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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-22250
3D SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4431352
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
26081 Avenue Hall
Valencia, California 91355
(Address of principal executive offices and zip code)
(805) 295-5600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any Amendment to this Form
10-K. [ ]
At February 28, 1997, there were outstanding 11,358,892 shares of the Common
Stock of Registrant, and the aggregate market value of the shares held on that
date by non-affiliates of Registrant, based on the closing price ($10.75 per
share) of the Registrant's Common Stock on the Nasdaq National Market on that
date, was $97,539,717. For purposes of this computation, it has been assumed
that the shares beneficially held by directors and officers of Registrant were
"held by affiliates"; this assumption is not to be deemed to be an admission by
such persons that they are affiliates of Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement with respect to its 1997 Annual Meeting
of Shareholders, currently scheduled to be held May 22, 1997, are incorporated
by reference into Part III of this Report.
Exhibit index is located on page 36.
3D SYSTEMS CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . 24
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition . . . . . . . . . . . . . . . . . . . . 26
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures . . . . . . . . . . . . . . . . . . . 34
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . 35
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 35
Item 12. Security Ownership of Certain Beneficial Owners and Management . 35
Item 13. Certain Relationships and Related Transactions . . . . . . . . . 35
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. 36
PART I
ITEM 1. BUSINESS
For a discussion of certain material factors which may affect the Company,
see "Cautionary Statements and Risk Factors" commencing on page 14 of this
Report.
GENERAL
3D Systems Corporation (the "Company") develops, manufactures and markets
in the United States and internationally Stereolithography Apparatus ("SLA")
systems designed to rapidly produce three-dimensional objects from
computer-aided design and manufacturing ("CAD/CAM")-generated solid or
surface data, and is the exclusive worldwide distributor of all Ciba
stereolithography photopolymers. The Company either directly or through its
network of authorized distributors provides a majority of its SLA customers
with a variety of on-site maintenance services. Through its 3D Systems
Technology Centers, the Company utilizes SLAs to produce models, prototypes,
mold patterns and other parts using CAD/CAM or other data supplied by its
customers on a contract basis.
Stereolithography is a "solid imaging" or "rapid prototyping" process
whereby a laser beam exposes and solidifies successive layers of
photosensitive resin until the desired object is formed to precise
specifications in hard plastic. SLA-produced parts can be used for concept
models, engineering prototypes, patterns and masters for molds and other
applications. This technology can provide users with significant time
savings, cost reductions and improved quality, compared to traditional
modeling, tooling and pattern-making techniques.
The Company has developed an "office system modeler," the Actua 2100,
which is a fully network-ready rapid prototyping system, about the size of an
office copier, which is designed for operation in engineering and design
office environments. The Actua 2100 uses "Multi-Jet Modeling," a technology
completely different from stereolithography, to build models in successive
layers using a special thermopolymer material. Designers and other users of
CAD-CAM systems are able to incorporate the Actua 2100 in their workstation
networks as a shared resource and are able to rapidly produce, in their
offices, models of products under development.
Solid imaging is a relatively new field embodying the use of computers
and computer automated equipment to rapidly produce prototypes, models and
even low volume production quantities of objects which traditionally have
been produced by machining and other methods. The Company believes that the
stereolithography technology, which it has developed and patented, represents
the first and to date the most significant development in this field. While
alternative technologies exist and while it has been reported that
significant research and development efforts are currently being undertaken
by corporations and universities around the world in an attempt to develop
additional alternative technologies and techniques, on the basis of total
systems installed, the Company believes that it currently remains the leader
in the solid imaging field.
The Company markets directly and through secondary distribution channels
to customers in the United States and Europe and through distributors in
other countries. The Company sold its first SLA system in 1988 and as of
December 31, 1996, had sold 741 systems to customers in 40 countries. Its
customers include major corporations in a broad range of industries including
manufacturers of automotive, aerospace, computer, electronic, consumer and
medical products. The Company also sells SLA systems to independent service
bureaus which, for a fee, provide stereolithographic services to their
customers.
As of December 31, 1996, the Company held 73 patents: 50 U.S.; 5
Japanese; 5 European; and 13 other foreign patents related to
stereolithography. The Company continues to develop improvements for its
line of products as well as new products to expand the applications of
stereolithography. In conjunction with Ciba Specialty Chemicals Inc. and its
affiliated companies (collectively, "CSC" or "Ciba Specialty Chemicals"), the
Company continues to develop resins with different and improved
characteristics to expand stereolithography applications. CSC is a
Swiss-based multinational manufacturer and distributor of specialty
chemicals, a 15.2% beneficial shareholder of the Company, and the Company's
partner in photopolymer development. Ciba-Geigy Limited ("Ciba") recently
completed its merger with Sandoz Ltd. And, in connection therewith, spun off
Ciba Specialty Chemicals Holding Inc. ("CSC
Page 3
Holding"), the parent company of CSC, which was formed to hold the worldwide
specialty chemicals businesses of Ciba and its affiliates. In connection
with these transactions, CSC companies succeeded to the respective rights and
obligations of Ciba and its affiliates under their contracts with the
Company, including the Photopolymer Research Agreement (see "Research and
Development") and the Photopolymer Distribution Agreement (see "Marketing and
Customers"). Based upon discussions with CSC, the Company does not expect
that the merger and spin-off will have a material effect on its relationship
with CSC's specialty chemicals divisions.
Unless otherwise indicated, all references to "CSC" include Ciba
Specialty Chemicals Inc. and its affiliates, including CSC Holding and its
wholly-owned subsidiaries in Canada, through which CSC holds its interest in
the Company, and the United States ("CSC US"), through which CSC conducts its
US operations.
CORPORATE STRUCTURE
The Company is a Delaware corporation, and is the sole shareholder in 3D
Systems (Canada) Inc., a British Columbia corporation ("3D Canada"). 3D Canada
is the sole shareholder of 3D Systems, Inc., a California based corporation ("3D
California"), which directly and through its subsidiaries conducts substantially
all of the Company's business.
Unless otherwise indicated, all references in this document to the Company
include 3D Systems Corporation, 3-D Systems Inc., its British Columbia
predecessor, 3D Systems (Canada) Inc. and 3D Systems, Inc. and its subsidiaries.
STEREOLITHOGRAPHY
Stereolithography is a solid imaging or rapid prototyping process whereby a
laser beam exposes and solidifies successive layers of photosensitive resin
until a three-dimensional object is formed in hard plastic to precise
specifications contained in CAD/CAM programs. The object may be used as a
prototype, model, mold pattern or, in some applications, as an end product.
The Company's stereolithography products have been developed to address a
key element in the development of new products -- the fabrication of models and
prototype objects, as well as the fabrication of patterns for limited production
of parts. Over the past decade, significant steps have been taken to utilize
computers in the design and development of new products. As a result, most
manufacturers now rely heavily on standard or specialized CAD/CAM computer
software programs to significantly shorten the product design cycle.
In designing a product or part, stereolithography permits the user to
realize a reduction in design costs, an improvement in design capabilities, the
reduction in the time from design concept to market, and a marked improvement in
the ability of a user to rapidly convert its design ideas to physical form.
Following the design of a new product or part, it is generally necessary to
construct or fabricate models, prototypes and/or production patterns. While
some progress has been made in automating this process, the fabrication of parts
or models of complex design has remained primarily a manual task. Working from
drawings produced by the CAD/CAM system, a skilled machinist or model builder
can take days or months to build a full size or scale model. Because many
products go through several prototype stages prior to production, model
building, prototype construction and pattern making may account for a
significant portion of the time required for the design and development of a new
product.
Stereolithography can be used to make models or prototype parts, molds, and
metal investment casting patterns directly from computer output generated by
CAD/CAM programs (the Company's products require that the CAD/CAM computer
output contain solid or surface data as opposed to data generated by simpler two
dimensional or three dimensional "wire frame" CAD/CAM programs used by
designers). Parts that take days, weeks or months to model or prototype with
traditional methods can be made in hours with stereolithography (or for large
parts, up to several days). Because the stereolithography process runs directly
from solid or surface CAD/CAM data, building the tangible object can be started
as soon as the model design is complete. This capability greatly reduces the
time between design and completion of the object.
Page 4
Fabrication of a model, prototype or other object using stereolithography
is a multiple step process. Upon completion of the CAD/CAM design, the output
is converted to the SLA format and transferred to and analyzed by the SLA
systems computer (current SLA software is capable of interfacing with more than
30 types of three-dimensional CAD/CAM solid or surface data systems) which
mathematically divides the computer-generated model into horizontal slices with
a thickness of from 0.05mm to 0.25mm (depending upon the degree of resolution
required). Under the technology utilized on all of the Company's currently
installed SLA systems, an elevator platform is precisely positioned below the
liquid resin surface at a distance equal to the desired thickness of the slice
to be formed. Then, starting with the lowest slice, the SLA system's laser,
directed by the scanning system under computer control, projects an ultraviolet
laser beam on the surface of the liquid resin, tracing the full pattern of the
slice and creating an adhesive solid slice of the object on the surface of the
liquid resin. The slice adheres to the elevator platform and the elevator is
then lowered slightly to submerge the cured layer in liquid resin and then
raised precisely so that a thin layer of resin covers the cured surface. The
next slice of the object is created on the liquid surface by another exposure
to the laser beam. The second slice adheres to the top of the first slice and
the process is then repeated with the third and successive layers of the object.
In this manner, the entire solid object is built on the elevator, slice by
slice.
During 1996, the Company introduced a new Zephyr-TM- recoating technology.
With this new technology, following each successive cured layer, the elevator
platform is lowered by one layer enabling an applicator to sweep over the cured
layer and apply a thin layer of resin, resulting in increased part-building
speed. See "Products and Services - Recent Product Introductions."
When the SLA system has finished making an object, some of the plastic has
not been fully cured. Full curing requires an additional one to five hours of
exposure to ultraviolet illumination through the use of one of the Company's
ultraviolet post-curing ovens (a Post-Curing Apparatus or "PCA").
The Company has also recently introduced the Actua-TM- 2100, a
network-ready rapid prototyping system intended for operation in design and
engineering offices. The Actua 2100 uses a technology completely different
than stereolithography. See "Products and Services -- Recent Product
Introductions."
APPLICATIONS AND ADVANTAGES OF STEREOLITHOGRAPHY
Almost all of the Company's customers use stereolithography in the design,
development and refinement of products as a means to significantly shorten the
design cycle as well as to reduce research, development and tooling costs. Among
the most important current applications and advantages of stereolithography are
the following:
DESIGN VERIFICATION AND OPTIMIZATION. The design cycle of the modern
factory in many cases mandates the use of CAD/CAM programs in the initial
design phase. By using the Company's SLA systems, the designer, in a matter
of hours (or, for large parts, up to several days), can produce a full-scale
model of the designed part. With the model in hand, ambiguities which existed
in two-dimensional renderings and other problems are easier to spot,
modifications and improvements are easier to visualize, and new models
incorporating proposed corrections and refinements can rapidly be produced.
BUILDING A PROTOTYPE TO TEST FOR FORM, FIT AND FUNCTION. Once the design
process has advanced sufficiently, it is generally desirable to construct a
full-scale model which can be tested with other parts of an assembly or
system to make certain that the design is functionally suitable. SLA systems
enable users to rapidly model a close-tolerance part, incorporate the part in
a larger prototype assembly or system, and verify its utility and
functionality.
GENERATION OF PROTOTYPE CASTINGS AND TOOLING. Historically, the generation
of metal prototype parts, which are often needed to test a design in real-life
operating environments, was usually the job of model shops and often required
months of manual labor. Through use of the Company's Quickcast-TM- system,
designers may now use SLA systems to build patterns for investment casting,
which results in the ability to rapidly build limited-run prototypes and parts
in a variety of metals, including aluminum, stainless steel, tool steel, copper
alloys, iconel, magnesium and titanium. Using the Company's recently acquired
Keltool-TM- process, stereolithography master patterns can be generated for use
as short-run prototype tooling ("bridge tooling") or production tooling ("hard
tooling") for the plastic injection molding industry.
Page 5
REFINING THE BID PROCESS. Once a design has been finalized, the customer
may desire to subcontract the manufacture of the new product. Because engineers
work better when they can express their ideas by reference to a tangible
embodiment of the product or part under discussion, many of the Company's
customers report that they are now using SLA-produced prototypes when seeking
bids from subcontractors. This often results in a shorter bid cycle, as well as,
in some cases, reductions in bid prices.
PRODUCTS AND SERVICES
For an analysis of revenues attributable to each of the Company's major
product and service groups, see "Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition - Results of Operations."
SLA SYSTEMS AND RELATED EQUIPMENT. The Company currently is manufacturing
and marketing five different Stereolithographic Apparatus models -- the SLA-250
Series 30A, Series 40 and Series 50; the SLA-350 Series 10; and the SLA-500
Series 40. All models embody the stereolithography technology. The models
differ in their features, the maximum size of objects that can be produced, and
price. Currently, per unit U.S. list prices range from $99,000 to $490,000.
Each SLA system consists of an ultraviolet laser, an optical scanning
system that controls the laser beam, a resin vat, an elevator assembly and a
computer that controls the exposure and position of the laser beam and the
elevator. SLA systems are capable of making multiple objects at the same time;
however, each SLA system is limited in the size of the objects that it can make
and, therefore, can make only scale models of large objects or, alternatively,
portions of large objects which are then joined together. For example, the
maximum size of a model or other object that can be created using the SLA-250 is
10 inches x 10 inches x 10 inches, while the maximum size of a model or other
object which can be created using the SLA-500 is 20 inches x 20 inches x 24
inches.
The Company markets ultraviolet ovens ( "PCAs") used in conjunction with
SLA systems. When the SLA system has finished making an object, some of the
plastic has not been fully cured. Full curing requires an additional one to
five hours of exposure to ultraviolet illumination through the use of the
Company's PCAs. The PCA provides uniform long wave ultraviolet illumination.
The Company is currently offering three PCA models, the PCA-250, PCA-350 and
PCA-500, each with a current U.S. list price of $10,100. The PCA-250 is
designed to perform with each series of the SLA-250, the PCA-350 with the
SLA-350, and the PCA-500 with the SLA-500. Approximately 70% of all SLA
systems sold by the Company have been purchased with a PCA.
RESINS. Under an agreement between the Company and Ciba Specialty
Chemicals Corporation, a Delaware Corporation ("Ciba Chemicals Delaware") and
a subsidiary of Ciba Specialty Chemicals, the Company is the exclusive
worldwide distributor to users of stereolithographic systems of Ciba
photopolymers (photosensitive resins) for stereolithography (see "Marketing
and Customers - Photopolymer Distribution Agreement," below). Currently, the
Company markets a total of five different resins, ranging in U.S. list price
from approximately $550 to $725 per gallon, which vary in building speed,
accuracy, surface finish and strength. The Company anticipates that it may,
from time to time, depending upon results obtained under its Photopolymer
Research Agreement described under "Research and Development," below, market
additional types of resins with varying properties.
SOFTWARE. The Company develops and markets part preparation software for
personal computers and engineering workstations. The software is designed to
enhance the interface between CAD/CAM systems and SLA systems. Solid CAD/CAM
data is converted to the SLA format in the CAD/CAM system and then
transmitted to a computer utilizing the Company's software, where the object
can be viewed, rotated, scaled and a model building structure added. The
software then produces the SLA process instructions. Currently, per unit
U.S. list prices of part preparation software range from $10,000 to $19,500
per copy.
QUICKCAST-TM-. During 1993, the Company introduced the QuickCast
process, which consists of special part building software and epoxy resin,
for making precision investment casting patterns using stereolithography
technology. The investment casting process for manufacturing metal parts is
centuries old. In typical investment casting, a foundry uses "patterns" of
the part to generate molds, into which liquid metal is poured to form the
part. The QuickCast process uses the Company's SLA systems to produce
foundry-useable mold patterns suitable for
Page 6
limited-run investment casting (each mold pattern can only be used to produce
one mold, which in turn can only be used to produce one part). While not
utilizable for high-capacity manufacturing, the ability to rapidly produce
prototypes and short run production quantities of fully functional complex
metal parts, in a wide variety of metals, is a major technological
improvement in stereolithography. Since its inception in 1993, the majority
of SLA systems sold by the Company have included the capability to use the
QuickCast process. The per unit U.S. list price for QuickCast software is
currently $10,000.
MAINTENANCE. All SLA systems sold directly by the Company to end users
include on-site hardware and software maintenance service, which are provided at
no additional charge up to the first year following installation; the Company
defers a portion of its revenues for these costs at the time of sale. After the
first year, the Company offers these customers optional hardware and software
maintenance contracts, which are available on a monthly and annual basis.
Although purchasers of SLA systems are not required to enter into maintenance
contracts with the Company, a majority of the Company's U.S. and European
customers for SLA systems are parties to these contracts; many others obtain
maintenance services from the Company on a time and material basis. Customers
acquiring SLA systems from the Company's foreign distributors are offered
maintenance contracts by these distributors. During 1994, 1995 and 1996,
revenues from maintenance contracts and maintenance services were approximately
$11.7 million, $14.3 million and $21.3 million, respectively. As of December
31, 1996, the Company had a staff of 42 full-time employees who provide on-site
remedial and preventative maintenance services necessary to keep the equipment
in good operating condition. To date, warranty expenses and product returns
have not been significant.
3D SYSTEMS TECHNOLOGY CENTERS. During January 1992, the Company opened its
first 3D Systems Technology Center at its Valencia, California headquarters
facility. During 1993, the Company opened three additional Technology Centers
at its offices located near London, England, Paris, France and Frankfurt,
Germany. The 3D Systems Technology Centers utilize their own SLA systems
together with CAD/CAM and other data supplied by their customers to produce
models, prototypes, mold patterns and other parts for customers on a contract
basis. The price for services offered by the Technology Centers varies on the
basis of the nature of the services requested. The Technology Centers currently
focus their efforts on the development of new techniques in stereolithography
and the development of new markets in which they can demonstrate the advantages
of stereolithography. The Technology Centers also enable the Company to keep
abreast of developments in the applications of stereolithography and serve as a
means to introduce prospective buyers to stereolithography. Revenues from the
Technology Centers in 1994, 1995 and 1996 were approximately $2.5 million, $4.2
million and $4.2 million, respectively.
3D KELTOOL. In September 1996, the Company purchased substantially
all of the assets and business operations of Keltool, Inc. of St. Paul,
Minnesota, a company which produced steel tooling for plastic injection molding
machines based on a patented process (renamed "3D Keltool" upon acquisition)
using sintered powdered steel. 3D Keltool utilizes SL file data or master
patterns supplied by its customers to produce highly accurate steel tool core
and cavity inserts for plastic injection molding machines on a contract basis.
The price for services rendered by 3D Keltool varies depending on the size and
complexity of the desired tools. Revenues of Keltool Inc. in 1995 and 1996
(through date of acquisition) were approximately $686,000 and $380,000,
respectively. Revenues of 3D Keltool from date of acquisition through December
31, 1996 were $150,000. See "Item 2. Properties" and Note 7 of Notes to
Consolidated Financial Statements.
RECENT PRODUCT INTRODUCTIONS. In order to improve and expand the
capabilities of its SLA systems and related software and resins, as well as to
enhance its portfolio of proprietary intellectual properties, the Company
historically has devoted a significant portion of its resources to research and
development activities. New products introduced by the Company include:
- ACTUA 2100 -- a network-ready system, about the size of an office
copier, the Actua 2100 is the first rapid prototyping system to be
offered by the Company which does not utilize photopolymers or lasers.
Instead, the Actua 2100, which is intended for use in the engineering
or design office environment, uses a "Multi-Jet Modeling" technology
to print models in successive layers with a special thermopolymer
material called ThermoJet-TM- and a print head with 96 jets oriented
in a linear array. The print head speeds back and forth as does a
printer, printing layer upon layer of material which solidifies in
seconds to form the physical model. The Actua 2100 offers a part
building capacity of 10 inches x 8 inches x 8 inches. Initial
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commercial shipments of the Actua 2100 began in December 1996. The
current per unit U.S. list price for the Actua 2100 is $65,000.
- SLA 350 SERIES 10 -- a new SLA precision modeler which incorporates a
solid state laser, the Zephyr-TM- Recoating System, (see paragraph
immediately below) and an automatic resin refill system. The SLA-350
offers a part building capacity of 13.8 inches x 13.8 inches x 15.7
inches. Additionally, the SLA-350 requires no additional facility
requirements for its operation. The Company began commercial shipments
of the SLA-350 in May 1996. The current per unit U.S. list price for
the SLA-350 Series 10 is $380,000.
- ZEPHYR-TM- RECOATING TECHNOLOGY -- a recoater which applies a layer of
resin as it sweeps over the part being built results in a faster
recoating process than previously offered in the SLA-250 and SLA-500
systems and an increase in part building speed. This technology was
offered as a service upgrade beginning in the second quarter of 1996
to existing SLA-250 and SLA-500 systems. The current per unit U.S.
list prices of the Zephyr upgrades for the SLA-250 and SLA-500 are
$30,000 and $35,000, respectively.
- SLA-500 SERIES 40 -- an enhancement of the SLA-500 which incorporates
the Zephyr Recoating System and offers easier building for challenging
part orientations, increased part building speed, and the capacity to
build thinner layers. The first commercial shipment of the SLA-500
Series 40 occurred in March 1996. The current per unit U.S. list
price for the SLA-500 Series 40 is $490,000.
