technology. Among its many enhanced features is SuperADM, which improves upon existing Absolute Distance Measurement technology by providing the new time-saving ability to reacquire the laser beam without the need to return to a known reference point or the need to hold the target stationary.
• Touch Screen Computer—See description under Faro Arm Control Station above.
• SoftCheck Tool Software—See description under Faro Arm Control Station above.
CAM2 Software CAM2 is the Company’s family of proprietary CAD-based measurement and statistical process control software. The CAM2 product line includes four software programs:
• CAM2 CAD Analyzer®allows users to convert very large, complex CAD files from engineering workstations into simpler graphical images which make them available on a personal computer level for numerous applications throughout the factory from assembly and inspection planning, to the creation of user or service manuals.
• CAM2 Measure®allows users to compare measurements of manufactured components or assemblies with the corresponding CAD data for the components or assemblies. CAM2 Measure®is offered with the FAROArm®and is also offered as an unbundled product.
• CAM2 Automotive®also allows users to compare measurements of manufactured components with the corresponding CAD file. Unlike CAM2 Measure®, CAM2 Automotive®is especially suited to the measurement of very large components with large CAD files, typical of those in the automotive industry. CAM2 Automotive®is offered with the FAROArm®and is also offered as an unbundled product.
• CAM2 SPC Process®allows for the collection, organization, and presentation of measurement data factory-wide. Not limited to measurements from the FAROArm®, CAM2 SPC Process® accepts data from CMMs and other computer-based measurement devices from many different measurement applications along the production line.
Specialty Products. The Company licenses and supports certain specialty products based on its articulated arm technologies that are used in medical applications. License and support fees from these products do not represent a significant portion of the Company’s revenues. However, the Company is maintaining an active campaign to license its formerly developed medical intellectual property to manufacturers of computer assisted surgical products.
Customers
The Company’s products have been purchased by approximately 2,900 customers worldwide, ranging from small machine shops to large manufacturing and industrial companies. The Company’s ten largest customers by revenue represented an aggregate of 9.0% of the Company’s total revenues in 2002. No customer represented more than 1.5% of the Company’s sales in 2002.
Sales and Marketing
The Company directs its sales and marketing efforts from its headquarters in Lake Mary, Florida. At December 31, 2002, the Company employed 108 sales and marketing professionals who provide global representation, operating from both the Company’s headquarters in the United States, and regional sales offices located in Germany, United Kingdom, France, Spain, Italy and Japan. See Footnote 15 to the Notes to Consolidated Financial Statements, incorporated herein by reference to Item 8 hereof, for financial information about the Company’s foreign and domestic operations and export sales required by this Item.
The Company uses a process of integrated lead qualification and sales demonstration. Once a
Research and Development
The Company believes that its future success depends on its ability to achieve technological leadership, which will require ongoing enhancements of its products and the development of new applications and products that provide 3-D measurement solutions. Accordingly, the Company intends to continue to make substantial investments in the development of new technologies, the
commercialization of new products that build on the Company’s existing technological base and the enhancement and development of additional applications for its products.
The Company’s research and development efforts are directed primarily at enhancing the
functional adaptability of its current products and developing new and innovative products that respond to specific requirements of the emerging market for 3-D measurement systems. The Company’s research and development efforts have been devoted primarily to mechanical hardware, electronics and software. The Company’s engineering development efforts will continue to focus on the
FAROArm®, the FAROLaser Tracker®, and the family of CAM2 products. See Technology below. At December 31, 2002, the Company employed 33 scientists and technicians in its research and development efforts. Research and development expenses were approximately $4.0 million in 2002 as compared to $3.4 million in 2001 and $3.5 million in 2000. Research and development activities, especially with respect to new products and technologies, are subject to significant risks, and there can be no assurance that any of the Company’s research and development activities will be completed successfully or on schedule, or, if so completed, will be commercially accepted.
Technology
The primary measurement function of both the articulated arm and the laser tracker is to provide orientation and position information with respect to the probe at the end of the arm (as with the FARO Arm) or target device with respect to the base unit (as with the FAROLaser Tracker). This information is processed by software and can be compared to the desired dimensions contained in the CAD data of a production part or assembly to determine whether the measured data conforms to such
dimensional specifications.
• FARO Arm: The articulated arm is designed with six or seven joints. The arm consists of aluminum links and rotating joints that are combined in different lengths and configurations, resulting in human arm-like characteristics. Each joint is instrumented with a rotational
transducer, a device used to measure rotation, which is based on optical digital technology. The position and orientation of the probe in three dimensions is determined by applying trigonometric calculations at each joint. The position of the end of a link of the arm can be determined by using the angle measured and the known length of the link. Through a complex summation of these calculations at each joint, the position and orientation of the probe is determined.
