2007 ANNUAL REPORT
T H E M E A S U R E O F S U C C E S S
®With approximately 16,000 installations and 7,400 customers globally, FARO Technologies Inc. designs, develops and markets portable, computerized measurement devices and software used to create digital models - or to perform evaluations against an existing model - for anything requiring highly detailed 3-D measurements, including part and assembly inspection, factory planning and asset documentation, as well as specialized applications ranging from surveying, recreating accident sites and crime scenes to digitally preserving historical sites.
FARO’s technology increases productivity by dramatically reducing the amount of on-site measuring time, and the various industry-specifi c software packages enable users to process and present their results quickly and more effectively.
Principal products include the world’s best-selling portable measurement arm - the FaroArm; the world’s best-selling laser trackers - the FARO Laser Tracker X and Xi; the FARO Laser ScanArm; FARO Laser Scanner LS; The FARO Gage, Gage-PLUS and PowerGAGE; and the CAM2 family of advanced CAD-based measurement and reporting software.
For more information, visit our eight-language website at www.faro.com.
OUR MISSION
Enabling our customers’ products and processes to be the best in the world.
OUR VISION
To remain the world’s leading three-dimensional measurement company.
In millions of dollars except EPS and Current Ratio 2007 2006 2005
Sales $ 191.6 $ 152.4 $ 125.6
Gross Profi t $ 115.0 $ 89.5 $ 72.9
Gross Margin 60.0% 58.7% 58.1%
Operating Income $ 19.1 $ 8.3 $ 10.2
Operating Margin 9.9% 5.5% 8.2%
Diluted Earnings Per Share $ 1.15 $ 0.56 $ 0.57
Current Ratio 4.7 3.5 3.8
Five-Year Compounded Annual Growth Rate in Sales:
32.9%
$191.6
2007
$152.4
2006
$125.6
2005
Sales (in millions)
$115.0
2007
$89.5
2006
$72.9
2005
Gross Profi t (in millions)
$1.15
2007
$0.56 2006
$0.57 2005
Diluted EPS (in dollars)
A little over ten years ago, FARO became a publicly- traded company on the NASDAQ stock exchange with a dream of putting portable, three-dimensional measurement equipment into the hands of every manufacturer in the world. Today, FARO is the world leader in three-dimensional measurement. With over 16,000 installations around the world and more than 7,400 customers, we generated more in pre-tax income in 2007 than we did in gross sales ten years ago when we went public. Over the last fi ve years, our compound annual growth rate has accelerated to 33%, good enough to be recognized by Forbes Magazine as one of America’s 25 fastest growing technology companies.
FARO is stronger now than it’s ever been. We have developed into a world-class enterprise with world-class talent. No matter where you go, from Lake Mary to Stuttgart to Singapore and all our locations in between, FARO employees are easy to identify: passionate, creative, accountable and well-balanced. It’s that team that enables the success we achieve every day.
JUST GETTING STARTED
Despite our rapid growth and continuous market penetration, the long-term opportunity for FARO is still the most exciting piece of this story. Our traditional core markets continue to be highly under-penetrated. At the same time, we consistently identify new markets and new applications for the technology in our portfolio today as well as the technology we envision being part of the portfolio in the future. We remain confi dent that the demands for accurate three dimensional data will continue to grow, not just in manufacturing, but also in a broad array of commercial, industrial and consumer-related areas.
FARO today covers more than twenty countries with our own Account Managers. However, that’s only 10% of the countries around the world. In the United States, there are 350 Standard Industry (SIC) codes and we’ve sold into all but 18 of them, 95% of the total available. Yet, when you look at the total customer population within those same codes, we’ve actually sold to less than 1%. The data is similar in Europe and Asia. Clearly, we have a lot more work to do.
DISCERN, DREAM, DELIVER
In last year’s letter, I introduced one of our core cultural principles: “Live with Passion.” I also introduced FARO’s shared mission and vision for the company: “Enable our customers’ products and processes to be the best in the world” (Mission); and “Remain the world’s leading three- dimensional measurement company” (Vision). This year I want to introduce you to what we call our 3D Guiding Principles for executing on the Mission and Vision:
“Discern, Dream, Deliver.”
“Discern” our customers’ needs. Delivering what customers want and delivering what they need are two very different things. The FARO way focuses on gaining an intimate understanding of the needs of our customers, whether they’re external or internal. To “discern” means truly understanding pain, complexity or roadblocks and developing the best solution (not always the most obvious solution) for eliminating those obstacles. Discerning is not just listening. Discerning goes much further. Discerning weeds through the symptoms and gets to the root cause. The solution created from understanding true root cause is far more powerful than the quick fi x generated by taking action on symptoms.
“Dream” beyond our reach. Dreaming is an activity to be encouraged and rewarded again and again. The dreams of one individual can far outweigh the logic of the group. As such, the collective dreams of the group should far outweigh anything else. Don’t get me wrong, logic is a necessary asset. Logic allows for sound decision making and setting reasonable goals.
However, the world is littered with logical people and logical companies who ultimately, failed. Dreamers continuously challenge the status quo because they don’t respect the status quo. Dreamers set lofty goals, suffer failures along the way, learn from them, and ultimately get where they’re headed. It is a team who dreams that allows us to discern our customers’ needs and take the solution to a level far beyond anyone’s expectations. It’s a team of dreamers who create solutions that customers don’t even recognize they need yet. And it’s a team of dreamers who stays not one step, but one hundred steps ahead of the rest.
