SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
ý |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2001
|
o |
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 of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
|
|
26081
Avenue Hall |
||
|
(Address of principal executive offices and zip code) |
||
|
|
|
|
|
(661) 295-5600 |
||
|
(Registrant’s telephone number, including area code) |
||
|
|
|
|
|
Securities registered pursuant to Section 12(b) of the Act: |
||
|
|
|
|
|
None |
||
|
|
|
|
|
Securities registered pursuant to Section 12(g) of the Act: |
||
|
|
|
|
|
Common Stock, $.001 par value |
||
|
|
|
|
|
Preferred Stock Purchase Rights |
||
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
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. o
At February 28, 2002, there were outstanding 13,356,660 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 ($12.25 per share) of the Registrant’s Common Stock on the Nasdaq National Market on that date, was $83,359,743. 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 these persons that they are affiliates of Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant’s Proxy Statement with respect to its 2002 Annual Meeting of Stockholders, currently scheduled on May 14, 2002, are incorporated by reference into Part III of this Report.
Exhibit index is located on page 33.
3D SYSTEMS CORPORATION
Annual Report on Form 10-K for the
Year Ended December 31, 2001
1
Forward-Looking Statements
This Annual Report on Form 10-K, including “Cautionary Statements and Risk Factors” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results and the results of our consolidated subsidiaries to differ materially from those expressed or implied by these forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statement concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the difficulty of keeping expense growth at modest levels while increasing revenues and other risks that are described from time to time in our Securities and Exchange Commission reports, including but not limited to the items discussed in “Cautionary Statements and Risk Factors” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 in this report. We assume no obligation and do not intend to update these forward-looking statements.
General
We design, manufacture, market and support, on an international basis, solid imaging systems and related materials. Solid imaging systems are designed to rapidly produce 3-dimensional physical objects from digital data using computer aided design and manufacturing, or CAD/CAM, software utilities and related computer applications. We offer to customers solutions that meet their challenges to decrease the time it takes to design and produce their products. Our customer solutions include the following:
• Streamlining part making, prototyping and manufacturing processes
• Verifying product designs
• Creating functional parts
• Generating production-quality samples or final parts
• Direct manufacturing of end-use parts
• Creating tooling used to manufacture 50 to 10,000, or more end-use parts.
Our hardware products include SLA® systems, SLS® systems and ThermoJet® solid object printers. We produce, market and distribute consumable materials used in these systems. Our growing installed base of systems requires an ongoing supply of materials as well as service support. ThermoJet printers use proprietary materials developed, manufactured and sold exclusively by us. Our subsidiary, RPC, develops and produces liquid photopolymer materials for our SLA systems. Beginning April 22, 2002 we will sell our new Accuraä line of materials, including the RPC photopolymer materials for our SLA systems.
SLA systems use our proprietary stereolithography, or SL, technology, a solid imaging process that uses a laser beam to expose and solidify successive layers of a photosensitive liquid until the desired object is formed to precise specifications in epoxy or acrylic resin. SL-produced parts can be used for concept models, engineering prototypes, patterns and masters for molds, consumable tooling or short-run manufacturing of final product, among other applications. SL technology can provide users with significant product development time-savings, cost reductions and improved quality, compared to traditional modeling, tooling and pattern-making techniques. In addition, with appropriate material functionality, SL technology can produce durable parts that can be used for rapid manufacturing.
SLS systems are based on proprietary selective laser sintering, or LS, technology initially developed and patented by The University of Texas. The LS technology was further refined and patented by DTM Corporation. We acquired DTM on August 24, 2001 and now own these patents. We have an exclusive worldwide license from The University of Texas to practice LS under selected basic laser sintering patents owned by the University. This technology uses laser energy to melt and fuse, or sinter, powdered material to create a solid object. SLS systems are used to produce functional models for use in product development and design, and are increasingly used for the direct manufacture of small lot quantities of plastic or metal parts for use as final products by end-users in both the consumer and industrial markets. Use of our SLS systems can significantly reduce the time required for production from what otherwise could be months or weeks to days or, in some cases, hours.
2
ThermoJet solid object printers, which are about the size of office copiers, employ hot-melt ink jet technology to build 3-dimensional models in successive layers using our proprietary thermoplastic materials. Designers, engineers, and other users of CAD/CAM utilities can incorporate our printers into office networks as a shared resource, to rapidly produce models of products under development for design concept communication and validation. In addition, objects produced by our 3D printers can be used as patterns and molds and, when combined with other secondary processes, such as investment casting, can produce parts with representative end-use properties.
