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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-22250
3D SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4431352
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
26081 AVENUE HALL
VALENCIA, CALIFORNIA 91355
(Address of Principal Executive Offices) (Zip Code)
(661) 295-5600 (Registrant's
Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No
Shares of Common Stock, par value $0.001, outstanding as of July 31, 2003:
12,767,947
3D SYSTEMS CORPORATION
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION...................................................................1
ITEM 1. Financial Statements...........................................................1
Condensed Consolidated Balance Sheets as of June 27, 2003 (unaudited) and
December 31, 2002 (unaudited)..................................................1
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 27, 2003 and June 28, 2002 (as restated) (unaudited)................2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 27, 2003 and June 28, 2002 (as restated) (unaudited)......................3
Condensed Consolidated Statements of Comprehensive (Loss) Income for the
Six Months Ended June 27, 2003 and June 28, 2002 (as restated) (unaudited).....5
Notes to Condensed Consolidated Financial Statements for the Six Months
Ended June 27, 2003 and June 28, 2002 (unaudited)..............................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................17
Liquidity and Capital Resources...............................................28
Cautionary Statements and Risk Factors........................................31
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....................39
ITEM 4. Controls and Procedures.......................................................41
PART II. OTHER INFORMATION......................................................................43
ITEM 1. Legal Proceedings.............................................................43
ITEM 6. Exhibits and Reports on Form 8-K..............................................43
3D SYSTEMS CORPORATION
Condensed Consolidated Balance Sheets
As of June 27, 2003 and December 31, 2002
(in thousands)
(unaudited)
JUNE 27, 2003 DECEMBER 31, 2002
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $1,269 in
2003 $ 8,985 $ 2,279
Accounts receivable, less allowances for doubtful accounts
of $2,660 and $3,068 18,054 27,420
Current portion of lease receivables 322 322
Inventories, net of reserves of $2,318 and $1,876 12,897 12,564
Prepaid expenses and other current assets 2,222 3,687
--------------- ---------------
Total current assets 42,480 46,272
Property and equipment, net 13,493 15,339
Licenses and patent costs, net 16,979 14,960
Lease receivables, less current portion and net of allowance
of $510 and $247 363 553
Acquired technology, net 6,860 7,647
Goodwill 44,650 44,456
Other assets, net 2,420 3,006
--------------- ---------------
$ 127,245 $ 132,233
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 8,550 $ 2,450
Accounts payable 6,454 10,830
Accrued liabilities 14,577 15,529
Current portion of long-term debt 155 10,500
Customer deposits 648 801
Deferred revenues 13,430 14,770
--------------- ---------------
Total current liabilities 43,814 54,880
Other liabilities 3,373 3,397
Long-term debt, less current portion 4,010 4,090
Subordinated debt 10,000 10,000
--------------- ---------------
Total liabilities 61,197 72,367
--------------- ---------------
Redeemable preferred stock, 8% convertible, authorized 5,000 shares,
issued and outstanding 2,634 15,158 ---
Stockholders' equity:
Common stock, authorized 25,000 shares, issued and outstanding
12,734 and issued and outstanding 12,725 13 13
Capital in excess of par value 85,100 84,931
Notes receivable from officers for purchase of stock (59) (59)
Preferred stock dividend (198) ---
Accumulated deficit (31,852) (21,419)
Accumulated other comprehensive loss (2,114) (3,600)
--------------- ---------------
Total stockholders' equity 50,890 59,866
--------------- ---------------
$ 127,245 $ 132,233
=============== ===============
See accompanying notes to condensed consolidated financial statements.
1
3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 27, 2003 and June 28, 2002
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
JUNE 28, 2002 JUNE 28, 2002
AS RESTATED AS RESTATED
JUNE 27,2003 (SEE NOTE 14) JUNE 27,2003 (SEE NOTE 14)
-------------- -------------- -------------- -------------
Sales:
Products $ 18,010 $ 19,110 $ 32,746 $ 38,371
Services
8,861 9,433 17,141 17,686
-------------- -------------- -------------- --------------
Total sales 26,871 28,543 49,887 56,057
-------------- -------------- -------------- --------------
Cost of sales:
Products 9,543 10,861 18,044 21,741
Services
6,547 6,883 13,569 13,197
-------------- -------------- -------------- --------------
Total cost of sales 16,090 17,744 31,613 34,938
-------------- -------------- -------------- --------------
Gross profit 10,781 10,799 18,274 21,119
-------------- -------------- -------------- --------------
Operating expenses:
Selling, general and administrative 9,719 12,974 20,375 23,944
Research and development 2,564 4,707 5,163 8,635
Severance and other restructuring costs 251 1,617 251 1,617
-------------- -------------- -------------- --------------
Total operating expenses 12,534 19,298 25,789 34,196
-------------- -------------- -------------- --------------
Loss from operations (1,753) (8,499) (7,515) (13,077)
Interest and other expense, net 993 668 1,887 1,368
Gain on arbitration settlement --- --- --- 18,464
-------------- -------------- -------------- --------------
(Loss) income before provision for income taxes (2,746) (9,167) (9,402) 4,019
Provision for (benefit from) income taxes 815 (3,539) 1,031 953
-------------- -------------- -------------- --------------
Net (loss) income (3,561) (5,628) (10,433) 3,066
-------------- -------------- -------------- --------------
Preferred stock dividend 198 -- 198 --
Net (loss) income available to common
shareholders $ (3,759) $ (5,628) $ (10,631) $ 3,066
============== ============== ============== ==============
Shares used to calculate basic net (loss) income
available to common shareholders per share 12,734 12,845 12,730 12,986
============== ============== ============== ==============
Basic net (loss) income available to $ (0.30) $ (0.44) $ (0.84) $ 0.24
common shareholders per share ============== ============== ============== ==============
Shares used to calculate diluted net (loss)
income to common shareholders per share 12,734 12,845 12,730 14,445
============== ============== ============== ==============
Diluted net (loss) income available $ (0.30) $ (0.44) $ (0.84) $ 0.21
to common shareholders per share ============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
2
3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 27, 2003 and June 28, 2002
(in thousands)
(unaudited)
SIX MONTHS ENDED
--------------- ---------------
JUNE 28, 2002
AS RESTATED
JUNE 27, 2003 (SEE NOTE 14)
--------------- ---------------
Cash flows from operating activities:
Net (loss) income $ (10,433) $ 3,066
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Deferred income taxes --- 893
Gain on arbitration settlement (including $1,846 included in selling,
general and administrative for legal reimbursement) --- (20,310)
Depreciation and amortization 4,590 4,776
Adjustment to allowance accounts 259 828
Adjustment to inventory reserve 568 ---
Loss on disposition of property and equipment 316 1,171
Stock compensation expense 130 ---
Changes in operating accounts, excluding acquisition:
Accounts receivable 10,329 7,039
Lease receivables 190 706
Inventories (521) 795
Prepaid expenses and other current assets 1,554 7
Other assets 435 460
Accounts payable (4,509) (250)
Accrued liabilities (1,443) (3,728)
Customer deposits (153) (569)
Deferred revenues (1,660) (126)
Other liabilities (187) 142
--------------- ---------------
Net cash used in operating activities (535) (5,100)
Cash flows from investing activities:
Investment in OptoForm SARL --- (1,200)
Investment in RPC --- (2,045)
Purchase of property and equipment (397) (2,079)
Additions to licenses and patents (3,231) (1,536)
Software development costs --- (308)
--------------- ---------------
Net cash used in investing activities (3,628) (7,168)
Cash flows from financing activities:
Exercise of stock options and purchase plan 40 529
Proceeds from sale of redeemable preferred stock 15,800 12,492
Issuance cost for redeemable preferred stock (642) ---
Repayment of officers and employee notes --- 145
Net borrowings under line of credit 6,100 ---
Borrowings --- 30,823
Repayment of long-term debt (10,425) (32,042)
--------------- ---------------
Net cash provided by financing activities 10,873 11,947
Effect of exchange rate changes on cash (4) 1,069
--------------- ---------------
Net increase in cash and cash equivalents 6,706 748
Cash and cash equivalents at the beginning of the period 2,279 5,948
--------------- ---------------
Cash and cash equivalents at the end of the period $ 8,985 $ 6,696
=============== ===============
See accompanying notes to condensed consolidated financial statements.
