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UNITED STATES
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, 2002
[_] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
26081 Avenue Hall
Valencia, California 91355
(Address of principal executive offices and zip code)
(661) 295-5600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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 [_] No [X]
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 Form 10-K or any amendment to this
Form 10-K. Yes [_] No [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
At June 28, 2002, there were outstanding 12,863,396 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 ($12.20 per share) of
the Registrant's Common Stock on the NASDAQ National Market on that date, was
$107,335,893. 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 an admission by these persons
that they are affiliates of Registrant.
At June 13, 2003, there were outstanding 12,734,301 shares of the Common Stock
of Registrant.
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1
3D SYSTEMS CORPORATION
Annual Report on Form 10-K for the
Year Ended December 31, 2002
PART I ............................................................................................................ 3
Item 1. Business ................................................................................................... 3
Item 2. Properties ................................................................................................. 11
Item 3. Legal Proceedings .......................................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ........................................................ 13
PART II ............................................................................................................ 13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................................... 13
Item 6. Selected Financial Data .................................................................................... 15
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ...................... 16
Item 7a. Quantitative and Qualitative Disclosures about Market Risk ................................................. 36
Item 8. Financial Statements and Supplementary Data ................................................................ 37
PART III ............................................................................................................ 38
Item 10. Directors and Executive Officers of the Registrant ......................................................... 38
Item 11. Executive Compensation ..................................................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............. 44
Item 13. Certain Relationships and Related Transactions ............................................................. 47
Item 14. Controls and Procedures .................................................................................... 49
Item 15. Principal Accountant Fees and Services ..................................................................... 50
PART IV ............................................................................................................ 51
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................................... 51
2
PART I
Forward-Looking Statements
This filing, 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.
Item 1. Business
Our consolidated financial statements for the year ended December 31, 2001 and
2000, as filed with the Commission on March 27, 2002, have been restated.
Accordingly, all financial data in this Report reflects the effects of the
restatements. See Note 24 to our Consolidated Financial Statements for a
description of the restatement.
General
We design, develop, 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.
Used worldwide to generate product concept models, functional prototypes, master
patterns for tooling and end-use production parts for direct and indirect
manufacturing, our solid imaging technologies change the way people design,
develop and manufacture products. The systems utilize patented
stereolithography, selective laser sintering, direct composite manufacturing and
3-D printing processes to fabricate physical objects using input from CAD/CAM
software, or 3-D scanning and sculpting devices.
Our customers use our solid imaging systems and solutions to:
. Streamline part making, prototyping and manufacturing processes
. Verify product designs
. Create functional parts
. Generate production-quality samples or final parts
. Direct manufacture end-use parts
. Create tooling used to manufacture end-use parts.
We expect our Advanced Digital Manufacturing (ADM(SM)) solutions to become a key
enabling technology for the customization of design and manufacturing using
additive fabrication techniques, also called mass customization or rapid
manufacturing. 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 offered by us, existing designs
can be manufactured without the costs and lead-time associated with hard
tooling, and more complex designs will become easier to manufacture.
An integrated package combining hardware, software, materials and process gives
us one of the widest ranges of solid imaging solutions in the world. Our
comprehensive range of products includes; the MJM (multi-jet modeling) product
line, the SLA(R) (stereolithography apparatus) product line, the SLS(R)
(selective laser sintering) product line, the DCM (direct composite
manufacturing) product line, and the Accura(R) material line, which provides a
broad range of prototype and manufacturing materials utilized by our MJM, SLA
and SLS systems.
We produce, market and distribute consumable materials used in all solid imaging
systems we offer. Our growing installed base of systems requires an ongoing
supply of materials as well as service support and provides us with an ongoing
revenue stream. In April 2002, we introduced our Accura family of materials for
use in our solid imaging systems. Since the introduction of our Accura
materials, we have introduced and continue to engage in research regarding
materials for our SLA and SLS systems.
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Our MJM systems use proprietary materials developed, manufactured and sold
exclusively by us. Of our MJM systems we currently offer the ThermoJet(R) solid
object printer. ThermoJet printers are about the size of office copiers and
employ hot-melt ink jet technology to build three-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 ThermoJet 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.
SLA systems use our proprietary stereolithography, ("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 products, among other
applications. SL technology provides 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 ADM solutions.
SLS systems are based on our proprietary selective laser sintering, or SLS(TM),
process initially developed and patented by The University of Texas. The SLS(TM)
process was further refined and patented by DTM Corporation. We acquired DTM on
August 24, 2001 and now own these DTM patents. We also have an exclusive
worldwide license from The University of Texas to practice SLS process under
selected laser sintering patents owned by The University of Texas. 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.
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, medical and dental 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, 2002, we held 359 patents related to solid imaging: 152 in
the United States, 146 in Europe, 17 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
Unless otherwise indicated, all references in this document to "the Company,"
"we," or "us" include 3D Systems Corporation, and its direct and indirect wholly
owned subsidiaries.
We were incorporated in Delaware in 1993, 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.
Products and Services
The 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 ADM applications.
Solid Imaging Systems
. MJM Systems. The ThermoJet solid object printer is the second generation
of multi-jet modeling systems to be offered by us. 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,
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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.
We introduced our third generation of multi-jet modeling solutions, the
InVision(TM) 3-D printer, in July 2002 at the international trade show SIGGRAPH.
The InVision 3-D printer is a network-ready system, about the size of an office
copier that combines proprietary photocurable hot melt materials with the ease
of ink-jet printing. The InVision 3-D printer has not been released commercially
into the market. Throughout 2002, we continued to research and develop the
InVision 3-D printer. We have begun, and expect to complete, design validation
testing, beta testing and market research, with respect to the InVision 3-D
printer, in 2003.
. SLA(R) Systems and Related Equipment. As of December 31, 2002, our
SLA product line includes three models: the Viper si2(TM) SLA system, the SLA
5000 system and the SLA 7000 system. 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 scale models of very large objects or, alternatively,
full-scale portions of large objects, which are then joined together. The Viper
SLA 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 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, hearing aid, jewelry and motorsport applications.
We also market PCA(TM) 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 systems may use the same PCA device for each
system.
. SLS(R) 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, nylon 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, form, 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 maximum size of 14.5 inches x 12.5 inches x 17.5
inches (370 mm x 320 mm x 445 mm).
SLS systems are increasingly used for the direct digital manufacture of
small lot quantities of plastic, nylon 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 also 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.
5
We market the SLS system to customers and prospects requiring direct
digital manufacturing solutions. Currently the SLS system is being utilized in
advanced digital manufacturing companies in the hearing aid industry and the
aerospace industry to produce mass production, customized end-use parts, such as
in-the-ear hearing aids and air ducts for non-commercial planes.
. DCM System. Our Direct Composite Manufacturing line consists of the
OptoForm(TM) system. The OptoForm system is an advanced digital manufacturing
system, which combines the precision of stereolithography with dense materials
comprising both a photosensitive epoxy polymer and a range of reinforcing
fillers including thermoplastics, metals, and ceramics, or a combination of
these paste materials. Similar to the techniques of the SLA and SLS systems the
OptoForm system spreads a layer of paste material across the platform. Parts are
created through the use of an ultraviolet laser to convert the paste into solid
cross-sections, layer by layer, until the desired objects are complete. The
OptoForm system offers a part-building capacity of 20 inches x 12.5 inches x 20
inches (500mm x 330mm x 500mm) which is limited by the weight of the material.
