2000
annual r e p o r t
FARO Technologies, Inc. and its international subsidiaries are pioneers and market leaders in the computer-aided manufacturing measurement (CAM2) market, which is the final frontier of the computer-aided design (CAD) and the computer-aided
manufacturing (CAM) revolution. The many benefits of computer-aided design have been available to the manufacturing floor because of software and hardware barriers to entry which FARO products overcome.
FARO's product line includes portable, 3D measurement equipment, a broad range of CAD-based inspection software for portable and fixed-base coordinate measurement machines, as well as factory-level statistical process control (SPC) and manufacturing
quality consulting services. FARO's products are developed internally, sold by a direct sales force and supported by a global direct sales, engineering and support organization. The company's products play a key role in the worldwide trend toward CAD-based total quality management for shortened production cycles and for the reduction in scrap and rework. FARO's products are used worldwide by a wide variety of large and small manufacturing companies. The Company has more than 2,300 customers including some of the most widely
recognized names in the world such as Boeing, General Motors, Johnson Controls, DaimlerChrysler, Ford, British Aerospace, Caterpillar, and Honda.
News and information are available at the company's web site at
http://www.faro.com.
Profile
Company
“We are proud of our 5 year
compounded sales growth rate
of 32.6% . Our excellent cash
flow and strong balance sheet
will allow us to maintain our
aggressive investment and
growth strategy“
45 40 35 30 25 20 15 10 5
$
98 99 00
Sales
(in millions)
30 25 20 15 10 5
$
98 99 00
Gross Profit
(in millions)
2.5 2.0 1.5 1.0 .5 0 -.5
EBITDA
(in millions)
For the year ended December 31, 2000, revenues
increased 22.2% to $40.5 million from $33.1 million in the
prior year. Gross profit increased by $6.2 million, from
$19.5 million in 1999 to $25.7 million in 2000. Earnings
per share excluding interest, taxes, depreciation and
amortization (EBITDA) and unusual items* increased to
an income of $2.5 million in 2000 from a loss $0.4 million
in 1999, an increase of $2.9 million.
5-Year Compounded Revenue Growth Rate of 32.6%
(in millions of dollars) 2000 1999 1998
* excluding a charge, in 1999, for the impairment of certain intangible assets and other unusual charges and credits, and a write down of in-process R&D in 1998"
Highlights
Financial
1
98 99 00
Sales $ 40.5 $ 33.1 $ 27.5
Gross Profit* $ 25.7 $ 19.5 $ 16.2
Margin% 63.5% 58.9% 59.0%
Earnings before interest, taxes,
depreciation and amortization* $ 2.5 $ (0.4) $ 0.5
Earnings per share*
basic $ 0.0 $ (0.25) $ (0.16)
diluted $ 0.0 $ (0.25) $ (0.16)
Dear Shareholders
In 2000 our primary goals were to return to profitability while not relinquishing our focus on investment in the medium term and sustaining a 5-year compounded growth rate of at least 30%. The year 2000 was very successful from these points of view and others I describe in this letter.
Leadership in the CAM2 Market
We believe that we are achieving a leadership role in what will become an extremely important and lucrative market segment. We believe the CAM2 market can grow to more than $1 Billion in the next 5 years. Hence, we are motivated tocontinue the geographical, marketing and technological investments required to maintain our lead in this new market. While the goals of corporate investment and those of profitability may be inconsistent in the short-term they are essentially linked in the medium-term.
Corporate Investment & Gross Profit
We have achieved excellent gross margins which drive our cash flows. These improved margins are a direct result of investments in Research and Development, Six Sigma quality programs, lean manufacturing and in the short-term ISO 9000. These initiatives, while expensive are essential to long-term profitability, customer satisfaction,establishing a positive reputation in the market place and funding our growth. In 2000, gross margin improved to 63.5% from 57.2% in 1999.
