As filed with the Securities and Exchange Commission on August 29, 2003
REGISTRATION NO. 333-_____
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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3D SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 7372 95-4431352
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification
Incorporation or Classification Code Number)
Organization) Number)
------------------------------------
26081 AVENUE HALL
VALENCIA, CALIFORNIA 91355
(661) 295-5600
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
CHARLES W. HULL
INTERIM CHIEF EXECUTIVE OFFICER, EXECUTIVE VICE PRESIDENT AND
CHIEF TECHNOLOGY OFFICER
3D SYSTEMS CORPORATION
26081 AVENUE HALL
VALENCIA, CALIFORNIA 91355
(661) 295-5600
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Services)
------------------------------------
WITH A COPY TO:
JULIE M. KAUFER, ESQ.
ARA A. BABAIAN, ESQ.
AKIN GUMP STRAUSS HAUER & FELD LLP
2029 CENTURY PARK EAST, SUITE 2400
LOS ANGELES, CALIFORNIA 90067
TELEPHONE: (310) 229-1000
FACSIMILE: (310) 229-1001
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) UNIT PRICE (2) REGISTRATION FEE
---------------------------- ----------------- -------------------- ----------------------- -----------------
Common Stock, $0.001 par
value 7,767,734 $7.50 $58,258,005 $4,714
============================ ================= ==================== ======================= ================
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(1) This prospectus covers the offer and sale of (a) 1,792,366 shares of
outstanding common stock, (b) 833,333 shares of common stock underlying our
7% convertible subordinated debentures, (c) 2,634,016 shares of common
stock issuable upon conversion of shares of our Series B Convertible
Preferred Stock, (d) 2,218,119 shares of common stock issuable as dividends
on our Series B Convertible Preferred Stock (based on 95% of the closing
price of the common stock on The Nasdaq National Market on August 26,
2003), (e) 264,900 shares of common stock issuable upon exercise of
warrants, (g) 25,000 shares of common stock reserved for issuance upon
exercise of stock options and (h) an indeterminable number of additional
shares of common stock, pursuant to Rule 416 under the Securities Act, that
may be issued to prevent dilution resulting from stock splits, stock
dividends, or similar transactions affecting the shares to be offered by
the selling stockholders.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933 based on the average of the
high and the low prices of registrant's common stock reported on The Nasdaq
National Market on August 26, 2003.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED AUGUST 29, 2003
PROSPECTUS
[LOGO]
3D SYSTEMS CORPORATION
7,767,734 SHARES OF COMMON STOCK
This prospectus relates to the resale of up to 7,767,734 shares of common
stock by the selling stockholders named in this prospectus.
The selling stockholders may offer for resale the shares covered by this
prospectus from time to time directly to purchasers or through underwriters,
broker-dealers or agents, in public or private transactions, at prevailing
market prices, at prices related to prevailing market prices or at privately
negotiated prices.
We will not receive any proceeds from the resale of our common stock by the
selling stockholders.
Our common stock is quoted on The Nasdaq Stock Market's National Market
under the symbol "TDSC." The last reported sale price of our common stock on
August 28, 2003 was $7.80 per share.
You should read this prospectus carefully before you invest.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------
The date of this prospectus is _______, 2003.
TABLE OF CONTENTS
Page
Prospectus Summary........................................................................1
Risk Factors..............................................................................5
Forward-Looking Statements................................................................15
Use of Proceeds...........................................................................16
Market Price of Securities................................................................16
Dividend Policy...........................................................................16
Capitalization............................................................................17
Selected Consolidated Financial Data......................................................18
Management's Discussion and Analysis of Financial Condition and Results of Operations.....20
Business..................................................................................43
Management................................................................................56
Selling Stockholders......................................................................66
Plan of Distribution......................................................................71
Related Party Transactions................................................................73
Description of Capital Stock..............................................................75
Legal Matters.............................................................................78
Experts...................................................................................78
Change in Accountants.....................................................................78
Where You Can Find More Information.......................................................78
Index to Consolidated Financial Statements................................................F-1
In this prospectus, when we to refer to 3D Systems Corporation and its
consolidated subsidiaries we use the terms "we," "our" and "us" when we do not
need to distinguish among these entities or their predecessors or when any
distinction is clear from the context.
PROSPECTUS SUMMARY
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE ENTIRE PROSPECTUS, INCLUDING
THE MORE DETAILED INFORMATION IN OUR CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
3D SYSTEMS CORPORATION
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 three-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
three-dimensional printing processes to fabricate physical objects using input
from CAD/CAM software, or three-dimensional scanning and sculpting devices.
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 customers use our solid imaging
systems and solutions to:
o streamline part making, prototyping and manufacturing processes,
o verify product designs,
o create functional parts,
o generate production-quality samples or final parts,
o direct manufacture end-use parts, and
o create tooling used to manufacture end-use parts.
We expect our Advanced Digital Manufacturing solutions, which we refer to
as ADM, 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:
o the MJM (multi-jet modeling) product line: our ThermoJet solid object
printer is a network-ready printer, about the size of an office
copier, which employs hot melt ink jet technology to build models in
successive layers using our proprietary thermoplastic material,
o the SLA (stereolithography apparatus) product line: the 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,
1
o the SLS (selective laser sintering) product line: the SLS systems
utilize a process called laser sintering, which we refer to as LS,
which uses laser energy to sinter powdered material to create solid
objects from powdered materials, and
o the DCM (direct composite manufacturing) product line: 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.
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.
As of December 31, 2002, we held 359 patents relating to solid imaging,
which include 152 in the United States, 146 in Europe, 17 in Japan and 44 in
other foreign jurisdictions. We continue to develop new products and processes
to expand the applications of solid imaging, and to develop improvements to our
existing product lines.
We were incorporated under the laws of Delaware. Our corporate headquarters
are located at 26801 Avenue Hall, Valencia, California 91355. Our telephone
number is (661) 295-5600.
2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary financial data for the years in the period ended December 31,
2002, 2001 and 2000 have been derived from our audited financial statements. The
summary financial data for the six months ended June 27, 2003 and June 28, 2002
have been derived from our unaudited interim financial statements and include,
in the opinion of management, all adjustments necessary for a fair presentation
of our financial position and operating results for these periods and as of such
dates. Our results for interim periods are not necessarily indicative of our
results for a full year's operations.
The summary financial data as of and for the years ended December 31, 2001
and 2000 and the six months ended June 28, 2002 have been restated. Unless
otherwise expressly stated, all financial information in this prospectus is
presented inclusive of the changes made to the financial data for these periods.
The reconciliation of previously reported amounts to the amounts currently
reported for the years ended December 31, 2001 and 2000 is presented in Note 24
of the Notes to the Consolidated Financial Statements and in Note 14 of the
Condensed Consolidated Financial Statements for the six months ended June 27,
2003 and June 28, 2002.
You should read the following information together with "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this prospectus.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
------------------------------- --------------------------------
JUNE 28, 2002 2001 2000
JUNE 27, 2003 (AS RESTATED) 2002 (AS RESTATED) (AS RESTATED)
------------- ------------- ------------ -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Sales:
Products (1) $ 32,746 $ 38,371 $ 81,039 $ 84,558 $ 79,857
Services (2) 17,141 17,686 34,922 34,182 29,429
------------- ------------- ------------ -------------- ------------
Total sales 49,887 56,057 115,961 118,740 109,286
------------- ------------- ------------ -------------- ------------
Cost of sales:
Products (1) 18,044 21,741 43,398 42,278 34,969
Services (2) 13,569 13,197 25,942 24,961 21,729
------------- ------------- ------------ -------------- ------------
Total cost of sales 31,613 34,938 69,340 67,239 56,698
------------- ------------- ------------ -------------- ------------
Gross profit 18,274 21,119 46,621 51,501 52,588
------------- ------------- ------------ -------------- ------------
Operating expenses:
Selling, general and administrative 20,375 23,944 48,331 42,807 32,710
Research and development 5,163 8,635 15,366 11,010 7,814
Severance and other restructuring
costs 251 1,617 4,354 --- ---
------------- ------------- ------------ -------------- ------------
Total operating expenses 25,789 34,196 68,051 53,817 40,524
------------- ------------- ------------ -------------- ------------
(Loss) income from operations (7,515) (13,077) (21,430) (2,316) 12,064
Interest and other (expense) income, net 1,887 1,368 (2,991) (1,033) 115
Gain on arbitration settlement --- 18,464 18,464 --- ---
------------- ------------- ------------ -------------- ------------
(Loss) income before provision for
income taxes (9,402) 4,019 (5,957) (3,349) 12,179
Provision for (benefit from) income taxes 1,031 953 8,909 (992) 4,309
------------- ------------- ------------ -------------- ------------
Net (loss) income (10,433) 3,066 (14,866) (2,357) 7,870
------------- ------------- ------------ -------------- ------------
Preferred stock dividend 198 --- --- --- ---
------------- ------------- ------------ -------------- ------------
Net (loss) income available to common
shareholders per share $ (10,631) $ 3,066 $ (14,866) $ (2,357) $ 7,870
============= ============= ============ ============== ============
Shares used to calculate basic net
(loss) income available to common
shareholders per share 12,730 12,986 12,837 12,579 11,851
------------- ------------- ------------ -------------- ------------
Basic net (loss) income available to
common shareholders per share $ (0.84) $ 0.24 $ (1.16) $ (0.19) $ 0.66
============= ============= ============ ============== ============
Shares used to calculate diluted net
(loss) income available to common
shareholders per share 12,730 14,445 12,837 12,579 12,889
------------- ------------- ------------ -------------- ------------
Diluted net (loss) income available to
common shareholders per share $ (0.84) $ 0.21 $ (1.16) $ (0.19) $ 0.61)
============= ============ ============ =============== ============
3
AT DECEMBER 31,
--------------------------
AT 2001
JUNE 27, 2003 2002 (AS RESTATED)
------------- --------- ---------------
BALANCE SHEET DATA:
Working (deficit) capital $ (1,334) $ (8,608) $ 16,008
Total assets 127,245 132,233 164,942
Current portion of long-term
debt 155 10,500 3,135
Long-term liabilities,
excluding current portion 17,383 17,487 33,179
Redeemable preferred stock 15,158 --- ---
Stockholders' equity 50,890 59,866 78,429
------------
(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.
4
RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD UNDERSTAND THE HIGH
DEGREE OF RISK INVOLVED. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS,
INCLUDING OUR HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES,
BEFORE DECIDING WHETHER TO INVEST IN SHARES OF OUR COMMON STOCK. THE FOLLOWING
RISKS AND UNCERTAINTIES ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL
ALSO MAY IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD SUFFER.
AS A RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD
LOSE PART OR ALL OF YOUR INVESTMENT. THE RISKS DISCUSSED BELOW ALSO INCLUDE
FORWARD-LOOKING STATEMENTS AND OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM
THOSE DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS.
FINANCE
OUR INDEPENDENT AUDITORS' REPORT EXPRESSES DOUBT ABOUT OUR ABILITY TO CONTINUE
AS A GOING CONCERN.
At December 31, 2002, our independent auditors' report, dated June 20,
2003, includes an explanatory paragraph relating to substantial doubt as to our
ability to continue as a going concern. We experienced significant operating
losses in the first and second quarters of 2003, each quarter of fiscal 2002 and
in preceding years. At June 27, 2003, we had $8.6 million outstanding under
our bank line with U.S. Bank and $4.0 million related to our industrial
development bonds. In addition, we have potential liability payable in October
2003 of approximately $1.6 million in connection with our guarantee of the value
of shares of our common stock underlying warrants issued in connection with an
acquisition. We have failed to meet our financial covenants under our bank
agreements and our reimbursement agreement relating to our municipal bond
financing. U.S. Bank has waived our compliance with the financial covenants in
our loan agreement with them through September 30, 2003 and subject to obtaining
a commitment letter from a qualified lending institution by September 30, 2003
to refinance all of our outstanding obligations with U.S. Bank, the waiver will
be extended to the earlier of December 31, 2003, or the expiration date of the
commitment letter. Wells Fargo Bank, N.A. has waived compliance with certain
covenants, provided that we remain in compliance with all other provisions of
the reimbursement agreement. The waiver extends through December 31, 2003,
provided that if we do not obtain a letter of credit to replace Wells Fargo on
or before December 31, 2003, we agree to retire $1.2 million of our industrial
development bonds through the use of restricted cash. If we are unable to obtain
a commitment letter as required under the U.S. Bank waiver, we will need to
raise additional capital through debt or equity financing to pay off the bank
loan or we will be in default.
We are primarily reliant on cash generated from operations to meet our cash
requirements. In order to preserve cash, we have been required to reduce
expenditures for capital projects, research and development, and in our
corporate infrastructure, any of which may have a material adverse affect on our
future operations. Further reductions in our cash balances could require us to
make more significant reductions in our operations, which would have a material
adverse impact on our future operations. We cannot assure you that we can
generate sufficient cash from operations and realize our anticipated cost
savings in order to allow us to continue as a going concern. In the event we are
unable to generate cash flow adequate to meet our operating needs and other
financial obligations and achieve our estimated cost savings, or unable to enter
into a commitment letter to refinance the U.S. Bank loan by September 30, 2003,
we will need to aggressively seek additional debt or equity financing and other
strategic alternatives. However, recent operating losses, our declining cash
balances, our historical stock performance, the ongoing inquiries into certain
matters relating to our revenue recognition, adverse rulings in certain patent
litigation actions and the general economic downturn may make it difficult for
us to attract equity investments or debt financing or strategic partners on
terms that are deemed favorable to us or at all. If we are unable to obtain
financing on terms acceptable to us or at all, we will not be able to accomplish
any or all of our initiatives and could be forced to consider steps that would
protect our assets against our creditors.
OUR DEBT LEVEL COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND AFFECT OUR
ABILITY TO RUN OUR BUSINESS.
As of June 27, 2003, our debt was $38.5 million, of which $8.7 million was
current borrowings, $25.2 million related to convertible and preferred
instruments and $4.0 million related to our industrial development bonds. This
level of debt could have important consequences to you as a holder of shares.
Below we have identified for you some of the material potential consequences
resulting from this significant amount of debt:
5
o We may be unable to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes.
o Our ability to adapt to changing market conditions may be hampered. We
may be more vulnerable in a volatile market and at a competitive
disadvantage to our competitors that have less debt.
o Our operating flexibility is more limited due to financial and other
restrictive covenants, including restrictions on incurring additional
debt, creating liens on our properties, making acquisitions and paying
dividends.
o We are subject to the risks that interest rates and our interest
expense will increase.
o Our ability to plan for, or react to, changes in our business is more
limited.
Under certain circumstances, we may be able to incur additional
indebtedness in the future. If we add new debt, the related risks that we now
face could intensify.
OUR BALANCE SHEET CONTAINS SEVERAL CATEGORIES OF INTANGIBLE ASSETS THAT WE MAY
BE REQUIRED TO WRITE-OFF OR WRITE-DOWN BASED ON IMPAIRMENT OF CERTAIN ASSETS AND
OUR FUTURE PERFORMANCE, WHICH MAY ADVERSELY IMPACT OUR FUTURE EARNINGS AND OUR
STOCK PRICE.
As of June 27, 2003, we had $23.8 million of unamortized intangible assets,
consisting of licenses, patents and other intellectual property and certain
expenses that we amortize over time. Any material impairment to any of these
items could reduce our net income and may adversely affect the trading price of
our common stock. On August 20, 2003, in the patent infringement suit pending in
the California federal court filed by EOS against DTM and 3D Systems, the trial
court ruled that it was unable to construe one of the claim phrases of one of
the patents which we had asserted against EOS in one of our patent infringement
actions, which ruling is a factual predicate for a potential ruling by the trial
court that the patent is invalid. In addition, in the same action, the court
ruled that certain DTM laser sintering machines infringed one of the patents
licensed by us to EOS. Consequently, we anticipate recognizing a charge to
operations in the third quarter ending September 26, 2003 of approximately $1.1
million related to the write off of capitalized legal fees and other costs.
At June 27, 2003, we had $44.7 million in goodwill capitalized on our
balance sheet. In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 142 "Goodwill and Other
Intangible Assets," which requires, among other things, the discontinuance of
the amortization of goodwill and certain other intangible assets that have
indefinite useful lives, and the introduction of impairment testing in its
place. Under SFAS No. 142, goodwill and some indefinite-lived intangibles will
not be amortized into results of operations, but instead will be tested for
impairment at least annually, with impairment being measured as the excess of
the carrying value of the goodwill or intangible asset over its fair value. In
addition, goodwill and intangible assets will be tested more often for
impairment as circumstances warrant, and may result in write-downs of some of
our goodwill and indefinite-lived intangibles. Accordingly, we could, from time
to time, incur impairment charges, which will be recorded as operating expenses
and will reduce our net income and adversely affect our operating results.
At June 27, 2003, we had approximately $4.6 million related to a license
fee prepaid in 1999 related to the solid object printer machine platform
included under license and patent costs, net, in our financial statements. The
amortization of this intangible is based on the number of solid object printer
units sold. If future sales of the solid object printer machine platforms do not
increase, then a more rapid rate of amortization of this balance will be
required relative to the number of units sold.
6
WE ARE CARRYING A SIGNIFICANT AMOUNT OF MODEL-RELATED INVENTORY AND TOOLING
COSTS FOR A SOLID OBJECT PRINTER MACHINE PLATFORM.
At June 27, 2003, we had incurred, or had outstanding commitments of,
approximately $2.1 million in inventory and tooling costs associated with the
development and production of a new solid object printer machine platform. If we
significantly write-down this inventory and tooling due to obsolescence, our
results of operations could be materially adversely affected. Changes to the
bill of material as a result of the design validation testing, or abandonment of
the new platform because of adverse market studies, may render inventory and
tooling obsolete. Additionally, we continue to carry inventory and have vendor
commitments related to our existing solid object printer model totaling $1.1
million, which if not sold, could become obsolete.
THE MIX OF PRODUCTS WE SELL AFFECTS OUR OVERALL PROFIT MARGINS.
We continuously expand our product offerings, including our materials, and
work to increase the number of geographic markets in which we operate and the
distribution channels we use in order to reach our various target markets and
customers. This variety of products, markets and channels results in a range of
gross margins and operating income which can cause substantial quarterly
fluctuations depending on the mix of product shipments from quarter to quarter.
We may experience significant quarterly fluctuations in gross margins or net
income due to the impact of the mix of products, channels or geographic markets
utilized from period to period. More recently, our mix of products sold has
reflected increased sales of our lower-end systems, which have reduced gross
margins as compared to the high-end SLA systems. If this trend continues over
time, we may experience lower average gross margins and returns.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
Products as complex as those we offer may contain undetected defects or
errors when first introduced or as enhancements are released that, despite our
testing, are not discovered until after the product has been installed and used
by customers. This could result in delayed market acceptance of the product or
damage to our reputation and business. We attempt to include provisions in our
agreements with customers that are designed to limit our exposure to potential
liability for damages arising from defects or errors in our products. However,
the nature and extent of these limitations vary from customer to customer, and
it is possible that these limitations may not be effective as a result of
unfavorable judicial decisions or laws enacted in the future. The sale and
support of our products entails the risk of product liability claims. Any
product liability claim brought against us, regardless of its merit, could
result in material expense to us, diversion of management time and attention,
and damage to our business reputation and ability to retain existing customers
or attract new customers.
OPERATIONS
POLITICAL AND ECONOMIC EVENTS AND THE UNCERTAINTY RESULTING FROM THEM MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.
The terrorist attacks that took place in the United States on September 11,
2001, along with the U.S. military campaign against terrorism in Iraq,
Afghanistan and elsewhere and continued violence in the Middle East have created
many economic and political uncertainties, some of which may materially harm our
business and revenues. The disruption of our business as a result of these
events, including disruptions and deferrals of customer purchasing decisions,
had an immediate adverse impact on our business. Since September 11, 2001, some
economic commentators have indicated that spending on capital equipment of the
type that we sell has been weaker than spending in the economy as a whole, and
many of our customers are in industries that also are viewed as under-performing
the overall economy, such as the automobile and telecommunication industries.
The long-term effects of these events on our customers, the market for our
common stock, the markets for our services and the U.S. economy as a whole are
uncertain. The consequences of any additional terrorist attacks, or any
expanded-armed conflicts are unpredictable, and we may not be able to foresee
events that could have an adverse effect on our markets or our business.
7
WE FACE SIGNIFICANT COMPETITION IN MANY ASPECTS OF OUR BUSINESS AND THIS
COMPETITION IS LIKELY TO INCREASE IN THE FUTURE.
We compete for customers with a wide variety of producers of equipment for
models, prototypes and other three-dimensional objects, ranging from traditional
model makers and subtractive-type producers, such as suppliers of automated
machining, or CNC, to a wide variety of additive solid imaging system
manufacturers, as well as service bureaus that provide any or all of these types
of technology, and producers of materials and services for this equipment. Some
of our existing and potential competitors are researching, designing, developing
and marketing other types of competitive equipment, materials and services. In
addition, we have not introduced any significant product advances in our SLA and
SLS systems in this year or in 2002 or 2001, which has negatively affected our
ability to compete in these markets. A continued reduction in our research and
development efforts attributable to these systems, or any reduction in our
research and development efforts generally, could affect our ability to compete
effectively. Many of our competitors have financial, marketing, manufacturing,
distribution and other resources substantially greater than ours. In many cases,
the existence of these competitors extends the purchase decision time as
customers investigate the alternative products and solutions. Under a settlement
agreement with the U.S. Department of Justice relating to our merger with DTM,
on June 6, 2002 we licensed to Sony Corporation certain of our patents for use
in the manufacture and sale of stereolithography in North America (the United
States, Canada and Mexico). Although stereolithography is a very small part of
its activities, and Sony thus far only has been active in the Japanese/Asia
Pacific region, Sony is an extremely large and sophisticated corporation with
annual revenues in excess of $62.0 billion. We cannot be certain of the market
impact of the license to Sony; however, we anticipate that Sony will be an
aggressive competitor in all aspects of our stereolithography business.
Our material revenue declined for the six months ended June 27, 2003, as
compared to the six months ended June 28, 2002. This was due to the termination
of our liquid resin research and development agreements with Vantico on April
22, 2002, under which we had jointly developed liquid photopolymers with Vantico
and served as the exclusive worldwide distributor (except in Japan) of these
materials. On September 20, 2001, we acquired RPC, an independent supplier of
stereolithography resins located in Switzerland, and many customers have
converted from Vantico material to our RPC resins. However, our management team
does not have substantial experience in the materials development and
manufacturing business. In addition, the manufacture of materials business
increases some of the existing risks we face and poses new risks to us. For
example, we must comply with all applicable environmental laws, rules and
regulations associated with large scale manufacturing of resins in Switzerland.
Our compliance with these laws may increase our cost of production and reduce
our margins and any failure to comply with these laws may result in legal or
regulatory action instituted against us, substantial monetary fines or other
damages.
We also face significant competition in the supply of nylon powdered
materials for laser sintering equipment. In North America, this competition is
the subject of a patent infringement suit against EOS GmbH of Planegg, Germany.
We also expect future competition may arise from the development of allied
or related techniques, both additive and subtractive, for equipment and
materials that are not encompassed by our patents, from the issuance of patents
to other companies that inhibit our ability to develop certain products and from
the improvement to existing material and equipment technologies. We have
determined to follow a strategy of continuing product development and aggressive
patent prosecution to protect our position to the extent practicable. We cannot
assure you that we will be able to maintain our current position in the field or
continue to compete successfully against current and future sources of
competition.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE AND INTRODUCE NEW PRODUCTS, WE
MAY LOSE REVENUE AND MARKET SHARE.
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. We believe
sales of our SLA and SLS systems have declined in part because we have not
introduced any significant advances in these produces this year or in 2002 or
2001. To remain competitive, we must
8
continually enhance and improve the functionality and features of our products,
services and technologies. Our success will depend, in part, on our ability to:
o obtain leading technologies useful in our business,
o enhance our existing products,
o develop new products and technologies that address the increasingly
sophisticated and varied needs of prospective customers, particularly
in the area of material functionality,
o respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis, and
o recruit and retain key technology employees.
WE HAVE INCURRED AND MAY CONTINUE TO INCUR SUBSTANTIAL EXPENSE PROTECTING OUR
PATENTS AND PROPRIETARY RIGHTS, WHICH WE BELIEVE ARE CRITICAL TO OUR SUCCESS.
We regard our copyrights, service marks, trademarks, trade secrets, patents
and similar intellectual property as critical to our success. Third parties may
infringe or misappropriate our proprietary rights, and we intend to pursue
enforcement and defense of our patents and other proprietary rights. We have
incurred, and may continue to incur, significant expenses in preserving our
proprietary rights, and these costs could have a material adverse effect on our
results of operations, liquidity and financial condition and could cause
significant fluctuations in our operating results from quarter to quarter.
As of December 31, 2002, we held 359 patents, which include 152 in the
United States, 146 in Europe, 17 in Japan, and 44 in other foreign
jurisdictions. At that date, we also had 176 pending patent applications: 52 in
the United States, 53 in Japan, 48 in European countries and 23 in other foreign
countries. As we discover new developments and components to our technology, we
intend to apply for additional patents. Effective trademark, service mark,
copyright, patent and trade secret protection may not be available in every
country in which our products and services are made available. We cannot assure
you that the pending patent applications will be granted or that we have taken
adequate steps to protect our proprietary rights, especially in countries where
the laws may not protect our rights as fully as in the United States. In
addition, our competitors may independently develop or initiate technologies
that are substantially similar or superior to ours. We cannot be certain that we
will be able to maintain a meaningful technological advantage over our
competitors.
We currently are involved in several patent infringement actions, both as
plaintiff and as defendant. At June 27, 2003, we had capitalized $8.9 million in
legal costs related to various litigation. On August 20, 2003, in the patent
infringement suit pending in the California federal court filed by EOS against
DTM and 3D Systems, the trial court ruled that it was unable to construe one of
the claim phrases of one of the patents which we had asserted against EOS in one
of our patent infringement actions, which ruling is a factual predicate for a
potential ruling by the trial court that the patent is invalid. In addition, in
the same action, the court ruled that certain DTM laser sintering machines
infringed one of the patents exclusively licensed by us to EOS. Consequently, we
anticipate recognizing a charge to operations in the third quarter ending
September 26, 2003 of approximately $1.1 million related to the write off of
capitalized legal fees and other costs. In addition, if our other patent
litigation is not settled favorably, we would need to write off additional legal
costs, which would have a significant negative impact on our financial results.
Our ability to fully protect and exploit our patents and proprietary rights
could be adversely impacted by the level of expense required for intellectual
property litigation.
WE, AS SUCCESSOR TO DTM, CURRENTLY ARE INVOLVED IN INTELLECTUAL PROPERTY
LITIGATION, THE OUTCOME OF WHICH COULD MATERIALLY AND ADVERSELY AFFECT US.
On August 24, 2001, we completed our acquisition of DTM. As the successor
to DTM, we face direct competition for selective laser sintering equipment and
materials outside the United States from EOS. Prior to our acquisition, DTM had
been involved in significant litigation with EOS in France, Germany, Italy,
Japan and the
9
United States with regard to its proprietary rights to selective laser sintering
technology. EOS also has challenged the validity of patents related to laser
sintering in the European Patent Office and the Japanese Patent Office. In
addition, EOS filed a patent infringement suit against DTM in federal court in
California alleging that DTM infringed certain U.S. patents that we license to
EOS.
