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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-22250
3D SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4431352
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
26081 Avenue Hall
Valencia, California 91355
(Address of principal executive offices and zip code)
(661) 295-5600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
------- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any Amendment to this Form
10-K. [ ]
At February 28, 1999, there were outstanding 11,389,310 shares of the Common
Stock of Registrant, and the aggregate market value of the shares held on that
date by non-affiliates of Registrant, based on the closing price ($6.375 per
share) of the Registrant's Common Stock on the Nasdaq National Market on that
date, was $57,781,017. For purposes of this computation, it has been assumed
that the shares beneficially held by directors and officers of Registrant were
"held by affiliates"; this assumption is not to be deemed to be an admission by
such persons that they are affiliates of Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement with respect to its 1999 Annual Meeting
of Shareholders, currently scheduled to be held May 20, 1999, are incorporated
by reference into Part III of this Report.
Exhibit index is located on page 33.
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3D SYSTEMS CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . .16
Item 4. Submission of Matters to a Vote of Security Holders. . . . . .17
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . .20
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . .21
Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition . . . . . . . . . . . .23
Item 8. Financial Statements and Supplementary Data. . . . . . . . . .31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures. . . . . . . . . . . . .31
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . .32
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . .32
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . .32
Item 13. Certain Relationships and Related Transactions . . . . . . . .32
PART IV
Item 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . .33
</TABLE>
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PART I
ITEM 1. BUSINESS
For a discussion of certain material factors which may affect the Company,
see "Cautionary Statements and Risk Factors" commencing on page 11 of this
Report.
GENERAL
3D Systems Corporation (the "Company") develops, manufactures and markets
worldwide solid imaging systems designed to rapidly produce physical objects
from the digital output of solid or surface data from computer aided design and
manufacturing ("CAD/CAM") and related computer systems. The Company's systems
include SLA Industrial Systems ("SLA") and Solid Object Printers. As part of
the SLA systems, the Company provides consumable materials as the exclusive
worldwide distributor (except for Japan) of stereolithography photopolymer
resins ("resins") produced by Ciba Specialty Chemicals, Inc. and its affiliated
companies (collectively "CSC" or Ciba Specialty Chemicals). The Company's solid
object printers use proprietary materials developed and manufactured by the
Company or its toll providers. The Company either directly or through its
network of authorized distributors provides a majority of its customers with a
variety of on site maintenance services.
SLA Industrial Systems use the Company's proprietary stereolithography
technology, a 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 hard plastic. SLA-produced parts can be
used for concept models, engineering prototypes, patterns and masters for molds
and other applications. This technology can provide users with significant time
savings, cost reductions and improved quality, compared to traditional modeling,
tooling and pattern-making techniques.
Solid Object Printing employs hot melt ink jetting technology to build
models in successive layers using a proprietary thermopolymer material and are
sold as the Actua 2100 and the ThermoJet Solid Object Printer. These printers,
the size of an office copier, are designed for operation in engineering and
design office environments. Designers, engineers, and other users of CAD/CAM
systems can incorporate these printers into their office networks as a shared
resource, to rapidly produce models of products under development.
Solid imaging is a relatively new field embodying the use of computers and
computer automated equipment to rapidly produce prototypes, models and even low
volume production quantities of objects which traditionally have been produced
by machining and other methods. The Company believes that the stereolithography
technology, which it has developed and patented, represents the first and to
date the most significant development in this field. While alternative
technologies exist and while it has been reported that significant research and
development efforts are currently being undertaken by corporations and
universities around the world in an attempt to develop additional alternative
technologies and techniques, on the basis of total systems installed, the
Company believes that it currently remains the leader in the solid imaging
field.
The Company markets directly and through secondary distribution channels
to customers in the United States and Europe and through distributors in
other countries. The Company sold its first SLA system in 1988 and its first
solid object printer in the fourth quarter of 1996. As of December 31,
1998, the Company had sold a total of 1,243 solid imaging systems to
customers in over 40 countries. Its customers include major corporations in a
broad range of industries including manufacturers of automotive, aerospace,
computer, electronic, consumer and medical products. The Company also sells
SLA systems to independent service bureaus which, for a fee, provide
stereolithographic services to their customers.
As of December 31, 1998, the Company held approximately 160 patents related
to solid imaging: 75 U.S.; 49 European; 6 Japanese; and 30 other foreign
patents. The Company continues to develop improvements for its lines of
products as well as new products to expand the applications of solid imaging.
In conjunction with CSC, the Company continues to develop resins with different
and improved characteristics to expand stereolithography applications. CSC is a
Swiss-based multinational manufacturer and distributor of specialty
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chemicals, a 15.1% beneficial shareholder of the Company, and the Company's
partner in photopolymer resin development.
Unless otherwise indicated, all references to "CSC" include Ciba Specialty
Chemicals Inc. and its affiliates, including Ciba Specialty Chemicals Holding
and its wholly-owned subsidiaries in Canada, through which CSC holds its
interest in the Company, and the United States ("CSC US"), through which CSC
conducts its US operations.
CORPORATE STRUCTURE
The Company is a Delaware corporation, and is the sole shareholder in 3D
Systems (Canada) Inc., a British Columbia corporation ("3D Canada"). 3D Canada
is the sole shareholder of 3D Systems, Inc., a California corporation ("3D
California"), which directly and through its subsidiaries conducts substantially
all of the Company's business.
Unless otherwise indicated, all references in this document to the Company
include 3D Systems Corporation, 3-D Systems Inc., its British Columbia
predecessor, 3D Systems (Canada) Inc. and 3D Systems, Inc. and its subsidiaries.
PRODUCTS AND SERVICES
For an analysis of revenues attributable to each of the Company's major
product and service groups, see "Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition - Results of Operations."
SLA INDUSTRIAL SYSTEMS AND RELATED EQUIPMENT. The Company currently is
manufacturing and marketing five SLA Industrial Systems-- the SLA 250 Smart
Start, the SLA-250 Series 50; the SLA-3500; the SLA-5000; and the SLA-7000. All
models embody the stereolithography technology. The models differ in their
features including the complexity and accuracy of part building, the maximum
size of objects that can be produced, and price.
Each SLA system consists of an ultraviolet laser, an optical scanning
system that controls the laser beam, a resin vat, an elevator assembly and a
computer that controls the exposure and position of the laser beam and the
elevator, all of which are designed to work together. SLA systems are capable
of making multiple objects at the same time; however, each SLA system is limited
in the size of the objects that it can make and, therefore, can make only scale
models of large objects or, alternatively, portions of large objects which are
then joined together. For example, the maximum size of a model or other object
that can be created using the SLA-250 is 10 inches x 10 inches x 10 inches,
while the maximum size of a model or other object which can be created using the
SLA-7000 is 20 inches x 20 inches x 24 inches.
The Company markets ultraviolet ovens ( "PCAs") used in conjunction with
SLA systems. When the SLA system has finished making an object, some of the
plastic has not been fully cured. Full curing requires an additional one to
five hours of exposure to ultraviolet illumination through the use of the
Company's PCAs. The PCA provides uniform long wave ultraviolet illumination.
The Company is currently offering three PCA models, the PCA 250, PCA 3500 and
PCA 5000. Approximately 70% of all SLA systems sold by the Company have been
purchased with a PCA.
SOLID OBJECT PRINTERS. The Actua 2100 and its successor, the ThermoJet
are network-ready systems and about the size of an office copier. They use a
hot melt ink jet technology to print models in successive layers with a
proprietary thermopolymer material and a print head with multiple jets
oriented in a linear array. The print head speeds back and forth as does a
printer, printing layer upon layer of material which solidifies in seconds to
form the physical model. These printers offer a part building capacity of 10
inches x 8 inches x 8 inches.
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MATERIALS. Under an agreement between the Company and CSC, the Company is
the exclusive worldwide distributor (other than Japan) to users of
stereolithographic systems of Ciba photopolymers (photosensitive resins) for
stereolithography (see "Marketing and Customers - Photopolymer Distribution
Agreement," below). Currently, the Company markets a total of thirteen different
resins, which vary in building speed, accuracy, surface finish and strength.
The Company anticipates that it may, from time to time, depending upon results
obtained under its Photopolymer Research Agreement described under "Research and
Development," below, market additional types of resins with varying properties.
For its solid object printers, the Company develops its proprietary
thermopolymer materials and manufactures these directly or through toll
providers.
SOFTWARE. The Company develops and markets part preparation software for
personal computers and engineering workstations. The software is designed to
enhance the interface between CAD/CAM systems and the Company's products.
Solid CAD/CAM data is converted to the STL format in the CAD/CAM system and then
transmitted to a computer utilizing the Company's software, where the object can
be viewed, rotated, scaled and a model building structure added. The software
then produces the SLA process instructions.
QUICKCAST. The Company's QuickCast process consists of special part
building software for making precision investment casting patterns using
stereolithography technology. The investment casting process for manufacturing
metal parts is centuries old. In typical investment casting, a foundry uses wax
patterns to generate molds, into which liquid metal is poured to form the part.
The QuickCast process uses the Company's SLA systems to produce foundry-useable
mold patterns suitable for limited-run investment casting (each mold pattern can
only be used to produce one mold, which in turn can only be used to produce one
part). While not intended for high-capacity manufacturing, the ability to
rapidly produce prototypes and short run production quantities of fully
functional complex metal parts, in a wide variety of metals, is a major
technological improvement in stereolithography. Most of the SLA systems sold by
the Company have included the capability to use the QuickCast process.
MAINTENANCE. All systems sold by the Company include on-site hardware
and software maintenance service, during a warranty period (typically one year)
at no additional charge. The Company defers a portion of its revenues for these
costs at the time of sale. After the warranty period expires, the Company
offers these customers optional hardware and software maintenance contracts,
which are available on a monthly and annual basis. Although purchasers are not
required to enter into maintenance contracts with the Company, a majority of the
Company's U.S. and European customers are parties to these contracts; many
others obtain maintenance services from the Company on a time and material
basis. Customers acquiring systems from the Company's foreign distributors are
offered maintenance contracts by the distributors. During 1996, 1997 and 1998,
revenues from maintenance contracts and maintenance services were approximately
$21.3 million, $25.0 million, and $28.1 million, respectively. As of December
31, 1998, the Company had a staff of 85 full-time employees who provide on-site
remedial and preventative maintenance services necessary to keep the equipment
in good operating condition. To date, warranty expenses and product returns
have not been significant.
3D SYSTEMS TECHNOLOGY CENTER. The Company provides services from its
technology centers at its Valencia, California headquarters and at its office
located near Frankfurt, Germany. The 3D Systems Technology Centers utilize SLA
systems together with CAD/CAM and other data supplied by their customers to
produce models, prototypes, mold patterns and other parts for customers on a
contract basis. The price for services offered by the Technology Centers varies
on the basis of the nature of the services requested. The Technology Centers
currently focus their efforts on the development of new applications and
techniques in stereolithography and the development of new markets in which they
can demonstrate the advantages of stereolithography. The Technology Centers
also enable the Company to keep abreast of developments in the applications of
stereolithography and serve as a means to introduce prospective buyers to
stereolithography.
3D KELTOOL. The 3D Keltool process uses master patterns to produce highly
accurate steel tool core and cavity inserts for use in plastic injection molding
machines. In 1998, the Company began licensing this technology to its customers
for their direct use. Since acquiring the 3D Keltool assets and operations in
September 1996 and through 1998, the Company produced 3D Keltool inserts for its
customers, using the 3D Keltool process, out of its St. Paul, Minnesota
facility. In the first quarter of 1999, the Company sold the St. Paul
operations to Rapid
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Tooling Technologies, a subsidiary of Rapid Design Technologies ("RDT"). As
part of this agreement, RDT was issued a multi year license for the use of
the 3D Keltool process.
RECENT PRODUCT INTRODUCTIONS. In order to improve and expand the
capabilities of its systems and related software and materials, as well as to
enhance its portfolio of proprietary intellectual properties, the Company
historically has devoted a significant portion of its resources to research and
development activities. Recent product introductions include the following:
SL5510 resin for the SLA-350 and SLA-3500 was made commercially available
January 1998. This resin has improved performance characteristics that include
exceptional humidity resistance, low viscosity and high accuracy, making it well
suited for master patterns and the use of 3D's QuickCast build style for
investment casting of metal parts.
SL5530HT resin was announced in December 1998. Designed specifically for
use with the SLA 350, 3500, 5000 and 7000, SL5530HT resin is a breakthrough in
materials development. SL5530HT can resist very high temperatures in excess of
200 C/392 F - twice the resistance of any other resin today. It also provides
optical clarity for flow visualization and accuracy that mirrors the dimensions
of the end-use part.
3D LIGHTYEAR part preparation software was released in the first quarter of
1999. 3D Lightyear exploits the power of the Windows NT operating system,
delivering functionality that extends beyond the capabilities of Unix-based
Maestro.
SLA 7000 is 400% faster, on average, than the next fastest SLA Industrial
System from 3D Systems. The SLA-7000 has a dual spot laser that reduces
downtime and errors while producing parts at .001 inch layers thickness in far
less post processing time. Commercial availability was announced in the first
quarter of 1999.
THERMOJET SOLID OBJECT PRINTER is the successor to the Actua 2100, offering
a significant improvement in speed, up to 300% faster. In addition, the
ThermoJet uses a new material, with improved part capabilities and color
capability. Commercial availability was announced in the first quarter of 1999.
RESEARCH AND DEVELOPMENT
The ability of the Company to compete successfully depends, among other
things, on its ability to design and develop new products and to refine
existing products. For the foreseeable future, the Company anticipates that
its research and development efforts will be focused on developing new
methods of solid imaging technology, improving and refining its existing
Solid Object Printer and SLA systems and developing software to facilitate
the interface between its solid imaging systems and CAD/CAM programs.
Research and development expenses decreased in 1998 to $9.4 million, down
from $11.0 million in 1997. The decrease in research and development
expenses in 1998 was primarily a result of the write-off during the third
quarter of 1997 of acquired in-process technology valued at approximately
$2.1 million in connection with the EOS acquisition (see Note 7 of Notes to
Consolidated Financial Statements) offset in part by increased personnel and
experimental material costs related to certain development projects. Based
on the Company's historical expenditures related to research and development
and its current development goals, the Company anticipates for the
foreseeable future, research and development expenses will be equal to
approximately ten percent of sales. This is a forward-looking statement,
however, and, as with any such statement, is subject to risk. For example,
if total sales of the Company for any particular period do not meet the
anticipated sales of the Company for that year, research and development
expenses as a percentage of sales may exceed ten percent. As of December 31,
1998, 66 employees or contractors of the Company were devoting substantially
all of their time to research and development activities, compared to 60
employees at December 31, 1997.
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The Company believes that further refinements in stereolithography will
depend upon improvements not only in the SLA systems, but also in the
chemical makeup of the resins used in the fabrication process. To this end,
the Company has dedicated a significant amount of time to the development of
new resins. To pursue this goal, the Company and CSC are parties to a
Research and Development Agreement (as revised, the "Photopolymer Research
Agreement") providing for the development of photopolymers,
photopolymerizable monomers, photoinitiators and other resins for use with
the SLA systems. Subject to certain conditions, the Photopolymer Research
Agreement will remain in effect until either party gives the other six months
advance notice of its determination to terminate the agreement. There can be
no assurance that this agreement will remain in place. The termination of
this agreement could have a material adverse effect on the Company's revenues
results of operations, liquidity, and financial position. Pursuant to the
Photopolymer Research Agreement, the two companies work jointly, with each
company funding its own portion of the research. Ownership of any inventions
or know-how, whether patented or not, will accrue to CSC if they are chemical
in nature and to the Company if they relate to the stereolithographic process.
The foregoing discussion relating to the Company's research and
development activities includes statements that involve risks and uncertainties.
For a discussion of the factors associated with such forward looking statements
which could cause actual results to differ materially from those projected in
the statements, see "Cautionary Statements and Risk Factors- We Must Keep Pace
with Technological Change and Introduce New Products to Remain Competitive," and
"Our New Products May Not Be Commercially Accepted."
MARKETING AND CUSTOMERS
The Company's sales and marketing strategy focuses on an internal sales
organization, which is responsible for overseeing worldwide sales and
value-added resellers, as well as the utilization of knowledgeable
international distributors. The Company employs a direct sales force
consisting of sales persons and application specialists that provide
technical sales support. At December 31, 1998, the Company's worldwide sales
and support staff consisted of 64 employees that were primarily located in
the U.S. and Europe. The Company has offices in the U.S. in California,
Michigan, Pennsylvania, and Texas, its European offices are located near
Frankfurt, London, Paris, Barcelona and Milan, and the Hong Kong office
services Asia Pacific.
In recent years, the Company's domestic sales strategy has focused on an
internal sales organization as well as the utilization of sales agents
(primarily, independent sales representatives in the machine tools industry).
These sales agents, however, were not producing the level of sales expected by
the Company. Additionally, the Company believed it could obtain better
visibility and contact with its customers by utilizing a direct sales force.
Accordingly, in August 1996, the Company terminated its arrangements with all of
its sales agents and began recruiting additional personnel to strengthen its
internal sales and support organization. During the second half of 1997 the
Company completed the initial staffing of its sales and support organization.
INTERNATIONAL DISTRIBUTORS. As of December 31, 1998, the Company had
entered into agreements with eight distributors in the Pacific Rim, five in
Europe and two in Latin America. International distributors are responsible for
marketing, sales, system installation, service and support to their customers.
International sales accounted for 33.8%, 41.5% and 44.1% of total sales in
the years ended December 31, 1996, 1997, and 1998, respectively. See Note 17 of
Notes to Consolidated Financial Statements. For a discussion of risks
associated with international operations, see "Cautionary Statements and Risk
Factors -- There are Many Risks Associated with International Business."
CUSTOMERS. The Company's customers include major companies in a broad
range of industries including manufacturers of automotive, aerospace, computer,
electronic, consumer and medical products. Purchasers of the Company's systems
include, among others, Allied Signal Inc., AMP, Inc., Apple Computer, Inc.,
Boeing Company, Canstar Sports, Inc., Chrysler Corp., Daimler-Benz AG, Eastman
Kodak Company, General Electric Company, General Motors Corporation, GM Hughes
Electronics Corporation, International Business Machines Corporation, Johnson &
Johnson, Motorola, Inc., Pratt & Whitney and Texas Instruments Inc. The Company
also sells its products to independent service bureaus which, for a fee, provide
stereolithographic services to their customers.
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LEASING AND RENTAL PROGRAMS. As part of its marketing activities, 3D
Capital Corporation ("3D Capital"), a wholly-owned subsidiary of the Company,
was formed in August of 1996 to provide lease financing for qualified U.S.
customers purchasing SLA systems. The leases are accounted for as sales-type
leases where the present value of the minimum payments, net of costs, are
recorded as sales. During 1997 and 1998, the Company sold and assigned a
portion of their lease receivables and expects to continue to periodically sell
or assign a portion of the lease receivables as a future source of financing.
In addition to sales-type leases, the Company occasionally offers selected
credit-worthy companies the right to rent its solid imaging system for
evaluation purposes. Substantially all of the customers who have participated in
the rental program have subsequently purchased a solid imaging system.
PHOTOPOLYMER DISTRIBUTION AGREEMENT. Pursuant to an agreement with CSC US,
and subject to conditions set forth in the agreement, the Company is the
exclusive worldwide distributor to users of stereolithographic processes of all
Ciba Specialty Chemicals stereolithography photopolymers. At the Company's
request, an affiliate of CSC US currently sells such photopolymers in Japan to
the Company's Japanese distributor. Subject to certain conditions, so long as
CSC US provides adequate supplies, the Company is required to fill all of its
requirements for its photopolymers through purchases from CSC US. Subject to
certain conditions, the agreement will remain in effect until either party
gives the other six months advance notice of termination. There can be no
assurance that this agreement will remain in place. Though the Company believes
it can obtain alternate agreements from other manufacturers, the termination of
this agreement or interruption of supply could have a material adverse effect
on the Company's revenues, results of operations, liquidity and financial
position. See "Cautionary Statements and Risk Factors --We Depend on a Single
or Limited Suppliers for Certain of our Components."
CUSTOMER SUPPORT AND SERVICE. Before installation of an SLA system, a new
purchaser typically receives training at the Company's facilities. During the
first several days after installation, an applications engineer remains at the
customer location to ensure that the customer is able to operate the SLA system
effectively and to answer any questions that may arise. The Company also makes
available to its customers, for a fee, additional training courses in SLA system
features and applications.
The Company and its distributors offer maintenance contracts to their
customers. See "Products and Services," above. The Company also makes
available in the U.S. a hotline to all of its users with maintenance contracts.
The hotline is staffed with technical representatives who answer questions and
arrange for on-site remedial services if necessary. The hotline is available
Monday through Friday, 8:00 a.m. Eastern time to 5:00 p.m. Pacific time.
