Back to GetFilings.com
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, 1997
[ ] 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)
(805) 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 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 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 27, 1998, there were outstanding 11,241,737 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 ($7.75 per
share) of the Registrant's Common Stock on the Nasdaq National Market on that
date, was $87,123,462. 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 1998 Annual Meeting
of Shareholders, currently scheduled to be held May 22, 1998, are incorporated
by reference into Part III of this Report.
Exhibit index is located on page 38.
3D SYSTEMS CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Selected Consolidated Financial Data. . . . . . . . . . . . . . . . 22
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . . . . . 24
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures. . . . . . . . . . . . . . . . . . . . . 30
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . . 31
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . 31
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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 13
of this Report.
GENERAL
3D Systems Corporation (the "Company") develops, manufactures and
markets in the United States and internationally Stereolithography Apparatus
("SLA-TM-") systems designed to rapidly produce three-dimensional objects
from computer-aided design and manufacturing ("CAD/CAM")-generated solid or
surface data, and is the exclusive worldwide distributor (except for Japan)
of all Ciba Specialty Chemicals Inc. and its affiliated companies
(collectively "CSC" or Ciba Specialty Chemicals) and its stereolithography
photopolymers. The Company either directly or through its network of
authorized distributors provides a majority of its customers with a variety
of on-site maintenance services. Through its 3D Systems Tooling Centers, the
Company utilizes SLAs to produce models, prototypes, mold patterns and other
parts using CAD/CAM or other data supplied by its customers on a contract
basis.
Stereolithography is a "solid imaging" or "rapid prototyping" process
whereby a laser beam exposes and solidifies successive layers of
photosensitive resin until the desired object is formed to precise
specifications in hard plastic. SLA-produced parts can be used for concept
models, engineering prototypes, patterns and masters for molds and other
applications. This technology can provide users with significant time
savings, cost reductions and improved quality, compared to traditional
modeling, tooling and pattern-making techniques.
The Company has developed an "office system modeler," the Actua
2100-TM-, about the size of an office copier, which is designed for operation
in engineering and design office environments. The Actua 2100 uses
"Multi-Jet Modeling" ("MJM"), a technology completely different from
stereolithography, to build models in successive layers using a special
thermopolymer material. Designers and other users of CAD-CAM systems are able
to incorporate the Actua 2100 in their workstation networks as a shared
resource and are able to rapidly produce, in their offices, models of
products under 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 objects which traditionally have
been produced by machining and other methods. The Company believes that the
stereolithography technology, which it has developed and patented, represents
the first and to date the most significant development in this field. While
alternative technologies exist and while it has been reported that
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, on the basis of total
systems installed, the Company believes that it currently remains the leader
in the solid imaging field.
The Company markets directly and through secondary distribution channels
to customers in the United States and Europe and through distributors in
other countries. The Company sold its first SLA system in 1988 and as of
December 31, 1997, had sold 902 systems to customers in 40 countries. Its
customers include major corporations in a broad range of industries including
manufacturers of automotive, aerospace, computer, electronic, consumer and
medical products. The Company also sells SLA systems to independent service
bureaus which, for a fee, provide stereolithographic services to their
customers.
As of December 31, 1997, the Company held approximately 139 patents
related to stereolithography: 65 U.S.; 46 European; 6 Japanese; and 22 other
foreign patents. The Company continues to develop improvements for its line
of products as well as new products to expand the applications of
stereolithography. In conjunction with CSC, the Company continues to develop
resins with different and improved characteristics to expand
stereolithography applications. CSC is a Swiss-based multinational
manufacturer and distributor of specialty
Page 3
chemicals, a 15.1% beneficial shareholder of the Company, and the Company's
partner in photopolymer development.
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 US operations.
CORPORATE STRUCTURE
The Company is a Delaware corporation, and is the sole shareholder in 3D
Systems (Canada) Inc., a British Columbia corporation ("3D Canada"). 3D
Canada is the sole shareholder of 3D Systems, Inc., a California based
corporation ("3D California"), which directly and through its subsidiaries
conducts substantially all of the Company's business.
Unless otherwise indicated, all references in this document to the
Company include 3D Systems Corporation, 3-D Systems Inc., its British
Columbia predecessor, 3D Systems (Canada) Inc. and 3D Systems, Inc. and its
subsidiaries.
STEREOLITHOGRAPHY
Stereolithography is a solid imaging or rapid prototyping process
whereby a laser beam exposes and solidifies successive layers of
photosensitive resin until a three-dimensional object is formed in hard
plastic to precise specifications contained in CAD/CAM programs. The object
may be used as a prototype, model, mold pattern or, in some applications, as
an end product.
The Company's stereolithography products have been developed to address
a key element in the development of new products -- the fabrication of models
and prototype objects, as well as the fabrication of patterns for limited
production of parts. Over the past decade, significant steps have been taken
to utilize computers in the design and development of new products. As a
result, most manufacturers now rely heavily on standard or specialized
CAD/CAM computer software programs to significantly shorten the product
design cycle.
In designing a product or part, stereolithography permits the user to
realize a reduction in design costs, an improvement in design capabilities,
the reduction in the time from design concept to market, and a marked
improvement in the ability of a user to rapidly convert its design ideas to
physical form.
Following the design of a new product or part, it is generally necessary
to construct or fabricate models, prototypes and/or production patterns.
While some progress has been made in automating this process, the fabrication
of parts or models of complex design has remained primarily a manual task.
Working from drawings produced by the CAD/CAM system, a skilled machinist or
model builder can take days or months to build a full size or scale model.
Because many products go through several prototype stages prior to
production, model building, prototype construction and pattern making may
account for a significant portion of the time required for the design and
development of a new product.
Solid imaging can be used to make models or prototype parts, molds, and
metal investment casting patterns directly from computer output generated by
CAD/CAM programs (the Company's products require that the CAD/CAM computer
output contain solid or surface data as opposed to data generated by simpler
two dimensional or three dimensional "wire frame" CAD/CAM programs used by
designers). Parts that take days, weeks or months to model or prototype with
traditional methods can be made in hours with solid imaging (or for large
parts, up to several days). Because the process runs directly from solid or
surface CAD/CAM data, building the tangible object can be started as soon as
the model design is complete. This capability greatly reduces the time
between design and completion of the object.
Fabrication of a model, prototype or other object using solid imaging
is a multiple step process. Upon completion of the CAD/CAM design, the
output is converted to the stereolithography format developed by 3D and
Page 4
transferred to and analyzed by the SLA systems computer (current SLA software
is capable of interfacing with more than 30 types of three-dimensional
CAD/CAM solid or surface data systems) which mathematically divides the
computer-generated model into horizontal slices with a thickness of from
0.05mm to 0.25mm (depending upon the degree of resolution required). Under
the technology utilized on all of the Company's currently installed SLA
systems, an elevator platform is precisely positioned below the liquid resin
surface at a distance equal to the desired thickness of the slice to be
formed. Then, starting with the lowest slice, the SLA system's laser,
directed by the scanning system under computer control, projects an
ultraviolet laser beam on the surface of the liquid resin, tracing the full
pattern of the slice and creating an adhesive solid slice of the object on
the surface of the liquid resin. The slice adheres to the elevator platform
and the elevator is then lowered slightly to submerge the cured layer in
liquid resin and then raised precisely so that a thin layer of resin covers
the cured surface. The next slice of the object is created on the liquid
surface by another exposure to the laser beam. The second slice adheres to
the top of the first slice and the process is then repeated with the third
and successive layers of the object. In this manner, the entire solid object
is built on the elevator, slice by slice.
APPLICATIONS AND ADVANTAGES OF STEREOLITHOGRAPHY
Almost all of the Company's customers use stereolithography in the
design, development and refinement of products as a means to significantly
shorten the design cycle as well as to reduce research, development and
tooling costs. Among the most important current applications and advantages
of stereolithography are the following:
DESIGN VERIFICATION AND OPTIMIZATION. The design cycle of the modern
factory in many cases mandates the use of CAD/CAM programs in the initial
design phase. By using the Company's SLA systems, the designer, in a matter
of hours (or, for large parts, up to several days), can produce a full-scale
model of the designed part. With the model in hand, ambiguities which existed
in two-dimensional renderings and other problems are easier to spot,
modifications and improvements are easier to visualize, and new models
incorporating proposed corrections and refinements can rapidly be produced.
BUILDING A PROTOTYPE TO TEST FOR FORM, FIT AND FUNCTION. Once the
design process has advanced sufficiently, it is generally desirable to
construct a full-scale model which can be tested with other parts of an
assembly or system to make certain that the design is functionally suitable.
SLA systems enable users to rapidly model a close-tolerance part, incorporate
the part in a larger prototype assembly or system, and verify its utility and
functionality.
GENERATION OF PROTOTYPE CASTINGS AND TOOLING. Historically, the
generation of metal prototype parts, which are often needed to test a design
in real-life operating environments, was usually the job of model shops and
often required months of manual labor. Through use of the Company's
Quickcast-TM- system, designers can use SLA systems to build patterns for
investment casting, which results in the ability to rapidly build limited-run
prototypes and parts in a variety of metals, including aluminum, stainless
steel, tool steel, copper alloys, and titanium. Using the Company's
recently acquired Keltool-Registered Trademark- process, stereolithography
master patterns can be used to develop short-run prototype tooling ("bridge
tooling") or production tooling ("hard tooling") for the plastic injection
molding industry.
REFINING THE BID PROCESS. Once a design has been finalized, the customer
may desire to subcontract the manufacture of the new product. Because
engineers work better when they can express their ideas by reference to a
tangible embodiment of the product or part under discussion, many of the
Company's customers report that they are now using SLA-produced prototypes
when seeking bids from subcontractors. This often results in a shorter bid
cycle, as well as, in some cases, reductions in bid prices.
PRODUCTS AND SERVICES
For an analysis of revenues attributable to each of the Company's major
product and service groups, see "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition - Results of
Operations."