In December of 2001, we formed OptoForm LLC (a Delaware limited
liability company) a joint-venture with DSM Somos, one of our resin suppliers,
to focus on the development and commercialization of equipment and materials for
the OptoForm system. As of March 28, 2003, we have placed five OptoForm
engineering evaluation machines at customer locations to facilitate continued
technical development of materials, hardware and software.
Materials
. Accura(R) Materials. We develop, manufacture, sell and distribute
proprietary materials used by the ThermoJet printer, InVision 3-D printer, SLA
and SLS systems. Under our distribution contract with Vantico, Inc., which
expired on April 22, 2002, we were the exclusive worldwide distributor of
Vantico photosensitive liquid resins for stereolithography. In September 2001 we
acquired RPC Ltd., a Swiss developer and manufacturer of stereolithography
materials. Upon termination of the Vantico distribution contract, we began to
sell our SL materials, under our Accura brand, to our worldwide (except Japan)
SLA system customer base. Throughout the term of the Vantico distribution
contract, the majority of our customers purchased materials from us upon the
initial purchase of equipment. We also sold materials necessary for ongoing
operation of the machines. We continue to provide initial vat fills and refills
of our new Accura SL materials to our customers, and service what we believe is
approximately one third of the SLA system customer base.
Our range of LS powdered materials used in our SLS systems, many of
which can be used in multiple applications, addresses a growing list of customer
needs. We believe our SLS process, in combination with the DuraForm(TM) material
system is currently the world's leading solid imaging technology used for
functional plastic and nylon prototype applications. LaserForm(TM) ST-200
material, the fourth-generation metal powder developed for the SLS system is
used for creation of prototype tooling and to make metal functional parts.
Software
. General. We develop part preparation software for personal computers
and engineering workstations designed to enhance the interface between digital
data and our solid imaging systems. 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 to be used by the SLS system, SLA
system, OptoForm or MJM system to create the solid images. In addition, we work
with outside companies, where appropriate, to develop software for our systems.
. QuickCast(TM) 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
for the QuickCast process.
Services
. Maintenance. All of the SLS and SLA systems are bundled with on-site
hardware and software maintenance service, during a warranty period (typically
one year). All ThermoJet printers are bundled with at least a 90-day warranty
period. After the warranty period, we offer customers optional maintenance
contracts, 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 post warranty maintenance contracts,
the majority of our United States, Asia Pacific and European SLA and SLS system
customers are parties to these contracts, and other customers obtain our
maintenance services on a time and materials basis. Our overseas distributors
also offer maintenance contracts to customers acquiring systems from them. As of
December 31, 2002, we had a staff of 127 full-time employees providing on-site
remedial and preventive maintenance services necessary to maintain our
customers' equipment in good operating condition.
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. Technology Centers. We provide services from our Technology Centers at
our Valencia, California headquarters, at our European headquarters near London,
England, at our offices in Japan 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.
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:
[X] Accura(R) SL materials: accuGen(TM). accuGen 100 material
combines accuracy, and green strength to maximize part
building productivity. accuGen 100 material is ideal for
prototype parts, master patterns, RTV (Room Temperature
Vulcanization) mold inserts and flow testing.
[X] Accura(R) SL material: accuDur(TM). accuDur 100 material
combines industry-standard durability with flexibility, high
accuracy and improved build speeds. accuDur 100 material is
a robust, flexible and durable material, ideal for building
parts for snap-fit testing, or any other application where
durability is required.
[X] Accura(R) SI 10 material. Accura SI 10 material is a
superior general purpose material offering an exceptional
combination of long vat life and accuracy in part building
resulting from its high green strength, humidity resistance
and the advances we have made in the material process, which
provides speed without compromising part quality. The SI 10
material creates parts with a glossy top finish, excellent
for thin wall parts and ideal for master patterns.
[X] Accura(R) SI 20 material. Accura SI 20 material is a durable
white material offering high green strength and good
throughput. This material is ideal for snap-fit testing and
RTV applications.
[X] Accura(R) SI 30 material. Accura SI 30 material is a
fast/durable material ideal for customers needing a
high-photo speed, low-viscosity material for functional
prototypes.
[X] Accura(R) SI 40 material. Accura SI 40 material is the first
material on the market that combines high temperature
resistance with strength. With properties that mimic Nylon
66 this material is ideal for automotive applications
including under-the-hood applications, wind tunnel testing
and flow analysis. The Accura SI 40 material produces parts
with optical clarity, high flexural modulus and moderate
elongation to break, with a high heat deflection temperature
allowing it to be drilled, self-tapped and bolted on for
true functional testing.
[X] Accura(R) LS material: LaserForm(TM) ST-200 material is the
second-generation stainless steel material to be offered for
our SLS systems. LaserForm ST-200 material is a specialty
stainless steel composite developed for our SLS systems to
produce durable, fully dense metal parts and tooling inserts
for injection molding and die casting applications.
[X] Software. Lightyear(TM) 1.3 and Buildstation(TM) 5.3
incorporates new Accura SL material styles simplifying the
users' ability to manually select style files.
[X] Software: Buildstation 4.0.0 for the SLA 250 system
incorporates new Accura SL material styles and enhancements
to Buildstation 3.8.6 software.
[X] Software. Software version 3.1 for all SLS systems is the
first version released under 3D Systems' label since the
purchase of DTM Corp. Version 3.1 provides SLS system
customers enhanced features including tagging, the ability
to enter text for a small label that will be built attached
to the part; slicing improvements; new Build Packet Browser
and Smart Feed enhancements specifically for our SLS
2500/plus/ customers.
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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 development arrangements with research
institutions, key customers, materials suppliers and hardware suppliers.
Research and development expenses were $15.4 million, $11.0 million and $7.8
million in 2002, 2001, and 2000, respectively. For the foreseeable future, we
anticipate that our research and development efforts will focus 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, and other peripheral equipment and software. 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.
We believe that further refinements in 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 2002, 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 introduced the InVision 3-D printer in July 2002. 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.
We continue our research and development in the field of materials. Our research
and development facilities are located in Marly, Switzerland and Valencia,
California. The R&D team focuses our development on SL, LS and MJM materials. In
2002, we announced the development of a steel composite material and the
research of aluminum and flame retardant nylon for the SLS system. We continue
to drive our research and development efforts for the SL material line focusing
on general materials for the rapid prototyping industry as well as specialized
materials for the advanced digital manufacturing industry.
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 our corporate office in California and in satellite offices throughout North
America; in our European offices located near Frankfurt, London, Paris, Milan
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. As of December 31, 2002, our worldwide sales and support
staff consisted of 91 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 50.6%, 48.6%, and 46.2% of total sales in the years
ended December 31, 2002, 2001 and 2000, respectively. (See Note 19 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, Boeing Company, BMW Group, Canstar Sports, Inc.,
DaimlerChrysler Corp., Dallara Automobili, 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, Levolor, Minardi Formula 1, Motorola, Inc.,
Navistar International Corporation, Nike, Inc., ODM (On-Demand Manufacturing), a
subsidiary of Boeing, Pratt & Whitney, Penske Racing, Raytheon Company, Renault
F1 Team 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,
General Pattern, Moehler Design and INCS, Inc.,
8
which for a fee provide solid imaging services to their customers. Each of
Renault FI Team, ODM, a subsidiary of Boeing, Widex and Siemens Hearing
Instruments established ADM centers in 2002.
Photopolymer Distribution Agreement. Pursuant to an agreement with Vantico, we
had been the exclusive worldwide distributor (except in Japan) to users of SL
processes of all Vantico liquid SL photopolymers. This agreement terminated on
April 22, 2002.
