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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended September 30, 2002
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the transition period from ______________ to_________________
Commission file number 1-13400
STRATASYS, INC.
-------------------
(Exact Name of registrant as Specified in Its Charter)
Delaware 36-3658792
--------------------------------- -----------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
14950 Martin Drive, Eden Prairie, Minnesota 55344
--------------------------------------------------
(Address of Principal Executive Offices)(Zip Code)
(952) 937-3000
---------------
(registrant's Telephone Number, Including Area Code)
Not Applicable
--------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the registrant: (1) 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
past 90 days. Yes X No ___
As of November 11, 2002, the registrant had 5,302,054 shares of Common
Stock, $.01 par value, outstanding.
STRATASYS, INC.
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements ............................................ 1
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 ..................................... 1
Consolidated Statements of Operations and Comprehensive
Income for the three and nine months ended
September 30, 2002 and 2001 ............................... 2
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 ............. 3
Notes to Financial Statements ............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 5
Item 4. Controls and Procedures .......................................... 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ................................ 13
Signatures ............................................................... 14
(i)
ITEM 1. FINANCIAL STATEMENTS
STRATASYS, INC.
CONSOLIDATED BALANCE SHEETS
==========================================================================================================
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,769,650 $ 10,211,398
Accounts receivable, less allowance for returns and
doubtful accounts of $475,691 in 2002 and $562,888 in 2001 11,228,513 12,132,738
Inventories 7,139,981 6,877,582
Prepaid expenses 388,331 558,879
Deferred income taxes 246,000 246,000
---------------------------------
Total current assets 30,772,475 30,026,597
---------------------------------
PROPERTY AND EQUIPMENT, net 5,766,638 6,006,529
---------------------------------
OTHER ASSETS
Intangible assets, net 3,055,883 3,288,222
Deferred income taxes 1,780,230 2,363,000
Other 130,717 266,997
---------------------------------
4,966,830 5,918,219
---------------------------------
$ 41,505,943 $ 41,951,345
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Obligations under capitalized leases $ 29,794 $ 130,320
Mortgage payable, current portion 59,997 54,994
Accounts payable and other current liabilities 3,886,670 3,736,284
Unearned maintenance revenue 4,359,835 4,510,751
---------------------------------
Total current liabilities 8,336,296 8,432,349
---------------------------------
MORTGAGE PAYABLE, less current portion 2,171,999 2,215,983
---------------------------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 15,000,000
shares, issued 6,468,291 shares in 2002 and
6,133,294 shares in 2001 64,683 61,333
Capital in excess of par value 34,752,884 32,943,974
Retained earnings 3,313,745 1,797,606
Accumulated other comprehensive loss (64,583) (72,084)
Less cost of treasury stock, 1,167,737 shares in 2002
and 740,400 shares in 2001 (7,069,081) (3,427,816)
---------------------------------
Total stockholders' equity 30,997,648 31,303,013
---------------------------------
$ 41,505,943 $ 41,951,345
=================================
See notes to financial statements.
1
STRATASYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
================================================================================================================================
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
2002 2001 2002 2001
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
SALES $ 12,028,475 $ 9,703,008 $ 28,536,472 $ 27,614,412
COST OF GOODS SOLD 4,326,895 3,771,738 11,069,358 11,052,528
--------------------------------- ---------------------------------
GROSS PROFIT 7,701,580 5,931,270 17,467,114 16,561,884
COSTS AND EXPENSES
Research and development 1,273,278 1,185,319 3,611,537 3,672,980
Selling, general and administrative 3,988,082 3,573,314 11,850,599 10,830,523
--------------------------------- ---------------------------------
5,261,360 4,758,633 15,462,136 14,503,503
--------------------------------- ---------------------------------
OPERATING INCOME 2,440,220 1,172,637 2,004,978 2,058,381
--------------------------------- ---------------------------------
OTHER INCOME (EXPENSE)
Interest income 36,325 78,442 117,228 282,973
Interest expense (44,051) (35,960) (135,313) (85,768)
Other (22,406) 91,051 133,582 (130,540)
--------------------------------- ---------------------------------
(30,132) 133,533 115,497 66,665
--------------------------------- ---------------------------------
INCOME BEFORE INCOME TAXES 2,410,088 1,306,170 2,120,475 2,125,046
INCOME TAXES 686,874 326,503 604,336 531,252
--------------------------------- ---------------------------------
NET INCOME $ 1,723,214 $ 979,667 $ 1,516,139 $ 1,593,794
================================= =================================
EARNINGS PER COMMON SHARE
Basic $ 0.32 $ 0.18 $ 0.28 $ 0.29
================================= =================================
Diluted $ 0.31 $ 0.18 $ 0.27 $ 0.29
================================= =================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic 5,326,904 5,470,107 5,346,650 5,472,785
================================= =================================
Diluted 5,529,858 5,487,212 5,616,378 5,480,021
================================= =================================
COMPREHENSIVE INCOME
NET INCOME $ 1,723,214 $ 979,667 $ 1,516,139 $ 1,593,794
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment 20,634 983 7,501 (18,386)
--------------------------------- ---------------------------------
COMPREHENSIVE INCOME $ 1,743,848 $ 980,650 $ 1,523,640 $ 1,575,408
================================= =================================
See notes to financial statements.