Page 5
SLA SYSTEMS AND RELATED EQUIPMENT. The Company currently is
manufacturing and marketing five different Stereolithographic Apparatus
models -- the SLA-250 Series 30A, Series 40 and Series 50; the SLA-3500; and
the SLA-5000. All models embody the stereolithography technology. The
models differ in their features including the complexity and accuracy of part
building, the maximum size of objects that can be produced, and price.
Each SLA system consists of an ultraviolet laser, an optical scanning
system that controls the laser beam, a resin vat, an elevator assembly and a
computer that controls the exposure and position of the laser beam and the
elevator, all of which are designed to work together.. 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 and, therefore, can
make only scale models of large objects or, alternatively, portions of large
objects which are then joined together. For example, the maximum size of a
model or other object that can be created using the SLA-250 is 10 inches x 10
inches x 10 inches, while the maximum size of a model or other object which
can be created using the SLA-5000 is 20 inches x 20 inches x 24 inches.
The Company markets ultraviolet ovens ( "PCAs") used in conjunction with
SLA systems. When the SLA system has finished making an object, some of the
plastic has not been fully cured. Full curing requires an additional one to
five hours of exposure to ultraviolet illumination through the use of the
Company's PCAs. The PCA provides uniform long wave ultraviolet illumination.
The Company is currently offering three PCA models, the PCA-250, PCA-350 and
PCA-500. Approximately 70% of all SLA systems sold by the Company have been
purchased with a PCA.
ACTUA 2100. A network-ready system and about the size of an office
copier, the Actua 2100 is the first system to be offered by the Company
which does not utilize photopolymers or lasers. Instead, the Actua 2100,
which is intended for use in the engineering or design office environment,
uses a "Multi-Jet Modeling" technology to print models in successive layers
with a special thermopolymer material called ThermoJet-TM- and a print head
with 96 jets oriented in a linear array. The print head speeds back and
forth as does a printer, printing layer upon layer of material which
solidifies in seconds to form the physical model. The Actua 2100 offers a
part building capacity of 10 inches x 8 inches x 8 inches.
RESINS. Under an agreement between the Company and CSC, the Company is
the exclusive worldwide distributor (other than Japan) to users of
stereolithographic systems of Ciba photopolymers (photosensitive resins) for
stereolithography (see "Marketing and Customers - Photopolymer Distribution
Agreement," below). Currently, the Company markets a total of eight different
resins, which vary in building speed, accuracy, surface finish and strength.
The Company anticipates that it may, from time to time, depending upon
results obtained under its Photopolymer Research Agreement described under
"Research and Development," below, market additional types of resins with
varying properties.
SOFTWARE. The Company develops and markets part preparation software
for personal computers and engineering workstations. The software is
designed to enhance the interface between CAD/CAM systems and the Company's
products. Solid CAD/CAM data is converted to the STL format in the CAD/CAM
system and then transmitted to a computer utilizing the Company's software,
where the object can be viewed, rotated, scaled and a model building
structure added. The software then produces the SLA process instructions.
QUICKCAST-TM-. The Company's QuickCast process consists of special
part building software and epoxy resin, for making precision investment
casting patterns using stereolithography technology. The investment casting
process for manufacturing metal parts is centuries old. In typical
investment casting, a foundry uses wax patterns of the part to generate
molds, into which liquid metal is poured to form the part. The QuickCast
process uses the Company's SLA systems to produce foundry-useable mold
patterns suitable for limited-run investment casting (each mold pattern can
only be used to produce one mold, which in turn can only be used to produce
one part). While not utilizable 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 stereolithography. Most of the SLA systems sold
by the Company have included the capability to use the QuickCast process.
Page 6
MAINTENANCE. All systems sold by the Company include on-site
hardware and software maintenance service, which are provided at no
additional charge up to the first year following installation; the Company
defers a portion of its revenues for these costs at the time of sale. After
the first year, the Company offers these customers optional hardware and
software maintenance contracts, which are available on a monthly and annual
basis. Although purchasers are not required to enter into maintenance
contracts with the Company, a majority of the Company's U.S. and European
customers are parties to these contracts; many others obtain maintenance
services from the Company on a time and material basis. Customers acquiring
systems from the Company's foreign distributors are offered maintenance
contracts by these distributors. During 1995, 1996 and 1997, revenues from
maintenance contracts and maintenance services were approximately $14.3
million, $21.3 million and $25.0 million, respectively. As of December 31,
1997, the Company had a staff of 63 full-time employees who provide on-site
remedial and preventative maintenance services necessary to keep the
equipment in good operating condition. To date, warranty expenses and
product returns have not been significant.
3D SYSTEMS TOOLING CENTER. During January 1992, the Company opened its
first 3D Systems Technology Center at its Valencia, California headquarters
facility. The Company also has an additional Technology Center at its
office located near Frankfurt, Germany. The 3D Systems Technology Centers
utilize their own SLA systems together with CAD/CAM and other data supplied
by their customers to produce models, prototypes, mold patterns and other
parts for customers 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 currently focus their efforts on the
development of new applications and techniques in stereolithography and the
development of new markets in which they can demonstrate the advantages of
stereolithography. The Technology Centers also enable the Company to keep
abreast of developments in the applications of stereolithography and serve as
a means to introduce prospective buyers to stereolithography. In September
1996, the Company purchased substantially all of the assets and business
operations of Keltool, Inc. of St. Paul, Minnesota, (renamed "3D Keltool"
upon acquisition) a company which produced steel tooling for plastic
injection molding machines based on a patented process using sintered
powdered steel. 3D Keltool utilizes SL file data or master patterns supplied
by its customers to produce highly accurate steel tool core and cavity
inserts for plastic injection molding machines on a contract basis. The price
for services rendered by 3D Keltool varies depending on the size and
complexity of the desired tools.
RECENT PRODUCT INTRODUCTIONS. In order to improve and expand the
capabilities of its systems and related software and materials, as well as
to enhance its portfolio of proprietary intellectual properties, the Company
historically has devoted a significant portion of its resources to research
and development activities. In 1997, product introductions included the
following:
SLA-5000 is a new system providing high throughput, greater ease of
use, lower cost of ownership, and improved part resolution. Building on the
strengths of both the prior SLA-500 and SLA-350 systems, the new SLA-5000
brings the state of the art forward, providing the high throughput and large
part building envelope of the SLA-500 along with the convenience and
ownership costs more commonly found with smaller systems. It also has new
features which distinguish it from all its predecessors. Two examples are
SmartSweep-TM-technology for improved part building throughput, and the new
tooling build style which enables regular production of parts in very thin
layers. Commercial availability was announced in September 1997.
SLA-3500 is a significant improvement over the SLA-350, offering both
higher throughput and improved part building resolution. Including both
SmartSweep technology and the new tooling build style, the SLA-3500 became
commercially available in September of 1997.
SLA-3500 upgrade for the SLA-350 offers the improved throughput and
resolution of the SLA-3500 to our existing SLA-350 customers. Including
SmartSweep and the tooling buildstyle, our SLA-350 customers can upgrade to
the latest system capabilities. This upgrade became commercially available
in September 1997.
SMARTSWEEP upgrade for the SLA-500 offers a significant throughput
improvement for the SLA-500 customer, packaged for rapid installation at the
customer's facility. This upgrade was commercially available in September
1997.
Page 7
MAESTRO 1.9 part preparation software was released with the SLA-5000 and
SLA-3500 in September 1997. This software package includes six integrated
modules (Part Manager-TM-, 3dverify-TM-, View-TM-, Vista-TM-, ZSlice-TM-, and
Converge-TM-). Maestro 1.9 builds upon the previous Maestro release, with
improved support editing, improved overall performance in every module, and
support of the new tooling build style.
QUICKCAST-TM-2.0 was also released in conjunction with Maestro 1.9,
offering a substantial improvement in the usefulness of stereolithography
parts for investment casting. The new "helical" style offers improved
drainage of liquid resin, allowing parts to be autoclaved. This results in
better casting yield, and is more consistent with the existing practices of
many foundries.
BUILDSTATION SOFTWARE VERSION 4.1 was released with the SLA-5000 and
SLA-3500 in September 1997. Improved throughput through advanced laser power
management, better system scheduling ability, and increased part start
reliability are all provided, along with support for the new SLA-3500 and
SLA-5000 hardware. This software is not sold separately, but provided with
new systems and for customers with maintenance contracts on supported
machines.
SLA-250/50HR was announced in September 1997. The system offers
one-third the laser spot size of a standard SLA-250, resulting in excellent
reproduction of fine detail on parts built with this machine. Features as
small as 0.004 inch can be built on this system, as well as ultra-thin layers
with the provided 0.0025 inch build parameter set.
SL 5195 RESIN was announced in September 1997 as the companion material
for the SLA-5000. SL 5195 is a multi-role one-component epoxy resin
formulated specifically for use on the solid-state SLA-5000 system. It may
be used for producing concept models, functional prototypes and patterns for
shell investment casting.
SL 5410 RESIN for the SLA-500 was made commercially available in June
1997. Offering the special property of humidity resistance, this material
also provides excellent part accuracy and significant improvement in system
throughput.
RESEARCH AND DEVELOPMENT
The ability of the Company to compete successfully depends, among other
things, on its ability to design and develop new products and to refine
existing products. For the foreseeable future, the Company anticipates that
its research and development efforts will be focused on developing new
methods of solid imaging technology, improving and refining its existing
Multi-Jet Modeling and SLA systems and developing software to facilitate the
interface between SLA systems and CAD/CAM programs. Research and development
expenses increased in 1997 to $11.0 million, up from $7.7 million in 1996.