We provide, either directly or through our network of authorized distributors, a variety of processing materials and on-site maintenance services for all of our solid imaging products. Our customers include major corporations throughout the world in a broad range of industries including manufacturers of automotive, aerospace, computer, electronic, consumer, telecommunication, appliance, footwear, toy, power tool and medical products. We also sell to independent service bureaus that, for a fee, provide solid imaging services to their customers, and to government agencies and universities.
As of December 31, 2001, we held 301 patents related to solid imaging: 143 in the United States, 101 in Europe, 13 in Japan, and 44 in other foreign countries. We continue to develop new products and processes to expand the applications of solid imaging, and to develop improvements to our existing product lines.
Corporate Structure
We are a Delaware corporation, and are the sole shareholder of 3D Canada Company, a Nova Scotia unlimited liability company, which we refer to as 3D Canada, and RPC, Ltd., a Swiss corporation. We jointly own 3D Holdings, LLC with 3D Canada. 3D Holdings, LLC is the sole shareholder of 3D Systems, Inc., a California corporation, which we refer to as 3D Inc. 3D Inc directly, and through its direct and indirect subsidiaries, conducts substantially all of our business. 3D Inc’s direct subsidiaries include 3D Systems Europe Ltd., a United Kingdom company that we refer to as 3D Europe, which serves as the headquarters for the Company’s European operations.
Unless otherwise indicated, all references in this document to “the Company,” “we,” or “us” include 3D Systems Corporation, 3-D Systems Inc., its British Columbia predecessor, called 3-D Canada, 3D Canada and its predecessor, 3D Systems (Canada), Inc., RPC, Ltd. and 3D Inc and its subsidiaries.
Products and Services
Following is a description of our products and their current uses. Each product can be used as a stand-alone resource and, as we work to improve process, material functionality, build-to-build and machine-to-machine uniformity, we anticipate increasing sales of multiple types of solid imaging equipment into single location for Advanced Digital ManufacturingSM applications, which we refer to as ADM. ADM is expected to become a key enabling technology for the customization of design and manufacturing using additive fabrication techniques, also called mass customization. ADM will allow designers to reduce part count in the design process and to add custom features and complexity to designs not currently feasible with today’s manufacturing techniques thus reducing part costs and assembly time. By using multiple technologies from 3D Systems, existing designs can be manufactured without the costs and lead-time associated with hard tooling, and more complex designs will become easier to manufacture.
SLA Systems and Related Equipment. As of December 31, 2001, our SLA® product line includes four models: the Viper si2™ SLA system, the SLA 3500, the SLA 5000 and the SLA 7000 systems. These models vary in their capabilities including the resolution and accuracy of part building, the maximum size of objects that can be produced, object building speed, and system price.
SLA systems produce highly detailed 3-dimensional parts with fine surface quality. The parts are created through the use of an ultraviolet laser to convert liquid photosensitive polymers into solid cross-sections, layer by layer, until the desired objects are complete. SLA systems are capable of making multiple objects at the same time; however, each SLA system is limited in the size of the objects that it can make during a single build session. Therefore, an SLA system can make only scale models of very large objects or, alternatively, full-scale portions of large objects, which are then joined together. The Viper si2 system, for example, can create a model, section of a model or other object with maximum size of 10 inches x 10 inches x 10 inches (250 mm x 250 mm x 250 mm). On the other hand, the maximum size model, section or other object that can be created using the SLA 7000 system is 20 inches x 20 inches x 24 inches (500 mm x 500 mm x 600 mm).
SLA systems are installed in many of the largest manufacturing organizations in the world and are used in a wide variety of applications, varying from short production runs of end-use products, to producing automobile prototype parts, to creating
3
new designs for testing in consumer focus groups. SLA systems are generally designed to build communication models to enable users to share ideas and evaluate concepts; perform form, fit and function testing on working models; build master patterns for investment casting; or quickly produce parts for direct use in working models. In addition, our products have been customized to produce thousands of tools and end-use parts in ADM applications, including certain dental applications.
We also market PCA™ equipment, ultraviolet curing devices used in conjunction with SLA systems, which provide uniform long wave ultraviolet illumination. Upon completion of a typical object by an SLA system, a small amount of the resin remains uncured. Full curing, or hardening, requires an additional one to two hours of exposure to ultraviolet illumination, which can be accomplished most effectively through the use of our PCA devices. Approximately two-thirds of all SLA systems sold have been purchased with a PCA device. (Purchasers of multiple SLA units do not need a PCA device for each unit.)