The Company co-founded and currently participates in both domestic and
international User Groups which currently include a substantial number of the
Company's customers. The User Groups organize an annual conference in both the
United States and Europe, at which the Company makes presentations relating to
updates in stereolithography, changes the Company has implemented in its systems
and related equipment, resins and software and future ideas and programs the
Company intends to pursue in the upcoming years.
BACKLOG. At December 31, 1998, the Company had orders (with scheduled
delivery dates) for 73 systems aggregating approximately $8.8 million, as
compared to systems aggregating approximately $3.5 million at December 31, 1997
and systems aggregating approximately $9.0 million at December 31, 1996. It is
anticipated that all orders included in the current backlog will be shipped by
June 30, 1999. As a matter of policy, the Company affords its customers the
right to cancel any system order at any time prior to their scheduled delivery
dates. Historically, the number of system orders canceled has not been
significant. Nonetheless, no assurance can be given that all orders in backlog
will be shipped. Backlog may not be indicative of future expected sales.
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PRODUCTION AND SUPPLIES
The Company assembles all of its systems at its 67,000 square foot facility
in Grand Junction, Colorado.
The Company purchases the major component parts for its systems from
outside sources and arranges with contract manufacturers for the manufacture of
subassemblies. The Company integrates the subassemblies and effects final
assembly of all systems at its production facility. The Company performs
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 and subassemblies, several of the critical components,
materials, and subassemblies, including lasers, resins, and certain ink jet
components, are currently provided by a single or limited sources. Resin
distributed by the Company are supplied exclusively by CSC under an agreement
subject to certain conditions, and either party has the right to terminate this
agreement subject to six months notice. The reliance on sole or limited source
vendors by the Company involves risks, including the possibility of shortages of
certain key components, product performance shortfalls, and reduced control over
delivery schedules, manufacturing capability, quality and costs. Business
disruptions, financial difficulties, or any significant change in condition of
relationship of a sole or limited source supplier of any particular component
could have a material and adverse effect on the Company's revenues, results of
operations, liquidity and financial condition by increasing the cost of goods
sold or reducing the availability of such components. An unanticipated change
in the source of supply of these components or unanticipated supply limitations
could adversely affect the Company's ability to meet its product orders.
COMPETITION AND PATENT RIGHTS
The Company believes no products technologically similar to the Company's
SLA systems are being sold in significant quantities in the United States;
however, products similar to the Company's SLA systems have been manufactured
and sold by other companies in the Pacific Rim and in Europe. In addition, the
Company believes that there are other companies researching, designing,
developing and marketing other types of solid imaging equipment in the United
States and in foreign markets, and additional companies may announce plans to
enter the solid imaging business, either with equipment similar to that marketed
by the Company, or with other types of equipment. See "Cautionary Statements
and Risk Factors -- Intense Competition."
Although it is estimated that there are approximately 19 companies
currently manufacturing rapid prototyping equipment, the following is a brief
description of competing products or technologies of the companies that the
Company believes are its current primary competitors. DTM, Inc., in conjunction
with B.F. Goodrich, markets systems based on a technology called Selective
Laser Sintering, which uses a powdered material which is sintered (solidified by
heating) by a laser. Helisys, Inc. markets systems based on a technology called
Laminated Object Manufacturing, which builds parts from sheets of paper or other
material that are laminated together with cross-sectional patterns being laser
cut into each sheet of paper. Stratasys, Inc. ("Stratasys") markets a fused
deposition modeling process that builds objects by dispensing individual layers
of thermoplastic material through a temperature controlled head.
With respect to the solid object printer concept, the Company believes that
the following companies are its current primary competitors: Stratasys, Sanders
Prototyping, and Z Corporation.
Products similar to the Company's stereolithography products are being
marketed in Japan by NTT Data and D-MEC. During 1998, the Company signed
patent cross license agreements with NTT Data and NTT Data CMET (marketed by NTT
Data) and with Sony Corporation (marketed by D-MEC). Under these agreements, 3D
Systems has granted a non exclusive license to produce and sell
stereolithography systems in the Asia Pacific area, and received a non-exclusive
worldwide license. In addition, E.I. du Pont de Nemours and Company ("Du Pont")
has licensed certain stereolithography technology to Teijin Seiki of Japan and
Aaroflex of Virginia, USA. The Company believes that other Japanese companies
are also developing and marketing products similar to those of the Company.
However, the Company does not have reliable data with respect to these efforts.
During 1996, Aaroflex, Inc. ("Aaroflex"), headquartered in Virginia, publicly
announced the availability and claimed that it has
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sold in the U.S., although not delivered, equipment which offers the same
functions as the Company's SLA systems. (See "Item 3 Legal Proceedings").
The Company believes that currently available alternatives to
stereolithography generally are not able to produce models having the
dimensional accuracy or fine surface finish of models provided by the
Company's stereolithography process. However, competitors have successfully
marketed their products to the Company's existing and potential customers.
Furthermore, in many cases, the existence of these competitors extends the
purchasing time while customers investigate alternative systems. The Company
competes primarily on the basis of the quality of its products and the
advanced state of its technology. Although the Company does not rely totally
on its patents to compete, the Company believes that the patents will help
the Company maintain its leading position in the solid imaging field in the
United States and Europe. See "Proprietary Protection," below and "Cautionary
Statements and Risk Factors -- Patents and Proprietary Information is
Critical to Our Success."
A number of companies, including Du Pont, are currently selling
stereolithography resins, which either complement or compete with those
distributed by the Company. Within the limits of its obligations under the
Photopolymer Research Agreement (see "Research and Development," above), the
Company encourages chemical companies to develop stereolithography resins that
are compatible with its SLA equipment, but it also works closely with CSC US to
remain competitive in the resin market. The Company believes that it currently
supplies resins to owners of a majority of the SLA systems currently installed
worldwide.
The Company does not believe that it currently has any significant
competition for its maintenance services, although some of the Company's
customers perform their own maintenance in-house. The Company offers software
and hardware maintenance contracts to its customers (see "Products and Services"
above). Maintenance for SLA systems sold internationally is offered by the
Company's distributors (see "Marketing and Customers" above).
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 the Company and through improvements to existing technologies, such as
automated machining. The Company has determined to follow a strategy of
continuing product development and aggressive patent prosecution to protect
itself to the extent possible in these areas.
PROPRIETARY PROTECTION
The stereolithography technology used by the Company in its products was
developed by Charles W. Hull, the Company's Vice Chairman, while employed by
UVP, Inc. This technology was originally patented by UVP, Inc., subsequently
licensed to the Company in 1986 and acquired by the Company in 1990.
At December 31, 1998, the Company had received approximately 160 patents
which includes 75 in the U.S., 49 in Europe, 6 in Japan and 30 other foreign
patents. At that date, the Company had 30 pending patent applications in the
United States, 54 in the Pacific Rim, 15 in Europe, 10 in Canada and 6 in Latin
America. As new developments and components to the technology are discovered,
the Company intends to apply for additional patents.
During January 1997, 3D Systems filed a patent infringement lawsuit against
Aaroflex, Inc. The lawsuit seeks compensation from Aaroflex for utilizing
certain stereolithography technology which the Company alleges is covered by six
of its U.S. patents and seeks other damages and attorneys fees as well as an
injunction barring Aaroflex from marketing its products using technology covered
by the Company's patents (see "Item 3. Legal Proceedings").
Application for a patent offers no assurance that a patent will be issued
as applied for. Issuance of a patent offers no assurance that the patent can be
protected against any claims of invalidation or that the patent can be enforced
against any infringement. In addition, litigation of patent issues can be costly
and time-consuming. See "Cautionary Statements and Risk Factors -- Patents and
Proprietary Protection."
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EMPLOYEES
At December 31, 1998, the Company had 465 full-time employees, and 26
independent contractors. None of these employees or independent contractors are
covered by labor agreements. The Company considers its relations with its
employees and its independent contractors to be satisfactory.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain certain
forward looking statements that involve risks and uncertainties. Factors
associated with the forward looking statements which could cause actual
results to differ materially from those projected in the statements appear
below. In addition to the other information contained in this document,
readers should carefully consider the following cautionary statements and
risk factors.
FLUCTUATIONS IN QUARTERLY RESULTS - 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. We believe that quarter to quarter or annual
comparisons of our operating results are not a good indication of our future
performance. In some quarters it is possible that our results could be below
analysts' expectations and investors. If so, the price of our common stock may
fall.
Many factors may cause these fluctuations. Some of these factors are
beyond our control. The factors include:
- the acceptance and reliability of new products in the market
- the size and timing of product shipments
- general world economic conditions
- changes in the mix of products and services sold
- currency and economic fluctuations in foreign markets and other
factors affecting international sales
- delays in the introduction of new services/products
- price competition
- the impact of changing technologies
In addition, certain components we use require an order lead time of three
months or longer. Other components that are currently readily available may
become more difficult to obtain in the future. We may experience delays in the
receipt of certain key components. To meet forecasted production levels, we may
be required to commit to certain long lead time items 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 affect
on our cash flow and results of operations.
Because of all of these factors, we cannot assure you that we will achieve
or sustain quarterly or annual profitability in the future.
THE MIX OF PRODUCTS SOLD AFFECTS OUR OVERALL PROFIT MARGINS
We continuously are expanding our product offerings as well as increasing
the number of geographic markets in which we operate and distribution channels
that we use in order to reach the various 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 quarter to quarter. We may experience significant
quarterly fluctuations in gross margins or net income due to the impact of the
mix of
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products, channels, or geographic markets utilized from period to period.
Also, the changing mix of products, channels, and markets used over time may
result in lower average gross margins and returns.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE AND INTRODUCE NEW PRODUCTS TO REMAIN
COMPETITIVE
To remain competitive, we must continue to enhance and improve the
functionality and features of our products, services and technologies. The
solid imaging industry is characterized 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
industry standards and practices. These developments could render our existing
products and proprietary technology and systems obsolete. Our success will
depend, in part, on our ability to:
- obtain leading technologies useful in our business
- enhance our existing products
- develop new products and technologies that address the increasingly
sophisticated and varied needs of existing and prospective customers
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis
Also, our competitors may develop new technologies that render our existing
products and services obsolete. We believe that our future success will depend
on our ability to deliver products which meet changing technology and customer
needs.
OUR NEW PRODUCTS MAY NOT BE COMMERCIALLY ACCEPTED
During the last 18 months, we have developed and introduced a
significant number of new products to the market, including equipment,
software and materials. These products undergo thorough quality assurance
testing. However, problems may arise in connection with the use of a new
product and we cannot assure you that we will be able to fix any problems
that arise timely, or at all. Also, we cannot assure you that any new
products we develop will be commercially accepted. If there are many
problems with our new products, or if these products are not accepted by the
marketplace, our results of operations and financial condition could be
materially adversely effected.
WE DEPEND ON A SINGLE OR LIMITED SUPPLIERS FOR CERTAIN OF OUR COMPONENTS
There are several potential suppliers of the material components, parts and
subassemblies for our 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, resins and certain ink jet components. CSC
supplies us with the resins we distribute pursuant to an agreement which either
party has the right to terminate with six months advance notice. Our reliance
on a limited number of vendors involves many risks including:
- shortages of certain key components
- product performance shortfalls
- reduced control over delivery schedules, manufacturing capabilities,
quality and costs
If any of our suppliers suffers business disruptions, financial difficulties,
or if there is any significant change in 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 and liquidity and financial condition would be
adversely affected. While we believe that we can obtain most of the
components necessary for our products from other manufacturers, any
unanticipated change in the source of supply, or unanticipated supply
limitations, could adversely affect our ability to meet our product orders.
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS
A material portion of our sales are to customers in foreign countries. Revenues
from international customers accounted for approximately 44.1% of total revenues
in 1998, 41.5% of total revenues in 1997 and 33.8% of total
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revenues in 1996. There are many risks inherent in our international business
activities. Our foreign operations could be adversely affected by:
- unexpected changes in regulatory requirements
- export controls, tariffs and other barriers
- social and political risks
- fluctuations in currency exchange rates
- seasonal reductions in business activity during the summer months in
Europe and in certain other parts of the world
- reduced protection for intellectual property rights in some countries
- difficulties in staffing and managing foreign operations
- taxation
- other factors, depending on the country in which an opportunity arises
In addition to the general risks associated with our international sales
and operations, we will be subject to risks specific to the individual countries
in which we do business.
The financial problems in Asia have been significant and have impacted
international financial markets. The Asian markets may continue to deteriorate
which could have a substantial adverse impact on our ability to collect our
receivables from Asian customers. At December 31, 1998, customer receivables
from Asia generally were in accordance with agreed payment terms.
THE ADOPTION OF THE EURO PRESENTS UNCERTAINTIES
In January 1999, the New "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union ("EMU"). Beginning in
2003, all EMU countries are expected to be operating with the Euro as their
single currency. A significant amount of uncertainty exists as to the effect
the Euro will have on the marketplace generally. Some of the rules and
regulations relating to the governance of the currency have not yet been defined
and finalized.
We believe that our internal systems and financial institution vendors can
handle the Euro conversion and we are examining current marketing and pricing
policies and strategies that we may put in place upon conversion to the Euro.
The cost of our effort is not expected to materially affect our results of
operations or financial condition. However, we cannot assure you that we have
identified all issues related to the Euro conversion and that any additional
issues would not materially hurt our results of operations or financial
condition. For example, the conversion to the Euro may have competitive
implications on our pricing and marketing strategies and we may be at risk to
the extent our principal European customers are unable to deal effectively with
the impact of the Euro conversion.
WE FACE YEAR 2000 RISKS
Computer-based systems that require date/time calculations to operate
correctly are subject to miscalculations and system failures on and after the
year 2000. This is known as the Y2K problem. The Y2K problem affects systems
that were developed to accept two digit entries for the year in the date code
field. After midnight on December 31,1999, these systems may recognize a date
using '00' as the year 1900 rather than the year 2000. Another known issue is
that many systems will not recognize the year 2000 as a leap year. The Y2K
problem is pervasive in that it goes beyond internal systems to involve supply
and distribution chains and extends to both public and private infrastructure
services including water, gas, electricity, transportation and communications.
We believe that our current products are year 2000 compliant. We also have
evaluated all products sold since inception for year 2000 readiness, and are
providing the results of our analysis and potential impact and resolutions to
our customers. We expect to complete all of the necessary software
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and hardware upgrade pathways in the first quarter of 1999. We plan to offer
the actual software patches that may be required to our customers by the end
of the third quarter of 1999. We believe that all of our products will meet
basic functionality requirements. However, since we cannot anticipate all
specific customer situations and uses, we may see an increase in warranty and
other claims as a result of the year 2000 transition. For these reasons, the
increase in customer claims could have a material adverse impact on our
results of operations and financial condition.
We are in the process of completing a comprehensive evaluation of our
internal systems and equipment. We are currently updating certain critical
infrastructure and management systems to meet year 2000 requirements. These
upgrades also will meet the Euro dollar requirements and expand our
capabilities. We are conducting transaction testing to evaluate compliance of
the overall system infrastructure. To date, we have substantially completed the
risk analysis on all U.S.-based systems and have substantially completed all of
the infrastructure upgrades on these systems as well as certain European
operations. We plan to complete the risk analysis of foreign operations in the
first quarter of 1999, as well as to implement the year 2000 compliance upgrade
of our core ERP system. We believe that the vast majority of Y2K-related issues
with respect to internal business systems will be inventoried, analyzed and
resolved by the end of the second quarter of 1999, and that certification and/or
testing will be completed by the end of the third quarter of 1999. If we do
not identify all of our infrastructure and systems that may be affected by the
year 2000 transition or do not timely update our infrastructure and management
systems to meet year 2000 requirements, our results of operations and financial
condition will be adversely affected.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services and of our vendors and
suppliers. We have completed a survey of key suppliers and evaluated their
individual risk potential as well as the risk potential of their suppliers.
Also, we have conducted site surveys of certain critical or sole source
suppliers. Based on these surveys, we believe that a substantial majority of
our suppliers are Y2K compliant or expect to be Y2K compliant by the fourth
quarter of 1999. We began evaluating next tier suppliers in the first quarter
of 1999. Our contingency strategies include seeking alternative sources of
supplies or acquiring sufficient material to support our operations for the
first half of 2000. We believe we have sufficient alternatives and liquidity to
meet our contingency strategy. However, the failure of our third party
suppliers to be year 2000 compliant could have a material adverse effect on us.
Year 2000 compliance is an issue for virtually all businesses whose
computer systems and applications may require significant hardware or software
upgrades or modifications. These companies may plan to devote a substantial
portion of their capital spending to fund upgrades and modifications, which
could divert spending away from capital manufacturing equipment spending. These
changes in customers' spending patterns may cause an adverse result on our
sales, operating results and financial condition.
PATENTS AND PROPRIETARY INFORMATION IS CRITICAL TO OUR SUCCESS
We regard our copyrights, service marks, trademarks, trade secrets, patents
and similar intellectual property as critical to our success. At December 31,
1998, we had received approximately 160 patents which includes 75 in the U.S.,
49 in Europe, 6 in Japan, and 30 other foreign patents. At that date, we had 30
pending patent applications with the United States, 54 in the Pacific Rim, 15 in
Europe, 10 in Canada and 6 in Latin America. As we discover new developments
and components to the 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 service are made
available. We cannot be certain 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. Moreover, our competitors may
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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.
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 could 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 results from quarter to quarter. We are currently pursuing a
patent infringement action in the central District of California against
Aaroflex, Inc., and in Japan against Teijin Seiki Co. Ltd. (See "Item 3. Legal
Proceedings.")
INTENSE COMPETITION
The solid imaging industry is highly competitive and subject to
technological change, innovation, and new product introductions. Certain of our
existing and potential competitors are researching, designing, developing and
marketing other types of equipment. Some of these 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. Also, these competitors have marketed these products successfully to
our existing and potential customers. In addition, a number of companies
currently sell stereolithography resins, which both complement and compete with
the resins we distribute.
We expect future competition may arise from the development of allied or
related techniques which are not encompassed by our patents, the issuance of
patents to other companies which inhibit our ability to develop certain
products, and improvement to existing technologies. Increased competition could
result in price reductions for our products, reduced margins, and loss of market
share, any of which could adversely impact our business. We have determined to
follow a strategy of continuing product development and aggressive patent
prosecution to protect our competitive position to the extent practicable. We
cannot assure you that we will be able to maintain our leading position in the
field of rapid prototyping or continue to compete successfully against current
and future sources of competition. These competitive pressures may adversely
affect our profitability and financial performance. See "Business -
Competition."
VOLATILITY OF STOCK PRICE
Historically, our stock price has been volatile. The prices of the common
stock have ranged from $5.50 to $11.86 during the 52-week period ended February
28, 1999. See "Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters."
Factors that may have significant impact on our market price of our stock
include:
- future announcements concerning our developments or those of our
competitors, including the receipt of substantial orders for products
- quality deficiencies in services or products
- results of technological innovations
- new commercial products
- changes in recommendations of securities analysts
- proprietary rights or product or patent litigation
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.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS
The Board of Directors is authorized to issue up to 5,000,000 shares of
preferred stock. The Board also is authorized to determine the price, rights,
preferences and privileges of those shares without any further vote or
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<PAGE>
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 financings, but it could make it more difficult for a third party to
acquire a majority of our outstanding voting stock. In addition, any
preferred stock to be issued may have other rights, including economic
rights, senior to the common stock which could have a material adverse effect
on the market value of the common stock.
We are subject to Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of the Company. One of these laws
prohibits us from engaging in a business combination with any interested
stockholder for a period of three years from the date the person became an
interested stockholder, unless some conditions are met. In addition, provisions
of our Certificate of Incorporation and By-laws, could have the effect of
discouraging potential takeover attempts or making it more difficult for
stockholders to change management.
In addition, we have adopted a Stockholders Rights Plan (see Note 12(b) of
Notes to Consolidated Financial Statements). Under the Rights Plan, we
distributed a dividend of one right for each outstanding share of our common
stock. These rights will cause substantial dilution if a person or group
attempts to acquire us on terms not approved by our Board of Directors and may
have the effect of deterring hostile takeover attempts.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, product
development, Technology Center and training facilities are located in a 78,320
square foot building in Valencia, California under a lease which expires on
December 31, 2002. The Company also leases sales and service offices in four
other states (California, Michigan, Pennsylvania and Texas) and in four
countries in the European Community (France, Germany, the United Kingdom and
Italy).
The Company's manufacturing and customer support operations are located in
a 67,000 square foot facility located in Grand Junction, Colorado (the "Colorado
Facility"). The Company constructed the Colorado Facility pursuant to an
agreement with the Mesa County Economic Development Council, Inc. executed in
October 1995. Following the completion of the Colorado Facility in June 1996,
the Company relocated its manufacturing and customer support operations from its
Valencia facility to the Colorado Facility during the third quarter of 1996.
During the fourth quarter of 1996, all of the Company's manufacturing activities
were performed at the Colorado Facility. During August 1996, the Company
completed a $4.9 million variable rate industrial development bond financing of
the Colorado Facility.
