SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-22250
3D SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4431352
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
26081 AVENUE HALL, VALENCIA, CALIFORNIA 91355
(Address of Principal Executive Offices) (Zip Code)
(661) 295-5600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Shares of Common Stock, par value $0.001, outstanding as of November 7,
2002: 12,708,171
3D SYSTEMS CORPORATION
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION.................................................3
ITEM 1. Financial Statements.......................................3
Consolidated Balance Sheets as of September 27, 2002
(unaudited) and December 31, 2001..........................3
Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 27, 2002
and September 28, 2001 (unaudited).........................4
Consolidated Statement of Stockholders' Equity for
the year ended December 31, 2001 and for the nine
months ended September 27, 2002 (unaudited)................5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 27, 2002 and
September 28, 2001 (unaudited).............................6
Consolidated Statements of Comprehensive Income
(Loss) for the Three Months and Nine Months Ended
September 27, 2002 and September 28, 2001 (unaudited)......8
Notes to Consolidated Financial Statements (unaudited).....9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................16
Liquidity and Capital Resources...........................26
Cautionary Statements and Risk Factors....................28
ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk.........................................35
ITEM 4. Controls and Procedures...................................36
PART II. OTHER INFORMATION....................................................37
ITEM 1. Litigation Proceedings....................................37
ITEM 6. Exhibits and Reports on Form 8-K..........................38
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
3D SYSTEMS CORPORATION
Consolidated Balance Sheets
As of September 27, 2002 and December 31, 2001
(in thousands)
(UNAUDITED)
SEPTEMBER 27, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,032 $ 5,948
Accounts receivable, less allowances for doubtful accounts
of $2,224 (2002) and $2,710 (2001) 30,120 38,181
Current portion of lease receivables 391 498
Inventories 14,940 17,822
Deferred tax assets 5,764 5,271
Prepaid expenses and other current assets 2,878 2,817
---------- ----------
Total current assets 55,125 70,537
Property and equipment, net 15,785 17,864
Licenses and patent costs, net 13,646 12,314
Deferred tax assets 10,035 6,618
Lease receivables, less current portion 1,019 1,750
Acquired technology, net 8,018 9,192
Goodwill 43,381 44,158
Other assets, net 2,951 3,572
---------- ----------
$ 149,960 $ 166,005
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 546 $ 6,151
Accounts payable 13,216 12,819
Accrued liabilities 10,373 15,681
Current portion of long-term debt 4,512 3,135
Customer deposits 904 1,624
Deferred revenues 12,623 13,697
---------- ----------
Total current liabilities 42,174 53,107
Deferred tax liabilities 4,888 4,210
Other liabilities 3,456 3,329
Long-term debt, less current portion 13,845 16,240
Subordinated debt 10,000 9,400
---------- ----------
74,363 86,286
---------- ----------
Stockholders' equity:
Preferred stock, authorized 5,000 shares, none issued --- ---
Common stock, authorized 25,000 shares, issued 12,931 and
outstanding 12,706 (2002) and issued 13,357 and
outstanding 13,132 (2001) 13 13
Capital in excess of par value 86,363 93,173
Notes receivable from officers for purchase of stock (59) (244)
Accumulated deficit (4,515) (5,263)
Accumulated other comprehensive loss (4,665) (6,420)
Treasury stock, at cost, 225 shares (2002 and 2001) (1,540) (1,540)
---------- ----------
Total stockholders' equity 75,597 79,719
---------- ----------
$ 149,960 $ 166,005
========== ==========
See accompanying notes to consolidated financial statements
Page 3
3D SYSTEMS CORPORATION
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
27, 2002 28, 2001 27, 2002 28, 2001
----------- ----------- ----------- -----------
Sales:
Products $ 19,062 $ 22,440 $ 57,354 $ 60,327
Services 9,327 9,104 27,013 24,162
----------- ----------- ----------- -----------
Total sales 28,389 31,544 84,367 84,489
Cost of sales:
Products 9,541 11,745 31,310 29,346
Services 6,701 6,280 19,898 17,509
----------- ----------- ----------- -----------
Total cost of sales 16,242 18,025 51,208 46,855
----------- ----------- ----------- -----------
Gross profit 12,147 13,519 33,159 37,634
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 11,129 10,001 35,072 28,001
Research and development 3,789 2,791 12,435 7,624
Severance and other restructuring
costs 2,734 --- 4,350 ---
----------- ----------- ----------- -----------
Total operating expenses 17,652 12,792 51,857 35,625
----------- ----------- ----------- -----------
(Loss) income from operations (5,505) 727 (18,698) 2,009
Interest and other income (expense), net (629) (360) (1,997) (22)
Gain on arbitration settlement --- --- 18,464 ---
----------- ----------- ----------- -----------
(Loss) income before (benefit from)
provision for income taxes (6,134) 367 (2,231) 1,987
(Benefit from) provision for income
taxes (4,345) 136 (2,979) 735
----------- ----------- ----------- -----------
Net (loss) income $ (1,789) $ 231 $ 748 $ 1,252
=========== =========== =========== ===========
Shares used to calculate basic net
income (loss) per share 12,675 12,499 12,881 12,396
=========== =========== =========== ===========
Basic net income (loss) per share $ (.14) $ .02 $ .06 $ .10
=========== =========== =========== ===========
Shares used to calculate diluted net
income (loss) per share 12,675 13,276 13,441 13,176
=========== =========== =========== ===========
Diluted net income (loss) per share $ (.14) $ .02 $ .06 $ .10
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
Page 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AS OF DECEMBER 31, 2001 AND SEPTEMBER 27, 2002
(IN THOUSANDS)
(UNAUDITED)
NOTES
COMMON STOCK RECEIVABLE
---------------------- CAPITAL IN FROM ACCUMULATED
PAR EXCESS OF OFFICERS OTHER TOTAL
VALUE PAR FOR PURCHASE ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES $0.001 VALUE OF STOCK DEFICIT INCOME (LOSS) STOCK EQUITY
--------- -------- ----------- ------------ ----------- ------------- --------- -------------
Balance at
December 31,
2000 12,198 $ 12 $ 81,568 $ (330) $ (3,922) $ (3,992) $ (1,540) $ 71,796
Exercise of stock
options 294 --- 2,127 --- --- --- --- 2,127
Employee stock
purchase plan 23 --- 242 --- --- --- --- 243
Private placement 617 --- 8,021 --- --- --- --- 8,021
Repayment of
officer loans --- --- --- 86 --- --- --- 86
Tax benefit
related to
stock option
exercises --- --- 1,215 --- --- --- --- 1,215
Net loss --- --- --- --- (1,341) --- --- (1,341)
Cumulative
translation
adjustment --- --- --- --- --- (2,428) --- (2,428)
--------- -------- ----------- ------------ ----------- ------------- --------- -----------
Balance at
December 31,
2001 13,132 13 93,173 (244) (5,263) (6,420) (1,540) 79,719
Exercise of stock
options 106 --- 788 --- --- --- --- 788
Employee stock
purchase plan 18 --- 155 --- --- --- --- 155
Vantico
settlement
(net of put
option) (1,550) (1) (20,308) --- --- --- --- (20,309)
Private placement 1,000 1 12,491 --- --- --- --- 12,492
Issuance of
warrants --- --- 64 --- --- --- --- 64
Repayment of
officer loans --- --- --- 185 --- --- --- 185
Net income --- --- --- --- 748 --- --- 748
Cumulative
translation
adjustment --- --- --- --- --- 1,755 --- 1,755
--------- -------- ----------- ------------ ----------- ------------- --------- -----------
Balance at
September 27,
2002 12,706 $ 13 $ 86,363 $ (59) $ (4,515) $ (4,665) $ (1,540) $ 75,597
========= ======== =========== ============ =========== ============= ========= ===========
See accompanying notes to consolidated financial statements.
Page 5
3D SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
NINE MONTHS ENDED
-------------------------
SEPTEMBER SEPTEMBER
27, 2002 28, 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 748 $ 1,252
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Deferred income taxes (3,897) 356
Gain on arbitration settlement (including $1,846 included
in S,G&A for legal reimbursement) (20,310) ---
Depreciation and amortization 7,129 4,253
Loss on disposition of property and equipment 179 153
Issuance of warrants related to RPC employees 64 ---
Changes in operating accounts, excluding acquisition:
Accounts receivable 9,565 (3,977)
Lease receivables 838 3,711
Inventories 3,087 (3,471)
Prepaid expenses and other current assets 105 999
Other assets 561 (1,606)
Accounts payable (410) (301)
Accrued liabilities (1,629) 1,524
Customer deposits (720) 23
Deferred revenues (1,446) (625)
Other liabilities 705 (1,735)
----------- -----------
Net cash (used in) provided by operating activities (5,431) 556
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in OptoForm SARL (1,200) (1,311)
Investment in DTM --- (48,606)
Investment in RPC (2,045) (2,113)
Purchase of property and equipment (1,569) (3,684)
Additions to licenses and patents (2,661) (203)
Software development costs (446) (299)
----------- -----------
Net cash used for investing activities (7,921) (56,216)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and purchase plan 943 2,282
Proceeds from sale of stock 12,492 8,021
Borrowings 34,928 39,092
Repayment of long-term debt (40,950) (4,061)
Repayment of notes receivable from officers and employees 185 39
----------- -----------
Net cash provided by financing activities 7,598 45,373
Effect of exchange rate changes on cash 838 (184)
----------- -----------
Net (decrease) increase in cash and cash equivalents (4,916) (10,471)
Cash and cash equivalents at the beginning of the period 5,948 18,999
----------- -----------
Cash and cash equivalents at the end of the period $ 1,032 $ 8,528
=========== ===========
See accompanying notes to consolidated financial statements.
Page 6
Supplemental schedule of non-cash investing and financing activities:
During the nine months ended September 27, 2002 and September 28, 2001, the
Company transferred $4.9 million and $2.4 million of property and equipment from
inventories to fixed assets, respectively. Additionally, $4.0 million and $1.3
million of property and equipment was transferred from fixed assets to
inventories for the nine months ended September 27, 2002 and September 28, 2001,
respectively.
In conjunction with the $22 million arbitration settlement with Vantico which
was settled through the return of shares to the Company, the Company allocated
$1.7 million to a put option which is included as an addition to stockholders'
equity in the first quarter of 2002.
The Company issued warrants valued at $64,000 to selling shareholders of RPC.
Page 7
3D SYSTEMS CORPORATION
Consolidated Statements of Comprehensive Income (loss)
(in thousands)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income (loss) $ (1,789) $ 231 $ 748 $ 1,252
Foreign currency translation (1,116) 1,402 1,755 (463)
------------- ------------- ------------- ------------
Comprehensive income (loss) $ (2,905) $ 1,633 $ 2,503 $ 789
============= ============= ============= ============
See accompanying notes to consolidated financial statements.
Page 8
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
September 27, 2002 and September 28, 2001
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements of 3D Systems
Corporation and subsidiaries (the "Company") are prepared in accordance
with instructions to Form 10-Q and, in the opinion of management, include
all adjustments (consisting only of normal recurring accruals) which are
necessary for the fair presentation of results for the interim periods. The
Company reports its interim financial information on a 13-week basis ending
the last Friday of each quarter, and reports its annual financial
information through the calendar year ended December 31. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001. The results of
the three and nine months ended September 27, 2002 are not necessarily
indicative of the results to be expected for the full year.
(2) Significant accounting policies and estimates
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to allowance for doubtful accounts,
income taxes, inventories, goodwill, intangible assets and contingencies.
The Company bases its estimates 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.
The Company believes the following critical accounting policies are most
affected by management's judgements and the estimates used in preparation
of the consolidated financial statements.
Allowance for doubtful accounts. The Company's estimate for the allowance
for doubtful accounts related to trade receivables is based on two methods.