2
STRATASYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
==================================================================================================
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
(UNAUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,516,139 $ 1,593,794
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income taxes 582,770 519,013
Depreciation 1,197,353 1,048,159
Amortization 649,941 521,734
Loss on disposal of assets 119 32,297
Increase (decrease) in cash attributable to
changes in assets and liabilities
Accounts receivable 904,225 (901,466)
Inventories (612,389) 656,500
Prepaid expenses 170,548 250,536
Other assets 136,280 110,527
Accounts payable and other current liabilities 150,386 (808,481)
Unearned maintenance revenue (150,916) 345,338
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,544,456 3,367,951
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of machinery and equipment (607,591) (1,442,518)
Payments for intangible assets (417,602) (396,975)
--------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,025,193) (1,839,493)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of obligations under capitalized leases (100,526) (156,419)
Repurchase of treasury stock (3,641,265) (89,292)
Payments of mortgage payable (38,981) (8,209)
Net proceeds from the sale of common stock 1,812,260
--------------------------------
NET CASH USED IN FINANCING ACTIVITIES (1,968,512) (253,920)
--------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 7,501 (18,386)
--------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,558,252 1,256,152
CASH AND CASH EQUIVALENTS, beginning of period 10,211,398 6,737,306
--------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 11,769,650 $ 7,993,458
================================
See notes to financial statements.
3
NOTES TO FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The financial information herein is unaudited; however, such information
reflects all adjustments (consisting of normal, recurring adjustments) which
are, in the opinion of management, necessary for a fair statement of results for
the interim period. The results of operations for the three and nine months
ended September 30, 2002, are not necessarily indicative of the results to be
expected for the full year. Certain financial information and footnote
disclosure normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted. The reader is referred to the audited financial
statements and notes thereto for the year ended December 31, 2001, filed as part
of the Company's Annual Report on Form 10-K for such year.
Note 2--- Inventory
Inventories consisted of the following at September 30 and December 31,
respectively:
2002 2001
---- ----
Finished Goods $2,953,341 $4,539,943
Work in process 38,770
Raw materials 4,147,870 2,337,639
---------- ----------
Totals $7,139,981 $6,877,582
========== ==========
Note 3--Material Commitments
The Company has signed material commitments with several vendors for fixed
delivery of selected inventory expected to be supplied in the ensuing
twelve-month period. These commitments amount to approximately $3,300,000, some
of which contain non-cancellation clauses.