3
Supplemental schedule of non-cash investing and financing activities:
During the six months ended June 27, 2003 and June 28, 2002, the Company
transferred $1.0 million and $3.2 million of property and equipment from
inventories to fixed assets, respectively. Additionally, $1.0 million and $1.8
million of property and equipment was transferred from fixed assets to
inventories for the three months ended June 27, 2003 and June 28, 2002.
In conjunction with the $22 million arbitration settlement with Vantico, which
was settled through the return of shares to the Company, the Company allocated
$1.7 million to a put option which is included as an addition to stockholders'
equity in the first quarter of 2002.
During the second quarter of 2003, the Company accrued dividends on the Series B
Convertible Preferred Stock of $0.2 million.
4
3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Comprehensive (Loss) Income
For the Three and Six Months Ended June 27, 2003 and June 28, 2002
(in thousands)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 28, 2002 JUNE 28, 2002
AS RESTATED AS RESTATED
JUNE 27, 2003 (SEE NOTE 14) JUNE 27, 2003 (SEE NOTE 14)
------------- ------------- ------------- ------------
Net (loss) income $ (3,561) $ (5,628) $ (10,433) $ 3,066
Foreign currency translation 1,210 2,515 1,486 2,871
------------- ------------- ------------- ------------
Comprehensive (loss) income $ (2,351) $ (3,113) $ (8,947) $ 5,937
============= ============= ============= ============
See accompanying notes to condensed consolidated financial statements.
5
3D SYSTEMS CORPORATION
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 27, 2003 and June 28, 2002
(unaudited)
(1) Going Concern
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company
incurred operating losses totaling $7.5 million and $21.4 million for the
six months ended June 27, 2003 and the year ended December 31, 2002,
respectively. In addition, the Company has a working capital deficit of
$1.3 million and an accumulated deficit of $31.9 million at June 27, 2003.
These factors among others raise substantial doubt about the Company's
ability to continue as a going concern.
Management's plans include raising additional working capital through debt
or equity financing. In May 2003, the Company sold approximately 2.6
million shares of its Series B Convertible Preferred Stock for aggregate
consideration of $15.8 million (Note 7 - Preferred Stock). Subsequently, on
May 5, 2003 the Company repaid $9.6 million of the U.S. Bank term loan
balance (Note 10 - Borrowings).
Management intends to obtain debt financing to replace the U.S. Bank
financing, and in July 2003, management accepted a proposal from Congress
Financial, a subsidiary of Wachovia, to provide a secured revolving credit
facility of up to $20.0 million, subject to its completion of due diligence
to its satisfaction and other conditions. Congress has not yet completed
its diligence process; however, based on a preliminary analysis of the
collateral, it has indicated that the loan, if made, would be for an amount
significantly less than $20.0 million. Management is pursuing alternative
financing sources, including a possible restructuring of the Company's
industrial development bonds to make collateral currently serving to secure
repayment of the bonds available for additional borrowings. Additionally,
management intends to pursue a program to increase margins and continue
cost saving programs. However, there is no assurance that the Company will
succeed in accomplishing any or all of these initiatives.
The accompanying condensed consolidated financial statements do not include
any adjustments relating to the recoverability or classification of asset
carrying amounts or the amounts and classification of liabilities that may
result should the Company be unable to continue as a going concern.
(2) Basis of Presentation
The accompanying condensed consolidated financial statements of the Company
are prepared in accordance with instructions to Form 10-Q and, in the
opinion of management, include all adjustments (consisting only of normal
recurring accruals) which are necessary for the fair presentation of
results for the interim periods. The Company reports its interim financial
information on a 13-week basis ending the last Friday of each quarter, and
reports its annual financial information through the calendar year ended
December 31. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002. The results of the six months ended June 27,
2003 are not necessarily indicative of the results to be expected for the
full year.
(3) Significant Accounting Policies and Estimates
The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to allowance for
doubtful accounts, income taxes, inventories, goodwill, intangible and
other long-lived assets and contingencies. The Company bases its estimates
on historical experience and on various other assumptions it believes
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates.
The Company believes the following critical accounting policies are most
affected by management's judgments and the estimates used in preparation of
the condensed consolidated financial statements.
Cash and Cash Equivalents.
Cash and cash equivalents include all cash on hand and cash in various
banking institutions. The Company also has $1.2 million of cash in Wells
Fargo Bank under restriction to pay off a portion of the outstanding
industrial development bonds relating to its Colorado facility (Note 10 -
Borrowings). Additionally, the Company has approximately $0.1 million of
cash on deposit under restriction, as required by an arrangement with a
certain utility supplier.
6
Allowance for Doubtful Accounts.
The Company's estimate for the allowance for doubtful accounts related to
trade receivables is based on two methods. The amounts calculated from each
of these methods are combined to determine the total amount reserved.
First, the Company evaluates specific accounts where it has information
that the customer may have an inability to meet its financial obligations
(for example, bankruptcy). In these cases, the Company uses its judgment,
based on available facts and circumstances, and records a specific reserve
for that customer against amounts due to reduce the receivable to the
amount that is expected to be collected. These specific reserves are
reevaluated and adjusted as additional information is received that impacts
the amount reserved. Second, a reserve is established for all customers
based on a range of percentages applied to aging categories. These
percentages are based on historical collection and write-off experience. If
circumstances change (for example, the Company experiences higher than
expected defaults or an unexpected material adverse change in a major
customer's ability to meet its financial obligation to the Company),
estimates of the recoverability of amounts due to the Company could be
reduced by a material amount.
Income Taxes.
The provisions of SFAS No. 109, "Accounting for Income Taxes," require a
valuation allowance when, based upon currently available information and
other factors, it is more likely than not that all or a portion of the
deferred tax asset will not be realized. SFAS No. 109 provides that an
important factor in determining whether a deferred tax asset will be
realized is whether there has been sufficient income in recent years and
whether sufficient income is expected in future years in order to utilize
the deferred tax asset. Forming a conclusion that a valuation allowance is
not needed is difficult when there is negative evidence, such as cumulative
losses in recent years. The existence of cumulative losses in recent years
is an item of negative evidence that is particularly difficult to overcome.
At June 27, 2003, the unadjusted net book value before valuation allowance
of the Company's deferred tax assets totaled approximately $23.4 million,
which principally was comprised of net operating loss carry-forwards and
other credits. During the six months ended June 27, 2003 and during the
Company's 2002 fourth quarter-end, the Company recorded valuation allowance
of approximately $4.8 million and $12.9 million, respectively, against its
net deferred tax assets, which was additional to the approximate $5.7
million allowance previously recorded. The Company intends to maintain a
valuation allowance until sufficient evidence exists to support its
reversal. Also, until an appropriate level of profitability is reached, the
Company does not expect to recognize any domestic tax benefits in future
periods.
The Company believes its determination to record a valuation allowance to
reduce its deferred tax assets is a critical accounting estimate because it
is based on an estimate of future taxable income in the United States,
which is susceptible to change and dependent upon events that are remote in
time and may or may not occur, and because the impact of recording a
valuation allowance may be material to the assets reported on the Company's
balance sheet. The determination of the Company's income tax provision is
complex due to operations in numerous tax jurisdictions outside the United
States, which are subject to certain risks, which ordinarily would not be
expected in the United States. Tax regimes in certain jurisdictions are
subject to significant changes, which may be applied on a retroactive
basis. If this were to occur, the Company's tax expense could be materially
different than the amounts reported. Furthermore, as explained in the
preceding paragraph, in determining the valuation allowance related to
deferred tax assets, the Company adopts the liability method as required by
SFAS No. 109, "Accounting for Income Taxes." This method requires that we
establish valuation allowance if, based on the weight of available
evidence, in the Company's judgment it is more likely than not that the
deferred tax assets may not be realized.
Inventory.
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method. Reserves for slow moving
and obsolete inventories are provided based on historical experience and
current product demand. The Company evaluates the adequacy of these
reserves quarterly. There were no inventories consigned to a sales agent at
June 27, 2003, and inventories consigned to a sales agent at December 31,
2002 were $0.1 million. The Company's determination relating to the
allowance for inventory obsolescence is subject to change because it is
based on management's current estimates of required reserves and potential
adjustments.
Property and Equipment.
Property and equipment are carried at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets,
generally three to thirty years. Leasehold improvements are amortized on a
straight-line basis over their estimated useful lives, or the lives of the
leases, whichever is shorter. Realized gains and losses are recognized upon
disposal or retirement of the related assets and are reflected in results
of operations. Repair and maintenance charges are expensed as incurred.