- SLA-250 SERIES 50 -- an enhancement to the SLA-250 which incorporates
the Zephyr Recoating System and a 40 milliwatt laser (as compared to
the SLA-250 Series 40 which is offered with a 20 milliwatt laser and
the option to upgrade to the 40 milliwatt) which speeds the part
building process. Initial commercial shipments of the SLA-250 Series
50 began in March 1996. The current per unit U.S. list price for the
SLA-250 Series 50 is $170,000.
- MAESTRO-TM- 1.8 WORKSTATION SOFTWARE -- features the versatility and
functionality of six fully integrated modules (Part Manager-TM-,
3dverify-TM-, View-TM-, Vista-TM-, ZSlice-TM-, and Converge-TM-) each
of which provides specific functionality and user selectable options
including traversing X, Y and Z axis part specifications, file
verification and viewing, automatic support generation and final data
preparation. An enhanced version of an earlier release, Maestro-TM-
1.8 was available beginning November 1996 and is currently priced at a
U.S. list price of $19,500.
- SL 5190 RESIN -- a one-component, low viscosity, epoxy based, photo
curable resin designed for use on the solid state laser based SLA-350
system. SL 5190 is a tough, stable, highly versatile resin which can
produce concept models, working prototypes, and patterns for shell
investment casting. Commercial shipments of SL 5190 Resin began in
May 1996 in connection with shipments of the SLA-350 Series 10. The
current U.S. list price of SL 5190 is approximately $720 per gallon.
- 3D SYSTEMS SL TOOLKIT-TM- - during September 1996, the Company
entered into an exclusive licensing agreement with Imageware, a
software developer, to market and support worldwide a software
package that provides a comprehensive suite of rapid prototyping
utilities which allows creation of tool models from CAD data for
rapid prototyping and tooling applications. Tradenamed 3D
Systems SL Toolkit, the rapid prototyping software module is a
front-end utility for use with the Company's workstation
software. 3D Systems SL Toolkit is currently priced at a U.S.
list price of $10,500.
- SLA-250 SERIES 30A ("SMARTSTART") -- Introduced in January 1997,
SmartStart is a new entry level SLA precision modeler which
incorporates a 12 milliwatt Helium Cadmium laser, doctor blade
recoating system, Maestro/JR workstation software and complete
vat of SL 5170 epoxy resin. SmartStart features a 90 day parts
and labor warranty (excluding laser) and is priced at
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a U.S. list price of $99,000. Commercial shipments of the SLA-250
Series 30A are scheduled to commence during the second quarter of 1997.
RESEARCH AND DEVELOPMENT
The ability of the Company to compete successfully depends, among other
things, on its ability to design and develop new products and to refine existing
products. In 1997 and 1998, the Company anticipates that its research and
development efforts will be focused on developing new methods of solid imaging
technology, improving and refining its existing Multi-Jet Modeling and SLA
systems and developing software to facilitate the interface between SLA systems
and CAD/CAM programs. Research and development expenses increased in 1996 to
$7.7 million, up from $6.1 million in 1995. The increase in research and
development expenses in 1996 was primarily a result of salaries and wages
attributable to the additional employees and consultants retained by the Company
in connection with expanding certain research and development projects. Based
on the Company's historical expenditures related to research and development and
its current development goals, the Company anticipates for the foreseeable
future, research and development expenses will be equal to approximately ten
percent of sales. This is a forward-looking statement, however, and if total
sales of the Company for any particular year do not meet the anticipated sales
of the Company for that year, research and development expenses as a percentage
of sales may exceed 10%. As of December 31, 1996, 49 employees or contractors of
the Company were devoting substantially all of their time to research and
development activities, compared to 46 employees at December 31, 1995.
During 1996, the Company concentrated a significant portion of its research
and development efforts on the design and development of two new products, the
Actua 2100 and the SLA-350 Series 10 (see "Products and Services -- Recent
Product Introductions). As a result of certain technical issues, which the
Company believes to be resolved, commercial shipments of the Actua 2100,
initially anticipated to occur during the first quarter of 1996, did not begin
until December 1996.
The Company believes that further refinements in stereolithography will
depend upon improvements not only in the SLA products, but also in the chemical
makeup of the resins used in the fabrication process. To this end, the Company
has dedicated a significant amount of time to the development of new resins. To
pursue this goal, the Company and Ciba Chemicals Delaware are parties to a
Research and Development Agreement (as revised, the "Photopolymer Research
Agreement") providing for the development of photopolymers, photopolymerizable
monomers, photoinitiators and other resins for use with the SLA systems.
Subject to certain conditions, the Photopolymer Research Agreement will remain
in effect until either party gives the other six months advance notice of its
determination to terminate the agreement. Pursuant to the Photopolymer Research
Agreement, the two companies work jointly, with each company funding its own
portion of the research. Ownership of any inventions or know-how, whether
patented or not, will accrue to Ciba Chemicals Delaware if they are chemical in
nature and to the Company if they relate to the stereolithographic process.
The foregoing discussion relating to the Company's research and
development activities includes statements that involve risks and uncertainties.
For a discussion of the factors associated with such forward looking statements
which could cause actual results to differ materially from those projected in
the statements, see "Cautionary Statements and Risk Factors--Technological
Change" and "Product Development."
MARKETING AND CUSTOMERS
The Company's marketing strategy focuses on a strong internal sales
organization, which is responsible for overseeing worldwide sales, as well as
the utilization of knowledgeable international distributors. The Company employs
a direct sales force consisting of sales persons and application specialists
that provide technical sales support. As of December 31, 1996, the Company's
domestic sales staff consisted of 23 sales persons in offices located in
California, Illinois, Michigan, Pennsylvania, and Texas. At that date, the
Company's international sales staff included 16 sales and marketing personnel 14
of whom were located in Europe, with offices near Frankfurt, London and Paris
and two of whom were located in the Company's Valencia, California facility.
The sales and marketing staff participate in trade shows and promote the
products directly to potential end-users and others through commercial and
industrial media.
Page 9
In recent years, the Company's domestic sales strategy has focused
on an internal sales organization as well as the utilization of sales agents
(primarily, independent sales representatives in the machine tools industry).
These sales agents however have not been producing the level of sales expected
by the Company. Additionally, the Company believed it could obtain better
visibility and contact with its customers by utilizing a direct sales force.
Accordingly, in August 1996, the Company terminated its arrangements with all of
its sales agents and began recruiting additional personnel to strengthen its
internal sales and support organization. Between September 1, 1996 and December
31, 1996 the Company completed the hiring of ten additional sales persons.
INTERNATIONAL DISTRIBUTORS. As of December 31, 1996, the Company had
entered into agreements with distributors in Australia, Brazil, Hong Kong,
Japan, Korea, Malaysia, Russia, South Africa, Spain, Taiwan and Uruguay.
International distributors are responsible for marketing, sales, system
installation, service and support to their customers.
International sales accounted for 34.6%, 35.2% and 33.8% of total sales
in the years ended December 31, 1994, 1995 and 1996, respectively. See Note 16
of Notes to Consolidated Financial Statements. For a discussion of risks
associated with international operations, see "Cautionary Statements and Risk
Factors -- International Risks."
ACTUA 2100 VALUE-ADDED RESELLERS ("VARS"). The Company has selected
VARs as the primary distribution channel for its Actua 2100 concept modeler.
VARs are required to have sufficient technical expertise as well as a sufficient
number of employees devoted to the sale and support of the Actua 2100. VARs are
responsible for installation, service and hot-line support and are prohibited
from distributing competing products. As of December 31, 1996, the Company had
qualified 13 VARs (all of which are headquartered in the U.S.) with a combined
total of 50 U.S. locations and four locations in Canada. During 1997, the
Company anticipates qualifying approximately seven additional North American
based VARs, ten European based VARs and ten VARs based in other parts of the
world (principally the Pacific Rim). VARs are also compensated for referrals
which result in sales of SLAs. The Company employs channel managers (in both the
U.S. and Europe) whose primary responsibilities include the qualifying and
performance monitoring of VAR organizations.
CUSTOMERS. The Company's SLA customers include major companies in a broad
range of industries including manufacturers of automotive, aerospace, computer,
electronic, consumer and medical products. As of December 31, 1996, 741 SLA
systems had been sold and shipped. Of these, 215 are installed in Europe, 446
in North America, and 80 in the Pacific Rim and in other parts of the world.
Purchasers of SLA systems include, among others, Allied Signal Inc., AMP, Inc.,
Apple Computer, Inc., Boeing Company, Canstar Sports, Inc., Chrysler Corp.,
Daimler-Benz AG, Eastman Kodak Company, General Electric Company, General Motors
Corporation, GM Hughes Electronics Corporation, International Business Machines
Corporation, Johnson & Johnson, Motorola, Inc., Pratt & Whitney and Texas
Instruments Inc. The Company also sells SLA systems to independent service
bureaus, which for a fee provide stereolithographic services to their customers.
At December 31, 1996, 115 domestic and international independent service bureaus
had purchased SLA systems.
LEASING AND RENTAL PROGRAMS. As part of its marketing activities,
3D Capital Corporation ("3D Capital"), a wholly-owned subsidiary of the Company,
was formed in 1996 to provide lease financing for qualified U.S. customers
purchasing SLA systems. The leases are accounted for as sales-type leases where
the present value of the minimum payments, net of costs, are recorded as sales.
Since its inception (August 1996) through December 31, 1996, 3D Capital recorded
nine SLA sales leases. The Company anticipates that 3D Capital will provide
similar type leases for its Actua 2100 system in the U.S. beginning in 1997.
In addition to sales-type leases, the Company occasionally offers
selected credit-worthy companies the right to rent an SLA system for evaluation
purposes. At December 31, 1996, an aggregate of nine SLA systems were installed
under rental agreements, as compared with seven systems installed at December
31, 1995 and December 31, 1994, respectively. To date, the Company has never
had more than ten systems on rental at any one time and substantially all of the
customers who have participated in the rental program have purchased an SLA
system.
PHOTOPOLYMER DISTRIBUTION AGREEMENT. Pursuant to an agreement with CSC US,
and subject to conditions set forth in the agreement, the Company is the
exclusive worldwide distributor to users of stereolithographic processes of all
Ciba Specialty Chemicals stereolithography photopolymers. At the Company's
request, an affiliate of CSC US
Page 10
currently sells such photopolymers in Japan to the Company's Japanese
distributor. Subject to certain conditions, so long as CSC US provides
adequate supplies, the Company is required to fill all of its requirements
for its photopolymers through purchases from CSC US. In order to maintain
its exclusive distribution rights, the Company must meet certain quotas
(which the Company believes should be commercially obtainable) based on the
dollar value of products purchased from CSC US on an annual basis as set
forth in the agreement. Subject to certain conditions, the agreement will
remain in effect until June 30, 1997 and will continue thereafter until
either party gives the other six months advance notice of termination.
CUSTOMER SUPPORT AND SERVICE. Before installation of an SLA system, a new
purchaser typically receives training at the Company's facilities. During the
first several days after installation, an application engineer remains at the
customer location to ensure that the customer is able to operate the SLA system
effectively and to answer any questions that may arise. The Company also makes
available to its customers, for a fee, additional training courses in SLA system
features and applications.
The Company and its distributors offer maintenance contracts to their
customers. See "Products and Services," above. The Company also makes
available in the U.S. a hotline to all of its users with maintenance contracts.
The hotline is staffed with technical representatives who answer questions and
arrange for on-site remedial services if necessary. The hotline is available
Monday through Friday, 8:00 a.m. Eastern time to 5:00 p.m. Pacific time.
The Company co-founded and currently participates in both domestic and
international SLA User Groups which currently include a substantial number of
the Company's customers. The SLA User Groups organize an annual conference in
both the United States and Europe, at which the Company makes presentations
relating to updates in stereolithography, changes the Company has implemented in
its systems and related equipment, resins and software and future ideas and
programs the Company intends to pursue in the upcoming years.
BACKLOG. At December 31, 1996, the Company had orders (with scheduled
delivery dates) for 17 SLA systems aggregating approximately $5.7 million, as
compared to approximately $10.9 million at December 31, 1995 and $7.3 million at
December 31, 1994. At December 31, 1996, the Company had orders for 61 Actua
2100s aggregating approximately $3.3 million compared to $60,000 at December 31,
1995. It is anticipated that all SLA and Actua 2100 orders included in the
current backlog will be shipped by June 30, 1997 and September 30, 1997,
respectively. As a matter of policy, the Company affords its customers the right
to cancel any SLA and Actua system order at any time prior to their scheduled
delivery dates. Historically, the number of SLA orders canceled has not been
significant. Nonetheless, no assurance can be given that all orders in backlog
will be shipped. Backlog may not be indicative of future expected sales.
PRODUCTION AND SUPPLIES
The Company has in the past assembled all SLA systems at its Valencia,
California facility. As a result of the increased number of orders for SLA
systems and, consequently, the increased number of systems being manufactured,
which has been experienced by the Company during the past three years, together
with the recent introduction of certain new products (principally the SLA-350
and Actua 2100), the Company determined it was necessary to obtain additional
space. Accordingly, in October 1995, the Company entered into an agreement with
the Mesa County Economic Development Council, Inc. in connection with the
Company's construction of a 67,000 square foot facility and relocation of its
manufacturing and customer support operations to Grand Junction, Colorado.
Following the completion of the Colorado facility in June 1996, the Company
relocated its manufacturing and customer support operations from its Valencia
facility to the Colorado facility during the third quarter of 1996. During the
fourth quarter of 1996, all of the Company's manufacturing activities were
performed at the Colorado facility.
The Company purchases the major component parts for its SLA systems from
outside sources and arranges with contract manufacturers for the manufacture of
subassemblies. The Company integrates the subassemblies and effects final
assembly of all the SLA systems at its production facility. The Company performs
numerous diagnostic tests and quality control procedures on each SLA system in
order to assure its operability and reliability.
Page 11
Although there is more than one potential supplier of all material
component parts and subassemblies of the SLA system, the Company relies on a
single source of supply for several components and subassemblies. Although two
other major domestic manufacturers produce stereolithography resins, resins
distributed by the Company are supplied exclusively by CSC US. Pursuant to a
License, Development and Original Equipment Manufacturing Agreement with
Spectra, Inc., a Delaware corporation (the "Spectra Agreement") ink jet products
used in the assembly of the Actual 2100 are supplied exclusively by Spectra. If
Spectra were for any reason unable or refused to deliver Multi-Jet Manufacturing
parts, the Company would be unable to meet orders for its Actua 2100 System
until it was able to obtain an alternative source of supply. In the event the
Company is required to enter into arrangements with an alternative supplier, as
a result of patents held by Spectra, the possibility exists that, at a minimum,
substantial time delays and costs would need to be incurred by the Company
before it could be able to recommence shipment of these products. The Company
is vulnerable to the possible business interruption of a supplier, and could
experience temporary delays or interruptions while an alternative supplier is
procured. Such delays, if encountered for an extended period by the Company,
could have a material adverse effect on the Company's business and results of
operations. The Company has in the past experienced some shortages of supplies
from certain vendors; however, these shortages have not had a material adverse
impact on the Company. See "Cautionary Statements and Risk Factors -- Limited
Sources of Supplies."
COMPETITION AND PATENT RIGHTS
Until recently, the Company believes no products technologically similar to
the Company's SLA systems were being sold in the United States; however,
products similar to the Company's SLA systems have been marketed and sold by
other companies in the Pacific Rim and in Europe. In addition, there are other
companies researching, designing, developing and marketing other types of solid
imaging equipment in the United States and in foreign markets, and additional
companies have announced plans to enter the solid imaging business, either with
equipment similar to that marketed by the Company, or with other types of
equipment. See "Cautionary Statements and Risk Factors -- Competition."
Although it is estimated that there are 21 companies currently
manufacturing rapid prototyping equipment, the following is a brief
description of competing products or technologies of the companies that the
Company believes are its current primary competitors. DTM, Inc., in
conjunction with B.F. Goodrich, markets a system called Selective Laser
Sintering, which uses a powdered material which is sintered (solidified by
heating) by a laser. Helisys, Inc. markets a system called Laminated Object
Manufacturing, which builds parts from sheets of paper that are laminated
together with cross-sectional patterns being laser cut into each sheet of
paper. Stratasys, Inc. ("Stratasys") markets a fused deposition modeling
process that builds objects by dispensing individual layers of thermoplastic
material through a temperature controlled head. Stratasys has introduced a
desktop-sized version of its modeler which is priced at approximately
$55,000. During 1995, Stratasys acquired certain assets, including patents
and other intellectual property related to a desktop-sized modeler, from
International Business Machines Corporation. In 1988, Cubital Ltd.
("Cubital") acquired a worldwide non-exclusive license from the Company to
exploit certain limited aspects of the stereolithography process in certain
applications; however, the license held by Cubital does not entitle it to
utilize lasers or a vat of liquid photopolymers and contains other
limitations which differentiate its products from those of the Company.
With respect to the office modeler concept and the Actua 2100, the Company
believes that the following companies are its current primary competitors. As
noted above, Stratasys markets a desktop-sized version of its modeler. BPM
Technology, Inc. markets a system called The Personal Modeler, which forms
models by shooting microscopic particles of molten thermoplastic that freeze
when they hit the object being built. Sanders Prototyping, Inc. markets a
desktop modeler that utilizes a single nozzle ink jet process to build a part.
Products similar to the Company's stereolithography products are being
marketed in Europe by EOS GmbH Electrical Optical Systems ("EOS") and in
Japan by EOS, Mitsubishi and Sony. E.I. du Pont de Nemours and Company ("Du
Pont") has licensed certain stereolithography technology to Teijin Seiki of
Japan. The Company believes that other Japanese companies are also
developing and marketing products similar to those of the Company. However,
the Company does not have reliable data with respect to these efforts.
During 1996, Aeroflex, Inc. ("Aeroflex"), headquartered in Virginia, publicly
announced the availability and claimed that it has sold, although not
delivered, equipment which offers the same functions as the Company's SLA
systems.
Page 12
The Company believes that currently available alternatives to
stereolithography generally are not able to produce models having the
dimensional accuracy or fine surface finish of models provided by the Company's
stereolithography process. However, competitors have successfully marketed
their products to the Company's existing and potential customers. Furthermore,
in many cases, the existence of these competitors extends the purchasing time
while customers investigate alternative systems. The Company competes primarily
on the basis of the quality of its products and the advanced state of its
technology. Although the Company does not rely totally on its patents to
compete, the Company believes that the patents will help the Company maintain
its leading position in the solid imaging field in the United States and Europe.
See "Proprietary Protection," below and "Cautionary Statements and Risk Factors
- -- Proprietary Protection."
A number of companies, including Allied Signal Inc. and Du Pont, are
currently selling stereolithography resins, which either complement or compete
with those distributed by the Company. Sales by the Company of Ciba's
stereolithography resins are a small but growing part of the Company's revenues
(approximately $10.6 million or 13% of total sales for 1996). Within the limits
of its obligations under the Photopolymer Research Agreement (see "Research and
Development," above), the Company encourages chemical companies to develop
stereolithography resins that are compatible with its SLA equipment, but it also
works closely with CSC US to remain competitive in the resin market. The
Company believes that it currently supplies resins to owners of a majority of
the more than 700 SLA systems currently installed worldwide.
The Company does not believe that it currently has any significant
competition for its maintenance services, although some of the Company's
customers perform their own maintenance in-house. The Company offers software
and hardware maintenance contracts to its customers (see "Products and
Services," above). Maintenance for SLA systems sold internationally is offered
by the Company's distributors (see "Marketing and Customers," above).
The Company's Technology Centers compete with other service bureaus
providing similar technologies and services. It is the Company's intention to
compete on the basis of service quality and responsiveness. The Company
believes that the demand for rapid prototyping service bureaus is sufficient to
support these competitors without having a material adverse impact on the demand
for the services offered by the Company's Technology Centers.
Future competition is expected to arise both from the development of allied
or related techniques not encompassed by the patents held by or licensed to the
Company and through improvements to existing technologies, such as automated
machining. The Company has determined to follow a strategy of continuing
product development and aggressive patent prosecution to protect itself to the
extent possible in these areas.
PROPRIETARY PROTECTION
The stereolithography technology used by the Company in its products was
developed by Charles W. Hull, the Company's President and Chief Operating
Officer while employed by UVP, Inc. This technology was originally patented by
UVP, Inc., subsequently licensed to the Company in 1986 and acquired by the
Company in 1990.
At December 31, 1996, the Company had received 50 patents in the United
States, 5 in Japan, 5 in Europe, 9 in Israel and 4 in Canada; 5 utility
models had been issued in Germany. At that date the Company had 32 pending
patent applications in the United States, 15 in Europe, 18 in Japan, 8 in
Canada, 5 in South Korea, 3 in Singapore and 3 in the Pacific Cooperative
Treaty, and international intellectual property organization. As new
developments and components to the technology are discovered, the Company
intends to apply for additional patents.
Four of the Company's Japanese patent applications have been examined by
the Japanese Patent Office and subsequently published for opposition.
Multiple oppositions were submitted against two of the four applications and
single oppositions were submitted against two of the applications. Thus far,
the Company has responded to all oppositions filed against applications.
Based on these responses, the Japanese Patent Office granted two patents in
1994. For the other applications, the Japanese Patent Office will review the
oppositions and the Company's responses, and may require the Company to
further defend or modify these applications before granting any patent
thereon.