The amounts calculated from each of these methods are combined to determine
the total amount reserved. First, the Company evaluates specific accounts
where it has information that the customer may have an inability to meet
its financial obligations (for example, bankruptcy). In these cases, the
Company uses its judgment, based on the available facts and circumstances,
and records a specific reserve for that customer against amounts due to
reduce the receivable to the amount that is expected to be collected. These
specific reserves are reevaluated and adjusted as additional information is
received that impacts the amount reserved. Second, a reserve is established
for all customers based on a range of percentages applied to aging
categories. These percentages are based on historical collection and
write-off experience. If circumstances change (for example, the Company
experiences higher than expected defaults or an unexpected material adverse
change in a major customer's ability to meet its financial obligation to
the Company), estimates of the recoverability of amounts due to the Company
could be reduced by a material amount.
Income taxes. The determination of the Company's income tax provision is
complex due to operations in numerous tax jurisdictions outside the United
States, which are subject to certain risks, which ordinarily would not be
expected in the United States. Tax laws in certain jurisdictions are
subject to significant changes, which may be applied on a retroactive
basis. If this were to occur, the Company's tax expense could be materially
different than the amounts reported. Furthermore, in determining the
valuation allowance related to deferred tax assets, the Company estimates
future taxable income and determines the magnitude of deferred tax assets,
which are more likely than not to be realized. Future taxable income could
be materially different than amounts estimated, in which case the Company
would need to adjust the valuation allowance.
Inventories. Inventories are stated at the lower of cost or market, cost
being determined using the first-in, first-out method. Reserves for slow
moving and obsolete inventories are provided based on historical experience
and current product demand. The Company evaluates the adequacy of these
reserves quarterly.
Page 9
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.
In the second quarter of 2002, the Company concluded that the fair value of
the Company's reporting unit exceeded it's carrying value and accordingly,
as of that date, there were no goodwill impairment issues. The Company
plans to perform a valuation of its reporting unit annually, or upon
significant changes in the Company's business environment.
Licenses and Patent Costs. For the nine months ended September 27, 2002 and
September 28, 2001, the Company capitalized $2.7 million and $.2 million
respectively, and $1.2 million and $0 respectively, for the three months
ended September 27, 2002 and September 28, 2001, related to the legal
defense and application of its patents and licenses.
Contingencies. The Company accounts for contingencies in accordance with
SFAS No. 5, "Accounting for Contingencies." SFAS No. 5 requires that the
Company record an estimated loss from a loss contingency when information
available prior to issuance of the Company's financial statements indicates
that it is probable that an asset has been impaired or a liability has been
incurred at the date of the financial statements and the amount of the loss
can be reasonably estimated. Accounting for contingencies such as
litigation require the Company to use its judgment. At this time the
Company cannot reasonably estimate its contingencies and no loss
contingencies have been recorded, however, management believes the ultimate
outcome of these matters will not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
Revenue recognition. Revenues from the sale of systems and related products
and services are recognized upon shipment, at which time title has passed
to the customer, or in the case of services, upon performance. The Company
provides end users with up to one year of maintenance and warranty
services, and defers a portion of its revenues at the time of sale based on
the relative fair value of such services. After the initial maintenance
period, the Company offers customers optional maintenance contracts;
revenue related to these contracts is deferred and recognized ratably over
the period of the contract. To date, the Company has not experienced any
significant warranty claims or significant product returns. 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.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted
accounting principles, with no need for management's judgment in their
application.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued 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
Company has not yet evaluated the financial statement impact of the
adoption of SFAS 146.
(3) Inventories (in thousands):
SEPTEMBER 27, DECEMBER 31,
2002 2001
---------------- -----------------
Raw materials $ 1,865 $ 2,397
Work in progress 281 759
Finished goods 12,794 14,666
---------------- -----------------
$ 14,940 $ 17,822
================ =================
Page 10
(4) Property and Equipment, net (in thousands):
SEPTEMBER 27, DECEMBER 31, USEFUL LIFE
2002 2001 (IN YEARS)
------------- ------------ --------------
Land and building $ 4,637 $ 4,637 30
Machinery and equipment 26,157 26,259 3-5
Office furniture and equipment 3,498 3,183 5
Leasehold improvements 3,453 3,323 Life of lease
Rental equipment 1,192 1,015 5
Construction in progress 1,389 925 N/A
------------ ------------
40,326 39,342
Less accumulated depreciation (24,541) (21,478)
------------ ------------
$ 15,785 $ 17,864
============ ============
(5) LICENSES AND PATENT COSTS
Licenses and patent costs at September 27, 2002 and December 31, 2001 are
summarized as follows (in thousands):
SEPTEMBER 27, DECEMBER 31,
2002 2001
------------- -----------
Licenses, at cost $ 2,333 $ 2,333
Patent costs 20,985 18,349
------------ -----------
23,318 20,682
Less: Accumulated amortization (9,672) (8,368)
------------ -----------
$ 13,646 $ 12,314
============ ===========
For three months ended September 27, 2002 and September 28, 2001, the
Company amortized $0.3 million and $0.2 million in license and patent
costs, respectively. For the nine months ended September 27, 2002 and
September 28, 2001, the Company amortized $1.3 million and $0.6 million in
license and patent costs, respectively. The Company incurred $2.6 million
in costs for the nine months ended September 27, 2002 to acquire, defend,
develop and extend patents in the United States, Japan, Europe, and certain
other countries.
ACQUIRED TECHNOLOGY
Acquired technology at September 27, 2002 and December 31, 2001 are
summarized as follows (in thousands):
SEPTEMBER 27, DECEMBER 31,
2002 2001
------------- ------------
Acquired technology $ 9,964 $ 9,880
Less: Accumulated amortization (1,946) (688)
-------------- -----------
$ 8,018 $ 9,192
============== ===========
For three months ended September 27, 2002 and September 28, 2001, the
Company amortized $0.5 million and $0.1 in acquired technology,
respectively. For the nine months ended September 27, 2002 and September
28, 2001, the Company amortized $1.3 million and $0.1 in acquired
technology, respectively.
GOODWILL
The changes in the carrying amount of goodwill for the nine months ended
September 27, 2002 are as follows (in thousands):
Balance as of December 31, 2001 $ 44,158
Effect of foreign currency exchange rates 210
Adjustments related to DTM acquisition (987)
Less: Accumulated amortization ---
-----------
Balance at September 27, 2002 $ 43,381
===========
The changes related to the DTM acquisition represent adjustments to the
purchase price for income tax refunds received partially offset by an
adjustment for sales and use taxes payable.
The Company recorded no goodwill expense for the three and nine months
ended September 28, 2001.
Page 11
During the nine months ended September 27, 2002 and September 28, 2001, the
Company had amortization expense on intangible assets of $3.0 million and
$1.0 million respectively. The estimated amortization expense for each of
the five succeeding fiscal years are as follows (in thousands):
FOR THE YEAR ENDING DECEMBER 31,
-----------------------------------
2003 $ 3,218
2004 $ 2,985
2005 $ 2,885
2006 $ 2,845
2007 $ 2,079
(6) Computation of Earnings Per Share
In accordance with SFAS No. 128, "Earnings Per Share," basic net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the period.
Dilutive net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
plus the number of additional common shares that would have been
outstanding if all potential dilutive common shares had been issued.
Potential common shares related to convertible debt, stock options and
warrants are excluded from the computation when their effect is
antidilutive.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings (loss) per share computations for the three and
nine months ended September 27, 2002 and September 28, 2001 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Numerator:
Net (loss) income--numerator
for basic and diluted net (loss)
income per share $ (1,789) $ 231 $ 748 $ 1,252
Denominator:
Denominator for basic net (loss)
income per share-- weighted
average shares 12,675 12,499 12,881 12,396
Effect of dilutive securities:
Stock options and warrants --- 777 560 780
------------- ------------- ------------- -------------
Denominator for diluted net (loss)
income per share 12,675 13,276 13,441 13,176
============= ============= ============= =============
Potential common shares related to convertible debt, stock options and
warrants that are antidilutive amounted to 1,781,916 shares and 388,808
shares for the nine months ended September 27, 2002 and September 28, 2001,
respectively.
(7) Segment Information
All of the Company's assets are devoted to the manufacture and sale of
Company systems, supplies and services; assets are not identifiable by
operating segment. The Company's three major operating segments are U.S.
operations, European operations and Asia/Pacific operations, and segment
operations are measured by gross profit.
Summarized data for the Company's operating segments is as follows (in
thousands):
Page 12
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
-------------- -------------- ------------- -------------
Sales:
U.S. operations $ 14,128 $ 14,387 $ 43,499 $ 39,844
European operations 11,973 13,834 31,497 33,431
Asia/Pacific operations 2,288 3,323 9,371 11,214
-------------- ------------- ------------ ------------
Total sales 28,389 31,544 84,367 84,489
Cost of sales:
U.S. operations 7,896 8,611 26,104 22,410
European operations 6,845 7,653 19,954 18,579
Asia/Pacific operations 1,501 1,761 5,150 5,866
-------------- ------------- ------------ ------------
Total cost of sales 16,242 18,025 51,208 46,855
-------------- ------------- ------------ ------------
Gross profit $ 12,147 $ 13,519 $ 33,159 $ 37,634
============== ============= ============ ============
(8) Debt
On August 17, 2001, the Company entered into a loan agreement with U.S.
Bank totaling $41.5 million, in order to finance the acquisition of DTM.
The financing arrangement consisted of a $26.5 million three-year revolving
credit facility and $15 million 66-month commercial term loan. At September
27, 2002, a total of $0.5 million was outstanding under the revolving
credit facility and $12.7 million outstanding under the term loan. The
interest rate at September 27, 2002 for the revolving credit facility and
term loan was 4.3%. The interest rate applicable to both facilities will be
either: (1) the prime rate plus a margin ranging from 0.25% to 1.0%, or (2)
the 90-day adjusted LIBOR plus a margin ranging from 2.0% to 2.75%. The
margin for each rate will vary depending upon our interest-bearing debt to
earnings before interest, taxes, depreciation and amortization, "EBITDA."
The terms of the debt agreement require the Company to maintain specific
levels of minimum tangible net worth, EBITDA and liquidity, along with
capital expenditure restrictions. The Company has amended the loan
agreement with U.S. Bank to reduce the amount of the revolving credit
facility to $13.5 million, eliminate the requirement that the Company
maintain a minimum of $5 million in cash at quarter end and allow for a
one-time benefit in our third and fourth quarter of 2002 EBITDA
calculations. The Company is in compliance with all loan covenants as
amended, at September 27, 2002. Subsequent to September 27, 2002, the
Company further amended its agreement with U.S. Bank which reduced the
Company's revolving credit facility and term loan to $9.7 million and $10.3
million respectively and altered its covenant requirements for 2003.
(9) Acquisitions
In August 2001, the Company acquired 100 percent of the outstanding common
shares of DTM. The results of DTM's operations have been included in the
consolidated financial statements since the date of acquisition.
At September 27, 2002, acquisition liabilities for severance and duplicate
facilities totaled $0.5 million. During the first nine months of 2002 the
Company made $0.6 million in acquisition related severance payments. The
final severance and facilities payments will be made in 2003 and 2006,
respectively.
The following table reflects unaudited pro-forma combined results of
operations of the Company and DTM on the basis that the acquisition of DTM
had taken place at the beginning of the period presented:
NINE MONTHS ENDED
SEPTEMBER 28, 2001
------------------
(IN THOUSANDS)
Net sales $ 107,204
Net income $ 132
Basic income per common share $ 0.01
Diluted income per common share $ 0.01
The unaudited pro-forma combined results of operations are not indicative
of the actual results that would have occurred had the acquisition been
consummated at the beginning of fiscal year 2001 or of future operations of
the combined entities under the ownership and operation of the Company.