7
Licenses and Patent Costs.
Licenses and patent costs are being amortized on a straight-line basis over
their estimated useful lives, which are approximately eight to
seventeen-years, or on a units-of-production basis, depending on the nature
of the license or patent.
Goodwill, Intangible and Other Long-Lived Assets.
The Company has applied Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" in its allocation of the purchase
prices of DTM Corporation (DTM) and RPC Ltd. (RPC). The annual impairment
testing required by SFAS No. 142, "Goodwill and Other Intangible Assets,"
requires the Company to use its judgment and could require the Company to
write-down the carrying value of its goodwill and other intangible assets
in future periods. SFAS No. 142 requires companies to allocate their
goodwill to identifiable reporting units, which are then tested for
impairment using a two-step process detailed in the statement. The first
step requires comparing the fair value of each reporting unit with its
carrying amount, including goodwill. If that fair value exceeds the
carrying amount, the second step of the process is not necessary and there
are no impairment issues. If that fair value does not exceed that carrying
amount, companies must perform the second step that requires an allocation
of the fair value of the reporting unit to all assets and liabilities of
that unit as if the reporting unit had been acquired in a purchase business
combination and the fair value of the reporting unit was the purchase
price. The goodwill resulting from that purchase price allocation is then
compared to its carrying amount with any excess recorded as an impairment
charge.
Upon implementation of SFAS No. 142 in January 2002 and again in the fourth
quarter of 2002, the Company concluded that the fair value of the Company's
reporting units exceeded their carrying value and accordingly, as of that
date, there were no goodwill impairment issues. The Company is required to
perform a valuation of its reporting unit annually, or upon significant
changes in the Company's business environment.
The Company evaluates long-lived assets other than goodwill for impairment
whenever events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. If the estimated future cash
flows (undiscounted and without interest charges) from the use of an asset
are less than the carrying value, a write-down would be recorded to reduce
the related asset to its estimated fair value.
Contingencies.
The Company accounts for contingencies in accordance with SFAS No. 5,
"Accounting for Contingencies," SFAS No. 5 requires that the Company record
an estimated loss from a loss contingency when information available prior
to issuance of the Company's financial statements indicates that it is
probable that an asset has been impaired or a liability has been incurred
at the date of the financial statements and the amount of the loss can be
reasonably estimated. Accounting for contingencies such as legal and income
tax matters requires the Company to use its judgment. At this time, the
Company's contingencies are not estimable and have not been recorded;
however, management believes the ultimate outcome of these actions will not
have a material effect on the Company's consolidated financial position,
results of operations or cash flows.
Revenue Recognition.
Revenues from the sale of systems and related products are recognized upon
shipment, provided that both title and risk of loss have passed to the
customer and collection is reasonably assured. Some sales transactions are
bundled and include equipment, software license, warranty, training and
installation. The Company allocates and records revenue in these
transactions based on vendor specific objective evidence that has been
accumulated through historic operations. The process of allocating the
revenue involves some management judgments. Revenues from services are
recognized at the time of performance. We provide end users with
maintenance under a warranty agreement for up to one year and defer a
portion of the revenues at the time of sale based on the objective evidence
for the of these services. After the initial warranty period, we offer
these customers optional maintenance contracts; revenue related to these
contracts is deferred and recognized ratably over the period of the
contract. Our warranty costs were $2.0 million and $2.5 million, for the
six months ended June 27, 2003 and June 28, 2002, respectively. The
Company's systems are sold with software products that are integral to the
operation of the systems. These software products are not sold separately.
Certain of the Company's sales were made through a sales agent to customers
where substantial uncertainty exists with respect to collection of the
sales price. The substantial uncertainty is generally a result of the
absence of a history of doing business with the customer and uncertain
political environment in the country in which the customer does business.
For these sales, the Company records revenues based on the cost recovery
method, which requires that the
8
sales proceeds received are first applied to the carrying amount of the
asset sold until the carrying amount has been recovered. Thereafter, all
proceeds are recognized as gross profit.
Credit is extended based on an evaluation of each customer's financial
condition. To reduce credit risk in connection with systems sales, the
Company may, depending upon the circumstances, require significant deposits
prior to shipment and may retain a security interest in the system until
fully paid. The Company often requires international customers to furnish
letters of credit.
Stock-based Compensation.
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board, APB, No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. The Company has adopted the
disclosure-only provisions of FAS No. 123 "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense relating to employee
stock options is determined based on the excess of the market price of the
Company's stock over the exercise price on the date of grant, the intrinsic
value method, versus the fair value method as provided under FAS No. 123.
Accordingly, no stock-based employee compensation cost is reflected in net
(loss) income, as all options granted under the plan had an exercise price
at least equal to the market value of the underlying common stock on the
date of grant. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date for the six-month
periods ended June 27, 2003 and June 28, 2002, consistent with the
provisions of FAS No. 123, the Company's net (loss) income and net (loss)
income per share would have changed. The following table represents the
effect on net (loss) income and net (loss) income per share if the Company
had applied the fair value based method and recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 27, June 28, June 27, June 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net (loss) income available to
common shareholders, as reported $ (3,759) $ (5,628) $ (10,631) $ 3,066
Add: Stock-based employee
compensation expense included in
reported net earnings, net of related
tax benefits --- --- --- ---
Deduct: Stock-based employee
compensation expense determined under
the fair value based method for all
awards, net of related tax effects 523 1,407 1,108 2,877
------------ ------------ ------------ ------------
Pro forma net (loss) income
available to common shareholders $ (4,282) $ (7,035) $ (11,739) $ 189
============ ============ ============ ============
Basic net (loss) earnings per common
share:
As reported $ (0.30) $ (0.44) $ (0.84) $ 0.24
============ ============ ============ ============
Pro forma $ (0.34) $ (0.55) $ (0.92) $ 0.01
============ ============ ============ ============
Diluted net (loss) earnings available
to common shareholders per share:
As reported $ (0.30) $ (0.44) $ (0.84) $ 0.21
============ ============ ============ ============
Pro forma $ (0.34) $ (0.55) $ (0.92) $ 0.01
============ ============ ============ ============
9
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and
are fully transferable. In addition, option pricing models require the
input of highly subjective assumptions, including the option's expected
life and the price volatility of the underlying stock. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate,
in the opinion of management, the existing models do not necessarily
provide a reliable single measure of the fair value of employee stock
options. The fair value of options granted for the three months ended June
27, 2003 and June 28, 2002 was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions:
June 27, 2003 June 28, 2002
-------------- -------------
Risk free interest rate 2.42 % 4.94 %
Expected life 4 years 4 years
Expected volatility 83 % 83 %
Because FAS No. 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in the future years.
Recent Accounting Pronouncements.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS No. 146
replaces Emerging Issues Task Force (EITF) Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity." This standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This
statement is effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS 146 does not have a material
impact on the Company's results of operations or financial condition.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation it has undertaken in issuing the
guarantee. FIN 45 also requires guarantors to disclose certain information
for guarantees, beginning December 31, 2002. These financial statements
contain the required disclosures.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor
with a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest
entity is an entity in which the equity investors do not have a controlling
financial interest or the equity investment at risk is insufficient to
finance the entity's activities without receiving additional subordinated
financial support from other parties. The Company does not have any
variable interest entities that must be consolidated.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
SFAS No. 150 establishes standards on the classification and measurement of
financial instruments with characteristics of both liabilities and equity.
SFAS No. 150 will become effective for financial instruments entered into
or modified after May 31, 2003. The Company does not have any financial
instruments to be accounted for under this pronouncement.
(4) Inventories (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
------------- -----------------
Raw materials $ 2,197 $ 2,617
Work in progress 401 196
Finished goods 10,299 9,751
------------- -----------------
$ 12,897 $ 12,564
============= =================
10
(5) Property and Equipment, net (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002 USEFUL LIFE
(IN YEARS)
----------------- ------------------ -----------------
Land $ 435 $ 435 ---
Building 4,202 4,202 30
Machinery and equipment 26,681 26,984 3-5
Office furniture and equipment 3,711 3,597 5
Leasehold improvements 4,205 4,137 Life of lease
Rental equipment 1,207 1,189 5
Construction in progress 391 206 N/A
----------------- ------------------
40,832 40,750
Less accumulated depreciation (27,339) (25,411)
----------------- ------------------
$ 13,493 $ 15,339
================= ==================
Depreciation expense for the three-month periods ended June 27, 2003 and
June 28, 2002 was $1.2 million and $1.8 million, respectively. Depreciation
expense for the six-month periods ended June 27, 2003 and June 28, 2002 was
$2.2 million and $2.8 million, respectively.