“Deliver” on our commitments. Discerning our customers’ needs and dreaming beyond our reach provide the future platforms and ongoing competitiveness to keep us in the lead. However, delivering on our commitments keeps us in the game. As I stated earlier, accountability is one
Letter to
Shareholders
of the hallmark characteristics of FARO employees around the world. The FARO team lives by a detailed operational metrics dashboard that highlights the good (and the bad) in everything from on-time delivery and cost to produce to service turn-around time and closure rate of quality non-conformances. Internal programs like The Power of One allow us to focus our efforts on key performance improvement areas. That discipline ensures we have tangible methods for measuring the results of our dreams.
LOOKING AHEAD
No doubt, 2007 was a fantastic year:
• Sales of $191.6 million, up 25.7%
• Gross Margin of 60.0%, up 130 basis points
• Net Income of $18.1 million, up 120.7%
• Cash Flow from Operations of $21.6 million, up 121.4%
While delivering that fi nancial return in 2007, we also introduced four new state of the art products, settled our ongoing patent case with no penalty or further cash impact, and reached a tentative settlement with the Department of Justice and the Securities and Exchange Commission with regards to our issue in China.
In 2008, we’re projecting a continuation of the performance we’ve come to expect. In particular, we’re still forecasting sales growth of 20-25% and gross margin of 58-60%. FARO is a dynamic company. Markets are continuously changing and evolving and we feel we have the right customer solutions and the right team to evolve with them.
As always, my thanks go to all of you, our investors, who put your faith in us every day by letting us put your hard- earned money to work. Likewise, our customers continue to place trust in FARO to make their products and processes the best in the world. And fi nally, my heartfelt thanks go out to the FARO team around the world who make this such an amazing place to work. I look forward to our ongoing success.
Best regards,
Jay W. Freeland President & CEO
In 2007, FARO celebrated it’s 10th anniversary as a public company by ringing the closing bell at the NASDAQ stock exchange.
Forbes Magazine recently named FARO one of America’s 25 fastest growing technology companies.
Photo courtesy of NASDAQ.Cover reproduced with permission of Forbes, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007 OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to Commission File Number 0-23081
FARO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-3157093
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
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 registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, par value $.001 NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No Í
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ‘ No Í
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 Í 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. Yes ‘ No Í
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ‘ Accelerated filer Í Non-accelerated filer ‘ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ‘ No Í
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant on June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $428 million (based on the last sale on such date on the NASDAQ Global Market).
As of March 5, 2008, there were outstanding 16,662,004 shares of the Registrant’s common stock. DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s proxy statement for the 2008 Annual Meeting of Shareholders are incorporated
TABLE OF CONTENTS
Page
PART I . . . 1
Item 1. Business. . . 2
Item 1A. Risk Factors. . . 9
Item 1B. Unresolved Staff Comments. . . 15
Item 2. Properties. . . 16
Item 3. Legal Proceedings. . . 16
Item 4. Submission of Matters to a Vote of Security Holders. . . 19
PART II . . . 20
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity. . . 20
Item 6. Selected Financial Data. . . 22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. . . 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . 33
Item 8. Financial Statements and Supplementary Data. . . 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . 61
Item 9A. Controls and Procedures. . . 61
Item 9B. Other Information. . . 62
PART III . . . 63
Item 10. Directors, Executive Officers, and Corporate Governance. . . 63
Item 11. Executive Compensation. . . 63
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. . . 63
Item 13. Certain Relationships and Related Transactions and Director Independence. . . 63
Item 14. Principal Accountant Fees and Services. . . 63
PART IV . . . 64
Item 15. Exhibits and Financial Statement Schedules. . . 64
PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION FARO Technologies, Inc. (“FARO”, the “Company”, “us”, “we”, or “our”) has made “forward-looking statements” in this report (within the meaning of the Private Securities Litigation Reform Act of 1995). Statements that are not historical facts or that describe our plans, beliefs, goals, intentions, objectives,
projections, expectations, assumptions, strategies, or future events are forward-looking statements. In addition, words such as “may,” “will,” “believe,” “plan,” “should,” “could,” “seek,” “expect,” “anticipate,” “intend,”
“estimate,” “goal,” “objective,” “project,” “forecast,” “target” and similar words, or discussions of our strategy or other intentions identify forward-looking statements. Other written or oral statements that constitute forward- looking statements also may be made by the Company from time to time.