Page 13
(10) Severance and other restructuring costs
On July 24, 2002, the Company substantially completed a reduction in
workforce, which eliminated 109 positions out of its total workforce of 523
or approximately 20% of the total workforce. In addition, the Company
closed its existing office in Austin, Texas, which it acquired as part of
its acquisition of DTM, as well as its sales office in Farmington Hills,
Michigan. This was the second reduction in workforce completed in 2002. On
April 9, 2002, the Company eliminated approximately 10% of its total
workforce. All costs incurred in connection with these restructuring
activities are included as severance and other restructuring costs in the
accompanying consolidated statement of operations.
A summary of the severance and other restructuring costs consist of the
following (in thousands, except number of employees):
Second Quarter Third Quarter
Provision Provision Remaining
April 2002 July 2002 Utilized Balance
-------------- ------------- -------- ---------
Severance costs (one-time benefits) $ 1,616 $ 1,906 $ 2,935 $ 587
Contract termination costs 0 638 86 552
Other associated costs 0 190 104 86
---------- ---------- -------- --------
Total severance and other restructuring costs $ 1,616 $ 2,734 $ 3,125 $ 1,225
========== ========== ======== ========
Number of employees 63 109 167 5
========== ========== ======== ========
These amounts are included in accrued liabilities and are expected to be
paid by October 2003. There have been no adjustments to the liability
except for payments of amounts due under the restructuring plan.
(11) Contingencies
3D SYSTEMS, INC. V. AAROFLEX, ET AL. On January 13, 1997, the Company filed
a complaint in federal court in California, against Aarotech Laboratories,
Inc., Aaroflex, Inc. and Albert C. Young. Aaroflex is the parent
corporation of Aarotech. Young is the Chairman of the Board and Chief
Executive Officer of both Aarotech and Aaroflex. The original complaint
alleged that stereolithography equipment manufactured by Aaroflex infringes
six of the Company's 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 the Company's complaint and on Aaroflex's counterclaims have
been dismissed and fact discovery in the case has been completed. The
Company's 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 the Company's motions for summary judgment on
infringement, reserving the right to revisit on its own initiative the
decisions following the determination of claim construction. The court also
granted in part the Company's motion on validity. The case is in the final
stages of preparation for trial. The court indicated a trial date would be
forthcoming shortly.
DTM VS. EOS, ET AL. The plastic sintering patent infringement actions
against EOS began in France, Germany and Italy in 1996. Legal actions in
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, the Company 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, but the appeal does not stay the injunction. In
February 2002, the Company 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
was recommenced and awaiting a decision from the court on this matter.
Page 14
EOS VS. DTM AND 3D SYSTEMS, INC. In December 2000, EOS filed a patent
infringement suit against DTM in federal court in California. EOS alleges
that DTM has infringed and continues to infringe certain U.S. patents that
the Company licenses to EOS. EOS has estimated its damages to be
approximately $27.0 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, the Company was added as a plaintiff to the lawsuit.
On October 17, 2001, the Company was substituted as a defendant in this
action because DTM's corporate existence terminated when it merged into the
Company's subsidiary, 3D Systems, Inc. in August 2001. In February 2002,
the court granted summary adjudication on the Company's 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. 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 from February 2003 to April 29, 2003, and has
set a cut-off date for all discovery of January 20, 2003.
3D SYSTEMS, INC. VS. AMES. In April 2002, the Company 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.
OTHER ITEMS
On May 22, 2002, EOS GmbH announced in a press release that it had filed a
lawsuit against the Company in a German court seeking damages for the
alleged breach of the 1997 Patent License Agreement. To date the Company
has not been served with any pleadings relating to this matter and is
therefore unable to make any evaluation of potential liability with respect
to it.
3D Systems is currently involved in a dispute with Regent Pacific
Management Corporation ("Regent"), which had provided management services
to 3D Systems from September 1999 through September 2002, and with Gary
Sbona, a principal of Regent who was also an employee and director of 3D
Systems during the term of Regent's engagement. This dispute involves a
claim by Regent that 3D Systems owes $780,000 in "liquidated damages"
related to the hiring of Ben DiLello and the engagement of Brian Service,
both former principals of Regent, at the end of the Regent engagement. It
is the Company's position that Regent had previously agreed to a waiver of
these fees. The dispute also involves a disagreement with regard to the
termination provisions in certain option certificates and agreements
pursuant to which Mr. Sbona was granted stock options. These certificates
and agreements cover 166,666 non-qualified stock options issued to Mr.
Sbona in 1999 at an exercise price of $6.00 and 350,000 incentive stock
options issued to Mr. Sbona in 2001 at an exercise price of $12.43.
At this time, the Company is not able to estimate these legal contingencies
and these contingencies have not been recorded; however, management
believes the ultimate outcome of these actions will not have a material
adverse effect on the Company's consolidated financial position, results of
operations and cash flows.
Page 15
3D SYSTEMS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 1, and the
cautionary statements and risk factors included in this Item 2 of this
Quarterly Report.
The forward-looking information set forth in this quarterly report on Form
10-Q is as of the date of this filing, and we undertake no duty to update
this information. If events occur subsequent to the date of this filing
that make it necessary to update the forward-looking information contained
in this Form 10-Q, the updated forward-looking information will be filed
with the Securities and Exchange Commission in a quarterly report on Form
10-Q or a current report on Form 8-K, each of which will be available at
our website at www.3dsystems.com. More information about potential factors
that could affect our business and financial results is included in the
section in this Item 2. entitled "Cautionary Statement and Risk Factors."
OVERVIEW
We develop, manufacture and market worldwide solid imaging systems designed
to reduce the time it takes to produce three-dimensional objects. Our
products produce physical objects from the digital output of solid or
surface data from computer aided design and manufacturing, which we refer
to as CAD/CAM, and related computer systems, and include SLA(R) systems,
SLS(R) systems and ThermoJet(R) solid object printers.
SLA systems use our proprietary stereolithography technology, which we
refer to as SL, an additive solid imaging process which uses a laser beam
to expose and solidify successive layers of photosensitive resin until the
desired object is formed to precise specifications in epoxy or acrylic
resin. SLS systems utilize a process called laser sintering, which we refer
to as LS, which uses laser energy to sinter powdered material to create
solid objects from powdered materials. LS and SL-produced parts can be used
for concept models, engineering prototypes, patterns and masters for molds,
consumable tooling, and short-run manufacturing of final product, among
other applications. ThermoJet solid object printers employ hot melt ink jet
technology to build models in successive layers using our proprietary
thermoplastic material. These printers, about the size of an office copier,
are network-ready and are designed for operation in engineering and design
office environments. The ThermoJet printer output can be used as patterns
and molds, and when combined with other secondary processes such as
investment casting, can produce parts with representative end-use
properties.
Our customers include major corporations in a broad range of industries
including service bureaus and manufacturers of automotive, aerospace,
computer, electronic, consumer and medical products. Our revenues are
generated by product and service sales. Product sales are comprised of
sales of systems and related equipment, materials, software and other
component parts, as well as rentals of systems. Service and warranty sales
include revenues from a variety of on-site maintenance services and
customer training.
For the first nine months of 2002, the continued general economic slowdown
in capital equipment spending worldwide impacted both revenues and
earnings. In the first nine months of 2002, SLA system unit sales were down
22% and SLS system unit sales were down 25% from the same period in 2001
(comparing the combined results of 3D Systems and DTM Corporation for both
periods). In addition, the total sales of SLA large frame systems decreased
by 36% in the first nine months of 2002 compared to the same period in
2001. This had a significant impact on both revenue and overall gross
margin.
Since the second quarter of 2001, the market for our capital equipment has
been impacted by overall economic conditions. Consequently, we reduced our
cost structure by implementing an approximate 10% reduction in workforce
worldwide in April 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 a charge of $2.7 million in the quarter ending
September 27, 2002.
Page 16
Sales into our Advanced Digital Manufacturing ("ADM") market continues to
increase including sales into aerospace, motorsports, jewelry, and hearing
aids. Our ADM revenue was $12.0 million or 42% of our overall revenue in
the third quarter of 2002 and $9.9 million or 35% of our total revenue in
the second quarter of 2002, and we believe that the market demand for new
ADM applications continues to grow. Total revenue for ADM for the first
nine months of 2002 was $27.8 million or 32.9% of the total revenue. During
the first nine months of 2002, we placed five systems into aerospace
applications, a total of seven into motorsports, and thirteen systems into
jewelry related applications as well as several other ADM applications.
The following table reflects recurring revenues (service and materials
sales) and non-recurring revenues (system sales and related equipment) and
those revenues as a percentage of total revenues for the periods indicated
below (in thousands, expect percentages):
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Recurring revenues $16,607 $17,027 $50,814 $45,692
Non-recurring revenues 11,782 14,517 33,553 38,797
------------- ------------- ------------- -------------
Total revenues $28,389 $31,544 $84,367 $84,489
============= ============= ============= =============
Recurring revenues 58.5% 54.0% 60.2% 54.1%
Non-recurring revenues 41.5% 46.0% 39.8% 45.9%
------------- ------------- ------------- -------------
Total revenues 100.0% 100.0% 100.0% 100.0%
============= ============= ============= =============
During the third quarter, we progressed in new material development,
announcing 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, fire retardant nylon (for
commercial aerospace applications) and a resin that mimics nylon material,
are focused on meeting the opportunities available in ADM and significantly
expanding the range of applications for which 3D can provide solid imaging
solutions.
Brian Service has been retained as Chief Executive Officer. Mr. Service's
services were previously provided under an arrangement with Regent Pacific
Corporation. From September 10, 2002 (the date of the termination of the
Regent Agreement), through October 15, 2002, Mr. Service was engaged on an
interim consulting basis for which he was paid $79,999. Effective October
15, 2002, Mr. Service was employed by us pursuant to an employment
agreement under which he has agreed to serve as Chief Executive Officer
until at least December 2003. Mr. Service is being paid $17,809 on a
bi-weekly basis under this agreement, and has been awarded fully vested
options, with a term of five years, to purchase 350,000 shares of our
common stock at a price of $5.78 (the closing price on October 15, 2002).
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 their 1.55 million shares to us. We
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) 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 Judgement 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 to 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.
Page 17
SIGNIFICANT ACCOUNTING POLICIES
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. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including
those related to allowance for doubtful accounts, income taxes,
inventories, goodwill and intangible assets and contingencies. We base our
estimates 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.
We believe the following critical accounting policies are most affected by
management's more significant judgments and estimates used in preparation
of our consolidated financial statements.
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 available facts and circumstances, and record a specific
reserve for that customer against amounts due to reduce the receivable to
the amount that we expect to collect. We reevaluate and adjust these
specific reserves when we receive additional information that impacts the
amount reserved. Second, we establish a reserve for all customers based on
a range of percentages applied to aging categories. These percentages are
based on historical collection and write-off experience. If circumstances
change (for example, we experience higher than expected defaults or an
unexpected material adverse change in a major customer's ability to meet
its financial obligation to us), our estimates of the recoverability of
amounts due to us could be reduced by a material amount.
Income taxes. 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, in determining the valuation allowance
related to deferred tax assets, we estimate future taxable income and
determine the magnitude of deferred tax assets which are more likely than
not to be realized. Future taxable income could be materially different
than amounts estimated, in which case we would need to adjust the valuation
allowance.
Inventories. 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. We evaluate the adequacy of these reserves
quarterly.
Goodwill and intangible assets. We have applied Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" in our
allocation of the purchase price of DTM Corporation and RPC. The annual
impairment testing required by SFAS No. 142, "Goodwill and Other Intangible
Assets" will also require us to use our judgment and could require us to
write down the carrying value of our 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 on 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.