In connection with the asset acquisition of Keltool, Inc. in September
1996, the Company assumed Keltool's obligations under an existing lease for
approximately 6,000 square feet located in St. Paul, Minnesota. In the first
quarter of 1999, the Company completed the sale of its St. Paul operations and
assigned this lease to the acquirer. In addition, the Company executed a lease
for approximately 21,000 square feet in Valencia, California which expires on
June 30, 2000 for its 3D Keltool operations. The Company's occupancy of this
facility commenced in February 1997.
For information concerning obligations of the Company under its leases, see
Note 18(a) of Notes to Consolidated Financial Statements. For information
concerning the Company's Colorado Facility, see Note 11.
The Company believes that the facilities described above will be adequate
to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
3D SYSTEMS, INC. V. AAROFLEX ET AL. On January 13, 1997, The Company filed
a complaint ("Complaint") in the United States District Court, Central District
of California, against Aarotech Laboratories, Inc. ("Aarotech"), Aaroflex, Inc.
("Aaroflex") and Albert C. Young ("Young"). Aaroflex is the parent corporation
of Aarotech. Young is
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the Chairman of the Board and Chief Executive Officer of both Aarotech and
Aaroflex. The Complaint alleges that stereolithography equipment
manufactured by Aaroflex infringes on six of the Company's patents. The
Company seeks damages and injunctive relief from the defendants. The
defendants have threatened to sue the Company for trade libel. To date, the
defendants have not filed such a suit.
The defendants filed a motion to dismiss the complaint or transfer the case
to their home district in Virginia. The Court granted this motion to dismiss on
the agenda of lack of personal jurisdiction. The Federal Circuit Court of
Appeals has reversed this district court's decision insofar as it relates to
Aaroflex, Inc. and the action against Aaroflex, Inc. is proceeding in the
District Court.
3D SYSTEMS, INC. V. TEIJIN SEIKI CO. LTD On March 21, 1997, the Company
filed a patent infringement action in District Court in Osaka, Japan under one
of its Japanese patents, alleging infringement, and seeking damages and
injunctive relief from the defendant. The action is in the early stages of
prosecution.
CENTURI CORP., DBA ESTES INDUS., COX ACQUISITION CORP., DBA COX V. 3D
SYSTEMS CORP., ROGERS TOOL & DIE, In January 1997, 3D Systems, Inc. entered into
two contracts with Centuri Corp., dba Estes Indus., Cox Acquisition Corp., dba
Cox ("Cox") under which 3D was to create certain tooling for Cox. Cox purported
to terminate the contracts in or about August 1997.
On September 16, 1997, Cox initiated a lawsuit against 3D in Los Angeles
Superior Court for Breach of Oral Contract, Fraud, Negligent Misrepresentation,
Conversion, Money Had and Received, and Accounting. The suit also named Rogers
Tool & Die, a contractor hired by Cox to work with 3D in creating the tooling.
Cox contended that it was damaged by 3D's and Rogers' alleged inability to
timely complete the contracts. On October 31, 1997, 3D demurred to Cox's
Verified Complaint. Rogers joined in 3D's demurrer. 3D's demurrer contended
that written, not oral, contracts governed the relationship of the parties, that
the Complaint did not adequately plead the required elements of fraud, that the
Complaint failed to state a claim for Negligent Misrepresentation, Conversion,
and Money Had and Received, and that Accounting was not actually a cognizable
cause of action, but an equitable remedy.
After a hearing on December 2, 1997, the Court sustained 3D's demurrer,
ordering Cox to file an amended complaint. On January 29, 1998, Cox filed a
Verified Amended Complaint, asserting causes of action for Breach of Written
Contract, Fraud, and Negligent Misrepresentation. The Verified Amended
Complaint also stated identical claims against Rogers. The Company believes
that the case has no merit and intends to vigorously defend this action.
PATENT OPPOSITION AND INVALIDATION PROCEEDINGS. The Company has received 6
patents in Japan and one other application has been examined by the Japanese
Patent Office and subsequently published for opposition. One opposition was
submitted against this application. The Company has responded to the
opposition. Based on this opposition and 3D's response, the Japanese Patent
Office may require the Company to further defend or modify this application
before granting any patent thereon or may even finally reject the application.
Furthermore, one of the six patents has had three invalidation trials filed
against it. These invalidation trials are ongoing. The Company has responded
to two of these trials and it is anticipated that the Company will respond to
the third trial in the coming months. These trials may result in maintaining
the patent with present or modified protection or may result in revocation of
the patent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers of the Company:
<TABLE>
<CAPTION>
AGE AT POSITION
NAME FEBRUARY 28, 1999 WITH THE COMPANY
- ---- ----------------- ----------------
<S> <C> <C>
Arthur B. Sims 61 Chief Executive Officer and Chairman of
the Board of Directors
Charles W. Hull 59 Chief Technical Officer and Vice
Chairman of the Board of Directors
Richard D. Balanson 49 Chief Operating Officer, President and
Director
Frank J. Spina 44 Vice President, Finance and Chief
Financial Officer
A. Sidney Alpert 60 Vice President, General Counsel and
Secretary
Marty E. McGough 49 Vice President & World Wide Operations
Manager
</TABLE>
The principal occupations of the executive officers of the Company are as
follows:
ARTHUR B. SIMS: Mr. Sims has served as Chief Executive Officer of the
Company since August 1993 and, since September 1991, has also served as Chief
Executive Officer of 3D Systems, Inc. From September 1990 to September 1991,
Mr. Sims was an independent management consultant. From 1989 until September
1990, Mr. Sims was President of Quadratron Systems Incorporated, a developer and
marketer of office automation software. From 1988 to 1989, Mr. Sims served as
President and Chief Executive Officer of CPT Corporation. Prior to that, he
served four years as Corporate Vice President and President of Computer Sciences
Corp.'s Industry Services Group and for one year as President and Chief
Executive Officer of United Information Services. Previously he was associated
with IBM and General Electric Company.
CHARLES W. HULL: Mr. Hull, has served as Chief Technical Officer and Vice
Chairman of the Company since April 1997, since August 1993 as Chief Operating
Officer and President of the Company and since March 1986 as President of 3D
Systems, Inc.; prior thereto, he was Vice-President of UVP, Inc. from January
1980 to March 1986. The stereolithography technology was developed by Mr. Hull
while employed by UVP, Inc., a systems manufacturing company. As of February
28, 1999, Mr. Hull retired from the Company. However, he will continue to serve
as Vice Chairman and a member of the Board of Directors as well as serve as a
consultant to the Company.
RICHARD D. BALANSON: Dr. Balanson has served as President and Chief
Operating Officer since April 1997 and since October 1996 was Executive Vice
President, Development and Manufacturing. From August 1994 to September 1996,
Mr. Balanson was General Manager, Executive Vice President and Member of the
Board of Maxtor Corporation, a major supplier of computer disk drives, where he
was in charge of engineering, manufacturing, materials, sales and marketing.
From October 1992 to June 1994, Dr. Balanson was President and Chief Operating
Officer of Applied Magnetics Corporation, an OEM components supplier to
manufacturers of disk and tape drives. From 1975 to 1992, he held several
management and technical positions with International Business Machines
Corporation including IBM Research Division, where he had responsibility for
research and development in many areas, including xerography, optics, lasers and
computer storage media.
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Frank J. Spina: Mr. Spina joined 3D in November of 1997, having spent his
previous three years as Vice President and Corporate Controller at Qualcomm
Inc., a $2 billion developer and manufacturer of wireless communications
products. Prior to Qualcomm, he worked for nine years at Motorola Inc. serving
his last four years as their Group Operations Controller. Mr. Spina is a
Certified Public Accountant, and a graduate of Baldwin Wallace College in Ohio.
A. SIDNEY ALPERT: Mr. Alpert became Vice President, General Counsel of the
Company in January 1996 and has served as Secretary of the Company since May
1996. Prior thereto, from January 1994 through December 1995, Mr. Alpert was an
intellectual property consultant. From July 1988 through December 1993, Mr.
Alpert served as Chairman of the Board and Chief Executive Officer of University
Patents, Inc. (currently known as Competitive Technologies, Inc.), a corporation
listed on the American Stock Exchange which handles patent management and
technology transfer activities primarily for universities and colleges.
MARTY E. MCGOUGH: Mr. McGough has served as Vice President and Worldwide
Operations Manager since September 1997 after joining 3D Systems in January of
1997 and is responsible for manufacturing and operations, as well as world wide
field service. He was formally with Maxtor Corporation where he held the
position of Senior Director of Strategic Commodities. Prior to Maxtor, he held
management positions in Operations, Marketing, Program Management and other
manufacturing and materials positions. Mr. McGough received his B.S. degree
from California State University, Northridge in business administration and
earned his Masters in Business Management also from CSUN.
Subject to the employment agreements between the Company and each of
Messrs. Sims and Balanson, all officers serve at the pleasure of the Board of
Directors of the Company.
Page 19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth for the periods indicated the high and low
closing sales prices of the Company's Common Stock (symbol: TDSC) on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HISTORIC PRICES
-----------------
YEAR PERIOD HIGH LOW
--------------------------------------------------------------
<S> <C> <C> <C>
1996 First Quarter 24-1/8 18-7/8
Second Quarter 24-7/8 20
Third Quarter 21-3/4 12
Fourth Quarter 14-47/64 9-3/4
1997 First Quarter 16-1/4 9-3/8
Second Quarter 9-3/4 6
Third Quarter 10-1/4 8
Fourth Quarter 10-3/4 6
1998 First Quarter 11-7/8 5-3/4
Second Quarter 11-11/16 9
Third Quarter 10-1/4 5-1/2
Fourth Quarter 8-1/2 5-1/2
1999 First Quarter (through February 28) 7-15/16 6-1/8
</TABLE>
As of February 28, 1999, the outstanding Common Stock was held of record by
602 stockholders.
DIVIDENDS
The Company has not paid any dividends on its Common Stock and currently
intends to retain any future earnings for use in its business. Therefore, it
should not be expected that any dividends will be declared on the Common Stock
in the foreseeable future. Any dividend payment will be at the discretion of
the Company's Board of Directors and will require the consent of Silicon Valley
Bank (see "Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources") and will be
dependent upon the Company's earnings, operating and financial condition and
capital requirements, as well as general business conditions.
Page 20
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following summary of selected consolidated financial data for the
periods set forth below has been derived from the Consolidated Financial
Statements of 3D Systems Corporation. Such information should be read in
conjunction with Management's Discussion and Analysis of Results of Operation
and Financial Condition and with the Consolidated Financial Statements appearing
elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA: (in thousands except per share data)
Sales:
Products(1) . . . . . . . . . . . . . . . . $ 28,848 $ 43,544 $ 53,229 $ 59,149 $ 65,434
Services(2) . . . . . . . . . . . . . . . . 14,489 19,038 26,403 31,108 32,683
-------------- ------------ ----------- ------------ ------------
Total Sales . . . . . . . . . . . . . . 43,337 62,582 79,632 90,257 98,117
-------------- ------------ ----------- ------------ ------------
Cost of sales:
Products(1) . . . . . . . . . . . . . . . . 13,928 19,328 24,893 35,463 33,477
Services(2) . . . . . . . . . . . . . . . . 8,734 11,936 16,906 21,745 22,062
-------------- ------------ ----------- ------------ ------------
Total cost of sales . . . . . . . . . . 22,662 31,264 41,799 57,208 55,539
-------------- ------------ ----------- ------------ ------------
Gross profit . . . . . . . . . . . . . . . . . . 20,675 31,318 37,833 33,049 42,578
Operating expenses:
Selling, general and administrative . . . . 14,359 20,302 24,748 29,653 30,448
Research and development . . . . . . . . . . 3,207 6,109 7,665 10,991 9,425
-------------- ------------ ----------- ------------ ------------
Total operating expenses . . . . . . . 17,566 26,411 32,413 40,644 39,873
-------------- ------------ ----------- ------------ ------------
3,109 4,907 5,420 (7,595) 2,705
Interest income . . . . . . . . . . . . . . . . . 151 1,257 1,541 1,202 949
Interest and other (expense) . . . . . . . . . . (71) (42) (129) (356) (467)
-------------- ------------ ----------- ------------ ------------
Income (loss) before income tax expense
(benefit) . . . . . . . . . . . . . . . . . . . 3,189 6,122 6,832 (6,749) 3,187
Income tax expense (benefit) . . . . . . . . . . (1,313)(3) (2,795)(3) 2,233 (2,160) 1,055
-------------- ------------ ----------- ------------ ------------
Net income (loss) . . . . . . . . . . . . . . . . $ 4,502 $ 8,917 $ 4,599 $ (4,589) $ 2,132
-------------- ------------ ----------- ------------ ------------
-------------- ------------ ----------- ------------ ------------
Weighted average number of shares
outstanding . . . . . . . . . . . . . . . . . . . 9,155 10,246 11,323 11,398 11,348
Net income (loss) per common share . . . . . . . $ 0.49 $ .87 $ .41 $ (.40) $ .19
-------------- ------------ ----------- ------------ ------------
-------------- ------------ ----------- ------------ ------------
Weighted average number of shares
outstanding and dilutive shares . . . . . . . . . 9,365 10,708 11,742 11,398 11,594
Net income (loss) per common share assuming
dilution . . . . . . . . . . . . . . . . . . . . $ 0.48 $ .83 $ .39 $ (.40) $ .18
-------------- ------------ ----------- ------------ ------------
-------------- ------------ ----------- ------------ ------------
SYSTEM DATA:
Systems shipped (unaudited) . . . . . . . . . . . 73 120 157 274 222
Cumulative number of systems shipped
(unaudited) . . . . . . . . . . . . . . . . . . . 470 590 747 1,021 1,243
</TABLE>
Page 21
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . $ 11,722 $ 50,022 $ 49,764 $ 38,310 $ 38,306
Total assets . . . . . . . . . . . . . . 30,465 81,551 92,239 91,340 95,103
Current portion of long-term debt . . . -- -- 100 95 100
Long-term liabilities, excluding
current portion . . . . . . . . . . . . 1,474 1,622 6,273 6,197 6,090
Stockholders' equity . . . . . . . . . . 19,985 62,950 68,703 64,595 66,557
</TABLE>
- ------------------------
(1) Includes systems and related equipment, material, software and other
component parts as well as rentals of equipment.
(2) Includes maintenance services provided by the Company's Technology Centers
and training services.
(3) Includes the recognition of deferred tax assets, in accordance with SFAS
No. 109, of $1.5 million in 1994 and $3.0 million in 1995.
Page 22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's future results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not specifically limited to: the ability to develop
and introduce cost effective new products in a timely manner; developments in
current or future litigation; the Company's ability to successfully manufacture
and sell significant quantities of equipment on a timely basis; as well as the
other risks detailed in this section and in the sections entitled Results of
Operations and Liquidity and Capital Resources and Cautionary Statements and
Risk Factors.
OVERVIEW
The Company develops, manufactures and markets worldwide solid imaging
systems designed to rapidly produce physical objects from the digital output of
solid or surface data from computer aided design and manufacturing ("CAD/CAM")
and related computer systems. The Company's systems include SLA Industrial
Systems (SLA) and Solid Object Printers. The SLA Industrial Systems use the
Company's proprietary stereolithography technology, a solid imaging process
whereby a laser beam exposes and solidifies successive layers of photosensitive
resin until the desired object is formed to precise specifications in hard
plastic. The Solid Object Printers, sold as the Actua 2100 and ThermoJet,
utilize hot melt ink jetting technology to print models in successive layers
with a special thermopolymer material. These objects can be used for concept
models, engineering prototypes, patterns and masters for molds and other
applications.
The Company has sold over 1,200 systems since 1988, and its customers
include major corporations in a broad range of industries including
manufacturers of automotive, aerospace, computer, electronic, consumer and
medical products. The Company's revenues are generated by product and service
sales. Product sales are comprised of the sale of systems and related
equipment, materials, software, and other component parts, as well as rentals of
systems. Service sales include revenues from a variety of on-site maintenance
services, customer training, services provided by the Company's Technology
Centers and 3D Keltool licensing and support services.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain items
from the Company's Statement of Operations to Total Revenues:
<TABLE>
<CAPTION>
PERCENT OF TOTAL REVENUES
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Sales:
Products . . . . . . . . . . 66.8% 65.5% 66.7%
Services . . . . . . . . . . 33.2% 34.5% 33.3%
--------- --------- ---------
Total sales . . . . . . 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of sales:
Products . . . . . . . . . . 31.3% 39.3% 34.1%
Services . . . . . . . . . . 21.2% 24.1% 22.5%
--------- --------- ---------
Total cost of sales . . 52.5% 63.4% 56.6%
--------- --------- ---------
Total gross profit . . . . . . . 47.5% 36.6% 43.4%
Gross profit - products . . 53.2% 40.0% 48.8%
Gross profit - services . . 36.0% 30.1% 32.5%
Selling, general and
administrative expenses . . . . . 31.1% 32.8% 31.0%
Research and development
expenses . . . . . . . . . . . 9.6% 12.2% 9.6%
--------- --------- ---------
Income (loss) from operations . . 6.8% (8.4%) 2.8%
Other income and expense . . . . 1.8% .9% .5%
Income tax benefit (expense) . . (2.8%) 2.4% (1.1%)
--------- --------- ---------
Net income (loss) . . . . . . . . 5.8% (5.1%) 2.2%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Page 23
<PAGE>
The following table sets forth for the periods indicated total revenues
attributable to each of the Company's major products and services groups:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Products:
Systems and related equipment. . $ 38,230 $ 40,859 $ 44,580
Materials. . . . . . . . . . . . 10,563 13,548 15,614
Other. . . . . . . . . . . . . . 4,436 4,742 5,240
--------- --------- ---------
Total products. . . . . . . 53,229 59,149 65,434
--------- --------- ---------
Services:
Maintenance. . . . . . . . . . . 21,341 25,010 28,140
Other. . . . . . . . . . . . . . 5,062 6,098 4,543
--------- --------- ---------
Total services. . . . . . . 26,403 31,108 32,683
--------- --------- ---------
Total sales . . . . . . . . . . . . . $ 79,632 $ 90,257 $ 98,117
--------- --------- ---------
--------- --------- ---------
Products:
Systems and related equipment. . 48.0% 45.3% 46.0%
Material . . . . . . . . . . . . 13.3 15.0 15.9
Other. . . . . . . . . . . . . . 5.6 5.2 4.8
--------- --------- ---------
Total products. . . . . . . 66.9 65.5 66.7
--------- --------- ---------
Services:
Maintenance. . . . . . . . . . . 26.8 27.7 28.7
Other. . . . . . . . . . . . . . 6.3 6.8 4.6
--------- --------- ---------
Total services. . . . . . . 33.1 34.5 33.3
--------- --------- ---------
Total sales . . . . . . . . . . . . . 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
1998 COMPARED TO 1997
SALES. Sales in 1998 were $98.1 million, an increase of 8.7% over the $90.3
million recorded during 1997.
Product sales in 1998 increased $6.3 million or 10.6% to $65.4 million compared
to $59.1 million in 1997. The dollar increase was primarily due to improved
average selling prices in Europe as a result of the EOS acquisition, and an
improved product mix as the demand for the Company's Millennium series 3500 and
5000, launched in late 1997, caused a shift in the mix of customer orders to
more of these high end SLA systems. The Company sold a total of 222 systems in
1998 compared to 274 systems in 1997. Orders for the Company's systems in 1998
(compared to 1997) increased significantly in Europe and were up in the U.S.,
while orders were down slightly in Asia Pacific.
In 1997, the U.S. market was impacted by inefficiencies caused by changes in the
domestic sales organization.
Page 24
<PAGE>
The Company believes that system sales may fluctuate on a quarterly basis as a
result of a number of factors, including the acceptance and reliability of new
products in the market, status of world economic conditions, fluctuations in
foreign currency exchange rates, impact of changing technology, and the timing
of product shipments. Due to the high price of certain systems, the
acceleration or delay of a small number of shipments from one quarter to another
can significantly affect the results of operations for the quarters involved.
Service sales in 1998 increased $1.6 million, or 5.1%, compared to 1997,
primarily as a result of increased maintenance revenues due to the larger
installed base of SLA systems in the U.S. and Europe. This increase was offset,
in part, by a decline in revenues from the Company's Technology Centers.
COST OF SALES. Cost of sales decreased to $55.5 million or approximately 56.6%
of sales in 1998 compared to $57.2 million or 63.4% of sales in 1997.
Product cost of sales as a percentage of product sales improved in 1998,
decreasing from 60.0% in 1997 to 51.2% in 1998. This improvement was due
primarily to increased average selling prices in Europe, an improved product mix
to a higher end SLA systems, continued reductions in overall cost of factory
operations, and revenues related to certain royalty bearing lease agreements.
In addition, 1997 included inventory adjustments totaling approximately $1.8
million that were primarily associated with the transition to new products, the
EOS acquisition, and field service inventories.