• FARO Laser Tracker: The laser tracker is a portable, high accuracy, three-dimensional coordinate measurement device, which has a measurement range of up to 230 feet. The tracker uses two rotary angular encoders and a laser-based distance measurement system to track and measure the position of a Retroreflector target. The measurement function is accomplished by a laser beam that is reflected from a retroreflecting target, typically a Spherically Mounted
Retroreflector (SMR). The orientation of the tracker’s mechanical axis is continuously updated based on feedback from a position-sensing detector. The tracker determines the coordinates of the target by measuring two angles and a radial distance. The angles are measured by
encoders mounted on the zenith and azimuth axes. The radial distance is measured by a fringe counting interferometer. The software on the controlling computer, CAM2®Measure, transforms this data into any user-defined coordinate system.
The Company’s products are the result of a successful integration of state-of-the-art developments in mechanical, optical and electronic hardware and applications software. The unique nature of the Company’s technical developments is evidenced by its numerous U.S. and international patents. The Company maintains low cost product design processes by retaining development responsibilities for all hardware, electronics and software.
Mechanical Hardware.
• The articulated arm is designed to function in diverse environments and under rigorous physical conditions. The arm monitors its temperature to adjust for environments ranging from -10 degrees to +50 degrees Celsius. The arm is constructed of pre-stressed precision bearings to resist shock loads. Low production costs are attained by the proprietary combination of reasonably priced electromechanical components accompanied by the optimization and on- board storage of calibration data. Many of the Company’s innovations relate to the
environmental adaptability of its products. Significant features include integrated counter- balancing, configuration convertibility and temperature compensation.
• The laser tracker is designed to function in diverse environments and hard to reach locations. The infrared laser adds a Super ADM (Absolute Distance Measurement) measurement mode in which the user does not need to reset the tracker to a reference position following a break in the laser beam.
Electronics. An on-board computer that is designed to handle complex analyses of data as well as communications with a variety of host computers processes the rotational information for each hardware device. The Company’s electronics are based on digital signal processing and surface mount technologies. The Company’s products meet all mandatory electronic safety requirements. Advanced circuit board development, surface mount production and automated testing methods are used to ensure low cost and high reliability.
Software. CAM2 is a Windows-based family of programs written for the most recent PC-based technology. CAM2 has been entirely designed and programmed by the Company utilizing field input. CAM2 CADanalyser®is a family member for viewing, analyzing and browsing CAD files. CAM2 Measure®is a complete 3D measurement application written entirely on the ACIS CAD development platform. Family member CAM2 Automotive®is also a complete 3D measurement software designed for very large CAD files and for specific Automotive applications and is written using a FARO’s proprietary graphics display engine. Family member CAM2 SPC Process®is designed for plant wide dimensional data acquisition and presentation in classical SPC (Statistical Process Control) formats for plant-wide quality control. CAM2 Open Measure is a version of CAM2 Measure which can be adapted to any CAD platform. This permits CAD users to have a complete 3D measurement application operating on their native CAD platform.
All the CAM2 family members implement UNICODE standards for worldwide translation allowing the Company to create foreign language versions to enter international markets more effectively. The software is developed with the cooperation of diverse user sites and a well-developed system for tracking and implementing market demands. The Company’s software products are available in 8 languages worldwide.
Intellectual Property
The Company relies on a combination of contractual provisions and trade secret laws to protect its proprietary information. There can be no assurance that the steps taken by the Company to protect its trade secrets and proprietary information will be sufficient to prevent misappropriation of its proprietary information or to preclude third-party development of similar intellectual property.
Despite the Company’s efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company’s products or to obtain and use information that the Company regards as proprietary. The Company intends to vigorously defend its proprietary rights against infringement by third parties. However, policing unauthorized use of the Company’s products is difficult, particularly overseas, and the Company is unable to determine the extent to which piracy of its software products exists. In addition, the laws of some foreign countries do not protect the Company’s proprietary rights to the same extent as the laws of the United States.
The Company does not believe that any of its products infringe on the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company’s business, operating results and financial condition.
Manufacturing and Assembly
The Company manufactures its articulated arm products primarily at its headquarters in Lake Mary, Florida, with manufacture of its laser tracker
▲products in Kennett Square, Pennsylvania. Some manufacturing also occurs in Europe. Manufacturing consists primarily of assembling components and subassemblies, purchased from suppliers, into finished products. The primary components, which include machined parts and electronic circuit boards, are produced by subcontractors according to the Company’s specifications. All products are assembled, calibrated and tested for accuracy and
functionality before shipment. In limited circumstances, the Company performs in-house circuit board assembly and part machining.
