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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-22250
3D SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-4431352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26081 Avenue Hall
Valencia, California 91355
(Address of principal executive offices and zip code)
(661) 295-5600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [_] No [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
At June 28, 2002, there were outstanding 12,863,396 shares of the Common Stock
of Registrant, and the aggregate market value of the shares held on that date by
non-affiliates of Registrant, based on the closing price ($12.20 per share) of
the Registrant's Common Stock on the NASDAQ National Market on that date, was
$107,335,893. For purposes of this computation, it has been assumed that the
shares beneficially held by directors and officers of Registrant were "held by
affiliates"; this assumption is not to be deemed an admission by these persons
that they are affiliates of Registrant.
At June 13, 2003, there were outstanding 12,734,301 shares of the Common Stock
of Registrant.
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1
3D SYSTEMS CORPORATION
Annual Report on Form 10-K for the
Year Ended December 31, 2002
PART I ............................................................................................................ 3
Item 1. Business ................................................................................................... 3
Item 2. Properties ................................................................................................. 11
Item 3. Legal Proceedings .......................................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ........................................................ 13
PART II ............................................................................................................ 13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................................... 13
Item 6. Selected Financial Data .................................................................................... 15
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ...................... 16
Item 7a. Quantitative and Qualitative Disclosures about Market Risk ................................................. 36
Item 8. Financial Statements and Supplementary Data ................................................................ 37
PART III ............................................................................................................ 38
Item 10. Directors and Executive Officers of the Registrant ......................................................... 38
Item 11. Executive Compensation ..................................................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............. 44
Item 13. Certain Relationships and Related Transactions ............................................................. 47
Item 14. Controls and Procedures .................................................................................... 49
Item 15. Principal Accountant Fees and Services ..................................................................... 50
PART IV ............................................................................................................ 51
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................................... 51
2
PART I
Forward-Looking Statements
This filing, including "Cautionary Statements and Risk Factors" set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7, contains forward-looking statements that involve risks
and uncertainties, as well as assumptions that, if they never materialize or
prove incorrect, could cause our results and the results of our consolidated
subsidiaries to differ materially from those expressed or implied by these
forward-looking statements. All statements other than statements of historical
fact are statements that could be deemed forward-looking statements, including
any projections of earnings, revenues or other financial items; any statements
of the plans, strategies and objectives of management for future operations; any
statement concerning proposed new products, services or developments; any
statements regarding future economic conditions or performance; any statements
of belief; and any statements of assumptions underlying any of the foregoing.
The risks, uncertainties and assumptions referred to above include the
difficulty of keeping expense growth at modest levels while increasing revenues
and other risks that are described from time to time in our Securities and
Exchange Commission reports, including but not limited to the items discussed in
"Cautionary Statements and Risk Factors" set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7 in this
report. We assume no obligation and do not intend to update these
forward-looking statements.
Item 1. Business
Our consolidated financial statements for the year ended December 31, 2001 and
2000, as filed with the Commission on March 27, 2002, have been restated.
Accordingly, all financial data in this Report reflects the effects of the
restatements. See Note 24 to our Consolidated Financial Statements for a
description of the restatement.
General
We design, develop, manufacture, market and support, on an international basis,
solid imaging systems and related materials. Solid imaging systems are designed
to rapidly produce 3-dimensional physical objects from digital data using
computer aided design and manufacturing, or CAD/CAM, software utilities and
related computer applications.
Used worldwide to generate product concept models, functional prototypes, master
patterns for tooling and end-use production parts for direct and indirect
manufacturing, our solid imaging technologies change the way people design,
develop and manufacture products. The systems utilize patented
stereolithography, selective laser sintering, direct composite manufacturing and
3-D printing processes to fabricate physical objects using input from CAD/CAM
software, or 3-D scanning and sculpting devices.
Our customers use our solid imaging systems and solutions to:
. Streamline part making, prototyping and manufacturing processes
. Verify product designs
. Create functional parts
. Generate production-quality samples or final parts
. Direct manufacture end-use parts
. Create tooling used to manufacture end-use parts.
We expect our Advanced Digital Manufacturing (ADM(SM)) solutions to become a key
enabling technology for the customization of design and manufacturing using
additive fabrication techniques, also called mass customization or rapid
manufacturing. ADM will allow designers to reduce part count in the design
process and to add custom features and complexity to designs not currently
feasible with today's manufacturing techniques thus reducing part costs and
assembly time. By using multiple technologies offered by us, existing designs
can be manufactured without the costs and lead-time associated with hard
tooling, and more complex designs will become easier to manufacture.
An integrated package combining hardware, software, materials and process gives
us one of the widest ranges of solid imaging solutions in the world. Our
comprehensive range of products includes; the MJM (multi-jet modeling) product
line, the SLA(R) (stereolithography apparatus) product line, the SLS(R)
(selective laser sintering) product line, the DCM (direct composite
manufacturing) product line, and the Accura(R) material line, which provides a
broad range of prototype and manufacturing materials utilized by our MJM, SLA
and SLS systems.
We produce, market and distribute consumable materials used in all solid imaging
systems we offer. Our growing installed base of systems requires an ongoing
supply of materials as well as service support and provides us with an ongoing
revenue stream. In April 2002, we introduced our Accura family of materials for
use in our solid imaging systems. Since the introduction of our Accura
materials, we have introduced and continue to engage in research regarding
materials for our SLA and SLS systems.
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Our MJM systems use proprietary materials developed, manufactured and sold
exclusively by us. Of our MJM systems we currently offer the ThermoJet(R) solid
object printer. ThermoJet printers are about the size of office copiers and
employ hot-melt ink jet technology to build three-dimensional models in
successive layers using our proprietary thermoplastic materials. Designers,
engineers and other users of CAD/CAM utilities can incorporate our printers into
office networks as a shared resource, to rapidly produce models of products
under development for design concept communication and validation. In addition,
objects produced by our ThermoJet printers can be used as patterns and molds
and, when combined with other secondary processes, such as investment casting,
can produce parts with representative end-use properties.
SLA systems use our proprietary stereolithography, ("SL technology"), a solid
imaging process that uses a laser beam to expose and solidify successive layers
of a photosensitive liquid until the desired object is formed to precise
specifications in epoxy or acrylic resin. SL-produced parts can be used for
concept models, engineering prototypes, patterns and masters for molds,
consumable tooling or short-run manufacturing of final products, among other
applications. SL technology provides users with significant product development
time-savings, cost reductions and improved quality, compared to traditional
modeling, tooling and pattern-making techniques. In addition, with appropriate
material functionality, SL technology can produce durable parts that can be used
for ADM solutions.
SLS systems are based on our proprietary selective laser sintering, or SLS(TM),
process initially developed and patented by The University of Texas. The SLS(TM)
process was further refined and patented by DTM Corporation. We acquired DTM on
August 24, 2001 and now own these DTM patents. We also have an exclusive
worldwide license from The University of Texas to practice SLS process under
selected laser sintering patents owned by The University of Texas. This
technology uses laser energy to melt and fuse, or sinter, powdered material to
create a solid object. SLS systems are used to produce functional models for use
in product development and design, and are increasingly used for the direct
manufacture of small lot quantities of plastic or metal parts for use as final
products by end-users in both the consumer and industrial markets. Use of our
SLS systems can significantly reduce the time required for production from what
otherwise could be months or weeks, to days or, in some cases, hours.
We provide, either directly or through our network of authorized distributors, a
variety of processing materials and on-site maintenance services for all of our
solid imaging products. Our customers include major corporations throughout the
world in a broad range of industries including manufacturers of automotive,
aerospace, computer, electronic, consumer, telecommunication, appliance,
footwear, toy, power tool, medical and dental products. We also sell to
independent service bureaus that, for a fee, provide solid imaging services to
their customers, and to government agencies and universities.
As of December 31, 2002, we held 359 patents related to solid imaging: 152 in
the United States, 146 in Europe, 17 in Japan, and 44 in other foreign
countries. We continue to develop new products and processes to expand the
applications of solid imaging, and to develop improvements to our existing
product lines.
Corporate Structure
Unless otherwise indicated, all references in this document to "the Company,"
"we," or "us" include 3D Systems Corporation, and its direct and indirect wholly
owned subsidiaries.
We were incorporated in Delaware in 1993, and are the sole shareholder of 3D
Canada Company, a Nova Scotia unlimited liability company, which we refer to as
3D Canada, and RPC, Ltd., a Swiss corporation. We jointly own 3D Holdings, LLC
with 3D Canada. 3D Holdings, LLC is the sole shareholder of 3D Systems, Inc., a
California corporation, which we refer to as 3D, Inc. 3D, Inc. directly, and
through its direct and indirect subsidiaries, conducts substantially all of our
business. 3D, Inc.'s direct subsidiaries include 3D Systems Europe Ltd., a
United Kingdom company that we refer to as 3D Europe, which serves as the
headquarters for the Company's European operations.
Products and Services
The following is a description of our products and their current uses. Each
product can be used as a stand-alone resource and, as we work to improve
process, material functionality, build-to-build and machine-to-machine
uniformity, we anticipate increasing sales of multiple types of solid imaging
equipment into single location for ADM applications.
Solid Imaging Systems
. MJM Systems. The ThermoJet solid object printer is the second generation
of multi-jet modeling systems to be offered by us. The ThermoJet printer is a
network-ready system, about the size of an office copier, that uses a hot-melt
ink jet technology to print models by accumulating material in successive layers
using proprietary thermoplastic solid imaging materials, or SIM, and a print
head with hundreds of jets oriented in a linear array. The print head scans back
and forth, similar to desktop ink jet printers,
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depositing layer upon layer of material to form the physical model. The printers
offer a part-building capacity of 10 inches x 7.8 inches x 8 inches (250 mm x
195 mm x 200 mm).
The ThermoJet printer creates concept models used for design reviews,
form and fit checking, styling, ergonomics evaluation and CAD-model
verification. Both technical and non-technical people more easily understand
these communication tools than complex two-dimensional presentation drawings.
Because SIM is substantially similar to investment casting waxes, ThermoJet
printer models can be readily used in the foundry environment for the production
of investment casting patterns.
We introduced our third generation of multi-jet modeling solutions, the
InVision(TM) 3-D printer, in July 2002 at the international trade show SIGGRAPH.
The InVision 3-D printer is a network-ready system, about the size of an office
copier that combines proprietary photocurable hot melt materials with the ease
of ink-jet printing. The InVision 3-D printer has not been released commercially
into the market. Throughout 2002, we continued to research and develop the
InVision 3-D printer. We have begun, and expect to complete, design validation
testing, beta testing and market research, with respect to the InVision 3-D
printer, in 2003.
. SLA(R) Systems and Related Equipment. As of December 31, 2002, our
SLA product line includes three models: the Viper si2(TM) SLA system, the SLA
5000 system and the SLA 7000 system. These models vary in their capabilities
including:
. the resolution and accuracy of part building,
. the maximum size of objects that can be produced,
. object building speed, and
. system price
SLA systems produce highly detailed 3-dimensional parts with fine
surface quality. The parts are created through the use of an ultraviolet laser
to convert liquid photosensitive polymers into solid cross-sections, layer by
layer, until the desired objects are complete. SLA systems are capable of making
multiple objects at the same time; however, each SLA system is limited in the
size of the objects that it can make during a single build session. Therefore,
an SLA system can make scale models of very large objects or, alternatively,
full-scale portions of large objects, which are then joined together. The Viper
SLA system, for example, can create a model, section of a model or other object
with maximum size of 10 inches x 10 inches x 10 inches (250 mm x 250 mm x 250
mm). On the other hand, the maximum size model, section or other object that can
be created using the SLA 7000 system is 20 inches x 20 inches x 24 inches (500
mm x 500 mm x 600 mm).
SLA systems are installed in many of the largest manufacturing
organizations in the world and are used in a wide variety of applications,
varying from short production runs of end-use products, to producing automobile
prototype parts, to creating new designs for testing in consumer focus groups.
SLA systems are generally designed to build communication models to enable users
to share ideas and evaluate concepts; perform form, fit and function testing on
working models; build master patterns for investment casting; or quickly produce
parts for direct use in working models. In addition, our products have been
customized to produce thousands of tools and end-use parts in ADM applications,
including certain dental, hearing aid, jewelry and motorsport applications.
We also market PCA(TM) equipment, ultraviolet-curing devices used in
conjunction with SLA systems, which provide uniform long wave ultraviolet
illumination. Upon completion of a typical object by an SLA system, a small
amount of the resin remains uncured. Full curing, or hardening, requires an
additional one to two hours of exposure to ultraviolet illumination, which can
be accomplished most effectively through the use of our PCA devices.
Approximately two-thirds of all SLA systems sold have been purchased with a PCA
device. Purchasers of multiple SLA systems may use the same PCA device for each
system.
. SLS(R) Systems and Related Equipment. SLS systems are primarily used
to produce functional parts for use in product development and design. Objects
produced by SLS systems are more durable and flexible, in the case of plastic
parts, than those produced by SLA systems, but lack the fine detail and surface
finish of an SL part. Functional models and prototypes are produced directly
from powdered sintering materials, generally, either plastic, nylon or metal.
SLS systems are also used to produce metal inserts for tooling and limited
quantities of direct metal parts for custom applications, as well as to produce
models and prototypes for testing actual product fit, form, ergonomic design and
functionality. SLS systems are capable of making multiple objects at the same
time; however, each is limited in the size of the objects that it can make
during a single build session maximum size of 14.5 inches x 12.5 inches x 17.5
inches (370 mm x 320 mm x 445 mm).
SLS systems are increasingly used for the direct digital manufacture of
small lot quantities of plastic, nylon or metal parts for use as final products
by end-users in both the consumer and industrial markets. Metal part production
requires processing with an additional furnace step. SLS systems also are used
to create tools, molds or patterns that are an intermediate step in most
manufacturing processes employed to manufacture low-volume/high-value end- use
parts. The systems' pattern production capability offer foundries the ability to
automate the pattern-making step of traditional investment casting processes to
manufacture metal parts. Parts cast from patterns produced with an SLS system
are used in final product assemblies. Foundries also use our SLS systems to
automate and accelerate the manufacture of sand molds and cores, which are used
for sand casting of metal parts, primarily for use in automotive and heavy
equipment applications.
5
We market the SLS system to customers and prospects requiring direct
digital manufacturing solutions. Currently the SLS system is being utilized in
advanced digital manufacturing companies in the hearing aid industry and the
aerospace industry to produce mass production, customized end-use parts, such as
in-the-ear hearing aids and air ducts for non-commercial planes.
. DCM System. Our Direct Composite Manufacturing line consists of the
OptoForm(TM) system. The OptoForm system is an advanced digital manufacturing
system, which combines the precision of stereolithography with dense materials
comprising both a photosensitive epoxy polymer and a range of reinforcing
fillers including thermoplastics, metals, and ceramics, or a combination of
these paste materials. Similar to the techniques of the SLA and SLS systems the
OptoForm system spreads a layer of paste material across the platform. Parts are
created through the use of an ultraviolet laser to convert the paste into solid
cross-sections, layer by layer, until the desired objects are complete. The
OptoForm system offers a part-building capacity of 20 inches x 12.5 inches x 20
inches (500mm x 330mm x 500mm) which is limited by the weight of the material.
In December of 2001, we formed OptoForm LLC (a Delaware limited
liability company) a joint-venture with DSM Somos, one of our resin suppliers,
to focus on the development and commercialization of equipment and materials for
the OptoForm system. As of March 28, 2003, we have placed five OptoForm
engineering evaluation machines at customer locations to facilitate continued
technical development of materials, hardware and software.
Materials
. Accura(R) Materials. We develop, manufacture, sell and distribute
proprietary materials used by the ThermoJet printer, InVision 3-D printer, SLA
and SLS systems. Under our distribution contract with Vantico, Inc., which
expired on April 22, 2002, we were the exclusive worldwide distributor of
Vantico photosensitive liquid resins for stereolithography. In September 2001 we
acquired RPC Ltd., a Swiss developer and manufacturer of stereolithography
materials. Upon termination of the Vantico distribution contract, we began to
sell our SL materials, under our Accura brand, to our worldwide (except Japan)
SLA system customer base. Throughout the term of the Vantico distribution
contract, the majority of our customers purchased materials from us upon the
initial purchase of equipment. We also sold materials necessary for ongoing
operation of the machines. We continue to provide initial vat fills and refills
of our new Accura SL materials to our customers, and service what we believe is
approximately one third of the SLA system customer base.
Our range of LS powdered materials used in our SLS systems, many of
which can be used in multiple applications, addresses a growing list of customer
needs. We believe our SLS process, in combination with the DuraForm(TM) material
system is currently the world's leading solid imaging technology used for
functional plastic and nylon prototype applications. LaserForm(TM) ST-200
material, the fourth-generation metal powder developed for the SLS system is
used for creation of prototype tooling and to make metal functional parts.
Software
. General. We develop part preparation software for personal computers
and engineering workstations designed to enhance the interface between digital
data and our solid imaging systems. Digital data, such as solid CAD/CAM, is
converted within the software utility; then, depending on the specific software
package, the object can be viewed, rotated, scaled, and model structures added.
The software then generates the information to be used by the SLS system, SLA
system, OptoForm or MJM system to create the solid images. In addition, we work
with outside companies, where appropriate, to develop software for our systems.
. QuickCast(TM) Technology. Our QuickCast build style consists of a
special process for making precision investment casting patterns using SL
technology. The QuickCast process uses our SLA systems to produce
foundry-useable mold patterns suitable for limited-run investment casting. While
not cost-competitive for high-capacity manufacturing, the ability to rapidly
produce prototypes and short-run production quantities of fully functional
complex metal parts, in a wide variety of metals, is a major technological
advantage of SL. All of the SLA systems we sell include the software capability
for the QuickCast process.
Services
. Maintenance. All of the SLS and SLA systems are bundled with on-site
hardware and software maintenance service, during a warranty period (typically
one year). All ThermoJet printers are bundled with at least a 90-day warranty
period. After the warranty period, we offer customers optional maintenance
contracts, available on a monthly and annual basis. Approximately three-quarters
of the services we provide are for post-warranty maintenance contracts. Although
purchasers are not required to enter into post warranty maintenance contracts,
the majority of our United States, Asia Pacific and European SLA and SLS system
customers are parties to these contracts, and other customers obtain our
maintenance services on a time and materials basis. Our overseas distributors
also offer maintenance contracts to customers acquiring systems from them. As of
December 31, 2002, we had a staff of 127 full-time employees providing on-site
remedial and preventive maintenance services necessary to maintain our
customers' equipment in good operating condition.
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. Technology Centers. We provide services from our Technology Centers at
our Valencia, California headquarters, at our European headquarters near London,
England, at our offices in Japan and at our office located near Frankfurt,
Germany. The Technology Centers produce models, prototypes, mold patterns and
other parts for customers at prices that vary based on the nature of the
services requested. The Technology Centers also focus their efforts on the
development of new applications and techniques and customer benchmarking, and
also enable us to keep abreast of developments and serve as a means to introduce
prospective buyers to our technology.
Recent Product Introductions. In order to improve and expand the capabilities of
our systems and related software and materials, as well as to enhance our
portfolio of proprietary intellectual properties, we have historically devoted a
significant portion of our resources to research and development activities.
Recent product introductions include:
[X] Accura(R) SL materials: accuGen(TM). accuGen 100 material
combines accuracy, and green strength to maximize part
building productivity. accuGen 100 material is ideal for
prototype parts, master patterns, RTV (Room Temperature
Vulcanization) mold inserts and flow testing.
[X] Accura(R) SL material: accuDur(TM). accuDur 100 material
combines industry-standard durability with flexibility, high
accuracy and improved build speeds. accuDur 100 material is
a robust, flexible and durable material, ideal for building
parts for snap-fit testing, or any other application where
durability is required.
[X] Accura(R) SI 10 material. Accura SI 10 material is a
superior general purpose material offering an exceptional
combination of long vat life and accuracy in part building
resulting from its high green strength, humidity resistance
and the advances we have made in the material process, which
provides speed without compromising part quality. The SI 10
material creates parts with a glossy top finish, excellent
for thin wall parts and ideal for master patterns.
[X] Accura(R) SI 20 material. Accura SI 20 material is a durable
white material offering high green strength and good
throughput. This material is ideal for snap-fit testing and
RTV applications.
[X] Accura(R) SI 30 material. Accura SI 30 material is a
fast/durable material ideal for customers needing a
high-photo speed, low-viscosity material for functional
prototypes.
[X] Accura(R) SI 40 material. Accura SI 40 material is the first
material on the market that combines high temperature
resistance with strength. With properties that mimic Nylon
66 this material is ideal for automotive applications
including under-the-hood applications, wind tunnel testing
and flow analysis. The Accura SI 40 material produces parts
with optical clarity, high flexural modulus and moderate
elongation to break, with a high heat deflection temperature
allowing it to be drilled, self-tapped and bolted on for
true functional testing.
[X] Accura(R) LS material: LaserForm(TM) ST-200 material is the
second-generation stainless steel material to be offered for
our SLS systems. LaserForm ST-200 material is a specialty
stainless steel composite developed for our SLS systems to
produce durable, fully dense metal parts and tooling inserts
for injection molding and die casting applications.
[X] Software. Lightyear(TM) 1.3 and Buildstation(TM) 5.3
incorporates new Accura SL material styles simplifying the
users' ability to manually select style files.
[X] Software: Buildstation 4.0.0 for the SLA 250 system
incorporates new Accura SL material styles and enhancements
to Buildstation 3.8.6 software.
[X] Software. Software version 3.1 for all SLS systems is the
first version released under 3D Systems' label since the
purchase of DTM Corp. Version 3.1 provides SLS system
customers enhanced features including tagging, the ability
to enter text for a small label that will be built attached
to the part; slicing improvements; new Build Packet Browser
and Smart Feed enhancements specifically for our SLS
2500/plus/ customers.
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Research and Development
Our ability to compete successfully depends, among other things, on our ability
to design and develop new machines, materials and applications, and to refine
existing products. We believe that our future growth will depend on new
materials, as well as improved part accuracy and processing speed. Our
development efforts are augmented by development arrangements with research
institutions, key customers, materials suppliers and hardware suppliers.
Research and development expenses were $15.4 million, $11.0 million and $7.8
million in 2002, 2001, and 2000, respectively. For the foreseeable future, we
anticipate that our research and development efforts will focus on material
functionality and system design improvements, and developing software to
facilitate the interface between our solid imaging systems and digital data from
CAD solid programs, scanners, and other peripheral equipment and software. We
have dedicated a significant amount of time to the development of new materials
for all systems. In September 2001, with the acquisition of RPC, we expanded our
SL materials' research capabilities.
We believe that further refinements in MJM technology will come as a result of
investment in the areas of material development, solid imaging processes and the
printing mechanism. We believe synthetic specialty chemicals will allow future
SIM formulations to demonstrate significant improvement in the material
durability and other mechanical properties, and that investment in the solid
imaging build processes will result in improvements in the quality of the model
output from the build process. We believe these improvements will include faster
model build times, higher resolution and smaller layer steps, more accurate
geometry representation and smoother and more uniform surface finish on all
surfaces of the finished model. In 2002, we continued our research into new MJM
materials and processes, devoting a large portion of the year to the development
of improved materials directed at addressing the top customer-identified
requirements, including part durability, down-facing surface quality and
post-processing effort. By combining our knowledge of both MJM and SL material
technology, we introduced the InVision 3-D printer in July 2002. We anticipate
that, when commercialized, the new materials and delivery system will more
appropriately meet the needs of the design communication, office and rapid
prototyping markets.
We continue our research and development in the field of materials. Our research
and development facilities are located in Marly, Switzerland and Valencia,
California. The R&D team focuses our development on SL, LS and MJM materials. In
2002, we announced the development of a steel composite material and the
research of aluminum and flame retardant nylon for the SLS system. We continue
to drive our research and development efforts for the SL material line focusing
on general materials for the rapid prototyping industry as well as specialized
materials for the advanced digital manufacturing industry.
Marketing and Customers
Our sales and marketing strategy focuses on a wide range of customer needs,
including traditional model, mold and prototyping, office uses and advanced
digital manufacturing. Our internal sales organization is responsible for
overseeing worldwide sales and value-added resellers, and our knowledgeable
international distributors provide sales and support services in areas remote
from our sales offices. Our direct sales force consists of sales persons based
in our corporate office in California and in satellite offices throughout North
America; in our European offices located near Frankfurt, London, Paris, Milan
and in our Hong Kong and Japan offices, which serve the Pacific Rim region. An
internal staff of application specialists is a key part of the marketing
organization effort to provide pre-sales support and to help existing customers
take advantage of the latest materials and techniques to improve part quality
and machine productivity. This group also leverages its customer contacts to
help identify new application opportunities that utilize our proprietary
processes.
Our marketing programs utilize a combination of seminars, trade shows,
advertising, direct mailings, literature, web presence, videos, press releases,
brochures and customer and application profiles to identify prospects that match
a typical user profile. As of December 31, 2002, our worldwide sales and support
staff consisted of 91 employees that are primarily located in the United States
and Europe.
International Sales. International sales, the majority of which are in Europe
and Asia, accounted for 50.6%, 48.6%, and 46.2% of total sales in the years
ended December 31, 2002, 2001 and 2000, respectively. (See Note 19 in the "Notes
to Consolidated Financial Statements").
Customers. Our customers include major companies in a broad range of industries
throughout the world, including manufacturers of automotive, aerospace,
computer, electronic, consumer and medical products. Purchasers of our systems
include original equipment manufacturers, or OEMs, such as AMP, Inc., Apple
Computer, Inc., Audi AG, Boeing Company, BMW Group, Canstar Sports, Inc.,
DaimlerChrysler Corp., Dallara Automobili, Eastman Kodak Company, The Electrolux
Group, General Electric Company, General Motors Corporation, Delphi Automotive
Systems, Hasbro, Inc., Jordan Grand Prix, International Business Machines
Corporation, Johnson & Johnson, Levolor, Minardi Formula 1, Motorola, Inc.,
Navistar International Corporation, Nike, Inc., ODM (On-Demand Manufacturing), a
subsidiary of Boeing, Pratt & Whitney, Penske Racing, Raytheon Company, Renault
F1 Team and Texas Instruments, Inc. We also sell our products to government
agencies and universities, which generally use our machines for research
activities, and to independent service bureaus, including Arrk Creative Network,
General Pattern, Moehler Design and INCS, Inc.,
8
which for a fee provide solid imaging services to their customers. Each of
Renault FI Team, ODM, a subsidiary of Boeing, Widex and Siemens Hearing
Instruments established ADM centers in 2002.
Photopolymer Distribution Agreement. Pursuant to an agreement with Vantico, we
had been the exclusive worldwide distributor (except in Japan) to users of SL
processes of all Vantico liquid SL photopolymers. This agreement terminated on
April 22, 2002.
Customer Support and Service. Before installation of an SLA or SLS system, a new
purchaser generally receives training at our facilities. For the first several
days after installation, an applications engineer remains at the customer
location to ensure that the customer is able to operate the system effectively
and to answer any questions that may arise. We also make available to our
customers, for a fee, additional training courses in system features and
applications. Training is not generally necessary for use of a ThermoJet
printer.
We offer maintenance contracts to our customers, which generate recurring
revenue. We also make available, in the United States, a hotline to all of our
maintenance contract users. The hotline is staffed with technical
representatives who answer questions and arrange for on-site remedial services
if necessary. The hotline is available Monday through Friday, local holidays
excepted, 5:00 a.m. to 5:00 p.m. Pacific time. In addition, customer service,
troubleshooting and answers to frequently asked questions, or FAQs, are
available through our website, www.3dsystems.com. Customers may also reach us
through e-mail, 24 hours a day.
We co-founded and participate in Global User Groups, which include a substantial
number of our customers. The User Groups organize annual conferences in the
United States, at which we make presentations relating to updates in
stereolithography and selective laser sintering, changes we have implemented in
our systems and related equipment, materials and software and future ideas and
programs we intend to pursue in the upcoming years.
Production and Supplies
All of our systems are assembled and SIM (Solid Imaging Material) is produced at
our 67,000 square foot facility in Grand Junction, Colorado. We produce
stereolithography materials at our facility in Marly, Switzerland. We
manufacture lasers in our facility in Valencia, California. We purchase the
major component parts for our systems and materials for SIM and resin from
outside sources and arrange with contract manufacturers for the manufacture of
subassemblies. We integrate the subassemblies and effect final assembly and test
of all systems at our production facility. We perform numerous diagnostic tests
and quality control procedures on each system to assure its operability and
reliability.
Although there is more than one potential supplier for many material components
parts, subassemblies and materials, several of the critical components,
materials, and subassemblies, including lasers, materials, and certain ink jet
components, are currently provided by a single or limited sources.
Our production methods are subject to compliance with applicable federal, state,
and local provisions regulating the discharge of materials into the environment.
We believe that we are in compliance with such regulations currently enacted and
continued compliance will not have any material effect on our capital
expenditures, earnings and competitive position. Currently we utilize a cleaning
solvent that is the subject of a waiver of environmental provisions within the
South Coast Air Quality Management District that includes our Valencia,
California facility. The waiver expires June 30, 2005 at which time we may be
required to switch to a different cleaning solvent. The impact on earnings
should not be material.
Competition and Patent Rights
Our principal competitors are companies that manufacture machines that make
models, prototypes, molds and small volume manufacturing parts, which include:
suppliers of automated machining, or CNC, and rotational molding equipment;
suppliers of traditional machining, milling and grinding equipment; and FDM
(Fused Deposition Modeling) technology; Parts-in-Minutes and makers of vacuum
casting silicon molding equipment; and manufacturers of other SL, LS and 3-D
printing systems. These suppliers are numerous, both international and regional
in scope, and many have well-recognized product lines that compete with us in
essentially all of our served and targeted customer areas. Conventional
machining and milling techniques continue to be the most common methods by which
plastic and metal parts, models, functional prototypes and metal tool inserts
are manufactured. Conventional pattern manufacturing techniques continue to be
the most common methods to custom manufacture parts and by which patterns are
made for use in investment casting.
We believe there are no products that use operating technologies like our SLA or
SLS systems currently being sold in significant quantities in the United States;
however, products similar to our SLA systems are manufactured and sold by other
companies in the Pacific Rim, and products similar to our SLS systems are
manufactured and sold by other companies in Europe and the Pacific Rim. In
addition, we anticipate additional competition with respect to SL technology in
the U.S., Canada and Mexico as a result of our license agreement with Sony
Corporation with respect to our SL technology entered into pursuant to the terms
of our consent decree with the Department of Justice.
9
We believe that other companies may announce plans to enter our business area
either with equipment similar to ours, or with other types of equipment. We
believe that currently available alternatives to SL generally are not able to
produce models having the dimensional accuracy and fine surface finish of models
provided by our SL process. However, non-SL competitors have successfully
marketed their products to our existing and potential customers. Furthermore, in
many cases, the existence of these competitors extends the purchasing time while
customers investigate alternative systems. We compete primarily on the basis of
the quality of our products and the advanced state of our technology. We believe
that LS has become established as a leading operating technology for the
production of functional plastic prototypes and that we have the largest
installed base of LS machines in the world.
We believe that our patents will continue to help us maintain a leading position
in the SL, LS and MJM fields.
A number of companies are currently selling materials which either complement or
compete with those we sell DSM Desotech Inc., and others, are currently selling
SL resins, In addition, upon termination of our distribution agreement with
Vantico, Vantico began selling competing resins. We believe that we supply
approximately 50% of the worldwide market for SL resins used in our SLA systems.
EOS and others are currently selling LS powdered materials. We believe we
currently supply powders to the majority of the LS systems currently installed
worldwide.
Future competition is expected to arise both from the development of new
technologies or techniques not encompassed by the patents held by or licensed to
us, and through improvements to existing technologies, such as CNC and
rotational molding. We have determined to follow a strategy of continuing
product development and aggressive patent prosecution to protect ourselves to
the extent possible in these areas.
Proprietary Protection
Charles W. Hull, the Company's founder and Chief Technology Officer, developed
the stereolithography technology used in our SLA product lines, while employed
by UVP, Inc. This technology was originally patented by UVP, Inc. and
subsequently licensed to us in 1986. We acquired the patent in 1990.
Researchers at The University of Texas initially developed the selective laser
sintering technology commercialized by DTM. The first selective laser-sintering
patent was issued to The University of Texas in 1989. Currently, we have
exclusive rights to 15 U.S. patents issued to The University of Texas. Two of
the original University of Texas patents expire in 2006 while others run until
2014. Patents granted on improvements to the original patent as well as new
patents that we have obtained extend some protection to at least 2010. Our
exclusive worldwide license from The University of Texas to use the selective
laser sintering technology continues until expiration of the patent rights that
are the subject of the license.
We developed the thermoplastic material used in the application of ink jet
technology to solid imaging. During 1999, we acquired two patents from
Dataproducts Corporation for dot-on-dot printing technology in order to increase
our patent protection in the MJM area.
In connection with the acquisition of OptoForm in February 2001, we acquired
technology, know-how and patent rights, which have remaining lives of over 15
years, related to a technology using composites in direct manufacturing. The
acquired U.S. and foreign patent rights protect the basic recoating mechanism
and materials used in the direct composite manufacturing process.
We do not have the breadth of patent protection for the solid object printers
that we have for our SL and LS technology; however, as noted above, during 1999
we acquired two patents for dot-on-dot printing technology from Dataproducts
Corporation in order to help us maintain our position in this field. In April
2002, we obtained the exclusive right, subject to one existing license, with
enforcement rights to a patent for 3-dimensional printing using two different
materials from Richard Helinski. In July of 2002, we reached an agreement with
Sanders Design International, Inc. (SDI) of Wilton, NH, to settle a patent
infringement suit that was pending in the U.S. District Court for the District
of New Hampshire. According to the settlement, all parties agreed that the
Helinski patent was valid and had been infringed by SDI. SDI agreed to pay us
for past infringement for all machines manufactured or in production as of the
date of the settlement agreement. In addition, SDI agreed to pay a running
royalty of 6% for all future systems manufactured under the patent and for all
consumables sold for use in their machines.
At December 31, 2002, we had 359 patents, which include 152 in the United
States, 146 in Europe, 17 in Japan and 44 in other foreign countries. At that
date, we also had 176 pending patent applications: 52 in the United States, 53
in Japan, 48 in European countries and 23 other foreign countries. As new
developments and components to the technology are discovered, we intend to apply
for additional patents.
Application for a patent offers no assurance that a patent will be issued as
applied for. Issuance of a patent offers no assurance that the patent can be
protected against any claims of invalidation or that the patent can be enforced
against any infringement. In addition, litigation of patent issues can be costly
and time-consuming.