Forward-looking statements are not guarantees of future performance and are subject to a number of known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Consequently, undue reliance should not be placed on these forward-looking statements. The Company does not intend to update any forward-looking statements, whether as a result of new information, future events, or otherwise, unless otherwise required by law. Important factors that could cause a material difference in the actual results from those contemplated in such forward- looking statements include, among others, and those elsewhere in this report and the following:
• the Company’s inability to further penetrate its customer base;
• development by others of new or improved products, processes or technologies that make the Company’s products obsolete or less competitive;
• the Company’s inability to maintain its technological advantage by developing new products and enhancing its existing products;
• the Company’s inability to successfully identify and acquire target companies or achieve expected benefits from acquisitions that are consummated;
• the cyclical nature of the industries of the Company’s customers and the financial condition of its customers;
• the fact that the market potential for the computer-aided measurement (“CAM2”) market and the potential adoption rate for the Company’s products are difficult to quantify and predict;
• the inability to protect the Company’s patents and other proprietary rights in the United States and foreign countries;
• fluctuations in the Company’s annual and quarterly operating results and the inability to achieve its financial operating targets as a result of a number of factors including, without limitation (i) litigation and regulatory action brought against the Company, (ii) quality issues with its products, (iii) excess or obsolete inventory, (iv) raw material price fluctuations, (v) expansion of the Company’s manufacturing capability and other inflationary pressures, (vi) the size and timing of customer orders, (vii) the amount of time that it takes to fulfill orders and ship the Company’s products, (viii) the length of the
Company’s sales cycle to new customers and the time and expense incurred in further penetrating its existing customer base, (ix) increases in operating expenses required for product development and new product, marketing, (x) costs associated with new product introductions, such as product development, marketing, assembly line start-up costs and low introductory period production volumes, (xi) the timing and market acceptance of new products and product enhancements, (xii) customer order deferrals in anticipation of new products and product enhancements, (xiii) the Company’s success in expanding its sales and marketing programs, (xiv) start-up costs associated with opening new sales offices outside of the United States, (xv) fluctuations in revenue without proportionate adjustments in fixed costs, (xvi) the efficiencies achieved in managing inventories and fixed assets, (xvii) investments in potential acquisitions or strategic sales, product or other initiatives, (xviii) shrinkage or other
inventory losses due to product obsolescence, scrap or material price changes, (xix) adverse changes in the manufacturing industry and general economic conditions, (xx) compliance with government regulations including health, safety, and environmental matters, (xxi) the ultimate costs of the Company’s monitoring obligations in respect of the Foreign Corrupt Practices Act (“FCPA”) matter; and (xxii) other factors noted herein;
• changes in gross margins due to changing product mix of products sold and the different gross margins on different products;
• the Company’s inability to successfully implement the requirements of Restriction of use of Hazardous Substances (“RoHS”) and Waste Electrical and Electronic Equipment (“WEEE”) compliance into its products;
• the inability of the Company’s products to displace traditional measurement devices and attain broad market acceptance;
• the impact of competitive products and pricing in the CAM2 market and the broader market for measurement and inspection devices;
• the effects of increased competition as a result of recent consolidation in the CAM2 market;
• risks associated with expanding international operations, such as fluctuations in currency exchange rates, difficulties in staffing and managing foreign operations, political and economic instability, compliance with import and export regulations, and the burdens and potential exposure of complying with a wide variety of U.S. and foreign laws and labor practices;
• the inability to reach a final resolution of the FCPA matter with the DOJ or the SEC or reaching a resolution on the FCPA matter that differs from the resolution currently anticipated by the Company whether with respect to monetary sanctions ultimately paid by the Company to the SEC or DOJ or otherwise;
• the amount of monetary sanctions ultimately paid by the Company to the SEC and the DOJ in connection with the FCPA matter;
• the loss of the Company’s Chief Executive Officer or other key personnel;
• difficulties in recruiting research and development engineers, and application engineers;
• the failure to effectively manage the Company’s growth;
• variations in the effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis; and
• the loss of key suppliers and the inability to find sufficient alternative suppliers in a reasonable period or on commercially reasonable terms.
ITEM1. BUSINESS.
The Company designs, develops, manufactures, markets and supports portable, software driven, 3-D measurement systems that are used in a broad range of manufacturing, industrial, building construction and forensic applications. The Company’s FaroArm, FARO Scan Arm and FARO Gage articulated measuring devices, the FARO Laser Scanner LS, the FARO Laser Tracker, and their companion CAM2 software, provide for Computer-Aided Design (“CAD”)-based inspection and/or factory-level statistical process control and high- density surveying. Together, these products integrate the measurement, quality inspection, and reverse
engineering functions 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 measurement. As of December 2007, our products have been purchased by approximately 7,400 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as Audi, Bell Helicopter, Boeing, British Aerospace, Caterpillar, Daimler Chrysler, General Electric, General Motors, Honda, Johnson Controls, Komatsu Dresser, Lockheed Martin, Nissan, Siemens and
Volkswagen, among many others.
The Company was founded in 1982 and re-incorporated in Florida in 1992. The Company’s worldwide headquarters are located at 125 Technology Park, Lake Mary, Florida 32746, and its telephone number is (407) 333-9911.
Industry Background
The Company believes that there are four principal forces driving the need for its products and services: 1) the widespread use by manufacturers of 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, 3) the inability of traditional measurement devices to address many manufacturing problems such as throughput, efficiency, and accuracy, especially those related to large components for products such as automobiles, aircraft, heavy duty construction equipment, and factory retrofits, and 4) the growing demand to capture large volumes of three-dimensional data for modeling and analysis.
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. The 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 linked to the CAD design to enable production to keep up with the rate of design change.
Quality standards dictate measurement to reduce defects.QS-9000 is the name given to the Quality System Requirements of the automotive industry that were developed by Chrysler, Ford, General Motors and major truck manufacturers and issued in late 1994. Companies that become registered under QS-9000 are considered to have higher standards and better quality products. Six Sigma embodies the principles of total quality management that focus on measuring results and reducing product or service failure rates to 3.4 per million. All aspects of a Six Sigma company’s infrastructure must be analyzed, and if necessary, restructured to increase revenues and raise customer satisfaction levels. The all-encompassing nature of these and other quality standards has resulted in manufacturers measuring every aspect of their process, including stages of product assembly that may never have been measured before, in part because of the lack of suitable measurement equipment.
Traditional products do not 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 (“CMM”) for objects that require higher precision measurement. However, the broader utility of each of these measurement methods is limited.
Although hand-measurement tools are often appropriate for simple geometric measurements, including hole diameters or length and width of a rectangular component, their use for complex part measurements, such as the fender of a car, is limited. Also these devices do not allow for the measurements to be directly compared to the CAD model of the part. Test fixtures (customized fixed tools used to make comparative measurements of complex production parts to “master parts”) are relatively expensive and must be reworked or discarded each time a dimensional change is made in the part being measured. In addition, these manual measuring devices do not permit the manufacturer to compare the dimensions of an object with its CAD model.