(6) Intangible Assets and Goodwill:
(a) Licenses and Patent Costs
Licenses and patent costs are summarized as follows (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
---------------- -----------------
Licenses, at cost $ 2,333 $ 2,333
Patent costs 26,246 22,946
---------------- -----------------
28,579 25,279
Less: Accumulated
amortization (11,600) (10,319)
---------------- -----------------
$ 16,979 $ 14,960
================ =================
For three months ended June 27, 2003 and June 28, 2002, the Company
amortized $0.6 million and $0.6 million in license and patent costs,
respectively. For the six months ended June 27, 2003 and June 28,
2002, the Company amortized $1.2 million and $1.0 million in license
and patent costs, respectively. The Company incurred $3.2 million and
$1.5 million in costs for the six months ended June 27, 2003 and June
28, 2002, respectively, and $1.6 million and $1.5 million for the
three months ended June 27, 2003 and June 28, 2002, respectively, to
acquire, defend, develop and extend patents in the United States,
Japan, Europe and certain other countries.
(b) Acquired Technology
Acquired technology is summarized as follows (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
---------------- -----------------
Acquired technology $ 10,111 $ 10,029
Less: Accumulated
amortization (3,251) (2,382)
---------------- -----------------
$ 6,860 $ 7,647
================ =================
For three months ended June 27, 2003 and June 28, 2002, the Company
amortized $0.4 million in acquired technology for each period. For the
six months ended June 27, 2003 and June 28, 2002, the Company
amortized $0.8 million in acquired technology for each period.
(c) Other Intangible Assets
During the three months ended June 27, 2003 and June 28, 2002, the
Company had amortization expense on other intangible assets of $0.2
million and $0.1 million, respectively. During the six months ended
June 27, 2003 and June 28, 2002, the Company had amortization expense
on other intangible assets of $0.3 million and $0.2 million,
respectively.
11
(d) Goodwill
The changes in the carrying amount of goodwill for the six months
ended June 27, 2003 are as follows (in thousands):
Balance as of December 31, 2002 $ 44,456
Effect of foreign currency exchange rates 194
---------------
Balance at June 27, 2003 $ 44,650
===============
The Company recorded no goodwill amortization in 2003.
(7) Redeemable Preferred Stock
On May 5, 2003, the Company sold 2,634,016 shares of Series B Convertible
Preferred Stock for an aggregate consideration of $15.8 million. The
Company incurred issuance costs of approximatelY $0.6 million in connection
with this transaction. The preferred stock accrues dividends at 8% per
share and is convertible at any time into 2,634,016 shares of common stock.
The preferred stock is redeemable at the Company's option after the third
anniversary date. Redemption is mandatory on the tenth anniversary date, at
$6.00 per share plus accrued dividends. The Company accrued $0.2 million
for dividends payable for the period from the issuance date through June
27, 2003.
(8) Computation of Earnings Per Share
Basic net (loss) income available to common shareholders per share is
computed by dividing net (loss) income available to common shareholders by
the weighted average number of shares of common stock outstanding during
the period. Diluted net (loss) income available to common shareholders per
share is computed by dividing net (loss) income available to common
shareholders by the weighted average number of shares of common stock
outstanding plus the number of additional common shares that would have
been outstanding if all potentially dilutive common shares had been issued.
Common shares related to stock options and stock warrants are excluded from
the computation when their effect is anti-dilutive.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings (loss) available per common share computations
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Numerator:
Net (loss) income available to
common shareholders--numerator
for basic and diluted net (loss)
income available per common share $ (3,759) $ (5,628) $ (10,631) $ 3,066
============= ============= ============= =============
Denominator:
Denominator for basic net (loss)
income available to common
shareholders per share--weighted
average shares 12,734 12,845 12,730 12,986
Effect of dilutive securities:
Stock options and warrants --- --- --- 1,459
------------- ------------- ------------- -------------
Denominator for diluted net (loss)
income available to common
shareholders per share $ 12,734 $ 12,845 $ 12,730 $ 14,445
============= ============= ============= =============
Potential common shares related to convertible debt, stock options and
stock warrants were excluded from the calculation of diluted EPS because
their effects were antidilutive. The weighted average for common shares
excluded from the computation were approximately 3,760,000 and 1,837,000
for the six months ended June 27, 2003, and June 28, 2002, respectively.
(9) Segment Information
The Company develops, manufactures and markets worldwide solid imaging
systems designed to reduce the time it takes to produce three-dimensional
objects. Segments are reported by geographic sales regions.
12
The Company's reportable segments include the Company's administrative,
sales, service, manufacturing and customer support operations in the United
States and sales and service offices in the European Community (France,
Germany, the United Kingdom, Italy and Switzerland) and in Asia (Japan,
Hong Kong and Singapore).
The Company evaluates performance based on several factors, of which the
primary financial measure is operating income. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies in Note 3.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -------------------------------
JUNE 27, 2003 JUNE 28, 2002 JUNE 27, 2003 JUNE 28, 2002
------------- ------------- -------------- -------------
Net sales:
USA $ 15,119 $ 18,225 $ 38,625 $ 40,146
Europe 12,342 16,149 13,629 25,008
Asia 4,090 2,784 6,867 7,084
------------- ------------- -------------- -------------
Subtotal 31,551 37,158 59,121 72,238
Intersegment elimination (4,680) (8,615) (9,234) (16,181)
------------- ------------- -------------- -------------
Total $ 26,871 $ 28,543 $ 49,887 $ 56,057
============= ============= ============== =============
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -------------------------------
JUNE 27, 2003 JUNE 28, 2002 JUNE 27, 2003 JUNE 28, 2002
------------- ------------- -------------- -------------
Intersegment eliminations:
USA $ 1,982 $ 3,792 $ 4,038 $ 8,301
Europe 2,698 4,823 5,196 7,880
Asia --- --- --- ---
------------- ------------- -------------- -------------
Total $ 4,680 $ 8,615 $ 9,234 $ 16,181
============= ============= ============== =============
All intersegment sales are recorded at amounts consistent with prices
charged to distributors, which are above cost.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -------------------------------
JUNE 27, 2003 JUNE 28, 2002 JUNE 27, 2003 JUNE 28, 2003
------------- ------------- -------------- -------------
(Loss) income from operations:
USA $ (4,227) $ (5,831) $ (12,034) $ (9,197)
Europe 883 (2,856) 1,353 (5,286)
Asia 1,658 825 2,496 2,809
------------- ------------- -------------- -------------
Subtotal (1,686) (7,862) (8,185) (11,674)
Intersegment elimination (67) (637) 670 (1,403)
------------- ------------- -------------- -------------
Total $ (1,753) $ (8,499) $ (7,515) $ (13,077)
============= ============= ============== =============
JUNE 27, 2003 DECEMBER 31, 2002
--------------- -----------------
Assets:
USA $ 298,526 $ 273,492
Europe 55,035 59,067
Asia 11,462 13,825
--------------- -----------------
Subtotal 365,023 346,384
--------------- -----------------
Intersegment elimination (237,778) (214,151)
--------------- -----------------
Total $ 127,245 $ 132,233
=============== =================
13
(10) Borrowings
The total outstanding borrowings are as follows (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
-------------- -------------------
Line of credit $ 8,550 $ 2,450
============== ===============----
Long-term debt current portion:
Industrial development bond $ 155 $ 150
Term loan --- 10,350
-------------- -------------------
Total long-term debt current portion $ 155 $ 10,500
============== ===================
Long-term debt, less current portion -
Industrial development bond $ 4,010 $ 4,090
-------------- -------------------
Total long-term debt, less current portion $ 4,010 $ 4,090
============== ===================
Subordinated debt $ 10,000 $ 10,000
============== ===================
On August 20, 1996, the Company completed a $4.9 million variable rate
industrial development bond financing of our Colorado facility. Interest on
the bonds is payable monthly (the interest rate at June 27, 2003 was
1.31%). Principal payments are payable in semi-annual installments through
August 2016. The bonds are collateralized by an irrevocable letter of
credit issued by Wells Fargo Bank, N.A. that is further collateralized by a
standby letter of credit issued by U.S. Bank in the amount of $1.2 million.
