2 0 0 1 A n n u a l R e p o r t
Sales $ 35.1 $ 40.5 $ 33.1
Gross Profit $ 20.8 $ 25.7 $ 18.9
Gross Margin% 59.3% 63.5% 57.1%
EBITDA $ (0.8) $ 2.5 $ (4.8)
Earnings per share
basic $ (0.26) $ 0.00 $ (0.67)
diluted $ (0.26) $ 0.00 $ (0.67)
Financial
H
Hiigghhlliigghhttss
(in millions of dollars except gross margin and earnings per share) 2001 2000 1999
01 00 99
$ 35.1
$ 33.1
$ 40.5
Sales (in millions)
Gross Margin (%)
Current Ratio
Current Assets $ 29.4 $ 32.3 $ 30.3
Current Ratio 4.1 3.8 5.6
Debt $ 0.1 $ 0.1 $ 0.0
Cash provided by (used in) operating activities $ (0.8) $ 4.7 $ 1.4
Cash and total investments $ 14.1 $ 19.0 $ 16.7
(at December 31, 2001; in millions of dollars except current ratio)
01 00 99
59.3
57.1 63.5
01 00 99
4.1
5.6 3.8
EPS
01 00 99
$ (0.26)
$ (0.67)
$ 0.00
Dear Shareholder,
A year ago in this letter I expressed optimism about a significant economic recovery in the USA by the third quarter of 2001. Few in the manufacturing arena expected the actual continued slump in the economy, let alone the tragic events of September 11, which paralyzed some segments of the economy in a period of extreme uncertainty. Largely as a result of a 31% decrease in sales in the United States, FARO had its first decline in revenues (13% overall) in its history. The drop in sales in the United States was offset somewhat by an approximately level year in Europe and a 24%
increase in sales in the rest of the world.
After a significant use of cash in the first quarter of the year, we quickly implemented an expense reduction program in the second quarter with a goal to return to profitability despite the continuing economic slump. As a result we reversed a use of cash in operations of $2.2 million in the first half of 2001to the generation of cash from operations of $1.4 million in the second half of the year. This initiative also resulted in our first profitable quarter of 2001in the fourth quarter of the year.
Beyond a reaction to the sluggish economy, our streamlining of expenses actually represents a shift in priorities for FARO, from a three-year period (1998-2000) marked by expansion of our product line, our geographic sales base and our customer base by sector, to a period of cost containment aimed at attaining our target financial model in 2003, with a goal of double digit bottom line as a percentage of sales.
FARO Technologies Inc. is a pioneer and leader in the Computer-Aided Manufacturing
Measurement (CAM2) market. 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 that shortens product cycles, 2) the adoption by manufacturers of quality standards such as Six Sigma and ISO-9000 (and its offshoot QS-9000) that stress the measurement of every step in a manufacturing process to reduce or eliminate defects, and 3) the inability of traditional measurement devices to address many manufacturing problems, especially related to large components of products such as automobiles, aircraft and heavy-duty construction equipment.
The acquisition of SpatialMetrix Corporation (‘‘SMX’’) in January 2002 provides FARO with an ability to measure up to 100 feet and completes the hardware product range contemplated for the CAM2 market as defined in 1997 when FARO went public. Economic recovery will have to accompany the achievement of our financial model goal, and in the meantime we will continue to carefully manage expenses to actual revenues.
2001was our first full year of sales of the Faro Control Station measurement system. This product allows customers to create inspection programs (Softcheck Tools姠 inspection programs) on the Faro Control Station by themselves, or to contract with FARO to create these programs. The latter does not require the customer to have inspectors with sophisticated computer skills, and provides FARO with a potential source of ongoing revenues from each product installation. In 2002 we will be trying alternative models for the promotion and delivery of these unique, industrial software products in order to increase their sales.
One measure of the potential market size for the Faro Control Station and Faro Laser Tracker products comes from a related, established technology known as Coordinate Measuring Machines (CMMs). These products do not directly compete with FARO’s products, but perform similar high- accuracy, quality-control functions for many of the same customers as FARO. Traditional CMMs have
been sold in their present configuration for more than twenty years and the number of these in use today is at least 200,000 units, with an average sale price of approximately $75,000 (range $15,000 to over $1.0 million)1. For example, in 1997, 17,900 units were sold, which amounted to total revenues of $1.3 billion.