Geographic Expansion
The second major component of our investment strategy is geographic
penetration. This effort carries a high price- tag in selling and administrative expenses. We currently operate in 9 tax jurisdictions and as many languages. The international scale of our largest customers and our goals of CAM2 market domination make this an essential part of our strategy. In 2000, we opened offices in Japan, Spain, Italy and Canada. Our recent introduction of software products in Japanese and Chinese opens new significant potential markets for 2001.
Worldwide and Regional Sales Growth
We continue to achieve our corporate goal of sustaining a greater than 30% compounded growth rate for the last 5 years. For the year, sales were up 22.2%, to $40.5 million in 2000 from $33.1 million in 1999. Regionally, our strongest sales growth was in the three European countries where we have a direct presence, Germany, the United Kingdom and France, which were up 33%, from $10.6 million in 1999 to $14.1 million in 2000. Sales in the United States were up 13%, from $17.7 million in 1999 to$20 million in 2000. Sales in the remainder of the world, exported from the U.S. and Germany, were up 33%, from $4.8 million in 1999 to $6.4 million in 2000.
Shareholders
To Our
2
3
General and administrative expenses were
$5.8 million, up $800,000 from $5 million in 1999 due to increased professional fees related to audit, tax and special projects and compensation expenses booked in the 4th quarter of 2000. We believe these expenditures will pay off in the form of future reductions in tax rates, improved controls, reduced employee turnover and improvements in other important areas.
R&D expenses for the year, were $3.5 million, down $300,000 or 7.3% from 1999. However, improvements in R&D management
processes motivated by our ISO 9000 registration will mean more new products and improvements in existing products for a given expenditure.
Depreciation and amortization expenses for the year decreased 34.4% to $2.9 million from $4.5 million in 1999 mainly due to the
Cash is King
Even with these continued investments in 2000, we generated over $4.5 million in cash from operations on sales of $40.5 million. We are very proud of the expense manage- ment efforts that have permitted us to invest aggressively while still maintaining positive cash flows. At year-end, our financial condition remained strong, with virtually no debt and $19.0 million of cash and marketable securities. Our shareholders' equity is $36 million and current assets exceed current liabilities by almost 4 times.
Efficiency Improvements
If one looks at the operational improvements in selling and manufacturing adding the cost of sales and the selling expenses they improved from 79.4% of sales in 1999 to 71% of sales in 2000, an improvement of 8.4% of sales.
non-recurring $3.1 million
impairment loss and write down of certain assets in the U.S. in 1999.
Earnings
EBITDA (Earnings before interest, taxes, depreciation and
amortization) for the year improved by $7.3 million from a loss of $4.8 million in 1999, including non- recurring charges, to income of
$2.5 million in 2000. EPS (Earnings per share) for the year increased 67 cents to breakeven from a loss per share of 67 cents in 2000.
New Products & Next Year
The preliminary introduction of our new Control Station product and SoftCheck tool service also occurred in Q3 2000. Our market studies indicated then that some substantial changes in the sales model would need to occur to accommodate this new product. Those changes were begun in Q4 2000 and are nearing completion in Q1 2001.This model includes less field appli- cation engineers and more lower commissioned sales engineers. It also includes significant develop- ments in web delivery and
SoftCheck tool manufacturing. We are hopeful that the positive impact of Control Station and a reinvigorated economy become evident in the third quarter of 2001.
Remember The Mission
In 1997 we predicted a that post IPO window of five years would be a critical period of opportunity as the CAM2 market solidified. We are currently at the three-year-and-six- month point. We look forward to the next year and a half as we continue our strategy towards growth and profitability.
We are proud of our 5 year
compounded sales growth rate of 32.6%. Our excellent cash flow and strong balance sheet will allow us to maintain our aggressive
investment and growth strategy”.