In order to further secure the reimbursement agreement, we executed a deed
of trust, security agreement and assignment of rents, an assignment of
rents and leases, and a related security agreement encumbering the Grand
Junction facility and certain personal property and fixtures located there.
In addition, the Grand Junction facility is encumbered by a second deed of
trust in favor of Mesa County Economic Development Council, Inc. securing
$0.8 million in allowances granted to us pursuant to an Agreement dated
October 4, 1995. At June 27, 2003, a total of $4.2 million was
outstanding under the bond. The terms of the letter of credit require the
Company to maintain specific levels of minimum tangible net worth and fixed
charge coverage ratios. On March 27, 2003, Wells Fargo sent a letter to the
Company stating that it was in default under two covenants of the
reimbursement agreement relating to this letter of credit relating to
minimum tangible net worth and fixed charge coverage ratios, and provided
the Company until April 26, 2003, to cure the default.
On May 2, 2003, Wells Fargo drew down a letter of credit in the amount of
$1.2 million which was held as partial security under the reimbursement
agreement relating to the letter of credit underlying the bonds and placed
the cash in a restricted account. The Company obtained a waiver for the
default from the Bank, provided that the Company meets certain terms and
conditions. The Company must remain in compliance with all other provisions
of the reimbursement agreement for this letter of credit. If a replacement
letter of credit cannot be obtained on or before December 31, 2003, the
Company has agreed to retire $1.2 million of the bonds using the restricted
cash. In July 2003, management accepted a proposal from Congress Financial,
a subsidiary of Wachovia, to provide a secured revolving credit facility of
up to $20.0 million, subject to its completion of due diligence to its
satisfaction and other conditions. Congress has not yet completed its
diligence process; however, based on a preliminary analysis of the
collateral, it has indicated that the loan, if made, would be for an amount
significantly less than $20.0 million. Management is pursuing alternative
financing sources, including a possible restructuring of the Company's
industrial development bonds to make collateral currently serving to secure
repayment of the bonds available for additional borrowings.
On August 17, 2001, the Company entered into a loan agreement with U.S.
Bank totaling $41.5 million, in order to finance the acquisition of DTM.
The financing arrangement consisted of a $26.5 million three-year revolving
credit facility and $15 million 66-month commercial term loan. At June 27,
2003, a total of $8.6 million was outstanding under the revolving credit
facility. The Company repaid $9.6 million that was outstanding under the
term loan on May 5, 2003. The interest rate at June 27, 2003 for the
revolving credit facility and term loan was 7.5%. The interest rate is
computed as either: (1) the prime rate plus a margin ranging from 0.25% to
4.0%, or (2) the 90-day adjusted LIBOR plus a margin ranging from 2.0% to
5.75%. Pursuant to the terms of the agreement, U.S. Bank has received a
first priority security interest in our accounts receivable, inventories,
equipment and general intangible assets.
On May 1, 2003, the Company entered into "Waiver Agreement Number Two" with
U.S. Bank whereby U.S. Bank waived all financial covenant violations at
December 31, 2002 and March 31, 2003. The events of default caused by the
Company's failure to timely submit audited financial statements and failure
to make the March 31, 2003 principal payment of $5.0 million were also
waived. The agreement requires the Company to obtain additional equity
investments of at least $9.6 million; to pay off the balance on the term
loan of $9.6 million by May 5, 2003; to increase the applicable interest
rate to Prime plus 5.25%; and to pay a $0.2 million waiver fee and all
related costs of drafting
14
the waiver. U.S. Bank also agreed to waive the Company's compliance with
each financial covenant in the loan agreement through September 30, 2003.
Provided the Company obtains a commitment letter from a qualified lending
institution by September 30, 2003, to refinance all of the outstanding
obligations with U.S. Bank, the waiver will be extended to the earlier of
December 31, 2003, or the expiration date of the commitment letter. The
Company has complied with all aspects of Waiver Agreement Number Two.
(11) Severance and Other Restructuring Costs
On July 24, 2002, the Company substantially completed a reduction in
workforce, which eliminated 109 positions out of its total workforce of 523
or approximately 20% of the total workforce. In addition, the Company
closed its existing office in Austin, Texas, which it acquired as part of
its acquisition of DTM, as well as its sales office in Farmington Hills,
Michigan. This was the second reduction in workforce completed in 2002. On
April 9, 2002, the Company eliminated approximately 10% of its total
workforce. All costs incurred in connection with these restructuring
activities are included as severance and other restructuring costs in the
accompanying condensed consolidated statements of operations.
A summary of the severance and other restructuring costs accrual consist of
the following (in thousands):
December June 27,
31, 2002 Utilized 2003
----------- --------- ----------
Severance costs (one-time benefits) $ 245 $ (209) $ 36
Contract termination costs 552 (312) 240
Other associated costs 66 (60) 6
----------- --------- ----------
Total severance and other
restructuring costs $ 863 $ (581) $ 282
=========== ========= ==========
These amounts are included in accrued liabilities and are expected to be
paid by October 2003. There have been no adjustments to the liability
except for payments of amounts due under the restructuring plan.
(12) Contingencies
The Company received an inquiry from the SEC relating to its revenue
recognition practices. The Audit Committee has completed its own inquiry
into the matter and shared its findings with the SEC. The Company has not
been notified that the SEC has initiated a formal investigation.
The Company is engaged in legal actions arising in the ordinary course of
business. At this time, financial obligations of these contingencies are
not estimable and no contingent loss and liabilities have been recorded.
(13) Subsequent Events
Legal Proceedings
E. James Selzer vs. 3D Systems Corporation (Case No. PC033145, Superior
Court of the State of California, County of Los Angeles). On July 28, 2003,
the Company was served with a complaint by its former chief financial
officer, whose employment had been terminated on April 21, 2003. The
complaint asserts breach of alleged employment and equipment purchase
contracts. In addition to declaratory relief, Mr. Selzer seeks compensatory
and contractual damages, which he requested to be proven at trial, and for
various expenses, together with reasonable attorney's fees and costs. The
Company is currently evaluating this complaint.
Other
The Company has agreed to maintain an effective registration statement with
respect to the resale of certain shares of its common stock that it sold in
private placement transactions. At the date hereof, the Company is not in
compliance with these obligations. In one transaction, the Company is
obligated to pay liquidated damages in an aggregate amount of approximately
$100,000 per month commencing July 15, 2003 and continuing until an
effective registration statement is available for use by the shareholders.
15
At June 27, 2003, the Company had a remaining note receivable totaling
$45,232, including accrued interest, from Mr. Hull, a director and
executive officer of the Company, pursuant to the 1996 Stock Incentive
Plan. The loan was used to purchase shares of the Company's common stock at
the fair market value on the date of purchase. The original amount of the
note was $60,000. The note bore interest at a rate of 6% per annum and
matured in 2003. Pursuant to the terms of the note, as a result of meeting
certain profitability targets for fiscal 2000, $20,000 of the principal
amount of the note was forgiven together with $3,671 of interest in 2000.
The note receivable is shown on the balance sheet as a reduction of
stockholders' equity. Pursuant to the terms of the note and related
transaction documents, in July 2003, the Company retired Mr.
Hull's note in exchange for 6,031 shares of common stock.
On August 4, 2003, the Company completed a reduction in its current
workforce by terminating 16 positions within its worldwide organization.
The estimated severance cost of this reduction is approximately $0.3
million.
On August 8, 2003, Brian K. Service resigned from his position as the
Company's Chief Executive Officer and as a member of the Company's Board of
Directors. Mr. Service will receive aggregate payments of approximately
$300,000 pursuant to the terms of his employment agreement and a consulting
agreement with Brian K. Service, Inc., an affiliate of Mr. Service, payable
through January 2004. Mr. Service will continue as an employee of the
Company for a 24-month term to assist with various clients and
transactions, for which he will be paid $188,000.
Effective August 8, 2003, Charles W. Hull, the Company's co-founder, Chief
Technical Officer and a director, was named acting Chief Executive Officer.
