UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-22250
3D SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4431352
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
26081 AVENUE HALL
VALENCIA, CALIFORNIA 91355
(Address of Principal Executive Offices) (Zip Code)
(661) 295-5600 (Registrant's
Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No
Shares of Common Stock, par value $0.001, outstanding as of July 31, 2003:
12,767,947
3D SYSTEMS CORPORATION
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION...................................................................1
ITEM 1. Financial Statements...........................................................1
Condensed Consolidated Balance Sheets as of June 27, 2003 (unaudited) and
December 31, 2002 (unaudited)..................................................1
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 27, 2003 and June 28, 2002 (as restated) (unaudited)................2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 27, 2003 and June 28, 2002 (as restated) (unaudited)......................3
Condensed Consolidated Statements of Comprehensive (Loss) Income for the
Six Months Ended June 27, 2003 and June 28, 2002 (as restated) (unaudited).....5
Notes to Condensed Consolidated Financial Statements for the Six Months
Ended June 27, 2003 and June 28, 2002 (unaudited)..............................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................17
Liquidity and Capital Resources...............................................28
Cautionary Statements and Risk Factors........................................31
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....................39
ITEM 4. Controls and Procedures.......................................................41
PART II. OTHER INFORMATION......................................................................43
ITEM 1. Legal Proceedings.............................................................43
ITEM 6. Exhibits and Reports on Form 8-K..............................................43
3D SYSTEMS CORPORATION
Condensed Consolidated Balance Sheets
As of June 27, 2003 and December 31, 2002
(in thousands)
(unaudited)
JUNE 27, 2003 DECEMBER 31, 2002
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $1,269 in
2003 $ 8,985 $ 2,279
Accounts receivable, less allowances for doubtful accounts
of $2,660 and $3,068 18,054 27,420
Current portion of lease receivables 322 322
Inventories, net of reserves of $2,318 and $1,876 12,897 12,564
Prepaid expenses and other current assets 2,222 3,687
--------------- ---------------
Total current assets 42,480 46,272
Property and equipment, net 13,493 15,339
Licenses and patent costs, net 16,979 14,960
Lease receivables, less current portion and net of allowance
of $510 and $247 363 553
Acquired technology, net 6,860 7,647
Goodwill 44,650 44,456
Other assets, net 2,420 3,006
--------------- ---------------
$ 127,245 $ 132,233
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 8,550 $ 2,450
Accounts payable 6,454 10,830
Accrued liabilities 14,577 15,529
Current portion of long-term debt 155 10,500
Customer deposits 648 801
Deferred revenues 13,430 14,770
--------------- ---------------
Total current liabilities 43,814 54,880
Other liabilities 3,373 3,397
Long-term debt, less current portion 4,010 4,090
Subordinated debt 10,000 10,000
--------------- ---------------
Total liabilities 61,197 72,367
--------------- ---------------
Redeemable preferred stock, 8% convertible, authorized 5,000 shares,
issued and outstanding 2,634 15,158 ---
Stockholders' equity:
Common stock, authorized 25,000 shares, issued and outstanding
12,734 and issued and outstanding 12,725 13 13
Capital in excess of par value 85,100 84,931
Notes receivable from officers for purchase of stock (59) (59)
Preferred stock dividend (198) ---
Accumulated deficit (31,852) (21,419)
Accumulated other comprehensive loss (2,114) (3,600)
--------------- ---------------
Total stockholders' equity 50,890 59,866
--------------- ---------------
$ 127,245 $ 132,233
=============== ===============
See accompanying notes to condensed consolidated financial statements.
1
3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 27, 2003 and June 28, 2002
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
JUNE 28, 2002 JUNE 28, 2002
AS RESTATED AS RESTATED
JUNE 27,2003 (SEE NOTE 14) JUNE 27,2003 (SEE NOTE 14)
-------------- -------------- -------------- -------------
Sales:
Products $ 18,010 $ 19,110 $ 32,746 $ 38,371
Services
8,861 9,433 17,141 17,686
-------------- -------------- -------------- --------------
Total sales 26,871 28,543 49,887 56,057
-------------- -------------- -------------- --------------
Cost of sales:
Products 9,543 10,861 18,044 21,741
Services
6,547 6,883 13,569 13,197
-------------- -------------- -------------- --------------
Total cost of sales 16,090 17,744 31,613 34,938
-------------- -------------- -------------- --------------
Gross profit 10,781 10,799 18,274 21,119
-------------- -------------- -------------- --------------
Operating expenses:
Selling, general and administrative 9,719 12,974 20,375 23,944
Research and development 2,564 4,707 5,163 8,635
Severance and other restructuring costs 251 1,617 251 1,617
-------------- -------------- -------------- --------------
Total operating expenses 12,534 19,298 25,789 34,196
-------------- -------------- -------------- --------------
Loss from operations (1,753) (8,499) (7,515) (13,077)
Interest and other expense, net 993 668 1,887 1,368
Gain on arbitration settlement --- --- --- 18,464
-------------- -------------- -------------- --------------
(Loss) income before provision for income taxes (2,746) (9,167) (9,402) 4,019
Provision for (benefit from) income taxes 815 (3,539) 1,031 953
-------------- -------------- -------------- --------------
Net (loss) income (3,561) (5,628) (10,433) 3,066
-------------- -------------- -------------- --------------
Preferred stock dividend 198 -- 198 --
Net (loss) income available to common
shareholders $ (3,759) $ (5,628) $ (10,631) $ 3,066
============== ============== ============== ==============
Shares used to calculate basic net (loss) income
available to common shareholders per share 12,734 12,845 12,730 12,986
============== ============== ============== ==============
Basic net (loss) income available to $ (0.30) $ (0.44) $ (0.84) $ 0.24
common shareholders per share ============== ============== ============== ==============
Shares used to calculate diluted net (loss)
income to common shareholders per share 12,734 12,845 12,730 14,445
============== ============== ============== ==============
Diluted net (loss) income available $ (0.30) $ (0.44) $ (0.84) $ 0.21
to common shareholders per share ============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
2
3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 27, 2003 and June 28, 2002
(in thousands)
(unaudited)
SIX MONTHS ENDED
--------------- ---------------
JUNE 28, 2002
AS RESTATED
JUNE 27, 2003 (SEE NOTE 14)
--------------- ---------------
Cash flows from operating activities:
Net (loss) income $ (10,433) $ 3,066
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Deferred income taxes --- 893
Gain on arbitration settlement (including $1,846 included in selling,
general and administrative for legal reimbursement) --- (20,310)
Depreciation and amortization 4,590 4,776
Adjustment to allowance accounts 259 828
Adjustment to inventory reserve 568 ---
Loss on disposition of property and equipment 316 1,171
Stock compensation expense 130 ---
Changes in operating accounts, excluding acquisition:
Accounts receivable 10,329 7,039
Lease receivables 190 706
Inventories (521) 795
Prepaid expenses and other current assets 1,554 7
Other assets 435 460
Accounts payable (4,509) (250)
Accrued liabilities (1,443) (3,728)
Customer deposits (153) (569)
Deferred revenues (1,660) (126)
Other liabilities (187) 142
--------------- ---------------
Net cash used in operating activities (535) (5,100)
Cash flows from investing activities:
Investment in OptoForm SARL --- (1,200)
Investment in RPC --- (2,045)
Purchase of property and equipment (397) (2,079)
Additions to licenses and patents (3,231) (1,536)
Software development costs --- (308)
--------------- ---------------
Net cash used in investing activities (3,628) (7,168)
Cash flows from financing activities:
Exercise of stock options and purchase plan 40 529
Proceeds from sale of redeemable preferred stock 15,800 12,492
Issuance cost for redeemable preferred stock (642) ---
Repayment of officers and employee notes --- 145
Net borrowings under line of credit 6,100 ---
Borrowings --- 30,823
Repayment of long-term debt (10,425) (32,042)
--------------- ---------------
Net cash provided by financing activities 10,873 11,947
Effect of exchange rate changes on cash (4) 1,069
--------------- ---------------
Net increase in cash and cash equivalents 6,706 748
Cash and cash equivalents at the beginning of the period 2,279 5,948
--------------- ---------------
Cash and cash equivalents at the end of the period $ 8,985 $ 6,696
=============== ===============
See accompanying notes to condensed consolidated financial statements.
3
Supplemental schedule of non-cash investing and financing activities:
During the six months ended June 27, 2003 and June 28, 2002, the Company
transferred $1.0 million and $3.2 million of property and equipment from
inventories to fixed assets, respectively. Additionally, $1.0 million and $1.8
million of property and equipment was transferred from fixed assets to
inventories for the three months ended June 27, 2003 and June 28, 2002.
In conjunction with the $22 million arbitration settlement with Vantico, which
was settled through the return of shares to the Company, the Company allocated
$1.7 million to a put option which is included as an addition to stockholders'
equity in the first quarter of 2002.
During the second quarter of 2003, the Company accrued dividends on the Series B
Convertible Preferred Stock of $0.2 million.
4
3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Comprehensive (Loss) Income
For the Three and Six Months Ended June 27, 2003 and June 28, 2002
(in thousands)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 28, 2002 JUNE 28, 2002
AS RESTATED AS RESTATED
JUNE 27, 2003 (SEE NOTE 14) JUNE 27, 2003 (SEE NOTE 14)
------------- ------------- ------------- ------------
Net (loss) income $ (3,561) $ (5,628) $ (10,433) $ 3,066
Foreign currency translation 1,210 2,515 1,486 2,871
------------- ------------- ------------- ------------
Comprehensive (loss) income $ (2,351) $ (3,113) $ (8,947) $ 5,937
============= ============= ============= ============
See accompanying notes to condensed consolidated financial statements.
5
3D SYSTEMS CORPORATION
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 27, 2003 and June 28, 2002
(unaudited)
(1) Going Concern
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company
incurred operating losses totaling $7.5 million and $21.4 million for the
six months ended June 27, 2003 and the year ended December 31, 2002,
respectively. In addition, the Company has a working capital deficit of
$1.3 million and an accumulated deficit of $31.9 million at June 27, 2003.
These factors among others raise substantial doubt about the Company's
ability to continue as a going concern.
Management's plans include raising additional working capital through debt
or equity financing. In May 2003, the Company sold approximately 2.6
million shares of its Series B Convertible Preferred Stock for aggregate
consideration of $15.8 million (Note 7 - Preferred Stock). Subsequently, on
May 5, 2003 the Company repaid $9.6 million of the U.S. Bank term loan
balance (Note 10 - Borrowings).
Management intends to obtain debt financing to replace the U.S. Bank
financing, and in July 2003, management accepted a proposal from Congress
Financial, a subsidiary of Wachovia, to provide a secured revolving credit
facility of up to $20.0 million, subject to its completion of due diligence
to its satisfaction and other conditions. Congress has not yet completed
its diligence process; however, based on a preliminary analysis of the
collateral, it has indicated that the loan, if made, would be for an amount
significantly less than $20.0 million. Management is pursuing alternative
financing sources, including a possible restructuring of the Company's
industrial development bonds to make collateral currently serving to secure
repayment of the bonds available for additional borrowings. Additionally,
management intends to pursue a program to increase margins and continue
cost saving programs. However, there is no assurance that the Company will
succeed in accomplishing any or all of these initiatives.
The accompanying condensed consolidated financial statements do not include
any adjustments relating to the recoverability or classification of asset
carrying amounts or the amounts and classification of liabilities that may
result should the Company be unable to continue as a going concern.
(2) Basis of Presentation
The accompanying condensed consolidated financial statements of the Company
are prepared in accordance with instructions to Form 10-Q and, in the
opinion of management, include all adjustments (consisting only of normal
recurring accruals) which are necessary for the fair presentation of
results for the interim periods. The Company reports its interim financial
information on a 13-week basis ending the last Friday of each quarter, and
reports its annual financial information through the calendar year ended
December 31. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002. The results of the six months ended June 27,
2003 are not necessarily indicative of the results to be expected for the
full year.
(3) Significant Accounting Policies and Estimates
The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to allowance for
doubtful accounts, income taxes, inventories, goodwill, intangible and
other long-lived assets and contingencies. The Company bases its estimates
on historical experience and on various other assumptions it believes
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates.
The Company believes the following critical accounting policies are most
affected by management's judgments and the estimates used in preparation of
the condensed consolidated financial statements.
Cash and Cash Equivalents.
Cash and cash equivalents include all cash on hand and cash in various
banking institutions. The Company also has $1.2 million of cash in Wells
Fargo Bank under restriction to pay off a portion of the outstanding
industrial development bonds relating to its Colorado facility (Note 10 -
Borrowings). Additionally, the Company has approximately $0.1 million of
cash on deposit under restriction, as required by an arrangement with a
certain utility supplier.
6
Allowance for Doubtful Accounts.
The Company's estimate for the allowance for doubtful accounts related to
trade receivables is based on two methods. The amounts calculated from each
of these methods are combined to determine the total amount reserved.
First, the Company evaluates specific accounts where it has information
that the customer may have an inability to meet its financial obligations
(for example, bankruptcy). In these cases, the Company uses its judgment,
based on available facts and circumstances, and records a specific reserve
for that customer against amounts due to reduce the receivable to the
amount that is expected to be collected. These specific reserves are
reevaluated and adjusted as additional information is received that impacts
the amount reserved. Second, a reserve is established for all customers
based on a range of percentages applied to aging categories. These
percentages are based on historical collection and write-off experience. If
circumstances change (for example, the Company experiences higher than
expected defaults or an unexpected material adverse change in a major
customer's ability to meet its financial obligation to the Company),
estimates of the recoverability of amounts due to the Company could be
reduced by a material amount.
Income Taxes.
The provisions of SFAS No. 109, "Accounting for Income Taxes," require a
valuation allowance when, based upon currently available information and
other factors, it is more likely than not that all or a portion of the
deferred tax asset will not be realized. SFAS No. 109 provides that an
important factor in determining whether a deferred tax asset will be
realized is whether there has been sufficient income in recent years and
whether sufficient income is expected in future years in order to utilize
the deferred tax asset. Forming a conclusion that a valuation allowance is
not needed is difficult when there is negative evidence, such as cumulative
losses in recent years. The existence of cumulative losses in recent years
is an item of negative evidence that is particularly difficult to overcome.
At June 27, 2003, the unadjusted net book value before valuation allowance
of the Company's deferred tax assets totaled approximately $23.4 million,
which principally was comprised of net operating loss carry-forwards and
other credits. During the six months ended June 27, 2003 and during the
Company's 2002 fourth quarter-end, the Company recorded valuation allowance
of approximately $4.8 million and $12.9 million, respectively, against its
net deferred tax assets, which was additional to the approximate $5.7
million allowance previously recorded. The Company intends to maintain a
valuation allowance until sufficient evidence exists to support its
reversal. Also, until an appropriate level of profitability is reached, the
Company does not expect to recognize any domestic tax benefits in future
periods.