Customer Support and Service. Before installation of an SLA or SLS system, a new
purchaser generally receives training at our facilities. For 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. Training is not generally necessary for use 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
maintenance contract users. 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.
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 selective 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 (Solid Imaging Material) is produced at
our 67,000 square foot facility in Grand Junction, Colorado. We produce
stereolithography materials at our facility in Marly, Switzerland. We
manufacture lasers in our facility in Valencia, California. 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.
Our production methods are subject to compliance with applicable federal, state,
and local provisions regulating the discharge of materials into the environment.
We believe that we are in compliance with such regulations currently enacted and
continued compliance will not have any material effect on our capital
expenditures, earnings and competitive position. Currently we utilize a cleaning
solvent that is the subject of a waiver of environmental provisions within the
South Coast Air Quality Management District that includes our Valencia,
California facility. The waiver expires June 30, 2005 at which time we may be
required to switch to a different cleaning solvent. The impact on earnings
should not be material.
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; and FDM
(Fused Deposition Modeling) technology; Parts-in-Minutes and makers of vacuum
casting silicon molding equipment; and manufacturers of other SL, LS and 3-D
printing 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 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 anticipate additional competition with respect to SL technology in
the U.S., Canada and Mexico as a result of our license agreement with Sony
Corporation with respect to our SL technology entered into pursuant to the terms
of our consent decree with the Department of Justice.
9
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.
We believe that our patents will continue to help us maintain a leading position
in the SL, LS and MJM fields.
A number of companies are currently selling materials which either complement or
compete with those we sell DSM Desotech Inc., and others, are currently selling
SL resins, In addition, upon termination of our distribution agreement with
Vantico, Vantico began selling competing resins. We believe that we supply
approximately 50% of the worldwide market for SL resins used in our SLA systems.
EOS and others are currently selling LS powdered materials. We believe we
currently supply powders to the majority of the LS systems currently installed
worldwide.
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 CNC 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 product lines, 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 protection 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 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.
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.
We do not have the breadth of patent protection for the solid object printers
that we have for our SL and LS technology; however, as noted above, 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. In April
2002, we obtained the exclusive right, subject to one existing license, with
enforcement rights to a patent for 3-dimensional printing using two different
materials from Richard Helinski. In July of 2002, we reached an agreement with
Sanders Design International, Inc. (SDI) of Wilton, NH, to settle a patent
infringement suit that was pending in the U.S. District Court for the District
of New Hampshire. According to the settlement, all parties agreed that the
Helinski patent was valid and had been infringed by SDI. SDI agreed to pay us
for past infringement for all machines manufactured or in production as of the
date of the settlement agreement. In addition, SDI agreed to pay a running
royalty of 6% for all future systems manufactured under the patent and for all
consumables sold for use in their machines.
At December 31, 2002, we had 359 patents, which include 152 in the United
States, 146 in Europe, 17 in Japan and 44 in other foreign countries. At that
date, we also had 176 pending patent applications: 52 in the United States, 53
in Japan, 48 in European countries and 23 other foreign countries. 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.
10
Employees
At December 31, 2002, we had 416 full-time employees. In addition, at that same
date we utilized the services of six independent contractors and one consultant.
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.
On July 24, 2002, we substantially completed a reduction in workforce, which
eliminated 109 positions out of our total workforce of 523 or approximately 20%
of the total workforce. In addition, we closed our existing office in Austin,
Texas that we acquired as part of our acquisition of DTM, as well as our sales
office in Farmington Hills, Michigan. This was the second reduction in force
completed in 2002. On April 9, 2002, the Company eliminated approximately 10% of
its total workforce.
Website Availability of Our Reports Filed with the Securities and Exchange
Commission
We maintain a website with the address www.3dsystems.com. We are not including
the information contained on our website as a part of, or incorporating it by
reference into, this filing. We make available free of charge through our
website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and
Current Reports on Form 8-K, and amendments to these reports, as soon as
reasonably practicable after we electronically file that material with, or
furnish that material to, the Securities and Exchange Commission.
Item 2. Properties
Our principal administrative functions, sales and marketing, product
development, technology center and training facilities are located in a 78,320
square foot building in Valencia, California. The lease for this property, which
was originally to expire on December 31, 2002, has been extended until December
31, 2007, and is subject to an optional five-year extension.
We also lease sales and service offices in Texas. 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 four countries in the
European Community (France, Germany, the United Kingdom and Italy), Malaysia,
Japan and Hong Kong.
A significant portion 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. To secure the
reimbursement agreement with Wells Fargo relating to the letter of credit
collateralizing these bonds, we executed a deed of trust, security agreement and
assignment of rents, an assignment of rents and leases, and a related security
agreement encumbering the Grand Junction facility and certain personal property
and fixtures located there. In addition, the Grand Junction facility is
encumbered by a second deed of trust in favor of Mesa County Economic
Development Council, Inc. ("MCEDCI"), securing $.8 million in allowances granted
to us by MCEDCI pursuant to an Agreement dated October 4, 1995.
We closed our facility located in Austin, Texas. Approximately 50,000 square
feet of space remains subject to a lease until December 31, 2006. Of this space,
approximately 20,000 square feet has been sublet.
We believe that the facilities described above will be adequate to meet our
needs for the immediate future.
Item 3. Legal Proceedings
3D Systems, Inc. vs. Aaroflex, et al. On January 13, 1997, we filed a complaint
in U.S. District Court, Central District of 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. The
Company seeks damages and injunctive relief from the defendants, who have
threatened to sue the Company 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. On April 24, 2002, the court denied our motions for summary judgment on
infringement, reserving the right to revisit on its own initiative the decisions
11
following the determination of claim construction. The court also granted in
part our motion on validity. The case is scheduled for trial commencing on
August 5, 2003, and the trial is scheduled to last for three weeks.
DTM vs. EOS, et al. The plastic sintering patent infringement actions against
EOS began in France (Paris Court of Appeals), Germany (District Court of Munich)
and Italy (Regional Court of Pinerolo) 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. EOS filed an appeal of that decision in
June 2002. That action is pending. 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 an 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. As a result,
the Tokyo High Court found that Hitachi Zosen was not infringing DTM's patent.
These rulings were unsuccessfully appealed by DTM to the Tokyo Supreme Court. We
amended the claims and the patent was reinstated in a corrective action in 2002
and no further challenges to the patent are pending in this matter.
Hitachi Zosen vs. 3D Systems, Inc. On November 25, 2002, 3D Systems was served
with a complaint through the Japanese Consulate General from EOS' Japanese
distributor, Hitachi Zosen, seeking damages in the amount of 535,293,436 yen
(approximately $4.5 million), alleging lost sales during the period in which DTM
Corporation had an injunction in Japan prohibiting the sale of EOS EOSint P350
laser sintering systems. Initial procedural hearings occurred in March and April
2003 in Tokyo District Court, with a third preliminary hearing scheduled for
June 30, 2003.
EOS vs. DTM and 3D Systems, Inc. In December 2000, EOS filed a patent
infringement suit against DTM in the U.S. District Court, Central District of
California. EOS alleges that DTM has infringed and continues to infringe certain
U.S. patents that 3D licenses 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. On October 17, 2001,
we were substituted as a defendant in this action because DTM's corporate
existence terminated when it merged into our subsidiary, 3D Systems, Inc. on
August 31, 2001. In February 2002, the court granted summary adjudication on our
motion that any potential liability for patent infringement terminated with the
merger of DTM into 3D Systems, Inc. Concurrently, the court denied EOS's motion
for a fourth amended complaint to add counts related to EOS's claim that 3D
Systems, Inc. is not permitted to compete in the field of laser sintering under
the terms of the 1997 Patent License Agreement between 3D Systems, Inc. and EOS.