Note 4 -- Income per common share
The difference between the number of shares used to compute basic income
per share and diluted income per share relates to additional shares to be issued
upon the assumed exercise of stock options and warrants, net of shares
hypothetically repurchased at the average market price with the proceeds of
exercise. For the three months ended September 30, 2002 and 2001, the additional
shares amounted to 202,954 and 17,105, respectively. For the nine months ended
September 30, 2002 and 2001, the additional shares amounted to 269,728 and
7,236, respectively.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We develop, manufacture, and market a family of rapid prototyping devices
that enable engineers and designers to create physical models, tooling and
prototypes out of plastic and other materials directly from a computer aided
design ("CAD") workstation. Historically, our growth has come from sales to a
number of industries, including automotive, consumer products, electronics,
medical, and aerospace. Universities, other educational institutions, government
agencies, and service bureaus have also been significant markets for us. Our
current and future growth is largely dependent upon our ability to penetrate new
markets, and develop and market new rapid prototyping devices and applications
that meet the needs of our current and prospective customers. We intend to focus
our new product development on various rapid prototyping devices, modeling
materials, and software enhancements. In 2002, we have focused our primary
business strategy on expanding international and domestic sales of our existing
family of rapid prototyping devices, while maintaining on-going development of
new rapid prototyping equipment, modeling materials, services, and software.
We introduced Dimension(TM), our new 3-D printer, in February 2002.
Dimension offers ABS modeling capabilities in a 3-D Printer platform. The part
output from competitive 3-D printers has tended to be extremely fragile.
Dimension allows users to create parts from ABS, which offers part strength
required of true form, fit and function testing. We believe that Dimension,
introduced at a selling price of $29,900, is the lowest priced system in the
rapid prototyping market. Commercial shipments of Dimension systems commenced in
February 2002.
In March 2002 we introduced the Prodigy Plus(TM). This system incorporates
our WaterWorks(TM) soluble support system on the Prodigy(TM) platform, and is
further enhanced by the addition of our Insight(TM) software that offers speed
and performance improvements over those of our Benchtop systems. Commercial
shipments commenced in May 2002.
Aided by the successful introduction of the Dimension, where both orders
and shipments continued to exceed our expectations, net revenue in the third
quarter of 2002 increased to $12,028,475. Gross unit shipments in the third
quarter of 2002 increased to 162 systems from 60 systems in the third quarter of
2001. In addition, sales of our high-end systems, including our Maxum(TM) and
Titan(TM) systems, improved from the levels reported in the first half of 2002.
Total bookings in the quarter exceeded our plan, but our backlog declined by
approximately 35% from the backlog as of June 30, 2002. Our backlog consists of
both Dimensions and our high-end systems, the majority of which are expected to
ship in the fourth quarter of 2002.
We have continued to implement our 2002 strategy to expand our position in
the 3-D printing market and our core rapid prototyping businesses. We anticipate
that we will continue to control our expenses while we expand our revenue growth
from the results attained in 2001. We believe that the 3-D printing market
represents a significant growth area and that the introduction of Dimension will
have a significant positive impact on our 2002 results and beyond. However, we
remain fully committed to the continued growth of our historic core business,
which is currently served by our Maxum, Titan, Prodigy Plus, and FDM 3000
systems. We also believe that our service, consumable, and maintenance revenues
derived from our installed base of systems will also improve over the results
attained in 2001. Our ability to implement our strategy is subject to numerous
uncertainties, many of which are described in this Management's Discussion and
Analysis of Financial Condition and Results of Operations and in the section
below captioned "Forward Looking Statements and Factors That May Affect Future
Results of Operations." We cannot ensure that our efforts will be successful.
We believe that the rapid prototyping industry is growing at approximately
5-10% per year and that 3-D printers and office modelers account for more than
30% of the total units of rapid prototyping systems shipped. Furthermore, we
believe the 3-D Printing segment of this market is the fastest growing component
of the market, and that our Dimension system, based upon price and performance,
is positioned to capture an increased share of this market. We believe that
there is a long-term trend toward lower-priced rapid prototyping systems capable
of producing functional prototypes. This pricing trend should lead to growth in
the more traditional functional prototyping marketplace as companies
5
continue to address in-house rapid prototyping and concept-modeling needs.
Certain market segments in the industry have not demonstrated significant
pricing sensitivity. These segments are more interested in modeling envelope
size, modeling material, throughput, part quality, part durability, rapid
manufacturing, and rapid tooling, which should allow growth to continue for
higher priced rapid prototyping systems, such as our Maxum and Titan systems,
that address these needs.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2002 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2001
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated. All items are included in or
derived from our statement of operations.