SLS Systems and Related Equipment. SLS systems are primarily used to produce functional parts for use in product development and design. Objects produced by SLS systems are more durable and flexible, in the case of plastic parts, than those produced by SLA systems, but lack the fine detail and surface finish of an SL part. Functional models and prototypes are produced directly from powdered sintering materials, generally, either plastic or metal. SLS systems are also used to produce metal inserts for tooling and limited quantities of direct metal parts for custom applications, as well as to produce models and prototypes for testing actual product fit and form and ergonomic design and functionality. SLS systems are capable of making multiple objects at the same time; however, each is limited in the size of the objects that it can make during a single build session.
SLS systems are increasingly used for the direct manufacture of small lot quantities of plastic or metal parts for use as final products by end-users in both the consumer and industrial markets. Metal part production requires processing with an additional furnace step. SLS systems are used to create tools, molds or patterns that are an intermediate step in most manufacturing processes employed to manufacture low-volume/high-value end-use parts. The systems’ pattern production capability offer foundries the ability to automate the pattern-making step of traditional investment casting processes to manufacture metal parts. Parts cast from patterns produced with an SLS system are used in final product assemblies. Foundries also use our SLS systems to automate and accelerate the manufacture of sand molds and cores, which are used for sand casting of metal parts, primarily for use in automotive and heavy equipment applications.
ThermoJet Solid Object Printers. The ThermoJet printer is a network-ready system, about the size of an office copier, that uses a hot-melt ink jet technology to print models by accumulating material in successive layers using proprietary thermoplastic solid imaging materials, or SIM, and a print head with hundreds of jets oriented in a linear array. The print head scans back and forth, similar to desktop ink jet printers, depositing layer upon layer of material to form the physical model. The printers offer a part-building capacity of 10 inches x 7.8 inches x 8 inches (250 mm x 195 mm x 200 mm).
The ThermoJet printer creates concept models used for design reviews, form and fit checking, styling, ergonomics evaluation and CAD-model verification. Both technical and non-technical people more easily understand these communication tools than complex two-dimensional presentation drawings. Because SIM is substantially similar to investment casting waxes, ThermoJet printer models can be readily used in the foundry environment for the production of investment casting patterns.
Materials. We develop and manufacture the materials used by the ThermoJet printer, and we have jointly developed materials for SLA systems with Vantico. Under our distribution contract with Vantico, which will expire on April 22, 2002, we have been the exclusive worldwide distributor of Vantico photosensitive liquid resins for stereolithography. In September 2001 we acquired RPC, a Swiss developer and manufacturer of stereolithography materials that provides 16 resins to SL customers. Upon termination of the Vantico distribution contract, we will be free to sell these resins, under our Accura brand, to our worldwide (except Japan) SLA system customer base. Throughout the term of the Vantico distribution contract, most of our customers purchased materials from us at the time of initial purchase of equipment. We also have sold materials necessary for ongoing operation of the machines. We anticipate that we will continue to provide initial vat fills and refills of our new Accura SL materials to our customers after the termination of the Vantico contract; however, we do not know whether, or to what extent, customer’s will accept the Accura materials.
Our range of powdered materials for use in our SLS systems addresses a growing list of customer needs, many of which can be used in multiple applications. All of the sintering materials we currently sell can be used in all models of our SLS systems. We believe our LS process, in combination with the DuraForm™ material system is currently the world’s leading solid imaging technology used for functional plastic and nylon prototype applications. LaserForm™ ST 100 material, our third-generation metal powder system is used for creation of prototype tooling and to make metal functional parts.
4
Software. We develop part preparation software for personal computers and engineering workstations that is designed to enhance the interface between digital data and our solid imaging products. Digital data, such as solid CAD/CAM, is converted within the software utility; then, depending on the specific software package, the object can be viewed, rotated, scaled, and model structures added. The software then generates the information that will be used by the SLS system, SLA system or ThermoJet printer for creation of the solid images. In addition, we work with outside companies, where appropriate, to develop software for our systems. For example, we have recently entered into a development agreement with Raindrop Geomagic for custom manufacturing opportunities.
QuickCast™ Technology. Our QuickCast build style consists of a special process for making precision investment casting patterns using SL technology. The QuickCast process uses our SLA systems to produce foundry-useable mold patterns suitable for limited-run investment casting. While not cost-competitive for high-capacity manufacturing, the ability to rapidly produce prototypes and short–run production quantities of fully functional complex metal parts, in a wide variety of metals, is a major technological advantage of SL. All of the SLA systems we sell include the software capability to use the QuickCast process.