The increase in research and development expenses in 1997 was primarily a
result of the write-off during the third quarter of 1997 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) as well as salaries and wages attributable to the additional
employees and consultants retained by the Company in connection with
expanding certain research and development projects. Based on the Company's
historical expenditures related to research and development and its current
development goals, the Company anticipates for the foreseeable future,
research and development expenses will be equal to approximately ten percent
of sales. This is a forward-looking statement, however, and if total sales
of the Company for any particular year do not meet the anticipated sales of
the Company for that year, research and development expenses as a percentage
of sales may exceed ten percent. As of December 31, 1997, 60 employees or
contractors of the Company were devoting substantially all of their time to
research and development activities, compared to 49 employees at December 31,
1996.
Page 8
The Company believes that further refinements in stereolithography will
depend upon improvements not only in the SLA products, but also in the
chemical makeup of the resins used in the fabrication process. To this end,
the Company has dedicated a significant amount of time to the development of
new resins. To pursue this goal, the Company and CSC are parties to a
Research and Development Agreement (as revised, the "Photopolymer Research
Agreement") providing for the development of photopolymers,
photopolymerizable monomers, photoinitiators and other resins for use with
the SLA systems. Subject to certain conditions, the Photopolymer Research
Agreement will remain in effect until either party gives the other six months
advance notice of its determination to terminate the agreement. There can be
no assurance that this agreement will remain in place. The termination of
this agreement could have a material adverse effect on the Company's revenues
results of operations, liquidity, and financial position. 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 the Company if they relate to the stereolithographic process.
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--Rapid Technological Change and New Products" and "New Product
Development."
MARKETING AND CUSTOMERS
The Company's sales and marketing strategy focuses on an internal sales
roganization, which is responsible for overseeing worldwide sales and
value-added resellers, as well as the utilization of knowledgeable
international distributors. The Company employs a direct sales force
consisting of sales persons and application specialists that provide
technical sales support. At December 31, 1997, the Company's worldwide
sales and support staff consisted of 80 employees that were primarily located
in the U.S. and Europe. The Company has offices in the U.S. in California,
Michigan, Pennsylvania, Texas and its European offices are located near
Frankfurt, London, Paris and Milan.
In recent years, the Company's domestic sales strategy has
focused on an internal sales organization as well as the utilization of sales
agents (primarily, independent sales representatives in the machine tools
industry). These sales agents, however, were not producing the level of sales
expected by the Company. Additionally, the Company believed it could obtain
better visibility and contact with its customers by utilizing a direct sales
force. Accordingly, in August 1996, the Company terminated its arrangements
with all of its sales agents and began recruiting additional personnel to
strengthen its internal sales and support organization. During the second
half of 1997 the Company completed the initial staffing of its sales and
support organization.
INTERNATIONAL DISTRIBUTORS. As of December 31, 1997, the Company had
entered into agreements with eight distributors in the Pacific Rim, five in
greater Europe and two in Latin America. International distributors are
responsible for marketing, sales, system installation, service and support to
their customers.
International sales accounted for 35.2%, 33.8% and 41.5% of total
sales in the years ended December 31, 1995, 1996 and 1997, respectively. See
Note 16 of Notes to Consolidated Financial Statements. For a discussion of
risks associated with international operations, see "Cautionary Statements
and Risk Factors -- Factors Affecting International Business."
ACTUA 2100 VALUE-ADDED RESELLERS ("VARS"). The Company has
selected VARs as the primary distribution channel for its Actua 2100 concept
modeler in the U.S. VARs are required to have sufficient technical expertise
as well as a sufficient number of employees devoted to the sale and support
of the Actua 2100. VARs are responsible for software installation, hot-line
support and are prohibited from distributing competing products. As of
December 31, 1997, the Company's VAR network had a combined total of over 70
U.S. locations and four locations in Canada. During 1998, the Company
anticipates expanding both its domestic and international VAR network. VAR's
are also compensated for referrals which result in sales of SLA's.
Page 9
CUSTOMERS. The Company's customers include major companies in a broad
range of industries including manufacturers of automotive, aerospace,
computer, electronic, consumer and medical products. Purchasers of the
Company's systems include, among others, Allied Signal Inc., AMP, Inc.,
Apple Computer, Inc., Boeing Company, Canstar Sports, Inc., Chrysler Corp.,
Daimler-Benz AG, Eastman Kodak Company, General Electric Company, General
Motors Corporation, GM Hughes Electronics Corporation, International Business
Machines Corporation, Johnson & Johnson, Motorola, Inc., Pratt & Whitney and
Texas Instruments Inc. The Company also sells its products to independent
service bureaus, which for a fee provide stereolithographic services to their
customers.
LEASING AND RENTAL PROGRAMS. As part of its marketing
activities, 3D Capital Corporation ("3D Capital"), a wholly-owned subsidiary
of the Company, was formed in August of 1996 to provide lease financing for
qualified U.S. customers purchasing SLA systems. The leases are accounted for
as sales-type leases where the present value of the minimum payments, net of
costs, are recorded as sales. During 1997, the Company sold and assigned a
portion of their lease receivables and expects to continue to periodically
sell or assign a portion of the lease receivables as a future source of
financing.
In addition to sales-type leases, the Company occasionally
offers selected credit-worthy companies the right to rent an SLA system for
evaluation purposes. Substantially all of the customers who have participated
in the rental program have subsequently purchased an SLA system.
PHOTOPOLYMER DISTRIBUTION AGREEMENT. Pursuant to an agreement with CSC
US, and subject to conditions set forth in the agreement, the Company is the
exclusive worldwide distributor to users of stereolithographic processes of
all Ciba Specialty Chemicals stereolithography photopolymers. At the
Company's request, an affiliate of CSC US currently sells such photopolymers
in Japan to the Company's Japanese distributor. Subject to certain
conditions, so long as CSC US provides adequate supplies, the Company is
required to fill all of its requirements for its 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 the Company believes it can obtain alternate
agreements from other manufacturers, the termination of this agreement or
interruption of supply could have a material adverse effect on the Company's
revenues, results of operations, liquidity and financial position. (See
"Cautionary Statements and Risk Factors - Dependence on Suppliers).
CUSTOMER SUPPORT AND SERVICE. Before installation of an SLA system, a
new purchaser typically receives training at the Company's 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. The Company also makes available to its customers, for a fee,
additional training courses in SLA system features and applications.
The Company and its distributors offer maintenance contracts to their
customers. See "Products and Services," above. The Company also makes
available in the U.S. a hotline to all of its 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, 8:00 a.m. Eastern time to 5:00
p.m. Pacific time.
The Company co-founded and currently participates in both domestic and
international User Groups which currently include a substantial number of
the Company's customers. The User Groups organize an annual conference in
both the United States and Europe, at which the Company makes presentations
relating to updates in stereolithography, changes the Company has implemented
in its systems and related equipment, resins and software and future ideas
and programs the Company intends to pursue in the upcoming years.
BACKLOG. At December 31, 1997, the Company had orders (with scheduled
delivery dates) for 15 systems aggregating approximately $3.5 million, as
compared to approximately $9.0 million at December 31, 1996 and $10.9 million
at December 31, 1995. It is anticipated that all orders included in the
current backlog will be shipped by March 31, 1998. As a matter of policy, the
Company affords its customers the right to cancel any system order at any
time prior to their scheduled delivery dates. Historically, the number of
system orders
Page 10
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
The Company assembles all of its systems at its 67,000 square foot
facility in Grand Junction, Colorado.
The Company purchases the major component parts for its systems from
outside sources and arranges with contract manufacturers for the manufacture
of subassemblies. The Company integrates the subassemblies and effects final
assembly of all systems at its production facility. The Company performs
numerous diagnostic tests and quality control procedures on each system to
assure its operability and reliability.
Although there is more than one potential supplier of material
components parts and subassemblies, several of the critical components,
materials, and subassemblies, including lasers, resins, and certain ink jet
components, are currently provided by a single or limited sources. Resin
distributed by the Company are supplied exclusively by CSC under a long term
agreement subject to certain conditions, and either party has the right to
terminate this agreement subject to six months notice. Pursuant to a
License, Development, and Original Equipment Manufacturing Agreement with
Spectra, Inc., ink jet products used in the assembly of the Actua 2100 are
supplied exclusively by Spectra. The reliance on sole or limited source
vendors by the Company 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
condition of relationship of a sole or limited source supplier of any
particular component could have a material and adverse effect on the
Company's revenues, results of operations, liquidity and financial condition
by increasing the cost of goods sold or reducing the availability of such
components. While the Company believes that it could obtain substantially all
necessary components from other manufacturers, an unanticipated change in the
source of supply of these components or unanticipated supply limitations
could adversely affect the Company's ability to meet its product orders.
COMPETITION AND PATENT RIGHTS
Until recently, the Company believes no products technologically similar
to the Company's SLA systems were being sold in the United States; however,
products similar to the Company's SLA systems have been manufactured and sold
by other companies in the Pacific Rim and in Europe. In addition, 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 have announced plans to enter the solid imaging
business, either with equipment similar to that marketed by the Company, or
with other types of equipment. See "Cautionary Statements and Risk Factors
- -- Competition."
Although it is estimated that there are 22 companies currently
manufacturing rapid prototyping equipment, the following is a brief
description of competing products or technologies of the companies that the
Company believes are its current primary competitors. DTM, Inc., in
conjunction with B.F. Goodrich, markets systems based on a technology called
Selective Laser Sintering, which uses a powdered material which is sintered
(solidified by heating) 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.
With respect to the office modeler concept and the Actua 2100, the
Company believes that the following companies are its current primary
competitors. Stratasys markets a desktop-sized version of its modeler.
Sanders Prototyping, Inc. markets a desktop modeler that utilizes double
nozzle ink jet process to build a part.
Products similar to the Company's stereolithography products are being
marketed in Japan by CMET and D-MEC. E.I. du Pont de Nemours and Company
("Du Pont") has licensed certain stereolithography technology to Teijin Seiki
of Japan and Aaroflex of Virginia, USA. The Company believes that other
Japanese companies are
Page 11
also developing and marketing products similar to those of the Company.