The Company believes its determination to record a valuation allowance to
reduce its deferred tax assets is a critical accounting estimate because it
is based on an estimate of future taxable income in the United States,
which is susceptible to change and dependent upon events that are remote in
time and may or may not occur, and because the impact of recording a
valuation allowance may be material to the assets reported on the Company's
balance sheet. The determination of the Company's income tax provision is
complex due to operations in numerous tax jurisdictions outside the United
States, which are subject to certain risks, which ordinarily would not be
expected in the United States. Tax regimes in certain jurisdictions are
subject to significant changes, which may be applied on a retroactive
basis. If this were to occur, the Company's tax expense could be materially
different than the amounts reported. Furthermore, as explained in the
preceding paragraph, in determining the valuation allowance related to
deferred tax assets, the Company adopts the liability method as required by
SFAS No. 109, "Accounting for Income Taxes." This method requires that we
establish valuation allowance if, based on the weight of available
evidence, in the Company's judgment it is more likely than not that the
deferred tax assets may not be realized.
Inventory.
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method. Reserves for slow moving
and obsolete inventories are provided based on historical experience and
current product demand. The Company evaluates the adequacy of these
reserves quarterly. There were no inventories consigned to a sales agent at
June 27, 2003, and inventories consigned to a sales agent at December 31,
2002 were $0.1 million. The Company's determination relating to the
allowance for inventory obsolescence is subject to change because it is
based on management's current estimates of required reserves and potential
adjustments.
Property and Equipment.
Property and equipment are carried at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets,
generally three to thirty years. Leasehold improvements are amortized on a
straight-line basis over their estimated useful lives, or the lives of the
leases, whichever is shorter. Realized gains and losses are recognized upon
disposal or retirement of the related assets and are reflected in results
of operations. Repair and maintenance charges are expensed as incurred.
7
Licenses and Patent Costs.
Licenses and patent costs are being amortized on a straight-line basis over
their estimated useful lives, which are approximately eight to
seventeen-years, or on a units-of-production basis, depending on the nature
of the license or patent.
Goodwill, Intangible and Other Long-Lived Assets.
The Company has applied Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" in its allocation of the purchase
prices of DTM Corporation (DTM) and RPC Ltd. (RPC). The annual impairment
testing required by SFAS No. 142, "Goodwill and Other Intangible Assets,"
requires the Company to use its judgment and could require the Company to
write-down the carrying value of its goodwill and other intangible assets
in future periods. SFAS No. 142 requires companies to allocate their
goodwill to identifiable reporting units, which are then tested for
impairment using a two-step process detailed in the statement. The first
step requires comparing the fair value of each reporting unit with its
carrying amount, including goodwill. If that fair value exceeds the
carrying amount, the second step of the process is not necessary and there
are no impairment issues. If that fair value does not exceed that carrying
amount, companies must perform the second step that requires an allocation
of the fair value of the reporting unit to all assets and liabilities of
that unit as if the reporting unit had been acquired in a purchase business
combination and the fair value of the reporting unit was the purchase
price. The goodwill resulting from that purchase price allocation is then
compared to its carrying amount with any excess recorded as an impairment
charge.
Upon implementation of SFAS No. 142 in January 2002 and again in the fourth
quarter of 2002, the Company concluded that the fair value of the Company's
reporting units exceeded their carrying value and accordingly, as of that
date, there were no goodwill impairment issues. The Company is required to
perform a valuation of its reporting unit annually, or upon significant
changes in the Company's business environment.
The Company evaluates long-lived assets other than goodwill for impairment
whenever events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. If the estimated future cash
flows (undiscounted and without interest charges) from the use of an asset
are less than the carrying value, a write-down would be recorded to reduce
the related asset to its estimated fair value.
Contingencies.
The Company accounts for contingencies in accordance with SFAS No. 5,
"Accounting for Contingencies," SFAS No. 5 requires that the Company record
an estimated loss from a loss contingency when information available prior
to issuance of the Company's financial statements indicates that it is
probable that an asset has been impaired or a liability has been incurred
at the date of the financial statements and the amount of the loss can be
reasonably estimated. Accounting for contingencies such as legal and income
tax matters requires the Company to use its judgment. At this time, the
Company's contingencies are not estimable and have not been recorded;
however, management believes the ultimate outcome of these actions will not
have a material effect on the Company's consolidated financial position,
results of operations or cash flows.
Revenue Recognition.
Revenues from the sale of systems and related products are recognized upon
shipment, provided that both title and risk of loss have passed to the
customer and collection is reasonably assured. Some sales transactions are
bundled and include equipment, software license, warranty, training and
installation. The Company allocates and records revenue in these
transactions based on vendor specific objective evidence that has been
accumulated through historic operations. The process of allocating the
revenue involves some management judgments. Revenues from services are
recognized at the time of performance. We provide end users with
maintenance under a warranty agreement for up to one year and defer a
portion of the revenues at the time of sale based on the objective evidence
for the of these services. After the initial warranty period, we offer
these customers optional maintenance contracts; revenue related to these
contracts is deferred and recognized ratably over the period of the
contract. Our warranty costs were $2.0 million and $2.5 million, for the
six months ended June 27, 2003 and June 28, 2002, respectively. The
Company's systems are sold with software products that are integral to the
operation of the systems. These software products are not sold separately.
Certain of the Company's sales were made through a sales agent to customers
where substantial uncertainty exists with respect to collection of the
sales price. The substantial uncertainty is generally a result of the
absence of a history of doing business with the customer and uncertain
political environment in the country in which the customer does business.
For these sales, the Company records revenues based on the cost recovery
method, which requires that the
8
sales proceeds received are first applied to the carrying amount of the
asset sold until the carrying amount has been recovered. Thereafter, all
proceeds are recognized as gross profit.
Credit is extended based on an evaluation of each customer's financial
condition. To reduce credit risk in connection with systems sales, the
Company may, depending upon the circumstances, require significant deposits
prior to shipment and may retain a security interest in the system until
fully paid. The Company often requires international customers to furnish
letters of credit.
Stock-based Compensation.
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board, APB, No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. The Company has adopted the
disclosure-only provisions of FAS No. 123 "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense relating to employee
stock options is determined based on the excess of the market price of the
Company's stock over the exercise price on the date of grant, the intrinsic
value method, versus the fair value method as provided under FAS No. 123.
Accordingly, no stock-based employee compensation cost is reflected in net
(loss) income, as all options granted under the plan had an exercise price
at least equal to the market value of the underlying common stock on the
date of grant. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date for the six-month
periods ended June 27, 2003 and June 28, 2002, consistent with the
provisions of FAS No. 123, the Company's net (loss) income and net (loss)
income per share would have changed. The following table represents the
effect on net (loss) income and net (loss) income per share if the Company
had applied the fair value based method and recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 27, June 28, June 27, June 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net (loss) income available to
common shareholders, as reported $ (3,759) $ (5,628) $ (10,631) $ 3,066
Add: Stock-based employee
compensation expense included in
reported net earnings, net of related
tax benefits --- --- --- ---
Deduct: Stock-based employee
compensation expense determined under
the fair value based method for all
awards, net of related tax effects 523 1,407 1,108 2,877
------------ ------------ ------------ ------------
Pro forma net (loss) income
available to common shareholders $ (4,282) $ (7,035) $ (11,739) $ 189
============ ============ ============ ============
Basic net (loss) earnings per common
share:
As reported $ (0.30) $ (0.44) $ (0.84) $ 0.24
============ ============ ============ ============
Pro forma $ (0.34) $ (0.55) $ (0.92) $ 0.01
============ ============ ============ ============
Diluted net (loss) earnings available
to common shareholders per share:
As reported $ (0.30) $ (0.44) $ (0.84) $ 0.21
============ ============ ============ ============
Pro forma $ (0.34) $ (0.55) $ (0.92) $ 0.01
============ ============ ============ ============
9
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and
are fully transferable. In addition, option pricing models require the
input of highly subjective assumptions, including the option's expected
life and the price volatility of the underlying stock. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate,
in the opinion of management, the existing models do not necessarily
provide a reliable single measure of the fair value of employee stock
options. The fair value of options granted for the three months ended June
27, 2003 and June 28, 2002 was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions:
June 27, 2003 June 28, 2002
-------------- -------------
Risk free interest rate 2.42 % 4.94 %
Expected life 4 years 4 years
Expected volatility 83 % 83 %
Because FAS No. 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in the future years.
Recent Accounting Pronouncements.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS No. 146
replaces Emerging Issues Task Force (EITF) Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity." This standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This
statement is effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS 146 does not have a material
impact on the Company's results of operations or financial condition.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation it has undertaken in issuing the
guarantee. FIN 45 also requires guarantors to disclose certain information
for guarantees, beginning December 31, 2002. These financial statements
contain the required disclosures.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor
with a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest
entity is an entity in which the equity investors do not have a controlling
financial interest or the equity investment at risk is insufficient to
finance the entity's activities without receiving additional subordinated
financial support from other parties. The Company does not have any
variable interest entities that must be consolidated.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
SFAS No. 150 establishes standards on the classification and measurement of
financial instruments with characteristics of both liabilities and equity.
SFAS No. 150 will become effective for financial instruments entered into
or modified after May 31, 2003. The Company does not have any financial
instruments to be accounted for under this pronouncement.
(4) Inventories (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
------------- -----------------
Raw materials $ 2,197 $ 2,617
Work in progress 401 196
Finished goods 10,299 9,751
------------- -----------------
$ 12,897 $ 12,564
============= =================
10
(5) Property and Equipment, net (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002 USEFUL LIFE
(IN YEARS)
----------------- ------------------ -----------------
Land $ 435 $ 435 ---
Building 4,202 4,202 30
Machinery and equipment 26,681 26,984 3-5
Office furniture and equipment 3,711 3,597 5
Leasehold improvements 4,205 4,137 Life of lease
Rental equipment 1,207 1,189 5
Construction in progress 391 206 N/A
----------------- ------------------
40,832 40,750
Less accumulated depreciation (27,339) (25,411)
----------------- ------------------
$ 13,493 $ 15,339
================= ==================
Depreciation expense for the three-month periods ended June 27, 2003 and
June 28, 2002 was $1.2 million and $1.8 million, respectively. Depreciation
expense for the six-month periods ended June 27, 2003 and June 28, 2002 was
$2.2 million and $2.8 million, respectively.
(6) Intangible Assets and Goodwill:
(a) Licenses and Patent Costs
Licenses and patent costs are summarized as follows (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
---------------- -----------------
Licenses, at cost $ 2,333 $ 2,333
Patent costs 26,246 22,946
---------------- -----------------
28,579 25,279
Less: Accumulated
amortization (11,600) (10,319)
---------------- -----------------
$ 16,979 $ 14,960
================ =================
For three months ended June 27, 2003 and June 28, 2002, the Company
amortized $0.6 million and $0.6 million in license and patent costs,
respectively. For the six months ended June 27, 2003 and June 28,
2002, the Company amortized $1.2 million and $1.0 million in license
and patent costs, respectively. The Company incurred $3.2 million and
$1.5 million in costs for the six months ended June 27, 2003 and June
28, 2002, respectively, and $1.6 million and $1.5 million for the
three months ended June 27, 2003 and June 28, 2002, respectively, to
acquire, defend, develop and extend patents in the United States,
Japan, Europe and certain other countries.
(b) Acquired Technology
Acquired technology is summarized as follows (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
---------------- -----------------
Acquired technology $ 10,111 $ 10,029
Less: Accumulated
amortization (3,251) (2,382)
---------------- -----------------
$ 6,860 $ 7,647
================ =================
For three months ended June 27, 2003 and June 28, 2002, the Company
amortized $0.4 million in acquired technology for each period. For the
six months ended June 27, 2003 and June 28, 2002, the Company
amortized $0.8 million in acquired technology for each period.
(c) Other Intangible Assets
During the three months ended June 27, 2003 and June 28, 2002, the
Company had amortization expense on other intangible assets of $0.2
million and $0.1 million, respectively. During the six months ended
June 27, 2003 and June 28, 2002, the Company had amortization expense
on other intangible assets of $0.3 million and $0.2 million,
respectively.
11
(d) Goodwill
The changes in the carrying amount of goodwill for the six months
ended June 27, 2003 are as follows (in thousands):
Balance as of December 31, 2002 $ 44,456
Effect of foreign currency exchange rates 194
---------------
Balance at June 27, 2003 $ 44,650
===============
The Company recorded no goodwill amortization in 2003.
(7) Redeemable Preferred Stock
On May 5, 2003, the Company sold 2,634,016 shares of Series B Convertible
Preferred Stock for an aggregate consideration of $15.8 million. The
Company incurred issuance costs of approximatelY $0.6 million in connection
with this transaction. The preferred stock accrues dividends at 8% per
share and is convertible at any time into 2,634,016 shares of common stock.
The preferred stock is redeemable at the Company's option after the third
anniversary date. Redemption is mandatory on the tenth anniversary date, at
$6.00 per share plus accrued dividends. The Company accrued $0.2 million
for dividends payable for the period from the issuance date through June
27, 2003.
(8) Computation of Earnings Per Share
Basic net (loss) income available to common shareholders per share is
computed by dividing net (loss) income available to common shareholders by
the weighted average number of shares of common stock outstanding during
the period. Diluted net (loss) income available to common shareholders per
share is computed by dividing net (loss) income available to common
shareholders by the weighted average number of shares of common stock
outstanding plus the number of additional common shares that would have
been outstanding if all potentially dilutive common shares had been issued.
Common shares related to stock options and stock warrants are excluded from
the computation when their effect is anti-dilutive.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings (loss) available per common share computations
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Numerator:
Net (loss) income available to
common shareholders--numerator
for basic and diluted net (loss)
income available per common share $ (3,759) $ (5,628) $ (10,631) $ 3,066
============= ============= ============= =============
Denominator:
Denominator for basic net (loss)
income available to common
shareholders per share--weighted
average shares 12,734 12,845 12,730 12,986
Effect of dilutive securities:
Stock options and warrants --- --- --- 1,459
------------- ------------- ------------- -------------
Denominator for diluted net (loss)
income available to common
shareholders per share $ 12,734 $ 12,845 $ 12,730 $ 14,445
============= ============= ============= =============
Potential common shares related to convertible debt, stock options and
stock warrants were excluded from the calculation of diluted EPS because
their effects were antidilutive. The weighted average for common shares
excluded from the computation were approximately 3,760,000 and 1,837,000
for the six months ended June 27, 2003, and June 28, 2002, respectively.
(9) Segment Information
The Company develops, manufactures and markets worldwide solid imaging
systems designed to reduce the time it takes to produce three-dimensional
objects. Segments are reported by geographic sales regions.
12
The Company's reportable segments include the Company's administrative,
sales, service, manufacturing and customer support operations in the United
States and sales and service offices in the European Community (France,
Germany, the United Kingdom, Italy and Switzerland) and in Asia (Japan,
Hong Kong and Singapore).