Simon Raab, Ph.D. Chairman of the Board, President and Chief Executive Officer
P.S. Please see the attached CD for a collection of trade articles about your Company, its products and customers.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
嘺 Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 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 (I.R.S. Employer Identification No.) of incorporation or organization)
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:
Name of Each Exchange Title of Each Class 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 嘺 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. □
As of March 20, 2001, there were outstanding 11,030,706 shares of Common Stock. The aggregate market value of the voting stock held by nonaffiliates of the Registrant based on the last sale price reported on the NASDAQ National Market as of March 20, 2001 was $30,665,363.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
This report contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) made by FARO Technologies, Inc. (the ‘‘Company’’). In addition, other written or oral statements, which constitute forward-looking statements, 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,’’ variations of such words, and similar expressions are intended to identify such forward-looking statements. Similarly, statements 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 risks and uncertainties, including those discussed below and elsewhere in this report. The Company’s actual results may differ materially from what is expressed or forecasted in such 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 the following factors: (i) loss of material customers; (ii) the failure to properly manage growth and successfully integrate acquired businesses; (iii) rapid technological change; (iv) an economic slowdown affecting the manufacturing sector; (v) the Company’s growth and operating strategies; (vi) the ability to attract and retain qualified sales, information services and management personnel; (vii) the impact of competition from new and existing competitors; (viii) the financial condition of the Company’s clients; (ix) potential increases in the Company’s costs; (x) fluctuations in the Company’s quarterly financial results; declaration and payment of dividends; and (xi) the loss of either of the Company’s executive officers. Additional factors that could cause actual results to differ materially are the factors detailed in Items 1 through 3 and 7 of this report.
ITEM 1. BUSINESS. Industry Background
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. Computer-aided design (‘‘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. The benefits of CAD are significant. The CAD process offers a three-dimensional, highly efficient and inherently flexible alternative to traditional design methods. Many manufacturers have also recently adopted computer-aided manufacturing (‘‘CAM’’) technology, in which CAD data directs machines in the manufacturing process. CAM has further improved the efficiency and quality of the production of manufactured goods.
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 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 measurements, their use for complex measurements is time-consuming and limited in adaptability. Test fixtures (customized fixed tools used to make comparative measurements of 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 but have only recently begun to provide a link to the CAD model of the object being measured. Fixed-base CMMs require that the object being measured be brought to the CMM and that the object fit within the CMMs measurement grid. In addition, conventional CMMs generally operate in metrology laboratories or environmentally stable quality inspection departments of manufacturing facilities rather than on the factory floor.
Isolation from the factory floor and the relatively small measurement grids of CMMs limit their utility to small, readily portable workpieces that require high levels of measurement precision. 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 to measure large or unconventionally shaped objects.
An increasingly competitive global marketplace has created a demand for higher quality products with shorter life cycles. 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. In most cases, only a relatively small percentage of the components of a manufactured product require highly precise measurements (less than one-thousandth of an inch). Conventional CMMs provide
manufacturers with very precise measurement capabilities and cost up to $2 million per unit. However, they are not responsive to manufacturers’ increasing need for cost-effective intermediate precision measurement capabilities. The Company believes that a greater percentage of components require intermediate precision measurements (between one- and twenty-thousandths of an inch). In the absence of intermediate precision measuring systems, manufacturers often are unable to make appropriate measurements or part-to-CAD comparisons during the manufacturing process, resulting in decreased productivity, poor product quality and unacceptable levels of product rework and scrap. Manufacturers increasingly require more rapid design, greater control of the manufacturing process, tools to compare components to their CAD specifications and the ability to measure precisely components that cannot be measured or inspected by conventional CMMs. 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 FAROArm姞 articulated measuring device 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 uses the acronym ‘‘CAMM’’ 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 or has pending 29 patents in the United States, 17 of which also are held or pending in other jurisdictions. The Company’s products have been purchased by more than 2,300 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as Audi, Boeing, British Aerospace, Caterpillar, DaimlerChrysler, General Electric, General Motors, Honda, Johnson Controls, Komatsu Dresser, Lockheed Martin, Siemens and Volkswagen among many others.