However, the Company does 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 U.S., although not delivered, equipment which offers the same functions
as the Company's SLA systems. (See "Item 3 Legal Proceedings").
The Company believes that currently available alternatives to
stereolithography generally are not able to produce models having the
dimensional accuracy or fine surface finish of models provided by the
Company's stereolithography process. However, competitors have successfully
marketed their products to the Company's existing and potential customers.
Furthermore, in many cases, the existence of these competitors extends the
purchasing time while customers investigate alternative systems. The Company
competes primarily on the basis of the quality of its products and the
advanced state of its technology. Although the Company does not rely totally
on its patents to compete, the Company believes that the patents will help
the Company maintain its leading position in the solid imaging field in the
United States and Europe. See "Proprietary Protection," below and "Cautionary
Statements and Risk Factors -- Patents and Proprietary Information."
A number of companies, including Du Pont, are currently selling
stereolithography resins, which either complement or compete with those
distributed by the Company. Within the limits of its obligations under the
Photopolymer Research Agreement (see "Research and Development," above), the
Company encourages chemical companies to develop stereolithography resins
that are compatible with its SLA equipment, but it also works closely with
CSC US to remain competitive in the resin market. The Company believes that
it currently supplies resins to owners of a majority of the SLA systems
currently installed worldwide.
The Company does not believe that it currently has any significant
competition for its maintenance services, although some of the Company's
customers perform their own maintenance in-house. The Company offers
software and hardware maintenance contracts to its customers (see "Products
and Services," above). Maintenance for SLA systems sold internationally is
offered by the Company's distributors (see "Marketing and Customers," above).
The Company's Tooling Centers compete with other service bureaus
providing similar technologies and services. It is the Company's intention
to compete on the basis of service quality and responsiveness. The Company
believes that the demand for rapid prototyping service bureaus is sufficient
to support these competitors without having a material adverse impact on the
demand for the services offered by the Company's Tooling Centers.
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 the Company and through improvements to existing technologies,
such as automated machining. The Company has determined to follow a strategy
of continuing product development and aggressive patent prosecution to
protect itself to the extent possible in these areas.
PROPRIETARY PROTECTION
The stereolithography technology used by the Company in its products was
developed by Charles W. Hull, the Company's Vice Chairman and Chief
Technology Officer while employed by UVP, Inc. This technology was
originally patented by UVP, Inc., subsequently licensed to the Company in
1986 and acquired by the Company in 1990.
At December 31, 1997, the Company had received approximately 139 patents
which includes 65 in the U.S., 46 in Europe, 6 in Japan, 22 other foreign
patents. In addition, 5 utility models had been issued in Germany. At that
date, the Company had 30 pending patents and patent applications with the
United States, 47 in the Pacific Rim, 16 in Europe, 9 in Canada and 2 in
Latin America. As new developments and components to the technology are
discovered, the Company intends to apply for additional patents. In addition
to the above noted six Japanese patents, one other application has been
examined by the Japanese Patent Office and subsequently published for
opposition. One opposition was submitted against this application. The
Company has responded to the opposition. Based on this opposition and 3D's
response, the Japanese Patent Office may require the Company to further
defend or modify this application before granting any patent thereon or may
even finally reject the
Page 12
application. Furthermore, one of the six patents has had three invalidation
trials filed against it. These invalidation trials are ongoing. The Company
has responded to two of these trials and it is anticipated that the Company
will respond to the third trial in the coming months. These trials may
result in maintaining the patent with present or modified protection or may
result in revocation of the patent.
During 1993, the Company, through its subsidiaries, filed a patent
infringement lawsuit in Germany against EOS. The lawsuit sought
compensation from EOS for utilizing certain technology which the Company
alleged was incorporated in its European patent and sought other damages and
remedies, which included, among others, barring EOS from marketing equipment
using technology incorporated in the Company's patent and one of the utility
models During 1994, a German subsidiary of the Company filed an
infringement lawsuit against a customer of EOS based on the utility models of
the Company. The lawsuit sought compensation from EOS' customer for damages
and attorney fees as well as an injunction barring the customer from using
the EOS equipment. In August, 1997, these lawsuits were settled as part of
an agreement under which 3D also acquired the stereolithography-related
assets of EOS (see Note 7 of Notes to Consolidated Financial Statements),
with each of the parties bearing their own expenses. The lawsuit against EOS
was officially withdrawn on October 6, 1997. The lawsuit against the EOS
customer was officially dismissed on October 1, 1997. Neither lawsuit may
be reinstituted. (See "Item 3. Legal Proceedings").
During January 1997, 3D filed a patent infringement lawsuit
against Aaroflex. The lawsuit seeks compensation from Aaroflex for utilizing
certain stereolithography technology which the Company alleges is
incorporated in six of its U.S. patents and seeks other damages and attorneys
fees as well as an injunction barring Aaroflex from marketing its products
using technology incorporated in the Company's patents (see "Item 3. Legal
Proceedings").
During March 1997, 3D also filed a patent infringement lawsuit in Japan
against Teijin Seiki Co. Ltd. under one of its Japanese patents, seeking
damages and an injunction barring Teijin Seiki from manufacturing and
marketing its infringing products. (See "Item 3 Legal Proceedings").
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."
EMPLOYEES
At December 31, 1997, the Company had 440 full-time employees. In
addition, at that same date the Company had 36 independent contractors. None
of these employees or independent contractors are covered by labor
agreements. The Company considers its relations with its employees and its
independent contractors to be satisfactory.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward
looking statements that involve risks and uncertainties. Factors associated
with the forward looking statements which could cause actual results to
differ materially from those projected in the statements appear below. In
addition to the other information contained in this document, readers should
carefully consider the following cautionary statements and risk factors.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced quarterly fluctuations in revenues and
profitability. There can be no assurance that the Company will achieve or
sustain profitability on a quarterly or annual basis in the future. The
Company's future results are affected by a number of factors including the
acceptance and reliability of new products in the market, the status of world
economic conditions, fluctuations in foreign currency exchange rates,
Page 13
impact of changing technologies, and the timing of product shipments. The
Company's results can fluctuate significantly due to the acceleration or
delay of only a few system shipments.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products has emerged only recently, and as
such is characterized by rapid technological advances, changes in customer
requirements, and frequent new product introductions and enhancements.
Accordingly, the Company's future success will depend upon its ability to
enhance its current products and develop and successfully introduce new
products that anticipate and respond to the changes in technology and
customer requirements. Any failure by the Company to anticipate or respond
adequately to technological developments or customer requirements, or any
significant delays in product development, enhancement or introduction,
could have an adverse effect on the Company's competitive position and on
its revenues, results of operations, liquidity and financial position. In
addition, advances in technologies and the introduction of new products can
render the Company's products, components, and materials obsolete, and can
have an adverse effect on the Company's results of operations, liquidity, and
financial position. There can be no assurance that the Company will be
successful in developing and marketing new products or enhancing existing
products, on a timely basis; failure to do so could have a material adverse
effect on the Company's business and operations.
Certain components used in the Company's products require an order of 3
months or longer. Other components that currently are readily available may
become more difficult to obtain in the future, and there can be no assurance
that the Company will not experience delays in the receipt of certain key
components. To meet forecasted production levels, the Company may be
required to commit to certain long lead time items prior to order receipt. If
forecasted orders exceed actual orders, the Company may hold large
inventories of slow moving or unusable parts, which could have an adverse
affect on the Company's cash flow and results of operations.
DEPENDENCE ON SUPPLIERS
Although there is more than one potential supplier of material
components parts and subassemblies, several of the critical components,
materials, and subassemblies, including lasers, resins, and certain ink jet
components, are currently provided by a single or limited sources. Resins
distributed by the Company are supplied exclusively by CSC under a long term
agreement subject to certain conditions, and either party has the right to
terminate this agreement subject to six months notice. Pursuant to a
License, Development, and Original Equipment Manufacturing Agreement with
Spectra, Inc., ink jet products used in the assembly of the Actua 2100 are
supplied exclusively by Spectra. The reliance on sole or limited source
vendors by the Company 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
condition of relationship of a sole or limited source supplier of any
particular component could have a material and adverse effect on the
Company's revenues, results of operations, liquidity and financial condition
by increasing the cost of goods sold or reducing the availability of such
components. While the Company believes that it could obtain substantially all
necessary components from other manufacturers, an unanticipated change in the
source of supply of these components or unanticipated supply limitations
could adversely affect the Company's ability to meet its product orders.
PATENTS AND PROPRIETARY INFORMATION
The Company relies on a combination of patents, copyrights, trade
secrets, trademarks, and proprietary know how to maintain and enhance its
competitive position. At December 31, 1997, the Company had received
approximately 139 patents which includes 65 in the U.S., 46 in Europe, 6 in
Japan, 22 other foreign patents. In addition, 5 utility models had been
issued in Germany. At that date, the Company had 30 pending patents and
patent applications with the United States, 47 in the Pacific Rim, 16 in
Europe, 9 in Canada and 2 in Latin America. As new developments and
components to the technology are discovered, the Company intends to apply for
additional patents. There can be no assurance that the pending patent
applications will be granted, that the Company's patents or copyrights will
provide adequate protection, that the Company's competitors will not
Page 14
independently develop or initiate technologies that are substantially
equivalent or superior to the Company's, or that the Company will be able to
maintain a meaningful technological advantage. Insofar as the Company
relies on trade secrets and proprietary know how to maintain its competitive
position, there can be no assurance that others may not independently develop
similar or superior technologies or gain access to the Company's trade
secrets or know how.
To maintain its competitive position, the Company intends to pursue
enforcement and defense of its patents. The Company could incur substantial
costs in seeking enforcement of its patent rights against infringement or the
unauthorized use of its proprietary technology by others or in defending
itself against similar claims. These costs could have an adverse effect on
the Company's results of operations, liquidity and financial condition, and
could cause significant fluctuations in results from quarter to quarter. The
Company is currently pursuing a patent infringement action in the Central
District of California against Aarotech Laboratories Inc., and Albert C.