3D Systems, Inc. filed counterclaims against EOS for the sale of polyamide
powders in the United States based on two of the patents acquired in the DTM
acquisition. The discovery cut off date was on January 20, 2003. A motion by 3D
Systems, Inc. for a preliminary injunction was denied by the court on May 14,
2002. The court rescheduled the trial date to October 7, 2003.
3D Systems, Inc. vs. AMES. In April 2002, we filed suit for patent infringement
against Advanced Manufacturing Engineering Systems of Nevada, Iowa for patent
infringement related to AMES' purchase and use of EOS powders in the Company's
SLS system. On June 24, 2002, upon motion by the defendants, this matter was
stayed pending trial of the EOS vs. DTM and 3D Systems, Inc. matter described
immediately above. We have been informed that Ames is no longer in business and
is in the process of requesting a dismissal of the action.
EOS GmbH Electro Optical Systems vs. 3D Systems, Inc. On January 21, 2003, we
were served with a complaint that had been filed in May of 2002 in Regional
Court, Commerce Division, Frankfurt, Germany, seeking 1,000,000 Euros for the
alleged breach of a non-competition agreement entered into in 1997. We answered
the complaint on April 25, 2003. At a hearing on June 27, 2003, the court
advised the parties that it intends to issue a decision in this matter on
September 27, 2003.
Board of Regents, The University of Texas System and 3D Systems, Inc. v. EOS
GmbH Electro Optical Systems. On February 25, 2003, 3D Systems, along with the
Board of Regents of the University of Texas, filed suit against EOS GmbH Electro
Optical Systems ("EOS") in the United States District Court, Western District of
Texas seeking damages and injunctive relief arising from violation of
12
U.S. Patents Nos. 5,597,589 and 5,639,070, which are patents relating to laser
sintering which have been licensed by the University of Texas to 3D. On March
25, 2003, EOS filed its answer to this complaint, along with counterclaims
including breach of contract and antitrust violations.
Regent Pacific Management Corporation v. 3D Systems Corporation. On June 11,
2003, Regent Pacific Management Corporation filed a complaint against us for
breach of contract in the Superior Court of the State of California, County of
San Francisco. Regent provided management services to us from September 1999
through September 2002. Regent alleges that we breached non-solicitation
provisions in our contract with it by retaining the services of two Regent
contractors following the termination of the contract. Regent seeks $780,000 in
liquidated damages together with reasonable attorney's fees and costs. We
currently are evaluating the complaint.
SEC Inquiry. We received an inquiry from the SEC relating to our revenue
recognition practices. The Audit Committee has completed its own inquiry into
the matter and shared its findings with the SEC. To date, the Company has not
been notified that the SEC has initiated a formal investigation.
In addition, on May 6, 2003, we received a subpoena from the U.S. Department of
Justice to provide certain documents to a grand jury investigating antitrust and
related issues within our industry. We have been advised that we currently are
not a target of the grand jury investigation, and we are complying with the
subpoena.
The Company is engaged in certain additional legal actions arising in the
ordinary course of business, and, on the advice of legal counsel, the Company
believes it has adequate legal defenses and that the ultimate outcome of these
actions will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
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 2002.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth, for the periods indicated, the range of
high and low bid information per share of our common stock as quoted on the
Nasdaq Stock Market's National Market. The Company's stock was traded under the
symbol "TDSC" until April 15, 2003 when, due to delinquent filings, the symbol
was changed to "TDSCE."
Historic Prices
--------------------------
Year Period High Low
-------------------- ----------------------- ----------- -------------
2001 First Quarter $ 14.56 $ 8.81
Second Quarter 18.52 9.69
Third Quarter 16.70 11.51
Fourth Quarter 15.09 9.73
2002 First Quarter 15.90 9.16
Second Quarter 15.80 10.80
Third Quarter 13.55 5.75
Fourth Quarter 8.51 4.98
2003 First Quarter 10.15 4.10
Second Quarter (through May 30) 6.70 4.00
As of May 30, 2003, the outstanding common stock was held of record by 435
stockholders.
Dividends
We have not paid any dividends on our common stock and currently intend to
retain any future earnings for use in our business. In addition, our loan
documents place limitations on our ability to pay dividends or make other
distributions in respect of our common stock. Also, holders of our Series B
Convertible Preferred Stock are entitled to receive, when, and if declared by
our Board of Directors, but only out of funds that are legally available
therefor, cash dividends at the rate of 8% of the Series B issuance price per
share per annum, which may be increased to 10% under certain circumstances. No
dividends may be paid on any shares of common stock or on shares of any other
stock ranking junior to the Series B Convertible Preferred Stock unless all
accrued and unpaid dividends have first been declared and paid in full with
respect to the Series B Convertible Preferred Stock.
13
Any future determination as to the payment of dividends on our common stock will
be restricted by these limitations, will be at the discretion of our board of
directors and will depend upon our earnings, operating and financial condition
and capital requirements, and other factors deemed relevant by our board of
directors, including the General Corporation Law of the State of Delaware, which
provides that dividends are only payable out of surplus or current net profits.
Equity Compensation Plans
The following table summarizes information about the equity securities
authorized for issuance under our compensation plans as of December 31, 2002.
For a description of these plans, please see Note 15, Stockholders' Equity and
Stockholders' Rights Plan, in our Consolidated Financial Statements.
Number of Number of
securities to Weighted- securities
be issued average remaining
upon exercise price available for
exercise of of future
outstanding outstanding issuance
options, options, under equity
Plan Category warrants, warrants and compensation
and rights rights plans
-------------- --------------- ---------------
(shares in thousands)
Equity compensation plans approved by stockholders 2,302 $ 11.48 803
Equity compensation plans not approved by stockholders 316 9.57 389
-------------- ---------------
Total 2,618 11.25 1,192
============== ===============
Recent Sales of Unregistered Securities
On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible Preferred
Stock for aggregate consideration of $15.8 million. The preferred stock accrues
dividends at 8% per share and is convertible at any time into approximately
2,634,016 shares of common stock. The stock is redeemable at the Company's
option at any time after the third anniversary date. The Company must redeem any
shares of preferred stock outstanding on the tenth anniversary date. The
redemption price is $6.00 per share plus accrued and unpaid dividends. We did
not employ any form of general solicitation or general advertising in connection
with the offer and sale of these securities. In addition, the purchasers of the
securities are "accredited investors" for purposes of Rule 501 of the Securities
Act. For these reasons, among others, the offer and sale of these securities
were exempt from registration pursuant to Rule 506 of Regulation D of the
Securities Act.
14
Item 6. Selected Financial Data
The following summary of selected financial data for the periods set forth below
has been derived from our audited financial statements. You should read the
information as of December 31, 2002 and 2001, and for the fiscal years ended
December 31, 2002, 2001 and 2000 in conjunction with Management's Discussion and
Analysis of Results of Operations and Financial Condition and with our
consolidated financial statements appearing elsewhere in this Form 10-K. The
selected financial data as of and for the years ended December 31, 2001 and
2000, has been restated. For additional information regarding the restatement,
please refer to Note 24 to the Consolidated Financial Statements included in
Item 8.
