A N N U A L R E P O R T 2 0 0 3
COMPUTER-AIDED MANUFACTURING
MEASUREMENT
underserved Computer-Aided Manufacturing Measure- ment (CAM2) market. The Company’s three main prod- ucts are the Faro Arm, the Faro Laser Tracker, and the Faro Gage. This portable product line provides for measurements of almost anything, anywhere, by any- one, in a manufacturing plant in the Company’s market. FARO has a worldwide base of approximately 3,500 customers in the automotive, aerospace, heavy equip- ment and many other industries, including some of the most widely recognized names in the world. Based in Lake Mary, Florida, the Company has a global reach with offices around the industrialized world. For more information, visit our eight-language website at www.faro.com.
Sales in Japan more than dou- bled in 2003 compared to 2002. In late 2003 FARO began an aggressive growth phase in China in recognition of the rapidly growing manufacturing market there. The Company has set a goal to have Asia/ Pacific sales grow to 1/3 of
H I G H L I G H T S
f i n a n c i a l
F
IVE-Y
EARC
OMPOUNDEDA
NNUALG
ROWTHR
ATE INS
ALES: 20%
F
or the year ended December 31, 2003 sales increased 55.4% to $71.8 million from $46.2 million in 2002. Net income in 2003 grew $10.3 million to $8.3 million from a loss of $2.0 million in 2002. The Company expe- rienced strong growth in all geographic regions in 2003, led by a 68% increase in sales in the Americas. The Company generated $4.7 million in cash from operations in 2003, and with the help of a private placement of Company stock in November, total cash and investments grew to $33 million at December 31, 2003, with virtu- ally no debt.In millions of dollars except EPS and Current Ratio 2003 2002 2001
Sales $71.8 $ 46.2 $ 36.1
Gross Profit $42.3 $ 25.1 $ 21.8
Gross Margin 58.9% 54.4% 60.4%
Operating Income (Loss) $ 7.4 $ (2.9) $ (3.4)
Operating Margin 10.4% -6.3% -9.4%
Diluted Earnings (Loss) Per Share $0.64 $(0.17) $(0.26)
Current Ratio 5.2 2.6 4.1
2001 2002 2003
S
ALES(IN MILLIONS)
$36.1
$46.2
$71.8
2001 2002 2003
G
ROSSP
ROFIT(IN MILLIONS)
$21.8
$25.1
$42.3
2001 2002 2003
G
ROSSM
ARGIN(%) 60.4%
54.4% 58.9%
2001 2002 2003
O
PERATINGM
ARGIN(%) (9.4)%
(6.3)% 10.4%
2001 2002 2003
D
ILUTEDEPS
$(0.26)
$(0.17)
$0.64
2001 2002 2003
C
URRENTR
ATIO4.1
2.6 5.2
T
OO
URS
HAREHOLDERS:
2003 was a year in which we started
to reap the rewards of our aggressive
growth strategy, which we employed
following our IPO in 1997. We have
transformed from a small American
company into one with a much larger
global reach, and we are in a position
to capture an increasing percentage
of the large, underserved CAM2 mar-
ket in which we operate. Our portable
products provide for many measure-
ments which were not possible using
traditional devices. This is one of the
reasons that our sales have grown in
a period of reduced capital spending by
manufacturers on other machine tools
and traditional measurement products.
S
ALESI
NCREASEIn 2003, we saw tremendous growth
in sales which resulted from a number
of different factors, and which defied
the only modest recovery seen in the
worldwide manufacturing economy.
Some of the factors which led to our
growth were:
• Acceptance of the new product line:
We introduced our newest generation
Laser Tracker and FaroArm products
in the second and third quarter of 2002,
respectively. The continued positive
demand by our customers for these
new products was a big part of sales
growth in 2003.
O
UR PORTABLE PRODUCTS PROVIDE FOR MANY MEASUREMENTS WHICH WERE NOT POSSIBLE USING TRADI-
TIONAL DEVICES
.
• Higher existing customer penetration:
In 2003, approximately 62% of our
sales came from existing customers.
This was a significant increase from
approximately 43% in 2002. Although
part of this increase was a result of
upgrades to our newest generation
products, we believe that a bigger
part was the broader acceptance of our
products among our larger customers.
• Larger sales force:
We increased our worldwide sales
headcount 13.2% in 2003, to 120 from
106 at the beginning of the year. Of this
group, we added 10 account managers
to bring the total to 57. Account man-
agers demonstrate our products to
our customers.
O
PERATINGM
ARGINI
NCREASEOur operating income grew in 2003 as
gross margin and operating expenses
moved closer to our target financial
model. Operating margin for the year
was 10.4% compared to our goal of
15–20%. Our gross margin improved
to 58.9% in 2003, close to our 60–63%
target, after dropping in 2002 when
short term delays in manufacturing at
a newly acquired factory temporarily
inflated production costs. Selling
expenses as a percentage of sales fell
to 25.6% in 2003, near the higher end
of our 23–25% goal. At 12.7% of sales
in 2003, G&A expenses remain higher
than our 10–12% target, but I expect
G&A expenses to drop in proportion
to sales as we continue to grow.
Research and development expenses
in 2003 were $4.5 million, or 6.3% of
sales, already in the middle of our
5–7% of sales goal. Our R&D efforts in
2003 yielded important developments
for our existing products, as well as
new products such as the Faro Gage,
and the FaroArm Laser Scanner.
N
ETI
NCOME, EPS I
NCREASEOur effective tax rate in 2003 was
12.8% of net income before income
tax. The primary reason for this rela-
tively low tax rate was a reduction in
a valuation allowance of approximately
$4 million. We also had a $1.1 million
gain from settlement of litigation with
the former SMX shareholders in 2003,
which offset significant G&A and Cost
of Sales write-downs related to that
acquisition, which we had to take in
2002. Net income in 2003 increased
$10.3 million to $8.3 million or 64 cents
per diluted share from a loss of $2.0
million, or 17 cents per share in 2002.
S
TRENGTHENEDB
ALANCES
HEETThrough the sale of 1.1 million shares
in a November 2003 private place-
ment we added approximately $25
million in cash and investments to our
balance sheet. We intend to use this
to support our manufacturing expan-
sion in Europe, our sales expansion in
Asia, and for strategic acquisitions.