The Company evaluates performance based on several factors, of which the
primary financial measure is operating income. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies in Note 3.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -------------------------------
JUNE 27, 2003 JUNE 28, 2002 JUNE 27, 2003 JUNE 28, 2002
------------- ------------- -------------- -------------
Net sales:
USA $ 15,119 $ 18,225 $ 38,625 $ 40,146
Europe 12,342 16,149 13,629 25,008
Asia 4,090 2,784 6,867 7,084
------------- ------------- -------------- -------------
Subtotal 31,551 37,158 59,121 72,238
Intersegment elimination (4,680) (8,615) (9,234) (16,181)
------------- ------------- -------------- -------------
Total $ 26,871 $ 28,543 $ 49,887 $ 56,057
============= ============= ============== =============
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -------------------------------
JUNE 27, 2003 JUNE 28, 2002 JUNE 27, 2003 JUNE 28, 2002
------------- ------------- -------------- -------------
Intersegment eliminations:
USA $ 1,982 $ 3,792 $ 4,038 $ 8,301
Europe 2,698 4,823 5,196 7,880
Asia --- --- --- ---
------------- ------------- -------------- -------------
Total $ 4,680 $ 8,615 $ 9,234 $ 16,181
============= ============= ============== =============
All intersegment sales are recorded at amounts consistent with prices
charged to distributors, which are above cost.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -------------------------------
JUNE 27, 2003 JUNE 28, 2002 JUNE 27, 2003 JUNE 28, 2003
------------- ------------- -------------- -------------
(Loss) income from operations:
USA $ (4,227) $ (5,831) $ (12,034) $ (9,197)
Europe 883 (2,856) 1,353 (5,286)
Asia 1,658 825 2,496 2,809
------------- ------------- -------------- -------------
Subtotal (1,686) (7,862) (8,185) (11,674)
Intersegment elimination (67) (637) 670 (1,403)
------------- ------------- -------------- -------------
Total $ (1,753) $ (8,499) $ (7,515) $ (13,077)
============= ============= ============== =============
JUNE 27, 2003 DECEMBER 31, 2002
--------------- -----------------
Assets:
USA $ 298,526 $ 273,492
Europe 55,035 59,067
Asia 11,462 13,825
--------------- -----------------
Subtotal 365,023 346,384
--------------- -----------------
Intersegment elimination (237,778) (214,151)
--------------- -----------------
Total $ 127,245 $ 132,233
=============== =================
13
(10) Borrowings
The total outstanding borrowings are as follows (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
-------------- -------------------
Line of credit $ 8,550 $ 2,450
============== ===============----
Long-term debt current portion:
Industrial development bond $ 155 $ 150
Term loan --- 10,350
-------------- -------------------
Total long-term debt current portion $ 155 $ 10,500
============== ===================
Long-term debt, less current portion -
Industrial development bond $ 4,010 $ 4,090
-------------- -------------------
Total long-term debt, less current portion $ 4,010 $ 4,090
============== ===================
Subordinated debt $ 10,000 $ 10,000
============== ===================
On August 20, 1996, the Company completed a $4.9 million variable rate
industrial development bond financing of our Colorado facility. Interest on
the bonds is payable monthly (the interest rate at June 27, 2003 was
1.31%). Principal payments are payable in semi-annual installments through
August 2016. The bonds are collateralized by an irrevocable letter of
credit issued by Wells Fargo Bank, N.A. that is further collateralized by a
standby letter of credit issued by U.S. Bank in the amount of $1.2 million.
In order to further secure the reimbursement agreement, we executed a deed
of trust, security agreement and assignment of rents, an assignment of
rents and leases, and a related security agreement encumbering the Grand
Junction facility and certain personal property and fixtures located there.
In addition, the Grand Junction facility is encumbered by a second deed of
trust in favor of Mesa County Economic Development Council, Inc. securing
$0.8 million in allowances granted to us pursuant to an Agreement dated
October 4, 1995. At June 27, 2003, a total of $4.2 million was
outstanding under the bond. The terms of the letter of credit require the
Company to maintain specific levels of minimum tangible net worth and fixed
charge coverage ratios. On March 27, 2003, Wells Fargo sent a letter to the
Company stating that it was in default under two covenants of the
reimbursement agreement relating to this letter of credit relating to
minimum tangible net worth and fixed charge coverage ratios, and provided
the Company until April 26, 2003, to cure the default.
On May 2, 2003, Wells Fargo drew down a letter of credit in the amount of
$1.2 million which was held as partial security under the reimbursement
agreement relating to the letter of credit underlying the bonds and placed
the cash in a restricted account. The Company obtained a waiver for the
default from the Bank, provided that the Company meets certain terms and
conditions. The Company must remain in compliance with all other provisions
of the reimbursement agreement for this letter of credit. If a replacement
letter of credit cannot be obtained on or before December 31, 2003, the
Company has agreed to retire $1.2 million of the bonds using the restricted
cash. In July 2003, management accepted a proposal from Congress Financial,
a subsidiary of Wachovia, to provide a secured revolving credit facility of
up to $20.0 million, subject to its completion of due diligence to its
satisfaction and other conditions. Congress has not yet completed its
diligence process; however, based on a preliminary analysis of the
collateral, it has indicated that the loan, if made, would be for an amount
significantly less than $20.0 million. Management is pursuing alternative
financing sources, including a possible restructuring of the Company's
industrial development bonds to make collateral currently serving to secure
repayment of the bonds available for additional borrowings.
On August 17, 2001, the Company entered into a loan agreement with U.S.
Bank totaling $41.5 million, in order to finance the acquisition of DTM.
The financing arrangement consisted of a $26.5 million three-year revolving
credit facility and $15 million 66-month commercial term loan. At June 27,
2003, a total of $8.6 million was outstanding under the revolving credit
facility. The Company repaid $9.6 million that was outstanding under the
term loan on May 5, 2003. The interest rate at June 27, 2003 for the
revolving credit facility and term loan was 7.5%. The interest rate is
computed as either: (1) the prime rate plus a margin ranging from 0.25% to
4.0%, or (2) the 90-day adjusted LIBOR plus a margin ranging from 2.0% to
5.75%. Pursuant to the terms of the agreement, U.S. Bank has received a
first priority security interest in our accounts receivable, inventories,
equipment and general intangible assets.
On May 1, 2003, the Company entered into "Waiver Agreement Number Two" with
U.S. Bank whereby U.S. Bank waived all financial covenant violations at
December 31, 2002 and March 31, 2003. The events of default caused by the
Company's failure to timely submit audited financial statements and failure
to make the March 31, 2003 principal payment of $5.0 million were also
waived. The agreement requires the Company to obtain additional equity
investments of at least $9.6 million; to pay off the balance on the term
loan of $9.6 million by May 5, 2003; to increase the applicable interest
rate to Prime plus 5.25%; and to pay a $0.2 million waiver fee and all
related costs of drafting
14
the waiver. U.S. Bank also agreed to waive the Company's compliance with
each financial covenant in the loan agreement through September 30, 2003.
Provided the Company obtains a commitment letter from a qualified lending
institution by September 30, 2003, to refinance all of the outstanding
obligations with U.S. Bank, the waiver will be extended to the earlier of
December 31, 2003, or the expiration date of the commitment letter. The
Company has complied with all aspects of Waiver Agreement Number Two.
(11) Severance and Other Restructuring Costs
On July 24, 2002, the Company substantially completed a reduction in
workforce, which eliminated 109 positions out of its total workforce of 523
or approximately 20% of the total workforce. In addition, the Company
closed its existing office in Austin, Texas, which it acquired as part of
its acquisition of DTM, as well as its sales office in Farmington Hills,
Michigan. This was the second reduction in workforce completed in 2002. On
April 9, 2002, the Company eliminated approximately 10% of its total
workforce. All costs incurred in connection with these restructuring
activities are included as severance and other restructuring costs in the
accompanying condensed consolidated statements of operations.
A summary of the severance and other restructuring costs accrual consist of
the following (in thousands):
December June 27,
31, 2002 Utilized 2003
----------- --------- ----------
Severance costs (one-time benefits) $ 245 $ (209) $ 36
Contract termination costs 552 (312) 240
Other associated costs 66 (60) 6
----------- --------- ----------
Total severance and other
restructuring costs $ 863 $ (581) $ 282
=========== ========= ==========
These amounts are included in accrued liabilities and are expected to be
paid by October 2003. There have been no adjustments to the liability
except for payments of amounts due under the restructuring plan.
(12) Contingencies
The Company received an inquiry from the SEC relating to its revenue
recognition practices. The Audit Committee has completed its own inquiry
into the matter and shared its findings with the SEC. The Company has not
been notified that the SEC has initiated a formal investigation.
The Company is engaged in legal actions arising in the ordinary course of
business. At this time, financial obligations of these contingencies are
not estimable and no contingent loss and liabilities have been recorded.
(13) Subsequent Events
Legal Proceedings
E. James Selzer vs. 3D Systems Corporation (Case No. PC033145, Superior
Court of the State of California, County of Los Angeles). On July 28, 2003,
the Company was served with a complaint by its former chief financial
officer, whose employment had been terminated on April 21, 2003. The
complaint asserts breach of alleged employment and equipment purchase
contracts. In addition to declaratory relief, Mr. Selzer seeks compensatory
and contractual damages, which he requested to be proven at trial, and for
various expenses, together with reasonable attorney's fees and costs. The
Company is currently evaluating this complaint.
Other
The Company has agreed to maintain an effective registration statement with
respect to the resale of certain shares of its common stock that it sold in
private placement transactions. At the date hereof, the Company is not in
compliance with these obligations. In one transaction, the Company is
obligated to pay liquidated damages in an aggregate amount of approximately
$100,000 per month commencing July 15, 2003 and continuing until an
effective registration statement is available for use by the shareholders.
15
At June 27, 2003, the Company had a remaining note receivable totaling
$45,232, including accrued interest, from Mr. Hull, a director and
executive officer of the Company, pursuant to the 1996 Stock Incentive
Plan. The loan was used to purchase shares of the Company's common stock at
the fair market value on the date of purchase. The original amount of the
note was $60,000. The note bore interest at a rate of 6% per annum and
matured in 2003. Pursuant to the terms of the note, as a result of meeting
certain profitability targets for fiscal 2000, $20,000 of the principal
amount of the note was forgiven together with $3,671 of interest in 2000.
The note receivable is shown on the balance sheet as a reduction of
stockholders' equity. Pursuant to the terms of the note and related
transaction documents, in July 2003, the Company retired Mr.
Hull's note in exchange for 6,031 shares of common stock.
On August 4, 2003, the Company completed a reduction in its current
workforce by terminating 16 positions within its worldwide organization.
The estimated severance cost of this reduction is approximately $0.3
million.
On August 8, 2003, Brian K. Service resigned from his position as the
Company's Chief Executive Officer and as a member of the Company's Board of
Directors. Mr. Service will receive aggregate payments of approximately
$300,000 pursuant to the terms of his employment agreement and a consulting
agreement with Brian K. Service, Inc., an affiliate of Mr. Service, payable
through January 2004. Mr. Service will continue as an employee of the
Company for a 24-month term to assist with various clients and
transactions, for which he will be paid $188,000.
Effective August 8, 2003, Charles W. Hull, the Company's co-founder, Chief
Technical Officer and a director, was named acting Chief Executive Officer.
(14) Restatement
Subsequent to the issuance of its June 28, 2002 consolidated quarterly
financial statements, the Company's management determined that certain
sales transactions recorded in the three months and six months ended June
28, 2002 did not meet all of the criteria required for revenue recognition
under United States Generally Accepted Accounting Principles. Additionally,
certain sales transactions, which previously had been recorded in prior
periods, were restated and recognized in the three and the six months ended
June 28, 2002. The restated transactions affect the Company's previously
recorded amounts for accounts receivable, inventory, deferred revenue,
sales, cost of sales and others as noted below. The consolidated financial
statements as of and for the three months and six months ended June 28,
2002 have been restated to correct the accounting for these transactions. A
summary of the significant effects of the restatement is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED REPORTED
AS RESTATED JUNE 28, AS RESTATED JUNE 28,
JUNE 28, 2002 2002 JUNE 28, 2002 2002
------------- ----------- ------------- ------------
(in thousands, except (in thousands, except
per share amounts) per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
Sales $ 28,543 $ 28,782 $ 56,057 $ 55,978
Cost of Sales 17,744 17,908 34,938 34,965
Gross profit 10,799 10,874 21,119 21,013
Research & development
expenses 4,707 4,787 8,635 8,645
Total operating expenses 19,298 19,378 34,196 34,205
Loss from operations (8,499) (8,504) (13,077) (13,192)
Income tax expense (benefit) (3,539) (3,210) 953 1,367
Net (loss) income (5,628) (5,962) 3,066 2,536
Basic net income per share (0.44) (0.46) 0.24 0.20
Diluted net income per share $ (0.44) $ (0.46) $ 0.21 $ 0.18
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in Item 1, and the cautionary
statements and risk factors included in this Item 2 of this Report.
The forward-looking information set forth in this Report is as of the date of
this filing, and we undertake no duty to update this information. More
information about potential factors that could affect our business and financial
results is included in the section in this Item 2 entitled "Cautionary Statement
and Risk Factors."
RESTATEMENT
In connection with the investigation conducted by the Audit Committee of our
Board of Directors as part of the fiscal 2002 audit which we discuss in detail
in our Annual Report on Form 10-K filed on June 30, 2003, we have restated our
previously issued financial statements for the three months and the six months
ended June 28, 2002. The restatement arose from the adjustments of certain
income statement items which principally relate to the treatment and timing of
revenue recognition of eight equipment sales transactions and 12 equipment sales
transactions for the three-month and six-month periods ended June 28, 2002,
respectively. The effect of the adjustments for the three months ended June 28,
2002 is to decrease the Company's previously reported second quarter 2002
consolidated revenues from $28.8 million to $28.5 million, decrease net loss
from $6.0 million to $5.6 million and decrease diluted net loss per share from
$0.46 to $0.44. The effect of the adjustments for the six months ended June 28,
2002 is to increase the Company's previously reported consolidated revenues from
$56.0 million to $56.1 million, increase net income from $2.5 million to $3.1
million and increase diluted net income per share from $0.18 to $0.21. At the
direction of the Audit Committee, the Company has implemented changes to its
financial organization and enhanced its internal controls in response to issues
identified in the investigation and otherwise raised by the restatement. The
Company continues to implement each of the changes recommended by Audit
Committee. These changes are more fully discussed in Item 4 of this Report.
Unless otherwise expressly stated, all financial information in this Report is
presented inclusive of these income statement changes and other adjustments. The
reconciliation of previously reported amounts to the amounts currently being
reported is presented in Note 14 of the accompanying Notes to Condensed
Consolidated Financial Statements in this Report.
OVERVIEW
We develop, manufacture and market worldwide solid imaging systems designed to
reduce the time it takes to produce three-dimensional objects. Our products
produce physical objects from the digital output of solid or surface data from
computer aided design and manufacturing, which we refer to as CAD/CAM, and
related computer systems, and include SLA(R) systems, SLS(R) systems and
ThermoJet(R) solid object printers.