“Quality” has rapidly emerged as a new emphasis in commerce and industry, and is a significant factor in international trade. The Company’s manufacturing, engineering and design headquarters have been registered to the ISO9001 standard since July 1998. Semi-annual surveillance audits have documented continuous improvement to this multinational standard. The Company continues to examine its scope of registration as the business evolves and has chosen English as the standard business language for its operations. This decision is expected to significantly influence the Company’s operations and documentation globally. This has been done in concert with the ISOStandard
Registrar, and is expected to increase customer confidence in the Company’s products and services worldwide.
The Company continues to achieve new levels of certification, achieving Accreditation to Guide 25 in May, 2000, and Registration to ISO/IEC 17025 in October, 2001. These global standards apply to the “Calibration and Certification of Measuring and Test Equipment”, and certify the organization’s level of training, procedures, and efficiency.
In July, 2002 the Company’s European Operations were registered to ISO 9001:2000. In addition the calibration and certification facilities in Europe were accredited to ISO17025.
In October, 2002 the Company Headquarters completed the transition to the ISO 9001:2000 standard, and continued registration to ISO17025 for Calibration and Certification Laboratories.
Competition
The broad market for measurement devices, which include hand-measurement tools, test fixtures and conventional, fixed-base CMMs, and portable measurement systems such as the Company’s products, is highly competitive. Manufacturers of hand-measurement tools and traditional CMMs include a significant number of well-established companies that are substantially larger and possess substantially greater financial, technical and marketing resources than the Company. There can be no assurance that these entities or others will not succeed in developing products or technologies that will directly compete with those of the Company. The market for measurement software to retrofit
traditional CMMs, and for statistical process control is also highly competitive. The Company will be required to make continued investments in technology and product development to maintain its technological advantage over its competition. There can be no assurance that the Company will have sufficient resources to make such investments or that the Company’s product development efforts will be sufficient to allow the Company to compete successfully as the industry evolves. The Company’s products compete on the basis of portability, accuracy, application features, ease-of-use, quality, price and technical support.
The Company’s significant direct competitors for its Control Station and related software are Romer SRL (France), Romer, Inc., a Cimcore Company (California), and Kosaka Laboratory Ltd. (Japan). In addition the Company is aware of a direct competitor in Germany, two direct competitors in Italy, and a direct competitor in the United Kingdom, each of which the Company believes currently has significantly less sales volume than the Company. However, there can be no assurance that these companies or other companies will not devote additional resources to the development and marketing of products that compete with those of the Company. With respect to the laser tracker market, Leica Geosystems (Switzerland) is the company’s only significant direct competitor. Leica Geosystems has the largest market share in the laser tracker market, is well established and is substantially larger and possesses substantially greater financial, technical, and marketing resources than the Company. As the market for
▲portable coordinate measurement systems expands, additional competition may emerge and the Company’s existing and future competitors may commit more resources to the markets in which the Company participates.
The worldwide trend toward CAD-based factory floor metrology has resulted in the introduction of CAD-based inspection software and statistical process control for conventional CMMs by most of the large CMM manufacturers. Certain CMM manufacturers are miniaturizing, and in some cases increasing the mobility of, their conventional CMMs. Nonetheless, these CMMs still have small measurement volumes, lack the adaptability typical of portable, articulated arm measurement devices and lose accuracy outside the controlled environment of the metrology lab.
Backlog
At December 31, 2002, the Company had orders representing approximately $8.8 million in product sales outstanding. The majority of these specific orders were shipped by March 11, 2003, and, as of March 11, 2003, the Company had orders representing approximately $9.6 million in product sales outstanding. At December 31, 2001, the Company had orders representing approximately
$706,000 in product sales outstanding.
The Company’s increased backlog is the result of the introduction of its new laser tracker and
Employees
At December 31, 2002, the Company had 291 full-time employees, consisting of 108 sales and marketing professionals, 61 production staff, 33 research and development staff, 45 administrative staff, and 44 customer service/application engineering specialists. The Company is not a party to any collective bargaining agreements. The Company believes its employee relations are good.
Management believes that its future growth and success will depend in part on its ability to retain and continue to attract highly skilled personnel. The Company anticipates that it will obtain the additional personnel required to satisfy its staffing requirements over the foreseeable future.