Conventional CMMs are generally large, fixed-base machines that provide very high levels of precision and provide a link to the CAD model of the object being measured. However, fixed-base CMMs require the object being measured be brought to the CMM and the object fit within the CMMs measurement grid. As manufactured subassemblies increase in size and become integrated into even larger assemblies, they become less
transportable, thus diminishing the utility of a conventional CMM. Consequently, manufacturers must continue to use hand-measuring tools, or expensive customized test fixtures, in order to measure large or unconventionally shaped objects. Some parts or assemblies are not easily accessible and cannot be measured at all using traditional devices.
Conventional surveying equipment is limited to single-point measurements and does not have the capacity to capture and analyze large volumes of three-dimensional data. As data requirements for construction, civil engineering and forensic inspection projects become more complex, single-point measurement devices will become increasingly more difficult to utilize in those applications.
Escalating global competition has created a demand for higher quality products with shorter life cycles. Customers require more rapid design, greater control of the manufacturing process, tools to compare components to their CAD specifications and the ability to precisely measure components that cannot be measured or
inspected by conventional devices, and the ability to capture and analyze large volumes of three-dimensional data. Moreover, they increasingly require measurement capabilities to be integrated into manufacturing processes and to be available on the factory floor.
FARO Products
The FaroArm.The FaroArm is a combination of a portable, six or seven-axis, instrumented articulated measurement arm, a computer, and software programs under the acronym CAM2.
• Articulated Arm—Each articulated arm is comprised of three major joints, each of which may consist of one, two or three axes of motion. The articulated arm is available in a variety of sizes, configurations and precision levels that are suitable for a broad range of applications. To take a measurement, the operator simply touches the object to be measured with a probe at the end of the arm and presses a button. Data can be captured at either individual points or a series of points. Digital rotational transducers located at each of the joints of the arm measure the angles at those joints. This rotational measurement data is transmitted to an on-board controller that converts the arm angles to precise locations in 3-D space using “xyz” position coordinates and “ijk” orientation coordinates.
• Computer—The Company pre-installs its CAM2 software on either a notebook or desktop style computer, depending on the customer’s need, and the measuring device, computer and installed software are sold as a system. The computers are not manufactured by the Company, but are purchased from various suppliers.
• CAM2 Software—See separate section on CAM2 Software below.
The Faro Scan Arm.The Faro Scan Arm is a FaroArm equipped with a combination of a hard probe (like that in the Faro Arm) and a non-contact line laser probe. This product provides our customers the ability to measure their products without touching them and offers a seven-axis contact/non-contact measurement device with a fully integrated laser scanner. The Scan Arm is used for non-contact measurement applications, including inspection, cloud-to-CAD comparison, rapid prototyping, reverse engineering and 3-D modeling.
The FARO Gage.Sold as a combination of an articulated arm device with a computer and software, the FARO Gage is a smaller, higher accuracy version of the FaroArm product. What distinguishes the FARO Gage from the FaroArm are the special mounting features and the basic software which are unique to the FARO Gage. The FARO Gage is targeted at machine tools, and bench tops around machine tools, where basic measurements of smaller machined parts must be measured. As such, the CAM2 software developed for this device features basic 2-D and 3-D measurements common to these applications. (See also “FARO Gage Software” below.)
The FARO Laser Tracker.A combination of a portable, large-volume laser measurement tool, a computer, and CAM2 software programs.
• Laser Tracker—The FARO Laser Tracker utilizes an ultra-precise laser beam to measure objects of up to 230 feet. It enables manufacturing, engineering, and quality control professionals to measure and inspect large parts, machine tools and other large objects on-site and/or in-process. With its greater angular resolution, repeatability, and accuracy, the FARO Laser Tracker advances already-proven tracker technology. Among its many enhanced features is SuperADM, which improves upon existing Absolute Distance Measurement technology by providing the time-saving ability to reacquire the laser beam without the need to return to a known reference point or the need to hold the target stationary.
• Computer—See description under FaroArm above.
• CAM2 Software—See separate section on CAM2 software below.
The FARO Laser Scanner LS.The FARO Laser Scanner LS utilizes laser technology to measure and collect a cloud of data points, allowing for the detailed and precise three-dimensional rendering of an object or an area as large as a factory. This technology is currently used for factory planning, facility life-cycle management, quality control, forensic analysis and in general, capturing large volumes of three-dimensional data. Laser scanning technology simplifies modeling, reduces project time and maintains or increases the accuracy of the image. The resulting data is used with major CAD systems or FARO’s own proprietary software for the applications listed above.
CAM2 Software.CAM2 is the Company’s family of proprietary CAD-based measurement and statistical process control software. The CAM2 product line includes the following software programs, many of which are translated into multiple languages:
• CAM2 Measure Xallows users to compare measurements of manufactured components or assemblies with the corresponding CAD data for the components or assemblies. CAM2 Measure X is offered with the FaroArm and the FARO Laser Tracker.
• CAM2 SPC Processallows for the collection, organization, and presentation of measurement data factory-wide. Not limited to measurements from the FaroArm or FARO Laser Tracker, CAM2 SPC Process accepts data from CMM and other computer-based measurement devices from many different measurement applications along the production line.
• Soft Check Toolis a custom software program designed to lead an operator through a measurement process on the FaroArm or FARO Laser Tracker with minimal training. These programs are created by the Company from specifications provided by the customer.
• FARO Gage Softwareincludes a dedicated graphical interface designed for the ease of use of the operator. Capable of producing graphical and tabular reports, the software runs a library of gauging and Soft Check tools.
• Laser Scanner LS Software.The Company has a number of programs available for its Laser Scanner LS product, as follows:
• FARO Scoutis a powerful software tool for displaying 3-D measurements and navigation in huge pointclouds.