SLA systems use our proprietary stereolithography technology, which we refer to
as SL, an additive solid imaging process which uses a laser beam to expose and
solidify successive layers of photosensitive resin until the desired object is
formed to precise specifications in epoxy or acrylic resin. SLS systems utilize
a process called laser sintering, which we refer to as LS, which uses laser
energy to sinter powdered material to create solid objects from powdered
materials. LS and SL-produced parts can be used for concept models, engineering
prototypes, patterns and masters for molds, consumable tooling, and short-run
manufacturing of final product, among other applications. ThermoJet solid object
printers employ hot melt ink jet technology to build models in successive layers
using our proprietary thermoplastic material. These printers, about the size of
an office copier, are network-ready and are designed for operation in
engineering and design office environments. The ThermoJet printer output can be
used as patterns and molds, and when combined with other secondary processes
such as investment casting, can produce parts with representative end-use
properties.
Our customers include major corporations in a broad range of industries
including service bureaus and manufacturers of automotive, aerospace, computer,
electronic, consumer and medical products. Our revenues are generated by product
and service sales. Product sales are comprised of sales of systems and related
equipment, materials, software and other component parts, as well as rentals of
systems. Service and warranty sales include revenues from a variety of on-site
maintenance services and customer training.
For the first six months of 2003, the continued general economic slowdown in
capital equipment spending worldwide impacted both revenues and earnings. In the
first six months of 2003, SLA system unit sales were down 14.7% and SLS system
unit sales were down 36.0% from the same period in 2002. This had a significant
impact on both revenue and overall gross margin.
17
We recognize the importance of recurring revenue to moderate the impact that
fluctuations in capital spending has on our high end equipment sales. The
following table reflects recurring revenues (service and materials sales) and
non-recurring revenues (system sales and related equipment) and those revenues
as a percentage of total revenues for the periods indicated below (in thousands,
except percentages):
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 28, June 28,
2002 June 27, 2002
June 27, 2003 (as restated) 2003 (as restated)
------------- ------------ ------------- ------------
Recurring sales $ 16,908 $ 16,430 $ 32,616 $ 34,185
Non-recurring sales 9,963 12,113 17,271 21,872
------------- ------------ ------------ ------------
Total sales $ 26,871 $ 28,543 $ 49,887 $ 56,057
============= ============ ============ ============
Recurring sales 62.9% 57.6% 65.4% 61.0%
Non-recurring sales 37.1% 42.4% 34.6% 39.0%
------------- ------------ ------------ ------------
100% 100% 100% 100%
============= ============ ============ ============
Since the second quarter of 2001, the market for our capital equipment has been
impacted by overall economic conditions. Consequently, we reduced our cost
structure by implementing an approximate 10% reduction in workforce worldwide in
April 2002. After reviewing our results for the second quarter of 2002 and the
long-term prospects for the worldwide economy, we took additional measures to
realign our projected expenses with anticipated revenue levels. During the third
quarter of 2002, we closed our existing facilities in Austin, Texas, and
Farmington Hills, Michigan, and reduced our workforce by an additional 20% or
109 employees. As a result of these activities, we recorded charges of $1.6
million and $2.7 million in the quarters ended June 28, 2002 and September 27,
2002, respectively. In addition, in April 2003, we reduced our workforce by
6.2%, or 27 employees, in the United States, and in August 2003, by 3.9%, or 16
employees, worldwide, as a result of continued lower revenue levels. We recorded
a $0.3 million charge for the April 2003 reduction in the second quarter of
2003, and we expect to record a charge of approximately $0.3 million for the
August 2003 reduction in the third quarter of 2003.
Sales into our Advanced Digital Manufacturing ("ADM") market continue to
increase including sales into aerospace, motorsports, jewelry, and hearing aids.
Our ADM revenue was approximately $17.0 million or 34.0% of our overall revenue
for the six months ended June 27, 2003 and $16.2 million or 28.9% of our total
revenue for the six months ended June 28, 2002, and we believe that the market
demand for new ADM applications continues to grow.
On March 19, 2002, we reached a settlement agreement with Vantico relating to
the termination of the Distribution Agreement and the Research and Development
Agreement which required Vantico to pay us $22 million in cash or by delivery of
1.55 million shares of our common stock. On April 22, 2002, Vantico delivered
the 1.55 million shares to us. Due to the termination of this agreement, we are
increasing our focus on our internal resin conversion program and our overall
materials business through RPC. We are moving forward with our retail materials
strategy with our Accura(TM) materials which we launched on April 23, 2002.
RELATED PARTIES
On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible Preferred
Stock, at a price of $6.00 per share, for aggregate consideration of $15.8
million. The preferred stock accrues dividends at 8% per share and is
convertible at any time into approximately 2,634,016 shares of common stock. The
stock is redeemable at our option after the third anniversary date. We must
redeem any shares of preferred stock outstanding on the tenth anniversary date.
The redemption price is $6.00 per share plus accrued and unpaid dividends.
Messrs. Loewenbaum, Service and Hull, the Chairman of our Board of Directors,
then Chief Executive Officer and Chief Technology Officer, respectively,
purchased an aggregate of $1,450,000 of the Series B Convertible Preferred
Stock. Additionally, Clark Partners I, L.P., a New York limited partnership,
purchased $5.0 million of the Series B Convertible Preferred Stock. Kevin Moore,
a member of our Board of Directors, is the president of the general partner of
Clark Partners I, L.P. In connection with the offering, Houlihan Lokey Howard &
Zukin rendered its opinion that the terms of the offering were fair to us from a
financial point of view. A special committee of our Board of Directors, composed
entirely of disinterested independent directors, approved the offer and sale of
the Series B Convertible Preferred Stock and recommended the transaction to our
Board of Directors. Our Board of Directors also approved the transaction, with
interested Board members not participating in the vote.
18
At June 27, 2003, we had a remaining note receivable totaling $45,232, including
accrued interest, from Mr. Hull, our director and executive officer, pursuant to
the 1996 Stock Incentive Plan. The loan was used to purchase shares of our
common stock at the fair market value on the date of purchase. The original
amount of the note was $60,000. The note bore interest at a rate of 6% per annum
and matured in 2003. Pursuant to the terms of the note, as a result of meeting
certain profitability targets for fiscal 2000, $20,000 of the principal amount
of the note was forgiven together with $3,671 of interest in 2000. The note
receivable is shown on the balance sheet as a reduction of stockholders' equity.
Pursuant to the terms of the note and related transaction documents, in July
2003, we retired Mr. Hull's note in exchange for 6,031 shares of our common
stock.
On August 8, 2003, Brian K. Service resigned from his position as the Company's
Chief Executive Officer and as a member of our Board of Directors. Mr. Service
will receive aggregate payments of approximately $300,000 pursuant to the terms
of his employment agreement and a consulting agreement with Brian K. Service,
Inc., an affiliate of Mr. Service, payable through January 2004. Mr. Service
will continue as our employee for a 24-month term to assist with various clients
and transactions, for which he will be paid $188,000.
Effective August 8, 2003, Charles W. Hull, the Company's co-founder, Chief
Technical Officer and a director, was named acting Chief Executive Officer.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make critical accounting estimates that directly impact our condensed
consolidated financial statements and related disclosures. Critical accounting
estimates are estimates that meet two criteria: (1) the estimates require that
we make assumptions about matters that are highly uncertain at the time the
estimates are made; (2) there exist different estimates that could reasonably be
used in the current period, or changes in the estimates used are reasonably
likely to occur from period to period, both of which would have a material
impact on the presentation of the financial condition or our results of our
operations. On an on-going basis, we evaluate our estimates, including those
related to the allowance for doubtful accounts, income taxes, inventory,
goodwill, intangible and other long-lived assets, contingencies and revenue
recognition. We base our estimates and assumptions on historical experience and
on various other assumptions we believe reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The following represent what management believes are the critical accounting
policies most affected by significant management estimates and judgments.
Management has discussed these critical accounting policies, the basis for their
underlying assumptions and estimates and the nature of our related disclosures
herein with the Audit Committee of our Board of Directors.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Our estimate for the allowance for doubtful
accounts related to trade receivables is based on two methods. The amounts
calculated from each of these methods are combined to determine the total amount
reserved. First, we evaluate specific accounts where we have information that
the customer may have an inability to meet its financial obligations (for
example, bankruptcy). In these cases, we use our judgment, based on available
facts and circumstances, and record a specific reserve for that customer against
amounts due to reduce the receivable to the amount that is expected to be
collected. These specific reserves are reevaluated and adjusted as additional
information is received that impacts the amount reserved. Second, a reserve is
established for all customers based on a range of percentages applied to aging
categories. These percentages are based on historical collection and write-off
experience. If circumstances change (for example, we experience higher than
expected defaults or an unexpected material adverse change in a major customer's
ability to meet its financial obligation to us), our estimates of the
recoverability of amounts due to us could be reduced by a material amount.
We believe that our allowance for doubtful accounts is a critical accounting
estimate because it is susceptible to change and dependent upon events that are
remote in time and may or may not occur, and because the impact of recognizing
additional allowance for doubtful accounts may be material to the assets
reported on our balance sheet and our results of operations.
INCOME TAXES. The provisions of SFAS No. 109, "Accounting for Income Taxes,"
require a valuation allowance when, based upon currently available information
and other factors, it is more likely than not that all or a portion of the
deferred tax asset will not be realized. SFAS No. 109 provides that an important
factor in determining whether a deferred tax asset will be realized is whether
there has been sufficient income in recent years and whether sufficient income
is expected in future years
19
in order to utilize the deferred tax asset. Forming a conclusion that a
valuation allowance is not needed is difficult when there is negative evidence,
such as cumulative losses in recent years. The existence of cumulative losses in
recent years is an item of negative evidence that is particularly difficult to
overcome. At June 27, 2003, the unadjusted net book value before valuation
allowance of our deferred tax assets totaled approximately $23.4 million, which
principally was comprised of net operating loss carry-forwards and other
credits. During the six months ended June 27, 2003 and during our 2002 fourth
quarter-end, we recorded valuation allowance of approximately $4.8 million and
$12.9 million, respectively, against our net deferred tax assets, which was
additional to the approximate $5.7 million allowance previously recorded. We
intend to maintain a valuation allowance until sufficient evidence exists to
support our reversal. Also, until an appropriate level of profitability is
reached, we do not expect to recognize any domestic tax benefits in future
periods.
We believe that our determination to record a valuation allowance to reduce our
deferred tax assets is a critical accounting estimate because it is based on an
estimate of future taxable income in the United States, which is susceptible to
change and dependent upon events that are remote in time and may or may not
occur, and because the impact of recording a valuation allowance may be material
to the assets reported on our balance sheet and our results of operations. The
determination of our income tax provision is complex due to operations in
numerous tax jurisdictions outside the United States, which are subject to
certain risks, which ordinarily would not be expected in the United States. Tax
regimes in certain jurisdictions are subject to significant changes, which may
be applied on a retroactive basis. If this were to occur, our tax expense could
be materially different than the amounts reported. Furthermore, as explained in
the preceding paragraph, in determining the valuation allowance related to
deferred tax assets, we adopt the liability method as required by SFAS No. 109,
"Accounting for Income Taxes." This method requires that we establish valuation
allowance if, based on the weight of available evidence, in our judgment it is
more likely than not that the deferred tax assets may not be realized.
INVENTORY. Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out method. Reserves for slow moving and
obsolete inventories are provided based on historical experience and current
product demand. Our reserve for slow moving and obsolete inventory was $2.3
million and $1.9 million at June 27, 2003 and December 31, 2002, respectively.
We evaluate the adequacy of these reserves quarterly. There were no inventories
consigned to a sales agent at June 27, 2003, and inventories consigned to a
sales agent at December 31, 2002 were $0.1 million. Our determination relating
to the allowance for inventory obsolescence is subject to change because it is
based on management's current estimates of required reserves and potential
adjustments.
We believe that the allowance for inventory obsolescence is a critical
accounting estimate because it is susceptible to change and dependent upon
events that are remote in time and may or may not occur, and because the impact
of recognizing additional obsolescence reserves may be material to the assets
reported on our balance sheet and results of operations.
GOODWILL, INTANGIBLE AND OTHER LONG-LIVED ASSETS. The Company has applied
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" in its allocation of the purchase prices of DTM Corporation (DTM)
and RPC Ltd. (RPC). The annual impairment testing required by SFAS No. 142,
"Goodwill and Other Intangible Assets," requires the Company to use its judgment
and could require the Company to write-down the carrying value of its goodwill
and other intangible assets in future periods. SFAS No. 142 requires companies
to allocate their goodwill to identifiable reporting units, which are then
tested for impairment using a two-step process detailed in the statement. The
first step requires comparing the fair value of each reporting unit with its
carrying amount, including goodwill. If that fair value exceeds the carrying
amount, the second step of the process is not necessary and there are no
impairment issues. If that fair value does not exceed that carrying amount,
companies must perform the second step that requires an allocation of the fair
value of the reporting unit to all assets and liabilities of that unit as if the
reporting unit had been acquired in a purchase business combination and the fair
value of the reporting unit was the purchase price. The goodwill resulting from
that purchase price allocation is then compared to its carrying amount with any
excess recorded as an impairment charge.
Upon implementation of SFAS No. 142 in January 2002 and again in the fourth
quarter of 2002, the Company concluded that the fair value of the Company's
reporting units exceeded their carrying value and accordingly, as of that date,
there were no goodwill impairment issues. The Company is required to perform a
valuation of its reporting unit annually, or upon significant changes in the
Company's business environment.
The Company evaluates long-lived assets other than goodwill for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. If the estimated future cash flows
(undiscounted and without interest charges) from the use of an asset are less
than the carrying value, a write-down would be recorded to reduce the related
asset to its estimated fair value.
We believe that our determination not to recognize an impairment of goodwill,
intangible or other long-lived assets is a critical accounting estimate because
it is susceptible to change, dependent upon estimates of the fair value of our
reporting units, and because the impact of recognizing an impairment may be
material to the assets reported on our balance sheet and our results of
operations.
20
CONTINGENCIES. We account for contingencies in accordance with SFAS No. 5,
"Accounting for Contingencies." SFAS No. 5 requires that we record an estimated
loss from a loss contingency when information available prior to issuance of our
financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies such as legal and income tax matters requires us to use our
judgment. At this time our contingencies are not estimable and have not been
recorded; however, management believes the ultimate outcome of these actions
will not have a material effect on our consolidated financial position, results
of operations or cash flows.
REVENUE RECOGNITION. Revenues from the sale of systems and related products are
recognized upon shipment, provided that both title and risk of loss have passed
to the customer and collection is reasonably assured. Some sales transactions
are bundled and include equipment, software license, warranty, training and
installation. The Company allocates and records revenue in these transactions
based on vendor specific objective evidence that has been accumulated through
historic operations. The process of allocating the revenue involves some
management judgments. Revenues from services are recognized at the time of
performance. We provide end users with maintenance under a warranty agreement
for up to one year and defer a portion of the revenues at the time of sale based
on the objective evidence for the value of these services. After the initial
warranty period, we offer these customers optional maintenance contracts;
revenue related to these contracts is deferred and recognized ratably over the
period of the contract. Our warranty costs were $2.0 million and $2.5 million,
for the six months ended June 27, 2003 and June 28, 2002, respectively. The
Company's systems are sold with software products that are integral to the
operation of the systems. These software products are not sold separately.