FARO Products
The FAROArm姞. The FAROArm姞 is a portable, six-axis, instrumented, articulated device that approximates the range of motion and dexterity of the human arm. Each articulated arm is comprised of three major joints, each of which may consist of one, two or three axes of motion. The FAROArm姞 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 as 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.
The FAROArm姞 has been designed as an open architecture system. The communications parameters of the on-board processors have the ability to combine advanced sensing probes, integrate with conventional CMM software and communicate with different CAD software packages and a variety of computer operating systems. This open architecture is designed to provide for easy integration of the FAROArm姞 into the manufacturing environment. The customer’s ability to use an installed base of computing hardware and software further reduces the cost of installation and training while initiating the transition to the Company’s preferred group of CAD-based products. To encourage integration of the FAROArm姞 into the manufacturing environment, the Company provides a group of seamless interface drivers for leading CAD/CAM packages. The Company also provides a full serial communication command protocol to the FAROArm姞 for customers who write their own interfaces.
The Company offers several models of the FAROArm姞 under three product lines: the Gold Series, Silver Series and the Bronze Millenium Series.
Gold Series. The Gold Series models are the Company’s highest precision (P.001 to P.005 inches) measuring devices and are available in four, six, eight, ten and twelve foot measurement diameters. These models are used for factory floor inspection and fit-checking applications requiring higher precision than the Silver Series. Depending on the component of the CAM2 software, the Gold Series models are priced between $50,000 and $60,000 when sold as a turnkey system including hardware, computer and software and $47,000 without computer and software.
Silver Series. The Silver Series models are the Company’s intermediate precision (P.003 to P.007 inches) measuring devices and are available in eight and twelve foot measurement diameters. These models are most frequently used for factory floor inspection and
fit-checking applications. Depending on the component of the CAM2 software, the Silver Series models are priced at $42,000 and $50,000 when sold as a turnkey system including hardware, computer and CAM2 software and $37,000 without computer and software.
Bronze Millennium Series. The Bronze Series models are the Company’s lighter-weight, medium precision (P.002 to P.007 inches) measuring devices and are available in four, six, eight and ten foot measurement diameters. These models are most frequently used for applications that do not require high-level precision, such as 3-D modeling, mold production and reverse- engineering applications. Depending on the component of CAM2 software, the Sterling Series models are priced between $34,000 and $42,000 when sold as a turnkey system including hardware, computer and CAM2 software and $27,000 without computer and software.
The Control Station with SoftCheck Tools. The Control Station was introduced in late 2000 as a practical factory based 3D measurement solution for manufacturers with repetitive part
production, minimal production engineering staff and assembly staff, and with little or no computer, CAD or metrology experience. The Control Station consists of a FARO Arm, a touch-screen computer and one or more SoftCheck Tools. The Control Station can be simply viewed as a player for custom delivered SoftCheck tools specifically developed by FARO for the Customer’s parts. A SoftCheck Tool is custom software program designed to lead an assembler through the inspection process. The SoftCheck Tools can be attained through the web or by direct communication with the Company’s applications engineering staff.
CAM2 Software. CAM2 is the Company’s family of proprietary CAD-based measurement and statistical process control software. The CAM2 product line includes six (6) software programs:
CAM2 CAD Analyzer姞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 CAD Analyzer姞 sells for $6,500.
CAM2 Design姞allows users to measure older parts without data files, or models of
potential products and convert them into CAD files for manufacturing. It is built on the AutoCAD姞 software development platform, which allows users to benefit from extensive hardware, software, interfacing and software support libraries and teaching products. CAM2 Design姞 is offered with the FAROArm姞 and is also offered as an unbundled product. When unbundled from the
FAROArm姞, CAM2 Design姞 sells for $26,000. As part of a product rationalization effort in 2000, CAM2 Design was discontinued. The increased performance of the CAM2 Measure product and the diminishing reverse engineering markets were contributing factors to this decision.
CAM2 Measure姞allows users to compare measurements of manufactured components or assemblies with the corresponding CAD data for the components or assemblies. CAM2
Measure姞 is offered with the FAROArm姞 and is also offered as an unbundled product. When unbundled from the FAROArm姞, CAM2 Measure姞 sells for $10,000.