Unless otherwise expressly stated, all financial information in this Report is
presented inclusive of the changes made to the financial statements for the
years ended December 31, 2001 and 2000. The reconciliation of previously
reported amounts to the amounts currently being reported is presented in the
accompanying Notes to Consolidated Financial Statements appearing in Item 8,
Note 24 to our Consolidated Financial Statements.
Years Ended December 31,
---------------------------------------------------------------------------------
2001 2000
2002 (as restated) (as restated) 1999 1998
-------------- -------------- ------------- -------------- --------------
(in thousands, except per share amounts)
Statements of Operations Data:
Sales:
Products(1) $ 81,039 $ 84,558 $ 79,857 $ 66,806 $ 65,434
Services(2) 34,922 34,182 29,429 30,143 32,683
-------------- -------------- ------------- -------------- --------------
Total sales 115,961 118,740 109,286 96,949 98,117
-------------- -------------- ------------- -------------- --------------
Cost of sales:
Products(1) 43,398 42,278 34,969 35,938 33,477
Services(2) 25,942 24,961 21,729 20,975 22,062
-------------- -------------- ------------- -------------- --------------
Total cost of sales 69,340 67,239 56,698 56,913 55,539
-------------- -------------- ------------- -------------- --------------
Gross profit 46,621 51,501 52,588 40,036 42,578
Operating expenses:
Selling, general and administrative 48,331 42,807 32,710 35,273 30,448
Research and development 15,366 11,010 7,814 8,931 9,425
Severance and other restructuring costs 4,354 --- --- 3,384 ---
-------------- -------------- ------------- -------------- --------------
Total operating expenses 68,051 53,817 40,524 47,588 39,873
-------------- -------------- ------------- -------------- --------------
(Loss) income from operations (21,430) (2,316) 12,064 (7,552) 2,705
Interest and other (expense) income, net (2,991) (1,033) 115 11 482
Gain on arbitration settlement 18,464 --- --- --- ---
-------------- -------------- ------------- -------------- --------------
(Loss) income before income taxes (5,957) (3,349) 12,179 (7,541) 3,187
Provision for (benefit from) income taxes 8,909 (992) 4,309 (2,240) 1,055
-------------- -------------- ------------- -------------- --------------
Net (loss) income $ (14,866) $ (2,357) $ 7,870 $ (5,301) $ 2,132
============== ============== ============= ============== ==============
Shares used to calculate basic net (loss)
income per share 12,837 12,579 11,851 11,376 11,348
Basic net (loss) income per share $ (1.16) $ (.19) $ .66 $ (.47) $ .19
============== ============== ============= ============== ==============
Shares used to calculate diluted net (loss)
income per share 12,837 12,579 12,889 11,376 11,594
Diluted net (loss) income per share $ (1.16) $ (.19) $ .61 $ (.47) $ .18
============== ============== ============= ============== ==============
At December 31,
------------------------------------------------------------------------------
2001 2000
2002 (as restated) (as restated) 1999 1998
-------------- -------------- -------------- -------------- --------------
Balance Sheet Data:
Working (deficit) capital $ (8,608) $ 16,008 $ 44,275 $ 31,219 $ 38,305
Total assets 132,233 164,942 109,623 90,658 95,103
Current portion of long-term debt 10,500 3,135 120 110 100
Long-term liabilities, excluding current
portion 17,487 33,179 7,585 9,168 6,090
Stockholders' equity 59,866 78,429 71,522 59,608 66,557
__________________________________
(1) Includes systems and related equipment, material, software and other
component parts as well as rentals of equipment.
(2) Includes maintenance services provided by our technology centers and
training services.
15
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The Consolidated Financial Statements as of and for the years ended December 31,
2001 and 2000 included in this Form 10-K have been restated. For additional
information regarding the restatement, please refer to Item 14 Controls and
Procedures and Note 24 to the Consolidated Financial Statements included in Item
8. All applicable financial information presented in this Item 7 has been
restated to take into account the effects of the restatements described in Note
24 to the Consolidated Financial Statements.
The following discussion should be read in conjunction with our consolidated
financial statements provided under Part II, Item 8 of this Annual Report on
Form 10-K. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, as discussed more
fully herein.
The forward-looking information set forth in this Annual Report on Form 10-K, or
this Report, is as of June 30, 2003, and we undertake no duty to update this
information. More information about potential factors that could affect our
business and financial results is included in the section entitled "Cautionary
Statements and Risk Factors" of this Report.
Restatement
Deloitte and Touche LLP, which we refer to in this Report as Deloitte, the
Company's independent auditor, in connection with its audit of our consolidated
financial statements for fiscal year 2002, identified 12 equipment sales
transactions for which revenue had been recognized in the fourth quarter of
2002, which Deloitte believed should have been recognized in other periods.
Deloitte brought these issues to the attention of management. Management
immediately notified the Audit Committee of the Board of Directors.
In response, the Audit Committee, which is comprised entirely of independent
directors, immediately commenced an investigation into our equipment revenue
recognition policies generally, and specifically with regard to the 12 equipment
sales transactions identified by Deloitte, and other related or similar
transactions. To assist it in this investigation, the Audit Committee retained
Morgan Lewis & Bockius, LLP, which we refer to in this report as Morgan Lewis,
as independent counsel, and Morgan Lewis retained the accounting firm of BDO
Seidman, LLP, which we refer to in this Report as BDO, to provide forensic
accounting services in support of its work. The investigation included a review
of significant equipment sales transactions of the Company during the period
from October 1, 2001 through December 31, 2002, to assess the revenue
recognition policies applied to these transactions, whether these equipment
sales transactions were departures from our stated revenue recognition policy
and accounting principles generally accepted in the United States of America and
the reasons for any departures.
As a result of the investigation by the Audit Committee, we have restated our
previously issued financial statements for the years ended December 31, 2001 and
2000. The restatement arose from the adjustments of certain income statement
items which principally relate to the treatment and timing of revenue
recognition of a small percentage of total equipment sales transactions. The
effect of the adjustments for the year ended December 31, 2001 is to decrease
the Company's previously reported fiscal 2001 consolidated revenues from $121.2
million to $118.7 million, increase net loss from $1.3 million to $2.4 million
and increase diluted loss per share from $0.11 to $0.19. For the year ended
December 31, 2000, the effect of these adjustments is to decrease the Company's
previously reported fiscal 2000 consolidated revenues from $109.7 million to
$109.3 million, decrease net income from $8.1 million to $7.9 million and
decrease diluted income per share from $0.63 to $0.61. At the direction of the
Audit Committee, the Company is implementing changes to its financial
organization and enhancing its internal controls in response to issues
identified in the investigation and otherwise raised by the restatement. These
changes are more fully discussed in Item 14 of this Report.
Unless otherwise expressly stated, all financial information in this Report is
presented inclusive of these income statement changes and other adjustments. The
reconciliation of previously reported amounts to the amounts currently being
reported is presented in Note 24 of the accompanying Notes to Consolidated
Financial Statements in this Report.
Overview
We develop, manufacture and market worldwide solid imaging systems designed to
reduce the time it takes to produce three-dimensional objects. Our products
produce physical objects from the digital output of solid or surface data from
computer aided design and manufacturing, which we refer to as CAD/CAM, and
related computer systems, and include SLA(R) and SLS(R) systems and ThermoJet(R)
solid object printers.