On August 20, 2003, the trial court in the California patent infringement
suit granted EOS' motion for summary judgment that certain DTM laser sintering
machines infringed one claim of one of the patents licensed by us to EOS. Any
damages attributable to the infringement cannot at this time be predicted and
will depend on other issues still to be determined at trial. EOS asserts that
damages will be approximately $40.0 million, and has asserted a claim of willful
infringement which provides for treble damages at the discretion of the trial
court. In light of the court's findings, we anticipate recognizing a charge to
operations in the third quarter ending September 26, 2003 of approximately $1.1
million related to the write off of capitalized legal fees and other costs. The
ultimate outcome of the determination of damages could have a material adverse
impact on our operations.
Our inability to resolve the remaining claims or to prevail in any related
litigation could result in additional findings 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. 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.
THE INQUIRY INITIATED BY THE SEC MAY LEAD TO CHARGES OR PENALTIES AND MAY
ADVERSELY AFFECT OUR BUSINESS.
If any government inquiry or other investigation leads to charges against
us, we likely will be harmed by negative publicity, the costs of litigation, the
diversion of management time and other negative effects, even if we ultimately
prevail. The SEC has inquired into matters pertaining to our revenue recognition
practices. Our Audit Committee has met, and cooperated fully, with the SEC. We
have not been notified that the SEC has initiated a formal investigation. This
matter is pending and continues to require management attention and resources.
Any adverse finding by the SEC may lead to significant fines and penalties and
limitations on our activities and may harm our relationships with existing
customers and impair our ability to attract new customers. The filing of our
restated financial statements will not necessarily resolve the SEC inquiry.
OUR ABILITY TO RETAIN EXISTING CUSTOMERS, AND ATTRACT NEW CUSTOMERS, MAY BE
IMPAIRED AS A RESULT OF QUESTIONS RAISED BY OUR REVENUE RECOGNITION ISSUES.
Our previous improper recognition of revenue with regard to certain sales
transactions, the ensuing audit committee investigation and the adjustments to
previously filed financial statements could seriously harm our relationships
with existing customers and impair our ability to attract new customers.
Customers who purchase our products make a significant long-term commitment to
the use of our technology. Our products often become an integral part of each
customer's facility and our customers look to us to provide continuing support,
enhancements and new versions of our products. Because of the long-term nature
of a commitment in some of our products, customers often are concerned about the
stability of their suppliers. Purchasing decisions by potential and existing
customers have been and may continue to be postponed, we believe in part due to
our previous improper recognition of revenue and the ensuing audit committee
investigation. The failure to timely file our Annual Report on Form 10-K for
fiscal 2002 and Quarterly Report on Form 10-Q for the first quarter of fiscal
2003 and the adjustments to our previously filed financial statements may cause
existing and potential customers concern over our stability and these concerns
may cause us to lose sales. Any loss in sales could adversely affect our results
of operations, further deepening concern among current and potential customers.
If potential and existing customers lose confidence in us, our competitive
position in our industry may be seriously harmed and our revenues could further
decline.
10
WE HAVE EXPERIENCED SIGNIFICANT TURNOVER IN PERSONNEL, INCLUDING SENIOR
EXECUTIVES, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We have experienced substantial turnover in our employees, including senior
members of our executive, finance, accounting and sales departments and
currently are operating under an interim chief executive officer and chief
financial officer. This turnover is a result of several factors, including the
duration and outcome of our audit committee investigation, reductions in our
workforce and the closure of our Austin facility. The departure of senior
management, including the resignation of Brian Service from the position of
Chief Executive Officer, and other key personnel may cause delays in completing
our business initiatives and adversely impact the organization's institutional
knowledge regarding key policies, significant contracts and agreements, and
other key facts. Many of these departed employees had significant experience
with our market, as well as relationships with many of our existing and
potential sources of financing, large stockholders, customers, suppliers,
employees and strategic partners. It will take substantial time for new
employees to develop an in-depth understanding of our market and to form
significant relationships with our customers and partners. In addition, the
reductions in workforce may lead to reduced employee morale and productivity,
increased attrition and difficulty retaining existing employees and recruiting
future employees, and a perception of instability, any of which could harm our
business and operating results.
WE DEPEND ON A SINGLE OR LIMITED NUMBER OF SUPPLIERS FOR SPECIFIED COMPONENTS.
IF THESE RELATIONSHIPS TERMINATE, OUR BUSINESS MAY BE DISRUPTED WHILE WE LOCATE
AN ALTERNATIVE SUPPLIER.
We subcontract for the manufacture of material laser sintering components,
powdered sintering materials and accessories from a single-source third-party
supplier. There are several potential suppliers of the material components,
parts and subassemblies for our stereolithography products. However, we
currently use only one or a limited number of suppliers for several of the
critical components, parts and subassemblies, including our lasers, materials
and certain ink jet components. Our reliance on a single or limited number of
vendors involves many risks including:
o shortages of some key components,
o product performance shortfalls, and
o reduced control over delivery schedules, manufacturing capabilities,
quality and costs.
If any of our suppliers suffers business disruptions or financial
difficulties, or if there is any significant change in the condition of our
relationship with the supplier, our costs of goods sold may increase or we may
be unable to obtain these key components for our products. In either event, our
revenues, results of operations, liquidity and financial condition would be
adversely affected. While we believe we can obtain most of the components
necessary for our products from other manufacturers, any unanticipated change in
the source of our supplies, or unanticipated supply limitations, could adversely
affect our ability to meet our product orders.
WE FACE RISKS ASSOCIATED WITH CONDUCTING BUSINESS INTERNATIONALLY AND IF WE DO
NOT MANAGE THESE RISKS, OUR RESULTS OF OPERATIONS MAY SUFFER.
A material portion of our sales is to customers in foreign countries. There
are many risks inherent in our international business activities that, unless
managed properly, may adversely affect our profitability, including our ability
to collect amounts due from customers. Our foreign operations could be adversely
affected by:
o unexpected changes in regulatory requirements,
o export controls, tariffs and other barriers,
o social and political risks,
o fluctuations in currency exchange rates,
11
o seasonal reductions in business activity in certain parts of the
world, particularly during the summer months in Europe,
o reduced protection for intellectual property rights in some countries,
o difficulties in staffing and managing foreign operations,
o taxation, and
o other factors, depending on the country in which an opportunity
arises.
OUR COMMON STOCK IS TRADING ON THE NASDAQ NATIONAL MARKET UNDER AN EXCEPTION
FROM THE CONTINUED LISTING REQUIREMENTS.
If we fail to timely file any periodic report due by December 31, 2003,
Nasdaq will delist our common stock and, as a consequence, fewer investors,
especially institutional investors, will be willing to invest in our company,
our stock price will decline, and it will be difficult to raise money on terms
acceptable to us, or at all.
If Nasdaq delists our common stock, it could become subject to the "Penny
Stock" rules of the SEC. Penny stocks generally are equity securities with a
price of less than $5.00 per share that are not registered on a national
securities exchange or quoted on the Nasdaq system. Broker-dealers dealing in
our common stock then would be subject to additional burdens which may
discourage them from effecting transactions in our common stock, which could
make it difficult for investors to sell their shares and, consequently, limit
the liquidity of our common stock.
In addition, if Nasdaq delists our common stock, we expect that some or all
of the following circumstances will occur, which likely will cause a further
decline in our trading price and make it more difficult to raise funds:
o there will be less liquidity in our common stock,
o there will be fewer institutional and other investors that will
consider investing in our common stock,
o there will be fewer market makers in our common stock,
o there will be less information available concerning the trading prices
and volume of our common stock, and
o there will be fewer broker-dealers willing to execute trades in shares
of our common stock.
MANAGEMENT
OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED EXECUTIVES COULD MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS.
Our ability to develop and expand our products, business and markets and to
manage our growth depends on the services of our executive team. We do not
maintain any key life insurance coverage for any member of our executive team.
Our success also depends on our ability to attract and retain additional key
technical, management and other personnel. Competition for these professionals
is intense. The loss of the services of any of our key executives or the failure
to attract and retain other key personnel could impair the development of new
products and have an adverse effect on our business, operating results and
financial condition.
CAPITAL STRUCTURE
OUR OPERATING RESULTS VARY FROM QUARTER TO QUARTER, WHICH COULD IMPACT OUR STOCK
PRICE.
Our operating results fluctuate from quarter to quarter and may continue to
fluctuate in the future. In some quarters, it is possible that results could be
below expectations of analysts and investors. If so, the price of our common
stock may decline.
12
Many factors, some of which are beyond our control, may cause these
fluctuations in operating results. These factors include:
o acceptance and reliability of new products in the market,
o size and timing of product shipments,
o currency and economic fluctuations in foreign markets and other
factors affecting international sales,
o price competition,
o delays in the introduction of new products,
o general worldwide economic conditions,
o changes in the mix of products and services sold,
o impact of ongoing litigation, and
o impact of changing technologies.
In addition, certain of our components require an order lead time of three
months or longer. Other components that currently are readily available may
become more difficult to obtain in the future. We may experience delays in the
receipt of some key components. To meet forecasted production levels, we may be
required to commit to long lead time prior to receiving orders for our products.
If our forecasts exceed actual orders, we may hold large inventories of slow
moving or unusable parts, which could have an adverse effect on our cash flows,
profitability and results of operations.
VOLATILITY OF STOCK PRICE.
Our future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Shortfalls in our revenues or
earnings in any given period relative to the levels expected by securities
analysts could immediately, significantly and adversely affect the trading price
of our common stock.
Historically, our stock price has been volatile. The prices of the common
stock have ranged from $4.39 to $13.50 during the 52-week period ended June 27,
2003.
Factors that may have a significant impact on the market price of our
common stock include:
o future announcements concerning our developments or those of our
competitors, including the receipt of substantial orders for products,
o quality deficiencies in services or products,
o results of technological innovations,
o new commercial products,
o changes in recommendations of securities analysts,
o proprietary rights or product, patent or other litigation, and
o sales or purchase of substantial blocks of stock.
13
TAKEOVER DEFENSE PROVISIONS MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK.
Various provisions of our corporate governance documents and of Delaware
law, together with our shareholders rights plan, may inhibit changes in control
not approved by our Board of Directors and may have the effect of depriving you
of an opportunity to receive a premium over the prevailing market price of our
common stock in the event of an attempted hostile takeover.
Our Board of Directors is authorized to issue up to 5 million shares of
preferred stock, of which approximately 3.6 million is outstanding or reserved
for issuance. Our Board of Directors also is authorized to determine the price,
rights, preferences and privileges of those shares without any further vote or
action by the stockholders. The rights of the holders of any preferred stock may
adversely affect the rights of holders of common stock. Our ability to issue
preferred stock gives us flexibility concerning possible acquisitions and
financing, but it
13
could make it more difficult for a third party to acquire a majority of our
outstanding voting stock. In addition, any preferred stock to be issued may have
other rights, including economic rights, senior to the common stock, which could
have a material adverse effect on the market value of the common stock. In
addition, provisions of our Certificate of Incorporation, as amended, and Bylaws
could have the effect of discouraging potential takeover attempts or making it
more difficult for stockholders to change management.
We are subject to Delaware laws that could have the effect of delaying,
deterring or preventing a change in our control. One of these laws prohibits us
from engaging in a business combination with any interested stockholder for a
period of three years from the date that the person became an interested
stockholder, unless certain conditions are met.
In addition, we have adopted a Shareholders' Rights Plan. Under the
Shareholders' Rights Plan, we distributed a dividend of one right for each
outstanding share of our common stock. These rights will cause substantial
dilution to the ownership of a person or group that attempts to acquire us on
terms not approved by our Board of Directors and may have the effect of
deterring hostile takeover attempts.
THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF OUR 7%
CONVERTIBLE SUBORDINATED DEBENTURES AND EXERCISE OF OUR SERIES B CONVERTIBLE
PREFERRED STOCK COULD DILUTE YOUR OWNERSHIP AND NEGATIVELY IMPACT THE MARKET
PRICE FOR OUR COMMON STOCK.
The Series B Convertible Preferred Stock are convertible at any time into
approximately 2,634,016 shares of common stock. Our subordinated debt is
convertible at any time into approximately 833,333 shares of common stock. To
the extent that all of the Series B Convertible Preferred Stock and 7%
convertible subordinated debentures are converted, a significantly greater
number of shares of our common stock will be outstanding and the interests of
our existing stockholders may be diluted. Moreover, future sales of substantial
amounts of our stock in the public market, or the perception that these sales
could occur, could adversely affect the market price of our common stock.
14
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, which we refer to in this
prospectus as the Securities Act, and Section 21E of the Securities Exchange Act
of 1934, as amended. Forward-looking statements are not statements of historical
fact but rather reflect our current expectations, estimates and predictions
about future results and events. These statements may use words such as
"anticipate," "believe," "estimate," "expect," "intend," "predict," "project"
and similar expressions as they relate to us or our management. When we make
forward-looking statements, we are basing them on our management's beliefs and
assumptions, using information currently available to us. These forward-looking
statements are subject to risks, uncertainties and assumptions, including but
not limited to, risks, uncertainties and assumptions discussed in this
prospectus. Factors that can cause or contribute to these differences include
those described under the headings "Risk Factors" and "Management Discussion and
Analysis of Financial Condition and Results of Operations."
If one or more of these or other risks or uncertainties materialize, or if
our underlying assumptions prove to be incorrect, actual results may vary
materially from what we projected. Any forward-looking statement you read in
this prospectus reflects our current views with respect to future events and is
subject to these and other risks, uncertainties and assumptions relating to our
operations, results of operations, growth strategy and liquidity. All subsequent
written and oral forward-looking statements attributable to us or individuals
acting on our behalf are expressly qualified in their entirety by this
paragraph. You should specifically consider the factors identified in this
prospectus which would cause actual results to differ before making an
investment decision. We are under no duty to update any of the forward-looking
statements after the date of this prospectus or to conform these statements to
actual results.
15
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the selling
stockholders. All proceeds from the sale of the common stock under this
prospectus will be for the account of the selling stockholders.
MARKET PRICE OF SECURITIES
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. Our stock is traded under the symbol
"TDSC."
Historic Prices
---------------------------
Year Period High Low
--------------- -------------------------------------------- -------------
2003 First Quarter $ 10.15 $ 4.10
Second Quarter 7.90 4.00
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
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
As of August 15, 2003, the closing price of our common stock on The Nasdaq
National Market was $8.60, and at that date, our outstanding common stock was
held of record by approximately 429 stockholders.
DIVIDEND POLICY
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 issuance price per share per
annum, which may be increased to 10% under certain circumstances. Dividends are
payable semi-annually, on the sixth month and the twelfth month anniversary of
the date of issuance. The dividends are cumulative to the extent not declared
and paid by our Board of Directors. 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.
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 on our earnings, operating and financial condition,
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.
16
CAPITALIZATION
The following table presents our capitalization as of June 27, 2003
(dollars in thousands):
Current portion of long-term debt.................. $ 155
Long-term debt, less current portion............... 4,010
Subordinated debt.................................. 10,000
------------
14,165
Redeemable preferred stock, 8% convertible, $0.001
par value; authorized 5,000,000 shares;
issued and outstanding 2,634,016 15,158
------------
Stockholders' equity:
Common stock, $0.001 par value; authorized
25,000,000 shares; issued and outstanding
12,724,381 (1)............................. 13
Capital in excess of par value................. 85,100
Notes receivable from officers for purchase of
stock.......................................... (59)
Preferred stock dividend (198)
Accumulated deficit (31,852)
Accumulated other comprehensive loss........... (2,114)
------------
Total stockholders' equity.................. $ 50,890
------------
Total capitalization........................ $ 80,213
============
------------------
(1) Share information is based on the number of shares outstanding as of
June 27, 2003 and:
o excludes 2,663,542 shares of common stock issuable upon exercise of
outstanding options under our stock incentive plans at a weighted
average exercise price of $10.95 per share;
o excludes 264,900 shares of common stock issuable upon exercise of
outstanding warrants at an exercise price of $15.27 per share;
o excludes 1,230,043 shares available for future issuance under our
stock incentive plans;
o excludes 833,333 shares issuable upon conversion of our 7% convertible
subordinated debentures;
o excludes 2,634,016 shares issuable upon conversion of 8% redeemable
preferred stock;
o excludes 25,000 shares of common stock issuable upon exercise of
outstanding options for consulting services at an exercise price of
$5.91; and
o excludes 50,000 shares of common stock issuable upon exercise of
outstanding options granted for consulting services at an exercise
price of $17.39.
17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of and for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from our audited
financial statements. The selected condensed consolidated financial data as of
and for the six months ended June 27, 2003 and June 28, 2002 have been derived
from our unaudited interim financial statements and include, in the opinion of
management, all adjustments necessary for a fair presentation of our financial
position and operating results for those periods and as of those dates. You
should read the selected consolidated financial data presented below together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes. Our
audited consolidated financial statements as of December 31, 2001 and 2000 and
our unaudited condensed consolidated financial statements as of and for the six
months ended June 27, 2003 and June 28, 2002 are included in this prospectus.
The selected financial data as of and for the years ended December 31, 2001
and 2000 and the six months ended June 28, 2002 have been restated. Unless
otherwise expressly stated, all financial information in this prospectus is
presented inclusive of the changes made to the financial data for these periods.
The reconciliation of previously reported amounts to the amounts currently being
reported for the years ended December 31, 2001 and 2000 is presented in
Note 24 in the Notes to Consolidated Financial Statements and in Note 14 in the
Notes to Condensed Consolidated Financial Statements for the six months ended
June 27, 2003 and June 28, 2002.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
--------------------------- ---------------------------------------------------------
JUNE 28, 2002 2001 2000
JUNE 27, 2003 (AS RESTATED) 2002 (AS (RESTATED) (AS RESTATED) 1999 1998
------------- ------------- ------- ------------ ------------ --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Sales:
Products (1) $ 32,746 $ 38,371 $ 81,039 $ 84,558 $ 79,857 $ 66,806 $ 65,434
Services (2) 17,141 17,686 34,922 34,182 29,429 30,143 32,683
------------- ------------- ------- ------------ ------------ --------- ----------
Total sales 49,887 56,057 115,961 118,740 109,286 96,949 98,117
------------- ------------- ------- ------------ ------------ --------- ----------
Cost of sales:
Products(1) 18,044 21,741 43,398 42,278 34,969 35,938 33,477
Services(2) 13,569 13,197 25,942 24,961 21,729 20,975 22,062
------------- ------------- ------- ------------ ------------ --------- ----------
Total cost of sales 31,613 34,938 69,340 67,239 56,698 56,913 55,539
------------- ------------- ------- ------------ ------------ --------- ----------
Gross profit 18,274 21,119 46,621 51,501 52,588 40,036 42,578
------------- ------------- ------- ------------ ------------ --------- ----------
Operating expenses:
Selling, general and
administrative 20,375 23,944 48,331 42,807 32,710 35,273 30,448
Research and development 5,163 8,635 15,366 11,010 7,814 8,931 9,425
Severance and other
restructuring costs 251 1,617 4,354 --- --- 3,384 ---
------------- ------------- ------- ------------ ------------ --------- ----------
Total operating expenses 25,789 34,196 68,051 53,817 40,524 47,588 39,873
------------- ------------- ------- ------------ ------------ --------- ----------
(Loss) income from operations (7,515) (13,077) (21,430) (2,316) 12,064 (7,552) 2,705
Interest and other (expense)
income, net 1,887 1,368 (2,991) (1,033) 115 11 482
Gain on arbitration settlement --- 18,464 18,464 --- --- --- ---
------------- ------------- ------- ------------ ------------ --------- ----------
(Loss) income before income taxes (9,402) 4,019 (5,957) (3,349) 12,179 (7,541) 3,187
Provision for (benefit from)
income taxes 1,031 953 8,909 (992) 4,309 (2,240) 1,055
------------- ------------- ------- ------------ ------------ --------- ----------
Net (loss) income (10,433) 3,066 (14,866) (2,357) 7,870 (5,301) 2,132
------------- ------------- ------- ------------ ------------ --------- ----------
Preferred stock dividend 198 --- --- --- --- --- ---
------------- ------------- ------- ------------ ------------ --------- ----------
Net (loss) income available to
common shareholders per share $ (10,631) $ 3,066 $(14,866) $ (2,357) $ 7,870 $ (5,301) $ 2,132
============= ============ ========= =========== ============ ========= =========
Shares used to calculate basic
net (loss) income available to
common shareholders per share 12,730 12,986 12,837 12,579 11,851 11,376 11,348
------------- ------------- ------- ------------ ------------ --------- ----------
Basic net (loss) income available
to common shareholders per
share $ (0.84) $ 0.24 $ (1.16) $ (0.19) $ 0.66 $ (0.47) $ 0.19
============= ============ ========= =========== ============ ========= =========
Shares used to calculate diluted
net (loss) income available to
common shareholders per share 12,730 14,445 12,837 12,579 12,889 11,376 11,594
------------- ------------- ------- ------------ ------------ --------- ----------
Diluted net (loss) income
available to common
shareholders per share $ (0.84) $ 0.21 $ (1.16) $ (0.19) $ 0.61 $ (0.47) $ 0.18
============= ============ ========= =========== ============ ========= =========
18
AT DECEMBER 31,
------------------------------------------------------
AT JUNE 28,
AT JUNE 2002 2001 2000
27, 2003 (AS RESTATED) 2002 (AS RESTATED) (AS RESTATED) 1999 1998
----------- -------------- ---------- ------------ ------------ ---------- ---------
BALANCE SHEET DATA:
Working (deficit)
capital $ (1,334) $ (15,415) $ (8,608) $ 16,008 $ 44,275 $ 31,219 $ 38,305
Total assets 127,245 156,203 132,233 164,942 109,623 90,658 95,103
Current portion of
long-term debt 155 3,517 10,500 3,135 120 110 100
Long-term liabilities 7,585 9,168 6,090
excluding current
portion 17,383 32,464 17,487 33,179
Redeemable preferred
stock 15,158 --- --- --- --- --- ---
Stockholders' equity 50,890 77,222 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.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The condensed consolidated financial statements for the six months ended
June 28, 2002 and the consolidated financial statements as of and for the years
ended December 31, 2001 and 2000 included in this prospectus have been restated.
All applicable financial information presented in this discussion has been
restated to take into account the effects of the restatements described in the
accompanying Notes to Consolidated Financial Statements for the years ended
December 31, 2002, 2001 and 2000 appearing in Note 24 and the accompanying Notes
to Condensed Consolidated Financial Statements for the six months ended June 27,
2003 and June 28, 2002 appearing in Note 14.
The following discussion should be read in conjunction with our
consolidated financial statements provided in this prospectus. 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 prospectus is as of the
date of this filing, and we undertake no duty to update this information. More
information about potential factors that could affect our business and financial
results is included in the section entitled "Risk Factors" of this prospectus.
RESTATEMENT
Deloitte and Touche LLP, which we refer to in this prospectus as Deloitte,
our independent auditor for the years ended December 31, 2002, 2001 and 2000, 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 sales to the attention
of management. Management immediately notified the Audit Committee of our 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 prospectus as
Morgan Lewis, as independent counsel, and Morgan Lewis retained the accounting
firm of BDO Seidman, LLP, which we refer to in this prospectus as BDO, to
provide forensic accounting services in support of its work. The investigation
included a review of our significant equipment sales transactions 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 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 six months ended June 28,
2002 and the years ended December 31, 2001 and 2000. The restatements 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 six months
ended June 28, 2002 is to increase our previously reported consolidated revenues
from $56.0 million to $56.1 million, increase net income from $2.5 million to
$3.1 million and increase diluted net income per share from $0.18 to $0.21, and
for the year ended December 31, 2001, to decrease our 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 our 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, we have implemented changes to
our financial organization and enhanced our internal controls in response to
issues identified in the investigation and otherwise raised by the restatement.
We are continuing to implement each of the changes recommended by the Audit
Committee.
20
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 and related computer systems, and
include SLA(R) systems, SLS(R) systems and ThermoJet(R) solid object printers.
SLA systems use our proprietary stereolithography technology, which we
refer to as SL, an additive solid imaging process which uses a laser beam to
expose and solidify successive layers of photosensitive resin until the desired
object is formed to precise specifications in epoxy or acrylic resin. SLS
systems utilize a process called laser sintering, which we refer to as LS, which
uses laser energy to sinter powdered material to create solid objects from
powdered materials. LS and SL-produced parts can be used for concept models,
engineering prototypes, patterns and masters for molds, consumable tooling, and
short-run manufacturing of final product, among other applications. ThermoJet
solid object printers employ hot melt ink jet technology to build models in
successive layers using our proprietary thermoplastic material. These printers,
about the size of an office copier, are network-ready and are designed for
operation in engineering and design office environments. The ThermoJet printer
output can be used as patterns and molds, and when combined with other secondary
processes such as investment casting, can produce parts with representative
end-use properties.
Our customers include major corporations in a broad range of industries
including service bureaus and manufacturers of automotive, aerospace, computer,
electronic, consumer and medical products. Our revenues are generated by product
and service sales. Product sales are comprised of sales of systems and related
equipment, materials, software and other component parts, as well as rentals of
systems. Service and warranty sales include revenues from a variety of on-site
maintenance services and customer training.
For the first six months of 2003, the continued general economic slowdown
in capital equipment spending worldwide impacted both revenues and earnings. In
the first six months of 2003, SLA system unit sales were down 14.7% and SLS
system unit sales were down 36.0% from the same period in 2002. This had a
significant impact on both revenue and overall gross margin.
We recognize the importance of recurring revenue to moderate the impact
that fluctuations in capital spending has on our high end equipment sales. The
following table reflects recurring revenues (service and materials sales) and
non-recurring revenues (system sales and related equipment) and those revenues
as a percentage of total revenues for the periods indicated below (in thousands,
except percentages):
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
--------------------- ----------------------------------------
JUNE 28,
JUNE 27, 2002 2001 2000
2003 (AS RESTATED) 2002 (AS RESTATED) (AS RESTATED)
---------- --------- ---------- ------------- -------------
Recurring sales $ 32,616 $ 34,185 $ 66,541 $ 64,815 $ 54,696
Non-recurring sales 17,271 21,872 49,420 53,925 54,590
---------- --------- ---------- ------------- -------------
Total sales $ 49,887 $ 56,057 $ 115,961 $ 118,740 $ 109,286
========== ========= ========== ============= =============
Recurring sales 65.4% 61.0% 57.4% 54.6% 50.0%
Non-recurring sales 34.6% 39.0% 42.6% 45.4% 50.0%
---------- --------- ---------- ------------- -------------
Total sales 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========= ========== ============= =============
Since the second quarter of 2001, the market for our capital equipment has
been impacted by overall economic conditions. Consequently, we reduced our cost
structure by implementing an approximate 10% reduction in workforce worldwide in
April 2002. After reviewing our results for the second quarter of 2002 and the
long-term prospects for the worldwide economy, we took additional measures to
realign our projected expenses with anticipated revenue levels. During the third
quarter of 2002, we closed our existing facilities in Austin, Texas, and
21
Farmington Hills, Michigan, and reduced our workforce by an additional 20% or
109 employees. As a result of these activities, we recorded charges of $1.6
million and $2.7 million in the quarters ended June 28, 2002 and September 27,
2002, respectively. In addition, in April 2003, we reduced our workforce by
6.2%, or 27 employees in the United States, and in August 2003, by 3.9%, or 16
employees, worldwide, as a result of continued lower revenue levels. We recorded
a $0.3 million charge for the April 2003 reduction in the second quarter of
2003, and we expect to record a charge of approximately $0.3 million for the
August 2003 reduction in the third quarter of 2003.