CAM2 Automotive姞also allows users to compare measurements of manufactured components with the corresponding CAD file. Unlike CAM2 Measure姞, CAM2 Automotive姞 is especially suited to the measurement of very large components with large CAD files, typical of those in the automotive industry. CAM2 Automotive姞 is offered with the FAROArm姞 and is also offered as an unbundled product. When unbundled from the FAROArm姞, CAM2 Automotive姞 sells for $20,000.
CAM2 SPC Graph姞allows the user to organize and compare measurement results from the FAROArm姞 in the form of pictures, tables, and charts, for the purpose of statistical process control. CAM2 SPC Graph姞 is tailored to an individual user. CAM2 SPC Graph姞 sells for $1,000.
CAM2 SPC Process姞allows for the collection, organization, and presentation of
measurement data factory-wide. Not limited to measurements from the FAROArm姞, CAM2 SPC Process姞 accepts data from CMMs and other computer-based measurement devices from many different measurement applications along the production line. CAM2 SPC Process姞 sells for
$90,000 per assembly line.
Specialty Products. The Company licenses and supports certain specialty products based on its articulated arm technology 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 more than 2,300 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 14.0% of the Company’s total revenues in 2000. No customer represented 4.0% or more of the Company’s sales in 2000. The following table illustrates, by vertical market, the Company’s diverse customer base:
AEROSPACE Boeing Lockheed Martin Northrop Grumman
GE Aerospace Orbital Sciences
Dee Howard Hughes Brothers Nordam Repair Div.
Ball Aerospace
AUTOMOTIVE DaimlerChrysler
General Motors Ford Honda Toyota Nissan Porsche Volkswagen
BMW
ELECTRIC UTILITIES AND MANUFACTURERS
General Electric Westinghouse Southern California Edison Tennessee Valley Authority ABB Power Generation
Hydro Quebec TurboCare Potomac Electric Power Turbine Technology International HEAVY EQUIPMENT
John Deere Case Corporation
Caterpillar Komatsu Dresser
Clark Industries Ingersoll Rand
AGCO Hay and Forage Melroe Company Volvo Construction Equipment
Renault Agriculture
CONSUMER PRODUCTS Harley Davidson
Polaris Bombardier
Xerox Hewlett Packard Fountain Power Boats
Taylor Made Products Mercury Marine
Amana Braun Corporation
Eastman Kodak
MISCELLANEOUS Bill Elliot Racing American Sheet Metal Monyo Oil Field Products
Atlas Foundry Molded Fiberglass Creative Foam Products
Able Design Plastics APW Enclosures Applied Composites Kolenda Tool and Die
Charmalloy Castings
Sales and Marketing
The Company directs its sales and marketing efforts from its headquarters in Lake Mary, Florida. At December 31, 2000, the Company employed 101 sales/application engineering professionals who operate from the Company’s headquarters, and include eight North American regional sales
representatives located in Charlotte, Chicago, Columbus (Ohio), Dallas, Detroit, Los Angeles, Seattle and Toronto, three German regional sales offices in Stuttgart, Munich, and Gladbeck, and sales offices located in Coventry, United Kingdom, suburban Paris, France, in Barcelona, Spain and in Nagoya, Japan. The Company also utilizes 14 North American and 24 international distributors primarily in territories where the Company does not have regional sales offices. See Footnote 15 of 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 customer opportunity is identified, the Company employs a team-based sales approach involving inside and outside sales personnel who are supported by application engineers.
The Company employs a variety of marketing techniques, including direct mail, trade shows, and advertising in trade journals, and proactively seeks publicity opportunities for customer testimonials. Management believes that word-of-mouth advertising from the Company’s existing customers provides an important marketing advantage. The Company also uses a computerized sales and marketing software system with telemarketing, lead tracking and analysis, as well as customer support capabilities. Finally, the Company utilizes its state-of-the-art web site to promote its product offerings. Each of the Company’s sales offices is linked electronically to the Company’s
headquarters.