Young and against Teijin Seiki Co. Ltd. (See "Item 3. Legal Proceedings.")
FACTORS AFFECTING INTERNATIONAL BUSINESS
Revenues from international customers accounted for approximately 41.5%
of total revenues in 1997, 33.8% of total revenues in 1996 and 35.2% of total
revenues in 1995. The Company's international business is subject to special
risks including unexpected changes in regulatory requirements, export
controls, fluctuations in currency exchange rates, tariffs or other barriers,
political risks, difficulties in staffing and managing foreign operations,
uncertainty on patent enhancement and potentially negative tax consequences.
These factors could have an adverse impact on the Company's operating
results. The Company is subject to U.S. export control laws and regulations
with respect to all of the Company's products and technologies exported from
the United States. Any imposition of more stringent export control
requirements on product classes that include products exported by the
Company could result in additional compliance burdens on the Company which
could have an adverse effect on its operations In addition, the laws of
certain foreign countries, including developing nations in Asia, South
America, Africa and Eastern Europe, may not protect the Company's
intellectual property rights or ensure the enforceability of its contract
rights to the same extent as do the laws of the United States.
PRODUCT MIX AND MARGINS
The Company continuously expands its product offerings, reaches into
an increasing number of geographic markets, and develops additional
distribution channels as needed to reach the various markets and customers.
This variety of products, channels, and markets results in a significantly
increasing range of gross margins and operating incomes which can cause
substantial quarterly fluctuations depending on the mix of shipments quarter
to quarter. There can be no assurance that the Company will not experience
significant quarterly fluctuations in gross margins or net income due to the
impact of product mix, or that a changing mix over time will not result in
lower average gross margins and returns.
COMPETITION
The rapid prototyping industry is highly competitive and subject to
technological change, innovation, and new product introductions. Certain of
the Company's existing and potential competitors are researching, designing,
developing, and marketing other types of rapid prototyping equipment. Certain
of these competitors have financial, marketing, manufacturing, distribution
and other resources substantially greater than those of the Company. There
can be no assurance that the Company's competitors will not devote a
significantly greater amount of their financial, marketing and other
resources to aggressively market competitive products and technologies, and
that such efforts will not have a material adverse effect on the Company's
results of operations, liquidity or financial position in the future. 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 been able to market these products successfully to the
Company's existing and potential customers. In addition, a number of
companies currently sell stereolithography resins, which both complement and
compete with those distributed by the Company.
Page 15
Future competition is expected to arise from the development of allied
or related techniques not encompassed by the patents held by or licensed to
the Company, the issuance of patents to other companies which may inhibit the
Company's ability to develop certain products encompassed by such patents and
improvement to existing technologies. Increased competition has and may
continue to result in price reductions, reduced margins and loss of market
share, all of which could materially adversely affect the Company. The
Company has determined to follow a strategy of continuing product development
and aggressive patent prosecution to protect its competitive position to the
extent practicable. There can be no assurance that the Company will be able
to maintain its leading position in the field of rapid prototyping or
continue to compete successfully against current and future sources of
competition or that the competitive pressures faced by the Company will not
adversely affect its profitability or financial performance. See "Business
- -- Competition."
NEW PRODUCT DEVELOPMENT
During the last 15 months, the Company has developed and introduced a
significant number of new products to the market, including equipment,
software, and materials. While these products undergo thorough quality
assurance testing, problems may arise in connection with the use of a new
product following its introduction into the marketplace and no assurance can
be given that the Company will be able to remedy these problems timely, or at
all. Moreover, there can be no assurance that any new products developed by
the Company will be accepted in the marketplace. Any material deficiencies
in the performance of the Company's products, or if the products are not
accepted by the marketplace for any reason, could have a material adverse
effect on the Company's results of operations and financial condition.
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Board of Directors of the Company has the authority to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action
by the Company's stockholders. The rights of the holders of the Company's
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of preferred stock. While the Company has no present
intention to issue shares of preferred stock, such issuance, while providing
desirable flexibility in connection with the possible acquisitions and other
corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of the Company and entrenching existing
management. In addition, such preferred stock may have other rights,
including economic rights senior to the Company's Common Stock, and, as a
result, the issuance thereof could have a material adverse effect on the
market value of the Company's Common Stock.
A number of provisions of the Company's Certificate of Incorporation and
By-Laws and the Delaware General Corporation Law and regulations relating to
matters of corporate governance, certain rights of Directors and the issuance
of preferred stock without stockholder approval, may be deemed to have and
may have the effect of making more difficult, and thereby discouraging, a
merger, tender offer, proxy contest or assumption of control and change of
incumbent management, even when stockholders other than the Company's
principal stockholders consider such a transaction to be their best interest.
In addition, the Company has adopted a Stockholder Rights Plan (the
"Rights Agreement"). (See Note 12(d) of Notes to Consolidated Financial
Statements). Pursuant to the Rights Agreement each outstanding share of the
Company's Common Stock has received one right entitling the holder to
purchase 1/100th of a share of Series A Preferred Stock of the Company for
each share of Common Stock then held by such holder. Each right becomes
exercisable upon certain triggering events related to an unsolicited takeover
attempt of the Company.
VOLATILITY OF STOCK PRICE
Historically, the Company's stock price has been volatile. The prices
of its Common Stock have ranged from $5 3/4 to $10 3/4 during the 52-week
period ended February 27, 1998. See "Item 5. Market for Registrants' Common
Stock and Related Stockholders Matters." Future announcements concerning the
Company or its competitors, including the receipt of substantial orders for
products, quality deficiencies in
Page 16
services or products, results of technological innovations, new commercial
products, changes in recommendations of securities analysts, proprietary
rights or product or patent litigation, may have a significant impact on the
market price of the Company's Common Stock. Any shortfalls in revenues or
earnings from the levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of the
Company's Common Stock in any given period. Consequently, the Company's
future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis.
ITEM 2. PROPERTIES
The Company's principal administrative, 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 which
expires on December 31, 2002. The Company also leases sales and service
offices in four other states (California, Michigan, Pennsylvania and Texas)
and in four countries in the European Community (France, Germany, the United
Kingdom and Italy).
The Company's manufacturing and customer support operations are located
in a 67,000 square foot facility located in Grand Junction, Colorado (the
"Colorado Facility"). The Company constructed the Colorado Facility pursuant
to an agreement with the Mesa County Economic Development Council, Inc.
executed in October 1995. Following the completion of the Colorado Facility
in June 1996, the Company relocated its manufacturing and customer support
operations from its Valencia facility to the Colorado Facility during the
third quarter of 1996. During the fourth quarter of 1996, all of the
Company's manufacturing activities were performed at the Colorado Facility.
During August 1996, the Company completed a $4.9 million variable rate
industrial development bond financing of the Colorado Facility.
In connection with the asset acquisition of Keltool, Inc. in September
1996, the Company assumed Keltool's obligations under an existing lease for
approximately 6,000 square feet located in St. Paul, Minnesota and continues
in effect until either party gives the other 60 days advance notice. As a
result of the anticipated growth of its operations relating to the Keltool
business, the Company executed a lease for approximately 21,000 square feet
in Valencia, California which expires on June 30, 2000. The Company's
occupancy of this facility commenced in February 1997.
For information concerning obligations of the Company under its leases,
see Note 17(a) of Notes to Consolidated Financial Statements. For
information concerning the Company's Colorado Facility, see Notes 11 and 18
of Notes to Consolidated Financial Statements.
The Company believes that the facilities described above will be
adequate to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On May 24, 1993, 3D Systems, Inc. and its wholly-owned German
subsidiary, 3D Systems GmbH (both referred to as "3D") filed a patent
infringement lawsuit against EOS, a European competitor, seeking compensation
from EOS for infringing patents owned by 3D. On November 2, 1994, 3D GmbH
filed a patent infringement lawsuit against Leopold Kostal GmbH & Co., a
German customer of EOS, seeking compensation from Kostal for infringing
patents owned by 3D, as well as an injunction barring Kostal from using the
EOS equipment. In August, 1997, these lawsuits were settled as part of an
agreement under which 3D also acquired the stereolithography-related assets
of EOS (see Note 7 of Notes to Consolidated Financial Statements), with each
of the parties bearing their own expenses. The lawsuit against EOS was
officially withdrawn on October 6, 1997. The lawsuit against Kostal was
officially withdrawn on October 1, 1997. Neither lawsuit may be reinstituted.
3D SYSTEMS, INC. V. AAROFLEX ET AL. On January 13, 1997, The Company
filed a complaint ("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
Page 17
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 the Company's patents.
The Company seeks damages and injunctive relief from the defendants. The
defendants have threatened to sue the Company 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 this motion to
dismiss on the grounds of lack of personal jurisdiction. The Company has
filed an appeal of this ruling to the Federal Court of Appeals, where an oral
hearing was held on March 2, 1998 and is awaiting judicial ruling. In
October 1997, defendants asserted that since they prevailed on their motion
to dismiss, they were entitled to Rule 11 sanctions in the amount of
$137,138.83 to be paid by Loeb & Loeb LLP and/or 3D. Defendants served
discovery requests directed to these Rule 11 sanctions issues. Subsequently,
the trial court ruled that the question of whether defendants may conduct
Rule 11 discovery must await the outcome of the pending appeal. A Rule 11
sanctions motion has not yet been served or filed.
3D SYSTEMS, INC. V. TEIJIN SEIKI CO. LTD On March 21, 1997, the Company
filed a patent infringement action in District Court in Osaka, Japan under
one of its Japanese patents, alleging infringement, and seeking damages and
injunctive relief from the defendant. The action is in the early stages of
prosecution.