Sales into our Advanced Digital Manufacturing market, which we refer to in
this prospectus as ADM, continue to increase including sales into aerospace,
motorsports, jewelry, and hearing aids. Our ADM revenue was approximately $17.0
million or 34.0% of our overall revenue for the six months ended June 27, 2003
and $16.2 million or 28.9% of our total revenue for the six months ended June
28, 2002. We believe that the market demand for new ADM applications continues
to grow.
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 Agreement and the Research and
Development Agreement which required Vantico to pay us $22 million in cash or by
delivery of 1.55 million shares of our common stock. On April 22, 2002, Vantico
delivered the 1.55 million shares 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. Due to the termination of this agreement, we are increasing our
focus on our internal resin conversion program and our overall materials
business through RPC. We are moving forward with our retail materials strategy
with our Accura(TM) materials which we launched on April 23, 2002.
On July 9, 2002, the U.S. 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 U.S. 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 identified as areas of significant opportunity for us
for 2002 and beyond. See Note 10 of Notes to Consolidated Financial Statements
for the years ended December 31, 2002, 2001 and 2000.
22
In February 2001, we acquired the stock and intellectual property of
OptoForm SARL, which we refer to in this prospectus as 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. See Note 10 of Notes to Consolidated Financial
Statements for the years ended December 31, 2002, 2001 and 2000.
In September 2001, we acquired the stock of RPC Ltd., a manufacturer of
sterolithography 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.
See Note 10 of Notes to Consolidated Financial Statements for the years ended
December 31, 2002, 2001 and 2000.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make critical accounting estimates that directly impact our condensed
consolidated financial statements and related disclosures. Critical accounting
estimates are estimates that meet two criteria: (1) the estimates require that
we make assumptions about matters that are highly uncertain at the time the
estimates are made; (2) there exist different estimates that could reasonably be
used in the current period, or changes in the estimates used are reasonably
likely to occur from period to period, both of which would have a material
impact on the presentation of the financial condition or our results of our
operations. On an on-going basis, we evaluate our estimates, including those
related to the allowance for doubtful accounts, income taxes, inventory,
goodwill, intangible and other long-lived assets, contingencies and revenue
recognition. We base our estimates and assumptions on historical experience and
on various other assumptions we believe reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The following represent what management believes are the critical
accounting policies most affected by significant management estimates and
judgments. Management has discussed these critical accounting policies, the
basis for their underlying assumptions and estimates and the nature of our
related disclosures herein with the Audit Committee of our Board of Directors.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Our estimate for the allowance for
doubtful accounts related to trade receivables is based on two methods. The
amounts calculated from each of these methods are combined to determine the
total amount reserved. First, we evaluate specific accounts where we have
information that the customer may have an inability to meet its financial
obligations (for example, bankruptcy). In these cases, we use our judgment,
based on available facts and circumstances, and record a specific reserve for
that customer against amounts due to reduce the receivable to the amount that is
expected to be collected. These specific reserves are reevaluated and adjusted
as additional information is received that impacts the amount reserved. Second,
a reserve is established for all customers based on a range of percentages
applied to aging categories. These percentages are based on historical
collection and write-off experience. If circumstances change (for example, we
experience higher than expected defaults or an unexpected material adverse
change in a major customer's ability to meet its financial obligation to us),
our estimates of the recoverability of amounts due to us could be reduced by a
material amount.
We believe that our allowance for doubtful accounts is a critical
accounting estimate because it is susceptible to change and dependent upon
events that are remote in time and may or may not occur, and because the impact
of recognizing additional allowance for doubtful accounts may be material to the
assets reported on our balance sheet and our results of operations.
INCOME TAXES. The provisions of SFAS No. 109, "Accounting for Income
Taxes," require a valuation allowance when, based upon currently available
information and other factors, it is more likely than not that all or a portion
of the deferred tax asset will not be realized. SFAS No. 109 provides that an
important factor in determining
23
whether a deferred tax asset will be realized is whether there has been
sufficient income in recent years and whether sufficient income is expected in
future years in order to utilize the deferred tax asset. Forming a conclusion
that a valuation allowance is not needed is difficult when there is negative
evidence, such as cumulative losses in recent years. The existence of cumulative
losses in recent years is an item of negative evidence that is particularly
difficult to overcome. At June 27, 2003, the unadjusted net book value before
valuation allowance of our deferred tax assets totaled approximately $23.4
million, which principally was comprised of net operating loss carry-forwards
and other credits. During the six months ended June 27, 2003 and during our 2002
fourth quarter-end, we recorded valuation allowance of approximately $4.8
million and $12.9 million, respectively, against our net deferred tax assets,
which was additional to the approximate $5.7 million allowance previously
recorded. We intend to maintain a valuation allowance until sufficient evidence
exists to support our reversal. Also, until an appropriate level of
profitability is reached, we do not expect to recognize any domestic tax
benefits in future periods.
We believe that our determination to record a valuation allowance to reduce
our deferred tax assets is a critical accounting estimate because it is based on
an estimate of future taxable income in the United States, which is susceptible
to change and dependent upon events that are remote in time and may or may not
occur, and because the impact of recording a valuation allowance may be material
to the assets reported on our balance sheet and our results of operations. The
determination of our income tax provision is complex due to operations in
numerous tax jurisdictions outside the United States, which are subject to
certain risks, which ordinarily would not be expected in the United States. Tax
regimes in certain jurisdictions are subject to significant changes, which may
be applied on a retroactive basis. If this were to occur, our tax expense could
be materially different than the amounts reported. Furthermore, as explained in
the preceding paragraph, in determining the valuation allowance related to
deferred tax assets, we adopt the liability method as required by SFAS No. 109,
"Accounting for Income Taxes." This method requires that we establish valuation
allowance if, based on the weight of available evidence, in our judgment it is
more likely than not that the deferred tax assets may not be realized.
INVENTORY. Inventories are stated at the lower of cost or market, cost
being determined on the first-in, first-out method. Reserves for slow moving and
obsolete inventories are provided based on historical experience and current
product demand. Our reserve for slow moving and obsolete inventory was $2.3
million and $1.9 million at June 27, 2003 and December 31, 2002, respectively.
We evaluate the adequacy of these reserves quarterly. There were no inventories
consigned to a sales agent at June 27, 2003, and inventories consigned to a
sales agent at December 31, 2002 were $0.1 million. Our determination relating
to the allowance for inventory obsolescence is subject to change because it is
based on management's current estimates of required reserves and potential
adjustments.
We believe that the allowance for inventory obsolescence is a critical
accounting estimate because it is susceptible to change and dependent upon
events that are remote in time and may or may not occur, and because the impact
of recognizing additional obsolescence reserves may be material to the assets
reported on our balance sheet and results of operations.
GOODWILL, INTANGIBLE AND OTHER LONG-LIVED ASSETS. We have applied Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," in
our allocation of the purchase prices of DTM Corporation (DTM) and RPC Ltd.
(RPC). The annual impairment testing required by SFAS No. 142, "Goodwill and
Other Intangible Assets," requires us to use our judgment and could require us
to write-down the carrying value of our goodwill and other intangible assets in
future periods. SFAS No. 142 requires companies to allocate their goodwill to
identifiable reporting units, which then are 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, we concluded that the fair value of our reporting units
exceeded their carrying value and accordingly, as of that date,
24
there were no goodwill impairment issues. We are required to perform a valuation
of our reporting unit annually, or upon significant changes in our business
environment.
We evaluate long-lived assets other than goodwill for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. If the estimated future cash flows (undiscounted and
without interest charges) from the use of an asset are less than the carrying
value, a write-down would be recorded to reduce the related asset to its
estimated fair value.
We believe that our determination not to recognize an impairment of
goodwill, intangible or other long-lived assets is a critical accounting
estimate because it is susceptible to change, dependent upon estimates of the
fair value of our reporting units, and because the impact of recognizing an
impairment may be material to the assets reported on our balance sheet and our
results of operations.
CONTINGENCIES. We account for contingencies in accordance with SFAS No. 5,
"Accounting for Contingencies." SFAS No. 5 requires that we record an estimated
loss from a loss contingency when information available prior to issuance of our
financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies such as legal and income tax matters requires us to use our
judgment. At this time our contingencies are not estimable and have not been
recorded; however, management believes the ultimate outcome of these actions
will not have a material effect on our consolidated financial position, results
of operations or cash flows.
REVENUE RECOGNITION. Revenues from the sale of systems and related products
are recognized upon shipment, provided that both title and risk of loss have
passed to the customer and collection is reasonably assured. Some sales
transactions are bundled and include equipment, software license, warranty,
training and installation. We allocate and record revenue in these transactions
based on vendor specific objective evidence that has been accumulated through
historic operations. The process of allocating the revenue involves some
management judgments. Revenues from services are recognized at the time of
performance. We provide end users with maintenance under a warranty agreement
for up to one year and defer a portion of the revenues at the time of sale based
on the objective evidence for the value of these services. After the initial
warranty period, we offer these customers optional maintenance contracts;
revenue related to these contracts is deferred and recognized ratably over the
period of the contract. Our warranty costs were $2.0 million and $2.5 million
for the six months ended June 27, 2003 and June 28, 2002, respectively, and $4.6
million, $4.2 million and $3.8 million for the years ended December 31, 2002,
2001 and 2000, respectively. Our systems are sold with software products that
are integral to the operation of the systems. These software products are not
sold separately.
Certain of our 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 the uncertain political environment in the
country in which the customer does business. For these sales, we record revenues
based on the cost recovery method, which requires that the sales proceeds
received are first applied to the carrying amount of the asset sold until the
carrying amount has been recovered. Thereafter, all proceeds are recognized as
gross profit.
Credit is extended based on an evaluation of each customer's financial
condition. To reduce credit risk in connection with systems sales, we may,
depending upon the circumstances, require significant deposits prior to shipment
and may retain a security interest in the system until fully paid. We often
require international customers to furnish letters of credit.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." This
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated
25
after December 31, 2002. The adoption of SFAS 146 does not have a material
impact on our results of operations or financial condition.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation it has undertaken in issuing the guarantee. FIN 45 also requires
guarantors to disclose certain information for guarantees, beginning December
31, 2002. These financial statements contain the required disclosures.
In 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 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 the Notes to the
Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. We do not have any variable interest entities that must be
consolidated.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards on the classification and measurement of financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
will become effective for financial instruments entered into or modified after
May 31, 2003. We do not have any financial instruments to be accounted for under
this pronouncement.
In May 2003, the Emerging Issues Task Force of the FASB ("EITF"), issued
EITF Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables" (Issue
00-21). Issue 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities
and how to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting. Issue 00-21 is effective for revenue
arrangements entered into in fiscal periods after June 15, 2003. The adoption of
Issue 00-21 does not have a material effect on the Company's results of
operations or financial condition.
26
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our statements of operations to total sales:
PERCENTAGE OF TOTAL SALES
--------------------------------------------------------------
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
----------------------- -------------------------------------
JUNE 28, 2003 2001 2000
JUNE 27, 2003 (AS RESTATED) 2002 (AS RESTATED) (AS RESTATED)
------------- ------------ ------- ------------- -------------
Sales:
Products 65.6% 68.4% 69.9% 71.2% 73.1%
Services 34.4% 31.6% 30.1% 28.8% 26.9%
------------- ------------ ------- ------------- -------------
Total sales 100.0% 100.0% 100.0% 100.0% 100.0%
------------- ------------ ------- ------------- -------------
Cost of sales:
Products 36.2% 38.8% 37.4% 35.6% 32.0%
Services 27.2% 23.5% 22.4% 21.0% 19.9%
------------- ------------ ------- ------------- -------------
Total cost of sales 63.4% 62.3% 59.8% 56.6% 51.9%
------------- ------------ ------- ------------- -------------
Gross profit 36.6% 37.7% 40.2% 43.4% 48.2%
Selling, general and administrative
expenses 40.8% 42.7% 41.7% 36.1% 29.9%
Research and development expenses 10.3% 15.4% 13.3% 9.3% 7.2%
Severance and other restructuring costs 0.5% 2.9% 3.8% --- ---
------------- ------------ ------- ------------- -------------
(Loss) income from operations (15.1)% (23.3)% (18.6)% (2.0)% 11.1%
Interest and other (expense) income, net (3.8)% (2.4)% (2.6)% (0.9)% 0.1%
Gain on arbitration settlement --- 32.9% 15.9% --- ---
Provision for (benefit from) income taxes 2.1% 1.7% 7.7% (0.8)% 3.9%
------------- ------------ ------- ------------- -------------
Net (loss) income (20.9)% 5.5% (12.9)% (2.1)% 7.2%
============= ============ ======= ============= =============
Cost of sales (as a percentage of
related sales):
Products 55.1% 56.7% 53.6% 50.0% 43.8%
Services 79.2% 74.6% 74.3% 73.0% 73.8%
Total cost of sales 63.4% 62.3% 59.8% 56.6% 51.9%
27
The following table sets forth, for the periods indicated, total sales
attributable to each of our major products and services groups, and those sales
as a percentage of total sales (in thousands, except percentages):
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
-------------------- ---------------------------------------
JUNE 28,
JUNE 27, 2002 2001 2000
2003 (AS RESTATED) 2002 (AS RESTATED) (AS RESTATED)
--------- ------------ -------- ------------- -------------
Products:
SLA systems and related equipment $ 10,082 $12,137 $ 29,186 $ 35,223 $ 44,803
SLS systems and related equipment 4,699 7,004 13,362 8,651 --
Solid object printers 599 1,116 1,931 5,261 6,520
Materials 15,475 16,499 31,619 30,633 25,267
Other 1,891 1,615 4,941 4,790 3,267
--------- ------------ -------- ------------- -------------
Total products 32,746 38,371 81,039 84,558 79,857
--------- ------------ -------- ------------- -------------
Services:
Maintenance 16,391 16,596 33,038 32,239 26,079
Other 750 1,090 1,884 1,943 3,350
--------- ------------ -------- ------------- -------------
Total services 17,141 17,686 34,922 34,182 29,429
--------- ------------ -------- ------------- -------------
Total sales $ 49,887 $56,057 $ 115,961 $118,740 $ 109,286
--------- ------------ -------- ------------- -------------
Products:
SLA systems and related equipment 20.2% 21.6% 25.2% 29.7% 41.0%
SLS systems and related equipment 9.4% 12.5% 11.5% 7.3% --
Solid object printers 1.2% 2.0% 1.7% 4.4% 6.0%
Materials 31.0% 29.4% 27.3% 25.8% 23.1%
Other 3.8% 2.9% 4.2% 4.0% 3.0%
--------- ------------ -------- ------------- -------------
Total products 65.6% 68.4% 70.0% 71.2% 73.1%
--------- ------------ -------- ------------- -------------
Services:
Maintenance 32.9% 29.7% 28.5% 27.2% 23.9%
Other 1.5% 1.9% 1.6% 1.6% 3.0%
--------- ------------ -------- ------------- -------------
Total services 34.4% 31.6% 30.1% 28.8% 26.9%
--------- ------------ -------- ------------- -------------
Total sales 100.0% 100.0% 100.0% 100.0% 100.0%
========= ============ ======== ============= =============
Segments are reported by geographic sales regions. Our reportable segments
include our administrative, sales, service, manufacturing and customer support
operations in the United States and sales and service offices in the European
Community (France, Germany, the United Kingdom, Italy and Switzerland) and in
Asia (Japan, Hong Kong and Singapore).
We evaluate performance based on several factors, of which the primary
financial measure is operating income. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies in Note 3 of the accompanying Notes to Consolidated Financial
Statements for the years ended December 31, 2002, 2001 and 2000.
28
Summarized financial information concerning our reportable segments is
shown in the following table (in thousands):
SIX MONTHS ENDED YEARS ENDED DECEMBER 31
------------------------------- ---------------------------------------
JUNE 28, 2002 2001 2000
JUNE 27, 2003 (AS RESTATED) 2002 (AS RESTATED) (AS RESTATED)
--------------- -------------- ------------ ----------- ------------
Sales:
U.S. operations $ 24,195 $ 29,086 $ 57,338 $ 61,031 $ 58,766
European operations 18,825 19,887 44,538 44,331 38,162
Asia/Pacific operations 6,867 7,084 14,085 13,378 12,358
--------------- -------------- ------------ ----------- ------------
Total sales 49,887 56,057 115,961 118,740 109,286
Cost of sales:
U.S. operations 16,744 17,189 37,668 31,265 23,656
European operations 11,288 14,229 24,673 29,001 25,699
Asia/Pacific operations 3,581 3,520 6,999 6,973 7,343
--------------- -------------- ------------ ----------- ------------
Total cost of sales 31,613 34,938 69,340 67,239 56,698
--------------- -------------- ------------ ----------- ------------
Gross profit $ 18,274 $ 21,119 $ 46,621 $ 51,501 $ 52,588
=============== ============== ============ =========== ============
SIX MONTHS ENDED JUNE 27, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 28, 2002
REVENUES. Revenues during the six months ended June 27, 2003, (the "first
half of 2003") were $49.9 million, a decrease of 11.0%, from the $56.1 million
recorded during the six months ended June 28, 2002 (the "first half of 2002").
The decrease in overall revenues was incurred for the most part in the first
three months of 2003, and reflects a decline in capital spending due to poor
economic conditions in the United States and the uncertainty surrounding the war
with Iraq. In addition, we believe that sales of our SLA and SLS systems
declined in part because we have not introduced any significant advances in
these products this year or in 2002 or 2001. Furthermore, the issues associated
with the completion of the fiscal year 2002 audit caused significant disruption
to our organization, and required the attention of our executive and management
staff for the better part of the first half of this year. We believe that the
completion of the 2002 audit has enabled management to refocus its attention and
efforts on our core business. In addition, we have implemented many of the
recommendations of our Audit Committee and continue to implement the remaining
recommendations.
Product sales of $32.7 million were recorded in the first half of 2003, a
decrease of 14.7%, compared to $38.4 million for the first half of 2002. The
decrease was primarily in the U.S. operating segment, which experienced a
decrease in revenue from $29.1 million to $24.2 million, or 16.8%. The decrease
is directly related to the decline in unit sales of our SLA systems as customers
delayed decisions with respect to capital expenditures. In addition, we believe
that sales of our SLA and SLS systems declined in part because we have not
introduced any significant advances in these products this year or in 2002 or
2001. Our Asia operating unit also experienced a decline in revenue from $7.1
million in the first half of 2002 to $6.9 million for the similar period in
2003, or 3.1%. The decline in sales for Asia is primarily due to service bureau
purchases of systems in the first quarter of 2002, which are not expected to be
repeated on an annual basis, partially offset by two large frame systems sales
in the second quarter of 2003. Product sales in our Europe operating segment of
$18.8 million in the first half of 2003 and $19.9 million for the first half of
2002 decreased approximately 5.3% as sales of systems declined.
Total units sold for the six months ended June 27, 2003 and June 28, 2002
were 103 and 133, respectively. During the first half of 2003, we sold a total
of 58 SLA systems, 16 SLS systems and 29 ThermoJet systems, as compared to 68
SLA systems, 25 SLS systems and 40 ThermoJet systems sold in the first half of
2002. The decrease in units sold is primarily due to the continued overall
economic decline in capital spending by customers in the United States and
Europe, the absence of significant advances in our SLA and SLS systems, and the
distraction of management's attention caused by the accounting issues.
System orders and sales may fluctuate on a quarterly basis as a result of a
number of other factors, including world economic conditions, fluctuations in
foreign currency exchange rates, acceptance of new products and the timing of
product shipments. Due to the price of certain systems and the overall low unit
volumes, the acceleration or delay of shipments of a small number of higher-end
SLA systems from one period to another can
29
significantly affect our results of operations for the quarters involved. We
also continue to experience a shift in our sales mix from our large frame SLA
systems to our small frame SLA systems.
Materials revenue of $15.5 million was recorded in the first half of 2003,
a 6.2% decrease from the $16.5 million recorded in the first half of 2002. The
decrease in materials revenue primarily relates to fewer initial vat fill
revenues resulting from a decrease in the number of systems sold in the first
three months of 2003 partially offset by an increase in materials revenue in
the second quarter. We continue to solicit customers to transition from Vantico
material to RPC supplied material. We believe that many customers have converted
to our RPC resins and that we supply approximately 50% of the worldwide market
for SL resins used in our SLA systems.
Service sales during the first half of 2003 totaled $17.1 million, a 3.4%
decrease from the $17.7 million recorded in the first half of 2002. The decrease
primarily reflects delays in customer decisions whether to renew maintenance
contracts as well as a decline in system sales, and consequently a decline in
warranty revenue. The decrease is partially offset by an increase in new
maintenance contract revenue as a result of an increase in the overall number of
systems in the marketplace.
COST OF SALES. Cost of sales was $31.6 million or 63.4% of sales in the
first half of 2003 and $34.9 million or 62.3% of sales in the first half of
2002.
Product cost of sales as a percentage of product sales was 55.1% in the
first half of 2003 and 56.7% in the first half of 2002. Product cost of sales as
a percentage of product sales decreased primarily due to lower costs of sales on
our resin materials, which we produce internally, offset slightly by a shift in
the sales mix of our SLA systems from large frame systems to small frame
systems.
Cost of sales for U.S. operations decreased to $16.7 million in the first
half of 2003 from $17.2 million in the first half of 2002. The monetary decrease
in cost of sales is directly related to the decrease in sales. Cost of sales for
U.S. operations as a percentage of U.S. sales increased to 69.2% in the first
half of 2003 from 59.1% in the first half of 2002. The increase in cost of sales
as a percent of sales in the United States relates to lower margins associated
with the mix of SLS and SLA systems, and the mix of SLA models, sold, partially
offset by better margins on materials sales. Cost of sales for our European
operations decreased to $11.3 million or 60.0% of European sales in the first
half of 2003 from $14.2 million or 71.5% of sales in the first half of 2002. The
monetary decrease in the cost of sales in Europe is a result of lower machine
sales. The decrease in cost of sales as a percentage of sales in Europe
principally relates to higher margins on resin sales, partially offset by lower
margins on service revenue during the first half of 2003. Our cost of sales for
our Asia/Pacific operations increased to $3.6 million or 52.1% of Asia/Pacific
sales in the first half of 2003 from $3.5 million or 49.7% of sales in the first
half of 2002 primarily as a result of lower sales of SLA and SLS systems.
Service cost of sales as a percentage of service sales was 79.2% in the
first half of 2003 and 74.6% in the first half of 2002. The increase in the
service cost of sales as a percentage of service sales is primarily attributable
to an unusually high occurrence of replacement of lasers in our machines, which
are covered by maintenance contracts, during the first three months of 2003.
This number of laser replacements has decreased during the second quarter of
2003, as reflected in the decrease of the service cost of sales as a percentage
of service sales from 84.8% in the first quarter of 2003 to 79.2% for the first
half of 2003. Additionally, delayed decisions by customers whether to renew
service contracts reduced our gross profit margins as certain of our service
costs of sales are fixed and do not fluctuate in relation to service revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $20.4 million in the first half of 2003 and
$23.9 million in the first half of 2002. This decrease was primarily a result of
cost savings achieved due to a reduction in workforce and other restructuring
activities during the second and third quarters of 2002 and the second quarter
of 2003, partially offset by increased professional fees incurred in connection
with the audit committee investigation and the completion of the 2002 audit.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
first half of 2003 decreased to $5.2 million or 10.3% of sales compared to $8.6
million or 15.4% of sales in the first half of 2002. The decrease in research
and development expenses is primarily due to closure of the research and
development facility in Austin, Texas, and consolidation of this activity in
other locations. Additionally, we reduced the workforce for
30
research and development during the second and third quarters of 2002 and the
second quarter of 2003. We continue the development work associated with the
InVision(R) si2 3-D printer. We do not anticipate any revenue from the
InVision(R) si2 3-D printer until we have successfully completed design
validation testing, which we currently anticipate to be in the third quarter of
2003. Given the anticipated impact of cost reductions and closure of our Austin
facility, we anticipate research and development expenses to be more in line
with historical levels of approximately 9% of revenue by the end of fiscal 2003.
LOSS FROM OPERATIONS. Operating loss for the first half of 2003 was $7.5
million compared to a loss of $13.1 million in the first half of 2002. This
decrease in operating loss is attributable primarily to improved operating
efficiencies during the second quarter of 2003. Our performance during the
second quarter of 2003, in terms of our operating loss, reflects significant
improvement over the first quarter of this 2003 and the second quarter of 2002.
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net for the
first half of 2003 was $1.9 million compared to interest and other expense, net
of $1.4 million in the first half of 2002. The increased expense in the first
half of 2003 reflects higher interest rates on our debt and additional loan
costs for U.S. Bank as a result of obtaining the required waivers of default.
PROVISION FOR INCOME TAXES. For the first half of 2003, our income tax
provision was $1.0 million primarily for foreign operations, compared to $1.0
million in the first half of 2002, primarily for the Vantico settlement recorded
in the first half of 2002.
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 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.
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
31
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 our 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 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, selling, general and administrative 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 three-dimensional
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, Texas, 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 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 of Notes to Consolidated Financial
Statements for the years ended December 31, 2002, 2001 and 2000.
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, we have
a net deferred tax asset, before the valuation allowance adjustment, in the
total amount of $18.7 million. See Note 18 of Notes to Consolidated Financial
Statements for the years ended December 31, 2002, 2001 and 2000.
32
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,
also may have 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses 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.
33
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 three-dimensional 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 $0.1
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 for the years ended December 31,
2002, 2001 and 2000.
RELATED PARTIES
On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible
Preferred Stock, at a price of $6.00 per share, for aggregate consideration of
$15.8 million. The preferred stock accrues dividends at 8% per share (subject to
increase to 10%) and is convertible at any time into approximately 2,634,016
shares of common stock. The stock is redeemable at our option after the third
anniversary date. We must redeem any shares of preferred stock outstanding on
the tenth anniversary date. The redemption price is $6.00 per share plus accrued
and unpaid dividends. Messrs. Loewenbaum, Service and Hull, the Chairman of our
Board of Directors, then Chief Executive Officer and Chief Technology Officer,
respectively, purchased an aggregate of $1.5 million of the Series B Convertible
Preferred Stock. Additionally, Clark Partners I, L.P., a New York limited
partnership, purchased $5.0 million of the Series B Convertible Preferred Stock.
