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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-22250
3D SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4431352
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
26081 Avenue Hall
Valencia, California 91355
(Address of principal executive offices and zip code)
(661) 295-5600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Preferred Stock Purchase Rights
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 twelve 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 |X| 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 definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any Amendment to this Form
10-K. |_|
At February 29, 2000, there were outstanding 11,602,633 shares of the Common
Stock of Registrant, and the aggregate market value of the shares held on that
date by non-affiliates of Registrant, based on the closing price ($11.6562 per
share) of the Registrant's Common Stock on the Nasdaq National Market on that
date, was $90,806,356. For purposes of this computation, it has been assumed
that the shares beneficially held by directors and officers of Registrant were
"held by affiliates"; this assumption is not to be deemed to be an admission by
such persons that they are affiliates of Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement with respect to its 2000 Annual Meeting
of Shareholders, currently scheduled to be held May 2, 2000, are incorporated by
reference into Part III of this Report.
Exhibit index is located on page 28.
Page 7
3D SYSTEMS CORPORATION
Annual Report on Form 10-K for the
Year Ended December 31, 1999
PART I....................................................................................................3
Item 1. Business......................................................................................3
Item 2. Properties...................................................................................15
Item 3. Legal Proceedings............................................................................15
Item 4. Submission of Matters to a Vote of Security Holders..........................................16
Item 4a. Executive Officers of the Registrant.........................................................16
PART II..................................................................................................18
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................18
Item 6. Selected Financial Data......................................................................19
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition........20
Item 7a. Quantitative and Qualitative Disclosures About Market Risk...................................26
Item 8. Financial Statements and Supplementary Data..................................................26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures........26
PART III.................................................................................................27
Item 10. Directors and Executive Officers of the Registrant...........................................27
Item 11. Executive Compensation.......................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................27
Item 13. Certain Relationships and Related Transactions...............................................27
PART IV..................................................................................................28
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K..............................28
Page 2
PART I
Item 1. Business
- - ----------------
For a discussion of certain material factors which may affect the Company, see
"Cautionary Statements and Risk Factors" commencing on page 10 of this Report.
General
3D Systems Corporation (the "Company," "We," or "Us") develops, manufactures
and markets worldwide solid imaging systems. Solid imaging systems are
designed to produce physical objects rapidly from digital data using computer
aided design and manufacturing ("CAD/CAM") software utilities and related
computer applications. Our hardware products include SLA-Registered
Trademark- industrial systems and ThermoJet(TM) solid object printers. In
addition, we market and distribute consumable materials used in these
systems. Our growing installed base of systems requires an ongoing supply of
materials as well as service support. ThermoJet printers use proprietary
materials developed, manufactured and sold exclusively by us. For SLA
systems, we are the exclusive worldwide distributor (except for Japan) of
Ciba Specialty Chemicals, Inc.'s ("CSC") stereolithography photopolymer
resins ("resins"), which we developed in conjunction with CSC.
SLA industrial systems use our proprietary stereolithography ("SL") technology,
a solid imaging process which uses a laser beam to expose and solidify
successive layers of photosensitive epoxy resin until the desired object is
formed to precise specifications in epoxy or acrylic resin. SL-produced parts
can be used for concept models, engineering prototypes, patterns and masters for
molds, consumable tooling or short-run manufacturing of final product, among
other applications. SL technology can provide users with significant product
development time savings, cost reductions and improved quality, compared to
traditional modeling, tooling and pattern-making techniques. In addition,
material functionality can produce more durable parts, which can be used for
rapid manufacturing. We provide, either directly or through our network of
authorized distributors, a variety of on-site maintenance services and
processing materials.
ThermoJet solid object printers employ hot melt ink jet technology to build
models in successive layers using our proprietary thermoplastic material. These
printers, about the size of an office copier, are designed for operation in
engineering and design office environments. Designers, engineers, and other
users of CAD/CAM utilities can incorporate the printers into office networks as
a shared resource, to rapidly produce models of products under development for
design concept communication and validation. In addition, the ThermoJet solid
object printer output can be used as patterns and molds and, when combined with
other secondary processes, can produce parts with representative end use
properties. We provide, either directly or through our network of authorized
distributors, on-site maintenance services.
We market directly and through secondary distribution channels to customers in
the United States, Europe and Asia, and through distributors in other countries.
We sold our first SLA system in 1988, our first solid object printer in the
fourth quarter of 1996, and as of December 31, 1999, had sold 1,546 machines to
customers in over 80 countries. Our customers include major corporations
throughout the world in a broad range of industries including manufacturers of
automotive, aerospace, computer, electronic, consumer and medical products. We
also sell SLA systems and ThermoJet printers to independent service bureaus,
which, for a fee, provide stereolithographic and 3D printing services to their
customers.
As of December 31, 1999, we held 197 patents related to solid imaging: 93 United
States; 61 European; 8 Japanese; and 35 other foreign patents. We continue to
develop improvements in our product lines as well as new products to expand the
applications of solid imaging. In conjunction with CSC, we continue to develop
materials for our SLA systems with different and improved characteristics to
expand SL applications. CSC is a Swiss-based multinational manufacturer and
distributor of specialty chemicals, a 14.9% beneficial shareholder of the
Company, and our partner in photopolymer resin development.
Solid imaging is a relatively new field embodying the use of computers and
computer automated equipment to rapidly produce prototypes, models and even
low-volume production quantities of physical objects that traditionally have
been produced by machining and other methods. We believe that stereolithography
and solid imaging hot melt ink jet technologies, which we have developed and
patented, represent the most significant developments in this field. While
alternative technologies exist and significant research and development efforts
are currently being undertaken by corporations and universities around the world
in an attempt to develop additional alternative technologies and techniques, we
remain the leader in the solid imaging field on the basis of total revenue and
systems installed.
Unless otherwise indicated, all references to "CSC" include Ciba Specialty
Chemicals, Inc. and its affiliates, including Ciba Specialty Chemicals Holding
and its wholly-owned subsidiaries in Canada, through which CSC holds its
interest in the Company, and the United States ("CSC US"), through which CSC
conducts its United States operations. On December 14, 1999, CSC announced it
would sell its Performance Polymer Division, the division with which we
primarily
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do business, to Morgan Grenfell Private Equity ("MGPE"). The announcement stated
that the transaction is expected to close in the first quarter of 2000. On
February 7, 2000, CSC advised us that the operations of the division will be run
by the present management in a newly created Swiss company headquartered in
Basel, Switzerland and that CSC will assign to the new company its rights and
obligations under all contracts related to the Performance Polymers Division.
MGPE is ultimately owned by Deutsch Bank AG.
Corporate Structure
The Company is a Delaware corporation, and is the sole shareholder of 3D Canada
Company, a Nova Scotia unlimited liability company (formerly 3D Systems (Canada)
Inc., a British Columbia corporation) ("3D Canada"). The Company and 3D Canada
jointly own 3D Holdings LLC, which is the sole shareholder of 3D Systems, Inc.,
a California corporation ("3D California"), which directly and through its
direct and indirect subsidiaries conducts substantially all of the Company's
business. 3D California's direct subsidiaries include 3D Systems Europe Ltd., a
United Kingdom company, which, beginning January 1, 2000, serves as the
headquarters for the Company's European operations.
Unless otherwise indicated, all references in this document to the Company, we,
or us include 3D Systems Corporation, 3-D Systems Inc., its British Columbia
predecessor ("3-D Canada"), 3D Canada Company and its predecessor, 3D Systems
(Canada), Inc. and 3D Systems, Inc. and its subsidiaries.
Products and Services
For an analysis of revenues attributable to our product and service groups, see
"Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition - Results of Operations" on page 21.
SLA Systems and Related Equipment. We currently manufacture and market five SLA
industrial systems-- the SLA 250 Series 50; the SLA 250/50 HR ("High
Resolution"); the SLA 3500; the SLA 5000; and the SLA 7000. All models use SL
technology. The models vary in their capabilities including the resolution and
accuracy of part building, the maximum size of objects that can be produced,
object building speed, and system price.
Each SLA system consists of an ultraviolet laser, an optical scanning system
that controls the position of the laser beam, a vat of photosensitive epoxy
resin, an elevator assembly and a central controller, which work together to
control the exposure of the resin to ultraviolet radiation, thereby curing it in
a defined pattern to create solid objects. SLA systems are capable of making
multiple objects at the same time; however, each SLA system is limited in the
size of the objects that it can make during a single build session. Therefore,
the system can make only scale models of very large objects or, alternatively,
full-scale portions of large objects which are then joined together. The SLA 250
system, for example, can create a model, section of a model or other object with
maximum size of 10 inches x 10 inches x 10 inches (250 mm x 250 mm x 250 mm). On
the other hand, the maximum size model, section of a model or other object that
can be created using the SLA 7000 system is 20 inches x 20 inches x 24 inches
(500 mm x 500 mm x 600 mm).
SLA systems are installed in many of the largest manufacturing organizations in
the world and are used in a wide variety of applications, varying from
prototyping automobile parts to creating new designs for testing in consumer
focus groups. SLA systems are designed to build communication models to enable
users to share ideas and evaluate concepts; perform form, fit and function
testing on working prototypes; build master patterns for investment casting; or
quickly produce parts for direct use in working prototypes.
We also market ultraviolet curing devices ("PCAs") used in conjunction with SLA
systems. The PCA provides uniform long wave ultraviolet illumination. When the
SLA system has completed a typical object, a small amount of the resin has not
been fully cured. Full curing requires an additional one to two hours of
exposure to ultraviolet illumination through the use of our PCAs. The Company is
currently offering three PCA models, the PCA 250, PCA 350 and PCA 500.
Approximately 70% of all SLA systems sold by us have been purchased with a PCA.
Solid object printers. The ThermoJet printer is a network-ready system, about
the size of an office copier, that uses a hot melt ink jet technology to print
models in successive layers using a proprietary thermoplastic solid imaging
material ("SIM") and a print head with hundreds of jets oriented in a linear
array. The print head scans back and forth, similar to desktop ink jet printers,
depositing layer upon layer of material to form the physical model. The printers
offer a part building capacity of 10 inches x 7.8 inches x 8 inches (250 mm x
195 mm x 200 mm).
The ThermoJet printer creates concept models used for design reviews, form and
fit checking, styling, ergonomics evaluation and CAD-model verification. By
printing a three-dimensional object, designs that appear complex on a
two-dimensional presentation are more easily understood by both technical and
non-technical people.
Page 4
Materials. We develop and manufacture the SIM used by the ThermoJet printer.