• FARO Sceneis software for displaying, analyzing, administration and editing of 3-D measurements in huge pointclouds including registration of multiple pointclouds.
• Farocloud for AutoCADsupports the visualization and analysis of millions of 3-D points in the well known AutoCAD software environment. As-built documentation of industrial structures, historic buildings or many more applications are possible.
• Faroworksis a web-based tool for the administration of complex projects and navigation from floorplan to scan with links to measurements.
• Walkinsideis a high performance 3-D viewer with full room measurement and other features.
Customers
As of December 2007, the Company’s products have been purchased by approximately 7,400 customers worldwide, including small machine shops, large manufacturing and industrial companies, universities and law enforcement agencies. The Company’s ten largest customers by revenue represented an aggregate of 5.8% of the Company’s total revenues in 2007. No customer represented more than 2.0% of the Company’s sales in 2007. Sales and Marketing
The Company directs its sales and marketing efforts on a decentralized basis in three main regions around the world: Americas, Europe/Africa and Asia/Pacific. The regional headquarters for the Americas is located in the Company’s headquarters in Lake Mary, Florida; the Europe/Africa regional headquarters is located in Stuttgart, Germany; and the regional headquarters for the Asia/Pacific region is located in Singapore. At December 31, 2007 the Company employed 118, 123, and 80 sales and marketing specialists in the Americas, Europe/Africa, and Asia/Pacific regions, respectively. The Company has direct sales representation in the United States, Canada, Brazil, Germany, United Kingdom, France, Spain, Italy, Poland, Netherlands, India, China, Singapore, Malaysia, Vietnam, Thailand, and Japan. See Footnote 19 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. Each product has a separate sales force who report to regional sales managers for all products. The Company employs a variety of marketing techniques to promote brand awareness and customer identification.
Research and Development
The Company believes that its future success depends on its ability to maintain 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 enhancing our existing products and developing new products for the CAM2 market.
At December 31, 2007, the Company employed 67 scientists and technicians in its research and
development efforts. Research and development expenses were approximately $10.3 million in 2007 compared to
$7.2 million in 2006 and $6.4 million in 2005. The Company believes that the continual development or
acquisition of innovative new products is critical to its future success. The field of CAM2 and more broadly, 3-D measurement, continues to expand and new technologies and applications will be essential to competing in this market. 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. Intellectual Property
The Company holds or has pending 74 patents in the United States and related patents worldwide. The Company also has 27 registered or pending trademarks in the United States and 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 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 FaroArm, FARO Gage, and FARO Laser Tracker products in the
Company’s manufacturing facilities located in Florida and Pennsylvania for customer orders from the Americas, in its manufacturing facility located in Switzerland for customer orders from the Europe/Africa region, and in its manufacturing facility located in Singapore for customer orders from the Asia/Pacific region. The Company manufactures its FARO Laser Scanner LS product in its facility located in Stuttgart, Germany. The Company expects all its existing plants to have the production capacity necessary to support its growth through 2008.
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. The Company performs limited in-house circuit board assembly and component part machining.
The Company’s manufacturing, engineering, and design headquarters have been registered to the ISO-9001 standard since July 1998. Semi-annual surveillance audits have documented continuous improvement to this multinational standard. The Company continues to examine its scope of registration as the business evolves and has chosen English as the standard business language for its operations. This decision is expected to significantly influence the Company’s operations and documentation globally.
This has been done in concert with the ISO9001:2000 Quality Management System Certification, and is expected to increase customer confidence in the Company’s processes, products and services worldwide. Additionally, the Company takes a global approach to ISO17025:2005 Calibration Laboratory recognition, seeking to have all locations registered with identical scopes of accreditation and capabilities for the products generated and serviced.
Currently the Company’s manufacturing sites in Lake Mary, Kennett Square, Stuttgart, Schaffhausen and Singapore are jointly registered to ISO-9001 and ISO17025. In addition, its service sites in the United States, Germany, India, Japan, China, Singapore and Brazil also have joint certification and accreditation to these key standards.
Competition
The Company’s portable measurement systems compete in the broad market for measurement devices for manufacturing and industrial applications which, in addition to portable articulated arms, laser tracker and laser scanner products, consist of fixed-base CMMs, templates and go/no-go gages, check fixtures, handheld
measurement tools, and various categories of surveying equipment. The broad market for measurement devices is highly competitive. In the Faro Gage product line, the Company competes with manufacturers of handheld measurement tools and fixed-base CMMs, including some large, well-established companies. In the Faro Arm, Faro Scan Arm, Faro Laser Tracker, and Faro Laser Scanner LS product lines, the Company competes primarily with Hexagon Metrology, a division of Hexagon. The Company also competes in these product lines with a number of other smaller competitors.
The Company will be required to make continued investments in technology and product development to maintain the technological advantage that it believes it currently has over its competition. Some of the Company’s competitors, including some manufacturers of fixed based CMMs and Hexagon, possess substantially greater financial, technical, and marketing resources than it possesses. Moreover, the Company cannot be certain that its technology or its product development efforts will allow it to successfully compete as the industry evolves. As the market for the Company’s portable measurement systems expands, additional competition may emerge and the Company’s existing and future competitors may commit more resources to the markets in which the Company participates.
Government Regulation
The Company’s operations are subject to numerous governmental laws and regulations, including those governing antitrust and competition, the environment, securities transactions and disclosures, import and export of products, currency conversions and repatriation, taxation of foreign earnings and earnings of expatriate personnel and use of local employees and suppliers. The Company’s foreign operations are subject to the U.S. FCPA, which makes illegal any payments to foreign officials or employees of foreign governments that are intended to induce them to use their influence to assist the Company or to gain any improper advantage for the Company. The Company operates in certain regions that are more highly prone to risk under the FCPA.