N
ET INCOME IN2003
INCREASED$10.3
MILLION TO$8.3
MILLION OR64
CENTS PER DILUTED SHARE FROM A LOSS OF$2.0
MILLION,
OR17
CENTS PER SHARE IN2002.
Our current ratio at December 31, 2003
was 5.2, and we had virtually no debt.
F
ORECASTEDG
ROWTH IN2004
We expect to complete the staffing of
our new sales offices in Japan and
China in the first half of 2004. Growth
in Asia is a key part of our projected
20–25% sales increase in 2004. We
also expect our new Faro Gage and
FaroArm Laser Scanner products to
play a part in 2004 sales growth. We
are forecasting continued but perhaps
smaller improvements in operating
margin in 2004, because of some neg-
ative pressure on selling expenses in
the first half of the year with our Asian
expansion. We have $1.7 million in
deferred tax assets remaining, which
may be recognized in 2004, so we are
projecting a 20–25% blended tax rate.
As a result, we are forecasting a 25–
50% increase in earnings in 2004.
On behalf of our management and on
your behalf, I would like to thank all of
our employees, suppliers, third-party
developers and customers who were
all key contributors to our success in
2003. I would also like to recognize
the contributions of our board of
directors whose support is, as always,
highly valued.
Simon Raab
Chairman of the Board,
President and Chief Executive Officer
Selected Financial Data 5
Management’s Discussion and Analysis of
Financial Condition and Results of Operations 6
Market for Registrant’s Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities 17
Cautionary Statements for Forward-Looking Information 18
Quantitative and Qualitative Disclosures About Market Risk 18
Consolidated Balance Sheets 19
Consolidated Statements of Operations 20
Consolidated Statements of Shareholders’ Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23
Independent Certified Public Accountant’s Report 36
FARO Technologies, Inc. and Subsidiaries
S E L E C T E D F I N A N C I A L D A T A
Historical—Years Ended December 31,
2003 2002 2001 2000 1999
Statement of Operations Data:
Sales $71,785,980 $46,246,372 $36,121,696 $40,912,663 $33,614,490
Gross profit 42,265,731 25,136,763 21,817,613 26,164,035 19,453,522
Income (loss) from operations 7,440,135 (2,939,243) (3,361,610) (237,350) (9,705,477)(1) Income (loss) before income taxes 9,435,270(2) (1,804,831) (2,506,226) 464,198 (8,516,286)
Net income (loss) 8,277,740 (2,015,571) (2,847,964) 39,517 (7,394,822)
Net income (loss) per common share:
Basic $ 0.68 $ (0.17) $ (0.26) $ — $ (0.67)
Diluted $ 0.64 $ (0.17) $ (0.26) $ — $ (0.67)
Weighted-average common shares outstanding:
Basic 12,181,221 11,853,732 11,032,449 11,021,606 11,015,140
Diluted 12,845,992 11,853,732 11,032,449 11,094,144 11,015,140
Historical—Years Ended December 31,
2003 2002 2001 2000 1999
Consolidated Balance Sheet Data:
Working capital $53,869,567 $18,338,541 $22,303,204 $23,672,736 $24,869,844
Total assets 81,913,888 45,194,780 39,654,124 44,699,274 42,103,912
Total debt 107,234 1,556,125 80,626 66,657 26,236
Total shareholders’ equity 68,921,099 33,383,649 32,336,461 35,955,453 36,599,346
(1) Includes a charge to write down development and core technology in the amount of $3.1 million. (2) Includes a favorable legal settlement of $1.1 million in other income.
The following information should be read in conjunction with the Consolidated Financial Statements of the Company, includ- ing the notes thereto, included elsewhere in this document.
Overview
The Company designs, develops, markets and supports port- able, software-driven, 3-D measurement systems that are used in a broad range of manufacturing and industrial appli- cations. The Company’s principal products are the Faro Arm and Faro Gage articulated arm measuring devices, the Faro Laser Tracker, a laser-based measuring device and their companion CAM2 software, 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 measure- ment technology in manufacturing and industrial applications and currently holds 33 patents. The Company’s products have been purchased by approximately 3,500 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as Audi, Bell Heli- copter, Boeing, British Aerospace, Caterpillar, DaimlerChrysler, General Electric, General Motors, Honda, Johnson Controls, Komatsu Dresser, Lockheed Martin, Siemens and Volkswagen among many others.
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, Italy in 2001, and China in 2003. Inter- national sales represented 47.3%, 57.0%, and 59.1% of sales in 2003, 2002, and 2001, respectively. The Company expects higher percentage sales growth in the Asia/Pacific region than other regions in 2004 and 2005 as a result of opening its China sales office, and the addition of sales personnel and the opening of a service center in its Japan organization. The Company derives revenues primarily from the sale of its Faro Arm and Faro Laser Tracker 3-D measurement equip- ment, and its related multi-faceted CAM2 software. Going
forward, the Company also expects to generate revenue from the sale of its new Faro Gage product. Revenue related to these products is recognized upon shipment. In addition, the Company sells one, two and three-year maintenance contracts and training and technology consulting services relating to its products. The Company recognizes the revenue from extended maintenance contracts proportionately, in the same manner as costs are incurred for such revenues. The Company also receives royalties from licensing agreements for its historical medical technology and recognizes the rev- enue from these royalties as licensees report use of the technology. In 2003 royalties from licensing agreements were
$601,000, or 0.8% of total sales.
In 2003 the Company began to manufacture its Faro Arm products in Switzerland for customer orders from Europe and Asia. It will begin to manufacture its Faro Laser Tracker and Faro Gage products in its Swiss plant by mid-2004. The production of these products for customer orders from the Americas will be done in the Company’s headquarters in Florida, and its manufacturing plant in Pennsylvania. The Company expects all its existing plants to provide the nec- essary capacity for its growth, at least through 2005. Cost of sales consists primarily of material, production over- head and labor. Since the Company’s IPO in 1997 it has had gross margin in the range of 54–64%. The Company expects to maintain gross margin at or near 60% going forward. Selling expenses consist primarily of salaries and commissions to sales and 14 marketing personnel, and promotion, adver- tising, travel and telecommunications. Selling expenses as a percentage of sales dropped significantly in 2003 as compared to 2002, to 25.6% from 30.0% and holding selling expenses as a percentage of sales to 25% or less will be a long-term goal of the Company, although the addition of new sales personnel in Asia may temporarily cause a rise in selling expenses as a percentage of sales in 2004 until these new sales people are fully trained and productive.