Most of FARO’s customers own one or more CMMs, suggesting that the number of CMMs might approximate the total market potential for FARO’s products. Over the past seven to ten years FARO and its principal competitors have estimated total unit shipments of articulated arm type CMMs (such as our Control Station) of only 10,000-12,000, and approximately 1,500 laser trackers. Like the CMM in its first 10 years, the Faro Control Station and Faro Laser Tracker have not yet become a
standard. On this basis, we see strong growth potential for FARO’s products.
FARO will strive to maintain its leadership in supplying the CAM2 market during its upcoming growth period while maintaining control over cash flow, and ultimately delivering sustained earnings growth.
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 above and in the accompanying Annual Report on Form 10-K.
1 Total Coordinate Measuring Machine Tools Market: Unit Shipment and Revenue Forecasts (World) 1994-2004. From World Special Machine Tools Market Copyright 1998, Frost & Sullivan
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, 2001 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 PrincipalExecutive 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, 2002, there were outstanding 11,420,384 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 March 20, 2002 was $31,291,852.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
FARO Technologies, 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. 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, 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 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 reduce selling expenses; (v) the impact of competitive product and pricing; (vi) delays in shipping the
Company’s new laser trackers 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.
ITEM 1. 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 step in a manufacturing process to reduce or eliminate defects, and 3) the inability of traditional measurement devices to address many manufacturing problems, especially related to large components of products such as automobiles, aircraft, and heavy duty construction equipment.
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 which 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 principles of total quality management which focuses 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 the level of customer satisfaction. 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 such as 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 that the object being measured be brought to the CMM and that 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 to measure large or unconventionally shaped objects. Moreover,
some parts or assemblies cannot be measured at all using traditional devices, because of problems of access.
An increasingly competitive global marketplace has created a demand for higher quality products with shorter life cycles. 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 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 Control Station and the Control Station Pro (formerly FAROArm) articulated 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 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 or has pending 29 patents in the United States, 19 of which also are held or pending in other jurisdictions. 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. See additional information about FARO’s business as set forth under the caption ‘‘Recent Developments’’ below.
Recent Developments
On January 16, 2002, the Company acquired SpatialMetrix Corporation (‘‘SMX’’), a leading manufacturer and supplier of laser trackers and targets, metrology software, and contract inspection services. In connection therewith, the Company issued 500,000 shares of the Company’s common stock to former SMX shareholders and satisfied certain debt obligations of SMX. Additionally, in connection with the SMX acquisition, the Company issued an additional 350,000 shares of FARO common 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 between April 1, 2001 and the completion of the acquisition. The acquisition will be recorded utilizing the purchase method of accounting.
SMX is based in Kennett Square, Pennsylvania and has approximately 60 employees. The Company believes that this acquisition provides FARO an excellent opportunity to expand its product line with a complementary technology for its existing worldwide customer base. The SMX new generation laser tracker is a high-accuracy, portable 3-dimensional measurement technology with a range of over 100 feet, which when combined with the Company’s Control Station product line and their companion Soft Check Tool and CAM2 software, results in a portable, computer-based product
line capable of handling a much wider range of manufacturing measurement applications.
The Company estimates that SMX has 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 expects to sell at competitive prices compared to 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 2001as part of a settlement of a patent infringement lawsuit. The operations of SMX are expected to contribute favorably to the Company’s revenue growth and results of operations once the new generation tracker begins to ship. The Company expects to start shipping new generation tracker products some time in the first half of 2002. Until then, the operations of SMX are expected to result in revenues of at least $1.0 million per quarter resulting form the sale of parts, comprehensive support, and technology consulting services. Operating expenses are estimated to be approximately $1.9 million per quarter.
FARO Products
The Control Station. The 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 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.
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: A SoftCheck Tool is 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. When the customer changes its part production it then contracts with the Company to create updated or new SoftCheck Tool programs. The Company believes that providing this ‘‘prefabricated’’ inspection software will increase acceptance of the Control Station by new and existing customers as it significantly reduces the need for the customer to have sophisticated programmers and inspectors on the factory floor.
The Control Station Pro. The 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, CAM2 Automotive. In contrast to the basic Control Station, 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 Control Station is often dedicated to the same part.
CAM2Software. CAM2 is the Company’s family of proprietary CAD-based measurement and statistical process control software. The CAM2 product line includes four software programs:
CAM2CAD 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.