CENTURI CORP., DBA ESTES INDUS., COX ACQUISITION CORP., DBA COX V. 3D
SYSTEMS CORP., ROGERS TOOL & DIE. In January 1997, 3D Systems, Inc. entered
into two contracts with Centuri Corp., dba Estes Indus., Cox Acquisition
Corp., dba Cox ("Cox") under which 3D was to create certain tooling for Cox.
Cox purported to terminate the contracts in or about August 1997.
On September 16, 1997, Cox initiated a lawsuit against 3D in Los Angeles
Superior Court for Breach of Oral Contract, Fraud, Negligent
Misrepresentation, Conversion, Money Had and Received, and Accounting. The
suit also named Rogers Tool & Die, a contractor hired by Cox to work with 3D
in creating the tooling. Cox contended that it was damaged by 3D's and
Rogers' alleged inability to timely complete the contracts. On October 31,
1997, 3D demurred to Cox's Verified Complaint. Rogers joined in 3D's
demurrer. 3D's demurrer contended that written, not oral, contracts governed
the relationship of the parties, that the Complaint did not adequately plead
the required elements of fraud, that the Complaint failed to state a claim
for Negligent Misrepresentation, Conversion, and Money Had and Received, and
that Accounting was not actually a cognizable cause of action, but an
equitable remedy.
After a hearing on December 2, 1997, the Court sustained 3D's demurrer,
ordering Cox to file an amended complaint. On January 29, 1998, Cox filed a
Verified Amended Complaint, asserting causes of action for Breach of Written
Contract, Fraud, and Negligent Misrepresentation. The Verified Amended
Complaint also stated identical claims against Rogers. 3D's current response
date is March 16, 1998.
The Company believes that the case has no merit and intends to
vigorously defend this action.
PATENT OPPOSITION AND INVALIDATION PROCEEDINGS. The Company has
received 6 patents in Japan and one other application has been examined by
the Japanese Patent Office and subsequently published for opposition. One
opposition was submitted against this application. The Company has responded
to the opposition. Based on this opposition and 3D's response, the Japanese
Patent Office may require the Company to further defend or modify this
application before granting any patent thereon or may even finally reject the
application. Furthermore, one of the six patents has had three invalidation
trials filed against it. These invalidation trials are ongoing. The Company
has responded to two of these trials and it is anticipated that the Company
will respond to the third trial in the coming months. These trials 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
None.
Page 18
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 27, 1998 WITH THE COMPANY
Arthur B. Sims 60 Chief Executive Officer and Chairman of
the Board of Directors
Charles W. Hull 58 Chief Technical Officer and Vice
Chairman of the Board of Directors
Richard D. Balanson 48 Chief Operating Officer, President and
Director
Frank J. Spina 43 Vice President, Finance and Chief
Financial Officer
A. Sidney Alpert 59 Vice President,
General Counsel and Secretary
Mark R. Bell 44 Vice President, Sales
The Americas
Marty E. McGough 48 Vice President & World Wide Operations
Manager
The principal occupations of the executive officers of the Company are as
follows:
ARTHUR B. SIMS: Mr. Sims has served as Chief Executive Officer of the
Company since August 1993 and, since September 1991, has also served as Chief
Executive Officer of 3D Systems, Inc. From September 1990 to September 1991,
Mr. Sims was an independent management consultant. From 1989 until September
1990, Mr. Sims was President of Quadratron Systems Incorporated, a developer and
marketer of office automation software. From 1988 to 1989, Mr. Sims served as
President and Chief Executive Officer of CPT Corporation. Prior to that, he
served four years as Corporate Vice President and President of Computer Sciences
Corp.'s Industry Services Group and for one year as President and Chief
Executive Officer of United Information Services. Previously he was associated
with IBM and General Electric Company.
CHARLES W. HULL: Mr. Hull has served as Chief Technical Officer and Vice
Chairman of the Company since April 1997, since August 1993 as Chief Operating
Officer and President of the Company and since March 1986 as President of 3D
Systems, Inc.; prior thereto, he was Vice-President of UVP, Inc. from January
1980 to March 1986. The stereolithography technology was developed by Mr. Hull
while employed by UVP, Inc., a systems manufacturing company.
RICHARD D. BALANSON: Mr. Balanson has served as President and Chief
Operating Officer since April 1997 and since October 1996 was Executive Vice
President, Development and Manufacturing. From August 1994 to September 1996,
Mr. Balanson was General Manager, Executive Vice President and Member of the
Board of Maxtor Corporation, a major supplier of computer disk drives, where he
was in charge of engineering, manufacturing, materials, sales and marketing.
From October 1992 to June 1994, Mr. Balanson was President and Chief Operating
Officer of Applied Magnetics Corporation, an OEM components supplier to
manufacturers of disk and tape drives. From 1975 to 1992, he held several
management and technical positions with International Business Machines
Corporation including IBM Research Division, where he had responsibility for
research and development in many areas, including xerography, optics, lasers and
computer storage media.
Page 19
FRANK J. SPINA: Mr. Spina joined 3D in November of 1997, having spent his
previous three years as Vice President and Corporate Controller at Qualcomm
Inc., a $2 billion developer and manufacturer of wireless communications
products. Prior to Qualcomm, he worked for nine years at Motorola Inc. serving
his last four years as their Group Operations Controller. Mr. Spina is a
Certified Public Accountant, and a graduate of Baldwin Wallace College in Ohio.
A. SIDNEY ALPERT: Mr. Alpert became Vice President, General Counsel of the
Company in January 1996 and has served as Secretary of the Company since May
1996. 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.
MARK R. BELL: Mr. Bell has served as Vice President, Sales, The Americas
since April 1996 and is responsible for sales in the United States, Canada,
Mexico and Latin America. Mr. Bell previously had been Eastern Region Sales
Director - U.S. since joining the Company in August 1990. From September 1987
to August 1990, Mr. Bell was Eastern Area Manager for Cimlinc, Inc., a provider
of CIM software solutions and services. From February 1987 to August 1987, Mr.
Bell was Eastern Area Manager for Manufacturing & Consulting Services, Inc.
(MCS), a software developer in the mechanical design and manufacturing (CAD/CAM)
industry. From October 1986 to January 1987, Mr. Bell was Eastern Region
Manager for Infodetics, a supplier of records management systems and microfilm
duplication equipment. Prior to 1986, Mr. Bell has been employed in various
sales management positions with McDonnell Douglas Corporation, Auto-Trol
Technology Corporation, Tektronix, Inc, and Burroughs Corporation.
MARTY E. MCGOUGH: Mr. McGough has served as Vice President and Worldwide
Operations Manager since September 1997 after joining 3D Systems in January
of 1997 and is responsible for manufacturing and operations, as well as world
wide field service. He was formally 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 B.S.
degree from California State University, Northridge in business
administration and earned his Masters in Business Management also from CSUN.
Subject to the employment agreements between the Company and each of
Messrs. Sims, Balanson, and Hull, all officers serve at the pleasure of the
Board of Directors of the Company.
Page 20
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 the Company's Common Stock (symbol: TDSC) on the Nasdaq
National Market. The Company effected a one-for-three reverse stock split on
May 23, 1995. Also shown are prices prior to the effective date of the reverse
stock split which have been adjusted by a factor of three to reflect the effect
of the reverse stock split.
AS ADJUSTED FOR 1-FOR-3
HISTORIC PRICES REVERSE STOCK SPLIT
Year Period High Low High Low
1995 First Quarter 4-11/16 3-5/16 14-1/16 9-15/16
Second Quarter
(through 5-7/8 4-5/16 17-5/8 12-15/16
May 23)
Second Quarter
(from May 24 - 17-7/8 15-7/16
June 30)
Third Quarter 21-7/8 15-3/8
Fourth Quarter 24 14-1/4
1996 First Quarter 24-1/8 18-7/8
Second Quarter 24-7/8 20
Third Quarter 21-3/4 12
Fourth Quarter 14-47/64 9-3/4
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
1998 First Quarter
(through February 8 5-3/4
27)
As of February 27, 1998, the outstanding Common Stock was held of record by
637 stockholders.
DIVIDENDS
The Company has not paid any dividends on its Common Stock and currently
intends to retain any future earnings for use in its business. Therefore, it
should not be expected that any dividends will be declared on the Common Stock
in the foreseeable future. Any dividend payment will be at the discretion of
the Company's Board of Directors and will require the consent of Silicon Valley
Bank (see "Item 7. Management's Discussion and Analysis of Results of Operation
and Financial Condition -- Liquidity and Capital Resources) and will be
dependent upon the Company's earnings, operating and financial condition and
capital requirements, as well as general business conditions.