Kevin Moore, a member of our Board of Directors, is the president of the general
partner of Clark Partners I, L.P. In connection with the offering, Houlihan
Lokey Howard & Zukin rendered its opinion that the terms of the offering were
fair to us from a financial point of view. A special committee of our Board of
Directors, composed entirely of disinterested independent directors, approved
the offer and sale of the Series B Convertible Preferred Stock and recommended
the transaction to our Board of Directors. Our Board of Directors also approved
the transaction, with interested Board members not participating in the vote.
At June 27, 2003, we had a remaining note receivable totaling $45,232,
including accrued interest, from Charles W. Hull, our director and executive
officer, pursuant to the 1996 Stock Incentive Plan. The loan was used to
purchase shares of our common stock at the fair market value on the date of
purchase. The original amount of the note was $60,000. The note bears interest
at a rate of 6% per annum and matures in 2003. Pursuant to the terms of the
note, as a result of meeting certain profitability targets for fiscal 2000,
$20,000 of the principal amount of the note was forgiven together with $3,671 of
interest in 2000. The note receivable is shown on the balance sheet as a
reduction of stockholders' equity. Pursuant to the terms of the note and related
transaction documents, in July 2003, we retired Mr. Hull's note in exchange for
6,031 shares of our common stock.
On August 8, 2003, Brian K. Service resigned from his position as our Chief
Executive Officer and as a member of our Board of Directors. Mr. Service will
receive aggregate payments of approximately $300,000 payable through January
2004. Mr. Service will continue as our employee for a 24-month term to assist
with various clients and transactions, for which he will be paid $188,000.
34
Effective August 8, 2003, Charles W. Hull, our co-founder, Chief Technical
Officer and a director, was named Interim Chief Executive Officer.
LIQUIDITY AND CAPITAL RESOURCES
AS OF AND FOR THE SIX MONTHS AS OF AND FOR THE YEARS ENDED
ENDED DECEMBER 31
------------------------------- ---------------------------------------
JUNE 28, 2002 2001 2000
JUNE 27, 2003 (AS RESTATED) 2002 (AS RESTATED) (AS RESTATED)
--------------- -------------- ------------- ------------ -------------
(IN THOUSANDS)
Cash and cash equivalents $ 8,985 $ 6,696 $ 2,279 $ 5,948 $ 18,999
Working (deficit) capital (1,334) (15,415) (8,608) 16,008 44,275
Cash (used for) provided by operating
activities (535) (5,100) 1,314 6,649 5,126
Cash used for investing activities (3,628) (7,168) (11,015) (58,088) (2,644)
Cash provided by financing activities 10,873 11,947 5,843 40,907 4,159
We have increased our cash balances as of June 27, 2003 to $9.0 million, of
which $1.3 million is restricted, from $2.3 million at December 31, 2002. The
increase is due to the collections on accounts receivable of $10.3 million, net
borrowings against our line of credit of $6.1 million and proceeds from a
preferred stock issuance in the second quarter of 2003 of $15.2 million, net of
issuance costs. This cash was consumed in operations by our net operating loss
of $10.4 million, which is offset by non-cash expenses of $4.6 million for
depreciation and amortization, to pay down accounts payable of $4.5 million and
accrued liabilities of $1.5 million and recognition of deferred revenues of $1.7
million. Additionally, we used cash to repay $10.4 million of debt and $3.2
million for patent defense and legal fees.
Net cash used in operating activities in the first six months of 2003 was
$0.5 million, as a result of the net loss of $10.4 million, offset by
collections on accounts receivable and payments of accounts payable. Our
accounts receivable balances at June 27, 2003 and June 28, 2002 were $18.1
million and $30.2 million, respectively, net of allowance accounts. Collections
on accounts receivable during the first half of 2003 and 2002 were $59.3 million
and $62.1, respectively. We turned our average accounts receivable balance
approximately 2.61 times and 1.77 times for the respective periods in 2003 and
2002. We continue to implement an aggressive strategy in collecting the
outstanding balances and have successfully decreased our Days Sales Outstanding
by approximately 27 days, from 85 days to 58 days. Foreign collections have
improved significantly with average days outstanding decreasing from an average
of 126 days to 85 days for foreign operations and from an average of 64 days to
42 days for domestic operations. We have also successfully reduced the balance
and number of accounts in the over 90 day category by approximately 16% during
the first half of 2003. The cash collected during the period was used to fund
operations and to pay down accounts payable of $4.5 million and accrued
liabilities of $1.4 million for sales commissions and royalties. Additionally,
we made payments in excess of $1.0 million to outside professionals relating to
the audit committee investigation and the completion of the 2002 audit.
Our inventory balances at June 27, 2003 and June 28, 2002 were $12.9
million and 17.3 million, respectively, net of reserves for obsolete inventory
and valuation reserves. Our inventory turn for the first half of 2003 was 4.9
times as compared to 3.8 times for the first half of 2002. We continue to build
finished goods inventory based on forecasted sales, which allows us to meet our
demand without experiencing long lead times for delivery.
Net cash used in investing activities during the first six months of 2003
totaled $3.6 million. The cash used primarily relates to additions to licenses
and patents of $3.2 million for legal defense and new patent filings. Equipment
purchases of $0.4 million were primarily for machinery and equipment used in
operations and replacement of aged computer equipment.
Net cash provided by financing activities during the first six months of
2003 totaled $10.9 million and primarily reflects $15.8 million, net of issuance
costs of $0.6 million, raised through the issuance of preferred stock and
borrowings from the line of credit of $6.1 million. The cash generated from the
issuance of stock was used to pay down the term loan of $9.6 million with U. S.
Bank. The remaining cash will be used to support operations and satisfy current
obligations.
35
Net cash provided by operating activities in the year ended December 31,
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. Net cash provided by operating
activities for the year ended December 31, 2001 of $6.6 million primarily
results from depreciation and amortization of $7.7 million and a decrease of
lease receivables of $2.9 million, reflecting the sale of $2.7 million of lease
receivables. The increases in operating expenses were partially offset by a
decrease of accrued liabilities of $2.3 million. Net cash provided by operating
activities for the year ended December 31, 2000, was $5.1 million comprised
primarily of net income of $8.1 million, depreciation and amortization expense
of $6.2 million, tax benefit related to stock option exercises of $2.0 million,
increases in accounts payable of $2.5 million and deferred revenues of $4.8
million. This was partially offset by increases in accounts receivable of $6.3
million, lease receivables of $2.0 million, inventory of $7.0 million, prepaid
and other assets of $4.0 million and a decrease in deferred income taxes of $2.0
million other liabilities of $1.4 million.
Net cash used for investing activities in the year ended December 31, 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 used for investing activities in the
year ended December 31, 2001 of $58.1 million primarily relates to the
investment in DTM of $49.6 million, additions to property and equipment of $3.3
million, the investment in RPC of $2.2 million and the investment in OptoForm
SARL of $1.4 million. Net cash used for investing activities in the year ended
December 31, 2000 totaled $2.6 million primarily for property and equipment
relating particularly to demonstration equipment for new products, computers and
manufacturing equipment required for expansion, license and patents costs, and
software development costs.
Net cash provided by financing activities in the year ended December 31,
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. Net cash provided by financing activities in the year
ended December 31, 2001 totaled $40.9 million and primarily reflected net
borrowings of $30.4 million related to the DTM acquisition, the sale of 617,000
shares of our common stock for $8.0 million and the exercise of stock options
and issuance of stock of $2.4 million. Net cash provided by financing activities
in the year ended December 31, 2000 totaling $4.2 million was the result of cash
provided from the exercise of stock options net of long-term debt repayments.
GOING CONCERN
The consolidated financial statements have been prepared assuming we will
continue as a going concern. We incurred operating losses totaling $7.5 million
and $31.9 million for the six months ended June 27, 2003 and the year ended
December 31, 2002, respectively, and have an accumulated deficit of $31.7
million at June 27, 2003.
These factors raise substantial doubt about our ability to continue as a
going concern. As of June 27, 2003, we had cash balances of $9.0 million, of
which $1.3 million was restricted, and $0.1 million was available under a bank
line of credit to meet current obligations. In addition, we have potential
liability payable in October 2003 of approximately $1.6 million in connection
with our guarantee of the value of shares of our common stock underlying
warrants issued in connection with an acquisition. We are obligated under our
existing line of credit to have a commitment letter from a substitute lender by
September 30, 2003. Failure to obtain a commitment letter from an acceptable
lender will cause the amount under the line of credit to become immediately due.
Management intends to obtain debt financing to replace the U.S. Bank financing
and also is pursuing alternative financing sources, including a possible
restructuring of our industrial development bonds to make collateral currently
serving to secure repayment of the bonds available for additional borrowings.
Additionally, management intends to pursue a program to increase margins and
continue cost saving programs. However, we cannot assure you that we will
succeed in accomplishing any or all of these initiatives.
36
On August 20, 2003, in the patent infringement suit pending in the
California federal court filed by EOS against DTM and 3D Systems, the trial
court granted EOS' motion for summary judgment that certain DTM laser sintering
machines infringed one claim of one of the patents licensed by us to EOS. Any
damages attributable to the infringement cannot at this time be predicted and
will depend on other issues still to be determined at trial. EOS asserts that
damages will be approximately $40.0 million, and has asserted a claim of willful
infringement, which provides for treble damages at the discretion of the court.
In light of the court's findings, we anticipate recognizing a charge to
operations in the third quarter ending September 26, 2003 of approximately $1.1
million related to the write off of capitalized legal fees and other costs. The
ultimate outcome of the determination of damages could have a material adverse
impact on our operations.
We cannot assure you that over the next 12 months or thereafter we will
generate funds from operations or that capital will be available from external
sources such as debt or equity financings or other potential sources to fund
future operating costs, debt service obligations, any damages that may be
awarded in the EOS litigation 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 intends to continue
raising additional capital to fund operations. The lack of additional capital
resulting from the inability to generate cash flow from operations or raise
equity or debt financing would force us to substantially curtail or cease
operations and would, therefore, have a material adverse effect on our 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 our 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
we be unable to continue as a going concern.
On August 20, 1996, we completed a $4.9 million variable rate industrial
development bond financing of our Colorado facility. Interest on the bonds is
payable monthly (the interest rate at June 27, 2003 was 1.31%). Principal
payments are payable in semi-annual installments through August 2016. The bonds
are collateralized by an irrevocable letter of credit issued by Wells Fargo
Bank, N.A. that is further collateralized by a standby letter of credit issued
by U.S. Bank in the amount of $1.2 million. In order to further secure the
reimbursement agreement, we executed a deed of trust, security agreement and
assignment of rents, an assignment of rents and leases, and a related security
agreement encumbering the Grand Junction facility and certain personal property
and fixtures located at that facility. In addition, the Grand Junction facility
is encumbered by a second deed of trust in favor of Mesa County Economic
Development Council, Inc. securing $0.8 million in allowances granted to us
pursuant to an Agreement dated October 4, 1995. At June 27, 2003, a total of
$4.2 million was outstanding under the bonds. The terms of the letter of credit
require us to maintain specific levels of minimum tangible net worth and fixed
charge coverage ratio.
On March 27, 2003, Wells Fargo sent a letter to us stating that we were 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 us until April 26, 2003, to cure these defaults.
On May 2, 2003, Wells Fargo drew down a letter of credit in the amount of
$1.2 million which was held as partial security under the reimbursement
agreement relating to the letter of credit underlying the bonds and placed the
cash in a restricted account. We obtained a waiver for the default from the
Wells Fargo Bank, provided that we meet certain terms and conditions. We must
remain in compliance with all other provisions of the reimbursement agreement
for this letter of credit. If a replacement letter of credit is not obtained on
or before December 31, 2003, we will agree to retire $1.2 million of the bonds
using the restricted cash.
On August 17, 2001, we entered into a loan agreement with U.S. Bank
totaling $41.5 million, in order to finance the acquisition of DTM. The
financing arrangement consisted of a $26.5 million three-year revolving credit
facility and $15 million 66-month commercial term loan. At June 27, 2003, a
total of $8.6 million was outstanding under the revolving credit facility. We
repaid $9.6 million that was outstanding under the term loan on May 5, 2003. The
interest rate at June 27, 2003 for the revolving credit facility and term loan
was 7.5%. The interest rate is computed as either: (1) the prime rate plus a
margin ranging from 0.25% to 4.0%, or (2) the 90-day adjusted LIBOR plus a
margin ranging from 2.0% to 5.75%. Pursuant to the terms of the agreement, U.S.
Bank has received a first priority security interest in our accounts receivable,
inventories, equipment and general intangible assets.
37
On May 1, 2003, we 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 our failure to timely
submit audited financial statements and failure to make the March 31, 2003
principal payment of $5.0 million also were waived. The agreement requires us to
obtain additional equity investments of at least $9.6 million; to pay off the
balance on the term loan of $9.6 million by May 5, 2003; to increase the
applicable interest rate to prime plus 5.25%; and to pay a $0.2 million waiver
fee and all related costs of drafting the waiver. U.S. Bank also agreed to waive
our compliance with each financial covenant in the loan agreement through
September 30, 2003. Provided we obtain a commitment letter from a qualified
lending institution by September 30, 2003, to refinance all of the outstanding
obligations with U.S. Bank, the waiver will be extended to the earlier of
December 31, 2003, or the expiration date of the commitment letter. Through the
date of this filing, we have 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 our option at any time after the third anniversary date.
We must redeem any shares of preferred stock outstanding on the tenth
anniversary date. The redemption price is equal to $6.00 per share plus accrued
and unpaid dividends. Net proceeds to us from this transaction were $15.2
million. We applied $9.6 million of these proceeds to pay down our term loan and
used the remainder for working capital.
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 six
months ended June 27, 2003 and June 28, 2002 aggregated $1.3 million for each
period.
The future contractual payments at December 31, 2002 are as follows:
LATER
CONTRACTUAL OBLIGATIONS 2003 2004 2005 2006 2007 YEARS TOTAL
-------- --------- -------- -------- ------- -------- ---------
Line of credit $ 2,450 $ --- $ --- $ --- $ --- $ --- $ 2,450
Term loan (a) 10,350 --- --- --- --- --- 10,350
Industrial development
bond 150 165 180 200 220 3,325 4,240
Subordinated debt --- --- --- 10,000 --- --- 10,000
-------- --------- -------- -------- ------- -------- ---------
Operating leases 2,949 2,599 1,723 1,518 738 --- 9,527
======== ========= ======== ======== ======= ======== =========
Total $ 15,899 $ 2,764 $ 1,903 $11,718 $ 958 $ 3,325 $ 36,567
-----------------------
(a) On May 5, 2003, we completely repaid this term loan.
In addition to the foregoing contractual commitments in connection with the
acquisition of RPC, we have guaranteed the value of an aggregate of 264,900
shares of common stock underlying warrants issued to the former RPC
shareholders. If the fair market value of our common stock is less than $25.27
on September 19, 2003, then each warrant holder has the right to receive, in
exchange for the warrant, an amount equal to CHF 8.25 (approximately $6.30 at
June 20, 2003) multiplied by the total number of shares of common stock then
underlying the warrant. The value of this commitment at the acquisition date was
$1.3 million and was included in the purchase price of RPC. See Note 10 of Notes
to Consolidated Financial Statements for the year ended December 31, 2002. Our
aggregate potential liability at June 27, 2003 was approximately $1.6 million.
Payment in cash is due within 30 days of exercise of the guaranty right by the
warrant holder.
In order to preserve cash, we have been required to reduce expenditures for
capital projects, research and development, and in our corporate infrastructure,
any of which may have a material adverse effect on our future
38
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.
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly results for the
ten quarters commencing January 1, 2001 and ending June 27, 2003. The quarterly
financial data as of each period presented below have been derived from our
unaudited condensed consolidated financial statements for those periods. Results
for these interim periods are not necessarily indicative of our results for a
full year's operations. The quarterly financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Results of Operations" and our consolidated
financial statements and related notes included elsewhere in this prospectus.
In dollars (in thousands, except per share amounts):
2003 QUARTER ENDED 2002 QUARTER ENDED 2001 QUARTER ENDED
---------------------------------------------------------------------------------------------------
JUN. 27 MAR. 28 DEC. 31 SEP. 27 JUN. 28 MAR. 29 DEC. 31 SEP. 28 JUN. 29 MAR. 30
(RESTATED)(RESTATED)(RESTATED)(RESTATED)(RESTATED)(RESTATED)(RESTATED)
---------------------------------------------------------------------------------------------------
Total sales $26,871 $23,017 $31,990 $27,914 $28,543 $27,514 $36,320 $31,407 $24,948 $26,065
Gross profit.... 10,781 7,495 13,590 11,910 10,799 10,320 15,449 13,448 10,766 11,838
Total operating
expenses...... 12,534 13,256 16,281 17,572 19,298 14,898 18,192 12,792 11,730 11,103
(Loss) income
from
operations.... (1,753) (5,761) (2,691) (5,662) (8,499) (4,578) (2,743) 656 (964) 735
Provision for
(benefit
from) income
taxes......... 815 216 12,035 (4,079) (3,539) 4,492 (1,596) 130 (126) 600
Net (loss)
income........ (3,561) (6,871) (15,720) (2,212) (5,628) 8,694 (2,160) 166 (564) 201
Net (loss)
income
available to
common
shareholders.. (3,759) (6,871) (15,720) (2,212) (5,628) 8,694 (2,160) 166 (564) 201
Basic net
(loss) income
available to
common
shareholders
per share..... (0.30) (0.54) (1.24) (0.17) (0.44) 0.66 (0.17) 0.01 (0.05) 0.02
Diluted net
(loss) income
available to
common
shareholders
per share..... (0.30) (0.54) (1.24) (0.17) (0.44) 0.59 (0.17) 0.01 (0.05) 0.02
The interim financial statements for the quarterly periods ended March 29,
June 28 and September 27, 2002 have been restated from amounts previously
reported in our Quarterly Reports on Form 10-Q.
The interim financial statements for the quarterly periods ended March 30,
June 29 and September 28, 2001 have been restated from amounts previously
reported in our Quarterly Reports on Form 10-Q.
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.
39
In the first quarter of 2002, we recorded an $20.3 million gain associated
with the Vantico arbitration.
In the second quarter of 2003, we accrued dividends of $0.2 million on our
redeemable preferred stock.
We 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.
We present our quarterly results on a 13-week basis ending the last
Friday of each quarter and report our annual financial information through the
calendar year ended December 31.
40
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and foreign currency
fluctuations.
INTEREST RATE RISK. Our exposure to market rate risk for changes in
interest rates relates primarily to our cash investments and long-term debt. We
invest our excess cash in money market funds or other high quality investments.
We protect and preserve our invested funds by limiting default, market and
reinvestment risk.
Investments in floating rate interest-earning instruments carry a degree of
interest rate risk. Floating rate securities may produce less income than
expected if interest rates fall. Due in part to this factor, our future
investment income may fall short of expectations due to changes in interest
rates.
We are exposed to interest rate risk on our revolving credit facility and
term loan with U.S. Bank, which have variable interest rates. At June 27, 2003,
we had a total of $8.6 million outstanding under our revolving credit facility.
We repaid $9.6 million outstanding on our term loan on May 5, 2003. The interest
rate at June 27, 2003 for the revolving credit facility and the term loan was
7.5%. The revolving credit facility expires in 2003.
We have an industrial development bond on our Colorado facility, which has
an outstanding balance of $4.2 million. We will make annual principal payments
of $150,000, $165,000, $180,000, $200,000, $220,000, for the years ending 2003,
2004, 2005, 2006, 2007, respectively, and $3,325,000 thereafter. The bond has a
variable interest rate and the interest rate at June 27, 2003 was 1.31%. An
increase or decrease in the variable interest rate of 1.00% would increase or
decrease our annual interest expense by $42,000. We have not entered into any
hedging contracts to protect ourselves against future changes in interest rates,
which could negatively impact the amount of interest we are required to pay.
However, we do not feel that this risk is significant and we do not plan to
attempt to hedge to mitigate this risk in the foreseeable future.
The carrying amount, principal maturity and estimated fair value of
long-term debt exposure as of December 31, 2002 are as follows:
CARRYING
AMOUNT PAYMENTS LATER FAIR
2002 2003 2004 2005 2006 2007 YEARS VALUE
--------- -------- ------- --------- ---------- --------- ------- ---------
Line of credit $ 2,450 $ 2,450 $ --- $ --- $ --- $ --- $ --- $ 2,450
Interest rate 7.5%
Term loan (a) $ 10,350 $10,350 $ --- $ --- $ --- $ --- $ --- $ 10,350
Interest rate 6.42%
Industry
Development
Bond $ 4,240 $ 150 $ 165 $ 180 $ 200 $ 220 $ 3,325 $ 4,240
Interest rate 1.31%
Subordinated debt $ 10,000 $ --- $ --- $ --- $ 10,000 $ --- $ --- $ 8,560
Interest rate 7.0%
----------
(a) On May 5, 2003, we completely repaid this term loan.
FOREIGN CURRENCY RISK. International revenues accounted for approximately
51.5% of our total revenue for the period ended June 27, 2003 International
sales are made primarily from our foreign sales subsidiaries in their respective
countries and are denominated in U.S. dollars or the local currency of each
country. These subsidiaries also incur most of their expenses in the local
currency. Accordingly, all foreign subsidiaries use the local currency as their
functional currency.
Our international business is subject to risks typical of an international
business, including, but not limited to differing economic conditions, changes
in political climate, differing tax structures, other regulations and
41
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 U.S. dollars. We also are exposed to foreign exchange rate
fluctuations as the financial results of foreign subsidiaries are translated
into U.S. dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
profitability. The realized effect of foreign exchange rate fluctuations in 2002
resulted in a $0.3 million gain.
As of June 27, 2003, we had foreign operations that are sensitive to
foreign currency exchange rates, including non-functional currency denominated
receivables and payables. Foreign operations amount exposed in foreign currency
when subjected to a 10% change in the value of the functional currency versus
the non-functional currency produces an approximate $1.8 million translation
adjustment in our balance sheet as of June 27, 2003.
We use derivative instruments to manage exposure to foreign currency risk.
We manage selected exposures through financial market transactions in the form
of foreign exchange forward and put option contracts. We do not enter into
derivative contracts for speculative purposes. We do not hedge its foreign
currency exposure in a manner that would entirely eliminate the effects of
changes in foreign exchange rates on our consolidated net (loss) income. We have
no put option contracts in place on June 27, 2003.
42
BUSINESS
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 three-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
three-dimensional printing processes to fabricate physical objects using input
from CAD/CAM software, or three-dimensional scanning and sculpting devices.
Our customers use our solid imaging systems and solutions to:
o Streamline part making, prototyping and manufacturing processes
o Verify product designs
o Create functional parts
o Generate production-quality samples or final parts
o Direct manufacture end-use parts
o Create tooling used to manufacture end-use parts.
We expect our Advanced Digital Manufacturing (ADMSM) 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.
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, which we refer to as 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
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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
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 our 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
o 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, 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).
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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) three-dimensional printer, in July 2002 at the international trade
show SIGGRAPH. The InVision three-dimensional 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 three-dimensional
printer has not been released commercially into the market. Throughout 2002, we
continued to research and develop the InVision three-dimensional printer. We
have begun, and expect to complete, design validation testing, beta testing and
market research, with respect to the InVision three-dimensional printer, in
2003.
o 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:
o the resolution and accuracy of part building,
o the maximum size of objects that can be produced,
o object building speed, and
o system price.
SLA systems produce highly detailed three-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.
o 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 also are 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,
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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.
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.
o 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 (500 mm x 330 mm x 500 mm) which is limited by the weight of the
material.
In December 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 June 27, 2003, we have placed five OptoForm engineering
evaluation machines at customer locations to facilitate continued technical
development of materials, hardware and software.
Materials
o ACCURA(R) MATERIALS. We develop, manufacture, sell and distribute
proprietary materials used by the ThermoJet printer, InVision three-dimensional
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
o 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
46
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 usedby 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.
o 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
o 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
June 27, 2003, we had a staff of 128 full-time employees providing on-site
remedial and preventive maintenance services necessary to maintain our
customers' equipment in good operating condition.
o 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:
o 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.
o 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.
o 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.
o 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.
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o 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.
o 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.
o 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.
o 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.
o SOFTWARE: Buildstation 4.0.0 for the SLA 250 system incorporates
new Accura SL material styles and enhancements to Buildstation
3.8.6 software.
o SOFTWARE. Software version 3.1 for all SLS systems is the first
version released under our 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 2500PLUS customers.
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 three-dimensional 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
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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 June 27, 2003, our worldwide sales and support
staff consisted of 85 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 of Notes
to Consolidated Financial Statements for the years ended December 31, 2002, 2001
and 2000.
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., 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,
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customer service, troubleshooting and answers to frequently asked questions, or
FAQs, are available through our website, www.3dsystems.com. Customers also may
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
three-dimensional 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 United States, 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 U.S. Department of Justice.
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
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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, our founder, Interim Chief Executive Officer 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 three-dimensional printing
using two different materials from Richard Helinski. In July 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 held 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
51
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.
EMPLOYEES
At June 27, 2003, we had 392 full-time employees. In addition, at that same
date we utilized the services of thirteen independent contractors and five
consultants. 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. In April 2002, we eliminated approximately
10% of our worldwide workforce, and in August 2003, we eliminated 4% of our U.S.
workforce.
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 also are 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 U.S. 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., which we refer to in this prospectus as 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.
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. We
seek damages and injunctive relief from the defendants, who have threatened to
sue us for trade libel. To date, the defendants have not filed such a suit.
52
Following decisions by the District Court and the Federal Circuit Court of
Appeals on jurisdictional issues, Aarotech and Mr. Young were dismissed from the
suit, and an action against Aaroflex is proceeding in the District Court.
Motions for summary judgment by Aaroflex on multiple counts contained in our
complaint and on Aaroflex's counterclaims have been dismissed and fact discovery
in the case has been completed. Our motions for summary judgment for patent
infringement and validity and Aaroflex's motion for patent invalidity were heard
on May 10, 2001. In February 2002, the court denied Aaroflex's invalidity
motions. On April 24, 2002, the court denied our motions for summary judgment on
infringement, reserving the right to revisit on its own initiative the decisions
following the determination of claim construction. The court also granted in
part our motion on validity. On July 25, 2003, the court notified us that
rulings on all patents in issue would be decided prior to September 30, 2003 and
trial on any remaining unresolved issues following the rulings in this matter
was rescheduled to November 12, 2003.
DTM vs. EOS, et al. The plastic sintering patent infringement actions
against EOS began in France (Paris Court 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. In France, the Court of Appeals has set the
hearing date for March 30, 2004 to address EOS' appeal of the lower court's
ruling that the asserted patent is not infringed. In 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 Italy, the trial court has set
a hearing for October 10, 2003 to consider the assertion of infringement by the
EOS product.
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 $0.2 million, 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'
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. We filed an answer on March 11,
2003. A hearing in this matter was held on August 19, 2003. Following questions
from the court, Hitachi Zosen was ordered to produce additional evidence and
other materials and a further hearing was scheduled for October 9, 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 we license to EOS. EOS had estimated its damages to be
approximately $27.0 million for the period from the fourth quarter of 1997
through 2002. In a press release dated August 26, 2003, EOS estimated its
damages to be approximately $40.0 million, and asserted a claim of willful
infringement which
53
provides for treble damages at the discretion of the court. 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 oursubsidiary, 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 one 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. On July 3,
2003, the court in this matter heard summary judgment motions by both parties.