10
Employees
At December 31, 2002, we had 416 full-time employees. In addition, at that same
date we utilized the services of six independent contractors and one consultant.
None of these employees or independent contractors is covered by labor
agreements. We consider our relations with our employees and independent
contractors to be satisfactory.
On July 24, 2002, we substantially completed a reduction in workforce, which
eliminated 109 positions out of our total workforce of 523 or approximately 20%
of the total workforce. In addition, we closed our existing office in Austin,
Texas that we acquired as part of our acquisition of DTM, as well as our sales
office in Farmington Hills, Michigan. This was the second reduction in force
completed in 2002. On April 9, 2002, the Company eliminated approximately 10% of
its total workforce.
Website Availability of Our Reports Filed with the Securities and Exchange
Commission
We maintain a website with the address www.3dsystems.com. We are not including
the information contained on our website as a part of, or incorporating it by
reference into, this filing. We make available free of charge through our
website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and
Current Reports on Form 8-K, and amendments to these reports, as soon as
reasonably practicable after we electronically file that material with, or
furnish that material to, the Securities and Exchange Commission.
Item 2. Properties
Our principal administrative functions, sales and marketing, product
development, technology center and training facilities are located in a 78,320
square foot building in Valencia, California. The lease for this property, which
was originally to expire on December 31, 2002, has been extended until December
31, 2007, and is subject to an optional five-year extension.
We also lease sales and service offices in Texas. The space leased for sales and
service offices is generally for one or two occupants and for terms of a year or
less. Sales and service offices are also located in four countries in the
European Community (France, Germany, the United Kingdom and Italy), Malaysia,
Japan and Hong Kong.
A significant portion of our manufacturing and United States customer support
operations are located in a 67,000 square foot facility located in Grand
Junction, Colorado. The construction cost of the Colorado facility has been
financed through a $4.9 million industrial development bond. To secure the
reimbursement agreement with Wells Fargo relating to the letter of credit
collateralizing these bonds, we executed a deed of trust, security agreement and
assignment of rents, an assignment of rents and leases, and a related security
agreement encumbering the Grand Junction facility and certain personal property
and fixtures located there. In addition, the Grand Junction facility is
encumbered by a second deed of trust in favor of Mesa County Economic
Development Council, Inc. ("MCEDCI"), securing $.8 million in allowances granted
to us by MCEDCI pursuant to an Agreement dated October 4, 1995.
We closed our facility located in Austin, Texas. Approximately 50,000 square
feet of space remains subject to a lease until December 31, 2006. Of this space,
approximately 20,000 square feet has been sublet.
We believe that the facilities described above will be adequate to meet our
needs for the immediate future.
Item 3. Legal Proceedings
3D Systems, Inc. vs. Aaroflex, et al. On January 13, 1997, we filed a complaint
in U.S. District Court, Central District of California, against Aarotech
Laboratories, Inc., Aaroflex, Inc. and Albert C. Young. Aaroflex is the parent
corporation of Aarotech. Young is the Chairman of the Board and Chief Executive
Officer of both Aarotech and Aaroflex. The original complaint alleged that
stereolithography equipment manufactured by Aaroflex infringes six of our
patents. In August 2000, two additional patents were added to the complaint. The
Company seeks damages and injunctive relief from the defendants, who have
threatened to sue the Company for trade libel. To date, the defendants have not
filed such a suit.
Following decisions by the District Court and the Federal Circuit Court of
Appeals on jurisdictional issues, Aarotech and Mr. Young were dismissed from the
suit, and an action against Aaroflex is proceeding in the District Court.
Motions for summary judgment by Aaroflex on multiple counts contained in our
complaint and on Aaroflex's counterclaims have been dismissed and fact discovery
in the case has been completed. Our motions for summary judgment for patent
infringement and validity and Aaroflex's motion for patent invalidity were heard
on May 10, 2001. In February 2002, the court denied Aaroflex's invalidity
motions. On April 24, 2002, the court denied our motions for summary judgment on
infringement, reserving the right to revisit on its own initiative the decisions
11
following the determination of claim construction. The court also granted in
part our motion on validity. The case is scheduled for trial commencing on
August 5, 2003, and the trial is scheduled to last for three weeks.
DTM vs. EOS, et al. The plastic sintering patent infringement actions against
EOS began in France (Paris Court of Appeals), Germany (District Court of Munich)
and Italy (Regional Court of Pinerolo) in 1996. Legal actions in France, Germany
and Italy are proceeding. EOS had challenged the validity of two patents related
to thermal control of the powder bed in the European Patent Office, or EPO. Both
of those patents survived the opposition proceedings after the original claims
were modified. One patent was successfully challenged in an appeal proceeding
and in January 2002, the claims were invalidated. The other patent successfully
withstood the appeal process and the infringement hearings were re-started. In
October 2001, a German district court ruled the patent was not infringed, and
this decision is being appealed. In November 2001, we received a decision of a
French court that the French patent was valid and infringed by the EOS product
sold at the time of the filing of the action and an injunction was granted
against future sales of the product. EOS filed an appeal of that decision in
June 2002. That action is pending. In February 2002, we received a decision from
an Italian court that the invalidation trial initiated by EOS was unsuccessful
and the Italian patent was held valid. The infringement action in a separate
Italian court has now been recommenced and a decision is expected based on the
evidence that has been submitted.
In 1997, DTM initiated an action against Hitachi Zosen Joho Systems, the EOS
distributor in Japan. In May 1998, EOS initiated two invalidation trials in the
Japanese Patent Office attempting to have DTM's patent invalidated on two
separate bases. The Japanese Patent Office ruled in DTM's favor in both trials
in July 1998, effectively ruling that DTM's patent was valid. In September 1999,
the Tokyo District Court then ruled in DTM's favor and granted a preliminary
injunction prohibiting further importation and selling of the infringing plastic
sintering EOS machine. In connection with this preliminary injunction, DTM was
required to place 20 million yen, which is approximately $200,000, on deposit
with the court towards potential damages that Hitachi might claim should the
injunction be reversed. Based on the Tokyo District Court's ruling, EOS then
filed an appeal in the Tokyo High Court to have the rulings of the Japanese
Patent Office revoked. On March 6, 2001, the Tokyo High Court ruled in EOS's
favor that the rulings of the Japanese Patent Office were in error. As a result,
the Tokyo High Court found that Hitachi Zosen was not infringing DTM's patent.
These rulings were unsuccessfully appealed by DTM to the Tokyo Supreme Court. We
amended the claims and the patent was reinstated in a corrective action in 2002
and no further challenges to the patent are pending in this matter.
Hitachi Zosen vs. 3D Systems, Inc. On November 25, 2002, 3D Systems was served
with a complaint through the Japanese Consulate General from EOS' Japanese
distributor, Hitachi Zosen, seeking damages in the amount of 535,293,436 yen
(approximately $4.5 million), alleging lost sales during the period in which DTM
Corporation had an injunction in Japan prohibiting the sale of EOS EOSint P350
laser sintering systems. Initial procedural hearings occurred in March and April
2003 in Tokyo District Court, with a third preliminary hearing scheduled for
June 30, 2003.
EOS vs. DTM and 3D Systems, Inc. In December 2000, EOS filed a patent
infringement suit against DTM in the U.S. District Court, Central District of
California. EOS alleges that DTM has infringed and continues to infringe certain
U.S. patents that 3D licenses to EOS. EOS has estimated its damages to be
approximately $27 million for the period from the fourth quarter of 1997 through
2002. In April 2001, consistent with an order issued by the federal court in
this matter, we were added as a plaintiff to the lawsuit. On October 17, 2001,
we were substituted as a defendant in this action because DTM's corporate
existence terminated when it merged into our subsidiary, 3D Systems, Inc. on
August 31, 2001. In February 2002, the court granted summary adjudication on our
motion that any potential liability for patent infringement terminated with the
merger of DTM into 3D Systems, Inc. Concurrently, the court denied EOS's motion
for a fourth amended complaint to add counts related to EOS's claim that 3D
Systems, Inc. is not permitted to compete in the field of laser sintering under
the terms of the 1997 Patent License Agreement between 3D Systems, Inc. and EOS.
3D Systems, Inc. filed counterclaims against EOS for the sale of polyamide
powders in the United States based on two of the patents acquired in the DTM
acquisition. The discovery cut off date was on January 20, 2003. A motion by 3D
Systems, Inc. for a preliminary injunction was denied by the court on May 14,
2002. The court rescheduled the trial date to October 7, 2003.
3D Systems, Inc. vs. AMES. In April 2002, we filed suit for patent infringement
against Advanced Manufacturing Engineering Systems of Nevada, Iowa for patent
infringement related to AMES' purchase and use of EOS powders in the Company's
SLS system. On June 24, 2002, upon motion by the defendants, this matter was
stayed pending trial of the EOS vs. DTM and 3D Systems, Inc. matter described
immediately above. We have been informed that Ames is no longer in business and
is in the process of requesting a dismissal of the action.
EOS GmbH Electro Optical Systems vs. 3D Systems, Inc. On January 21, 2003, we
were served with a complaint that had been filed in May of 2002 in Regional
Court, Commerce Division, Frankfurt, Germany, seeking 1,000,000 Euros for the
alleged breach of a non-competition agreement entered into in 1997. We answered
the complaint on April 25, 2003. At a hearing on June 27, 2003, the court
advised the parties that it intends to issue a decision in this matter on
September 27, 2003.
Board of Regents, The University of Texas System and 3D Systems, Inc. v. EOS
GmbH Electro Optical Systems. On February 25, 2003, 3D Systems, along with the
Board of Regents of the University of Texas, filed suit against EOS GmbH Electro
Optical Systems ("EOS") in the United States District Court, Western District of
Texas seeking damages and injunctive relief arising from violation of
12
U.S. Patents Nos. 5,597,589 and 5,639,070, which are patents relating to laser
sintering which have been licensed by the University of Texas to 3D. On March
25, 2003, EOS filed its answer to this complaint, along with counterclaims
including breach of contract and antitrust violations.
Regent Pacific Management Corporation v. 3D Systems Corporation. On June 11,
2003, Regent Pacific Management Corporation filed a complaint against us for
breach of contract in the Superior Court of the State of California, County of
San Francisco. Regent provided management services to us from September 1999
through September 2002. Regent alleges that we breached non-solicitation
provisions in our contract with it by retaining the services of two Regent
contractors following the termination of the contract. Regent seeks $780,000 in
liquidated damages together with reasonable attorney's fees and costs. We
currently are evaluating the complaint.
SEC Inquiry. We received an inquiry from the SEC relating to our revenue
recognition practices. The Audit Committee has completed its own inquiry into
the matter and shared its findings with the SEC. To date, the Company has not
been notified that the SEC has initiated a formal investigation.
In addition, on May 6, 2003, we received a subpoena from the U.S. Department of
Justice to provide certain documents to a grand jury investigating antitrust and
related issues within our industry. We have been advised that we currently are
not a target of the grand jury investigation, and we are complying with the
subpoena.
The Company is engaged in certain additional legal actions arising in the
ordinary course of business, and, on the advice of legal counsel, the Company
believes it has adequate legal defenses and that the ultimate outcome of these
actions will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote by security holders during the fourth
quarter of fiscal 2002.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth, for the periods indicated, the range of
high and low bid information per share of our common stock as quoted on the
Nasdaq Stock Market's National Market. The Company's stock was traded under the
symbol "TDSC" until April 15, 2003 when, due to delinquent filings, the symbol
was changed to "TDSCE."
Historic Prices
--------------------------
Year Period High Low
-------------------- ----------------------- ----------- -------------
2001 First Quarter $ 14.56 $ 8.81
Second Quarter 18.52 9.69
Third Quarter 16.70 11.51
Fourth Quarter 15.09 9.73
2002 First Quarter 15.90 9.16
Second Quarter 15.80 10.80
Third Quarter 13.55 5.75
Fourth Quarter 8.51 4.98
2003 First Quarter 10.15 4.10
Second Quarter (through May 30) 6.70 4.00
As of May 30, 2003, the outstanding common stock was held of record by 435
stockholders.
Dividends
We have not paid any dividends on our common stock and currently intend to
retain any future earnings for use in our business. In addition, our loan
documents place limitations on our ability to pay dividends or make other
distributions in respect of our common stock. Also, holders of our Series B
Convertible Preferred Stock are entitled to receive, when, and if declared by
our Board of Directors, but only out of funds that are legally available
therefor, cash dividends at the rate of 8% of the Series B issuance price per
share per annum, which may be increased to 10% under certain circumstances. No
dividends may be paid on any shares of common stock or on shares of any other
stock ranking junior to the Series B Convertible Preferred Stock unless all
accrued and unpaid dividends have first been declared and paid in full with
respect to the Series B Convertible Preferred Stock.
13
Any future determination as to the payment of dividends on our common stock will
be restricted by these limitations, will be at the discretion of our board of
directors and will depend upon our earnings, operating and financial condition
and capital requirements, and other factors deemed relevant by our board of
directors, including the General Corporation Law of the State of Delaware, which
provides that dividends are only payable out of surplus or current net profits.
Equity Compensation Plans
The following table summarizes information about the equity securities
authorized for issuance under our compensation plans as of December 31, 2002.
For a description of these plans, please see Note 15, Stockholders' Equity and
Stockholders' Rights Plan, in our Consolidated Financial Statements.
Number of Number of
securities to Weighted- securities
be issued average remaining
upon exercise price available for
exercise of of future
outstanding outstanding issuance
options, options, under equity
Plan Category warrants, warrants and compensation
and rights rights plans
-------------- --------------- ---------------
(shares in thousands)
Equity compensation plans approved by stockholders 2,302 $ 11.48 803
Equity compensation plans not approved by stockholders 316 9.57 389
-------------- ---------------
Total 2,618 11.25 1,192
============== ===============
Recent Sales of Unregistered Securities
On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible Preferred
Stock for aggregate consideration of $15.8 million. The preferred stock accrues
dividends at 8% per share and is convertible at any time into approximately
2,634,016 shares of common stock. The stock is redeemable at the Company's
option at any time after the third anniversary date. The Company must redeem any
shares of preferred stock outstanding on the tenth anniversary date. The
redemption price is $6.00 per share plus accrued and unpaid dividends. We did
not employ any form of general solicitation or general advertising in connection
with the offer and sale of these securities. In addition, the purchasers of the
securities are "accredited investors" for purposes of Rule 501 of the Securities
Act. For these reasons, among others, the offer and sale of these securities
were exempt from registration pursuant to Rule 506 of Regulation D of the
Securities Act.
14
Item 6. Selected Financial Data
The following summary of selected financial data for the periods set forth below
has been derived from our audited financial statements. You should read the
information as of December 31, 2002 and 2001, and for the fiscal years ended
December 31, 2002, 2001 and 2000 in conjunction with Management's Discussion and
Analysis of Results of Operations and Financial Condition and with our
consolidated financial statements appearing elsewhere in this Form 10-K. The
selected financial data as of and for the years ended December 31, 2001 and
2000, has been restated. For additional information regarding the restatement,
please refer to Note 24 to the Consolidated Financial Statements included in
Item 8.
Unless otherwise expressly stated, all financial information in this Report is
presented inclusive of the changes made to the financial statements for the
years ended December 31, 2001 and 2000. The reconciliation of previously
reported amounts to the amounts currently being reported is presented in the
accompanying Notes to Consolidated Financial Statements appearing in Item 8,
Note 24 to our Consolidated Financial Statements.
Years Ended December 31,
---------------------------------------------------------------------------------
2001 2000
2002 (as restated) (as restated) 1999 1998
-------------- -------------- ------------- -------------- --------------
(in thousands, except per share amounts)
Statements of Operations Data:
Sales:
Products(1) $ 81,039 $ 84,558 $ 79,857 $ 66,806 $ 65,434
Services(2) 34,922 34,182 29,429 30,143 32,683
-------------- -------------- ------------- -------------- --------------
Total sales 115,961 118,740 109,286 96,949 98,117
-------------- -------------- ------------- -------------- --------------
Cost of sales:
Products(1) 43,398 42,278 34,969 35,938 33,477
Services(2) 25,942 24,961 21,729 20,975 22,062
-------------- -------------- ------------- -------------- --------------
Total cost of sales 69,340 67,239 56,698 56,913 55,539
-------------- -------------- ------------- -------------- --------------
Gross profit 46,621 51,501 52,588 40,036 42,578
Operating expenses:
Selling, general and administrative 48,331 42,807 32,710 35,273 30,448
Research and development 15,366 11,010 7,814 8,931 9,425
Severance and other restructuring costs 4,354 --- --- 3,384 ---
-------------- -------------- ------------- -------------- --------------
Total operating expenses 68,051 53,817 40,524 47,588 39,873
-------------- -------------- ------------- -------------- --------------
(Loss) income from operations (21,430) (2,316) 12,064 (7,552) 2,705
Interest and other (expense) income, net (2,991) (1,033) 115 11 482
Gain on arbitration settlement 18,464 --- --- --- ---
-------------- -------------- ------------- -------------- --------------
(Loss) income before income taxes (5,957) (3,349) 12,179 (7,541) 3,187
Provision for (benefit from) income taxes 8,909 (992) 4,309 (2,240) 1,055
-------------- -------------- ------------- -------------- --------------
Net (loss) income $ (14,866) $ (2,357) $ 7,870 $ (5,301) $ 2,132
============== ============== ============= ============== ==============
Shares used to calculate basic net (loss)
income per share 12,837 12,579 11,851 11,376 11,348
Basic net (loss) income per share $ (1.16) $ (.19) $ .66 $ (.47) $ .19
============== ============== ============= ============== ==============
Shares used to calculate diluted net (loss)
income per share 12,837 12,579 12,889 11,376 11,594
Diluted net (loss) income per share $ (1.16) $ (.19) $ .61 $ (.47) $ .18
============== ============== ============= ============== ==============
At December 31,
------------------------------------------------------------------------------
2001 2000
2002 (as restated) (as restated) 1999 1998
-------------- -------------- -------------- -------------- --------------
Balance Sheet Data:
Working (deficit) capital $ (8,608) $ 16,008 $ 44,275 $ 31,219 $ 38,305
Total assets 132,233 164,942 109,623 90,658 95,103
Current portion of long-term debt 10,500 3,135 120 110 100
Long-term liabilities, excluding current
portion 17,487 33,179 7,585 9,168 6,090
Stockholders' equity 59,866 78,429 71,522 59,608 66,557
__________________________________
(1) Includes systems and related equipment, material, software and other
component parts as well as rentals of equipment.
(2) Includes maintenance services provided by our technology centers and
training services.
15
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The Consolidated Financial Statements as of and for the years ended December 31,
2001 and 2000 included in this Form 10-K have been restated. For additional
information regarding the restatement, please refer to Item 14 Controls and
Procedures and Note 24 to the Consolidated Financial Statements included in Item
8. All applicable financial information presented in this Item 7 has been
restated to take into account the effects of the restatements described in Note
24 to the Consolidated Financial Statements.
The following discussion should be read in conjunction with our consolidated
financial statements provided under Part II, Item 8 of this Annual Report on
Form 10-K. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, as discussed more
fully herein.
The forward-looking information set forth in this Annual Report on Form 10-K, or
this Report, is as of June 30, 2003, and we undertake no duty to update this
information. More information about potential factors that could affect our
business and financial results is included in the section entitled "Cautionary
Statements and Risk Factors" of this Report.
Restatement
Deloitte and Touche LLP, which we refer to in this Report as Deloitte, the
Company's independent auditor, in connection with its audit of our consolidated
financial statements for fiscal year 2002, identified 12 equipment sales
transactions for which revenue had been recognized in the fourth quarter of
2002, which Deloitte believed should have been recognized in other periods.
Deloitte brought these issues to the attention of management. Management
immediately notified the Audit Committee of the Board of Directors.
In response, the Audit Committee, which is comprised entirely of independent
directors, immediately commenced an investigation into our equipment revenue
recognition policies generally, and specifically with regard to the 12 equipment
sales transactions identified by Deloitte, and other related or similar
transactions. To assist it in this investigation, the Audit Committee retained
Morgan Lewis & Bockius, LLP, which we refer to in this report as Morgan Lewis,
as independent counsel, and Morgan Lewis retained the accounting firm of BDO
Seidman, LLP, which we refer to in this Report as BDO, to provide forensic
accounting services in support of its work. The investigation included a review
of significant equipment sales transactions of the Company during the period
from October 1, 2001 through December 31, 2002, to assess the revenue
recognition policies applied to these transactions, whether these equipment
sales transactions were departures from our stated revenue recognition policy
and accounting principles generally accepted in the United States of America and
the reasons for any departures.
As a result of the investigation by the Audit Committee, we have restated our
previously issued financial statements for the years ended December 31, 2001 and
2000. The restatement arose from the adjustments of certain income statement
items which principally relate to the treatment and timing of revenue
recognition of a small percentage of total equipment sales transactions. The
effect of the adjustments for the year ended December 31, 2001 is to decrease
the Company's previously reported fiscal 2001 consolidated revenues from $121.2
million to $118.7 million, increase net loss from $1.3 million to $2.4 million
and increase diluted loss per share from $0.11 to $0.19. For the year ended
December 31, 2000, the effect of these adjustments is to decrease the Company's
previously reported fiscal 2000 consolidated revenues from $109.7 million to
$109.3 million, decrease net income from $8.1 million to $7.9 million and
decrease diluted income per share from $0.63 to $0.61. At the direction of the
Audit Committee, the Company is implementing changes to its financial
organization and enhancing its internal controls in response to issues
identified in the investigation and otherwise raised by the restatement. These
changes are more fully discussed in Item 14 of this Report.
Unless otherwise expressly stated, all financial information in this Report is
presented inclusive of these income statement changes and other adjustments. The
reconciliation of previously reported amounts to the amounts currently being
reported is presented in Note 24 of the accompanying Notes to Consolidated
Financial Statements in this Report.
Overview
We develop, manufacture and market worldwide solid imaging systems designed to
reduce the time it takes to produce three-dimensional objects. Our products
produce physical objects from the digital output of solid or surface data from
computer aided design and manufacturing, which we refer to as CAD/CAM, and
related computer systems, and include SLA(R) and SLS(R) systems and ThermoJet(R)
solid object printers.
SLA systems use our proprietary stereolithography technology, which we refer to
as SL, an additive solid imaging process which uses a laser beam to expose and
solidify successive layers of photosensitive resin until the desired object is
formed to precise specifications in epoxy or acrylic resin. SLS systems utilize
a proprietary process called selective laser sintering, which we refer to as the
SLS process, which uses laser energy to sinter powdered material to create solid
objects from powdered materials. LS and SL-produced parts can be used for
concept models, engineering prototypes, patterns and masters for molds,
consumable tooling, and short-run manufacturing of final product, among other
applications. ThermoJet solid object printers employ hot melt ink jet technology
to build
16
models in successive layers using our proprietary thermoplastic material. These
printers, about the size of an office copier, are network-ready and are designed
for operation in engineering and design office environments. The ThermoJet
printer output can be used as patterns and molds, and when combined with other
secondary processes such as investment casting, can produce parts with
representative end-use properties.
Our customers include major corporations in a broad range of industries
including service bureaus and manufacturers of automotive, aerospace, computer,
electronic, consumer and medical products. Our revenues are generated by product
and service sales. Product sales are comprised of sales of systems and related
equipment, materials, software and other component parts, as well as rentals of
systems. Service and warranty sales include revenues from a variety of on-site
maintenance services and customer training.
For the year ended December 31, 2002, the continued general economic slowdown in
capital equipment spending worldwide impacted both revenues and earnings. In
2002, SLA system unit sales were down 26.8% and SLS system unit sales were down
41.3% from 2001 (comparing the combined results of 3D Systems and DTM
Corporation for both periods). This had a significant impact on both revenue and
overall gross margin and we expect this to continue in 2003.
We recognize the importance of recurring revenue to moderate the impact that
fluctuations in capital spending has on our high end equipment revenue. The
following table reflects recurring revenues (service and material sales) and
non-recurring revenues (system sales and related equipment) and those revenues
as a percentage of total revenues for the periods indicated below:
Years Ended December 31,
---------------------------------------------
2002 2001 2000
------------ ------------ ------------
Recurring sales $ 66,541 $ 64,815 $ 54,696
Non-recurring sales 49,420 53,925 54,590
------------ ------------ ------------
Total sales $ 115,961 $ 118,740 $ 109,286
============ ============ ============
Recurring sales 57.4% 54.6% 50.0%
Non-recurring sales 42.6% 45.4% 50.0%
------------ ------------ ------------
Total sales 100.0% 100.0% 100.0%
============ ============ ============
The market for our capital equipment has been impacted by overall economic
conditions since the second quarter of 2001. Consequently, we reduced our cost
structure by implementing an approximate 10%, or 63 employees, reduction in
workforce worldwide in April of 2002. After reviewing our results for the second
quarter of 2002 and the long-term prospects for the worldwide economy, we took
additional measures to realign our projected expenses with anticipated revenue
levels. During the third quarter of 2002, we closed our existing facilities in
Austin, Texas and Farmington Hills, Michigan and reduced our workforce by an
additional 20% or 109 employees. As a result of these activities, we recorded
charges of $1.6 million and $2.7 million in the quarters ending June 28, 2002
and September 27, 2002, respectively.
Sales into the Advanced Digital Manufacturing ("ADM") market continue to
increase including sales related to aerospace, motorsports, jewelry, and hearing
aids. Our ADM revenue was $37.2 million or 32.2% of our overall revenue in 2002,
and we believe that the market demand for new ADM applications continues to
grow. During 2002, we placed 7 systems into aerospace applications, a total of
11 systems into motorsports, and 22 systems into jewelry related applications as
well as several other ADM applications.
During 2002, we announced that we are developing four new materials for use in
our SLS systems and the release of another series of resins for our SLA systems.
New materials such as aluminum, hard steel, flame retardant nylon (for
commercial aerospace applications) and a resin that mimics nylon material, are
focused on meeting the opportunities available in ADM and will significantly
expand the range of applications for which we can provide solid imaging
solutions.
On March 19, 2002, we reached a settlement agreement with Vantico relating to
the termination of the Distribution and Research and Development Agreement which
required Vantico to pay us $22 million through payment of cash or delivery of
1.55 million shares of 3D Systems common stock. On April 22, 2002, Vantico
delivered the 1.55 million shares of our common stock to us. Under our
distribution contract with Vantico, we were the exclusive worldwide distributor
of Vantico photosensitive liquid resins for stereolithography. Our material
revenue, excluding DTM related revenues, declined to $17.0 million for the year
ended December 31, 2002 from $25.5 million for the year ended December 31, 2001,
as a result of the termination of the distribution agreement and prices have
fallen significantly as a result of increased competition. On September 20,
2001, we acquired RPC, an independent supplier of stereolithography resins which
has enabled us to solicit customers to transition from Vantico material to RPC
material. We believe that many customers have converted to our RPC resins and
that we supply approximately 50% of the worldwide market for SL resins used in
our SLA systems. We
17
continue to focus on our resin conversion program and our overall materials
business. We are moving forward with our retail materials strategy with our
Accura(TM) SL materials which we launched on April 23, 2002.
On July 9, 2002, the United States Department of Justice approved Sony
Corporation as the licensee for certain of our technology, as provided for by
the Final Judgment issued on April 17, 2002, by the United States District Court
for the District of Columbia, relating to our acquisition of DTM Corporation.
Under the terms of the license agreement, we have granted a license to Sony for
certain of our North American patents and software copyrights for use only in
the field of stereolithography within North America (consisting of the United
States, Canada and Mexico) together with a list of our North American
stereolithography customers, in exchange for a license fee of $900,000, which we
received and recorded into revenue in August 2002. In addition, we recorded
$450,000 in cost of sales associated with the license fee. This license applies
only to those North American patents which we owned or licensed as of April 17,
2002, as well as any applied-for patents as of April 17, 2002, that cover
technology marketed prior to April 17, 2002 for use in the field of
stereolithography. The license does not apply to technology that we may develop
in the future. The license is perpetual, assignable, transferable and
non-exclusive, but there is no right to sublicense except as necessary to
establish distribution and to outsource manufacturing.
On August 24, 2001, we completed our acquisition of DTM in which we purchased
all of the outstanding shares of common stock of DTM for approximately $45
million in cash. DTM's operations have been fully integrated into our existing
business allowing us to realize synergies and cost savings. The acquisition
allows us to offer our customers an expanded product line and increases our
capabilities in the areas of advanced digital manufacturing and rapid tooling,
which we have identified as areas of significant opportunity for us for 2002 and
beyond.
In February 2001, we acquired the stock and intellectual property of OptoForm
SARL ("Optoform"). The OptoForm technology is capable of producing products with
metal and ceramic properties. The aggregate purchase price was $2.6 million, of
which $1.4 million was settled in cash at the time of closing and $1.2 million
was paid in February 2002. The acquisition of OptoForm has allowed us to
continue to expand our product offerings and increase our capabilities in the
areas of advanced digital manufacturing and rapid tooling.
In September 2001, we acquired the stock of RPC Ltd., a manufacturer of
sterolithography material. The aggregate purchase price was $5.5 million. (See
note 10 of the Notes to Consolidated Financial Statements)
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
critical accounting estimates that directly impact our consolidated financial
statements and related disclosures. Critical accounting estimates are estimates
that meet two criteria: (1) the estimates require that we make assumptions about
matters that are highly uncertain at the time the estimates are made; (2) there
exist different estimates that could reasonably be used in the current period,
or changes in the estimates used are reasonably likely to occur from period to
period, both of which would have a material impact on the presentation of the
financial condition or our results of our operations. On an on-going basis, we
evaluate our estimates, including those related to the allowance for doubtful
accounts, income taxes, inventory, goodwill and intangible assets, contingencies
and revenue recognition. We base our estimates and assumptions on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The following represent what management believes are the critical accounting
policies most affected by significant management estimates and judgments.
Management has discussed these critical accounting policies, the basis for their
underlying assumptions and estimates and the nature of our related disclosures
herein with the Audit Committee of the Board of Directors.
Allowance for doubtful accounts. Our estimate for the allowance for doubtful
accounts related to trade receivables is based on two methods. The amounts
calculated from each of these methods are combined to determine the total amount
reserved. First, we evaluate specific accounts where we have information that
the customer may have an inability to meet its financial obligations (for
example, bankruptcy). In these cases, we use our judgment, based on the best
available facts and circumstances, and record a specific reserve for that
customer against amounts due to reduce the receivable to the amount that is
expected to be collected. These specific reserves are reevaluated and adjusted
as additional information is received that impacts the amount reserved. Second,
a reserve is established for all customers based on a range of percentages
applied to aging categories. These percentages are based on historical
collection and write-off experience. If circumstances change (for example, we
experience higher than expected defaults or an unexpected material adverse
change in a major customer's ability to meet its financial obligation to us),
our estimates of the recoverability of amounts due to us could be reduced.
18
We believe that our allowance for doubtful accounts is a critical accounting
estimate because it is susceptible to change and dependent upon events that are
remote in time and may or may not occur, and because the impact recognizing
additional allowance for doubtful accounts may be material to the assets
reported on our balance sheet.
Income taxes. At December 31, 2002, the unadjusted net book value of our
deferred tax assets totaled approximately $18.7 million, which was principally
comprised of net operating loss carryforwards of $14.2 million and for credits
of $6.1 million. The provisions of SFAS No. 109 "Accounting for Income Taxes",
require a valuation allowance when, based upon currently available information
and other factors, it is more likely than not that all or a portion of the
deferred tax asset will not be realized. SFAS No. 109 provides that an important
factor in determining whether a deferred tax asset will be realized is whether
there has been sufficient income in recent years and whether sufficient income
is expected in future years in order to utilize the deferred tax asset. Forming
a conclusion that a valuation allowance is not needed is difficult when there is
negative evidence, such as cumulative losses in recent years. The existence of
cumulative losses in recent years is an item of negative evidence that is
particularly difficult to overcome. During our 2002 fourth quarter-end, we
recorded a valuation allowance of approximately $12.9 million against our net
deferred tax assets. We intend to maintain a valuation allowance until
sufficient evidence exists to support its reversal. Also, until an appropriate
level of profitability is reached, we do not expect to recognize any domestic
tax benefits in future periods.
We believe that our determination to record a valuation allowance to reduce our
deferred tax assets is a critical accounting estimate because it is based on an
estimate of future taxable income in the United States, which is susceptible to
change and dependent upon events that are remote in time and may or may not
occur, and because the impact of recording a valuation allowance may be material
to the assets reported on our balance sheet. The determination of our income tax
provision is complex due to operations in numerous tax jurisdictions outside the
United States, which are subject to certain risks, which ordinarily would not be
expected in the United States. Tax regimes in certain jurisdictions are subject
to significant changes, which may be applied on a retroactive basis. If this
were to occur, our tax expense could be materially different than the amounts
reported. Furthermore, as explained in the preceding paragraph, in determining
the valuation allowance related to deferred tax assets, the Company adopts the
liability method as required by SFAS No. 109, "Accounting for Income Taxes".
This method requires that we establish valuation allowance if, based on the
weight of available evidence, in the Company's judgment it is more likely than
not that the deferred tax assets may not be realized.
Inventory. Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out method. Reserves for slow moving and
obsolete inventories are provided based on historical experience and current
product demand. Our reserve for slow moving and obsolete inventory was $1.9
million and $1.6 million at December 31, 2002 and 2001, respectively. We
evaluate the adequacy of these reserves quarterly. Our determination relating to
the allowance for inventory obsolescence is subject to change because it is
based on management's current estimates of required reserves and potential
adjustments. We believe that the allowance for inventory obsolescence is a
critical accounting estimate because it is susceptible to change and dependent
upon events that are remote in time and may or may not occur, and because the
impact of recognizing additional obsolescence reserves may be material to the
assets reported on our balance sheet and results of operations.
Goodwill and intangible assets. The Company has applied Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" in its allocation
of the purchase price of DTM Corporation (DTM) and RPC Ltd. (RPC). The annual
impairment testing required by SFAS No. 142, "Goodwill and Other Intangible
Assets" requires the Company to use its judgment and could require the Company
to write-down the carrying value of its goodwill and other intangible assets in
future periods. SFAS No. 142 requires companies to allocate their goodwill to
identifiable reporting units, which are then tested for impairment using a
two-step process detailed in the statement. The first step requires comparing
the fair value of each reporting unit with its carrying amount, including
goodwill. If that fair value exceeds the carrying amount, the second step of the
process is not necessary and there are no impairment issues. If that fair value
does not exceed that carrying amount, companies must perform the second step
that requires an allocation of the fair value of the reporting unit to all
assets and liabilities of that unit as if the reporting unit had been acquired
in a purchase business combination and the fair value of the reporting unit was
the purchase price. The goodwill resulting from that purchase price allocation
is then compared to its carrying amount with any excess recorded as an
impairment charge.