Currently we market three types of SIM, in several shades. We anticipate, based
upon our research and development efforts, that we will market additional SIM
types with differing material properties. We are the exclusive worldwide
distributor (other than Japan), to users of stereolithographic systems, of CSC
photopolymers (photosensitive resins) for stereolithography (see "Marketing and
Customers - Photopolymer Distribution Agreement," on page 7, below). Currently,
we market a total of 14 different resins, which vary in building speed,
accuracy, surface finish and mechanical properties. Depending upon results
obtained under our Photopolymer Research Agreement (described under "Research
and Development," on page 6, below), we anticipate that we will market
additional types of resins with varying properties. Most of our customers
purchase material from us at the time of initial purchase of equipment (SLA
system or ThermoJet printer). We also sell material necessary for ongoing
operation of the machines. During 1999, 1998 and 1997 revenues from materials
sales were $15.6 million, $18.6 million and $13.5 million, respectively.
Approximately three-quarters of our material revenue is from ongoing operation
of the machines.
Software. We develop and market part preparation software for personal computers
and engineering workstations. The software is designed to enhance the interface
between CAD/CAM utilities and our solid imaging products. Solid CAD/CAM data is
converted to the STL format within the CAD/CAM utility. Depending on the
specific software package, the object is typically viewed, rotated, scaled, and
model structures added. The software then generates the information that will be
used by the SLA or ThermoJet machine for creation of the solid images.
QuickCast(TM) Technology. Our QuickCast build style consists of a special
process for making precision investment casting patterns using SL technology.
Investment casting is a process whereby a foundry uses wax patterns to generate
molds into which liquid metal is poured to form the part. Each wax pattern can
be used only once to produce a mold. Similarly, the QuickCast process uses our
SLA systems to produce foundry-useable mold patterns suitable for limited-run
investment casting. While not cost-competitive for high-capacity manufacturing,
the ability to rapidly produce prototypes and short run production quantities of
fully functional complex metal parts, in a wide variety of metals, is a major
technological improvement in SL. All of the SLA systems we sell include the
software capability to use the QuickCast process.
Maintenance. All of the SLA systems we sell include on-site hardware and
software maintenance service, during a warranty period (typically one year) at
no additional charge. All ThermoJet printers include at least a 90-day warranty
period at no additional charge. After the warranty period, we offer customers
optional maintenance contracts, which are available on a monthly and annual
basis. Approximately three-quarters of the services we provide are for
post-warranty maintenance contracts. Although purchasers are not required to
enter into maintenance contracts with us, a majority of our United States, Asia
Pacific and European SLA system customers are parties to these contracts, and
many others obtain our maintenance services on a time and material basis.
Customers acquiring systems from some of our overseas distributors are offered
maintenance contracts by the distributors. During 1999, 1998 and 1997, revenues
from maintenance contracts and maintenance services were approximately $26.7
million, $28.1 million, and $25.0 million, respectively. As of December 31,
1999, we had a staff of 98 full-time employees who provide on-site remedial and
preventive maintenance services necessary to keep the equipment in good
operating condition. To date, warranty expenses and product returns have not
been significant.
3D Systems Technology Centers. The Company provides services from its Technology
Centers at its Valencia, California headquarters and at its office located near
Frankfurt, Germany. The 3D Systems Technology Centers utilize SLA systems
together with CAD/CAM and other data supplied by customers to produce models,
prototypes, mold patterns and other parts on a contract basis. The price for
services offered by the Technology Centers varies on the basis of the nature of
the services requested. The Technology Centers also focus their efforts on the
development of new applications and techniques in SL and the development of new
markets in which the advantages of SL can be demonstrated. The Technology
Centers also enable us to keep abreast of developments in the applications of
rapid prototyping and serve as a means to introduce prospective buyers to our
technology.
3D Keltool(R) Process. The 3D Keltool process uses master patterns to produce
highly accurate steel tool core and cavity inserts for use in plastic injection
molding machines. In 1998, we began licensing this technology to our customers
for their direct use. Since acquiring the 3D Keltool assets and operations in
September 1996 and through 1998, we produced 3D Keltool inserts for our
customers, using the 3D Keltool process, out of our St. Paul, Minnesota
facility. In the first quarter of 1999, we sold the St. Paul operations to Rapid
Tooling Technologies ("RTT"). As part of the agreement to purchase the St. Paul
operations, RTT obtained a license for the use of the 3D Keltool process.
Recent Product Introductions. In order to improve and expand the capabilities of
our systems and related software and materials, as well as to enhance our
portfolio of proprietary intellectual properties, we have historically devoted a
significant portion of our resources to research and development activities.
Recent product introductions include:
SL5530HT resin was announced in December 1998. Designed specifically for use
with the SLA 350, 3500, 5000 and 7000 systems, SL5530HT resin is a breakthrough
in materials development. Depending on the hardware platform, SL5530HT
Page 5
can resist temperatures in excess of 200(degree) C/392(degree) F - twice the
heat resistance of any other resin today. It also possesses optical clarity
useful for flow visualization and build accuracy that mirrors the dimensions of
the part design.
3D Lightyear(TM) part preparation software was released in the second quarter of
1999. 3D Lightyear software fully exploits the power of the Windows NT operating
system, delivering functionality that extends beyond the capabilities of its
predecessor, Unix-based Maestro. An accompanying release of control software for
the SLA 350/3500/500/5000/7000 systems also incorporated new functions for
customers who owned these large-frame SLA machines.
SLA 7000 system, the Company's new SLA machine introduced in the first quarter
of 1999, is faster (depending upon part geometry and layer thickness) than our
next fastest solid imaging system. The SLA 7000 system gains its speed advantage
from a dual-spot high power laser, high speed scanning software and a new high
photosensitivity material. In addition to its speed, the SLA 7000 system can
produce parts at 0.001 inch (0.025 mm) layers thickness (depending on part size
and geometry).
SL 7510 high photosensitivity material was initially released for the SLA 7000
machine. It was also released during 1999 for the SLA 3500 and SLA 5000 systems.
Final material properties are machine-dependent, but generally the SL 7510
material offers excellent durability, fast build speed, accuracy and humidity
resistance.
SL 5430 material for the SLA 500 system was released in January 2000. It
combines excellent productivity and clarity, with high temperature resistance -
up to 250(degree) C/482(degree) F.
SL 7540 material was released in March 2000, on all three solid-state platforms
(the SLA 3500/5000/7000 systems). It is a leap ahead in material properties,
offering exceptional durability and surface quality. Along with this material,
we released new versions of our Lightyear and Buildstation software (1.1 and
5.1, respectively). The software releases enable a new method of supporting SL
parts, which result in better part surface finish and better part building
yield. In combination, the software and material are an important step ahead in
part building and part versatility.
ThermoJet solid object printer is the successor to the Actua(TM) 2100 office
modeler, offering a significant improvement in speed and reliability. It is up
to 300% faster than its predecessor. In addition, the ThermoJet printer,
introduced in the first quarter of 1999, uses a new material, TJ-88, with
improved part durability. Along with the hardware and materials release, a new
version of part preparation and control software was introduced, which further
improved the ease of use of the ThermoJet software.
Research and Development
Our ability to compete successfully depends, among other things, on our ability
to design and develop new machines, materials and applications, and to refine
existing products. For the foreseeable future, we anticipate that our research
and development efforts will be focused on system design and material
functionality improvements for the ThermoJet solid object printer and SLA
systems, and developing software to facilitate the interface between our solid
imaging systems and CAD/CAM programs. Research and development expenses
decreased in 1999 to $8.9 million, down from $9.4 million in 1998. The decrease
in research and development expenses in 1999 was primarily a result of
significant investment in 1998 in new product introduction (ThermoJet solid
object printer and SLA 7000 system). Based on our historical expenditures
related to research and development and our current development goals, we
anticipate, for the foreseeable future, research and development expenses will
be equal to approximately 8% of sales. This is a forward-looking statement,
however, and, as with any such statement, is subject to risk. For example, if
our total sales for any particular period do not meet our anticipated sales for
that period, research and development expenses as a percentage of sales may
exceed 8%. As of December 31, 1999, 50 employees or contractors were devoting
substantially all of their time to research and development activities for the
Company, compared to 66 employees at December 31, 1998.
We believe that further refinements in stereolithography will depend upon
improvements not only in our SLA products, but also in the chemical makeup of
the resins used in the fabrication process. To this end, we have dedicated a
significant amount of time to the development of new resins. To pursue this
goal, we are a party to a Research and Development Agreement with CSC (the
"Photopolymer Research Agreement") providing for the development of
photopolymers, photopolymerizable monomers, photoinitiators and other resins for
use with our SLA systems. Subject to certain conditions, the Photopolymer
Research Agreement will remain in effect until either party gives the other six
months notice of intent to terminate the agreement. Pursuant to the Photopolymer
Research Agreement, the two companies work jointly, with each company funding
its own portion of the research. Ownership of any inventions or know-how,
whether patented or not, will accrue to CSC if they are chemical in nature, and
to us if they relate to the stereolithographic process. CSC has announced that
it will sell its Performance Polymer Division, the division that engages in
photopolymer research with us. We believe that the Photopolymer Research
Agreement will be transferred to the new company, and we have consented to the
assignment. This is a forward-looking statement and, as such, is subject to
risk. For example, management of the acquiring company may decide not to assume
the obligations under the contract or may decide to negotiate a new contract
Page 6
with less favorable terms. If the Photopolymer Research Agreement is not
assigned, or if it is otherwise terminated, we may be unable to develop
improvements in the chemical makeup of the resins used in the SL fabrication
process, which could result in a material adverse effect on our revenues,
results of operations, liquidity and financial position.
We believe that further refinements in solid object printing will come as a
result of investment in the areas of material development, solid imaging
processes and the printing mechanism. In 1999, 3D Systems began an aggressive
material development program with an outside consulting firm to develop SIM
ingredients and chemical compounds with properties optimized for the ink jet
solid imaging process. We believe these synthetic specialty chemicals will allow
future SIM formulations to demonstrate significant improvement in the material
durability and other mechanical properties, and that investment in the solid
imaging build processes will result in improvements in the quality of the model
output from the build process. We believe these improvements will include faster
model build times, higher resolution and smaller layer steps, more accurate
geometry representation and smoother and more uniform surface finish on all
surfaces of the finished model. Investment in the printer system design and
mechanism is expected to result in substantial cost savings, an increase in
reliability and improvements in ease of use.
The foregoing discussion relating to the Company's research and development
activities includes statements that involve risks and uncertainties. For a
discussion of the factors associated with such forward-looking statements which
could cause actual results to differ materially from those projected in the
statements, see "Cautionary Statements and Risk Factors--We Must Keep Pace with
Rapid Technological Change and Introduce New Products to Remain Competitive" on
page 11 and "Our New Products May Not Be Commercially Accepted" on page 11.