General and administrative expenses consist primarily of salaries for administrative personnel, rent, utilities and pro- fessional and legal expenses. The Company expects general and administrative expenses to drop as a percentage of sales as higher sales should not require a proportionate increase in these expenses. Research and development expenses represent salaries, equipment and third-party services. The
Company has a commitment to ongoing research and devel- opment and intends to continue to fund these efforts at the level of 5-7% of sales going forward.
The Company has received a favorable income tax rate com- mitment from the Swiss government as an incentive for the Company to establish a manufacturing plant there. As a result the Company expects its blended (consolidated) tax rate to be in a range between 25% and 30% of consolidated tax- able income for at least 2004 and 2005.
Accounting for wholly owned foreign subsidiaries is main- tained in the currency of the respective foreign jurisdiction and, therefore, fluctuations in exchange rates may have an impact on intercompany accounts reflected in the Company’s consolidated financial statements. The Company is aware of off-balance-sheet financial instruments to hedge its exposure to foreign currency exchange rates, including cross-currency swaps, forward contracts and foreign currency options (see Foreign Exchange Exposure below). However the Company does not regularly use such instruments.
During fiscal years 2002 and 2001, the Company’s sales growth was adversely affected by the economic slowdown, which began in 2001 in the United States and Europe. This effect, however, was offset by sales growth resulting from the acquisition in January 2002 of SpatialMetrix Corporation (SMX), which manufactured the predecessor to the Faro Laser Tracker, and the introduction in September and October 2002 of the latest generation of the Company’s traditional Faro Arm product. In 2003 sales growth resulted primarily from strong customer response to the new Faro Arm and Laser Tracker products, and an increase in worldwide sales and marketing activities, including an increase in headcount from 106 in 2002 to 120 at the end of 2003.
In 2003 the Company recorded approximately $1.1 million in
“other income” as a result of recovering approximately 100,000 shares of Company stock related to a positive arbi- tration settlement between the Company and the former SMX shareholders.
Results of Operations
The following table sets forth for the periods presented, the percentage of sales represented by certain items in the Company’s consolidated statements of operations:
Years Ended December 31, 2003 2002 2001 Statement of Operations Data:
Sales 100.0% 100.0% 100.0%
Cost of Sales 41.1% 45.6% 39.6% Gross profit 58.9% 54.4% 60.4% Operating expenses:
Selling 25.5% 30.0% 37.2%
General and administrative 12.7% 17.0% 16.1% Depreciation and amortization 3.0% 5.0% 7.1% Research and development 6.3% 8.7% 9.3% Employee stock options 1.0% — —
Total operating expenses 48.5% 60.7% 69.7% Income (loss) from operations 10.4% (6.3)% (9.3)% Interest income 0.1% 1.2% 2.5% Other income, net 2.7% 1.3% (0.1)% Interest expense (0.1)% (0.1)% — Net income (loss) before
income taxes 13.1% (3.9)% (6.9)% Income tax expense 1.6% 0.5% 0.9% Net income (loss) 11.5% (4.4)% (7.8)%
2003 Compared to 2002
Sales
Sales increased $25.6 million or 55.4%, from $46.2 million for the year ended December 31, 2002 to $71.8 million for year ended December 31, 2003. The increase resulted from higher unit sales of the Faro Arm and Laser Tracker prod- ucts, an increase in headcount in sales and marketing from 106 in 2002 to 120 in 2003, and from a 15% average price increase on existing products on January 1, 2003. Geographically, sales increased $15.4 million or 68.5% in the Americas, $9.2 million or 49.8% in Europe/Africa, and
$0.9 million, or 17.8% in the Asia/Pacific region.
Gross profit
Gross profit increased by $17.1 million or 68.1%, from $25.1 million for the year ended December 31, 2002 to $42.2 million for the year ended December 31, 2003. Gross margin percent- age increased from 54.4% for the year ended December 31, 2002 to 58.9% for the year ended December 31, 2003 due to higher selling prices and efficiencies in Laser Tracker manufacturing plant output.
Selling expenses
Selling expenses increased by $4.5 million or 32.6%, from
$13.8 million for the year ended December 31, 2002 to
$18.3 million for the year ended December 31, 2003. This increase was a result of increased sales headcount and higher commissions due to higher sales. As a percentage of sales, selling expenses dropped to 25.6% of sales in 2003 from 30.0% in 2002.
General and administrative expenses
General and administrative expenses increased by $1.2 million or 15.2% from $7.9 million for the year ended December 31, 2002 to $9.1 million for the year 16 ended December 31, 2003. The increase was primarily due to the increase in professional and legal fees, service charges and network costs. General and administrative expenses as per- centage of sales fell to 12.7% of the sales in 2003 from 17.0% of the sales in 2002.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased by
$148,000 or 6.6%, from $2.3 million for the year ended December 31, 2002 to $2.1 million in 2003, due to a reduc- tion in amortization of existing product technology of
$374,000, offset by an increase of $226,000 in depreciation of new equipment.
Research and development expenses
Research and development expenses increased by $497,000 or 12.3%, from $4.0 million for the year ended December 31, 2002 to $4.5 million for the year ended December 31, 2003 due primarily to the increased subcontractor costs and materials. The Company plans to spend at least 5% of sales on research and development.
Employee stock option expenses
Employee stock option expenses increased by $709,000 from $9,000 for the year ended December 31, 2002 to
$718,000 for the year ended December 31, 2003 due prima- rily to an increase in the price of the Company’s stock and the recording of expense in connection with certain stock options that are accounted for as variable options. (See also
“Note 12—Stock Compensation” to the Consolidated Finan- cial Statements contained herein).
Interest income/expense
Interest income decreased by $479,000 or 85.4%, from
$561,000 for the year ended December 31, 2002 to $82,000 for the year ended December 31, 2003 primarily from lower average investments and lower interest rates in 2003. Interest expense increased by $18,000 from $28,000 for the year ended December 31, 2002 to $46,000 for the year ended December 31, 2003 due to increased use of a credit line (See Liquidity and Capital Resources below).