Management of the Registrant
The officers and key management personnel of the Company are as follows:
Name Age Principal Position
Simon Raab, Ph.D. . . 50 Chairman of the Board, Chief Executive Officer, and President
Gregory A. Fraser, Ph.D. . . 48 Executive Vice President, Secretary, and Treasurer Joanne M. Karimi . . . 44 Vice President of Human Resources
Allen Sajedi . . . 43 Vice President and Chief Technical Officer Wendelin K.J. Scharbach . . . 47 Co-Managing Director of FAROEurope Siegfried K. Buss . . . 37 Co-Managing Director of FAROEurope
Simon Raab, Ph.D., a co-founder of the Company, has served as the Chairman of the Board, Chief Executive Officer and a director of the Company since its inception in 1982 and as President since 1986. Mr. Raab holds a Ph.D. in Mechanical Engineering from McGill University, Montreal, Canada, a Masters of Engineering Physics from Cornell University and a Bachelor of Science in Physics with a minor in Biophysics from the University of Waterloo, Canada.
Gregory A. Fraser, Ph.D.,a co-founder of the Company, has served as Executive Vice President, Secretary, and Treasurer since August 1999. Prior to that Mr. Fraser served as Chief Financial Officer and Executive Vice President since May 1997 and as Secretary, Treasurer and a director of the Company since its inception in 1982. Mr. Fraser holds a Ph.D. in Mechanical Engineering from McGill University, Montreal, Canada, a Masters of Theoretical and Applied Mechanics from Northwestern University and a Bachelor of Science and Bachelor of Mechanical Engineering from Northwestern University.
Joanne M. Karimi.,has served as Vice President of Human Resources of the Company since July 2001 and as Director of Human Resource Systems since October 1998. Prior to that, Ms. Karimi served as Director of Human resources of the Disney Vacation Club, a unit of The Walt
▲Disney
Company. Ms. Karimi holds a MBA and a Bachelor’s Degree in Business Management from the University of West Florida.
Allen Sajedihas served as Vice President and Chief Technical Officer since 2002 and as Chief Engineer of the Company since 1990. Mr. Sajedi holds a Bachelor’s Degree in Mechanical Engineering from McGill University, Montreal, Canada.
Wendelin K.J. Scharbach,a co-founder of CATS GmbH, a predecessor of FAROEurope, the Company’s principal subsidiary in Europe, has served as Co-managing Director of FAROEurope since May 1998. Prior to that Mr. Scharbach was Managing Director of CATS GmbH.
Siegfried K. Buss,a co-founder of CATS GmbH, a predecessor of FAROEurope, the Company’s principal subsidiary in Europe, has served as Co-managing Director of FAROEurope since May 1998. Prior to that Mr. Buss was Managing Director of CATS GmbH.
ITEM2. PROPERTIES.
The Company’s headquarters are located in a leased building in Lake Mary, Florida containing approximately 35,000 square feet. This facility houses the Company’s U.S. sales and marketing, production, research and development, administrative staff, and customer service/application
operations. Additionally, the Company has a leased facility consisting of 16,000 square feet located in Kennett Square, Pennsylvania. Such facility houses manufacturing operations of the laser tracker product lines.
The Company’s European headquarters are located in a leased building in Stuttgart, Germany containing approximately 19,500 square feet. The Company also has a combined sales and research and development facility that is located in a leased building in Aveiro, Portugal containing
approximately 2,800 square feet. The Company believes that its current facilities will be adequate for its foreseeable needs and that it will be able to locate suitable space for additional regional offices or enhanced production needs as those needs develop.
The information required by the remainder of this Item is incorporated herein by reference to Exhibit 99.1 attached hereto.
ITEM3. LEGAL PROCEEDINGS.
On January 16, 2002, the Company acquired SpatialMetriX Corporation (“SMX”) in exchange for 500,000 shares of FAROcommon stock (50,000 shares of which are being held in escrow) and the satisfaction by the Company of certain obligations of SMX. In connection therewith, the Company issued an additional 350,000 shares of FAROcommon stock and paid $2.0 million in cash to fully satisfy SMX’s obligations to its two lenders. The Company also assumed and/or satisfied other obligations of SMX. The Company believes that SMX breached several of its representations and warranties to FAROin connection with the acquisition, and as a result, the Company has asserted indemnification and set-off claims against the former SMX shareholders, which include but are not limited to the shares being held in escrow. The representative for the former SMX shareholders has disclaimed any liability for these claims. There is no pending litigation for these claims. The Company does not believe that the results of such litigation, even if the outcome were unfavorable to the Company, would have a materially adverse effect on the Company’s business, financial condition or results of operations.