On August 20, 2003, the trial court entered rulings on its MARKMAN patent
claims construction of certain phrases in the claims of the patents in suit and
on the pending motions for summary judgment. The trial court granted EOS' motion
for summary judgment that certain DTM laser sintering machines infringed one
claim of one of the patents exclusively licensed by us to EOS, and denied DTM's
motion that there was no infringement of any of the patents licensed to EOS. In
connection with our counterclaim against EOS for the sale of polyamide powders
in the United States, the trial court ruled that it was unable to construe one
of the claim phrases in the patent, which ruling is a factual predicate for a
potential ruling by the trial court that the patent is invalid. On the other
pending motions for summary judgment, the court denied our motion for partial
summary judgment on license agreement interpretation, denied DTM's motion for
partial summary judgment on EOS' claim of willful infringement, denied our
motion for partial summary judgment on validity of one of the patents acquired
in the DTM acquisition and granted EOS' motion for summary adjudication
regarding DTM's affirmative defenses of laches and estoppel. Trial in this
matter for all remaining issues is scheduled for October 7, 2003. The parties
jointly have requested a status conference with the court to discuss the options
for proceeding in light of the court's rulings. The ruling of infringement by
certain of the DTM machines allows for a claim by EOS for damages for that
infringement, which claim will be decided at trial if the ruling of infringement
is not overturned on an interim appeal by the Federal Circuit. Any damages
attributable to the infringement by certain DTM machines cannot at this time be
estimated and will depend on other issues still to be determined at trial.
In light of the court's findings, we are anticipating the recognition of a
charge to operations in the third quarter ending September 26, 2003 of
approximately $1.1 million related to the write off of capitalized legal fees
and other costs. The ultimate outcome of the determination of damages could have
a material adverse impact on our operations.
3D Systems, Inc. vs. AMES. In April 2002, we filed suit for patent
infringement against Advanced Manufacturing Engineering Systems of Nevada, Iowa,
in the U.S. District Court, Western District of Texas, for patent infringement
related to AMES' purchase and use of EOS powders in the our 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 the court dismissed this
action on July 23, 2003.
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 2002 in Regional
Court, Commerce Division, Frankfurt, Germany, seeking 1.0 million 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. vs.
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 U.S. 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 us. On March
25, 2003, EOS filed its answer to this complaint, along with counterclaims
including breach of contract and antitrust violations. Following a summary
judgment hearing, the court on June 25, 2003 dismissed the anti-trust conspiracy
54
counterclaims against the University of Texas. On July 21, 2003, EOS filed an
amended antitrust counterclaim, in response to which 3D Systems filed a motion
to strike on August 20, 2003. Trial has been scheduled in June 2004.
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 $0.8 million
in liquidated damages together with reasonable attorney's fees and costs. On
August 13, 2003, we filed an answer generally denying Regent's allegations.
E. James Selzer vs. 3D Systems Corporation (Case No. PC033145, Superior
Court of the State of California, County of Los Angeles). On July 28, 2003, we
were served with a complaint by our former chief financial officer, whose
employment had been terminated on April 21, 2003. The complaint asserts breach
of alleged employment and equipment purchase contracts. In addition to
declaratory relief, Mr. Selzer seeks compensatory and contractual damages, which
he requested to be proven at trial, and for indemnification, various expenses,
together with reasonable attorney's fees and costs. We currently are evaluating
this 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. We have 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.
We are engaged in certain additional legal actions arising in the ordinary
course of business, and, on the advice of legal counsel, we believe we have
adequate legal defenses and that the ultimate outcome of these actions will not
have a material adverse effect on our consolidated financial position, results
of operations or cash flows.
55
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following persons serve as our directors:
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).......... 59 Director and Chairman of the Board
Kevin S. Moore (1) (2) (3)........... 48 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:
EXECUTIVE OFFICERS AGE PRESENT POSITION
------------------ --- ----------------
Charles W. Hull..................... 64 Interim Chief Executive Officer,
Executive Vice President, Chief
Technology Officer
Kevin McNamara...................... 47 Acting Chief Financial 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:
SIGNIFICANT EMPLOYEES AGE PRESENT POSITION
--------------------- --- ----------------
Keith Kosco......................... 51 General Counsel and Corporate Secretary
Our executive officers are appointed by and serve at the discretion of our
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. Effective
August 8, 2003, Mr. Hull has served as our Interim Chief Executive Officer.
Effective May 3, 2000, Mr. Hull has served as Executive Vice President, and
since April 1997, as our Chief Technology 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., a subsidiary of ours through which substantially all of our
business and operations is conducted. From February to June 1999, Mr. Hull acted
as a consultant to us and served as Vice
56
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 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 our Board of Directors until September 1999
when he was elected Chairman of our Board of Directors. 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.
RICHARD C. SPALDING. Mr. Spalding has been our director since 2001. Since
April 2003, Mr. Spalding has served as a Partner of Thomas Weisel Healthcare
Venture Partners, a venture capital group which Mr. Spalding co-founded. Since
January 2000, Mr. Spalding 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. ........
KEVIN MCNAMARA. Mr. McNamara has served as our Acting Chief Financial
Officer since August 15, 2003. Mr. McNamara began working with 3D Systems in
June 2003 as a financial consultant. He has served as Chief Financial Officer of
HCCA International, Inc., a healthcare management and recruitment company, since
September 2002. Mr. McNamara is a member of Voyent Partners, a private equity
firm, since August 2001. Previously, he served as the Chief Executive Officer
and a director of Private Business, Inc. from November 1999 until February 2001.
From 1996 to 1999, he was Senior Vice President and Chief Financial Officer for
Envoy Corporation, and from 1994 to 1995, he was President of the Merchant
Services Division of National Bancard Corporation. Mr. McNamara serves on the
Board of Directors of two public companies, Luminex Corporation and ProxyMed,
Inc., and several private companies. He received his undergraduate degree at
Virginia Commonwealth University and his Masters of Business Administration at
the University of Richmond, Virginia. He is a certified public accountant in
Virginia.
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
57
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.
DIRECTOR COMPENSATION
During fiscal 2002, we paid 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. In addition, non-employee directors each
received an annual automatic grant of ten-year options to purchase, at the fair
market value of the Common Stock on the date of grant, 10,000 shares of Common
Stock. For fiscal 2003, in addition to the foregoing compensation, the
Chairperson of Audit Committee will receive an annual retainer of $15,000, and
the Chairpersons of the Corporate Governance and Compensation Committees and the
members of the Audit Committee, each will receive an annual retainer of $5,000.
At the regularly scheduled Board meeting on November 18, 2002, our Board of
Directors unanimously voted to grant to Mr. Loewenbaum compensation of $180,000
per annum for performing the duties of Chairman of our Board of Directors.
58
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, information concerning all
compensation paid for services to us in all capacities for each of the three
years ended December 31 indicated below. We refer to these officers as the named
executive officers.
ANNUAL COMPENSATION LONG TERM COMPENSATION
Number of
Fiscal Year Securities All
Name and Ended Underlying Other
PRINCIPAL POSITION(1) DECEMBER 31 SALARY BONUS OPTIONS COMPENSATION
--------------------- ----------- ------ ----- ------- ----------------
Charles W. Hull (2)...... 2002 $ 275,000 --- --- $ 2,040 (3)
Interim Chief Executive 2001 $ 275,000 --- 10,000 $ 26,679 (4)
Officer, Executive Vice 2000 $ 275,000 $ 66,000 --- $ 3,518 (3)
President and Chief
Technology Officer
Brian K. Service (5)..... 2002 $ (6) --- 350,000 $ 151,434 (7)
Chief Executive 2001 $ (6) --- --- ---
Officer,
Chief Operating Officer 2000 $ (6) --- --- ---
and
President
Grant R. Flaharty (8).... 2002 $ 314,000 --- 25,000 $ 1,823 (3)
Executive Vice 2001 $ 263,077 --- 10,000 $ 9,941 (9)
President
of Global Business 2000 $ 213,462 $ 70,442 40,000 $ 36,357 (10)
Operations
E. James Selzer (11)..... 2002 $ 240,769 --- --- $ 1,705 (3)
Sr. VP, Global Finance 2001 $ 200,000 $ 40,000 10,000 $ 1,662 (3)
&
Administration and Chief 2000 $ 108,870 --- 75,000 $ 1,578 (3)
Financial Officer
Ray Saunders............. 2002 $ 173,046 --- 10,000 $ 1,839 (3)
Senior Vice President 2001 $ 149,988 $ 8,727 11,500 $ 1,753 (3)
Operations and 2000 $ 45,378 --- 30,000 $ 67 (3)
Development
------------
(1) For a description of the employment agreements between certain officers and
us, see "Employment Agreements" below.
(2) Mr. Hull was appointed Interim Chief Executive Officer effective August 8,
2003.
(3) 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.
(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 and loan forgiveness ($23,671).
(5) Mr. Service's employment with us as Chief Executive Officer and President
terminated effective August 8, 2003.
59
(6) Mr. Service was appointed our Chief Executive Officer and President on
September 16, 1999. From September 1999 to September 2002, Mr. Service was
compensated for his services by Regent Pacific Management Corporation. 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 was employed by us pursuant to an employment
agreement under which he received $87,264 for services in 2002. This
agreement has been terminated.
(7) Consists of consulting fees paid to Brian K. Service, Inc. for which Mr.
Service serves as a stockholder, officer and director.
(8) Mr. Flaharty was reassigned from his position and no longer serves as an
executive officer effective May 23, 2003.
(9) 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.
(10) Consists of the value of insurance premiums for employer paid group term
life insurance, moving-related expenses totaling $30,658, and employer
matching contributions made pursuant to our Section 401(k) plan.
(11) Mr. Selzer's employment with us terminated effective April 21, 2003.
OPTION GRANTS IN FISCAL 2002
The following table sets forth certain information regarding the grant of
stock options made during fiscal 2002 to the named executive officers.
Percent of
Total Potential
Options Realizable Value
Number of Granted To at Assumed
Securities Employees Exercise Rates of Stock
Underlying in or Base Price
Name Options Fiscal Price Expiration Appreciation for
Granted Year (1) Date Option Term (2)
------------- ----------- --------- ------------- --------------------
5% ($) 10% ($)
------- --------
Charles W. Hull...... --- --- --- --- --- ---
Brian K. Service..... 350,000 47% $5.78 10/14/07 558,918 1,235,062
Grant R. Flaharty.... 25,000 3.3% $11.98 2/5/12 188,354 477,326
E. James Selzer...... --- --- --- --- --- ---
Ray Saunders......... 10,000 1.3% $11.98 2/5/12 75,342 190,930
------------
(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.
60
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 ($7.80 per share).
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised
on Value Options at In-the-Money Options at
Exercise Realized December 31, 2002 (#) December 31, 2002 ($)
(#) ($)
Name EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Charles W. Hull....... --- --- 77,500 7,500 --- ---
Brian K. Service...... --- --- 350,000 --- 1,986,250 ---
Grant R. Flaharty..... --- --- 142,500 52,500 450,937 28,437
E. James Selzer...... --- --- 60,000 25,000 --- ---
Ray Saunders......... --- --- 19,000 32,500 --- ---
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with the following named
executive officers.
We entered into an employment agreement with Charles W. 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 our Board of Directors. 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, 3D Systems, Inc. and we
entered into a four-year consulting agreement. 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. All of the stock options granted to Mr. Hull and unexercised
as of the date of the consulting agreement continued in force during the
consulting term and are continued under his subsequent employment arrangement.
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We have no interlocking relationships involving any of our Compensation
Committee members that would be required by the SEC to be reported in this
prospectus, and no officer or full-time employee of ours serves on our
Compensation Committee. Mr. Sbona, a member of the Compensation Committee during
fiscal 2002, provided services to us as a part-time employee during fiscal 2002.
61
PRINCIPAL STOCKHOLDERS
The following table sets forth as of August 15, 2003, unless otherwise
indicated, certain information relating to the ownership of common stock by (i)
each person known by us be the beneficial owner of more than five percent of the
outstanding shares of our common stock (638,397 shares) or our Series B
Convertible Preferred Stock (131,701 shares), (ii) each of our directors, (iii)
each of the 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 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 that person's name.
NUMBER OF
SHARES OF
SERIES B
AMOUNT AND CONVERTIBLE
NATURE OF PREFERRED
NAME AND ADDRESS OF BENEFICIAL PERCENT STOCK PERCENT OF
BENEFICIAL OWNER OWNERSHIP (1) OF CLASS (1) BENEFICIALLY OWNED (1) OF CLASS (1)
------------------------------ ----------------- ----------- --------------------- -----------
Directors:
Miriam V. Gold 54,166 (2) * --- *
Charles W. Hull 578,431 (3) 4.5% 8,333 *
Jim D. Kever 89,166 (4) * --- *
G. Walter Loewenbaum II 1,305,013 (5) 10.2% 208,334 7.9%
Kevin S. Moore 1,788,254 (6) 14.0% 833,333 (7) 31.6%
Richard C. Spalding 9,298 (8) * --- *
Non-director named executive
officers:
Grant R. Flaharty (9) 192,867 (10) 1.5% --- *
Kevin McAlea, Ph.D. 40,833 (11) * 3,333 *
Ray Saunders 41,833 (12) * 2,833 *
E. James Selzer (13) 63,179 (14) * --- *
G. Peter V. White --- * --- *
5% Holders:
The Clark Estates, Inc. 1,766,605 (15) 13.8% 833,333 (7) 31.6%
One Rockefeller
Plaza, New York, New
York 10020
St. Denis J. Villere & 1,230,114 (16) 9.6% --- *
Company
210 Baronne Street,
Suite 808, New
Orleans, Louisiana
70112
Daruma Asset Management, 1,423,200 (17) 11.2% --- *
Inc.
60 East 42nd Street,
Suite 1111, New York,
New York 10165
T. Rowe Price 1,295,482 (18) 10.2% 263,482 10.0%
Associates, Inc.
100 East Pratt
Street, Baltimore,
Maryland 21202
3D Systems 2003 Grat --- * 665,000 25.2%
Lisa P. Selz Trustee
c/o Bernard Setz
62
ING Furman Selz
230 Park Ave.
New York, NY 10169
Directors and executive
officers as a group
(10 persons) 3,935,109 (19) 30.8% 1,056,166 40.1%
-------------
* 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
August 15, 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
October 14, 2003.
(3) Includes (a) 476,010 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) 80,000 shares of our common stock
reserved for issuance upon exercise of stock options which are or will
become exercisable on or prior to October 14, 2003 and (c) 8,333 shares of
our common stock issuable upon conversion of our Series B Convertible
Preferred Stock.
(4) Includes (a) 47,499 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to October 14, 2003, (b) 29,167 shares of our common stock issuable upon
conversion of convertible debentures (8,333 shares 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
Trust, 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 Willis Loewenbaum
1992 Trust for which Mr. and Mrs. Loewenbaum serve as trustees, (f) 16,594
shares held in the name of the Elizabeth Scott 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 October 14, 2003, (h) 83,333
shares of our common stock issuable upon conversion of convertible
debentures and (i) 208,334 shares of our common stock 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 of
our common stock 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) 20,643 shares of our common
stock reserved for issuance upon exercise of stock options which are or
will become exercisable on or prior to October 14, 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.
63
(7) Represents Series B Convertible Preferred Stock held by Clark Partners I,
L.P., with respect to which Mr. Moore disclaims beneficial ownership. Clark
Partners I, L.P. is a limited partnership, the general partner of which is
Ninth Floor Corporation. The Clark Estates, Inc. provides management and
administrative services to Clark Partners I, L.P. The purchase price for
the Series B Convertible Preferred Stock was provided by funds available
for investment by accounts for which The Clark Estates, Inc. provides
management and administrative services. 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.
(8) Includes 8,791 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to October 14, 2003.
(9) Mr. Flaharty was reassigned from his position and no longer serves as an
executive officer effective May 23, 2003.
(10) Includes 185,000 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to October 14, 2003.
(11) Includes (a) 37,500 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to October 14, 2003 and (b) 3,333 shares of our common stock issuable upon
conversion of our Series B Convertible Preferred Stock.
(12) Includes (a) 39,000 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to October 14, 2003 and (b) 2,833 shares of our common stock issuable upon
conversion of our Series B Convertible Preferred Stock.
(13) Mr. Selzer's employment with us terminated effective April 2003, and his
beneficial ownership of shares is subject to the terms and conditions of
his option agreements and the 1996 Stock Incentive Plan with respect to
termination of employment.
(14) 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 October 14, 2003.
(15) Includes 833,333 shares of our common stock issuable upon conversion of our
Series B Convertible Preferred Stock held by Clark Partners I, L.P. Clark
Partners I, L.P. is a limited partnership, the general partner of which is
Ninth Floor Corporation. The Clark Estates, Inc. provides management and
administrative services to Clark Partners I, L.P. The purchase price for
the Series B Convertible Preferred Stock was provided by funds available
for investment by accounts for which The Clark Estates, Inc. provides
management and administrative services.
(16) St. Denis J. Villere & Company, which we refer to as Villere in this Proxy
Statement, 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.
(17) Daruma Asset Management, Inc., a New York corporation, which we refer to as
Daruma in this Proxy Statement, 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
64
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 ownership of our securities by Daruma
is taken exclusively from Amendment No. 4 to Schedule 13G filed by Daruma
on February 18, 2003.
(18) Includes 263,482 shares issuable upon conversion of our Series B
Convertible Preferred Stock. T. Rowe Price Associates, Inc., which we refer
to as T. Rowe Price in this Proxy Statement, 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, other than ownership of our Series B
Convertible Preferred Stock, is taken exclusively from a Schedule 13G filed
by T. Rowe Price on February 5, 2003.
(19) Includes (a) 487,599 shares of our common stock reserved for issuance upon
exercise of stock options that are or will become exercisable on or prior
to October 14, 2003, (b) 120,833 shares of our common stock issuable upon
conversion of convertible debentures and (c) 1,056,166 shares of our common
stock 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 SEC.
65
SELLING STOCKHOLDERS
The shares of our common stock to which this prospectus relates are being
registered for re-offers and resales by the selling stockholders named below. We
have registered these shares to permit the selling stockholders to resell the
shares when they deem appropriate. Subject to the restrictions described in this
prospectus, the selling stockholders may resell all, a portion or none of their
shares at any time under this prospectus. In addition, subject to the
restrictions described in this prospectus, the selling stockholders identified
above may sell, transfer or otherwise dispose of all or a portion of our common
stock being offered under this prospectus in transactions exempt from the
registration requirements of the Securities Act. We do not know when or in what
amounts a selling stockholder may offer shares for sale under this prospectus.
The following table sets forth each selling stockholder, together with the
number of shares of our common stock owned by each stockholder as of August 15,
2003, unless otherwise indicated, the number of shares of our common stock being
offered by each selling stockholder under this prospectus and the number of
shares of our common stock owned by each stockholder upon completion of this
offering. Our common stock being offered under this prospectus is being offered
for the account of the selling stockholders.
NUMBER OF PERCENTAGE OF
NUMBER OF SHARES OF SHARES OF OUR
SHARES OF OUR NUMBER OF OUR COMMON COMMON
COMMON STOCK SHARES OF OUR STOCK OWNED STOCK OWNED
OWNED PRIOR TO COMMON STOCK AFTER THE AFTER THE
SELLING STOCKHOLDER THE OFFERING BEING OFFERED (1) OFFERING OFFERING
-------------------------------- ----------------- ------------------- -------------- -------------------
Edward M. Giles IRA.............. 40,000 40,000 --- *
Isles Capital.................... 5,000 5,000 --- *
John D. Hogan IRA................ 5,000 5,000 --- *
Avanti Partners III, L.P......... 52,500 43,000 9,500 *
T. Rowe Price Small-Cap
Value Fund, Inc. (2)......... 1,295,482 (3) 1,295,482 --- *
Leila Williams Garden City
Royal Trust................... 250,000 250,000 --- *
The Zemurray Foundation.......... 220,700 190,000 30,700 *
The Toler Foundation............. 17,000 17,000 --- *
William Goldring................. 93,900 80,000 13,900 *
Ian Arnof........................ 196,000 (4) 196,000 --- *
Chitimacha Tribe................. 2,500 (5) 2,500 --- *
Frierson Joint................... 12,500 (5) 12,500 --- *
Marika Geohagam.................. 2,083 (5) 2,083 --- *
Louise Glickman.................. 4,167 (5) 4,167 --- *
John Godfrey..................... 12,500 (5) 12,500 --- *
Holly Greenlee Revocable
Trust......................... 4,167 (5) 4,167 --- *
Dolly Johnsen.................... 2,083 (5) 2,083 --- *
Meg Knee......................... 6,250 (5) 6,250 --- *
LeBlanc Joint.................... 6,250 (5) 6,250 --- *
James Leonard Jt................. 12,500 (5) 12,500 --- *
Martha Mackie.................... 2,083 (5) 2,083 --- *
Martha Mackie Usuf QTIP.......... 6,250 (5) 6,250 --- *
McCloskey TIC.................... 12,500 (5) 12,500 --- *
Peggy Kaufmann................... 2,083 (5) 2,083 --- *
Catherine Moscoso................ 4,167 (5) 4,167 --- *
Villere/Parkside #2.............. 8,333 (5) 8,333 --- *
Susan Peters..................... 8,333 (5) 8,333 --- *
Ann Preaus Sep Property.......... 3,333 (5) 3,333 --- *
John Quinn....................... 5,333 (5) 3,333 2,000 *
66
Robert & Margaret Reily.......... 12,500 (5) 12,500 --- *
William Rudolf................... 2,083 (5) 2,083 --- *
Leona Stich Usuf................. 8,333 (5) 8,333 --- *
Linda Monroe..................... 2,083 (5) 2,083 --- *
Elizabeth Taylor................. 4,167 (5) 4,167 --- *
St. Denis J. Villere, 12,500 (5) 12,500 --- *
Personal......................
Claude Williams.................. 6,250 (5) 6,250 --- *
Louise S. McGehee School......... 12,500 (5) 12,500 --- *
Institute of Mental Hygiene...... 12,500 (5) 12,500 --- *
Charles Henderson................ 83,333 (5) 83,333 --- *
Goldring Fdn. #2................. 41,667 (5) 41,667 --- *
Woldenberg Inter-Vivos Trust..... 25,000 (5) 25,000 --- *
Thomas Kendall Winingder on
behalf of Dorothy
Kendall Winingder............. 1,667 (5) 1,667 --- *
Thomas Kendall Winingder on
behalf of Diana Dee
Winingder..................... 1,667 (5) 1,667 --- *
T&T Partnership (Tom
Winingder-Partner)............ 4,167 (5) 4,167 --- *
G. Walter Loewenbaum IRA......... 25,000 (5) 25,000 --- *
Christopher W. Cresci, ind....... 12,501 (6) 12,501 --- *
Elizabeth M. Cresci.............. 12,501 (6) 12,501 --- *
Kyle P. Cresci................... 12,501 (6) 12,501 --- *
Elizabeth Scott Loewenbaum
1993 Trust.................... 39,511 (5) 22,917 16,594 *
Anna Willis Loewenbaum 1993
Trust......................... 39,511 (5) 22,917 16,594 *
The Loewenbaum 1992 Trust ....... 61,998 (5) 7,500 54,498 *
Lillian Shaw Loewenbaum
Trust......................... 50,000 (5) 5,000 45,000 *
Harlan Seymour................... 8,333 (5) 8,333 --- *
Stephen Kleeman.................. 37,499 (7) 37,499 --- *
Kevin McNamara (8)............... 33,333 (9) 33,333 --- *
Bob Miller....................... 41,667 (5) 41,667 --- *
Bob Mimeles...................... 83,333 (5) 83,333 --- *
Michael A. Nicolais.............. 83,334 (10) 83,334 --- *
Esmond Phelps.................... 16,666 (11) 16,666 --- *
George Bernard Hamilton
Trust......................... 8,333 (5) 8,333 --- *
Fred Goad........................ 41,667 (5) 41,667 --- *
Frances Goad Johnson............. 20,833 (5) 20,833 --- *
Jimmy D. Kever Trust............. 8,333 (5) 8,333 --- *
Jim Kever (12)................... 89,166 (13) 20,833 76,666 *
Cardiology Consultants (Ben
Jacobs)....................... 41,667 (5) 41,667 --- *
Huger Intervivos Trust I......... 4,167 (5) 4,167 --- *
James M. Huger................... 4,167 (5) 4,167 --- *
Laurence Hirsch.................. 36,667 (5) 36,667 --- *
Scott Weber Luba Webber
67
JTTN a Trust.................. 8,333 (5) 8,333 --- *
David W. Quinn................... 8,333 (5) 8,333 --- *
Thomas Kendall Winingder,
ind........................... 833 (5) 833 --- *
Bettina Steinmann................ 112,582 (14) 112,582 --- *
Alfred Steinmann................. 33,112 (14) 33,112 --- *
Christian Bovet.................. 34,437 (14) 34,437 --- *
Paul Bernhard.................... 15,894 (14) 15,894 --- *
Manfred Hofmann.................. 52,981 (14) 52,981 --- *
Adrian Schulthess................ 15,894 (14) 15,894 --- *
Trudy M. Self.................... 5,833 (15) 5,833 --- *
G. Walter Loewenbaum II (16)..... 1,305,013 (17) 208,334 1,071,679 8.4%
3D Systems 2003 Grat, Lisa
P. Selz Trustee............... 665,000 (15) 665,000 --- *
Bear Sterns SEC Corp
Custodian for the Brian
K Service IRA................. 3,400 (15) 3,400 --- *
Brian K Service Intl.
Business Consultancy
Defined Benefit Dated 21,600 (15) 21,600 --- *
1/1/99........................
The Charles William Hull
and Charlene Antoinette
Hull 1992 Revocable
Living Trust.................. 8,333 (15) 8,333 --- *
George D. Kennedy................ 50,000 (15) 50,000 --- *
Christopher D. Villere........... 12,500 (15) 12,500 --- *
George G. Villere................ 17,000 (15) 17,000 --- *
Frances G. Villere............... 34,000 (15) 34,000 --- *
Gayle Higgins Jones.............. 4,000 (15) 4,000 --- *
Matthew Service.................. 4,000 (15) 4,000 --- *
Davenport & Company LLC FBO *
GBH Management
Retirement Plan............... 8,000 (15) 8,000 ---
Deborah C. Ziegler............... 12,000 (15) 12,000 --- *
Bear Stearns Securities
Corp., as Custodian, FBO
Jay R. Harris IRA............. 33,000 (15) 33,000 --- *
Franye Goad Johnson GST.......... 60,000 (15) 60,000 --- *
Fred & Deana Goad................ 110,000 (15) 110,000 --- *
Chadwick T. Forrest.............. 3,333 (15) 3,333 --- *
Heather Gradison................. 17,000 (15) 17,000 --- *
George D. Kennedy
Charitable Remainder 16,700 (15) 16,700 --- *
Unit Trust....................
Ray R. Saunders, Jr. and
Deborah Saunders 41,833 (19) 2,833 39,000 *
(18).........