Other income
Other income increased by $1.3 million from $601,000 for the year ended December 31, 2002 to $1.9 million for the year ended December 31, 2003 due primarily to the settle- ment of litigation with the former shareholders of SMX for
$1.1 million. (See also Note 2—Acquisition). Income tax expense
Income tax expense increased by $946,000 from $211,000 for the year ended December 31, 2002 to $1.2 million for the year ended December 31, 2003. The effective tax rate in 2003 was 12.8% of net income before income tax. The pri- mary reason for the relatively low tax rate was a reduction in valuation allowance of approximately $4.0 million. Of that reduction, $2.8 million relates to usage of “net operating losses” in foreign jurisdictions and $1.2 million of the reduc- tion in valuation allowance relates to domestic assets for which the Company now believes are more likely than not to be realized. The Company has $1.7 million in deferred tax assets remaining, which may be recognized in 2004 if the Company remains consistently profitable. (See also “Note 10— Income Taxes” to the Consolidated Financial Statements contained herein). Separate from income tax expenses, the Company recorded an addition to Shareholders’ Equity of
$1.4 million for the income tax benefit received from the exercise of unqualified stock options by employees. Net income (loss)
The results from operations increased by $10.3 million from a loss of $2.0 million for the year ended December 31, 2002 to $8.3 million for the year ended December 31, 2003 as a result of the factors described above.
2002 Compared to 2001
Sales
Sales increased by $10.1 million or 28.0%, from $36.1 mil- lion for the year ended December 31, 2001 to $46.2 million for year ended December 31, 2002. The increase resulted primarily from sales of the new laser product line in 2002. Geographically sales increased in all regions primarily due to sales of the new laser product line (United States increased
$5.1 million or 34.5%, Europe increased $2.2 million or 15.4%, Japan increased $1.9 million or 111.8%, other foreign sales increased $900,000 or 16.4%). (See also Note 15 to the Consolidated Financial Statements). Royalty income included in sales decreased by $20,000 from $1,010,000 for the year ended December 31, 2001 to $990,000 for the year ended December 31, 2002.
Gross profit
Gross profit increased by $3.3 million or 15.1%, from $21.8 million for the year ended December 31, 2001 to $25.1 mil- lion for the year ended December 31, 2002. Gross margin decreased from 60.4% for the year ended December 31, 2001 to 54.4% for the year ended December 31, 2002. The decrease in gross margin was primarily a result of a one- time inventory write-down ($729,000) recorded in the second quarter of 2002 related to the new laser product line, the impact of the new laser product line acquired in January 2002 and, to a lesser extent, the new generation arm prod- ucts introduced in the third quarter of 2002. Gross margins on sales are expected to ultimately meet or exceed the Company’s historic levels once both production facilities are at full production levels. Plant capacity utilization is expected to increase with additional manufacturing efficiencies expected in 2003.
Selling expenses
Selling expenses increased by $456,000 or 3.4%, from
$13.4 million for the year ended December 31, 2001 to
$13.9 million for the year ended December 31, 2002. This increase was a result of higher sales commissions on higher sales in the U.S. ($1.0 million) and higher expenses in Japan ($382,000) offset largely by cost reduction measures imple- mented in the United States ($742,000) and Europe ($184,000). While an increase in total expenses was experi- enced in 2002 compared to 2001, this amount represents a decrease in the percentage of sales from 37.2% in 2001 to 30.0% in 2002.
General and administrative expenses
General and administrative expenses increased by $2.1 million or 36.2% from $5.8 million for the year ended December 31, 2001 to $7.9 million for the year ended December 31, 2002. The increase was due to administrative expenses resulting from the integration of the former SMX in 2002 ($915,000), professional fees unrelated to SMX ($352,000), a provision for doubtful accounts receivable ($245,000) recorded in the second quarter of 2002 related to the recently acquired laser product line, and a shifting of personnel from research and development to administrative positions ($549,000).
Depreciation and amortization expenses
Depreciation and amortization expenses decreased by
$292,000, or 11.2%, from $2.6 million for the year ended December 31, 2001 to $2.3 million in 2002. Depreciation and amortization expenses in 2002 reflect the effect (approxi- mately $740,000) of the adoption, effective January 1, 2002, of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142) partly offset by an increase in depreciation resulting from newly acquired assets in late 2002. (See Note 6 to the Consolidated Financial Statements).
Research and development expenses
Research and development expenses increased by $663,000, or 19.5%, from $3.4 million for the year ended December 31, 2001 to $4.0 million for the year ended December 31, 2002, principally as a result of research and development expenses of the new laser tracker product line ($1.6 million), offset in part by lower expenses for the new generation arm devel- opment in the U.S. ($388,000) and shifting of personnel to administrative positions costs in Europe ($549,000—see General and administrative expenses above).
Interest income
Interest income decreased by $339,000, or 37.7%, from
$900,000 for the year ended December 31, 2001 to $561,000 for the year ended December 31, 2002. The decrease was primarily attributable to lower interest bearing cash balances (see Liquidity and Capital Resources below) and lower inter- est rates prevailing in 2002.
Other income (loss)
Other income increased by $644,000, from $43,000 loss for the year ended December 31, 2001 to $601,000 in income for the year ended December 31, 2002 primarily due to for- eign currency gains during the current year.
Income tax expense
Income tax expense decreased by $131,000 from $342,000 for the year ended December 31, 2001 to $211,000 for the year ended December 31, 2002.
Net loss
Net loss decreased by $800,000 from $2.8 million for the year ended December 31, 2001 to $2.0 million for the year ended December 31, 2002 primarily due to higher gross profit from increased sales and cost savings measures implemented in the U.S. and Europe, partially offset by inte- gration expenses of the Laser Division and reduced income tax expense.
Liquidity and Capital Resources
Since 1997, the Company had financed its operations prima- rily from cash provided by operating activities and from the proceeds of its 1997 initial public offering of Common Stock (approximately $31.7 million). On November 12, 2003 the Company along with Company’s two co-founders completed a $41.5 million private placement of its common stock with various institutional investors. In the private placement, the Company sold 1,158,000 shares, or approximately 8% of total shares outstanding, and the two co-founders of the Company, Simon Raab and Gregory Fraser, sold 772,000 shares, or approximately 20% of their holdings, in the aggre- gate. The shares were sold for $21.50 per share, resulting in total proceeds before placement agent fees and other offer- ing expenses of $24.9 million and $16.6 million to the Company and the co-founders, respectively.
On September 17, 2003, the Company entered into a loan agreement with SunTrust Bank for a line of credit of $5 mil- lion. The Company has not drawn on this line of credit. Total marketable securities (cash and cash equivalents and invest- ments) at December 31, 2003 were $33.5 million, compared to $5.9 million at December 31, 2002. This $27.6 million increase was primarily due to the $24.9 million private place- ment on November 12, 2003 described above. (See Note 1 to the Consolidated Financial Statements).