Manufacturers of electrical goods have become subject to the European Union’s RoHS and WEEE
directives, which took effect during 2006. Parallel initiatives are being proposed in other jurisdictions, including several states in the United States and China. RoHS prohibits the use of lead, mercury and certain other specified substances in electronics products, and WEEE makes producers of electrical goods financially responsible for specified collection, recycling, treatment, and disposal of covered electronic products and components.
The Company expects that it will have its products in compliance with the RoHS directive in time.
However, if the Company is unable to do so, it would be unable to sell its products in European Union countries, as well as possible several states in the United States and China, which would have a material adverse effect on its sales and results of operation.
Backlog
At December 31, 2007, the Company had orders representing approximately $19.1 million in product sales outstanding. The majority of these specific orders were shipped by February 20, 2008, and, as of February 20, 2008, the Company had orders representing approximately $13.0 million in product sales outstanding. At December 31, 2006 and 2005, the Company had orders representing approximately $10.3 million and $7.3 million in product sales outstanding, respectively.
The Company’s increase in backlog at December 31, 2007 is consistent with the Company’s overall sales growth and includes planned customer delivery dates in early 2008. The Company believes that substantially all of the outstanding sales orders as of February 20, 2008 will be shipped during 2008.
Employees
At December 31, 2007, the Company had 780 full-time employees, consisting of 321 sales and marketing professionals, 144 production staff, 67 research and development staff, 112 administrative staff, and 136 customer service/application engineering specialists. The Company is not a party to any collective bargaining agreements and 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 be able to obtain the additional personnel required to satisfy its staffing requirements over the foreseeable future.
Geographic Information
The information regarding net sales, operating income, and long-lived assets set forth in Note 19 to the Consolidated Financial Statements is hereby incorporated by reference into this Part I, Item 1.
Available Information
The Company maintains a web site with the address www.faro.com. Information contained on its web site is not a part of, or incorporated by reference into, this Annual Report on Form 10-K. The Company makes available free of charge through its web site its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to these reports, as soon as reasonably practicable after it electronically files these reports with, or furnishes these reports to, the Securities and Exchange Commission. ITEM1A. RISKFACTORS.
The Company discusses expectations regarding its future performance and makes other forward-looking statements in its annual and quarterly reports, press releases and other written and oral statements. These forward-looking statements are based on currently available competitive, financial and economic data and its operating plans. Forward-looking statements are not guarantees of future performance and are subject to a number of known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Consequently, undue reliance should not be placed on these forward-looking statements. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from the Company’s expectations. The following discussion of risks and uncertainties include, but are not limited to, some important factors to consider when evaluating the Company’s trends and future results.
The Company’s customers’ buying process for its products is highly decentralized, and therefore, it typically requires significant time and expense for the Company to further penetrate the potential market of a specific customer, which may delay its ability to generate additional revenue.
The Company’s success will depend, in part, on its ability to further penetrate its customer base. During 2007, 48.0% of the Company’s revenue was attributable to sales to its existing customers, compared to 45.1% in 2006. If the Company is not able to continue to penetrate its existing customer base, its sales growth will be impaired. Most of its customers have a decentralized buying process for measurement devices. Thus, the Company must spend significant time and resources to increase revenues from a specific customer. For example, the Company may provide products to only one of its customer’s manufacturing facilities or for a specific product line within a manufacturing facility. The Company cannot be certain that it will be able to maintain or increase the amount of sales to its existing customers.
Others may develop products that make the Company’s products obsolete or less competitive.
The CAM2 market is emerging and could be characterized by rapid technological change. Others may develop new or improved products, processes or technologies that may make the Company’s products obsolete or less competitive. The Company cannot assure you that it will be able to adapt to evolving markets and
technologies or maintain its technological advantage.
The Company’s success will depend, in part, on its ability to maintain its technological advantage by developing new products and applications and enhancing its existing products. Developing new products and applications and enhancing its existing products can be complex and time-consuming and will require substantial investment by the Company. Significant delays in new product releases or difficulties in developing new products could adversely affect the Company’s revenues and results of operations. Because its customers are concentrated in a few industries, a reduction in sales to any one of these industries could cause a significant decline in the Company’s revenues.
An economic slowdown in manufacturing will affect the Company’s growth and profitability.
A significant portion of the Company’s sales are to manufacturers in the automotive, aerospace and heavy equipment industries. The Company is dependent upon the continued growth, viability and financial stability of its customers in these industries, which are highly cyclical and dependent upon the general health of the economy and consumer spending. The cyclical nature of these industries may exert significant influence on the Company’s revenues and results of operations. In addition, the volume of orders from its customers and the prices of its products may be adversely impacted by decreases in capital spending by a significant portion of its customers during recessionary periods. If one or more of its significant customers were to become insolvent or otherwise were unable to pay for the products provided by the Company, its operating results and financial condition would be adversely affected.
The Company’s inability to protect its patents and proprietary rights in the United States and foreign countries could adversely affect its revenues.
The Company’s success depends in large part on its ability to obtain and maintain patent and other
proprietary right protection for its processes and products in the United States and other countries. The Company also relies upon trade secrets, technical know-how and continuing inventions to maintain its competitive position. The Company seeks to protect its technology and trade secrets, in part, by confidentiality agreements with its employees and contractors. The Company’s employees may breach these agreements or the Company’s trade secrets may otherwise become known or be independently discovered by inventors. If the Company is unable to obtain or maintain protection of its patents, trade secrets and other proprietary rights, it may not be able to prevent third parties from using its proprietary rights.