The Company believes that the benefits from improved average selling prices have
been optimized and will not increase further and competitive pricing initiatives
may result in lower average selling prices over time. In addition, while the
Company expects reductions in factory costs to continue, the rate of reductions
may decrease. These are forward looking statements, and as such, are subject to
risks and uncertainties. For example, the acceptance and reliability of new
products in the market may result in inventory adjustments and increased factory
costs, and the impact of competition on changing economic conditions in the U.S.
and Europe may materially impact average selling prices. In addition, there can
be no assurance that the Company will not experience significant quarterly
fluctuations due to the impact of mix of products, channels, and markets, or
that a changing mix over time will not result in a higher average percentage of
cost of sales to product sales.
Service cost of sales as a percentage of service sales decreased to 67.5% in
1998 from 69.9% in 1997 primarily due to the fact that 1997 included certain
hardware upgrade costs associated with the Company's NT version system software.
In addition, field service costs are improving as a result of increased
reliability of the Company's systems. This is offset, in part, by declining
revenues in the Company's Technology Center. While the Company expects to see
continued improvements in field service costs, the Company does not expect an
improvement in Technology Center revenues in the first half of 1999. As such,
service cost of sales as a percentage of sales are not expected to decrease
further in 1999. This is a forward looking statement, however, and as such
includes certain risks. For example, the reliability of new products in the
market or a further decline in the demand or market pricing of Technology Center
services, could cause an increase in service costs of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") improved, as a percent of sales, to 31.0% of total sales
in 1998 from 32.9% in 1997. SG&A expense increased $.8 million or 2.7% from
1998 to 1997, due primarily to increased commissions and sales bonuses resulting
from higher sales and profits, and costs related to expanded marketing and
communications programs, and increased bad debt costs due to conditions in the
service bureau customer base, most notably the Chapter 7 filing of P2 Holdings
dba Plynetics Express, one of the largest service bureaus in the U.S. With the
introduction of new products, the Company expects an increase in SG&A expenses
in 1999 as compared to 1998, while SG&A expenses as a percent of sales is
expected to continue to decline. However, this is a forward looking statement
and, as such, includes certain risks. For example, the acceptance and
reliability of new products, or changing economic conditions in the U.S. and
Europe may materially impact total sales for any particular period, and result
in an increase in SG&A expenses as a percentage of sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses in
1998 decreased approximately $1.6 million or approximately 14.2% compared to
1997. The decrease in R&D expenses in 1998 was due primarily to the fact that
1997 included a write-off of acquired in-process technology valued at
approximately $2,100,000 in connection with the EOS acquisition (see Note 7 of
Notes to Consolidated Financial Statements) offset in part by increased
personnel and experimental material costs related to certain development
projects. Based on the Company's historical expenditures related to research
and development and its current development goals, the Company anticipates for
the foreseeable future, research and development expenses will be approximately
ten percent of sales. However, this is a forward-looking statement and, as with
any such statement, is subject to uncertainties. For example, if total
Page 25
<PAGE>
sales of the Company for any particular period do not meet the anticipated
sales of the Company for that period, research and development expenses as a
percentage of sales may exceed ten percent.
OPERATING INCOME (LOSS). Operating income in 1998 was 2.8% of total sales
compared to an operating loss of (8.4%) of total sales in 1997. The improvement
in 1998 is primarily attributable to inventory write offs and costs associated
with the EOS acquisition included in 1997, improved average selling prices and
product mix, and improving product and service cost of sales, as described
above.
OTHER INCOME AND EXPENSES. Interest income decreased by $.3 million in 1998
compared to 1997. This decrease is primarily due to lower average income on
leases and investment balances. Interest and other expense increased by $.1
million in 1998 compared to 1997 due to various non operating expenses.
PROVISION FOR INCOME TAXES (BENEFITS). For 1998 the Company's tax expense was
$1.1 million or 33.1% of pre-tax income (loss), compared to a tax benefit of
$2.2 million in 1997. The Company's effective tax rate was favorably impacted
from statutory rates primarily as a result of utilizing research and
experimentation tax credits and the effects of foreign operations.
Page 26
<PAGE>
1997 COMPARED TO 1996
SALES. Sales in 1997 were $90.3 million, an increase of 13% over the $79.6
million recorded during 1996.
Product sales in 1997 increased $5.9 million or 11% to $59.1 million compared to
$53.2 million in 1996. The dollar increase was primarily the result of
increased shipments of SLAs in both the U.S. and Europe. The Company sold a
total of 161 SLA systems and a total of 113 Actua 2100 systems in 1997. In
1996, the Company sold 151 SLAs and 6 Actua 2100's. Orders for the Company's
systems in 1997 (compared to 1996) increased in both Europe and Asia Pacific but
declined in the U.S. market and total systems backlog at the end of 1997 was
lower than the end of 1996.
The Company believes that the decline in the U.S. orders in 1997 (when compared
to 1996) was due primarily to the inefficiencies caused by the recent changes in
the domestic sales organization from a strategy of utilizing independent sales
representatives (primarily in the machine tool industry) to a direct sales
force. The Company completed its staffing of its domestic sales organization
during the second half of 1997.
Service sales in 1997 increased $4.7 million, or 18%, compared to 1996,
primarily as a result of increased maintenance revenues due to the larger
installed base of SLA systems in the U.S. and Europe.
COST OF SALES. Cost of sales increased to $57.2 million or 63% of sales in 1997
compared to $41.8 million or 52% of sales in 1996.
Product cost of sales as a percentage of product sales increased to 60% in 1997
compared to 47% in 1996. The increase in 1997 was primarily the result of
greater discounting of system sales in 1997 due to competition, the sales mix of
the Company's products as well as the channels and markets in which the Company
distributes its products. In addition, the Company recorded inventory
adjustments totaling approximately $1.8 million, or 5 percentage points of the
increase, that were primarily associated with the transition to our new
generation of products announced in the third quarter of 1997, the EOS
acquisition and field service inventories.
Service cost of sales as a percentage of service sales increased to 70% in 1997
compared to 64% in 1996, primarily as a result of certain hardware upgrades
afforded SLA-500 customers with software maintenance contracts due to the
Company's new NT version system software, increased parts costs under the
Company's field maintenance contracts and the effect of certain inefficiencies
attributable to the Company's Keltool operations which were acquired in
September 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("S,G&A") expenses increased $5.0 million or 20% in 1997 compared
to 1996, primarily as a result of approximately $2.0 million of non-recurring
expenses for severance benefits and other costs related to restructuring plans
designed to reduce costs and improve operating results and the expanded
sales and marketing program in Europe and the U.S.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses in
1997 increased approximately $3.3 million of 43% compared to 1996. The increase
in R&D expenses in 1997 was primarily the result of the write-off during the
third quarter of 1997 of acquired in-process technology valued at approximately
$2,100,000 in connection with the EOS acquisition (see Note 7 of Notes to
Consolidated Financial Statements) and increased personnel costs and
experimental material related to certain development projects.
OPERATING INCOME (LOSS). Operating loss in 1997 was (8.4%) of total sales
compared to operating income of 6.8% of total sales in 1996. The decrease in
percentage of operating income to total sales in 1997 was primarily attributable
to increases in cost of sales (both products and services) in 1997 and the
increased S,G&A and R&D expenses, as described above.
OTHER INCOME AND EXPENSES. Interest income decreased to $1.2 million in 1997
from $1.5 million in 1996, primarily as a result of the lower investment
balances due to cash used for operating activities and investment activities
partially offset by interest income from lease receivables. Interest expense
increased to $.4 million in 1997 from $.1 million in 1996 primarily as a result
of the Company's financing of its Colorado facility which was effected August
20, 1996.
PROVISION FOR INCOME TAXES (BENEFITS). For 1997 the Company's tax benefit was
$2.2 million or 32% of pre-tax income (loss), compared to a tax expense of $2.2
million in 1996.
Page 27
<PAGE>
FOREIGN OPERATIONS
International sales accounted for 33.8%, 41.5% and 44.1% of total sales in
1996, 1997 and 1998, respectively. For information with respect to allocation
of sales among the Company's foreign operations, see Note 17 of Notes to
Consolidated Financial Statements.
The effects of the Asian currency crisis affected the growth of the Asian
market, and sales for 1998 were approximately equal to 1997 levels. The
European operations continued to grow and the Company opened an office in
Barcelona, Spain to address the growth of the Southern European market.
To date, the Company has not entered into hedging transactions to protect
against changes in foreign currency exchange rates.
Page 28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
1996 1997 1998
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents(1) . . . . . $ 25,078 $ 12,695 $ 15,912
Short-term investments . . . . . . . . 3,759 3,498 3,485
Working capital(1) . . . . . . . . . . 49,764 38,310 38,306
Cash provided by (used for) operating
activities . . . . . . . . . . . . . . (7,016) (4,979) 7,563
Cash used for investing activities . . (12,497) (8,202) (4,234)
Cash provided by (used for)
financing activities . . . . . . . . . 5,384 1,059 (853)
</TABLE>
- -------------------
(1) Includes $722,000 of restricted cash at December 31, 1996.
Net cash provided by (used for) operating activities in 1996, 1997, and
1998 was $(7.0) million, $(5.0) million and $7.6 million, respectively. The
positive cash flow from operations in 1998 was comprised primarily of net income
of $2.1 million adjusted for non-cash items such as amortization and
depreciation in the amount of $5.8 million.
Net cash used for investing activities in 1998 totaled $4.2 million and was
primarily the result of an increase in property and equipment relating primarily
to increased demonstration equipment due to new products, the purchase of
computers and manufacturing equipment required for expansion, and an increase in
license and patent costs.
Net cash used for financing activities in 1998, totaling $.9 million was
the result of the Company buying back 200,000 of its own shares in the open
market, for approximately $1.4 million, partially offset by proceeds from the
exercise of stock options and warrants.
In August 1998, the Company extended its credit facility with Silicon
Valley Bank ("SVB") (the "Credit Facility"). Under the terms of the agreement,
which remains in effect through August 18, 1999, the Company can borrow from SVB
up to $10,000,000, at the bank's prime interest rate. The Credit Facility
contains certain financial covenants including the maintenance of certain
financial ratios, working capital, tangible net worth as well as covenants
limiting mergers, acquisitions, recapitalizations, dividends, loans to others,
and hypothecation of assets or corporate guarantees. As of December 31, 1998,
the Company has yet to utilize the Credit Facility.
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 in the open market
and through private transactions. During 1997, the Company purchased 25,000 of
its own shares for approximately $165,000. During the first quarter of 1998,
the Company purchased 200,000 of its own shares for approximately $1.4 million.
The Company may continue to acquire additional shares from time to time at
prevailing market prices, at a rate consistent with the combination of corporate
cash flow and market conditions.
The Company believes that funds generated from operations, existing working
capital and its current line of credit will be sufficient to satisfy its
anticipated operating requirements for at least the next twelve months. From
time to time the Company considers the acquisition of businesses, products or
technologies complimentary to the Company's current business. Should the
Company decide to pursue such a transaction, and it exceeds funds available from
current operations, the Company may require additional funds.
There were no significant inflationary trends that impacted the Company in
1998.
The Company has established a team to address the issues raised by the
introduction of the Single European Currency ("Euro") for initial implementation
as of January 1, 1999 and during the transition period through January 1,
2002. The Company expects that its internal systems that will be affected by
the initial introduction of the Euro will be Euro capable by the third quarter
1999 and does not expect the costs of system modifications to be material. The
Company does not presently expect that the introduction and use of the Euro
will materially affect the Company's foreign exchange or
Page 29
<PAGE>
will result in any material increase in costs to the Company. While the Company
will continue to evaluate the impact of the Euro introduction over time, based
on currently available information, management does not believe that the
introduction of the Euro currency will have a material adverse impact on the
Company's financial condition or overall trends in results of operations.
YEAR 2000 COMPLIANCE. Computer-based systems that require date/time calculations
to operate correctly are subject to miscalculations and system failures on and
after the year 2000. This is known as the Y2K problem. The Y2K problem affects
systems that were developed to accept two digit entries for the year in the date
code field. After midnight on December 31, 1999, these systems may recognize a
date using '00' as the year 1900 rather than the year 2000. Another known issue
is that many systems will not recognize the year 2000 as a leap year. The Y2K
problem is pervasive in that it goes beyond internal systems to involve supply
and distribution chains and extends to both public and private infrastructure
services including water, gas, electricity, transportation and communications.
The Company believes its current products are Year 2000 compliant. In
addition, the Company has been evaluating all products sold since inception for
Year 2000 readiness, and is providing the results of the analysis and potential
impacts and resolutions to its customers. Current information on the Company's
Y2K status can be found on the Internet at: http://www.3dsystems.com. In the
fourth quarter of 1998, the Company completed the evaluation of substantially
all its products. The necessary upgrade pathways to its customers will be
completed by the end of the first quarter of 1999. The Company plans to have the
actual software patches that may be required available for customers by the
third quarter 1999. The Company believes that all products will meet basic
functionality requirements, however, since all specific customer situations and
uses cannot be anticipated, 3D Systems may see an increase in warranty and other
claims as a result of the Year 2000 transition. For these reasons, the impact
of customer claims could have a material adverse impact on the Company's results
of operations or financial condition.
The Company is continuing the comprehensive evaluation of its internal
business systems. Certain critical infrastructure and information systems are
being upgraded to meet Year 2000 requirements. These upgrades will also have
the benefit of meeting the Euro currency requirements and expanding the
capability of the Company. At the completion of these current projects, the
Company will be conducting transaction testing to evaluate compliance of the
overall system infrastructure. To date, the Company has substantially completed
the risk analysis on all U.S.-based systems. During the fourth quarter 1998,
the Company has completed substantially all infrastructure upgrades in the U.S.
as well as certain European operations. The Company plans to complete the risk
analysis of foreign operations in the first quarter of 1999, as well as
implement the Year 2000 compliance upgrade of its core ERP system. The Company
believes that the vast majority of Y2K-related issues with respect to internal
business systems will be inventoried, analyzed, and resolved by the third
quarter 1999, and that certification and/or testing will be completed by the end
of the third quarter 1999.
Since the majority of the efforts related to Year 2000 Compliance are being
performed by internal resources, and are part of an overall plan to upgrade the
overall capability of the Company and meet Euro currency requirements, there is
no exact program budget or cost associated exclusively with Year 2000 efforts.
The Company believes costs related to Year 2000 compliance are less than
$750,000, and estimates that costs for the worldwide program will not exceed
$1.5 million. As stated in the Liquidity and Capital Resources section, the
Company believes that funds generated from operations will be sufficient to
satisfy Year 2000 compliance costs.
3D Systems is continuing to review its critical suppliers to determine that
the suppliers' operations and the products and services they provide are Year
2000 compliant. The Company has completed a survey of key suppliers and
evaluated their individual risk potential as well as the risk potential of their
suppliers. In addition, the Company has conducted site surveys of certain
critical or sole source suppliers. The Company will begin evaluating next
tier suppliers in the first quarter 1999. Currently, the Company's contingency
strategies include seeking alternative sources of supplies or acquiring
sufficient material to support the Company's operations for the first half of
2000. Though the Company believes it has sufficient alternatives and liquidity
to meet this contingency strategy, such failures of suppliers remain a
possibility and could have a material adverse impact on the Company's results of
operations or financial condition.
Year 2000 compliance is an issue for virtually all businesses, whose
computer systems and applications may require significant hardware and software
upgrades or modifications. Companies owning and operating such systems may plan
to devote a substantial portion of their capital spending to fund such upgrades
and modifications and divert spending away from capital manufacturing equipment
spending. Such changes in customers' spending patterns could have a material
adverse impact on the Company's sales, operating results or financial condition.
Page 30
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements as of December 31, 1997 and 1998 and for each
of the three years in the period ended December 31, 1998 and the report of
Independent Accountants are listed on pages F-1 to F-27 of this Annual Report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Page 31
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers of the Registrant required
by Item 401(b) of Regulation S-K is presented at the end of Part I of this Form
10-K. Information regarding directors of the Registrant required by Item 401 of
Regulation S-K and information regarding Directors and Executive Officers of
Registrant required by Item 405 of Regulation S-K will be presented under the
caption "Election of Directors" in the definitive Proxy Statement for the
Company's 1998 Annual Meeting of Shareholders, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K will be presented
under the captions "Election of Directors" and "Executive Compensation" in the
definitive Proxy Statement for the Company's 1998 Annual Meeting of
Shareholders, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K will be presented
under the caption "Principal Shareholders" in the definitive Proxy Statement for
the Company's 1998 Annual Meeting of Shareholders, and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K will be presented
under the caption "Transactions with Executive Officers and Directors" in the
definitive Proxy Statement for the Company's 1998 Annual Meeting of
Shareholders, and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
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a The following Consolidated Financial Statements, Financial Statement
Schedule and Exhibits are filed as part of this Annual Report on
Form 10-K as listed on page F1 of this document.
b REPORTS ON FORM 8-K
Current report on Form 8-K dated October 22, 1997 containing item 5
disclosure.
c EXHIBITS
The following exhibits are included as part of this Annual Report on
Form 10-K and incorporated herein by this reference:
1.1 Arrangement Agreement (and related exhibits) among Registrant, 3-D
Canada and Avenue Hall Holding Corporation, dated as of May 19, 1993.
Incorporated by reference to Exhibit 1.1 to Form 8-B filed August 16,
1993 and the amendment thereto filed on Form 8-B/A filed on February
4, 1994.
1.2 Exchange Agreement among Registrant, 3-D Canada, Avenue Hall Holding
Corporation and Montreal Trust Company of Canada, dated as of May 19,
1993. Incorporated by reference to Exhibit 1.2 to Form 8-B filed
August 16, 1993 and the amendment thereto filed on Form 8-B/A filed
February 4, 1994.
2.1 Material captioned "United States Domestication of the Company" set
forth in the Information Circular (Proxy Statement) dated May 21,
1993, for the Annual Meeting of Shareholders of 3-D Canada, held on
June 25, 1993, filed with the Securities and Exchange Commission on
May 24, 1993.
2.2 Asset Purchase Agreement entered into as of December 31, 1990 by and
between Spectra-Physics GmbH and 3D Systems GmbH. Incorporated herein
by reference to Exhibit 2.1 to 3-D Canada's Current Report on Form 8-K
filed January 14, 1991 and the amendments thereto.
2.3 Agreement for transfer of a business entered into as of December 31,
1990 by and between Spectra-Physics (France) and 3D Systems France.
Incorporated herein by reference to Exhibit 2.2 to 3-D Canada's
Current Report on Form 8-K filed January 14, 1991 and the amendments
thereto.
2.4 Asset Purchase Agreement entered into as of December 31, 1990 by and
between Spectra-Physics Limited and 3D Systems, Inc. Limited
(England). Incorporated herein by reference to Exhibit 2.3 to 3-D
Canada's Current Report on Form 8-K filed January 14, 1991 and the
amendments thereto.
2.5 Amendment dated August 28, 1991 to Asset Purchase Agreement between 3D
Systems GmbH and Spectra-Physics GmbH dated December 29, 1990.
Incorporated herein by reference to Exhibit 2.4 to 3-D Canada's
Current Report on Form 8-K filed September 11, 1991.
3.1 Certificate of Incorporation of Registrant. Incorporated by reference
to Exhibit 3.1 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to
Form 8-B filed August 16, 1993 and the amendment thereto filed on Form
8-B/A filed on February 4, 1994.
4.1* 1989 Employee and Director Incentive Plan. Incorporated by reference
to Exhibit 4.1 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
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* Management contract or compensatory plan or arrangement.
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4.2* Form of Director Option Contract to be entered into pursuant to the
1989 Employee and Director Incentive Plan. Incorporated by reference
to Exhibit 4.2 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
4.3* Form of Officer Option Contract to be entered into pursuant to the
1989 Employee and Director Incentive Plan. Incorporated by reference
to Exhibit 4.3 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
4.4* Form of Employee Option Contract to be entered into pursuant to the
1989 Employee and Director Incentive Plan. Incorporated by reference
to Exhibit 4.4 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.1 Lease with respect to Valencia property dated as of July 12, 1988, by
and between 3D California and Valencia Tech Associates. Incorporated
herein by reference to Exhibit 3.1 to 3-D Canada's annual Report on
Form 20-F for the year ended December 31, 1987 (Reg. No. 0-16333).
10.2 Amendment No. 1 to Lease Agreement between 3D California and Katell
Valencia Associates, a California limited partnership, dated May 28,
1993. Incorporated by reference to Exhibit 10.2 to Form 8-B filed
August 16, 1993 and the amendment thereto filed on Form 8-B/A filed on
February 4, 1994.
10.3 Agreement dated as of July 19, 1988, by and among 3D California, UVP,
Cubital, Ltd. and Scitex Corporation Ltd. Incorporated herein by
reference to Exhibit 3.10 to 3-D Canada's Annual Report on Form 20-F
for the year ended December 31, 1987 (Reg. No. 0-16333).
10.4 Exclusive License Agreement dated as of May 16, 1986, by and between
3D California and UVP. Incorporated herein by reference to Exhibit 5
to 3-D Canada's Registration Statement on Form 20-F (Reg. No. 0-16333).