Upon implementation of SFAS No. 142 in January 2002 and again in the fourth
quarter of 2002, the Company concluded that the fair value of the Company's
reporting units exceeded their carrying value and accordingly, as of that date,
there were no goodwill impairment issues. The Company is required to perform a
valuation of its reporting unit annually, or upon significant changes in the
Company's business environment.
We believe that our determination not to recognize an impairment of goodwill is
a critical accounting estimate because it is susceptible to change, dependent
upon estimates of the fair value of our reporting units, and because the impact
of recognizing an impairment may be material to the assets reported on our
balance sheet and our results of operations.
Contingencies. We account for contingencies in accordance with SFAS No. 5,
"Accounting for Contingencies". SFAS No. 5 requires that we record an estimated
loss from a loss contingency when information available prior to issuance of our
financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated (see Note 20
of the Notes to the Consolidated Financial Statements).
19
Accounting for contingencies such as legal and income tax matters requires us to
use our judgment. At this time our contingencies are not estimable and have not
been recorded, however, management believes the ultimate outcome of these
actions will not have a material effect on our consolidated financial position,
results of operations or cash flows.
Revenue Recognition. Revenues from the sale of systems and related products are
recognized upon shipment, provided that both title and risk of loss have passed
to the customer and collection is reasonably assured. Some sales transactions
are bundled and include equipment, software license, warranty, training and
installation. The Company allocates and records revenue in these transactions
based on vendor specific objective evidence that has been accumulated through
historic operations. The process of allocating the revenue involves some
management judgments. Revenues from services are recognized at the time of
performance. We provide end users with maintenance under a warranty agreement
for up to one year and defer a portion of the revenues at the time of sale based
on the objective evidence for the fair value of these services. After the
initial warranty period, we offer these customers optional maintenance
contracts; revenue related to these contracts is deferred and recognized ratably
over the period of the contract. Our warranty costs were $4.6 million, $4.2
million and $3.8 million, for the years ended December 31, 2002, 2001 and 2000,
respectively. The Company's systems are sold with software products that are
integral to the operation of the systems. These software products are not sold
separately.
Certain of the Company's sales are made through a sales agent to customers where
substantial uncertainty exists with respect to collection of the sales price.
The substantial uncertainty is generally a result of the absence of a history of
doing business with the customer and with respect to the uncertain political
environment in the country in which the customer does business. For these sales,
the Company records revenues based on the cost recovery method, which requires
that the sales proceeds received are first applied to the carrying amount of the
asset sold until the carrying amount has been recovered, thereafter, all
proceeds are credited to sales.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS 146
will not have a material impact on our results of operations or financial
condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amended SFAS No. 123,
"Accounting for Stock-Based Compensation." The new standard provides alternative
methods of transition for a voluntary change to the fair market value based
method for accounting for stock-based employee compensation. Additionally, the
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. In compliance with SFAS No. 148, we have
elected to continue to follow the intrinsic value method in accounting for its
stock-based employee compensation plan as defined by Accounting Principles Board
("APB") Opinion No. 25 and has made the applicable disclosures in Note 15 of the
Notes to the Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No. 150 (SFAS No. 150), "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 establishes standards on the classification and
measurement of financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 will become effective for financial instruments entered
into or modified after May 31, 2003. We are in the process of assessing the
effect of SFAS No. 150 and does not expect the implementation of the
pronouncement to have a material effect on its financial condition or results of
operations.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation it has undertaken in issuing the guarantee. We will apply FIN 45
to guarantees, if any, issued after December 31, 2002. We have not yet evaluated
the financial statement impact of the adoption of FIN 45. FIN 45 also requires
guarantors to disclose certain information for guarantees, including product
warranties, outstanding at December 31, 2002.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. We do not expect to identify any variable interest entities
that must be consolidated.
20
Results of Operations
The following table sets forth the percentage relationship of certain items from
our Statements of Operations to total sales:
Percentage of Total Sales
Years Ended December 31,
-----------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
Sales:
Products 69.9% 71.2% 73.1%
Services 30.1% 28.8% 26.9%
---------------- ---------------- ----------------
Total sales 100.0% 100.0% 100.0%
---------------- ---------------- ----------------
Cost of sales:
Products 37.4% 35.6% 32.0%
Services 22.4% 21.0% 19.9%
---------------- ---------------- ----------------
Total cost of sales 59.8% 56.6% 51.9%
---------------- ---------------- ----------------
Gross profit 40.2% 43.4% 48.2%
Selling, general and administrative expenses 41.7% 36.1% 29.9%
Research and development expenses 13.3% 9.3% 7.2%
Severance and other restructuring costs 3.8% --- ---
---------------- ---------------- ----------------
(Loss) income from operations (18.6)% (2.0)% 11.1%
Interest and other (expense) income, net (2.6)% (0.9)% 0.1%
Gain on arbitration settlement 15.9% --- ---
Provision for (benefit from) income taxes 7.7% (0.8)% 3.9%
---------------- ---------------- ----------------
Net (loss) income (12.9)% (2.1)% 7.2%
================ ================ ================
The following table sets forth, for the periods indicated, total sales
attributable to each of the Company's major products and services groups, and
those sales as a percentage of total sales:
Years Ended December 31,
-----------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
(in thousands, except for percentages)
Products:
SLA systems and related equipment $ 29,186 $ 35,223 $ 44,803
SLS systems and related equipment 13,362 8,651 --
Solid object printers 1,931 5,261 6,520
Materials 31,619 30,633 25,267
Other 4,941 4,790 3,267
----------------- ----------------- -----------------
Total products 81,039 84,558 79,857
----------------- ----------------- -----------------
Services:
Maintenance 33,038 32,239 26,079
Other 1,884 1,943 3,350
----------------- ----------------- -----------------
Total services 34,922 34,182 29,429
----------------- ----------------- -----------------
Total sales $ 115,961 $ 118,740 $ 109,286
================= ================= =================
Products:
SLA systems and related equipment 25.2% 29.7% 41.0%
SLS systems and related equipment 11.5% 7.3% --%
Solid object printers 1.7% 4.4% 6.0%
Material 27.3% 25.8% 23.1%
Other 4.2% 4.0% 3.0%
----------------- ----------------- -----------------
Total products 70.0% 71.2% 73.1%
----------------- ----------------- -----------------
Services:
Maintenance 28.5% 27.2% 23.9%
Other 1.6% 1.6% 3.0%
----------------- ----------------- -----------------
Total services 30.1% 28.8% 26.9%
----------------- ----------------- -----------------
Total sales 100.0% 100.0% 100.0%
================= ================= =================
21
2002 Compared to 2001
Sales. Sales in 2002 were $116.0 million, a decrease of 2.3% from the $118.7
million recorded in 2001. Sales for 2001 reflect the consolidated results of DTM
as of August 17, 2001. The SLS product line of machines and materials resulting
from the DTM acquisition contributed $27.9 million and $13.8 million in revenue
in 2002 and 2001, respectively.
Product sales of $81.0 million were recorded in 2002, a decrease of 4.2%
compared to $84.6 million for 2001. Without the inclusion of the SLS product
line (which includes materials from the SLS product line), product sales of
$53.1 million would have been recorded for 2002, compared to $70.8 million for
2001. This decrease in product sales is due primarily to the decrease in our
sales of ThermoJet solid object printers and related equipment of $3.3 million
or 63.3%, a decrease in sales of our SLA systems and related equipment of $6.0
million or 17.1% and a decrease in materials revenue of $8.5 million or 33.4%.
In 2002, we sold a total of 139 SLA systems compared to 2001 in which we sold a
total of 190 SLA systems. In addition, we sold 44 SLS systems in 2002, compared
to 39 SLS systems in 2001. SLS unit sales from 2001 reflect the consolidated
results of DTM as of August 17, 2001. The reduction in the number of units sold
is a result of the economic slowdown worldwide during most of 2002.
Without the inclusion of $14.6 million and $5.1 million in materials revenue
from the SLS product line in 2002 and 2001, respectively, materials revenue of
$17.0 million were recorded in 2002, a 33.4% decrease from the $25.5 million
recorded in 2001. The decrease in materials revenue primarily relates to lower
resin volumes as we continue to solicit customers to transition from Vantico
material to our manufactured material. We have recovered in excess of 70% of
the market share lost from the termination of our sales agreement with Vantico
through December 31, 2002.
System orders and resultant sales may fluctuate on a yearly basis as a result of
a number of other factors, including world economic conditions, fluctuations in
foreign currency exchange rates, acceptance of new products and the timing of
product shipments. Due to the price of certain systems and the overall low unit
volumes, the acceleration or delay of shipments of a small number of higher-end
SLA systems from one period to another can significantly affect the results of
operations for the periods involved.
Service sales in 2002 totaled $34.9 million, an increase of 2.2% from $34.2
million in 2001. The increase primarily reflects an increase in maintenance
contract revenue, coupled with the consolidation of service revenue from the DTM
acquisition. The increase in maintenance contract revenue reflects a continued
emphasis of providing a multitude of maintenance contract options to our
customers and enhanced selling efforts in this area, coupled with an increase in
the installed base of machines.
Sales for our U.S. operating segment for 2002 and 2001 were $57.4 million and
$61.0 million, respectively, a decrease of 6.1%. Sales for our European
operating segment were $44.5 million, a slight increase from the $44.3 million
recorded in 2001. Sales for our Asia/Pacific operating segment for 2002 were
$14.1 million, an increase of 5.2% from the $13.4 million recorded in 2001
primarily due to an increase in service revenues. As noted above, the economic
slowdown worldwide has impacted our overall sales for 2002. This was partially
offset by the addition of DTM revenue for four months in 2001 and twelve months
in 2002.
Cost of sales. Cost of sales increased to $69.3 million or 59.8% of sales in
2002 from $67.2 million or 56.6% of sales in 2001. Without the inclusion of the
SLS product line, cost of sales were $55.7 million or 63.3% of sales in 2002 and
$59.8 million or 56.9% in 2001.
Product cost of sales as a percentage of product sales increased to 53.6% in
2002 from 50.0% in 2001. Without the inclusion of the SLS product line, product
cost of sales as a percentage of product sales was 56.0% in 2002 and 49.2% in
2001. The increase as a percent of product sales in 2002 compared to 2001 is due
primarily to a shift in the sales mix from higher-end SLA systems to our smaller
systems, which have lower margins. The lower end systems appeal to a broader
base of customers and we anticipate that the lost margin will be recovered over
time by the increased sales volume.
Service cost of sales as a percentage of service sales increased to 74.3% in
fiscal year 2002 from 73.0% in 2001. The increase is due to an increase in fixed
costs of the Company's Education Centers, centers at which we train customers to
use our products, and Technology Centers, attributable to the addition of the
SLS product line.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") totaled $48.3 million in 2002 and $42.8 million
for 2001. The increase primarily reflects additional expenses related to bad
debt expense, directors and officers insurance, group medical benefits and
professional fees. In addition, SG&A expenses for DTM are included for the full
year in 2002 and four months in 2001 (from the acquisition date). These expenses
are partially offset by head count related cost savings net of employee
severance.
Research and development expenses. Research and development expenses in 2002
increased to $15.4 million or 13.3% of revenue compared to $11.0 million or 9.3%
of revenue in 2001. The increase in research and development expenses is
primarily due to development costs related to the InVision Si2 3-D printer and
the decision to maintain our facility in Austin, Texas acquired from DTM. Also
included in 2002 was approximately $1.5 million of amortization related to
technology acquired in the DTM acquisition. Due to our recent decrease in our
workforce, including closing the facility in Austin, we anticipate future
research and development expenses to be more in line with historical levels
related to revenues.
22
(Loss) income from operations. Operating loss for 2002 was $21.4 million
compared to $2.3 million in 2001 due to lower gross profits and higher operating
expenses in 2002.
Gain on arbitration settlement. Gain on arbitration settlement reflects an $18.5
million gain associated with the Vantico arbitration which was recorded in the
first quarter of 2002 (see Note 21 to financial statements).
Interest and other (expense) income, net. Interest and other expense, net for
2002 was $3.0 million compared to interest and other expense, net of $1.0
million in 2001. The increased expense in 2002 reflects a higher average debt
balance and our higher average cost of capital during 2002.
Provision for (benefit from) income taxes. For 2002, our tax provision was $8.9
million or (149.6)% of the pre-tax loss, compared to a tax benefit of $1.0
million or 29.6% of the pre-tax loss in 2001. The 2002 tax provision included an
increase of the valuation allowance of deferred tax assets in the amount of
$12.9 million or (217.5)% of the pre-tax loss. As of December 31, 2002, the
Company has a net deferred tax asset, before the valuation allowance adjustment,
in the total amount of $18.7 million. See Note 18 of the Notes to Consolidated
Financial Statements.
2001 Compared to 2000
Sales. Sales in 2001 were $118.7 million, an increase of 8.6% from the $109.3
million recorded in 2000. Sales for 2001 reflect the consolidated results of DTM
as of August 17, 2001. The SLS product line of machines and materials
contributed $13.8 million in revenue in 2001.
Product sales of $84.6 million were recorded in 2001, an increase of 5.9%
compared to $79.9 million for 2000. The increase in product revenue is primarily
due to the consolidation of the results of DTM, with sales from the SLS product
line of $13.8 million. Without the consolidation of DTM, product sales of $70.8
million would have been recorded for 2001, compared to $79.9 million for 2000.
This decrease in product sales is due primarily to the decrease in sales of SLA
systems and related equipment of $9.6 million or 21.4%.
The decrease in machine sales primarily resulted from decreased sales of the
higher-end SLA systems, especially the SLA 7000 system, primarily due to a
general economic decline in higher dollar capital equipment purchases by
customers. In 2001, we sold a total of 37 SLA 7000 systems compared to 57 in
2000. Although sales of our higher-end SLA systems in 2001 were below the prior
year, sales of our newly introduced Viper si2 SLA system exceeded expectations,
with 71 units sold in 2001. The Viper si2 SLA system became generally available
on July 12, 2001.
Excluding the consolidation of $5.1 million in materials revenue from DTM,
materials revenue of $25.5 million were recorded in 2001, a slight decrease from
the $25.5 million recorded in 2000. The decrease in material revenue primarily
reflects the sale of fewer large frame SLA units. We believe that the
termination of our agreements with Vantico, coupled with our acquisition of RPC,
may have also impacted materials revenue.
System orders and resultant sales may fluctuate on a yearly basis as a result of
a number of other factors, including world economic conditions, fluctuations in
foreign currency exchange rates, acceptance of new products and the timing of
product shipments. Due to the price of certain systems and the overall low unit
volumes, the acceleration or delay of shipments of a small number of higher-end
SLA systems from one period to another can significantly affect the results of
operations for the periods involved.
Service sales in 2001 totaled $34.2 million, an increase of 16.2% from $29.4
million in 2000. The increase primarily reflects an increase in maintenance
contract revenue, coupled with the consolidation of service revenue from the DTM
acquisition. The increase in maintenance contract revenue reflects a continued
emphasis of providing a multitude of maintenance contract options to our
customers and enhanced selling efforts in this area, coupled with an increase in
the installed base of machines.
Cost of sales. Cost of sales increased to $67.2 million or 56.6% of sales in
2001 from $56.7 million or 51.9% of sales in 2000. Excluding the results of DTM,
cost of sales were $59.9 million or 50.5% of sales in 2001.
Product cost of sales as a percentage of product sales increased to 50.0% in
2001 from 43.8% in 2000. Without the consolidation of DTM, product cost of sales
as a percentage of product sales was 48.5% in 2001. The increase as a percent of
product sales in 2001 compared to 2000 is due primarily to a shift in the sales
mix from higher-end SLA systems to our smaller systems.
Service cost of sales as a percentage of service sales decreased to 73.0% in
fiscal year 2001 from 73.8% in 2000. The decrease is due to a change in the mix
of service sales from time and materials and other service revenues to
maintenance contract revenues in 2001.
23
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") totaled $42.8 million in 2001 and $32.7 million
for 2000. The increase primarily reflects expenses from the DTM acquisition,
acquisition related amortization costs, legal fees related to the Vantico
arbitration, and bad debt write-offs in the fourth quarter of 2001.
Additionally, the first six months of 2001 reflect an overall increase in
personnel expenses and other costs as we continued to build infrastructure to
support anticipated revenue growth.
Research and development expenses. Research and development expenses in 2001
increased to $11.0 million compared to $7.8 million in 2000. Excluding the
results of DTM, research and development expenses were $9.3 million in 2001, or
7.8% of sales compared with $7.8 million in 2000, or 7.2% of sales. The increase
in research and development expenses is primarily due to development costs
related to the InVision Si2 3-D printer and the initial decision to maintain our
facility in Austin, Texas. Due to our recent decrease in our workforce in 2001,
we anticipate future research and development expenses to be more in line with
historical levels related to revenues.
(Loss) income from operations. Operating loss for 2001 was $2.3 million compared
to operating income of $12.1 million in 2000, due to reductions in gross profit
and higher operating expenses in 2001 compared to 2000.
Interest and other (expense) income, net. Interest and other expense, net for
2001 was $1.0 million compared to interest and other income, net of $.1 million
in 2000. The increased expense in 2001 reflects $1.0 million of interest expense
and amortization of loan costs related to the new U.S. Bank term loan and
revolving line of credit.
Provision for (benefit from) income taxes. For 2001, our tax provision was a
benefit of $1.0 million or 29.6% of the pre-tax loss, compared to a tax charge
of $4.3 million or 35.4% of the pre-tax income in 2000.
Foreign Operations
International sales, primarily from Europe, accounted for 50.6%, 48.6% and
46.2%, of total sales in 2002, 2001 and 2000, respectively. For information with
respect to allocation of sales among our foreign operations, see Note 19 of
Notes to Consolidated Financial Statements.
Related Parties
At December 31, 2002, the Company has remaining notes receivable totaling
$59,000 from certain executive officers and employees of the Company pursuant to
the 1996 Stock Incentive Plan. The original amount of the loans was $670,000, of
which $40,000 was forgiven in 2000, $120,000 was canceled (and shares returned
and canceled) in 1999, and $185,000, $86,000, $120,000 and $60,000 were repaid
in 2002, 2001, 2000 and 1998, respectively. The loans were used to purchase
shares of the Company's common stock at the fair market value on the date of
purchase and upon exercise of stock options. Of the total notes receivable,
$41,000 may be forgiven, in part or whole, if certain profitability targets are
met. The notes bear interest at a rate of 6% per annum and mature in the years
2003 and 2004. The notes receivable are shown on the balance sheet as a
reduction of stockholders' equity.
For 2001, in connection with his services as our employee, our Board of
Directors granted to Mr. Gary J. Sbona, a 3D Systems employee and Chairman and
Chief Executive Officer of Regent Pacific Management Corporation, options to
purchase 350,000 shares of our common stock, at an exercise price of $12.43 per
share. We previously granted Mr. Sbona options to purchase 350,000 shares of our
common stock in 2000 and 1999 at exercise prices of $17.39 and $6.00 per share,
respectively. The exercise prices of the 350,000 options granted in 2001, 2000
and 1999 exceeded the fair market value of our common stock at the dates of
grant. All options generally vest over a three-year period or sooner subject to
certain conditions. In 2000, 116,666 options were exercised at a per share price
of $16.00.
We are currently involved in litigation with Regent Pacific, which provided
management services to us from September 1999 through September 2002. The
litigation involves a disagreement with regard to non-solicitation claims
related to two Regent contractors subsequently employed by us. We are involved
in a dispute with Regent with respect to the termination provisions in the
option certificates and agreements pertaining to 166,666 non-qualified stock
options issued to Mr. Sbona in 1999 and to the 350,000 options issued to Mr.
Sbona in 2001.
In December 2001, we sold $10.0 million aggregate principal amount of 7%
convertible subordinated debentures. Messrs. G. Walter Lowenbaum and Jim Kever
purchased an aggregate of $1.0 million of the debentures. The debentures are
immediately convertible at the option of the holder at a conversion price of
$12.00 per share. Mr. Loewenbaum is the Chairman of our Board of Directors and
Mr. Kever serves as a member on our Board of Directors.
On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible Preferred
Stock, at a price of $6.00 per share, for aggregate consideration of $15.8
million. The preferred stock accrues dividends at 8% per share and is
convertible at any time into
24
approximately 2,634,016 shares of common stock. The stock is redeemable at the
Company's option after the third anniversary date, The Company must redeem any
shares of preferred stock outstanding on the tenth anniversary date. The
redemption price is $6.00 per share plus accrued and unpaid dividends. Messrs.
Loewenbaum, Service and Hull, our Chairman of the Board, Chief Executive Officer
and Chief Technology Officer, respectively, purchased an aggregate of $1,450,000
of the preferred shares. Additionally, Clark Partners I, L.P., a New York
limited partnership, purchased $5.0 million of the preferred shares. Kevin
Moore, a member of our Board of Directors, is the president of the general
partner of Clark Partners I, L.P. In connection with the offering, Houlihan
Lokey Howard & Zukin rendered its opinion that the terms of the offering were
fair to the Company from a financial point of view. A special committee of the
Board of Directors, composed entirely of disinterested independent directors,
approved the offer and sale of the preferred shares and recommended the
transaction to the Board of Directors. The Board also approved the transaction,
with interested Board members not participating in the vote.
In June 2000, we entered into a distribution agreement for ThermoJet printers
with 3D Solid Solutions, which we refer to as 3DSS, a partnership in which Mr.
Loewenbaum, the Chairman of our Board of Directors, is a limited partner. As of
December 31, 2002, Solid Imaging Technologies, LLC, of which Mr. Loewenbaum is
the sole member, was the general partner of 3DSS. In 2002, 3DSS paid us
approximately $84,000 for the purchase of products and services.
Brian Service has been retained as Chief Executive Officer. Mr. Service
previously provided consulting services under an arrangement with Regent Pacific
Management Corporation. From September 10, 2002 (the date of the termination of
the Regent Agreement), through October 15, 2002, Mr. Service was engaged on an
interim consulting basis for which he was paid $79,999. Effective October 15,
2002, Mr. Service was employed by us pursuant to an employment agreement under
which he has agreed to serve as Chief Executive Officer until at least December
2003. Mr. Service is being paid $17,809 on a bi-weekly basis under this
agreement, and has been awarded fully vested options, with a term of five years,
to purchase 350,000 shares of our common stock at a price of $5.78 (the closing
price on October 15, 2002).
On November 18, 2002, the Company entered into a consulting agreement with Brian
K. Service, Inc. ("BKSI"), a corporation in which the Company's Chief Executive
Officer is a stockholder, officer, and director. Pursuant to this agreement the
Company would pay to BKSI an amount up to $310,000 for an 11-month period for
the provision of the services of qualified consultants to the Company. Under
this agreement, the Company paid $71,000 through December 31, 2002.
From October 1999 until November 2002, G. Walter Loewenbaum II was an employee
of the Company, with a salary of $180,000 per annum. He resigned from this
employment in November 2002. At the regularly scheduled Board meeting on
November 18, 2002, the Board unanimously voted to grant to Mr. Loewenbaum
compensation of $180,000 per annum for performing the duties of Chairman of the
Board of the Company.
Liquidity and Capital Resources
As of and for the Years Ended
December 31
-------------------------------------------------------
2002 2001 2000
----------------- ------------------ ----------------
(in thousands)
Cash and cash equivalents $ 2,279 $ 5,948 $ 18,999
Working (deficit) capital (8,608) 16,008 44,275
Cash provided by operating activities 1,314 6,649 5,126
Cash used for investing activities (11,015) (58,088) (2,644)
Cash provided by financing activities 5,843 40,907 4,159
GOING CONCERN
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred operating losses totaling
$21.4 million and $2.3 million for the years ended December 31, 2002 and 2001,
respectively, and has an accumulated deficit of $21.4 million at December 31,
2002.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. As of June 13, 2003, the Company had cash balances of $7.7
million, of which $1.2 million was restricted, and $0.6 million was available
under a bank line of credit available to meet current obligations. Further, the
Company is obligated under its existing line of credit to have a commitment
letter from a substitute lender by September 30, 2003. Failure to obtain a
commitment letter from an acceptable lender will cause the amount under the line
of credit to become immediately due. Management has obtained a proposal from
Congress Financial, a subsidiary of Wachovia, to provide a secured revolving
credit facility of up to $20.0 million. The proposal is contingent on Congress
Financial completing due diligence to its satisfaction and other conditions. We
cannot assure you that over the next twelve months or thereafter we will
generate funds from operations or that capital will be available from external
sources such as debt or equity financings or other potential sources to fund
future operating costs, debt service obligations and capital requirements. Our
operations are not currently profitable. Our ability to continue operations is
uncertain if we are not successful in obtaining outside funding. Management
plans to continue raising additional capital to fund operations. The lack
25
of additional capital resulting from the inability to generate cash flow or
raise financing from operations or to raise capital from external sources would
force the Company to substantially curtail or cease operations and would,
therefore, have a material adverse effect on its business. Further, we cannot
assure you that any necessary funds, if available, will be available on
attractive terms or that they will not have a significantly dilutive effect on
the Company's existing shareholders.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability or classification of asset carrying
amounts or the amounts and classification of liabilities that may result should
the Company be unable to continue as a going concern.
Net cash provided by operating activities in 2002 of $1.3 million primarily
results from the decrease in the accounts receivable balance of $11.5 million
and the decrease of inventories of $7.1 million partially offset by a net loss
of $14.9 million which included a non-cash gain from the Vantico settlement of
$20.3 million, a non-cash charge of $12.9 million resulting from an increase in
the valuation allowance for deferred income taxes and non-cash charges for
depreciation and amortization of $9.9 million. Furthermore, cash provided by
operations was decreased due to a decrease in accounts payable of $2.6 million
and other liabilities of $1.1 million.
Net cash used for investing activities in 2002 of $11.0 million primarily
relates to additions to licenses and patents of $4.7 million related to legal
defense and new patent filings, additions to property and equipment of $3.2
million for machinery and equipment, the scheduled payments for the OptoForm
acquisition of $1.2 million, and $2.0 million in payments for the RPC
acquisition.
Net cash provided by financing activities in 2002 of $5.8 million primarily
reflects $12.5 million in proceeds from the sale of stock and $44.6 million in
additional borrowings partially offset by $52.5 million in debt repayment.
On August 20, 1996, we completed a $4.9 million variable rate industrial
development bond financing of our Colorado facility. Interest on the bonds is
payable monthly (the interest rate at December 31, 2002 was 1.31%). Principal
payments are payable in semi-annual installments through August 2016. The bonds
are collateralized by an irrevocable letter of credit issued by Wells Fargo
Bank, N.A. that is further collateralized by a standby letter of credit issued
by U.S. Bank in the amount of $1.2 million. At December 31, 2002, a total of
$4.2 million was outstanding under the bond. The terms of the letter of credit
require us to maintain specific levels of minimum tangible net worth and fixed
charge coverage ratio. We were not in compliance with these covenants at
December 31, 2002.
On March 27, 2003, Wells Fargo sent a letter to the Company stating that it was
in default of the fixed charge coverage ratio and minimum tangible net worth
covenants of the reimbursement agreement relating to the letter of credit. The
bank provided the Company until April 26, 2003, to cure these defaults.
On May 2, 2003, Wells Fargo drew down a letter of credit in the amount $1.2
million which was held as partial security under the reimbursement agreement
relating to the letter of credit underlying the bonds and placed the cash in a
restricted account. The Company obtained a waiver for the defaults from the
Wells Fargo Bank in a letter dated June 16, 2003, provided that the Company meet
certain terms and conditions. The Company must remain in compliance with all
other provisions of the reimbursement agreement for this letter of credit. In
addition, on or before September 30, 2003, the Company must provide Wells Fargo
with evidence of a proposal from another bank to replace this letter of credit,
or should a replacement letter of credit not be obtained on or before December
31, 2003, the Company will agree to retire $1.2 million of the bonds using the
restricted cash. Wells Fargo has accepted the proposal letter from Congress
Financial as satisfying the requirement in the waiver agreement.
On August 17, 2001, the Company entered into a loan agreement with U.S. Bank
totaling $41.5 million, in order to finance the acquisition of DTM. The
financing arrangement consisted of a $26.5 million three-year revolving credit
facility and a $15 million 66-month commercial term loan. At December 31, 2002,
a total of $2.4 million was outstanding under the revolving credit facility and
$10.4 million was outstanding under the term loan. The interest rate at December
31, 2002, for the revolving credit facility and term loan was 7.5% and 6.42%,
respectively. The interest rate is computed as either: (1) the prime rate plus a
margin ranging from 0.25% to 4.0%, or (2) the 90-day adjusted LIBOR plus a
margin ranging from 2.0% to 5.75%. Pursuant to the terms of the agreement, U.S.
Bank has received a first priority security interest in our accounts receivable,
inventories, equipment and general intangible assets. The Company paid $1.2
million of loan origination fees and costs to US Bank during 2001 in connection
with this loan.
On May 1, 2003 the Company entered into "Waiver Agreement Number Two" with U.S.
Bank whereby U.S. Bank waived all financial covenant violations at December 31,
2002 and March 31, 2003. The events of default caused by the Company's failure
to timely submit audited financial statements and failure to make the March 31,
2003 principal payment of $5.0 million were also waived. The agreement requires
the Company to obtain additional equity investments of at least $9.6 million; to
pay off the balance on the term loan of $9.6 million by May 5, 2003; to increase
the applicable interest rate to prime plus 5.25%; and to pay a $150,000 waiver
fee and all related costs of drafting the agreement. US Bank has also agreed to
waive the Company's compliance with each financial covenant in the loan
agreement through September 30, 2003. Provided the Company obtains a commitment
letter from a qualified lending institution by September 30, 2003, to refinance
all of the outstanding obligations with US Bank, the waiver will be extended to
the earlier of December 31, 2003, or the expiration date of the commitment
letter. Through the date of this filing the
26
Company has complied with all aspects of Waiver Agreement Number Two including
the receipt of equity investments of $ 9.6 million and the $9.6 million
principal repayment of the term loan.
On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible Preferred
Stock at a price of $6.00 per share for aggregate consideration of $15.8
million. The preferred stock accrues dividends at 8% per share and is
convertible at any time into approximately 2,634,016 shares of common stock. The
stock is redeemable at the Company's option at any time after the third
anniversary date. The Company must redeem any shares of preferred stock
outstanding on the tenth anniversary date. The redemption price is equal to
$6.00 per share plus accrued and unpaid dividends. Net proceeds to us from these
transactions were $15.3 million.
On May 7, 2002, we repurchased 125,000 shares of our common stock from Vantico.
On that same date we sold 1,125,000 shares of our common stock to accredited
investors in a private placement transaction. These shares were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act. Net proceeds to us from these transactions were $12.5 million.
We lease certain facilities under non-cancelable operating leases expiring
through December 2006. The leases are generally on a net-rent basis, whereby we
pay taxes, maintenance and insurance. Leases that expire are expected to be
renewed or replaced by leases on other properties. Rental expense for the years
ended December 31, 2002, 2001 and 2000, aggregated $2.8 million, $2.0 million
and $1.9 million, respectively.
The future contractual payments are as follows:
Later
Contractual Obligations 2003 2004 2005 2006 2007 Years Total
- ---------------------------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Line of credit $ 2,450 $ --- $ --- $ --- $ --- $ --- $ 2,450
Term loan 10,350 --- --- --- --- --- 10,350
Industrial development bond 150 165 180 200 220 3,325 4,240
Subordinated debt --- --- --- 10,000 --- --- 10,000
Operating leases 2,949 2,599 1,723 1,518 738 --- 9,527
------------- ------------- ------------- ------------- ------------- ------------- -------------
Total Contractual Obligations $ 15,899 $ 2,764 $ 1,903 $ 11,718 $ 958 $ 3,325 $ 36,567
============= ============= ============= ============= ============= ============= =============
In addition to the foregoing contractual commitments in connection with the
acquisition of RPC, the Company has guaranteed the value of an aggregate of
264,900 shares of common stock underlying warrants issued to the former RPC
shareholders. If the fair market value of our common stock is less than $25.27
on September 19, 2003, then each warrant holder has the right to receive, in
exchange for the warrant, an amount equal to CHF 8.25 (approximately $6.30 at
June 20, 2003) multiplied by the total number of shares of common stock then
underlying the warrant. The value of this commitment at the acquisition date was
$1.3 million and was included in the purchase price of RPC (see Note 10 of Notes
to Consolidated Financial Statements). Our aggregate potential liability at
December 31, 2002 was approximately $1.6 million. Payment in cash is due within
30 days of exercise of the guaranty right by the warrant holder.
In order to preserve cash, we have been required to reduce expenditures for
capital projects, research and development, and in our corporate infrastructure,
any of which may have a material adverse effect on our future operations.
Further reductions in our cash balances could require us to make more
significant cuts in our operations, which would have a material adverse impact
on our future operations. We cannot assure you that we can achieve adequate
savings from these reductions over a short enough period of time in order to
allow us to continue as a going concern.
In the event we are unable to generate cash flow and achieve our estimated cost
savings, we will need to aggressively seek additional debt or equity financing
and other strategic alternatives. However, recent operating losses, our
declining cash balances, our historical stock performance, the ongoing inquiries
into certain matters relating to our revenue recognition and the general
economic downturn may make it difficult for us to attract equity investments or
debt financing or strategic partners on terms that are deemed favorable to us.
If our financial condition continues to worsen and we are unable to attract
equity or debt financing or other strategic transactions, we could be forced to
consider steps that would protect our assets against our creditors.
27
CAUTIONARY STATEMENTS AND RISK FACTORS
The risks and uncertainties described below are not the only risks and
uncertainties we face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial also may impair our business operations.
If any of the following risks actually occur, our business, results of
operations and financial condition could suffer. In that event the trading price
of our common stock could decline, and you may lose all or part of your
investment in our common stock. The risks discussed below also include
forward-looking statements and our actual results may differ substantially from
those discussed in these forward-looking statements.
Risks Arising from Recent Events
Our independent auditors' report expresses doubt about our ability to continue
as a going concern.