For the year ended December 31, 2003, net cash provided by operating activities was $4.7 million compared to net cash used by operating activities of $5.0 million in 2002. The
$9.7 million increase reflects strong growth in sales and operating income, partially offset by increases in accounts receivable, taxes, and unearned revenue and the other income realized in Company stock in the settlement of the SMX litigation.
Net cash used by investing activities for the year ended December 31, 2003 was $15.2 million, compared to $118,000 in 2002, primarily due to increased net investment purchases of $14.1 million.
Net cash provided by the financing activities for the year ended December 31, 2003 was $23.0 million compared to a provision of $1.4 million in 2002. The increase was primarily the proceeds of the $24.9 million private placement of the Company common stock in November 2003.
We believe that our working capital, together with antici- pated cash flow from our operations, will be sufficient to fund our long-term liquidity requirements. Our liquidity is not dependent upon the use of off-balance-sheet financing
arrangements, such as securitization of receivables or obtaining access to capital through special-purpose entities. On January 16, 2002, in connection with its acquisition of SMX, the Company issued 500,000 shares of FARO common stock to the former shareholders. On September 16, 2003 the Company settled a dispute with the former SMX share- holders, which resulted in approximately 100,000 shares being returned from the 500,000 initially issued in the acquisition.
Contractual Obligations and Commercial Commitments The Company is a party to a capital lease of $107,234 and a party to automotive and other equipment with an initial term of 36 to 60 months and other non-cancelable operating leases, including leases with related parties (see Note 8 of Notes to the Consolidated Financial Statements) that expire on or before 2007.
Commitments under the lease agreements are as follows at December 31, 2003:
Payments Due Under: Capital Operating
Year Leases Leases Total
2004 $ 42,585 $1,145,251 $1,187,836
2005 31,871 1,403,698 1,435,569
2006 30,163 936,589 966,752
2007 2,615 304,292 306,907
2008 — 159,596 159,596
Thereafter — — —
Total future minimum
lease payments $107,234 $3,949,426 $4,056,660
Critical Accounting Policies
In response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected our most subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate in addition to any inherent uncertainties pertaining to the estimate and the possible effects on the Company’s financial condition. The two accounting estimation processes discussed below are the Company’s process of recognizing research and development expenditures, and the allowance for obsolete and slow-moving inventory. These estimation processes affect current assets and operating results and are therefore critical in assessing the financial and operating status of the Company. These estimates involve certain assumptions that if incorrect could create an adverse impact on the Company’s operations and financial position.
Research and development costs incurred in the discovery of new knowledge and the resulting translation of this new knowledge into plans and designs for new products, prior to the attainment of the related products’ technological feasibility, are recorded as expenses in the period incurred. Product design costs incurred in the development of products after technological feasibility is attained are capitalized and amor- tized using the straight-line method over the estimated economic lives of the related products, not to exceed three years. The Company considers technological feasibility to be established when the Company has completed all planning, designing, coding and testing activities that are necessary to establish design specifications, including function, features and technical performance requirements. Capitalization of product design costs ceases and amortization of such costs begins when the product is available for general release to customers. The Company periodically assesses the value of capitalized product design costs and records a reserve for obsolescence or impairment when, in the circumstances (including the discontinuance or probable discontinuance of the related products from the market), it deems the asset to be obsolete or impaired.
The reserve for obsolete and slow-moving inventory was
$155,000, $90,000 and $298,000 at December 31, 2003, 2002 and 2001 respectively. The reserve for obsolete and slow-moving inventory is used to determine the Company’s inventories at the lower of average cost or net realizable value. Since the amount of inventorial cost that the Company will truly recoup through sales cannot be known with exact certainty, the Company relies on past sales experience and future sales forecasts. Inventory is considered as obsolete and an allowance in an amount equal to 100% of the aver- age cost of such inventory is recorded if the Company has withdrawn it from the market or if the Company has had no sales of the product for the past 12 months nor sales fore- casted for the next 12 months. The Company classifies as slow-moving inventory those with quantities on hand greater than the amounts we have sold in the past 12 months or have forecasted to sell in the next 12 months, and reserve such amount as is adequate to reduce the car- rying value to its estimated net realizable value. The Company performs an obsolete and slow-moving inventory review twice a year and writes off identified obsolete and slow-moving inven-tory accordingly.
The Company performs ongoing evaluations of its customers and adjusts their credit ratings accordingly. The Company continuously monitors collections and payments from its customers and maintains a provision for uncollectible amounts based on its historical experience and any other
issues it has identified. While such credit losses have histor- ically been within its expectations, the Company cannot guar- antee this will continue in the future. The allowances recorded for 2003, 2002 and 2001 were approximately, $140,000,
$582,000 and $311,000 respectively. The amount written off, net of recoveries in 2003 was $737,000, which related primarily to very old receivables acquired as part of the SMX acquisition. The Company reserved for these doubtful receiv- ables in 2002, therefore there was no income statement effect of this write-off in 2003.
Transactions with Related and Other Parties
The Company leases its headquarters from Xenon Research, Inc. (“Xenon”), all of the issued and outstanding capital stock of which is owned by Simon Raab, the Company’s President and Chief Executive Officer, and Diana Raab, his spouse. The term of the lease expires on February 28, 2006, and the Company has two five-year renewal options. Base rent under the lease was $398,000 for 2003. Base rent during renewal periods will reflect changes in the U.S. Bureau of Labor Statistics Consumer Price Index for all Urban Consumers.
Foreign Exchange Exposure
The Company conducts a significant portion of its business outside the United States. At present, a slight majority of the Company’s revenues are invoiced, and a significant por- tion of its operating expenses paid, in foreign currencies. Fluctuations in exchange rates between the U.S. dollar and such foreign currencies may have a material adverse effect on the Company’s business, results of operations and financial condition, and could specifically result in foreign exchange gains and losses. The impact of future exchange rate fluctu- ations on the results of the Company’s operations cannot be accurately predicted. To the extent that the percentage of the Company’s non-U.S. dollar revenues derived from inter- national sales increases in the future, the Company’s expo- sure to risks associated with fluctuations in foreign exchange rates will increase further.