Certain of the Company's sales were made through a sales agent to customers
where substantial uncertainty exists with respect to collection of the sales
price. The substantial uncertainty is generally a result of the absence of a
history of doing business with the customer and uncertain political environment
in the country in which the customer does business. For these sales, the Company
records revenues based on the cost recovery method, which requires that the
sales proceeds received are first applied to the carrying amount of the asset
sold until the carrying amount has been recovered. Thereafter, all proceeds are
recognized as gross profit.
Credit is extended based on an evaluation of each customer's financial
condition. To reduce credit risk in connection with systems sales, the Company
may, depending upon the circumstances, require significant deposits prior to
shipment and may retain a security interest in the system until fully paid. The
Company often requires international customers to furnish letters of credit.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS 146
does not have a material impact on our results of operations or financial
condition.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation it has undertaken in issuing the guarantee. FIN 45 also requires
guarantors to disclose certain information for guarantees, beginning December
31, 2002. These financial statements contain the required disclosures.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. We do not have any variable interest entities that must be
consolidated.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards on the classification and measurement of financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
will become effective for financial instruments entered into or modified after
May 31, 2003. We do not have any financial instruments to be accounted for under
this pronouncement.
21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our statements of operations to total sales:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 28, 2002 JUNE 28, 2002
JUNE 27, 2003 (AS RESTATED) JUNE 27, 2003 (AS RESTATED)
------------- ------------- ------------- -------------
Sales:
Products 67.0% 67.0% 65.6% 68.4%
Services 33.0% 33.0% 34.4% 31.6%
Total sales 100.0% 100.0% 100.0% 100.0%
Cost of sales:
Products 35.5% 38.1% 36.2% 38.8%
Services 24.4% 24.1% 27.2% 23.5%
Total cost of sales 59.9% 62.2% 63.4% 62.3%
Gross profit 40.1% 37.8% 36.6% 37.7%
Selling, general and administrative
expenses 36.2% 45.5% 40.8% 42.7%
Research and development expenses 9.5% 16.5% 10.3% 15.4%
Severance and other restructuring 0.9% 5.7% 0.5% 2.9%
Loss from operations (6.5)% (29.8)% (15.1)% (23.3)%
Interest and other (expense) income,
net (3.7)% (2.3)% (3.8)% (2.4)%
Gain on arbitration settlement --- --- --- 32.9%
Provision for (benefit from) income 3.0 (12.4)% 2.1% 1.7%
Net (loss) income (13.2)% (19.7)% (20.9)% 5.5%
Cost of sales (as a percentage of related
Products sales): 53.0% 56.8% 55.1% 56.7%
Services 73.9% 73.0% 79.2% 74.6%
Total cost of sales 59.9% 62.2% 63.4% 62.3%
22
The following table sets forth, for the periods indicated, total sales
attributable to each of our major products and services groups, and those
sales as a percentage of total sales (in thousands, except percentages):
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 28, 2002 JUNE 28, 2002
JUNE 27, 2003 (AS RESTATED) JUNE 27, 2003 (AS RESTATED)
------------- ------------- ------------- -------------
Products:
SLA systems and related
equipment $ 6,629 $ 6,242 $ 10,082 $ 12,137
SLS systems and related equipment 2,300 4,958 4,699 7,004
Solid object printers 238 262 599 1,116
Materials 8,047 6,997 15,475 16,499
Other 796 651 1,891 1,615
------------- ------------- -------------- -------------
Total products 18,010 19,110 32,746 38,371
------------- ------------- -------------- -------------
Services:
Maintenance 8,454 8,963 16,391 16,596
Other 407 470 750 1,090
------------- ------------- -------------- -------------
Total services 8,861 9,433 17,141 17,686
------------- ------------- -------------- -------------
Total sales $ 26,871 $ 28,543 $ 49,887 $ 56,057
============= ============= ============== =============
Products:
SLA systems and related
equipment 24.7% 21.9% 20.2% 21.6%
SLS systems and related
equipment 8.5% 17.4% 9.4% 12.5%
Solid object printers 0.9% 0.9% 1.2% 2.0%
Materials 29.9% 24.5% 31.0% 29.4%
Other 3.0% 2.3% 3.8% 2.9%
------------- ------------- -------------- -------------
Total products 67.0% 67.0% 65.6% 68.4%
------------- ------------- -------------- -------------
Services:
Maintenance 31.5% 31.4% 32.9% 29.7%
Other 1.5% 1.6% 1.5% 1.9%
------------- ------------- -------------- -------------
Total services 33.0% 33.0% 34.4% 31.6%
------------- ------------- -------------- -------------
Total sales 100.0% 100.0% 100.0% 100.0%
============= ============= ============== =============
Segments are reported by geographic sales regions. The Company's reportable
segments include the Company's administrative, sales, service,
manufacturing and customer support operations in the United States and
sales and service offices in the European Community (France, Germany, the
United Kingdom, Italy and Switzerland) and in Asia (Japan, Hong Kong and
Singapore).
The Company evaluates performance based on several factors, of which the
primary financial measure is operating income. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies in Note 3 of the accompanying Notes to Condensed
Consolidated Financial Statements in this Report.
23
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 28, 2002 JUNE 28, 2002
JUNE 27, 2003 (AS RESTATED) JUNE 27, 2003 (AS RESTATED)
------------- ------------- ------------- -------------
Sales:
U.S. operations $ 13,137 $ 14,145 $ 24,195 $ 29,086
European operations 9,644 11,614 18,825 19,887
Asia/Pacific operations 4,090 2,784 6,867 7,084
-------------- ------------- ------------ -----------
Total sales 26,871 28,543 49,887 56,057
Cost of sales:
U.S. operations 8,598 9,133 16,744 17,189
European operations 5,502 7,235 11,288 14,229
Asia/Pacific operations 1,990 1,376 3,581 3,520
-------------- ------------- ------------ -----------
Total cost of sales 16,090 17,744 31,613 34,938
-------------- ------------- ------------ -----------
Gross profit $ 10,781 $ 10,799 $ 18,274 $ 21,119
============== ============= ============ ===========
THREE MONTHS ENDED JUNE 27, 2003 COMPARED TO
THE THREE MONTHS ENDED JUNE 28, 2002
REVENUES. Revenues during the three months ended June 27, 2003, (the "second
quarter of 2003") were $26.9 million, a decrease of 5.9%, from the $28.5 million
recorded during the three months ended June 28, 2002 (the "second quarter of
2002"). The decrease in overall revenues reflects a decline in capital spending
due to poor economic conditions in the United States and Europe and the
uncertainty surrounding the war with Iraq. In addition, we believe that sales of
our SLA and SLS systems declined in part because we have not introduced any
significant advances in these products this year or in 2001 or 2002.
Furthermore, the resolution of the issues associated with the completion of the
fiscal year 2002 audit caused significant disruption to our organization, and
required the attention of our executive and management staff during the first
half of this year. We believe that the completion of the 2002 audit has enabled
management to refocus its attention and efforts on our core business. In
addition, we have implemented many of the recommendations of our Audit
Committee, as discussed in Item 4 of this Report and continue to implement the
remaining recommendations.
Product sales of $18.0 million were recorded in the second quarter of 2003, a
decrease of 5.8%, compared to $19.1 million for the second quarter of 2002. The
decrease was shared by our U.S. and European operating segments. Our U.S.
operations experienced a decrease in revenue from $14.1 million to $13.1
million, or 7.1% and our European operations decreased 17.0%, from $11.6 million
to $9.6. The decrease is directly related to the decline in unit sales of our
SLA systems as customers delayed decisions with respect to capital expenditures
and the distractions created by the annual audit as noted above. In addition, we
believe that sales of our SLA and SLS systems declined in part because we have
not introduced any significant advances in these products this year or in 2001
or 2002, as noted above. Our Asia/Pacific operating unit experienced an increase
in revenue of 46.9% from $2.8 million in the second quarter of 2002 to $4.1
million for the similar period in 2003. The increase in sales for Asia is
primarily due to sales of two large frame SLA systems.
Total units sold for the three months ended June 27, 2003 and June 28, 2002 were
64 and 66, respectively. During the second quarter of 2003, we sold a total of
38 SLA systems, 9 SLS systems and 11 ThermoJet systems, as compared to 44 SLA
systems, 9 SLS systems and 11 ThermoJet systems sold in the second quarter of
2002. The decrease in units sold is primarily due to the continued overall
economic decline in capital spending by customers in the United States and the
distraction of management's attention caused by the accounting issues discussed
in Item 4 of this Report.
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. We also continue to experience a shift in
our sales mix from our large frame SLA systems to our small frame SLA systems.
Materials revenue of $8.0 million was recorded in the second quarter of 2003, a
15.0% increase from the $7.0 million recorded in the second quarter of 2002. The
second quarter of 2002 was the first quarter in which we operated without the
benefit of the Vantico sales agreement. Sales for that quarter reflect the start
up of our resin conversion program and independent materials business. We are
moving forward with a retail materials strategy based in our Accura(TM)
materials, which we launched on April 23, 2002. The increase in materials
revenue primarily relates to higher volume of resin sales as we continue to
solicit customers to transition from Vantico material to RPC (Accura(TM) )
supplied material. We believe that many customers have converted to our
Accura(TM) resins and that we supply approximately 50% of the worldwide market
for SL resins used in our SLA systems.
24
Service sales during the second quarter of 2003 totaled $8.9 million, a decrease
of 5.3% from the $9.4 million recorded in the second quarter of 2002. The
decrease primarily reflects a decline in system sales, and consequently a
decline in warranty revenue, as well as delayed decisions by customers whether
to renew maintenance contracts. The decrease is partially offset by an increase
in new maintenance contract revenue as a result of an increase in the overall
number of systems in the marketplace.
COST OF SALES. Cost of sales was $16.1 million or 59.9% of sales in the second
quarter of 2003 and $17.7 million or 62.2% of sales in the second quarter of
2002. The decrease in cost of sales, as a percentage of sales, primarily is
attributable to an increase in materials revenue as a percentage of overall
revenues for the second quarter of 2003.
Product cost of sales as a percentage of product sales was 53.0% in the second
quarter of 2003 and 56.8% in the second quarter of 2002. Product cost of sales
as a percentage of product sales decreased primarily due to greater material
revenue as a percentage of total product revenue. Material sales represented
29.9% of overall sales for the second quarter of 2003, as opposed to 24.5% of
overall sales for the comparative period in 2002. Materials sales carry a lower
cost of sale since most of our resin materials are being produced internally. As
a percentage of material sales, materials cost of sales was 27.6% and 42.2% for
the respective periods in 2003 and 2002 due to the start up of our RPC business.
Cost of sales for U.S. operations decreased to $8.6 million in the second
quarter of 2003 from $9.1 million in the second quarter of 2002. The monetary
decrease in cost of sales is directly related to the decrease in sales. Cost of
sales for U.S. operations as a percentage of U.S. sales increased to 65.4% in
the second quarter of 2003 from 64.6% in the second quarter of 2002. The
increase is due to the change in our sales mix for the quarter between service
revenue and systems revenue. Cost of sales for our European operations decreased
to $5.5 million or 57.1% of European sales in the second quarter of 2003 from
$7.2 million or 62.3% of sales in the second quarter of 2002. The decrease in
European cost of sales as a percent of European sales relates to lower margins
associated with the mix and prices of SLS and SLA systems sold, offset by higher
margins on resin sales. Cost of sales for our Asia/Pacific operations increased
to $2.0 million or 48.7% of Asia/Pacific sales in the second quarter of 2003
from $1.4 million or 49.4% of sales. The increase is related to the increased
sales in Asia and the margins are consistent between the periods.
Service cost of sales as a percentage of service sales was 73.9% in the second
quarter of 2003 and 73.0% in the second quarter of 2002. The slight increase in
the service cost of sales as a percentage of service sales is primarily
attributable to delayed decisions by customers whether to renew service
contracts. This effect reduces our gross profit margins as certain of our
service costs of sales are fixed and do not fluctuate in relation to service
revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $9.7 million in the second quarter of 2003 and
$13.0 million in the second quarter of 2002. This decrease was primarily a
result of cost savings achieved due to a reduction in workforce and other
restructuring activities during the second and third quarters of 2002 and the
second quarter of 2003. These cost savings were offset by increased professional
fees incurred in connection with the audit committee investigation and the
completion of the 2002 audit.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
second quarter of 2003 decreased to $2.6 million or 9.5% of sales compared to
$4.7 million or 16.5% of sales in the second quarter of 2002. The decrease in
research and development expenses is primarily due to closure of the research
and development facility in Austin, Texas, and consolidation of this activity in
other existing locations. Additionally, we reduced the workforce for research
and development during the second and third quarters of 2002 and the second
quarter of 2003. We continue the 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, which we currently anticipate to be in the third quarter of
2003. The impact of cost reductions and closure of our Austin facility are
impacting our research and development expenses, bringing them in line with
historical levels of approximately 9% of revenue by the end of fiscal 2003.
LOSS FROM OPERATIONS. Operating loss for the second quarter of 2003 was $1.8
million compared to a loss of $8.5 million in the second quarter of 2002. This
decrease in operating loss is attributable primarily to the restructuring and
cost savings measures we have implemented in the second and third quarters of
2002 and in the second quarter of 2003. We have made significant improvements in
our operational efficiency, reduced our labor and occupancy costs and have
improved our margins on material by developing and marketing our own line of
resins. Our performance during the second quarter of 2003, in terms of our
operating loss, reflects significant improvement over the second quarter of
2002.
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net for the second
quarter of 2003 was $1.0 million compared to interest and other expense, net of
$0.7 million in the second quarter of 2002. The increased expense in
25
the second quarter of 2003 reflects higher interest rates on our debt and
additional loan costs for U.S. Bank as a result of obtaining the required
waivers of default.
PROVISION (BENEFIT FROM) FOR INCOME TAXES. For the second quarter of 2003, our
income tax provision was $0.8 million, for taxes related to our foreign
operations, compared to a benefit from income tax of $(3.5) million in the
second quarter of 2002, arising from our net loss for the quarter.
SIX MONTHS ENDED JUNE 27, 2003 COMPARED TO
THE SIX MONTHS ENDED JUNE 28, 2002
REVENUES. Revenues during the six months ended June 27, 2003, (the "first half
of 2003") were $49.9 million, a decrease of 11.0%, from the $56.1 million
recorded during the six months ended June 28, 2002 (the "first half of 2002").
The decrease in overall revenues was incurred for the most part in the first
three months of 2003, and reflects a decline in capital spending due to poor
economic conditions in the United States and the uncertainty surrounding the war
with Iraq. In addition, we believe that sales of our SLA and SLS systems
declined in part because we have not introduced any significant advances in
these products this year or in 2001 or 2002. Furthermore, the resolution of the
issues associated with the completion of the fiscal year 2002 audit, which have
since been resolved, caused significant disruption to our organization, and
required the attention of our executive and management staff for the better part
of the first half of this year. We have made significant inroads in resolving
many of these issues, as discussed in Item 4 of this document, and continue to
address the remaining issues.