At December 31, 2002, our independent auditors' report, dated June 20, 2003,
includes an explanatory paragraph relating to substantial doubt as to our
ability to continue as a going concern. We have experienced significant
operating losses in each quarter of fiscal 2002 and in preceding years. Our cash
and short-term investment balances have continued to decline since December 31,
2002, and we expect to experience further declining balances. We have failed to
meet our financial covenants under our bank agreements and our reimbursement
agreement relating to our municipal bond financing. US Bank has waived our
compliance with the financial covenants in our loan agreement with them through
September 30, 2003 and subject to obtaining a commitment letter from a qualified
lending institution by September 30, 2003 to refinance all of our outstanding
obligations with US Bank, the waiver will be extended to the earlier of December
31, 2003, or the expiration date of the commitment letter. Wells Fargo has
waived compliance with certain covenants, provided that we remain in compliance
with all other provisions of the reimbursement agreement. The waiver extends
through December 31, 2003 provided that if we do not obtain a letter of credit
to replace Wells Fargo on or before December 31, 2003, we agree to retire $1.2
of the bonds through the use of restricted cash. If we are unable to obtain a
commitment letter as required under the US Bank waiver, we will need to raise
additional capital through debt or equity financing to pay off the bank loan or
we will be in default.
We are primarily reliant on cash generated from operations to meet our cash
requirements. In order to preserve cash, we have been required to reduce
expenditures for capital projects, research and development, and in our
corporate infrastructure, any of which may have a material adverse affect on our
future operations. Further reductions in our cash balances could require us to
make more significant reductions in our operations, which would have a material
adverse impact on our future operations. We cannot assure you that we can
generate sufficient cash from operations and realize our anticipated cost
savings in order to allow us to continue as a going concern. In the event we are
unable to generate cash flow and achieve our estimated cost savings, or unable
to enter into a commitment letter to refinance the US Bank loan by September 30,
2003, we will need to aggressively seek additional debt or equity financing and
other strategic alternatives. However, recent operating losses, our declining
cash balances, our historical stock performance, the ongoing inquiries into
certain matters relating to our revenue recognition and the general economic
downturn may make it difficult for us to attract equity investments or debt
financing or strategic partners on terms that are deemed favorable to us or at
all. If we are unable to obtain financing on terms acceptable to us, or at all,
we will not be able to accomplish any or all of our initiatives and could be
forced to consider steps that would protect our assets against our creditors.
The inquiry initiated by SEC may lead to charges or penalties and may adversely
affect our business.
If any government inquiry or other investigation leads to charges against us, we
likely will be harmed by negative publicity, the costs of litigation, the
diversion of management time, and other negative effects, even if we ultimately
prevail. The SEC has inquired into matters pertaining to our revenue recognition
practices. Our Audit Committee has met, and cooperated fully, with the SEC. To
date, the Company has not been notified that the SEC has initiated a formal
investigation. This matter is pending and continues to require management
attention and resources. Any adverse finding by the SEC may lead to significant
fines and penalties and limitations on our activities and may harm our
relationships with existing customers and impair our ability to attract new
customers. The filing of our restated financial statements will not necessarily
resolve the SEC inquiry.
Our common stock is trading on The Nasdaq National Market under an exception
from the continued listing requirements.
If we fail to file our first quarter 10-Q by July 14, 2003, or fail to timely
file any other periodic report due by December 31, 2003, Nasdaq will delist our
common stock and, as a consequence, fewer investors, especially institutional
investors, will be willing to invest in our company, our stock price will
decline, and it will be difficult to raise money on terms acceptable to us, or
at all.
If Nasdaq delists our common stock, it could become subject to the Securities
and Exchange Commission "Penny Stock" rules. Penny stocks generally are equity
securities with a price of less than $5.00 per share that are not registered on
a national securities exchange
28
or quoted on the Nasdaq system. Broker-dealers dealing in our common stock would
then be subject to additional burdens which may discourage them from effecting
transactions in our common stock, which could make it difficult for investors to
sell their shares and, consequently, limit the liquidity of our common stock.
In addition, if Nasdaq delists our common stock, we expect that some or all of
the following circumstances will occur, which likely will cause a further
decline in our trading price and make it more difficult to raise funds:
. there will be less liquidity in our common stock;
. there will be fewer institutional and other investors that will
consider investing in our common stock;
. there will be fewer market makers in our common stock;
. there will be less information available concerning the trading
prices and volume of our common stock; and
. there will be fewer broker-dealers willing to execute trades in
shares of our common stock.
Finance
Our debt level could adversely affect our financial health and affect our
ability to run our business.
As of June 13, 2003, our debt was $38.6 million, of which $8.6 million was
current borrowings and $25.8 million related to convertible and preferred
instruments. This level of debt could have important consequences to you as a
holder of shares. Below we have identified for you some of the material
potential consequences resulting from this significant amount of debt.
. We may be unable to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes.
. Our ability to adapt to changing market conditions may be hampered.
We may be more vulnerable in a volatile market and at a competitive
disadvantage to our competitors that have less debt.
. Our operating flexibility is more limited due to financial and other
restrictive covenants, including restrictions on incurring additional
debt, creating liens on our properties, making acquisitions and
paying dividends.
. We will be subject to the risks that interest rates and our interest
expense will increase.
. Our ability to plan for, or react to, changes in our business is more
limited.
Under certain circumstances, we may be able to incur additional indebtedness in
the future. If we add new debt, the related risks that we now face could
intensify.
Our balance sheet contains several categories of intangible assets that we may
be required to write-off or write-down based on the future performance of the
Company, which may adversely impact our future earnings and our stock price.
As of December 31, 2002, we had $67.1 million of unamortized intangible assets,
including goodwill, licenses and patents, other intellectual property, and
certain expenses that we amortize over time. Any material impairment to any of
these items could reduce our net income and may adversely affect the trading
price of our common stock.
We currently have $44.5 million in goodwill capitalized on our balance sheet. In
June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets,"
which requires among other things, the discontinuance of the amortization of
goodwill and certain other intangible assets that have indefinite useful lives,
and the introduction of impairment testing in its place. Under SFAS 142,
goodwill and some indefinite-lived intangibles will not be amortized into
results of operations, but instead will be tested for impairment at least
annually, with impairment being measured as the excess of the carrying value of
the goodwill or intangible asset over its fair value. In addition, goodwill and
intangible assets will be tested more often for impairment as circumstances
warrant, and may result in write-downs of some of our goodwill and
indefinite-lived intangibles. Accordingly, we could, from time to time, incur
impairment charges, which will be recorded as operating expenses and will reduce
our net income and adversely affect our operating results.
We currently have approximately $4.9 million related to a license fee prepaid in
1999 related to the solid object printer machine platform included under license
and patent costs, net, in our financial statements. The amortization of this
intangible is based on the number of solid object printer units sold. If future
sales of the solid object printer machine platforms do not increase, then a more
rapid rate of amortization of this balance will be required relative to the
number of units sold.
29
We are carrying a significant amount of model-related inventory and tooling
costs for a solid object printer machine platform.
We are carrying approximately $2.0 million in inventory and tooling cost
associated with the development and production of a new solid object printer
machine platform. Changes to the bill of material as a result of the design
validation testing, or abandonment of the new platform because of adverse market
studies, may render inventory and tooling obsolete. Additionally, we continue to
carry inventory and have vendor commitments related to our existing solid object
printer model totaling $1.1 million, which if not sold, could become obsolete. A
significant write-down of inventory and tooling due to obsolescence could
adversely affect our results of operations.
The mix of products we sell affects our overall profit margins.
We continuously expand our product offerings, including our materials, and work
to increase the number of geographic markets in which we operate and the
distribution channels we use in order to reach our various target markets and
customers. This variety of products, markets and channels results in a range of
gross margins and operating income which can cause substantial quarterly
fluctuations depending on the mix of product shipments from quarter to quarter.
We may experience significant quarterly fluctuations in gross margins or net
income due to the impact of the mix of products, channels, or geographic markets
utilized from period to period. More recently, our mix of products sold has
reflected increased sales of our lower end systems, which have reduced gross
margins as compared to the high-end SLA systems. If this trend continues over
time, we may experience lower average gross margins and returns.
We may be subject to product liability claims.
Products as complex as those we offer may contain undetected defects or errors
when first introduced or as enhancements are released that, despite our testing,
are not discovered until after the product has been installed and used by
customers, which could result in delayed market acceptance of the product or
damage to our reputation and business. We attempt to include provisions in our
agreements with customers that are designed to limit our exposure to potential
liability for damages arising from defects or errors in our products. However,
the nature and extent of such limitations vary from customer to customer, and it
is possible that these limitations may not be effective as a result of
unfavorable judicial decisions or laws enacted in the future. The sale and
support of our products entails the risk of product liability claims. Any
product liability claim brought against us, regardless of its merit, could
result in material expense to us, diversion of management time and attention,
and damage to our business reputation and ability to retain existing customers
or attract new customers.
Operations
We face significant competition in many aspects of our business and this
competition is likely to increase in the future
We compete for customers with a wide variety of producers of equipment for
models, prototypes and other 3-dimensional objects, ranging from traditional
model makers and subtractive-type producers, such as CNC machine makers, to a
wide variety of additive solid imaging system manufacturers as well as service
bureaus that provide any or all of these types of technology, and producers of
materials and services for this equipment. Some of our existing and potential
competitors are researching, designing, developing and marketing other types of
equipment, materials and services. Any reduction in our research and development
efforts could affect our ability to compete effectively. Many of our competitors
have financial, marketing, manufacturing, distribution and other resources
substantially greater than ours. In many cases, the existence of these
competitors extends the purchase decision time as customers investigate the
alternative products and solutions. Under a settlement agreement with the
Department of Justice relating to our merger with DTM, we were required to
license certain of our patents for use in the manufacture and sale of either
stereolithography or laser sintering products, but not both, in North America.
On June 6, 2002, we entered into a license agreement with Sony Corporation,
pursuant to which they would license our patents for use in the field of
stereolithography in North America (defined as the United States, Canada and
Mexico). On July 9, 2002, we were informed by the Department of Justice that
they had approved Sony as our licensee. Although stereolithography is a very
small part of its activities, and Sony has thus far only been able to be active
in the Japanese/Asia Pacific region, Sony is an extremely large and
sophisticated corporation with annual revenues in excess of $58 billion. We
cannot be certain of the market impact of the license to Sony, however we
anticipate that Sony will be an aggressive competitor in all aspects of our
stereolithography business.
Our material revenue, excluding DTM related revenues, declined significantly for
the year ended December 31, 2002 as compared to the year ended December 31,
2001. This was due to the termination of our liquid resin research and
development agreements with Vantico on April 22, 2002 we had jointly developed
liquid photopolymers with Vantico and served as the exclusive worldwide
distributor (except in Japan) of these materials. Sales of these materials
accounted for 27.4% and 25.5% of our total revenues for 2002 and 2001,
respectively. Sales of our materials excluding the LS product line accounted for
19.5% and 24.8% of our total revenues for 2002 and 2001 respectively. On
September 20, 2001, we acquired RPC, an independent supplier of
stereolithography resins located in Switzerland and many customers have
converted from Vantico material to our RPC resins.
30
However, prices have fallen significantly as a result of increased competition.
In addition, our management team does not have substantial experience in the
materials development and manufacturing business. In addition, the manufacture
of materials business increases some of the existing risks we face and poses new
risks to our company. For example, we must comply with all applicable
environmental laws, rules and regulations associated with large scale
manufacturing of resins in Switzerland. Our compliance with these laws may
increase our cost of production and reduce our margins and any failure to comply
with these laws may result in legal or regulatory action instituted against us,
substantial monetary fines or other damages. In addition we entered into a
two-year non-exclusive distribution agreement for the sale of a line of resins
produced by another chemical manufacturer.
We also face significant competition in the supply of nylon powdered materials
for laser sintering equipment where we have a leading position. In North America
this competition is the subject of a patent infringement suit against EOS. We
entered into two agreements with chemical manufacturers for the development,
manufacture, and distribution of new nylon powder materials as well as a third
agreement for the development of a new aluminum powder material.
We also expect future competition may arise from the development of allied or
related techniques, both additive and subtractive, for equipment and materials
that are not encompassed by our patents, from the issuance of patents to other
companies that inhibit our ability to develop certain products, and from the
improvement to existing material and equipment technologies. We have determined
to follow a strategy of continuing product development and aggressive patent
prosecution to protect our position to the extent practicable. We cannot assure
you that we will be able to maintain our current position in the field or
continue to compete successfully against current and future sources of
competition.
If we do not keep pace with technological change and introduce new products, we
may lose revenue and market share.
We are affected by rapid technological change, changes in user and customer
requirements and preferences, frequent new product and service introductions
embodying new technologies and the emergence of new standards and practices, any
of which could render our existing products and proprietary technology and
systems obsolete. We believe that our future success will depend on our ability
to deliver products that meet changing technology and customer needs. To remain
competitive, we must continue to enhance and improve the functionality and
features of our products, services and technologies. Our success will depend, in
part, on our ability to:
. obtain leading technologies useful in our business,
. enhance our existing products,
. develop new products and technologies that address the increasingly
sophisticated and varied needs of prospective customers, particularly
in the area of material functionality,
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis, and
. recruit and retain key technology employees.
We have incurred and may continue to incur substantial expense protecting our
patents and proprietary rights, which we believe are critical to our success.
We regard our copyrights, service marks, trademarks, trade secrets, patents and
similar intellectual property as critical to our success. Third parties may
infringe or misappropriate our proprietary rights, and we intend to pursue
enforcement and defense of our patents and other proprietary rights. We have
incurred, and may continue to incur, significant expenses in preserving our
proprietary rights, and these costs could have a material adverse effect on our
results of operations, liquidity and financial condition and could cause
significant fluctuations in our operating results from quarter to quarter.
As of December 31, 2002, we held 359 patents, which include 152 in the United
States, 146 in Europe, 17 in Japan, and 44 in other foreign jurisdictions. At
that date, we also had 176 pending patent applications: 52 in the United States,
53 in Japan, 48 in European countries and 23 other foreign countries. As we
discover new developments and components to our technology, we intend to apply
for additional patents. Effective trademark, service mark, copyright, patent and
trade secret protection may not be available in every country in which our
products and services are made available. We cannot assure you that the pending
patent applications will be granted or that we have taken adequate steps to
protect our proprietary rights, especially in countries where the laws may not
protect our rights as fully as in the United States. In addition, our
competitors may independently develop or initiate technologies that are
substantially similar or superior to ours. We cannot be certain that we will be
able to maintain a meaningful technological advantage over our competitors.
We currently are involved in several patent infringement actions, both as
plaintiff and as defendant. At December 31, 2002, we had capitalized $6.3
million in legal costs related to various litigation, which if not settled
favorably, would need to be written off and
31
would have a significant negative impact on our financial results. Our ability
to fully protect and exploit our patents and proprietary rights could be
adversely impacted by the level of expense required for intellectual property
litigation.
We, as successor to DTM, currently are involved in intellectual property
litigation, the outcome of which could materially and adversely affect us.
On August 24, 2001, we completed our acquisition of DTM. As the successor to
DTM, we face direct competition for selective laser sintering equipment and
materials outside the United States from EOS GmbH of Planegg, Germany, which we
refer to in this Report as EOS. Prior to our acquisition, DTM had been involved
in significant litigation with EOS in France, Germany, Italy, Japan and the
United States with regard to its proprietary rights to selective laser sintering
technology. EOS has also challenged the validity of patents related to laser
sintering in the European Patent Office and the Japanese Patent Office. In
addition, EOS filed a patent infringement suit against DTM in federal court in
California alleging that DTM infringed certain U.S. patents that we license to
EOS.
Our inability to resolve the claims or to prevail in any related litigation
could result in a finding of infringement of our licensed patents. Additionally,
one EOS patent is asserted which, if found valid and infringed, could preclude
the continued development and sale of certain of our laser sintering products
that incorporate the intellectual property that is the subject of the patent. In
addition, we may become obligated to pay substantial monetary damages for past
infringement. Regardless of the outcome of these actions we will continue to
incur significant related expenses and costs that could have a material adverse
effect on our business and operations. Furthermore, these actions could involve
a substantial diversion of the time of some members of management. The failure
to preserve our laser sintering intellectual property rights and the costs
associated with these actions could have a material adverse effect on our
results of operations, liquidity and financial condition and could cause
significant fluctuations in operating results from quarter to quarter.
We depend on a single or limited number of suppliers for specified components.
If these relationships terminate, our business may be disrupted while we locate
an alternative supplier.
We subcontract for manufacture of material laser sintering components, powdered
sintering materials and accessories from a single-source third-party supplier.
There are several potential suppliers of the material components, parts and
subassemblies for our stereolithography products. However, we currently use only
one or a limited number of suppliers for several of the critical components,
parts and subassemblies, including our lasers, materials and certain ink jet
components. Our reliance on a single or limited number of vendors involves many
risks including:
. shortages of some key components,
. product performance shortfalls, and
. reduced control over delivery schedules, manufacturing capabilities,
quality and costs.
If any of our suppliers suffers business disruptions, financial difficulties, or
if there is any significant change in the condition of our relationship with the
supplier, our costs of goods sold may increase or we may be unable to obtain
these key components for our products. In either event, our revenues, results of
operations, liquidity and financial condition would be adversely affected. While
we believe we can obtain most of the components necessary for our products from
other manufacturers, any unanticipated change in the source of our supplies, or
unanticipated supply limitations, could adversely affect our ability to meet our
product orders.
Our ability to retain existing customers, and attract new customers may be
impaired as a result of questions raised by our revenue recognition issues.
Our improper recognition of revenue with regard to certain sales transactions,
the ensuing audit committee investigation and the adjustments to previously
filed financial statements could seriously harm our relationships with existing
customers and impair our ability to attract new customers. Customers who
purchase our products make a significant long-term commitment to the use of our
technology. Our products often become an integral part of each customer's
facility and our customers look to us to provide continuing support,
enhancements and new versions of our products. Because of the long-term nature
of a commitment in some of our products, customers are often concerned about the
stability of their suppliers. Purchasing decisions by potential and existing
customers have been and may continue to be postponed, we believe in part due to
our improper recognition of revenue and the ensuing audit committee
investigation. The failure to timely file our 10-K and 10-Q and the adjustments
to our previously filed financial statements may cause existing and potential
customers concern over our stability and these concerns may cause us to lose
sales. Any loss in sales could adversely affect our results of operations,
further deepening concern among current and potential customers. If potential
and existing customers lose confidence in us, our competitive position in our
industry may be seriously harmed and our revenues could further decline.
32
The audit committee investigation into our revenue recognition issues and our
recent reductions in work force, have caused turnover in our finance and sales
which could have a material adverse effect on our business.
The recent departure of key accounting, finance and sales personnel may cause
delays in completing our business initiatives and adversely impact our
organization's institutional knowledge regarding key policies, significant
contracts and agreements, and other key facts. We have experienced substantial
turnover in our employees, including senior members of our finance, accounting
and sales departments, since the commencement of the audit committee
investigation. In addition, in 2002, we completed substantial reductions in our
workforce and closed our office in Austin, Texas, which we acquired as part of
our acquisition of DTM and our sales office in Farmington Hills, Michigan. Many
of these departed employees had significant experience with our market, as well
as relationships with many of our existing and potential customers and business
partners. It will take substantial time for new employees to develop an in-depth
understanding of our market and to form significant relationships with our
customers and partners. In addition, the reductions in force may lead to reduced
employee morale and productivity, increased attrition and difficulty retaining
existing employees and recruiting future employees, any of which could harm our
business and operating results.
We are seeking a significant number of new members to our organization. Our
future success depends in substantial part on our ability to identify, hire,
train, assimilate and retain an adequate number of highly qualified finance,
sales, engineering, marketing, managerial and support personnel. Despite the
current economic downturn, the competition for qualified employees in our
industry is particularly intense and it can be difficult to attract and retain
quality employees at reasonable cost. If we cannot successfully recruit and
retain these persons our development and introduction of new products could be
delayed and our ability to compete successfully could be impaired.
We face risks associated with conducting business internationally and if we do
not manage these risks, our results of operations may suffer.
A material portion of our sales is to customers in foreign countries. There are
many risks inherent in our international business activities that, unless
managed properly, may adversely affect our profitability, including our ability
to collect amounts due from customers. Our foreign operations could be adversely
affected by:
. unexpected changes in regulatory requirements,
. export controls, tariffs and other barriers,
. social and political risks,
. fluctuations in currency exchange rates,
. seasonal reductions in business activity in certain parts of the
world, particularly during the summer months in Europe,
. reduced protection for intellectual property rights in some
countries,
. difficulties in staffing and managing foreign operations,
. taxation, and
. other factors, depending on the country in which an opportunity
arises.
Political and economic events and the uncertainty resulting from them may have a
material adverse effect on our operating results.
The terrorist attacks that took place in the United States on September 11,
2001, along with the United States' military campaign against terrorism in Iraq,
Afghanistan and elsewhere and continued violence in the Middle East have created
many economic and political uncertainties, some of which may materially harm our
business and revenues. The disruption of our business as a result of these
events, including disruptions and deferrals of customer purchasing decisions,
had an immediate adverse impact on our business. Since September 11, 2001, some
economic commentators have indicated that spending on capital equipment of the
type that we sell has been weaker than spending in the economy as a whole, and
many of our customers are in industries that are also viewed as under-performing
the overall economy, such as the automobile and telecommunication industries.
The long-term effects of these events on our customers, the market for our
common stock, the markets for our services and the U.S. economy as a whole are
uncertain. The consequences of any additional terrorist attacks, or any
expanded-armed conflicts are unpredictable, and we may not be able to foresee
events that could have an adverse effect on our markets, or our business.
33
Management
The loss of Brian Service, our Chief Executive Officer, or our inability to
attract and retain qualified executives could materially and adversely affect
our business.
Our ability to develop and expand our products, business and markets and to
manage our growth is dependent upon the services of our executive team,
including Brian Service, who currently is employed as Chief Executive Officer.
We do not maintain any key life insurance coverage for Mr. Service or any other
member of our executive team. Our success also depends on our ability to attract
and retain additional key technical, management and other personnel. Competition
for these professionals is intense. The loss of the services of any of our key
executives or the failure to attract and retain other key personnel could impair
the development of new products and have an adverse effect on our business,
operating results and financial condition.
Capital Structure
Our operating results vary from quarter to quarter, which could impact our stock
price.
Our operating results fluctuate from quarter to quarter and may continue to
fluctuate in the future. In some quarters it is possible that results could be
below expectations of analysts and investors. If so, the price of our common
stock may decline.
Many factors, some of which are beyond our control, may cause these fluctuations
in operating results. These factors include:
. acceptance and reliability of new products in the market,
. size and timing of product shipments,
. currency and economic fluctuations in foreign markets and other
factors affecting international sales,
. price competition,
. delays in the introduction of new products,
. general worldwide economic conditions,
. changes in the mix of products and services sold,
. impact of ongoing litigation, and
. impact of changing technologies.
In addition, certain of our components require an order lead time of three
months or longer. Other components that currently are readily available may
become more difficult to obtain in the future. We may experience delays in the
receipt of some key components. To meet forecasted production levels, we may be
required to commit to long lead time prior to receiving orders for our products.
If our forecasts exceed actual orders, we may hold large inventories of slow
moving or unusable parts, which could have an adverse effect on our cash flows,
profitability and results of operations.
Volatility of stock price.
Our future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis. Shortfalls in our revenues or earnings in any
given period relative to the levels expected by securities analysts could
immediately, significantly and adversely affect the trading price of our common
stock.
Historically, our stock price has been volatile. The prices of the common stock
have ranged from $4.00 to $13.84 during the 52-week period ended May 16, 2003.
Factors that may have a significant impact on the market price of our common
stock include:
. future announcements concerning our developments or those of our
competitors, including the receipt of substantial orders for
products,
34
. quality deficiencies in services or products,
. results of technological innovations,
. new commercial products,
. changes in recommendations of securities analysts,
. proprietary rights or product, patent or other litigation, and
. sales or purchase of substantial blocks of stock.
Takeover defense provisions may adversely affect the market price of our common
stock.
Various provisions of our corporate governance documents and of Delaware law,
together with our shareholders rights plan, may inhibit changes in control not
approved by our Board of Directors and may have the effect of depriving you of
an opportunity to receive a premium over the prevailing market price of our
common stock in the event of an attempted hostile takeover.
The Board is authorized to issue up to five million shares of preferred stock,
of which approximately 3.7 million is outstanding or reserved for issuance. The
Board also is authorized to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of any preferred stock may adversely
affect the rights of holders of common stock. Our ability to issue preferred
stock gives us flexibility concerning possible acquisitions and financing, but
it could make it more difficult for a third party to acquire a majority of our
outstanding voting stock. In addition, any preferred stock to be issued may have
other rights, including economic rights, senior to the common stock, which could
have a material adverse effect on the market value of the common stock. In
addition, provisions of our Certificate of Incorporation and Bylaws could have
the effect of discouraging potential takeover attempts or making it more
difficult for stockholders to change management.
We are subject to Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of the Company. One of these laws
prohibits us from engaging in a business combination with any interested
stockholder for a period of three years from the date that the person became an
interested stockholder, unless certain conditions are met.
In addition, we have adopted a Shareholders' Rights Plan. Under the
Shareholders' Rights Plan, we distributed a dividend of one right for each
outstanding share of our common stock. These rights will cause substantial
dilution to the ownership of a person or group that attempts to acquire us on
terms not approved by our Board of Directors and may have the effect of
deterring hostile takeover attempts.
The number of shares of common stock issuable upon conversion of our Debentures
and exercise of our Series B Convertible Preferred Stock could dilute your
ownership and negatively impact the market price for our common stock.
Our shares of Series B Convertible Preferred Stock are convertible at any time
into approximately 2,634,016 shares of common stock. Our subordinated debt is
convertible at any time into approximately 833,333 shares of common stock. To
the extent that all of the shares of preferred stock and debentures are
converted, a significantly greater number of shares of our common stock will be
outstanding and the interests of our existing stockholders may be diluted.
Moreover, future sales of substantial amounts of our stock in the public market,
or the perception that such sales could occur, could adversely affect the market
price of our common stock.
35
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of interest rate changes and foreign currency
fluctuations.
Interest Rate Risk. Our exposure to market rate risk for changes in interest
rates relates primarily to our cash investments and long-term debt. We invest
our excess cash in money market funds or other high quality investments. We
protect and preserve our invested funds by limiting default, market and
reinvestment risk.
Investments in floating rate interest-earning instruments carry a degree of
interest rate risk. Floating rate securities may produce less income than
expected if interest rates fall. Due in part to this factor, our future
investment income may fall short of expectations due to changes in interest
rates.
We are exposed to interest rate risk on our revolving credit facility and term
loan with US Bank, which have variable interest rates. At December 31, 2002, we
had a total of $2.4 million outstanding under our revolving credit facility and
$10.4 million outstanding on our term loan. The interest rates at December 31,
2002 for the revolving credit facility and the term loan were 7.5% and 6.42%,
respectively. The revolving credit facility expires in 2003. This loan was paid
off in May 2003.
We have an industrial development bond on our Colorado facility, which has an
outstanding balance of $4.2 million. We will make annual principal payments of
$150,000, $165,000, $180,000, $200,000, $220,000, for the years ending 2003,
2004, 2005, 2006, 2007 and $3,325,000 thereafter. The bond has a variable
interest rate and the interest rate at December 31, 2002 was 1.31%. An increase
or decrease in the variable interest rate of 1.00% would increase or decrease
our annual interest expense by $42,000. We have not entered into any hedging
contracts to protect ourselves against future changes in interest rates, which
could negatively impact the amount of interest we are required to pay. However,
we do not feel that this risk is significant and we do not plan to attempt to
hedge to mitigate this risk in the foreseeable future.
In the fourth quarter of 2001, we sold convertible subordinate debentures. As of
December 31, 2001 we received $9.4 million in proceeds from this sale. We
received additional proceeds of $600,000 in January 2002, for a total of $10.0
million. The convertible debentures are convertible into an aggregate of 833,333
shares of our common stock immediately at the option of the holder or at our
discretion at any time after December 31, 2003, and prior to maturity at
December 31, 2006. The debentures bear interest at the rate of 7% payable
quarterly. The Chairman of the Board of Directors and related parties
contributed $1.0 million to the completion of the convertible debentures.
The carrying amount, principal maturity and estimated fair value of long-term
debt exposure as of December 31, 2002 are as follows:
Carrying Payments
Amount 2002 2003 2004 2005 2006 2007 Later Years Fair Value
------------ ----------- ------------ ----------- ------------ ----------- ------------ -----------
Line of credit $ 2,450 $ 2,450 $ -- $ -- $ -- $ -- $ -- $ 2,450
Interest rate 7.5%
Term loan $ 10,350 $ 10,350 $ -- $ -- $ -- $ -- $ -- $ 10,350
Interest rate 6.42%
Industry
Development
Bond $ 4,240 $ 150 $ 165 $ 180 $ 200 $ 220 $ 3,325 $ 4,240
Interest rate 1.31%
Subordinated debt $ 10,000 $ -- $ -- $ -- $ 10,000 $ -- $ -- $ 8,560
7.00%
Foreign Currency Risk. International revenues accounted for approximately 50.5%
of our total revenue in 2002. International sales are made primarily from our
foreign sales subsidiaries in their respective countries and are denominated in
United States dollars or the local currency of each country. These subsidiaries
also incur most of their expenses in the local currency. Accordingly, all
foreign subsidiaries use the local currency as their functional currency.
Our international business is subject to risks typical of an international
business, including, but not limited to differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors.
Our exposure to foreign exchange rate fluctuations arises in part from
inter-company accounts in which costs incurred in the United States are charged
to our foreign sales subsidiaries. These inter-company accounts are typically
denominated in United States dollars. We are also exposed to foreign exchange
rate fluctuations as the financial results of foreign subsidiaries are
translated into United States dollars in consolidation. As exchange rates vary,
these results, when translated, may vary from expectations and adversely impact
overall expected profitability. The realized effect of foreign exchange rate
fluctuations in 2002 resulted in a $1.3 million gain.
36
As of December 31, 2002, we had investments in foreign operations that are
sensitive to foreign currency exchange rates, including non-functional currency
denominated receivables and payables. The net amount that is exposed in foreign
currency when subjected to a 10% change in the value of the functional currency
versus the non-functional currency produces an approximate $4.2 million change
in our balance sheet as of December 31, 2002.
The Company uses derivative instruments to manage exposure to foreign currency
risk. The Company manages selected exposures through financial market
transactions in the form of foreign exchange forward and put option contracts.
The Company does not enter into derivative contracts for speculative purposes.
The Company does not hedge its foreign currency exposure in a manner that would
entirely eliminate the effects of changes in foreign exchange rates on its
consolidated net (loss) income. The Company has no put option contracts in place
on December 31, 2002. The notional amount covered by all of our put option
contracts was $8.5 million at December 31, 2001. The put options were related to
transactions denominated in Euros and pounds sterling, with settlement dates in
January and February 2002. The premium paid for the put options was $144,000 in
2001, and the market value was approximately $8,000 at December 31, 2001.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements as of December 31, 2002 and 2001 and for each
of the three years in the period ended December 31, 2002 are included on pages
F-1 to F-33 of this filing.
37
PART III
Item 10. Directors and Executive Officers of Registrant
Directors and Executive Officers
The following persons serve as our directors as of June 13, 2003:
Directors Age Present Position
- --------- --- ----------------
Miriam V. Gold (1) (2) ............... 54 Director
Charles W. Hull ...................... 64 Director
Jim D. Kever (2) (3).................. 50 Director
G. Walter Loewenbaum II (1)........... 58 Director and Chairman of the Board
Kevin S. Moore (1) (2) (3)............ 48 Director
Brian K. Service...................... 55 Director
Richard C. Spalding (3)............... 52 Director
(1) Member of the Compensation Committee.
(2) Member of the Corporate Governance Committee.
(3) Member of the Audit Committee.
The following persons serve as our executive officers as of June 13, 2003:
Executive Officers Age Present Position
- ------------------ --- ----------------
Brian K. Service ..................... 55 Chief Executive Officer, Chief
Operating Officer and President
Charles W. Hull....................... 64 Executive Vice President, Chief
Technology Officer
G. Peter V. White .................... 62 Vice President, Finance
Kevin McAlea, Ph.D. .................. 44 Senior Vice President, Worldwide
Revenue Generation
Ray Saunders.......................... 54 Senior Vice President Operations
and Development
The following person is a significant employee as of June 13, 2003:
Significant Employees Age Present Position
- --------------------- --- ----------------
Keith Kosco........................... 50 General Counsel and Corporate
Secretary
Our executive officers are appointed by and serve at the discretion of the Board
of Directors. There are no family relationships between any director and/or any
executive officer.
Miriam V. Gold. Ms. Gold has been our director since 1994. Since July 2002, Ms.
Gold has been Deputy General Counsel of Ciba Specialty Chemical Corporation.
Prior to that, since 1992, Ms. Gold served as Assistant General Counsel of Ciba
Specialty Chemicals Corporation, and its predecessors, Novartis Inc. and
Ciba-Geigy Corporation. Her legal practice involves a broad range of matters,
including counseling on compliance, antitrust and general business issues. In
addition, she was Vice President of Legal & Regulatory Affairs for the Additives
Division of Ciba from 1995 to 2001. In 2002, Ms. Gold was an adjunct professor
at Pace University School of Law, where she taught a course in In-House
Practice, focusing on the unique role of in-house counsel in ensuring that
companies are positioned to operate legally and responsibly. Ms. Gold received
her J.D. from New York University School of Law, and her B.A. in American
History from Barnard College.
Charles W. Hull. Mr. Hull has been our director since 1993. Since April 1997,
Mr. Hull has served as our Chief Technology Officer and, effective May 3, 2000,
as Executive Vice President and a member of the Office of the Chief Executive
Officer. Mr. Hull also has served as Vice Chairman of our Board of Directors and
as our President and Chief Operating Officer. From March 1986 until April 1997,
Mr. Hull served as President of 3D Systems, Inc. From February to June 1999, Mr.
Hull acted as a consultant to us and served as a Vice Chairman of our Board of
Directors. From January 1980 to March 1986, Mr. Hull was Vice President of UVP,
Inc., a systems manufacturing company, where he developed our stereolithography
technology.
Jim D. Kever. Mr. Kever has been our director since 1996. He is Principal in
Voyent Partners, LLC, a venture capital partnership. From August 1995 until May
2001, Mr. Kever was associated with WebMD Corporation, Transaction Services
Division (formerly Envoy Corporation) as the President and Co-Chief Executive
Officer. Prior to August 1995, he served as Envoy Corporation's
38
Executive Vice President, Secretary and General Counsel. Mr. Kever also is a
director of Transaction Systems Architects, Inc., a supplier of electronic
payment software products and network integration solutions, as well as Luminex
Corporation, a value-added manufacturer of laboratory testing equipment. He also
is on the Board of Directors of Tyson Foods, Inc., an integrated processor of
poultry-based food products.