Page 21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following summary of selected consolidated financial data for the
periods set forth below has been derived from the Consolidated Financial
Statements of 3D Systems Corporation. Such information should be read in
conjunction with Management's Discussion and Analysis of Results of Operation
and Financial Condition and with the Consolidated Financial Statements appearing
elsewhere in this Form 10-K.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ----------- ------------ -------------
STATEMENTS OF OPERATIONS DATA: (In thousands except per share data)
Sales:
Products(1). . . . . . . . . . . . . . . . . . . $ 20,951 $ 28,848 $ 43,544 $ 53,229 $ 59,149
Services(2). . . . . . . . . . . . . . . . . . . 10,130 14,489 19,038 26,403 31,108
---------- ---------- ----------- ------------ -------------
Total Sales. . . . . . . . . . . . . . . . . 31,081 43,337 62,582 79,632 90,257
---------- ---------- ----------- ------------ -------------
Cost of sales:
Products(1). . . . . . . . . . . . . . . . . . . 10,191 13,928 19,328 24,893 35,463
Services(2). . . . . . . . . . . . . . . . . . . 6,097 8,734 11,936 16,906 21,745
---------- ---------- ----------- ------------ -------------
Total cost of sales. . . . . . . . . . . . . 16,288 22,662 31,264 41,799 57,208
---------- ---------- ----------- ------------ -------------
Gross profit . . . . . . . . . . . . . . . . . . . 14,793 20,675 31,318 37,833 33,049
Operating expenses:
Selling, general and administrative. . . . . . . 11,570 14,359 20,302 24,748 29,653
Research and development . . . . . . . . . . . . 2,590 3,207 6,109 7,665 10,991
---------- ---------- ----------- ------------ -------------
Total operating expenses . . . . . . . . . . 14,160 17,566 26,411 32,413 40,644
---------- ---------- ----------- ------------ -------------
633 3,109 4,907 5,420 (7,595)
Interest income. . . . . . . . . . . . . . . . . . 61 151 1,257 1,541 1,202
Interest expense . . . . . . . . . . . . . . . . . (89) (71) (42) (129) (356)
---------- ---------- ----------- ------------ -------------
Income (loss) before income tax expense
(benefit) . . . . . . . . . . . . . . . . . . . 605 3,189 6,122 6,832 (6,749)
Income tax expense (benefit) . . . . . . . . . . . 74 (1,313)(3) (2,795)(3) 2,233 (2,160)
---------- ---------- ----------- ------------ -------------
Net income (loss). . . . . . . . . . . . . . . . . $ 531 $ 4,502 $ 8,917 $ 4,599 $ (4,589)
---------- ---------- ----------- ------------ -------------
---------- ---------- ----------- ------------ -------------
Weighted average number of shares
outstanding. . . . . . . . . . . . . . . . . . . 9,154 9,155 10,246 11,323 11,398
Net income (loss) per common share(4). . . . . . . $ 0.06 $ 0.49 $ .87 $ .41 $ (.40)
---------- ---------- ----------- ------------ -------------
---------- ---------- ----------- ------------ -------------
Weighted average number of shares
outstanding and dilutive shares. . . . . . . . . . 9,165 9,365 10,708 11,742 11,398
Net income (loss) per common share assuming
dilution(4). . . . . . . . . . . . . . . . . . . $ 0.06 $ 0.48 $ .83 $ .39 $ (.40)
---------- ---------- ----------- ------------ -------------
---------- ---------- ----------- ------------ -------------
SYSTEM DATA:
SLA systems shipped (unaudited). . . . . . . . . . 59 73 120 151 161
Actua Systems shipped (unaudited). . . . . . . . . --- --- --- 6 113
Cumulative number of SLA systems shipped
(unaudited). . . . . . . . . . . . . . . . . . . 397 470 590 741 902
Cumulative number of Actua systems shipped
(unaudited). . . . . . . . . . . . . . . . . . . --- --- --- 6 119
Page 22
AT DECEMBER 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ----------- ------------ -------------
BALANCE SHEET DATA:
Working capital(5) . . . . . . . . . . . . $ 7,197 $ 11,722 $ 50,022 $ 49,764 38,310
Total assets(5) . . . . . . . . . . . . . 24,594 30,465 81,551 92,239 91,340
Current portion of long-term debt . . . . 200 -- -- 100 95
Long-term liabilities, excluding current
portion . . . . . . . . . . . . . . . . . 1,288 1,474 1,622 6,273 6,197
Stockholders' equity . . . . . . . . . . . 14,685 19,985 62,950 68,703 64,595
- ---------------------
(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 Tooling Centers and
training services.
(3) Includes the recognition of deferred tax assets, in accordance with SFAS
No. 109, of $1.5 million in 1994 and $3.0 million in 1995. See
"Management's Discussion and Analysis of Results of Operations and
Financial Condition - Results of Operations."
(4) All periods presented have been adjusted to reflect the one-for-three
reverse stock split effected on May 23, 1995. Per share data for 1993
through 1995 reflect the issuance of approximately 3.2 million shares
(post-split) in connection with the Company's rights offering in June 1992.
(5) Includes $766,000 and $722,000 of restricted cash at December 31, 1995 and
1996, respectively. See Note 17(c) of Notes to Consolidated Financial
Statements
Page 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's 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; the Company's 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 and Liquidity and Capital Resources.
OVERVIEW
The Company develops, manufactures and markets in the United States and
internationally both its stereolithography apparatus (SLA) and its Actua 2100
systems designed to rapidly produce three-dimensional objects from
computer-aided design and manufacturing generated solid or surface data.
Stereolithography is a solid imaging process whereby a laser beam exposes and
solidifies successive layers of photosensitive resin until the desired object is
formed to precise specifications in hard plastic. The Actua 2100 utilizes
Multi-Jet Modeling technology to print models in successive layers with a
special thermopolymer material. These objects can be used for concept models,
engineering prototypes, patterns and masters for molds and other appreciations.
The Company has sold over 900 systems since 1988 and its customers include
major corporations in a broad range of industries including manufacturers of
automotive, aerospace, computer, electronic, consumer and medical products. The
Company's 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, services
provided by the Company's Tooling Centers and customer training.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
items from the Company's Statement of Operations to and Total Revenues:
PERCENT OF TOTAL REVENUES
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
----------- ---------- ----------
Sales:
Products . . . . . . . . . . . 69.6% 66.8% 65.5%
Services . . . . . . . . . . . 30.4% 33.2% 34.5%
----------- ---------- ----------
Total sales . . . . . . . 100.0% 100.0% 100.0%
----------- ---------- ----------
Cost of sales:
Products . . . . . . . . . . . 30.9% 31.3% 39.3%
Services . . . . . . . . . . . 19.1% 21.2% 24.1%
----------- ---------- ----------
Total cost of sales . . . 50.0% 52.5% 63.4%
----------- ---------- ----------
Total gross profit . . . . . . . . 50.0% 47.5% 36.6%
Gross profit - products . . . 55.6% 53.2% 40.0%
Gross profit - services . . . 37.3% 36.0% 30.1%
Selling, general and administrative
expenses . . . . . . . . . . . . 32.4% 31.1% 32.8%
Research and development expenses . 9.8% 9.6% 12.2%
----------- ---------- ----------
Income from operations . . . . . . 7.8% 6.8% (8.4%)
Interest income (expense), net . . 1.9% 1.8% .9%
Income tax benefit (expense) . . . 4.5% (2.8%) 2.4%
----------- ---------- ----------
Net income . . . . . . . . . . . 14.2% 5.8% (5.1%)
----------- ---------- ----------
----------- ---------- ----------
Page 24
The following table sets forth for the periods indicated total revenues
attributable to each of the Company's major products and services groups:
YEARS ENDED DECEMBER 31,
1995 1996 1997
---------- ---------- ----------
(In thousands except percent data)
Products:
Systems and related equipment . $ 29,931 $ 38,230 $ 40,859
Materials . . . . . . . . . . . 8,168 10,563 13,548
Other . . . . . . . . . . . . . 5,445 4,436 4,742
----------- ---------- ----------
Total products . . . . . . 43,544 53,229 59,149
----------- ---------- ----------
Services:
Maintenance . . . . . . . . . . 14,323 21,341 25,010
Other . . . . . . . . . . . . . 4,715 5,062 6,098
----------- ---------- ----------
Total services . . . . . . 19,038 26,403 31,108
----------- ---------- ----------
Total sales . . . . . . . . . . . . . $ 62,582 $ 79,632 $ 90,257
----------- ---------- ----------
----------- ---------- ----------
Products:
Systems and related equipment . 47.8% 48.0% 45.3%
Material . . . . . . . . . . . . 13.1 13.3 15.0
Other . . . . . . . . . . . . . 8.7 5.6 5.2
----------- ---------- ----------
Total products . . . . . . 69.6 66.9 65.5
----------- ---------- ----------
Services:
Maintenance . . . . . . . . . . 22.9 26.8 27.7
Other . . . . . . . . . . . . . 7.5 6.3 6.8
----------- ---------- ----------
Total services . . . . . . 30.4 33.1 34.5
----------- ---------- ----------
Total sales . . . . . . . . . . . . . 100.0% 100.0% 100.0%
----------- ---------- ----------
----------- ---------- ----------
1997 COMPARED TO 1996
SALES. Sales in 1997 were $90.3 million, an increase of 13% over the $79.6
million recorded during 1996.
Product sales in 1997 increased $5.9 million or 11% to $59.1 million compared
to $53.2 million in 1996. The dollar increase was primarily the result of
increased shipments of SLAs in both the U.S. and Europe. The Company sold a
total of 161 SLA systems and a total of 113 Actua 2100 systems in 1997. In
1996, the Company sold 151 SLAs and 6 Actua 2100's. Orders for the Company's
systems in 1997 (compared to 1996) increased in both Europe and Asia Pacific
but declined in the U.S. market and total systems backlog at the end of 1997
was lower than the end of 1996.
The Company believes that the decline in the U.S. orders in 1997 (when
compared to 1996) was due primarily to the inefficiencies caused by the
recent changes in the domestic sales organization from a strategy of
utilizing independent sales representatives (primarily in the machine tool
industry) to a direct sales force. The Company completed its staffing of its
domestic sales organization during the second half of 1997. While
historically there has not always been an accurate correlation between orders
and ending backlog in one year and revenues in the next year, the decline in
U.S. orders in 1997, coupled with potential inefficiencies caused by the
recent changes in the Company's domestic sales organization, could negatively
impact domestic revenues during the first half of 1998. The Company
anticipates that total orders should increase in 1998 as compared to 1997
primarily as a result of an increased sales force and the assimilation of the
EOS acquisition. However, this is a forward-looking statement and as with
other such statements are subject to uncertainties. As a result of
competitive pricing pressures or other market conditions, total orders may
Page 25
not increase in 1998.
The Company believes that system sales may also fluctuate on a quarterly
basis as a result of a number of other factors, including the status of world
economic conditions, fluctuations in foreign currency exchange rates and the
timing of product shipments. Due to the high price 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.
Service sales in 1997 increased $4.7 million, or 18%, compared to 1996,
primarily as a result of increased maintenance revenues due to the larger
installed base of SLA systems in the U.S. and Europe.