Marketing and Customers
Our sales and marketing strategy focuses on an internal sales organization,
which is responsible for overseeing worldwide sales and value-added resellers,
as well as the utilization of knowledgeable international distributors. We
employ a direct sales force consisting of sales persons and application
specialists that provide technical sales support. At December 31, 1999, our
worldwide sales and support staff consisted of 61 employees that were primarily
located in the United States and Europe. We have sales offices in the United
States in California, Michigan, Minnesota, Indiana, Ohio, North Carolina, South
Carolina and Massachusetts; our European offices are located near Frankfurt,
London, Paris, Barcelona and Milan, and our Hong Kong office serves the Asia
Pacific region.
International Sales. International sales, the majority of which are to Europe,
accounted for 47.5%, 44.1% and 41.5% of total sales in the years ended December
31, 1999, 1998, and 1997, respectively. (See "Note 16 of Notes to Consolidated
Financial Statements" on page F-8.) On September 17, 1999, we announced the
formation of a new management team for our European operations, which will have
a pan-European vision, rather than a fragmented country-by-country focus. Our
European operations finished 1999 with a 17.8% growth over 1998. Platform sales
to automotive and Formula One customers are still the strongest, but sales to
the consumer electronics industry also showed a large percentage of growth year
over year.
As of December 31, 1999, we had entered into agreements with three independent
distributors in the Pacific Rim, five in greater Europe and one in Latin
America. International distributors are responsible for marketing, sales, system
installation, service and support to their customers. For a discussion of risks
associated with international operations, see "Cautionary Statements and Risk
Factors - There are Many Risks Associated with International Business" on page
12.
Customers. Our customers include major companies in a broad range of industries
throughout the world, including manufacturers of automotive, aerospace,
computer, electronic, consumer and medical products. Purchasers of our systems
include original equipment manufacturers ("OEMs") such as AMP, Inc., Apple
Computer, Inc., Audi AG, Benetton F1, Boeing Company, BMW Group, Canstar Sports,
Inc., DaimlerChrysler Corp., Eastman Kodak Company, The Electrolux Group,
General Electric Company, General Motors Corporation, Delphi Automotive Systems,
Hasbro, Inc., Jordan Grand Prix, International Business Machines Corporation,
Johnson & Johnson, Motorola, Inc., Navistar International Corporation, Nike,
Inc., Pratt & Whitney, Raytheon Company and Texas Instruments, Inc. We also sell
our products to government agencies and universities, which generally use our
machines for research activities, and to independent service bureaus, including
Arrk Creative Network, the largest rapid prototype manufacturer in the world,
General Pattern, Moehler Design and INCS, Inc., which for a fee provide
stereolithographic services to their customers.
Photopolymer Distribution Agreement. Pursuant to an agreement with CSC US, and
subject to conditions set forth in the agreement, we are the exclusive worldwide
distributor to users of SL processes of all Ciba Specialty Chemicals SL
photopolymers. At our request, an affiliate of CSC US currently sells such
photopolymers in Japan to our Japanese distributor. Subject to certain
conditions, so long as CSC US provides adequate supplies, we are required to
fill all of our requirements for our photopolymers through purchases from CSC
US. Subject to certain conditions, the agreement will remain in effect until
either party gives the other six months advance notice of termination. There can
be no assurance that this agreement will remain in place. Though we believe we
can obtain alternate agreements from other manufacturers, the
Page 7
termination of this agreement or interruption of supply could have a material
adverse effect on our revenues, results of operations, liquidity and financial
position. (See "Cautionary Statements and Risk Factors - We Depend on a Single
or Limited Suppliers for Certain of our Components" on page 11). CSC has
announced that it will sell its Performance Polymer Division, the division with
which we have the agreement. We believe that the Photopolymer Distribution
Agreement will be transferred to the new company, and we have consented to the
assignment. This is a forward-looking statement and, as such, is subject to
risk. For example, management of the acquiring company may decide not to assume
the obligations under the contract or may decide to negotiate a new contract
with less favorable terms.
Customer Support and Service. Before installation of an SLA system, a new
purchaser typically receives training at our facilities. During the first
several days after installation, an applications engineer remains at the
customer location to ensure that the customer is able to operate the SLA system
effectively and to answer any questions that may arise. We also make available
to our customers, for a fee, additional training courses in SLA system features
and applications.
No training is necessary in connection with the purchase of a ThermoJet printer.
We offer maintenance contracts to our customers, which generate recurring
revenue. (See "Products and Services," on page 4, above.) We also make
available, in the United States, a hotline to all of our users with maintenance
contracts. The hotline is staffed with technical representatives who answer
questions and arrange for on-site remedial services if necessary. The hotline is
available Monday through Friday, local holidays excepted, 5:00 a.m. to 5:00 p.m.
Pacific time. In addition, customer service, troubleshooting and answers to
frequently asked questions ("FAQs") are available through our website,
www.3dsystems.com. Customers may also reach us through e-mail, 24 hours a day.
We co-founded and currently participate in both domestic and international SL
User Groups, which currently include a substantial number of our customers. The
User Groups organize annual conferences in both the United States and Europe, at
which we make presentations relating to updates in stereolithography, changes we
have implemented in our systems and related equipment, materials and software
and future ideas and programs we intend to pursue in the upcoming years.
Backlog. At December 31, 1999, the Company had orders (with scheduled delivery
dates) for 12 systems aggregating approximately $4.4 million, as compared to
systems aggregating approximately $8.9 million at December 31, 1998 and $3.5
million at December 31, 1997. It is anticipated that all orders included in the
current backlog will be shipped by June 30, 2000. As a matter of policy, we
afford our customers the right to cancel any system order at any time prior to
its scheduled delivery date. Historically, the number of system orders canceled
has not been significant. Nonetheless, no assurance can be given that all orders
in backlog will be shipped. Backlog may not be indicative of future expected
sales.
Production and Supplies
All of our systems are assembled and SIM is produced at our 67,000 square foot
facility in Grand Junction, Colorado. We purchase the major component parts for
our systems and materials for SIM from outside sources and arrange with contract
manufacturers for the manufacture of subassemblies. We integrate the
subassemblies and effect final assembly of all systems at our production
facility. We perform numerous diagnostic tests and quality control procedures on
each system to assure its operability and reliability.
Although there is more than one potential supplier for many material components
parts, subassemblies and materials, several of the critical components,
materials, and subassemblies, including lasers, materials, and certain ink jet
components, are currently provided by a single or limited sources. Resins for
the Company's SLA systems are supplied exclusively by CSC under the Photopolymer
Distribution Agreement, described above, and either party has the right to
terminate this agreement with six months notice. Our reliance on sole or limited
source vendors involves risks, including the possibility of shortages of certain
key components, product performance shortfalls, and reduced control over
delivery schedules, manufacturing capability, quality and costs. Business
disruptions, financial difficulties, or any significant change in the condition
of or our relationship with a sole or limited source supplier of any particular
component could have a material and adverse effect on our revenues, results of
operations, liquidity and financial condition by increasing the cost of goods
sold or reducing the availability of such components. An unanticipated change in
the source of supply of these components or unanticipated supply limitations
could adversely affect our short-term ability to meet our product orders. (See
"Cautionary Statements and Risk Factors - We Depend on a Single or Limited
Suppliers for Certain of our Components" on page 11.)
Page 8
Competition and Patent Rights
We believe there are no products technologically similar to our SLA systems
being sold in significant quantities in the United States; however, products
similar to our SLA systems are manufactured and sold by other companies in the
Pacific Rim. In addition, we believe that there are other companies researching,
designing, developing and marketing other types of solid imaging equipment in
the United States and in foreign markets, and additional companies may announce
plans to enter the solid imaging business, either with equipment similar to
ours, or with other types of equipment. (See "Cautionary Statements and Risk
Factors -- We are Subject to Intense Competition" on page 14.)
Although it is estimated that there are approximately 19 companies currently
manufacturing rapid prototyping equipment, the following is a brief description
of competing products or technologies of the companies that we believe are our
current primary competitors in the SL area. DTM, Inc. markets systems based on a
technology called Selective Laser Sintering, which uses a powdered material that
is sintered (solidified by heating) by energy supplied by a laser. Helisys, Inc.
markets systems based on a technology called Laminated Object Manufacturing,
which builds parts from sheets of paper or other material that are laminated
together with cross-sectional patterns being laser cut into each sheet of paper.
Stratasys, Inc. ("Stratasys") markets a Fused Deposition Modeling process that
builds objects by dispensing individual layers of thermoplastic material through
a temperature controlled head.
NTT Data and D-MEC market products similar to our SL products in Japan. During
1998, we signed patent cross-license agreements with NTT Data and NTT Data CMET
(marketed by NTT Data) and with Sony Corporation (marketed by D-MEC). Under
these agreements, Sony and NTT Data each obtained a non-exclusive license to
produce and sell SL systems in the Asia Pacific area. In addition, E.I. du Pont
de Nemours and Company ("DuPont") has licensed certain SL technology to Teijin
Seiki of Japan and Aaroflex of the United States. We believe that other Japanese
companies are also developing and marketing products similar to ours; however,
we do not have reliable data with respect to these efforts. During 1996,
Aaroflex, Inc. ("Aaroflex"), headquartered in Virginia, publicly announced the
availability and claimed that it has sold in the United States, although not
delivered, equipment that offers the same functions as our SLA systems. (See
"Item 3. Legal Proceedings" on page 15.)
We believe that currently available alternatives to SL generally are not able to
produce models having the dimensional accuracy and fine surface finish of models
provided by our SL process. However, competitors have successfully marketed
their products to our existing and potential customers. Furthermore, in many
cases, the existence of these competitors extends the purchasing time while
customers investigate alternative systems. We compete primarily on the basis of
the quality of our products and the advanced state of our technology. Although
we do not rely totally on our patents to compete, we believe that our patents
will help us maintain our leading position in the SL field in the United States
and Europe. (See "Proprietary Protection," on page 10, below and "Cautionary
Statements and Risk Factors -- Patents and Proprietary Information are Critical
to our Success" on page 13.)
A number of companies, including DSM Desotech Inc. ("DSM"), which acquired the
SOMOS solid imaging business of DuPont in April 1999, are currently selling SL
resins, which either complement or compete with those we distribute. We believe
that we currently supply resins to owners of a majority of the SLA systems
currently installed worldwide.
With respect to our solid object printers, we believe that the following
companies are our current primary competitors. Stratasys, described above, is
also a competitor in the 3D-printer area. Sanders Prototyping markets
ModelMaker, a technology that deposits wax material using an ink jet print head.
Z Corporation makes a printer that produces models using a starch-based powder
material and a water-based liquid binder.