G. Walter Loewenbaum II. Mr. Loewenbaum has been our director since March 1999,
serving as a Vice Chairman of the Board until September 1999 when he was elected
Chairman of the Board. Mr. Loewenbaum is Managing Director of LeCorgne
Loewenbaum LLC. Prior to that, since 1990, he served as Chairman and Chief
Executive Officer of Loewenbaum & Company (formerly Southcoast Capital Corp.),
an investment banking and investment management firm that he founded. Mr.
Loewenbaum also serves as the Chairman of the Board of Luminex Corporation, a
value-added manufacturer of laboratory testing equipment.
Kevin S. Moore. Mr. Moore has been our director since October 1999. Since 1991,
Mr. Moore has been with The Clark Estates, Inc., a private investment firm,
where he currently is President and a director. Mr. Moore also is a director of
Ducommun, Incorporated, as well as Aspect Resources LLC, The Clark Foundation
and the National Baseball Hall of Fame & Museum, Inc.
Brian K. Service. Mr. Service has served as our President and Chief Executive
Officer since September 1999 and, since October 1999, also has served as
President and Chief Executive Officer of 3D Systems, Inc. Mr. Service was
elected to 3D Systems' Board of Directors in January 2001. From September 1999
to September 2002, Mr. Service provided his services to us pursuant to an
agreement between us and Regent Pacific Management Corporation, where he was a
Managing Director. Prior to Regent Pacific, Mr. Service served as Chief
Executive Officer of Salmond Smith Biolab, Ltd. Prior to Salmond, he was Chief
Executive Officer of Milk Products, Inc. Mr. Service holds a Bachelor's degree
in Chemical Engineering from Canterbury University of New Zealand and has
completed the Stanford Executive Program from Stanford University Business
School. Mr. Service also was a director of Visual Data Corporation until April
2003.
Richard C. Spalding. Mr. Spalding has been our director since 2001. Since April
1999, Mr. Spalding has served as a Partner of Thomas Weisel Healthcare Venture
Partners, a venture capital group which Mr. Spaulding co-founded. Since January
2000, Mr. Spaulding also has served as a General Partner of ABS Ventures, a
venture capital group. From February 1997 to March 1999, Mr. Spalding served as
Vice President and Chief Financial Officer of Portal Software, an Internet
billing company. From March 1996 to February 1997, he served as Vice President
Finance and Corporate Development for Fusion Medical Technology. From November
1991 to February 1996, he served as Managing Director of Alex Brown & Sons,
heading up the Investment Banking for the West Coast. From June 1977 to November
1991, Mr. Spalding practiced law with Brobeck, Phleger and Harrison, serving as
outside counsel for numerous public and private companies.
G. Peter V. White. Mr. White has served as our Vice President, Finance since
March 2003. Prior thereto, from June 2002 to March 2003, he served as Managing
Director of WHI-Tec & Associates. From January 1998 to June 2002, Mr. White
served as the Chief Financial Officer and Chief Operating Officer of
MATRIX-Systems, Inc., and prior to that, he served as Managing Director of
Phoenix Equity Partners since January 1996.
Kevin McAlea, Ph.D. Dr. McAlea has served as our Senior Vice President,
Worldwide Revenue Generation since May 2003. Prior thereto, from September 2001
to May 2003, he served as our Vice President & General Manager, Europe. From
1997 to August 2001, he served as Vice President, Marketing and Business
Development of DTM Corporation, a Texas corporation which we acquired in August
2001. From 1993 to 1997, Dr. McAlea served as Director of Process and Materials
Development of DTM. Prior to DTM, Dr. McAlea spent more than eight years in
materials research and development for General Electric Company. His last
position was managing the Polymer Physics Program at GE's Corporate Research and
Development Center.
Ray Saunders. Mr. Saunders has served as our Senior Vice President Operations
and Development since May 2003. From July 2002 to May 2003, Mr. Saunders served
as our Vice President of Operations and Development and, prior to that, as our
Vice President of Manufacturing since September 2000. From January 1994 until
September 2000, Mr. Saunders served as Director of Operations for Axiohm
Transaction Solutions, Inc. where he was responsible for the manufacturing
operations of its San Diego Division. Prior to Axiohm, he was the Vice President
and General Manager of Brumko Magnetics, Inc., a division of Applied Magnetics
Corporation.
Keith Kosco. Mr. Kosco has served as our General Counsel since April 2002 and as
our Corporate Secretary since May 2002. From September 2001 until April 2002, he
was an independent consultant. From May 1998 until September 2001, Mr. Kosco
served as the Assistant General Counsel of Litton Industries. From November 1996
until April 1998, he was Of Counsel to the law firm of Squire, Sanders & Dempsey
LLP, and from July 1981 until April 1996 he was an Associate and then a Partner
with the law firm of Morgan, Lewis & Bockius, LLP.
39
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, officers (including a
person performing a principal policy-making function) and persons who own more
than 10% of a registered class of our equity securities to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities of ours.
Directors, officers and 10% holders are required by Securities and Exchange
Commission regulations to send us copies of all of the Section 16(a) reports
they file. Based solely upon a review of the copies of the forms sent to us and
the representations made by the reporting persons to us, we believe that during
the fiscal year ended December 31, 2002, our directors, officers and 10% holders
complied with all filing requirements under Section 16(a) of the Exchange Act,
provided, however, Brian K. Service filed a Form 5, which reported one
transaction on an untimely basis.
40
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer and as to each
of the other four most highly compensated officers whose compensation exceeded
$100,000 during the last fiscal year (referred to in this Annual Report as named
executive officers), information concerning all compensation paid for services
to us in all capacities for each of the three years ended December 31 indicated
below.
----------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
------------------- ----------------------
Number of
Fiscal Year Securities All
Name Ended Underlying Other
Principal Position/(1)/ December 31 Salary Bonus Options Compensation
----------------------- ----------- ------ ----- ------- ------------
Brian K. Service .............. 2002 $ /(2)/ -- 350,000 $ 151,434 /(3)/
President & Chief 2001 /(2)/ -- -- --
Executive Officer 2000 /(2)/ -- -- --
Charles W. Hull ............... 2002 $ 275,000 -- -- $ 2,040 /(4)/
Executive Vice President 2001 $ 275,000 -- 10,000 $ 26,679 /(5)/
& Chief Technology 2000 $ 275,000 $ 66,000 -- $ 3,518 /(4)/
Officer
Grant R. Flaharty /(6)/ ....... 2002 314,000 -- 25,000 $ 1,823 /(4)/
Executive Vice President 2001 $ 263,077 -- 10,000 $ 9,941 /(7)/
of Global Business 2000 $ 213,462 $ 70,442 40,000 $ 36,357 /(8)/
Operations
E. James Selzer /(9)/ ......... 2002 $ 240,769 -- -- $ 1,705 /(4)/
Sr. VP, Global Finance & 2001 $ 200,000 $ 40,000 10,000 $ 1,662 /(4)/
Administration and Chief 2000 $ 108,870 -- 75,000 $ 1,578 /(4)/
Financial Officer
Ray Saunders .................. 2002 $ 173,046 -- 10,000 1,839 /(4)/
Senior Vice President 2001 $ 149,988 $ 8,727 11,500 1,753 /(4)/
Operations and 2000 $ 45,378 -- 30,000 67 /(4)/
Development
----------------------------------------------------------------------------------------------------------------
(1) For a description of the employment contracts between certain officers and
us, see "Employment Agreements" below.
(2) Mr. Service was appointed our President and Chief Executive Officer on
September 16, 1999. From September 1999 to September 2002, Mr. Service was
compensated for his services by Regent Pacific. We had an agreement with
Regent Pacific, pursuant to which Regent Pacific provided the management
services of a team of up to three full-time executives, including the chief
executive, at an aggregate fee of $45,000 per week. Although our named
executive officers do not include the Regent Pacific executives for any
periods presented, it is likely that these persons would have qualified as
our most highly compensated officers if a pro rata portion of the fee paid
to Regent Pacific were attributed to them as compensation. From September
10, 2002 (the date of termination of the Regent Agreement), through October
15, 2002, Mr. Service was engaged on an interim consulting basis for which
he was paid $79,999. Effective October 15, 2002, Mr. Service is employed by
us pursuant to an employment agreement and he received $87,264 for services
in 2002.
(3) Consists of consulting fees paid to Brian K. Service, Inc. for which Mr.
Service serves as a stockholder, officer and director.
(4) Consists of the value of insurance premiums for employer paid group term
life insurance and employer matching contributions made pursuant to our
Section 401(k) plan.
(5) Consists of the value of insurance premiums for employer paid group term
life insurance and employer matching contributions made pursuant to our
Section 401(k) plan and loan forgiveness ($23,671). See Item 13. Certain
Relationships and Related Party Transactions.
(6) Mr. Flaharty was reassigned from his position and no longer serves as a
executive officer of the Company effective May 23, 2003.
41
(7) Consists of the value of insurance premiums for employer paid group term
life insurance and employer matching contributions in 2001 made pursuant to
our Section 401(k) plan and below market interest attributable to a moving
facilitation loan in 2000. See Item 13. Certain Relationships and Related
Party Transactions.
(8) Consists of the value of insurance premiums for employer paid group term
life insurance, moving-related expenses totaling $30,658, and employer
matching contributions made pursuant to our Section 401(k) plan.
(9) Mr. Selzer's employment with the Company terminated effective April 2003.
Option Grants in Fiscal 2002
The following table sets forth certain information regarding the grant of stock
options made during fiscal 2002 to the named executive officers.
- ----------------------------------------------------------------------------------------------------------
Percent of
Total Potential
Number of Options Realizable Value
Securities Granted To at Assumed
Underlying Employees Exercise Rates of Stock Price
Options in or Base Expiration Appreciation for
Name Granted Fiscal Year Price /(1)/ Date Option Term /(2)/
---- ------------- ------------ ----------- ----------- -------------------------
5% ($) 10% ($)
------ -------
Brian K. Service ..... 350,000 47% $5.78 10/14/07 2,581,918 3,258,062
Charles W. Hull ...... -- -- -- -- -- --
Grant R. Flaharty .... 25,000 3.3% $11.98 2/5/12 487,854 776,826
E. James Selzer ...... -- -- -- -- -- --
Ray Saunders ......... 10,000 1.3% $11.98 2/5/12 195,060 310,601
- ----------------------------------------------------------------------------------------------------------
(1) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares, subject to certain conditions.
(2) The potential realizable value is based on the assumption that the common
stock appreciates at the annual rate shown (compounded annually) from the
date of grant until the expiration of the option term. These amounts are
calculated pursuant to applicable requirements of the Securities and
Exchange Commission and do not represent a forecast of the future
appreciation of the common stock.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth, for each of the named executive officers,
certain information regarding the exercise of stock options during fiscal 2002,
the number of shares of common stock underlying stock options held at fiscal
year-end and the value of options held at fiscal year-end based upon the last
reported sales price of the common stock on The Nasdaq National Market on
December 31, 2002 ($7.80 per share).
Shares
Acquired Number of Securities
on Value Underlying Unexercised Value of Unexercised
Exercise Realized Options at In-the-Money Options at
(#) ($) December 31, 2002 (#) December 31, 2002 ($)
------------ ---------- ----------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ----------- ------------- ----------- -------------
Brian K. Service ..... -- -- 350,000 -- 1,986,250 --
Charles W. Hull ...... -- -- 77,500 7,500 -- --
Grant R. Flaharty .... -- -- 142,500 52,500 450,937 28,437
E. James Selzer ...... -- -- 60,000 25,000 -- --
Ray Saunders ......... -- -- 19,000 32,500 -- --
42
Employment Agreements
We have entered into employment contracts with the following named executive
officers.
Brian K. Service has been retained as Chief Executive Officer. Mr. Service's
services previously were provided under an arrangement with Regent Pacific
Management Corporation. From September 10, 2002 (the date of termination of the
Regent Agreement), through October 15, 2002, Mr. Service was engaged on an
interim consulting basis for which he was paid $79,999. Effective October 15,
2002, Mr. Service is employed by us pursuant to an employment agreement under
which he has agreed to serve as Chief Executive Officer until at least December
2003. Mr. Service is being paid $17,809 on a bi-weekly basis under this
agreement, and has been awarded fully vested options, with a term of five years,
to purchase 350,000 shares of our common stock at a price of $5.78 (the closing
price on October 15, 2002).
On November 18, 2002, we entered into a consulting agreement with Brian K.
Service, Inc., a corporation in which our Chief Executive Officer is a
stockholder, officer and director. Pursuant to this agreement, we pay to Brian
K. Service, Inc. an amount up to $310,000 for an 11-month period for the
provision of the services of qualified consultants to us. Under this agreement,
we paid Brian K. Service, Inc. $71,000 through December 31, 2002.
We entered into an employment agreement with Mr. Hull in April 1994, pursuant to
which Mr. Hull served as President and Chief Operating Officer of both us and 3D
Systems, Inc. until April 1997, at which time Mr. Hull was appointed our Vice
Chairman and Chief Technology Officer. Pursuant to the agreement, Mr. Hull's
initial base salary was $200,000 per year, subject to increase at the discretion
of the Board of Directors. Effective November 7, 1994, January 1, 1996, February
1, 1997, and January 1, 1998, the Board of Directors increased Mr. Hull's base
salary to $235,000, $250,000, $262,500 and $275,000, respectively. In addition
to standard benefits, Mr. Hull is eligible to participate in the Executive
Incentive Compensation Plan. Mr. Hull's employment agreement also permits Mr.
Hull, at any time during his employment term, to terminate his duties under the
agreement and elect to become a consultant to us. Effective February 28, 1999,
Mr. Hull terminated his duties under the agreement and Mr. Hull, we and 3D
Systems, Inc. entered into a four-year consulting agreement. Mr. Hull's duties
pursuant to the agreement included consulting with our Board of Directors and
our officers concerning those aspects of the business with which Mr. Hull
previously had been concerned. As compensation for Mr. Hull's consulting
services, we paid Mr. Hull at an annual rate of $275,000 for the period March
1999 through May 1999. In June 1999, Mr. Hull rejoined us as our Chief
Technology Officer at a base salary of $275,000. Effective May 3, 2000, Mr. Hull
was promoted to Executive Vice President and a member of the Office of the Chief
Executive Officer; he continues his duties as Chief Technology Officer.
Stock Incentive Plans
We have in effect the 1989 Employee and Director Plan, the 1996 Stock Incentive
Plan, the 1996 Non-Employee Directors' Stock Option Plan, the 1998 Employee
Stock Purchase Plan and the 2001 Stock Option Plan. The purpose of our plans is
to advance our interests and our stockholders by strengthening our and our
subsidiaries' ability to obtain and retain the services of the types of officers
and employees who will contribute to our long term success and to provide
incentives which are linked directly to increases in stock value which will
inure to the benefit of all of our stockholders.
Directors' Compensation
We pay our non-employee directors an annual retainer of $15,000 plus $1,500 for
each Board meeting attended either in person or telephonically, and $1,500 for
attendance at each committee meeting not held on a day that a Board meeting was
held. Non-employee directors also each receive an annual automatic grant of
ten-year options to purchase, at the fair market value of our common stock on
the date of grant, 10,000 shares of our common stock. In addition, the
Chairperson of Audit Committee receives an annual retainer of $15,000, and the
Chairpersons of the Corporate Governance and Compensation Committees and the
members of the Audit Committee each receives an annual retainer of $5,000.
Compensation Committee Interlocks and Insider Participation
We have no interlocking relationships involving any of our Compensation
Committee members that would be required by the Securities and Exchange
Commission to be reported in this Annual Report, and no officer or employee of
ours serves on our Compensation Committee.
43
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Principal Stockholders
The following table sets forth as of June 13, 2003, unless otherwise indicated,
certain information relating to the ownership of our common stock by (i) each
person known by us to be the beneficial owner of more than five percent of the
outstanding shares of our common stock, (ii) each of our directors, (iii) each
of our named executive officers, and (iv) all of our executive officers and
directors as a group. Except as may be indicated in the footnotes to the table
and subject to applicable community property laws, each person identified in the
table has the sole voting and investment power with respect to the shares owned.
The address of each person listed is in care of 3D Systems Corporation, 26081
Avenue Hall, Valencia, California 91355, unless otherwise set forth below the
person's name.
- ---------------------------------------------------------------------------------------------------------
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (1) Percent of Class (1)
- ---------------------------------------------------------------------------------------------------------
Directors:
- ---------------------------------------------------------------------------------------------------------
Miriam V. Gold 40,299 (2) *
- ---------------------------------------------------------------------------------------------------------
Charles W. Hull 581,963 (3) 4.5%
- ---------------------------------------------------------------------------------------------------------
Jim D. Kever 75,000 (4) *
- ---------------------------------------------------------------------------------------------------------
G. Walter Loewenbaum II 1,305,013 (5) 9.9%
- ---------------------------------------------------------------------------------------------------------
Kevin S. Moore 1,782,206 (6) 13.1%
- ---------------------------------------------------------------------------------------------------------
Brian K. Service 376,300 (7) 2.9%
- ---------------------------------------------------------------------------------------------------------
Richard C. Spalding 3,840 (8) *
- ---------------------------------------------------------------------------------------------------------
Non-Director Named Executive Officers:
- ---------------------------------------------------------------------------------------------------------
Grant R. Flaharty (9) 127,367 (10) 1.0%
- ---------------------------------------------------------------------------------------------------------
Kevin McAlea, Ph.D. 18,750 (2) *
- ---------------------------------------------------------------------------------------------------------
Ray Saunders 36,500 (2) *
- ---------------------------------------------------------------------------------------------------------
E. James Selzer (11) 63,179 (12) *
- ---------------------------------------------------------------------------------------------------------
G. Peter V. White -- *
- ---------------------------------------------------------------------------------------------------------
5% Holders:
- ---------------------------------------------------------------------------------------------------------
The Clark Estates, Inc. 1,766,605 (6) 13.0%
One Rockefeller Plaza, New York, New York 10020
- ---------------------------------------------------------------------------------------------------------
St. Denis J. Villere & Company 1,230,114 (13) 9.7%
210 Baronne Street, Suite 808, New Orleans,
Louisiana 70112
- ---------------------------------------------------------------------------------------------------------
Daruma Asset Management, Inc. 1,423,200 (14) 11.2%
60 East 42nd Street, Suite 1111, New York,
New York 10165
- ---------------------------------------------------------------------------------------------------------
T. Rowe Price Associates, Inc. 1,032,500 (15) 8.1%
100 East Pratt Street, Baltimore, Maryland
21202
- ---------------------------------------------------------------------------------------------------------
Directors and officers as a group (10 persons) 4,219,871 (16) 28.8%
- ---------------------------------------------------------------------------------------------------------
* Less than one percent.
(1) Under Rule 13d-3, certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or
the power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the
shares (for example, upon exercise of an option) within 60 days of the date
as of which the information is provided. In computing the percentage
ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by the person (and only the
person) by reason of these acquisition rights. As a result, the percentage
of outstanding shares of any person as shown in this table does not
necessarily reflect the person's actual ownership or voting power with
respect to the number of shares of our common stock actually outstanding at
June 13, 2003.
(2) Consists of shares of our common stock reserved for issuance upon exercise
of stock options which are or will become exercisable on or prior to August
13, 2003.
(3) Includes (a) 409,344 shares of our common stock held in the Charles William
Hull and Charlene Antoinette Hull 1992 Revocable Living Trust for which Mr.
and Mrs. Hull serve as trustees, (b) 77,500 shares of our common stock
reserved for issuance upon exercise of stock options which are or will
become exercisable on or prior to August 13, 2003 and (c) 8,333 shares
issuable upon conversion of our Series B Convertible Preferred Stock.
44
(4) Includes (a) 33,333 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to August 13, 2003, (b) 29,167 shares issuable on conversion of convertible
debentures (8,333 of which relate to debentures owned by a trust for the
benefit of Mr. Kever's minor children, with respect to which Mr. Kever
disclaims beneficial ownership) and (c) 1,000 shares of our common stock
held in trust for the benefit of Mr. Kever's minor children, with respect
to which Mr. Kever disclaims beneficial ownership.
(5) Includes (a) 45,000 shares held in the name of Lillian Shaw Loewenbaum, Mr.
Loewenbaum's wife, (b) 54,498 shares held in the name of the Loewenbaum
1992 Trust for which Mr. and Mrs. Loewenbaum serve as trustees, (c) 150,000
shares held in the name of the Guaranty & Trust Co ttee fbo G. Walter
Loewenbaum, Mr. Loewenbaum's pension plan, (d) 72,065 shares held in the
name of The Waterproof Partnership LTD for which Mr. and Mrs. Loewenbaum
serve as the general partners and as certain of the limited partners, (e)
16,594 shares held in the name of the Anna Loewenbaum 1992 Trust for which
Mr. and Mrs. Loewenbaum serve as trustees, (f) 16,594 shares held in the
name of the Elizabeth Loewenbaum 1992 Trust for which Mr. and Mrs.
Loewenbaum serve as trustees, (g) 175,000 shares of our common stock
reserved for issuance upon exercise of stock options which are or will
become exercisable on or prior to August 13, 2003, (h) 83,333 shares
issuable on conversion of convertible debentures and (i) 208,334 shares
issuable upon conversion of our Series B Convertible Preferred Stock.
(6) Includes (a) 933,272 shares owned by The Clark Estates, Inc. with respect
to which Mr. Moore disclaims beneficial ownership, (b) 833,333 shares
issuable upon conversion of our Series B Convertible Preferred Stock held
by Clark Partners I, L.P., with respect to which Mr. Moore disclaims
beneficial ownership, and (c) 9,999 shares of our common stock reserved for
issuance upon exercise of stock options which are or will become
exercisable on or prior to August 13, 2003. Mr. Moore is the President and
a director of The Clark Estates, Inc. and the President of the general
partner of Clark Partners I, L.P.
(7) Includes (a) 350,000 shares of our common stock reserved for issuance upon
exercise of stock options that are or will become exercisable on or prior
to August 13, 2003 and (b) 25,000 shares issuable upon conversion of our
Series B Convertible Preferred Stock.
(8) Includes 3,333 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to August 13, 2003.
(9) Mr. Flaharty was reassigned from his position and no longer serves as a
executive officer of the Company effective May 23, 2003.
(10) Includes 119,500 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to August 13, 2003.
(11) Mr. Selzer's employment with the Company terminated effective April 2003.
(12) Includes 60,000 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to August 13, 2003.
(13) St. Denis J. Villere & Company, which we refer to as Villere in this Annual
Report, is a Louisiana partnership in commendam, an investment advisor
registered under the Investment Advisors Act of 1940. As of December 31,
2001, Villere was deemed to have or share voting or dispositive power over,
and therefore to own beneficially 1,230,114 shares. Of that amount, Villere
has sole voting and dispositive power over 98,833 shares and shared voting
and dispositive power over 1,131,281 shares. All information regarding the
beneficial ownership of our securities by Villere is taken exclusively from
Amendment No. 1 to Schedule 13G filed by Villere on February 11, 2003.
(14) Daruma Asset Management, Inc., a New York corporation, which we refer to as
Daruma in this Annual Report, is a an investment advisor registered under
the Investment Advisors Act of 1940. These securities are beneficially
owned by one or more investment advisory clients whose accounts are managed
by Daruma. Investment advisory clients of Daruma have the right to receive
dividends, as well as the proceeds, from the sale of these securities. The
investment advisory contracts relating to these accounts grant to Daruma
sole investment and/or voting power over the securities owned by the
accounts. Therefore, Daruma may be deemed to be the beneficial owner of
these securities for purposes of Rule 13d-3 under the Securities Act of
1934, as amended. Mariko O. Gordon owns in excess of 50% of the outstanding
voting stock and is the president of Daruma. Ms. Gordon may be deemed to be
the beneficial owner of securities held by persons and entities advised by
Daruma for purposes of Rule 13d-3. Daruma and Ms. Gordon each disclaims
beneficial ownership in any of these securities. Daruma and Ms. Gordon are
of the view that they are not acting as a "group" for purposes of Section
13(d) under the Securities Act of 1934 and that they are not otherwise
required to attribute to each other the "beneficial ownership" of
securities held by any of them or by any persons or entities advised by
Daruma. All information regarding the beneficial
45
ownership of our securities by Daruma is taken exclusively from Amendment
No. 4 to Schedule 13G filed by Daruma on February 18, 2003.
(15) T. Rowe Price Associates, Inc., which we refer to as T. Rowe Price in this
Annual Report, is a Maryland corporation, an investment advisor registered
under the Investment Advisors Act of 1940, and T. Rowe Price Small-Cap
Value Fund, Inc. is a Maryland corporation. As of February 14, 2003, T.
Rowe Price was deemed to have sole voting or dispositive power over, and
therefore to own beneficially, 1,032,000 shares of our common stock. All
information regarding the beneficial ownership of our securities by T. Rowe
Price is taken exclusively from a Schedule 13G filed by T. Rowe Price on
February 5, 2003.
(16) Includes (a) 744,714 shares of our common stock reserved for issuance upon
exercise of stock options that are or will become exercisable on or prior
to August 13, 2003, (b) 112,500 shares issuable upon conversion of
convertible debentures and (c) 1,075,000 shares issuable upon conversion of
our Series B Convertible Preferred Stock.
The information as to shares beneficially owned has been individually furnished
by our respective directors, named executive officers, and other stockholders,
or taken from documents filed with the Securities and Exchange Commission.
46
Item 13. Certain Relationships and Related Transactions
Certain Transactions with Directors and Executive Officers and 5% Stockholders
Except as disclosed in this Annual Report, neither our directors or executive
officers nor any stockholder owning more than five percent of our issued shares,
nor any of their respective associates or affiliates, had any material interest,
direct or indirect, in any material transaction to which we were a party during
fiscal 2002, or which is presently proposed.
See "Employment Agreements" for a summary of employment agreements with certain
of our executive officers.
On September 9, 1999, the Company and Regent Pacific Management Corporation
executed an agreement pursuant to which Regent Pacific agreed to provide certain
key management employees' services to the Company at a fee of $45,000 per week,
including the services of Mr. Service, as President and Chief Executive Officer,
and up to two other Regent Pacific personnel as part of the Company's management
team. The Regent Agreement also provided that Gary J. Sbona, Chairman and Chief
Executive Officer of Regent Pacific, join the Company's Board of Directors. The
Agreement had a one-year term and, on August 8, 2000 was extended for an
additional one-year term, and provided for the availability of up to two
additional executives to provide management services on an as needed basis,
beginning as of February 12, 2000. The Agreement was again extended on October
30, 2001 for an additional one-year term under the same terms as the previous
extension. The Agreement also required that the Company provide Director &
Officer insurance for Messrs. Sbona and Service.
Simultaneously with the execution of the Regent Agreement, the Company entered
into an employment agreement with Gary J. Sbona. As an inducement to Mr. Sbona
to provide services as a part-time employee of the Company, the Board of
Directors granted to him an option to purchase 350,000 shares of the Company's
Common Stock at an exercise price of $6.00 per share. The shares subject to such
option generally vest over a three year period, or sooner subject to certain
conditions. On August 8, 2000 the Oversight Committee (later subsumed into the
newly created Corporate Governance Committee) extended Mr. Sbona's Employment
Agreement for an additional year and authorized the grant of an additional
350,000 shares to Mr. Sbona at an exercise price of $17.3875 per share. The
shares subject to this option vest on the same basis as the shares granted in
1999. On October 30, 2001, the Oversight Committee of the Board of Directors
extended Mr. Sbona's Employment Agreement for an additional year and authorized
the grant of an additional 350,000 shares to Mr. Sbona at an exercise price of
$12.4280.
On May 1, 1999, we entered into an employment agreement with G. Walter
Loewenbaum II, Chairman of the Board, whereby Mr. Loewenbaum agreed to provide
part-time services to us in the area of strategic direction in exchange for
$10,000 per month and an option to purchase 150,000 shares of our common stock
at a price of $6.6125 per share. The options vested on January 1, 2000. The
original term of the agreement was for six (6) months. On December 20, 1999, the
Board of Directors voted, with Mr. Loewenbaum abstaining, to change Mr.
Loewenbaum's status to "at-will" employee pursuant to the terms and conditions
of his employment agreement. On August 8, 2000 the Oversight Committee of the
Board of Directors voted to increase Mr. Loewenbaum's monthly compensation to
$15,000. On February 12, 2002, the Oversight Committee awarded Mr. Loewenbaum an
option to purchase an additional 75,000 shares of our common stock at a price of
$11.75 per share. These options vest in equal annual installments over a
three-year period. Effective November 17, 2002, Mr. Loewenbaum resigned as an
employee.
During 2001, we used Mr. Loewenbaum's fractional share interest in a corporate
airplane for trips to and from our locations in Valencia, Grand Junction and
Austin. In addition, the airplane was used by Mr. Loewenbaum for trips to our
Board meetings. The total amount paid to Mr. Loewenbaum during 2001 for this use
was $71,503.
In June 2000, we entered into a distribution agreement for ThermoJet printers
with 3D Solid Solutions, which we refer to as 3DSS, a partnership in which Mr.
Loewenbaum, the Chairman of our Board of Directors, is a limited partner. As of
December 31, 2002, Solid Imaging Technologies, LLC, of which Mr. Loewenbaum is
the sole member, was the general partner of 3DSS. In 2002, 3DSS paid us
approximately $84,000 for the purchase of products and services.
In 1998, we adopted under the 1996 Stock Incentive Plan the Executive Long-Term
Stock Incentive Plan pursuant to which we offered loans to our executive
officers of up to $60,000 to purchase shares of the common stock reserved for
issuance under the 1996 Plan. Charles W. Hull, our Executive Vice President,
Chief Technology Officer, executed a promissory note for the principal amount of
$60,000 that bears interest at the rate of 6% per annum. The note is secured by
the shares of common stock purchased. Subject to certain forgiveness provisions
set forth below, all principal and accrued interest outstanding under the note
becomes due and payable upon the earlier to occur of (i) a sale, transfer or
other disposition of the shares of common stock securing the note; (ii) the
termination of the executive's employment with us; (iii) the fifth anniversary
of the execution of the note; (iv) the sale, lease or other disposition of all
or substantially all of our assets to a single purchaser or group of related
purchasers; (v) the sale, lease or other disposition, in one transaction or a
series of related transactions of the majority of our outstanding capital stock;
or (vi) our merger or consolidation into or with another corporation in which
our stockholders will own less than 50% of the voting securities of the
surviving corporation. If during a fiscal year ending before January 1, 2004, we
report earnings per share of: (a) at least $0.50 per share but less than $1.00
per share, we will forgive 1/3 of the original principal amount of the note, or
a smaller amount of principal
47
then outstanding, together with all of the interest accrued on the amount; (b)
at least $1.00 per share but less than $1.50 per share, we will forgive 2/3 of
the original principal amount of the note, or a smaller amount of principal then
outstanding, together with all of the interest accrued on the amount; or (c) at
least $1.50 per share, we will forgive the entire original principal amount of
the note, or a smaller amount of principal then outstanding, together with all
interest accrued on the amount; provided, however, that the provisions of
clauses (a) and (b) of this sentence shall be applicable to Mr. Hull only one
time. For the fiscal year ended December 31, 2000, we earned $0.63 per
fully-diluted share; therefore, $20,000 of the principal amount of Mr. Hull's
loan was forgiven together with $3,671 of interest.
Pursuant to a July 1990 Distribution Agreement with Vantico, Inc., successor to
Ciba Specialty Chemicals, Inc., and subject to conditions set forth in the
agreement, we have been Vantico's exclusive distributor (except in Japan) of all
photopolymers manufactured by Vantico for use in stereolithography. We purchased
from Vantico resins valued at approximately $183,815 net of product returns and
applicable credits during fiscal 2002. Pursuant to a Settlement Agreement and
Mutual General Releases dated March 19, 2002, the Distribution Agreement with
Vantico terminated on April 22, 2002. In connection with the Settlement
Agreement, Vantico paid us $22,000,000 by transferring to us 1,550,000 shares of
our stock. A related Research and Development Agreement terminated at the same
time.
In 1990, 3D Systems, Inc. acquired the patents for stereolithography technology
from UVP, Inc. in exchange for $9,075,000, $500,000 of which was paid in cash
and $350,000 by certain offsets. The balance of the purchase price ($8,225,000)
is payable based upon sales of stereolithography systems and licensing of the
patents and subject to certain conditions. Pursuant to a 1987 contract between
UVP and Charles W. Hull, our Executive Vice President, Chief Technology Officer
and a director of ours, Mr. Hull is entitled to receive from UVP, with respect
to his prior relationship with UVP, an amount equal to 10% of all royalties or
other amounts received by UVP with respect to the patents, but only after
recoupment of certain expenses by UVP. To date, Mr. Hull has received $698,626
from UVP under that contract.
On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible Preferred
Stock for aggregate consideration of $15.8 million. The Series B Convertible
Preferred Stock accrues dividends at 8% per share and is convertible at any time
into approximately 2,634,016 shares of common stock at a price of $6.00 per
common share. The stock is redeemable at our option after the third anniversary
date. We are obligated to redeem any shares of Series B Convertible Preferred
Stock outstanding at the tenth anniversary of the issuance date. The redemption
price is $6.00, plus accrued and unpaid dividends. Messrs. Loewenbaum, Service
and Hull, our Chairman of the Board, Chief Executive Officer and Chief
Technology Officer, respectively, purchased an aggregate of $1,450,002 of the
preferred shares. Additionally, Clark Partners I, L.P., a New York limited
partnership, purchased $5.0 million of the preferred shares. Kevin Moore, a
member of our Board of Directors, is the president of the general partner of
Clark Partners I, L.P. In connection with the offering, Houlihan Lokey Howard &
Zukin rendered its opinion that the terms of the offering were fair to the
Company from a financial point of view. A special committee of the Board of
Directors, composed entirely of disinterested independent directors, approved
the offer and sale of the preferred shares and recommended the transaction to
the Board of Directors. The Board of Directors also approved the transaction,
with interested Board members not participating in the vote.
Our Board of Directors believes, based on its reasonable judgment, but without
further investigation, that the terms of each of the foregoing transactions or
arrangements between us on the one hand and our affiliates, officers, directors
or stockholders which were parties to the transactions on the other hand, were,
on an overall basis, at least as favorable to 3D as could then have been
obtained from unrelated parties.
48
Item 14. Controls and Procedures
Deloitte and Touche, which we refer to in this Report as Deloitte, the Company's
independent auditor, in connection with its audit of the Company's financial
statements for fiscal year 2002, identified sales transactions for which revenue
had been recognized in the fourth quarter of 2002, which Deloitte believed
should be recognized in other periods. Deloitte brought these issues to the
attention of management. Management immediately notified the Audit Committee of
the Board of Directors.