(14) Restatement
Subsequent to the issuance of its June 28, 2002 consolidated quarterly
financial statements, the Company's management determined that certain
sales transactions recorded in the three months and six months ended June
28, 2002 did not meet all of the criteria required for revenue recognition
under United States Generally Accepted Accounting Principles. Additionally,
certain sales transactions, which previously had been recorded in prior
periods, were restated and recognized in the three and the six months ended
June 28, 2002. The restated transactions affect the Company's previously
recorded amounts for accounts receivable, inventory, deferred revenue,
sales, cost of sales and others as noted below. The consolidated financial
statements as of and for the three months and six months ended June 28,
2002 have been restated to correct the accounting for these transactions. A
summary of the significant effects of the restatement is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED REPORTED
AS RESTATED JUNE 28, AS RESTATED JUNE 28,
JUNE 28, 2002 2002 JUNE 28, 2002 2002
------------- ----------- ------------- ------------
(in thousands, except (in thousands, except
per share amounts) per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
Sales $ 28,543 $ 28,782 $ 56,057 $ 55,978
Cost of Sales 17,744 17,908 34,938 34,965
Gross profit 10,799 10,874 21,119 21,013
Research & development
expenses 4,707 4,787 8,635 8,645
Total operating expenses 19,298 19,378 34,196 34,205
Loss from operations (8,499) (8,504) (13,077) (13,192)
Income tax expense (benefit) (3,539) (3,210) 953 1,367
Net (loss) income (5,628) (5,962) 3,066 2,536
Basic net income per share (0.44) (0.46) 0.24 0.20
Diluted net income per share $ (0.44) $ (0.46) $ 0.21 $ 0.18
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in Item 1, and the cautionary
statements and risk factors included in this Item 2 of this Report.
The forward-looking information set forth in this Report is as of the date of
this filing, and we undertake no duty to update this information. More
information about potential factors that could affect our business and financial
results is included in the section in this Item 2 entitled "Cautionary Statement
and Risk Factors."
RESTATEMENT
In connection with the investigation conducted by the Audit Committee of our
Board of Directors as part of the fiscal 2002 audit which we discuss in detail
in our Annual Report on Form 10-K filed on June 30, 2003, we have restated our
previously issued financial statements for the three months and the six months
ended June 28, 2002. The restatement arose from the adjustments of certain
income statement items which principally relate to the treatment and timing of
revenue recognition of eight equipment sales transactions and 12 equipment sales
transactions for the three-month and six-month periods ended June 28, 2002,
respectively. The effect of the adjustments for the three months ended June 28,
2002 is to decrease the Company's previously reported second quarter 2002
consolidated revenues from $28.8 million to $28.5 million, decrease net loss
from $6.0 million to $5.6 million and decrease diluted net loss per share from
$0.46 to $0.44. The effect of the adjustments for the six months ended June 28,
2002 is to increase the Company's previously reported consolidated revenues from
$56.0 million to $56.1 million, increase net income from $2.5 million to $3.1
million and increase diluted net income per share from $0.18 to $0.21. At the
direction of the Audit Committee, the Company has implemented changes to its
financial organization and enhanced its internal controls in response to issues
identified in the investigation and otherwise raised by the restatement. The
Company continues to implement each of the changes recommended by Audit
Committee. These changes are more fully discussed in Item 4 of this Report.
Unless otherwise expressly stated, all financial information in this Report is
presented inclusive of these income statement changes and other adjustments. The
reconciliation of previously reported amounts to the amounts currently being
reported is presented in Note 14 of the accompanying Notes to Condensed
Consolidated Financial Statements in this Report.
OVERVIEW
We develop, manufacture and market worldwide solid imaging systems designed to
reduce the time it takes to produce three-dimensional objects. Our products
produce physical objects from the digital output of solid or surface data from
computer aided design and manufacturing, which we refer to as CAD/CAM, and
related computer systems, and include SLA(R) systems, SLS(R) systems and
ThermoJet(R) solid object printers.
SLA systems use our proprietary stereolithography technology, which we refer to
as SL, an additive solid imaging process which uses a laser beam to expose and
solidify successive layers of photosensitive resin until the desired object is
formed to precise specifications in epoxy or acrylic resin. SLS systems utilize
a process called laser sintering, which we refer to as LS, which uses laser
energy to sinter powdered material to create solid objects from powdered
materials. LS and SL-produced parts can be used for concept models, engineering
prototypes, patterns and masters for molds, consumable tooling, and short-run
manufacturing of final product, among other applications. 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 network-ready and are designed for operation in
engineering and design office environments. The ThermoJet printer output can be
used as patterns and molds, and when combined with other secondary processes
such as investment casting, can produce parts with representative end-use
properties.
Our customers include major corporations in a broad range of industries
including service bureaus and manufacturers of automotive, aerospace, computer,
electronic, consumer and medical products. Our revenues are generated by product
and service sales. Product sales are comprised of sales of systems and related
equipment, materials, software and other component parts, as well as rentals of
systems. Service and warranty sales include revenues from a variety of on-site
maintenance services and customer training.
For the first six months of 2003, the continued general economic slowdown in
capital equipment spending worldwide impacted both revenues and earnings. In the
first six months of 2003, SLA system unit sales were down 14.7% and SLS system
unit sales were down 36.0% from the same period in 2002. This had a significant
impact on both revenue and overall gross margin.
17
We recognize the importance of recurring revenue to moderate the impact that
fluctuations in capital spending has on our high end equipment sales. The
following table reflects recurring revenues (service and materials sales) and
non-recurring revenues (system sales and related equipment) and those revenues
as a percentage of total revenues for the periods indicated below (in thousands,
except percentages):
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 28, June 28,
2002 June 27, 2002
June 27, 2003 (as restated) 2003 (as restated)
------------- ------------ ------------- ------------
Recurring sales $ 16,908 $ 16,430 $ 32,616 $ 34,185
Non-recurring sales 9,963 12,113 17,271 21,872
------------- ------------ ------------ ------------
Total sales $ 26,871 $ 28,543 $ 49,887 $ 56,057
============= ============ ============ ============
Recurring sales 62.9% 57.6% 65.4% 61.0%
Non-recurring sales 37.1% 42.4% 34.6% 39.0%
------------- ------------ ------------ ------------
100% 100% 100% 100%
============= ============ ============ ============
Since the second quarter of 2001, the market for our capital equipment has been
impacted by overall economic conditions. Consequently, we reduced our cost
structure by implementing an approximate 10% reduction in workforce worldwide in
April 2002. After reviewing our results for the second quarter of 2002 and the
long-term prospects for the worldwide economy, we took additional measures to
realign our projected expenses with anticipated revenue levels. During the third
quarter of 2002, we closed our existing facilities in Austin, Texas, and
Farmington Hills, Michigan, and reduced our workforce by an additional 20% or
109 employees. As a result of these activities, we recorded charges of $1.6
million and $2.7 million in the quarters ended June 28, 2002 and September 27,
2002, respectively. In addition, in April 2003, we reduced our workforce by
6.2%, or 27 employees, in the United States, and in August 2003, by 3.9%, or 16
employees, worldwide, as a result of continued lower revenue levels. We recorded
a $0.3 million charge for the April 2003 reduction in the second quarter of
2003, and we expect to record a charge of approximately $0.3 million for the
August 2003 reduction in the third quarter of 2003.
Sales into our Advanced Digital Manufacturing ("ADM") market continue to
increase including sales into aerospace, motorsports, jewelry, and hearing aids.
Our ADM revenue was approximately $17.0 million or 34.0% of our overall revenue
for the six months ended June 27, 2003 and $16.2 million or 28.9% of our total
revenue for the six months ended June 28, 2002, and we believe that the market
demand for new ADM applications continues to grow.
On March 19, 2002, we reached a settlement agreement with Vantico relating to
the termination of the Distribution Agreement and the Research and Development
Agreement which required Vantico to pay us $22 million in cash or by delivery of
1.55 million shares of our common stock. On April 22, 2002, Vantico delivered
the 1.55 million shares to us. Due to the termination of this agreement, we are
increasing our focus on our internal resin conversion program and our overall
materials business through RPC. We are moving forward with our retail materials
strategy with our Accura(TM) materials which we launched on April 23, 2002.
RELATED PARTIES
On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible Preferred
Stock, at a price of $6.00 per share, for aggregate consideration of $15.8
million. The preferred stock accrues dividends at 8% per share and is
convertible at any time into approximately 2,634,016 shares of common stock. The
stock is redeemable at our option after the third anniversary date. We must
redeem any shares of preferred stock outstanding on the tenth anniversary date.