10.5 Form of Subscription Agreement made as of the 18th day of April, 1989
between 3-D Canada and places pursuant to the private placement of
special warrants completed on April 27, 1989, together with all
Schedules thereto, and form of Confirmation of Agreement.
Incorporated herein by reference to Exhibit 2.6 to 3-D Canada's Annual
Report on Form 20-F for the year ended December 31, 1988.
10.6 Patent Purchase Agreement dated January 5, 1990 by and between 3D
California and UVP. Incorporated herein by reference to Exhibit 10.28
to 3-D Canada's Registration Statement on Form S-1 (Reg. No. 33-31789).
10.7 Security Agreement dated as of the 5th day of January, 1990 by and
between UVP and 3D California relating to security interest on UVP
Patent. Incorporated herein by reference to Exhibit 10.29 to 3-D
Canada's Registration Statement on Form S-1 (Reg. No. 33-31789).
10.8 Assignment of UVP Patent dated January 12, 1990 by UVP to 3D
California. Incorporated herein by Reference to Exhibit 10.30 to 3-D
Canada's Registration Statement on Form S-1 (Reg. No. 33-31789).
10.9 Exchange Agreement dated July 23, 1990 by and among 3-D Canada, 3D
California, CIBA-GEIGY Capital Corporation, Raymond S. Freed, Charles
W. Hull, Bethany Griffiths, Virginia Hiramatsu, Paul B. Warren and
Edwin J. Kaftal, together with all Exhibits thereto. Incorporated
herein by reference to Exhibit 10.30 to 3-D Canada's Registration
Statement on Form S-1 (Reg. No. 33-31789).
10.10 Research and Development Agreement entered into as of August 15, 1990
by and between 3D California and Ciba-Geigy Limited. Incorporated
herein by reference to Exhibit 10.32 to 3-D Canada's Current Report on
Form 8-K filed August 21, 1990 and the amendments thereto.
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* Management contract or compensatory plan or arrangement.
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10.11 Distribution Agreement entered into as of July 1, 1990 by and between
3D California and Ciba-Geigy Limited. Incorporated herein by
reference to Exhibit 10.33 to 3-D Canada's Current Report on Form 8-K
filed August 21, 1990 and the amendments thereto.
10.12 Severance agreements: 10.12(a) Severance Agreement dated April 5,
1991 by and between 3-D Canada and Mr. Raymond S. Freed; and 10.12(b)
Severance Agreement dated May 15, 1991 by and between 3-D Canada and
Mr. Edwin J. Kaftal. Incorporated by reference to 3-D Canada's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, and
the amendments thereto.
10.13* Employment Agreement dated of as September 4, 1991, between 3D
California and Arthur B. Sims. Incorporated herein by reference to
Exhibit 10.14 to 3-D Canada's Annual Report on Form 10-K for the year
ended December 31, 1992, and the amendments thereto.
10.14* Employment Agreement dated as of September 6, 1991, between 3D
California and Gordon L. Almquist. Incorporated herein by reference
to Exhibit 10.15 to 3-D Canada's Annual Report on Form 10-K for the
year ended December 31, 1992, and the amendments thereto.
10.15* Employment Agreement dated as of October 31, 1991, between 3D
California and Edward M. Gloyne. Incorporated herein by reference to
Exhibit 10.16 to 3-D Canada's Annual Report on Form 10-K for the year
ended December 31, 1992, and the amendments thereto.
10.16* Employment Agreement dated as of June 29, 1992 between 3D California
and Richard P. Fedchenko. Incorporated herein by reference to Exhibit
10.18 to 3-D Canada's Annual Report on Form 10-K for the year ended
December 31, 1992, and the amendments thereto.
10.17 Form of Indemnification Agreement between Registrant and certain of
its executive officers and directors. Incorporated by reference to
Exhibit 10.18 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.18 Amendment No.1 to a Shareholders' Agreement, such Shareholders'
Agreement being dated as of April 10, 1991, among 1726 Holdings Ltd.,
a British Columbia corporation ("1726"), Lionheart Capital Corp., a
British Columbia corporation ("Lionheart"), 3-D Canada, and Raymond S.
Freed, Charles W. Hull, Bethany Griffiths, Virginia Hiramatsu, Paul B.
Warren and Edwin J. Kaftal (Freed, Hull, Griffiths, Hiramatsu, Warren
and Kaftal are collectively referred to as the "Founders"), dated as
of May 5, 1993, by and among 1726, Lionheart, 3-D Canada, the Founders
and Registrant. Incorporated by reference to Exhibit 10.19 to Form
8-B filed August 16, 1993 and the amendment thereto filed on Form 8-B/A
filed on February 4, 1994.
10.19 Loan and Security Agreement, as amended, dated as of June 2, 1993, by
and between 3-D California, 3D Systems Inc. Limited (England), 3D
Systems France SARL, 3D Systems GmbH, 3D Systems Japan, Ltd. and
Silicon Valley Bank. Incorporated by reference to Exhibit 10.20 to
Form 8-B filed August 16, 1993 and the amendment thereto filed on Form
8-B/A filed on February 4, 1994.
10.20 Cross-Corporate Continuing Guaranty dated as of August 12, 1993,
executed by Registrant, 3D Systems Inc. Limited (England), 3D Systems
France SARL, 3D Systems GmbH, 3D Systems Japan, Ltd. and 3D California
in favor of Silicon Valley Bank. Incorporated by reference to Exhibit
10.21 to Form 8-B filed August 16, 1993 and the amendment thereto
filed on Form 8-B/A filed on February 4, 1994.
10.22 Antidilution Agreement dated as of August 12, 1993, by and between
Registrant and Silicon Valley Bank. Incorporated by reference to
Exhibit 10.23 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.23 Registration Rights Agreement dated as of August 12, 1993, by and
between Registrant and Silicon Valley Bank. Incorporated by reference
to Exhibit 10.24 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
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* Management contract of compensatory plan or arrangement.
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10.24 Assumption Agreement dated as of August 12, 1993, by and between 3D
Systems (Canada) Inc. and Silicon Valley Bank. Incorporated by
reference to Exhibit 10.25 to Form 8-B filed August 16, 1993 and the
amendment thereto filed on Form 8-B/A filed on February 4, 1994.
10.25 Letter Agreement dated July 31, 1993 by and among 3D California,
Silicon Valley Bank, and UVP, Inc. Incorporated by reference to
Exhibit 10.26 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.26 Standby Share Purchase Agreement dated as of May 26, 1992, by and
among 3-D Canada and Invesco MIM, C&S Investment Management, Ltd.,
Noland Carter, Prudential Portfolio Managers Limited, Fred C. Goad,
Jr., The Clark Estates, Inc., Foreign & Colonial Smaller Companies
PLC. Incorporated herein by reference to Exhibit 1.2 to 3-D Canada's
Registration Statement on Form S-2 (Reg. No. 33-46823).
10.27 Stock Purchase Agreement, as amended, dated as of September 30, 1986,
by and among 3D California, Lionheart Resources Corporation, a British
Columbia corporation, and 3-D Canada. Incorporated herein by
reference to Exhibit 4 to 3-D Canada's annual report on Form 20-F for
the year ended December 31, 1987 (Reg. No. 0-16333).
10.28 Security Agreement dated as of August 12, 1993, by and between
Registrant and Silicon Valley Bank. Incorporated by reference to
Exhibit 10.29 to Form 8-B filed August 16, 1993 and the amendment
thereto filed on Form 8-B/A filed on February 4, 1994.
10.29 Letter of Understanding with respect to Loan and Security Agreement,
as amended, dated August 12, 1993, by and between 3-D California, 3D
Systems Inc. Limited (England), 3D Systems France SARL, 3D Systems
GmbH, 3D Systems Japan, Ltd. and Silicon Valley Bank. Incorporated by
reference to Exhibit 10.30 to Form 8-B filed August 16, 1993 and the
amendment thereto filed on Form 8-B/A filed on February 4, 1994.
10.31 Termination Agreement entered into as of January 1, 1990 by and among
3D California, The Japan Steel Works, Ltd. and 3D Systems Japan, Ltd.
Incorporated herein by reference to Exhibit 10.27 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1989.
10.32 Amendment to Termination Agreement dated April 13, 1993 by and among
3D California, The Japan Steel Works, Ltd. and 3D Systems Japan, Ltd.
Incorporated by reference to Exhibit 10.33 to Form 8-B filed August
16, 1993 and the amendment thereto filed on Form 8-B/A filed on
February 4, 1994.
10.33* Employment Agreement dated March 1, 1994, by and among the Registrant,
3D Systems, Inc., a California corporation and Charles W. Hull.
Incorporated herein by reference to Exhibit 10.1 to the Registrant's
Form 10-Q for the quarterly period ended July 1, 1994 filed on August
9, 1994.
10.35 Amendment to Loan Agreement dated as of August 3, 1994, by and between
3D Systems, Inc., 3D Systems Inc. Limited, 3D Systems France SARL, 3D
Systems GmbH and Silicon Valley Bank. Incorporated herein by
reference to Exhibit 10.36 to the Registrant's Form 10-Q for the
quarterly period ended September 30, 1994 filed on November 4, 1994.
10.36 Amended Schedule to Loan and Security Agreement dated as of August 3,
1994, by and between 3D Systems, Inc., 3D Systems Inc. Limited, 3D
Systems France SARL, 3D Systems GmbH and Silicon Valley Bank.
Incorporated herein by reference to Exhibit 10.37 to the Registrant's
Form 10-Q for the quarterly period ended September 31, 1994 filed on
November 4, 1994.
10.37 Collateral Assignment, Patent Mortgage and Security Agreement dated as
of August 3, 1991, by and between 3D Systems, Inc., 3D Systems Inc.
Limited, 3D Systems France SARL, 3D Systems GmbH, 3D Systems
Corporation, 3D Systems (Canada) Inc. and Silicon Valley Bank.
Incorporated herein by reference to Exhibit 10.38 to the Registrant's
Form 10-Q for the quarterly period ended September 30, 1994 filed on
November 4, 1994.
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* Management contract of compensatory plan or arrangement.
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10.38* Employment Agreement dated October 31, 1994, by and among the
Registrant, 3D Systems, Inc., a California corporation and Arthur B.
Sims. Incorporated by reference to Exhibit 10.39 to Form 10-K for the
year ended December 31, 1994.
10.39 Letter of intent dated March 7, 1995 by and between 3D Systems, Inc.,
a California corporation and CIBA-GEIGY Corporation, a New York
corporation. Incorporated by reference to Exhibit 10.40 to Form 10-K
for the year ended December 31, 1994.
10.40 Agreement dated October 4, 1995 between the Registrant and Mesa County
Economic Development Council, inc., a Colorado non-profit Corporation.
Incorporated herein by reference to Exhibit 10.1 to the Registrant's
Form 10-Q for the quarterly period ended September 29, 1995 filed
November 13, 1995.
10.41 Amendment No. 1 to Distribution Agreement dated May 5, 1995 between
Ciba Chemicals and the Registrant. Incorporated herein by reference
to Exhibit 10.40 to Amendment No. 1 to Registration Statement on Form
S-2 filed on May 25, 1995.
10.42 Registration and Indemnification Agreement dated June 1995 between the
Registrant and 1726 Holdings Canada, Inc. Incorporated herein by
reference to Exhibit 10.41 to Amendment No. 2 to Registration
Statement of Form S-2 filed on June 13, 1995.
10.43* Employment Agreement dated as of December 27, 1995 between the
Registrant and A. Sidney Alpert. Incorporated herein by reference to
Exhibit 10.43 to the Registrant's 10-K for the year ended December 31,
1995 filed on April 1, 1996.
10.44 Amendment dated July 5, 1995 to Loan and Security Agreement dated June
2, 1993, as previously amended, by and between the Registrant, 3D
California, 3D Systems, Inc. Limited, 3D Systems France SARL, 3D
Systems GmbH and Silicon Valley Bank. Incorporated herein by
reference to Exhibit 10.44 to the Registrant's Form 10-K for the year
ended December 31, 1996.
10.45 License, Development, and OEM Agreement dated March 31, 1995 between
Spectra, Inc. and 3D Systems, Inc. Incorporated herein by reference
to Exhibit 10.45 to the Registrant's 10-K for the year ended December
31, 1995 filed on April 1, 1996. [Portions of the exhibit have been
omitted and filed separately with the SEC pursuant to a grant of
confidential treatment].
10.46* Employment letter dated April 11, 1996 between the Registrant and Mark
R. Bell. Incorporated herein by reference to exhibit 10.1 to the
Registrant's 10-Q for the quarterly period ended March 29, 1996 filed
on May 7, 1996.
10.47 Asset Purchase Agreement dated as of August 30, 1996 by and between 3D
Systems, Inc., a California corporation, Keltool, Inc. a Minnesota
corporation and Wayne Duescher. Incorporated herein by reference to
Exhibit 10.1 to the Registrant's 10-Q for the quarterly period ended
September 27, 1996 filed on November 12, 1996.
10.48 Warrant Agreement dated September 9, 1996 by and between 3D Systems,
Inc., a California corporation and Keltool, Inc. a Minnesota
corporation. Incorporated herein by reference to Exhibit 10.2 to the
Registrant's 10-Q for the quarterly period ended September 27, 1996
filed on November 12, 1996.
10.49 Non-Competition Agreement dated September 9, 1996 by and between 3D
Systems, Inc., a California corporation and Wayne O. Duescher.
Incorporated herein by reference to Exhibit 10.3 to the Registrant's
10-Q for the quarterly period ended September 27, 1996 filed on
November 12, 1996.
10.50* Employment Agreement dated as of February 6, 1996 between the
Registrant and Eugen J. Geyer. Incorporated herein by reference to
Exhibit 10.50 to the Registrant's Form 10-K for the year ended
December 31, 1997.
10.51* Employment Agreement dated October 28, 1996 between the Registrant and
Richard D. Balanson. Incorporated herein by reference to Exhibit
10.51 to the Registrant's Form 10-K for the year ended December 31,
1997.
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* Management contract of compensatory plan or arrangement.
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10.52 Amendment dated July 5, 1996 to Loan and Security Agreement dated June
2, 1993, as previously amended, by and between the Registrant and
Silicon Valley Bank. Incorporated herein by reference to Exhibit 10.52
to the Registrant's Form 10-K for the year ended December 31, 1996.
10.53 Amendment, dated August 18, 1997, to Loan Agreement and Amended
Schedule to Loan and Security Agreement dated June 2, 1993 between
Silicon Valley Bank and 3D Systems, Inc., 3D Systems Inc. Limited, 3D
Systems France SARL and 3D Systems GmbH. Incorporated herein by
reference to Exhibit 10.53 to the Registrant's Form 10-K for the
year ended December 31, 1997.
10.54* Employment Agreement effective November 17, 1997 between the
Registrant and Mr. Frank J. Spina. Incorporated herein by reference
to Exhibit 10.54 to the Registrant's Form 10-K for the year ended
December 31, 1997.
10.55* Employment letter effective January 7, 1997 between the Registrant and
Mr. Martin E. McGough. Incorporated herein by reference to Exhibit
10.55 to the Registrant's Form 10-K for the year ended December 31,
1997.
10.56 Patent License Agreement dated December 16, 1998 by and between 3D
Systems, Inc., NTT Data CMET, Inc. and NTT Data Corporation.
[Confidential Treatment Requested].