We believe that currently available alternatives to our solid object printers
generally are not able to produce models having the dimensional accuracy, fine
detail or smooth surface finish of models provided by our printers. We do not
have the level of patent protection for the solid object printers that we have
for our SL technology; however, during 1999 we acquired two patents for
dot-on-dot printing technology from Dataproducts Corporation in order to help us
maintain our position in this field.
We believe that we do not currently have any significant competition for our
maintenance services, although some of our customers perform their own
maintenance in-house and some use other providers of service contracts and time
and materials arrangements. We offer software and hardware maintenance contracts
to our customers (see "Products and Services," on page 4, above). Maintenance
for some SLA systems sold internationally is offered by our distributors (see
"Marketing and Customers," on page 7, above).
Future competition is expected to arise both from the development of new
technologies or techniques not encompassed by the patents held by or licensed to
us, and through improvements to existing technologies, such as automated
machining. We have determined to follow a strategy of continuing product
development and aggressive patent prosecution to protect ourselves to the extent
possible in these areas.
Page 9
Proprietary Protection
Charles W. Hull, the Company's founder and Chief Technology Officer developed
the stereolithography technology used in our SLA products, while employed by
UVP, Inc. This technology was originally patented by UVP, Inc. and subsequently
licensed to us in 1986. We acquired the patent in 1990.
In the case of our ThermoJet printers, the ink jet technology employed by the
printers has been primarily developed elsewhere and is subject to license
agreements. The thermoplastic material used and the application of the ink jet
technology to solid imaging have been developed by us. During 1999, we acquired
two patents from Dataproducts Corporation for dot-on-dot printing technology in
order to increase our patent protection in this area.
At December 31, 1999, we had 197 patents which include 93 in the United States,
61 in Europe, 8 in Japan and 35 in other foreign countries. At that date, we had
54 pending patent applications with the United States, 49 in the Pacific Rim, 15
in Europe, 8 in Canada and 2 in Latin America. As new developments and
components to the technology are discovered, we intend to apply for additional
patents.
In 1997, we filed patent infringement lawsuits against Aaroflex, Inc. and Teijin
Seiki. The Aaroflex lawsuit seeks compensation from Aaroflex for utilizing
certain SL technology which we allege is incorporated in six of our United
States patents, and we seek other damages and attorneys' fees as well as an
injunction barring Aaroflex from marketing its products using technology
incorporated in our patents. The Teijin Seiki lawsuit, which is in the early
stages of prosecution, alleges infringement of our Japanese patents, and seeks
damages and injunctive relief. Teijin Seiki has filed an invalidation action
against one of our patents, and we have appealed an unfavorable decision in that
action. (See "Item 3. Legal Proceedings" on page 15.)
Application for a patent offers no assurance that a patent will be issued as
applied for. Issuance of a patent offers no assurance that the patent can be
protected against any claims of invalidation or that the patent can be enforced
against any infringement. In addition, litigation of patent issues can be costly
and time-consuming. (See "Cautionary Statements and Risk Factors -- Patents and
Proprietary Protection are Critical to our Success" on page 13.)
Employees
At December 31, 1999, we had 422 full-time employees, including 5 members of
executive management supplied pursuant to an agreement with Regent Pacific
Management Corporation ("Regent Pacific") (see "Item 13. Certain Relationships
and Related Transactions" on page 27 for further information on the Regent
Pacific Agreement). In addition, at that same date we utilized the services of
14 independent contractors. None of these employees or independent contractors
is covered by labor agreements. We consider our relations with our employees and
independent contractors to be satisfactory.
CAUTIONARY STATEMENTS AND RISK FACTORS
The risks and uncertainties described below are not the only risks and
uncertainties we face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial also may impair our business operations.
If any of the following risks actually occur, our business, results of
operations and financial condition could suffer. In that event the trading price
of our common stock could decline, and our stockholders may lose all or part of
their investment in our common stock. The risks discussed below also include
forward-looking statements and our actual results may differ substantially from
those discussed in these forward-looking statements.
Fluctuations in Quarterly Results - Our Operating Results Vary From Quarter to
Quarter Which Could Impact Our Stock Price
Our operating results fluctuate from quarter to quarter and may continue to
fluctuate in the future. We believe that quarter to quarter or annual
comparisons of our operating results are not a good indication of our future
performance. In some quarters it is possible that results could be below
expectations of analysts and investors. If so, the price of our common stock may
fall.
Many factors, some of which are beyond our control, may cause these fluctuations
in operating results. These factors include:
Acceptance and reliability of new products in the market
Size and timing of product shipments
Page 10
General world economic conditions
Changes in the mix of products and services sold
Currency and economic fluctuations in foreign markets and other factors
affecting international sales
Delays in the introduction of new services/products
Price competition
Impact of changing technologies
In addition, certain components we use require an order lead time of three
months or longer. Other components that currently are readily available may
become more difficult to obtain in the future. We cannot assure you that we will
not experience delays in the receipt of certain key components. To meet
forecasted production levels, we may be required to commit to certain long lead
time items prior to receiving orders for our products. If our forecasts exceed
actual orders, we may hold large inventories of slow moving or unusable parts,
which could have an adverse effect on our cash flows and results of operations.
Because of all of these and other factors, we cannot assure you that we will
achieve or sustain quarterly or annual profitability in the future.
The Mix of Products Sold Affects Our Overall Profit Margins
We continuously expand our product offerings and work to increase the number of
geographic markets in which we operate and the distribution channels we use in
order to reach the various markets and customers. This variety of products,
markets and channels results in a range of gross margins and operating income
which can cause substantial quarterly fluctuations depending on the mix of
product shipments quarter to quarter. We may experience significant quarterly
fluctuations in gross margins or net income due to the impact of the mix of
products, channels, or geographic markets utilized from period to period. Also,
the changing mix of products sold over time may result in lower average gross
margins and returns.
We Must Keep Pace with Technological Change and Introduce New Products to Remain
Competitive
To remain competitive, we must continue to enhance and improve the functionality
and features of our products, services and technologies. The solid imaging
industry is characterized by rapid technological change, changes in user and
customer requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of new industry
standards and practices. These developments could render our existing products
and proprietary technology and systems obsolete. Our success will depend, in
part, on our ability to:
Obtain leading technologies useful in our business
Enhance our existing products
Develop new products and technology that address the increasingly
sophisticated and varied needs of prospective customers
Respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis
Retain key technology employees
Also, our competitors may develop new technologies that render our existing
products and services obsolete. We believe that our future success will depend
on our ability to deliver products that meet changing technology and customer
needs.
Our New Products May Not Be Commercially Accepted
During 1999, we introduced a significant number of new products to the
market, including equipment, software and materials. These products undergo
thorough quality assurance testing. However, problems have arisen in
connection with the use of certain new products, which we have worked to
rectify. We believe that the problems have been addressed, but we cannot
assure you that we will be able to fix any new problems that arise in a
timely manner, or at all. Also, we cannot assure you that any new products we
develop will be commercially accepted. If there are many problems with our
new products, or if the marketplace does not accept these products, our
results of operations and financial condition could be materially and
adversely affected.
Page 11
We Depend on a Single or Limited Suppliers for Certain of our Components
There are several potential suppliers of the material components, parts and
subassemblies for our products. However, we currently use only one or a
limited number of suppliers for several of the critical components, parts and
subassemblies, including our lasers, materials and certain ink jet
components. CSC supplies us with the resins we distribute pursuant to the
Photopolymer Distribution Agreement, which either party has the right to
terminate with six months advance notice. CSC has announced that it will sell
its Performance Polymer Division, the division with which we have the
Agreement. We believe that the Agreement will be transferred to the new
company, and we have consented to the assignment. If our Photopolymer
Distribution Agreement is not assigned, or if it is otherwise terminated, we
may be unable to locate an alternate source of resins, which would result in
a material adverse effect on our revenues, results of operations, liquidity
and financial position. Our reliance on a limited number of vendors involves
many risks including:
Shortages of certain key components
Product performance shortfalls
Reduced control over delivery schedules, manufacturing capabilities,
quality and costs
If any of our suppliers suffers business disruptions, financial difficulties, or
if there is any significant change in condition of our relationship with the
supplier, our costs of goods sold may increase or we may be unable to obtain
these key components for our products. In either event, our revenues, results of
operations, liquidity and financial condition would be adversely affected. While
we believe that we can obtain most of the components necessary for our products
from other manufacturers, any unanticipated change in the source of our
supplies, or unanticipated supply limitations, could adversely affect our
ability to meet our product orders.
The Downturn in the Service Bureau Industry Affects the Market for Our Product
The service bureau market has become highly competitive, which has lead to
the demise of some service bureaus that have, historically, been a large part
of our customer base. The demise of a number of large service bureaus has
lead to the introduction of used machines into the market at prices lower
than the price of a new machine. Competition has lead to lower part prices,
which may impact our marketing efforts in two ways. First, lower margins may
cause existing service bureaus to reduce their expenditures for new machines.
Second, lower prices offered by services bureaus may influence a potential
purchaser of our machines to buy parts from a service bureau rather than
purchase a machine for its own use. While we believe that the service bureau
market has stabilized, our results of operations and financial condition may
be adversely impacted by additional changes in the industry and continued
dependence on the service bureau market. We believe that our future success
depends, in part, on developing additional customers outside of the service
bureau market segment, thus diminishing our reliance on service bureaus.
We Rely on Regent Pacific Management Corporation for our Executive Management
Regent Pacific Management Corporation ("Regent Pacific") provides management
services for us. The management services provided under our agreement with
Regent Pacific include the services of Brian K. Service as President and Chief
Executive Officer, and four other Regent Pacific personnel as part of our
management team. This agreement is due to expire on September 8, 2000, but may
be canceled any time after March 17, 2000 at the option of the Board of
Directors. If the agreement with Regent Pacific were canceled or not renewed,
the loss of the Regent Pacific personnel could have a material adverse effect on
our operations, especially during any transition phase to new management after
such cancellation or non-renewal. Similarly, if any adverse change in our
relationship with Regent Pacific occurs, it could hinder management's ability to
direct our business and materially and adversely affect our results of
operations and financial condition. (See "Item 13. Certain Relationships and
Related Transactions" on page 27 for further information on the Regent Pacific
Agreement.)
There are Many Risks Associated with International Business
A material portion of our sales is to customers in foreign countries. Revenues
from international customers accounted for approximately 47.5% of total revenues
in 1999, 44.1% of total revenues in 1998 and 41.5% of total revenues in 1997.