The Company is not involved in any pending legal proceedings other than routine litigation arising in the ordinary course of business.
ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last quarter of calendar 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company’s Common Stock, par value $.001 per share, began trading on the NASDAQ Stock Market in September 1997 under the symbol FARO. Before that date, there was no established public trading market for the Common Stock. The following table sets forth the high and low sale price of the Company’s Common Stock for its two most recent fiscal years:
2002 2001
High Low High Low
First Quarter . . . 3.500 1.530 4.375 2.188 Second Quarter . . . 3.560 1.450 2.875 1.406 Third Quarter . . . 2.169 1.060 2.984 1.594 Fourth Quarter . . . 2.100 1.350 2.484 1.297 The Company has not paid any cash dividends on its Common Stock to date. The payment of dividends, if any in the future is within the discretion of the Board of Directors and will depend on the Company’s earnings, its capital requirements and financial condition, and may be restricted by future credit arrangements entered into by the Company. The Company expects to retain future earnings for use in operating and expanding its business and does not anticipate paying any cash dividends in the reasonably foreseeable future. As of March 11, 2003, the last sale price of the Company’s Common Stock was $2.56, and there were approximately 87 holders of record of Common Stock. The Company believes that there are approximately 1,300 beneficial owners of its Common Stock.
In 1998 the Board of Directors authorized the officers of the Company, without further approval of the Board, to purchase in the open market up to a maximum of one million shares of the Company’s Common Stock. In 1998, the Company purchased 40,000 shares of its Common Stock in the open market under such stock repurchase plan. During the three years in the period ended December 31, 2002 the Company did not purchase any shares of its Common Stock in the open market.
ITEM6. SELECTED FINANCIAL DATA.
The operating results of SMX have been included in the consolidated statements effective January 16, 2002, the date of acquisition (See Acquisition of SMX above). 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.
Years Ended December 31
Pro Forma Pro Forma (1) Historical
2002 2001 2002 2001 2000 1999 1998
Statement of Operations Data:
Sales . . . . $46,374,076 $47,408,591 $46,246,372 $36,121,696 $40,912,663 $33,614,490 $27,787,877 Gross profit . . . . 25,162,134 24,625,944 25,136,763 21,817,613 26,164,035 19,453,522 16,496,564 Income (loss) from
operations . . . . (3,444,656) (9,253,333) (2,939,243) (3,361,610) (237,350) (9,705,477)(2) (5,684,607) Income (loss) before
income taxes . . . . (2,310,244) (8,416,101) (1,804,831) (2,506,226) 464,198 (8,516,286) (4,480,562) Net income (loss) . . (2,520,984) (8,757,839) (2,015,571) (2,847,964) 39,517 (7,394,822) (4,931,094) Net income (loss)
per common share:
Basic . . . . $ (0.21) $ (0.74) $ (0.17) $ (0.26) $ — $ (0.67)$ (0.46)
Diluted . . . . $ (0.21) $ (0.74) $ (0.17) $ (0.26) $ — $ (0.67)$ (0.46)
Weighted average common shares outstanding:
Basic . . . . 11,853,732 11,882,449 11,853,732 11,032,449 11,021,606 11,015,140 10,632,708 Diluted . . . . 11,853,732 11,882,449 11,853,732 11,032,449 11,094,144 11,015,140 10,632,708
At December 31
Pro Forma Pro Forma (1) Historical
2002 2001 2002 2001 2000 1999 1998
Consolidated Balance Sheet Data:
Working capital . . . . 18,338,541 18,143,563 18,338,541 $22,303,204 $23,672,736 $24,869,844 $30,997,769 Total assets . . . . 45,194,780 44,441,451 45,194,780 39,654,124 44,699,274 42,103,912 49,120,147 Total debt . . . . 1,556,125 55,506 1,556,125 80,626 66,657 26,236 337,710 Total shareholders’
equity . . . . 33,383,649 32,488,788 33,383,649 32,336,461 35,955,453 36,599,346 45,375,391 (1) The Pro forma statement of operations and balance sheet data reflects a charge to operations of $1.7 million to record
amortization of intangible assets acquired (including $1.2 million for amortization of goodwill). (2) Includes a charge to write down development and core technology in the amount of $3.1 million.
ITEM7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following information should be read in conjunction with the Consolidated Financial Statements of the Company, including the notes thereto, included elsewhere in this document.