Product sales of $32.7 million were recorded in the first half of 2003, a
decrease of 14.7%, compared to $38.4 million for the first half of 2002. The
decrease was primarily in the U.S. operating segment, which experienced a
decrease in revenue from $29.1 million to $24.2 million, or 16.8%. The decrease
is directly related to the decline in unit sales of our SLA systems as customers
delayed decisions with respect to capital expenditures. In addition, we believe
that sales of our SLA and SLS systems declined in part because we have not
introduced any significant advances in these products this year or in 2001 or
2002, as noted above. Our Asia operating unit also experienced a decline in
revenue of 3.1% from $7.1 million in the first half of 2002 to $6.9 million for
the similar period in 2003. The decline in sales for Asia is primarily due to
service bureau purchases of systems in the first quarter of 2002 which are not
expected to be repeated on an annual basis partially offset by large frame
systems sales in the second quarter of 2003. Product sales in our Europe
operating segment of $18.8 million in the first half of 2003 and $19.9 million
for the first half of 2002 decreased approximately 5.3% as sales of systems
declined.
Total units sold for the six months ended June 27, 2003 and June 28, 2002 were
103 and 133, respectively. During the first half of 2003, we sold a total of 58
SLA systems, 16 SLS systems and 29 ThermoJet systems, as compared to 68 SLA
systems, 25 SLS systems and 40 ThermoJet systems sold in the first half of 2002.
The decrease in units sold is primarily due to the continued overall economic
decline in capital spending by customers in the United States and the
distraction of management's attention caused by the accounting issues discussed
in Item 4 of this Report.
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. We also continue to experience a shift in
our sales mix from our large frame SLA systems to our small frame SLA systems.
Materials revenue of $15.5 million was recorded in the first half of 2003, a
6.2% decrease from the $16.5 million recorded in the first half of 2002. The
decrease in materials revenue primarily relates to fewer initial vat fill
revenues resulting from a decrease in the number of systems sold in the first
three months of 2003 partially offset by an increase in materials revenue in the
second quarter. We continue to solicit customers to transition from Vantico
material to RPC supplied material. We believe that many customers have converted
to our RPC resins and that we supply approximately 50% of the worldwide market
for SL resins used in our SLA systems.
Service sales during the first half of 2003 totaled $17.1 million, a slight
decrease from the $17.7 million recorded in the first half of 2002. The decrease
primarily reflects delays in customer decisions whether to renew maintenance
contracts. The decrease is partially offset by an increase in new maintenance
contract revenue as a result of an increase in the overall number of systems in
the marketplace.
COST OF SALES. Cost of sales was $31.6 million or 63.4% of sales in the first
half of 2003 and $34.9 million or 62.3% of sales in the first half of 2002.
Product cost of sales as a percentage of product sales was 55.1% in the first
half of 2003 and 56.7% in the first half of 2002. Product cost of sales as a
percentage of product sales decreased primarily due to lower costs of sales on
our resin materials, which we produce internally, offset slightly by a shift in
the sales mix of our SLA systems from large frame systems to small frame
systems.
26
Cost of sales for U.S. operations decreased to $16.7 million in the first half
of 2003 from $17.2 million in the first half of 2002. The monetary decrease in
cost of sales is directly related to the decrease in sales. Cost of sales for
U.S. operations as a percentage of U.S. sales increased to 69.2% in the first
half of 2003 from 59.1% in the first half of 2002. The increase in cost of sales
as a percent of sales in the United States relates to lower margins associated
with the mix of SLS and SLA systems, and the mix of SLA models, sold. Cost of
sales for our European operations decreased to $11.3 million or 60.0% of
European sales in the first half of 2003 from $14.2 million or 71.5% of sales in
the first half of 2002. The monetary decrease in the cost of sales in Europe is
a result of lower machine sales as noted above. The decrease in cost of sales as
a percentage of sales in Europe principally relates to higher margins on resin
sales, partially offset by lower margins on service revenue during the first
half of 2003 as noted below. Our cost of sales for our Asia/Pacific operations
increased to $3.6 million or 52.1% of Asia/Pacific sales in the first half of
2003 from $3.5 million or 49.7% of sales in the first half of 2002 primarily as
a result of lower sales of SLA and SLS systems.
Service cost of sales as a percentage of service sales was 79.2% in the first
half of 2003 and 74.6% in the first half of 2002. The increase in the service
cost of sales as a percentage of service sales is primarily attributable to an
unusually high occurrence of warranty replacement of lasers in our machines
during the first quarter of 2003. This warranty replacement has decreased during
the second quarter of 2003, as reflected in the decrease of the service cost of
sales as a percentage of service sales from 84.8% in the first quarter of 2003
to 79.2% for the first half of 2003. Additionally, delayed decisions by
customers whether to renew service contracts reduced our gross profit margins as
certain of our service costs of sales are fixed and do not fluctuate in relation
to service revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $20.4 million in the first half of 2003 and
$23.9 million in the first half of 2002. This decrease was primarily a result of
cost savings achieved due to a reduction in workforce and other restructuring
activities during the second and third quarters of 2002 and the second quarter
of 2003, offset by increased professional fees incurred in connection with the
audit committee investigation and the completion of the 2002 audit.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
first half of 2003 decreased to $5.2 million or 10.3% of sales compared to $8.6
million or 15.4% of sales in the first half of 2002. The decrease in research
and development expenses is primarily due to closure of the research and
development facility in Austin, Texas, and consolidation of this activity in
other existing locations. Additionally, we reduced the workforce for research
and development during the second and third quarters of 2002 and the second
quarter of 2003. We continue the 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, which we currently anticipate to be in the third quarter of
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 of approximately 9% of revenue by the end of fiscal
2003.
LOSS FROM OPERATIONS. Operating loss for the first half of 2003 was $7.5 million
compared to a loss of $13.1 million in the first half of 2002. This decrease in
operating loss is attributable primarily to improved operating efficiencies
during the second quarter of 2003. Our performance during the second quarter of
2003, in terms of our operating loss, reflects significant improvement over the
first quarter of this 2003 and the second quarter of 2002.
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net for the first
half of 2003 was $1.9 million compared to interest and other expense, net of
$1.4 million in the first half of 2002. The increased expense in the first half
of 2003 reflects higher interest rates on our debt and additional loan costs for
U.S. Bank as a result of obtaining the required waivers of default.
PROVISION FOR INCOME TAXES. For the first half of 2003, our income tax provision
was $1.0 million primarily for foreign operations, compared to $1.0 million in
the first half of 2002, primarily for the Vantico settlement recorded in the
first half of 2002.
27
LIQUIDITY AND CAPITAL RESOURCES
JUNE 27, 2003 DECEMBER 31, 2002
------------------- ------------------
(IN THOUSANDS)
Cash and cash equivalents $ 8,985 $ 2,279
Working capital deficit (1,334) (8,608)
SIX MONTHS ENDED
-------------------- ------------------
JUNE 27, 2003 JUNE 28, 2002
(AS RESTATED)
------------------- ------------------
(IN THOUSANDS)
Cash used in operating
activities $ (535) $ (5,100)
Cash used in investing activities (3,628) (7,168)
Cash provided by financing
activities 10,873 11,947
We have increased our cash balances as of June 27, 2003 to $9.0 million, of
which $1.3 million is restricted, from $2.3 million at December 31, 2002. The
increase is due to the collections on accounts receivable of $10.3 million, net
borrowings against our line of credit of $6.1 million and proceeds from a
preferred stock issuance in the second quarter of 2003 of $15.2 million, net of
issuance costs. This cash was consumed in operations by our net operating loss
of $10.4 million, which is offset by non-cash expenses of $4.6 for depreciation
and amortization, and to pay down accounts payable of $4.5 million, accrued
liabilities of $1.5 million and other liabilities of $1.7 million. Additionally,
we used cash to repay the $9.6 million of our term debt with U.S. Bank and $3.2
million for patent defense and legal fees.
Net cash used in operating activities in the first six months of 2003 was $0.5
million, as a result of the net loss of $10.4 million, offset by collections on
accounts receivable and payments of accounts payable. Our accounts receivable
balances at June 27, 2003 and June 28, 2002 were $18.1 million and $30.2
million, respectively, net of allowance accounts. Collections on accounts
receivable during the first half of 2003 and 2002 were $59.3 million and $62.1,
respectively. We turned our average accounts receivable balance approximately
2.61 times and 1.77 times for the respective periods in 2003 and 2002. We
continue to be implement an aggressive strategy in collecting the outstanding
balances and have successfully decreased our Days Sales Outstanding by
approximately 27 days, from 85 days to 58 days. Foreign collections have
improved significantly with average days outstanding decreasing from an average
of 126 days to 85 days for foreign operations and from an average of 64 days to
42 days for domestic operations. We have also successfully reduced the balance
and number of accounts in the over 90 day category by approximately 16% during
the first half of 2003. The cash collected during the period was used to fund
operations and to pay down accounts payable of $4.5 million and accrued
liabilities of $1.4 million for sales commissions and royalties. Additionally,
we made payments in excess of $1.0 million to outside professionals relating to
the audit committee investigation and the completion of the 2002 audit.
Our inventory balances at June 27, 2003 and June 28, 2002 were $12.9 million and
17.3 million, respectively, net of reserves for obsolete inventory and valuation
reserves. Our inventory turn for the first half of 2003 was 4.9 times as
compared to 3.8 times for the first half of 2002. We continue to build finished
goods inventory based on forecasted sales, which allows us to meet our demand
without experiencing long lead times for delivery.
Net cash used in investing activities during the first six months of 2003
totaled $3.6 million. The cash used primarily relates to additions to licenses
and patents of $3.2 million for legal defense and new patent filings. Equipment
purchases of $0.4 million were primarily for machinery and equipment used in
operations and replacement of aged computer equipment.
Net cash provided by financing activities during the first six months of 2003
totaled $10.9 million and primarily reflects $15.8 million, net of issuance
costs of $0.6 million, raised through the issuance of preferred stock and
borrowings from the line of credit of $6.1million. The cash generated from the
issuance of stock was used to pay down the term loan of $9.6 million with U. S.
Bank. The remaining cash will be used to support operations and satisfy current
obligations.
GOING CONCERN
The condensed consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred operating losses
totaling $7.5 million and $31.9 million for the six months ended June 27, 2003
and the year ended December 31, 2002, respectively, and has an accumulated
deficit of $31.7 million at June 27, 2003.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. As of June 27, 2003, the Company had cash balances of $9.0
million, of which $1.3 million was restricted, and $0.1 million was available
under a bank line of credit to meet current obligations. Further, the Company is
obligated under its existing line of credit to have a commitment letter from a
substitute lender by September 30, 2003. Failure to obtain a commitment letter
from an acceptable lender will cause the amount under the line of credit to
become immediately due. Management intends to obtain debt financing to replace
the U.S. Bank financing and in July 2003, management accepted a proposal from
Congress Financial, a subsidiary of Wachovia, to provide a secured revolving
credit facility of up to $20.0 million, subject to its completion of due
diligence to its satisfaction and other conditions. Congress has not yet
completed its due diligence process; however, based on a preliminary analysis of
the collateral, it has indicated that the loan, if made, would be for an amount
significantly less than $20.0 million. Management is pursuing alternative
financing sources, including a possible restructuring of the Company's
industrial development bonds, to make collateral currently serving to secure
repayment of the bonds available for additional borrowings. Additionally,
management intends to pursue a program to increase margins and continue cost
saving programs. However, there is no assurance that we will succeed in
accomplishing any or all of these initiatives. Additionally, we cannot assure
you that over the next 12 months or thereafter we will generate funds from
operations or that capital will be available from external sources such as debt
or equity financings or other potential sources to fund future operating costs,
debt service obligations and capital requirements. Our operations are not
currently profitable. Our ability to continue operations is uncertain if we are
not successful in obtaining outside funding. Management plans to continue
raising additional capital to fund operations. The lack of additional capital
resulting from the inability to generate cash flow from operations or raise
equity or debt financing would force the Company to substantially curtail or
cease operations and would, therefore, have a material adverse effect on its
business. Further, we cannot assure you that any necessary funds, if available,
will be available on attractive terms or that they will not have a significantly
dilutive effect on the Company's existing shareholders.
29
The accompanying condensed consolidated financial statements do not include any
adjustments relating to the recoverability or classification of asset carrying
amounts or the amounts and classification of liabilities that may result should
the Company be unable to continue as a going concern.
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 June 27, 2003 was 1.31%). Principal
payments are payable in semi-annual installments through August 2016. The bonds
are collateralized by an irrevocable letter of credit issued by Wells Fargo
Bank, N.A. that is further collateralized by a standby letter of credit issued
by U.S. Bank in the amount of $1.2 million. In order to further secure the
reimbursement agreement, we executed a deed of trust, security agreement and
assignment of rents, an assignment of rents and leases, and a related security
agreement encumbering the Grand Junction facility and certain personal property
and fixtures located there. In addition, the Grand Junction facility is
encumbered by a second deed of trust in favor of Mesa County Economic
Development Council, Inc. securing $0.8 million in allowances granted to us
pursuant to an Agreement dated October 4, 1995. At June 27, 2003, a total of
$4.2 million was outstanding under the bonds. The terms of the letter of credit
require us to maintain specific levels of minimum tangible net worth and fixed
charge coverage ratio.
On March 27, 2003, Wells Fargo sent a letter to the Company stating that it was
in default of the fixed charge coverage ratio and minimum tangible net worth
covenants of the reimbursement agreement relating to the letter of credit. The
bank provided the Company until April 26, 2003, to cure the default.
On May 2, 2003, Wells Fargo drew down a letter of credit in the amount of $1.2
million which was held as partial security under the reimbursement agreement
relating to the letter of credit underlying the bonds and placed the cash in a
restricted account. The Company obtained a waiver for the default from the Wells
Fargo Bank, provided that the Company meet certain terms and conditions. The
Company must remain in compliance with all other provisions of the reimbursement
agreement for this letter of credit. If a replacement letter of credit is not be
obtained on or before December 31, 2003, the Company will agree to retire $1.2
million of the bonds using the restricted cash.
On August 17, 2001, the Company entered into a loan agreement with U.S. Bank
totaling $41.5 million, in order to finance the acquisition of DTM. The
financing arrangement consisted of a $26.5 million three-year revolving credit
facility and $15 million 66-month commercial term loan. At June 27, 2003, a
total of $8.6 million was outstanding under the revolving credit facility. The
Company repaid $9.6 million that was outstanding under the term loan on May 5,
2003. See Note 1 of the accompanying Notes to Condensed Consolidated Financial
Statements in this Report. The interest rate at June 27, 2003 for the revolving
credit facility and term loan was 7.5%. The interest rate is computed as either:
(1) the prime rate plus a margin ranging from 0.25% to 4.0%, or (2) the 90-day
adjusted LIBOR plus a margin ranging from 2.0% to 5.75%. Pursuant to the terms
of the agreement, U.S. Bank has received a first priority security interest in
our accounts receivable, inventories, equipment and general intangible assets.
On May 1, 2003 the Company entered into "Waiver Agreement Number Two" with U.S.