Page 13
During 1993, the Company, through its subsidiaries, filed a patent
infringement lawsuit in Germany against EOS. The lawsuit seeks compensation
from EOS for utilizing certain technology which the Company alleges was
incorporated in its European patent and seeks other damages and remedies, which
include, among others, barring EOS from marketing equipment using technology
incorporated in the Company's patent and one of the utility models (see "Item 3.
Legal Proceedings").
During 1994, a German subsidiary of the Company filed an infringement
lawsuit against a customer of EOS based on the utility models of the Company.
The lawsuit seeks compensation from EOS' customer for damages and attorneys fees
as well as an injunction barring the customer from using the EOS equipment (see
"Item 3. Legal Proceedings").
During January 1997, 3D California filed a patent infringement
lawsuit against Aaroflex. The lawsuit seeks compensation from Aaroflex for
utilizing certain stereolithography technology which the Company alleges is
incorporated in six of its U.S. patents and seeks other damages and attorneys
fees as well as an injunction barring Aaroflex from marketing its products using
technology incorporated in the Company's patents (see "Item 3. Legal
Proceedings").
Application for a patent offers no assurance that a patent will be issued
as applied for. Issuance of a patent offers no assurance that the patent can be
protected against any claims of invalidation or that the patent can be enforced
against any infringement. In addition, litigation of patent issues can be costly
and time-consuming. See "Cautionary Statements and Risk Factors -- Proprietary
Protection."
EMPLOYEES
At December 31, 1996, the Company had 389 full-time employees. In
addition, at that same date the Company had 57 independent contractors. None of
these employees or independent contractors are covered by labor agreements. The
Company considers its relations with its employees and its independent
contractors to be satisfactory.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward-looking
statements that involve risks and uncertainties. Factors associated with the
forward looking statements which could cause actual results to differ materially
from those projected in the statements appear below. In addition to the other
information contained in this document, readers should carefully consider the
following cautionary statements and risk factors.
FLUCTUATION OF OPERATING RESULTS
While the Company has reported profits for each quarter beginning with the
quarter ended October 1, 1993, it can be expected that operating results may
fluctuate on a quarterly basis as a result of a number of factors, including the
status of world economic conditions, fluctuations in foreign currency exchange
rates and the timing of product shipments. The current U.S. list price for an
SLA-500 system, for example, is $490,000; thus, the acceleration or delay of a
small number of shipments from one quarter to the next can significantly affect
the Company's results of operations for that quarter.
DEPENDENCE ON A SINGLE PRODUCT LINE
The Company has developed and marketed a single product line consisting of
closely interdependent products in a single field (rapid prototyping) based on a
proprietary technology (stereolithography, and, just recently, Multi Jet
Modeling). For the foreseeable future, the Company plans to continue to pursue
this business strategy. As a consequence, the prospects of the Company and the
future value of an investment in the Common Stock will be dependent on the
success of its products in this single field.
RISKS ASSOCIATED WITH NEW PRODUCT
The Company has developed an "office system modeler," the Actua 2100,
which is designed to be a rapid-prototyping system for operation in offices
and is offered for sale at a U.S. list price of $65,000. The first commercial
shipments of the Actua 2100 occurred in December 1996. As of the date hereof,
the Company cannot fully anticipate potential manufacturing or operational
issues that may arise or competitive forces that may affect sales of the
Actua 2100. Accordingly, there can be no assurance that a significant market
for the Actua 2100 can be developed or sustained.
HIGH UNIT PRICES
Page 14
Currently, per unit U.S. list prices for the Company's SLA systems range
from approximately $100,000 to over $400,000. These prices have resulted in
long sales cycles and pose significant barriers to the purchase of SLA systems
for potential customers.
GROSS MARGINS
The Company anticipates that the gross margins related to the Actua 2100
system will be lower than margins on its SLA systems, and, if revenues from the
sales of Actua 2100 represent a material portion of the Company's product sales,
gross margins from product sales would be reduced. The Company also anticipates
that gross margins related to the Actua 2100 will be lower during the initial
phases of production as a result of certain inefficiencies. Additionally, the
Company historically has sold its products primarily through a direct sales
force. The Company expects that sales through VARs will represent a larger
percentage of total Actua 2100 sales than sales through the Company's direct
sales force and, as a result, the Company's average selling prices and gross
margins may be adversely affected due to the lower unit prices that are
typically charged when selling through an indirect channel. Moreover, there can
be no assurance that the Company will be able to attract VARs that will be able
to market the Actua 2100 effectively and will be qualified to provide timely and
cost-effective customer support and service or that the Company will be able to
resolve territorial or other potential conflicts among its VARs. Further, in
certain instances the Company has granted exclusive distribution rights which
are limited in territory and duration. Consequently, the Company may be
adversely affected should any VAR fail to adequately penetrate its market
segment. Also, in response to perceived market conditions, during January 1997,
the Company reduced its prices for the SLA-250 Series 40 and Series 50 by
approximately 20% and introduced the SLA-250 Series 30A (an entry-level SLA
priced at $99,000 with a lower profit margin than other SLA systems). While
sales of the SLA 250 system may increase as a result of price reductions and the
introduction of the SLA-250 Series 30A, profit margins related to these sales
will decrease and may have a materially adverse affect on the profits of the
Company.
TECHNOLOGICAL CHANGE
The market for rapid prototyping equipment has emerged only recently and
may be characterized by rapid advances in technology. Accordingly, the
Company's ability to compete in this market may depend in large part on its
success in enhancing its existing products and in developing new products.
There can be no assurance that the Company will succeed in such efforts or that
any of its products will not be rendered obsolete or uneconomical by
technological advances made by others.
PROPRIETARY PROTECTION
The Company's technology is patented in the United States and additional
patents have been granted, published for opposition or are pending in Canada,
Europe, Germany, Israel, Japan, Singapore and South Korea. Application for a
patent offers no assurance that a patent will be issued or issued without
material modification. Moreover, there can be no assurance that the issued
patents will not be circumvented or invalidated, that additional patents will be
granted, that proprietary information can be maintained as such or that the
Company will be able to maintain a meaningful technological advantage. The
Company could incur substantial costs in seeking enforcement of its patent
rights against infringement or the unauthorized use of its proprietary
technology by others or in defending itself against similar claims of others.
Insofar as the Company relies on trade secrets and proprietary know-how to
maintain its competitive position, there can be no assurance that others may not
independently develop similar or superior technologies or gain access to the
Company's trade secrets or know-how. See "Item 3. Legal Proceedings."
COMPETITION
The business environment in which the Company operates is highly
competitive and subject to rapid technological change. Certain of the Company's
existing and potential competitors have greater financial, marketing
Page 15
and other resources than the Company. Until recently, the Company believes
no products technologically similar to the Company's SLA systems have been
sold in the United States, although products similar to the SLA systems have
been marketed and sold by other companies in Japan and in Europe. In
addition, there are other companies researching, designing, developing and
marketing other types of rapid prototyping equipment in the United States and
in foreign markets, and additional companies have announced plans to enter
the rapid prototyping business, either with equipment similar to that
marketed by the Company, or with other types of equipment. In many cases the
existence of these competitors extends the purchase decision time while
customers investigate alternative equipment. These competitors have also
been able to market their products successfully to the Company's existing and
potential customers. In addition, a number of companies currently sell
stereolithography resins, which both complement and compete with those
distributed by the Company.
Future competition is expected to arise from the development of allied or
related technologies not encompassed by the patents held by or licensed to the
Company, the issuance of patents to other companies which may inhibit the
Company's ability to develop certain products encompassed by such patents and
improvement to existing technologies, such as automated machining. Increased
competition could result in price reductions, reduced margins and loss of market
share, all of which could materially adversely affect the Company. The Company
has determined to follow a strategy of continuing product development and
aggressive patent support to protect its competitive position to the extent
practicable. However, as competition has increased, and new competitors have
entered the market, the Company's market share has decreased, and there can be
no assurance that the Company will be able to maintain its leading position in
the field of rapid prototyping or continue to compete successfully against
current and future sources of competition or that the competitive pressures
faced by the Company will not adversely affect its profitability or financial
performance.
PRODUCT DEVELOPMENT
Stereolithography, Multi-Jet Modeling and the development of resins and
thermopolymers used in connection therewith, are relatively new and evolving
technologies, and products developed in this field could, following
introduction, require additional refinement. For example, during 1994, it
was discovered that inadvertent alterations to the SLA systems' end products
had occurred when using certain of the epoxy-based resins distributed by the
Company which had a tendency, especially in areas of high humidity, to absorb
water vapor. Additionally, another resin has exhibited over time a rise in
material viscosity when used in the Company's SLA systems. While the Company
believes that the steps it has taken to remedy these problems have proven
effective, there can be no assurance that future product development issues
will not arise.
LIMITED SOURCES OF SUPPLIES
The Company purchases the major component parts for its SLA systems and
Actua 2100 system from outside sources and conducts final assembly of these
systems at its facility in Grand Junction, Colorado. Although there is more
than one potential supplier of most component parts of these systems, the
Company currently relies on a single source of supply for several components.
Although two other major domestic manufacturers produce stereolithography
resins, resins distributed by the Company are supplied exclusively by CSC US.
Pursuant to the Spectra Agreement, ink jet products used in the assembly of the
Actua 2100 are supplied exclusively by Spectra. If Spectra were for any reason
unable or refused to deliver Multi-Jet Manufacturing parts, the Company would be
unable to meet orders for its Actua 2100 System until it was able to obtain an
alternative source of supply. In the event the Company is required to enter
into arrangements with an alternative supplier, as a result of patents held by
Spectra, the possibility exists that, at a minimum, substantial time delays and
costs would need to be incurred by the Company before it could be able to
recommence shipment of these products. Accordingly, the Company is vulnerable
to the possible business interruption of a supplier, and the Company could
experience temporary delays or interruptions while an alternative supplier is
procured. Such delays, if encountered for an extended period by the Company,
could have a material adverse effect on the Company's business and results of
operations.
Page 16
INTERNATIONAL RISKS
In 1994, 1995 and 1996, international sales, principally in Europe,
accounted for approximately $15.0 million, $22.0 million and $26.9 million or
34.6%, 35.2% and 33.8%, respectively, of the Company's total sales. The
Company anticipates that international sales may continue to account for a
significant portion of the Company's revenues. The Company's international
business is subject to special risks, including fluctuating exchange rates,
uncertainties in patent enforcement, changes in import and export controls,
tariffs, product safety and other regulatory requirements, in addition to
currency controls and political and economic risks. To date, these risks have
not had a material impact on the Company's business.
ACQUISITION OF KELTOOL, INC.
In September 1996, the Company completed the acquisition of substantially
all of the assets of Keltool, Inc. with the expectation that the acquisition
would result in beneficial synergies for the combined business. Achieving this
goal will depend in part on whether the operations of Keltool can be integrated
with the operation of the Company in an efficient, effective and timely manner.
There can be no assurance that this will occur. The acquisition will require,
among other things, the education of the Company's employees with respect to the
Keltool process, coordination of the companies' sales and marketing efforts and
the elimination of redundant and/or unnecessary overhead. Moreover, the
integration of the businesses will require the dedication of management
resources, which may temporarily distract attention from the day-to-day business
of the Company. The inability of management to integrate successfully the
operations of Keltool could have a material adverse effect on the business and
results of combined business.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, product
development, Technology Center and training facilities are located in a 78,320
square foot building in Valencia, California under a lease which expires on
December 31, 2002. The Company also leases nearby additional space which is
utilized for additional offices and warehousing purposes. The Company also
leases sales and service offices in four other states (Illinois, Michigan,
Pennsylvania and Texas) and in three countries in the European Community
(France, Germany and the United Kingdom).
The Company's manufacturing and customer support operations are located in
a 67,000 square foot facility located in Grand Junction, Colorado (the "Colorado
Facility"). The Company constructed the Colorado Facility pursuant to an
agreement with the Mesa County Economic Development Council, Inc. executed in
October 1995. Following the completion of the Colorado Facility in June 1996,
the Company relocated its manufacturing and customer support operations from its
Valencia facility to the Colorado Facility during the third quarter of 1996.
During the fourth quarter of 1996, all of the Company's manufacturing activities
were performed at the Colorado Facility. During August 1996, the Company
completed a $4.9 million variable rate industrial development bond financing of
the Colorado Facility.
In connection with the asset acquisition of Keltool, Inc. in September
1996, the Company assumed Keltool's obligations under an existing lease for
approximately 6,000 square feet located in St. Paul, Minnesota which expires in
September 1997. As a result of the anticipated growth of its operations
relating to the Keltool business, the Company executed a lease for approximately
21,000 square feet in Valencia, California which expires on June 30, 2000. The
Company's occupancy of this facility commenced during February 1997.
For information concerning obligations of the Company under its leases, see
Note 17(a) of Notes to Consolidated Financial Statements. For information
concerning the Company's Colorado Facility, see Notes 11 and 18 of Notes to
Consolidated Financial Statements.
The Company believes that the facilities described above will be adequate
to meet its needs for the foreseeable future.
Page 17
ITEM 3. LEGAL PROCEEDINGS
3D SYSTEMS, INC. AND 3D SYSTEMS GMBH VS. EOS GMBH ELECTRO OPTICAL SYSTEMS,
DISTRICT COURT, MUNICH, GERMANY, CASE NO. 40168/93. On May 24, 1993, the Company
through its California and German subsidiaries, filed a patent infringement
lawsuit against EOS, a European competitor. The lawsuit, filed in the
Dusseldorf District Court, Germany, seeks compensation from EOS for utilizing
certain technology in EOS's products which the Company alleges was incorporated
in its European patent application (the "3D Patent") and seeks damages from EOS
for using this technology related to the 3D Patent after the patent's issuance
by the European Patent Office. The lawsuit further seeks reimbursement of
attorneys fees as well as an order by the Court barring EOS from marketing
equipment using the technology contained in the 3D Patent. On August 24, 1993,
pursuant to the Company's request, the Dusseldorf District Court ruled to
transfer the case to the Munich District Court. On November 18, 1993, the 3D
Patent was issued by the European Patent Office (Application Serial No.
85109899, Patent No. 171069).
On February 21, 1994, the Company amended its complaint to include
additional infringement by EOS upon certain other Company technology contained
in a German Utility Model issued to the Company by the German Patent Office (the
"GPO") on November 4, 1993 (the "3D Utility Model"). On March 1, 1994, a
hearing was held in the Munich District Court (the "Court") at which time the
Court postponed a ruling on the lawsuit but ordered the Company to post a
performance bond in the amount of 1.1 million Deutschmarks (approximately
$766,000 at December 31, 1995) to cover certain potential legal fees of EOS
related to the lawsuit (in the event of an unfavorable outcome to the Company)
as a result of one of the plaintiffs being a foreign corporation. During April
1994, the Company obtained a bank guarantee in the amount of 1.1 million
Deutschmarks which serves as the required performance bond. In connection with
the bank guarantee, the Company is required to maintain with its foreign bank
compensating cash balances equal to 1.1 million Deutschmarks. On May 31, 1994,
EOS notified the Court of its request made to the GPO to cancel the 3D Utility
Model.
On March 20, 1995, the GPO ruled to cancel the 3D Utility Model. The
Company appealed the ruling of the GPO to the German Federal Patent Court on
April 3, 1995. On February 8, 1996 the Court ruled that EOS is required to pay
the Company adequate compensation for the unauthorized use of the 3D Patent
during the period from November 7, 1991 to the patent issuance on November 18,
1993 (the "Infringement Period"), and that the Company is obligated to reimburse
EOS for certain attorney fees incurred by EOS of approximately $70,000. The
Court has not made a final determination of certain additional legal fees and
costs which may be required to be borne by the Company. The Company expects
that the compensation for unauthorized use due from EOS should approximate or
exceed all amounts which may be due to EOS, however, the actual amounts remain
to be determined. The Court further ruled that EOS, by redesigning its products,
did not infringe the 3D Patent after November 18, 1993. The Court further ruled
that the action with regard to the 3D Utility Model was suspended pending a
decision from the German Federal Patent Court on the validity of the 3D Utility
Model. The parties have requested that the Federal Patent Court delay its ruling
regarding the validity of the 3D Utility Model.
The Company has determined to appeal the Court's ruling. Regardless of the
outcome of the appeal of either the Court's ruling or the GPO ruling, the
Company intends, to the extent that it continues to believe such actions to be
appropriate, to continue to prosecute its claims based upon its European patents
and the other utility models which are not a subject of either appeal. While
the Company has been advised by Bardehle Pagenberg Dost Altenburg Frohwitter
Geissler & Partner, counsel in this action, that it is more likely than not that
the Company will ultimately prevail in this matter, no assurance can be given
that the Company will be successful.
If the Company is unsuccessful in this litigation, total reimbursements by
the Company of EOS's legal fees and court costs could range as high as $650,000.
3D SYSTEMS GMBH VS. LEOPOLD KOSTAL GMBH & CO., DISTRICT COURT, DUSSELDORF,
GERMANY, CASE NO'S. 40299/94, 40336/94 AND 40337/94. On October 14, 1994, the
Company notified a German customer of EOS, Leopold Kostal GmbH & Co. KG
("Kostal"), of its intention to file a patent infringement suit against Kostal
for operating certain equipment purchased from EOS (which the Company alleges
incorporates certain technology contained in the 3D Utility Model as well as two
other German Utility Models issued to the Company in 1994) unless Kostal
immediately ceased to use the EOS equipment. Additionally, the Company offered
to waive its rights to any damages against Kostal if Kostal would agree to
purchase a stereolithography system from the Company, at a discount from
Page 18
then current published prices, as a replacement for the EOS system. On
October 24, 1994, Kostal rejected this offer and, on November 2, 1994, the
Company filed a lawsuit against Kostal for infringement. The lawsuit seeks
compensation from Kostal for damages and attorneys fees as well as an
injunction barring Kostal from using the EOS equipment.
As noted above, on March 20, 1995, the GPO ruled to cancel the initial 3D
Utility Model. Subsequent thereto, Kostal introduced the GPO ruling into this
litigation. In addition, on April 19, 1995, EOS filed cancellation requests
against two other Utility Models of the Company and has introduced this
information into the Kostal litigation as well.
On September 12, 1995, the court ruled to suspend a decision regarding
Kostal's alleged infringement of the two other German Utility Models pending a
decision concerning their validity by the GPO.
3D SYSTEMS, INC. VS. AAROTECH, ET AL. UNITED STATES DISTRICT COURT, CENTRAL
DISTRICT OF CALIFORNIA, CASE NO. 97-0231WDK(EX). On January 13, 1997, 3D
California filed a complaint ("Complaint") in the United States District Court,
Central District of California, against Aaroflex, Inc. ("Aaroflex") and its
wholly owned subsidiary, Aarotech Laboratories, Inc. ("Aarotech") and Albert C.
Young ("Young"). Young is the Chairman of the Board and Chief Executive Officer
of both Aarotech and Aaroflex. The Complaint alleges that stereolithography
equipment manufactured by Aaroflex infringes on six of the patents of 3D
California. 3D California seeks damages and injunctive relief from the
defendants. The defendants have threatened to sue 3D California for trade
libel. To date, the defendants have not filed such a suit. The defendants have
filed a motion to dismiss the Complaint or transfer the case to their home
district in Virginia. The Court has set a hearing date of June 23, 1997 for the
defendants' motion.
While the Company believes that it has substantial defenses to the claims
described above, and intends to vigorously defend all legal actions, no
assurance can be given that the Company would, in fact, prevail in these
matters, and the possibility exists that an adverse decision might have a
material adverse effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 19
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers of the Company:
AGE AT POSITION
NAME FEBRUARY 28, 1997 WITH THE COMPANY
- ---- ----------------- ----------------
Arthur B. Sims 59 Chief Executive Officer and Chairman of
the Board of Directors
Charles W. Hull 57 Chief Operating Officer, President and
Director
Richard D. Balanson 47 Executive Vice President, Development
and Manufacturing
Gordon L. Almquist 47 Vice President, Finance and Chief
Financial Officer
A. Sidney Alpert 58 Vice President, General Counsel and
Secretary
Mark R. Bell 43 Vice President, Sales The Americas
Richard P. Fedchenko 58 Vice President, Strategy and Market
Development
Eugen J. Geyer 47 Vice President, 3D Europe
Robert E. Horrell 52 Vice President, Service Business
The principal occupations of the executive officers of the Company are as
follows:
ARTHUR B. SIMS: Mr. Sims has served as Chief Executive Officer of the
Company since August 1993 and, since September 1991, has also served as Chief
Executive Officer of 3D Systems, Inc. From September 1990 to September 1991,
Mr. Sims was an independent management consultant. From 1989 until September
1990, Mr. Sims was President of Quadratron Systems Incorporated, a developer
and marketer of office automation software. From 1988 to 1989, Mr. Sims
served as President and Chief Executive Officer of CPT Corporation. Prior to
that, he served four years as Corporate Vice President and President of
Computer Sciences Corp.'s Industry Services Group and for one year as
President and Chief Executive Officer of United Information Services.
Previously he was associated with IBM and General Electric Company.
CHARLES W. HULL: Mr. Hull has served as Chief Operating Officer and
President of the Company since August 1993 and since March 1986 as President
of 3D Systems, Inc.; prior thereto, he was Vice-President of UVP, Inc. from
January 1980 to March 1986. The stereolithography technology was developed
by Mr. Hull while employed by UVP, Inc., a systems manufacturing company.