Inflation
The Company believes that inflation has not had a material impact on its results of operations in recent years and does not expect inflation to have a material impact on its opera- tions in 2004.
Impact of Recently Issued Accounting Standards
In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 00-21, Multiple-Deliverable
Revenue Arrangements (“EITF 00-21”). EITF 00-21 addresses how to account for arrangements that may involve the deliv- ery or performance of multiple products, services, and/or rights to use assets. The consensus mandates how to iden- tify whether goods or services or both that are to be deliv- ered separately in a bundled sales arrangement should be accounted for separately because they are “separate units of accounting” The guidance can affect the timing of revenue recognition for such arrangements, even though it does not change rules governing the timing or pattern of revenue recognition of individual items accounted for separately. The final consensus will be applicable to agreements entered into in fiscal years beginning after June 15, 2003 with early adoption permitted. Additionally, companies will be permit- ted to apply the consensus guidance to all existing arrange- ments as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, Accounting Changes. The Company is assessing, but at this point does not believe, the adoption of EITF 00-21 will have a material impact on our financial position, cash flows or results of operations.
In January 2003, the Financial Accounting Standard Board (“FASB”) issued FASB Interpretation No. 46 (FIN 46) “Con- solidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enter- prises of variable interest entities. Under current practice, two enterprises generally have been included in consoli- dated financial statements because one enterprise controls the other through voting interests. This interpretation defines the concept of “variable interests” and requires existing unconsolidated variable interest entities to be con- solidated by their primary beneficiaries if the entities do not effectively disperse the risks among the parties involved. This interpretation applied immediately to variable interest entities created after January 31, 2003, and to variable inter- est entities in which an enterprise obtains an interest after that date. It applied in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. If it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when this interpretation becomes effective, the enterprise shall disclose information about those entities in all financial statements issued after January 31, 2003. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect
adjustment as of the beginning of the first year restated. We have completed our assessment of this interpretation and determined that we are not party to any variable interest entities as of December 31, 2003.
In December 2002, the FASB issued SFAS No. 148, “Account- ing for Stock-Based Compensation—Transition and Disclo- sure” (SFAS 148), an amendment of SFAS 123. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. This statement is effective for financial statements for fiscal years ending after December 15, 2002. Adoption of SFAS 148 did not have a material impact on the Company’s financial position or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, includ- ing certain derivative instruments embedded in other con- tracts (collectively referred to as derivatives) and for hedging activities under Statement of Financial Accounting Standards No. 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities.” The statement was effective for contracts entered into or modified after June 30, 2003. The adoption of this standard did not have a material impact on our financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circum- stances). This standard was effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities that are subject to the provisions of this Statement for the first fiscal period beginning after December 15, 2003. The adoption of this standard did not have a material impact on our financial position or results of operations.
Cautionary Statements
We discuss expectations regarding our future performance and make other forward-looking statements in our annual and quarterly reports, press releases, and other written and oral statements. These forward-looking statements are based on currently available competitive, financial and eco- nomic data and our operating plans. They are inherently uncer- tain, and investors must recognize that events could turn out to be significantly different from our expectations. The fol- lowing discussion of risks and uncertainties which is not exclusive, highlights some important factors to consider when evaluating our trends and future results.
Our customers’ buying process for our products is highly decentralized, and therefore, it typically requires significant time and expense for us to further penetrate the potential market of a specific customer, which may delay our ability to generate additional revenue.
Our success will depend, in part, on our ability to further penetrate our customer base. Most of our customers have a decentralized buying process for measurement devices. Thus, we must spend significant time and resources to increase revenues from a specific customer. For example, we may provide products to only one of our customers’ manufacturing facilities or for a specific product line within a manufacturing facility. We cannot assure you that we will be able to maintain or increase the amount of sales to our exist- ing customers.
Others may develop products that make our products obso- lete or less competitive.
The computer-aided manufacturing measurement (“CAM2”) market is emerging and could be characterized by rapid technological change. Others may develop new or improved products, or processes or technologies may make our prod- ucts obsolete or less competitive. We cannot assure you that we will be able to adapt to evolving markets and technologies or maintain our technological advantage.
Our success will depend, in part, on our ability to maintain our technological advantage by developing new products and enhancing our existing products. Developing new prod- ucts and enhancing our existing products can be complex and time-consuming. Significant delays in new product releases, or difficulties in developing new products, could adversely affect our revenues and results of operations. Because our customers are concentrated in a few industries, a reduction in sales to any one of these industries could cause a signifi- cant decline in our revenues.
Approximately 75% of our sales are to manufacturers in the automotive, aerospace and heavy equipment industries. We are dependent upon the continued growth, viability and financial stability of our 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 our rev- enues and results of operations. In addition, the volume of orders from our customers and the prices of our products may be adversely impacted by decreases in capital spending by a significant portion of our customers during recessionary periods. In addition, we generate significant accounts receiv- able in connection with providing products and services to our customers. If one or more of our significant customers were to become insolvent or otherwise were unable to pay for the products provided by us, our operating results and financial condition would be adversely affected.
Our inability to protect our patents and proprietary rights in the United States and foreign countries could adversely affect our revenues.
Our success depends in large part on our ability to obtain and maintain patent and other proprietary right protection for our processes and products in the United States and other countries. We also rely upon trade secrets, technical know- how, and continuing inventions to maintain our competitive position. We seek to protect our technology and trade secrets, in part, by confidentiality agreements with our employees and contractors. Our employees may breach these agree- ments or our trade secrets may otherwise become known or be independently discovered by inventors. If we are unable to obtain or maintain protection of our patents, trade secrets and other proprietary rights, we may not be able to prevent third parties from using our proprietary rights.
Our patent protection involves complex legal and technical questions. Our patents may be challenged, narrowed, invali- dated, or circumvented. We may be able to protect our pro- prietary rights from infringement by third parties only to the extent that our proprietary processes and products are cov- ered by valid and enforceable patents or are effectively maintained as trade secrets. Furthermore, others may inde- pendently develop similar or alternative technologies or design around our patented technologies. Litigation or other proceedings to defend or enforce our intellectual property rights could require us to spend significant time and money and could otherwise adversely affect our business.
Claims from others that we infringe their intellectual property rights may adversely affect our operations.