In June 1996, the Company entered into an Original Equipment Manufacturer (OEM) agreement with Mitutoyo Corporation (‘‘Mitutoyo’’), a Japanese company that is the world’s largest manufacturer of metrology tools. Mitutoyo markets the FAROArm姞 in Japan under the name SPINARM姞. The agreement, which grants Mitutoyo non-exclusive distribution right in Japan, expires in June 2001 and is renewable for successive one-year terms.
In March 1999, the Company entered into an OEM agreement with Brown & Sharpe
Manufacturing Company (‘‘Brown & Sharpe’’), a North Kingstown, Rhode Island company that is a world leader in the manufacture of traditional CMMs and other metrology products. Brown & Sharpe markets the FAROArm姞 worldwide under the name GAGE 2000 A. The agreement, which grants Brown & Sharpe non-exclusive distribution right worldwide, expires in March 2002, and is renewable for successive one-year terms.
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姞 and the family of CAM2 products. Significant efforts are also being directed toward the development of new Control Station measurement technologies and additional features for existing products. See ‘‘Technology’’.
At December 31, 2000, the Company employed 37 scientists and technicians in its research and development efforts. Research and development expenses were approximately $3.6 million in 2000 as compared to $3.8 million in 1999 and $2.6 million in 1998. 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 the FAROArm姞 and The Control Station is to provide orientation and position information with respect to the probe at the end of the FAROArm姞. 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.
To accomplish this measurement function, the FAROArm姞 and The Control Station is designed as an articulated arm 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.
The Company’s products are the result of a successful integration of state-of-the-art
developments in mechanical and electronic hardware and applications software. The unique nature of the Company’s technical developments is evidenced by the Company’s numerous U.S. and
international patents. The Company maintains low cost product design processes by retaining development responsibilities for all electronics, hardware and software.
Mechanical Hardware. The FAROArm姞 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.
Electronics. An on-board computer that is designed to handle complex analyses of joint data as well as communications with a variety of host computers processes the rotational information
for each joint. 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, 32-bit application family written for the most recent PC- based technology. CAM2 has been entirely designed and programmed by the Company utilizing field input and industry wide beta site installations. CAM2 CAD analyser姞 is a family member for viewing, analyzing and browsing CAD files. CAM2 Design姞 is a family member primarily used for reverse engineering and is written as an AutoCAD runtime extension (ARX) that is the AutoCAD Application Programming Interface (API). Family member CAM2 Measure姞 is a simplified version of Design for pure measurement applications written entirely on the ACIS CAD development platform. Family member CAM2 Automotive姞 is a measurement software designed for large CAD files and specific Automotive applications and is written using a proprietary graphics display engine. Family member CAM2 SPC Process姞 is designed for plant wide dimensional data acquisition and presentation in classical SPC (Statistical Process Control) formats for plant-wide quality control.
All the CAM2 family members are written in the C++ development language using Microsoft Foundation Class (MFC) standards. The software fully implements 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 beta sites and a well-developed system for tracking and implementing market demands. The Company’s software products are available in seven (7) languages worldwide.
Intellectual Property
The Company holds or has pending 29 patents in the United States, 17 of which are also held or pending in other jurisdictions. The Company also has 13 registered trademarks in the United States, 25 foreign registered trademarks, 8 trademark applications pending in the United States and
3 foreign trademark applications pending. The Company also has internet domain names registered worldwide.
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 products primarily at its headquarters in Lake Mary, Florida. 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 ISO 9001 standard since July 1998. Yearly 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 ISO Standard Registrar, and is expected to increase customer confidence in the Company’s products and services worldwide.