Overview
The Company designs, develops, markets and supports portable, software-driven, measurement systems that are used in a broad range of manufacturing and industrial applications. The Company’s principal products are the Control Station and the Control Station Pro measuring devices and their companion Soft Check Tool and CAM2 software, respectively, which provide for CAD-based inspection and factory-level statistical process control. Together, these products integrate the measurement and quality inspection function with CAD software 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. The Company is a pioneer in the development and marketing of 3-D measurement technology in manufacturing and industrial applications and currently holds 29 patents. The Company’s products have been purchased by approximately 2,900 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as Audi, Bell
Helicopter, Boeing, British Aerospace, Caterpillar, DaimlerChrysler, General Electric, General Motors, Honda, Johnson Controls, Komatsu Dresser, Lockheed Martin, Siemens and Volkswagen among many others.
From its inception in 1982 through 1992, the Company focused on providing computerized, 3-D measurement devices to the orthopedic and neurosurgical markets. During this period, the company introduced a knee laxity measurement device, a diagnostic tool for measuring posture, scoliosis and back flexibility, and a surgical guidance device utilizing a six-axis articulated arm.
In 1992, in an effort to capitalize on a demand for 3-D portable measurement tools for the factory floor, the Company made a strategic decision to target its core measurement technology to the manufacturing and industrial markets. In order to focus on manufacturing and industrial applications of its technology, the Company phased out the direct sale of its medical products and entered into licensing agreements with two major neurosurgical companies for its medical technology. Since 1992, the Company has entered into additional licensing agreements for the use of its technology for medical applications.
Prior to 2002 the Company accounted for royalty revenues from these licensing agreements as
“Other Income”. In 2002, the Company reclassified Royalty Revenues from “Other Income” to “Sales” on the basis that the licensing of technology is consistent with the Company’s main business of 3D measurement.
In 1995, the Company made a strategic decision to target international markets. The Company › established sales offices in France and Germany in 1996, Great Britain in 1997, Japan and Spain in 2000 and Italy in 2001. International sales represented 57.0%, 59.1%, and 50.0% of sales in 2002, 2001, and 2000, respectively.
The Company derives revenues primarily from the sale of its measurement equipment, and its related multi-faceted Soft Check Tool and CAM2 software. Revenue related to these products is recognized upon shipment. Going forward, the Company expects to generate an increasing percentage of its revenue from the sale of its laser tracker product.
Historically, the Company’s sales growth has resulted from increased unit sales due to an expanded sales effort that included the addition of sales personnel and expanded promotional efforts. In 2000, the Company introduced The Control Station with SoftCheck Tools, new accessory items such as the FARORail, the FAROPowerhouse and new versions of all the members of the CAM2 software
family. In January 2002, the Company acquired SpatialMetrix Corporation (“SMX”), a leading
manufacturer and supplier of laser trackers and metrology software. The new generation laser tracker is a high-accuracy, portable 3-dimensional measurement technology.
In addition to providing a one-year basic warranty without additional charge, the Company offers its customers one
▲and three-year extended maintenance contracts, which include on-line help services, software upgrades and hardware warranties. In addition, the Company sells training and technology consulting services relating to its products. The Company recognizes the revenue from extended maintenance contracts proportionately, in the same manner as costs are incurred for such revenues.
Cost of sales consists primarily of material, production overhead and labor. Selling expenses consist primarily of salaries and commissions to sales and marketing personnel, and promotion, advertising, travel and telecommunications.
General and administrative expenses consist primarily of salaries for administrative personnel, rent, utilities and professional and legal expenses. Research and development expenses represent salaries, equipment and third-party services.
Accounting for wholly owned foreign subsidiaries is maintained in the currency of the respective foreign jurisdiction and, therefore, fluctuations in exchange rates may have an impact on intercompany accounts reflected in the Company’s consolidated financial statements. In the normal course of business, the Company from time to time employs off-balance sheet financial instruments to hedge its exposure to foreign currency exchange rates, including cross-currency swaps, forward contracts, and foreign currency options (see Foreign Exchange Exposure below).
During fiscal years 2002 and 2001, the Company’s sales growth has been adversely affected by the economic slowdown currently affecting the United States and Europe. This effect, however, was partially offset by sales growth resulting from the acquisition of SMX in January 2002. In 2001 the Company adopted a cost reduction plan, which continued into 2002. This plan included reducing discretionary spending, canceling certain non-strategic product developments, and a reduction of the company’s existing U.S. workforce, primarily in administration, research and development, and manufacturing.
New Products
The Company commenced shipments of its new generation laser tracker product line late in the third quarter of 2002. The Company also released a new generation of its FAROArm production under the names Platinum and Titanium. The arms replace previous generation arms that were released in 1998. The Company expects the new generation arms to allow the Company to maintain its market leadership in this segment of the portable measure market. Manufacture of both the new generation laser trackers and the new generation portable measurement arms involve both new and distinct manufacturing designs as well as innovative production processes when compared to the Company’s previous product offering.