COST OF SALES. Cost of sales increased to $57.2 million or 63% of sales in
1997 compared to $41.8 million or 52% of sales in 1996.
Product cost of sales as a percentage of product sales increased to 60% in
1997 compared to 47% in 1996. The increase in 1997 was primarily the result
of greater discounting of system sales in 1997 due to competition, the sales
mix of the Company's products as well as the channels and markets in which
the Company distributes its products. In addition, the Company recorded
inventory adjustments totaling approximately $1.8 million, or 5 percentage
points of the increase, that were primarily associated with the transition to
our new generation of products announced in the third quarter of 1997, the
EOS acquisition and filed service inventories.
Product pricing will continue to be a function of competitive pressures and
the Company will continue to experience fluctuations due to the mix of
product, channel and markets. Nonetheless, the Company does not currently
anticipate that it will be required to recognize any material inventory
adjustments during the current fiscal year, and thus expects that product
cost of sales as a percentage of product sales for 1998 should improve from
1997. This is, of course, a forward-looking statement, and as such is subject
to risks and uncertainties. For example, if the new products introduced last
year are not commercially successful, the Company may be required to record
inventory adjustments; and the consequences of competitive pricing issues can
never be accurately predicted.
Service cost of sales as a percentage of service sales increased to 70% in
1997 compared to 64% in 1996, primarily as a result of certain hardware
upgrades afforded SLA-500 customers with software maintenance contracts due
to the Company's new NT version system software, increased parts costs under
the Company's field maintenance contracts and the effect of certain
inefficiencies attributable to the Company's Keltool operations which were
acquired in September 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("S,G&A") expenses increased $5.0 million or 20% in 1997
compared to 1996, primarily as a result of approximately $2.0 million of
non-recurring expenses for severance benefits and other costs related to
restructuring plans designed to reduce costs and improve operating results
and the the expanded sales and marketing program in Europe and the U.S.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses
in 1997 increased approximately $3.3 million of 43% compared to 1996. The
increase in R&D expenses in 1997 was primarily the result of the write-off
during the third quarter of 1997 of acquired in-process technology valued at
approximately $2,100,000 in connection with the EOS acquisition (see Note 7
of Notes to Consolidated Financial Statements) and increased personnel costs
and experimental material related to certain development projects. Based on
the Company's historical expenditures related to research and development and
its current development goals, the Company anticipates for the foreseeable
future, research and development expenses will be approximately ten percent
of sales. However, this is a forward-looking statement and, as with any such
statement, is subject to uncertainties. For example: if total sales of the
Company for any particular period do not meet the anticipated sales of the
Company for that period, research and development expenses as a percentage of
sales may exceed the 10 percent level.
OPERATING INCOME (LOSS). Operating loss in 1997 was (8.4%) of total sales
compared to operating income of 6.8% of total sales in 1996. The decrease in
percentage of operating income to total sales in 1997 was primarily
attributable to increases in cost of sales (both products and services) in
1997 and the increased S,G&A and R&D expenses, as described above.
OTHER INCOME AND EXPENSES. Interest income decreased to $1.2 million in 1997
from $1.5 million in 1996, primarily as a result of the lower investment
balances due to cash used for operating activities and investment activities
partially offset by interest income from lease receivables.
Interest expense increased to $356,203 in 1997 from $128,860 in 1996
primarily as a result of the Company's financing of its Colorado facility
which was effected August 20, 1996.
PROVISION FOR INCOME TAXES (BENEFITS). For 1997 the Company's tax benefit
was $2.2 million or 32% of pre-tax income (loss), compared to a tax expense
of $2.2 million in 1996.
Page 26
1996 COMPARED TO 1995
SALES. Sales in 1996 were $79.6 million, an increase of 27% over the $62.6
million recorded during 1995.
Product sales in 1996 increased $9.7 million or 22% to $53.2 million compared
to $43.5 million in 1995. The increase was primarily the result of increased
shipments of SLAs in both the U.S and Europe. The Company sold a total of 151
SLA systems in 1996, comprised of 5 SLA-190's, 56 SLA-250's, 40 SLA-350's
(the Company's newest SLA system which features the new Zephyr-TM- recoater,
a solid state laser and an automatic resin re-filling system) and 50
SLA-500's (the Company's largest and highest priced system). In 1995, the
Company sold 120 SLAs, comprised of 5 SLA-190's, 63 SLA-250's and 52
SLA-500's. Orders for the Company's SLA systems in 1996 (compared to 1995)
increased in Europe but declined in both the U.S. and Asia-Pacific markets
and total SLA systems backlog at the end of 1996 was lower than the end of
1995.
The Company believes that the decline in the U.S. orders in 1996 (when
compared to 1995) was due primarily to the performance, and termination, of a
number of the Company's independent domestic sales representatives
("agents"), and, to a lesser extent, to competitive pressures. The Company's
domestic marketing strategy has focused on a strong internal sales
organization, as well as the utilization of agents (primarily, independent
sales representatives in the machine tools industry). During 1996, these
sales agents however were not producing the level of sales expected by the
Company. Additionally, the Company believed it could obtain better
visibility and contact with its customers by utilizing a direct sales force.
Accordingly, in August 1996, the Company terminated its arrangements with all
of its sales agents and began recruiting additional personnel to strengthen
its internal sales and support organization. Between September 1, 1996 and
December 31, 1996, the Company completed the hiring of ten additional sales
persons. Although the Company offered its agents the opportunity to enter
into new arrangements with the Company, at lower commission rates than under
the prior agreements, to date no agents have entered into new agreements.
Because of the long cycle for SLA systems sales, the Company does not
anticipate that these additions to its internal sales organization will
significantly increase domestic sales in the first half of 1997. While
historically there has not always been an accurate correlation between orders
and ending backlog in one year and revenues in the next year, the decline in
U.S. orders in 1996, coupled with potential inefficiencies caused by the
recent changes in the Company's domestic sales organization, could negatively
impact domestic revenues during the first half of 1997. The Company
anticipates that European orders should increase in 1997 as compared to 1996
primarily as a result of an increased sales force. However, this is a
forward-looking statement and as with other such statements are subject to
uncertainties. As a result of competitive pricing pressures or other market
conditions, European orders may not increase in 1997.
The Company believes that SLA system sales may also fluctuate on a quarterly
basis as a result of a number of other factors, including the status of world
economic conditions, fluctuations in foreign currency exchange rates and the
timing of product shipments (the current U.S. list price of an SLA-500, for
example, is $490,000; thus 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).
During 1997, there are several additional factors which may impact quarterly
sales. During 1996, the Company introduced two new products, the SLA-350
Series 10, a new, advanced SLA system and the low-priced Actua 2100 office
modeler (which uses a technology completely different from
stereolithography), designed for operation in engineering and design offices.
During May 1996, the Company began commercial shipments of the SLA-350. As a
result of certain technical issues, which the Company believes to be
resolved, commercial shipments of the Company's Actua 2100 were delayed until
late December, 1996 (the Company shipped a total of six commercial units in
December 1996). The possibility exists that the announcement and introduction
of these new products may have caused, and may cause in the future,
potential customers of the Company who were considering the purchase of one
of the Company's other models to defer their purchase decision until further
information is available as to the performance and reliability of the new
products. Further delays in shipments of new products may also occur as a
result of unexpected problems encountered in actual use.
Service sales in 1996 increased $7.4 million, or 39%, compared to 1995,
primarily as a result of increased maintenance revenues due to the larger
installed base of SLA systems in the U.S. and Europe as well as from greater
sales (approximately $648,000) of SLA upgrades (primarily Zephyr upgrades) to
existing SLA customers. The Company anticipates that sales of Zephyr upgrades
in 1997 will be significantly lower compared to 1996.
COST OF SALES. Cost of sales increased to $41.8 million or 52% of sales in
1996 compared to $31.3 million or 50% of sales in 1995.
Page 27
Product cost of sales as a percentage of product sales increased to 47% in
1996 compared to 44% in 1995. The increase in 1996 was primarily the result
of the stronger dollar in 1996, as compared to 1995; greater discounting of
European SLA system sales in 1996 due to competition; and increased
manufacturing expenses as a result of the Company's new and larger
manufacturing facility in Grand Junction, Colorado. The Company's gross
profit margins on product sales are affected by several factors including,
among others, sales mix, distribution channels and fluctuations in foreign
currency exchange rates and, therefore, may vary in future periods from those
experienced during 1996. Additionally, the Company anticipates that the
gross margins related to the Actua 2100 system will be lower than margins on
its SLA systems, and, if revenues from the sales of Actua 2100 represent a
material portion of the Company's product sales, gross margins from product
sales would be reduced. The Company also anticipates that gross margins
related to the Actua 2100 will be lower during the initial phases of
production as a result of certain inefficiencies and anticipates, in the
event of increased production, that Actua 2100 gross margins could increase
as a result of lower per unit material costs (due to greater purchasing
economies) and increased manufacturing efficiencies. Additionally, the
Company anticipates that gross margins relating to the SLA 250 may be lower
than historical margins due to the introduction in January 1997 of the
SLA-250 Series 30A (an entry level SLA priced at $99,000 with a lower profit
margin than other SLA systems) and the approximately 20% price reduction of
the SLA-250 Series 40 and Series 50 effected by the Company in January 1997.
Service cost of sales as a percentage of service sales increased to 64% in
1996 compared to 63% in 1995, primarily as a result of lower margins from the
Company's U.S. Technology Center due to the Technology Center's testing of
both new hardware and software products as well as the increased use of
outside vendors for certain rapid prototyping applications in 1996. The
decreased margins from the U.S. Technology Centers were partially offset,
however, by improved margins from field service operations due to the more
profitable Zephyr upgrades delivered in 1996 compared to those upgrades
offered in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("S,G&A") expenses increased $4.4 million or 22% in 1996
compared to 1995, primarily as a result of expanded sales and