From time to time we receive notices from others claiming we infringe their intellectual property rights. The number of these claims may grow. Responding to these claims may require us to enter into royalty and licensing agreements on unfavorable terms, require us to stop selling or to redesign affected products, or require us to pay damages. Any litiga- tion or interference proceedings, regardless of their out- come, may be costly and may require significant time and attention of our management and technical personnel. Our operating results may fluctuate due to a number of fac- tors, many of which are beyond our control.
Our annual and quarterly operating results have varied sig- nificantly in the past and likely will vary significantly in the future as a result of:
• the size and timing of customer orders;
• the amount of time that it takes to fulfill orders and ship our products;
• the length of our sales cycle to new customers and the time and expense incurred in further penetrating our exist- ing customer base;
• increases in operating expenses required 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;
• our success in expanding our sales and marketing programs;
• start-up costs associated with opening new sales offices outside of the United States;
• fluctuations in revenue without proportionate adjustments in fixed costs;
• the efficiencies achieved in managing inventories and fixed assets; and
• adverse changes in the manufacturing industry and general economic conditions.
Any one or a combination of these factors could adversely affect our annual and quarterly operating results in the future. The CAM2 market is an emerging market, and our growth depends on the ability of our products to attain broad market acceptance.
The CAM2 market is in an early stage of adoption. The market for traditional fixed-base coordinate measurement machines (“CMMs”), check fixtures, and other handheld measurement tools is mature. Part of our strategy is to continue to displace
these traditional measurement devices. Displacing tradi- tional measurement devices and achieving broad market acceptance of our products requires significant effort to con- vince manufacturers to reevaluate their historical measure- ment procedures and methodologies.
We market three closely interdependent products (Faro Arms, Faro Laser Tracker, and Faro Gage) and related software for use in measurement and inspection applications. Substantially all our revenues currently are derived from sales of these products and software, and we plan to continue our busi- ness strategy of focusing on the portable software-driven, 3-D measurement and inspection market. Consequently, our financial performance will depend in large part on portable, computer-based measurement and inspection products achiev- ing broad market acceptance. If our products cannot attain broad market acceptance, we will not grow as anticipated and may be required to make increased expenditures on research and development for new applications or new products. We compete with manufacturers of portable measurement systems and traditional measurement devices, many of which have more resources than us and may develop products or technologies that will directly compete with us.
Our portable measurement systems compete in the broad market for measurement devices for manufacturing and industrial applications, which, in addition to portable articu- lated arms and laser tracker products, consists of fixed-base CMMs, check fixtures, and handheld measurement tools. The broad market for measurement devices is highly competitive. Manufacturers of handheld measurement tools and fixed- base CMMs include a significant number of well-established companies that are substantially larger and possess substan- tially greater financial, technical and marketing resources than we possess. In the laser tracker product line, we compete primarily with Leica Geosystems, who is significantly larger than us and, we believe, currently the leader in this product line. We will be required to make continued investments in technology and product development to maintain our tech- nological advantage over our competition. We cannot assure you that we will have sufficient resources to make additional investments in technology and product development or that our product development efforts will allow us to success- fully compete as the industry evolves.
Our competitors may develop products or technologies that directly compete with us. For example, fixed-base CMMs are introducing computer-aided-design (“CAD”)-based inspec- tion software in response to the trend toward CAD-based factory floor metrology. In addition, some fixed-base CMM manufacturers are miniaturizing and increasing the mobility
of their conventional CMMs. These companies may con- tinue to alter their products and devote resources to the development and marketing of additional products that com- pete with ours.
We derive a substantial part of our revenues from our inter- national operations, which are subject to greater volatility and often require more management time and expense to achieve profitability than our domestic operations.
Since 2000, we have derived over 50% of our sales from international operations. We recently opened a manufactur- ing facility in Schaufhausen, Switzerland and have regional sales offices in Germany, France, Spain, Italy, Japan, and the United Kingdom. We are in the process of opening our first direct sales offices in China. Should trade relations between the United States and China deteriorate, our ability to trans- fer products between China and other regions of the world, including the United States, Asia and Europe could be signif- icantly impaired and our results of operations would suffer. In our experience, entry into new international markets requires considerable management time as well as start-up expenses for market development, hiring, and establishing office facil- ities before any significant revenues are generated. As a result, initial operations in a new market may operate at low margins or may be unprofitable. Our international operations may be subject to a number of 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;
• export duties, import controls, and trade barriers;
• governmental restrictions on the transfer of funds to us from our operations outside the United States;
• burdens of complying with a wide variety of foreign laws and labor practices;
• fluctuations in currency exchange rates, which could affect local payroll utility and other expenses; and
• inability to use net operating losses incurred by our foreign operations to reduce our U.S. income taxes.
Several of the countries where we operate 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 our results of operations and any measures that we may implement to reduce the effect of volatile currencies and other risks of our international operations may not be effective. In addition, during 1997 and 1998, several Asian
countries, including Japan, experienced severe currency fluctuation and economic deflation. If such situations reoc- cur or occur in other regions where we operate, it may neg- atively impact our sales and our ability to collect payments from customers in these regions.
We rely to a large extent on the experience and manage- ment ability of our senior executive officers.
Our success will depend, in part, on the services of our founders, Simon Raab, our Chief Executive Officer, and Gregory Fraser, our Executive Vice President and Chief Financial Officer. The loss or interruption of the continued full-time services of these executives could have a material adverse effect on us. We do not have employment agree- ments with these executives.
We may not be able to identify, consummate, or achieve expected benefits from acquisitions.
We have completed two significant acquisitions since our initial public offering in 1997. We intend to pursue access to additional technologies, complementary product lines, and sales channels through selective acquisitions and strategic investments. We may not be able to identify and success- fully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory terms or otherwise com- plete acquisitions in the future. In the past, we have used our stock as consideration for acquisitions. Our common stock may not remain at a price at which it can be used as consid- eration for acquisitions without diluting our existing share- holders, and potential acquisition candidates may not view our stock attractively.
Realization of the benefits of acquisitions often requires integration of some or all of the acquired companies’ sales and marketing, distribution, manufacturing, engineering, finance and administrative organizations. The integration of acquisi- tions demands substantial attention from senior manage- ment and the management of the acquired companies. Any acquisition may be subject to a variety of risks and uncer- tainties, including:
• the inability to assimilate effectively the operations, prod- ucts, technologies, and personnel of the acquired companies (some of which may be located in diverse geographic regions);
• the inability to maintain uniform standards, controls, proce- dures and policies;
• the need or obligation to divest portions of the acquired companies; and
• the potential impairment of relationships with customers.