Results of Operations
The following table sets forth for the periods presented, the percentage of sales represented by certain items in the Company’s consolidated statements of operations:
Year Ended December 31,
2002 2001 2000
Statement of Operations Data:
Sales . . . 100.0% 100.0% 100.0% Cost of Sales . . . 45.6% 39.6% 36.0% Gross margin . . . 54.4% 60.4% 64.0% Operating expenses:
Selling . . . 30.0% 37.2% 34.3% General and administrative . . . 17.0% 16.1% 14.1% Depreciation and amortization . . . 5.0% 7.1% 7.2% Research and development . . . 8.7% 9.3% 8.7% Employee stock options . . . — — 0.3% Total operating expenses . . . 60.7% 69.7% 64.6% Loss from operations . . . (6.3)% (9.3)% (0.6)% Interest income . . . 1.2% 2.5% 2.1% Other income, net . . . 1.3% (0.1)% (0.4)% Interest expense . . . (0.1)% — — Income (loss) before income taxes . . . (3.9)% (6.9)% 1.1% Income tax expense (benefit) . . . 0.5% 0.9% 1.0% Net income (loss) . . . (4.4)% (7.9)% 0.1%
2002 Compared to 2001
Sales. Sales increased by $10.1 million or 28.0%, from $36.1 million for the year ended December 31, 2001 to $46.2 million for year ended December 31, 2002. The increase resulted
primarily from sales of the new laser product line in 2002. Geographically sales increased in all regions primarily due to sales of the new laser product line (United States increased $5.1 million or 34.5%, Europe increased $2.2 million or 15.4%, Japan increased $1.9 million or 111.8%, other foreign sales increased $900,000
▲or 16.4▲%).▲(See note 15 to the Financial Statements where “Other Foreign” includes approximately $800,000 of European Sales). Royalty income included in sales decreased by
$20,000 from $1,010,000 for the year ended December 31, 2001 to $990,000 for the year ended December 31, 2002.
Gross profit. Gross profit increased by $3.3 million or 15.1%, from $21.8 million for the year ended December 31, 2001 to $ 25.1 million for the year ended December 31, 2002. Gross margin decreased from 60.4% for the year ended December 31, 2001 to 54.4% for the year ended December 31, 2002. The decrease in gross margin was primarily a result of a one-time inventory write-down ($729,000) recorded in the second quarter of 2002 related to the new laser product line (see
Acquisition of SMX above), the impact of the new laser product line acquired in January 2002 and, to a lesser extent, the new generation arm products introduced in the third quarter of 2002 (see New Products above). Gross margins on sales are expected to ultimately meet or exceed the Company’s historic levels once both production facilities are at full production levels. Plant capacity utilization is expected to increase with additional manufacturing efficiencies expected in 2003.
Selling expenses. Selling expenses increased by $456,000 or 3.4%, from $13.4 million for the year ended December 31, 2001 to $13.9 million for the year ended December 31, 2002. This increase was a result of higher sales commissions on higher sales in the U.S. ($1.0 million) and higher
expenses in Japan ($382,000) offset largely by cost reduction measures implemented in the United States ($742,000) and Europe ($184,000). While an increase in total expenses was experienced in 2002 compared to 2001, this amount represents a decrease in the percentage of sales from 37.2% in 2001 to 30.0% in 2002.
General and administrative expenses. General and administrative expenses increased by $2.1 million or 36.2% from $5.8 million for the year ended December 31, 2001 to $7.9 million for the year ended December 31, 2002. The increase was due to administrative expenses resulting from the integration of the former SMX in 2002 ($915,000),
▲professional fees unrelated to SMX
▲($352,000), a provision for doubtful accounts receivable ($245,000) recorded in the second quarter of 2002 related to the recently acquired laser product line, and a shifting of personnel from Research and Development to Administrative positions ($549,000).
Depreciation and amortization expenses. Depreciation and amortization expenses decreased by
$292,000, or 11.2%, from $2.6 million for the year ended December 31, 2001 to $2.3 million in 2002. Depreciation and amortization expenses in 2002 reflect the effect
▲(approximately $740,000) of the adoption, effective January 1, 2002, of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142) partly offset by an increase
▲in depreciation resulting from newly acquired assets
▲in late▲2002. See note 6 consolidated financial statement.