Bank whereby U.S. Bank waived all financial covenant violations at December 31,
2002 and March 31, 2003. The events of default caused by the Company's failure
to timely submit audited financial statements and failure to make the March 31,
2003 principal payment of $5.0 million were also waived. The agreement requires
the Company to obtain additional equity investments of at least $9.6 million; to
pay off the balance on the term loan of $9.6 million by May 5, 2003; to increase
the applicable interest rate to prime plus 5.25%; and to pay a $0.2 million
waiver fee and all related costs of drafting the waiver. U.S. Bank also agreed
to waive the Company's compliance with each financial covenant in the loan
agreement through September 30, 2003. Provided the Company obtains a commitment
letter from a qualified lending institution by September 30, 2003, to refinance
all of the outstanding obligations with U.S. Bank, the waiver will be extended
to the earlier of December 31, 2003, or the expiration date of the commitment
letter. Through the date of this filing, the Company has complied with all
aspects of Waiver Agreement Number Two including the receipt of equity
investments of $9.6 million and the $9.6 million principal repayment of the term
loan.
On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible Preferred
Stock at a price of $6.00 per share for aggregate consideration of $15.8
million. The preferred stock accrues dividends at 8% per share and is
convertible at any time into approximately 2,634,016 shares of common stock. The
stock is redeemable at the Company's option at any time
29
after the third anniversary date. The Company must redeem any shares of
preferred stock outstanding on the tenth anniversary date. The redemption price
is equal to $6.00 per share plus accrued and unpaid dividends. Net proceeds to
us from this transaction were $15.2 million.
We lease certain facilities under non-cancelable operating leases expiring
through December 2006. The leases are generally on a net-rent basis, whereby we
pay taxes, maintenance and insurance. Leases that expire are expected to be
renewed or replaced by leases on other properties. Rental expense for the three
months and six months ended June 27, 2003 and June 28, 2002 aggregated $0.7
million and $1.3 million for each period, respectively.
The future contractual payments at December 31, 2002 are as follows:
LATER
CONTRACTUAL OBLIGATIONS 2003 2004 2005 2006 2007 YEARS TOTAL
- ---------------------------- --------- ----------- ------------- -------- ------------ --------- -----------
Line of credit $ 2,450 $ --- $ --- $ --- $ --- $ --- $ 2,450
Term loan (a) 10,350 --- --- --- --- --- 10,350
Industrial development bond 150 165 180 200 220 3,325 4,240
Subordinated debt --- --- --- 10,000 --- --- 10,000
--------- ----------- ------------- -------- ------------- -------- -----------
Operating leases 2,949 2,599 1,723 1,518 738 --- 9,527
========= =========== ============ ========= ============== ======= ===========
Total $ 15,899 $ 2,764 $ 1,903 $ 11,718 $ 958 $ 3,325 $ 36,567
<FN>
- -----------------------
(a) On May 5, 2003 we completely repaid this term loan.
</FN>
In addition to the foregoing contractual commitments in connection with the
acquisition of RPC, the Company has guaranteed the value of an aggregate of
264,900 shares of common stock underlying warrants issued to the former RPC
shareholders. If the fair market value of our common stock is less than $25.27
on September 19, 2003, then each warrant holder has the right to receive, in
exchange for the warrant, an amount equal to CHF 8.25 (approximately $6.30 at
June 20, 2003) multiplied by the total number of shares of common stock then
underlying the warrant. The value of this commitment at the acquisition date was
$1.3 million and was included in the purchase price of RPC. See Note 10 of Notes
to Consolidated Financial Statements for the year ended December 31, 2002. Our
aggregate potential liability at June 27, 2003 was approximately $1.6 million.
Payment in cash is due within 30 days of exercise of the guaranty right by the
warrant holder.
In order to preserve cash, we have been required to reduce expenditures for
capital projects, research and development, and in our corporate infrastructure,
any of which may have a material adverse effect on our future operations.
Further reductions in our cash balances could require us to make more
significant cuts in our operations, which would have a material adverse impact
on our future operations. We cannot assure you that we can achieve adequate
savings from these reductions over a short enough period of time in order to
allow us to continue as a going concern.
In the event we are unable to generate cash flow and achieve our estimated cost
savings, we will need to aggressively seek additional debt or equity financing
and other strategic alternatives. However, recent operating losses, our
declining cash balances, our historical stock performance, the ongoing inquiries
into certain matters relating to our revenue recognition and the general
economic downturn may make it difficult for us to attract equity investments or
debt financing or strategic partners on terms that are deemed favorable to us.
If our financial condition continues to worsen and we are unable to attract
equity or debt financing or other strategic transactions, we could be forced to
consider steps that would protect our assets against our creditors.
30
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, financial condition
and results of operations 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.
FINANCE
OUR INDEPENDENT AUDITORS' REPORT EXPRESSES DOUBT ABOUT OUR ABILITY TO CONTINUE
AS A GOING CONCERN.
At December 31, 2002, our independent auditors' report, dated June 20, 2003,
includes an explanatory paragraph relating to substantial doubt as to our
ability to continue as a going concern. We experienced significant operating
losses in the first and second quarters of 2003, each quarter of fiscal 2002 and
in preceding years. We have failed to meet our financial covenants under our
bank agreements and our reimbursement agreement relating to our municipal bond
financing. U.S. Bank has waived our compliance with the financial covenants in
our loan agreement with them through September 30, 2003 and subject to obtaining
a commitment letter from a qualified lending institution by September 30, 2003
to refinance all of our outstanding obligations with U.S. Bank, the waiver will
be extended to the earlier of December 31, 2003, or the expiration date of the
commitment letter. Wells Fargo Bank, N.A. has waived compliance with certain
covenants, provided that we remain in compliance with all other provisions of
the reimbursement agreement. The waiver extends through December 31, 2003,
provided that if we do not obtain a letter of credit to replace Wells Fargo on
or before December 31, 2003, we agree to retire $1.2 million of the bonds
through the use of restricted cash. If we are unable to obtain a commitment
letter as required under the U.S. Bank waiver, we will need to raise additional
capital through debt or equity financing to pay off the bank loan or we will be
in default.
We are primarily reliant on cash generated from operations to meet our cash
requirements. In order to preserve cash, we have been required to reduce
expenditures for capital projects, research and development, and in our
corporate infrastructure, any of which may have a material adverse affect on our
future operations. Further reductions in our cash balances could require us to
make more significant reductions in our operations, which would have a material
adverse impact on our future operations. We cannot assure you that we can
generate sufficient cash from operations and realize our anticipated cost
savings in order to allow us to continue as a going concern. In the event we are
unable to generate cash flow and achieve our estimated cost savings, or unable
to enter into a commitment letter to refinance the U.S. Bank loan by September
30, 2003, we will need to aggressively seek additional debt or equity financing
and other strategic alternatives. However, recent operating losses, our
declining cash balances, our historical stock performance, the ongoing inquiries
into certain matters relating to our revenue recognition and the general
economic downturn may make it difficult for us to attract equity investments or
debt financing or strategic partners on terms that are deemed favorable to us or
at all. If we are unable to obtain financing on terms acceptable to us or at
all, we will not be able to accomplish any or all of our initiatives and could
be forced to consider steps that would protect our assets against our creditors.
OUR DEBT LEVEL COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND AFFECT OUR
ABILITY TO RUN OUR BUSINESS.
As of June 27, 2003, our debt was $38.5 million, of which $8.7 million was
current borrowings, $25.2 million related to convertible and preferred
instruments and $4.0 million related to our industrial development bonds. 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 are subject to the risks that interest rates and our interest
expense will increase.
31
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.
OUR BALANCE SHEET CONTAINS SEVERAL CATEGORIES OF INTANGIBLE ASSETS THAT WE MAY
BE REQUIRED TO WRITE-OFF OR WRITE-DOWN BASED ON OUR FUTURE PERFORMANCE, WHICH
MAY ADVERSELY IMPACT OUR FUTURE EARNINGS AND OUR STOCK PRICE.
As of June 27, 2003, we had $23.8 million of unamortized intangible assets,
consisting of licenses, patents and other intellectual property 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.
At June 27, 2003, we had $44.7 million in goodwill capitalized on our balance
sheet. In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) 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 No. 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.
At June 27, 2003, we had approximately $4.6 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.
WE ARE CARRYING A SIGNIFICANT AMOUNT OF MODEL-RELATED INVENTORY AND TOOLING
COSTS FOR A SOLID OBJECT PRINTER MACHINE PLATFORM.
We have incurred or have outstanding commitments of approximately $2.1 million
in inventory and tooling costs associated with the development and production of
a new solid object printer machine platform. If we significantly write-down this
inventory and tooling due to obsolescence, our results of operations could be
materially adversely affected. 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 obsolete. Additionally,
we continue to carry inventory and have vendor commitments related to our
existing solid object printer model totaling $1.1 million, which if not sold,
could become obsolete.
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 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. This 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 these 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
32
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
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 U.S. military campaign against terrorism in Iraq,
Afghanistan and elsewhere and continued violence in the Middle East 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 as a whole, and
many of our customers are in industries that also are viewed as under-performing
the overall 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.
WE FACE SIGNIFICANT COMPETITION IN MANY ASPECTS OF OUR BUSINESS AND THIS
COMPETITION IS LIKELY TO INCREASE IN THE FUTURE.
We compete for customers with a wide variety of producers of equipment for
models, prototypes and other three-dimensional objects, ranging from traditional
model makers and subtractive-type producers, such as suppliers of automated
machining, or CNC, 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, and producers of materials and services for this equipment. Some
of our existing and potential competitors are researching, designing, developing
and marketing other types of equipment, materials and services. Any reduction in
our research and development efforts could affect our ability to compete
effectively. Many of our 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. Under a settlement
agreement with the U.S. Department of Justice relating to our merger with DTM,
on June 6, 2002 we licensed to Sony Corporation certain of our patents for use
in the manufacture and sale of stereolithography in North America (the United
States, Canada and Mexico). Although stereolithography is a very small part of
its activities, and Sony has thus far only has been active in the Japanese/Asia
Pacific region, Sony is an extremely large and sophisticated corporation with
annual revenues in excess of $62.0 billion. We cannot be certain of the market
impact of the license to Sony; however, we anticipate that Sony will be an
aggressive competitor in all aspects of our stereolithography business.
Our material revenue declined for the six months ended June 27, 2003, as
compared to the six months ended June 28, 2002. This was due to the termination
of our liquid resin research and development agreements with Vantico on April
22, 2002, under which we had jointly developed liquid photopolymers with Vantico
and served as the exclusive worldwide distributor (except in Japan) of these
materials. On September 20, 2001, we acquired RPC, an independent supplier of
stereolithography resins located in Switzerland, and many customers have
converted from Vantico material to our RPC resins. However, our management team
does not have substantial experience in the materials development and
manufacturing business. In addition, the manufacture of materials business
increases some of the existing risks we face and poses new risks to us. 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 also face significant competition in the supply of nylon powdered materials
for laser sintering equipment where we have a leading position. In North
America, this competition is the subject of a patent infringement suit against
EOS GmbH of Planegg, Germany.
We also expect future competition may arise from the development of allied or
related techniques, both additive and subtractive, for equipment and materials
that are not encompassed by our patents, from the issuance of patents to other
companies that inhibit our ability to develop certain products and from the
improvement to existing material and equipment technologies. We have determined
to follow a strategy of continuing product development and aggressive patent
prosecution to protect our position to the extent practicable. We cannot assure
you that we will be able to maintain our current position in the field or
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.
33
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, any
of which could render our existing products and proprietary technology and
systems obsolete. We believe that our future success will depend on our ability
to deliver products that meet changing technology and customer needs. To remain
competitive, we must continue to enhance and improve the functionality and
features of our products, services and technologies. Our success will depend, in
part, on our ability to:
o obtain leading technologies useful in our business,
o enhance our existing products,
o develop new products and technologies that address the increasingly
sophisticated and varied needs of prospective customers, particularly
in the area of material functionality,
o respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis, and
33
o recruit and retain key technology employees.
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, 2002, we held 359 patents, which include 152 in the United
States, 146 in Europe, 17 in Japan, and 44 in other foreign jurisdictions. At
that date, we also had 176 pending patent applications: 52 in the United States,
53 in Japan, 48 in European countries and 23 in other foreign countries. 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. At June 27, 2003, we had capitalized $8.9 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. 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 also has 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
34
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.
THE INQUIRY INITIATED BY THE SEC MAY LEAD TO CHARGES OR PENALTIES AND MAY
ADVERSELY AFFECT OUR BUSINESS.
If any government inquiry or other investigation leads to charges against us, we
likely will be harmed by negative publicity, the costs of litigation, the
diversion of management time and other negative effects, even if we ultimately
prevail. The SEC has inquired into matters pertaining to our revenue recognition
practices. Our Audit Committee has met, and cooperated fully, with the SEC. We
have not been notified that the SEC has initiated a formal investigation. This
matter is pending and continues to require management attention and resources.
Any adverse finding by the SEC may lead to significant fines and penalties and
limitations on our activities and may harm our relationships with existing
customers and impair our ability to attract new customers. The filing of our
restated financial statements will not necessarily resolve the SEC inquiry.
OUR ABILITY TO RETAIN EXISTING CUSTOMERS, AND ATTRACT NEW CUSTOMERS, MAY BE
IMPAIRED AS A RESULT OF QUESTIONS RAISED BY OUR REVENUE RECOGNITION ISSUES.
Our previous improper recognition of revenue with regard to certain sales
transactions, the ensuing audit committee investigation and the adjustments to
previously filed financial statements could seriously harm our relationships
with existing customers and impair our ability to attract new customers.
Customers who purchase our products make a significant long-term commitment to
the use of our technology. Our products often become an integral part of each
customer's facility and our customers look to us to provide continuing support,
enhancements and new versions of our products. Because of the long-term nature
of a commitment in some of our products, customers often are concerned about the
stability of their suppliers. Purchasing decisions by potential and existing
customers have been and may continue to be postponed, we believe in part due to
our previous improper recognition of revenue and the ensuing audit committee
investigation. The failure to timely file our Annual Report on Form 10-K for
fiscal 2002 and Quarterly Report on Form 10-Q for the first quarter of fiscal
2003 and the adjustments to our previously filed financial statements may cause
existing and potential customers concern over our stability and these concerns
may cause us to lose sales. Any loss in sales could adversely affect our results
of operations, further deepening concern among current and potential customers.
If potential and existing customers lose confidence in us, our competitive
position in our industry may be seriously harmed and our revenues could further
decline.
WE HAVE EXPERIENCED SIGNIFICANT TURNOVER IN PERSONNEL, INCLUDING SENIOR
EXECUTIVES, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We have experienced substantial turnover in our employees, including senior
members of our finance, accounting and sales departments. This turnover is a
result of several factors, including the duration and outcome of our audit
committee investigation, reductions in our workforce and the closure of our
Austin facility. This departure of senior management and other key personnel
(including the resignation of Brian Service from the position of Chief Executive
Officer) may cause delays in completing our business initiatives and adversely
impact the organization's institutional knowledge regarding key policies,
significant contracts and agreements, and other key facts. Many of these
departed employees had significant experience with our market, as well as
relationships with many of our existing and potential sources of financing,
large stockholders, customers, suppliers, employees and strategic partners. It
will take substantial time for new employees to develop an in-depth
understanding of our market and to form significant relationships with our
customers and partners. In addition, the reductions in workforce may lead to
reduced employee morale and productivity, increased attrition and difficulty
retaining existing employees and recruiting future employees, and a perception
of instability, any of which could harm our business and operating results.