RICHARD D. BALANSON: Mr. Balanson became Executive Vice President,
Development and Manufacturing in October 1996. From August 1994 to September
1996, Mr. Balanson was General Manager, Executive Vice President and Member of
the Board of Maxtor Corporation, a major supplier of computer disk drives, where
he was in charge of engineering, manufacturing, materials, sales and marketing.
From October 1992 to June 1994, Mr.
Page 20
Balanson was President and Chief Operating Officer of Applied Magnetics
Corporation, an OEM components supplier to manufacturers of disk and tape
drives. From 1975 to 1992, he held several management and technical
positions with International Business Machines Corporation including IBM
Research Division, where he had responsibility for research and development
in many areas, including xerography, optics, lasers and computer storage
media.
GORDON L. ALMQUIST: Mr. Almquist became Vice President, Finance and Chief
Financial Officer of the Company in September 1991. Prior thereto, from March
1990 to September 1991 he served as Vice President, Finance and Administration
of Quadratron Systems Incorporated, a developer and marketer of office
automation software. From November 1989 to February 1990, Mr. Almquist served
as a financial consultant; and from August 1988 to October 1989, Mr. Almquist
served as Vice President, Finance and Treasurer of Premier Pump and Pool
Products, Inc. From January 1978 to July 1988, Mr. Almquist served in various
financial management positions (most recently as Vice President, Finance,
Treasurer and Secretary) for Bishop Incorporated, a corporation which was
engaged in the marketing and distribution of drafting and engineering equipment
and supplies for the electronics and architectural industries. Mr. Almquist is
a Certified Public Accountant.
A. SIDNEY ALPERT: Mr. Alpert became Vice President and General Counsel of
the Company in January 1996 and has served as Secretary of the Company since May
1996. Prior thereto, from January 1994 through December 1995, Mr. Alpert was an
intellectual property consultant. From late 1988 through March 1995, Mr. Alpert
served as Chairman of the Board of University Communications, Inc., which
markets a satellite-delivered interactive computer-based education program. Mr.
Alpert is a consultant to Competitive Technologies, Inc. ("CTI") (formally known
as University Patents, Inc.), a corporation listed on the American Stock
Exchange which handles patent management and technology transfer activities
primarily for universities and colleges. University Communications, Inc. is an
affiliate of CTI. Mr. Alpert has been employed in various managerial capacities
with CTI since 1972, from July 1988 until December 1993 was Chairman of the
Board and Chief Executive Officer of CTI, and remained on the Board of Directors
until December, 1995.
MARK R. BELL: Mr. Bell has served as Vice President, Sales, The Americas
since April 1996 and is responsible for sales in the United States, Canada,
Mexico and Latin America. Mr. Bell previously had been Eastern Region Sales
Director - U.S. since joining the Company in August 1990. From September 1987
to August 1990, Mr. Bell was Eastern Area Manager for Cimlinc, Inc., a provider
of CIM software solutions and services. From February 1987 to August 1987, Mr.
Bell was Eastern Area Manager for Manufacturing & Consulting Services, Inc.
(MCS), a software developer in the mechanical design and manufacturing (CAD/CAM)
industry. From October 1986 to January 1987, Mr. Bell was Eastern Region
Manager for Infodetics, a supplier of records management systems and microfilm
duplication equipment. Prior to 1986, Mr. Bell has been employed in various
sales management positions with McDonnell Douglas Corporation, Auto-Trol
Technology Corporation, Tektronix, Inc, and Burroughs Corporation.
RICHARD P. FEDCHENKO: Mr. Fedchenko has served as Vice President, Strategy
and Market Development of the Company since August 1993 and since August 1992 as
Vice President, Strategy and Market Development of 3D Systems, Inc. Prior
thereto, Mr. Fedchenko served as Consultant with Douglass Rosewater and Brown,
an advertising and public relations agency from 1990 through June 1992. From
1985 to 1990, Mr. Fedchenko was Vice President, Marketing, and Executive
Consultant, for Strategic Directions International, Inc., a management
consulting firm. From 1985 through 1992, Mr. Fedchenko served as Associate
Professor of Management, Azusa Pacific University (APU) and held various
directorships within the School of Business of APU.
EUGEN J. GEYER: Mr. Geyer became Corporate Vice President, 3D Systems
Europe in January 1996, and is responsible for the Company's operations
throughout Europe, including its subsidiaries in Germany, France and the United
Kingdom. From 1992 to 1995, Mr. Geyer was the Chief Executive Officer of 4P
Folie Forchheim GmbH, a German subsidiary of Van Leer Worldwide Packaging,
headquartered in Holland. From 1991 to 1992, he was Executive Vice President of
Marketing and Sales of EMS-Chemie AG, a Swiss chemical company. From 1974 to
1991, Mr. Geyer held management positions with the General Electric Plastics
Group and, from 1987 to 1989, was President and Managing Director of a GE joint
venture in Brazil.
Page 21
ROBERT E. HORRELL: Mr. Horrell has served as Vice President, Service
Businesses of the Company since October 1996 and from March 1987 through
September 1996 as Vice President, Operations of the Company. From April 1982 to
February 1987, he was Vice-President, Operations of Elec-Trol, Inc. a developer
and manufacturer of electronic components.
Subject to the employment agreements between the Company and each of
Messrs. Sims, Balanson, Geyer and Hull, all officers serve at the pleasure of
the Board of Directors of the Company.
Page 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth for the periods indicated the high and low
closing sales prices of the Company's Common Stock (symbol: TDSC) on the Nasdaq
National Market. The Company effected a one-for-three reverse stock split on
May 23, 1995. Also shown are prices prior to the effective date of the reverse
stock split which have been adjusted by a factor of three to reflect the effect
of the reverse stock split.
Historic Prices
As Adjusted for 1-for-3
Reverse Stock Split
YEAR PERIOD HIGH LOW HIGH LOW
- ---- ------ ---- --- ---- ---
1995 First Quarter 4-11/16 3-5/16 14-1/16 9-15/16
Second Quarter (through
May 23) 5-7/8 4-5/16 17-5/8 12-15/16
Second Quarter
(from May 24 - June 30) 17-7/8 15-7/16
Third Quarter 21-7/8 15-3/8
Fourth Quarter 24 14-1/4
1996 First Quarter 24-1/8 18-7/8
Second Quarter 24-7/8 20
Third Quarter 21-3/4 12
Fourth Quarter 14-47/64 9-3/4
1997 First Quarter
(through February 28,
1997) 16-1/4 10-1/8
As of February 28, 1997, the outstanding Common Stock was held of record by
652 stockholders.
DIVIDENDS
The Company has not paid any dividends on its Common Stock and currently
intends to retain any future earnings for use in its business. Therefore, it
should not be expected that any dividends will be declared on the Common Stock
in the foreseeable future. Any dividend payment will be at the discretion of
the Company's Board of Directors and will require the consent of Silicon Valley
Bank (see "Item 7. Management's Discussion and Analysis of Results of Operation
and Financial Condition -- Liquidity and Capital Resources) and will be
dependent upon the Company's earnings, operating and financial condition and
capital requirements, as well as general business conditions.
Page 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following summary of selected consolidated financial data for the
periods set forth below has been derived from the Consolidated Financial
Statements of 3D Systems Corporation. Such information should be read in
conjunction with Management's Discussion and Analysis of Results of Operation
and Financial Condition and with the Consolidated Financial Statements appearing
elsewhere in this Form 10-K.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND UNIT AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Sales:
Products(1) . . . . . . . . $18,466 $20,951 $28,848 $43,544 $53,229
Services(2) . . . . . . . . 7,489 10,130 14,489 19,038 26,403
------- ------- ------- ------- -------
Total Sales. . . . . . 25,955 31,081 43,337 62,582 79,632
------- ------- ------- ------- -------
Cost of sales:
Products(1) . . . . . . . . 8,835 10,191 13,928 19,328 24,893
Services(2) . . . . . . . . 5,489 6,097 8,734 11,936 16,906
------- ------- ------- ------- -------
Total cost of sales . 14,324 16,288 22,662 31,264 41,799
------- ------- ------- ------- -------
Gross profit . . . . . . . . . . 11,631 14,793 20,675 31,318 37,833
Operating expenses:
Selling, general and
administrative . . . . . . 11,118 12,345 14,359 20,302 24,748
Research and development . 3,198 2,590 3,207 6,109 7,665
Restructuring costs, net. . -- 350 -- -- --
Insurance recovery, net . . -- (1,125)(3) -- -- --
------- ------- ------- ------- -------
Total operating
expenses. . . . . . . 14,316 14,160 17,566 26,411 32,413
------- ------- ------- ------- -------
Income (loss) from operations. . (2,685) 633 3,109 4,907 5,420
Interest income. . . . . . . . . 81 61 151 1,257 1,541
Interest expense . . . . . . . . (170) (89) (71) (42) (129)
------- ------- ------- ------- -------
Income (loss) before income tax
expense (benefit) . . . . . . . (2,774) 605 3,189 6,122 6,832
Income tax expense (benefit) . . -- 74 (1,313)(4) (2,795)(4) 2,233
------- ------- ------- ------- -------
Net income (loss). . . . . . . . $(2,774) $ 531 $ 4,502 $ 8,917 $ 4,599
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income (loss) per common
share(5). . . . . . . . . . . . $ (0.36) $ 0.06 $ 0.48 $ .83 $ .39
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average number of
shares outstanding. . . . . . . 7,632 9,165 9,365 10,708 11,742
SLA SYSTEMS DATA:
SLA systems shipped (unaudited). 58 59 73 120 151
Cumulative number of SLA systems
shipped (unaudited) . . . . . . 338 397 470 590 741
Page 24
AT DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital(6). . . . . $ 6,331 $ 7,197 $11,722 $50,022 $49,764
Total assets(6) . . . . . . 22,009 24,594 30,465 81,551 92,239
Short-term debt . . . . . . 442 200 -- -- 100
Long-term liabilities,
excluding current portion. 1,077 1,288 1,474 1,622 6,273
Stockholders' equity. . . . 15,039 14,685 19,985 62,950 68,703
(1) Includes SLA systems and related equipment, resins, software and other
component parts as well as rentals of equipment.
(2) Includes maintenance, services provided by the Company's Technology Centers
and training services.
(3) Reflects net benefits of an insurance settlement payment received by the
Company from its insurance carrier related to a claim to recover costs
incurred by the Company in connection with a patent infringement suit.
(4) Includes the recognition of deferred tax assets, in accordance with SFAS
No. 109, of $1.5 million in 1994 and $3.0 million in 1995. See
"Management's Discussion and Analysis of Results of Operations and
Financial Condition - Results of Operations."
(5) All periods presented have been adjusted to reflect the one-for-three
reverse stock split effected on May 23, 1995. Per share data for 1992
through 1995 reflect the issuance of approximately 3.2 million shares
(post-split) in connection with the Company's rights offering in June 1992.
(6) Includes $710,000, $766,000 and $722,000 of restricted cash at December 31,
1994, 1995 and 1996, respectively. See Note 17(c) of Notes to Consolidated
Financial Statements
Page 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company's revenues are generated by product and service sales. Product
sales are comprised of the sale of SLA systems and related equipment, resins,
software, and other component parts, as well as rentals of SLA systems. Service
sales include revenues from maintenance, services provided by the Company's
Technology Centers and customer training.
The following table sets forth certain operating amounts and ratios as a
percentage of total sales except as otherwise indicated:
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS, EXCEPT PERCENT DATA)
Sales:
Products. . . . . . . . . . $28,848 $43,544 $53,229
Services. . . . . . . . . . 14,489 19,038 26,403
------- ------- -------
Total sales. . . . . . 43,337 62,582 79,632
------- ------- -------
Cost of sales:
Products. . . . . . . . . . 13,928 19,328 24,893
Services. . . . . . . . . . 8,734 11,936 16,906
------- ------- -------
Total cost of sales. . 22,662 31,264 41,799
------- ------- -------
Total gross profit . . . . . . . 20,675 31,318 37,833
% of total sales . . . . . . . . 47.7% 50.0% 47.5%
Gross profit - products . . 14,920 24,216 28,336
% of total product sales. . 51.7% 55.6% 53.2%
Gross profit - services . . 5,755 7,102 9,497
% of total service sales. . 39.7% 37.3% 36.0%
Selling, general and
administrative expenses . . . . 14,359 20,302 24,748
% of total sales . . . . . . . . 33.1% 32.4% 31.1%
Research and development
expenses. . . . . . . . . . . . 3,207 6,109 7,665
% of total sales . . . . . . . . 7.4% 9.8% 9.6%
------- ------- -------
Page 26
YEARS ENDED DECEMBER 31, (CONTINUED)
-----------------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS, EXCEPT PERCENT DATA)
Income from operations . . . . . $ 3,109 $ 4,907 $ 5,420
% of total sales . . . . . . . . 7.2% 7.8% 6.8%
Interest income (expense), net . 80 1,214 1,412
% of total sales . . . . . . . . .2% 1.9% 1.8%
Income tax benefit (expense) . . 1,313 2,796 (2,233)
% of total sales . . . . . . . 3.0% 4.5% (2.8%)
------- ------- -------
Net income . . . . . . . . . . $ 4,502 $ 8,917 $ 4,599
% of total sales . . . . . . . 10.4% 14.2% 5.8%
------- ------- -------
------- ------- -------
Page 27
The following table sets forth for the periods indicated total revenues
attributable to each of the Company's major products and services groups:
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- ---------
(IN THOUSANDS)
Products:
SLAs and related equipment. . . $18,645 $29,931 $38,230
Resins. . . . . . . . . . . . . 6,414 8,168 10,563
Software, other component
parts and rentals . . . . . . 3,789 5,445 4,436
------- ------- -------
Total products . . . . . . 28,848 43,544 53,229
------- ------- -------
Services:
Maintenance . . . . . . . . . . 11,650 14,322 21,341
Technology Centers. . . . . . . 2,453 4,230 4,227
Training. . . . . . . . . . . . 386 485 835
------- ------- -------
Total services . . . . . . 14,489 19,038 26,403
------- ------- -------
Total sales. . . . . . . . . . . . . $43,337 $62,582 $79,632
------- ------- -------
------- ------- -------
Products:
SLAs and related equipment. . . 43.0% 47.8% 48.0%
Resins. . . . . . . . . . . . . 14.8 13.1 13.3
Software, other component
parts and rentals . . . . . . . 8.8 8.7 5.6
------- ------- -------
Total products . . . . . . 66.6 69.6 66.9
------- ------- -------
Services:
Maintenance . . . . . . . . . . 26.9 22.9 26.8
Technology Centers. . . . . . . 5.6 6.7 5.3
Training. . . . . . . . . . . . 0.9 0.8 1.0
------- ------- -------
Total services . . . . . . 33.4 30.4 33.1
------- ------- -------
Total sales. . . . . . . . . . . . . 100.0% 100.0 % 100.0%
------- ------- -------
------- ------- -------
1996 COMPARED TO 1995
SALES. Sales in 1996 were $79.6 million, an increase of 27% over the $62.6
million recorded during 1995.
Product sales in 1996 increased $9.7 million or 22% to $53.2 million compared to
$43.5 million in 1995. The increase was primarily the result of increased
shipments of SLAs in both the U.S and Europe. The Company sold a total of 151
SLA systems in 1996, comprised of 5 SLA-190's, 56 SLA-250's, 40 SLA-350's (the
Company's newest SLA system which features the new Zephyr-TM- recoater, a solid
state laser and an automatic resin re-filling system) and 50 SLA-500's (the
Company's largest and highest priced system). In 1995, the Company sold 120
SLAs, comprised of 5 SLA-190's, 63 SLA-250's and 52 SLA-500's. Orders for the
Company's SLA systems in 1996 (compared to
Page 28
1995) increased in Europe but declined in both the U.S. and Asia-Pacific
markets and total SLA systems backlog at the end of 1996 was lower than the
end of 1995.
The Company believes that the decline in the U.S. orders in 1996 (when
compared to 1995) was due primarily to the performance, and termination, of a
number of the Company's independent domestic sales representatives
("agents"), and, to a lesser extent, to competitive pressures. The Company's
domestic marketing strategy has focused on a strong internal sales
organization, as well as the utilization of agents (primarily, independent
sales representatives in the machine tools industry). During 1996, these
sales agents however were not producing the level of sales expected by the
Company. Additionally, the Company believed it could obtain better
visibility and contact with its customers by utilizing a direct sales force.
Accordingly, in August 1996, the Company terminated its arrangements with all
of its sales agents and began recruiting additional personnel to strengthen
the internal sales and support organization. Between September 1, 1996 and
December 31, 1996, the Company completed the hiring of ten additional sales
persons. Although the Company offered its agents the opportunity to enter
into new arrangements with the Company, at lower commission rates than under
the prior agreements, to date no agents have entered into new agreements.
Because of the long cycle for SLA systems sales, the Company does not
anticipate that these additions to its internal sales organization will
significantly increase domestic sales in the first half of 1997. While
historically there has not always been an accurate correlation between orders
and ending backlog in one year and revenues in the next year, the decline in
U.S. orders in 1996, coupled with potential inefficiencies caused by the
recent changes in the Company's domestic sales organization, could negatively
impact domestic revenues during the first half of 1997. The Company
anticipates that European orders should increase in 1997 as compared to 1996
primarily as a result of an increased sales force. However, this is a
forward-looking statement and as with other such statements are subject to
uncertainties. As a result of competitive pricing pressures or other market
conditions, European orders may not increase in 1997.
The Company believes that SLA system sales may also fluctuate on a quarterly
basis as a result of a number of other factors, including the status of world
economic conditions, fluctuations in foreign currency exchange rates and the
timing of product shipments (the current U.S. list price of an SLA-500, for
example, is $490,000; thus the acceleration or delay of a small number of
shipments from one quarter to another can significantly affect the results of
operations for the quarters involved).
During 1997, there are several additional factors which may impact quarterly
sales. During 1996, the Company introduced two new products, the SLA-350 Series
10, a new, advanced SLA system and the low-priced Actua 2100 office modeler
(which uses a technology completely different from stereolithography), designed
for operation in engineering and design offices. During May 1996, the Company
began commercial shipments of the SLA-350. As a result of certain technical
issues, which the Company believes to be resolved, commercial shipments of the
Company's Actua 2100 were delayed until late December, 1996 (the Company shipped
a total of six commercial units in December 1996). The possibility exists that
the announcement and introduction of these new products may have caused, and may
cause in the future, potential customers of the Company who were considering
the purchase of one of the Company's other models to defer their purchase
decision until further information is available as to the performance and
reliability of the new products. Further delays in shipments of new products may
also occur as a result of unexpected problems encountered in actual use.
Service sales in 1996 increased $7.4 million, or 39%, compared to 1995,
primarily as a result of increased maintenance revenues due to the larger
installed base of SLA systems in the U.S. and Europe as well as from greater
sales (approximately $648,000) of SLA upgrades (primarily Zephyr upgrades) to
existing SLA customers. The Company anticipates that sales of Zephyr upgrades in
1997 will be significantly lower compared to 1996.
COST OF SALES. Cost of sales increased to $41.8 million or 52% of sales in 1996
compared to $31.3 million or 50% of sales in 1995.
Product cost of sales as a percentage of product sales increased to 47% in 1996
compared to 44% in 1995. The increase in 1996 was primarily the result of the
stronger dollar in 1996, as compared to 1995; greater discounting of European
SLA system sales in 1996 due to competition; and increased manufacturing
expenses as a result of the Company's new and larger manufacturing facility in
Grand Junction, Colorado. The Company's gross profit margins on product sales
are affected by several factors including, among others, sales mix, distribution
channels and
Page 29
fluctuations in foreign currency exchange rates and, therefore, may
vary in future periods from those experienced during 1996. Additionally, the
Company anticipates that the gross margins related to the Actua 2100 system will
be lower than margins on its SLA systems, and, if revenues from the sales of
Actua 2100 represent a material portion of the Company's product sales, gross
margins from product sales would be reduced. The Company also anticipates that
gross margins related to the Actua 2100 will be lower during the initial phases
of production as a result of certain inefficiencies and anticipates, in the
event of increased production, that Actua 2100 gross margins could increase as a
result of lower per unit material costs (due to greater purchasing economies)
and increased manufacturing efficiencies. Additionally, the Company anticipates
that gross margins relating to the SLA 250 may be lower than historical margins
due to the introduction in January 1997 of the SLA-250 Series 30A (an entry
level SLA priced at $99,000 with a lower profit margin than other SLA systems)
and the approximately 20% price reduction of the SLA-250 Series 40 and Series 50
effected by the Company in January 1997.