There are many risks inherent in our international business activities. Our
foreign operations could be adversely affected by:
Unexpected changes in regulatory requirements
Export controls, tariffs and other barriers
Social and political risks
Fluctuations in currency exchange rates
Seasonal reductions in business activity in certain parts of the world,
particularly during the summer months in Europe
Page 12
Reduced protection for intellectual property rights in some countries
Difficulties in staffing and managing foreign operations
Taxation
Other factors, depending on the country in which an opportunity arises
Although we are exposed to risks associated with fluctuations in foreign
currency exchange rates, we have not entered into hedging transactions to
protect against such risks. Given our growing export base, we are evaluating the
possibility of entering into protective hedging transactions in the future.
Adverse fluctuations in currency exchange rates could have a material adverse
effect on our revenues, results of operations, liquidity and financial position.
In addition to the general risks associated with our international sales and
operations, we are subject to risks specific to the individual countries in
which we do business. In recognition of our exposure to such risks in Europe,
which represents the vast majority of our international operations, we have
adopted a new European organizational structure, headquartered in the United
Kingdom. This organization is expected to have a pan-European rather than an
individual-country focus. We have created a new executive-management level
position, which reports directly to the Company's Chief Executive Officer, and
appointed a United States vice president to this position to oversee our
European operations. The management team reporting to this vice president
consists of European managers representing the countries in which we do the
majority of our business: Germany, United Kingdom, France, Italy and Spain. We
believe that this new emphasis on our ties to Europe will serve us in handling
the identified risks; however, there can be no assurance that this plan will be
successful. For example, the new structure may result in cross-cultural conflict
or lack of acceptance from non-headquarter country customers.
There have been significant financial problems in Asia which have impacted the
international markets. The continuing effects of the economic downturn and
ongoing competition in the Asian markets could have a substantial adverse impact
on our ability to sell our high-margin products in the Pacific Rim.
The Adoption of the Euro Presents Uncertainties
In January 1999, the New "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union ("EMU"). Beginning in
2003, all EMU countries are expected to be operating with the Euro as their
single currency. A significant amount of uncertainty exists as to the effect the
Euro will have on the marketplace generally. Some of the rules and regulations
relating to the governance of the currency have not yet been defined and
finalized.
We believe that our internal systems and financial institution vendors can
handle the Euro conversion, and we are examining current marketing and pricing
policies and strategies that we may put in place upon conversion to the Euro.
The cost of our effort is not expected to materially affect our results of
operations or financial condition. However, we cannot assure you that we have
identified all issues related to the Euro conversion and that any additional
issues would not materially hurt our results of operations or financial
condition. For example, the conversion to the Euro may have competitive
implications on our pricing and marketing strategies, and we may be at risk to
the extent our principal European customers are unable to deal effectively with
the impact of the Euro conversion.
We Face Year 2000 Risks
We believe that our current products are Year 2000 compliant. We evaluated all
products sold since inception for Year 2000 readiness, and provided necessary
software and hardware upgrade pathways to our customers. Based upon responses to
date, we believe that all of our products meet basic functionality requirements;
however, since we cannot anticipate all possible specific customer situations
and uses, we may see an increase in warranty and other claims as a result of the
Year 2000 transition. Any increase in customer claims could have a material
adverse impact on our results of operations and financial condition.
Patents and Proprietary Rights are Critical to Our Success
We regard our copyrights, service marks, trademarks, trade secrets, patents
and similar intellectual property as critical to our success. At December 31,
1999, we have 197 patents, which includes 93 in the United States, 61 in
Europe, 8 in Japan, and 35 in other foreign jurisdictions. At that date, we
had 54 pending patent applications with the United States, 49 in the Pacific
Rim, 15 in Europe, 8 in Canada and 2 in Latin America. As we discover new
developments and components to the technology, we intend to apply for
additional patents. Effective trademark, service mark, copyright, patent and
trade secret protection may not be available in every country in which our
products and services are made available. We cannot be certain that the
pending patent applications will be granted or that we have taken adequate
steps to protect our proprietary rights, especially in countries where the
laws may not protect our rights as fully as in the United States. Moreover,
our
Page 13
competitors may independently develop or initiate technologies that are
substantially similar or superior to ours. We cannot be certain that we will be
able to maintain a meaningful technological advantage over our competitors.
Third parties may infringe or misappropriate our proprietary rights, and we
intend to pursue enforcement and defense of our patents and other proprietary
rights. We could incur significant expenses in preserving our proprietary rights
and these costs could have a material adverse effect on our results of
operations, liquidity and financial condition and could cause significant
fluctuations in results from quarter to quarter. We are currently pursuing
patent infringement actions in the central District of California against
Aaroflex, Inc., and in Japan against Teijin Seiki Co. Ltd. (See "Item 3. Legal
Proceedings" on page 15.)
We are Subject to Intense Competition
The solid imaging industry is highly competitive and subject to technological
change, innovation, and new product introductions. Certain of our existing and
potential competitors are researching, designing, developing and marketing other
types of equipment. A few of these competitors have financial, marketing,
manufacturing, distribution and other resources substantially greater than ours.
In many cases, the existence of these competitors extends the purchase decision
time as customers investigate the alternative products and solutions. Also,
these competitors have marketed these products successfully to our existing and
potential customers. In addition, a number of companies currently sell
stereolithography materials, which both complement and compete with the
materials we distribute.
We expect future competition may arise from the development of allied or related
techniques that are not encompassed by our patents, the issuance of patents to
other companies that inhibit our ability to develop certain products, and the
improvement to existing technologies. Increased competition could result in
price reductions for our products, reduced margins, and loss of market share,
any of which could adversely impact our business. We have determined to follow a
strategy of continuing product development and aggressive patent prosecution to
protect out competitive position to the extent practicable. We cannot assure you
that we will be able to maintain our leading position in the field of rapid
prototyping or continue to compete successfully against current and future
sources of competition. These competitive pressures may adversely affect our
profitability and financial performance. (See "Business - Competition and Patent
Rights" on page 9.)
Volatility of Stock Price
Historically, our stock price has been volatile. The prices of the common stock
have ranged from $4.25 to $11.9375 during the 52-week period ended February 29,
2000. (See "Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters" on page 18.)
Factors that may have significant impact on the market price of our common stock
include:
Future announcements concerning our developments or those of our
competitors, including the receipt of substantial orders for products
Quality deficiencies in services or products
Results of technological innovations
New commercial products
Changes in recommendations of securities analysts
Proprietary rights or product or patent litigation
Sales or purchase of substantial blocks of stock
Our future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis. Shortfalls in our revenues or earnings in any
given period relative to the levels expected by securities analysts could
immediately, significantly and adversely affect the trading price of our common
stock.
We are Subject to Anti-Takeover Provisions
The Board of Directors is authorized to issue up to 5 million shares of
preferred stock. The Board also is authorized to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. The rights of the holders of any preferred stock may adversely
affect the rights of holders of common stock. Our ability to issue preferred
stock gives us flexibility concerning possible acquisitions and financings, but
it could make it more difficult for a third party to acquire a majority of our
outstanding voting stock. In addition, any preferred stock to be issued may have
other rights, including economic rights, senior to the common stock, which could
have a material adverse effect on the market value of the common stock.
Page 14
We are subject to Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of the Company. One of these laws
prohibits us from engaging in a business combination with any interested
stockholder for a period of three years from the date that the person became an
interested stockholder, unless some conditions are met. In addition, provisions
of our Certificate of Incorporation and Bylaws could have the effect of
discouraging potential takeover attempts or making it more difficult for
stockholders to change management.
In addition, we have adopted a Shareholders Rights Plan (see "Note 12(b) of
Notes to Consolidated Financial Statements" on page F-15). Under the Rights
Plan, we distributed a dividend of one right for each outstanding share of our
common stock. These rights will cause substantial dilution to the ownership of a
person or group that attempts to acquire us on terms not approved by our Board
of Directors and may have the effect of deterring hostile takeover attempts.
Item 2. Properties
Our principal administrative functions, sales and marketing, product
development, Technology Center and training facilities are located in a 78,320
square foot building in Valencia, California under a lease that expires on
December 31, 2002. We also lease sales and service offices in seven other states
(North Carolina, South Carolina, Ohio, Massachusetts, Minnesota, Indiana, and
Michigan). The space leased for sales and service offices is generally for one
or two occupants and for terms of a year or less. Three other lease obligations,
all of which are sublet, are for properties whose use has been discontinued in
California, Georgia, and Texas. Sales and service offices are also located in
five countries in the European Community (France, Spain, Germany, the United
Kingdom and Italy).
All of our manufacturing and United States customer support operations are
located in a 67,000 square foot facility located in Grand Junction, Colorado
(the "Colorado Facility"). The construction cost of the Colorado Facility has
been financed through a $4.9 million variable rate industrial development bond.
In connection with the asset acquisition of Keltool, Inc. in September 1996, we
assumed Keltool's obligations under an existing lease for approximately 6,000
square feet located in St. Paul, Minnesota. In the first quarter of 1999, we
completed the sale of our St. Paul operations and assigned this lease to the
acquirer. In addition, we leased approximately 21,000 square feet in Valencia,
California for the 3D Keltool operations. The lease for this facility was
terminated in 1999, with the Company acting as a guarantor for the new tenant
until the lease expiration on June 30, 2000.
For information concerning obligations of the Company under its leases, see
"Note 18(a) of Notes to Consolidated Financial Statements" on page F-23. For
information concerning our Colorado Facility, see Note 11 on page F-15.
We believe that the facilities described above will be adequate to meet our
needs for the immediate future.
Item 3. Legal Proceedings
3D Systems, Inc. v. Aaroflex et al. On January 13, 1997, we filed a complaint in
the United States District Court, Central District of California, against
Aarotech Laboratories, Inc. ("Aarotech"), Aaroflex, Inc. ("Aaroflex") and Albert
C. Young ("Young"). Aaroflex is the parent corporation of Aarotech. Young is the
Chairman of the Board and Chief Executive Officer of both Aarotech and Aaroflex.
The complaint alleges that stereolithography equipment manufactured by Aaroflex
infringes on six of our patents. We seek damages and injunctive relief from the
defendants, who have threatened to sue us for trade libel. To date, the
defendants have not filed such a suit.
The defendants filed a motion to dismiss the complaint or transfer the case to
their home district in Virginia. The Court granted the motion to dismiss for
lack of personal jurisdiction. The Federal Circuit Court of Appeals reversed the
District Court's decision insofar as it relates to Aaroflex and the action
against Aaroflex is proceeding in the District Court. Motions for summary
judgment by Aaroflex on multiple counts contained in our complaint and on
Aaroflex's counterclaims have been dismissed and the case is in discovery.
3D Systems, Inc. v. Teijin Seiki Co. Ltd. On March 21, 1997, we filed a patent
infringement action in District Court in Osaka, Japan under one of our Japanese
patents, alleging infringement, and seeking damages from the defendant and
injunctive relief. The action is in the early stages of prosecution. As
described below, Teijin Seiki has filed an invalidation action against one of
our patents, and we have appealed an unfavorable decision in that action.