In the second quarter of 2002, the Company concluded that the fair value of
the Company's reporting unit exceeded it's carrying value and accordingly,
as of that date, there were no goodwill impairment issues. The Company
plans to perform a valuation of its reporting unit annually, or upon
significant changes in the Company's business environment.
Page 18
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 we can reasonably estimate the amount of the loss.
Accounting for contingencies such as legal and income tax matters requires
us to use our judgment. At this time, we are not able to estimate our
contingencies and we have not recorded these contingencies. 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
and services are recognized upon shipment, at which time title has passed
to the customer, or performance. We provide end users with up to one year
of maintenance and warranty services, and defer a portion of our revenues
at the time of sale based on the relative fair value of our services. After
the initial maintenance period, we offer these customers optional
maintenance contracts; revenue related to these contracts is deferred and
recognized ratably over the period of the contract. To date, we have not
experienced any significant warranty claims or product returns. We license
software in conjunction with the sale of our systems, that are integral to
the operation of the systems. We do not sell these software products
separately.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted
accounting principles, with no need for management's judgment in their
application.
Recent Accounting Pronouncements
In June 2002, the FASB issued 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
Company has not yet evaluated the financial impact of the adoption of SFAS
146.
Page 19
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Statements of Operations to
total sales:
PERCENTAGE OF TOTAL SALES
--------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Sales:
Products 67.1% 71.1% 68.0% 71.4%
Services 32.9% 28.9% 32.0% 28.6%
Total sales 100.0% 100.0% 100.0% 100.0%
Cost of sales:
Products (as a percent of product sales) 50.1% 52.3% 54.6% 48.6%
Services (as a percent of services sales) 71.8% 69.0% 73.7% 72.4%
Total cost of sales 57.2% 57.1% 60.7% 55.5%
Gross profit 42.8% 42.9% 39.3% 44.5%
Selling, general and administrative expenses 39.2% 31.7% 41.6% 33.1%
Research and development expenses 13.4% 8.9% 14.7% 9.0%
Severance costs 9.6% --- 5.2% ---%
Income (loss) from operations (19.4)% 2.3% (22.2)% 2.4%
Interest and other income (expense), net (2.2)% (1.2)% (2.3)% (0.1)%
Gain on arbitration settlement ---% ---% 21.9% ---%
Provision for (benefit from) income taxes (15.3)% 0.4% (3.5)% 0.8%
Net income (loss) (6.3)% 0.7% 0.9% 1.5%
Page 20
The following table sets forth, for the periods indicated, total sales
attributable to each of our major products and services groups, and those
sales as a percentage of total sales (in thousands, except for
percentages):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- ------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
--------------- --------------- -------------- --------------
Products:
SLA systems and related equipment $ 6,427 $ 8,580 $ 18,252 $ 28,416
Solid object printers 377 1,183 1,493 4,192
SLS systems and related equipment 3,008 3,976 10,223 3,976
Materials 7,280 7,923 23,801 21,530
Other 1,970 778 3,585 2,213
--------------- --------------- -------------- --------------
Total products 19,062 22,440 57,354 60,327
--------------- --------------- -------------- --------------
Services:
Maintenance 8,867 8,532 25,463 22,556
Other 460 572 1,550 1,606
--------------- --------------- -------------- --------------
Total services 9,327 9,104 27,013 24,162
--------------- --------------- -------------- --------------
Total sales $ 28,389 $ 31,544 $ 84,367 $ 84,489
=============== =============== ============== ==============
Products:
SLA systems and related equipment 22.7% 27.2% 21.6% 33.6%
Solid object printers 1.3% 3.8% 1.8% 5.0%
SLS systems and related equipment 10.6% 12.6% 12.1% 4.7%
Materials 25.7% 25.1% 28.2% 25.5%
Other 6.9% 2.4% 4.3% 2.6%
--------------- --------------- -------------- --------------
Total products 67.2% 71.1% 68.0% 71.4%
--------------- --------------- -------------- --------------
Services:
Maintenance 31.2% 27.1% 30.2% 26.7%
Other 1.6% 1.8% 1.8% 1.9%
--------------- --------------- -------------- --------------
Total services 32.8% 28.9% 32.0% 28.6%
--------------- --------------- -------------- --------------
Total sales 100.0% 100.0% 100.0% 100.0%
=============== =============== ============== ==============
All of the Company's assets are devoted to the manufacture and sale of
Company systems, supplies and services; assets are not identifiable by
operating segment. The Company's three major operating segments are U.S.
operations, European operations and Asia/Pacific operations, and segment
operations are measured by gross profit.
Summarized data for the Company's operating segments is as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
-------------- -------------- ------------- -------------
Sales:
U.S. operations $ 14,351 $ 14,387 $ 43,722 $ 39,844
European operations 11,750 13,834 31,274 33,431
Asia/Pacific operations 2,288 3,323 9,371 11,214
-------------- ------------- ------------ ------------
Total sales 28,389 31,544 84,367 84,489
Cost of sales:
U.S. operations 8,001 8,611 26,209 22,410
European operations 6,740 7,653 19,849 18,579
Asia/Pacific operations 1,501 1,761 5,150 5,866
-------------- ------------- ------------ ------------
Total cost of sales 16,242 18,025 51,208 46,855
-------------- ------------- ------------ ------------
Gross profit $ 12,147 $ 13,519 $ 33,159 $ 37,634
============== ============= ============ ============
Page 21
THREE MONTHS ENDED SEPTEMBER 27, 2002 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 28, 2001
SALES. Sales during the three months ended September 27, 2002, (the "third
quarter of 2002") were $28.4 million, a decrease of 10.0% from the $31.6
million recorded during the three months ended September 28, 2001 (the
"third quarter of 2001"). Sales for the three months ended September 27,
2002, include a full period of sales of the LS product line acquired
through our acquisition of DTM on August 24, 2001. The SLS product line of
machines and materials contributed $6.6 million in revenue for the three
months ended September 27, 2002 compared to $5.9 million in revenue for the
three months ended September 28, 2001.
Product sales of $19.1 million were recorded in the third quarter of 2002,
a decrease of 14.7% compared to $22.4 million for the third quarter of
2001. Without the inclusion of the SLS product line (which includes
materials from the SLS product line), product sales of $12.5 million would
have been recorded for the third quarter of 2002, compared to $16.5 million
for the third quarter of 2001. This decrease in product sales is due
primarily to the decrease in our sales of ThermoJet(R) solid object
printers of $0.8 million or 68.1%, a decrease in sales of our SLA systems
and related equipment of $2.2 million or 25.1%, a decrease in materials
revenue of $2.3 million or 39.0% partially offset by an increase in other
revenue of $1.2 million. Included in other revenue for the third quarter of
2002 was a license fee granted to Sony Corporation for $0.9 million. We
acquired DTM on August 24, 2001, and therefore sales of SLS systems for the
third quarter of 2001 only represent sales as of and subsequent to the date
of acquisition. SLS System and related equipment sales decreased to $3.0
million for the third quarter of 2002 from $4.0 million for the third
quarter of 2001, a decrease of 24.3%.
In the third quarter of 2002, we sold a total of 34 SLA systems compared to
the third quarter of 2001 in which we sold a total of 49 SLA systems. In
addition, we sold 11 SLS systems in the third quarter of 2002, compared to
16 SLS systems sold in the third quarter of 2001, which includes sales
subsequent to the date of the DTM acquisition.
Due to a continued overall economic decline in capital spending by
customers worldwide our sales mix has been generally shifting from our
larger frame SLA systems to our small frame SLA systems. However in the
third quarter of 2002, we have sold one more larger frame system than the
third quarter ended of 2001. In the third quarter of 2002, we sold 12
larger frame SLA systems compared to 11 in the same period of the prior
year.
Materials revenue of $7.3 million was recorded in the third quarter of
2002, an 8.1% decrease from the $7.9 million recorded in the third quarter
of 2001. Without the inclusion of the SLS product line, materials revenue
of $3.7 million would have been recorded for the third quarter of 2002
compared to $6.0 million for the third quarter of 2001. The decrease in
materials revenue primarily relates to lower resin volumes as we continue
to solicit customers to transition from Vantico material to RPC supplied
material.
System orders and sales may fluctuate on a quarterly 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 our results of operations for the quarters involved.
Service sales during the third quarter of 2002 totaled $9.3 million, an
increase of 2.4% from $9.1 million in the third quarter of 2001. The
increase primarily reflects increased maintenance contract revenue as a
result of the SLS product line and a gradual increase in the overall number
of systems in the marketplace.
Sales for our U.S. operating segment for the third quarter of 2002 and 2001
were $14.4 million and $14.4 million, respectively. The U.S. sales included
revenue related to the SLA license granted to Sony Corporation of $0.9
million offset by a decrease in resin material revenue due to the
termination of the Vantico distributor relationship in April, 2002, and the
commencement of sales by our wholly owned subsidiary, RPC. Sales for our
European operating segment for the third quarter of 2002 were $11.8 million
a decrease of 15.1% from the $13.8 million recorded during the third
quarter of 2001 primarily due to a decrease in SLA and SLS system sales and
a decrease in resin material. Sales for our Asia/Pacific operating segment
for the third quarter of 2002 were $2.3 million, a decrease of 31.1% from
the $3.3 million recorded during the third quarter of 2001 primarily due to
a decrease in SLA and SLS system sales and a decrease in resin material
revenue.
COST OF SALES. Cost of sales was $16.2 million or 57.2% of sales in the
third quarter of 2002 and $18.0 million or 57.1% of sales in the third
quarter of 2001.
Page 22
Product cost of sales as a percentage of product sales was 50.1% in the
third quarter of 2002 and 52.3% in the third quarter of 2001. Product cost
of sales as a percentage of product sales decreased primarily due to a
shift in the sales mix of our SLA systems. We sold one more higher-end SLA
system (which have higher margins) and 16 fewer smaller systems (which
have lower margins) in the third quarter of 2002 as compared to the third
quarter of 2001. We also recorded higher gross margins as a percent of
revenue on our resin materials as a result of producing our own resins
instead of acting as a distributor for Vantico.
Service cost of sales as a percentage of service sales was 71.8% in the
third quarter of 2002 and 69.0% in the third quarter of 2001. The increase
in the service cost of sales as a percentage of service sales is primarily
attributable to an increase in service inventory reserves of $0.2 million
for older parts.
Cost of sales for U.S. operations decreased to $8.0 million or 55.8 % of
U.S. sales in the third quarter of 2002 from $8.6 million or 59.9% of sales
in the third quarter of 2001. The decrease in cost of sales as a percent of
sales primarily is due to higher margins recorded related to resin sales.
Cost of sales for our European operations decreased to $6.7 million or
57.4% of sales in the third quarter of 2002 from $7.7 million or 55.3% of
sales in the third quarter of 2001. The increase in cost of sales as a
percent of sales relates to higher margins on resin sales offset by lower
margins associated with the mix of SLS and SLA systems sold. Cost of sales
for our Asia/Pacific operations decreased to $1.5 million or 65.6% of sales
in the third quarter of 2002 from $1.8 million or 53.0% of sales in the
third quarter of 2001 primarily as a result of lower sales of SLA and SLS
systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $11.1 million in the third quarter of 2002
and $10.0 million in the third quarter of 2001. This increase was primarily
a result of including a full quarter of DTM related operating expenses in
the third quarter of 2002 compared to the prior year.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
third quarter of 2002 increased to $3.8 million or 13.3% of sales compared
to $2.8 million or 8.8% of sales in the third quarter of 2001. The increase
in research and development expenses is primarily due to development work
associated with the InVision(R) si2 3-D printer. We do not anticipate any
revenue from the InVision(R) si2 3-D printer until we have successfully
completed design validation testing, beta testing and market research,
which we currently anticipate in 2003. Given the anticipated impact of cost
reductions and closure of our Austin facility, we anticipate further
research and development expenses to be more in line with historical levels
relative to revenues.