The redemption price is $6.00 per share plus accrued and unpaid dividends.
Messrs. Loewenbaum, Service and Hull, the Chairman of our Board of Directors,
then Chief Executive Officer and Chief Technology Officer, respectively,
purchased an aggregate of $1,450,000 of the Series B Convertible Preferred
Stock. Additionally, Clark Partners I, L.P., a New York limited partnership,
purchased $5.0 million of the Series B Convertible Preferred Stock. Kevin Moore,
a member of our Board of Directors, is the president of the general partner of
Clark Partners I, L.P. In connection with the offering, Houlihan Lokey Howard &
Zukin rendered its opinion that the terms of the offering were fair to us from a
financial point of view. A special committee of our Board of Directors, composed
entirely of disinterested independent directors, approved the offer and sale of
the Series B Convertible Preferred Stock and recommended the transaction to our
Board of Directors. Our Board of Directors also approved the transaction, with
interested Board members not participating in the vote.
18
At June 27, 2003, we had a remaining note receivable totaling $45,232, including
accrued interest, from Mr. Hull, our director and executive officer, pursuant to
the 1996 Stock Incentive Plan. The loan was used to purchase shares of our
common stock at the fair market value on the date of purchase. The original
amount of the note was $60,000. The note bore interest at a rate of 6% per annum
and matured in 2003. Pursuant to the terms of the note, as a result of meeting
certain profitability targets for fiscal 2000, $20,000 of the principal amount
of the note was forgiven together with $3,671 of interest in 2000. The note
receivable is shown on the balance sheet as a reduction of stockholders' equity.
Pursuant to the terms of the note and related transaction documents, in July
2003, we retired Mr. Hull's note in exchange for 6,031 shares of our common
stock.
On August 8, 2003, Brian K. Service resigned from his position as the Company's
Chief Executive Officer and as a member of our Board of Directors. Mr. Service
will receive aggregate payments of approximately $300,000 pursuant to the terms
of his employment agreement and a consulting agreement with Brian K. Service,
Inc., an affiliate of Mr. Service, payable through January 2004. Mr. Service
will continue as our employee for a 24-month term to assist with various clients
and transactions, for which he will be paid $188,000.
Effective August 8, 2003, Charles W. Hull, the Company's co-founder, Chief
Technical Officer and a director, was named acting Chief Executive Officer.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make critical accounting estimates that directly impact our condensed
consolidated financial statements and related disclosures. Critical accounting
estimates are estimates that meet two criteria: (1) the estimates require that
we make assumptions about matters that are highly uncertain at the time the
estimates are made; (2) there exist different estimates that could reasonably be
used in the current period, or changes in the estimates used are reasonably
likely to occur from period to period, both of which would have a material
impact on the presentation of the financial condition or our results of our
operations. On an on-going basis, we evaluate our estimates, including those
related to the allowance for doubtful accounts, income taxes, inventory,
goodwill, intangible and other long-lived assets, contingencies and revenue
recognition. We base our estimates and assumptions on historical experience and
on various other assumptions we believe reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The following represent what management believes are the critical accounting
policies most affected by significant management estimates and judgments.
Management has discussed these critical accounting policies, the basis for their
underlying assumptions and estimates and the nature of our related disclosures
herein with the Audit Committee of our Board of Directors.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Our estimate for the allowance for doubtful
accounts related to trade receivables is based on two methods. The amounts
calculated from each of these methods are combined to determine the total amount
reserved. First, we evaluate specific accounts where we have information that
the customer may have an inability to meet its financial obligations (for
example, bankruptcy). In these cases, we use our judgment, based on available
facts and circumstances, and record a specific reserve for that customer against
amounts due to reduce the receivable to the amount that is expected to be
collected. These specific reserves are reevaluated and adjusted as additional
information is received that impacts the amount reserved. Second, a reserve is
established for all customers based on a range of percentages applied to aging
categories. These percentages are based on historical collection and write-off
experience. If circumstances change (for example, we experience higher than
expected defaults or an unexpected material adverse change in a major customer's
ability to meet its financial obligation to us), our estimates of the
recoverability of amounts due to us could be reduced by a material amount.
We believe that our allowance for doubtful accounts is a critical accounting
estimate because it is susceptible to change and dependent upon events that are
remote in time and may or may not occur, and because the impact of recognizing
additional allowance for doubtful accounts may be material to the assets
reported on our balance sheet and our results of operations.
INCOME TAXES. The provisions of SFAS No. 109, "Accounting for Income Taxes,"
require a valuation allowance when, based upon currently available information
and other factors, it is more likely than not that all or a portion of the
deferred tax asset will not be realized. SFAS No. 109 provides that an important
factor in determining whether a deferred tax asset will be realized is whether
there has been sufficient income in recent years and whether sufficient income
is expected in future years
19
in order to utilize the deferred tax asset. Forming a conclusion that a
valuation allowance is not needed is difficult when there is negative evidence,
such as cumulative losses in recent years. The existence of cumulative losses in
recent years is an item of negative evidence that is particularly difficult to
overcome. At June 27, 2003, the unadjusted net book value before valuation
allowance of our deferred tax assets totaled approximately $23.4 million, which
principally was comprised of net operating loss carry-forwards and other
credits. During the six months ended June 27, 2003 and during our 2002 fourth
quarter-end, we recorded valuation allowance of approximately $4.8 million and
$12.9 million, respectively, against our net deferred tax assets, which was
additional to the approximate $5.7 million allowance previously recorded. We
intend to maintain a valuation allowance until sufficient evidence exists to
support our reversal. Also, until an appropriate level of profitability is
reached, we do not expect to recognize any domestic tax benefits in future
periods.
We believe that our determination to record a valuation allowance to reduce our
deferred tax assets is a critical accounting estimate because it is based on an
estimate of future taxable income in the United States, which is susceptible to
change and dependent upon events that are remote in time and may or may not
occur, and because the impact of recording a valuation allowance may be material
to the assets reported on our balance sheet and our results of operations. The
determination of our income tax provision is complex due to operations in
numerous tax jurisdictions outside the United States, which are subject to
certain risks, which ordinarily would not be expected in the United States. Tax
regimes in certain jurisdictions are subject to significant changes, which may
be applied on a retroactive basis. If this were to occur, our tax expense could
be materially different than the amounts reported. Furthermore, as explained in
the preceding paragraph, in determining the valuation allowance related to
deferred tax assets, we adopt the liability method as required by SFAS No. 109,
"Accounting for Income Taxes." This method requires that we establish valuation
allowance if, based on the weight of available evidence, in our judgment it is
more likely than not that the deferred tax assets may not be realized.
INVENTORY. Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out method. Reserves for slow moving and
obsolete inventories are provided based on historical experience and current
product demand. Our reserve for slow moving and obsolete inventory was $2.3
million and $1.9 million at June 27, 2003 and December 31, 2002, respectively.
We evaluate the adequacy of these reserves quarterly. There were no inventories
consigned to a sales agent at June 27, 2003, and inventories consigned to a
sales agent at December 31, 2002 were $0.1 million. Our determination relating
to the allowance for inventory obsolescence is subject to change because it is
based on management's current estimates of required reserves and potential
adjustments.
We believe that the allowance for inventory obsolescence is a critical
accounting estimate because it is susceptible to change and dependent upon
events that are remote in time and may or may not occur, and because the impact
of recognizing additional obsolescence reserves may be material to the assets
reported on our balance sheet and results of operations.
GOODWILL, INTANGIBLE AND OTHER LONG-LIVED ASSETS. The Company has applied
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" in its allocation of the purchase prices of DTM Corporation (DTM)
and RPC Ltd. (RPC). The annual impairment testing required by SFAS No. 142,
"Goodwill and Other Intangible Assets," requires the Company to use its judgment
and could require the Company to write-down the carrying value of its goodwill
and other intangible assets in future periods. SFAS No. 142 requires companies
to allocate their goodwill to identifiable reporting units, which are then
tested for impairment using a two-step process detailed in the statement. The
first step requires comparing the fair value of each reporting unit with its
carrying amount, including goodwill. If that fair value exceeds the carrying
amount, the second step of the process is not necessary and there are no
impairment issues. If that fair value does not exceed that carrying amount,
companies must perform the second step that requires an allocation of the fair
value of the reporting unit to all assets and liabilities of that unit as if the
reporting unit had been acquired in a purchase business combination and the fair
value of the reporting unit was the purchase price. The goodwill resulting from
that purchase price allocation is then compared to its carrying amount with any
excess recorded as an impairment charge.