Service cost of sales as a percentage of service sales increased to 64% in 1996
compared to 63% in 1995, primarily as a result of lower margins from the
Company's U.S. Technology Center due to the Technology Center's testing of both
new hardware and software products as well as the increased use of outside
vendors for certain rapid prototyping applications in 1996. The decreased
margins from the U.S. Technology Centers were partially offset, however, by
improved margins from field service operations due to the more profitable Zephyr
upgrades delivered in 1996 compared to those upgrades offered in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("S,G&A") expenses increased $4.4 million or 22% in 1996 compared
to 1995, primarily as a result of expanded sales and marketing programs in both
Europe and the U.S. The Company currently anticipates that S,G&A expenses will
be higher in 1997 compared to 1996 due primarily to the expansion of the
Company's U.S. direct sales distribution channel. The Company currently
anticipates that if its revenues continue to grow, S,G&A expenses as a
percentage of total sales in future quarters should begin to decline, primarily
as a result of economies of scale. However, these are forward-looking
statements and as with other such statements are subject to uncertainties. For
example, if sales do not continue to grow over the period, it is less likely
that S,G&A expenses as a percentage of total sales would decline.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses in
1996 increased approximately $1.6 million or 25% compared to 1995. The increase
in R&D expenses in 1996 was primarily the result of the write-off during the
third quarter of 1996 of acquired in-process technology valued at $430,000 in
connection with the Keltool acquisition (see Note 7 of Notes to Consolidated
Financial Statements) as well as the Company's efforts towards the development
of the Actua 2100 and certain other development projects. Based on the Company's
historical expenditures related to research and development and its current
development goals, the Company anticipates for the foreseeable future, research
and development expenses will be equal to approximately ten percent of sales.
However, this is a forward-looking statements and, as with any such statement,
is subject to uncertainties. For example, if total sales of the Company for any
particular period do not meet the anticipated sales of the Company for that
period, research and development expenses as a percentage of sales may exceed
10%.
OPERATING INCOME. Operating income in 1996 was 6.8% of total sales compared to
7.8% of total sales in 1995. The decrease in the percentage of operating income
to total sales in 1996 was primarily attributable to increases in cost of sales
(both products and services) in 1996, as described above.
OTHER INCOME AND EXPENSES. Interest income increased to $1.5 million in 1996
from $1.3 million in 1995, primarily as a result of the investment of funds from
the Company's stock offering which was completed in June 1995.
Interest expense increased to $128,860 in 1996 from $41,967 in 1995 primarily
as a result of the Company's financing of its Colorado facility which was
effected August 20, 1996 (see Note 11 of Notes to Consolidated Financial
Statements).
Page 30
PROVISION FOR INCOME TAXES (BENEFITS). The Company's tax expense in 1996 was
$2.2 million or 33% of pre-tax income, compared to a tax benefit of $2.8 million
in 1995. During the third quarter of 1995, the Company realized a net income tax
benefit of $2.9 million which included a deferred tax benefit resulting from the
recognition of deferred tax assets of $3.0 million (related primarily to net
operating loss carryforwards attributable to the Company's domestic operations).
The Company's tax rate in 1997 is expected to approximate 38%.
1995 COMPARED TO 1994
SALES. Sales in 1995 reached $62.6 million, an increase of 44% compared to
the $43.3 million recorded in 1994.
Product sales in 1995 increased $14.7 million or 51% compared to 1994. The
increase in product sales was primarily the result of increased shipments of
SLA systems, which management believes was the result of QuickCast-TM-, the
Company's investment casting application (introduced in June 1993), increased
participation by independent sales agents in domestic sales of SLA systems, as
well as the increased acceptance by industry of rapid prototyping equipment and
technology. The Company sold a total of 120 SLA systems in 1995, including 52
SLA-500's (the Company's largest and highest priced system), compared to 73
during 1994, including 29 SLA-500's.
Service sales in 1995 increased $4.5 million or 31% compared to 1994 primarily
as a result of increased maintenance revenues due to the larger installed base
of SLA systems in the U.S. and Europe and from increased capacity and demand for
services from the Company's Technology Centers. Sales by the Company's U.S.
Technology Center were adversely impacted during 1994 as a result of down-time
experienced during a portion of the first quarter of 1994 (as a result of the
January 17, 1994 Northridge earthquake) and by lower part yields caused by
certain experimental processes used during the first half of 1994.
COST OF SALES. Cost of sales increased to $31.3 million in 1995 from $22.7
million in 1994, but decreased as a percentage of sales to 50% in 1995 from 52%
in 1994.
Product cost of sales as a percentage of product sales decreased to 44% in
1995 compared to 48% in 1994. The decrease in 1995 was primarily the result of
the increased sales of SLA systems described above; the weaker U.S. dollar in
1995 compared to 1994; and increased manufacturing efficiencies due to the
higher level of production. These factors were partially offset by increased
commission payments to sales agents as a result of a greater portion of domestic
SLA systems sales occurring through sales agents in 1995 compared to 1994.
Service cost of sales as a percentage of service sales increased to 63% in
1995 compared to 60% in 1994, primarily as a result of lower margins on SLA
system upgrades offered in 1995 compared to 1994 and higher parts costs and
expenses related to maintenance services in 1995 compared to 1994. The decrease
in maintenance service margins was partially offset by improved margins from
Company's Technology Centers due increased efficiencies as a result of the
increase in sales described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1995 increased $5.9 million or 41% over 1994 but
decreased as a percentage of sales to 32% in 1995 from 33% in 1994. The
increase was primarily the result of increased domestic selling and marketing
expenses ($2.5 million) related to greater domestic sales and new product
introductions in 1995; increased European expenses ($1.2 million) as a result
of additional personnel, increased marketing expenses associated with new
product introductions and the weaker U.S. dollar in 1995 as compared to 1994;
and relocation expenses recognized in the fourth quarter of 1995 ($850,000)
related to the Company's move of its manufacturing and customer support
operations in 1996 to a new and larger facility in Colorado.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
1995 totaled $6.1 million or 9.8% of sales compared to $3.2 million or 7.4% of
sales in 1994. The increase of $2.9 million or 90% over 1994 was primarily the
result of salaries and wages related to additional employees and consultants and
increased materials and components in connection with expanding certain research
and development projects. Additionally, during
Page 31
1995, the Company paid $250,000 in fees related to the Company's acquisition
of the exclusive rights to certain technology.
OTHER INCOME AND EXPENSES. Interest income increased to $1.3 million in
1995 compared to $150,779 in 1994, primarily as a result of the Company's stock
offering which was completed in June 1995.
Interest expense decreased to $41,967 in 1995 from $70,273 in 1994
primarily as a result of lower fees and expenses associated with the Company's
bank line of credit in 1995 and lower imputed interest amortization due to the
lower balance of severance obligations in 1995 compared to 1994.
PROVISION FOR INCOME TAXES (BENEFITS). During the third quarter of 1995,
the Company realized a net income tax benefit of $2.9 million which included a
deferred tax benefit resulting from the recognition of deferred tax assets of
$3.0 million which was partially offset by provisions for federal and state
income taxes and foreign income taxes attributable to the Company's German
subsidiary. Under SFAS No. 109, the Company's is required to periodically
evaluate the realizability of its deferred tax assets (in this case, consisting
primarily of net operating loss carryforwards). When management believes that it
is more likely than not that the Company will be able to utilize the benefit of
its deferred tax assets, the Company is required to recognize such deferred tax
assets. Accordingly, in the third quarter of 1995, based upon its positive
cumulative income trends and projections for future taxable income in 1996, the
Company recognized deferred tax assets of $3.0 million or $.28 per share.
FOREIGN OPERATIONS
International sales accounted for 34.6%, 35.2% and 33.8% of total sales in
1994, 1995 and 1996, respectively. For information with respect to allocation
of sales among the Company's foreign operations, see Note 16 of Notes to
Consolidated Financial Statements.
The cost of sales of the Company's foreign operations has been
significantly higher than domestic costs of sales, primarily due to the
structure of transfer pricing by the Company to its foreign subsidiaries, which
are above the Company's cost.
Operating results of foreign operations have been substantially lower than
domestic operating results due to the structure of transfer pricing,
discussed above, the Company's determination to utilize other advantageous
tax planning strategies, and, to a lesser extent, the inefficiencies of size
inherent in maintaining three separate operations (one each in England,
France and Germany), as well as litigation costs.
To date, the Company has not entered into hedging transactions to protect
against changes in foreign currency exchange rates.
LIQUIDITY AND CAPITAL RESOURCES
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
---------- ---------- -------------
(IN THOUSANDS)
Cash and cash equivalents(1) . . . . . . . . $ 7,134 $ 39,025 $ 25,078
Short-term investments . . . . . . . . . . . -- -- 3,759
Working capital(1) . . . . . . . . . . . . . 11,722 50,022 49,764
Cash provided by (used for)
operating activities . . . . . . . . . . . . 3,005 2,953 (7,016)
Cash used for investing activities . . . . . (2,444) (4,720) (12,497)
Cash provided by (used for) financing
activities. . . . . . . . . . . . . . . . . (896) 33,837 5,384
- ----------------
(1) Includes $710,000, $766,000 and $722,000 of restricted cash at December 31,
1994, 1995 and 1996, respectively. See Note 17(c) of Notes to Consolidated
Financial Statements.
Page 32
Net cash provided by (used for) operating activities in 1994, 1995 and
1996 was $3.0 million, $3.0 million and $(7.0) million, respectively. The
negative cash flow from operations in 1996 was comprised primarily of an
increase in inventory ($5.7 million) as a result of an increase in finished
goods and Actua 2100 inventory components, an increase in lease receivables
($4.8 million), and an increase in accounts receivable ($5.1 million),
primarily as a result of the increase in sales during the fourth quarter of
1996 compared to the comparable prior year period, a greater portion of
European customers with extended pay terms in 1996 compared to 1995, and a
greater portion of shipments occurring later in the fourth quarter of 1996
compared to fourth quarter of 1995. These decreases were partially offset by
net income ($4.6 million), non cash depreciation and amortization ($3.6
million), and a decrease in deferred tax assets ($1.5 million). During the
third quarter of 1996, the Company began providing lease financing for
qualified U.S. customers. The leases are accounted for as sales-type leases
where the present value of the minimum payments, net of executory costs, are
recorded as sales. The Company expects to periodically sell a portion of the
lease receivables as a future source of financing.
Net cash used for investing activities in 1996 totaled $12.5 million and
was primarily the result of construction expenditures related to the
Company's Grand Junction, Colorado facility ($4.0 million), the net purchase
of short-term investments ($3.8 million), SLA equipment manufactured for use
as demonstration equipment ($2.0 million), and the purchase of computers and
manufacturing equipment due to an increase in personnel and increased
production capacity.
Net cash provided by financing activities in 1996 was the result of the
Company's financing of its Colorado facility through the issuance of $4.9
million in tax-exempt industrial revenue development bonds and by the exercise
of stock options by employees.
In July 1995, the Company extended its credit facility with Silicon
Valley Bank ("SVB") (the "Credit Facility"). Under the terms of the
agreement, which remains in effect through July 5, 1997, the Company can
borrow from SVB up to $4,000,000, at prime. The Credit Facility, which is
unsecured, contains certain financial covenants including the maintenance of
certain financial ratios, working capital, tangible net worth as well as
covenants limiting mergers, acquisitions, recapitalizations, dividends, loans
to others, and hypothecation of assets or corporate guarantees. Since
inception of the Credit Facility (June 1993) and at all times through
December 31, 1996, the Company has been in compliance with all financial
covenants then in effect and has not utilized the facility.
On June 26, 1995, the Company issued and sold 1,583,334 shares of common
stock pursuant to a public offering of its common stock at $16.75 per share
(the "Offering"). On June 29, 1995, the underwriters exercised their option
to purchase an additional 465,000 shares to cover over-allotments related to
the Offering (the "Overallotment"). Net proceeds from the Offering
(including the Overallotment), after deducting underwriting discounts,
commissions and related cash expenses, including payments in lieu of
fractional shares, was approximately $31,500,000. Concurrent with the
Offering, the Company's bank exercised its warrant to purchase 16,666 shares
of common stock at a price of $4.32 per share ($71,997 in the aggregate).
In connection with the Company's lawsuit filed against a European
competitor, the Company's German subsidiary, 3D Systems GmbH ("3D GmbH"),
obtained during April 1994 a bank guarantee of 1.1 million Deutschmarks
(approximately $722,000 at December 31, 1996). In connection with the bank
guarantee, 3D GmbH is required to maintain with its bank cash balances equal
to 1.1 million Deutschmarks (see Note 17(c) of Notes to Consolidated
Financial Statements).
The Company believes that funds generated from operations, existing
working capital and its current line of credit will be sufficient to satisfy
its anticipated operating requirements for at least the next twelve months.
There were no significant inflationary trends that impacted the Company in
1996.
NO EARTHQUAKE INSURANCE. The Company's principal executive offices are
located in a leased facility in Valencia, California -- an area which
experienced significant damage in the 1994 Northridge earthquake. The Company
does not currently carry insurance against earthquake-related risks.
Page 33
RECENT ACCOUNTING PRONOUNCEMENTS. In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 128 "Earning Per Share". SFAS No. 128 requires dual presentation
of newly defined basic and diluted earning per share on the face of the income
statement for all entities with complex capital structures. The accounting
standard is effective for fiscal years ending after December 15, 1997, including
interim periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements as of December 31, 1995 and 1996 and for each
of the three years in the period ended December 31, 1996 and the report of
Independent Public Accountants are included on pages F-1 to F-23 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
Page 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers of the Registrant required
by Item 401(b) of Regulation S-K is presented at the end of Part I of this Form
10-K. Information regarding directors of the Registrant required by Item 401 of
Regulation S-K and information regarding Directors and Executive Officers of
Registrant required by Item 405 of Regulation S-K will be presented under the
caption "Election of Directors" in the definitive Proxy Statement for the
Company's 1997 Annual Meeting of Shareholders, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K will be presented
under the captions "Election of Directors" and "Executive Compensation" in the
definitive Proxy Statement for the Company's 1997 Annual Meeting of
Shareholders, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K will be presented
under the caption "Principal Shareholders" in the definitive Proxy Statement for
the Company's 1997 Annual Meeting of Shareholders, and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K will be presented
under the caption "Transactions with Executive Officers and Directors" in the
definitive Proxy Statement for the Company's 1997 Annual Meeting of
Shareholders, and is incorporated herein by reference.
Page 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
a The following Consolidated Financial Statements, Financial Statement
Schedule and Exhibits are filed as part of this Annual Report on Form 10-K
as listed on page F1 of this document.
b REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1996.
c EXHIBITS
The following exhibits are included as part of this Annual Report on
Form 10-K and incorporated herein by this reference:
1.1 Arrangement Agreement (and related exhibits) among Registrant, 3-D
Canada and Avenue Hall Holding Corporation, dated as of May 19, 1993.
Incorporated by reference to Exhibit 1.1 to Form 8-B filed August 16,
1993 and the amendment thereto filed on Form 8-B/A filed on February
4, 1994.
1.2 Exchange Agreement among Registrant, 3-D Canada, Avenue Hall Holding
Corporation and Montreal Trust Company of Canada, dated as of May 19,
1993. Incorporated by reference to Exhibit 1.2 to Form 8-B filed
August 16, 1993 and the amendment thereto filed on Form 8-B/A filed
February 4, 1994.
2.1 Material captioned "United States Domestication of the Company" set
forth in the Information Circular (Proxy Statement) dated May 21,
1993, for the Annual Meeting of Shareholders of 3-D Canada, held on
June 25, 1993, filed with the Securities and Exchange Commission on
May 24, 1993.
2.2 Asset Purchase Agreement entered into as of December 31, 1990 by and
between Spectra-Physics GmbH and 3D Systems GmbH. Incorporated herein
by reference to Exhibit 2.1 to 3-D Canada's Current Report on Form 8-K
filed January 14, 1991 and the amendments thereto.
2.3 Agreement for transfer of a business entered into as of December 31,
1990 by and between Spectra-Physics (France) and 3D Systems France.
Incorporated herein by reference to Exhibit 2.2 to 3-D Canada's
Current Report on Form 8-K filed January 14, 1991 and the amendments
thereto.
2.4 Asset Purchase Agreement entered into as of December 31, 1990 by and
between Spectra-Physics Limited and 3D Systems, Inc. Limited
(England). Incorporated herein by reference to Exhibit 2.3 to 3-D
Canada's Current Report on Form 8-K filed January 14, 1991 and the
amendments thereto.
2.5 Amendment dated August 28, 1991 to Asset Purchase Agreement between 3D
Systems GmbH and Spectra-Physics GmbH dated December 29, 1990.
Incorporated herein by reference to Exhibit 2.4 to 3-D Canada's
Current Report on Form 8-K filed September 11, 1991.
3.1 Certificate of Incorporation of Registrant. Incorporated by reference
to Exhibit 3.1 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to
Form 8-B filed August 16, 1993 and the amendment thereto filed on Form
8-B/A filed on February 4, 1994.
4.1* 1989 Employee and Director Incentive Plan. Incorporated by reference
to Exhibit 4.1 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
- -----------------------
* Management contract or compensatory plan or arrangement.
Page 36
4.2* Form of Director Option Contract to be entered into pursuant to the
1989 Employee and Director Incentive Plan. Incorporated by reference
to Exhibit 4.2 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
4.3* Form of Officer Option Contract to be entered into pursuant to the
1989 Employee and Director Incentive Plan. Incorporated by reference
to Exhibit 4.3 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
4.4* Form of Employee Option Contract to be entered into pursuant to the
1989 Employee and Director Incentive Plan. Incorporated by reference
to Exhibit 4.4 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.1 Lease with respect to Valencia property dated as of July 12, 1988, by and
between 3D California and Valencia Tech Associates. Incorporated herein
by reference to Exhibit 3.1 to 3-D Canada's annual Report on Form 20-F for
the year ended December 31, 1987 (Reg. No. 0-16333).
10.2 Amendment No. 1 to Lease Agreement between 3D California and Katell
Valencia Associates, a California limited partnership, dated May 28, 1993.
Incorporated by reference to Exhibit 10.2 to Form 8-B filed August 16,
1993 and the amendment thereto filed on Form 8-B/A filed on February 4,
1994.
10.3 Agreement dated as of July 19, 1988, by and among 3D California, UVP,
Cubital, Ltd. and Scitex Corporation Ltd. Incorporated herein by reference
to Exhibit 3.10 to 3-D Canada's Annual Report on Form 20-F for the year
ended December 31, 1987 (Reg. No. 0-16333).
10.4 Exclusive License Agreement dated as of May 16, 1986, by and between 3D
California and UVP. Incorporated herein by reference to Exhibit 5 to 3-D
Canada's Registration Statement on Form 20-F (Reg. No. 0-16333).
10.5 Form of Subscription Agreement made as of the 18th day of April, 1989
between 3-D Canada and places pursuant to the private placement of special
warrants completed on April 27, 1989, together with all Schedules thereto,
and form of Confirmation of Agreement. Incorporated herein by reference
to Exhibit 2.6 to 3-D Canada's Annual Report on Form 20-F for the year
ended December 31, 1988.
10.6 Patent Purchase Agreement dated January 5, 1990 by and between 3D
California and UVP. Incorporated herein by reference to Exhibit 10.28 to
3-D Canada's Registration Statement on Form S-1 (Reg. No. 33-31789).
10.7 Security Agreement dated as of the 5th day of January, 1990 by and between
UVP and 3D California relating to security interest on UVP Patent.
Incorporated herein by reference to Exhibit 10.29 to 3-D Canada's
Registration Statement on Form S-1 (Reg. No. 33-31789).
10.8 Assignment of UVP Patent dated January 12, 1990 by UVP to 3D California.
Incorporated herein by Reference to Exhibit 10.30 to 3-D Canada's
Registration Statement on Form S-1 (Reg. No. 33-31789).
10.9 Exchange Agreement dated July 23, 1990 by and among 3-D Canada, 3D
California, CIBA-GEIGY Capital Corporation, Raymond S. Freed, Charles W.
Hull, Bethany Griffiths, Virginia Hiramatsu, Paul B. Warren and Edwin J.
Kaftal, together with all Exhibits thereto. Incorporated herein by
reference to Exhibit 10.30 to 3-D Canada's Registration Statement on
Form S-1 (Reg. No. 33-31789).
10.10 Research and Development Agreement entered into as of August 15, 1990
by and between 3D California and Ciba-Geigy Limited. Incorporated
herein by reference to Exhibit 10.32 to 3-D Canada's Current Report on
Form 8-K filed August 21, 1990 and the amendments thereto.
- ---------------------------
* Management contract or compensatory plan or arrangement.
Page 37
10.11 Distribution Agreement entered into as of July 1, 1990 by and between
3D California and Ciba-Geigy Limited. Incorporated herein by
reference to Exhibit 10.33 to 3-D Canada's Current Report on Form 8-K
filed August 21, 1990 and the amendments thereto.
10.12 Severance agreements: 10.12(a) Severance Agreement dated April 5,
1991 by and between 3-D Canada and Mr. Raymond S. Freed; and 10.12(b)
Severance Agreement dated May 15, 1991 by and between 3-D Canada and
Mr. Edwin J. Kaftal. Incorporated by reference to 3-D Canada's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, and
the amendments thereto.
10.13* Employment Agreement dated of as September 4, 1991, between 3D
California and Arthur B. Sims. Incorporated herein by reference to
Exhibit 10.14 to 3-D Canada's Annual Report on Form 10-K for the year
ended December 31, 1992, and the amendments thereto.
10.14* Employment Agreement dated as of September 6, 1991, between 3D
California and Gordon L. Almquist. Incorporated herein by reference
to Exhibit 10.15 to 3-D Canada's Annual Report on Form 10-K for the
year ended December 31, 1992, and the amendments thereto.
10.15* Employment Agreement dated as of October 31, 1991, between 3D
California and Edward M. Gloyne. Incorporated herein by reference to
Exhibit 10.16 to 3-D Canada's Annual Report on Form 10-K for the year
ended December 31, 1992, and the amendments thereto.