INCOME (LOSS) FROM OPERATIONS. Operating loss for the third quarter of 2002
was $5.5 million compared to operating income of $0.7 million in the third
quarter of 2001. This increase in operating loss is attributable primarily
to decreased revenue and an increase in operating expenses due to the
acquisition of DTM and severance and other restructuring costs due to a
reduction in workforce.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense), net for the third quarter of 2002 was $(0.6) million compared to
interest and other income (expense), net of $(0.4) million in the third
quarter of 2001. The increased expense in the third quarter of 2002
reflects interest expense and amortization of loan costs related to our
U.S. Bank term loan and revolving line of credit incurred as part of the
acquisition of DTM in August 2001.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. For the third quarter of 2002,
our income tax benefit was $4.3 million, compared to a tax provision of
$0.1 million in the third quarter of 2001. Included in the tax benefit is
$2.2 million related to the Vantico settlement recorded in the first
quarter of 2002.
Page 23
NINE MONTHS ENDED SEPTEMBER 27, 2002 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 28, 2001
SALES. Sales during the nine months ended September 27, 2002, (the "first
nine months of 2002") were $84.4 million, consistent with the $84.5 million
recorded during the nine months ended September 28, 2001 (the "first nine
months of 2001"). Sales for the first nine months of 2002 include revenue
from the SLS product line acquired through our acquisition of DTM in August
2001. The SLS product line of machines and materials contributed $20.8
million in revenue for the first nine months of 2002 compared to $5.9
million for the first nine months of 2001.
Product sales of $57.4 million were recorded in the first nine months of
2002, a decrease of 4.9% compared to $60.3 million for the first nine
months of 2001. Without the inclusion of the SLS product line, product
sales of $36.5 million would have been recorded for the first nine months
of 2002, compared to $54.5 million for the first nine months of 2001. This
decrease in product sales is due primarily to the decrease in our sales of
ThermoJet(R) solid object printers of $2.7 million or 64.4%, a decrease in
the sales of our SLA systems and related equipment of $10.2 million or
35.8%, a decrease of $6.2 million or 39.4% related to terminating our
distribution relationship with Vantico and producing and supplying our own
resins, partially offset by an increase in other revenue of $0.9 million
due to a license fee granted in the first nine months ended 2002.
Due to a continued general economic decline in capital equipment spending
by customers worldwide, our sales mix has shifted from our large frame SLA
systems to our small frame SLA systems. In the first nine months of 2002,
we sold a total of 92 SLA systems, compared to the first nine months of
2001 in which we sold a total of 118 SLA systems. In the first nine months
of 2002, we sold 30 large frame SLA systems compared to 47 in the prior
period.
Materials revenue of $23.8 million were recorded in the first nine months
of 2002, an increase of 10.5% compared to $21.5 million for the first nine
months of 2001. The acquisition of DTM in August of 2001 added $10.6
million and $1.9 million to materials revenue for the first nine months of
2002 and 2001, respectively. Eliminating the impact of the DTM acquisition,
material sales would have been $13.2 million for the nine months ended 2002
and $19.6 million for the nine months ended 2001. The decrease primarily
relates to lower resin volumes as we continue to solicit customers to
transition from Vantico material to RPC supplied material.
System orders and sales may fluctuate on a quarterly 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 our results of operations for the quarters involved.
Service sales during the first nine months of 2002 totaled $27.0 million,
an increase of 11.8% from $24.2 million in the first nine months of 2001.
The increase primarily reflects increased maintenance contract revenue as a
result of the LS product line and a gradual increase in the overall number
of systems in the marketplace.
Sales for our U.S. operating segment for the first nine months of 2002 were
$43.7 million, an increase of 9.7% from the $39.8 million recorded during
the first nine months of 2001. Sales for our European operating segment for
the first nine months of 2002 were $31.3 million a decrease of 6.5% from
the $33.4 million recorded during the first nine months of 2001. Sales for
our Asia/Pacific operating segment for the first nine months of 2002 were
$9.4 million a decrease of 16.4% from the $11.2 million recorded during the
first nine months of 2001. The SLS product line of machines and material
contributed to $9.6 million in U.S. operations and $9.7 million in European
operations and is primarily responsible for the increase in revenue offset
by a decrease in our SLA product line and materials. The SLS product line
also contributed to $1.5 million in Asia/Pacific operations for the first
nine months of 2002. The overall decrease in revenue associated with
Asia/Pacific operations is primarily a result of a decrease in the SLA
product line from the first nine months of 2002 when compared to the first
nine months of 2001.
COST OF SALES. Cost of sales increased to $51.2 million or 60.7% of sales
in first nine months of 2002 from $46.9 million or 55.5% of sales in the
first nine months of 2001.
Product cost of sales as a percentage of product sales increased to 54.6%
in the first nine months of 2002 from 48.6% in the first nine months of
2001. Without the inclusion of the SLS product line, product cost of sales
as a percentage of product sales was 54.6% in the first nine months of 2002
compared to 48.0% in the first nine months of 2001. Product cost of sales
as a percentage of product sales increased primarily due to a shift in the
sales mix from higher-end SLA systems to our smaller systems in the first
nine months of 2002 as compared to the first nine months of 2001.
Page 24
Service cost of sales as a percentage of service sales remained relatively
consistent at 73.7% in the first nine months of 2002 and 72.5% in 2001.
Cost of sales for U.S. operations increased to $26.2 million or 60.0% of
U.S. sales in the first nine months of 2002 from $22.4 million or 56.2% of
U.S. sales in the first nine months of 2001. Cost of sales for our European
operations increased to $19.8 million or 63.5% of European sales in the
first nine months of 2002 from $18.6 million or 55.6% of sales in the first
nine months of 2001. Cost of sales for our Asia/Pacific operations
decreased to $5.2 million or 55.0% of Asia sales in the first nine months
of 2002 from $5.9 million or 52.3% of Asia sales for the first nine months
of 2001. The change in cost of sales as a percent of revenue relates to a
change in mix of products sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $35.1 million (net of $1.8 million credit
for legal fees reimbursement as provided in the Vantico arbitration
settlement) in the first nine months of 2002 and $28.0 million in the first
nine months of 2001. The increase is primarily attributable to increased
personnel associated with the acquisition of DTM in August 2001.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
first nine months of 2002 increased to $12.4 million compared to $7.6
million in the first nine months of 2001. The increase in research and
development expenses is primarily due to development costs related to the
InVision(R) si2 3-D printer and the initial decision to maintain our
facility in Austin, Texas. Due to our recent decrease in our workforce, we
anticipate future research and development expenses to be more in line with
historical levels relative to revenues.
INCOME (LOSS) FROM OPERATIONS. Operating loss for the first nine months of
2002 was $18.7 million compared to operating income of $2.0 million in the
first nine months of 2001. The increase in operating loss is attributable
to a decreased gross profit and increased operating expenses. Operating
expenses increased due to the acquisition of DTM.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense), net for the first nine months of 2002 was $(2.0) million
compared to interest and other income (expense), net of $(0.02) million in
the first nine months of 2001. The increased expense in the first nine
months of 2002 reflects interest expense and amortization of loan costs
related to our U.S. Bank term loan and revolving line of credit incurred as
part of the acquisition of DTM in August 2001.
GAIN ON ARBITRATION SETTLEMENT. Gain on arbitration settlement reflects an
$18.5 million gain associated with the Vantico arbitration which was
recorded in the first quarter of 2002.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. For the first nine months of
2002, our income tax benefit was $3.0 million compared to an income tax
provision of $0.7 million in the first nine months of 2001. Included in the
tax benefit is $2.2 million benefit recorded in the third quarter of 2002
related to the Vantico settlement recorded in the first quarter of 2002.
Page 25
LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 27, 2002 DECEMBER 31, 2001
------------------ -----------------
(IN THOUSANDS)
Cash and cash equivalents $ 1,032 $ 5,948
Working capital 12,951 17,430
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 27, 2002 SEPTEMBER 28, 2001
------------------ ------------------
(IN THOUSANDS)
Cash (used for) provided by operating
activities $ (5,431) $ 556
Cash used for investing activities (7,921) (56,216)
Cash provided by financing activities 7,598 45,373
Net cash used for operating activities in the first nine months of 2002 of
$5.4 million primarily results from net income of $0.7 million, offset by a
non-cash gain from the Vantico settlement of $20.3 million. In addition
cash was generated by the decrease in the accounts receivable balance by
$9.6 million and the decrease in inventory of $3.1 million. Furthermore,
cash was decreased due to a decrease in accrued liabilities of $1.6 million
related to payments for sales commissions, royalties, and payments related
to severance and other restructuring costs.
Net cash used for investing activities during the first nine months of 2002
totaled $7.9 million and primarily relates to the payments for the Optoform
acquisition of $1.2 million, $2.0 million in payments for the RPC
acquisition, additions to property and equipment of $1.6 million for
machinery and equipment and additions to licenses and patents of $2.7
million related to legal defense and new patent filings.
Net cash provided by financing activities during the first nine months of
2002 totaled $7.6 million and primarily reflects $12.5 million in proceeds
from the sale of stock, $41.0 million in debt repayment partially offset by
$34.9 million in additional borrowings on our line of credit.
On August 17, 2001, we entered into a loan agreement with U.S. Bank
totaling $41.5 million, in order to finance the acquisition of DTM. The
financing arrangement consisted of a $26.5 million three-year revolving
credit facility and $15 million 66-month commercial term loan. At September
27, 2002, a total of $0.5 million was outstanding under the revolving
credit facility and $12.7 million was outstanding under the term loan. The
interest rate at September 27, 2002, for the revolving credit facility and
term loan was 4.3%. The interest rate applicable to both facilities will be
either: (1) the prime rate plus a margin ranging from 0.25% to 1.0%, or (2)
the 90-day adjusted LIBOR plus a margin ranging from 2.0% to 2.75%. The
margin for each rate will vary depending upon our interest-bearing debt to
earnings before interest taxes depreciation and amortization, "EBITDA." The
terms of the debt agreement required us to maintain specific levels of
minimum tangible net worth, EBITDA and liquidity, along with capital
expenditure restrictions. In addition, our total borrowing capacity is
limited to a borrowing base calculation consisting of a percentage of
accounts receivable and inventory. Pursuant to the terms of the agreement,
U.S. Bank has received a first priority security interest in our accounts
receivable, inventory, equipment and general intangible assets. The breach
of any of these covenants would result in a default under our agreement
with U.S. Bank. An event of default would permit our lenders to declare all
amounts borrowed from them due and payable, together with accrued and
unpaid interest. Moreover, these lenders would have the option to terminate
any obligation to make further extensions of credit under these
instruments. If we are unable to repay debt to our senior lenders, these
lenders could proceed against our assets, which would have a material
impact on our operations.
During the third quarter, we amended our loan agreement with U.S. Bank to
reduce the amount of the revolving credit facility to $13.5 million,
eliminate the requirement that we maintain a minimum of $5 million in cash
at quarter end and allow for a one-time benefit in our Q3 and Q4 2002
EBITDA calculations. We are in compliance with all loan covenants as
amended, at September 27, 2002.
Subsequent to September 27, 2002, U.S. Bank has amended the Senior Debt to
EBITDA, Total Debt to EBITDA and the Fixed Charge Coverage ratio covenants
for 2003 so that we will be in compliance based on our current level of
expected operations during those quarters and has added a covenant
requiring that we achieve a positive net income for each quarter in 2003.
Additionally, we agreed to reduce the revolving credit facility to $9.7
million and the term loan to $10.3 million. Based on our current financial
projections and modifications to our loan agreement with U.S. Bank, we
expect to be in compliance with our loan covenants for the next 12 months.