SLA systems use our proprietary stereolithography technology, which we refer to
as SL, an additive solid imaging process which uses a laser beam to expose and
solidify successive layers of photosensitive resin until the desired object is
formed to precise specifications in epoxy or acrylic resin. SLS systems utilize
a proprietary process called selective laser sintering, which we refer to as the
SLS process, which uses laser energy to sinter powdered material to create solid
objects from powdered materials. LS and SL-produced parts can be used for
concept models, engineering prototypes, patterns and masters for molds,
consumable tooling, and short-run manufacturing of final product, among other
applications. ThermoJet solid object printers employ hot melt ink jet technology
to build
16
models in successive layers using our proprietary thermoplastic material. These
printers, about the size of an office copier, are network-ready and are designed
for operation in engineering and design office environments. The ThermoJet
printer output can be used as patterns and molds, and when combined with other
secondary processes such as investment casting, can produce parts with
representative end-use properties.
Our customers include major corporations in a broad range of industries
including service bureaus and manufacturers of automotive, aerospace, computer,
electronic, consumer and medical products. Our revenues are generated by product
and service sales. Product sales are comprised of sales of systems and related
equipment, materials, software and other component parts, as well as rentals of
systems. Service and warranty sales include revenues from a variety of on-site
maintenance services and customer training.
For the year ended December 31, 2002, the continued general economic slowdown in
capital equipment spending worldwide impacted both revenues and earnings. In
2002, SLA system unit sales were down 26.8% and SLS system unit sales were down
41.3% from 2001 (comparing the combined results of 3D Systems and DTM
Corporation for both periods). This had a significant impact on both revenue and
overall gross margin and we expect this to continue in 2003.
We recognize the importance of recurring revenue to moderate the impact that
fluctuations in capital spending has on our high end equipment revenue. The
following table reflects recurring revenues (service and material sales) and
non-recurring revenues (system sales and related equipment) and those revenues
as a percentage of total revenues for the periods indicated below:
Years Ended December 31,
---------------------------------------------
2002 2001 2000
------------ ------------ ------------
Recurring sales $ 66,541 $ 64,815 $ 54,696
Non-recurring sales 49,420 53,925 54,590
------------ ------------ ------------
Total sales $ 115,961 $ 118,740 $ 109,286
============ ============ ============
Recurring sales 57.4% 54.6% 50.0%
Non-recurring sales 42.6% 45.4% 50.0%
------------ ------------ ------------
Total sales 100.0% 100.0% 100.0%
============ ============ ============
The market for our capital equipment has been impacted by overall economic
conditions since the second quarter of 2001. Consequently, we reduced our cost
structure by implementing an approximate 10%, or 63 employees, reduction in
workforce worldwide in April of 2002. After reviewing our results for the second
quarter of 2002 and the long-term prospects for the worldwide economy, we took
additional measures to realign our projected expenses with anticipated revenue
levels. During the third quarter of 2002, we closed our existing facilities in
Austin, Texas and Farmington Hills, Michigan and reduced our workforce by an
additional 20% or 109 employees. As a result of these activities, we recorded
charges of $1.6 million and $2.7 million in the quarters ending June 28, 2002
and September 27, 2002, respectively.
Sales into the Advanced Digital Manufacturing ("ADM") market continue to
increase including sales related to aerospace, motorsports, jewelry, and hearing
aids. Our ADM revenue was $37.2 million or 32.2% of our overall revenue in 2002,
and we believe that the market demand for new ADM applications continues to
grow. During 2002, we placed 7 systems into aerospace applications, a total of
11 systems into motorsports, and 22 systems into jewelry related applications as
well as several other ADM applications.
During 2002, we announced that we are developing four new materials for use in
our SLS systems and the release of another series of resins for our SLA systems.
New materials such as aluminum, hard steel, flame retardant nylon (for
commercial aerospace applications) and a resin that mimics nylon material, are
focused on meeting the opportunities available in ADM and will significantly
expand the range of applications for which we can provide solid imaging
solutions.
On March 19, 2002, we reached a settlement agreement with Vantico relating to
the termination of the Distribution and Research and Development Agreement which
required Vantico to pay us $22 million through payment of cash or delivery of
1.55 million shares of 3D Systems common stock. On April 22, 2002, Vantico
delivered the 1.55 million shares of our common stock to us. Under our
distribution contract with Vantico, we were the exclusive worldwide distributor
of Vantico photosensitive liquid resins for stereolithography. Our material
revenue, excluding DTM related revenues, declined to $17.0 million for the year
ended December 31, 2002 from $25.5 million for the year ended December 31, 2001,
as a result of the termination of the distribution agreement and prices have
fallen significantly as a result of increased competition. On September 20,
2001, we acquired RPC, an independent supplier of stereolithography resins which
has enabled us to solicit customers to transition from Vantico material to RPC
material. We believe that many customers have converted to our RPC resins and
that we supply approximately 50% of the worldwide market for SL resins used in
our SLA systems. We
17
continue to focus on our resin conversion program and our overall materials
business. We are moving forward with our retail materials strategy with our
Accura(TM) SL materials which we launched on April 23, 2002.
On July 9, 2002, the United States Department of Justice approved Sony
Corporation as the licensee for certain of our technology, as provided for by
the Final Judgment issued on April 17, 2002, by the United States District Court
for the District of Columbia, relating to our acquisition of DTM Corporation.
Under the terms of the license agreement, we have granted a license to Sony for
certain of our North American patents and software copyrights for use only in
the field of stereolithography within North America (consisting of the United
States, Canada and Mexico) together with a list of our North American
stereolithography customers, in exchange for a license fee of $900,000, which we
received and recorded into revenue in August 2002. In addition, we recorded
$450,000 in cost of sales associated with the license fee. This license applies
only to those North American patents which we owned or licensed as of April 17,
2002, as well as any applied-for patents as of April 17, 2002, that cover
technology marketed prior to April 17, 2002 for use in the field of
stereolithography. The license does not apply to technology that we may develop
in the future. The license is perpetual, assignable, transferable and
non-exclusive, but there is no right to sublicense except as necessary to
establish distribution and to outsource manufacturing.
On August 24, 2001, we completed our acquisition of DTM in which we purchased
all of the outstanding shares of common stock of DTM for approximately $45
million in cash. DTM's operations have been fully integrated into our existing
business allowing us to realize synergies and cost savings. The acquisition
allows us to offer our customers an expanded product line and increases our
capabilities in the areas of advanced digital manufacturing and rapid tooling,
which we have identified as areas of significant opportunity for us for 2002 and
beyond.
In February 2001, we acquired the stock and intellectual property of OptoForm
SARL ("Optoform"). The OptoForm technology is capable of producing products with
metal and ceramic properties. The aggregate purchase price was $2.6 million, of
which $1.4 million was settled in cash at the time of closing and $1.2 million
was paid in February 2002. The acquisition of OptoForm has allowed us to
continue to expand our product offerings and increase our capabilities in the
areas of advanced digital manufacturing and rapid tooling.
In September 2001, we acquired the stock of RPC Ltd., a manufacturer of
sterolithography material. The aggregate purchase price was $5.5 million. (See
note 10 of the Notes to Consolidated Financial Statements)
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
critical accounting estimates that directly impact our consolidated financial
statements and related disclosures. Critical accounting estimates are estimates
that meet two criteria: (1) the estimates require that we make assumptions about
matters that are highly uncertain at the time the estimates are made; (2) there
exist different estimates that could reasonably be used in the current period,
or changes in the estimates used are reasonably likely to occur from period to
period, both of which would have a material impact on the presentation of the
financial condition or our results of our operations. On an on-going basis, we
evaluate our estimates, including those related to the allowance for doubtful
accounts, income taxes, inventory, goodwill and intangible assets, contingencies
and revenue recognition. We base our estimates and assumptions on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The following represent what management believes are the critical accounting
policies most affected by significant management estimates and judgments.