For the quarters ended September 30,
2002 2001
---- ----
Net sales 100.0% 100.0%
Cost of sales 36.0% 38.9%
Gross margin 64.0% 61.1%
Selling, general, and administrative expenses 33.2% 36.8%
Research & development expense 10.6% 12.2%
Operating income 20.3% 12.1%
Other income (expense) (0.3%) 1.4%
Income before taxes 20.0% 13.5%
Income taxes 5.7% 3.4%
Net income 14.3% 10.1%
NET SALES
Net sales for the quarter ended September 30, 2002 were $12,028,475,
compared with net sales of $9,703,008 for the quarter ended September 30, 2001.
This represents an increase of $2,325,467, or 24.0%. Dimension sales were very
strong and exceeded our internal expectations, as did sales of our Titan and
Maxum systems. Revenues from consumables, maintenance, and other services also
increased in the quarter ended September 30, 2002 as compared with the same 2001
period. Maintenance and consumable revenue was enhanced by the larger installed
base of systems and continued emphasis on the sale of maintenance contracts.
Domestic sales accounted for approximately 55% of total revenue in the
third quarter of 2002, compared with approximately 60% recorded in the third
quarter of 2001. In the United States, our eastern region recorded the highest
revenue. Internationally, our European region reported the highest revenue,
which amounted to approximately 23% of total sales, compared with approximately
15% recorded in the comparable 2001 period. Our combined Asia Pacific region,
which comprises Japan, China, the Far East and India, accounted for
approximately 21% of total revenue in the third quarter of 2002, similar to the
results reported for the comparable 2001 period. We believe that sales into our
Asia Pacific, European, and eastern USA regions will remain strong throughout
the remainder of 2002. However, declining economic conditions in any of these
regions could adversely impact our future sales and profitability.
6
GROSS PROFIT
Gross profit increased to $7,701,580, or 64% of sales, in the quarter
ended September 30, 2002, compared with $5,931,270, or 61.1% of sales, in the
quarter ended September 30, 2001. This represents an increase of $1,770,310, or
29.8%. Gross profit increased due to higher revenues, principally due to strong
sales of our Dimension, Titan, and Maxum systems and service and consumable
sales. The improvement to gross profit as a percentage of sales was principally
due to favorable product mix, a cost reduction to a product line, lower scrap
and obsolescence expenses, and a reclassification from cost of goods sold to R&D
expense of approximately $100,000 resulting from a transfer of finished goods
inventory for internal use. Gross profits as a percentage of sales should range
between 58% to 62% over the next several quarters, but will be highly dependent
upon sales mix and volumes. Accordingly, our actual results could differ.
OPERATING EXPENSES
SG&A expenses increased to $3,988,082 for the quarter ended September 30,
2002, from $3,573,314 for the quarter ended September 30, 2001. This represents
an increase of $414,768, or 11.6%. Variable commission and travel-related
expenses, together with marketing, promotional, and sales expenses associated
with the Dimension product launch, accounted for much of the increase in the
quarter ended September 30, 2002, as compared with same quarter in 2001. SG&A
expenses should be expected to be higher than comparative year-over-year
quarters for the next several quarters, primarily due to expected expenses
associated with the Dimension product launch. Our actual results could differ,
however.
R&D expenses increased to $1,273,278 for the quarter ended September 30,
2002 from $1,185,319 for the quarter ended September 30, 2001. The increase
amounted to $87,959, or 7.4%. As referenced above, approximately $100,000 of
expense associated with the internal use of inventory was reclassified to R&D
expense from cost of goods sold. In light of rising salary and benefit expenses,
our goal of controlling R&D expenses has been successful thus far in 2002.
Future trends in R&D should reflect expense levels reasonably consistent with
the results reported in the quarter and nine months ended September 30, 2002,
although some fluctuations due to the timing of certain expenses or to the
completion of certain projects could impact the reported results in any given
quarter.
For the reasons cited above, our operating income for the quarter ended
September 30, 2002 amounted to $2,440,220, or 20.3% of sales, compared with
operating income of $1,172,637, or 12.1% of sales, for the quarter ended
September 30, 2001. This represents an increase of $1,267,583, or 108.1%.