Centuri Corp., dba Estes Indus., Cox Acquisition Corp., dba Cox v. 3D Systems
Corp., Rogers Tool & Die (the "Centuri Litigation"). In January 1997, we entered
into two contracts with Centuri Corp., dba Estes Indus., Cox Acquisition Corp.,
dba Cox ("Centuri") under which we were to create certain tooling for Centuri.
On September 16, 1997, Centuri initiated a lawsuit against us in Los Angeles
Superior Court for Breach of Oral Contract, Fraud, Negligent Misrepresentation,
Conversion, Money Had and Received, and an Accounting. At a settlement hearing
on July 1, 1999 the parties agreed to
Page 15
settle the case pursuant to an agreement which provides for the confidentiality
of the settlement terms. No liability of any party was admitted.
Patent Opposition and Invalidation Proceedings. We have received eight patents
in Japan. One of these patents had an opposition submitted against it, but the
opposition was dismissed, and the patent has been maintained as originally
issued. Furthermore, one of the eight patents has had three invalidation trials
filed against it. These invalidation trials were decided against us. We have
responded by appealing the decision in the third trial. Based on this opposition
and our response, the trial may result in maintaining the patent with present or
modified protection, or may result in revocation of the patent.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote by security holders during the fourth
quarter of fiscal 1999.
Item 4a. Executive Officers of the Registrant
The following table sets forth certain information concerning the executive
officers of the Company:
Age at Position
Name February 29, 2000 with the Company
- - ---- ----------------- ----------------
Brian K. Service 52 President and Chief Executive Officer
Charles W. Hull 60 Vice President, Chief Technology
Officer
H. Michael Hogan III 37 Vice President, Chief Financial
Officer
A. Sidney Alpert 61 Vice President, General Counsel and
Secretary
Clark A. Hardesty 50 Vice President, Sales & Marketing
Martin E. McGough 50 Vice President & World Wide
Operations Manager
Grant R. Flaharty 38 Vice President & General Manager,
Europe
The principal occupations of our executive officers are as follows:
Brian K. Service: Mr. Service has served as President and Chief Executive
Officer of the Company since September 1999 and, since October 1999, has also
served as President and Chief Executive Officer of 3D California. Mr. Service is
a Principal of Regent Pacific Management Corporation ("Regent Pacific"), and he
provides services to the Company pursuant to an agreement between the Company
and Regent Pacific. (See "Item 13. Certain Relationships and Related
Transactions" on page 27.) Prior to Regent Pacific, Mr. Service served as Chief
Executive Officer of Salmond Smith Biolab, Ltd. Prior to Salmond, he was Chief
Executive Officer of Milk Products, Inc. Mr. Service holds a Bachelor's degree
in Chemical Engineering from Canterbury University of New Zealand and has
completed the Stanford Executive Program from Stanford University Business
School.
Charles W. Hull: Mr. Hull has served as Vice President, Chief Technology Officer
since April 1997, from August 1993 to April 1997 as Chief Operating Officer and
President of the Company, and from March 1986 to October 1999 as President of 3D
California; prior thereto, he was Vice President of UVP, Inc. from January 1980
to March 1986. Mr. Hull developed the Company's stereolithography technology
while employed by UVP, Inc., a systems manufacturing company. As of February 28,
1999, Mr. Hull had retired from the Company and he served as Vice Chairman and a
member of the Board of Directors and as a consultant to the Company from March
1999 through May 1999. In June 1999, Mr. Hull rejoined the Company as Vice
President, Chief Technology Officer.
H. Michael Hogan III: Mr. Hogan has served as Vice President, Chief Financial
Officer since September 1999 when he joined the Company as part of the
management team provided by Regent Pacific. (See "Item 13. Certain Relationships
Page 16
and Related Transactions"). Mr. Hogan is a Principal of Regent Pacific. Prior
to Regent Pacific, Mr. Hogan was with the turnaround management firm of Jay
Alix and Associates. Mr. Hogan holds a Bachelor's degree from Colgate
University and is a Certified Insolvency Reorganization Accountant and a
Certified Turnaround Professional.
A. Sidney Alpert: Mr. Alpert became Vice President, General Counsel of the
Company in January 1996 after serving on the Board from 1993 to 1996, and has
served as Secretary of the Company since May 1996. Effective June 1, 1999,
Mr. Alpert and the Company agreed to amend his employment agreement, whereby
he became a part-time employee, devoting approximately 40% of his time to the
Company. Prior thereto, from January 1994 through December 1995, Mr. Alpert
was an intellectual property consultant. From July 1988 through December
1993, Mr. Alpert served as Chairman of the Board and Chief Executive Officer
of University Patents, Inc. (currently known as Competitive Technologies,
Inc.), a corporation listed on the American Stock Exchange which handles
patent management and technology transfer activities primarily for
universities and colleges.
Clark A. Hardesty: Mr. Hardesty has served as Vice President, Sales & Marketing
since September 1999 when he joined 3D Systems as part of the management team
provided to the Company by Regent Pacific. (See "Certain Relationships and
Related Transactions"). Mr. Hardesty is a Principal of Regent Pacific. Prior to
Regent Pacific, Mr. Hardesty was the owner of White Hawk Holding Company, a
manufacturing company serving the aerospace industry. Mr. Hardesty holds a
Bachelor's degree from Northeastern University, a Master's degree from Harvard
University, and an MBA from Case Western Reserve University.
Martin E. McGough: Mr. McGough has served as Vice President and Worldwide
Operations Manager since September 1997 after joining the Company in January of
1997 and is responsible for manufacturing and operations, as well as worldwide
field service. He was formerly with Maxtor Corporation where he held the
position of Senior Director of Strategic Commodities. Prior to Maxtor, he held
management positions in Operations, Marketing, Program Management and other
manufacturing and materials positions. Mr. McGough received his Bachelor's
degree from California State University, Northridge in Business Administration
and earned his Master's in Business Management also from CSUN.
Grant R. Flaharty: Mr. Flaharty has served as Vice President and General
Manager, 3D Systems Europe, since September 1999 after joining the Company in
April of 1998 and is responsible for European operations. He was formerly with
Qualcomm, Inc., a developer of wireless communications products, as Director of
Manufacturing Finance. Prior to Qualcomm, he was with Motorola, Inc. as
Operations Controller. Mr. Flaharty received his Bachelor's degree from Regis
College in Accounting and is also a Certified Public Accountant.
Subject to the Agreement between the Company and Regent Pacific, all officers
serve at the pleasure of the Board of Directors of the Company.
Page 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The following table sets forth, for the periods indicated, the high and
low closing sales prices of our common stock (symbol: TDSC) on the Nasdaq
National Market.
Historic Prices
---------------
Year Period High Low
--------------------------------------------------------------------
2000 First Quarter (through February 29) 11-15/16 7-1/2
1999 First Quarter 7-15/16 5-15/16
Second Quarter 6-1/4 5
Third Quarter 5-11/16 4-1/4
Fourth Quarter 8-23/32 4-1/2
1998 First Quarter 11-7/8 5-3/4
Second Quarter 11-11/16 9
Third Quarter 10-1/4 5-1/2
Fourth Quarter 8-1/2 5-1/2
1997 First Quarter 16-1/4 9-3/8
Second Quarter 9-3/4 6
Third Quarter 10-1/4 8
Fourth Quarter 10-3/4 6
As of February 29, 2000, the outstanding common stock was held of record
by 553 stockholders.
Dividends
We have not paid any dividends on our common stock and currently intend to
retain any future earnings for use in our business. Therefore, you should not
expect that any dividends will be declared on the common stock in the
foreseeable future. Any dividend payment will be at the discretion of our Board
of Directors and will be dependent upon our earnings, operating and financial
condition and capital requirements, as well as general business conditions.
Page 18
Item 6. Selected Financial Data
The following summary of selected financial data for the periods set forth below
has been derived from the Consolidated Financial Statements of 3D Systems
Corporation. Such information with respect to 1999 to 1997 should be read in
conjunction with Management's Discussion and Analysis of Results of Operations
and Financial Condition and with the Consolidated Financial Statements appearing
elsewhere in this Form 10-K.
Years Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Statements of Operations Data: (in thousands except per share amounts)
Sales:
Products(1) $ 66,806 $ 65,434 $ 59,149 $ 53,229 $ 43,544
Services(2) 30,143 32,683 31,108 26,403 19,038
-------- -------- -------- -------- --------
Total sales 96,949 98,117 90,257 79,632 62,582
-------- -------- -------- -------- --------
Cost of sales:
Products(1) 35,938 33,477 35,463 24,893 19,328
Services(2) 20,975 22,062 21,745 16,906 11,936
-------- -------- -------- -------- --------
Total cost of sales 56,913 55,539 57,208 41,799 31,264
-------- -------- -------- -------- --------
Gross profit 40,036 42,578 33,049 37,833 31,318
Operating expenses:
Selling, general and administrative 35,273 30,448 29,653 24,748 20,302
Research and development 8,931 9,425 10,991 7,665 6,109
Other 3,384 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses 47,588 39,873 40,644 32,413 26,411
-------- -------- -------- -------- --------
Income (loss) from operations (7,552) 2,705 (7,595) 5,420 4,907
Interest income 415 949 1,202 1,541 1,257
Interest and other expense (404) (467) (356) (129) (42)
-------- -------- -------- -------- --------
Income (loss) before income taxes (7,541) 3,187 (6,749) 6,832 6,122
Income tax expense (benefit) (3) (2,240) 1,055 (2,160) 2,233 (2,795)
-------- -------- -------- -------- --------
Net income (loss) (5,301) $ 2,132 $ (4,589) $ 4,599 $ 8,917
======== ======== ======== ======== ========
Shares used to calculate basic net income
(loss) per share 11,376 11,348 11,398 11,323 10,246
Basic net income (loss) per share $ (.47) $ .19 $ (.40) $ .41 $ .87
======== ======== ======== ======== ========
Shares used to calculate diluted net income
(loss) per share 11,376 11,594 11,398 11,742 10,708
Diluted net income (loss) per share $ (.47) $ .18 $ (.40) $ .39 $ .83
======== ======== ======== ======== ========
System Data:
Systems shipped (unaudited) 303 222 274 157 120
Cumulative number of systems
shipped (unaudited) 1,546 1,243 1,021 747 590
At December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Balance Sheet Data:
Working capital $31,219 $38,305 $38,310 $49,764 $50,022
Total assets 90,658 95,103 91,340 92,239 81,551
Current portion of long-term
debt 110 100 95 100 --
Long-term liabilities,
excluding current portion 9,168 6,090 6,197 6,273 1,622
Stockholders' equity 59,608 66,557 64,595 68,703 62,950
(1) Includes systems and related equipment, material, software and other
component parts as well as rentals of equipment.