Management has discussed these critical accounting policies, the basis for their
underlying assumptions and estimates and the nature of our related disclosures
herein with the Audit Committee of the Board of Directors.
Allowance for doubtful accounts. Our estimate for the allowance for doubtful
accounts related to trade receivables is based on two methods. The amounts
calculated from each of these methods are combined to determine the total amount
reserved. First, we evaluate specific accounts where we have information that
the customer may have an inability to meet its financial obligations (for
example, bankruptcy). In these cases, we use our judgment, based on the best
available facts and circumstances, and record a specific reserve for that
customer against amounts due to reduce the receivable to the amount that is
expected to be collected. These specific reserves are reevaluated and adjusted
as additional information is received that impacts the amount reserved. Second,
a reserve is established for all customers based on a range of percentages
applied to aging categories. These percentages are based on historical
collection and write-off experience. If circumstances change (for example, we
experience higher than expected defaults or an unexpected material adverse
change in a major customer's ability to meet its financial obligation to us),
our estimates of the recoverability of amounts due to us could be reduced.
18
We believe that our allowance for doubtful accounts is a critical accounting
estimate because it is susceptible to change and dependent upon events that are
remote in time and may or may not occur, and because the impact recognizing
additional allowance for doubtful accounts may be material to the assets
reported on our balance sheet.
Income taxes. At December 31, 2002, the unadjusted net book value of our
deferred tax assets totaled approximately $18.7 million, which was principally
comprised of net operating loss carryforwards of $14.2 million and for credits
of $6.1 million. The provisions of SFAS No. 109 "Accounting for Income Taxes",
require a valuation allowance when, based upon currently available information
and other factors, it is more likely than not that all or a portion of the
deferred tax asset will not be realized. SFAS No. 109 provides that an important
factor in determining whether a deferred tax asset will be realized is whether
there has been sufficient income in recent years and whether sufficient income
is expected in future years in order to utilize the deferred tax asset. Forming
a conclusion that a valuation allowance is not needed is difficult when there is
negative evidence, such as cumulative losses in recent years. The existence of
cumulative losses in recent years is an item of negative evidence that is
particularly difficult to overcome. During our 2002 fourth quarter-end, we
recorded a valuation allowance of approximately $12.9 million against our net
deferred tax assets. We intend to maintain a valuation allowance until
sufficient evidence exists to support its reversal. Also, until an appropriate
level of profitability is reached, we do not expect to recognize any domestic
tax benefits in future periods.
We believe that our determination to record a valuation allowance to reduce our
deferred tax assets is a critical accounting estimate because it is based on an
estimate of future taxable income in the United States, which is susceptible to
change and dependent upon events that are remote in time and may or may not
occur, and because the impact of recording a valuation allowance may be material
to the assets reported on our balance sheet. The determination of our income tax
provision is complex due to operations in numerous tax jurisdictions outside the
United States, which are subject to certain risks, which ordinarily would not be
expected in the United States. Tax regimes in certain jurisdictions are subject
to significant changes, which may be applied on a retroactive basis. If this
were to occur, our tax expense could be materially different than the amounts
reported. Furthermore, as explained in the preceding paragraph, in determining
the valuation allowance related to deferred tax assets, the Company adopts the
liability method as required by SFAS No. 109, "Accounting for Income Taxes".
This method requires that we establish valuation allowance if, based on the
weight of available evidence, in the Company's judgment it is more likely than
not that the deferred tax assets may not be realized.
Inventory. Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out method. Reserves for slow moving and
obsolete inventories are provided based on historical experience and current
product demand. Our reserve for slow moving and obsolete inventory was $1.9
million and $1.6 million at December 31, 2002 and 2001, respectively. We
evaluate the adequacy of these reserves quarterly. Our determination relating to
the allowance for inventory obsolescence is subject to change because it is
based on management's current estimates of required reserves and potential
adjustments. We believe that the allowance for inventory obsolescence is a
critical accounting estimate because it is susceptible to change and dependent
upon events that are remote in time and may or may not occur, and because the
impact of recognizing additional obsolescence reserves may be material to the
assets reported on our balance sheet and results of operations.
Goodwill and intangible assets. The Company has applied Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" in its allocation
of the purchase price of DTM Corporation (DTM) and RPC Ltd. (RPC). The annual
impairment testing required by SFAS No. 142, "Goodwill and Other Intangible
Assets" requires the Company to use its judgment and could require the Company
to write-down the carrying value of its goodwill and other intangible assets in
future periods. SFAS No. 142 requires companies to allocate their goodwill to
identifiable reporting units, which are then tested for impairment using a
two-step process detailed in the statement. The first step requires comparing
the fair value of each reporting unit with its carrying amount, including
goodwill. If that fair value exceeds the carrying amount, the second step of the
process is not necessary and there are no impairment issues. If that fair value
does not exceed that carrying amount, companies must perform the second step
that requires an allocation of the fair value of the reporting unit to all
assets and liabilities of that unit as if the reporting unit had been acquired
in a purchase business combination and the fair value of the reporting unit was
the purchase price. The goodwill resulting from that purchase price allocation
is then compared to its carrying amount with any excess recorded as an
impairment charge.
Upon implementation of SFAS No. 142 in January 2002 and again in the fourth
quarter of 2002, the Company concluded that the fair value of the Company's
reporting units exceeded their carrying value and accordingly, as of that date,
there were no goodwill impairment issues. The Company is required to perform a
valuation of its reporting unit annually, or upon significant changes in the
Company's business environment.
We believe that our determination not to recognize an impairment of goodwill is
a critical accounting estimate because it is susceptible to change, dependent
upon estimates of the fair value of our reporting units, and because the impact
of recognizing an impairment may be material to the assets reported on our
balance sheet and our results of operations.
Contingencies. We account for contingencies in accordance with SFAS No. 5,
"Accounting for Contingencies". SFAS No. 5 requires that we record an estimated
loss from a loss contingency when information available prior to issuance of our
financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated (see Note 20
of the Notes to the Consolidated Financial Statements).
19
Accounting for contingencies such as legal and income tax matters requires us to
use our judgment. At this time our contingencies are not estimable and have not
been recorded, however, management believes the ultimate outcome of these
actions will not have a material effect on our consolidated financial position,
results of operations or cash flows.
Revenue Recognition. Revenues from the sale of systems and related products are
recognized upon shipment, provided that both title and risk of loss have passed
to the customer and collection is reasonably assured. Some sales transactions
are bundled and include equipment, software license, warranty, training and
installation. The Company allocates and records revenue in these transactions
based on vendor specific objective evidence that has been accumulated through
historic operations. The process of allocating the revenue involves some
management judgments. Revenues from services are recognized at the time of
performance. We provide end users with maintenance under a warranty agreement
for up to one year and defer a portion of the revenues at the time of sale based
on the objective evidence for the fair value of these services. After the
initial warranty period, we offer these customers optional maintenance
contracts; revenue related to these contracts is deferred and recognized ratably
over the period of the contract. Our warranty costs were $4.6 million, $4.2
million and $3.8 million, for the years ended December 31, 2002, 2001 and 2000,
respectively. The Company's systems are sold with software products that are
integral to the operation of the systems. These software products are not sold
separately.
Certain of the Company's sales are made through a sales agent to customers where
substantial uncertainty exists with respect to collection of the sales price.