Over the next several quarters, our operating results could be adversely
affected if the downturn in general economic conditions experienced by most
capital equipment manufacturers in 2001 and 2002 were to continue. Our expense
levels are based in part on our expectations of future revenues and product mix.
Our planning assumes that the economic conditions affecting capital equipment
manufacturers will slowly improve, commencing in late 2002 and continuing
through 2003. If general economic conditions should worsen or the recovery takes
longer than we expect, the revenues we recognize, or the mix of those revenues,
could be severely impacted. While our backlog at the end of September was
significantly higher than our backlog as of the end of 2001, we will still need
a significant number of new orders to achieve our revenue and operating profit
objectives. These factors may lead to operating losses in certain quarters, or
reduced operating and gross profits as compared with prior periods. Our
intention is to build our backlog of unshipped orders in the fourth quarter,
assuming that we are able to achieve our fourth quarter revenue plan. This would
improve operating results for the first quarter of 2003, which has historically
been our weakest and most volatile quarter. We can give no assurances that we
will succeed in this. While we have adjusted, and will continue to adjust, our
expense levels based on revenues, fluctuations in revenues and product mix in a
particular period could adversely impact our operating results.
7
OTHER INCOME (EXPENSE)
Other expense netted to $30,132 in the quarter ended September 30, 2002
compared with other income of $133,533 in the quarter ended September 30, 2001.
Interest income declined to $36,325 in the quarter ended September 30, 2002
compared with $78,442 in the same quarter in 2001. The reduction in interest
income was primarily due to lower interest rates. Interest expense increased to
$44,051 in the quarter ended September 30, 2002 from $35,960 in the same quarter
of 2001, primarily due to interest expense on the mortgage of our manufacturing
facility. In the quarter ended September 30, 2002, we recognized other expense
of $22,406, principally due to a loss on foreign currency transactions related
to the euro, which compared with other income of $91,051, principally due to
income on foreign currency transactions related to the euro in the same quarter
of 2001.
NET INCOME
For the reasons cited above, the net income for the third quarter of 2002
amounted to $1,723,214, or 14.3% of sales, compared with net income of $979,667,
or 10.1% of sales, in the comparable 2001 quarter. This resulted in earnings per
diluted common share of $.31 in the quarter ended September 30, 2002, compared
with earnings per diluted common share of $.18 for the quarter ended September
30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2001
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated. All items are included in or
derived from our statement of operations.
For the nine months ended September 30,
2002 2001
---- ----
Net sales 100.0% 100.0%
Cost of sales 38.8% 40.0%
Gross margin 61.2% 60.0%
Selling, general, and administrative expenses 41.5% 39.2%
Research & development expense 12.7% 13.3%
Operating income 7.0% 7.5%
Other income 0.4% 0.2%
Income before taxes 7.4% 7.7%
Income taxes 2.1% 1.9%
Net income 5.3% 5.8%
NET SALES
Net sales for the nine months ended September 30, 2002, were $28,536,472,
compared with sales of $27,614,412 for the nine months ended September 30, 2001.
This represents an increase of $922,060, or 3.3%. Dimension and Titan sales were
very strong and exceeded our internal expectations. Neither Titan nor Dimension
was available for sale for full nine-month period of 2001, so year-over-year
comparison is not applicable. Revenues from both consumables and maintenance
also increased in the nine months ended September 30, 2002 as compared with the
same 2001 period. Maintenance and consumable revenue were enhanced by the larger
installed base of systems and continued emphasis on the sale of maintenance
contracts. Certain market segments, especially automotive, have remained weak
for us throughout 2002. Historically, these segments have provided us with
significant revenue and profitability, and their continued weakness could
represent a risk to us for meeting our future growth and profitability
objectives.
Domestic sales accounted for approximately 54% of total revenue in both
the nine months ended September 30, 2002, as well as the comparable 2001 period.
However, international system sales were equivalent to the results achieved in
8
our domestic markets for the 2002 period. In the United States, our eastern
region continued to record the highest revenue, replacing our central region,
which has been impacted by weakness in the automotive industry. Internationally,
both our European and Far East regions recorded revenues that amounted to 22% of
total sales. Europe accounted for only 19% of total revenue for the nine months
ended September 30, 2001, while our combined Asia Pacific region, which
comprises Japan, China, the Far East and India, accounted for approximately 22%
of total revenue in the nine months ended September 30, 2001.