CAM2Measure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. CAM2Automotive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.
CAM2SPC 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.
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 7.6% of the Company’s total
revenues in 2001. No customer represented more than 1.1% of the Company’s sales in 2001. The following table illustrates, by vertical market, the Company’s diverse customer base:
AEROSPACE AUTOMOTIVE
ELECTRIC UTILITIES AND MANUFACTURERS
Lear Corporation Audi General Electric
Boeing DaimlerChrysler Westinghouse
Lockheed Martin General Motors Southern California Edison
Northrop Grumman Ford Tennessee Valley Authority
GE Aerospace Honda ABB Power Generation
Orbital Sciences Hyundai Motors Hydro Quebec
Harris Corporation Toyota TurboCare
Dee Howard Nissan Potomac Electric Power
Hughes Brothers Porsche Turbine Technology International
Nordam Repair Div. Volkswagen Siemens Power Corporation
Ball Aerospace BMW
HEAVY EQUIPMENT CONSUMER PRODUCTS MISCELLANEOUS
John Deere Harley Davidson Bill Elliot Racing
Case Corporation Polaris American Sheet Metal
Caterpillar Bombardier Monyo Oil Field Products
Komatsu Dresser Xerox Atlas Foundry
Clark Industries Hewlett Packard Molded Fiberglass
Ingersol Rand Fountain Power Boats Creative Foam Products
AGCO Taylor Made Products Able Design Plastics
Hay and Forage Mercury Marine APW Enclosures
HEAVY EQUIPMENT CONSUMER PRODUCTS MISCELLANEOUS
Melroe Company Amana Applied Composites
Volvo Construction Equipment Braun Corporation Kolenda Tool and Die
Renault Agriculture Eastman Kodak Charmalloy Castings
Sales and Marketing
The Company directs its sales and marketing efforts from its headquarters in Lake Mary, Florida. At December 31, 2001, the Company employed 85 sales and marketing 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, Rivoli, Italy and in Nagoya, Japan. The Company also utilizes 12 North American and 27 international distributors primarily in territories where the Company does not have regional sales offices. 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 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 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 March 1999, the Company entered into an OEM agreement with Brown & Sharpe
Manufacturing Company (‘‘Brown & Sharpe’’), a unit of Hexagon, A. B. of Stockholm, Sweden 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. The Company anticipates that this agreement will be renewed. 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, 2001, the Company employed 31 scientists and technicians in its research and development efforts. Research and development expenses were approximately $3.4 million in 2001 as compared to $3.6 million in 2000 and $3.8 million in 1999. 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 articulated arm in the Control Station and Control Station Pro is to provide orientation and position information with respect to the probe at the end of the arm. 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 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 armlike 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 its 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 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 ⳮ10 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 CADanalyser姞 is a family member for viewing, analyzing and browsing CAD files. CAM2 Measure姞 is complete 3D measurement application written entirely on the ACIS CAD development platform. Family member CAM2 Automotive姞 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姞 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 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, 19 of which are also held or pending in other jurisdictions. The Company also has 12 registered trademarks in the United States, 26 foreign registered trademarks, 6 trademark applications pending in the United States and 4 foreign trademark applications pending. The Company also has 45 URL domain names worldwide registered.
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 timeconsuming, 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 9001standard 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 ISO Standard 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.
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 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 laser trackers and our portable coordinate measurement machines 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, 2001, the Company had orders representing approximately $706,000 in
product sales outstanding. The majority of such orders were shipped by March 20, 2002. Additionally, the Company had orders representing approximately $1.0 million in warranty, training and service sales outstanding at December 31, 2001.
Employees
At December 31, 2001, the Company had 235 full-time employees, consisting of 85 sales and marketing professionals, 29 production staff, 31research and development staff, 44 administrative staff, and 46 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 PrincipalPosition
Simon Raab, Ph.D. .......... 49 Chairman of the Board, Chief Executive Officer, and President
Gregory A. Fraser, Ph.D. ..... 47 Executive Vice President, Secretary, and Treasurer Wendelin K.J. Scharbach ..... 46 Managing Director of FARO Europe
Joanne M. Karimi ........... 43 Vice President of Human Resources Edward M. Pelshaw.......... 43 Vice President of Manufacturing
Allen Sajedi ................ 42 Vice President and Chief Technical Officer
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 CATS GmbH, 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.