The Company’s patent protection involves complex legal and technical questions. Its patents may be challenged, narrowed, invalidated or circumvented. The Company may be able to protect its proprietary rights from infringement by third parties only to the extent that its proprietary processes and products are covered by valid and enforceable patents or are effectively maintained as trade secrets. Furthermore, others may
independently develop similar or alternative technologies or design around the Company’s patented technologies. Litigation or other proceedings to defend or enforce its intellectual property rights could require the Company to spend significant time and money and could otherwise adversely affect its business.
Claims from others that the Company infringes their intellectual property rights may adversely affect its operations.
From time to time the Company receives notices from others claiming it infringes their intellectual property rights. The number of these claims may grow. Responding to these claims may require the Company to enter into royalty or licensing agreements on unfavorable terms, require it to stop selling or to redesign affected products or require it to pay damages. Any litigation or interference proceedings, regardless of their outcome, may be costly and may require significant time and attention of the Company’s management and technical personnel.
Potential product failures or product availability and performance issues could result in lost sales, loss of customers and possible delays in new product introductions and enhancements and increased warranty costs.
The Company has a history of new product introductions and enhancements to existing products. Potential product failures in new or existing products of the Company could result in delays in new product introductions, which could lead to a loss of sales, and increased warranty costs.
The Company may not be able to achieve financial results within its target goals, and its operating results may fluctuate due to a number of factors, many of which are beyond its control.
The Company’s ability to achieve financial results that are within its goals is subject to a number of factors, some of which are beyond its control. Moreover, the Company’s annual and quarterly operating results have varied significantly in the past and likely will vary significantly in the future. Factors that cause the Company’s financial results to fluctuate include those set forth elsewhere in this report and the following:
• the effectiveness of sales promotions and sales of demonstration equipment;
• geographic expansion in the Asia/Pacific region and other regions;
• training and ramp-up time for new sales people;
• investments in potential acquisitions or strategic sales, product or other initiatives;
• investments in technologies and new products;
• quality issues with the Company’s products;
• shrinkage or other inventory losses due to product obsolescence, scrap or material price changes;
• the efficiencies achieved in managing inventories and fixed assets;
• expansion of the Company’s manufacturing capability and other inflationary pressures;
• the size and timing of customer orders, many of which are received towards the end of the quarter;
• the amount of time that it takes to fulfill orders and ship the Company’s products;
• the length of the Company’s sales cycle to new customers and the time and expense incurred in further penetrating its existing customer base;
• increases in operating expenses for product development and new product marketing;
• costs associated with new product introductions, such as assembly line start-up costs and low introductory period production volumes;
• 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;
• start-up costs and ramp-up time associated with opening new sales offices outside of the United States;
• potential decreases in revenue without proportionate adjustments in fixed costs;
• changes in gross margins due to: lower average selling prices, changing product mix of products sold and the different gross margins on different products;
• variations in the effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis;
• compliance with government regulations including health, safety, and environmental matters;
• the ultimate costs of the Company’s monitoring obligations in respect of the FCPA matter and the amount of monetary sanctions ultimately paid by the Company to the SEC and DOJ in connection with the FCPA matter;
• litigation and regulatory action brought against the Company; and
• adverse changes in the manufacturing industry and general economic conditions.
Any one or a combination of these factors could adversely affect the Company’s annual and quarterly operating results in the future and could cause it to fail to achieve its target financial results.
The CAM2 market is an emerging market and the Company’s growth depends on the ability of the Company’s products to attain broad market acceptance.
The market for traditional fixed-base CMMs, check fixtures, handheld measurement tools, and surveying equipment is mature. Part of the Company’s strategy is to continue to displace these traditional measurement devices. Displacing traditional measurement devices and achieving broad market acceptance of the Company’s products requires significant effort to convince manufacturers to reevaluate their historical measurement procedures and methodologies.
Because the CAM2 market is emerging, the potential size and growth rate of the CAM2 market is uncertain and difficult to quantify. If the CAM2 market does not continue to expand or does not expand at least as quickly as the Company anticipates, it may not be able to continue its sales growth, which also may affect its
profitability.
The Company markets five closely interdependent products (FaroArm, Scan Arm, FARO Laser Scanner LS, FARO Laser Tracker and FARO Gage) and related software for use in measurement, inspection, and high density surveying applications. Substantially all of the Company’s revenues are currently derived from sales of these products and software and it plans to continue its business strategy of focusing on the portable software-driven, 3-D measurement and inspection market. Consequently, the Company’s financial performance will depend in large part on portable, computer-based measurement, inspection, and high density surveying products achieving broad market acceptance. If its products cannot attain broad market acceptance, the Company will not grow as anticipated and may be required to make increased expenditures on research and development for new applications or new products.
The Company competes with manufacturers of portable measurement systems and traditional measurement devices, many of which have more resources than the Company and may develop new products and
technologies.
The broad market for measurement devices is highly competitive. In the FARO Gage product line, the Company competes with manufacturers of handheld measurement tools and fixed-base CMMs, including some large, well-established companies. In the FaroArm, FARO Scan Arm, FARO Laser Tracker, and FARO Laser Scanner LS product lines, the Company competes primarily with Hexagon Metrology, a division of Hexagon. The Company also competes in these product lines with a number of other smaller competitors.
The Company will be required to make continued investments in technology and product development to maintain the technological advantage that it believes it currently has over its competition. Some of its
competitors, including some manufacturers of fixed based CMMs and Hexagon, possess substantially greater financial, technical, and marketing resources than it possesses. Moreover, the Company cannot be certain that its technology or its product development efforts will allow it to successfully compete as the industry evolves. As the market for its portable measurement systems expands, additional competition may emerge and the
Company’s existing and future competitors may commit more resources to the markets in which the Company participates.