GROSS PROFIT
Gross profit improved to $17,467,114, or 61.2% of sales, in the nine
months ended September 30, 2002, compared with $16,561,884, or 60% of sales, in
the comparable period of 2001. This represents an increase of $905,230, or 5.5%.
Gross profit increased due to higher revenues, a favorable mix to higher margin
products, lower scrap and obsolescence expense, and the reclassification of cost
of goods sold to R&D expense of approximately $100,000 resulting from the
transfer of finished goods inventory for internal use.
OPERATING EXPENSES
SG&A expenses increased to $11,850,599 for the nine months ended September
30, 2002, from $10,830,523 for the comparable period of 2001. This represents an
increase of $1,020,076, or 9.4%. Bad debt expense in the 2002 period exceeded
$200,000, principally the result of a customer's bankruptcy. Variable
commissions and travel expenses were higher in the 2002 period as a result of
increased revenues, while marketing, promotional, and sales expenses associated
with the Dimension product launch accounted for much of the remainder of the
increases in the period.
R&D expenses declined to $3,611,537 for the nine months ended September
30, 2002 from $3,672,890 for the nine months ended September 30, 2001. The
decrease amounted to $61,443, or 1.7%. On higher revenues, R&D expenses
decreased as a percentage of sales to 12.7% in the nine months ended September
30, 2002, from 13.3% in the 2001 period. Our R&D expenses for the fourth quarter
of 2002, with some modest fluctuations, should be consistent with the results
reported in the first nine months of the year, although our actual results could
differ.
For the reasons cited above, our operating income for the nine months
ended September 30, 2002 amounted to $2,004,978, or 7.0% of sales, compared with
operating income of $2,058,381, or 7.5% of sales, for the nine months ended
September 30, 2001. This represents a decline of $53,403, or 2.6%.
OTHER INCOME
Other income netted to $115,467 in the nine months ended September 30,
2002 compared with other income of $66,665 in the comparable 2001 period.
Interest income declined to $117,228 in the current nine-month period, compared
with $282,973 in the 2001 nine-month period. The reduction in interest income
was primarily due to lower interest rates. Interest expense increased to
$135,313 in the nine months ended September 30, 2002 from $85,768 in the same
period of 2001, primarily due to interest expense on the mortgage of our
manufacturing facility. In the nine months ended September 30, 2002, we
recognized other income of $133,582, principally due to income from foreign
currency transactions related to the euro, which compared with a loss on foreign
currency transactions related to the euro of $130,540 in the same period of
2001.
NET INCOME
For the reasons cited above, the net income for the nine months ended
September 30, 2002, amounted to $1,516,139, or 5.3% of sales, compared with net
income of $1,593,794, or 5.8% of sales, in the comparable 2001 period. This
resulted in earnings per diluted common share of $.27 in the nine months ended
September 30, 2002, compared with earnings per diluted common share of $.29 for
the comparable period ended September 30, 2001.
9
LIQUIDITY AND CAPITAL RESOURCES
Operating activities for the nine months ended September 30, 2002,
provided cash of $4,544,456, primarily reflecting our net income of $1,516,139
and a decrease in accounts receivable of $904,225. Strong collections of our
second quarter receivables accounted for this decrease. An increase in
inventories and a decrease in unearned maintenance revenue used cash of $904,225
and $150,916, respectively. Most of the increase in inventories was on our best
selling product lines, allowing us to expand capacity for expected future
shipments. In the nine months ended September 30, 2001, our operating activities
provided cash of $3,367,951, primarily reflecting our net income of $1,593,794,
coupled with a decrease in inventories and an increase in unearned maintenance
of $656,500 and $345,338, respectively. An increase in accounts receivable and a
decrease in accounts payable and other current liabilities used cash of $901,466
and $808,481, respectively, in the same 2001 period.
Our investing activities used cash of $1,025,193 in the nine months ended
September 30, 2002, reflecting the acquisition of machinery and equipment of
$607,591 and payments for intangible assets, including patents and capitalized
software, of $417,602. Our investing activities used cash of $1,839,493 in the
nine months ended September 30, 2001, including $1,442,518 for the acquisition
of machinery and equipment and $396,975 for payments for intangible assets,
including patents and capitalized software.