Joanne M. Karimi.,has served as Vice President of Human Resources of the Company since July 2001and 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 World Disney Company. Ms. Karimi holds a MBA and a Bachelor’s Degree in Business Management from the University of West Florida.
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 that, 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 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.
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 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, 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 99.1attached 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 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company’s Common Stock, par value $.001per 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:
2001 2000
High Low High Low
First Quarter ................................. 43⁄8 23⁄16 57⁄8 23⁄8
Second Quarter .............................. 27⁄8 113⁄32 329⁄32 23⁄8
Third Quarter ................................ 263⁄64 119⁄32 51⁄2 3 Fourth Quarter ............................... 231⁄64 119⁄64 415⁄16 225⁄32
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 20, 2002, the last sale price of the Company’s Common Stock was $2.74, and there were approximately 81holders of record of Common Stock. The Company believes that there are approximately 1,394 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 repurchase plan. During the three years in the period ended December 31, 2001 the Company did not purchase any shares of its Common Stock in the open market.
ITEM 6. SELECTED FINANCIAL DATA.
The operating results of SMX will be included in the consolidated statements effective at the date of acquisition. The pro forma selected financial data is presented for informational purposes assuming that the Company had acquired SMX as of January 1, 2001. The pro forma selected financial data has been prepared for comparative purposes only and do not purport to be indicative of the results of operations and financial position which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future.
Years Ended December 31
Pro Forma(1) Historical
2001 2001 2000 1999 1998 1997
Statement of Operations Data:
Sales....................... $46,400,491 $35,113,596 $40,452,913 $33,105,740 $27,514,699 $23,516,385 Gross profit.................. 23,617,844 20,809,513 25,704,285 18,944,802 16,223,386 13,905,547 Income (loss) from operations ... (10,261,433) (4,369,710) (697,100) (9,705,477)(2) (5,684,607)(3) 4,932,276 Income (loss) before income
taxes..................... (8,416,101) (2,506,226) 464,198 (8,516,286) (4,480,562) 5,321,260 Net income (loss) ............. (8,757,839) (2,847,964) 39,517 (7,394,822) (4,931,094) 3,206,630 Net income (loss) per common
share:
Basic..................... $ (0.74) $ (0.26) $ — $ (0.67) $ (0.46) $ 0.41 Diluted.................... $ (0.74) $ (0.26) — (0.67) (0.46) 0.39 Weighted average common
shares Outstanding:
Basic..................... 11,882,449 11,032,449 11,021,606 11,015,140 10,632,708 7,831,715 Diluted.................... 11,882,449 11,032,449 11,094,144 11,015,140 10,632,708 8,189,048
At December 31,
Pro Forma(1) Historical
2001 2001 2000 1999 1998 1997
Consolidated Balance Sheet Data:
Working capital............... 18,143,563 $22,303,204 $23,672,736 $24,869,844 $30,997,769 $37,277,545 Total assets.................. 44,441,451 39,654,124 44,699,274 42,103,912 49,120,147 41,192,333 Total debt.................... 55,506 55,506 49,260 26,236 337,710 — Total shareholders’ equity....... 32,488,788 32,336,461 35,955,453 36,599,346 45,375,39138,939,411 (1) The pro forma statement of operations and balance sheet data reflects a change to operations of $1.7 million to record
amortization of intangible assets acquired (including $1.2 million for amortization of goodwill) and an adjustment to reduce interest expense (and accrued liabilities) of $866,000 related to SMX bank debt paid-off upon completion of the acquisition. (2) Includes a charge to write down development and core technology in the amount of $3.1million.
(3) 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, 3D
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 (formerly FAROArm姞) articulated 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 or has pending 29 patents in the United States, 19 of which also are held or pending in other jurisdictions. 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. 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 60.8%, 50.6% and 46.6% of sales in 2001, 2000 and 1999, respectively.
The Company derives revenues primarily from the sale of its 3-D 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 also expects to generate revenue from the sale of its laser tracker product.
Revenue growth has historically 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 January 2001, the Company acquired SpatialMetrix Corporation (‘‘SMX’’), a leading manufacturer and supplier of laser trackers and targets, metrology software, and contract inspection services. The SMX new generation laser tracker is a high-accuracy, portable 3-
dimensional measurement technology. The Company expects to begin shipments of this laser tracker in the second quarter of 2002.
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 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 as costs are projected to be incurred.
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