In May 2000, the Company received Accreditation to ISO/IEC Guide 25, which is a standard for Calibration and Testing Laboratories. The Company’s Scope of Supply for this accreditation is:
‘‘Calibration and Certification of Measuring and Test Equipment.’’ Competition
The broad market for measurement devices, which include hand-measurement tools, test fixtures and conventional, fixed-base CMMs, 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 FAROArm姞 and related software are Romer SRL (France) and Romer, Inc., a Cimcore Company (California). Prior to 2000 these two companies were a joint venture. 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. The Company also has an established, competitor in Japan that markets a portable measuring device. There can be no assurance that such companies will not devote additional resources to the development and marketing of products that compete with those of the Company.
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, 2000, the Company had orders representing approximately $1.0 million in product sales outstanding. The majority of such orders were shipped by March 20, 2001. Additionally, the Company had orders representing approximately $1.3 million in warranty, training and service sales outstanding at December 31, 2000.
Employees
At December 31, 2000, the Company had 232 full-time employees, consisting of 101
sales/application-engineering professionals, 37 production staff, 37 research and development staff, 40 administrative staff, and 17 customer service 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 for 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........... 48 Chairman of the Board, Chief Executive Officer, and President Gregory A. Fraser, Ph.D. ..... 46 Executive Vice President, Secretary, and Treasurer
Wendelin K.J. Scharbach..... 45 Managing Director of FARO Europe Edward M. Pelshaw ......... 42 Vice President of Manufacturing Allen Sajedi................ 41 Chief Engineer
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.
Wendelin K.J. Scharbach a co-founder of a predecessor of FARO Europe, the Company’s principal subsidiary in Europe has served as Managing Director of FARO Europe since May 1998. Prior to that Mr. Scharbach was Managing Director of CATS GmbH. Mr. Scharbach holds a Bachelors Degree in Mechanical Engineering from University of Karlsruhe in Germany.
Edward M. Pelshawhas served as Vice President of Manufacturing of the Company since January 2000. Prior to that Mr. Pelshaw served as Director of Manufacturing of the Company since 1997, and as Purchasing Manager since 1996. Prior to joining the Company in 1996, Mr. Pelshaw served as Senior Supply and Logistic Officer with the U.S. Army. Mr. Pelshaw holds an MBA from the Webster University and a Bachelor of Science degree from Hawaii Pacific University.
Allen Sajedihas served as Chief Engineer of the Company since 1990. Mr. Sajedi holds a Bachelor of Mechanical Engineering from McGill University, Montreal, Canada.
ITEM 2. PROPERTIES.
The Company’s headquarters and principal operations are located in a leased building in Lake Mary, Florida containing approximately 35,000 square feet. The Company’s European headquarters are located in a leased building in Stuttgart, Germany containing approximately 14,000 square feet. The Company leases and operates a combined sales and training facility located in Wixom, Michigan containing approximately 4,300 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 as those needs develop.
In addition, the Company has seven sales offices in Europe, and a sales office in each, Canada and Japan. The Company leases all of the sales offices. The information required by the remainder of this Item is incorporated herein by reference to Exhibit 99.1 attached hereto.
ITEM 3. 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 4. 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 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company’s Common Stock began trading on the NASDAQ Stock Market in September 1997 under the symbol FARO. The following table sets forth the high and low sale price of the Company’s Common Stock for its two most recent fiscal years:
2000 1999
High Low High Low
First Quarter.................................................. 57⁄8 23⁄8 7 33⁄4
Second Quarter ............................................... 329⁄32 23⁄8 67⁄16 45⁄8
Third Quarter ................................................. 51⁄2 3 6 23⁄4
Fourth Quarter ................................................ 415⁄16 225⁄32 5 21⁄4
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.
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 20, 2001, the last sale price of the Company’s Common Stock was $2.63, and there were
approximately 76 holders of record of Common Stock. The Company believes that there are approximately 1,550 beneficial owners of its Common Stock.
On August 26, 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 the fiscal year 1998, the Company purchased 40,000 shares of its Common Stock in the open market under such stock repurchased plan. During the two years in the period ended December 31, 2000 the Company did not purchase any shares of its Common Stock in the open market.