We cannot assure you that we will be able to integrate suc- cessfully any acquisitions or that any acquired companies will operate profitably, or that we will realize the expected bene- fits from any acquisition.
We may face difficulties managing growth.
Our growth has placed significant demands on our manage- ment and operations and financial resources. If our business continues to grow rapidly in the future, we expect it to result in:
• increased responsibility for existing and new management personnel, and
• incremental strain on our operations, and financial and management systems.
Our success under such conditions will depend to a signifi- cant extent on the ability of our executive officers and other members of senior management to operate effectively both independently and as a group. If we are not able to manage future growth, our business, financial condition and operat- ing results may be harmed.
Our dependence on suppliers for materials could impair our ability to manufacture our products.
Outside vendors provide key components used by us in the manufacture of our products. Although we believe that alter- native sources for these components are available, any supply interruption in a limited source component would harm our ability to manufacture our 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 us, or incompatible with our manufacturing processes, could harm our ability to manufacture our products. We may not be able to find a sufficient alternative supplier in a rea- sonable period, or on commercially reasonable terms, if at all. If we fail to obtain a supplier for the manufacture of com- ponents of our potential products, we may experience delays or interruptions in our operations, which would adversely affect our results of operations and financial condition. We may experience volatility in our stock price.
The price of our common stock has been, and may continue to be, highly volatile in response to various factors, many of which are beyond our control, including:
• developments in the industries in which we operate;
• actual or anticipated variations in quarterly or annual oper- ating results;
• speculation in the press or investment community; and
• announcements of technological innovations or new prod- ucts by us or our competitors.
Our common stock’s market price may also be affected by our inability to meet analyst and investor expectations and failure to achieve projected financial results, including those set forth in this prospectus. Any failure to meet such expec- tations or projected financial results, even if minor, could cause the market price of our common stock to decline. Volatility in our stock price may result in your inability to sell your shares at or above the price at which you purchased them. In addition, stock markets have generally experienced a high level of price and volume volatility, and the market prices of equity securities of many companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies. These broad market fluctu- ations may adversely affect our common stock’s market price. In the past, securities class action lawsuits frequently have been instituted against such companies following periods of volatility in the market price of such companies’ securities. If any such litigation is instigated against us, it could result in substantial costs and a diversion of manage- ment’s attention and resources, which could have a material adverse effect on our business, results of operations and financial condition.
Our executive officers and directors control a significant per- centage of our common stock and these shareholders may take actions that are adverse to your interests.
Our executive officers and directors and entities affiliated with them, in the aggregate, beneficially own approximately 24.0% of our common stock, 21.0% of which is beneficially owned by our two co-founders, Simon Raab and Gregory Fraser. As a result, these shareholders, acting together, can signifi- cantly influence all matters requiring shareholder approval, including the election and removal of directors and approval of significant corporate transactions such as mergers, con- solidations and sales of assets. They also could dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring, or preventing a change in control or impeding a merger or con- solidation, takeover, or other business combination, which could cause the market price of our common stock to fall or prevent you from receiving a premium in such a transaction. Anti-takeover provisions in our articles of incorporation and bylaws and provisions of Florida law could delay or prevent a change of control that you may favor.
Our articles of incorporation, our bylaws and Florida law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to you. These provisions could discourage potential takeover attempts and could adversely
affect the market price of our shares. Because of these pro- visions, you might not be able to receive a premium on your investment. These provisions include:
• a limitation on shareholders’ ability to call a special meet- ing of our shareholders;
• advance notice requirements to nominate directors for election to our Board of Directors or to propose matters that can be acted on by shareholders at shareholder meet- ings; and
• the authority of the Board of Directors to issue, without shareholder approval, preferred stock with such terms as the Board of Directors may determine.
The provisions described above could delay or make more difficult transactions involving a change in control of us, or our management.
M A R K E T F O R R E G I S T R A N T ’ S C O M M O N E Q U I T Y , R E L A T E D S T O C K H O L D E R
M A T T E R S , A N D I S S U E R P U R C H A S E S O F E Q U I T Y S E C U R I T I E S
The Company’s Common Stock, par value $.001 per share, trades on the NASDAQ Stock Market under the symbol FARO. The following table sets forth the high and low sale price of the Company’s Common Stock for its two most recent fiscal years:
2003 2002 High Low High Low First Quarter 3.31 1.91 3.50 1.53 Second Quarter 7.72 3.12 3.56 1.45 Third Quarter 13.53 6.67 2.17 1.06 Fourth Quarter 30.20 12.10 2.10 1.35
The Company has not paid any cash dividends on its Common Stock to date. The Company expects to retain future earn- ings for use in operating and expanding its business and does not anticipate paying any cash dividends in the reason- ably foreseeable future. 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. As of March 15, 2004, the last sale price of the Company’s Common Stock was $24.34, and there were approximately 78 holders of record of Common Stock. The Company believes that there are approximately 11,300 beneficial own- ers of its Common Stock. In 1998 the Board of Directors authorized the officers of the Company, without further approval of the Board, to purchase in the open market up to a maximum of one million shares of the Company’s Common Stock.
In 1998, the Company purchased 40,000 shares of its Common Stock in the open market under such stock repur- chase plan. During the three years in the period ended December 31, 2003 the Company did not purchase any shares of its Common Stock in the open market.
On November 12, 2003, the Company sold 1,158,000 shares of its common stock, and two of the Company’s founders sold 772,000 shares of the common stock to certain institu- tional investors in a private placement that was not regis- tered under the Securities Act of 1933. The shares were sold for $21.50 per share, resulting in total proceeds before place- ment agent fees and other offering expenses of $24.9 mil- lion and $16.6 million to the Company and the co-founders, respectively. The purchasers of the shares sold in the trans- action were 31 institutional investors. Robert W. Baird & Co. served as the placement agent for the transaction, and received a fee equal to $2,489,700, or 6% of the aggregate sales proceeds. The Company also reimbursed Robert W. Baird & Co. for $50,000 in expenses incurred in connection with the transaction.
The private placement transaction was exempt from regis- tration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and Rule 506 under Regulation D promulgated by the Securities and Exchange Commission thereunder. These exemptions were available for the private placement transaction on the basis that the transaction did not involve a public offering and satisfied each of the criteria under Rule 506 of Regulation D.