22.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants - PricewaterhouseCoopers LLP
27 Financial Data Schedule
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
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CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants..............................................................................F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998...................................................F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998.....................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998...........F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998.....................F-6
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1996, 1997 and 1998...........F-7
Notes to Consolidated Financial Statements for the Years Ended December 31, 1996, 1997 and 1998................F-8
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants on Financial Statement Schedule..............................................F-26
Schedule II - Valuation and Qualifying Accounts................................................................F-27
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F-1
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
3D Systems Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, cash flows and
comprehensive income present fairly, in all material respects, the financial
position of 3D Systems Corporation and its subsidiaries (the "Company") at
December 31, 1997 and 1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Woodland Hills, California
February 16, 1999
F-2
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3D SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
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ASSETS December 31, 1997 December 31, 1998
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Current assets:
Cash and cash equivalents $ 12,694,831 $ 15,911,793
Short-term investments 3,498,265 3,484,641
Accounts receivable, less allowances for
doubtful accounts of $441,399 (1997) and
$944,144 (1998) 23,618,237 24,486,730
Current portion of lease receivables 1,257,006 2,069,126
Inventories 12,164,633 10,829,346
Deferred tax assets 3,319,651 2,063,163
Prepaid expenses and other current assets 2,305,163 1,916,149
--------------------- ---------------------
Total current assets 58,857,786 60,760,948
Property and equipment, net 16,895,011 16,327,078
Licenses and patent costs, net 5,464,351 5,120,672
Deferred tax assets 3,971,000 5,069,796
Lease receivables 3,944,462 5,801,788
Other assets 2,207,109 2,022,316
--------------------- ---------------------
$ 91,339,719 $ 95,102,598
--------------------- ---------------------
--------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,885,831 $ 4,849,905
Accrued liabilities 8,003,949 8,161,684
Current portion of long-term debt 95,000 100,000
Customer deposits 238,248 330,162
Deferred revenues 7,325,112 9,013,559
--------------------- ---------------------
Total current liabilities 20,548,140 22,455,310
Other liabilities 1,491,534 1,485,378
Long-term debt, less current portion 4,705,000 4,605,000
--------------------- ---------------------
26,744,674 28,545,688
--------------------- ---------------------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 5,000,000
shares; none issued
Common stock, $.001 par value. Authorized 25,000,000
shares; issued 11,450,071 and outstanding 11,425,071 (1997)
and issued 11,614,317 and outstanding 11,389,317 (1998) 11,450 11,614
Capital in excess of par value 73,856,965 74,834,225
Notes receivable from officers --- (360,000)
Accumulated deficit (8,897,605) (6,765,447)
Accumulated other comprehensive income (loss) (210,827) 376,459
Treasury stock, at cost, 25,000 shares (1997) and 225,000
shares (1998) (164,938) (1,539,941)
--------------------- ---------------------
Total stockholders' equity 64,595,045 66,556,910
--------------------- ---------------------
$ 91,339,719 $ 95,102,598
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
3D SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ---------------------------------------
<S> <C> <C> <C>
Sales:
Products $ 53,228,089 $ 59,148,861 $ 65,434,369
Services 26,403,414 31,107,812 32,682,587
------------------ ------------------ ------------------
Total sales 79,631,503 90,256,673 98,116,956
------------------ ------------------ ------------------
Cost of sales:
Products 24,893,210 35,462,442 33,477,086
Services 16,905,678 21,744,779 22,062,222
------------------ ------------------ ------------------
Total cost of sales 41,798,888 57,207,221 55,539,308
------------------ ------------------ ------------------
Gross profit 37,832,615 33,049,452 42,577,648
------------------ ------------------ ------------------
Operating expenses:
Selling, general and administrative 24,747,871 29,653,342 30,448,272
Research and development 7,665,092 10,990,809 9,424,979
------------------ ------------------ ------------------
Total operating expenses 32,412,963 40,644,151 39,873,251
------------------ ------------------ ------------------
Income (loss) from operations 5,419,652 (7,594,699) 2,704,397
Interest income 1,541,229 1,202,176 949,361
Interest and other expense (128,860) (356,203) (466,373)
------------------ ------------------ ------------------
Income (loss) before income taxes 6,832,021 (6,748,726) 3,187,385
Provision for income taxes (benefit) 2,232,704 (2,159,592) 1,055,227
------------------ ------------------ ------------------
Net income (loss) $ 4,599,317 $ (4,589,134) $ 2,132,158
------------------ ----------------- -----------------
------------------ ----------------- -----------------
Weighted average shares outstanding 11,322,973 11,397,529 11,347,778
------------------ ----------------- -----------------
------------------ ----------------- -----------------
Net income (loss) per common share $ .41 $ (.40) $ .19
------------------ ----------------- -----------------
------------------ ----------------- -----------------
Weighted average shares outstanding
and dilutive shares 11,741,635 11,397,529 11,593,557
------------------ ----------------- -----------------
------------------ ----------------- -----------------
Net income (loss) per common share
assuming dilution $ .39 $ (.40) $ .18
------------------ ---------------------------------------
------------------ ---------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
3D SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Common Notes
Stock Capital in Receivable Cumulative
Par Value Excess of Par From Accumulated Translation
Shares $0.001 Value Officers Deficit Adjustment
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 11,279,232 $ 11,279 $ 71,850,602 --- $ (8,907,788) $ (3,638)
Exercise of stock options 79,660 80 484,141 --- --- ---
Issuance of warrants related to
Keltool acquisition --- --- 193,025 --- --- ---
Net income --- --- --- --- 4,599,317 ---
Cumulative translation
adjustment --- --- --- --- --- 475,572
----------------------------------------------------------------------------------------
Balance at December 31, 1996 11,358,892 11,359 72,527,768 --- (4,308,471) 471,934
Exercise of stock options 91,179 91 418,361 --- --- ---
Tax benefit related to non-
qualified stock options --- --- 183,836 --- --- ---
Issuance of warrants related to
EOS acquisition --- --- 727,000 --- --- ---
Net income --- --- --- --- (4,589,134) ---
Cumulative translation
adjustment --- --- --- --- --- (682,761)
Purchase of treasury stock (25,000) --- --- --- --- ---
----------------------------------------------------------------------------------------
Balance at December 31, 1997 11,425,071 11,450 73,856,965 --- (8,897,605) (210,827)
Exercise of stock options 59,226 59 365,602 --- --- ---
Employee stock purchase plan 37,687 38 191,725 --- --- ---
Officer loans 67,333 67 419,933 (420,000) --- ---
Repayment of officer loans --- --- --- 60,000 --- ---
Net income --- --- --- --- 2,132,158 ---
Cumulative translation
adjustment --- --- --- --- --- 587,286
Purchase of treasury stock (200,000) --- --- --- --- ---
----------------------------------------------------------------------------------------
Balance at December 31, 1998 11,389,317 $ 11,614 $ 74,834,225 $ (360,000) $ (6,765,447) $ 376,459
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
<CAPTION>
Total
Treasury Stockholders'
Stock Equity
----------------------------
<S> <C> <C>
Balance at December 31, 1995 --- $ 62,950,455
Exercise of stock options --- 484,221
Issuance of warrants related to
Keltool acquisition --- 193,025
Net income --- 4,599,317
Cumulative translation
adjustment --- 475,572
----------------------------
Balance at December 31, 1996 --- 68,702,590
Exercise of stock options --- 418,452
Tax benefit related to non-
qualified stock options --- 183,836
Issuance of warrants related to
EOS acquisition --- 727,000
Net income --- (4,589,134)
Cumulative translation
adjustment --- (682,761)
Purchase of treasury stock (164,938) (164,938)
----------------------------
Balance at December 31, 1997 (164,938) 64,595,045
Exercise of stock options --- 365,661
Employee stock purchase plan --- 191,763
Officer loans --- ---
Repayment of officer loans --- 60,000
Net income --- 2,132,158
Cumulative translation
adjustment --- 587,286
Purchase of treasury stock (1,375,003) (1,375,003)
----------------------------
Balance at December 31, 1998 $ (1,539,941) $ 66,556,910
----------------------------
----------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
3D SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Cash flows from operating activities: 1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
Net income $ 4,599,317 $ (4,589,134) $ 2,132,158
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Deferred income taxes 1,549,717 (2,511,000) 157,692
Depreciation of property and equipment 2,506,044 3,755,758 4,083,399
Amortization of licenses and patent costs 586,243 732,386 1,003,034
Amortization of software development costs 509,327 495,127 503,804
Amortization of intangibles --- 162,153 222,778
Changes in operating assets and liabilities:
Accounts receivable (5,104,652) (4,938,252) (570,221)
Lease receivables (4,760,935) (440,533) (2,733,296)
Inventories (5,673,675) (60,641) 1,160,255
Prepaid expenses and other current assets (763,492) (38,022) 389,013
Other assets (986,547) (1,403,621) (541,789)
Accounts payable (1,002,793) 1,266,286 (176,258)
Accrued liabilities (165,030) 1,318,410 157,735
Customer deposits (339,194) (655,863) 91,914
Deferred revenues 2,156,115 1,857,918 1,688,447
Other liabilities (126,681) 70,295 (6,156)
------------------ ----------------- -----------------
Net cash provided by (used for) operating activities (7,016,236) (4,978,733) 7,562,509
------------------ ----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (9,431,540) (8,356,351) (5,822,045)
Disposition of property and equipment 1,413,563 2,382,104 2,234,226
Increase in licenses and patent costs (719,994) (2,488,947) (659,354)
Purchase of short term investments (8,444,148) (3,498,265) (6,647,458)
Proceeds from short term investments 4,684,656 3,759,492 6,661,082
------------------ ----------------- -----------------
Net cash used for investing activities (12,497,463) (8,201,967) (4,233,549)
------------------ ----------------- -----------------
Cash flows from financing activities:
Exercise of stock options and warrants 484,221 418,452 557,424
Repayment of note payable --- (100,000) (95,000)
Repayment of officer loans --- --- 60,000
Tax benefit related to non-qualified stock options --- 183,836 ---
Restricted cash --- 722,000 ---
Proceeds from long term debt 4,900,000 --- ---
Purchase of treasury stock --- (164,938) (1,375,003)
------------------ ----------------- -----------------
Net cash provided by (used for) financing activities 5,384,221 1,059,350 (852,579)
------------------ ----------------- -----------------
Effect of exchange rate changes on cash 226,992 459,740 740,581
------------------ ----------------- -----------------
Net increase (decrease) in cash and cash equivalents (13,902,486) (11,661,610) 3,216,962
Cash and cash equivalents at the beginning of the period 38,258,927 24,356,441 12,694,831
------------------ ----------------- -----------------
Cash and cash equivalents at the end of the period $ 24,356,441 $ 12,694,831 $ 15,911,793
------------------ ----------------- -----------------
------------------ ----------------- -----------------
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 103,667 $ 346,383 $ 248,690
------------------ ----------------- -----------------
------------------ ----------------- -----------------
Income taxes $ 1,708,808 $ 274,509 $ (410,423)
------------------ ----------------- -----------------
------------------ ----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
3D SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------ ------------------
<S> <C> <C> <C>
Net income (loss) $ 4,599,317 $ (4,589,134) $ 2,132,158
Other comprehensive income (loss):
Foreign currency translation adjustments 475,572 (682,761) 587,286
------------------- ------------------ ------------------
Comprehensive income (loss) $ 5,074,889 $ (5,271,895) $ 2,719,444
------------------- ------------------ ------------------
------------------- ------------------ ------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
3D SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1997 and 1998
(1) ORGANIZATION AND BUSINESS
3D Systems Corporation (the "Company") develops, produces and markets
Stereolithography Apparatus ("SLA") and Actua 2100 systems and related
materials, parts and services. 3D Systems, Inc., a California based
corporation ("3D California"), an indirect wholly-owned subsidiary of
the Company, directly and through its subsidiaries, conducts
substantially all of the Company's business.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
Certain reclassifications have been made to the prior year
consolidated financial statements to conform to the current
year presentation.
(b) SALES AND CONCENTRATION OF CREDIT RISK
Revenues from the sale of the Company's systems and related
products are recognized upon shipment and satisfaction of
Company obligations, if any. The Company provides end users
with up to one year of maintenance and warranty services, and
defers a portion of its revenues for these costs at the time
of sale based on the relative fair value of such services.
After the initial maintenance period, the Company offers these
customers optional maintenance contracts; revenue related to
these contracts is deferred and recognized ratably over the
period of the contract. To date, the Company has not
experienced any significant warranty claims or product
returns.
Credit is extended based on an evaluation of each customer's
financial condition. To reduce credit risk in connection with
sales of SLA systems, the Company may, depending upon the
circumstances, require significant deposits prior to shipment
and may retain a security interest in the SLA systems until
fully paid. The Company often requires international customers
to furnish letters of credit.
The Company invests its excess cash in interest bearing
deposits with major banks, commercial paper and money market
funds. Although a majority of the cash accounts exceed the
federally insured deposit amount, management does not
anticipate non-performance by the financial institutions.
Management reviews the stability of these institutions on a
periodic basis.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to
be cash equivalents. The carrying value of these instruments
approximates market value because of their short maturity.
(d) INVESTMENTS
The Company's short-term investments are classified as held to
maturity and recorded at amortized cost under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 115.
F-8
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
(e) LEASES
At the inception of a lease, the gross lease receivable, the
reserve for potential losses, the estimated residual value of
the leased equipment and the unearned lease income are
recorded. The unearned lease income represents the excess of
the gross lease receivable plus the estimated residual value
over the cost of the equipment leased and is recorded in
deferred revenue.
(f) INVENTORIES
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market value.
(g) PROPERTY AND EQUIPMENT
Property and equipment is carried at cost and depreciated on a
straight-line basis over the estimated useful lives of the
related assets, generally three to five years. Leasehold
improvements are amortized on a straight-line basis over their
estimated economic useful lives, or the lives of the leases,
whichever is shorter. Realized gains and losses are recognized
upon disposal or retirement of the related assets and are
reflected in results of operations. Repair and maintenance
charges are expensed as incurred.
(h) LICENSES AND PATENT COSTS
Licenses and patent costs are being amortized on a
straight-line basis over their estimated useful lives, which
are approximately eight to seventeen years.
(i) LONG TERM ASSETS
The carrying value of long term assets is periodically
reviewed by management, and impairment losses, if any, are
recognized when the expected nondiscounted future operating
cash flow derived from such assets are less than their
carrying value.
(j) CAPITALIZED SOFTWARE COSTS
Certain software development and production costs are
capitalized upon a product's reaching technological
feasibility. As of December 31, 1997 and 1998, the Company had
cumulatively capitalized software development costs of
$3,418,058 and $3,837,880, respectively. Costs capitalized in
1997 and 1998 were $501,394 and $419,822, respectively.
Amortization of software development costs begins when the
related products are available for market. Amortization
expense amounted to $509,327, $495,127 and $503,804 for 1996,
1997 and 1998, respectively, based on the straight-line method
using estimated useful lives of two years. Net capitalized
costs aggregated $530,991 and $447,009 at December 31, 1997
and 1998, respectively, and are included in other assets in
the accompanying consolidated balance sheets.
(k) FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign operations
are translated at the end of the period exchange rates;
revenues and expenses are translated at the average exchange
rates prevailing during the period. The effect of the
unrealized exchange rate fluctuations on translating foreign
currency assets and liabilities into U.S. dollars are
accumulated as a separate component of stockholders' equity.
Gains and losses resulting from foreign currency transactions
are included in operations during the period realized. The
aggregate foreign exchange gains (losses) included in
operations were $8,773, ($478,643) and $275,903 for 1996, 1997
and 1998, respectively. To date, the Company has not entered
into hedging transactions to protect against changes in
foreign currency exchange rates.
F-9
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
(l) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
(m) EARNINGS PER SHARE
Net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of shares of
common stock outstanding during the period. Net income (loss)
per common share assuming dilution is computed by dividing net
income (loss) 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 dilutive
potential common shares had been issued. Potential common
shares related to stock options and stock warrants are
excluded from the computation when their effect is
antidilutive.
(n) ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising
expenses were approximately $1,955,000, $2,946,000 and
$2,261,000 for the years ended 1996, 1997 and 1998,
respectively.
(o) ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates.
(p) STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of
the shares at the date of grant. The Company accounts for
stock option grants in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees."
(q) INCOME TAXES
The Company accounts for income taxes using the liability
method as required by SFAS No. 109, "Accounting for Income
Taxes." Under SFAS No. 109, deferred income taxes are
determined based on the differences between the financial
statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to
the amounts expected to be realized.
(r) COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," and accordingly has included a separate
Statement of Comprehensive Income. Comprehensive income
generally represents all changes in shareholders' equity
during the period except those resulting from investments by,
or distributions to, shareholders.
F-10
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
(s) SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of a Business Enterprise and Related Information."
SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The
management approach designates the internal organization that
is used by management for making operating decisions and
assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosures
about products and services, geographic areas, and major
customers. The adoption of SFAS No. 131 did not affect results
of operations or financial position but did affect the
disclosure of segment information (Note 17).
(3) 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 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------------- ---------------
<S> <C> <C>
Total minimum lease payment receivable $ 4,588,034 $ 7,085,988
Estimated unguaranteed residual value 613,434 784,926
---------------- ---------------
Gross investment in leases 5,201,468 7,870,914
Unearned income (979,144) (1,219,926)
---------------- ---------------
Total investment in leases $ 4,222,324 $ 6,650,988
---------------- ---------------
---------------- ---------------
Short-term interest in leases $ 888,510 $ 1,547,418
Long-term interest in leases $ 3,333,814 $ 5,103,570
</TABLE>
Future minimum lease payments to be received as of December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 2,069,126
2000 1,937,259
2001 1,679,014
2002 929,859
2003 324,528
Later years 146,202
----------------
$ 7,085,988
----------------
----------------
</TABLE>
(4) INVENTORIES
Components of inventories at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------------ -------------------
<S> <C> <C>
Raw materials $ 2,259,504 $ 1,138,415
Work in process 1,141,702 818,839
Finished goods 8,763,427 8,872,092
------------------ -------------------
$ 12,164,633 $ 10,829,346
------------------ -------------------
------------------ -------------------
</TABLE>
F-11
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
(5) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1998
-------------------- -------------------
<S> <C> <C>
Land and building $ 4,613,051 $ 4,637,262
Machinery and equipment 15,704,394 18,415,758
Office furniture and equipment 2,713,906 2,888,896
Leasehold improvements 2,100,530 2,517,495
Rented equipment 906,098 451,553
Construction in progress 1,119,065 1,185,690
-------------------- -------------------
27,157,044 30,096,654
Less accumulated depreciation and
amortization (10,262,033) (13,769,576)
-------------------- -------------------
$ 16,895,011 $ 16,327,078
-------------------- -------------------
-------------------- -------------------
</TABLE>
(6) LICENSES AND PATENT COSTS
Licenses and patent costs, at December 31, 1997 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1998
-------------------- -------------------
<S> <C> <C>
Licenses, at cost $ 3,607,862 $ 3,607,862
Patent costs 6,274,271 6,933,625
-------------------- -------------------
9,882,133 10,541,487
Less accumulated amortization (4,417,782) (5,420,815)
-------------------- -------------------
$ 5,464,351 $ 5,120,672
-------------------- -------------------
-------------------- -------------------
</TABLE>
F-12
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
(a) In 1997 and 1998, the Company incurred and capitalized
$330,561 and $643,405, respectively, of costs to develop and
extend patents in the United States, Japan, Europe and certain
other countries and expensed previously developed capitalized
patent costs of $392,862 and $364,726, respectively.
(b) Effective January 5, 1990, 3D California acquired the patents
for stereolithography technology from UVP, Inc. ("UVP") in
exchange for $9,075,000, $500,000 of which was paid in cash
and $350,000 in offsets of costs incurred by the Company on
behalf of UVP. The initial payment and offsets ($850,000) have
been capitalized and are being amortized over the remaining
life of patents (approximately 4 years at December 31, 1998).
The agreement further provided for payment deferrals during
1990 through 1992 aggregating $950,000. The Company accrues
royalty expense based upon the sales levels of SLA machines
under the agreement, up to a maximum of $8,225,000. In 1996,
1997 and 1998, royalty expense aggregated $674,182, $667,904,
and $710,968 respectively, and is included in cost of
sales-products in the accompanying consolidated statements of
operations. Royalty obligations at December 31, 1997 and 1998
are $1,612,450 and $1,745,267 respectively, and are included
in the accompanying consolidated balance sheets. In the event
the Company licenses the acquired technology to a third party,
the Company is required to pay UVP 50% of the royalties it
receives up to an aggregate maximum of $8,225,000, including
the Company's payments based on sales levels of its SLA
machines. UVP has retained a security interest in the
purchased technology until the purchase price is fully paid.
(c) The excess of the cost of the Company's investment in 3D
California over the related underlying equity in the net
assets of the subsidiary at the date of acquisition
($2,011,707) has been attributed to the licenses and patents
of 3D California and is being amortized on the same basis as
the underlying licenses and patents.
7) ACQUISITIONS
(a) On September 9, 1996, 3D California, purchased substantially
all of the assets and business operations of Keltool, Inc.
("Keltool"), of St. Paul, Minnesota, a Company which produces
steel tooling for plastic injection molding machines based on
a patented process using sintered powdered steel.
Additionally, acquired in-process technology was previously
expensed. The purchase price paid by the Company included
$1,740,000 payable in cash (of which $875,000 was paid on
September 9, 1996 and $865,000 paid on October 10, 1996), the
assumption of certain liabilities ($13,000) and the value of
warrants to purchase 50,000 shares of the Company's common
stock at an exercise price of $14.75 per share ($193,000). The
warrants were issued at fair market value and expire on
September 9, 1999.
The allocation of the purchase consideration for Keltool was
as follows:
<TABLE>
<CAPTION>
<S> <C>
Trade receivables $ 72,000
Inventory 46,000
Equipment 505,000
In process research and development projects 430,000
Intangible assets 893,000
---------------
$ 1,946,000
---------------
---------------
</TABLE>
The results of operations relating to Keltool from September
9, 1996 through December 31, 1996 are included with those of
the Company and were not significant.
F-13
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
(b) On September 22, 1997, the Company completed the acquisition
of the rapid prototyping "Stereos" product line assets and
business from EOS GmbH of Germany, formerly 3D's major
European competitor. Under the terms of the agreement, 3D paid
$3.25 million, subject to certain adjustments based on final
determination of the value of the assets acquired, issued a
warrant to buy 150,000 of 3D's common shares at $8.00 per
share exercisable within the three year period following the
closing (valued at $727,000), and granted EOS exclusive
licenses to 3D patents related to laser sintering.
Additionally, the Company agreed to settle all pending patent
infringement and unfair competition lawsuits brought against
EOS and an EOS customer.
In accordance with the purchase method of accounting, the
purchase price has been allocated to the underlying assets and
liabilities based on their respective fair values at the date
of acquisition. The in-process research and development was
expensed in the quarter ended September 26, 1997 as a
nonrecurring cost after determining that it had not reached
technological feasibility and for which there is no
alternative future use.
The total purchase price is estimated at $4,075,000 and was
allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
In process research and development projects $ 2,045,000
Inventory 360,000
Patents 395,000
Intangible assets 1,275,000
------------
$ 4,075,000
------------
------------
</TABLE>
(8) NOTE PAYABLE
In August 1998, the Company extended its credit facility with Silicon
Valley Bank ("SVB") (the "Credit Facility"). Under the terms of the
agreement, which remains in effect through August 18, 1999, the Company
can borrow from SVB up to $10,000,000, at the bank's prime interest
rate. The Credit Facility contains certain financial covenants
including the maintenance of certain financial ratios, working capital,
tangible net worth as well as covenants limiting mergers, acquisitions,
recapitalizations, dividends, loans to others, and hypothecation of
assets or corporate guarantees. As of December 31, 1998, the Company
has yet to utilize the Credit Facility.
(9) ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
<S> <C> <C>
Employee related benefits $ 1,853,617 $ 2,090,035
Payroll and related taxes 1,352,106 931,015
Rent 361,531 328,611
Commissions 708,161 463,608
Restructuring 771,344 ---
Product royalties 721,801 825,134
Sales tax 400,830 576,527
EOS acquisition costs 486,484 443,189
Other 1,348,075 2,503,565
--------------------- ---------------------
$ 8,003,949 $ 8,161,684
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
F-14
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
(10) OTHER LIABILITIES
Other liabilities at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------------------- -------------------
<S> <C> <C>
Royalty payable $ 950,000 $ 950,000
Retirement plan 398,676 535,378
Other 142,858 ---
--------------------- -------------------
$ 1,491,534 $ 1,485,378
--------------------- -------------------
--------------------- -------------------
</TABLE>
(11) LONG-TERM DEBT
On August 20, 1996, the Company completed a $4.9 million variable rate
industrial development bond financing of its Colorado facility.
Interest on the bonds are payable monthly (the interest rate at
December 31, 1998 was 4.20%). Principal payments are payable in
semi-annual installments beginning in February 1997 through August
2016. The bonds are collateralized by an irrevocable standby letter of
credit issued by Norwest Bank Minnesota, N.A. which is further
collateralized by the building and related machinery and equipment as
well as a standby letter of credit issued by SVB in the amount of
approximately $1.4 million. The terms of the letters of credit require
the Company to maintain specific levels of minimum tangible net worth,
debt to equity ratio and quick ratio. Annual maturities of long-term
debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 100,000
2000 110,000
2001 120,000
2002 135,000
2003 150,000
Later years 4,090,000
---------------------
Total 4,705,000
Less current portion 100,000
---------------------
Long-term debt $ 4,605,000
---------------------
---------------------
</TABLE>
(12) STOCKHOLDERS' EQUITY AND STOCKHOLDERS' RIGHTS PLAN
(a) On May 23, 1996, the Company's stockholders approved the 1996
Stock Incentive Plan (the "1996 Plan") and the 1996 Stock
Option Plan for Non-Employee Directors (the "Director Plan").
The maximum number of shares of Common Stock that may be
issued pursuant to options granted under the 1996 Plan and
Director Plan is 1,300,000 and 200,000, respectively. Granting
of options under both plans expire on March 21, 2006. The 1996
Plan also provides for "reload options", which are options to
purchase additional shares if a grantee uses already-owned
shares to pay for an option exercise. The Company also has a
1989 Plan in which options for substantially all common shares
have been previously issued. The 1989 Plan expires in 1999
unless terminated earlier by the Board of Directors. The
option price per share under all plans is equal to the fair
market value on the date of grant. The vesting and exercise
periods for all plans, except the Director Plan, are
determined at the discretion of the Compensation Committee of
the Board of Directors. The majority of options issued under
the 1996 Plan and the
F-15
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
1989 Plan vest 25% annually, commencing one year from the date
of grant and expire between six and ten years from date of
grant. Under the Director Plan, each non-employee director
("outside director") of the Company will automatically be
granted annually non-statutory stock options to purchase 7,500
shares of Common Stock. Each option issued under the Director
Plan vests in equal annual installments over a three year
period beginning on the first anniversary and expires ten
years from the date of grant. Prior to the adoption of the
Director Plan, each outside director was automatically granted
annually non-statutory stock options to purchase 3,333 shares
of Common Stock under the 1989 Plan, as amended, beginning in
1993.