Maintenance. All of the SLS and SLA systems we sell include on-site hardware and software maintenance service, during a warranty period (typically one year) at no additional charge. All ThermoJet printers include at least a 90-day warranty period at no additional charge. After the warranty period, we offer customers optional maintenance contracts, which are available on a monthly and annual basis. Approximately three-quarters of the services we provide are for post-warranty maintenance contracts. Although purchasers are not required to enter into maintenance contracts with us, a majority of our United States, Asia Pacific and European SLA and SLS system customers are parties to these contracts, and many others obtain our maintenance services on a time and materials basis. Our overseas distributors offer maintenance contracts to customers acquiring systems from them. As of December 31, 2001, we had a staff of 134 full-time employees who provide on-site remedial and preventive maintenance services necessary to maintain the equipment in good operating condition. To date, warranty expenses and product returns have not been significant.
Technology Centers. We provide services from our Technology Centers at our Valencia, California headquarters, at our European headquarters near London, England, at our Austin, Texas facility and at our office located near Frankfurt, Germany. The Technology Centers produce models, prototypes, mold patterns and other parts for customers at prices that vary based on the nature of the services requested. The Technology Centers also focus their efforts on the development of new applications and techniques and customer benchmarking, and also enable us to keep abreast of developments and serve as a means to introduce prospective buyers to our technology
3D KeltoolÒ Process. We license the 3D Keltool process, which uses master patterns to produce steel tool core and cavity inserts for use in plastic injection molding machines.
Recent Product Introductions. In order to improve and expand the capabilities of our systems and related software and materials, as well as to enhance our portfolio of proprietary intellectual properties, we have historically devoted a significant portion of our resources to research and development activities. Recent product introductions include:
• Vanguard si2 SLS system. Vanguard and Vanguard HS (High Speed) are the first SLS systems developed specifically for advanced manufacturing applications. The Vanguard system allows customers to move directly from a CAD file to a durable, functional plastic or metal part or tool in a fraction of the time required for traditional machining and tooling processes. The Vanguard system can quickly generate small runs of production parts and produces large volumes of parts with maximum efficiency. It creates accurate, complex parts, casting patterns, and tools with features as small as 0.5 mm (.02 inch), and its benefits include high part accuracy, fast build speed and unattended operations.
• Viper si2 SLA system. The Viper si2 SLA system is our first solid imaging system to combine standard and high-resolution part building in the same system. Standard part building gives customers the best balance between build speed and part resolution. High resolution (HR) mode is for ultra-detailed small parts and features. The system features a carefully integrated digital signal processor (DSP) controlled high speed scanning system with a single, solid-state laser that delivers 100 mW of available power.
• Software. The Viper si2 system comes fully equipped with upgraded versions of 3D Lightyear™ part preparation and Buildstation™ control software.
Research and Development
Our ability to compete successfully depends, among other things, on our ability to design and develop new machines, materials and applications, and to refine existing products. We believe that our future growth will depend on new materials, as well as improved part accuracy and processing speed. Our development efforts are augmented by
5
development arrangements with research institutions, key customers, materials suppliers and hardware suppliers. For the foreseeable future, we anticipate that our research and development efforts will be focused on material functionality and system design improvements, and developing software to facilitate the interface between our solid imaging systems and digital data from CAD solid programs, scanners, CRTs and other peripheral equipment. We have dedicated a significant amount of time to the development of new materials for all systems. In September 2001, with the acquisition of RPC, we expanded our SL materials’ research capabilities. Over 100 employees or contractors were devoting substantially all of their time to research and development activities.
In August 2001 we gave notice to Vantico that our joint development agreement for SL materials would terminate in February 2002. On August 17, 2001, Vantico filed a claim with the International Chamber of Commerce International Court of Arbitration requesting a declaration of the parties’ rights under the Agreement. On September 4, 2001, we filed a counterclaim requesting that Vantico be enjoined from impermissibly using our confidential information, shared with Vantico during the 13-year duration of the development agreement. On March 19, 2002 we settled this dispute, and Vantico has agreed to pay us $22 million, in cash or through transfer of 1.55 million shares of our stock, by April 22, 2002. The development agreement will terminate on that date.
In February 2001, we acquired the stock and intellectual property of OptoForm SARL, a start-up company that has developed solid imaging machines that are capable of using paste-like materials. We refer to this technology as DCM (Direct Composite Manufacturing). The purchase of OptoForm SARL provided us with independently-developed hardware, processing techniques, and materials that enhance our ability to offer complete solutions for short-to-medium run direct manufacturing and rapid tooling applications. In December 2001, we entered into a joint marketing venture with DSM Desotech, a producer and developer of materials, to develop and exploit the benefits of this new technology. The name of the venture is OptoForm LLC.