In the nine months ended September 30, 2002, our financing activities used
cash of $1,968,512, which included the purchase of treasury stock for an
aggregate of $3,641,265, and for payments of obligations under capital leases of
$100,526. We purchased 427,337 outstanding shares during this nine-month period.
Net proceeds from the sale of common stock pursuant to the exercise of employee
and director options provided cash of $1,812,260, which represented options
exercised to purchase 334,997 shares. In the nine months ended September 30,
2001, our financing activities used cash of $253,920, principally for repayments
under capitalized leases and purchase of treasury stock for $156,419 and
$89,292, respectively.
The net increase in cash in the nine months ended September 30, 2002, for
the reasons cited above, amounted to $1,558,252. In the comparable 2001 period,
the net increase in cash amounted to $1,256,152. Our ending cash and cash
equivalents balance as of September 30, 2002 and 2001 was $11,769,650 and
$7,993,458, respectively.
For the remainder of 2002, we expect to use our cash for working capital
purposes; for improvements to our manufacturing facility; for new product
development and sustaining engineering; for the acquisition of equipment,
including production equipment, tooling, and computers; for the purchase of
intangible assets, including patents; for increased selling and marketing
activities, especially as they relate to the Dimension product launch and market
development; for acquisitions; and for our common stock buyback program. In
October 2002, our board of directors authorized a continuation of our stock
buyback program by authorizing an additional $1,000,000 to the prior
authorization of $2,000,000, net of the proceeds from the exercise of stock
options. While we believe that the primary source of liquidity during 2002 and
2003 will be derived from current cash balances and cash flows from operations,
we have maintained a line of credit for the lesser of $4,000,000 or a defined
borrowing base. To date, we have not borrowed against this credit facility.
As of September 30, 2002, we had gross accounts receivable of $11,704,204,
less an allowance of $475,691 for returns and doubtful accounts. Historically,
our bad debt expense has been minimal. However, in the nine months ended
September 30, 2002, principally due to the bankruptcy of a customer, we
wrote-off receivables in excess of $200,000. Certain customers, especially those
that purchased our Maxum or Titan systems, continue to carry high balances.
Additionally, at September 30, 2002, large balances were concentrated with
certain international distributors, and some of these balances exceed our
payment terms. Default by one or more of these distributors or customers would
result in a significant charge against our current reported earnings. We have
reviewed our policies that govern credit and collections, and will continue to
monitor them in light of current payment status and economic conditions. While
we can give no assurances, we believe that most, if not all, of the accounts
receivable balances will ultimately be collected.
10
Our total current assets amounted to $30,772,475 at September 30, 2002,
the majority of which consisted of cash and cash equivalents, inventories and
accounts receivable. Total current liabilities amounted to $8,336,296. Our debt
is minimal, consisting of a mortgage payable of $2,231,996 and principal
payments due under a capital lease of $29,794. We will pay off the capital lease
by the end of 2002. We estimate that we will spend approximately $1,200,000 in
2002 for facility improvements, production and R&D equipment, computers and
integrated software, and tooling, of which approximately $900,000 has been
completed. As of September 30, 2002, material commitments for inventory
purchases from selected vendors for the ensuing twelve-month period ending
September 30, 2003, should amount to approximately $3,300,000. We intend to
finance these purchases from existing cash or from cash flows from operations.
Inflation
We believe that inflation has not had a material effect on our operations
or on our financial condition during the three most recent fiscal years.
FOREIGN CURRENCY TRANSACTIONS
Prior to 2001, substantially all of our recognized revenues from foreign
sales were invoiced in United States dollars. Therefore, our exposure to foreign
currency exchange rates was immaterial. Commencing in late 2000 and continuing
throughout 2002, we began to invoice sales to certain European distributors in
euros. Our reported results have been subject to fluctuations based upon changes
in the exchange rates of that currency in relation to the United States dollar.