In response, the Audit Committee, which is comprised entirely of independent
directors, immediately commenced an investigation into the Company's revenue
recognition policies generally, and specifically with regard to the sales
transactions identified by Deloitte, and other related or similar transactions.
To assist it in this investigation, the Audit Committee retained Morgan Lewis &
Bockius, LLP, which we refer to in this Report as Morgan Lewis, as independent
counsel, and Morgan Lewis retained the accounting firm of BDO Seidman, LLP,
which we refer to in this Report as BDO, to provide forensic accounting services
in support of its work. The investigation included a review of the accounts of
the Company during the period from October 1, 2001 through December 31, 2002 to
assess the revenue recognition policies applied to these transactions, whether
these transactions were departures from the Company's stated revenue recognition
policy and accounting principles generally accepted in the United States of
America and the reasons for any departures.
During the conduct of the investigation and the audit of the Company's financial
statements for 2002, deficiencies in the Company's internal controls were
identified relating to:
. accounting policies and procedures;
. personnel and their roles and responsibilities;
Deloitte has verbally advised the Audit Committee and management that these
internal control deficiencies constitute reportable conditions and,
collectively, a material weakness as defined in Statement of Auditing Standards
No. 60. At the direction of the Audit Committee, the Company is implementing
changes to its financial organization and enhancing its internal controls in
response to BDO's conclusions. These changes include,
. Retaining new management in senior finance and operations
positions, and in many staff positions,
. terminating or reassigning senior officers and key employees,
. developing a comprehensive policies and procedures manual,
including written procedures for sales order documentation and
shipping and storage, that is accessible and understood by all
employees,
. establishing an internal audit function and retaining an internal
audit director,
. clarifying the Company's revenue recognition policies and
introducing more formalized and frequent training of finance,
sales and other staff,
. communicating a zero tolerance policy for employees who engage in
violations of the Company's accounting policies and procedures,
. establishing an anonymous hotline for employees to report
potential violations of policies and procedures or of applicable
laws or regulations, and
. additional management oversight and detailed reviews of
personnel, disclosures and reporting.
The Company has not yet completed the implementation of all of the changes
identified above. In order to prepare the Annual Report on Form 10-K reflecting
the restated fiscal 2001 and 2000 results, this Report, and the Quarterly Report
on Form 10-Q for the quarter ended March 28, 2003, the Company implemented
interim alternative and additional control measures (the "Interim Measures") to
ensure that the financial statements, and other financial information included
in these reports, fairly present in all material respects the financial
condition, results of operations and cash flows of the Company as of, and for,
the periods presented in these reports.
Our management, including the Chief Executive Officer and our Principal
Accounting Officer, does not expect that our disclosure controls or our internal
controls will prevent all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs.
49
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and we cannot assure you that any design will succeed in
achieving its stated goals under all potential future conditions. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Evaluation of disclosure controls and procedures. During fiscal 2002, the
Company formed a disclosure committee to assist the Chief Executive Officer and
Principal Accounting Officer in fulfilling their responsibility in designing,
establishing, maintaining and reviewing the Company's disclosure controls and
procedures (the "Disclosure Committee"). The Disclosure Committee currently
includes the Company's Chief Executive Officer, Principal Accounting Officer,
General Counsel, Chief Technology Officer, Senior Vice President, Development
and Operations, Senior Vice President, Worldwide Revenue Generation . Within 90
days prior to the date of filing this report, the Company's Chief Executive
Officer and Principal Accounting Officer, along with the other members of the
Disclosure Committee, evaluated the Company's disclosure controls and
procedures. The Company's Chief Executive Officer and Principal Accounting
Officer have concluded that, with the application of the Interim Measures
together with the other changes to its organization and controls implemented to
date, the disclosure controls and procedures are sufficient to bring to their
attention on a timely basis material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act.
Changes in internal controls. Since the date of the last quarterly filing, the
Company is in the process of implementing the changes identified above, and has
applied the Interim Measures, all of which are intended to increase the
effectiveness of its control procedures. Other than the aforementioned items,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls.
Item 15. Principal Accountant Fees and Services
Audit and Non-Audit Fees
The following table presents fees billed for professional audit services
rendered by Deloitte & Touche LLP for the audit of our annual financial
statements for the years ended December 31, 2002, and December 31, 2001, and for
other services rendered by Deloitte & Touche LLP during those periods:
2002 2001
------------ ------------
(amounts in thousands)
Audit Fees (1) $ 660 $ 289
Audit Related Fees (2) 35 28
Tax Fees (3) 458 210
All Other Fees (4) - 33
------------ ------------
$ 1,153 $ 560
============ ============
(1) Audit fees consisted of audit work performed in the preparation of
financial statements, as well as work generally only the independent
auditor can reasonably be expected to provide, such as statutory audits.
(2) Audit related fees consist primarily of procedures related to registration
statement filings and consultation on accounting standards.
(3) Tax fees include all tax services relating to tax compliance, tax planning
and reporting.
(4) All other fees in 2001 consisted principally of services provided in
connection with our acquisition of DTM Corporation.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit
Services of Independent Auditors
Consistent with SEC policies regarding auditor independence, the Audit
Committee has responsibility for appointing, setting compensation and overseeing
the work of the independent auditor. In recognition of this responsibility, the
Audit Committee has established a policy to pre-approve all audit and
permissible non-audit services provided by the independent auditor.
50
PART IV
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The following Consolidated Financial Statements, Financial Statement
Schedule and Exhibits are filed as part of this filing as listed on
page F-1 of this document.
(a) (2) Exhibits
The following exhibits are included as part of this filing and
incorporated herein by this reference:
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 on February 4, 1994.
3.2 Amendment to Certificate of Incorporation filed on May 23, 1995.
Incorporated by reference to Exhibit 3.2 to Registrant's Registration
Statement on Form S-2/A filed on May 25, 1995.
3.3 Certificate of Designation of Rights, Preferences and Privileges of
Preferred Stock. Incorporated by reference to Exhibit 2 to
Registrant's Registration Statement on Form 8-A filed January 8, 1996.
3.4 Certificate of Designations of the Series B Convertible Preferred
Stock, filed with the Secretary of State of Delaware on May 2, 2003.
Incorporated by reference to Exhibit 3.1 to Registrant's Current
Report on Form 8-K, filed on May 7, 2003.
3.5 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 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 on February 4, 1994.
4.2* Form of Director Option Contract 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 on February 4, 1994.
4.3* Form of Officer Option Contract 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 on February 4, 1994.
4.4* Form of Employee Option Contract 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 on February 4, 1994.
4.5 3D Systems Corporation 1996 Stock Incentive Plan. Incorporated by
reference to Appendix A to Registrant's Definitive Proxy Statement
filed on March 30, 2001.
4.6* Form of Incentive Stock Option Contract for Executives pursuant to the
1996 Stock Incentive Plan. Incorporated by reference to Exhibit 4.6 of
Registrant's Form 10-K for the year ended December 31, 2000.
4.7* Form of Non-Statutory Stock Option Contract for Executives pursuant to
the 1996 Stock Incentive Plan. Incorporated by reference to Exhibit
4.7 of Registrant's Form 10-K for the year ended December 31, 2000.
4.8* Form of Employee Incentive Stock Option Contract pursuant to the 1996
Stock Incentive Plan. Incorporated by reference to Exhibit 4.8 of
Registrant's Form 10-K for the year ended December 31, 1999.
4.9* Form of Employee Non-Statutory Stock Option Contract pursuant to the
1996 Stock Incentive Plan.
51
Incorporated by reference to Exhibit 4.9 of Registrant's Form 10-K for
the year ended December 31, 1999.
4.10* 3D Systems Corporation 1996 Non-Employee Directors' Stock Option Plan.
Incorporated by reference to Appendix B to Registrant's Definitive
Proxy Statement filed on March 30, 2001.
4.11* Form of Director Option Contract pursuant to the 1996 Non-Employee
Director Stock Option Plan. Incorporated by reference to Exhibit 4.5
of Registrant's Form 10-K for the year ended December 31, 1999.
4.12 3D Systems Corporation 1998 Employee Stock Purchase Plan. Incorporated
by reference to Exhibit 4.1 to Registrant's Registration Statement on
Form S-8 filed on July 10, 1998.
4.13 3D Systems Corporation 2001 Stock Option Plan. Incorporated by
reference to Exhibit 10.1 to Registrant's Registration Statement on
Form S-8 filed on June 11, 2001.
10.1 Lease dated as of July 12, 1988, by and between 3D Systems, Inc. and
Valencia Tech Associates. Incorporated 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 Third Amendment to Lease dated as of August 27, 2002 by and between
Katell Valencia Associates, a California limited partnership and 3D
Systems, Inc., a California corporation.
10.3 Amendment No. 1 to Lease Agreement between 3D Systems, Inc. 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 on
February 4, 1994.
10.4 Agreement dated as of July 19, 1988, by and among 3D Systems, Inc.,
UVP, Cubital, Ltd. and Scitex Corporation Ltd. Incorporated 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).
10.5 Patent Purchase Agreement dated January 5, 1990 by and between 3D
Systems, Inc. and UVP. Incorporated by reference to Exhibit 10.28 to
3-D Canada's Registration Statement on Form S-1 (Reg. No. 33-31789).
10.6 Security Agreement dated as of the 5th day of January, 1990 by and
between UVP and 3D Systems, Inc. relating to security interest in UVP
Patent. Incorporated by reference to Exhibit 10.29 to 3-D Canada's
Registration Statement on Form S-1 (Reg. No. 33-31789).
10.7 Assignment of UVP Patent dated January 12, 1990 by UVP to 3D Inc.
Incorporated by reference to Exhibit 10.30 to 3-D Canada's
Registration Statement on Form S-1 (Reg. No. 33-31789).
10.8 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 on February 4, 1994.
10.9 Agreement dated October 4, 1995 between Registrant and Mesa County
Economic Development Council, Inc., a Colorado non-profit corporation.
Incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q
for the quarterly period ended September 29, 1995, filed on November
13, 1995.
10.10 Retainer Agreement effective September 9, 1999 between Registrant and
Regent Pacific Management Corporation. Incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K, filed on
February 23, 2000.
10.11 Patent License Agreement dated December 16, 1998 by and between 3D
Systems, Inc., NTT Data CMET, Inc. and NTT Data Corporation.
Incorporated by reference to Exhibit 10.56 to Form 10-K for the year
ended December 31, 1998.
10.12 Stock Option Agreement dated May 20, 1999 between Registrant and
Arthur B. Sims. Incorporated
52
by reference to Exhibit 10.54 to Form 10-K for the year ended December
31, 1999, filed on March 30, 2000.
10.13 Amendment to Retainer Agreement effective August 8, 2000 between
Registrant and Regent Pacific Management Corporation. Incorporated by
reference to Exhibit 10.1 to Registrant's Form 10-Q for the third
quarter of 2000, filed on November 9, 2000.
10.14 Amendment dated August 27, 1998 to R&D Agreement of July 1, 1990
between Registrant and Ciba-Geigy Limited. Incorporated by reference
to Exhibit 10.41 of Registrant's Form 10-K for the year ended December
31, 2000.
10.15 Termination Agreement dated July 21, 2000, between 3D Systems
Corporation, a California Corporation, Charles W. Hull ("Hull"), as
Founders' Agent pursuant to the Shareholders Agreement and Ciba
Specialty Chemicals Canada Inc., a Canadian corporation ("Ciba
Canada"), terminating the Shareholders' Agreement, dated 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 10.42 of Registrant's Form 10-K
for the year ended December 31, 2000.
10.16 Agreement and Plan of Merger by and among Registrant, Tiger Deals,
Inc., a Delaware corporation, and DTM Corporation, a Texas
corporation. Incorporated by reference to Form 8-K, filed April 2,
2001.
10.17 Amendment to Employment Agreement effective October 30, 2001 between
Registrant and Gary J. Sbona. Incorporated by reference to Exhibit
10.44 of Registrant's Form 10-K for the year ended December 31, 2001,
filed on March 27, 2002.
10.18 Agreement effective October 30, 2001 between Registrant and Regent
Pacific Management Corporation. Incorporated by reference to Exhibit
10.45 of Registrant's Form 10-K for the year ended December 31, 2001,
filed on March 27, 2002.
10.19 Employment Agreement for Brian Service dated October 15, 2002.
Incorporated by reference to Exhibit 10.9 to Registrant's Form 10-Q
for the quarterly period ended September 27, 2002, filed on November
12, 2002.
10.20* Consulting Agreement for Brian Service dated November 18, 2002.
10.21 Debenture Purchase Agreement dated as of December 19, 2001, by and
among Registrant and the purchasers listed on Schedule I thereto.
10.22 Rights Agreement dated as of December 4, 1995, between Registrant and
U.S. Stock Transfer Corporation, as Rights Agent. Incorporated by
reference to Exhibit 1 to Registrant's Registration Statement on Form
8-A filed January 8, 1996.
10.23* Stock Option Agreement dated July 1, 1999, between Registrant and G.
Walter Loewenbaum II. Incorporated by reference to Exhibit 10.1 to
Registrant's Registration Statement on Form S-8 filed on March 4,
2002.
10.24* Stock Option Agreement dated September 9, 1999, between Registrant and
Gary J. Sbona. Incorporated by reference to Exhibit 10.2 to
Registrant's Registration Statement on Form S-8 filed on March 4,
2002.
10.25* Stock Option Agreement dated May 20, 1999, between Registrant and
Arthur B. Sims. Incorporated by reference to Exhibit 10.3 to
Registrant's Registration Statement on Form S-8 filed on March 4,
2002.
10.26 Intentionally omitted.
53
10.27 Amendment Agreement Number One to Loan and Security Agreement dated
July 26, 2001. Incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for the quarterly period ended September 27,
2002, filed on November 12, 2002.
10.28 Amendment Agreement Number Two to Loan and Security Agreement dated
August 16, 2001. Incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-Q for the quarterly period ended September 27,
2002, filed on November 12, 2002.
10.29 Amendment Agreement Number Three to Loan and Security Agreement dated
October 1, 2001. Incorporated by reference to Exhibit 10.3 to
Registrant's Form 10-Q for the quarterly period ended September 27,
2002, filed on November 12, 2002.
10.30 Amendment Agreement Number Four to Loan and Security Agreement dated
November 1, 2001. Incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-Q for the quarterly period ended September 27,
2002, filed on November 12, 2002.
10.31 Amendment Agreement Number Five to Loan and Security Agreement dated
December 20, 2001. Incorporated by reference to Exhibit 10.5 to
Registrant's Form 10-Q for the quarterly period ended September 27,
2002, filed on November 12, 2002.
10.32 Amendment Agreement Number Six to Loan and Security Agreement dated
August 30, 2002. Incorporated by reference to Exhibit 10.6 to
Registrant's Form 10-Q for the quarterly period ended September 27,
2002, filed on November 12, 2002.
10.33 Amendment Agreement Number Seven to Loan and Security Agreement dated
October 1, 2002. Incorporated by reference to Exhibit 10.7 to
Registrant's Form 10-Q for the quarterly period ended September 27,
2002, filed on November 12, 2002.
10.34 Amendment Agreement Number Eight to Loan and Security Agreement dated
November 12, 2002. Incorporated by reference to Exhibit 10.8 to
Registrant's Form 10-Q for the quarterly period ended September 27,
2002, filed on November 12, 2002.
10.35 Sixth Amendment to Reimbursement Agreement dated November 8, 2002.
Incorporated by reference to Exhibit 10.10 to Registrant's Form 10-Q
for the quarterly period ended September 27, 2002, filed on November
12, 2002.
10.36 Form of Securities Purchase Agreement. Incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K, filed on May
7, 2003.
10.37 Waiver Agreement Number Two, dated as of May 1, 2003, between and
among U.S. Bank National Association, Registrant, and 3D Holdings,
LLC. Incorporated by reference to Exhibit 10.2 to Registrant's Current
Report on Form 8-K, filed on May 7, 2003.
10.38* Employment Agreement dated March 1, 1994, by and among Registrant, 3D
Systems, Inc., a California corporation and Charles W. Hull.
Incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q
for the quarterly period ended July 1, 1994, filed on August 9, 1994.
16.1 Letter, dated April 23, 2003, from Deloitte & Touche LLP to the
Securities and Exchange Commission. Incorporated by reference to
Exhibit 16.1 to Registrant's Current Report on Form 8-K, filed on
April 23, 2003.
16.2 Letter, dated April 29, 2003, from Deloitte & Touche LLP to the
Securities and Exchange Commission. Incorporated by reference to
Exhibit 16.1 to Registrant's Current Report on Form 8-K, filed on
April 30, 2003.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Auditors - Deloitte & Touche LLP.
99.1 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 dated June 30, 2003.
54
99.2 Certification of Principal Accounting Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 dated June 30, 2003.
(b) Reports on Form 8-K
Current Report on Form 8-K, reporting under Items 5 and 7, filed
October 25, 2002.
__________________
* Management contract or compensatory plan or arrangement
55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements
Independent Auditors' Report ................................................................. F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 (Restated) ...................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001
(Restated) and 2000 (Restated) ............................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001 (Restated) and 2000 (Restated) ....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001
(Restated) and 2000 (Restated) ............................................................... F-6
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended
December 31, 2002, 2001 (Restated) and 2000 (Restated) ....................................... F-8
Notes to Consolidated Financial Statements for the Years Ended December 31, 2002,
2001 and 2000 ................................................................................ F-9
Consolidated Financial Statement Schedule
Independent Auditors' Report ................................................................. F-34
Schedule II -- Valuation and Qualifying Accounts for the Years Ended December 31, 2002,
2001 and 2000 ................................................................................ F-35
F1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
3D Systems Corporation
Valencia, California
We have audited the accompanying consolidated balance sheets of 3D Systems
Corporation and its subsidiaries (the "Company") as of December 31, 2002 and
2001 and the related consolidated statements of operations, stockholders'
equity, cash flows and comprehensive (loss) income for each of the three years
in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of 3D Systems Corporation and its
subsidiaries as of December 31, 2002 and 2001 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements for the year ended December 31, 2002 have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company's recurring losses
from operations, working capital deficiency and accumulated deficit raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 24, the accompanying 2001 and 2000 financial statements
have been restated.
/s/ Deloitte & Touche LLP
- ------------------------------------
Deloitte & Touche LLP
Los Angeles, California
June 20, 2003
3D SYSTEMS CORPORATION
Consolidated Balance Sheets
As of December 31, 2002 and 2001
2001
As Restated
ASSETS 2002 (See Note 24)
--------------- -------------------
(in thousands, except par value)
Current assets:
Cash and cash equivalents $ 2,279 $ 5,948
Accounts receivable, net of allowance for
doubtful accounts of $3,068 (2002) and $1,755 (2001) 27,420 36,262
Current portion of lease receivables 322 498
Inventories 12,564 18,546
Deferred income taxes --- 5,271
Prepaid expenses and other current assets 3,687 2,817
------------ -------------------
Total current assets 46,272 69,342
Property and equipment, net 15,339 17,864
Licenses and patent costs, net 14,960 12,314
Deferred income taxes --- 6,750
Lease receivables, less current portion and net of allowance of
$414 (2002) and $247 (2001) 553 1,750
Acquired technology, net 7,647 9,192
Goodwill 44,456 44,158
Other assets, net 3,006 3,572
------------ -------------------
$ 132,233 $ 164,942
============ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 2,450 $ 6,151
Accounts payable 10,830 12,819
Accrued liabilities 15,529 15,608
Current portion of long-term debt 10,500 3,135
Customer deposits 801 1,624
Deferred revenues 14,770 13,997
------------ -------------------
Total current liabilities 54,880 53,334
Deferred tax liabilities --- 4,210
Other liabilities 3,397 3,329
Long-term debt, less current portion 4,090 16,240
Subordinated debt 10,000 9,400
------------ -------------------
72,367 86,513
------------ -------------------
Commitments and contingencies (Note 20) --- ---
Stockholders' equity:
Preferred stock, authorized 5,000 shares; none issued --- ---
Common stock, $.001 par value, authorized 25,000 shares; issued and outstanding
12,725 (2002); and issued 13,357 and outstanding 13,132 (2001) 13 13
Capital in excess of par value 84,931 93,173
Notes receivable from officers and employees (59) (244)
Accumulated deficit (21,419) (6,553)
Accumulated other comprehensive loss (3,600) (6,420)
Treasury stock, 225 shares (2001) at cost --- (1,540)
------------ -------------------
Total stockholders' equity 59,866 78,429
------------ -------------------
$ 132,233 $ 164,942
============ ===================
See accompanying notes to consolidated financial statements.
F3
3D Systems Corporation
Consolidated Statements of Operations
Years ended December 31, 2002, 2001 and 2000
2001 2000
As Restated As Restated
2002 (See note 24) (See note 24)
---------------------- ---------------------- ----------------------
(in thousands, except per share amounts)
Sales:
Products $ 81,039 $ 84,558 $ 79,857
Services 34,922 34,182 29,429
---------------------- ---------------------- ----------------------
Total sales 115,961 118,740 109,286
---------------------- ---------------------- ----------------------
Cost of sales:
Products 43,398 42,278 34,969
Services 25,942 24,961 21,729
---------------------- ---------------------- ----------------------
Total cost of sales 69,340 67,239 56,698
---------------------- ---------------------- ----------------------
Gross profit 46,621 51,501 52,588
---------------------- ---------------------- ----------------------
Operating expenses:
Selling, general and administrative 48,331 42,807 32,710
Research and development 15,366 11,010 7,814
Severance and other restructuring costs 4,354 --- ---
---------------------- ---------------------- ----------------------
Total operating expenses 68,051 53,817 40,524
---------------------- ---------------------- ----------------------
(Loss) income from operations (21,430) (2,316) 12,064
Interest and other (expense) income, net (2,991) (1,033) 115
Gain on arbitration settlement 18,464 --- ---
---------------------- ---------------------- ----------------------
(Loss) income before income taxes (5,957) (3,349) 12,179
Provision for (benefit from) income taxes 8,909 (992) 4,309
---------------------- ---------------------- ----------------------
Net (loss) income $ (14,866) $ (2,357) $ 7,870
====================== ====================== ======================
Shares used to calculate basic net (loss) income per share 12,837 12,579 11,851
====================== ====================== ======================
Basic net (loss) income per share $ (1.16) $ (0.19) $ 0.66
====================== ====================== ======================
Shares used to calculate diluted net (loss) income per
share 12,837 12,579 12,889
====================== ====================== ======================
Diluted net (loss) income per share $ (1.16) $ (0.19) $ 0.61
====================== ====================== ======================
See accompanying notes to consolidated financial statements.
F4
3D Systems Corporation
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2002, 2001 and 2000
Notes
Receivable Accumulated
Common Stock Capital in From Officers Other Total
Par Value Excess of Par And Accumulated Comprehensive Treasury Stockholders'
Shares $0.001 Value Employees Deficit Loss Stock Equity
------ --------- ------------- ------------- ----------- ------------- -------- -------------
(in thousands)
Balance at January 1,
2000 11,433 $ 12 $ 75,064 $ (240) $ (12,066) $ (1,622) $ (1,540) $ 59,608
Exercise of stock options 779 (a) 4,848 --- --- --- --- 4,848
Shares exchanged in
option exercise (39) (a) (669) --- --- --- --- (669)
Exercise of stock
warrants 5 (a) 29 --- --- --- --- 29
Employee stock purchase
plan 20 (a) 191 --- --- --- --- 191
Forgiveness of officer
loans --- --- 7 40 --- --- --- 47
Employee stock loans --- --- --- (250) --- --- --- (250)
Repayment of officer
loans --- --- --- 120 --- --- --- 120
Tax benefit related to
stock option exercises --- --- 2,046 --- --- --- --- 2,046
Stock-based
compensation --- --- 52 --- --- --- --- 52
Net income (As restated,
see note 24) --- --- --- --- 7,870 --- --- 7,870
Cumulative translation
adjustment --- --- --- --- --- (2,370) --- (2,370)
------ --------- ------------- ------------- ----------- ------------- -------- -------------
Balance at December 31,
2000 (As restated, see
note 24) 12,198 12 81,568 (330) (4,196) (3,992) (1,540) 71,522
Exercise of stock options 294 (a) 2,127 -- -- -- -- 2,127
Private placement 617 (a) 8,021 -- -- -- -- 8,021
Employee stock purchase
plan 23 1 242 -- -- -- -- 243
Repayment of officer
loans -- -- -- 86 -- -- -- 86
Tax benefit related to
stock option exercises -- -- 1,215 -- -- -- -- 1,215
Net loss (As restated, see
note 24) -- -- -- -- (2,357) -- -- (2,357)
Cumulative translation
adjustment -- -- -- -- -- (2,428) -- (2,428)
------ --------- ------------- ------------- ----------- ------------- -------- -------------
Balance at December 31,
2001 (As restated, see
note 24) 13,132 13 93,173 (244) (6,553) (6,420) (1,540) 78,429
Exercise of stock
options 117 (a) 850 --- --- --- --- 850
Employee stock purchase
plan 26 (a) 202 --- --- --- --- 202
Private placement, net 1,000 1 12,491 --- --- --- --- 12,492
Vantico settlement (1,550) (1) (20,309) --- --- --- --- (20,310)
Repayment of officer
loans --- --- --- 185 --- --- --- 185
Issuance of warrants --- --- 64 --- --- --- --- 64
Retirement of treasury
shares --- --- (1,540) --- --- --- 1,540 ---
Net loss --- --- --- --- (14,866) --- --- (14,866)
Cumulative translation
adjustment --- --- --- --- --- 2,820 --- 2,820
------ --------- ------------- ------------- ----------- ------------- -------- -------------
Balance at December 31,
2002 12,725 $ 13 $ 84,931 $ (59) $ (21,419) $ (3,600) $ --- $ 59,866
====== ========= ============= ============= =========== ============= ======== =============
________________________________________
(a) Amounts not shown due to rounding
See accompanying notes to consolidated financial statements.
F5
3D Systems Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
2001 2000
As Restated As Restated
Cash flows from operating activities: 2002 See note 24 See note 24
----------------- ----------------- ------------------
(in thousands)
Net (loss) income $ (14,866) $ (2,357) $ 7,870
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Deferred income taxes 7,813 (1,882) 1,979
Gain on arbitration settlement (including $1,846 included in S,G&A
for legal reimbursement) (20,310) -- --
Depreciation and amortization 9,902 7,704 6,245
Forgiveness of officer loan -- --- 47
Tax benefit related to stock option exercises -- 1,215 2,046
Stock-based compensation 64 -- 52
Loss on disposition of property and equipment 263 834 --
Changes in operating accounts, excluding effects of acquisitions:
Accounts receivable 11,466 753 (7,105)
Lease receivables 1,373 2,927 (2,083)
Inventories 7,088 (2,655) (7,079)
Prepaid expenses and other current assets (612) 1,849 (1,520)
Other assets 486 (186) (2,523)
Accounts payable (2,575) 2,096 2,536
Accrued liabilities 2,067 (2,324) 548
Customer deposits (824) 409 745
Deferred revenues 88 161 4,799
Other liabilities (109) (1,895) (1,431)
----------------- ----------------- -----------------
Net cash provided by operating activities 1,314 6,649 5,126
----------------- ----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (3,210) (3,317) (4,893)
Proceeds on disposition of property and equipment 602 -- 2,958
Additions to licenses and patent costs (4,724) (1,173) (368)
Disposition of licenses and patents -- -- 101
Software development costs (364) (489) (442)
Investment in DTM (138) (49,551) --
Investment in RPC (1,981) (2,171) --
Investment in OptoForm SARL (1,200) (1,387) --
----------------- ----------------- -----------------
Net cash used for investing activities (11,015) (58,088) (2,644)
----------------- ----------------- -----------------
Cash flows from financing activities:
Exercise of stock options and stock purchase plan 1,052 2,369 4,399
Employee loans for stock option exercises -- -- (250)
Borrowings 44,564 53,492 --
Repayment of long-term debt (52,450) (23,061) (110)
Repayment of notes receivable from officers and employees 185 86 120
Proceeds from sale of stock 12,492 8,021 --
----------------- ----------------- -----------------
Net cash provided by financing activities 5,843 40,907 4,159
----------------- ----------------- -----------------
Effect of exchange rate changes on cash 189 (2,519) (195)
----------------- ----------------- -----------------
Net (decrease) increase in cash and cash equivalents (3,669) (13,051) 6,446
Cash and cash equivalents at the beginning of the period 5,948 18,999 12,553
----------------- ----------------- -----------------
Cash and cash equivalents at the end of the period $ 2,279 $ 5,948 $ 18,999
================= ================= =================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,918 $ 764 $ 180
================= ================= =================
Income taxes $ 732 $ 903 $ 97
================= ================= =================
See accompanying notes to consolidated financial statements.
F6
3D Systems Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
(in thousands)
Supplemental schedule of non cash investing activities:
On August 24, 2001, the Company acquired DTM Corporation ("DTM") for $44.6
million in cash, plus $4.9 million in acquisition costs. In conjunction with the
merger, the following table summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of acquisition as follows:
Fair value of tangible assets acquired $ 14,643
Fair value of goodwill and other identifiable intangible assets 49,332
Purchase price (49,551)
===========
Liabilities assumed $ 14,424
===========
In conjunction with the acquisitions of OptoForm (February 2001) and RPC
(September 2001), the Company recorded current liabilities of $1.2 million and
$2.0 million, respectively, which were paid in 2002. In connection with the RPC
acquisition, the Company is carrying a $1.6 million current liability, at
December 31, 2002, related to payments due to RPC shareholders in September
2003.
In 2002, 2001 and 2000, the Company transferred $4.8 million, $4.7 million and
$2.2 million, respectively of property and equipment from inventories to fixed
assets. Additionally, $5.9 million, $1.6 million and $2.9 million of property
and equipment was transferred from fixed assets to inventories in 2002, 2001 and
2000, respectively.
In conjunction with the $22 million arbitration settlement with Vantico, which
was settled through the return of shares to the Company, the Company allocated
$1.7 million to a put option which is included as an addition to stockholders'
equity in 2002.
See accompanying notes to consolidated financial statements.
F7
3D Systems Corporation
Consolidated Statements of Comprehensive (Loss) Income
Years ended December 31, 2002, 2001 and 2000
2001 2000
As restated As restated
2002 (see note 24) (see note 24)
-------------- --------------- ---------------
(in thousands)
Net (loss) income $ (14,866) $ (2,357) $ 7,870
Other comprehensive (loss) income:
Foreign currency translation adjustments 2,820 (2,428) (2,370)
-------------- --------------- ---------------
Comprehensive (loss) income $ (12,046) $ (4,785) $ 5,500
============== =============== ===============
See accompanying notes to consolidated financial statements.
F8
3D Systems Corporation
Notes to Consolidated Financial Statements
Years ended December 31, 2002, 2001 and 2000
(1) Going Concern
The consolidated financial statements for the year ended December 31,
2002 have been prepared assuming the Company will continue as a going
concern. The Company incurred operating losses totaling $21.4 million
and $2.3 million for the years ended December 31, 2002 and 2001,
respectively. In addition, the Company has a working capital deficit of
$8.6 million and an accumulated deficit of $21.4 million at December
31, 2002. These factors among others raise substantial doubt about the
Company's ability to continue as a going concern.
Management's plans include raising additional debt and equity
financing. In May 2003, the Company sold approximately 2.6 million
shares of its Series B Convertible Preferred Stock for aggregate
consideration of $15.8 million (Note 23 -Preferred Stock).
Subsequently, on May 5, 2003 the Company repaid the US Bank term loan
balance of $9.6 million (Note 14 - Borrowings).
Management intends to obtain debt financing to replace the US Bank
financing and currently has a proposal from Congress Financial to
provide a secured revolving credit facility of up to $20 million.
Additionally, management intends to pursue a program to increase
margins and continue cost saving programs. However, there is no
assurance that the Company will succeed in accomplishing any or all of
these initiatives.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability or classification of asset
carrying amounts or the amounts and classification of liabilities that
may result should the Company be unable to continue as a going concern.
(2) Basis of Presentation
The Company reports its interim financial information on a 13-week
basis ending the last Friday of each quarter, and reports its annual
financial information through the calendar year ended December 31. The
consolidated financial statements include the accounts of 3D Systems
Corporation and its wholly owned subsidiaries. All inter-company
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.
(3) Significant Accounting Policies
(a) Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities." SFAS No. 146 replaces Emerging Issues
Task Force (EITF) Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit
an Activity." This standard requires companies to recognize
costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or
disposal activities that are initiated after December 31,
2002. The adoption of SFAS 146 will not have a material impact
on the Company's results of operations or financial condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation -- Transition and Disclosure",
which amended SFAS No. 123, "Accounting for Stock-Based
Compensation." The new standard provides alternative methods
of transition for a voluntary change to the fair market value
based method for accounting for stock-based employee
compensation. Additionally, the statement amends the
disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. In compliance with SFAS No. 123, the Company has
elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation plan as
defined by Accounting Principles Board ("APB") Opinion No. 25
and has made the applicable disclosures later in this Note.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 establishes standards on
the classification and
F9
measurement of financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 will become
effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective for the first
interim period beginning after June 15, 2003. The Company is
in the process of assessing the effect of SFAS No. 150 and
does not expect the implementation of the pronouncement to
have a material effect on its financial condition or results
of operations.
In November 2002, the FASB issued FASB Interpretation No. 45
(FIN 45), "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness
of Others." FIN 45 requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of
the obligation it has undertaken in issuing the guarantee. The
Company will apply FIN 45 to guarantees, if any, issued after
December 31, 2002. The Company has not yet evaluated the
financial statement impact of the adoption of FIN 45. FIN 45
also requires guarantors to disclose certain information for
guarantees, beginning December 31, 2002. These financial
statements contain the required disclosures.
In January 2003, the FASB issued FASB Interpretation No. 46
(FIN 46), "Consolidation of Variable Interest Entities." FIN
46 requires an investor with a majority of the variable
interests in a variable interest entity to consolidate the
entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable
interest entity is an entity in which the equity investors do
not have a controlling financial interest or the equity
investment at risk is insufficient to finance the entity's
activities without receiving additional subordinated financial
support from other parties. The Company does not expect to
identify any variable interest entities that must be
consolidated.