10.16* Employment Agreement dated as of June 29, 1992 between 3D California
and Richard P. Fedchenko. Incorporated herein by reference to Exhibit
10.18 to 3-D Canada's Annual Report on Form 10-K for the year ended
December 31, 1992, and the amendments thereto.
10.17 Form of Indemnification Agreement between Registrant and certain of
its executive officers and directors. Incorporated by reference to
Exhibit 10.18 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.18 Amendment No.1 to a Shareholders' Agreement, such Shareholders'
Agreement being dated as of April 10, 1991, among 1726 Holdings Ltd.,
a British Columbia corporation ("1726"), Lionheart Capital Corp., a
British Columbia corporation ("Lionheart"), 3-D Canada, and Raymond S.
Freed, Charles W. Hull, Bethany Griffiths, Virginia Hiramatsu, Paul B.
Warren and Edwin J. Kaftal (Freed, Hull, Griffiths, Hiramatsu, Warren
and Kaftal are collectively referred to as the "Founders"), dated as
of May 5, 1993, by and among 1726, Lionheart, 3-D Canada, the Founders
and Registrant. Incorporated by reference to Exhibit 10.19 to Form 8-B
filed August 16, 1993 and the amendment thereto filed on Form 8-B/A
filed on February 4, 1994.
10.19 Loan and Security Agreement, as amended, dated as of June 2, 1993, by
and between 3-D California, 3D Systems Inc. Limited (England), 3D
Systems France SARL, 3D Systems GmbH, 3D Systems Japan, Ltd. and
Silicon Valley Bank. Incorporated by reference to Exhibit 10.20 to
Form 8-B filed August 16, 1993 and the amendment thereto filed on Form
8-B/A filed on February 4, 1994.
10.20 Cross-Corporate Continuing Guaranty dated as of August 12, 1993,
executed by Registrant, 3D Systems Inc. Limited (England), 3D Systems
France SARL, 3D Systems GmbH, 3D Systems Japan, Ltd. and 3D California
in favor of Silicon Valley Bank. Incorporated by reference to Exhibit
10.21 to Form 8-B filed August 16, 1993 and the amendment thereto
filed on Form 8-B/A filed on February 4, 1994.
10.21 Warrant to Purchase Common Stock, dated August 12, 1993, granted by
Registrant in favor of Silicon Valley Bank. Incorporated by reference
to Exhibit 10.22 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.22 Antidilution Agreement dated as of August 12, 1993, by and between
Registrant and Silicon Valley Bank. Incorporated by reference to
Exhibit 10.23 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
- ----------------------
* Management contract of compensatory plan or arrangement.
Page 38
10.23 Registration Rights Agreement dated as of August 12, 1993, by and
between Registrant and Silicon Valley Bank. Incorporated by reference
to Exhibit 10.24 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.24 Assumption Agreement dated as of August 12, 1993, by and between 3D
Systems (Canada) Inc. and Silicon Valley Bank. Incorporated by
reference to Exhibit 10.25 to Form 8-B filed August 16, 1993 and the
amendment thereto filed on Form 8-B/A filed on February 4, 1994.
10.25 Letter Agreement dated July 31, 1993 by and among 3D California,
Silicon Valley Bank, and UVP, Inc. Incorporated by reference to
Exhibit 10.26 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.26 Standby Share Purchase Agreement dated as of May 26, 1992, by and
among 3-D Canada and Invesco MIM, C&S Investment Management, Ltd.,
Noland Carter, Prudential Portfolio Managers Limited, Fred C. Goad,
Jr., The Clark Estates, Inc., Foreign & Colonial Smaller Companies
PLC. Incorporated herein by reference to Exhibit 1.2 to 3-D Canada's
Registration Statement on Form S-2 (Reg. No. 33-46823).
10.27 Stock Purchase Agreement, as amended, dated as of September 30, 1986,
by and among 3D California, Lionheart Resources Corporation, a British
Columbia corporation, and 3-D Canada. Incorporated herein by
reference to Exhibit 4 to 3-D Canada's annual report on Form 20-F for
the year ended December 31, 1987 (Reg. No. 0-16333).
10.28 Security Agreement dated as of August 12, 1993, by and between
Registrant and Silicon Valley Bank. Incorporated by reference to
Exhibit 10.29 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.29 Letter of Understanding with respect to Loan and Security Agreement,
as amended, dated August 12, 1993, by and between 3-D California, 3D
Systems Inc. Limited (England), 3D Systems France SARL, 3D Systems
GmbH, 3D Systems Japan, Ltd. and Silicon Valley Bank. Incorporated by
reference to Exhibit 10.30 to Form 8-B filed August 16, 1993 and the
amendment thereto filed on Form 8-B/A filed on February 4, 1994.
10.30 Settlement Agreement and Release dated August 11, 1993, by and between
3D California, Federal Insurance Company and Chubb & Son, Inc.
Incorporated by reference to Exhibit 10.31 to Form 8-B filed August
16, 1993 and the amendment thereto filed on Form 8-B/A filed on
February 4, 1994.
10.31 Termination Agreement entered into as of January 1, 1990 by and among
3D California, The Japan Steel Works, Ltd. and 3D Systems Japan, Ltd.
Incorporated herein by reference to Exhibit 10.27 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1989.
10.32 Amendment to Termination Agreement dated April 13, 1993 by and among
3D California, The Japan Steel Works, Ltd. and 3D Systems Japan, Ltd.
Incorporated by reference to Exhibit 10.33 to Form 8-B filed August
16, 1993 and the amendment thereto filed on Form 8-B/A filed on
February 4, 1994.
10.33* Employment Agreement dated March 1, 1994, by and among the Registrant,
3D Systems, Inc., a California corporation and Charles W. Hull.
Incorporated herein by reference to Exhibit 10.1 to the Registrant's
Form 10-Q for the quarterly period ended July 1, 1994 filed on August
9, 1994.
10.34* Employment Letter dated February 8, 1993 among 3D Systems, Inc., a
California corporation and Robert Horrell. Incorporated herein by
reference to Exhibit 10.35 to the Registrant's Form 10-K for the year
ending December 31, 1993 filed on March 31, 1994.
10.35 Amendment to Loan Agreement dated as of August 3, 1994, by and between
3D Systems, Inc., 3D Systems Inc. Limited, 3D Systems France SARL, 3D
Systems GmbH and Silicon Valley Bank. Incorporated herein by
reference to Exhibit 10.36 to the Registrant's Form 10-Q for the
quarterly period ended September 30, 1994 filed on November 4, 1994.
- ----------------------
* Management contract of compensatory plan or arrangement.
Page 39
10.36 Amended Schedule to Loan and Security Agreement dated as of August 3,
1994, by and between 3D Systems, Inc., 3D Systems Inc. Limited, 3D
Systems France SARL, 3D Systems GmbH and Silicon Valley Bank.
Incorporated herein by reference to Exhibit 10.37 to the Registrant's
Form 10-Q for the quarterly period ended September 31, 1994 filed on
November 4, 1994.
10.37 Collateral Assignment, Patent Mortgage and Security Agreement dated as
of August 3, 1991, by and between 3D Systems, Inc., 3D Systems Inc.
Limited, 3D Systems France SARL, 3D Systems GmbH, 3D Systems
Corporation, 3D Systems (Canada) Inc. and Silicon Valley Bank.
Incorporated herein by reference to Exhibit 10.38 to the Registrant's
Form 10-Q for the quarterly period ended September 30, 1994 filed on
November 4, 1994.
10.38* Employment Agreement dated October 31, 1994, by and among the
Registrant, 3D Systems, Inc., a California corporation and Arthur B.
Sims. Incorporated by reference to Exhibit 10.39 to Form 10-K for the
year ended December 31, 1994.
10.39 Letter of intent dated March 7, 1995 by and between 3D Systems, Inc.,
a California corporation and CIBA-GEIGY Corporation, a New York
corporation. Incorporated by reference to Exhibit 10.40 to Form 10-K
for the year ended December 31, 1994.
10.40 Agreement dated October 4, 1995 between the Registrant and Mesa County
Economic Development Council, inc., a Colorado non-profit Corporation.
Incorporated herein by reference to Exhibit 10.1 to the Registrant's
Form 10-Q for the quarterly period ended September 29, 1995 filed
November 13, 1995.
10.41 Amendment No. 1 to Distribution Agreement dated May 5, 1995 between
Ciba Chemicals and the Registrant. Incorporated herein by reference
to Exhibit 10.40 to Amendment No. 1 to Registration Statement on Form
S-2 filed on May 25, 1995.
10.42 Registration and Indemnification Agreement dated June 1995 between the
Registrant and 1726 Holdings Canada, Inc. Incorporated herein by
reference to Exhibit 10.41 to Amendment No. 2 to Registration
Statement of Form S-2 filed on June 13, 1995.
10.43* Employment Agreement dated as of December 27, 1995 between the
Registrant and A. Sidney Alpert. Incorporated herein by reference to
Exhibit 10.43 to the Registrant's 10-K for the year ended December 31,
1995 filed on April 1, 1996.
10.44 Amendment dated July 5, 1995 to Loan and Security Agreement dated June
2, 1993, as previously amended, by and between the Registrant, 3D
California, 3D Systems, Inc. Limited, 3D Systems France SARL, 3D
Systems GmbH and Silicon Valley Bank.
10.45 License, Development, and OEM Agreement dated March 31, 1995 between
Spectra, Inc. and 3D Systems, Inc. [Confidential Treatment Requested].
Incorporated herein by reference to Exhibit 10.45 to the Registrant's
10-K for the year ended December 31, 1995 filed on April 1, 1996.
10.46* Employment letter dated April 11, 1996 between the Registrant and Mark
R. Bell. Incorporated herein by reference to exhibit 10.1 to the
Registrant's 10-Q for the quarterly period ended March 29, 1996 filed
on May 7, 1996.
10.47 Asset Purchase Agreement dated as of August 30, 1996 by and between 3D
Systems, Inc., a California corporation, Keltool, Inc. a Minnesota
corporation and Wayne Duescher. Incorporated herein by reference to
Exhibit 10.1 to the Registrant's 10-Q for the quarterly period ended
September 27, 1996 filed on November 12, 1996.
10.48 Warrant Agreement dated September 9, 1996 by and between 3D Systems,
Inc., a California corporation and Keltool, Inc. a Minnesota
corporation. Incorporated herein by reference to Exhibit 10.2 to the
Registrant's 10-Q for the quarterly period ended September 27, 1996
filed on November 12, 1996.
- ---------------------
* Management contract of compensatory plan or arrangement.
Page 40
10.49 Non-Competition Agreement dated September 9, 1996 by and between 3D
Systems, Inc., a California corporation and Wayne O. Duescher.
Incorporated herein by reference to Exhibit 10.3 to the Registrant's
10-Q for the quarterly period ended September 27, 1996 filed on
November 12, 1996.
10.50* Employment Agreement dated as of February 6, 1996 between the
Registrant and Eugen J. Geyer.
10.51* Employment Agreement dated October 28, 1996 between the Registrant and
Richard D. Balanson.
10.52 Amendment dated July 5, 1996 to Loan and Security Agreement dated June
2, 1993, as previously amended, by and between the Registrant and
Silicon Valley Bank.
11.1 Computation of Per Share Earnings.
22.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants - Coopers & Lybrand L.L.P.
27 Financial Data Schedule
- ------------------
* Management contract or compensatory plan or arrangement.
Page 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
3D SYSTEMS CORPORATION
By: /s/ Gordon L. Almquist
---------------------------------
Gordon L. Almquist
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Date: 3/25/97
-------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Date Title
- --------- ---- ------
/s/ Arthur B. Sims 3/21/97 Chief Executive Officer And
- ----------------------------- Chairman of the Board of
Directors (Principal Executive
Officer
/s/ Gordon L. Almquist 3/25/97 Chief Financial Officer and Vice
- ----------------------------- President, Finance (Principal
Financial Officer and Principal
Accounting Officer)
Signature Date Title
- --------- ---- ------
/s/ Charles W. Hull 3/24/97 Chief Operating Officer,
- ----------------------------- President and Director
/s/ A. Sidney Alpert 3/21/97 Vice President, General Counsel
- ----------------------------- and Secretary
/s/ Donald S. Bates 3/21/97 Director
- -----------------------------
/s/ Miriam V. Gold 3/21/97 Director
- -----------------------------
/s/ John D. Beadsmoore 3/21/97 Director
- -----------------------------
/s/ Jim D. Kever 3/24/97 Director
- -----------------------------
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
- ----------- ----------- ------------
10.50 Employment Agreement dated as of February 6, 1996
between the Registrant and Eugen J. Geyer.
10.51 Employment Agreement dated October 28, 1996 between
the Registrant and Richard D. Balanson.
10.52 Amendment dated July 5, 1996 to Loan and Security
Agreement dated June 2, 1993, as previously amended,
by and between the Registrant and Silicon Valley Bank.
11.1 Computation of Per Share Earnings.
22.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants - Coopers
& Lybrand, L.L.P.
27 Financial Data Schedule
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS PAGE
- --------------------------------- ----
Report of Independent Public Accountants . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 . . . . . F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996. . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996. . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996. . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1994, 1995 and 1996. . . . . . . . . . . . . . . . . F-7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
- -----------------------------------------
Report of Independent Public Accountants on Financial Statement Schedule. . F-23
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . F-24
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
3D Systems Corporation
We have audited the accompanying consolidated balance sheets of 3D Systems
Corporation and Subsidiaries as of December 31, 1995 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of 3D Systems
Corporation and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Los Angeles, California
February 20, 1997
F-2
3D SYSTEMS CORPORATION
Consolidated Balance Sheets
ASSETS December 31, 1995 December 31, 1996
----------------- -----------------
Current assets:
Cash and cash equivalents. . . . . . . . . . $38,258,927 $24,356,441
Restricted cash (Note 17(c)) . . . . . . . . 766,000 722,000
Short-term investments (Note (2d)) . . . . . . - 3,759,492
Accounts receivable, less allowances
for doubtful accounts of $368,399
(1995) and $406,178 (1996). . . . . . . . . 14,439,863 19,601,383
Current portion of lease receivables . . . . - 987,362
Inventories (Note 4) . . . . . . . . . . . . 6,627,317 12,309,588
Deferred tax assets (Note 14). . . . . . . . 5,301,118 2,958,227
Prepaid expenses and other current
assets. . . . . . . . . . . . . . . . . . . 1,608,203 2,332,337
----------- -----------
Total current assets . . . . . . . . . . 67,001,428 67,026,830
Property and equipment, net (Notes 5 and 18). . 8,940,571 14,452,504
Licenses and patent costs, net (Note 6) . . . . 3,520,500 3,660,568
Deferred tax assets (Note 14) . . . . . . . . . 1,029,000 1,821,000
Lease receivables, less current portion . . . . - 3,773,573
Other assets. . . . . . . . . . . . . . . . . . 1,059,507 1,504,382
----------- -----------
$81,551,006 $92,238,857
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . $ 5,305,349 $ 3,805,930
Accrued liabilities (Note 9). . . . . . . . . 6,672,261 6,890,343
Current portion of long-term debt (Note 11) . - 100,000
Customer deposits . . . . . . . . . . . . . . 1,233,305 894,111
Deferred revenues . . . . . . . . . . . . . . 3,768,121 5,572,892
----------- -----------
Total current liabilities. . . . . . . . 16,979,036 17,263,276
----------- -----------
Other liabilities (Note 10) . . . . . . . . . . 1,621,515 1,472,991
Long-term debt, less current portion (Note 11). - 4,800,000
----------- -----------
18,600,551 23,536,267
----------- -----------
Commitments and Contingencies (Note 17):
Stockholders' equity (Note 12):
Preferred stock, $.001 par value. Authorized
5,000,000 shares; none issued
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
11,279,232 (1995) and 11,358,892 (1996). . . 11,279 11,359
Capital in excess of par value. . . . . . . . 71,850,602 72,527,768
Accumulated deficit . . . . . . . . . . . . . (8,907,788) (4,308,471)
Cumulative translation adjustment . . . . . . (3,638) 471,934
----------- -----------
Total stockholders' equity. . . . . . . 62,950,455 68,702,590
----------- -----------
$81,551,006 $92,238,857
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
F-3
3D SYSTEMS CORPORATION
Consolidated Statements of Operations
Years ended December 31, 1994, 1995 and 1996
1994 1995 1996
------------ ------------ ------------
Sales:
Products. . . . . . . . . . . . . . . $28,848,437 $43,543,618 $53,228,089
Services. . . . . . . . . . . . . . . 14,488,862 19,038,323 26,403,414
------------ ------------ ------------
Total sales . . . . . . . . . . . . 43,337,299 62,581,941 79,631,503
------------ ------------ ------------
Cost of sales:
Products. . . . . . . . . . . . . . . 13,928,125 19,328,055 24,893,210
Services. . . . . . . . . . . . . . . 8,734,307 11,935,564 16,905,678
------------ ------------ ------------
Total cost of sales . . . . . . . . 22,662,432 31,263,619 41,798,888
------------ ------------ ------------
Gross profit. . . . . . . . . . . . . . 20,674,867 31,318,322 37,832,615
------------ ------------ ------------
Operating expenses:
Selling, general and administrative
(Note 18). . . . . . . . . . . . . . 14,359,151 20,302,494 24,747,871
Research and development (Note 7) . . 3,207,216 6,108,799 7,665,092
------------ ------------ ------------
Total operating expenses. . . . . . 17,566,367 26,411,293 32,412,963
------------ ------------ ------------
Income from operations. . . . . . . . . 3,108,500 4,907,029 5,419,652
Interest income . . . . . . . . . . . . 150,779 1,256,597 1,541,229
Interest expense. . . . . . . . . . . . (70,273) (41,967) (128,860)
------------ ------------ ------------
Income before income taxes. . . . . . . 3,189,006 6,121,659 6,832,021
Provision for income taxes (benefit)
(Note 14). . . . . . . . . . . . . . . (1,313,000) (2,795,663) 2,232,704
------------ ------------ ------------
Net income. . . . . . . . . . . . . . . $ 4,502,006 $ 8,917,322 $ 4,599,317
------------ ------------ ------------
------------ ------------ ------------
Net income per share. . . . . . . . . . $ .48 $ .83 $ .39
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of shares
outstanding during the period 9,365,034 10,707,825 11,741,635
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
F-4
3D Systems Corporation
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1995 and 1996
Common
Stock Capital in Cumulative Total
Par Value Excess of Par Accumulated Translation Stockholders'
Shares $.001 Value Deficit Adjustment Equity
---------- --------- ------------- ------------ ----------- -------------
Balance at December 31, 1993. . . . 9,154,384 $ 9,154 $37,566,116 $(22,327,116) $(562,988) $14,685,166
Exercise of stock options
(Note 12(b)) . . . . . . . . . . . 1,666 2 13,912 - - 13,914
Net income. . . . . . . . . . . . . - - - 4,502,006 - 4,502,006
Cumulative translation adjustment . - - - - 783,931 783,931
---------- --------- ------------- ------------ ----------- -------------
Balance at December 31, 1994. . . . 9,156,050 9,156 37,580,028 (17,825,110) 220,943 19,985,017
Issuances of common stock
(Note 12(c)) . . . . . . . . . . . 2,064,842 2,065 31,587,103 - - 31,589,168
Exercise of stock options
(Note 12(b)) . . . . . . . . . . . 58,340 58 412,871 - - 412,929
Tax benefit related to
non-qualified stock options. . . . - - 1,835,000 - - 1,835,000
Contributed land (Note 18). . . . . - - 435,600 - - 435,600
Net income. . . . . . . . . . . . . - - - 8,917,322 - 8,917,322
Cumulative translation adjustment . - - - - (224,581) (224,581)
---------- --------- ------------- ------------ ----------- -------------
Balance at December 31, 1995. . . . 11,297,232 11,279 71,850,602 (8,907,788) (3,638) 62,950,455
Exercise of stock options
(Note 12(b)) . . . . . . . . . . . 79,660 80 484,141 - - 484,221
Issuance of warrants related to
Keltool acquisition (Note 7). . . . - - 193,025 - - 193,025
Net income. . . . . . . . . . . . . - - - 4,599,317 - 4,599,317
Cumulative translation adjustment . - - - - 475,572 475,572
---------- --------- ------------- ------------ ----------- -------------
Balance at December 31, 1996. . . . 11,358,892 $11,359 $72,527,768 $(4,308,471) $471,934 $68,702,590
---------- --------- ------------- ------------ ----------- -------------
---------- --------- ------------- ------------ ----------- -------------
See accompanying notes to
consolidated financial statements.