The substantial uncertainty is generally a result of the absence of a history of
doing business with the customer and with respect to the uncertain political
environment in the country in which the customer does business. For these sales,
the Company records revenues based on the cost recovery method, which requires
that the sales proceeds received are first applied to the carrying amount of the
asset sold until the carrying amount has been recovered, thereafter, all
proceeds are credited to sales.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS 146
will not have a material impact on our results of operations or financial
condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amended SFAS No. 123,
"Accounting for Stock-Based Compensation." The new standard provides alternative
methods of transition for a voluntary change to the fair market value based
method for accounting for stock-based employee compensation. Additionally, the
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. In compliance with SFAS No. 148, we have
elected to continue to follow the intrinsic value method in accounting for its
stock-based employee compensation plan as defined by Accounting Principles Board
("APB") Opinion No. 25 and has made the applicable disclosures in Note 15 of the
Notes to the Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No. 150 (SFAS No. 150), "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 establishes standards on the classification and
measurement of financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 will become effective for financial instruments entered
into or modified after May 31, 2003. We are in the process of assessing the
effect of SFAS No. 150 and does not expect the implementation of the
pronouncement to have a material effect on its financial condition or results of
operations.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation it has undertaken in issuing the guarantee. We will apply FIN 45
to guarantees, if any, issued after December 31, 2002. We have not yet evaluated
the financial statement impact of the adoption of FIN 45. FIN 45 also requires
guarantors to disclose certain information for guarantees, including product
warranties, outstanding at December 31, 2002.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. We do not expect to identify any variable interest entities
that must be consolidated.
20
Results of Operations
The following table sets forth the percentage relationship of certain items from
our Statements of Operations to total sales:
Percentage of Total Sales
Years Ended December 31,
-----------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
Sales:
Products 69.9% 71.2% 73.1%
Services 30.1% 28.8% 26.9%
---------------- ---------------- ----------------
Total sales 100.0% 100.0% 100.0%
---------------- ---------------- ----------------
Cost of sales:
Products 37.4% 35.6% 32.0%
Services 22.4% 21.0% 19.9%
---------------- ---------------- ----------------
Total cost of sales 59.8% 56.6% 51.9%
---------------- ---------------- ----------------
Gross profit 40.2% 43.4% 48.2%
Selling, general and administrative expenses 41.7% 36.1% 29.9%
Research and development expenses 13.3% 9.3% 7.2%
Severance and other restructuring costs 3.8% --- ---
---------------- ---------------- ----------------
(Loss) income from operations (18.6)% (2.0)% 11.1%
Interest and other (expense) income, net (2.6)% (0.9)% 0.1%
Gain on arbitration settlement 15.9% --- ---
Provision for (benefit from) income taxes 7.7% (0.8)% 3.9%
---------------- ---------------- ----------------
Net (loss) income (12.9)% (2.1)% 7.2%
================ ================ ================
The following table sets forth, for the periods indicated, total sales
attributable to each of the Company's major products and services groups, and
those sales as a percentage of total sales:
Years Ended December 31,
-----------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
(in thousands, except for percentages)
Products:
SLA systems and related equipment $ 29,186 $ 35,223 $ 44,803
SLS systems and related equipment 13,362 8,651 --
Solid object printers 1,931 5,261 6,520
Materials 31,619 30,633 25,267
Other 4,941 4,790 3,267
----------------- ----------------- -----------------
Total products 81,039 84,558 79,857
----------------- ----------------- -----------------
Services:
Maintenance 33,038 32,239 26,079
Other 1,884 1,943 3,350
----------------- ----------------- -----------------
Total services 34,922 34,182 29,429
----------------- ----------------- -----------------
Total sales $ 115,961 $ 118,740 $ 109,286
================= ================= =================
Products:
SLA systems and related equipment 25.2% 29.7% 41.0%
SLS systems and related equipment 11.5% 7.3% --%
Solid object printers 1.7% 4.4% 6.0%
Material 27.3% 25.8% 23.1%
Other 4.2% 4.0% 3.0%
----------------- ----------------- -----------------
Total products 70.0% 71.2% 73.1%
----------------- ----------------- -----------------
Services:
Maintenance 28.5% 27.2% 23.9%
Other 1.6% 1.6% 3.0%
----------------- ----------------- -----------------
Total services 30.1% 28.8% 26.9%
----------------- ----------------- -----------------
Total sales 100.0% 100.0% 100.0%
================= ================= =================
21
2002 Compared to 2001
Sales. Sales in 2002 were $116.0 million, a decrease of 2.3% from the $118.7
million recorded in 2001. Sales for 2001 reflect the consolidated results of DTM
as of August 17, 2001. The SLS product line of machines and materials resulting
from the DTM acquisition contributed $27.9 million and $13.8 million in revenue
in 2002 and 2001, respectively.
Product sales of $81.0 million were recorded in 2002, a decrease of 4.2%
compared to $84.6 million for 2001. Without the inclusion of the SLS product
line (which includes materials from the SLS product line), product sales of
$53.1 million would have been recorded for 2002, compared to $70.8 million for
2001. This decrease in product sales is due primarily to the decrease in our
sales of ThermoJet solid object printers and related equipment of $3.3 million
or 63.3%, a decrease in sales of our SLA systems and related equipment of $6.0
million or 17.1% and a decrease in materials revenue of $8.5 million or 33.4%.
In 2002, we sold a total of 139 SLA systems compared to 2001 in which we sold a
total of 190 SLA systems. In addition, we sold 44 SLS systems in 2002, compared
to 39 SLS systems in 2001. SLS unit sales from 2001 reflect the consolidated
results of DTM as of August 17, 2001. The reduction in the number of units sold
is a result of the economic slowdown worldwide during most of 2002.
Without the inclusion of $14.6 million and $5.1 million in materials revenue
from the SLS product line in 2002 and 2001, respectively, materials revenue of
$17.0 million were recorded in 2002, a 33.4% decrease from the $25.5 million
recorded in 2001. The decrease in materials revenue primarily relates to lower
resin volumes as we continue to solicit customers to transition from Vantico
material to our manufactured material. We have recovered in excess of 70% of
the market share lost from the termination of our sales agreement with Vantico
through December 31, 2002.
System orders and resultant sales may fluctuate on a yearly basis as a result of
a number of other factors, including world economic conditions, fluctuations in
foreign currency exchange rates, acceptance of new products and the timing of
product shipments. Due to the price of certain systems and the overall low unit
volumes, the acceleration or delay of shipments of a small number of higher-end
SLA systems from one period to another can significantly affect the results of
operations for the periods involved.
Service sales in 2002 totaled $34.9 million, an increase of 2.2% from $34.2
million in 2001. The increase primarily reflects an increase in maintenance
contract revenue, coupled with the consolidation of service revenue from the DTM
acquisition. The increase in maintenance contract revenue reflects a continued
emphasis of providing a multitude of maintenance contract options to our
customers and enhanced selling efforts in this area, coupled with an increase in
the installed base of machines.
Sales for our U.S. operating segment for 2002 and 2001 were $57.4 million and
$61.0 million, respectively, a decrease of 6.1%. Sales for our European
operating segment were $44.5 million, a slight increase from the $44.3 million
recorded in 2001. Sales for our Asia/Pacific operating segment for 2002 were
$14.1 million, an increase of 5.2% from the $13.4 million recorded in 2001
primarily due to an increase in service revenues. As noted above, the economic
slowdown worldwide has impacted our overall sales for 2002. This was partially
offset by the addition of DTM revenue for four months