(b) Revenue Recognition
Revenues from the sale of systems and related products are
recognized upon shipment, provided that both title and risk of
loss have passed to the customer and collection is reasonably
assured. Some sales transactions are bundled and include
equipment, software license, warranty, training and
installation. The Company allocates and records revenue in
these transactions based on vendor specific objective evidence
that has been accumulated through historic operations. The
process of allocating the revenue involves some management
judgments. Revenues from services are recognized at the time
of performance. We provide end users with maintenance under a
warranty agreement for up to one year and defer a portion of
the revenues at the time of sale based on the relative fair
value of those services. After the initial warranty period, we
offer these customers optional maintenance contracts; revenue
related to these contracts is deferred and recognized ratably
over the period of the contract. Our warranty costs were $4.6
million, $4.2 million and $3.8 million, for the years ended
December 31, 2002, 2001 and 2000, respectively. The Company's
systems are sold with software products that are integral to
the operation of the systems. These software products are not
sold separately.
Certain of the Company's sales were made through a sales
agent to customers where substantial uncertainty exists with
respect to collection of the sales price. The substantial
uncertainty is generally a result of the absence of a history
of doing business with the customer and uncertain political
environment in the country in which the customer does
business. For these sales, the Company records revenues based
on the cost recovery method, which requires that the sales
proceeds received are first applied to the carrying amount of
the asset sold until the carrying amount has been recovered,
thereafter, all proceeds are credited to sales.
Credit is extended based on an evaluation of each customer's
financial condition. To reduce credit risk in connection with
systems sales the Company may, depending upon the
circumstances, require significant deposits prior to shipment
and may retain a security interest in the system until fully
paid. The Company often requires international customers to
furnish letters of credit.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents. The carrying value of these instruments
approximates market value because of their short maturity.
The Company invests its excess cash in interest-bearing
deposits with major banks 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.
(d) Allowance for Doubtful Accounts
F10
The Company's estimate for the allowance for doubtful accounts
related to trade receivables is based on two methods. The
amounts calculated from each of these methods are combined to
determine the total amount reserved. First, the Company
evaluates specific accounts where it has information that the
customer may have an inability to meet its financial
obligations (for example, bankruptcy). In these cases, the
Company uses its judgment, based on the available facts and
circumstances, and records a specific reserve for that
customer against amounts due to reduce the receivable to the
amount that is expected to be collected. These specific
reserves are reevaluated and adjusted as additional
information is received that impacts the amount reserved.
Second, a reserve is established for all customers based on a
range of percentages applied to aging categories. These
percentages are based on historical collection and write-off
experience. If circumstances change (for example, the Company
experiences higher than expected defaults or an unexpected
material adverse change in a major customer's ability to meet
its financial obligation to the Company), estimates of the
recoverability of amounts due to the Company could be reduced
by a material amount.
(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 as
deferred revenues.
(f) Inventories
Inventories are stated at the lower of cost or market, cost
being determined using the first-in, first-out method.
Reserves for slow moving and obsolete inventories are provided
based on historical experience and current product demand. The
Company evaluates the adequacy of these reserves quarterly.
The reserve for slow moving and obsolete inventory was $1,876
and $1,618 at December 31, 2002 and 2001, respectively.
Inventories consigned to a sales agent at December 31, 2002
and 2001 were $0.2 million and $0.1 million, respectively.
(g) Property and Equipment
Property and equipment are carried at cost and depreciated on
a straight-line basis over the estimated useful lives of the
related assets, generally three to thirty years. Leasehold
improvements are amortized on a straight-line basis over their
estimated useful lives, or the lives of the leases, whichever
is shorter. Realized gains and losses are recognized upon
disposal or retirement of the related assets and are reflected
in results of operations. Repair and maintenance charges are
expensed as incurred.
(h) Goodwill and Intangible Assets
The Company has applied Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" in its
allocation of the purchase price of DTM Corporation (DTM) and
RPC Ltd. (RPC). The annual impairment testing required by SFAS
No. 142, "Goodwill and Other Intangible Assets" requires the
Company to use its judgment and could require the Company to
write-down the carrying value of its goodwill and other
intangible assets in future periods. SFAS No. 142 requires
companies to allocate their goodwill to identifiable reporting
units, which are then tested for impairment using a two-step
process detailed in the statement. The first step requires
comparing the fair value of each reporting unit with its
carrying amount, including goodwill. If that fair value
exceeds the carrying amount, the second step of the process is
not necessary and there are no impairment issues. If that fair
value does not exceed that carrying amount, companies must
perform the second step that requires an allocation of the
fair value of the reporting unit to all assets and liabilities
of that unit as if the reporting unit had been acquired in a
purchase business combination and the fair value of the
reporting unit was the purchase price. The goodwill resulting
from that purchase price allocation is then compared to its
carrying amount with any excess recorded as an impairment
charge.
Upon implementation of SFAS No. 142 in January 2002 and in the
fourth quarter of 2002, the Company concluded that the fair
value of the Company's reporting units exceeded their carrying
values and accordingly, as of those dates, there were no
goodwill impairment issues. The Company is required to perform
a valuation of its reporting units annually in the fourth
quarter, or upon significant changes in the Company's business
environment.
(i) Licenses and Patent Costs
F11
Licenses and patent costs are being amortized on a
straight-line basis over their estimated useful lives, which
are approximately eight to seventeen-years, or on a
units-of-production basis, depending on the nature of the
license or patent.
(j) Long-Lived Assets
The Company evaluates long-lived assets other than goodwill
for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be
recoverable. If the estimated future cash flows (undiscounted
and without interest charges) from the use of an asset are
less than the carrying value, a write-down would be recorded
to reduce the related asset to its estimated fair value.
(k) Capitalized Software Costs
Certain software development and production costs are
capitalized upon a product's reaching technological
feasibility. Costs capitalized in 2002, 2001 and 2000 were
$364,000, $489,000 and $442,000, respectively. Amortization of
software development costs begins when the related products
are available for sale. Amortization expense amounted to
$452,000, $467,000 and $457,000 for 2002, 2001 and 2000,
respectively, based on the straight-line method using
estimated useful lives of two years. Net capitalized costs
aggregated $414,000 and $502,000 at December 31, 2002 and
2001, respectively, and are included in other assets in the
accompanying consolidated balance sheets.
(l) Contingencies
The Company accounts for contingencies in accordance with SFAS
No. 5, "Accounting for Contingencies". SFAS No. 5 requires
that the Company record an estimated loss from a loss
contingency when information available prior to issuance of
the Company's financial statements indicates that it is
probable that an asset has been impaired or a liability has
been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated. Accounting for
contingencies such as litigation requires the Company to use
its judgment. The Company cannot reasonably estimate the costs
arising from its contingencies. However, management believes
the ultimate outcome of these matters will not have a material
effect on the Company's consolidated financial position,
results of operations or cash flows.
(m) Foreign Currency Translation
The Company uses derivative instruments to manage exposure to
foreign currency risk. International sales are made primarily
from the Company's foreign sales subsidiaries in their
respective countries and are denominated in United States
dollars or the local currency of each country. The Company's
exposure to foreign exchange rate fluctuations arises in part
from inter-company accounts in which costs incurred in the
United States are charged to our foreign sales subsidiaries.
These inter-company accounts are denominated in United States
dollars. The Company manages selected exposures through
financial market transactions in the form of foreign exchange
forward and put option contracts. The Company does not enter
into derivative contracts for speculative purposes. The
Company does not hedge its foreign currency exposure in a
manner that would entirely eliminate the effects of changes in
foreign exchange rates on its consolidated net (loss) income.
The Company had no derivative contracts in place on December
31, 2002. The notional amount covered by all of our put option
contracts was $8.5 million at December 31, 2001. The put
options were related to transactions denominated in Euros and
Pounds Sterling, with settlement dates in January and February
2002. The premium paid for the put options was $144,000 in
2001, and the market value was approximately $8,000 at
December 31, 2001.
The effect of the unrealized exchange rate fluctuations on
translating foreign currency assets and liabilities into
United States dollars is accumulated as a separate component
of stockholders' equity. Gains and losses resulting from
foreign currency transactions are included in current
operations. The aggregate foreign currency exchange gains
(losses) included in cost of sales were $640,000, $(227,000)
and $162,000 for 2002, 2001 and 2000, respectively. The
aggregate foreign exchange losses included in other expense in
2002 was $255,000. No foreign exchange gains or losses were
included in other (expense) income in 2001 or 2000.
(n) Research and Development Costs
Research and development costs are expensed as incurred.
F12
(o) Earnings Per Share
Basic net (loss) income per share is computed by dividing net
(loss) income by the weighted average number of shares of
common stock outstanding during the period. Diluted net (loss)
income per share is computed by dividing net (loss) income by
the weighted average number of shares of common stock
outstanding plus the number of additional common shares that
would have been outstanding if all potentially dilutive common
shares had been issued. Common shares related to stock options
and stock warrants are excluded from the computation when
their effect is anti-dilutive.
(p) Advertising Costs
Advertising costs are expensed as incurred. Advertising
expenses were approximately $2.3 million, $2.1 million and
$1.7 million for the years ended December 31, 2002, 2001 and
2000, respectively.
(q) Use of Estimates
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in
the United States of America. The preparation of these
financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to
the allowance for doubtful accounts, income taxes,
inventories, goodwill and intangible assets, contingencies and
revenue recognition. The Company bases its estimates on
historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates.
(r) Stock Option Plans
The Company has employee stock benefit plans, which are
described more fully in "Note 15: Stockholders' Equity and
Stockholders' Rights Plan." The Company's stock option plans
are accounted for under the intrinsic value recognition and
measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As
the exercise price of all options granted under these plans
was equal to the market price of the underlying common stock
on the grant date, no stock-based employee compensation cost
is recognized in net income.
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure," the
following pro forma net income and earnings per share
information is presented as if the Company accounted for
stock-based compensation awarded under the stock incentive
plans using the fair value method. Under the fair value
method, the estimated fair value of stock incentive awards is
charged against income on a straight-line basis over the
vesting period.
F13
2002 2001 2000
---------- ---------- ----------
Net (loss) income, as reported $ (14,866) $ (2,357) $ 7,870
Add: Stock based employee compensation expense included
in reported net earnings, net of related tax benefits --- --- ---
Deduct: Stock based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effects 5,806 3,859 646
---------- ---------- ----------
Pro forma net (loss) earnings $ (20,672) $ (6,216) $ 7,224
========== ========== ==========
Basic net earnings per common share:
As reported $ (1.16) $ (0.19) $ 0.66
========== ========== ==========
Pro forma $ (1.61) $ (0.49) $ 0.61
========== ========== ==========
Diluted net earnings per common share:
As reported $ (1.16) $ (0.19) $ 0.61
========== ========== ==========
Pro forma $ (1.61) $ (0.49) $ 0.56
========== ========== ==========
(s) Income Taxes
Deferred income tax assets and liabilities are computed
annually for the difference between the financial statement
and income statement basis of assets and liabilities. Such
deferred income tax assets and liability computation are based
on enacted tax laws and rates applicable to periods in which
the differences are expected to reverse. A valuation allowance
is provided, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
(t) Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash
equivalents, accounts receivable, lease receivables, accounts
payable, line of credit, term loan and industrial development
bond are carried at cost, which approximates their fair value,
because of the short-term maturity of these instruments and
interest on long-term borrowings vary with the market. The
fair value of the Company's subordinated debt is estimated to
be $8.6 million at December 31, 2002 (see Note 14).
(4) Leases
The Company provides lease financing for qualified customers. The
leases are accounted for as sales-type leases where the present value
of minimum lease payments, net of costs, are recorded as sales. The
components of lease receivables at December 31, 2002 and 2001 are as
follows:
F14
2002 2001
---------------- ----------------
(in thousands)
Total minimum lease payment receivable $ 696 $ 1,331
Estimated unguaranteed residual value 179 917
---------------- ----------------
Gross investment in leases 875 2,248
Unearned income (142) (548)
---------------- ----------------
Total investment in leases $ 733 $ 1,700
================ ================
Short-term interest in leases $ 277 $ 11
Long-term interest in leases $ 456 $ 1,689
Future minimum lease payments to be received as of December 31, 2002
are as follows:
(in thousands)
2003 $ 322
2004 251
2005 63
2006 60
--------------
$ 696
==============
In 2001, lease receivables totaling $3.3 million were sold to an
outside party. No gain or loss was recognized on the transaction. The
terms of the sale required the Company to guarantee to the purchaser
certain cash payments in the event of default on those receivables. At
December 31, 2002, the Company has fully reserved for the maximum
amount of payments under the guarantee of approximately $383,000.
(5) Inventories
Components of inventories at December 31, 2002 and 2001 are as follows:
2002 2001
-------------- --------------
(in thousands)
Raw materials $ 2,617 $ 2,397
Work in process 196 759
Finished goods 9,751 15,390
-------------- --------------
$ 12,564 $ 18,546
============== ==============
F15
(6) Property and Equipment
Property and equipment at December 31, 2002 and 2001 are summarized as
follows:
Useful Life
2002 2001 (in years)
-------------- -------------- -------------
(in thousands)
Land $ 435 $ 435 --
Building 4,202 4,202 30
Machinery and equipment 26,984 26,259 3-5
Office furniture and equipment 3,597 3,183 5
Leasehold improvements 4,137 3,323 Life of Lease
Rental equipment 1,189 1,015 5
Construction in progress 206 925 N/A
-------------- --------------
40,750 39,342
Less: Accumulated depreciation (25,411) (21,478)
-------------- --------------
$ 15,339 $ 17,864
============== ==============
Depreciation expense for 2002, 2001 and 2000 was $5.8 million, $4.8
million and $3.9 million, respectively.
(7) Licenses and Patent Costs
Licenses and patent costs at December 31, 2002 and 2001 are
summarized as follows:
Weighted
average
useful life
2002 2001 (in years)
-------------- -------------- -------------
(in thousands)
Licenses, at cost $ 2,333 $ 2,333 10
Patent costs 22,946 18,349 9.94
-------------- --------------
25,279 20,682
Less: Accumulated amortization (10,319) (8,368)
-------------- --------------
$ 14,960 $ 12,314
-------------- --------------
(a) In 2002, 2001 and 2000, the Company incurred and capitalized
$4,724,000 (there were no significant retirements in 2002) and
$1,173,000 (there were no retirements in 2001) and $7,000 (net of
addition of $368,000 and retirements of $361,000), respectively,
of costs to acquire, develop and extend patents in the United
States, Japan, Europe and certain other countries, and amortized
previously capitalized patent costs of $1.9 million and $1.2
million, respectively. In addition, in 2001, the Company
acquired, through various acquisitions, patents of $2,890,000.
(b) Effective January 5, 1990, 3D, Inc. acquired from UVP, Inc.
("UVP"), UVP's patents for stereolithography technology 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 were fully amortized as of December 31, 2002. The
agreement further provided for payment deferrals during 1990
through 1992 aggregating $950,000 and annual payments based upon
the sales levels of SLA machines up to a maximum of $8,225,000.
The Company records the annual payments as royalty expense. In
2002, 2001 and 2000, royalty expense aggregated $599,000,
$662,000 and $725,000, respectively, and is included in Cost of
Sales Products in the accompanying consolidated statements of
operations. Royalty obligations at December 31, 2002 and 2001,
are $1,804,000 and $1,672,000, respectively, and are included in
accrued liabilities in the accompanying consolidated balance
sheets. In the event the Company licenses the acquired technology
to a third party, the Company is required to make additional
accelerated payments to UVP of 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. In 2002 and
2001, the Company made additional accelerated payments totaling
$375,000 and $179,000, respectively. UVP has retained a security
interest in the purchased technology until the purchase price is
fully paid. At December 31, 2002, $1.7 million of the maximum
royalty payments remained to be paid to UVP under this agreement.
F16
During the years ended December 31, 2002, 2001 and 2000, the Company
recorded amortization expense on intangible assets of $2.4 million,
$2.2 million, and $2.2 million, respectively.
The estimated annual amortization expense of license, patents and
acquired technology for each of the five succeeding fiscal years is as
follows (in thousands):
For the year ending December 31,
2003 $ 3,452
2004 $ 3,219
2005 $ 3,119
2006 $ 3,079
2007 $ 2,315
(8) Acquired Technology
Acquired technology at December 31, 2002 and 2001 is summarized as
follows:
2002 2001
---------- ----------
(in thousands)
Acquired technology $ 10,029 $ 9,880
Less: Accumulated amortization $ (2,382) (688)
---------- ----------
$ 7,647 $ 9,192
========== ==========
In 2002, 2001, the Company amortized $1.7 million, and $.7 million in
acquired technology, respectively. There was no amortization expense
recorded in 2000.
(9) Goodwill
The changes in the carrying amount of goodwill by reportable segment
are as follows (in thousands):
Europe Asia USA Total
-------- ------- -------- --------
Balance at January 1, 2001 $ -- $ -- $ -- $ --
Acquisition of DTM 13,629 6,442 17,361 37,432
Acquisition of RPC 3,399 464 1,180 5,043
Acquisition of Optoform 1,683 -- -- 1,683
-------- ------- -------- --------
Balance as of December 31, 2001 18,711 6,906 18,541 44,158
Effect of foreign currency exchange rates 160 -- -- 160
Adjustments related to DTM acquisition 50 24 64 138
-------- ------- -------- --------
Balance at December 31, 2002 $ 18,921 $ 6,930 $ 18,605 $ 44,456
======== ======= ======== ========
The adjustments related to the DTM acquisition represent adjustments to
the purchase price for sales and use taxes payable partially offset by
income tax refunds received.
The Company recorded no goodwill amortization expense for the years
ended December 31, 2002, 2001 and 2000.
F17
(10) Acquisitions
In February 2001, the Company acquired the stock and intellectual property
of OptoForm SARL, a start-up company that has developed direct composites
manufacturing paste or composite materials. The aggregate purchase price
was $2.6 million, of which $1.4 million was settled in cash at the time of
closing and $1.2 million was paid in February 2002. The acquisition of
OptoForm SARL was accounted for using the purchase method of accounting and
is not material to the financial statements.
In August, 2001 the Company acquired 100 percent of the outstanding common
shares of DTM. DTM designed, developed, manufactured, marketed and
supported, on an international basis, solid imaging, manufacturing and
tooling systems and related powdered sintering materials and services. The
results of DTM's operations have been included in the consolidated
financial statements since the date of acquisition. Under the terms of the
merger agreement, the Company paid $5.80 per share in cash for all the
outstanding shares of common stock of DTM. The transaction valued DTM at
approximately $44.6 million (before transaction costs of $4.9 million). The
transaction was funded from a combination of sources consisting of cash on
hand of $5.6 million, a $24.0 million revolving line of credit and a $15.0
million term loan.
The purchase price for the DTM acquisition has been allocated to assets
acquired and liabilities assumed based on their fair value at the date of
acquisition, as adjusted within the allocation period. The difference
between the purchase price and the fair market value of the assets and
liabilities acquired was recorded as goodwill. The net assets acquired and
liabilities assumed are as follows:
At December 31, 2001
------------------------
(in thousands)
Current assets $ 12,368
Property, plant, and equipment 2,275
Intangible assets 11,900
Goodwill 37,432
------------------------
Total assets acquired 63,975
Total liabilities assumed 14,424
------------------------
Net assets acquired $ 49,551
========================
The $11.9 million of acquired intangible assets have a useful life of
approximately six years. The intangible assets are comprised of acquired
technology of $9.1 million and patents of $2.8 million.
During 2001, the Company accrued $2.1 million under purchase accounting for
DTM for severance costs and duplicate facilities. The Company terminated 42
DTM employees subsequent to the acquisition. At December 31, 2002,
acquisition liabilities for severance and duplicate facilities totaled
$472,000 of which $232,000 is recorded in accrued liabilities and $240,000
is recorded in other liabilities. The final severance and facilities
payments will be made in 2003 and 2006, respectively.
The following table reflects unaudited pro-forma combined results of
operations of the Company and DTM on the basis that the acquisition of DTM
had taken place at the beginning of the fiscal year for all periods
presented:
Years Ended
----------------------------------------
December 31, 2001 December 31, 2000
------------------- -------------------
(in thousands except for per share data)
Net sales $ 141,534 $ 142,296
Net (loss) income $ (6,682) $ 7,470
Basic (loss)income per common share $ (0.53) $ .63
Diluted (loss) income per common share $ (0.53) $ .58
The unaudited pro-forma combined results of operations are not necessarily
indicative of the actual results that would have occurred had the
acquisitions been consummated at the beginning of the fiscal year or of
future operations of the combined entities under the ownership and
operation of the Company.
In September 2001, the Company acquired the stock of RPC, a manufacturer of
solid imaging material. The aggregate purchase price was $5.5 million of
which $2.2 million was settled in cash at the time of closing, $2.0 million
was paid in 2002 and the balance is due September 2003. The balance is
denominated in Swiss Francs and the carrying value as of December 31, 2002
was $1.6 million. The acquisition of RPC was accounted for using the
purchase method of accounting and is not material to the financial
statements.
F18
(11) Accrued Liabilities
Accrued liabilities at December 31, 2002 and 2001 are as follows:
2002 2001
--------------- --------------
(in thousands)
Taxes payable $ 3,155 $ 915
Payroll and related taxes 3,018 2,565
Bonuses and commissions 1,915 3,211
Amounts due to RPC 1,599 2,045
Product royalties 1,134 2,055
Severance 822 947
Accrued health costs 1,687 656
Professional services 373 414
Amounts due to OptoForm --- 1,217
Rent --- 187
Other 1,826 1,396
--------------- --------------
$ 15,529 $ 15,608
=============== ==============
The Company has a self-insured medical and dental plan covering all
domestic employees except for employees based in Colorado. The plan has a
stop loss feature whereby any claims over $50,000 per individual are
covered by an insurance policy.
The Company sponsors a profit sharing 401K plan (the "plan") covering
substantially all of its employees. The plan entitles employees to make
minimum contribution amounts to the plan after meeting certain eligibility
requirements. Contributions are limited to the maximum contribution
allowances under the Internal Revenue Code. The Company matches 50% of the
employee contribution up to a maximum as outlined in the plan. The Company
may also make discretionary contributions to the plan, which are allocable
to participants in accordance with the plan. For the years ended December
31, 2002, 2001 and 2000, the Company expensed $391,000, $331,000 and
$332,000, respectively.
(12) Other Liabilities
Other liabilities at December 31, 2002 and 2001 are as follows:
2002 2001
--------------- ---------------
(in thousands)
Royalty payable $ 950 $ 950
Net present value of lease obligation 744 299
Long-term payments to RPC shareholders --- 1,325
Employee termination costs 150 452
Accrued pension costs 941 303
Other 612 ---
--------------- ---------------
$ 3,397 $ 3,329
=============== ===============
F19
(13) Severance and other restructuring costs
On July 24, 2002, the Company substantially completed a reduction in
workforce, which eliminated 109 positions out of its total workforce of 523
or approximately 20% of the total workforce. In addition, the Company
closed its existing office in Austin, Texas, which it acquired as part of
its acquisition of DTM, as well as its sales office in Farmington Hills,
Michigan. This was the second reduction in workforce completed in 2002. On
April 9, 2002, the Company eliminated approximately 10% of its total
workforce. All costs incurred in connection with these restructuring
activities are included as severance and other restructuring costs in the
accompanying consolidated statement of operations.
A summary of the severance and other restructuring costs consist of the
following (in thousands, except number of employees):
Second Third
Quarter Quarter
Provision Provision Remaining
April 2002 July 2002 Utilized Balance
------------ ----------- ---------- -----------
Severance costs (one-time benefits) $ 1,616 $ 1,906 $ 3,277 $ 245
Contract termination costs --- 638 86 552
Other associated costs --- 194 128 66
------------ ----------- ---------- -----------
Total severance and other restructuring costs $ 1,616 $ 2,738 $ 3,491 $ 863
============ =========== ========== ===========
Positions eliminated 63 109 172
============ =========== ==========
These amounts are included in accrued liabilities and are expected to be
paid by October 2003. There have been no adjustments to the liability
except for payments of amounts due under the restructuring plan.
(14) Borrowings
The total outstanding borrowings as of December 31, 2002 and 2001 are as
follows:
2002 2001
-------------- --------------
(in thousands)
Line of credit $ 2,450 $ 6,151
============== ==============
Long-term debt current portion:
Industrial development bond $ 150 $ 135
Term loan 10,350 3,000
-------------- --------------
Total long-term debt current portion $ 10,500 $ 3,135
============== ==============
Long-term debt, less current portion:
Industrial development bond $ 4,090 $ 4,240
Term loan --- 12,000
-------------- --------------
Total long-term debt, less current portion $ 4,090 $ 16,240
============== ==============
Subordinated debt $ 10,000 $ 9,400
============== ==============
Annual maturities of debt as of December 31, are as follows:
(in thousands)
-------------------
2003 $ 12,950
2004 165
2005 180
2006 10,200
2007 220
Later years 3,325
-------------------
Total 27,040
Less current portion 12,950
-------------------
Long-term debt $ 14,090
===================
Debt
On August 20, 1996, the Company completed a $4.9 million variable rate
industrial development bond financing of our Colorado facility. Interest on
the bonds is payable monthly (the interest rate at December 31, 2002 was
1.31%). Principal payments are payable in semi-annual installments through
August 2016. The bonds are collateralized by an irrevocable letter of
credit issued by Wells Fargo Bank, N.A. that is further collateralized by a
standby letter of credit issued by U.S. Bank in the amount of $1.2 million.
At December 31, 2002, a total of $4.2 million was outstanding under the
bond. The terms of the letter of credit require the Company to maintain
specific levels of minimum tangible net worth and fixed charge coverage
ratios. The Company was not in compliance with such covenants at December
31, 2002.
F20
On March 27, 2003, Wells Fargo sent a letter to the Company stating
that it was in default under two covenants of the reimbursement
agreement relating to this letter of credit relating minimum tangible
net worth and fixed charge coverage ratios, and provided the Company
until April 26, 2003, to cure such default.
On May 2, 2003, the Bank drew down a letter of credit in the amount
$1.2 million which was held as partial security for certain bonds and
placed the cash in a restricted account. The Company obtained a waiver
for the defaults from the Bank in a letter dated June 16, 2003,
provided that the Company meets certain terms and conditions. The
Company must remain in compliance with all other provisions of the
reimbursement agreement for this letter of credit. On or before
September 30, 2003, the Company must also provide the Bank with
evidence of a proposal from another bank to replace this letter of
credit, or should a replacement letter of credit not be obtained on or
before December 31, 2003, the Company has agreed to retire $1.2
million of the bonds using the restricted cash. Wells Fargo has
accepted the proposal letter from Congress Financial as satisfying the
requirement in the waiver agreement.
On August 17, 2001, the Company entered into a loan agreement with U.S.
Bank totaling $41.5 million, in order to finance the acquisition of
DTM. The financing arrangement consisted of a $26.5 million three-year
revolving credit facility and $15 million 66-month commercial term
loan. At December 31, 2002, a total of $2.4 million was outstanding
under the revolving credit facility and $10.4 million was outstanding
under the term loan. The interest rate at December 31, 2002, for the
revolving credit facility and term loan was 7.5% and 6.42%,
respectively. The interest rate is computed as either: (1) the prime
rate plus a margin ranging from 0.25% to 4.0%, or (2) the 90-day
adjusted LIBOR plus a margin ranging from 2.0% to 5.75%. Pursuant to
the terms of the agreement, U.S. Bank has received a first priority
security interest in our accounts receivable, inventories, equipment
and general intangible assets. The Company paid $1.2 million of loan
origination fees and costs to US Bank during 2001 in connection with
this loan.
On May 1, 2003 the Company entered into "Waiver Agreement Number Two"
with U.S. Bank whereby U.S. Bank waived all financial covenant
violations at December 31, 2002 and March 31, 2003. The events of
default caused by the Company's failure to timely submit audited
financial statements and failure to make the March 31, 2003 principal
payment of $5.0 million were also waived. The agreement requires the
Company to obtain additional equity investments of at least $9.6
million; to pay off the balance on the term loan of $9.6 million by
May 5, 2003; to increase the applicable interest rate to Prime plus
5.25%; and to pay a $150,000 waiver fee and all related costs of
drafting the agreement. US Bank has also agreed to waive the Company's
compliance with each financial covenant in the loan agreement through
September 30, 2003. Provided the Company obtains a commitment letter
from a qualified lending institution by September 30, 2003, to
refinance all of the outstanding obligations with US Bank, the waiver
will be extended to the earlier of December 31, 2003, or the
expiration date of the commitment letter. The Company has complied
with all aspects of Waiver Agreement Number Two including the receipt
of equity investments of $ 9.6 million and the $9.6 million principal
repayment of the term loan.
Subordinated Debt
In the fourth quarter of 2001, the Company initiated the sale of a
subordinated convertible debenture. As of December 31, 2001, the
Company received $9.4 million in proceeds from the sale. The Company
received additional proceeds of $600,000 in January 2002, for a total
of $10.0 million. The convertible debentures can be converted into
833,333 shares of the Company's common stock immediately at the option
of the holder, or at the Company's discretion any time after December
31, 2003, and prior to maturity at December 31, 2006. The debenture
bears interest at the rate of 7%, payable quarterly.
F21
The Company estimates the fair market value (FMV) of the subordinated
debt based on prevailing interest rates, the number of days outstanding
and the volatility of the Company's stock price. At December 31, 2003,
the estimated FMV of the debt is $8.6 million.
(15) Stockholders' Equity and Stockholders' Rights Plan
In September 2001, the Company sold 617,000 shares of its $.001 par
value common stock to outside investors for $8,021,000. In May 2002,
the Company sold 1,125,000 shares (125,000 shares were repurchased from
Vantico and subsequently resold in this private placement) of its $.001
par value common stock to outside investors for aggregate net proceeds
of $12.5 million.
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 the Director Plan is 3.6 million and 300,000,
respectively. Both the 1996 Plan and the Director Plan expire on March
21, 2006, and no further options will be granted after that date. 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. To date the "reload option" provision has
not been utilized. The Company also had a 1989 Employee and Director
Incentive Plan (the "1989 Plan") in which options for substantially all
common shares authorized under these plans had been previously issued.
On February 28, 2001, the Board of Directors of the Company adopted the
2001 Stock Incentive Plan (the "2001 Plan"). Under the 2001 Plan, the
committee and the Chief Executive Officer are authorized to grant
non-qualified stock options to purchase shares of Common Stock of the
Company. The number of options granted to an individual is based upon a
number of factors, including his or her position, salary and
performance, and the overall performance and stock price of the
Company. Officers of the Company, including members of the Board of
Directors who are officers, are not eligible for stock option grants
under the 2001 Plan. Subject to adjustment for stock splits, stock
dividends and other similar events, the total number of shares of
Common Stock reserved for issuance under the 2001 Plan is 500,000
shares. The option exercise price per share under all plans is equal to
the fair market value on the date of grant. The vesting 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 2001 Plan, the 1996 Plan and the
1989 Plan vest 25% annually, commencing one year from the date of grant
and expiring between six and ten years from the date of grant. Under
the Director Plan, each non-employee director ("outside director") of
the Company will automatically be granted annual 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 of the grant, and
expires ten years from the date of grant.
A summary of the status of the Company's stock options is summarized below:
2002 2001 2000
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- -------- -------- -------- --------
(shares in thousands)
Outstanding at beginning of year 3,153 $ 11.43 2,160 $ 9.68 2,400 $ 7.33
Granted 744 8.84 1,344 13.28 701 14.20
Exercised (117) 7.28 (294) 7.56 (779) 6.23
Lapsed or canceled (1,162) 10.84 (57) 8.63 (162) 8.78
--------- -------- -------- -------- -------- --------
Outstanding at year end 2,618 11.25 3,153 11.43 2,160 9.68
========= ======== ========
Options exercisable at year end 1,585 1,019 719
Options available for future grants 1,192 793 266
Weighted average fair value of options granted during
the year: $ 4.78 $ 3.66 $ 2.80
F22
The following table summarizes information about stock options outstanding at
December 31, 2002:
Range: Options Outstanding Options Exercisable
------------------------------------- --------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Outstanding Average
Remaining Exercise Exercise
Contractual Price Price
Life (Years)
----------- ------------ -------- ----------- --------
(shares in thousands)
$3.00 to $4.99 75 6.71 4.88 75 4.88
$5.00 to $9.99 959 5.94 6.39 826 6.31
$10.00 to $14.99 719 8.08 11.69 280 10.68
$15.00 to $19.99 815 6.00 16.36 354 16.80
$20.00 to $24.50 50 3.12 24.20 50 24.20
---------- -----------
2,618 1,585
=========== ===========
(a) As of December 31, 2002, options for 389,400, 670,635 and 132,075
shares of common stock were available for future grants under the
2001, 1996 and the 1996 Director Plans, respectively (1,192,110 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, 2002, no SARs or
LSARs have been issued.
(b) 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 15.1% or more of the Company's common stock. The rights will
expire on December 3, 2005.
(c) On May 6, 1997, the Company announced that its Board of Directors had
authorized the Company to buy up to 1.5 million of its shares of
common stock in the open market and through private transactions.
During 1997 and 1998 the Company purchased 25,000 and 200,000 of its
own shares of common stock for approximately $165,000 and $1.4
million, respectively. In the fourth quarter of 2002, these shares
were retired. Currently, it is not anticipated that the Company will
acquire any additional shares under this program.
(d) In the second quarter of 1998, the Company established the 1998
Employee Stock Purchase Plan ("ESPP") to provide eligible employees
the opportunity to acquire limited quantities of the Company's common
stock. The exercise price of each option will be the lesser of (i) 85%
of the fair market value of the shares on the date the option is
granted or (ii) 85% of the fair market value of the shares on the last
day of the period during which the option is outstanding. An aggregate
of 600,000 shares of common stock has been reserved for issuance under
the plan.
Shares purchased under the Company's ESPP were 26,163, 23,090 and
19,895, at weighted average prices of $7.73, $10.50 and $9.57 in 2002,
2001 and 2000, respectively. The weighted average fair values of ESPP
shares issued in 2002, 2001 and 2000, were $2.65, $2.76 and $4.51,
respectively.
(e) The Company applies the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for its plan stock
options. These interpretations include FASB Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25", issued in March 2000. Under
this method, compensation expense is generally recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price. The Company has adopted the disclosure
only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which was released in
December of 2002 as an amendment to SFAS No. 123. These statements
establish accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123 and SFAS No. 148, the Company has
elected to continue to apply the intrinsic value-based method of
accounting described above.
The Company accounts for option grants to non-employees using the
guidance of SFAS No. 123, as amended by SFAS No. 148, and Emerging
Issues Task Force ("EITF") No. 96-18, whereby the fair value of such
options is determined using the Black-Scholes option pricing model at
the earlier of the date at which the non-employee's performance is
complete or a performance commitment is reached.