F-5
3D SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1995 and 1996
Cash flows from operating activities: 1994 1995 1996
------------ ------------ ------------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 4,502,006 $ 8,917,322 $ 4,599,317
Adjustments to reconcile net income to net
cash provided by (used for) operating
activities:
Deferred income taxes. . . . . . . . . . . . . . . . . . (1,483,000) (4,846,600) 1,549,717
Depreciation of property and equipment . . . . . . . . . 1,415,706 1,801,278 2,506,044
Amortization of licenses and patent costs. . . . . . . . 553,675 515,811 586,243
Amortization of software development costs . . . . . . . 247,465 435,758 509,327
Realized non cash foreign currency loss (gain) . . . . . 400,989 - -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (1,109,723) (7,355,901) (5,104,652)
Lease receivables . . . . . . . . . . . . . . . . . . . - - (4,760,935)
Inventories . . . . . . . . . . . . . . . . . . . . . . (1,241,541) (2,046,571) (5,673,675)
Prepaid expenses and other current assets . . . . . . . (123,439) (938,842) (763,492)
Other assets. . . . . . . . . . . . . . . . . . . . . . (609,126) (637,799) (986,547)
Accounts payable. . . . . . . . . . . . . . . . . . . . 455,827 2,599,705 (1,002,793)
Accrued liabilities . . . . . . . . . . . . . . . . . . 992,495 2,936,785 232,641
Customer deposits . . . . . . . . . . . . . . . . . . . (1,480,948) 767,964 (339,194)
Deferred revenues . . . . . . . . . . . . . . . . . . . 298,635 1,334,208 1,758,444
Other liabilities . . . . . . . . . . . . . . . . . . . 185,724 136,113 (126,681)
----------- ----------- ------------
Net cash provided by (used for) operating activities. 3,004,745 3,619,231 (7,016,236)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . . . . . (3,126,420) (5,753,722) (9,431,540)
Disposition of property and equipment . . . . . . . . . . . 819,098 613,885 1,413,563
Increase in licenses and patent costs . . . . . . . . . . . (137,133) (246,275) (719,994)
Purchase of short term investments. . . . . . . . . . . . . - - (8,444,148)
Proceeds from short term investments. . . . . . . . . . . . - - 4,684,656
----------- ----------- ------------
Net cash used for investing activities. . . . . . . . (2,444,455) (5,386,112) (12,497,463)
----------- ----------- ------------
Cash flows from financing activities:
Net proceeds from stock offering. . . . . . . . . . . . . . - 31,589,168 -
Exercise of stock options and warrants. . . . . . . . . . . 13,914 412,929 484,221
Repayments of note payable. . . . . . . . . . . . . . . . . (200,000) - -
Tax benefit related to non-qualified stock options. . . . . - 1,835,000 -
Restricted cash . . . . . . . . . . . . . . . . . . . . . . (710,000) - -
Proceeds from long term debt. . . . . . . . . . . . . . . . - - 4,900,000
----------- ----------- ------------
Net cash (used for) provided by financing activities. (896,086) 33,837,097 5,384,221
----------- ----------- ------------
Effect of exchange rate changes on cash . . . . . . . . . . 262,440 (234,812) 226,992
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents. . . . . (73,356) 31,835,404 (13,902,486)
Cash and cash equivalents at the beginning of the period. . . 6,496,879 6,423,523 38,258,927
----------- ----------- ------------
Cash and cash equivalents at the end of the period. . . . . . $ 6,423,523 $38,258,927 $ 24,356,441
----------- ----------- ------------
----------- ----------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 62,352 $ 31,556 $ 103,667
----------- ----------- ------------
----------- ----------- ------------
Income taxes. . . . . . . . . . . . . . . . . . . . . . 191,493 $ 461,010 $ 1,708,808
----------- ----------- ------------
----------- ----------- ------------
See accompanying notes to consolidated financial statements.
F-6
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1994, 1995 and 1996
(1) ORGANIZATION AND BUSINESS
3D Systems Corporation (the "Company") develops, produces and markets
Stereolithography Apparatus ("SLA") systems and related resins, parts and
services. 3D Systems, Inc., a California based corporation ("3D
California"), an indirect wholly-owned subsidiary of the Company, directly
and through its subsidiaries, conducts substantially all of the Company's
business.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year
consolidated financial statements to conform to the current year
presentation.
(b) SALES AND CONCENTRATION OF CREDIT RISK
Revenues from the sale of stereolithography equipment and related
products is recognized upon shipment and satisfaction of
significant vendor obligations, if any. The Company provides end
users with up to one year of free maintenance and warranty
services, and defers a portion of its revenues for these costs at
the time of sale. After the initial period, the Company offers
these customers optional maintenance contracts; revenue related to
these contracts is deferred and recognized ratably over the period
of the contract. To date, the Company has not experienced any
significant warranty claims or product returns.
Credit is extended based on an evaluation of each customer's
financial condition. To reduce credit risk in connection with
sales of SLA systems, the Company may, depending upon the
circumstances, require significant deposits prior to shipment and
may retain a security interest in the SLA systems until fully paid.
The Company often requires international customers to furnish
letters of credit. To date, the Company has not incurred any
significant credit related losses.
The Company invests its excess cash in interest bearing deposits
with major banks, commercial paper and money market funds.
Although a majority of the cash accounts exceed the federally
insured deposit amount, management does not anticipate
non-performance by the financial institutions. Management reviews
the stability of these institutions on a periodic basis.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents. The carrying value of these instruments approximates
market value because of their short maturity.
(d) INVESTMENTS
The Company's short-term investments are classified as held to
maturity and recorded at amortized cost under the provisions of
SFAS No. 115.
F-7
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
(e) LEASES
At the inception of a lease, the gross lease receivable, the
reserve for potential losses, the estimated residual value of the
leased equipment and the unearned lease income are recorded. The
unearned lease income represents the excess of the gross lease
receivable plus the estimated residual value over the cost of the
equipment leased and is recorded in deferred revenue.
(f) INVENTORIES
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market value.
(g) PROPERTY AND EQUIPMENT
Property and equipment is carried at cost and depreciated on a
straight-line basis over the estimated useful lives of the related
assets, generally five years. Leasehold improvements are amortized
on a straight-line basis over their estimated economic 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.
(h) 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.
(i) LONG TERM ASSETS
The carrying value of long term assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the
expected nondiscounted future operating cash flow derived from such
assets are less than their carrying value.
(j) CAPITALIZED SOFTWARE COSTS
Certain software development and production costs are capitalized
upon a product's reaching technological feasibility. As of December
31, 1995 and 1996, the Company had cumulatively capitalized
software development costs of $2,575,582 and $2,916,664,
respectively. Costs capitalized in 1995 and 1996 were $607,552 and
$341,082, respectively. Amortization of software development costs
begins when the related products are available for market.
Amortization expense amounted to $247,465, $435,758 and $509,327
for 1994, 1995 and 1996, respectively, based on the straight-line
method using estimated useful lives of two years. Net capitalized
costs aggregated $692,969 and $524,724 at December 31, 1995 and
1996, respectively, and are included in other assets in the
accompanying consolidated balance sheets.
(k) FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign operations are
translated at the end of the period exchange rates; revenues and
expenses are translated at the average exchange rates prevailing
during the period. The effect of the unrealized exchange rate
fluctuations on translating foreign currency assets and liabilities
into U.S. dollars are accumulated as a separate component of
stockholders' equity. Gains and losses resulting from foreign
currency transactions are included in operations during the period
realized. The aggregate foreign exchange gains (losses) included
in operations were $(436,240), $143,108 and $8,773 for 1994, 1995
and 1996, respectively. To date, the Company has not entered into
hedging transactions to protect against changes in foreign currency
exchange rates.
F-8
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
(l) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
(m) NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is computed based upon the
weighted average number of shares of common stock and common stock
equivalents (e.g., options and warrants) outstanding.
(n) ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses
were approximately $833,000, $1,407,000 and $1,955,000 for the
years ended 1994, 1995 and 1996, respectively.
(o) ESTIMATES
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
(p) STOCK - BASED COMPENSATION
In 1996 the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation". This standard establishes a fair value
method for accounting for stock-based compensation plans either
through recognition or disclosures. The Company adopted this
standard by choosing the disclosure option rather than expense
recognition. See note 12(b) and (e).
(3) LEASES
1996
------------
Total minimum lease payment receivable $4,402,152
Estimated unguaranteed residual value 358,783
------------
Gross investment in leases 4,760,935
Unearned income (848,228)
------------
Total investment in leases $3,912,707
------------
------------
Short-term interest in leases $ 691,920
Long-term interest in leases $3,220,787
Future minimum lease payments to be received:
1997 $ 987,362
1998 1,117,606
1999 1,117,606
2000 915,968
2001 263,610
F-9
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
(4) INVENTORIES
Components of inventories at December 31, 1995 and 1996 are as follows:
1995 1996
------------ ------------
Raw materials $ 2,100,269 $ 4,517,981
Work in process 2,022,565 1,226,627
Finished goods 2,504,483 6,564,980
------------ ------------
$ 6,627,317 $12,309,588
------------ ------------
------------ ------------
(5) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 are summarized as
follows:
1995 1996
------------ ------------
Land and building $ 435,600 $ 4,613,051
Machinery and equipment 8,829,827 12,477,147
Office furniture and equipment 1,861,702 2,302,613
Leasehold improvements 1,617,215 1,809,169
Rented equipment 622,483 676,669
Construction in progress 2,133,289 461,010
------------ ------------
15,500,116 22,339,659
Less accumulated depreciation
and amortization (6,559,545) (7,887,155)
------------ ------------
$ 8,940,571 $14,452,504
------------ ------------
------------ ------------
(6) LICENSES AND PATENT COSTS
Licenses and patent costs, at December 31, 1995 and 1996 are summarized
as follows:
1995 1996
------------ ------------
Licenses, at cost $ 2,332,862 $ 2,582,862
Patent costs 4,382,093 4,852,087
------------ ------------
6,714,955 7,434,949
Less accumulated amortization (3,194,455) (3,774,381)
------------ ------------
$ 3,520,500 $ 3,660,568
------------ ------------
------------ ------------
(a) In 1995 and 1996, the Company incurred and capitalized $315,200 and
$469,995, respectively, of costs to develop and extend patents in
the United States, Japan, Europe and certain other countries and
expensed previously capitalized patent costs of $97,431 and
$341,302, respectively.
F-10
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
(b) Effective January 5, 1990, 3D California acquired the patents for
stereolithography technology from UVP, Inc. ("UVP") in exchange for
$9,075,000, $500,000 of which was paid in cash and $350,000 in
offsets of costs incurred by the Company on behalf of UVP. The
initial payment and offsets ($850,000) have been capitalized and
are being amortized over the remaining life of patents
(approximately 6 years at December 31, 1996). The agreement
further provided for payment deferrals during 1990 through 1992
aggregating $950,000. The Company accrues royalty expense based
upon the sales levels of SLA machines under the agreement, up to a
maximum of $8,225,000. In 1994, 1995 and 1996, royalty expense
aggregated $306,424, $567,916 and $674,182, respectively, and is
included in cost of sales-products in the accompanying consolidated
statements of operations. Royalty obligations at December 31, 1995
and 1996 are $1,517,916 and $1,624,182 respectively, and are
included in the accompanying consolidated balance sheets (see Notes
9 and 10). In the event the Company licenses the acquired
technology to a third party, the Company is required to pay UVP 50%
of the royalties it receives up to an aggregate maximum of
$8,225,000, including the Company's payments based on sales levels
of its SLA machines. UVP has retained a security interest in the
purchased technology until the purchase price is fully paid.
(c) The excess of the cost of the Company's investment in 3D California
over the related underlying equity in the net assets of the
subsidiary at the date of acquisition ($2,011,707) has been
attributed to the licenses and patents of 3D California and is
being amortized on the same basis as the underlying licenses and
patents.
(7) ACQUISITION
On September 9, 1996, 3D California, purchased substantially all of the
assets and business operations of Keltool, Inc. ("Keltool"), of St.
Paul, Minnesota, a Company which produces steel tooling for plastic
injection molding machines based on a patented process using sintered
powdered steel. Acquired in-process technology valued at $430,000 was
expensed immediately. The purchase price paid by the Company included
$1,740,000 payable in cash (of which $875,000 was paid on September 9,
1996 and $865,000 paid on October 10, 1996), the assumption of certain
liabilities ($13,000) and the value of warrants to purchase 50,000
shares of the Company's common stock at an exercise price of $14.75 per
share ($193,000). The warrants were issued at fair market value and
expire on September 9, 1999.
The allocation of the purchase consideration for Keltool is as follows:
Trade receivables $ 72,000
Inventory 46,000
Equipment 505,000
In process research and development projects 430,000
Intangible assets 893,000
----------
$1,946,000
-----------
-----------
The results of operations relating to Keltool from September 9, 1996
through December 31, 1996 are included with those of the Company and
were not significant.
(8) NOTE PAYABLE
In July 1996, the Company extended its credit facility with Silicon
Valley Bank ("SVB") (the "Credit Facility"). Under the terms of the
agreement, which remains in effect through July 5, 1997, the Company can
borrow from SVB up to $4,000,000, at prime. The Credit Facility, which
is unsecured, contains certain financial covenants including the
maintenance of certain financial ratios, working capital, tangible net
worth as well as covenants limiting mergers, acquisitions,
recapitalizations, dividends, loans to others, and hypothecation of
assets or corporate guarantees. Since inception of the Credit Facility
(June 1993) and at all times through December 31, 1996, the Company has
not utilized the facility.
F-11
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
(9) ACCRUED LIABILITIES
Accrued liabilities at December 31, 1995 and 1996 are as follows:
1995 1996
------------ ------------
Payroll and related taxes $ 486,143 $ 926,645
Profit sharing contribution 200,000 229,966
Rent 383,158 368,575
Vacation 654,737 905,918
Commissions 1,016,341 839,251
Bonuses 917,413 812,412
Colorado relocation 850,000 98,122
Value Added Tax 67,270 80,784
Warranty 362,531 397,671
Legal fees 228,167 197,724
Deferred compensation 126,757 126,757
UVP royalties 567,916 674,182
Sales tax 52,033 414,660
Other 759,795 817,676
------------ -------------
$6,672,261 $6,890,343
------------ -------------
------------ -------------
(10) OTHER LIABILITIES
Other liabilities at December 31, 1995 and 1996 are as follows:
1995 1996
------------ -------------
Royalty payable $ 950,000 $ 950,000
Retirement plan 310,735 329,039
Deferred compensation 146,494 15,380
Other 214,286 178,572
------------ -------------
$1,621,515 $1,472,991
------------ -------------
------------ -------------
F-12
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
(11) LONG-TERM DEBT
On August 20, 1996, the Company completed a $4.9 million variable rate
industrial development bond financing of its Colorado facility.
Interest on the bonds are payable monthly (the interest rate at December
31, 1996 was 3.84%). Principal payments are payable in semi-annual
installments beginning in February 1997 through August 2016. The bonds
are collateralized by an irrevocable standby letter of credit issued by
Norwest Bank Minnesota, N.A. which is further collateralized by the
building and related machinery and equipment as well as a standby letter
of credit issued by SVB in the amount of approximately $1.3 million.
The terms of the letters of credit require the Company to maintain
specific levels of minimum tangible net worth, debt to equity ratio and
quick ratio. Annual maturities of long-term debt are as follows:
1997 $ 100,000
1998 95,000
1999 100,000
2000 110,000
2001 120,000
thereafter 4,375,000
----------
Total 4,900,000
Less current portion 100,000
----------
Long-term debt $4,800,000
----------
----------
(12) STOCKHOLDERS' EQUITY AND STOCKHOLDERS' RIGHTS PLAN
(a) On March 21, 1995, the Board of Directors approved a one-for-three
reverse stock split of the Company's common stock which was effected
on May 23, 1995. All references in these consolidated financial
statements to the number of shares of common stock and per share
amounts have been retroactively adjusted to reflect the reverse
stock split.
(b) On May 23, 1996, the Company's stockholders approved the 1996 Stock
Incentive Plan (the "1996 Plan") and the 1996 Stock Option Plan for
Non-Employee Directors (the "Director Plan"). The maximum number of
shares of Common Stock that may be issued pursuant to options granted
under the 1996 Plan and Director Plan is 1,300,000 and 200,000,
respectively. Granting of options under both plans expire on
March 21, 2006. The 1996 Plan also provides for "reload options",
which are options to purchase additional shares if a grantee uses
already-owned shares to pay for an option exercise. The Company also
has a 1989 Plan in which options for substantially all common shares
have been issued as of December 31, 1996. The 1989 Plan expires in
1999 unless terminated earlier by the Board of Directors. The option
price per share under all plans is equal to the fair market value on
the date of grant. The vesting periods and exercise periods for all
plans, except the Director Plan, are determined at the discretion of
the Compensation Committee of the Board of Directors. The majority of
options issued under the 1996 Plan and the 1989 Plan vest 25%
annually, commencing one year from the date of grant and expire
between six and ten years from date of grant. Under the Director Plan,
each non-employee director ("outside director") of the Company will
automatically be granted annually non-statutory stock options to
purchase 7,500 shares of Common Stock. Each option issued under
the Director Plan vests in equal annual installments over a three
year period beginning on the first anniversary and expires ten years
from the date of grant. Prior to the adoption of the Director Plan,
each outside director was automatically granted annually non-statutory
stock options to purchase 3,333 shares of Common Stock under the 1989
Plan, as amended, beginning in 1993.
F-13
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
A summary of the status of the Company's stock options is summarized below:
1994 1995 1996
------------------------------------------------------------
Wgtd. Wgtd. Wgtd.
Avg. Avg. Avg.
Exer. Exer. Exer.
Shares Price Shares Price Shares Price
------------------------------------------------------------
Outstanding at beginning of year 678,054 $ 5.35 735,686 $ 5.89 688,990 $ 6.12
Granted 76,000 10.58 25,600 16.55 961,401 15.51
Exercised (1,667) 8.35 (58,340) 7.08 (87,091) 6.52
Lapsed or canceled (16,701) 4.80 (13,956) 9.44 (13,881) 7.21
------- ------- ---------
Outstanding at year end 735,686 $ 5.89 688,990 $ 6.12 1,549,419 $11.91
------- ------- ---------
------- ------- ---------
Options exercisable at year end 418,654 525,383 472,135
Options available for future grant -- 164,655 717,114
Weighted average fair value of
options granted during the year: -- $ 7.99 $ 10.50
The following table summarizes information about stock options outstanding at
December 31, 1996:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------------
Wgtd. Avg.
Number Remaining Wgtd. Avg. Number Wgtd. Avg.
Outstanding Contractual Exercise Outstanding Exercise
Range of Exercise Price: at 12/31/96 Life Price at 12/31/96 Price
-------------------------------------- -----------------------------
$ 3.00 to $4.99 305,048 3.32 $ 4.73 234,531 $ 4.69
5.00 to 9.99 203,866 3.98 5.44 202,032 5.42
10.00 to 14.99 658,499 9.41 10.72 30,861 11.31
15.00 to 19.99 21,599 7.77 16.65 4,711 17.12
20.00 to 24.50 360,407 9.04 23.53 - -
--------- -------
3.00 to 24.50 1,549,419 7.39 $11.91 472,135 $ 5.56
--------- -------
--------- -------
As of December 31, 1996, options for 532,900 shares, 170,000 shares and
14,214 shares of Common Stock were available for grant under the 1996
Plan, Director Plan and 1989 Plan, respectively (717,114 shares in the
aggregate).
The 1996 Plan and 1989 Plan also provide for the issuance of Stock
Appreciation Rights (SARs) and Limited Stock Appreciation Rights
(LSARs). As of December 31, 1996, no SARs or LSARs have been issued.
(c) On June 26, 1995, the Company issued 1,583,334 of common stock
pursuant to a public offering of its common stock at $16.75 per
share (the "Offering"). On June 29, 1995, the underwriters exercised
their option to purchase an additional 465,000 shares to cover
overallotments related to the Offering (the "Overallotment"). Net
proceeds from the Offering (including the Overallotment), after
deducting underwriting discounts, commissions and related cash
expenses including payment in lieu of fractional shares, was
approximately $31,500,000. Concurrent with the Offering, the
Company's bank exercised its warrant to purchase 16,666 shares of
common stock at a price of $4.32 per share ($71,997 in the
aggregate).
F-14
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
(d) In December 1995, the Company's Board of Directors adopted a
Shareholders Rights Plan (the "Plan"). Under the provisions of the
Plan, the Company distributed to its stockholders, rights entitling
the holders to purchase one-hundredth of a share of Series A
Preferred Stock for each share of Common Stock then held at an
exercise price of $75. Upon the occurrence of certain "triggering
events," each right entitles its holder to purchase, at the rights
then-current exercise price, a number of shares of common stock of
the Company having a market value equal to twice the exercise
price. A triggering event occurs ten days following the date a
person or group (other than an "Exempt Person"), without the
consent of the Company's Board of Directors, acquires 15% or more
of the Company's common stock or upon the announcement of a tender
offer or an exchange offer, the consummation of which would result
in the ownership by a person or group of 15% or more of the
Company's common stock. An Exempt Person includes Ciba Specialty
Chemicals Holding, Inc. (formerly Ciba-Geigy Limited) ("CSC
Holding"), which beneficially owned approximately 15.2% of the
issued and outstanding common stock of the Company at December 31,
1996. The Plan permits CSC Holding to increase its ownership
position in the Company up to 28.7% of the issued and outstanding
common stock of the Company without losing its status as an Exempt
Person. The rights will expire on December 3, 2005.
(e) The Company has adopted the disclosure-only option under SFAS No.