The Company derives a substantial part of its revenues from its international operations, which are subject to greater volatility and often require more management time and expense to achieve profitability than its domestic operations.
Since 2000, the Company has derived approximately half of its sales from international operations. In the Company’s experience, entry into new international markets requires considerable management time as well as start-up expenses for market development, hiring and establishing office facilities before any significant revenues are generated. As a result, initial operations in a new market may operate at low margins or may be unprofitable.
The Company’s international operations are subject to various risks, including:
• difficulties in staffing and managing foreign operations;
• political and economic instability;
• unexpected changes in regulatory requirements and laws;
• longer customer payment cycles and difficulty collecting accounts receivable;
• compliance with export and import regulations and trade restrictions;
• governmental restrictions on the transfer of funds to the Company from its operations outside the United States;
• burdens of complying with a wide variety of foreign laws and labor practices; and
• fluctuations in currency exchange rates.
The Company’s foreign subsidiaries maintain their financial records and statements in their respective local currencies and the Company’s consolidated financial results are affected by foreign currency translation
adjustments. Moreover, several of the countries where the Company operates have emerging or developing economies, which may be subject to greater currency volatility, negative growth, high inflation, limited
availability of foreign exchange and other risks. These factors may harm the Company’s results of operations and any measures that it may implement to reduce the effect of volatile currencies and other risks of its international operations may not be effective.
The Company has not finally resolved the FCPA matter with the DOJ and the SEC.
As previously reported on the Company’s Form 8-K dated March 15, 2006, the Company learned that its China subsidiary had made payments to certain customers in China that may have violated the FCPA and other applicable laws. The Company has engaged in settlement discussions with both the SEC and the DOJ concerning the FCPA matter and has determined that the settlement discussions are likely to result in a resolution that will include a fine and disgorgement of associated profits. The Company recorded in the third quarter of 2007 a reserve of $2.65 million in anticipation of the amount that could be necessary to satisfy its financial obligations to the SEC and the DOJ in resolving this matter. However, there is no assurance that such discussions will result in a resolution of the FCPA matter. Predicting at this time when the FCPA matter will be finally resolved with the SEC and the DOJ is not possible.
The monetary sanctions ultimately paid by the Company to the SEC and DOJ in resolving this matter, whether imposed on the Company or agreed to by settlement, may exceed the amount that has been reserved by the Company. In addition, the ultimate costs of the Company’s continuing monitoring obligations in respect of the FCPA matter are uncertain and may vary from the Company’s preliminary estimates of such amount as a result of a number of factors, including without limitation the fact that neither the scope of the monitoring obligation nor the identity of outside monitoring firm have been determined.
The Company may not be able to identify, consummate or achieve expected benefits from acquisitions. The Company has completed three significant acquisitions since its initial public offering in 1997. The Company may pursue access to additional technologies, complementary product lines and sales channels through selective acquisitions and strategic investments. The Company may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory terms or otherwise complete acquisitions in the future. In the past the Company has used its stock as consideration for acquisitions. The Company’s common stock may not remain at a price at which it can be used as consideration for acquisitions without diluting its existing shareholders, and potential acquisition candidates may not view its stock attractively.
Realization of the benefits of acquisitions often requires integration of some or all of the sales and marketing, distribution, manufacturing, engineering, finance and administrative organizations of the acquired companies. The integration of acquisitions demands substantial attention from senior management and the management of the acquired companies. Any acquisition may be subject to a variety of risks and uncertainties including:
• the inability to assimilate effectively the operations, products, technologies and personnel of the acquired companies (some of which may be located in diverse geographic regions);
• the inability to maintain uniform standards, controls, procedures and policies;
• the need or obligation to divest portions of the acquired companies; and
• the potential impairment of relationships with customers.
The Company cannot assure you that it will be able to integrate successfully any acquisitions, that any acquired companies will operate profitably or that it will realize the expected benefits from any acquisition. The Company may face difficulties managing growth.
If its business continues to grow rapidly in the future, the Company expects it to result in:
• increased complexity;
• increased responsibility for existing and new management personnel; and
• incremental strain on its operations and financial and management systems.
If the Company is not able to manage future growth, its business, financial condition and operating results may be harmed.
The Company’s dependence on suppliers for materials could impair its ability to manufacture its products. Outside vendors provide key components used by the Company in the manufacture of its products. Although the Company believes that alternative sources for these components are available, any supply
interruption in a limited source component would harm its ability to manufacture its products until a new source of supply is identified. In addition, an uncorrected defect or supplier’s variation in a component, either known or unknown to the Company, or incompatible with its manufacturing processes, could harm its ability to
manufacture its products. The Company may not be able to find a sufficient alternative supplier in a reasonable period, or on commercially reasonable terms, if at all. If the Company fails to obtain a supplier for the
manufacture of components of its potential products, it may experience delays or interruptions in its operations, which would adversely affect its results of operations and financial condition.
The Company’s failure to attract and retain qualified personnel could lead to a loss of sales or decreased profitability or growth. Required compensation levels including equity based compensation to attract and retain personnel could result in increased compensation expense.
The Company may not be able to attract and retain enough qualified personnel to support its growth. In addition, the loss of the Company’s Chief Executive Officer, Chief Technology Officer, or Chief Financial Officer, or other key personnel could adversely effect its sales, profitability, or growth. Moreover, the Company continues to rely in part on equity awards to attract and retain qualified personnel. Because of new accounting regulations requiring the expensing of stock options, if the Company continues to rely on equity compensation to attract and retain qualified personnel, its compensation expenses may increase.