Page 26
On August 20, 1996, we completed a $4.9 million variable rate industrial
development bond financing of our Colorado facility. Interest on the bonds
is payable monthly (the interest rate at September 27, 2002 was 1.8%).
Principal payments are payable in semi-annual installments beginning in
February 1997 through August 2016. The bonds are collateralized by an
irrevocable letter of credit issued by Wells Fargo Bank, N.A. that is
further collateralized by a standby letter of credit issued by U.S. Bank in
the amount of $1.2 million. At September 27, 2002, a total of $4.2 million
was outstanding under the bond. The terms of the letter of credit require
us to maintain specific levels of minimum tangible net worth and EBITDA. We
were in compliance with these covenants at September 27, 2002. If we were
not to be in compliance with these covenants the lender could proceed
against our assets, which would have a material impact on our operations.
Subsequent to September 27, 2002, Wells Fargo Bank has amended the Fixed
Charge Coverage ratio covenant. This covenant is now consistent with the
U.S. Bank amended covenant. Based on our current financial projections and
modifications made to our loan agreement with Wells Fargo Bank, we expect
to be in compliance with our loan covenants under the variable rate
industrial development bond financing for the next 12 months.
On October 3, 2002, we entered into a listing agreement with an agent to
sell our manufacturing facility in Grand Junction, CO. If this transaction
were completed, we would likely enter into a 10-year or longer lease on the
facility and retire the outstanding industrial bonds associated with this
facility.
In conjunction with a system sold to a governmental agency in the third
quarter of 2002 (which we cannot include as collateral under our U.S. Bank
facility) we entered into a short-term financing with a financial
institution to allow access to those funds. A total of $1.1 million was
advanced at a rate of 8.25% and is required to be repaid on November 30,
2002. A letter of credit totaling $1.1 million was entered into in
conjunction with the transaction.
On May 7, 2002, we repurchased 125,000 shares of our common stock from
Vantico. On that same date, we sold 1,125,000 shares of our common stock to
accredited investors in a private placement transaction. These shares were
issued in reliance on the exemption from registration provided by Section
4(2) of the Securities Act. Net proceeds to us from these transactions were
$12.5 million.
The future contractual payments are as follows:
LATER
CONTRACTUAL OBLIGATIONS 2002 2003 2004 2005 2006 YEARS TOTAL
------------------------------ --------- -------- --------- -------- --------- -------- ---------
Line of credit $ 546 $ -- $ -- $ -- $ -- $ -- $ 546
Other financings 1,100 --- --- --- --- --- 1,100
Term loan 750 3,000 3,000 3,000 3,000 -- 12,750
Industrial development bond --- 150 165 180 200 3,470 4,165
Subordinated debt -- -- -- -- 10,000 -- 10,000
Operating leases 391 499 443 380 32 -- 1,745
--------- -------- --------- -------- --------- -------- ---------
Total Contractual Obligations $ 2,787 $ 3,649 $ 3,608 $ 3,560 $ 13,232 $ 3,470 $ 30,306
========= ======== ========= ======== ========= ======== =========
Currently, our $20 million U.S. Bank credit facility approximates the loan
balance outstanding plus open letters of credit. Based upon anticipated
levels of operations and cost savings from the restructuring, we believe
our cash flow from operations and available cash on hand will be adequate
to meet our anticipated requirements for interest payments and other debt
service obligations, working capital, capital expenditures and other
operating needs for the next 12 months. We cannot assure you that our
business will generate cash flow or that we will achieve our estimated cost
savings and as a result, we may need to raise additional capital through
debt or equity markets in the future. If we were unable to secure
additional capital, we would expect to further reduce our cost structure to
ensure adequate funds are available for the operations of the Company.
Future operating performance and our ability to service or refinance
existing indebtedness will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond our
control.
Page 27
CAUTIONARY STATEMENTS AND RISK FACTORS
The risks and uncertainties described below are not the only risks and
uncertainties we face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial also may impair our business operations.
If any of the following risks actually occur, our business, results of
operations and financial condition could suffer. In that event the trading price
of our common stock could decline, and you may lose all or part of your
investment in our common stock. The risks discussed below also include
forward-looking statements and our actual results may differ substantially from
those discussed in these forward-looking statements.
POLITICAL AND ECONOMIC EVENTS AND THE UNCERTAINTY RESULTING FROM THEM MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.
The terrorist attacks that took place in the United States on September 11,
2001, along with the United States' military campaign against terrorism in
Afghanistan and elsewhere, ongoing violence in the Middle East and increasing
speculation regarding future military action against Iraq have created many
economic and political uncertainties, some of which may materially harm our
business and revenues. The disruption of our business as a result of these
events, including disruptions and deferrals of customer purchasing decisions,
had an immediate adverse impact on our business. Since September 11, 2001, some
economic commentators have indicated that spending on capital equipment of the
type that we sell has been weaker than spending in the economy, such as the
automobile and telecommunication industries. The long-term effects of these
events on our customers, the market for our common stock, the markets for our
services and the U.S. economy as a whole are uncertain. The consequences of any
additional terrorist attacks, or any expanded-armed conflicts are unpredictable,
and we may not be able to foresee events that could have an adverse effect on
our markets, or our business.
FINANCE
OUR DEBT LEVEL COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND AFFECT OUR
ABILITY TO RUN OUR BUSINESS.
As of September 27, 2002, our debt was $28.9 million. You should be aware
that this level of debt could have important consequences to you as a
holder of shares. Below we have identified for you some of the material
potential consequences resulting from this significant amount of debt.
o We may be unable to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes.
o Our ability to adapt to changing market conditions may be hampered. We
may be more vulnerable in a volatile market and at a competitive
disadvantage to our competitors that have less debt.
o Our operating flexibility is more limited due to financial and other
restrictive covenants, including restrictions on incurring additional
debt, creating liens on our properties, making acquisitions and paying
dividends.
o We will be subject to the risks that interest rates and our interest
expense will increase.
o Our ability to plan for, or react to, changes in our business is more
limited.
Under certain circumstances, we may be able to incur additional indebtedness in
the future. If we add new debt, the related risks that we now face could
intensify.
WE MUST GENERATE CASH FLOW FROM OPERATIONS TO SERVICE OUR DEBT.
Our debt level requires us to dedicate a portion of our cash flow from
operations to pay down our indebtedness, thereby reducing the funds available to
us for working capital, capital expenditures and general corporate purposes. Our
ability to make payments on our debt will depend on our ability to generate cash
in the future. Insufficient cash flow could place us at risk of default under
our debt agreements or could prevent us from expanding our business as planned.
Our ability to generate cash is subject to general economic, financial,
competitive, regulatory and other factors that are beyond our control. Our
business may not generate sufficient cash flow from operations, our strategy to
increase operating efficiencies may not be realized and future borrowings may
not be available to use under our credit facility in an amount sufficient to
enable us to fund our liquidity needs.
Page 28
OUR FAILURE TO SATISFY COVENANTS IN OUR DEBT INSTRUMENTS WOULD CAUSE A DEFAULT
UNDER THOSE INSTRUMENTS.
In addition to imposing restrictions on our business and operations, our debt
instruments include a number of covenants relating to financial ratios and
tests. The covenants include requirements that we meet certain earning levels
relative to our debt. For the quarters ended June 28, 2002 and September 27,
2002, we experienced operating losses. If we do not meet our anticipated levels
of operations and realize the cost savings associated with the restructurings
taken during 2002, we will not meet our debt covenants. In addition, our ability
to comply with these covenants may be affected by events beyond our control,
including prevailing economic, financial and industry conditions. The breach of
any of these covenants would result in a default under these instruments. An
event of default would permit our lenders to declare all amounts borrowed from
them to be due and payable, together with accrued and unpaid interest. Moreover,
these lenders would have the option to terminate any obligation to make further
extensions of credit under these instruments. If we are unable to repay debt to
our lenders, these lenders could proceed against our assets. If we do not
achieve profitability on a quarterly basis in 2003, we will not be in compliance
with our covenants for those periods.
OUR BALANCE SHEET CONTAINS SEVERAL CATEGORIES OF INTANGIBLE ASSETS THAT WE MAY
BE REQUIRED TO WRITE OFF OR WRITE DOWN BASED ON THE FUTURE PERFORMANCE OF THE
COMPANY, WHICH MAY ADVERSELY IMPACT OUR FUTURE EARNINGS AND OUR STOCK PRICE.
As of September 27, 2002, we had $66.4 million of unamortized intangible assets,
including goodwill, licenses and patents, other intellectual property, deferred
tax assets, and certain expenses that we amortize over time. Any material
impairment to any of these items could reduce our net income and may adversely
affect the trading price of our common stock.
We currently have $43.6 million in goodwill capitalized on our balance sheet. In
June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets,"
which requires among other things, the discontinuance of the amortization of
goodwill and certain other intangible assets that have indefinite useful lives,
and the introduction of impairment testing in its place. Under SFAS 142,
goodwill and some indefinite-lived intangibles will not be amortized into
results of operations, but instead will be tested for impairment at least
annually, with impairment being measured as the excess of the carrying value of
the goodwill or intangible asset over its fair value. In addition, goodwill and
intangible assets will be tested more often for impairment as circumstances
warrant, and may result in write-downs of some of our goodwill and
indefinite-lived intangibles. Accordingly, we could, from time to time, incur
impairment charges, which will be recorded as operating expenses and will reduce
our net income and adversely affect our operating results.
We currently have approximately $4.9 million related to a license fee prepaid in
1999 related to the Solid Object Printer machine platform included under license
and patent costs, net, in our financial statements. The amortization of this
intangible is based on the number of Solid Object Printer units sold. If future
sales of the Solid Object Printer machine platforms do not increase, then a more
rapid rate of amortization of this balance will be required relative to the
number of units sold.
As of September 27, 2002, we have recorded $15.6 million in deferred tax assets
on our balance sheet, which are accounted for in accordance with FAS 109. If we
anticipate that we would not return to profitability and utilize those deferred
tax assets in the near future, we would be required to fully reserve for the
amount of the deferred tax assets. This could have significant impact on our
results of operations in the period that the reserve is recorded.
WE ARE CARRYING A SIGNIFICANT AMOUNT OF MODEL-RELATED INVENTORY AND TOOLING
COSTS FOR A SOLID OBJECT PRINTER MACHINE PLATFORM.
We are carrying approximately $1.8 million in inventory and tooling cost
associated with the development and production of a new solid object printer
machine platform. Design validation testing of the new platform is in process.
Changes to the bill of material as a result of the design validation testing, or
abandonment of the new platform because of adverse market studies, may render
inventory and tooling cost obsolete. Additionally, we continue to carry
inventory and have vendor commitments related to our existing solid object
printer model totaling $1.8 million, which if not sold, could become obsolete. A
significant write down of inventory and tooling due to obsolescence could
adversely affect our results of operations.
THE MIX OF PRODUCTS WE SELL AFFECTS OUR OVERALL PROFIT MARGINS.
We continuously expand our product offerings, including our materials, and work
to increase the number of geographic markets in which we operate and the
distribution channels we use in order to reach our various target markets and
customers. This variety of products, markets and channels results in a range of
gross margins and operating income which can cause
Page 29
substantial quarterly fluctuations depending on the mix of product shipments
from quarter to quarter. We may experience significant quarterly fluctuations in
gross margins or net income due to the impact of the mix of products, channels,
or geographic markets utilized from period to period. More recently, our mix of
products sold has reflected increased sales of our lower end systems, which have
reduced gross margins as compared to the high-end SLA systems. If this trend
continues over time, we may experience lower average gross margins and returns.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
Products as complex as those we offer may contain undetected defects or errors
when first introduced or as enhancements are released that, despite our testing,
are not discovered until after the product has been installed and used by
customers, which could result in delayed market acceptance of the product or
damage to our reputation and business. We attempt to include provisions in our
agreements with customers that are designed to limit our exposure to potential
liability for damages arising from defects or errors in our products. However,
the nature and extent of such limitations vary from customer to customer, and it
is possible that these limitations may not be effective as a result of
unfavorable judicial decisions or laws enacted in the future. The sale and
support of our products entails the risk of product liability claims. Any
product liability claim brought against us, regardless of its merit, could
result in material expense to us, diversion of management time and attention,
and damage to our business reputation and ability to retain existing customers
or attract new customers.