We believe that further refinements in inkjet/multijet modeling, or MJM, technology will come as a result of investment in the areas of material development, solid imaging processes and the printing mechanism. We believe synthetic specialty chemicals will allow future SIM formulations to demonstrate significant improvement in the material durability and other mechanical properties, and that investment in the solid imaging build processes will result in improvements in the quality of the model output from the build process. We believe these improvements will include faster model build times, higher resolution and smaller layer steps, more accurate geometry representation and smoother and more uniform surface finish on all surfaces of the finished model. In 2001, we continued our research into new MJM materials and processes, devoting a large portion of the year to the development of improved materials directed at addressing the top customer-identified requirements, including part durability, down-facing surface quality and post-processing effort. By combining our knowledge of both MJM and SL material technology, we anticipate that, when commercialized, the new materials and delivery system will more appropriately meet the needs of the design communication, office and rapid prototyping markets.
Marketing and Customers
Our sales and marketing strategy focuses on a wide range of customer needs, including traditional model, mold and prototyping, office uses and advanced digital manufacturing. Our internal sales organization is responsible for overseeing worldwide sales and value-added resellers, and our knowledgeable international distributors provide sales and support services in areas remote from our sales offices. Our direct sales force consists of sales persons based in offices in California and Michigan; in our European offices located near Frankfurt, London, Paris, Barcelona, Milan and Marly, Switzerland, and in our Hong Kong and Japan offices, which serve the Pacific Rim region. An internal staff of application specialists is a key part of the marketing organization effort to provide pre-sales support and to help existing customers take advantage of the latest materials and techniques to improve part quality and machine productivity. This group also leverages its customer contacts to help identify new application opportunities that utilize our proprietary processes.
Our marketing programs utilize a combination of seminars, trade shows, advertising, direct mailings, literature, web presence, videos, press releases, brochures and customer and application profiles to identify prospects that match a typical user profile. At December 31, 2001, our worldwide sales and support staff consisted of 117 employees that are primarily located in the United States and Europe.
International Sales. International sales, the majority of which are in Europe and Asia, accounted for 48.7%, 46.1% and 47.5% of total sales in the years ended December 31, 2001, 2000 and 1999, respectively. (See Note 15 in the “Notes to Consolidated Financial Statements”).
Customers. Our customers include major companies in a broad range of industries throughout the world, including manufacturers of automotive, aerospace, computer, electronic, consumer and medical products. Purchasers of our systems include original equipment manufacturers, or OEMs, such as AMP, Inc., Apple Computer, Inc., Audi AG, Benetton F1,
6
Boeing Company, BMW Group, Canstar Sports, Inc., DaimlerChrysler Corp., Eastman Kodak Company, The Electrolux Group, General Electric Company, General Motors Corporation, Delphi Automotive Systems, Hasbro, Inc., Jordan Grand Prix, International Business Machines Corporation, Johnson & Johnson, Motorola, Inc., Navistar International Corporation, Nike, Inc., Pratt & Whitney, Raytheon Company and Texas Instruments, Inc. We also sell our products to government agencies and universities, which generally use our machines for research activities, and to independent service bureaus, including Arrk Creative Network, the largest rapid prototype manufacturer in the world, General Pattern, Moehler Design and INCS, Inc., which for a fee provide solid imaging services to their customers. Our primary ADM customer is Align Technology, Inc.
We do not consider ourselves dependent on any particular customer. In 2001, 2000 and 1999, no customer represented 10% or more of our revenues.
Photopolymer Distribution Agreement. Pursuant to an agreement with Vantico, we have been the exclusive worldwide distributor (except Japan) to users of SL processes of all Vantico liquid SL photopolymers. This agreement will terminate on April 22, 2002, and, subject to certain conditions, as long as Vantico provides adequate supplies, we are required to purchase all of our liquid photopolymers for distribution to customers from Vantico until that date.
Customer Support and Service. Before installation of an SLA or SLS system, a new purchaser generally receives training at our facilities. During the first several days after installation, an applications engineer remains at the customer location to ensure that the customer is able to operate the system effectively and to answer any questions that may arise. We also make available to our customers, for a fee, additional training courses in system features and applications.
No training is necessary in connection with the purchase of a ThermoJet printer.
We offer maintenance contracts to our customers, which generate recurring revenue. We also make available, in the United States, a hotline to all of our users with maintenance contracts. The hotline is staffed with technical representatives who answer questions and arrange for on-site remedial services if necessary. The hotline is available Monday through Friday, local holidays excepted, 5:00 a.m. to 5:00 p.m. Pacific time. In addition, customer service, troubleshooting and answers to frequently asked questions, or FAQs, are available through our website, www.3dsystems.com. Customers may also reach us through e-mail, 24 hours a day. Customers may access information regarding RPC materials, through RPC’s website at www.rpc.ch.
We co-founded and participate in Global User Groups, which include a substantial number of our customers. The User Groups organize annual conferences in the United States, at which we make presentations relating to updates in stereolithography and laser sintering, changes we have implemented in our systems and related equipment, materials and software and future ideas and programs we intend to pursue in the upcoming years.