Kevin McAlea (20)................ 40,833 (21) 3,333 37,500 *
Todd Moutafian................... 4,334 (15) 4,334 --- *
Clark Partners I, L.P............ 833,333 (22) 833,333 --- *
68
-----------------
* Assumes the sale of all shares of the selling stockholder being offered. No
estimate can be given as to the amount of shares that will be held by the
selling stockholders after completion of this offering because the selling
stockholders may offer some or all of the shares and because there are currently
no agreements, arrangements or understandings with respect to the sale of any of
the shares held by the selling stockholders, whether or not covered by this
prospectus.
(1) The selling stockholders holding shares of our Series B Convertible
Preferred Stock also may receive, in the aggregate, 2,218,119 shares of our
common stock issuable as dividends on the Series B Convertible Preferred
Stock (based on 95% of the closing price of the common stock on The Nasdaq
National Market on August 26, 2003). These selling stockholders currently
do not beneficially own the shares of our common stock issuable as
dividends.
(2) T. Rowe Price Associates, Inc., as investment adviser to T. Rowe Price
Small-Cap Value Fund, Inc., may be deemed to be the beneficial owner of
these shares with the power to vote and/or dispose of these shares. T. Rowe
Price Associates, Inc. disclaims beneficial ownership of these shares.
(3) Includes 263,482 shares of our common stock issuable upon conversion of our
Series B Convertible Preferred Stock.
(4) Includes 116,000 shares of our common stock issuable upon conversion of our
Series B Convertible Preferred Stock.
(5) Includes shares of our common stock issuable upon conversion of our 7%
convertible subordinated debentures.
(6) Consists of (a) 4,167 shares of our common stock issuable upon conversion
of our 7% convertible subordinated debentures and (b) 8,334 shares of our
common stock issuable upon conversion of our Series B Convertible Preferred
Stock.
(7) Consists of (a) 20,833 shares of our common stock issuable upon conversion
of our 7% convertible subordinated debentures and (b) 16,666 shares of our
common stock issuable upon conversion of our Series B Convertible Preferred
Stock.
(8) Kevin McNamara is our Acting Chief Financial Officer.
(9) Consists of (a) 8,333 shares of our common stock issuable upon conversation
of our 7% convertible subordinated debentures and (b) 25,000 shares of our
common stock reserved for issuance upon exercise of stock options which are
or will become exercisable on or prior to October 14, 2003.
(10) Consists of (a) 16,667 shares of our common stock issuable upon conversion
of our 7% convertible subordinated debentures and (b) 66,667 shares of our
common stock issuable upon conversion of our Series B Convertible Preferred
Stock.
(11) Consists of (a) 8,333 shares of our common stock issuable upon conversion
of our 7% convertible subordinated debentures and (b) 8,333 shares of our
common stock issuable upon conversion of our Series B Convertible Preferred
Stock.
(12) Jim D. Kever is a member of our Board of Directors.
(13) Includes (a) 47,499 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to October 14, 2003, (b) 29,167 shares of our common stock issuable upon
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.
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(14) Includes shares of our common stock issuable upon exercise of warrants.
(15) Includes shares of our common stock issuable upon conversion of our Series
B Convertible Preferred Stock.
(16) G. Walter Loewenbaum II is the Chairman of our Board of Directors. He
serves as co-trustee of the Elizabeth Scott Loewenbaum 1993 Trust, the Anna
Willis Loewenbaum 1993 Trust and The Loewenbaum 1992 Trust. Mr.
Loewenbaum's wife is the trustee of the Lillian Shaw Loewenbaum Trust. Mr.
Loewenbaum is the beneficiary of the G. Walter Loewenbaum IRA.
(17) Includes (a) 45,000 shares held in the name of Lillian Shaw Loewenbaum
Trust, 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 Willis Loewenbaum
1992 Trust for which Mr. and Mrs. Loewenbaum serve as trustees, (f) 16,594
shares held in the name of the Elizabeth Scott 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 October 14, 2003, (h) 83,333
shares of our common stock issuable upon conversion of convertible
debentures and (i) 208,334 shares of our common stock issuable upon
conversion of our Series B Convertible Preferred Stock.
(18) Ray R. Saunders is our Senior Vice President Operations and Development.
(19) Includes (a) 39,000 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to October 14, 2003 and (b) 2,833 shares of our common stock issuable upon
conversion of our Series B Convertible Preferred Stock.
(20) Kevin McAlea, Ph.D. is our Senior Vice President, Worldwide Revenue
Generation.
(21) Includes (a) 37,500 shares of our common stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or prior
to October 14, 2003 and (b) 3,333 shares of our common stock issuable upon
conversion of our Series B Convertible Preferred Stock.
(22) Consists of shares of our Series B Convertible Preferred Stock held by
Clark Partners I, L.P., with respect to which Kevin S. Moore, a member of
our Board of Directors, disclaims beneficial ownership. Clark Partners I,
L.P. is a limited partnership, the general partner of which is Ninth Floor
Corporation. The Clark Estates, Inc. provides management and administrative
services to Clark Partners I, L.P. 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.
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PLAN OF DISTRIBUTION
The common stock covered by this prospectus may be offered and sold at
various times by the selling stockholders. As used in this prospectus, "selling
stockholders" includes the selling stockholders named in the table above and
pledgees, donees, transferees or other successors-in-interest selling shares
received from a named selling stockholder as a gift, partnership distribution or
other non-sale-related transfer after the date of this prospectus. The selling
stockholders will act independently of us in making decisions with respect to
the timing, manner and size of each sale. The selling stockholders are under no
obligation to sell all or any of the shares. The common stock may be sold by or
for the account of the selling stockholders in transactions on The Nasdaq
National Market, the over-the-counter market or otherwise. The sales may be made
at fixed prices, at market prices prevailing at the time or at privately
negotiated prices, by means of one or more of the following methods:
o a block trade in which the broker-dealer so engaged will attempt to
sell the common stock as an agent, but may position and resell a
portion of the block as a principal to facilitate the transaction;
o purchases by brokers, dealers or underwriters as principal and resale
by those purchasers for their own accounts under this prospectus;
o ordinary brokerage transactions in which the broker solicits
purchasers;
o in connection with the loan or pledge of the common stock registered
hereunder to a broker-dealer, and the sale of the common stock so
loaned or the sale of the shares so pledged upon a default;
o in connection with the writing of non-traded and exchanged-traded call
options, in hedge transactions and in settlement of other transactions
in standardized or over-the-counter option;
o in privately negotiated transactions; or
o in a combination of any of the above methods.
In effecting sales, brokers or dealers engaged by the selling stockholder
may arrange for other brokers or dealers to participate in the resales. Brokers,
dealers or agents may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders or from the purchasers, or from
both. This compensation may exceed customary commissions.
The aggregate proceeds to the selling stockholders from the sale of our
common stock offered by them under this prospectus will be the purchase price of
the shares less discounts, concessions and commissions, if any. Any commissions,
discounts, concessions or other fees, if any, are payable to brokers or dealers
in connection with any sale of the common stock will be borne by the selling
stockholders selling those shares.
In order to comply with the securities laws of certain states, if
applicable, the shares must be sold in those jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states, the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and the selling stockholder complies with the
exemption.
The selling stockholders and any participating brokers or dealers may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with the sale of any shares covered by this prospectus. In such
event, any commission, discount or concession these "underwriters" receive may
be deemed to be underwriting compensation. In addition, because selling
stockholders may be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act, the selling stockholders will be subject to the
prospectus delivery requirements of the Securities Act.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. We will bear all
costs, expenses and fees in connection with the registration of the
71
shares (other than fees and expenses, if any, of legal counsel or other advisors
to the selling stockholders). We will not receive any of the proceeds of the
sale of our common stock by the selling stockholders.
72
RELATED PARTY TRANSACTIONS
At June 27, 2003, we had a remaining note receivable totaling $45,232,
including accrued interest, from Charles W. Hull, our director and executive
officer, pursuant to the 1996 Stock Incentive Plan. The loan was used to
purchase shares of our common stock at the fair market value on the date of
purchase. The original amount of the note was $60,000. The note bears interest
at a rate of 6% per annum and matures in 2003. Pursuant to the terms of the
note, as a result of meeting certain profitability targets for fiscal 2000,
$20,000 of the principal amount of the note was forgiven together with $3,671 of
interest in 2000. The note receivable is shown on the balance sheet as a
reduction of stockholders' equity. Pursuant to the terms of the note and related
transaction documents, in July 2003, we retired Mr. Hull's note in exchange for
6,031 shares of our common stock.
For 2001, in connection with his services as our employee, our Board of
Directors granted to Gary J. Sbona, our 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.
On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible
Preferred Stock, at a price of $6.00 per share, for aggregate consideration of
$15.8 million. The preferred stock accrues dividends at 8% per share and is
convertible at any time into approximately 2,634,016 shares of common stock. The
stock is redeemable at our option after the third anniversary date, We must
redeem any shares of preferred stock outstanding on the tenth anniversary date.
The redemption price is $6.00 per share plus accrued and unpaid dividends.
Messrs. Loewenbaum, Service and Hull, the Chairman of our Board of Directors,
then Chief Executive Officer and Chief Technology Officer, respectively,
purchased an aggregate of $1.5 million of the Series B Convertible Preferred
Stock. Additionally, Clark Partners I, L.P., a New York limited partnership,
purchased $5.0 million of the Series B Convertible Preferred Stock. Kevin Moore,
a member of our Board of Directors, is the president of the general partner of
Clark Partners I, L.P. In connection with the offering, Houlihan Lokey Howard &
Zukin rendered its opinion that the terms of the offering were fair to us from a
financial point of view. A special committee of our Board of Directors, composed
entirely of disinterested independent directors, approved the offer and sale of
the Series B Convertible Preferred Stock and recommended the transaction to our
Board of Directors. Our Board of Directors also approved the transaction, with
interested Board members not participating in the vote.
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.
From October 1999 until November 2002, G. Walter Loewenbaum II was our
employee, with a salary of $180,000 per annum. He resigned from this employment
in November 2002.
Brian K. Service was retained as Chief Executive Officer until August 2003.
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. This agreement has been terminated. Mr. Service was paid
$17,809 on a bi-
73
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., which we refer to in this prospectus as BKSI, a corporation in
which Brian K. Service, our then Chief Executive Officer, is a stockholder,
officer and director. Pursuant to this agreement, we would pay to BKSI an amount
up to $295,000 for an 11-month period for the provision of the services of
qualified consultants to us. Under this agreement, we paid $51,000 through
December 31, 2002. This agreement has been terminated.
On August 8, 2003, Brian K. Service resigned from his position as our Chief
Executive Officer and as a member of our Board of Directors. Mr. Service will
receive aggregate payments of approximately $300,000 payable through January
2004. Mr. Service will continue as our employee for a 24-month term to assist
with various clients and transactions, for which he will be paid $188,000.
Effective August 8, 2003, Charles W. Hull, our co-founder, Chief Technical
Officer and a director, was named Interim Chief Executive Officer.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 25,000,000 shares of common stock,
par value $0.001 per share, and 5,000,000 shares of preferred stock, par value
$0.001 per share, the rights and preferences of which may be established from
time to time by our Board of Directors. As of June 27, 2003, there were
12,734,301 shares of common stock outstanding that were held of record by
approximately 437 stockholders, 2,634,016 shares of Series B Convertible
Preferred Stock outstanding, outstanding options to purchase 2,690,875 shares of
common stock, 833,333 shares underlying 7% convertible subordinated debentures
and 264,900 shares underlying warrants. The following description of our capital
stock does not purport to be complete and is subject to and qualified by our
Certificate of Incorporation, as amended, and Bylaws, which are included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Delaware law.
COMMON STOCK
Our common stock is traded on The Nasdaq National Market under the symbol
"TDSC." Holders of our common stock are entitled to one vote for each share on
all matters voted upon by our stockholders, including the election of directors
and do not have cumulative voting rights. Subject to the rights of holders of
any then outstanding shares of our preferred stock, our common stockholders are
entitled to receive ratably any dividends out of assets legally available
therefore as our board of directors may from time to time determine. For a
description of our dividend policy, please refer to the information in this
prospectus under the heading "Dividend Policy." Holders of our common stock are
entitled to share ratably in our net assets upon our dissolution or liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of our preferred stock then outstanding. Holders of our common stock have
no preemptive rights to purchase shares of our stock. The shares of our common
stock are not subject to any redemption provisions and are not convertible into
any other shares of our capital stock. All outstanding shares of our common
stock are fully paid and nonassessable. The rights, preferences and privileges
of holders of our common stock will be subject to those of the holders of any
shares of our preferred stock we may issue in the future.
PREFERRED STOCK
As of June 27, 2003, we have:
o 1,000,000 shares of Series A Preferred Stock, authorized but unissued;
and
o 2,634,016 shares of Series B Convertible Preferred Stock issued and
outstanding.
Our Board of Directors has reserved our Series A Preferred Stock for
issuance pursuant to the terms of our Shareholders Rights Plan.
Our Series B Convertible Preferred Stock is immediately convertible into
shares of our common stock on a one for one basis. 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 issuance price per share per
annum, which may be increased to 10% under certain circumstances. Dividends are
payable semi-annually, on the sixth month and the twelfth month anniversary of
the date of issuance. The dividends are cumulative to the extent not declared
and paid by our Board of Directors. 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. The stock is redeemable at our option after the third
anniversary date. We must redeem any shares of preferred stock outstanding on
the tenth anniversary date. The redemption price is $6.00 per share plus accrued
and unpaid dividends. The shares of common stock underlying the Series B
Convertible Preferred Stock are included in this prospectus.
In addition, our Board of Directors may, from time to time, authorize the
issuance of one or more additional classes or series of preferred stock without
stockholder approval. Subject to the provisions of our Certificate of
Incorporation, as amended, and limitations prescribed by law, our Board of
Directors is authorized to adopt
75
resolutions to issue shares, establish the number of shares, change the number
of shares constituting any series and provide or change the voting powers,
designations, preferences and relative rights, qualifications, limitations or
restrictions on shares of our preferred stock, including dividend rights, terms
of redemption, conversion rights and liquidation preferences, in each case
without any action or vote by our stockholders. We have no current intention to
issue any shares of preferred stock.
One of the effects of undesignated preferred stock may be to enable our
Board of Directors to discourage an attempt to obtain control of our company by
means of a tender offer, proxy contest, merger or otherwise. The issuance of
preferred stock may adversely affect the rights of our common stockholders by,
among other things:
o restricting dividends on the common stock;
o diluting the voting power of the common stock;
o impairing the liquidation rights of the common stock; or
o delaying or preventing a change in control without further action by
the stockholders.
DEBENTURES
We sold $10.0 million aggregate principal amount of 7% convertible
subordinated debentures. These 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 shares of common stock underlying the debentures are included in
this prospectus.
WARRANTS
At June 27, 2003, there were warrants outstanding to purchase an aggregate
of 264,900 shares of our common stock at an exercise price of $15.27. All of the
warrants currently are exercisable and expire on September 19, 2003. The shares
of common stock underlying these warrants are included in this prospectus.
REGISTRATION RIGHTS
We have not granted registration rights with respect to any shares of
common stock, other than the shares included in this prospectus.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Our Certificate of Incorporation, as amended, limits our and our
stockholders' ability to recover monetary damages against a director for breach
of fiduciary duty as a director, including breaches resulting from grossly
negligent behavior. However, our directors will be personally liable to us and
our stockholders for monetary damages if they acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper benefit from their actions as directors. In addition, our
amended Certificate of Incorporation provides that we will indemnify our
directors and officers to the fullest extent permitted by Delaware law.
Our Bylaws provide that we have the power to indemnify our directors,
officers, employees and other agents to the fullest extent not prohibited by
Section 145 of the Delaware General Corporation Law.
We have entered into indemnification agreements with certain of our
directors and officers. These agreements require us to indemnify these directors
and officers for certain expenses, including attorneys' fees, judgments, fines
and settlement amounts incurred by any such person in any action or proceeding,
including any action by or in our right, arising out of the person's services as
our director or officer of ours or any other company
76
or enterprise to which the person provides services at our request to the
fullest extent permitted by law against personal liability for actions taken in
the good faith performance of their duties to us.
In addition, we maintain director and officer liability insurance which,
subject to certain exceptions and limitations, insures directors and officers
for any alleged breach of duty, neglect, error, misstatement, misleading
statement, omission or act in their respective capacities as directors and
officer of ours.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation law which
regulates corporate acquisitions. This law provides that specified persons who,
together with affiliates and associates, own, or within three years did own, 15%
or more of the outstanding voting stock of a corporation may not engage in
business combinations with the corporation for a period of three years after the
date on which the person became an interested stockholder. The law defines the
term "business combination" to include mergers, asset sales and other
transactions in which the interested stockholder receives or could receive a
financial benefit on other than a pro rata basis with other stockholders. This
provision has an anti-takeover effect with respect to transactions not approved
in advance by our Board of Directors, including discouraging takeover attempts
that might result in a premium over the market price for the shares of our
market price. With approval of our stockholders, we could amend our certificate
of incorporation in the future to avoid the restrictions imposed by this
anti-takeover law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation.
77
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Akin Gump Strauss Hauer & Feld LLP, Los Angeles,
California.
EXPERTS
Our consolidated financial statements as of December 31, 2002 and 2001, and
for each of the three years in the period ended December 31, 2002 and the
related financial statement schedules included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein (which reports express an unqualified opinion and
include explanatory paragraphs relating to (i) a going concern uncertainty and
(ii) a restatement of our 2001 and 2000 financial statements), and have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
As discussed in our Current Report on Form 8-K filed on April 23, 2003,
Deloitte informed us on April 16, 2003, that it did not intend to stand for
reelection as our principal independent accountant. On July 16, 2003, Deloitte
advised us that the client-auditor relationship between us and Deloitte had
ceased.
The reports of Deloitte on our financial statements for the fiscal years
ended December 31, 2002 and 2001 have not included an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles, except for the 2002 report which contained
an explanatory paragraph relating to a going concern uncertainty.
During the fiscal years ended December 31, 2002 and 2001 and the period
from January 1, 2003 to July 16, 2003: (a) there were no disagreements with
Deloitte on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Deloitte, would have caused Deloitte to make
reference to the subject matter of the disagreements in connection with its
report, and (b) there were no "reportable events" as the term is defined in Item
304(a)(1)(v) of Regulation S-K, except as follows:
Deloitte informed us that material weaknesses in our internal control
existed. Specifically, Deloitte advised us that:
o Our accounting and finance staff are inadequate to meet the needs of a
complex, multinational SEC registrant. We need to strengthen our
capability to implement existing generally accepted accounting
principles as well as understand and implement new accounting
standards. In addition, we need to strengthen our capabilities in
performing routine accounting processes involved in closing our books
such as account reconciliations and analyses.
o We need to strengthen our controls and processes related to revenue
recognition. During 2002, 2001 and 2000, revenue was recognized for
transactions that did not meet the requirements for revenue
recognition under our policies or generally accepted accounting
principles.
We furnished Deloitte with a copy of the foregoing disclosures and
requested Deloitte to furnish us with a letter addressed to the SEC stating
whether it agrees with the above statements and, if not, stating the respects in
which it does not agree. A copy of the letter, dated July 22, 2003 from Deloitte
to the SEC has been filed as an exhibit to our Current Report on Form 8-K filed
July 23, 2003.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to our common stock. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedule to the registration statement. For further information
with respect to us and our common
78
stock, we refer you to the registration statement and the exhibits and schedules
filed as a part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or document
that has been filed as an exhibit is qualified in all respects by the filed
exhibit.
You may read and copy the registration statement, the related exhibits and
the other material we file with the SEC without charge at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. You also can
request copies of those documents, upon payment of a duplication fee, by writing
to the SEC. Please call the SEC at (800) SEC-0330 for further information on the
operation of the public reference rooms. The SEC also maintains an internet site
that contains reports, proxy and information statements and other information
regarding issuers that file with the SEC. The site's address is www.sec.gov.
We also will provide to you a copy of these filings at no cost. You may
request copies of these filings by writing or telephoning us as follows: 26801
Avenue Hall, Valence, California 91355, Attention, General Counsel, or
661-295-5600. In addition, you may access these filings at our website. Our
website's address is www.3dsystems.com. The foregoing website references are
inactive textual references only.
You should rely only on the information contained in this prospectus or any
prospectus supplement or that we have specifically referred you to. We have not
authorized anyone else to provide you with different information. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of those documents or
that any document incorporated by reference is accurate as of any date other
than its filing date. You should not consider this prospectus to be an offer or
solicitation relating to the securities in any jurisdiction in which such an
offer or solicitation relating to the securities is not authorized. Furthermore,
you should not consider this prospectus to be an offer or solicitation relating
to the securities if the person making the offer or solicitation is not
qualified to do so, or if it is unlawful for you to receive such an offer or
solicitation.
79
3D SYSTEMS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2002,
2001 AND 2000
Independent Auditors' Report.......................................................... F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001 (restated)............... F-2
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001
(restated) and 2000
(restated)............................................................................ F-3
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002,
2001 (restated) and 2000 (restated)............................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001
(restated) and 2000
(restated)............................................................................ F-5
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December
31, 2002, 2001 (restated) and 2000 (restated)..................................... F-7
Notes to Consolidated Financial Statements for the Years Ended December 31, 2002, 2001 F-8
and 2000..........................................................................
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE FOR THE YEARS ENDED DECEMBER 31, 2002, 2001
AND 2000
Independent Auditors' Report.......................................................... F-34
Schedule II-- Valuation and Qualifying Accounts for the Years Ended December 31, 2002, F-35
2001 and 2000.....................................................................
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE
27, 2003 AND JUNE 28, 2002
Condensed Consolidated Balance Sheets as of June 27, 2003 (unaudited) and December 31,
2002.............................................................................. F-36
Condensed Consolidated Statements of Operations for the Six Months Ended June 27, 2003
and June 28, 2002 (as restated) (unaudited)....................................... F-37
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 27, 2003
(unaudited) and June 28, 2002 (as restated) (unaudited)........................... F-38
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Six Months
Ended June 27, 2003 and June 28, 2002 (as restated) (unaudited)................... F-40
Notes to Condensed Consolidated Financial Statements for the Six Months Ended June 27,
2003 and June 28, 2002 (unaudited)................................................ F-41
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
F-1
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.
F-2
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.
F-3
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 13,132 13 93,173 (244) (6,553) (6,420) (1,540) 78,429
December 31,
2001 (As
restated, see
note 24)
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.
F-4
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 selling, general and administrative 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.
F-5
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.
F-6
3D SYSTEMS CORPORATION
Consolidated Statements of Comprehensive (Loss) Income
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
AS RESTATED AS RESTATED
(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.
F-7
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 U.S. Bank term loan balance of $9.6 million (Note 14 -
Borrowings).
Management intends to obtain debt financing to replace the U.S. 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. 148, 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
measurement of financial instruments with characteristics of both
liabilities and equity. SFAS No. 150
F-8
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.
F-9
(d) Allowance for Doubtful Accounts
The Company's estimate for the allowance for doubtful accounts related
to trade receivables is based on two methods. The amounts calculated
from each of these methods are combined to determine the total amount
reserved. First, the Company evaluates specific accounts where it has
information that the customer may have an inability to meet its
financial obligations (for example, bankruptcy). In these cases, the
Company uses its judgment, based on the available facts and
circumstances, and records a specific reserve for that customer
against amounts due to reduce the receivable to the amount that is
expected to be collected. These specific reserves are reevaluated and
adjusted as additional information is received that impacts the amount
reserved. Second, a reserve is established for all customers based on
a range of percentages applied to aging categories. These percentages
are based on historical collection and write-off experience. If
circumstances change (for example, the Company experiences higher than
expected defaults or an unexpected material adverse change in a major
customer's ability to meet its financial obligation to the Company),
estimates of the recoverability of amounts due to the Company could be
reduced by a material amount.
(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
F-10
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
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 U.S. 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 U.S. 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 U.S. 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
F-11
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.
(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.
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.
F-12
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:
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
F-13
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
============= =============
F-14
(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
2002 2001 LIFE (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.
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.
F-15
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
----------- ---------- ---------- ---------
18,711 6,906 18,541 44,158
Balance as of December 31, 2001
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.
F-16
(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
F-17
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.
(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
================= =================
(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):
F-18
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
============= ==============
F-19
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.
On March 27, 2003, Wells Fargo sent a letter to the Company stating that it
was in default under two covenants of the reimbursement agreement relating
to this letter of credit relating to minimum tangible net worth and fixed
charge coverage ratios, and provided the Company until April 26, 2003, to
cure 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 default
from the Bank, provided that the Company meets certain terms and
conditions. The Company must remain in compliance with all other provisions
of the reimbursement agreement for this letter of credit. 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 U.S. 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. U.S. 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 U.S. Bank, the waiver
will be extended to the earlier of December 31, 2003, or the expiration
date of the commitment letter. The Company has complied with all aspects of
Waiver Agreement Number Two including the receipt of equity investments of
$9.6 million and the $9.6 million principal repayment of the term loan.
F-20
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.
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.
F-21
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
The following table summarizes information about stock options outstanding
at December 31, 2002:
RANGE: OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING PRICE
-------------- ------------- ------------- ------------- ------------
(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.
F-22
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 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.
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%
F-23
(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 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
F-24
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 $295,000 for an 11-month period for the provision of
the services of qualified consultants to the Company. The Company paid
$51,000 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
============= ============ -----------
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
============= ============ ===========
F-25
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 (35.0)% (34.0)% 34.0%
statutory rate
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
============ ============
As of December 31, 2002, the Company has net operating loss carry-forwards
for U.S. 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.
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 carry-forwards.
As of December 31, 2002, the Company has research and development tax
credit carry-forwards for U.S. 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.
The Company has alternative minimum tax credit carry-forwards of $475,000
for U.S. federal income tax purposes, which do not expire.
F-26
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, 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 3,144 664 703
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
============= ============= ============
F-27
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:
YEAR ENDING DECEMBER 31:
-------------------------------------------------
(IN THOUSANDS)
2003 $ 2,949
2004 2,599
2005 1,723
2006 1,518
2007 738
Later years --
-------------
$ 9,527
=============
F-28
(b) United States v. 3D Systems Corporation and DTM Corporation. The U.S.
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 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' favor that the rulings of the
F-29
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' motion for a fourth amended complaint to add counts related to
EOS' 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, in the U.S. District Court, Western District of
Texas, 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 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.
We filed an answer on March 11, 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 U.S. 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 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.
F-30
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.
(22) Selected Quarterly Financial Data (unaudited)
Summarized quarterly financial data follows:
QUARTER ENDED
------------------------------------------------------------------------
SEPTEMBER 27, 2002 JUNE 28, 2002 MARCH 29, 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) (0.17) (0.14) (0.44) (0.46) 0.66 0.65
Diluted (loss) income per
share (1.24) (0.17) (0.14) (0.44) (0.46) 0.59 0.58
QUARTER ENDED
----------------------------------------------------------------------------------
DECEMBER 31, 2001 SEPTEMBER 28, 2001 JUNE 29, 2001 MARCH 30, 2001
----------------- ------------------ --------------- --------------
AS AS AS
AS PREVIOUSLY AS PREVIOUSLY PREVIOUSLY AS PREVIOUSLY
RESTATED REPORTED RESTATED REPORTED AS RESTATED REPORTED RESTATED REPORTED
--------- --------- --------- -------- ----------- ---------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
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 1,103 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) 0.01 0.02 (0.05) (0.03) 0.02 0.11
Diluted (loss)
income per share (0.17) (0.20) 0.01 0.02 (0.05) (0.03) 0.02 0.11
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.