(2) Includes maintenance services provided by the Company's Technology Centers
and training services.
(3) Includes the recognition of deferred tax assets, in accordance with SFAS
No. 109, of $3.0 million in 1995.
Page 19
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Except for historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties. Our future
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not specifically
limited to: the ability to develop and introduce cost-effective new products in
a timely manner; developments in current or future litigation; our ability to
successfully manufacture and sell significant quantities of equipment on a
timely basis; as well as the other risks detailed in this section and in the
sections entitled Results of Operations, Liquidity and Capital Resources, and
Cautionary Statements and Risk Factors.
Overview
We develop, manufacture and market worldwide solid imaging systems designed to
rapidly produce physical objects from the digital output of solid or surface
data from computer aided design and manufacturing ("CAD/CAM") and related
computer systems. Our systems include SLA(TM) stereolithography apparatus
equipment and ThermoJet(TM) solid object printers.
SLA industrial systems use our proprietary stereolithography ("SL") technology,
a solid imaging process which uses a laser beam to expose and solidify
successive layers of photosensitive epoxy resin until the desired object is
formed to precise specifications in epoxy or acrylic resin. SL-produced parts
can be used for concept models, engineering prototypes, patterns and masters for
molds, consumable tooling or short-run manufacturing of final product, among
other applications. SL technology can provide users with significant product
development time savings, cost reductions and improved quality, compared to
traditional modeling, tooling and pattern-making techniques. In addition,
material functionality can produce more durable parts, which can be used for
rapid manufacturing. We provide a majority of our SLA system customers, either
directly or through our network of authorized distributors, with a variety of
on-site maintenance services and processing materials.
ThermoJet solid object printers employ hot melt ink jet technology to build
models in successive layers using our proprietary thermoplastic material. These
printers, about the size of an office copier, are designed for operation in
engineering and design office environments. Designers, engineers, and other
users of CAD/CAM utilities can incorporate the printers into office networks as
a shared resource, to rapidly produce models of products under development for
design concept communication and validation. In addition, the ThermoJet solid
object printer output can be used as patterns and molds and, when combined with
other secondary processes, can produce parts with representative end use
properties. We provide a majority of our ThermoJet printer customers, either
directly or through our network of authorized distributors, with on-site
maintenance services.
We have sold 1,546 systems since 1988 and our customers include major
corporations in a broad range of industries including manufacturers of
automotive, aerospace, computer, electronic, consumer and medical products. Our
revenues are generated by product and service sales. Product sales are comprised
of the sale of systems and related equipment, materials, software, and other
component parts, as well as rentals of systems. Service sales include revenues
from a variety of on-site maintenance services, customer training, services
provided by our Technology Centers and licensing of 3D Keltool (R) process and
support services.
Recent Developments
During 1999, we introduced several new products to expand the use and
applications of our solid imaging systems. At the top of the product line, we
launched the SLA 7000 system in early 1999, a premium priced high performance
SLA industrial system. This system increases the speed of producing solid images
and provides for high quality resolution. The ThermoJet solid object printer was
also introduced late in the first quarter, as a replacement for the Actua(TM)
2100. The ThermoJet printer produces solid images significantly faster than its
predecessor with improved reliability and has a list price 20% below that of the
former model. In addition, we launched a series of new materials to support our
new and existing systems (see "Part I, Item 1. Business, Products and Services,
Recent Product Introductions" on page 5). As part of our strategy to expand the
use of solid object printing and to improve the returns from recurring revenue
streams from materials, we commenced manufacturing of our own proprietary
materials for the ThermoJet printer at our facility in Grand Junction, Colorado.
During the first two quarters of 1999, we incurred substantial net losses and
our revenue did not increase compared to the same period in 1998. During this
period, our President also resigned. In addition, difficulties were encountered
in the launch of the SLA 7000 system along with other operational issues which
led to certain actions by management late in the second quarter of
1999. These actions included realignment of several management positions,
exiting facilities and legal structure reorganization. (See "Note 19 of Notes to
Consolidated Financial Statements" on page F-25.) In August 1999, we retained an
outside firm, Regent Pacific Management Corporation ("Regent Pacific"), to
review our operations and strategic direction. Also during the third quarter,
our Chief Executive Officer and Chief Financial Officer
Page 20
resigned. Upon completion of the review by Regent Pacific, we undertook certain
operational changes and replaced certain key executives (see "Note 14 of Notes
to Consolidated Financial Statements" on page F-19). In conjunction with this
program, executives of Regent Pacific filled certain key executive
positions including Chief Executive Officer, Chief Financial Officer, and Vice
President of Sales and Marketing (see "Part III, Item 13. Certain Relationships
and Related Transactions" on page 27). Additionally, Regent Pacific took
additional steps to assist us in further developing and implementing an
operating plan to improve our overall performance. Implementation of major
components of this operating plan, including measures designed to result in
margin improvements, operating savings and workforce reductions were initiated
in the fourth quarter of 1999, with the initial impact of these reductions
occurring in the first quarter of 2000. This is a forward-looking statement and
is subject to uncertainties. For example, the plan may not be completely
implemented in the expected timeframe, or may not be as effective as
anticipated.
Results of Operations
The following table sets forth the percentage relationship of certain items from
the Company's Statements of Operations to Total Revenues:
Percent of Total Revenues
Years Ended December 31,
1999 1998 1997
------ ------ ------
Sales:
Products 68.9% 66.7% 65.5%
Services 31.1% 33.3% 34.5%
------ ------ ------
Total sales 100.0% 100.0% 100.0%
------ ------ ------
Cost of sales:
Products 37.1% 34.1% 39.3%
Services 21.6% 22.5% 24.1%
------ ------ ------
Total cost of sales 58.7% 56.6% 63.4%
------ ------ ------
Total gross profit 41.3% 43.4% 36.6%
Gross profit - products 46.2% 48.8% 40.0%
Gross profit - services 30.4% 32.5% 30.1%
Selling, general and
administrative expenses 36.4% 31.0% 32.8%
Research and development expenses 9.2% 9.6% 12.2%
Other 3.5% - -
------ ------ ------
Income (loss) from operations (7.8%) 2.8% (8.4%)
Other income and expense 0.0% 0.5% 0.9%
Income tax benefit (expense) 2.3% (1.1%) 2.4%
------ ------ ------
Net income (loss) (5.5%) 2.2% (5.1%)
====== ====== ======
The following table sets forth, for the periods indicated, total revenues
attributable to each of the Company's major products and services groups:
1999 1998 1997
--------- --------- ---------
(in thousands)
Products:
Systems and related equipment $ 45,225 $ 44,580 $ 40,859
Materials 18,560 15,614 13,548
Other 3,021 5,240 4,742
--------- --------- ---------
Total products 66,806 65,434 59,149
--------- --------- ---------
Services:
Maintenance 26,655 28,140 25,010
Other 3,488 4,543 6,098
--------- --------- ---------
Total services 30,143 32,683 31,108
--------- --------- ---------
Total sales $ 96,949 $ 98,117 $ 90,257
========= ========= =========
Products:
Systems and related equipment 46.7% 46.0% 45.3%
Material 19.1% 15.9% 15.0%
Other 3.1% 4.8% 5.2%
--------- --------- ---------
Total products 68.9% 66.7% 65.5%
--------- --------- ---------
Services:
Maintenance 27.5% 28.7% 27.7%
Other 3.6% 4.6% 6.8%
--------- --------- ---------
Total services 31.1% 33.3% 34.5%
--------- --------- ---------
Total sales 100.0% 100.0% 100.0%
========= ========= =========
Page 21
1999 Compared to 1998
Sales. Sales in 1999 were $96.9 million, a decrease of 1.2% from the $98.1
million recorded in 1998. Sales consist of SLA systems and ThermoJet printers,
related equipment, software, related component parts, system rentals, materials,
and the ongoing servicing of systems.
System sales in 1999 increased $0.6 million or 1.4% to $45.2 million compared to
$44.6 million in 1998. The increase in sales relates primarily to a higher level
of ThermoJet printers sold. The sales of SLA machines showed a nominal increase
in 1999 due to problems associated with the introduction of the SLA 7000 system
early in the year which initially created some confusion in the marketplace
relative to customers' needs and whether the SLA 7000 system or other systems
would better suit our customers' requirements. These issues were addressed in
the latter half of the year and resulted in a higher number of SLA units being
sold relative to the first half of the year. The issues relating to the
introduction of the SLA 7000 system have been reduced, and we believe that
continued improvements in hardware, software and materials will support market
acceptance of this product in the future at a level consistent with that
experienced in the latter half of 1999. This is a forward-looking statement and
is subject to uncertainties. For instance, demand for competitors' products may
negatively impact sales of our systems. We sold a total of 303 systems in 1999
versus 222 systems in 1998.
In 1999, our total revenue from Europe increased to $40.3 million from $35.4
million in 1998. This represents 41.6% and 36.0% of our total revenue for
1999 and 1998, respectively. We attribute this higher rate of growth relative
to the rest of the world to a less mature market for our systems in Europe
versus the United States and the benefit realized from the acquisition of a
major competitor in 1997. It is expected that this higher growth level in
Europe versus the United States will continue into 2000. This is a
forward-looking statement and as with other such statements is subject to
uncertainties. For instance, economic or competitive conditions in Europe
could negatively impact our prospects for future growth in the region.
System sales may also fluctuate on a quarterly basis as a result of a number of
other factors, including the acceptance and reliability of new products in the
market, status of world economic conditions, fluctuations in foreign currency
exchange rates, impact of changing technology, and the timing of product
shipments. Due to the high price and gross margin of certain systems, the
acceleration or delay of a small number of shipments from one quarter to another
can significantly affect the results of operations for the quarters involved.
Material sales in 1999 increased $3.0 million to $18.6 million versus $15.6 in
1998. This is due primarily to higher material sales for both the SLA systems
and ThermoJet printers. Approximately three-quarters of our revenue from sales
of material is derived from post-installation sales. As the overall installed
base of our machines increases for both types of products and as new and
improved materials are developed for both machines, we expect that the revenue
growth rate associated with materials will exceed that of machine sales on a
percentage basis. This is a forward-looking statement and as with other such
statements is subject to uncertainties. For instance, the total number of
systems sold may decrease, leading to a decrease in the total materials sold in
the future. Also, continued competitive pricing pressure or negative customer
acceptance of our products may impact the total revenue level.