Production and Supplies
All of our systems are assembled and SIM is produced at our 67,000 square foot facility in Grand Junction, Colorado. RPC produces stereolithography materials at our facility in Marly, Switzerland. We purchase the major component parts for our systems and materials for SIM and resin from outside sources and arrange with contract manufacturers for the manufacture of subassemblies. We integrate the subassemblies and effect final assembly and test of all systems at our production facility. We perform numerous diagnostic tests and quality control procedures on each system to assure its operability and reliability.
Although there is more than one potential supplier for many material components parts, subassemblies and materials, several of the critical components, materials, and subassemblies, including lasers, materials, and certain ink jet components, are currently provided by a single or limited sources. Liquid resins for SLA systems are currently supplied almost exclusively by Vantico under the distribution agreement, described above, which will terminate on April 22, 2002.
Competition and Patent Rights
Our principal competitors are companies that manufacture machines that make models, prototypes, molds and small volume manufacturing parts, which include: suppliers of automated machining, or CNC, and rotational molding equipment; suppliers of traditional machining, milling and grinding equipment; suppliers of ink jet systems and FDM technology; Parts-in-Minutes and makers of vacuum casting silicon molding equipment; and manufacturers of other SL and LS systems. These suppliers are numerous, both international and regional in scope, and many have well-recognized product lines that compete with us in essentially all of our served and targeted customer areas. Conventional machining
7
and milling techniques continue to be the most common methods by which plastic and metal parts, models, functional prototypes and metal tool inserts are manufactured. Conventional pattern manufacturing techniques continue to be the most common methods to custom manufacture parts and by which patterns are made for use in investment casting.
We believe there are no products that use operating technologies like our SLA or SLS systems currently being sold in significant quantities in the United States; however, products similar to our SLA systems are manufactured and sold by other companies in the Pacific Rim, and products similar to our SLS systems are manufactured and sold by other companies in Europe and the Pacific Rim. In addition, we will soon face competition with respect to such technologies in the U.S., Canada and Mexico because we are required, under the terms of our agreement with the U.S. Department of Justice, to license a competitor to sell either SL or LS systems in North America.
We believe that other companies may announce plans to enter our business area either with equipment similar to ours, or with other types of equipment.
We believe that currently available alternatives to SL generally are not able to produce models having the dimensional accuracy and fine surface finish of models provided by our SL process. However, non-SL competitors have successfully marketed their products to our existing and potential customers. Furthermore, in many cases, the existence of these competitors extends the purchasing time while customers investigate alternative systems. We compete primarily on the basis of the quality of our products and the advanced state of our technology. We believe that LS has become established as a leading operating technology for the production of functional plastic prototypes and that we have the largest installed base of LS machines in the world.
Although we do not rely totally on our patents to compete, we believe that our patents will continue to help us maintain a leading position in the SL and LS fields.
A number of companies, including DSM Desotech Inc., are currently selling SL resins, which either complement or compete with those we sell. In addition, upon termination of our distribution agreement with Vantico, Vantico will sell its resins in competition with us. We believe that we currently supply resins to owners of a majority of the SLA systems currently installed worldwide; however, the number of customers we will retain upon termination of the distribution agreement is uncertain.
We do not have the level of patent protection for the solid object printers that we have for our SL and LS technology; however, during 1999 we acquired two patents for dot-on-dot printing technology from Dataproducts Corporation in order to help us maintain our position in this field.
We believe that we do not currently have any significant competition for our maintenance services, although certain of our customers perform their own maintenance in-house and some use other providers of service contracts and time and materials arrangements.
Future competition is expected to arise both from the development of new technologies or techniques not encompassed by the patents held by or licensed to us, and through improvements to existing technologies, such as automated (CNC) machining and rotational molding. We have determined to follow a strategy of continuing product development and aggressive patent prosecution to protect ourselves to the extent possible in these areas.
Proprietary Protection
Charles W. Hull, the Company’s founder and Chief Technology Officer, developed the stereolithography technology used in our SLA products, while employed by UVP, Inc. This technology was originally patented by UVP, Inc. and subsequently licensed to us in 1986. We acquired the patent in 1990.
Researchers at The University of Texas initially developed the selective laser sintering technology commercialized by DTM. The first selective laser-sintering patent was issued to The University of Texas in 1989. Currently, we have exclusive rights to 15 U.S. patents issued to The University of Texas. Two of the original University of Texas patents expire in 2006 while others run until 2014. Patents granted on improvements to the original patent as well as new patents that we have obtained extend some protections to at least 2010. Our exclusive worldwide license from The University of Texas to use the selective laser sintering technology continues until expiration of the patent rights that are the subject of the license.