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 the 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:
o shortages of some key components,
o product performance shortfalls, and
o reduced control over delivery schedules, manufacturing capabilities,
quality and costs.
35
If any of our suppliers suffers business disruptions or 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:
o unexpected changes in regulatory requirements,
o export controls, tariffs and other barriers,
o social and political risks,
o fluctuations in currency exchange rates,
o seasonal reductions in business activity in certain parts of the
world, particularly during the summer months in Europe,
o reduced protection for intellectual property rights in some countries,
o difficulties in staffing and managing foreign operations,
o taxation, and
o other factors, depending on the country in which an opportunity
arises.
OUR COMMON STOCK IS TRADING ON THE NASDAQ NATIONAL MARKET UNDER AN EXCEPTION
FROM THE CONTINUED LISTING REQUIREMENTS.
If we fail to timely file any periodic report due by December 31, 2003, Nasdaq
will delist our common stock and, as a consequence, fewer investors, especially
institutional investors, will be willing to invest in our company, our stock
price will decline, and it will be difficult to raise money on terms acceptable
to us, or at all.
If Nasdaq delists our common stock, it could become subject to the "Penny Stock"
rules of the SEC. Penny stocks generally are equity securities with a price of
less than $5.00 per share that are not registered on a national securities
exchange or quoted on the Nasdaq system. Broker-dealers dealing in our common
stock then would be subject to additional burdens which may discourage them from
effecting transactions in our common stock, which could make it difficult for
investors to sell their shares and, consequently, limit the liquidity of our
common stock.
In addition, if Nasdaq delists our common stock, we expect that some or all of
the following circumstances will occur, which likely will cause a further
decline in our trading price and make it more difficult to raise funds:
o there will be less liquidity in our common stock,
o there will be fewer institutional and other investors that will
consider investing in our common stock,
o there will be fewer market makers in our common stock,
o there will be less information available concerning the trading prices
and volume of our common stock, and
o there will be fewer broker-dealers willing to execute trades in shares
of our common stock.
36
MANAGEMENT
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 depends on the services of our executive team. We do not
maintain any key life insurance coverage for or any 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 is 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.
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:
o acceptance and reliability of new products in the market,
o size and timing of product shipments,
o currency and economic fluctuations in foreign markets and other
factors affecting international sales,
o price competition,
o delays in the introduction of new products,
o general worldwide economic conditions,
o changes in the mix of products and services sold,
o impact of ongoing litigation, and
o 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 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 $4.39 to $13.50 during the 52-week period ended June 27,
2003.
Factors that may have a significant impact on the market price of our
common stock include:
o future announcements concerning our developments or those of our
competitors, including the receipt of substantial orders for products,
o quality deficiencies in services or products,
37
o results of technological innovations,
o new commercial products,
o changes in recommendations of securities analysts,
o proprietary rights or product, patent or other litigation, and
o sales or purchase of substantial blocks of stock.
TAKEOVER 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.
Our Board of Directors is authorized to issue up to 5 million shares of
preferred stock, of which approximately 3.7 million is outstanding or reserved
for issuance. Our Board of Directors 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, as
amended, 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 our control. 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 7%
CONVERTIBLE SUBORDINATED DEBENTURES AND EXERCISE OF OUR SERIES B CONVERTIBLE
PREFERRED STOCK COULD DILUTE YOUR OWNERSHIP AND NEGATIVELY IMPACT THE MARKET
PRICE FOR OUR COMMON STOCK.
The Series B Convertible Preferred Stock are convertible at any time into
approximately 2,634,016 shares of common stock. Our subordinated debt is
convertible at any time into approximately 833,333 shares of common stock. To
the extent that all of the Series B Convertible Preferred Stock and 7%
convertible subordinated 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 these sales
could occur, could adversely affect the market price of our common stock.
38
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. Our exposure to market rate risk for changes in interest
rates relates primarily to our cash investments and long-term debt. We invest
our excess cash in money market funds or other high quality investments. We
protect and preserve our invested funds by limiting default, market and
reinvestment risk.
Investments in floating rate interest-earning instruments carry a degree of
interest rate risk. Floating rate securities may produce less income than
expected if interest rates fall. Due in part to this factor, our future
investment income may fall short of expectations due to changes in interest
rates.
We are exposed to interest rate risk on our revolving credit facility and term
loan with U.S. Bank, which have variable interest rates. At June 27, 2003, we
had a total of $8.6 million outstanding under our revolving credit facility. The
Company repaid $9.6 million outstanding on our term loan on May 5, 2003. The
interest rate at June 27, 2003 for the revolving credit facility and the term
loan was 7.5%. The revolving credit facility expires in 2003.
We have an industrial development bond on our Colorado facility, which has an
outstanding balance of $4.2 million. We will make annual principal payments of
$150,000, $165,000, $180,000, $200,000, $220,000, for the years ending 2003,
2004, 2005, 2006, 2007, respectively, and $3,325,000 thereafter. The bond has a
variable interest rate and the interest rate at June 27, 2003 was 1.31%. An
increase or decrease in the variable interest rate of 1.00% would increase or
decrease our annual interest expense by $42,000. We have not entered into any
hedging contracts to protect ourselves against future changes in interest rates,
which could negatively impact the amount of interest we are required to pay.
However, we do not feel that this risk is significant and we do not plan to
attempt to hedge to mitigate this risk in the foreseeable future.
In the fourth quarter of 2001, we sold convertible subordinate debentures. As of
December 31, 2001 we received $9.4 million in proceeds from this sale. We
received additional proceeds of $0.6 million in January 2002, for a total of
$10.0 million. The convertible debentures are convertible into an aggregate of
833,333 shares of our common stock immediately at the option of the holder or at
our discretion at any time after December 31, 2003, and prior to maturity at
December 31, 2006. The debentures bear interest at the rate of 7% payable
quarterly. The Chairman of our Board of Directors and related parties
contributed $1.0 million to the completion of the convertible debentures.
The carrying amount, principal maturity and estimated fair value of long-term
debt exposure as of December 31, 2002 are as follows:
CARRYING
AMOUNT PAYMENTS
2002 2003 2004 2005 2006 2007 LATER YEARS FAIR VALUE
---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Line of credit $ 2,450 $ 2,450 $ --- $ --- $ --- $ --- $ --- $ 2,450
Interest rate 7.5%
Term loan (a) $ 10,350 $ 10,350 $ --- $ --- $ --- $ --- $ --- $ 10,350
Interest rate 6.42%
Industry Development
Bond $ 4,240 $ 150 $ 165 $ 180 $ 200 $ 220 $ 3,325 $ 4,240
Interest rate 1.31%
Subordinated debt $ 10,000 $ --- $ --- $ --- $ 10,000 $ --- $ --- $ 8,560
Interest rate 7.0%
<FN>
- -----------------------
(a) On May 5, 2003, we completely repaid this term loan.
</FN>
FOREIGN CURRENCY RISK. International revenues accounted for approximately 51.5%
of our total revenue for the period ended June 27, 2002. International sales are
made primarily from our foreign sales subsidiaries in their respective countries
and are denominated in U.S. 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.
39
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 U.S. dollars. We also are exposed to foreign exchange rate
fluctuations as the financial results of foreign subsidiaries are translated
into U.S. 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 fluctuations in 2002
resulted in a $0.3 million gain.
As of June 27, 2003, we had foreign operations that are sensitive to foreign
currency exchange rates, including non-functional currency denominated
receivables and payables. Foreign operations amount exposed in foreign currency
when subjected to a 10% change in the value of the functional currency versus
the non-functional currency produces an approximate $1.8 million translation
adjustment in our balance sheet as of June 27, 2003.
We use derivative instruments to manage exposure to foreign currency risk. We
manage selected exposures through financial market transactions in the form of
foreign exchange forward and put option contracts. We do not enter into
derivative contracts for speculative purposes. We do not hedge its foreign
currency exposure in a manner that would entirely eliminate the effects of
changes in foreign exchange rates on our consolidated net (loss) income. We have
no put option contracts in place on June 27, 2003.
40
ITEM 4. CONTROLS AND PROCEDURES
In connection with the investigation conducted by the Audit Committee of our
Board of Directors as part of the fiscal 2002 audit, which we discuss in detail
in our Annual Report on Form 10-K filed on June 30, 2003, deficiencies in the
Company's internal controls were identified relating to:
o accounting policies and procedures;
o personnel and their roles and responsibilities;
Deloitte and Touche LLP advised the Audit Committee and management that these
internal control deficiencies constitute reportable conditions and a material
weakness as defined in Statement of Auditing Standards No. 60, which we discuss
in our Current Report on Form 8-K filed on July 23, 2003. At the direction of
the Audit Committee, the Company is implementing changes to its financial
organization and enhancing its internal controls. These changes include,
o retaining new management in senior finance and operations positions,
and in many staff positions,
o terminating or reassigning senior officers and key employees,
o developing a comprehensive policies and procedures manual, including
written procedures for sales order documentation and shipping and
storage, that is accessible and understood by all employees,
o establishing an internal audit function and retaining an internal
audit director,
o clarifying the Company's revenue recognition policies and introducing
more formalized and frequent training of finance, sales and other
staff,
o communicating a zero tolerance policy for employees who engage in
violations of the Company's accounting policies and procedures,
o establishing an anonymous hotline for employees to report potential
violations of policies and procedures or of applicable laws or
regulations, and
o additional management oversight and detailed reviews of personnel,
disclosures and reporting.
The Company is in the process of implementing these changes. To date, the
Company has retained a Director of Internal Audit, expanded the number of
employees in its finance department, terminated or reassigned senior officers
and key employees, established an anonymous hotline for employees to report
potential violations of policies and procedures and, through its Disclosure
Committee, which is discussed in more detail below, engaged in detailed reviews
of its public disclosures and reporting. The Company is in the process of
implementing each other recommendation. In order to prepare this report, pending
full implementation of the changes set forth above, the Company implemented
interim alternative and additional control measures (the "INTERIM MEASURES") to
ensure that the financial statements, and other financial information included
in these reports, fairly present in all material respects the financial
condition, results of operations and cash flows of the Company as of, and for,
the periods presented in these reports.
Our management, including the Principal Executive Officer and our Principal
Accounting Officer, does not expect that our disclosure controls or our internal
controls will prevent all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and we cannot assure you that any design will succeed in
achieving its stated goals under all potential future conditions. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
41
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. During fiscal 2002, the
Company formed a disclosure committee to assist the Principal Executive Officer
and Principal Accounting Officer in fulfilling their responsibility in
designing, establishing, maintaining and reviewing the Company's disclosure
controls and procedures (the "DISCLOSURE COMMITTEE"). The Disclosure Committee
currently includes the Company's Principal Executive Officer, Principal
Accounting Officer, General Counsel, Chief Technology Officer, Senior Vice
President, Development and Operations, Senior Vice President, Worldwide Revenue
Generation. The Company's Principal Executive Officer and Principal Accounting
Officer, along with the other members of the Disclosure Committee, evaluated the
Company's disclosure controls and procedures as of the end of the period covered
by this Report. The Company's Principal Executive Officer and Principal
Accounting Officer have concluded that, with the application of the Interim
Measures together with the other changes to its organization and controls
implemented to date, the disclosure controls and procedures are sufficient to
bring to their attention on a timely basis material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act.
CHANGES IN INTERNAL CONTROLS. The Company has implemented and continues to
implement the changes identified above, and has applied the Interim Measures,
all of which are intended to increase the effectiveness of its control
procedures. Other than the aforementioned items, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls.
42
PART II-- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
3D Systems, Inc. vs. Aaroflex, et al.(U.S. District Court, Central District of
California). On July 25, 2003, the court notified the Company that rulings on
all patents in issue would be decided prior to September 30, 2003 and trial on
any remaining unresolved issues following the rulings in this matter was
rescheduled to November 12, 2003.
DTM vs. EOS, et al. The plastic sintering patent infringement actions against
EOS began in France (Paris Court), Germany (District Court of Munich) and Italy
(Regional Court of Pinerolo) in 1996. Legal actions in France, Germany and Italy
are proceeding. In France, the Court of Appeals has set the hearing date for
March 30, 2004 to address EOS' appeal of the lower court's ruling that the
asserted patent is not infringed. In Italy, the trial court has set a hearing
for October 10, 2003 to consider the assertion of infringement by the EOS
product.
Hitachi Zosen vs. 3D Systems, Inc. (Tokyo District Court, Japan) At a hearing
held on June 30, 2003, the Judge offered 3D the opportunity to submit a brief to
rebut Hitachi Zosen's brief in support of its claim for damages before the next
hearing which he scheduled for August 19th. Counsel for the Company is currently
preparing this brief.
EOS vs. DTM and 3D Systems, Inc. (U.S. District Court, Central District of
California). On July 3, 2003, the Court in this matter heard summary judgment
motions by both parties. The Court informed the parties that it expected to
issue a decision on these matters on or about July 31, 2003. A decision on these
matters has not been issued at the date of filing this report.
3D Systems, Inc. vs. AMES. (U.S. District Court, Western District of Texas) This
matter was dismissed without prejudice on July 23, 2003.
E. James Selzer vs. 3D Systems Corporation (Case No. PC033145, Superior Court of
the State of California, County of Los Angeles). On July 28, 2003, the Company
was served with a complaint by its former chief financial officer, whose
employment had been terminated on April 21, 2003. The complaint asserts breach
of alleged employment and equipment purchase contracts. In addition to
declaratory relief, Mr. Selzer seeks compensatory and contractual damages, which
he requested to be proven at trial, and for various expenses, together with
reasonable attorney's fees and costs. The Company is currently evaluating this
complaint.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
31.1 Certification of Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 Dated August 11, 2003.
31.2 Certification of Principal Accounting Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 Dated August 11, 2003.
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.
C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 Dated August 11, 2003.
32.2 Certification of Principal Accounting Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 Dated August 11, 2003.
b. Reports on Form 8-K
- Current Report on Form 8-K, Items 5 and 7, filed April 16, 2003.
- Current Report on Form 8-K, Items 4, 5 and 7, filed April 23,
2003.
- Current Report on Form 8-K, Items 4 and 7, filed April 30, 2003.
- Current Report on Form 8-K, Items 5 and 7, filed May 7, 2003.
- Current Report on Form 8-K, Items 7 and 12, filed July 2, 2003.
- Current Report on Form 8-K, Items 7 and 12, filed July 15, 2003.
- Current Report on Form 8-K, Items 4 and 7, filed July 23, 2003.
- Current Report on Form 8-K, Items 5 and 7, filed August 11, 2003.
43
SIGNATURE
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/ G. Peter V. White
- --------------------------------
G. Peter V. White Date: August 11, 2003
Vice President, Finance
(Principal Accounting Officer)
EXHIBIT INDEX
NUMBER EXHIBIT TITLE
31.1 Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 Dated August 11, 2003.
31.2 Certification of Principal Accounting Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 Dated August 11, 2003.
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 Dated August 11, 2003.
32.2 Certification of Principal Accounting Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 Dated August 11, 2003.