A summary of the status of the Company's stock options is
summarized below:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- ------------------------
Wgtd. Wgtd. Wgtd.
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ---------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 688,990 $6.12 1,549,419 $11.91 1,672,585 $ 10.30
Granted 961,401 15.51 524,633 8.86 517,000 7.01
Exercised (87,091) 6.52 (97,849) 4.85 (59,226) 6.17
Lapsed or canceled (13,881) 7.21 (303,618) 17.48 (263,478) 13.33
------------ ------------ ------------
Outstanding at year end 1,549,419 11.91 1,672,585 10.30 1,866,881
------------ ------------ ------------
------------ ------------ ------------
Options exercisable at year end 472,135 649,657 842,407
Options available for future grant 717,114 496,120 238,267
Weighted average fair value of
options granted during the year: $ 10.50 $ 4.75 $ 3.77
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------------
Wgtd. Avg. Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Outstanding Exercise
Range: At 12/31/98 Life Price At 12/31/98 Price
-------------- -------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$3.00 to 4.99 219,256 1.82 $ 4.86 219,256 $ 4.86
5.00 to 9.99 989,499 7.41 7.10 242,175 6.30
10.00 to 14.99 497,159 7.59 10.61 279,659 10.69
15.00 to 19.99 8,666 5.53 17.51 8,166 17.53
20.00 to 24.50 152,301 5.55 23.76 93,151 23.49
-------------- --------------
1,866,881 842,407
-------------- --------------
-------------- --------------
</TABLE>
F-16
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
As of December 31, 1998, options for 120,763 shares, 117,500
shares and 4 shares of Common Stock were available for grant
under the 1996 Plan, 1996 Director Plan and 1989 Plan,
respectively (238,267 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, 1998, 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% or more of the Company's
common stock. An Exempt Person includes Ciba Specialty
Chemicals Holdings, Inc. (formerly Ciba-Geigy Limited) ("CSC
Holdings"), which beneficially owned approximately 15.1% of
the issued and outstanding common stock of the Company at
December 31, 1996. The Plan permits CSC Holdings to increase
its ownership position in the Company up to 28.7% of the
issued and outstanding common stock of the Company without
losing its status as an Exempt Person. The rights will expire
on December 3, 2005.
(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 in the open market and through private
transactions. During 1997 and 1998 the Company purchased
25,000 and 200,000 of its own shares for approximately
$165,000 and $1,375,000, respectively. The Company will
continue to acquire additional shares from time to time at
prevailing market prices, at a rate consistent with the
combination of corporate cash flow and market conditions.
(d) In the second quarter 1998, the Company established the 1998
Employee Stock Purchase Plan ("ESPP") to provide eligible
employees the opportunity to acquire limited amounts 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.
During 1998, 37,687 shares were purchased under the Company's
ESPP at a weighted average price of $5.11. At December 31,
1998 there were 562,313 shares available for future grants.
The weighted average fair value of ESPP shares issued in 1998
was $0.96.
(e) Pro forma information regarding net income and earnings per
share is required by SFAS No. 123, and has been determined as
if the Company had accounted for the Plans under the fair
value method of the Statement. The fair value of options
issued under the Plans was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted average assumptions: no dividend yield, volatility
factor of the expected market price of the Company's common
stock of .60 for 1996 and 1998 and .58 for 1997, a forfeiture
rate of .05 for 1996 and 1998 and zero for 1997, a
weighted-average expected life of the options of 4.0 years for
1996 and 3.9 years for 1997 and 1998 and a risk-free interest
rate of 6.24%, 6.28% and 5.95% for 1996, 1997 and 1998,
respectively. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense
over the options' vesting period. The Company's pro forma net
income (loss), net income (loss) per common share and net
income (loss) per common share assuming dilution would
approximate the following:
F-17
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
As Reported Pro Forma
-------------------- --------------------
<S> <C> <C>
Year Ended December 31, 1998:
Net income (loss) $ 2,132,158 $ (367,617)
Net income (loss) per share .19 (.03)
Net income (loss) per share assuming dilution .18 (.03)
Year Ended December 31, 1997:
Net income (loss) $ (4,589,134) $ (6,943,277)
Net income (loss) per share (.40) (.61)
Net income (loss) per share assuming dilution (.40) (.61)
Year Ended December 31, 1996:
Net income $ 4,599,317 $ 3,473,417
Net income per share .41 .31
Net income per share assuming dilution .39 .30
</TABLE>
The effects of applying SFAS No. 123 in this proforma
disclosure are not indicative of future amounts. SFAS No. 123
does not apply to awards prior to 1995, and additional awards
in future years are anticipated.
13) COMPUTATION OF EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator of
the basic and diluted earnings per share (EPS) computations for the
years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---------------- --------------- --------------
<S> <C> <C> <C>
Numerator:
Net income (loss) - numerator for net income
(loss) per common share and net income
(loss) per common share assuming dilution $ 4,599,317 $ (4,589,134) $ 2,132,158
Denominator:
Denominator for net income (loss) per
common share -weighted average shares 11,322,973 11,397,529 11,347,778
Effect of dilutive securities:
Stock options and warrants 418,662 --- 245,779
---------------- --------------- --------------
Denominator for net income (loss) per
common share, assuming dilution 11,741,635 11,397,529 11,593,557
---------------- --------------- --------------
---------------- --------------- --------------
</TABLE>
Common shares related to stock options and stock warrants that are
antidilutive amounted to approximately 731,666, 1,872,592 and 1,436,526
for the years ended December 31, 1996, 1997, and 1998, respectively.
(14) RELATED PARTY TRANSACTIONS
During 1996, 1997 and 1998, the Company purchased materials from an
indirect wholly-owned subsidiary of CSC Holdings, Inc. (a 15.1%
beneficial stockholder of the Company) aggregating approximately
$6,457,000, $8,831,000 and $8,847,000, respectively. Sales to the
subsidiary in 1996, 1997 and 1998 amounted to approximately $253,000,
$131,000 and $87,000, respectively. Approximately $68,000 and $403,000
of net accounts payable are included in the accompanying consolidated
balance sheet at December 31, 1997 and December 31, 1998, respectively.
F-18
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
At December 31, 1998, the Company has remaining notes receivable
totaling $360,000 from certain executive officers of the Company
pursuant to the Executive Long-Term Stock Incentive Plan (which was
adopted under the 1996 Stock Incentive Plan). The original loans of
$420,000, of which $60,000 has been repaid, were used to purchase an
aggregate of 67,333 shares of the Company's common stock at the fair
market value on the date of offer. These notes bear an interest rate of
6% per annum and mature in the year 2003. The plan calls for the loans
to be forgiven, in part or whole, if certain profitability targets are
met. The notes receivable are shown on the balance sheet as a reduction
of stockholders' equity.
(15) INCOME TAXES
The components of the Company's pretax income are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
Domestic $ 9,126,264 $ (5,692,955) $ 552,028
Foreign (2,294,243) (1,055,771) 2,635,357
------------------- ------------------- -------------------
Total $ 6,832,021 $ (6,748,726) $ 3,187,385
------------------- ------------------- -------------------
------------------- ------------------- -------------------
</TABLE>
The components of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------------- ----------------------
<S> <C> <C>
Deferred tax assets:
Research tax credits $ 2,274,000 $ 2,968,000
Alternative minimum tax credits 369,000 340,000
California manufacturer credit 202,000 226,000
Net operating loss carryforwards 5,252,000 4,556,000
Inventory reserves 614,000 152,000
Accrued liabilities 1,486,000 1,550,000
Allowance for doubtful accounts 194,000 182,000
Patents and licenses 748,000 818,000
Deferred compensation 7,000 ---
Other 65,000 ---
----------------------- ----------------------
Total deferred tax assets 11,211,000 10,792,000
Valuation allowance (2,114,000) (1,163,000)
----------------------- ----------------------
Net deferred tax assets 9,097,000 9,629,000
----------------------- ----------------------
Deferred tax liabilities:
Deferred lease revenue 1,369,000 1,606,000
Software development 212,000 309,000
Property and equipment (excess book
basis over tax basis) 214,000 580,000
Other 11,349 1,041
----------------------- ----------------------
Total deferred tax liabilities 1,806,349 2,496,041
----------------------- ----------------------
Net deferred tax assets $ 7,290,651 $ 7,132,959
----------------------- ----------------------
----------------------- ----------------------
</TABLE>
F-19
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
The valuation allowance for deferred taxes relates primarily to foreign
deferred tax assets and was decreased by $951,000 during 1998 primarily
due to utilization of foreign net operating losses. Although
realization is not assured, management believes it is more likely than
not that the Company will realize the benefit of the net deferred tax
assets. The amount of the net deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The components of income tax expense (benefit) for the years ended
December 31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Current: 1996 1997 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
U.S. federal $ 417,733 $ 292,056 $ 3,688
State 244,080 29,673 72,034
Foreign 20,000 60,890 821,814
----------------- ----------------- -----------------
Total current 681,813 382,619 897,536
----------------- ----------------- -----------------
Deferred:
U.S. federal 1,037,000 (2,120,593) 4,096
State 533,000 (421,194) 153,595
Foreign (19,109) (424) ---
----------------- ----------------- -----------------
Total deferred 1,550,891 (2,542,211) 157,691
----------------- ----------------- -----------------
Total income tax expense (benefit) $ 2,232,704 $ (2,159,592) $ 1,055,227
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
The overall effective tax rate differs from the statutory federal tax
rate for the years ended December 31, 1996, 1997 and 1998 as follows:
<TABLE>
<CAPTION>
% of Pretax Income (Loss)
1996 1997 1998
----------------- --------------- ---------------
<S> <C> <C> <C>
Tax provision based on the federal statutory rate 34.0% (34.0)% 34.0%
Alternative minimum taxes 1.8 --- ---
State taxes, net of federal benefit 7.5 (3.9) 4.7
Utilization of net operating losses (17.8) --- (5.3)
Foreign net operating losses with no benefit 16.9 6.1 ---
Research tax credits (11.7) --- (7.1)
Foreign taxes --- .9 3.0
Foreign sales corporation benefit (2.1) (1.4) ---
Other 4.1 .3 3.8
----------------- --------------- ---------------
32.7% (32.0)% 33.1%
----------------- --------------- ---------------
----------------- --------------- ---------------
</TABLE>
F-20
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
As of December 31, 1998, the Company has net operating loss
carryforwards for United States federal and foreign income tax purposes
of approximately $10,324,070 and $2,395,631, respectively. The United
States federal net operating loss carryforwards begin to expire in
2006, and the foreign net operating loss carryforwards expire through
2002, except for certain operating losses which do not expire. Ultimate
utilization of these loss carryforwards is dependent on future taxable
earnings of the Company.
The Company has research and experimentation tax credit carryforwards
for United States federal and state income tax purposes of $2,153,000
and $816,000 respectively, which begin to expire 2003 through December
31, 2007 and 2008, respectively.
In addition, the Company has alternative minimum tax credit
carryforwards for United States federal and state income tax purposes
at December 31, 1998 of $311,000 and $29,000, respectively.
(16) EMPLOYEE BENEFIT PLAN
In 1989, 3D California adopted a defined contribution 401(k) plan (the
"Plan") for its employees. Employees must be at least 21 years of age
and must have at least six consecutive months of service with the
Company to be eligible for the Plan. Participants may contribute
between 1% and 15% of their compensation to the Plan. The Company may
make discretionary matching contributions limited to 50% of the
employee contribution up to a maximum of 3-1/2% of the employee's
compensation or discretionary profit sharing contributions.
Participants are fully and immediately vested in employee contributions
and vest in employer contributions over a four year period. For the
years ended December 31, 1996 and 1998 the Company accrued profit
sharing contributions of $229,966 and $150,032, respectively. No profit
sharing was accrued for the year ended December 31, 1997.
(17) GEOGRAPHIC SEGMENT INFORMATION
All of the Company's assets are devoted to the manufacture and sale of
Company systems, together with related supplies and services. The
Company attributes revenues to geographic areas based on shipment in
the country of origination.
Summarized data for the Company's operations are as follows:
<TABLE>
<CAPTION>
Rest of
USA Germany Europe Asia Eliminations Total
------------------------------------ ------------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
For the year ended December 31, 1996: (In thousands)
Sales to unaffiliated customers 52,727 10,694 10,948 5,263 --- 79,632
Inter-area sales 12,577 102 --- --- (12,679) ---
Income (loss) from operations 7,166 (2,276) (148) --- 678 5,420
Long-lived assets at December 31, 1996 15,317 1,821 2,479 --- --- 19,617
For the year ended December 31, 1997:
Sales to unaffiliated customers 52,830 16,132 12,685 8,610 --- 90,257
Inter-area sales 17,671 510 377 --- (18,558) ---
(Loss) from operations (6,481) (64) (810) --- (240) (7,595)
Long-lived assets at December 31, 1997 21,266 2,202 915 183 --- 24,566
For the year ended December 31, 1998:
Sales to unaffiliated customers 54,842 17,774 16,428 9,073 --- 98,117
Inter-area sales 13,693 1,075 89 --- (14,857) ---
Income (loss) from operations (429) 309 2,432 --- 392 2,704
Long-lived assets at December 31, 1998 20,762 1,914 614 180 --- 23,470
</TABLE>
Inter-area sales to the Company's foreign subsidiaries are recorded at
amounts consistent with prices charged to distributors, which are above
cost.
F-21
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
(18) COMMITMENTS AND CONTINGENCIES
(a) The Company leases its facilities under noncancelable
operating leases expiring through December 2002. The leases
are generally on a net-rent basis, whereby the Company pays
taxes, maintenance and insurance. Leases that expire are
expected to be renewed or replaced by leases on other
properties. Rental expense for the years ended December 31,
1996, 1997 and 1998 aggregated approximately $1,642,000,
$2,575,000 and $2,354,000, respectively.
Minimum annual rental commitments under the leases at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 2,302,865
2000 2,173,278
2001 1,584,427
2002 1,005,784
2003 173,667
Later years 469,060
-------------------
$ 7,709,081
-------------------
-------------------
</TABLE>
(b) 3D California is a party to an agreement with Ciba Specialty
Chemicals Inc. ("CSC") and certain of its subsidiaries (the
"Photopolymer Research Agreement"), dated August 15, 1990,
relating to the research and development of photopolymers,
photopolymerizable monomers and photoinitiators for use with
stereolithography technology. The agreement obligates each of
the parties to cooperate in the development of photopolymers,
photopolymerizable monomers and photoinitiators. The agreement
provides that the parties shall deal exclusively with each
other in the development of stereolithographic products except
that: (a) 3D California may recommend to its customers
products produced by suppliers other than CSC in the event
that another supplier produces products suitable for
stereolithography and CSC cannot produce a product with
similar performance parameters, (b) 3D California may pursue
the development of certain products developed pursuant to the
agreement if CSC determines it has no capabilities or interest
in such products, (c) CSC may cooperate in developing
competing products if such products involve new fields of
technology in which 3D California does not have and is not
able within a reasonable time to develop expertise.
As part of the Photopolymer Research Agreement, the parties
have agreed that if a change in control of the Company or 3D
California should occur, then at the option of CSC, 3D
California will be required to pay CSC an amount equal to
CSC's "deferred research and development costs", up to $10
million. A "change in control" is defined to have occurred
only if a person, or group of related persons, becomes the
beneficial owner of in excess of 31.4% of the Company's
outstanding voting securities (such percentage to be ratably
increased in the event of any sale by a CSC affiliate of any
of its shares of the Company's shares of common stock), unless
approved by CSC, or its indirect nominees to the Board of
Directors of the Company. "Deferred Research and Development
Costs" means all costs incurred by CSC during the five full
fiscal years immediately preceding the occurrence of a change
in control, multiplied by two. The existence of this provision
may deter potential acquirers from seeking to acquire the
Company, or a significant interest in the equity securities of
the Company.
F-22
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
In connection with the Photopolymer Research Agreement, 3D
California entered into a Photopolymer Distribution Agreement
with a subsidiary of CSC, dated as of July 1, 1990, pursuant
to which 3D California is the exclusive worldwide distributor
of photopolymers manufactured by CSC. At the request of 3D
California, an affiliate of CSC currently sells such
photopolymers in Japan to 3D California's Japanese
distributor. Subject to certain conditions, so long as CSC
provides adequate supplies, 3D California is required to fill
all of its requirements for its photopolymers through
purchases from CSC. In order to maintain its exclusive
distribution rights, 3D California must meet certain quotas
based on the dollar value of products purchased from CSC on an
annual basis as set forth in the agreement. 3D California has
in the past failed to meet quotas established under the
agreement and, in May 1995, 3D California and CSC mutually
agreed to reduce the quotas to levels which 3D California
believes should be commercially obtainable. Subject to certain
conditions, the agreement will remain in effect until June 30,
1997 and will continue thereafter until either party gives the
other six months advance notice of termination.
(c) On May 24, 1993, 3D Systems, Inc. and its wholly-owned German
subsidiary, 3D Systems GmbH (both referred to as "3D") filed a
patent infringement lawsuit against EOS, a European
competitor, seeking compensation from EOS for infringing
patents owned by 3D.
On November 2, 1994, 3D GmbH filed a patent infringement
lawsuit against Leopold Kostal GmbH & Co., a German customer
of EOS, seeking compensation from Kostal for infringing
patents owned by 3D, as well as an injunction barring Kostal
from using the EOS equipment.
In August 1997, these lawsuits were settled as part of an
agreement under which 3D also acquired the
stereolithography-related assets of EOS, with each of the
parties bearing their own expenses. The lawsuit against EOS
was officially withdrawn on October 6, 1997. The lawsuit
against Kostal was officially withdrawn on October 1, 1997.
Neither lawsuit may be reinstituted. Accordingly, the court
order which required 3D to post a performance bond in the
amount of 1.1 million Deutchmarks to cover certain potential
legal fees in the event of an unfavorable outcome to 3D was
also withdrawn and the restriction on cash eliminated.
(d) On January 13, 1997, 3D Systems, Inc. (the "Company") filed a
complaint ("Complaint") in the United States District Court,
Central District of California, against Aarotech Laboratories,
Inc. ("Aarotech"), Aaroflex, Inc. ("Aaroflex") and Albert C.
Young ("Young"). Aaroflex is the parent corporation of
Aarotech. Young is the Chairman of the Board and Chief
Executive Officer of both Aarotech and Aaroflex. The Complaint
alleges that stereolithography equipment manufactured by
Aaroflex infringes on six of the Company's patents. The
Company seeks damages and injunctive relief from the
defendants. The defendants have threatened to sue the Company
for trade libel. To date, the defendants have not filed such a
suit.
The defendants filed a motion to dismiss the complaint or
transfer the case to their home district in Virginia. The
District Courts' decision granting this motion has been
reversed as to defendant Aaroflex, and the case has been
remanded to the District Court for proceeding including
discovery and ultimately trial.
F-23
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
(e) Centuri Corp., dba Estes Indus., Cox Acquisition Corp., dba
Cox v. 3D Systems Corp., Rogers Tool & Die, L.A.S.C. Case No.
BC 177962 (filed September 16, 1997) (FDH/RSC).
In January 1997, 3D Systems, Inc. entered into two contracts
with Centuri Corp., dba Estes Indus., Cox Acquisition Corp.,
dba Cox ("Cox") under which 3D was to create certain tooling
for Cox. Cox purported to terminate the contracts in or about
August 1997.
On September 16, 1997, Cox initiated a lawsuit against 3D for
Breach of Oral Contract, Fraud, Negligent Misrepresentation,
Conversion, Money Had and Received, and Accounting. The suit
also named Rogers Tool & Die, another contractor hired by Cox
to work with 3D in creating the tooling. Cox contended that it
was damaged by 3D's and Rogers' alleged inability to timely
complete the contracts. On October 31, 1997, 3D demurred to
Cox's Verified Complaint. Rogers joined in 3D's demurrer. 3D's
demurrer contended that written, not oral, contracts governed
the relationship of the parties, that the Complaint did not
adequately plead the required elements of fraud, that the
Complaint failed to state a claim for Negligent
Misrepresentation, Conversion, and Money Had and Received, and
that Accounting was not actually a cognizable cause of action,
but an equitable remedy.
After a hearing on December 2, 1997, the Court sustained 3D's
demurrer, ordering Cox to file an amended complaint. On
January 29, 1998, Cox filed a Verified Amended Complaint,
asserting causes of action for Breach of Written Contract,
Fraud, and Negligent Misrepresentation. The Verified Amended
Complaint also stated identical claims against Rogers. The
Company believes that the case has no merit and intends to
vigorously defend this action.