We developed the thermoplastic material used in and the application of ink jet technology to solid imaging. During 1999, we acquired two patents from Dataproducts Corporation for dot-on-dot printing technology in order to increase our patent protection in the MJM area.
8
In connection with the acquisition of OptoForm in February 2001, we acquired technology, know-how and patent rights, which have remaining lives of over 15 years, related to a technology using composites in direct manufacturing. The acquired U.S. and foreign patent rights protect the basic recoating mechanism and materials used in the direct composite manufacturing process.
At December 31, 2001, we had 301 patents which include 143 in the United States, 101 in Europe, 13 in Japan and 44 in other foreign countries. At that date, we also had 159 pending patent applications: 33 in the United States, 76 in the Pacific Rim, 43 in Europe and 7 in Canada. As new developments and components to the technology are discovered, we intend to apply for additional patents.
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.
Employees
At December 31, 2001, we had 580 full-time employees. In addition, at that same date we utilized the services of 33 independent contractors. None of these employees or independent contractors is covered by labor agreements. We consider our relations with our employees and independent contractors to be satisfactory.
Our principal administrative functions, sales and marketing, product development, Technology Center and training facilities are located in a 78,320 square foot building in Valencia, California under a lease that expires on December 31, 2002. We are currently investigating and analyzing our options for replacing, renewing and/or augmenting this space.
We also lease sales and service offices in Michigan. The space leased for sales and service offices is generally for one or two occupants and for terms of a year or less. Sales and service offices are also located in five countries in the European Community (France, Spain, Germany, the United Kingdom and Italy) and in Japan, Hong Kong and Singapore.
Substantially all of our manufacturing and United States customer support operations are located in a 67,000 square foot facility located in Grand Junction, Colorado. The construction cost of the Colorado facility has been financed through a $4.9 million industrial development bond. We also currently lease a 50,000-square foot facility in Austin, Texas consisting of two buildings. One of the buildings is primarily devoted to research and development related to our SLS line of products. Although we do not currently need the other building, we are required to maintain it until we reach final agreement with the Department of Justice regarding a licensee of our patents.
We believe that the facilities described above will be adequate to meet our needs for the immediate future.
United States v. 3D Systems Corporation and DTM Corporation. The United States Department of Justice, or DOJ, filed a complaint on June 6, 2001 challenging our acquisition of DTM. Under a settlement agreement with the DOJ relating to our merger with DTM, we must license our patents for use in either the manufacture and sale of SL or LS products, but not both, in North America. We refer to this settlement agreement as the Final Judgment. The Final Judgment requires that, by five days after we receive notice that the court has entered the Final Judgment, we must have completed the license to a company that currently manufactures either stereolithography or laser sintering machines, subject to the approval of the DOJ. The court has not yet entered the Final Judgment. On February 15, 2002, we executed a license agreement under the terms of the Final Judgment. We cannot complete this license until it is approved. The DOJ is currently reviewing the terms of the proposed license agreement and our proposed licensee.
Vantico International S.A. and Vantico, Inc v. 3D Systems, Inc. On August 19, 2001, we gave a six-month notice of termination of our Resin Development Agreement with Vantico. On August 17, 2001, Vantico filed a claim with the International Chamber of Commerce International Court of Arbitration requesting a declaration of the parties’ rights under the Agreement. On September 4, 2001, we filed a counterclaim requesting that Vantico be enjoined from impermissibly using our confidential information, shared with Vantico during the 13-year duration of the Resin Development Agreement. On March 19, 2002, we settled this dispute under an agreement that requires Vantico to pay
9
us either $22 million in cash; or through transfer of 1.55 million shares of our stock. The effective termination dates for both the Resin Development Agreement and our distribution agreement with Vantico will be no later than April 22, 2002.
3D Systems, Inc. v. Aaroflex, et al. On January 13, 1997, we filed a complaint in federal court in California, against Aarotech Laboratories, Inc., Aaroflex, Inc. and Albert C. Young. Aaroflex is the parent corporation of Aarotech. Young is the Chairman of the Board and Chief Executive Officer of both Aarotech and Aaroflex. The original complaint alleged that stereolithography equipment manufactured by Aaroflex infringes six of our patents. In August 2000, two additional patents were added to the complaint. We seek damages and injunctive relief from the defendants, who have threatened to sue us for trade libel. To date, the defendants have not filed such a suit.