Research and development expenses. Research and development expenses increased by
$663,000, or 19.5%, from $3.4 million for the year ended December 31, 2001 to $4.0 million for the year ended December 31, 2002 principally as a result of research and development expenses of the new laser tracker product line ($1.6 million) offset in part by lower expenses for the new generation arm development in the US ($388,000) and shifting of personnel to administrative positions costs in Europe ($549,000—see General and Administrative expenses above).
Interest income. Interest income decreased by $339,000, or 37.7%, from $900,000 for the year ended December 31, 2001 to $561,000 for the year ended December 31, 2002. The decrease was primarily attributable to lower interest bearing cash balances (see Liquidity and Capital Resources below) and lower interest rates prevailing in 2002.
Other income(loss). Other income increased by $644,000, from $43,000 loss for the year ended December 31, 2001 to $601,000 in income for the year ended December 31, 2002 primarily due to foreign currency gains during the current year.
Income tax expense. Income tax expense decreased by $131,000 from $342,000 for the year ended December 31, 2001 to $211,000 for the year ended December 31, 2002.
Net loss. Net loss decreased by $800,000 from $2.8 million for the year ended December 31, 2001 to $2.0 million for the year ended December 31, 2002 primarily due to higher gross profit from increased sales and cost savings measures implemented in the US and Europe, partially offset by integration expenses of the Laser Division and reduced income tax expense.
$14.8 million) and Germany ($1.7 million, or 19.8%, from $8.6 million to $6.9 million), partially offset by increased sales in the remainder of the world (an increase of $2.5
▲million, or 21.0
▲%, from $11.9
▲million
to $14.4 million). The decrease in the U.S. primarily resulted from lower product unit sales resulting mainly from the slowing U.S. economy throughout 2001. The decrease in Germany reflects the
adverse translation effect (approximately $700,000) of the stronger U.S. dollar in 2001. Royalty income included in Sales increased by $550,000 from $460,000 for the year ended December 31, 2000 to
$1,010,000 for the year ended December 31, 2001.
Gross profit. Gross profit decreased by $4.4 million, or 16.8%, from $26.2 million in 2000 to
$21.8 million in 2001. Gross margin decreased to 60.4% in 2001 from 64.0% in 2000. The decrease in gross margin resulted primarily from downward pressure on unit prices in the U.S. and Europe and the translation effect of the stronger U.S. dollar on international sales.
Selling expenses. Selling expenses decreased $598,000, or 4.3%, from $14.0 million in 2000 to
$13.4 million in 2001. This decrease was primarily a result of lower selling expenses in the United States ($1.3 million) resulting from cost reduction efforts in the second half of 2001 and lower sales commissions on lower U.S. sales, the translation effect of the stronger U.S. dollar in 2001
(approximately $250,000), offset in part by higher expenses in Europe ($670,000) and Japan ($282,000), principally as a result of higher compensation and marketing expenses.
General and administrative expenses. General and administrative expenses increased by
$50,000, or 1.0%, from $5.8 million in 2000 to $5.8 million in 2001. The increase was due to new operations in Japan ($188,000), offset in part by lower expenses in the U.S. ($53,000) and Europe ($15,000) and the effect of the stronger U.S. dollar in 2001 (approximately $70,000).
Depreciation and amortization expenses. Depreciation and amortization expenses decreased by
$372,000, or 12.8%, from $2.9 million in 2000 to $2.5 million in 2001 primarily as a result of assets becoming fully amortized in 2001.
Research and development expenses. Research and development expenses decreased by
$179,000, or 5.0%, from $3.5 million in 2000 to $3.4 million in 2001. The decrease was due to decline across many expense categories in Europe ($286,000) and the translation effect of the stronger U.S. dollar in 2001 ($50,000) on the European R&D expenses, offset in part by increase across many expense categories in the United States ($157,000).
Interest income. Interest income increased by $40,000, from $860,000 in 2000 to $900,000 in 2001 primarily as a result of higher average principal amounts invested in 2001, including loans to SMX (see Liquidity and Capital Resources below).
Other income, net. Net expenses decreased by $114,000 from $157,000 in 2000 to $43,000 in 2001. The decrease resulted principally from lower foreign exchange losses in Europe in 2001.
Income tax expense. Income tax expense decreased by $83,000, from $425,000 in 2000 to
$342,000 in 2001. The net tax expense resulted from an increase in the valuation allowance for the Company’s US deferred income tax assets offset by benefits realized by the utilization of German net operating loss carryforwards which were previously reserved. At December 31, 2001 the Company has deferred income tax assets of approximately $7.7 million (including $1.4 million related to the U.S. operations and $6.3 million related to foreign operations) which are offset by a valuation allowance of