F-31
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 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 the Company for breach of contract in the Superior Court of the
State of California, County of San Francisco. Regent provided management
services to the Company from September 1999 through September 2002. Regent
alleges that the Company breached non-solicitation provisions in the
Company's 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.
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:
F-32
AS AS
AS RESTATED PREVIOUSLY AS RESTATED PREVIOUSLY
DECEMBER REPORTED DECEMBER REPORTED
31, 2001 DECEMBER 31, 2000 DECEMBER
31, 2001 31, 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 42,807 43,761 32,710 32,710
administrative
Research and development 11,010 10,710 7,814 7,814
(Loss) income from (2,316 ) (1,096 ) 12,064 12,338
operations
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 (0.19 ) (0.11 ) 0.66 0.69
per share
Diluted net (loss) income (0.19 ) (0.11 ) 0.61 0.63
per share
F-33
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 and 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. Our audits also included the consolidated financial statement
schedule of the Company. 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
F-34
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
============= ============ ============ ============ ============
F-35
3D SYSTEMS CORPORATION
Condensed Consolidated Balance Sheets
As of June 27, 2003 and December 31, 2002
(in thousands)
(unaudited)
JUNE 27, 2003 DECEMBER 31, 2002
--------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $1,269 in
2003 $ 8,985 $ 2,279
Accounts receivable, less allowances for doubtful accounts
of $2,660 and $3,068 18,054 27,420
Current portion of lease receivables 322 322
Inventories, net of reserves of $2,318 and $1,876 12,897 12,564
Prepaid expenses and other current assets 2,222 3,687
--------------- -------------
Total current assets 42,480 46,272
Property and equipment, net 13,493 15,339
Licenses and patent costs, net 16,979 14,960
Lease receivables, less current portion and net of allowance
of $510 and $414 363 553
Acquired technology, net 6,860 7,647
Goodwill 44,650 44,456
Other assets, net 2,420 3,006
--------------- -------------
$ 127,245 $ 132,233
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 8,550 $ 2,450
Accounts payable 6,454 10,830
Accrued liabilities 14,577 15,529
Current portion of long-term debt 155 10,500
Customer deposits 648 801
Deferred revenues 13,430 14,770
--------------- -------------
Total current liabilities 43,814 54,880
Other liabilities 3,373 3,397
Long-term debt, less current portion 4,010 4,090
Subordinated debt 10,000 10,000
--------------- -------------
Total liabilities 61,197 72,367
--------------- -------------
Redeemable preferred stock, 8% convertible, authorized 5,000 shares,
issued and outstanding 2,634 15,158 ---
Stockholders' equity:
Common stock, authorized 25,000 shares, issued and outstanding
12,734 and issued and outstanding 12,725 13 13
Capital in excess of par value 85,100 84,931
Notes receivable from officers for purchase of stock (59) (59)
Preferred stock dividend (198) ---
Accumulated deficit (31,852) (21,419)
Accumulated other comprehensive loss (2,114) (3,600)
--------------- -------------
Total stockholders' equity 50,890 59,866
--------------- -------------
$ 127,245 $ 132,233
=============== =============
See accompanying notes to condensed consolidated financial statements.
F-36
3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Operations
For the Six Months Ended June 27, 2003 and June 28, 2002
(in thousands, except per share amounts)
(unaudited)
SIX MONTHS ENDED
--------------------------------------
JUNE 28, 2002
AS RESTATED
JUNE 27, 2003 (SEE NOTE 14)
------------------ ----------------
Sales:
Products $ 32,746 $ 38,371
Services
17,141 17,686
------------------ ----------------
Total sales 49,887 56,057
------------------ ----------------
Cost of sales:
Products 18,044 21,741
Services 13,569 13,197
------------------ ----------------
Total cost of sales 31,613 34,938
------------------ ----------------
Gross profit
18,274 21,119
------------------ ----------------
Operating expenses:
Selling, general and administrative 20,375 23,944
Research and development
Severance and other restructuring costs 5,163 8,635
251 1,617
------------------ ----------------
Total operating expenses 25,789 34,196
------------------ ----------------
Loss from operations (7,515) (13,077)
Interest and other expense, net 1,887 1,368
Gain on arbitration settlement --- 18,464
------------------ ----------------
(Loss) income before provision for income taxes (9,402) 4,019
Provision for (benefit from) income taxes 1,031 953
------------------ ----------------
Net (loss) income (10,433) 3,066
------------------ ----------------
Preferred stock dividend 198 ---
------------------ ----------------
Net (loss) income available to common shareholders $ (10,631) $ 3,066
================== ================
Shares used to calculate basic net (loss) income
available to common shareholders per share 12,730 12,986
================== ================
Basic net (loss) income available to common
shareholders per share $ (0.84) $ 0.24
================== ================
Shares used to calculate diluted net (loss) income to
common shareholders per share 12,730 14,445
================== ================
Diluted net (loss) income available to common
shareholders per share $ (0.84) $ 0.21
================== ================
See accompanying notes to condensed consolidated financial statements.
F-37
3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 27, 2003 and June 28, 2002
(in thousands)
(unaudited)
SIX MONTHS ENDED
------------------------------
JUNE 27, 2003 JUNE 28, 2002
AS RESTATED
(SEE NOTE 14)
------------------------------
Cash flows from operating activities:
Net (loss) income $ (10,433) $ 3,066
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Deferred income taxes --- 893
Gain on arbitration settlement (including $1,846 included in selling,
general and administrative for legal reimbursement) --- (20,310)
Depreciation and amortization 4,590 4,776
Adjustment to allowance accounts 259 828
Adjustment to inventory reserve 568 ---
Loss on disposition of property and equipment 316 1,171
Stock compensation expense 130 ---
Changes in operating accounts, excluding acquisition:
Accounts receivable 10,329 7,039
Lease receivables 190 706
Inventories (521) 795
Prepaid expenses and other current assets 1,554 7
Other assets 435 460
Accounts payable (4,509) (250)
Accrued liabilities (1,443) (3,728)
Customer deposits (153) (569)
Deferred revenues (1,660) (126)
Other liabilities (187) 142
------------------ -----------
Net cash used in operating activities (535) (5,100)
Cash flows from investing activities:
Investment in OptoForm SARL --- (1,200)
Investment in RPC --- (2,045)
Purchase of property and equipment (397) (2,079)
Additions to licenses and patents (3,231) (1,536)
Software development costs --- (308)
------------------ -----------
Net cash used in investing activities (3,628) (7,168)
Cash flows from financing activities:
Exercise of stock options and purchase plan 40 529
Proceeds from sale of redeemable preferred stock 15,800 12,492
Issuance cost for redeemable preferred stock (642) ---
Repayment of officers and employee notes --- 145
Net borrowings under line of credit 6,100 ---
Borrowings --- 30,823
Repayment of long-term debt (10,425) (32,042)
------------------ -----------
Net cash provided by financing activities 10,873 11,947
Effect of exchange rate changes on cash (4) 1,069
------------------ -----------
Net increase in cash and cash equivalents 6,706 748
Cash and cash equivalents at the beginning of the period 2,279 5,948
------------------ -----------
Cash and cash equivalents at the end of the period $ 8,985 $ 6,696
================== ===========
See accompanying notes to condensed consolidated financial statements.
F-38
Supplemental schedule of non-cash investing and financing activities:
During the six months ended June 27, 2003 and June 28, 2002, the Company
transferred $1.0 million and $3.2 million of property and equipment from
inventories to fixed assets, respectively.
In conjunction with the $22 million arbitration settlement with Vantico,
which was settled through the return of shares to the Company, the Company
allocated $1.7 million to a put option which is included as an addition to
stockholders' equity in the first quarter of 2002.
During the second quarter of 2003, the Company accrued dividends on the
Series B Convertible Preferred Stock of $0.2 million.
F-39
3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Comprehensive (Loss) Income
For the Six Months Ended June 27, 2003 and June 28, 2002
(in thousands)
(unaudited)
SIX MONTHS ENDED
---------------------------
JUNE 27, JUNE 28, 2002
AS RESTATED
2003 (SEE NOTE 14)
---------------------------
Net (loss) income $ (10,433) $ 3,066
Foreign currency translation 1,486 2,871
--------------- -----------
Comprehensive (loss) income $ (8,947) $ 5,937
=============== ===========
See accompanying notes to condensed consolidated financial statements.
F-40
3D SYSTEMS CORPORATION
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 27, 2003 and June 28, 2002
(unaudited)
(1) Going Concern
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company
incurred operating losses totaling $7.5 million and $21.4 million for the six
months ended June 27, 2003 and the year ended December 31, 2002, respectively.
In addition, the Company has a working capital deficit of $1.3 million and an
accumulated deficit of $31.9 million at June 27, 2003. These factors among
others raise substantial doubt about the Company's ability to continue as a
going concern.
Management's plans include raising additional working capital through debt
or equity financing. In May 2003, the Company sold approximately 2.6 million
shares of its Series B Convertible Preferred Stock for aggregate consideration
of $15.8 million (Note 7 - Preferred Stock). Subsequently, on May 5, 2003 the
Company repaid $9.6 million of the U.S. Bank term loan balance (Note 10 -
Borrowings).
Management intends to obtain debt financing to replace the U.S. Bank
financing, and in July 2003, management accepted a proposal from Congress
Financial, a subsidiary of Wachovia, to provide a secured revolving credit
facility of up to $20.0 million, subject to its completion of due diligence to
its satisfaction and other conditions. Congress has not yet completed its
diligence process; however, based on a preliminary analysis of the collateral,
it has indicated that the loan, if made, would be for an amount significantly
less than $20.0 million. Management is pursuing alternative financing sources,
including a possible restructuring of the Company's industrial development bonds
to make collateral currently serving to secure repayment of the bonds available
for additional borrowings. Additionally, management intends to pursue a program
to increase margins and continue cost saving programs. However, there is no
assurance that the Company will succeed in accomplishing any or all of these
initiatives.
The accompanying condensed consolidated financial statements do not include
any adjustments relating to the recoverability or classification of asset
carrying amounts or the amounts and classification of liabilities that may
result should the Company be unable to continue as a going concern.
(2) Basis of Presentation
The accompanying condensed consolidated financial statements of the Company
are prepared in accordance with Regulation S-X and, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) which are necessary for the fair presentation of results for the
interim periods. The Company reports its interim financial information on a
13-week basis ending the last Friday of each quarter, and reports its annual
financial information through the calendar year ended December 31. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002. The
results of the six months ended June 27, 2003 are not necessarily indicative of
the results to be expected for the full year.
(3) Significant Accounting Policies and Estimates
The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to allowance for doubtful accounts, income taxes,
inventories, goodwill, intangible and other long-lived assets and contingencies.
The Company bases its estimates on historical experience and on various other
assumptions it believes reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates.
The Company believes the following critical accounting policies are most
affected by management's judgments and the estimates used in preparation of the
condensed consolidated financial statements.
F-41
CASH AND CASH EQUIVALENTS.
Cash and cash equivalents include all cash on hand and cash in various
banking institutions. The Company also has $1.2 million of cash in Wells Fargo
Bank under restriction to pay off a portion of the outstanding industrial
development bonds relating to its Colorado facility (Note 10 - Borrowings).
Additionally, the Company has approximately $0.1 million of cash on deposit
under restriction, as required by an arrangement with a certain utility
supplier.
ALLOWANCE FOR DOUBTFUL ACCOUNTS.
The Company's estimate for the allowance for doubtful accounts related to
trade receivables is based on two methods. The amounts calculated from each of
these methods are combined to determine the total amount reserved. First, the
Company evaluates specific accounts where it has information that the customer
may have an inability to meet its financial obligations (for example,
bankruptcy). In these cases, the Company uses its judgment, based on available
facts and circumstances, and records a specific reserve for that customer
against amounts due to reduce the receivable to the amount that is expected to
be collected. These specific reserves are reevaluated and adjusted as additional
information is received that impacts the amount reserved. Second, a reserve is
established for all customers based on a range of percentages applied to aging
categories. These percentages are based on historical collection and write-off
experience. If circumstances change (for example, the Company experiences higher
than expected defaults or an unexpected material adverse change in a major
customer's ability to meet its financial obligation to the Company), estimates
of the recoverability of amounts due to the Company could be reduced by a
material amount.
INCOME TAXES.
The provisions of SFAS No. 109, "Accounting for Income Taxes," require a
valuation allowance when, based upon currently available information and other
factors, it is more likely than not that all or a portion of the deferred tax
asset will not be realized. SFAS No. 109 provides that an important factor in
determining whether a deferred tax asset will be realized is whether there has
been sufficient income in recent years and whether sufficient income is expected
in future years in order to utilize the deferred tax asset. Forming a conclusion
that a valuation allowance is not needed is difficult when there is negative
evidence, such as cumulative losses in recent years. The existence of cumulative
losses in recent years is an item of negative evidence that is particularly
difficult to overcome. At June 27, 2003, the unadjusted net book value before
valuation allowance of the Company's deferred tax assets totaled approximately
$23.4 million, which principally was comprised of net operating loss
carry-forwards and other credits. During the six months ended June 27, 2003 and
during the Company's 2002 fourth quarter-end, the Company recorded a valuation
allowance of approximately $4.8 million and $12.9 million, respectively, against
its net deferred tax assets, which was additional to the approximate $5.7
million allowance previously recorded. The Company intends to maintain a
valuation allowance until sufficient evidence exists to support its reversal.
Also, until an appropriate level of profitability is reached, the Company does
not expect to recognize any domestic tax benefits in future periods.
The Company believes its determination to record a valuation allowance to
reduce its deferred tax assets is a critical accounting estimate because it is
based on an estimate of future taxable income in the United States, which is
susceptible to change and dependent upon events that are remote in time and may
or may not occur, and because the impact of recording a valuation allowance may
be material to the assets reported on the Company's balance sheet. The
determination of the Company's income tax provision is complex due to operations
in numerous tax jurisdictions outside the United States, which are subject to
certain risks, which ordinarily would not be expected in the United States. Tax
regimes in certain jurisdictions are subject to significant changes, which may
be applied on a retroactive basis. If this were to occur, the Company's tax
expense could be materially different than the amounts reported. Furthermore, as
explained in the preceding paragraph, in determining the valuation allowance
related to deferred tax assets, the Company adopts the liability method as
required by SFAS No. 109, "Accounting for Income Taxes." This method requires
that we establish valuation allowance if, based on the weight of available
evidence, in the Company's judgment it is more likely than not that the deferred
tax assets may not be realized.
INVENTORY.
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method. Reserves for slow moving and
obsolete inventories are provided based on historical experience and current
product demand. The Company evaluates the adequacy of these reserves quarterly.
There were no inventories consigned to a sales agent at June 27, 2003, and
inventories consigned to a sales agent at December 31, 2002 were $0.1 million.
The Company's determination relating to the allowance for inventory obsolescence
is subject to change because it is based on management's current estimates of
required reserves and potential adjustments.
F-42
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.
LICENSES AND PATENT COSTS.
Licenses and patent costs are being amortized on a straight-line basis over
their estimated useful lives, which are approximately eight to seventeen-years,
or on a units-of-production basis, depending on the nature of the license or
patent.
GOODWILL, INTANGIBLE AND OTHER LONG-LIVED ASSETS.
The Company has applied Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" in its allocation of the purchase
prices of DTM Corporation (DTM) and RPC Ltd. (RPC). The annual impairment
testing required by SFAS No. 142, "Goodwill and Other Intangible Assets,"
requires the Company to use its judgment and could require the Company to
write-down the carrying value of its goodwill and other intangible assets in
future periods. SFAS No. 142 requires companies to allocate their goodwill to
identifiable reporting units, which are then tested for impairment using a
two-step process detailed in the statement. The first step requires comparing
the fair value of each reporting unit with its carrying amount, including
goodwill. If that fair value exceeds the carrying amount, the second step of the
process is not necessary and there are no impairment issues. If that fair value
does not exceed that carrying amount, companies must perform the second step
that requires an allocation of the fair value of the reporting unit to all
assets and liabilities of that unit as if the reporting unit had been acquired
in a purchase business combination and the fair value of the reporting unit was
the purchase price. The goodwill resulting from that purchase price allocation
is then compared to its carrying amount with any excess recorded as an
impairment charge.
Upon implementation of SFAS No. 142 in January 2002 and again in the fourth
quarter of 2002, the Company concluded that the fair value of the Company's
reporting units exceeded their carrying value and accordingly, as of that date,
there were no goodwill impairment issues. The Company is required to perform a
valuation of its reporting unit annually, or upon significant changes in the
Company's business environment.
The Company evaluates long-lived assets other than goodwill for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. If the estimated future cash flows
(undiscounted and without interest charges) from the use of an asset are less
than the carrying value, a write-down would be recorded to reduce the related
asset to its estimated fair value.
LEASE RECEIVABLES.
In 2001, the Company sold lease receivables totaling $3.3 million 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 June 27,2003, the
Company has fully reserved for the maximum amount of payments under the
guarantee of approximately $383,000.
CONTINGENCIES.
The Company accounts for contingencies in accordance with SFAS No. 5,
"Accounting for Contingencies," SFAS No. 5 requires that the Company record an
estimated loss from a loss contingency when information available prior to
issuance of the Company's financial statements indicates that it is probable
that an asset has been impaired or a liability has been incurred at the date of
the financial statements and the amount of the loss can be reasonably estimated.
Accounting for contingencies such as legal and income tax matters requires the
Company to use its judgment. At this time, the Company's contingencies are not
estimable and have not been recorded; however, management believes the ultimate
outcome of these actions will not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
REVENUE RECOGNITION.
Revenues from the sale of systems and related products are recognized upon
shipment, provided that both title and risk of loss have passed to the customer
and collection is reasonably assured. Some sales transactions are bundled and
include equipment, software license, warranty, training and installation. The
Company allocates and records revenue in these transactions based on vendor
specific objective evidence that has been accumulated through historic
operations. The process of allocating the revenue involves some management
judgments. Revenues from services are recognized at the time of performance. We
provide end users with maintenance under a warranty agreement for up to one year
and defer a portion of the revenues at the time of sale based on the objective
evidence for the of these services. After the initial warranty period, we offer
these customers optional maintenance contracts; revenue related to these
contracts is deferred and recognized ratably
F-43
over the period of the contract. Our warranty costs were $2.0 million and $2.5
million, for the six months ended June 27, 2003 and June 28, 2002, respectively.
The Company's systems are sold with software products that are integral to the
operation of the systems. These software products are not sold separately.
Certain of the Company's sales were made through a sales agent to customers
where substantial uncertainty exists with respect to collection of the sales
price. The substantial uncertainty is generally a result of the absence of a
history of doing business with the customer and uncertain political environment
in the country in which the customer does business. For these sales, the Company
records revenues based on the cost recovery method, which requires that the
sales proceeds received are first applied to the carrying amount of the asset
sold until the carrying amount has been recovered. Thereafter, all proceeds are
recognized as gross profit.
Credit is extended based on an evaluation of each customer's financial
condition. To reduce credit risk in connection with systems sales, the Company
may, depending upon the circumstances, require significant deposits prior to
shipment and may retain a security interest in the system until fully paid. The
Company often requires international customers to furnish letters of credit.
STOCK-BASED COMPENSATION.
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board, APB, No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. The Company has adopted the
disclosure-only provisions of FAS No. 123 "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense relating to employee stock
options is determined based on the excess of the market price of the Company's
stock over the exercise price on the date of grant, the intrinsic value method,
versus the fair value method as provided under FAS No. 123. Accordingly, no
stock-based employee compensation cost is reflected in net (loss) income, as all
options granted under the plan had an exercise price at least equal to the
market value of the underlying common stock on the date of grant. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date for the six-month periods ended June 27, 2003
and June 28, 2002, consistent with the provisions of FAS No. 123, the Company's
net (loss) income and net (loss) income per share would have changed. The
following table represents the effect on net (loss) income and net (loss) income
per share if the Company had applied the fair value based method and recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition Disclosure," to stock-based
employee compensation.
SIX MONTHS ENDED
----------------------------
JUNE 27, JUNE 28,
2003 2002
------------ ------------
Net (loss) income available to
common shareholders, as reported $ (10,631) $ 3,066
Add: Stock-based employee
compensation expense included in reported
net earnings, net of related tax benefits --- ---
Deduct: Stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of related tax effects 1,108 1,804
------------ ------------
Pro forma net (loss) income
available to common shareholders $ (11,739) $ 1,262
============ ============
Basic net (loss) earnings per common share:
As reported $ (0.84) $ 0.24
============ ============
Pro forma $ (0.92) $ 0.10
============ ============
Diluted net (loss) earnings available to common
shareholders per share:
As reported $ (0.84) $ 0.21
============ ============
Pro forma $ (0.92) $ 0.08
============ ============
F-44
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes option
pricing model was developed for use in estimating the fair value of short-lived
exchange traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions, including the option's expected life and the price
volatility of the underlying stock. Because the Company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of employee
stock options. The fair value of options granted for the six months ended June
27, 2003 and June 28, 2002 was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions:
JUNE 27, 2003 JUNE 28, 2002
-------------- ---------------
Risk free interest rate 2.42% 4.94%
Expected life 4 years 4 years
Expected volatility 83% 83%
Because FAS No. 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in the future years.
RECENT ACCOUNTING PRONOUNCEMENTS.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." This
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS 146
does not have a material impact on the Company's results of operations or
financial condition.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation it has undertaken in issuing the guarantee. FIN 45 also requires
guarantors to disclose certain information for guarantees, beginning December
31, 2002. These financial statements contain the required disclosures.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. The Company does not have any variable interest entities
that must be consolidated.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards on the classification and measurement of financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
will become effective for financial instruments entered into or modified after
May 31, 2003. The Company does not have any financial instruments to be
accounted for under this pronouncement.
In May 2003, the Emerging Issues Task Force of the FASB ("EITF"), issued
EITF Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables" (Issue
00-21). Issue 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities
and how to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting. Issue 00-21 is effective for revenue
arrangements entered into in fiscal periods after June 15, 2003. The adoption of
Issue 00-21 does not have a material effect on the Company's results of
operations or financial condition.
(4) Inventories (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
------------- -------------------
Raw materials $ 2,197 $ 2,617
Work in progress 401 196
Finished goods 10,299 9,751
------------- -------------------
$ 12,897 $ 12,564
============= ===================
F-45
(5) Property and Equipment, net (in thousands):
USEFUL LIFE
JUNE 27, 2003 DECEMBER 31, 2002 (IN YEARS)
----------------- ------------------ -----------------
Land $ 435 $ 435 ---
Building 4,202 4,202 30
Machinery and equipment 26,681 26,984 3-5
Office furniture and equipment 3,711 3,597 5
Leasehold improvements 4,205 4,137 Life of lease
Rental equipment 1,207 1,189 5
Construction in progress 391 206 N/A
----------------- ------------------
40,832 40,750
Less accumulated depreciation (27,339) (25,411)
----------------- ------------------
$ 13,493 $ 15,339
================= ==================
Depreciation expense for the six-month periods ended June 27, 2003 and June
28, 2002 was $2.2 million and $2.8 million, respectively.
(6) Intangible Assets and Goodwill:
(a) Licenses and Patent Costs
Licenses and patent costs are summarized as follows (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
---------------- ------------------
Licenses, at cost $ 2,333 $ 2,333
Patent costs 26,246 22,946
---------------- ------------------
28,579 25,279
Less: Accumulated
amortization (11,600) (10,319)
---------------- ------------------
$ 16,979 $ 14,960
================ ==================
For the six months ended June 27, 2003 and June 28, 2002, the Company
amortized $1.2 million and $1.0 million in license and patent costs,
respectively. The Company incurred $3.2 million and $1.5 million in costs for
the six months ended June 27, 2003 and June 28, 2002, respectively to acquire,
defend, develop and extend patents in the United States, Japan, Europe and
certain other countries.
(b) Acquired Technology
Acquired technology is summarized as follows (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
---------------- ------------------
Acquired technology $ 10,111 $ 10,029
Less: Accumulated
amortization (3,251) (2,382)
---------------- ------------------
$ 6,860 $ 7,647
================ ==================
For the six months ended June 27, 2003 and June 28, 2002, the Company
amortized $0.8 million in acquired technology for each period.
(c) Other Intangible Assets
During the six months ended June 27, 2003 and June 28, 2002, the Company
had amortization expense on other intangible assets of $0.3 million and $0.2
million, respectively.
F-46
(d) Goodwill
The changes in the carrying amount of goodwill for the six months ended
June 27, 2003 are as follows (in thousands):
Balance as of December 31, 2002 $ 44,456
Effect of foreign currency exchange rates 194
---------------
Balance at June 27, 2003 $ 44,650
===============
The Company recorded no goodwill amortization in 2003.
(7) Redeemable Preferred Stock
On May 5, 2003, the Company sold 2,634,016 shares of redeemable Series B
Convertible Preferred Stock for an aggregate consideration of $15.8 million. The
Company incurred issuance costs of approximately $0.6 million in connection with
this transaction. The preferred stock accrues dividends at 8% per share and is
convertible at any time into 2,634,016 shares of common stock. The preferred
stock is redeemable at the Company's option after the third anniversary date.
Redemption is mandatory on the tenth anniversary date, at $6.00 per share plus
accrued dividends. The Company accrued $0.2 million for dividends payable for
the period from the issuance date through June 27, 2003.
(8) Computation of Earnings Per Share
Basic net (loss) income available to common shareholders per share is
computed by dividing net (loss) income available to common shareholders by the
weighted average number of shares of common stock outstanding during the period.
Diluted net (loss) income available to common shareholders per share is computed
by dividing net (loss) income available to common shareholders by the weighted
average number of shares of common stock outstanding plus the number of
additional common shares that would have been outstanding if all potentially
dilutive common shares had been issued. Common shares related to stock options
and stock warrants are excluded from the computation when their effect is
anti-dilutive.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings (loss) available per common share computations (in
thousands):
SIX MONTHS ENDED
----------------------------
JUNE 27, JUNE 28,
2003 2002
------------- -------------
Numerator:
Net (loss) income available to common shareholders -- numerator for
basic and diluted net (loss) income
available per common share $ (10,631) $ 3,066
============= =============
Denominator:
Denominator for basic net
(loss) income available to common shareholders per share
-- weighted average shares 12,730 12,986
Effect of dilutive securities:
Stock options and warrants --- 1,459
------------- -------------
Denominator for diluted net
(loss) income available to
common shareholders per share $ 12,730 $ 14,445
============= =============
Potential common shares related to convertible debt, stock options and
stock warrants were excluded from the calculation of diluted EPS because their
effects were antidilutive. The weighted average for common shares excluded from
the computation were approximately 3,760,000 and 1,837,000 for the six months
ended June 27, 2003, and June 28, 2002, respectively.