123, "Accounting for Stock Based Compensation," as of December 31,
1996. Pro forma information regarding net income and earnings per
share is required by SFAS No. 123, and has been determined as if
the Company had accounted for the Plans under the fair value method
of the Statement. The fair value of options issued under the Plans
was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions: no
dividend yield, volatility factor of the expected market price of
the Company's common stock of .60, a forfeiture rate of .05, a
weighted-average expected life of the options of 3.5 years and 4.0
years for 1995 and 1996, respectively and a risk-free interest rate
of 6.28% and 6.24% for 1995 and 1996, repectively. For purposes of
pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The
Company's pro forma net income and net income per common share
would approximate the following:
As Reported Pro Forma
------------- -----------
Year Ended December 31, 1996:
Net income $4,599,317 $3,473,417
Net income per share .39 .30
Year Ended December 31, 1995:
Net income $8,917,322 $8,888,952
Net income per share .83 .83
The effects of applying SFAS No. 123 in this proforma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards
prior to 1995, and additional awards in future years are anticipated.
(13) RELATED PARTY TRANSACTIONS
During 1994, 1995 and 1996, the Company purchased materials from an
indirect wholly-owned subsidiary of CSC Holding (a 15.2% beneficial
stockholder of the Company) aggregating approximately $4,134,000,
$5,984,000 and $6,457,000 respectively. In addition, there were no
sales to CSC Holding or its affiliates in 1994. Sales in 1995 and 1996
amounted to approximately $772,000 and $253,000. Approximately $140,000
of net accounts payable and $441,000 of net accounts receivable are
included in the accompanying consolidated balance sheet at December 31,
1995 and December 31, 1996, respectively.
(14) INCOME TAXES
The components of the Company's pretax income are as follows:
1994 1995 1996
------------ ------------ ------------
Domestic $3,218,926 $6,417,867 $ 9,126,264
Foreign (29,920) (296,208) (2,294,243)
------------ ------------ ------------
Total $3,189,006 $6,121,659 $ 6,832,021
------------ ------------ ------------
------------ ------------ ------------
F-15
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
The components of the Company's net deferred tax assets are as follows:
December 31, 1995 December 31, 1996
----------------- -----------------
Deferred tax assets:
Research tax credits $ 1,187,000 $ 1,985,000
Alternative minimum tax credits 272,000 360,000
California manufacturer credit -- 62,000
Net operating loss carryforwards 3,585,000 2,800,000
Inventory reserves 799,000 707,000
Accrued liabilities 1,466,000 1,228,000
Allowance for doubtful accounts 147,000 158,000
Patents and licenses 608,000 263,000
Property and equipment (excess tax
basis over book basis) -- 304,227
Goodwill -- 206,000
Deferred compensation 58,000 57,000
----------- -----------
Total deferred tax assets 8,122,000 8,130,227
Valuation allowance (837,000) (1,763,000)
----------- -----------
Net deferred tax assets 7,285,000 6,367,227
----------- -----------
Deferred tax liabilities:
Deferred lease revenue -- 1,328,000
Software development 33,000 250,000
Property and equipment (excess book
basis over tax basis) 921,882 --
Other -- 10,000
----------- -----------
Total deferred tax liabilities 954,882 1,588,000
----------- -----------
Net deferred tax assets $ 6,330,118 $ 4,779,227
----------- -----------
----------- -----------
The valuation allowance for deferred taxes was increased by $926,000
during 1996 primarily due to foreign net operating losses. Recognition
of deferred tax assets of $1,483,000 or $.16 per share of common stock
in 1994 and $3,012,118 or $.28 per share of common stock in 1995 was
based on the Company's recent positive income trend and estimates of
future taxable income. Although realization is not assured, management
believes it is more likely than not that the Company will realize the
benefit of the net deferred tax assets. The amount of the net deferred
tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward
period are reduced. Additionally, the valuation allowance at December
31, 1995 and 1996 relates exclusively to foreign deferred tax assets.
F-16
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
The components of income tax expense (benefit) for the years ended
December 31, 1994, 1995 and 1996 are as follows:
1994 1995 1996
----------- ----------- -----------
Current:
U.S. federal $ 92,000 $ 159,860 $ 417,733
State 31,000 32,657 244,080
Foreign 47,000 23,938 20,000
----------- ----------- -----------
Total current 170,000 216,455 681,813
----------- ----------- -----------
Deferred:
U.S. federal (1,249,000) (2,760,000) 1,037,000
State (234,000) (283,000) 533,000
Foreign -- 30,882 (19,109)
----------- ----------- -----------
Total deferred (1,483,000) (3,012,118) 1,550,891
----------- ----------- -----------
Total income tax expense (benefit) $(1,313,000) $(2,795,663) $ 2,232,704
----------- ----------- -----------
----------- ----------- -----------
The overall effective tax rate differs from the statutory federal tax
rate for the years ended December 31, 1994, 1995 and 1996, as follows:
% of Pretax Income
1994 1995 1996
----------- ----------- -----------
Tax provision based on the
federal statutory rate 34.0% 34.0% 34.0%
Alternative minimum taxes 2.8 2.6 1.8
State taxes, net of federal benefit (4.2) (2.7) 7.5
Utilization of net operating losses (34.0) (34.0) (17.8)
Foreign net operating losses with no
benefit recognition 27.8 2.3 16.9
Research tax credits -- -- (11.7)
Foreign taxes 1.5 .9 --
Recognition of deferred tax assets (69.1) (48.8) --
Other -- -- 2.0
----------- ----------- -----------
(41.2)% (45.7)% 32.7%
----------- ----------- -----------
----------- ----------- -----------
As of December 31, 1996, the Company has net operating loss
carryforwards for United States federal income taxes and foreign income
tax purposes of approximately $3,231,000 and $4,337,000, respectively.
The United States federal net operating loss carryforwards expire
through 2008 and the foreign net operating loss carryforwards expire
through 2001, except for certain operating losses which do not expire.
Ultimate utilization of these loss carryforwards is dependent on future
taxable earnings of the Company.
F-17
Approximately $4,813,000 of the United States federal and $1,586,000 of
state net operating loss carryforwards at December 31, 1994 related to tax
benefits available to the Company as a result of stock options exercised.
The tax benefit was credited to capital in excess of par value in 1995.
The Company has research and experimentation tax credit carryforwards for
United States federal and state income tax purposes of $1,504,000 and
$481,000, respectively, which are available through December 31, 2006 and
2007, respectively.
In addition, the Company has alternative minimum tax credit carryforwards
for United States federal income tax purposes at December 31, 1996 of
$360,000.
(15) EMPLOYEE BENEFIT PLAN
In 1989, 3D California adopted a defined contribution 401(k) plan (the
"Plan") for its employees. Employees must be at least 21 years of age and
must have at least 6 consecutive months of service with the Company to be
eligible for the Plan. Participants may contribute between 1% and 15% of
their compensation to the Plan. The Company may make discretionary
matching contributions limited to 50% of the employee contribution up to a
maximum of 3-1/2% of the employee's compensation or discretionary profit
sharing contributions. Participants are fully and immediately vested in
employee contributions and vest in employer contributions over a four year
period. For the years ended December 31, 1994, 1995 and 1996, the Company
accrued profit sharing contributions of $150,000, $200,000 and $229,966,
respectively, which were funded on March 2, 1995, March 12, 1996 and
March 5, 1997, respectively.
(16) GEOGRAPHIC SALES INFORMATION
All of the Company's assets are devoted to the manufacture and sale of
stereolithography products, together with related supplies and services.
Summarized data for the Company's operations are as follows:
Rest of
USA Germany Europe Japan Other Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1994:
Sales to unaffiliated customers $28,351,476 $ 8,392,826 $3,892,060 $ -- $ 2,700,937 $ -- $43,337,299
Inter-area sales 6,713,977 -- -- -- -- (6,713,977) --
Income (loss) from operations 3,111,880 12,250 (55,787) -- -- 40,157 3,108,500
Identifiable assets at
December 31, 1994 24,358,015 4,994,930 2,288,045 56,370 -- (1,232,387) 30,464,973
For the year ended
December 31, 1995:
Sales to unaffiliated customers 40,553,855 10,218,684 6,428,723 -- 5,380,679 -- 62,581,941
Inter-area sales 9,648,261 -- -- -- -- (9,648,261) --
Income (loss) from operations 6,168,211 (379,965) 23,703 -- -- (904,920) 4,907,029
Identifiable assets at
December 31, 1995 70,363,237 8,404,833 4,679,621 -- -- (1,896,685) 81,551,006
For the year ended
December 31, 1996:
Sales to unaffiliated customers 52,725,890 10,694,286 10,947,870 -- 5,263,457 -- 79,631,503
Inter-area sales 12,576,885 101,787 -- -- -- (12,687,672) --
Income (loss) from operations 7,165,565 (2,275,717) (148,418) -- -- 677,822 5,419,652
Identifiable assets at
December 31, 1996 76,431,217 7,682,057 8,333,161 -- -- (207,578) 92,238,857
Inter-area sales to the Company's foreign subsidiaries are recorded at
amounts consistent with prices charged to distributors, which are above
cost.
F-18
(17) COMMITMENTS AND CONTINGENCIES
(a) The Company leases its facilities under noncancelable operating leases
expiring through December 2002. The leases are generally on a
net-rent basis, whereby the Company pays taxes, maintenance and
insurance. Leases that expire are expected to be renewed or replaced
by leases on other properties. Rental expense for the years ended
December 31, 1994, 1995 and 1996 aggregated approximately $1,122,000,
$1,192,000 and $1,642,000, respectively.
Minimum annual rental commitments under the leases at December 31,
1996 are as follows:
Year ending December 31:
1997 $1,665,800
1998 1,510,400
1999 1,332,700
2000 1,220,800
2001 863,400
thereafter 1,001,700
----------
$7,594,800
----------
----------
(b) 3D California is a party to an agreement with Ciba Specialty
Chemicals, Inc. ("CSC") and certain of its subsidiaries (the
"Photopolymer Research Agreement"), dated August 15, 1990,
relating to the research and development of photopolymers,
photopolymerizable monomers and photoinitiators for use with
stereolithography technology. The agreement obligates each of
the parties to cooperate in the development of photopolymers,
photopolymerizable monomers and photoinitiators. The agreement
provides that the parties shall deal exclusively with each other
in the development of stereolithographic products except that: (a)
3D California may recommend to its customers products produced by
suppliers other than CSC in the event that another supplier produces
products suitable for stereolithography and CSC cannot produce a
product with similar performance parameters, (b) 3D California may
pursue the development of certain products developed pursuant to the
agreement if CSC determines it has no capabilities or interest in
such products, (c) CSC may cooperate in developing competing products
if such products involve new fields of technology in which 3D
California does not have and is not able within a reasonable time to
develop expertise.
As part of the Photopolymer Research Agreement, the parties have
agreed that if a change in control of the Company or 3D California
should occur, then at the option of CSC, 3D California will be
required to pay CSC an amount equal to CSC's "deferred research and
development costs", up to $10 million. A "change in control" is
defined to have occurred only if a person, or group of related
persons, becomes the beneficial owner of in excess of 31.4% of the
Company's outstanding voting securities (such percentage to be
ratably increased in the event of any sale by a CSC affiliate of
any of its shares of the Company's shares of common stock), unless
approved by CSC, or its indirect nominees to the Board of Directors
of the Company. "Deferred Research and Development Costs" means all
costs incurred by CSC during the five full fiscal years immediately
preceding the occurrence of a change in control, multiplied by two.
The existence of this provision may deter potential acquirers from
seeking to acquire the Company, or a significant interest in the
equity securities of the Company.
In connection with the Photopolymer Research Agreement, 3D California
entered into a Photopolymer Distribution Agreement with a subsidiary
of CSC, dated as of July 1, 1990, pursuant to which 3D California is
the exclusive worldwide distributor of photopolymers manufactured by
CSC. At the request of 3D California, an affiliate of CSC currently
sells such photopolymers in Japan to 3D California's Japanese
distributor. Subject to certain conditions,
F-19
so long as CSC provides adequate supplies, 3D California is required
to fill all of its requirements for its photopolymers through
purchases from CSC. In order to maintain its exclusive distribution
rights, 3D California must meet certain quotas based on the dollar
value of products purchased from CSC on an annual basis as set forth
in the agreement. 3D California has in the past failed to meet
quotas established under the agreement and, in May 1995, 3D California
and CSC mutually agreed to reduce the quotas to levels which 3D
California believes should be commercially obtainable. Subject to
certain conditions, the agreement will remain in effect until June 30,
1997 and will continue thereafter until either party gives the other
six months advance notice of termination.
(c) On May 24, 1993, 3D Systems, Inc. and its wholly-owned German
subsidiary, 3D Systems GmbH ("3D GmbH" and together with 3D Systems,
Inc. "3D"), filed a patent infringement lawsuit against EOS, a
European competitor. The lawsuit, filed in the Dusseldorf District
Court, Germany, seeks compensation from EOS for utilizing certain
technology in EOS's products which 3D alleges was incorporated in its
European patent application (the "3D Patent") and seeks damages from
EOS for using this technology related to the 3D Patent after the
patent's issuance by the European Patent Office. The lawsuit further
seeks reimbursement of attorneys fees as well as an order by the Court
barring EOS from marketing equipment using the technology contained in
the 3D Patent. On August 24, 1993, per 3D's request, the Dusseldorf
District Court ruled to transfer the case to the Munich District
Court. On November 18, 1993, the 3D Patent was issued by the European
Patent Office.
On February 21, 1994, 3D amended its complaint to include additional
infringement by EOS upon certain other 3D technology contained in a
German Utility Model issued to 3D by the German Patent Office (the
"GPO") on November 4, 1993 (the "3D Utility Model"). On March 1,
1994, a hearing was held in the Munich District Court (the "Court") at
which time the Court postponed a ruling on the lawsuit but ordered 3D
to post a performance bond in the amount of 1.1 million Deutschmarks
(approximately $722,000 at December 31, 1996) to cover certain
potential legal fees of EOS related to the lawsuit (in the event of
an unfavorable outcome to 3D) as a result of one of the plaintiffs
being a foreign corporation. During April 1994, 3D GmbH obtained a
bank guarantee in the amount of 1.1 million Deutschmarks which serves
as the required performance bond. In connection with the bank
guarantee, 3D GmbH is required to maintain with its bank compensating
cash balances equal to 1.1 million Deutschmarks. On May 31, 1994, EOS
notified the Court of its request made to the GPO to cancel the 3D
Utility Model.
On March 20, 1995, the GPO ruled to cancel the 3D Utility Model.
3D appealed the ruling of the GPO to the German Federal Patent Court
on April 3, 1995. On February 8, 1996 the Court ruled that EOS is
required to pay 3D GmbH adequate compensation for the unauthorized use
of the 3D Patent during the period from November 7, 1991 and the
patent issuance on November 18, 1993 (the "Infringement Period"), and
that 3D is obligated to reimburse EOS for certain attorney fees
incurred by EOS of approximately $70,000. The Court has not made a
final determination of certain additional legal fees and costs
which may be required to be borne by 3D. 3D expects that the
compensation for unauthorized use due from EOS should approximate
or exceed all amounts which may be due to EOS, however, the actual
amounts remain to be determined. The Court further ruled that EOS,
by redesigning its products, did not infringe the 3D Patent after
November 18, 1993. The Court further ruled that the action with
regard to the 3D Utility Model was suspended pending a
decision from the German Federal Patent Court on the validity of the
3D Utility Model. The parties have requested that the Federal Patent
Court delay its ruling regarding the validity of the 3D Utility Model.
3D has determined to appeal the Court's ruling. Regardless of the
outcome of the appeal of either the Court's ruling or the GPO ruling,
3D intends, to the extent that it continues to believe such actions to
be appropriate, to continue to prosecute its claims based upon its
European patents and the other utility models which are not a subject
of either appeal. While 3D has been advised by Bardehle Pagenberg
Dost Altenburg Frohwitter Geissler & Partner, counsel in this action,
that it is more likely than not that 3D will ultimately prevail in
this matter, no assurance can be given that 3D will be successful.
If 3D is unsuccessful in this litigation, total reimbursements by 3D
of EOS's legal fees and court costs could range as high as $650,000.
F-20
(d) On October 14, 1994, 3D GmbH notified a German customer of EOS,
Leopold Kostal GmbH & Co. KG ("Kostal"), of its intention to file
a patent infringement suit against Kostal for operating certain
equipment purchased from EOS (which 3D GmbH alleges incorporates
certain technology contained in the 3D Utility Model as well as
two other German Utility Models issued to 3D Systems, Inc. in
1994) unless Kostal immediately ceased to use the EOS equipment.
Additionally, the Company offered to waive its rights to any damages
against Kostal if Kostal would agree to purchase a stereolithography
system from the Company, at a discount from then current published
prices, as a replacement for the EOS system.
On October 24, 1994, Kostal rejected this offer and, on November 2,
1994, 3D GmbH filed a lawsuit against Kostal for infringement. The
lawsuit seeks compensation from Kostal for damages and attorneys fees
as well as an injunction barring Kostal from using the EOS equipment.
As noted above, on March 20, 1995, the GPO ruled to cancel the
initial 3D Utility Model. Subsequent thereto, Kostal introduced the
GPO ruling into this litigation. In addition, on April 19, 1995, EOS
filed cancellation requests against two other Utility Models of the
Company and has introduced this information into the Kostal litigation
as well.
On September 12, 1995, the court ruled to suspend a decision regarding
Kostal's alleged infringement of the two other German Utility Models
pending a decision concerning their validity by the GPO.
(e) On January 13, 1997, 3D Systems, Inc. (the "Company") filed a
complaint ("Complaint") in the United States District Court,
Central District of California, against Aarotech Laboratories,
Inc. ("Aarotech"), Aaroflex, Inc. ("Aaroflex") and Albert C. Young
("Young"). Aaroflex is the parent corporation of Aarotech. Young
is the Chairman of the Board and Chief Executive Officer of both
Aarotech and Aaroflex. The Complaint alleges that stereolithography
equipment manufactured by Aaroflex infringes on six of the Company's
patents. The Company seeks damages and injunctive relief from the
defendants. The defendants have threatened to sue the Company for
trade libel. To date, the defendants have not filed such a suit.
The defendants have filed a motion to dismiss the complaint or
transfer the case to their home district in Virginia. The Court
has set a hearing date on June 23, 1997 for the defendant's motion.
The Company believes, based in part on the advice of counsel, that it has
substantial defenses to the claims described above, and intends to
vigorously defend all legal actions, and that the likely outcome will not
have a material adverse effect on the financial condition and results of
operations of the Company.
(18) COLORADO FACILITY
On October 30, 1995, the Company executed an agreement with the Mesa
County Economic Development Council, Inc. ("MCEDC") in connection with the
Company's relocation of its manufacturing and customer support operations
from Valencia, California to Grand Junction, Colorado (the "Relocation").
The Relocation provided for the Company's construction of a 67,000 square
foot facility in Grand Junction (the "Facility") at a cost of approximately
$4 million. During the fourth quarter of 1995, the Company recognized
$850,000 of expenses associated with the Relocation (consisting primarily
of employee moving allowances and travel expenses and severance of an
estimated 28 manufacturing employees) and is included in selling, general
and administrative expenses in the accompanying consolidated statement of
operations for the year ended December 31, 1995.
In consideration for the Company's construction of its Facility along
with certain other intentions by the Company including the employment of at
least 100 people (including 70 local new hires), the payment of certain
minimum wage rates at the Facility, and the maintenance of the Facility for
a period of at least seven years, MCEDC granted to the Company certain
economic incentives, including ten acres of land. The value of the
incentives, estimated to worth approximately $775,000, vest (subject to
certain limitations and conditions) to the Company equally over a seven
year period beginning July 1, 1996. As of December 31, 1995, the Company
recorded the value of ten acres of land ($435,600) provided to the Company
under the MCEDC agreement and credited capital in excess of par value.
F-21
(19) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share data)
Quarter Ended
------------------------------------------------------------------------------------------
Mar. 31 June 30, Sept. 29, Dec. 31, Mar. 29, June 28, Sept. 27, Dec. 31,
1995 1995 1995(a) 1995(b) 1996 1996 1996(c) 1996(d)
------------------------------------------------------------------------------------------
Total sales $13,618 $14,657 $15,614 $18,691 $19,167 $18,555 $19,790 $22,120
Gross profit 7,126 7,219 7,640 9,332 9,512 8,959 9,498 9,864
Total operating
expense 5,766 5,804 6,185 8,655 8,028 8,051 8,299 8,035
Income from
operations 1,360 1,415 1,454 677 1,484 908 1,199 1,829
Income tax
expenses
(benefit) 90 100 (2,877) (108) 812 478 511 432
Net income 1,331 1,410 4,866 1,310 1,121 801 1,015 1,662
Net income per
share of
common stock .14 .14 .41 .11 .10 .07 .09 .14
(a) Includes the impact of recognition of deferred tax assets. See
Note 14.
(b) Includes relocation expenses of $850,000 related to the Company's
plans to move certain operations to Colorado in 1996. See Note 18.
(c) Includes write off of $430,000 of in-process technology relative to
the Keltool acquisition. See Note 7.
(d) Includes the recognition of $798,000 of additional research tax
credits. See Note 14.
Per share amounts for each of the quarterly periods presented do not
necessarily add up to the total presented for the year since each
amount is independently calculated.
The Company presents its quarterly results 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.
F-22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors
3D Systems Corporation
Our report on the consolidated financial statements of 3D Systems Corporation
and Subsidiaries is included on page F-2 of this Form 10-K. In connection
with our audits of such financial statements, we have audited the related
financial statement schedule as of December 31, 1994, 1995 and 1996 and for
each of the three years in the period ended December 31, 1996, as listed on
the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Los Angeles, California
February 20, 1997