Service sales in 1999 decreased $2.5 million, or 7.8%, compared to 1998,
primarily due to increased competition from other providers of service contracts
and time and material arrangements, and due to the introduction of tiered
pricing plans offered to our customers. Technology Center revenues remained at
lower levels throughout the year relative to 1998 due to a strategic shift in
focus to sales support. Also, we sold the St. Paul, Minnesota 3D Keltool inserts
business, causing a decline in insert revenues in 1999 versus 1998. In the
future, we expect service revenue to increase, due to the growing installed
customer base. However, we believe that competitive forces will continue to
limit service revenue growth in the future. This is a forward-looking statement
and as with other such statements is subject to uncertainties. For instance,
increased competition may cause our service revenue to decrease further, even
though we are servicing a larger number of systems but at a lower level of
revenue per system.
Cost of sales. Cost of sales increased to $56.9 million or 58.7% of sales in
1999 compared to $55.5 million or 56.6% of sales in 1998.
Product cost of sales (including systems and materials) as a percentage of
product sales increased from 51.2% in 1998 to 53.8% in 1999. This increase was
the result of a change in sales mix resulting from selling a higher number of
ThermoJet printers which have a lower gross margin than SLA systems. This was
mitigated slightly by a higher overall level of sales in Europe which has
historically had a higher average selling price for SLA systems than elsewhere
and a higher level of material sales, some of which have a relatively high gross
margin relative to other products.
Page 22
Though we continue to strive to reduce manufacturing costs and expect costs per
unit to decrease as our volume increases, these cost improvements may be offset
by continued pricing pressure from competitors. These are forward-looking
statements, and as such, are subject to risks and uncertainties. For example,
the acceptance and reliability of new products in the market may result in
inventory adjustments and increased factory costs, and the impact of competition
on changing economic conditions in the United States and Europe may dramatically
impact average selling prices. In addition, we cannot assure you that we will
not experience significant quarterly fluctuations due to the impact of mix of
products, channels, and markets, or that a changing mix over time will not
result in a higher average percentage of cost of sales to product sales.
Service cost of sales as a percentage of service sales increased slightly to
69.6% in 1999 from 67.5% in 1998 primarily due to continued competitive pricing
pressure relating to longer term maintenance contracts and time and materials
services. In addition, field service revenue is decreasing as a result of
increased reliability of our systems. While we continue to contain costs related
to field service operations and operate with improved efficiency, we cannot
assure you that service cost of sales as a percentage of service revenue will
not increase further. This is a forward-looking statement, however, and as such
includes certain risks. For example, the reliability of new products in the
market or a further decline in the demand or continued competitive pricing
pressures could cause an increase in service costs of sales.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses increased by $4.8 million or 15.8% to $35.3
million in 1999 versus $30.4 million in 1998. This is primarily due to an
increase of $1.5 million in marketing expenses in 1999 over 1998 resulting from
the marketing and communication programs undertaken for the introduction of the
SLA 7000 system and the ThermoJet printer in early 1999. This was in addition to
an overall buildup of the sales and marketing department that occurred during
late 1998 and continued into early 1999. General and administrative expenses
increased $2.4 million to $12.7 million in 1999 versus $10.3 million in 1998.
Higher costs were incurred relating to general and administrative expenses as a
result of management changes during the year and the lack of strict policies and
procedures governing expenditures, which subsequently have been established in
connection with the new operating plan implemented during the fourth quarter of
1999, as well as costs associated with the sale of the 3D Keltool insert
operations and legal expenses associated with the protection of certain of our
patents. As part of the new operating plan which was implemented in the fourth
quarter of 1999, it is expected that costs associated with SG&A will decrease in
2000 in both dollar amounts and as a percentage of sales. However, this is a
forward-looking statement and, as such, includes certain risks. For example, the
acceptance and reliability of new products, or changing economic conditions in
the United States and Europe may dramatically impact total sales for any
particular period, and result in an increase in SG&A expenses as a percentage of
sales. Additionally, we may not realize the benefits of the new operating plan
in the expected timeframe, or the plan may not be completely implemented in the
expected timeframe, or may not be as effective as anticipated.
Research and development expenses. Research and development expenses decreased
in 1999 to $8.9 million, down from $9.4 million in 1998. The decrease in
research and development expenses in 1999 was primarily a result of significant
investment in 1998 in new product introduction (SLA 7000 system and ThermoJet
solid object printer). Based on our historical expenditures related to research
and development and our current development goals, we anticipate for the
foreseeable future, research and development expenses will be equal to
approximately 8% of sales. This is a forward-looking statement, however, and, as
with any such statement, is subject to risk. For example, if our total sales for
any particular period do not meet our anticipated sales for that year, research
and development expenses as a percentage of sales may exceed 8%.
Other operating expenses. During 1999, we incurred $3.4 million relating to
non-recurring charges associated with actions taken by management involving
certain employee related costs and costs associated with the litigation and
settlement costs for the Centuri Litigation (see "Note 18(e) of Notes to
Consolidated Financial Statements" on page F-23).
Operating income (loss). The operating loss in 1999 was $7.6 million or 7.8% of
revenue versus operating income of $2.7 million or 2.8% of revenue in 1998. The
1999 loss relates to lower average gross margins, additional operating expenses
associated with realigning our operations, and higher marketing costs
incurred relative to 1998.
Interest and other income and expense. Interest and other income and expense
decreased by $0.7 million in 1999 compared to 1998. This decrease is primarily
due to lower interest income as a result of lower investment levels in 1999.
Provision for (benefit from) income taxes. For 1999, our tax benefit was $2.2
million or 29.7% of the pre-tax loss, compared to a tax expense of $1.1 million
on pre-tax income of $3.2 million in 1998. Our effective tax rate was favorably
impacted primarily by research credits and the effects of foreign operations.
1998 Compared to 1997
Sales. Sales in 1998 were $98.1 million, an increase of 8.7% over the $90.3
million recorded during 1997.
Page 23
Product sales in 1998 increased $6.3 million or 10.6% to $65.4 million compared
to $59.1 million in 1997. The dollar increase was primarily due to improved
average selling prices in Europe as a result of the EOS acquisition, and an
improved product mix as the demand for our SLA 3500 and 5000 systems, launched
in late 1997, caused a shift to high end stereolithography systems. A total of
222 systems were sold in 1998 compared to 274 systems in 1997. Orders for our
systems in 1998 compared to 1997 increased significantly in Europe and were up
in the United States, while orders were down slightly in Asia Pacific.
In 1997, the United States market was impacted by inefficiencies caused by the
changes in our domestic sales organization.
Service sales in 1998 increased $1.6 million, or 5.1%, compared to 1997,
primarily as a result of increased maintenance revenues due to the larger
installed base of SLA systems in the United States and Europe. This increase was
offset, in part, by a decline in revenues from our Technology Centers.
Cost of sales. Cost of sales decreased to $55.5 million or 56.6% of sales in
1998 compared to $57.2 million or 63.4% of sales in 1997.
Product cost of sales as a percentage of product sales improved in 1998,
decreasing from 60.0% in 1997 to 51.2% in 1998. This improvement was the result
of increased average selling prices in Europe, improved product mix to higher
end SLA systems, continued reductions in overall cost of factory operations, and
revenues related to certain royalty agreements. In addition, 1997 cost of sales
included inventory adjustments totaling approximately $1.8 million that were
primarily associated with the transition to new products, the EOS acquisition,
and field service inventories.
Service cost of sales as a percentage of service sales decreased to 67.5% in
1998 from 69.9% in 1997 primarily due to the fact that 1997 included certain
hardware upgrade costs associated with our NT version system software. In
addition, field service costs improved as a result of increased reliability of
our systems. This was offset, in part, by declining revenues in our Technology
Center, increasing costs of sales as a percentage of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses improved, as a percentage of sales, to 31.0% of total
sales in 1998 from 32.9% in 1997. SG&A expense increased $0.8 million or 2.7%
from 1998 to 1997, due primarily to increased commissions and sales bonuses
resulting from higher sales and profits, costs associated with selling and
distributor incentive programs in 1998, and costs related to expanded marketing
and communications programs.
Research and development expenses. Research and development ("R&D") expenses in
1998 decreased approximately $1.6 million or 14.2% compared to 1997. The
decrease in R&D expenses in 1998 was due primarily to the fact that 1997
included a write-off of acquired in-process technology valued at approximately
$2.1 million in connection with the EOS acquisition (see "Note 7 of Notes to
Consolidated Financial Statements" on page F-13), offset in part by increased
personnel and experimental material costs related to certain development
projects.
Operating income (loss). Operating income in 1998 was 2.8% of total sales
compared to operating loss of (8.4%) of total sales in 1997. The improvement in
1998 is primarily attributable to inventory write-offs and costs associated with
the EOS acquisition included in 1997, improved average selling prices and
product mix, and improving product and service cost of sales, as described
above.
Interest and other income and expense. Interest and other income and expense
decreased by $0.1 million in 1998 compared to 1997. This decrease is primarily
due to lower interest income. Other expense increased by $0.2 million in 1998
compared to 1997 due to various non-operating expenses.
Provision for (benefit from) income taxes. For 1998 our provision for income
taxes was $1.1 million or 33.1% of pre-tax income, compared to a tax benefit of
$2.2 million in 1997. The effective tax rate was favorably impacted primarily as
a result of research credits and the effects of foreign operations.
Foreign Operations
International sales, primarily from Europe, accounted for 47.5%, 44.1%, and
41.5% of total sales in 1999, 1998 and 1997, respectively. For information with
respect to allocation of sales among the Company's foreign operations, see "Note
17 of Notes to Consolidated Financial Statements" on page F-22.
During 1999, our European operations continued to grow and are expected to
provide an increasing percentage of our total revenue. However, this is a
forward-looking statement and, as with any such statement, is subject to
uncertainties. For example, we may be negatively impacted by foreign currency
movements which would limit our growth prospects or put
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us at a disadvantage relative to other competitors in the European market. We
also receive a limited portion of our total revenue from Asia through
distributors and an established sales office. Due to continued economic problems
in Asia and competitive pressures, we expect our sales to these areas to
continue to be limited.
To date, we have not entered into hedging transactions to protect against
changes in foreign currency exchange rates, but we are considering doing so
for transactions in the future. However, this is a forward-looking statement
and, as with any such statement, is subject to uncertainties. For example, we
may determine that it is not appropriate for us to enter into hedging
transactions or develop alternative methods to limit our foreign currency
exposure.
Liquidity and Capital Resources
As of and for the Years Ended
December 31
--------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Cash and cash equivalents $ 12,553 $ 15,912 $ 12,695
Short-term investments ------ 3,485 3,498
Working capital 31,219 38,306 38,310
Cash provided by (used for) operating activities 1,589 7,563 (4,978)
Cash used for investing activities (5,999) (4,234) (8,202)
Cash provided by (used for) financing activities 250 (853) 1,059
Net cash provided by (used for) operating