(9) Segment Information
The Company develops, manufactures and markets worldwide solid imaging
systems designed to reduce the time it takes to produce three-dimensional
objects. Segments are reported by geographic sales regions.
F-47
The Company's reportable segments include the Company's administrative,
sales, service, manufacturing and customer support operations in the United
States and sales and service offices in the European Community (France, Germany,
the United Kingdom, Italy and Switzerland) and in Asia (Japan, Hong Kong and
Singapore).
The Company evaluates performance based on several factors, of which the
primary financial measure is operating income. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in Note 3.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables (in thousands):
SIX MONTHS ENDED
-------------------------------
JUNE 27, 2003 JUNE 28, 2002
---------------- -------------
Net sales:
USA $ 38,625 $ 40,146
Europe 13,629 25,008
Asia 6,867 7,084
-------------- -------------
Subtotal 59,121 72,238
Intersegment elimination (9,234) (16,181)
-------------- -------------
Total $ 49,887 $ 56,057
============== =============
SIX MONTHS ENDED
-------------------------------
JUNE 27, 2003 JUNE 28, 2002
---------------- -------------
Intersegment eliminations:
USA $ 4,038 $ 8,301
Europe 5,196 7,880
Asia --- ---
-------------- -------------
Total $ 9,234 $ 16,181
============== =============
All intersegment sales are recorded at amounts consistent with prices
charged to distributors, which are above cost.
SIX MONTHS ENDED
-------------------------------
JUNE 27, 2003 JUNE 28, 2002
---------------- -------------
(Loss) income from operations:
USA $ (12,034) $ (9,197)
Europe 1,353 (5,286)
Asia 2,496 2,809
-------------- -------------
Subtotal (8,185) (11,674)
Intersegment elimination 670 (1,403)
-------------- -------------
Total $ (7,515) $ (13,077)
============== =============
JUNE 27, 2003 DECEMBER 31, 2002
-------------- -----------------
Assets:
USA $ 298,526 $ 273,492
Europe 55,035 59,067
Asia 11,462 13,825
-------------- -----------------
Subtotal 365,023 346,384
-------------- -----------------
Intersegment elimination (237,778) (214,151)
-------------- -----------------
Total $ 127,245 $ 132,233
============== =================
F-48
(10) Borrowings
The total outstanding borrowings are as follows (in thousands):
JUNE 27, 2003 DECEMBER 31, 2002
-------------- -------------------
Line of credit $ 8,550 $ 2,450
============== ===================
Long-term debt current portion:
Industrial development bond $ 155 $ 150
Term loan --- 10,350
-------------- -------------------
Total long-term debt current portion $ 155 $ 10,500
-------------- -------------------
Long-term debt, less current portion -
Industrial development bond $ 4,010 $ 4,090
-------------- -------------------
Total long-term debt, less current portion $ 4,010 $ 4,090
============== ===================
Subordinated debt $ 10,000 $ 10,000
============== ===================
On August 20, 1996, the Company completed a $4.9 million variable rate
industrial development bond financing of its Colorado facility. Interest on the
bonds is payable monthly (the interest rate at June 27, 2003 was 1.31%).
Principal payments are payable in semi-annual installments through August 2016.
The bonds are collateralized by an irrevocable letter of credit issued by Wells
Fargo Bank, N.A. that is further collateralized by a standby letter of credit
issued by U.S. Bank in the amount of $1.2 million. In order to further secure
the reimbursement agreement, we executed a deed of trust, security agreement and
assignment of rents, an assignment of rents and leases, and a related security
agreement encumbering the Grand Junction facility and certain personal property
and fixtures located there. In addition, the Grand Junction facility is
encumbered by a second deed of trust in favor of Mesa County Economic
Development Council, Inc. securing $0.8 million in allowances granted to us
pursuant to an Agreement dated October 4, 1995. At June 27, 2003, a total of
$4.2 million was outstanding under the bond. The terms of the letter of credit
require the Company to maintain specific levels of minimum tangible net worth
and fixed charge coverage ratios.
On March 27, 2003, Wells Fargo sent a letter to the Company stating that it
was in default under two covenants of the reimbursement agreement relating to
this letter of credit relating to minimum tangible net worth and fixed charge
coverage ratios, and provided the Company until April 26, 2003, to cure the
default.
On May 2, 2003, Wells Fargo drew down a letter of credit in the amount of
$1.2 million which was held as partial security under the reimbursement
agreement relating to the letter of credit underlying the bonds and placed the
cash in a restricted account. The Company obtained a waiver for the default from
the Bank, provided that the Company meets certain terms and conditions. The
Company must remain in compliance with all other provisions of the reimbursement
agreement for this letter of credit. If a replacement letter of credit cannot be
obtained on or before December 31, 2003, the Company has agreed to retire $1.2
million of the bonds using the restricted cash. In July 2003, management
accepted a proposal from Congress Financial, a subsidiary of Wachovia, to
provide a secured revolving credit facility of up to $20.0 million, subject to
its completion of due diligence to its satisfaction and other conditions.
Congress has not yet completed its diligence process; however, based on a
preliminary analysis of the collateral, it has indicated that the loan, if made,
would be for an amount significantly less than $20.0 million. Management is
pursuing alternative financing sources, including a possible restructuring of
the Company's industrial development bonds to make collateral currently serving
to secure repayment of the bonds available for additional borrowings.
On August 17, 2001, the Company entered into a loan agreement with U.S.
Bank totaling $41.5 million, in order to finance the acquisition of DTM. The
financing arrangement consisted of a $26.5 million three-year revolving credit
facility and $15 million 66-month commercial term loan. At June 27, 2003, a
total of $8.6 million was outstanding under the revolving credit facility. The
Company repaid $9.6 million that was outstanding under the term loan on May 5,
2003. The interest rate at June 27, 2003 for the revolving credit facility and
term loan was 7.5%. The interest rate is computed as either: (1) the prime rate
plus a margin ranging from 0.25% to 4.0%, or (2) the 90-day adjusted LIBOR plus
a margin ranging from 2.0% to 5.75%. Pursuant to the terms of the agreement,
U.S. Bank has received a first priority security interest in our accounts
receivable, inventories, equipment and general intangible assets.
F-49
On May 1, 2003, the Company entered into "Waiver Agreement Number Two" with
U.S. Bank whereby U.S. Bank waived all financial covenant violations at December
31, 2002 and March 31, 2003. The events of default caused by the Company's
failure to timely submit audited financial statements and failure to make the
March 31, 2003 principal payment of $5.0 million were also waived. The agreement
requires the Company to obtain additional equity investments of at least $9.6
million; to pay off the balance on the term loan of $9.6 million by May 5, 2003;
to increase the applicable interest rate to Prime plus 5.25%; and to pay a $0.2
million waiver fee and all related costs of drafting the waiver. U.S. Bank also
agreed to waive the Company's compliance with each financial covenant in the
loan agreement through September 30, 2003. Provided the Company obtains a
commitment letter from a qualified lending institution by September 30, 2003, to
refinance all of the outstanding obligations with U.S. Bank, the waiver will be
extended to the earlier of December 31, 2003, or the expiration date of the
commitment letter. The Company has complied with all aspects of Waiver Agreement
Number Two.
(11) Severance and Other Restructuring Costs
On July 24, 2002, the Company substantially completed a reduction in
workforce, which eliminated 109 positions out of its total workforce of 523 or
approximately 20% of the total workforce. In addition, the Company closed its
existing office in Austin, Texas, which it acquired as part of its acquisition
of DTM, as well as its sales office in Farmington Hills, Michigan. This was the
second reduction in workforce completed in 2002. On April 9, 2002, the Company
eliminated approximately 10% of its total workforce. All costs incurred in
connection with these restructuring activities are included as severance and
other restructuring costs in the accompanying condensed consolidated statements
of operations.
A summary of the severance and other restructuring costs accrual consist of
the following (in thousands):
DECEMBER 31, 2002 UTILIZED JUNE 27, 2003
----------------- ------------- --------------
Severance costs (one-time benefits) $ 245 $ (209) $ 36
Contract termination costs 552 (312) 240
Other associated costs 66 (60) 6
----------------- ------------- --------------
Total severance and other
restructuring costs $ 863 $ (581) $ 282
================= ============= ==============
These amounts are included in accrued liabilities and are expected to be paid by
October 2003. There have been no adjustments to the liability except for
payments of amounts due under the restructuring plan.
(12) Contingencies
3D Systems, Inc. vs. 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 the Company's patents. In August 2000, two additional patents
were added to the complaint. The Company seeks damages and injunctive relief
from the defendants, who have threatened to sue the Company for trade libel. To
date, the defendants have not filed such a suit.
Following decisions by the District Court and the Federal Circuit Court of
Appeals on jurisdictional issues, Aarotech and Mr. Young were dismissed from the
suit, and an action against Aaroflex is proceeding in the District Court.
Motions for summary judgment by Aaroflex on multiple counts contained in the
Company's complaint and on Aaroflex's counterclaims have been dismissed and fact
discovery in the case has been completed. The Company's motions for summary
judgment for patent infringement and validity and Aaroflex's motion for patent
invalidity were heard on May 10, 2001. In February 2002, the court denied
Aaroflex's invalidity motions. On April 24, 2002, the court denied the Company's
motions for summary judgment on infringement, reserving the right to revisit on
its own initiative the decisions following the determination of claim
construction. The court also granted in part the Company's motion on validity.
On July 25, 2003, the court notified the Company that rulings on all patents in
issue would be decided prior to September 30, 2003 and trial on any remaining
unresolved issues following the rulings in this matter was rescheduled to
November 12, 2003.
DTM vs. EOS, et al. The plastic sintering patent infringement actions
against EOS began in France (Paris Court 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
F-50
invalidated. The other patent successfully withstood the appeal process and the
infringement hearings were re-started. In October 2001, a German district court
ruled the patent was not infringed, and this decision is being appealed. In
November 2001, the Company received a decision of a French court that the French
patent was valid and infringed by the EOS product sold at the time of the filing
of the action and an injunction was granted against future sales of the product.
EOS filed an appeal of that decision in June 2002. In France, the Court of
Appeals has set the hearing date for March 30, 2004 to address EOS' appeal of
the lower court's ruling that the asserted patent is not infringed. In 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 been
recommenced and a decision is expected based on the evidence that has been
submitted. In Italy, the trial court has set a hearing for October 10, 2003 to
consider the assertion of infringement by the EOS product.
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 $0.2 million, 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'
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.
The Company 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. The Company filed an answer on March
11, 2003. A hearing in this matter was held on August 19, 2003. Following
questions from the court, Hitachi Zosen was ordered to produce additional
evidence and other materials and a further hearing was scheduled for October 9,
2003.
3D Systems, Inc. vs. AMES. In April 2002, the Company filed suit for patent
infringement against Advanced Manufacturing Engineering Systems of Nevada, Iowa,
in the U.S. District Court, Western District of Texas, 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. The Company has been informed that Ames is no longer in business, and the
court dismissed this action on July 23, 2003.
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 2002 in
Regional Court, Commerce Division, Frankfurt, Germany, seeking 1.0 million Euros
for the alleged breach of a non-competition agreement entered into in 1997. The
Company 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. vs.
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 U.S. 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 the Company. On
March 25, 2003, EOS filed its answer to this complaint, along with counterclaims
including breach of contract and antitrust violations. Following a summary
judgment hearing, the court on June 25, 2003 dismissed the anti-trust conspiracy
counterclaims against the University of Texas. On July 21, 2003, EOS filed an
amended antitrust counterclaim, in response to which 3D Systems filed a motion
to strike on August 20, 2003. Trial has been scheduled in June 2004.
Regent Pacific Management Corporation vs. 3D Systems Corporation. On June
11, 2003, Regent Pacific Management Corporation filed a complaint against the
Company for breach of contract in the Superior Court of the State of California,
County of San Francisco. Regent provided management services to the Company from
September 1999 through September 2002. Regent alleges that the Company breached
non-solicitation provisions in its contract with Regent Pacific by retaining the
services of two Regent contractors following the termination of the contract.
Regent seeks $0.8 million in
F-51
liquidated damages together with reasonable attorney's fees and costs. On August
13, 2003, the Company filed an answer generally denying Regent's allegations.
SEC Inquiry. The Company received an inquiry from the SEC relating to its
revenue recognition practices. The Audit Committee has completed its own inquiry
into the matter and shared its findings with the SEC. The Company has not been
notified that the SEC has initiated a formal investigation.
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 the
Company is 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 its consolidated financial
position, results of operations or cash flows.
(13) Subsequent Events
LEGAL PROCEEDINGS
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 the Company licenses to EOS. EOS had estimated its damages to
be approximately $27.0 million for the period from the fourth quarter of 1997
through 2002. In a press release dated August 26, 2003, EOS estimated its
damages to be approximately $40.0 million, and asserted a claim of willful
infringement which provides for treble damages at the discretion of the court.
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 its subsidiary, 3D Systems,
Inc. on August 31, 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' motion for a fourth amended complaint to add
counts related to EOS' 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 one
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. On July 3, 2003, the court in this
matter heard summary judgment motions by both parties.
On August 20, 2003, the trial court entered rulings on its MARKMAN patent
claims construction of certain phrases in the claims of the patents in suit and
on the pending motions for summary judgment. The trial court granted EOS' motion
for summary judgment that certain DTM laser sintering machines infringed one
claim of one of the patents exclusively licensed by the Company to EOS, and
denied DTM's motion that there was no infringement of any of the patents
licensed to EOS. In connection with the Company's counterclaim against EOS for
the sale of polyamide powders in the United States, the trial court ruled that
it was unable to construe one of the claim phrases in the patent, which ruling
is a factual predicate for a potential ruling by the trial court that the patent
is invalid. On the other pending motions for summary judgment, the court denied
the Company's motion for partial summary judgment on license agreement
interpretation, denied DTM's motion for partial summary judgment on EOS' claim
of willful infringement, denied the Company's motion for partial summary
judgment on validity of one of the patents acquired in the DTM acquisition and
granted EOS' motion for summary adjudication regarding DTM's affirmative
defenses of laches and estoppel. Trial in this matter for all remaining issues
is scheduled for October 7, 2003. The parties jointly have requested a status
conference with the court to discuss the options for proceeding in light of the
court's rulings. The ruling of infringement by certain of the DTM machines
allows for a claim by EOS for damages for that infringement, which claim will be
decided at trial if the ruling of infringement is not overturned on an interim
appeal by the Federal Circuit. Any damages attributable to the infringement by
certain DTM machines cannot at this time be predicted and will depend on other
issues still to be determined at trial.
In light of the court's findings, the Company is anticipating the
recognition of a charge to operations in the third quarter ending September 26,
2003 of approximately $1.1 million related to the write off of capitalized legal
fees and other costs. The ultimate outcome of the determination of damages could
have a material adverse impact on the Company's operations.
F-52
E. James Selzer vs. 3D Systems Corporation (Case No. PC033145, Superior
Court of the State of California, County of Los Angeles). On July 28, 2003, the
Company was served with a complaint by its former chief financial officer, whose
employment had been terminated on April 21, 2003. The complaint asserts breach
of alleged employment and equipment purchase contracts. In addition to
declaratory relief, Mr. Selzer seeks compensatory and contractual damages, which
he requested to be proven at trial, and for indemnification, various expenses,
together with reasonable attorney's fees and costs. The Company currently is
evaluating this complaint.
OTHER
The Company has agreed to maintain an effective registration statement with
respect to the resale of certain shares of its common stock that it sold in
private placement transactions. At the date hereof, the Company is not in
compliance with these obligations. In one transaction, the Company is obligated
to pay liquidated damages in an aggregate amount of approximately $100,000 per
month commencing July 15, 2003 and continuing until an effective registration
statement is available for use by the shareholders.
At June 27, 2003, the Company had a remaining note receivable totaling
$45,232, including accrued interest, from Mr. Hull, a director and executive
officer of the Company, pursuant to the 1996 Stock Incentive Plan. The loan was
used to purchase shares of the Company's common stock at the fair market value
on the date of purchase. The original amount of the note was $60,000. The note
bore interest at a rate of 6% per annum and matured in 2003. Pursuant to the
terms of the note, as a result of meeting certain profitability targets for
fiscal 2000, $20,000 of the principal amount of the note was forgiven together
with $3,671 of interest in 2000. The note receivable is shown on the balance
sheet as a reduction of stockholders' equity. Pursuant to the terms of the note
and related transaction documents, in July 2003, the Company retired Mr. Hull's
note in exchange for 6,031 shares of common stock.
On August 4, 2003, the Company completed a reduction in its current
workforce by terminating 16 positions within its worldwide organization. The
estimated severance cost of this reduction is approximately $0.3 million.
On August 8, 2003, Brian K. Service resigned from his position as the
Company's Chief Executive Officer and as a member of the Company's Board of
Directors. Mr. Service will receive aggregate payments of approximately $300,000
pursuant to the terms of his employment agreement and a consulting agreement
with Brian K. Service, Inc., an affiliate of Mr. Service, payable through
January 2004. Mr. Service will continue as an employee of the Company for a
24-month term to assist with various clients and transactions, for which he will
be paid $188,000.
Effective August 8, 2003, Charles W. Hull, the Company's co-founder, Chief
Technical Officer and a director, was named Interim Chief Executive Officer.
(14) Restatement
Subsequent to the issuance of its June 28, 2002 consolidated quarterly
financial statements, the Company's management determined that certain sales
transactions recorded in the six months ended June 28, 2002 did not meet all of
the criteria required for revenue recognition under United States Generally
Accepted Accounting Principles. Additionally, certain sales transactions, which
previously had been recorded in prior periods, were restated and recognized in
the six months ended June 28, 2002. The restated transactions affect the
Company's previously recorded amounts for accounts receivable, inventory,
deferred revenue, sales, cost of sales and others as noted below. The
consolidated financial statements as of and for the six months ended June 28,
2002 have been restated to correct the accounting for these transactions. A
summary of the significant effects of the restatement is as follows:
F-53
SIX MONTHS ENDED
-------------------------
AS
PREVIOUSLY
REPORTED
AS RESTATED JUNE 28,
JUNE 28,2002 2002
------------ -----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS
Sales $ 56,057 $ 55,978
Cost of Sales 34,938 34,965
Gross profit 21,119 21,013
Research & development
expenses 8,635 8,645
Total operating expenses 34,196 34,205
Loss from operations (13,077) (13,192)
Income tax expense (benefit) 953 1,367
Net (loss) income 3,066 2,536
Basic net income per share 0.24 0.20
Diluted net income per share $ 0.21 $ 0.18
F-54
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information contained in this document is current
only as of its date.
7,767,734 SHARES
3D SYSTEMS CORPORATION
COMMON STOCK
------------
PROSPECTUS
------------
____________, 2003
Through and including _________, all dealers that effect transactions in
these securities, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the fees and expenses incurred by us in
connection with the issuance and distribution of the securities being
registered. All the amounts shown are estimates except the SEC registration fee.
SEC registration fee................................................. $ 4,714
Accounting fees and expenses......................................... 145,000
Legal fees and expenses.............................................. 125,000
Transfer agent and registrar fees and expenses....................... 200
Miscellaneous expenses............................................... 5,086
Total........................................................ $279,800
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act.
As permitted by the Delaware General Corporation Law, our Certificate of
Incorporation, as amended, includes a provision that eliminates the personal
liability of our directors for monetary damages for breach of fiduciary duty as
a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation law regarding
unlawful dividends and stock purchases; or
- for any transaction for which the director derived an improper
personal benefit.
As permitted by the Delaware General Corporation Law, our Bylaws provide
that:
- we may indemnify our directors and officers to the fullest extend
permitted by the Delaware General Corporation Law, subject to very
limited exceptions;
- we may indemnify our other employees and agents to the fullest extent
permitted by the Delaware General Corporation Law, subject to very
limited exceptions;
- we may advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding to the fullest extent permitted by
the Delaware General Corporation Law;
- we may advance expenses, as incurred, to our employees and agents in
connection with a legal proceeding; and
- the rights conferred in the Bylaws are not exclusive.
II-1
We have entered into indemnification agreements with certain of our
directors and officers to give these directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
our amended Certificate of Incorporation and to provide additional procedural
protections. At present, there is no pending litigation or proceeding involving
a director, officer or employee of ours regarding which indemnification is
sought, nor are we aware of any threatened litigation that may result in claims
for indemnification.
The indemnification provisions in our amended Certificate of Incorporation
and Bylaws and the indemnification agreements entered into between us and each
of our directors and officers may be sufficiently broad to permit
indemnification of our directors and officers for liabilities arising under the
Securities Act.
ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES
In September 2001, we sold 617,000 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 $8.0 million.
In the fourth quarter of 2001, we sold convertible subordinate debentures
to accredited investors in a private placement transaction. These debentures
were issued in reliance on the exemption from registration provided by Section
4(2) of the Securities Act. As of December 31, 2001, we received $9.4 million in
proceeds from this sale. We received additional proceeds of $0.6 million in
January 2002, for a total of $10.0 million. The convertible debentures are
convertible into an aggregate of 833,333 shares of our common stock immediately
at the option of the holder or at our discretion at any time after December 31,
2003, and prior to maturity at December 31, 2006. The debentures bear interest
at the rate of 7% payable quarterly.
In September 2002, in connection with the acquisition of RPC, we issued
warrants to former RPC shareholders to purchase an aggregate of 264,900 shares
of our common stock at an exercise price of $15.27. 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. Our aggregate potential liability at March 28, 2003 was
approximately $1.6 million. Payment in cash is due within 30 days of exercise of
the guaranty right by the warrant holder. All of the warrants currently are
exercisable and expire on September 19, 2003.
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.
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, to accredited investors for
aggregate consideration of $15.8 million. These shares were issued in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act. The preferred stock accrues dividends at 8% per share and is convertible at
any time into approximately 2,634,016 shares of common stock. The stock is
redeemable at our option after the third anniversary date. We must redeem any
shares of preferred stock outstanding on the tenth anniversary date. The
redemption price is $6.00 per share plus accrued and unpaid dividends.
II-2
ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
NUMBER EXHIBIT TITLE
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.
II-3
4.9* Form of Employee Non-Statutory Stock Option Contract pursuant to the 1996
Stock Incentive Plan. 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.
5.1 Opinion of Akin Gump Strauss Hauer & Feld LLP.
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.
II-4
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 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.
II-5
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 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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.
10.33 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.
10.34 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.
10.35 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.
10.36 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.
II-6
10.37* 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.
10.38 Lease Amendment No. 2 dated as of March 1, 1996 by and between Katell
Valencia Associates, a California limited partnership and 3D Systems, Inc.,
a California corporation. Incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for the quarterly period ended March 28, 2003, filed
on July 14, 2003.
10.39 Waiver dated June 26, 2003, between Wells Fargo and Registrant.
Incorporated by reference to Exhibit 10.2 to Registrant's Form 10-Q for the
quarterly period ended March 28, 2003, filed on July 14, 2003.
10.40 Waiver dated June 16, 2003, between Wells Fargo and Registrant.
10.41 Letter Agreement between Registrant and Brian K. Service, dated August 8,
2003. Incorporated by reference to Exhibit 10.1 to Registrant's Current
Report on Form 8-K, filed on August 11, 2003.
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.
16.3 Letter, dated July 22, 203, 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 July 23, 2003.
21.1 Subsidiaries of Registrant.
23.1 Consent of Akin Gump Strauss Hauer & Feld LLP (as set forth in Exhibit
5.1).
23.2 Consent of Independent Auditors - Deloitte & Touche LLP.
24.1 Power of Attorney (included on page II-5 of this registration statement).
---------------
* Management contract or compensatory plan or arrangement
(b) The following financial statement schedule is filed herewith:
Other financial statement schedules are omitted because the information
called for is not required or is shown either in our consolidated financial
statements or the notes thereto.
ITEM 17 UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sale are being made, a
post-effective amendment to this registration statement; to include
any prospectus required by Section 10(a)(3) of the Securities Act of
1933; to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of
II-7
prospectus filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registration has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Valencia,
State of California, on this day of August, 2003.
3D SYSTEMS CORPORATION
By:
/s/ Charles W. Hull
-------------------------------------------
Charles W. Hull
Interim Chief Executive Officer,
Executive Vice President and
Chief Technology Officer
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS that each individual whose signature
appears below constitute and appoints Brian K. Service and Keith Kosco, and each
of them, his or her true and lawful attorneys-in-fact and agents with full power
of substitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for he same offering covered by the Registration Statement that is to
be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, as amended, and all post-effective amendments thereto,
and to file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his, her or their substitute or
substitutes, may lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the date indicated.
NAME TITLE DATE
/s/ Charles W. Hull
----------------------------
Charles W. Hull Director, Interim Chief Executive August 29, 2003
Officer, Executive Vice President
and Chief Technology Officer
(Principal Executive Officer)
/s/ Kevin McNamara
----------------------------
Kevin McNamara Acting Chief Financial Officer August 29, 2003
(Principal Financial Officer)
/s/ G. Peter V. White
----------------------------
G. Peter V. White Vice President, Finance August 29, 2003
(Principal Accounting Officer)
/s/ G. Walter Loewenbaum II
-----------------------------
G. Walter Loewenbaum II Chairman of the Board of Directors August 29, 2003
/s/ Miriam V. Gold
-----------------------------
Miriam V. Gold Director August 29, 2003
/s/ Jim D. Kever
-----------------------------
Jim D. Kever Director August 29, 2003
-----------------------------
Kevin S. Moore Director August __, 2003
/s/ Richard C. Spalding
-----------------------------
Richard C. Spalding Director August 29, 2003
EXHIBIT INDEX
NUMBER EXHIBIT TITLE
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. Incorporated by reference to Exhibit 4.9 of
Registrant's Form 10-K for the year ended December 31, 1999.
1
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.
5.1 Opinion of Akin Gump Strauss Hauer & Feld LLP.
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.
2
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 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.
3
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 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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.
10.33 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.
10.34 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.
10.35 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.
10.36 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.
10.37* 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.
4
10.38 Lease Amendment No. 2 dated as of March 1, 1996 by and between Katell
Valencia Associates, a California limited partnership and 3D Systems, Inc.,
a California corporation. Incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for the quarterly period ended March 28, 2003, filed
on July 14, 2003.
10.39 Waiver dated June 26, 2003, between Wells Fargo and Registrant.
Incorporated by reference to Exhibit 10.2 to Registrant's Form 10-Q for the
quarterly period ended March 28, 2003, filed on July 14, 2003.
10.40 Waiver dated June 16, 2003, between Wells Fargo and Registrant.
10.41 Letter Agreement between Registrant and Brian K. Service, dated August 8,
2003. Incorporated by reference to Exhibit 10.1 to Registrant's Current
Report on Form 8-K, filed on August 11, 2003.
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.
16.3 Letter, dated July 22, 203, 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 July 23, 2003.
21.1 Subsidiaries of Registrant.
23.1 Consent of Akin Gump Strauss Hauer & Feld LLP (as set forth in Exhibit
5.1).
23.2 Consent of Independent Auditors - Deloitte & Touche LLP.
24.1 Power of Attorney (included on page II-5 of this registration statement).
---------------------
* Management contract or compensatory plan or arrangement
5