F23
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and
are fully transferable. In addition, option pricing models require the
input of highly subjective assumptions, including the option's expected
life and the price volatility of the underlying stock. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate,
in the opinion of management, the existing models do not necessarily
provide a reliable single measure of the fair value of employee stock
options. The fair value of options granted in 2002, 2001 and 2000 was
estimated at the date of grant using a Black-Scholes option-pricing model
with the following weighted average assumptions:
2002 2001 2000
-------- -------- --------
Expected life (in years) 2.7 2.9 3.8
Risk-free interest rate 1.97% 4.80% 5.00%
Volatility 0.83 0.63 0.70
Dividend yield 0.00% 0.00% 0.00%
(16) Computation of (Loss) Earnings Per Share
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings (loss) per share (EPS) computations for the
years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
------------ ------------ ------------
(in thousands)
Numerator:
Net (loss) income -- numerator for basic and diluted net (loss) income per
share $ (14,866) $ (2,357) $ 7,870
Denominator:
Denominator for basic net (loss) income per share-weighted average shares 12,837 12,579 11,851
Effect of dilutive securities:
Stock options, warrants and convertible debt --- --- 1,038
------------ ------------ ------------
Denominator for diluted net (loss) income per share-weighted average shares 12,837 12,579 12,889
============ ============ ============
Potential common shares related to convertible debt, stock options and
stock warrants were excluded from the calculation of diluted EPS because
their effects were antidilutive. The weighted average for common shares
excluded from the computation were approximately 3,641,000, 2,791,000 and
459,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
(17) Related Party Transactions
(a) At December 31, 2002, the Company has remaining notes receivable
totaling $59,000 from certain executive officers and employees of the
Company pursuant to the 1996 Stock Incentive Plan and for purchases of
stock related to stock options. The original amount of the loans was
$670,000, of which $40,000 was forgiven in 2000, $120,000 was
canceled (and shares returned and canceled) in 1999, and $185,000,
$86,000 and $120,000 and $60,000 were repaid in 2002, 2001, 2000 and
1998, respectively. The loans were used to purchase shares of the
Company's common stock at the fair market value on the date of
purchase. These notes bear interest at a rate of 6% per annum and
mature in the years 2003 and 2004. The notes receivable are shown on
the balance sheet as a reduction of stockholders' equity.
(b) For 2001, in connection with his services as an employee of the
Company, the Company's Board granted to Mr. Gary J. Sbona, the
Chairman and Chief Executive Officer of Regent Pacific Corporation,
options to purchase 350,000 shares of the Company's common stock, at
an exercise price of $12.43 per share. The Company granted Mr. Sbona
options to purchase 350,000 shares of the Company's common stock in
2000 and 1999 at an exercise price of $17.39 and $6.00 per share,
respectively. The 350,000 shares granted in 2001 and 1999 both
exceeded the fair market value of the Company's common stock at the
date of grant. All shares will vest over a three-year period or sooner
upon certain change in control transactions or upon
F24
the termination of Regent Pacific's management agreement. In 2000,
116,666 options were exercised at a per share price of $16.00.
(c) On December 31, 2001, the Chairman of the Board of Directors and
related parties contributed $1.0 million to the completion of the
$10.0 million subordinate convertible debenture (see Note 14). The
Chairman of the Board of Directors and related parties can convert the
$1.0 million debenture into 83,333 shares of the Company's common
stock at any time after December 31, 2003 and prior to maturity at
December 31, 2006. The debenture bears interest at the rate of 7%,
payable quarterly.
(d) In June 2000, the Company entered into a distribution agreement for
ThermoJet printers with 3D Solid Solutions ("3DSS"), a partnership in
which Mr. Loewenbaum, the Chairman of the Board of Directors, is a
partner. As of December 31, 2001, Solid Imaging Technologies, LLC, of
which Mr. Loewenbaum is the sole member, was the general partner of
3DSS. In addition, Mr. Loewenbaum also had both direct and indirect
limited partnership interest in 3DSS. As of December 31, 2001 3DSS
owes $118,000 to the Company for the purchase of five printers plus
materials and maintenance. In 2002, 3DSS paid the Company
approximately $84,000 for the purchase of products and services, and
does not owe the Company any money at December 31, 2002.
(e) Brian Service has been retained as Chief Executive Officer. Mr.
Service's services were previously provided under an arrangement with
Regent Pacific Corporation. From September 10, 2002 (the date of the
termination of the Regent Agreement), through October 15, 2002, Mr.
Service was engaged on an interim consulting basis for which he was
paid $79,999. Effective October 15, 2002, Mr. Service was employed by
the Company pursuant to an employment agreement under which he has
agreed to serve as Chief Executive Officer until at least December
2003. Mr. Service is being paid $17,809 on a bi-weekly basis under
this agreement, and has been awarded fully vested options, with a term
of five years, to purchase 350,000 shares of our common stock at a
price of $5.78.
(f) On November 18, 2002, the Company entered into a consulting agreement
with Brian K. Service, Inc. ("BKSI"), a corporation in which the
Company's Chief Executive Officer is a stockholder, officer and
director. Pursuant to this agreement, the Company would pay to BKSI an
amount of up to $310,000 for an 11-month period for the provision of
the services of qualified consultants to the Company. The Company paid
$71,000 pursuant to this agreement through December 31, 2002. This
agreement was approved by the Oversight Committee of the Company's
Board of Directors (subsequently subsumed into the newly created
Corporate Governance Committee), which is responsible for approving
all transactions between the Company and its officers and directors.
(g) From October 1999 until November 2002, G. Walter Loewenbaum II was an
employee of the Company, with a salary of $180,000 per annum. He
resigned from this employment in November 2002. At the regularly
scheduled Board meeting on November 18, 2002, the Board voted
unanimously to grant to Mr. Loewenbaum compensation of $180,000 per
annum for performing the duties of Chairman of the Board of the
Company.
(18) Income Taxes
The components of the Company's pretax income (loss) are as follows:
2002 2001 2000
------------ ------------ ------------
(in thousands)
Domestic $ (7,439) $ (3,877) $ 10,783
Foreign 1,482 528 1,396
------------ ------------ ------------
Total $ (5,957) $ (3,349) $ 12,179
============ ============ ============
The components of income tax expense (benefit) for the years ended December
31, 2002, 2001 and 2000 are as follows:
Current: 2002 2001 2000
------------ ------------ ------------
(in thousands)
U.S. Federal $ --- $ 1,189 $ 1,833
State --- (343) 443
Foreign 1,595 556 54
------------ ------------ ------------
Total $ 1,595 $ 1,402 $ 2,330
============ ============ ============
F25
------------ ------------ ------------
Deferred:
U.S. Federal $ 5,652 $ (2,669) $ 1,478
State 1,662 275 (21)
Foreign --- --- 522
------------ ------------ ------------
Total 7,314 (2,394) 1,979
------------ ------------ ------------
Total income tax expense (benefit) $ 8,909 $ (992) $ 4,309
============ ============ ============
The overall effective tax rate differs from the statutory federal tax rate for
the years ended December 31, 2002, 2001 and 2000 as follows:
% of Pretax (Loss) Income
------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Tax (benefit) provision based on the federal statutory rate (35.0)% (34.0)% 34.0%
State taxes, net of federal benefit 18.2 (1.4) 2.3
Increase in excess of book over tax basis in foreign
subsidiaries (36.9) --- ---
Deemed dividend related to foreign operations 11.6 --- ---
Utilization of net operating losses --- --- (0.4)
--- ---
Research tax credits (8.3) (8.4) (1.7)
Foreign taxes 18.1 11.2 0.8
Change in valuation allowance --- (1.0)
181.6
Foreign sales corporation benefit --- --- (0.4)
Other 0.4 3.0 1.8
-------------- -------------- --------------
149.7% (29.6)% 35.4%
============== ============== ==============
The components of the Company's net deferred tax assets at December 31 are as
follows:
2002 2001
-------------- --------------
(in thousands)
Deferred tax assets:
Tax credits $ 6,138 $ 4,636
Net operating loss carry-forwards 14,212 10,145
Reserves and allowances 1,793 1,044
Accrued liabilities 1,917 2,518
Property and equipment (excess tax basis over book basis) 345 712
Deferred revenue 488 ---
Other 15 59
------------- -------------
Total deferred tax assets 24,908 19,114
Valuation allowance (18,696) (5,835)
------------- -------------
Net deferred tax assets $ 6,212 $ 13,279
============= =============
Deferred tax liabilities:
Intangibles $ 3,931 $ 4,210
Deferred lease revenue 803 1,026
Capitalized software development costs 168 190
Patents and licenses 414 ---
State taxes 896 42
------------- -------------
Total deferred tax liabilities 6,212 5,468
------------- -------------
Net deferred tax assets $ --- $ 7,811
============= =============
During 2002, $6.3 million was excluded from taxable income as a result of making
increased investments in certain foreign subsidiaries. The technical
requirements to defer such income are not well developed and as a consequence
there is some risk that on audit some or all of such amount might be required to
be recognized as taxable income which would reduce the amount of net operating
loss carryforwards.
As of December 31, 2002, the Company has net operating loss carry-forwards for
United States federal and foreign income tax purposes of approximately $31.1
million and $6.1 million, respectively. Approximately $6.5 million of the
federal net operating losses as of December 31, 2002 were acquired as part of
the DTM acquisition in 2001 and are subject to loss limitations pursuant to IRC
Section 382. The federal net operating losses will begin to expire in 2011.
Ultimate utilization of these loss carry-forwards depends on future taxable
earnings of the Company.
As of December 31, 2002, the Company has research and development tax credit
carry-forwards for United States federal and state income tax purposes of $3.6
million and $1.9 million, respectively. The federal credits will begin to expire
in 2003; the state credits will not expire.
F26
The Company has alternative minimum tax credit carry-forwards of $475,000 for
United States federal income tax purposes, which do not expire.
The Company has not provided for any taxes on the unremitted earnings of its
foreign subsidiaries, as the Company intends to permanently reinvest all such
earnings offshore.
(19) Segment Information
The Company develops, manufactures and markets worldwide solid imaging
systems designed to reduce the time it takes to produce three-dimensional
objects. Segments are reported by geographic sales regions. The Company's
reportable segments include the Company's administrative, sales, service,
manufacturing and customer support operations in the United States and
sales and service offices in the European Community (France, Spain,
Germany, the United Kingdom, Italy, and Switzerland) and in Asia (Japan,
Hong Kong, and Singapore).
The Company evaluates performance based on several factors, of which the
primary financial measure is operating income. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies in Note 3 of the Notes to Consolidated Financial
Statements.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables:
2002 2001 2000
-------------- -------------- --------------
(in thousands)
Net Sales:
USA $ 69,385 $ 81,873 $ 81,050
Europe 62,083 51,826 44,203
Asia 14,085 13,378 12,358
-------------- -------------- --------------
Subtotal 145,553 147,077 137,611
Intersegment Elimination (29,592) (28,337) (28,325)
-------------- -------------- --------------
Total $ 115,961 $ 118,740 $ 109,286
============== ============== ==============
2002 2001 2000
-------------- -------------- --------------
(in thousands)
Intersegment Sales:
USA $ 12,047 $ 20,841 $ 22,284
Europe 17,545 7,496 6,041
Asia --- --- ---
-------------- -------------- --------------
Total $ 29,592 $ 28,337 $ 28,325
============== ============== ==============
All intersegment sales are recorded at amounts consistent with prices charged to
distributors, which are above cost.
2002 2001 2000
-------------- -------------- --------------
(in thousands)
(Loss) income from
operations:
USA $ (29,662) $ (9,263) $ 6,413
Europe 664 703
3,144
Asia 5,555 6,405 5,015
-------------- -------------- --------------
Subtotal (20,963) (2,194) 12,131
Intersegment Elimination (467) (122) (67)
-------------- -------------- --------------
Total $ (21,430) $ (2,316) $ 12,064
============== ============== ==============
F27
2002 2001 2000
-------------- -------------- --------------
(in thousands)
Depreciation and
amortization:
USA $ 7,040 $ 5,986 $ 5,340
Europe 2,769 1,718 905
Asia 93 --- ---
-------------- -------------- --------------
Total $ 9,902 $ 7,704 $ 6,245
============== ============== ==============
2002 2001
-------------- --------------
(in thousands)
Assets:
USA $ 273,492 $ 313,785
Europe 59,067 54,818
Asia 13,825 7,062
-------------- --------------
Subtotal 346,384 375,665
-------------- --------------
Intersegment Elimination (214,151) (210,723)
-------------- --------------
Total $ 132,233 $ 164,942
============== ==============
2002 2001 2000
-------------- -------------- --------------
(in thousands)
Capital expenditures:
USA $ 1,519 $ 1,783 $ 2,858
Europe 1,302 1,534 2,035
Asia 389 --- ---
-------------- -------------- --------------
Total $ 3,210 $ 3,317 $ 4,893
============== ============== ==============
2002 2001
-------------- --------------
(in thousands)
Long-Lived Assets:
USA $ 49,351 $ 54,659
Europe 28,716 25,379
Asia 7,341 7,062
-------------- --------------
Total $ 85,408 $ 87,100
============== ==============
(20) Commitments and Contingencies
(a) The Company leases its facilities under non-cancelable operating
leases. 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, 2002, 2001 and 2000,
aggregated $2.8 million, $2.0 million and $1.9 million, respectively.
Minimum annual rental commitments under the leases at December 31,
2002 are as follows:
F28
Year ending December 31:
------------------------------------------
(in thousands)
2003 $ 2,949
2004 2,599
2005 1,723
2006 1,518
2007 738
Later years --
-------------
$ 9,527
=============
(b) United States v. 3D Systems Corporation and DTM Corporation. The
United States Department of Justice, or DOJ, filed a complaint on June
6, 2001 challenging the Company's acquisition of DTM. Under a
settlement agreement with the DOJ related to the merger with DTM, the
Company must license its patents for use in either the manufacture and
sale of SL or LS products, but not both, in North America. The Company
refers to this settlement agreement as the Final Judgment. On July 9,
2002,the DOJ approved Sony Corporation as the selected licensee for
the field of stereolithography.
(c) Vantico International S.A. and Vantico, Inc. v. 3D Systems, Inc. In
August 2001, the Company gave a six-month notice of termination of our
Resin Development Agreement with Vantico. In August 2001, Vantico
filed a claim with the International Chamber of Commerce International
Court of Arbitration requesting a declaration of the parties' rights
under the Agreement. On September 4, 2001, the Company filed a
counterclaim requesting that Vantico be enjoined from impermissibly
using the Company's confidential information, shared with Vantico
during the 13-year duration of the Resin Development Agreement. On
March 19, 2002, the Company settled its dispute under an agreement
that required Vantico to pay the Company either $22 million in cash,
or through transfer of 1.55 million shares of the Company's stock (see
Note 21).
(d) 3D Systems, Inc. v. Aaroflex, et al. On January 13, 1997, the Company
filed a complaint in U.S. District Court, Central District of
California, against Aarotech Laboratories, Inc., Aaroflex, Inc. and
Albert C. Young. Aaroflex is the parent corporation of Aarotech.
Young is the Chairman of the Board and Chief Executive Officer of both
Aarotech and Aaroflex. The original complaint alleged that
stereolithography equipment manufactured by Aaroflex infringes six of
our patents. In August 2000, two additional patents were added to the
complaint. The Company seeks damages and injunctive relief from the
defendants, who have threatened to sue the Company for trade libel. To
date, the defendants have not filed such a suit.
Following decisions by the District Court and the Federal Circuit
Court of Appeals on jurisdictional issues, Aarotech and Mr. Young were
dismissed from the suit, and an action against Aaroflex is proceeding
in the District Court. Motions for summary judgment by Aaroflex on
multiple counts contained in the Company's complaint and on Aaroflex's
counterclaims have been dismissed and fact discovery in the case has
been completed. The Company's motions for summary judgment for patent
infringement and validity and Aaroflex's motion for patent invalidity
were heard on May 10, 2001. In February 2002, the court denied
Aaroflex's invalidity motions. On April 24, 2002, the court denied the
Company's motions for summary judgment on infringement, reserving the
right to revisit on its own initiative the decisions following the
determination of claim construction. The court also granted in part
the Company's motion on validity. The case is scheduled for trial
commencing August 5, 2003, and the trial is scheduled to last three
weeks.
(e) DTM vs. EOS, et al. The plastic sintering patent infringement actions
against EOS began in France, Germany, and Italy in 1996. Legal actions
in France, Germany, and Italy are proceeding. EOS had challenged the
validity of two patents related to thermal control of the powder bed
in the European Patent Office, or EPO. Both of those patents survived
the opposition proceedings after the original claims were modified.
One patent was successfully challenged in an appeal proceeding and in
January 2002, the claims were invalidated. The other patent
successfully withstood the appeal process and the infringement
hearings were re-started. In October 2001, a German district court
ruled the patent was not infringed, and this decision is being
appealed. In November 2001, the Company received a decision of a
French court that the French patent was valid and infringed by the EOS
product sold at the time of the filing of the action and an injunction
was granted against future sales of the product. In June 2002 EOS
filed an appeal for the French decision. That action is pending. In
February 2002, the Company received a decision from an Italian court
that the invalidation trial initiated by EOS was unsuccessful and the
Italian patent was held valid. The infringement action in a separate
Italian court has now recommenced and a decision is expected based on
the evidence that has been submitted.
In 1997, DTM initiated an action against Hitachi Zosen Joho Systems,
the EOS distributor in Japan. In May 1998, EOS initiated two
invalidation trials in the Japanese Patent Office attempting to have
DTM's
F29
patent invalidated on two separate bases. The Japanese Patent Office
ruled in DTM's favor in both trials in July 1998, effectively ruling
that DTM's patent was valid. In September 1999, the Tokyo District
Court then ruled in DTM's favor and granted a preliminary injunction
prohibiting further importation and selling of the infringing plastic
sintering EOS machine. In connection with this preliminary injunction,
DTM was required to place 20 million yen, which is approximately
$200,000, on deposit with the court towards potential damages that
Hitachi might claim should the injunction be reversed. Based on the
Tokyo District Court's ruling, EOS then filed an appeal in the Tokyo
High Court to have the rulings of the Japanese Patent Office revoked.
On March 6, 2001, the Tokyo High Court ruled in EOS's favor that the
rulings of the Japanese Patent Office were in error. As a result, the
Tokyo High Court found that Hitachi Zosen was not infringing DTM's
patent. These rulings were unsuccessfully appealed by DTM to the Tokyo
Supreme Court. We amended the claims and the patent was reinstated in
a corrective action in 2002 and no further claims are pending
pertaining to the patent in this matter.
(f) EOS vs. DTM and 3D Systems, Inc. In December 2000, EOS filed a patent
infringement suit against DTM in U.S. District Court, Central District
of California. EOS alleges that DTM has infringed and continues to
infringe certain U.S. patents that the Company licenses to EOS. EOS
has estimated its damages to be approximately $27.0 million for the
period from the fourth quarter of 1997 through 2002. In April 2001,
consistent with an order issued by the federal court in this matter,
the Company was added as a plaintiff to the lawsuit. On October 17,
2001, the Company was substituted as a defendant in this action
because DTM's corporate existence terminated when it merged into the
Company's subsidiary, 3D Systems, Inc. in August 2001. In February
2002, the court granted summary adjudication on the Company's motion
that any potential liability for patent infringement terminated with
the merger of DTM into 3D Systems, Inc. Concurrently, the court denied
EOS's motion for a fourth amended complaint to add counts related to
EOS's claim that 3D Systems, Inc. is not permitted to compete in the
field of laser sintering under the terms of the 1997 Patent License
Agreement between 3D Systems, Inc. and EOS. 3D Systems, Inc. filed
counterclaims against EOS for the sale of polyamide powders in the
United States based on two of the patents acquired in the DTM
acquisition. A motion by 3D Systems, Inc. for a preliminary injunction
was denied by the court on May 14, 2002.
(g) 3D Systems, Inc. vs. AMES. In April 2002, the Company filed suit for
patent infringement against Advanced Manufacturing Engineering Systems
of Nevada, Iowa for patent infringement related to AMES' purchase and
use of EOS powders in the Company's SLS system. On June 24, 2002, upon
motion by the defendants, this matter was stayed pending trial of the
EOS vs. DTM and 3D Systems, Inc. matter described immediately above.
(h) EOS GmbH Electro Optical Systems vs. 3D Systems, Inc. On January 21,
2003, The Company was served with a complaint that had been filed in
May of 2002 in Regional Court, Commerce Division, Frankfurt, Germany,
seeking 1,000,000 Euros for the alleged breach of a non-competition
agreement entered into in 1997. The Company answered the complaint on
April 25, 2003.
(i) Hitachi Zosen vs. 3D Systems, Inc. On November 25, 2002, 3D Systems
was served with a complaint through the Japanese Consulate General
from EOS' Japanese distributor, Hitachi Zosen, seeking damages in the
amount of 535,293,436 yen (approximately $4.5 million), alleging lost
sales during the period in which DTM Corporation had an injunction in
Japan prohibiting the sale of EOS EOSint P350 laser sintering systems.
Initial procedural hearings occurred in March and April 2003 in Tokyo
District Court, with a third preliminary hearing set for June 30,
2003.
(j) Board of Regents, The University of Texas System and 3D Systems, Inc.
vs. EOS GmbH Electro Optical Systems. On February 25, 2003, 3D
Systems, Inc. along with the Board of Regents of the University of
Texas, filed suit against EOS GmbH Electro Optical Systems ("EOS") in
the United States District Court, Western District of Texas seeking
damages and injunctive relief arising from violation of U.S. Patents
Nos. 5,597,589 and 5,639,070, which are patents relating to laser
sintering which have been licensed by the University of Texas to 3D.
On March 25, 2003, EOS filed its answer to this complaint, along with
counterclaims including breach of contract and antitrust.
(k) Regent Pacific Management Corporation vs. 3D Systems Corporation. On
June 11, 2003, Regent Pacific Management Corporation filed a complaint
against us for breach of contract in the Superior Court of the State
of California, County of San Francisco. Regent provided
F30
management services to us from September 1999 through September 2002.
Regent alleges that we breached non-solicitation provisions in our
contract with it by retaining the services of two Regent contractors
following the termination of the contract. Regent seeks $780,000 in
liquidated damages together with reasonable attorney's fees and costs.
The Company currently is evaluating the complaint.
(l) The Company is engaged in certain additional legal actions arising in
the ordinary course of business. On the advice of legal counsel, the
Company believes it has adequate legal defenses and that the ultimate
outcome of these actions will not have a material adverse effect on
the Company's consolidated financial position, results of operations
or cash flows.
At this time these contingencies are not estimable and have not been
recorded, however, management believes the ultimate outcome of these
actions will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
(21) Gain on Arbitration Settlement
On March 19, 2002 the Company reached a settlement agreement with Vantico
relating to the termination of the Distribution and Research and
Development agreements which required Vantico to pay 3D Systems, Inc. $22
million. Under the terms of the settlement, Vantico could satisfy its
obligation through payment in cash or delivery of 1.55 million shares of
the Company's common stock. On April 22, 2002, Vantico delivered 1.55
million shares of the Company's common stock to the Company. Of the $22
million settlement, the Company recorded other income of $18.5 million,
reimbursement for legal and professional fees of $1.8 million, and $1.7
million as capital in excess of par relating to the value of Vantico's
option to settle its obligation through the return of shares to 3D Systems,
Inc.
The net operating loss carryforward includes an amount of $6.3 million that
was excluded from taxable income as a result of making increased investment
in certain foreign subsidiaries. The technical requirements to defer such
income are not well developed and as a consequence there is some risk that
on audit some or all of such amount might be required to be recognized as
taxable income which would reduce the amount of net operating loss
carryforwards.
(22) Selected Quarterly Financial Data (unaudited)
Summarized quarterly financial data follows:
Quarter Ended
--------------------------------------------------------------------------------------------
September 27, 2002 June 28, 2002 March 31, 2002
----------------------- -------------------------- --------------------------
As As As
Dec. 31, Previously Previously Previously
2002 As Restated Reported As Restated Reported As Restated Reported
------------ ----------------------- -------------------------- --------------------------
(in thousands, except per share information)
Total sales $ 31,990 $ 27,914 $ 28,389 $ 28,543 $ 28,782 $ 27,514 $ 27,195
Gross profit 13,590 11,910 12,147 10,799 10,874 10,320 10,137
Total operating expenses 16,281 17,572 17,652 19,298 19,378 14,898 14,828
(Loss) income from operations (2,691) (5,662) (5,508) (8,499) (8,504) (4,578) (4,691)
Income tax expense (benefit) 12,035 (4,079) (4,345) (3,539) (3,210) 4,492 4,575
Net (loss) income (15,720) (2,212) (1,789) (5,628) (5,962) 8,694 8,498
Basic income (loss) per share (1.24) (.17) (.14) (.44) (.46) .66 .65
Diluted (loss) income per share (1.24) (.17) (.14) (.44) (.46) .59 .58
F31
Quarter Ended
----------------------------------------------------------------------------------------------
December 31, 2001 September 28, 2001 June 29, 2001 March 31, 2001
-------------------- -------------------- ----------------------- -------------------------
As As As As
As Previously As Previously Previously Previously
Restated Reported Restated Reported As Restated Reported As Restated Reported
----------------------------------------------------------------------------------------------
Total sales $36,320 $ 36,735 $ 31,407 $ 31,544 $ 24,948 $ 25,042 $ 26,065 $ 27,903
Gross profit 15,449 15,741 13,448 13,519 10,766 10,911 11,838 13,204
Total operating expenses 18,192 18,847 12,792 12,792 11,730 11,730 11,103 11,103
(Loss) income from
operations (2,743) (3,106) 656 727 (964) (819) 735 2,101
Income tax (benefit) expense (1,596) (1,523) 130 136 (126) (202) 600 802
Net (loss) income (2,160) (2,593) 166 231 (564) (344) 201 1,365
Basic (loss) income per share (0.17) (0.20) .01 .02 (.05) (.03) .02 .11
Diluted (loss) income per
share (0.17) (0.20) .01 .02 (.05) (.03) .02 .11
The interim financial statements for the quarterly periods ended March 31,
June 28 and September 27, 2002 have been restated from amounts previously
reported in the Company's quarterly reports on Form 10-Q to correct for
certain errors made in the revenue recognition process (see Note 24).
The interim financial statements for the quarterly periods ended March 31,
June 29, September 28 and December 31, 2001 have been restated from
amounts previously reported in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 to correct for certain errors made in
the revenue recognition process (see Note 24).
Income tax expense for the fourth quarter of 2002 includes an increase in
the valuation allowance of deferred tax assets in the amount of $12.9
million.
In the first quarter of 2002, the Company recorded an $20.3 million gain
associated with the Vantico arbitration.
The Company incurred additional expenses related to the DTM acquisition,
legal fees related to the Vantico arbitration and had debt write-offs in
the fourth quarter of 2001.
Per share amounts for each of the quarterly periods presented do not
necessarily add up to the total presented for the year because 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.
(23) Subsequent Events
Preferred Stock
On May 5, 2003, The Company sold 2,634,016 shares of our Series B
Convertible Preferred Stock for aggregate consideration of $15.8 million.
The preferred stock accrues dividends at 8% per share and is convertible
at any time into approximately 2,634,016 shares of common stock. The stock
is redeemable at the Company's option after the third anniversary date.
Redemption is mandatory on the tenth anniversary date, at $6.00 per share
plus accrued dividends.
SEC Inquiry
We received an inquiry from the SEC relating to our revenue recognition
practices. The Audit Committee has completed its own inquiry into the
matter and shared its findings with the SEC. To date, the Company has not
been notified that the SEC has initiated a formal investigation.
Nasdaq Inquiry
On April 15, 2003, the Company received a Nasdaq Staff Determination
letter notifying us that our common stock is subject to delisting from the
Nasdaq National Market because we did not file this Annual Report on Form
10-K in a timely manner. On May 16, 2003, we engaged in a hearing before a
Nasdaq Listing Qualifications Panel to appeal
F32
the Staff Determination. On June 12, 2003, Nasdaq determined to
continue our listing under an exception to the continued listing
requirements which requires us to file this Annual Report on Form 10-K
by June 30, 2003 and our First Quarter Report on Form 10-Q by July 14,
2003.
Legal Proceedings
Regent Pacific Management Corporation vs. 3D Systems Corporation
On June 11, 2003, Regent Pacific Management Corporation filed a
complaint against us for breach of contract in the Superior Court of
the State of California, County of San Francisco. Regent provided
management services to us from September 1999 through September 2002.
Regent alleges that we breached non-solicitation provisions in our
contract with it by retaining the services of two Regent contractors
following the termination of the contract. Regent seeks $780,000 in
liquidated damages together with reasonable attorney's fees and costs.
We currently are evaluating the complaint.
In addition, on May 6, 2003, the Company received a subpoena from the
U.S. Department of Justice to provide certain documents to a grand
jury investigating antitrust and related issues within its industry.
The Company has been advised that it currently is not a target of the
grand jury investigation, and is complying with the subpoena.
(24) Restatement
Subsequent to the issuance of its 2001 consolidated financial
statements, the Company's management determined that certain sales
transactions recorded in 2001 and 2000 did not meet all of the
criteria required for revenue recognition under United States
Generally Accepted Accounting Principles. The restated transactions
affect the Company's previously recorded amounts for accounts
receivable, inventory, deferred revenue, sales, cost of sales and
others as noted below. The consolidated financial statements as of and
for the years ended December 31, 2001 and 2000 have been restated to
correct the accounting for these transactions. A summary of the
significant effects of the restatement is as follows:
As Previously As Previously
As Restated Reported As Restated Reported
December 31, December 31, December 31, December 31,
2001 2001 2000 2000
---------------- ------------------- ----------------- ----------------
Consolidated Balance Sheets (in thousands, except per share amounts)
As of December 31:
Accounts receivable $ 36,262 $ 38,181
Inventories 18,546 17,822
Current assets 69,342 70,537
Deferred income taxes 6,750 6,618
Total assets 164,942 166,005
Accrued liabilities 15,608 15,681
Deferred revenues 13,997 13,697
Current liabilities 53,334 53,107
Accumulated deficit (6,553) (5,263)
Stockholders' equity 78,429 79,719
Consolidated Statements of Operations
For the year ended December 31:
Sales 118,740 121,224 $ 109,286 $ 109,675
Cost of sales 67,239 67,849 56,698 56,813
Selling, general and administrative 42,807 43,761 32,710 32,710
Research and development 11,010 10,710 7,814 7,814
(Loss) income from operations (2,316) (1,096) 12,064 12,338
Provision for (benefit from) income tax (992) (788) 4,309 4,309
Net (loss) income (2,357) (1,341) 7,870 8,144
Basic net (loss) income per share (0.19) (0.11) 0.66 0.69
Diluted net (loss) income per share (0.19) (0.11) 0.61 0.63
F33
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
3D Systems Corporation
Valencia, California
We have audited the consolidated financial statements of 3D Systems Corporation
and its subsidiaries (the "Company") as of December 31, 2002, 2001 and for each
of the three years in the period ended December 31, 2002, and have issued our
report thereon dated June 20, 2003, which report expresses an unqualified
opinion and includes explanatory paragraphs relating to (i) a going concern
uncertainty and (ii) a restatement of the Company's 2001 and 2000 financial
statements, and is included elsewhere in this Annual Report on Form 10-K. Our
audits also included the consolidated financial statement schedule of the
Company listed in Item 16. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedule when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
- --------------------------
Deloitte & Touche LLP
Los Angeles, California
June 20, 2003
F34
SCHEDULE II
3D SYSTEMS CORPORATION
Valuation and Qualifying Accounts
Years ended December 31, 2002, 2001 and 2000
Balance at Additions Additions Balance at
Year beginning of due to charged to end of
Ended Item year acquisition expense Deductions Year
- ------------------------------------------- --------------- --------------- --------------- --------------- ---------------
(in thousands)
2002 Allowance for doubtful accounts $ 1,755 $ --- $ 2,942 $ (1,629) $ 3,068
=============== =============== =============== =============== ===============
2001 Allowance for doubtful accounts $ 1,599 $ 793 $ 290 $ (927) $ 1,755
=============== =============== =============== =============== ===============
2000 Allowance for doubtful accounts $ 2,912 $ --- $ 300 $ (1,613) $ 1,599
=============== =============== =============== =============== ===============
2002 Inventory obsolescence reserve $ 1,618 $ --- $ 585 $ (327) $ 1,876
=============== =============== =============== =============== ===============
2001 Inventory obsolescence reserve $ 753 $ 1,104 $ 336 $ (575) $ 1,618
=============== =============== =============== =============== ===============
2000 Inventory obsolescence reserve $ 1,776 $ --- $ 1,026 $ (2,049) $ 753
=============== =============== =============== =============== ===============
F35
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/ Peter V. White
-------------------------
Peter V. White
Principal Accounting Officer
Date: June 30, 2003
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Brian K. Service and Peter V. White or any one of them,
his attorney-in-fact and agent, with full power of substitution, for him in any
and all capacities, to sign any amendments to this Annual Report, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming to
all that said attorneys-in-fact, or their substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the dates indicated.
Signature Date Title
- --------------------------------- ----------------------- -----------------------------------------------
/s/ Brian K. Service June 30, 2003 Chief Executive Officer, President and Director
- --------------------------------- ----------------------- (Principal Executive Officer)
/s/ Peter V. White June 30, 2003 Principal Accounting Officer
- --------------------------------- -----------------------
/s/ Charles W. Hull June 30, 2003 Chief Technology Officer and Director
- --------------------------------- -----------------------
/s/ G. Walter Loewenbaum II June 30, 2003 Chairman of the Board of Directors
- --------------------------------- -----------------------
/s/ Miriam V. Gold June 30, 2003 Director
- --------------------------------- -----------------------
/s/ Jim D. Kever June 30, 2003 Director
- --------------------------------- -----------------------
/s/ Kevin S. Moore June 30, 2003 Director
- --------------------------------- -----------------------
/s/ Richard C. Spalding June 30, 2003 Director
- --------------------------------- -----------------------
Certification of
Principal Executive Officer of
3D Systems Corporation
I, Brian K. Service, certify that:
1. I have reviewed this annual report on Form 10-K of 3D Systems Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 30, 2003
/s/ Brian K. Service
By: Brian K. Service
Title: Chief Executive Officer, Chief
Operating Officer and President
(Principal Executive Officer)
Certification of
Principal Accounting Officer of
3D Systems Corporation
I, Peter V. White, certify that:
1. I have reviewed this annual report on Form 10-K of 3D Systems Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 30, 2003
/s/ Peter V. White
By: Peter V. White
Title: Vice President, Finance
(Principal Accounting Officer)