Following decisions by the District Court and the Federal Circuit Court of Appeals on jurisdictional issues, Aarotech and Mr. Young were dismissed from the suit, and an action against Aaroflex is proceeding in the District Court. Motions for summary judgment by Aaroflex on multiple counts contained in our complaint and on Aaroflex’s counterclaims have been dismissed and fact discovery in the case has been completed. Our motions for summary judgment for patent infringement and validity and Aaroflex’s motion for patent invalidity were heard on May 10, 2001. In February 2002, the court denied Aaroflex’s invalidity motions. Decisions on our motions are still pending. Trial was originally scheduled to occur in 2001. No new trial date has been set.
3D Systems, Inc. v. Teijin Seiki Co. Ltd. On March 21, 1997, we filed a patent infringement action in the District Court in Osaka, Japan under one of our Japanese patents, alleging infringement, and seeking damages from the defendant and injunctive relief. As described below, Teijin Seiki filed an invalidation action against the patent, and we unsuccessfully appealed an unfavorable decision in that action. As a result, the infringement lawsuit has been dismissed.
Patent Opposition and Invalidation Proceedings. We had been granted fourteen patents in Japan. An opposition was submitted against one of these patents, but the opposition was dismissed, and the patent has been maintained as originally issued. Another of the patents has been revoked after invalidation proceedings.
DTM vs. EOS, et al. The plastic sintering patent infringement actions against EOS began in France, Germany, and Italy in 1996. Legal actions in France, Germany, and Italy are proceeding. EOS had challenged the validity of two patents related to thermal control of the powder bed in the European Patent Office, or EPO. Both of those patents survived the opposition proceedings after the original claims were modified. One patent was successfully challenged in an appeal proceeding and in January 2002, the claims were invalidated. The other patent successfully withstood the appeal process and the infringement hearings were re-started. In October 2001, a German district court ruled the patent was not infringed, and this decision is being appealed. In November 2001, we received a decision of a French court that the French patent was valid and infringed by the EOS product sold at the time of the filing of the action and an injunction was granted against future sales of the product. Extension of this decision and the injunction to future EOS products incorporating the same thermal control features is possible and contemplated. In February 2002, we received a decision from an Italian court that the invalidation trial initiated by EOS was unsuccessful and the Italian patent was held valid. The infringement action in a separate Italian court has now been recommenced and a decision is expected based on the evidence that has been submitted.
In 1997, DTM initiated action against Hitachi Zosen Joho Systems, the EOS distributor in Japan. In May 1998, EOS initiated two invalidation trials in the Japanese Patent Office attempting to have DTM’s patent invalidated on two separate bases. The Japanese Patent Office ruled in DTM’s favor in both trials in July 1998, effectively ruling that DTM’s patent was valid. In September 1999, the Tokyo District Court then ruled in DTM’s favor and granted a preliminary injunction prohibiting further importation and selling of the infringing plastic sintering EOS machine. In connection with this preliminary injunction, DTM was required to place 20 million yen, which is approximately $200,000, on deposit with the court towards potential damages that Hitachi might claim should the injunction be reversed. Based on the Tokyo District Court’s ruling EOS then filed an appeal in the Tokyo High Court to have the rulings of the Japanese Patent Office revoked. On March 6, 2001, the Tokyo High Court ruled in EOS’s favor that the rulings of the Japanese Patent Office were in error. This ruling was unsuccessfully appealed by DTM to the Tokyo Supreme Court. Options to file a corrective action to receive amended patent claims are currently being pursued.
EOS vs. DTM and 3D Systems, Inc. In December 2000, EOS filed a patent infringement suit against DTM in federal court in California. EOS alleges that DTM has infringed and continues to infringe certain U.S. patents that we license to EOS. EOS has estimated its damages to be approximately $27 million for the period from the fourth quarter of 1997 through 2002. In April 2001, consistent with an order issued by the federal court in this matter, we were added as a plaintiff to the lawsuit. We were substituted on October 17, 2001 as a defendant in this action because DTM’s corporate existence terminated when it merged into our subsidiary, 3D Inc on August 31, 2001. In February 2002, the court granted us summary adjudication on our motion that any potential liability for patent infringement terminated with the merger of DTM into 3D Inc, ruling that 3D Inc had the right to enter the laser sintering business. Concurrently, the court denied as futile EOS’s motion for a fourth amended complaint to add counts related to EOS’s claim that we are not permitted to
10
compete in the field of laser sintering under the terms of the 1997 Patent License Agreement between 3D Inc and EOS. We have filed a motion for summary adjudication that EOS is not licensed under the 1997 License Agreement to the patent rights we acquired when 3D Inc and DTM merged. These proceedings are in the discovery stage and a trial date has been set for August 2003.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote by security holders during the fourth quarter of fiscal 2001.
Item 4a. Executive Officers of the Registrant
The following table sets forth certain information concerning the executive officers of the Company:
|
Name |