OPERATIONS
OUR RESEARCH AND DISTRIBUTION AGREEMENTS WITH VANTICO TERMINATED ON APRIL 22,
2002. IF WE ARE UNABLE TO TIMELY AND COST EFFECTIVELY DEVELOP RESINS ADEQUATE
FOR USE WITH OUR PRODUCTS WHICH ARE COMMERCIALLY ACCEPTED, WE MAY LOSE CUSTOMERS
AND MARKET SHARE AND OUR REVENUES AND PROFITABILITY MAY DECLINE.
Under the terms of research and distribution agreements with Vantico, we had
jointly developed liquid photopolymers with Vantico and served as the exclusive
worldwide distributor (except in Japan) of these materials, manufactured by
Vantico for use in stereolithography. Sales of our materials accounted for 28.2%
and 25.5% of our total revenues for the first nine months of 2002 and 2001,
respectively. Sales of our materials excluding the LS product line accounted for
20.7% and 24.8% of our total revenues for the first nine months of 2002 and 2001
respectively. A significant portion of our current SLA system customer base
continue to use Vantico resins. These agreements with Vantico terminated on
April 22, 2002, as a result of the settlement of our arbitration with Vantico.
We obtained one alternative source of resins through the acquisition, on
September 20, 2001, of RPC, an independent supplier of stereolithography resins
located in Switzerland. Our management team does not, however, have substantial
experience in the materials manufacturing business and we may not be able to
timely and cost-effectively develop adequate enhancements to the existing RPC
product line, or if developed, produce sufficient quantities of RPC resins and
other materials that meet the needs of our customers or otherwise develop or
obtain materials adequate for use with our products that are commercially
accepted. In addition, the manufacture of materials business increases some of
the existing risks we face and poses new risks to our company. For example, we
must comply with all applicable environmental laws, rules and regulations
associated with large scale manufacturing of resins in Switzerland. Our
compliance with these laws may increase our cost of production and reduce our
margins and any failure to comply with these laws may result in legal or
regulatory action instituted against us, substantial monetary fines or other
damages. We may not be able to retain a sufficient number of additional
qualified employees on a timely basis, or at all.
In addition, in order to provide additional resins for sale and to partially
replace Vantico resins previously sold by the Company, in June 2002, we entered
into a two-year non-exclusive distribution agreement for the sale of a line of
resins produced by another chemical manufacturer. Stereolithography is, however,
very sensitive to even slight variations in materials, and we cannot be certain
that these new resins will perform satisfactorily or be acceptable to customers
Our material revenue, excluding DTM related revenues, declined significantly for
the first nine months of 2002 as compared to the first nine months of 2001. This
was due to lower resin purchases as our customers transition from Vantico
material to RPC supplied material. Unless substantially more Vantico customers
transition to our products, which they are not required to do so, we will
continue to see decreased revenue for material sales.
If we are unable to develop or otherwise obtain sufficient quantities of
commercially accepted materials, we will face significant competition for
materials sales from various suppliers, including Vantico. As a result, we may
lose customers and market share, our revenues may decline and our results of
operations may be materially and adversely affected.
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THE SIGNIFICANT COMPETITION WE FACE COULD CAUSE US TO LOSE MARKET SHARE OR
REDUCE PRICES, AND THIS COMPETITION WILL LIKELY INCREASE IN THE NEAR FUTURE.
We compete for customers with a wide variety of producers of models, prototypes
and other 3-dimensional objects, ranging from traditional model makers and
subtractive-type producers, such as CNC machine makers, to a wide variety of
additive solid imaging system manufacturers as well as service bureaus that
provide any or all of these types of technology. Some of our existing and
potential competitors are researching, designing, developing and marketing other
types of equipment, materials and services. We anticipate a reduction in our
research and development costs in the future due to the recent reduction in our
workforce. This reduction could affect our new product development or delay
current research and development efforts. Many of these competitors have
financial, marketing, manufacturing, distribution and other resources
substantially greater than ours. In many cases, the existence of these
competitors extends the purchase decision time as customers investigate the
alternative products and solutions. Also, these competitors have marketed these
products successfully to our existing and potential customers.
Under a settlement agreement with the Department of Justice relating to our
merger with DTM we were required to license certain of our patents for use in
the manufacture and sale of either stereolithography or laser sintering
products, but not both, in North America. On June 6, 2002, we entered into a
license agreement with Sony Corporation, pursuant to which they would license
our patents for use in the field of stereolithography in North America (defined
as the United States, Canada and Mexico). On July 9, 2002, we were informed by
the Department of Justice that they had approved Sony as our licensee. Sony is
an extremely large and sophisticated corporation with annual revenues in excess
of $60 billion. Sony also has considerable experience in manufacture and sale of
stereolithography machines and materials outside of the United States (including
in its home country of Japan). Although we cannot be certain of the market
impact, which the license to Sony will have, we anticipate that Sony will be an
aggressive competitor in all aspects of our stereolithography business.
We also compete with Vantico as a result of the termination of our distribution
agreement with Vantico, once we expect competition may arise from the
development of allied or related techniques, both additive and subtractive, that
are not encompassed by our patents, the issuance of patents to other companies
that inhibit our ability to develop certain products, and the improvement to
existing technologies. We cannot assure you that we will be able to maintain our
current position in the field or our current price level, or to continue to
compete successfully against current and future sources of competition.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE AND INTRODUCE NEW PRODUCTS, WE
MAY LOSE REVENUE AND MARKET SHARE.
To remain competitive, we must continue to enhance and improve the functionality
and features of our products, services and technologies. We are affected by
rapid technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new standards and practices. These
developments could render our existing products and proprietary technology and
systems obsolete. Our success will depend, in part, on our ability to:
Obtain leading technologies useful in our business,
Enhance our existing products,
Develop new products and technology that address the increasingly
sophisticated and varied needs of prospective customers, particularly
in the area of material functionality,
Respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis, and
Retain key technology employees.
Also, new technologies or materials that render our existing products and
services obsolete may be developed. We believe that our future success will
depend on our ability to deliver products that meet changing technology and
customer need. Our acquisitions of DTM or RPC may not enable us to further
expand into advanced digital manufacturing and rapid tooling or ensure that we
can successfully design, manufacture and market the increasingly sophisticated
platforms, materials and services, which the change in technology requires.
Page 31
WE HAVE INCURRED AND MAY CONTINUE TO INCUR SUBSTANTIAL EXPENSE PROTECTING OUR
PATENTS AND PROPRIETARY RIGHTS, WHICH WE BELIEVE ARE CRITICAL TO OUR SUCCESS.
We regard our copyrights, service marks, trademarks, trade secrets, patents and
similar intellectual property as critical to our success. Third parties may
infringe or misappropriate our proprietary rights, and we intend to pursue
enforcement and defense of our patents and other proprietary rights. We have
incurred, and may continue to incur, significant expenses in preserving our
proprietary rights, and these costs could have a material adverse effect on our
results of operations, liquidity and financial condition and could cause
significant fluctuations in our operating results from quarter to quarter.
As of December 31, 2001, we held 301 patents, which include 143 in the United
States, 101 in Europe, 13 in Japan, and 44 in other foreign jurisdictions. At
that date, we had 33 pending patent applications with the United States, 75 in
the Pacific Rim, 43 in Europe, 7 in Canada and 1 in Latin America. As we
discover new developments and components to our technology, we intend to apply
for additional patents. Effective trademark, service mark, copyright, patent and
trade secret protection may not be available in every country in which our
products and services are made available. We cannot assure you that the pending
patent applications will be granted or that we have taken adequate steps to
protect our proprietary rights, especially in countries where the laws may not
protect our rights as fully as in the United States. In addition, our
competitors may independently develop or initiate technologies that are
substantially similar or superior to ours. We cannot be certain that we will be
able to maintain a meaningful technological advantage over our competitors.
We currently are involved in several patent infringement actions, both as
plaintiff and as defendant. We have capitalized $4.2 million in legal costs
related to various litigation, which if not settled favorably, would need to be
written off and would have a significant negative impact on our financial
results. Our ability to fully protect and exploit our patents and proprietary
rights could be adversely impacted by the level of expense required for
intellectual property litigation.
WE, AS SUCCESSOR TO DTM, CURRENTLY ARE INVOLVED IN INTELLECTUAL PROPERTY
LITIGATION, THE OUTCOME OF WHICH COULD MATERIALLY AND ADVERSELY AFFECT US.
On August 24, 2001, we completed our acquisition of DTM. As the successor to
DTM, we face direct competition for selective laser sintering equipment and
materials outside the United States from EOS GmbH of Planegg, Germany, which we
refer to as EOS. Prior to our acquisition, DTM had been involved in significant
litigation with EOS in France, Germany, Italy, Japan and the United States with
regard to its proprietary rights to selective laser sintering technology. EOS
has also challenged the validity of patents related to laser sintering in the
European Patent Office and the Japanese Patent Office. In addition, EOS filed a
patent infringement suit against DTM in federal court in California alleging
that DTM infringed certain U.S. patents that we license to EOS.
Our inability to resolve the claims or to prevail in any related litigation
could result in a finding of infringement of our licensed patents. Additionally,
one EOS patent is asserted which, if found valid and infringed, could preclude
the continued development and sale of certain of our laser sintering products
that incorporate the intellectual property that is the subject of the patent. In
addition, we may become obligated to pay substantial monetary damages for past
infringement. Regardless of the outcome of these actions we will continue to
incur significant related expenses and costs that could have a material adverse
effect on our business and operations. Furthermore, these actions could involve
a substantial diversion of the time of some members of management. The failure
to preserve our laser sintering intellectual property rights and the costs
associated with these actions could have a material adverse effect on our
results of operations, liquidity and financial condition and could cause
significant fluctuations in operating results from quarter to quarter.
WE DEPEND ON A SINGLE OR LIMITED NUMBER OF SUPPLIERS FOR SPECIFIED COMPONENTS.
IF THESE RELATIONSHIPS TERMINATE, OUR BUSINESS MAY BE DISRUPTED WHILE WE LOCATE
AN ALTERNATIVE SUPPLIER.
We subcontract for manufacture of material laser sintering components, powdered
sintering materials and accessories from a single-source third-party supplier.
There are several potential suppliers of the material components, parts and
subassemblies for our stereolithography products. However, we currently use only
one or a limited number of suppliers for several of the critical components,
parts and subassemblies, including our lasers, materials and certain ink jet
components. Our reliance on a single or limited number of vendors involves many
risks including:
Shortages of some key components,
Product performance shortfalls, and
Reduced control over delivery schedules, manufacturing capabilities,
quality and costs.
Page 32
If any of our suppliers suffers business disruptions, financial difficulties, or
if there is any significant change in the condition of our relationship with the
supplier, our costs of goods sold may increase or we may be unable to obtain
these key components for our products. In either event, our revenues, results of
operations, liquidity and financial condition would be adversely affected. While
we believe we can obtain most of the components necessary for our products from
other manufacturers, any unanticipated change in the source of our supplies, or
unanticipated supply limitations, could adversely affect our ability to meet our
product orders.
WE FACE RISKS ASSOCIATED WITH CONDUCTING BUSINESS INTERNATIONALLY AND IF WE DO
NOT MANAGE THESE RISKS, OUR RESULTS OF OPERATIONS MAY SUFFER.