Upon implementation of SFAS No. 142 in January 2002 and again in the fourth
quarter of 2002, the Company concluded that the fair value of the Company's
reporting units exceeded their carrying value and accordingly, as of that date,
there were no goodwill impairment issues. The Company is required to perform a
valuation of its reporting unit annually, or upon significant changes in the
Company's business environment.
The Company evaluates long-lived assets other than goodwill for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. If the estimated future cash flows
(undiscounted and without interest charges) from the use of an asset are less
than the carrying value, a write-down would be recorded to reduce the related
asset to its estimated fair value.
We believe that our determination not to recognize an impairment of goodwill,
intangible or other long-lived assets is a critical accounting estimate because
it is susceptible to change, dependent upon estimates of the fair value of our
reporting units, and because the impact of recognizing an impairment may be
material to the assets reported on our balance sheet and our results of
operations.
20
CONTINGENCIES. We account for contingencies in accordance with SFAS No. 5,
"Accounting for Contingencies." SFAS No. 5 requires that we record an estimated
loss from a loss contingency when information available prior to issuance of our
financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies such as legal and income tax matters requires us to use our
judgment. At this time our contingencies are not estimable and have not been
recorded; however, management believes the ultimate outcome of these actions
will not have a material effect on our consolidated financial position, results
of operations or cash flows.
REVENUE RECOGNITION. Revenues from the sale of systems and related products are
recognized upon shipment, provided that both title and risk of loss have passed
to the customer and collection is reasonably assured. Some sales transactions
are bundled and include equipment, software license, warranty, training and
installation. The Company allocates and records revenue in these transactions
based on vendor specific objective evidence that has been accumulated through
historic operations. The process of allocating the revenue involves some
management judgments. Revenues from services are recognized at the time of
performance. We provide end users with maintenance under a warranty agreement
for up to one year and defer a portion of the revenues at the time of sale based
on the objective evidence for the value of these services. After the initial
warranty period, we offer these customers optional maintenance contracts;
revenue related to these contracts is deferred and recognized ratably over the
period of the contract. Our warranty costs were $2.0 million and $2.5 million,
for the six months ended June 27, 2003 and June 28, 2002, respectively. The
Company's systems are sold with software products that are integral to the
operation of the systems. These software products are not sold separately.
Certain of the Company's sales were made through a sales agent to customers
where substantial uncertainty exists with respect to collection of the sales
price. The substantial uncertainty is generally a result of the absence of a
history of doing business with the customer and uncertain political environment
in the country in which the customer does business. For these sales, the Company
records revenues based on the cost recovery method, which requires that the
sales proceeds received are first applied to the carrying amount of the asset
sold until the carrying amount has been recovered. Thereafter, all proceeds are
recognized as gross profit.
Credit is extended based on an evaluation of each customer's financial
condition. To reduce credit risk in connection with systems sales, the Company
may, depending upon the circumstances, require significant deposits prior to
shipment and may retain a security interest in the system until fully paid. The
Company often requires international customers to furnish letters of credit.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS 146
does not have a material impact on our results of operations or financial
condition.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation it has undertaken in issuing the guarantee. FIN 45 also requires
guarantors to disclose certain information for guarantees, beginning December
31, 2002. These financial statements contain the required disclosures.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. We do not have any variable interest entities that must be
consolidated.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards on the classification and measurement of financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
will become effective for financial instruments entered into or modified after
May 31, 2003. We do not have any financial instruments to be accounted for under
this pronouncement.
21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our statements of operations to total sales:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 28, 2002 JUNE 28, 2002
JUNE 27, 2003 (AS RESTATED) JUNE 27, 2003 (AS RESTATED)
------------- ------------- ------------- -------------
Sales:
Products 67.0% 67.0% 65.6% 68.4%
Services 33.0% 33.0% 34.4% 31.6%
Total sales 100.0% 100.0% 100.0% 100.0%
Cost of sales:
Products 35.5% 38.1% 36.2% 38.8%
Services 24.4% 24.1% 27.2% 23.5%
Total cost of sales 59.9% 62.2% 63.4% 62.3%
Gross profit 40.1% 37.8% 36.6% 37.7%
Selling, general and administrative
expenses 36.2% 45.5% 40.8% 42.7%
Research and development expenses 9.5% 16.5% 10.3% 15.4%
Severance and other restructuring 0.9% 5.7% 0.5% 2.9%
Loss from operations (6.5)% (29.8)% (15.1)% (23.3)%
Interest and other (expense) income,
net (3.7)% (2.3)% (3.8)% (2.4)%
Gain on arbitration settlement --- --- --- 32.9%
Provision for (benefit from) income 3.0 (12.4)% 2.1% 1.7%
Net (loss) income (13.2)% (19.7)% (20.9)% 5.5%
Cost of sales (as a percentage of related
Products sales): 53.0% 56.8% 55.1% 56.7%
Services 73.9% 73.0% 79.2% 74.6%
Total cost of sales 59.9% 62.2% 63.4% 62.3%
22
The following table sets forth, for the periods indicated, total sales
attributable to each of our major products and services groups, and those
sales as a percentage of total sales (in thousands, except percentages):
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 28, 2002 JUNE 28, 2002
JUNE 27, 2003 (AS RESTATED) JUNE 27, 2003 (AS RESTATED)
------------- ------------- ------------- -------------
Products:
SLA systems and related
equipment $ 6,629 $ 6,242 $ 10,082 $ 12,137
SLS systems and related equipment 2,300 4,958 4,699 7,004
Solid object printers 238 262 599 1,116
Materials 8,047 6,997 15,475 16,499
Other 796 651 1,891 1,615
------------- ------------- -------------- -------------
Total products 18,010 19,110 32,746 38,371
------------- ------------- -------------- -------------
Services:
Maintenance 8,454 8,963 16,391 16,596
Other 407 470 750 1,090
------------- ------------- -------------- -------------
Total services 8,861 9,433 17,141 17,686
------------- ------------- -------------- -------------
Total sales $ 26,871 $ 28,543 $ 49,887 $ 56,057
============= ============= ============== =============
Products:
SLA systems and related
equipment 24.7% 21.9% 20.2% 21.6%
SLS systems and related
equipment 8.5% 17.4% 9.4% 12.5%
Solid object printers 0.9% 0.9% 1.2% 2.0%
Materials 29.9% 24.5% 31.0% 29.4%
Other 3.0% 2.3% 3.8% 2.9%
------------- ------------- -------------- -------------
Total products 67.0% 67.0% 65.6% 68.4%
------------- ------------- -------------- -------------
Services:
Maintenance 31.5% 31.4% 32.9% 29.7%
Other 1.5% 1.6% 1.5% 1.9%
------------- ------------- -------------- -------------
Total services 33.0% 33.0% 34.4% 31.6%
------------- ------------- -------------- -------------
Total sales 100.0% 100.0% 100.0% 100.0%
============= ============= ============== =============
Segments are reported by geographic sales regions. The Company's reportable
segments include the Company's administrative, sales, service,
manufacturing and customer support operations in the United States and
sales and service offices in the European Community (France, Germany, the
United Kingdom, Italy and Switzerland) and in Asia (Japan, Hong Kong and
Singapore).
The Company evaluates performance based on several factors, of which the
primary financial measure is operating income. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies in Note 3 of the accompanying Notes to Condensed
Consolidated Financial Statements in this Report.
23
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 28, 2002 JUNE 28, 2002
JUNE 27, 2003 (AS RESTATED) JUNE 27, 2003 (AS RESTATED)
------------- ------------- ------------- -------------
Sales:
U.S. operations $ 13,137 $ 14,145 $ 24,195 $ 29,086
European operations 9,644 11,614 18,825 19,887
Asia/Pacific operations 4,090 2,784 6,867 7,084
-------------- ------------- ------------ -----------
Total sales 26,871 28,543 49,887 56,057
Cost of sales:
U.S. operations 8,598 9,133 16,744 17,189
European operations 5,502 7,235 11,288 14,229
Asia/Pacific operations 1,990 1,376 3,581 3,520
-------------- ----