ITEM 6. SELECTED FINANCIAL DATA.
Years Ended December 31
2000 1999 1998 1997 1996
Statement of Operations Data:
Sales .................. $40,452,913 $33,105,740 $27,514,699 $23,516,385 $14,656,337 Gross profit ............. 25,704,285 18,944,802 16,223,386 13,905,547 8,170,069 Income (loss) from
operations ............ (697,100) (9,705,477)(1) (5,684,607)(2) 4,932,276 2,710,075 Income (loss) before
income taxes .......... 464,198 (8,516,286) (4,480,562) 5,321,260 2,522,554 Net income (loss) ........ 39,517 (7,394,822) (4,931,094) 3,206,630 1,406,662 Net income (loss) per
common share:
Basic .................. $ — $ (0.67) $ (0.46) $ 0.41 $ 0.20 Diluted ................. — (0.67) (0.46) 0.39 0.19 Weighted average common
shares Outstanding:
Basic .................. 11,021,606 11,015,140 10,632,708 7,831,715 7,000,000 Diluted ................. 11,094,144 11,015,140 10,632,708 8,189,048 7,349,041
At December 31
2000 1999 1998 1997 1996
Consolidated Balance Sheet Data:
Working capital ........... $23,672,736 $24,869,844 $30,997,769 $37,277,545 $3,832,424 Total assets .............. 44,699,274 42,103,912 49,120,147 41,192,333 7,815,668 Total debt................ 49,260 26,236 337,710 — 1,501,267 Total shareholders’ equity... 35,955,453 36,599,346 45,375,391 38,939,411 3,773,699 (1) Includes a charge to write down development and core technology in the amount of $3.1 million. (2) Includes a charge for in-process research and development in connection with the German
acquisition in the amount of $3.2 million.
ITEM 7. 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, 3-D
measurement systems that are used in a broad range of manufacturing and industrial applications. The Company’s principal products are the FAROArm姞 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. The Company is a pioneer in the development and marketing of 3-D measurement
technology in manufacturing and industrial applications and currently holds or has pending 29 patents in the United States, 17 of which also are held or pending in other jurisdictions. The Company’s products have been purchased by more than 2,300 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as Audi, Boeing, British Aerospace, Caterpillar, DaimlerChrysler, General Electric, General Motors, Honda, Johnson Controls, Komatsu Dresser, Lockheed Martin, Siemens and Volkswagen.
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. 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 and Japan and Spain in 2000. International sales represented 50.6%, 46.6% and 46.4% of sales in 2000, 1999 and 1998, respectively.
The Company derives revenues primarily from the sale of the FAROArm姞, its six-axis articulated measuring device, and its multi-faceted CAM2 software. Revenue related to the Company’s 3-D measurement equipment and related software is recognized upon shipment as the Company considers the earnings process substantially complete as of the shipping date. Revenue from sales of software only is recognized when no further significant production, modification or customization of the software is required and where the following criteria are met: persuasive evidence of a sales agreement exists, delivery has occurred, and the sales price is fixed or determinable and collectible. Revenues resulting from sales of comprehensive support, training and technology consulting services are recognized as such services are performed. Extended maintenance plan revenues are
recognized in proportion to maintenance costs projected to be incurred. The Company warrants its products against defects in design, materials and workmanship for one year. A provision for
estimated future costs relating to warranty expenses is recorded when products are shipped. Costs relating to extended maintenance plans are recognized as incurred.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 summarizing its views of applying generally accepted accounting principles to revenue recognition in financial statements. The Company’s policy of revenue recognition is consistent with this bulletin.
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 and expanded promotional efforts which include a multilingual web site and Company demo CD. In 2000 the Company introduced The Control Station with SoftCheck Tools, new accessory items such as The FARO Rail, the FARO Powerhouse and new versions of all the members of the CAM2 software family.
In addition to providing a one-year basic warranty without additional charge, the Company offers its customers one, two and three-year extended maintenance contracts, which include on-line help