We have previously hedged using forward foreign exchange contracts, although
this hedging involved relatively small positions. We will continue to monitor
our exposure to currency fluctuations, and, when appropriate, may use financial
hedging techniques in the future. Instruments to hedge our risks may include
foreign currency forward, swap, and option contracts. These instruments will be
used to selectively manage risk but there can be no assurances that we will be
fully protected against material foreign currency fluctuations. Translation
exposure to our balance sheet with respect to foreign operations is not hedged.
We expect to continue to derive most of our revenue from regions where the
transactions are negotiated, invoiced, and paid in US dollars. Fluctuations in
the currency exchange rates in these other countries may therefore reduce the
demand for our products by increasing the price of our products in the currency
of countries in which the local currency has declined in value.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS
All statements herein that are not historical facts or that include such
words as "expect", "anticipate", "project", "estimate" or "believe" or other
similar words are forward-looking statements that we deem to be covered by and
to qualify for the safe harbor protection covered by the Private Securities
Litigation Reform Act of 1995 (the "1995 Act"). Investors and prospective
investors in our Company should understand that several factors govern whether
any forward-looking statement herein will be or can be achieved. Any one of
these factors could cause actual results to differ materially from those
projected herein. These forward-looking statements include the expected
increases in net sales of rapid prototyping systems, services and consumables,
our ability to maintain our gross margins on these sales, and our plans and
objectives to introduce new products, control expenses, improve the quality and
reliability of our systems, and improve profitability. The forward-looking
statements included herein are based on current expectations that involve a
number of risks and uncertainties. These forward-looking statements are based on
assumptions, among others, that we (1) will be able to continue to introduce new
rapid prototyping systems and materials acceptable to the market and improve our
existing technology and software in our current product offerings, (2) will be
able to successfully launch the new Dimension product, and that the market will
accept this product, (3) will be able to maintain our revenues and gross margins
on our present products, (4) will be able to control our operating expenses, (5)
will be able to expand our manufacturing capabilities to meet the expected
demand generated by Dimension, and (6) will be able to retain and recruit
employees with the necessary skills to produce, develop, market, and sell our
products. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive, market and technology
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that the assumptions underlying the forward-looking
11
statements contained herein are reasonable, any of those assumptions could prove
inaccurate, and therefore there is and can be no assurance that the results
contemplated in any such forward-looking statement will be realized. The impact
of actual experience and business developments may cause us to alter our
marketing plans, our capital expenditure budgets, or our engineering, selling,
manufacturing or other budgets, which may in turn affect our results of
operations or the success of our new product development and introduction. Due
to the factors noted above and elsewhere in the Management's Discussion and
Analysis of Financial Condition and Results of Operations, our future earnings
and stock price may be subject to significant volatility, particularly on a
quarterly basis. Additionally, we may not learn of revenue or earnings
shortfalls until late in a fiscal quarter, since we frequently receive the
majority of our orders very late in a quarter. This could result in an immediate
and adverse effect on the trading price of our common stock. Past financial
performance should not be considered a reliable indicator of future performance,
and investors should not use historical trends to anticipate results or trends
in future periods.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing
date of this report, our chief executive officer and chief financial officer
have concluded that our disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934
(the "Exchange Act")) are effective to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities Exchange Commission rules and forms.
b) Changes in Internal Controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect the disclosure controls subsequent
to the chief executive officer's and chief financial officer's most recent
evaluation, and there have been no corrective actions with regard to significant
deficiencies and material weaknesses in such controls.
12
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
(1) Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(2) Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
None
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 14, 2002 STRATASYS, INC.
By: /s/ Thomas W. Stenoien
----------------------------------
Thomas W. Stenoien
Chief Financial Officer
(Principal Financial Officer)
14
STRATASYS, INC.
CERTIFICATION
I, S. Scott Crump, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stratasys, Inc. (the
"registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of and for the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal control; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ S. Scott Crump
- -------------------------------------
President and Chief Executive Officer
November 14, 2002
- -------------------------------------
Date
STRATASYS, INC.
CERTIFICATION
I, Thomas W. Stenoien, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stratasys, Inc. (the
"registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of and for the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal control; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Thomas W. Stenoien
- ----------------------------
Chief Financial Officer
November 14, 2002
- ----------------------------
Date