A material portion of our sales is to customers in foreign countries. There are
many risks inherent in our international business activities that, unless
managed properly, may adversely affect our profitability, including our ability
to collect amounts due from customers. Our foreign operations could be adversely
affected by:
Unexpected changes in regulatory requirements,
Export controls, tariffs and other barriers,
Social and political risks,
Fluctuations in currency exchange rates,
Seasonal reductions in business activity in certain parts of the
world, particularly during the summer months in Europe,
Reduced protection for intellectual property rights in some countries,
Difficulties in staffing and managing foreign operations,
Taxation, and
Other factors, depending on the country in which an opportunity
arises.
MANAGEMENT
THE LOSS OF MR. BRIAN SERVICE, OUR CHIEF EXECUTIVE OFFICER, OR OUR INABILITY TO
ATTRACT AND RETAIN QUALIFIED EXECUTIVES COULD MATERIALLY AND ADVERSELY AFFECT
OUR BUSINESS.
Our ability to develop and expand our products, business and markets and to
manage our growth is dependent upon the services of our executive team,
including Brian Service, who currently is employed as Chief Executive Officer.
We do not maintain any key life insurance coverage for Mr. Service or any other
member of our executive team. Our success also depends on our ability to attract
and retain additional key technical, management and other personnel. Competition
for these professionals in intense. The loss of the services of any of our key
executives or the failure to attract and retain other key personnel could impair
the development of new products and have an adverse effect on our business,
operating results and financial condition.
OUR RECENT REDUCTIONS IN FORCE AND RESTRUCTURING OF THE COMPANY MAY HAVE AN
ADVERSE IMPACT ON OUR BUSINESS.
On July 24, 2002, we had substantially completed a reduction in workforce, which
eliminated 109 positions out of its total work force of 523, or approximately
20% of the total workforce. This reduction also included announcing the closing
of the our office in Austin, Texas, which we acquired as part of our acquisition
of DTM and the closure of our sales office in Farmington Hills, Michigan. This
was the second reduction in force we announced in 2002. On April 9, 2002, the
Company announced that it had eliminated approximately 10% of its total
workforce. It is impossible to determine the effect of these reductions and
restructurings on the morale of our remaining employees and on our ability to
retain those employees and to recruit new employees. In addition, the reductions
and reorganization may have an adverse impact on our ability to conduct
research, to design and manufacture new platforms and materials, and to service
existing customers and to attract new ones.
Page 33
CAPITAL STRUCTURE
OUR OPERATING RESULTS VARY FROM QUARTER TO QUARTER, WHICH COULD IMPACT OUR STOCK
PRICE.
Our operating results fluctuate from quarter to quarter and may continue to
fluctuate in the future. In some quarters it is possible that results could be
below expectations of analysts and investors. If so, the price of our common
stock may decline.
Many factors, some of which are beyond our control, may cause these fluctuations
in operating results. These factors include:
Acceptance and reliability of new products in the market,
Size and timing of product shipments,
Currency and economic fluctuations in foreign markets and other
factors affecting international sales,
Price competition,
Delays in the introduction of new products,
General worldwide economic conditions,
Changes in the mix of products and services sold,
Impact of ongoing litigation, and
Impact of changing technologies.
In addition, certain of our components require an order lead time of three
months or longer. Other components that currently are readily available may
become more difficult to obtain in the future. We may experience delays in the
receipt of some key components. To meet forecasted production levels, we may be
required to commit to long lead time items prior to receiving orders for our
products. If our forecasts exceed actual orders, we may hold large inventories
of slow moving or unusable parts, which could have an adverse effect on our cash
flows, profitability and results of operations.
VOLATILITY OF STOCK PRICE.
Our future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis. Shortfalls in our revenues or earnings in any
given period relative to the levels expected by securities analysts could
immediately, significantly and adversely affect the trading price of our common
stock.
Historically, our stock price has been volatile. The prices of the common stock
have ranged from $4.98 to $15.90 during the 52-week period ended October 23,
2002.
Factors that may have a significant impact on the market price of our common
stock include:
Future announcements concerning our developments or those of our
competitors, including the receipt of substantial orders for products,
Quality deficiencies in services or products,
Results of technological innovations,
New commercial products,
Changes in recommendations of securities analysts,
Proprietary rights or product, patent or other litigation, and
Sales or purchase of substantial blocks of stock.
Page 34
TAKEOVER AND DEFENSE PROVISIONS MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK.
Various provisions of our corporate governance documents and of Delaware law,
together with our shareholders rights plan, may inhibit changes in control not
approved by our Board of Directors and may have the effect of depriving you of
an opportunity to receive a premium over the prevailing market price of our
common stock in the event of an attempted hostile takeover.
The Board is authorized to issue up to five million shares of preferred stock.
The Board also is authorized to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of any preferred stock may adversely
affect the rights of holders of common stock. Our ability to issue preferred
stock gives us flexibility concerning possible acquisitions and financing, but
it could make it more difficult for a third party to acquire a majority of our
outstanding voting stock. In addition, any preferred stock to be issued may have
other rights, including economic rights, senior to the common stock, which could
have a material adverse effect on the market value of the common stock. In
addition, provisions of our Certificate of Incorporation and Bylaws could have
the effect of discouraging potential takeover attempts or making it more
difficult for stockholders to change management.
We are subject to Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of our company. One of these laws
prohibits us from engaging in a business combination with any interested
stockholder for a period of three years from the date that the person became an
interested stockholder, unless certain conditions are met.
In addition, we have adopted a Shareholders' Rights Plan. Under the
Shareholders' Rights Plan, we distributed a dividend of one right for each
outstanding share of our common stock. These rights will cause substantial
dilution to the ownership of a person or group that attempts to acquire us on
terms not approved by our Board of Directors and may have the effect of
deterring hostile takeover attempts.
THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF OUR DEBENTURES
COULD DILUTE YOUR OWNERSHIP AND NEGATIVELY IMPACT THE MARKET PRICE FOR OUR
COMMON STOCK.
Our debentures are convertible into common stock at the holders' option at a
conversion price of $12.00 per share. If the holders elect to convert all $10
million principal amount of the debentures, we would be obligated to issue
833,333 shares of our common stock at $12.00 per share. To the extent that all
of the debentures are converted, a significantly greater number of shares of our
common stock will be outstanding and the interests of our existing stockholders
may be diluted. Moreover, future sales of substantial amounts of our stock in
the public market, or the perception that such sales could occur, could
adversely affect the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and foreign currency
fluctuations.
INTEREST RATE RISK. The information required to be disclosed related to interest
rate risk is not significantly different from the information set forth in Item
7a Quantitative and Qualitative Disclosures About Market Risk included in the
2001 Form 10-K and is therefore not presented here.
FOREIGN CURRENCY RISK. International revenues accounted for 49.4% of our total
revenue in the third quarter of 2002. International sales are made primarily
from our foreign sales subsidiaries in their respective countries and are
denominated in United States dollars or the local currency of each country.
These subsidiaries also incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their functional
currency.
Our international business is subject to risks typical of an international
business, including, but not limited to differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors.
Our exposure to foreign exchange rate fluctuations arises in part from
inter-company accounts in which costs incurred in the United States are charged
to our foreign sales subsidiaries. These inter-company accounts are typically
denominated in United States dollars. We are also exposed to foreign exchange
rate fluctuations as the financial results of foreign subsidiaries are
translated into United States dollars in consolidation. As exchange rates vary,
these results, when translated, may vary from expectations and adversely impact
overall expected profitability. The realized effect of foreign exchange rate
fluctuation in the third quarter of 2002 resulted in a $0.4 million gain.
Page 35
As of September 27, 2002, we had investments in foreign operations that are
sensitive to foreign currency exchange rates, including non-functional currency
denominated receivables and payables. The net amount that is exposed in foreign
currency when subjected to a 10% change in the value of the functional currency
versus the non-functional currency produces an immaterial change in our balance
sheet as of September 27, 2002.
ITEM 4. CONTROLS AND PROCEDURES
a. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Management of the Company,
with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, have evaluated the Company's disclosure controls and
procedures pursuant to Rule 13a-14 promulgated by the Securities and Exchange
Commission within 90 days of the date of filing of this Form 10-Q, and have
determined that the disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in the Company's periodic filings with the Securities and Exchange
Commission.
b. CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses identified in the system of
internal controls.
Page 36
PART II -- OTHER INFORMATION
ITEM 1. Litigation Proceedings
3D SYSTEMS, INC. V. AAROFLEX, ET AL. On January 13, 1997, we filed a complaint
in federal court in California, against Aarotech Laboratories, Inc., Aaroflex,
Inc. and Albert C. Young. Aaroflex is the Parent Corporation of Aarotech. Young
is the Chairman of the Board and Chief Executive Officer of both Aarotech and
Aaroflex. The original complaint alleged that stereolithography equipment
manufactured by Aaroflex infringes six of our patents. In August 2000, two
additional patents were added to the complaint. 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
following the determination of claim construction. The court also granted in
part our motion on validity. The case is in the final stages of preparation for
trial. The court indicated a trial date would be forthcoming shortly.
DTM VS. EOS, ET AL. The plastic sintering patent infringement actions against
EOS began in France, Germany and Italy in 1996. Legal actions in 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, but the appeal will not stay the injunction. 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.
EOS VS. DTM AND 3D SYSTEMS, INC. In December 2000, EOS filed a patent
infringement suit against DTM in federal court in California. EOS alleges that
DTM has infringed and continues to infringe certain U.S. patents that we
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. 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. 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 from February 2003 to April 29, 2003,
and set a cut-off date for all discovery of January 20, 2003.
3D SYSTEMS, INC. VS. AMES. In April 2002, the Company 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.
On May 22, 2002, EOS GmbH announced in a press release that it had filed a
lawsuit against the Company in a German court seeking damages for the alleged
breach of the 1997 Patent License Agreement. To date the Company has not been
served with any pleadings relating to this matter and is therefore unable to
make any evaluation of potential liability with respect to it.
Page 37
The Company is engaged in certain additional legal actions arising in the
ordinary course of business. 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 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Amendment Agreement Number One to Loan and Security Agreement
dated July 26, 2001.
10.2 Amendment Agreement Number Two to Loan and Security Agreement
dated August 16, 2001.
10.3 Amendment Agreement Number Three to Loan and Security Agreement
dated October 1, 2001.
10.4 Amendment Agreement Number Four to Loan and Security Agreement
dated November 1, 2001.
10.5 Amendment Agreement Number Five to Loan and Security Agreement
dated December 20, 2001.
10.6 Amendment Agreement Number Six to Loan and Security Agreement
dated August 30, 2002.
10.7 Amendment Agreement Number Seven to Loan and Security Agreement
dated October 1, 2002.
10.8 Amendment Agreement Number Eight to Loan and Security Agreement
dated November 12, 2002.
10.9 Employment Agreement for Brian Service dated October 15, 2002.
10.10 Sixth Amendment to Reimbursement Agreement dated November 8,
2002.
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 dated November 12, 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 dated November 12, 2002.
b. Reports on Form 8-K
- Current report on Form 8-K, Items 5 and 7, filed July 24, 2002.
Page 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/S/ E. JAMES SELZER
- -----------------------------
E. James Selzer Date: November 12, 2002
Senior Vice President
Global Finance & Administration
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
(Duly authorized to sign on behalf of Registrant)
Page 39
Certification of
Chief Executive Officer
Of 3D Systems Corporation
I, Brian K. Service, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 3D Systems Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/S/ BRIAN K. SERVICE
- --------------------------------
By: Brian K. Service
Title: Chief Executive Officer
Page 40
Certification of
Chief Financial Officer
Of 3D Systems Corporation
I, E. James Selzer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 3D Systems Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/S/ E. JAMES SELZER
- --------------------------------
By: E. James Selzer
Title: Chief Financial Officer
Page 41