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-24
<PAGE>
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1996, 1997 and 1998
(19) SUBSEQUENT EVENTS
(a) In the first quarter 1999, the Company sold the assets and
assigned the lease for it's 3D Keltool St. Paul, MN operations
to Rapid Tooling Technologies, a subsidiary of Rapid Design
Technologies ("RDT"). As part of this agreement, RDT was
issued a multi year license fee for the use of the 3D Keltool
process.
(b) The Company announced availability of a significant number of
new products in the first quarter including:
- SLA 7000 - 400% faster, on average, than the next fastest
SLA Industrial System. The SLA 7000 has a dual spot laser
that reduces downtime and errors while producing parts at
.001 inch layers thickness in far less post processing
time.
- ThermoJet Solid Object Printer - is the successor to the
Actua 2100, offering a significant improvement in speed,
up to 300% faster. In addition, the ThermoJet uses a new
material, with improved part capabilities and color
capability.
- 3D Lightyear - part preparation software that exploits the
power of the Windows NT operating system, delivering
functionality that extends beyond the capabilities of
Unix-based Maestro.
(20) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------
Mar. 28, June 27, Sept. 26, Dec. 31, Mar. 27, June 26, Sept. Dec. 31,
1997 1997 1997(a) 1997(b) 1998 1998 25, 1998 1998
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total sales $21,459 $21,803 $22,294 $24,701 $22,836 $24,673 $23,342 $27,266
Gross profit 8,669 8,455 8,425 7,500 9,389 10,751 10,082 12,355
Total operating expenses 8,321 9,182 11,979 11,162 8,950 10,048 9,506 11,369
Income (loss) from operations 348 (726) (3,554) (3,663) 439 703 576 987
Income tax expense (benefit) 253 (181) (1,212) (1,020) 191 283 224 357
Net income (loss) 388 (279) (2,135) (2,563) 354 526 477 775
Net income(loss) per common share .03 (.02) (.19) (.22) .03 .05 .04 .07
Net income (loss) per common
share assuming dilution .03 (.02) (.19) (.22) .03 .04 .04 .07
</TABLE>
(a) Includes write off of approximately $2.1 million of in-process
technology related to the EOS acquisition. See Note 7.
(b) Includes write off of approximately $2.1 million primarily
related to inventory adjustments and European restructuring.
Per share amounts for each of the quarterly periods presented do not
necessarily add up to the total presented for the year since each
amount is independently calculated.
The Company presents its quarterly results on a 13 week basis ending
the last Friday of each quarter, and reports its annual financial
information through the calendar year ended December 31.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors
3D Systems Corporation
Our report on the consolidated financial statements of 3D Systems Corporation
and Subsidiaries is included on page F-2 of this Form 10-K. In connection with
our audits of such financial statements, we have audited the related financial
statement schedule as of December 31, 1996, 1997 and 1998 and for each of the
three years in the period ended December 31, 1998, as listed on the index on
page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Woodland Hills, California
February 16, 1999
F-26
<PAGE>
SCHEDULE II
3D SYSTEMS CORPORATION
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
YEAR ENDED ITEM YEAR EXPENSES DEDUCTIONS YEAR
- ------------------ ------------------------------------- --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1996 Inventory obsolescence reserve $ 1,196,483 $ 47,596 $ (992,746) $ 251,333
--------------- -------------- --------------- -------------
--------------- -------------- --------------- -------------
1997 Inventory obsolescence reserve $ 251,333 $ 981,335 $ (683,847) $ 548,821
--------------- -------------- --------------- -------------
--------------- -------------- --------------- -------------
1998 Inventory obsolescence reserve $ 548,821 $ 2,197,064 $ (2,126,340) $ 619,545
--------------- -------------- --------------- -------------
--------------- -------------- --------------- -------------
1996 Allowance for doubtful accounts $ 368,399 $ 119,412 $ (81,633) $ 406,178
--------------- -------------- --------------- -------------
--------------- -------------- --------------- -------------
1997 Allowance for doubtful accounts $ 406,178 $ 351,179 $ (315, 958) $ 441,399
--------------- -------------- --------------- -------------
--------------- -------------- --------------- -------------
1998 Allowance for doubtful accounts $ 441,399 $ 1,449,526 $ (946,781) $ 944,144
--------------- -------------- --------------- -------------
--------------- -------------- --------------- -------------
1996 Deferred tax valuation allowance $ 837,000 $ 926,000 $ --- $ 1,763,000
--------------- -------------- --------------- -------------
--------------- -------------- --------------- -------------
1997 Deferred tax valuation allowance $ 1,763,000 $ 351,000 $ --- $ 2,114,000
--------------- -------------- --------------- -------------
--------------- -------------- --------------- -------------
1998 Deferred tax valuation allowance $ 2,114,000 $ --- $ 951,134 $ 1,162,866
--------------- -------------- --------------- -------------
--------------- -------------- --------------- -------------
</TABLE>
F-27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
3D SYSTEMS CORPORATION
By: /s/ Frank J. Spina
----------------------------------------------
Frank J. Spina
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
Date: March 31, 1999
--------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
Signature Date Title
- --------- ---- ------
/s/ Arthur B. Sims 3/31/99 Chief Executive Officer and
- ------------------------ ------- Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Richard D. Balanson 3/31/99 President, Chief Operating Officer
- ------------------------ ------- and Director
/s/ Frank J. Spina 3/31/99 Chief Financial Officer and Vice
- ------------------------ ------- President, Finance (Principal
Financial Officer and Principal
Accounting Officer)
<PAGE>
Signature Date Title
- --------- ---- ------
/s/ Charles W. Hull 3/31/99 Director
- ------------------------ -------
/s/ Donald S. Bates 3/31/99 Director
- ------------------------ -------
/s/ Miriam V. Gold 3/31/99 Director
- ------------------------ -------
/s/ Jim D. Kever 3/31/99 Director
- ------------------------ -------
/s/ Ian White-Thompson 3/31/99 Director
- ------------------------ -------
<PAGE>
EXHIBIT 10.56
PATENT LICENSE AGREEMENT
THIS PATENT LICENSE AGREEMENT ("Agreement") is made this ____day of
_______________, 1998 (the "Effective Date") by and between 3D Systems, Inc.,
a corporation organized and existing under the laws of the State of
California, U.S.A., and having an office at 26081 Avenue Hall, Valencia,
California, U.S.A. ("3D") on the one hand, and NTT DATA CMET INC., a
corporation organized and existing under the laws of Japan, and having an
office at 15-8 Kamata 5-Chome, Oota-ku, Tokyo 144-0052, Japan ("CMET") and
NTT DATA CORPORATION, a corporation organized and existing under the laws of
Japan, and having an office at Toyosu Center Building, 3-3 Toyosu 3-Chome,
Koto-ku, Tokyo 135-6033, Japan ("NTT DATA") on the other hand (3D and CMET
and NTT DATA hereafter occasionally referred to as "party" or "parties").
This Agreement is made with reference to the following:
A. The parties each own certain patent rights relating to
Stereolithography.
B. The parties have jointly concluded that their respective needs and
interests will be served by a mutual exchange of licenses of the patent
rights.
THEREFORE, 3D on the one hand, and CMET and NTT DATA on the other hand,
agree as follows:
1 DEFINITIONS
1.1 The terms "Agreement" and "Effective Date" shall have the meanings
ascribed to them above.
1.2 "Affiliate" with respect to a party means any corporate or other
legal entity in which a party directly or indirectly owns or controls at
least eighty percent (80%) of participating shares entitled to vote for the
election of directors, or eighty percent (80%) of the equity interest having
the power to direct management policies.
1.3 "Cover" or "covered" with respect to an apparatus or method in
question, shall mean that: (i) the act of making, using, offering to sell or
otherwise dispose of, selling or otherwise disposing of, or importing the
apparatus or method, which act if done without authority of the patent owner,
would infringe, either literally or under the doctrine of equivalents, at
least one claim of an issued and unexpired Patent, under the laws of the
country in which such act occurs; or (ii) the act of inducing infringement,
either literally or under the doctrine of equivalents, if such act, which act
if done without the authority of the patent owner, is contrary to the laws of
the country in which an issued and enforceable Patent is in existence at the
time and in the country that such act occurs. However, any patent claims
that have been invalidated by a competent authority
1
<PAGE>
in a decision from which an appeal has not been taken shall not cover an
apparatus or method in question.
1.4 "Patents" shall mean all patents owned or controlled by the parties
that contain a claim or claims applicable to Stereolithography.
1.5 "Licensed Patents" of a granting party shall mean and include all
issued Patents and pending patent applications containing one or more
published claim(s) applicable to Stereolithography having an effective filing
date earlier than the Effective Date, including all issued Patents and
pending patent applications containing one or more published claim(s)
applicable to Stereolithography that were or will be filed subsequent to the
Effective Date but are entitled to claim the benefit of the effective filing
date prior to the Effective Date.
1.6 "Licensed Products" shall mean any and all Stereolithography
equipment and software dedicated thereto of a party which are covered by one
or more Licensed Patents of the other party.
1.7 [Confidential Treatment Requested].
1.8 "Stereolithography" shall mean and include equipment, systems,
supplies and software utilized in the fabrication of three-dimensional
objects, layer-by-layer from photo-curable liquid materials.
1.9 [Confidential Treatment Requested].
1.10 "3D Licensed Territory" shall mean all countries of the world.
2 GRANT OF LICENSE; RELEASE
2.1 3D hereby grants a personal, non-transferable, and non-exclusive
right and license under 3D's Licensed Patents: (i) to CMET and its
Affiliates, to make, have made, use, sell, lease, or otherwise dispose of,
and import Licensed Products and spare parts and replacement parts for the
Licensed Product in the CMET/NTT DATA Licensed Territory; and (ii) to NTT
DATA and its Affiliates, to make, have made, use, sell, lease or otherwise
dispose of, and import Licensed Products and spare parts and replacement
parts for the Licensed Product in the CMET/NTT DATA Licensed Territory.
2.2 The right and license granted to CMET, NTT DATA and their
Affiliates in Section 2.1 shall not include the right, directly or
indirectly, by implication, estoppel or otherwise, to sublicense another.
The sale, lease or other disposition by CMET or NTT DATA of a Licensed
Product in the CMET/NTT DATA Licensed Territory shall not convey, by
implication, estoppel or otherwise, to the party to which the Licensed
Product was sold, leased, or otherwise transferred, any license or right
under the Licensed Patents, except that any such party (i) may use, sell,
lease or otherwise dispose of the acquired Licensed
2
<PAGE>
Product in the CMET/NTT DATA Licensed Territory, (ii) may only export the
acquired Licensed Product to a country outside of the CMET/NTT DATA Licensed
Territory for use in a branch office of the same party or a subsidiary
thereof for the personal business use of the party and/or subsidiary thereof,
provided that such use shall not include the right to sell or otherwise
provide to any third party any parts or models made on such acquired Licensed
Product, and (iii) may use, sell, or otherwise dispose of products throughout
the world that are produced or designed using the acquired Licensed Product.
2.3 CMET and NTT DATA hereby grant a personal, non-transferable,
paid-up and non-exclusive right and license under both CMET's and NTT DATA's
Licensed Patents to 3D and its Affiliates to make, have made, use, sell,
lease, or otherwise dispose of, and import Licensed Products and spare parts
and replacement parts for the Licensed Product throughout the world,
provided, however, that the right and license with respect to any of the CMET
and NTT DATA's Licensed Patents that are co-owned with a third party are
contingent upon each third party's consent, which third parties are not
controlled by CMET or NTT DATA. CMET and NTT DATA shall make all reasonable
efforts to timely obtain the consent of each such third party.
2.4 The right and license granted to 3D and its Affiliates in Section
2.3 shall not include the right, directly or indirectly, by implication,
estoppel or otherwise, to sublicense another. The sale, lease or other
disposition by 3D of a Licensed Product in the 3D Licensed Territory shall
not convey, by implication, estoppel or otherwise, to the party to which the
Licensed Product was sold, leased, or otherwise transferred, any license or
right under the Licensed Patents, except that any such party may use, sell,
lease or otherwise dispose of the acquired Licensed Product, and may use,
sell, lease or otherwise dispose of products throughout the world that are
produced on or designed by use of the acquired Licensed Product.
2.5 No right or license is granted herein, to CMET, NTT DATA, 3D, or
any third party, by implication, estoppel or otherwise under any patent,
patent application or other patent right other than the Licensed Patents.
2.6 No right or license is granted, by implication, estoppel or
otherwise, other than those rights and licenses expressly granted in this
Agreement.
2.7 3D hereby releases CMET and NTT DATA and CMET and NTT DATA both
release 3D, and all purchasers and users of Licensed Products acquired,
either directly or indirectly, from the released party from any and all
claims, demands, and rights of action which the releasing party may have on
account of any infringement of any Licensed Patent by the manufacture, use,
sale or other disposition or importation of Licensed Products which, prior to
the effective date of this Agreement, were manufactured, used, sold or
otherwise disposed of or imported by the released party;
[Confidential Treatment Requested].
3
<PAGE>
3 [Confidential Treatment Requested]
3.1 [Confidential Treatment Requested]
3.1.1 [Confidential Treatment Requested]
3.1.2 [Confidential Treatment Requested]
3.1.2.(a) [Confidential Treatment Requested]
3.1.2.(b) [Confidential Treatment Requested]
3.1.2.(c) [Confidential Treatment Requested]
3.2 [Confidential Treatment Requested]
3.3 [Confidential Treatment Requested]
(a) [Confidential Treatment Requested]
(b) [Confidential Treatment Requested]
3.3.1 [Confidential Treatment Requested]
3.3.2 [Confidential Treatment Requested]
(a) [Confidential Treatment Requested]
(b) [Confidential Treatment Requested]
3.3.3. [Confidential Treatment Requested]
3.3.4 [Confidential Treatment Requested]
3.3.5 [Confidential Treatment Requested]
(a) [Confidential Treatment Requested]
(b) [Confidential Treatment Requested]
4 [Confidential Treatment Requested]
4
<PAGE>
4.1 [Confidential Treatment Requested]
4.2 [Confidential Treatment Requested]
4.3 [Confidential Treatment Requested]
5 [Confidential Treatment Requested]
5.1 [Confidential Treatment Requested]
6 TERM AND TERMINATION
6.1 This Agreement shall commence on the Effective Date and shall
extend for the life of the last to expire of the Licensed Patents.
6.1.1 [Confidential Treatment Requested]
6.2 In addition to the right of termination provided in Article 5.1 by
CMET and NTT DATA, either party shall have the right to terminate this
Agreement, or the rights granted by it hereunder, as a result of the other
party's material breach. The party claiming breach of the Agreement shall
give the other party written notice of the breach, specifying the nature
thereof, and the other party shall have thirty (30) days after such notice to
cure such breach. Upon the failure of the party in breach to cure the breach
within the thirty (30) day period, the other party shall have the right to
terminate this Agreement by giving written notice of termination. This
Agreement shall terminate effective on the date set forth in the termination
notice. The right of a party to terminate this Agreement for material breach
shall be in addition to and not in lieu of any other right or remedy that the
terminating party may have at law or in equity, including without limitation,
the right to sue a breaching party for any prior breach of the Agreement, or
for breach of the whole Agreement or any unperformed balance thereof.
Failure of a party to conform to the provision of Article 7.4 of this
Agreement shall be deemed a material breach.
6.3 Unless impermissible under the applicable laws as of the date that
written notice of termination is given, either party shall have the right to
terminate this Agreement, or the rights granted by it hereunder, by giving
the other party written notice of a termination as a result of such other
party being for more than sixty (60) days the subject of any voluntary or
involuntary proceeding relating to bankruptcy, insolvency, liquidation,
receivership, or assignment for the benefit of creditors. This Agreement
shall terminate effective on the date set forth in the termination notice.
6.4 On the effective date of any termination, cancellation or
expiration of this Agreement, the rights and licenses granted herein shall
terminate.
6.5 [Confidential Treatment Requested]
5
<PAGE>
6.6 Neither party shall be liable for damages of any kind as a result
of properly exercising its respective right to terminate or cancel this
Agreement, or rights granted hereunder, according to the terms and conditions
of this Agreement, and termination or cancellation will not affect any other
right or remedy of either party.
6.7 Any confidentiality obligations imposed on the parties under this
Agreement shall survive and remain binding on parties for a period of three
years after the date of any termination, cancellation or expiration of this
Agreement.
7 GENERAL PROVISIONS
7.1 CONFIDENTIALITY OF AGREEMENT. The parties agree that the terms of
this Agreement are to be strictly confidential, and neither party shall
disclose such terms to any third party except: (i) to legal counsel; (ii) to
auditors; (iii) to the extent, if any, required by law (e.g., a governmental
filing); (iv) in accordance with the terms of a protective or other order
duly entered in a legal proceeding; or (v) with the prior written consent of
the other party. If disclosure of this Agreement or the terms and conditions
thereof is required to be made in a governmental filing (e.g., a filing with
the Securities and Exchange Commission), the disclosing party shall request
confidential treatment of the terms and conditions of this Agreement and use
its best efforts to ensure that confidential treatment is so afforded to such
terms and conditions, as may be permitted under the rules of the applicable
governmental agency. When 3D submits this License Agreement to the
Securities and Exchange Commission ("S.E.C."), CMET and NTT DATA will be
permitted to review 3D's request to maintain the confidentiality of the
sections that CMET and NTT DATA deem to be confidential before the
confidentiality request is filed with the S.E.C. and to submit a statement
prepared by CMET and NTT DATA together with the confidentiality request, if
CMET and NTT DATA deem such action to be appropriate. Furthermore, 3D will
timely advise CMET and NTT DATA of any objections by the S.E.C. to the
confidentiality request and permit CMET and NTT DATA to be involved in any
further proceedings that are initiated to maintain the confidentiality of the
sections of the License Agreement that CMET and NTT DATA deem to be
confidential. If a party intends to publicly announce any information with
regard to this Agreement, that party must obtain prior, written consent from
the other parties to be permitted to make such public announcement.
7.2 GOVERNING LAW AND DISPUTE RESOLUTION. This Agreement shall be
governed and interpreted in accordance with the substantive laws of Japan.
The parties agree that any action to enforce this Agreement shall be filed
in, and the parties consent to personal jurisdiction and venue in, the Tokyo
District Court; provided that any disputes between the parties caused or
arising out of the difference between the parties whether a product is
covered by a claim or claims of any one of a Licensed Patents shall be
submitted for arbitration to the Arbitration Center in Tokyo, Japan, which is
co-managed by the Japan Federation of Attorneys Bar Association and the Japan
Patent Attorneys Association. The parties agree to submit such disputes to
the exclusive
6
<PAGE>
jurisdiction of first instance to such Arbitration Center, and the finding(s)
of the Arbitration may not be overruled unless clearly erroneous.
7.3 NON-ASSIGNABILITY OF THIS AGREEMENT. This Agreement and the rights
and obligations of the parties hereunder may be assigned only to an Affiliate
of either party or to a purchaser of the entire business or all the assets to
which this Agreement pertains (regardless of the form of the sale of such
businesses or assets) without the prior written approval of the other party
hereto. Any other assignment entered without prior, written approval shall
be null and void. Notwithstanding the foregoing, with respect to any
assignment by either party, the assignee shall not be released or otherwise
relieved of any liability for infringements occurring prior to the date of
the assignment.
7.4 NON-ASSIGNABILITY OF LICENSED PATENTS. Neither party may assign
any patents or patent applications included with the Licensed Patents for
which a registration or recordation of the terms of this Agreement has not
been completed (irrespective of whether such assignment is voluntarily or
otherwise) without giving notice of this Agreement to the intended assignee
of the Licensed Patent(s) and obtaining from such intended assignee a written
consent, which consent shall be addressed to the other party or parties, that
the intended assignee shall not enforce the assigned Licensed Patent(s)
against the relevant Licensee(s) nor make any claims or demands on the
assigned Licensed Patent(s) against the relevant Licensee(s) and shall be
bound by the same obligation of the grantor as herein provided. Any
assignment executed without obtaining such written consent shall be null and
void.
7.5 REGISTRATION OF LICENSE. Each licensed party shall have the right
to register or record its license with regard to any Licensed Patents in any
and all appropriate government agencies and the granting party shall take all
reasonable efforts to cooperate to effect such registration. Upon issuance
of any Japanese Licensed Patents, the parties shall perform all necessary
procedures to register the non-exclusive license. The Licensee of such
Japanese Licensed Patents shall bear all of out-of-pocket expenses arising
from such procedure.
7.6 NOTICES. All notices provided for in this Agreement shall be
effective when received by personal delivery, telecopier or telex, or one
business day after being received by courier or by registered or certified
airmail at the following address:
If to 3D:
Vice President, General Counsel
3D Systems, Inc.
26081 Avenue Hall
Valencia, CA 91355 U.S.A.
Telecopier: (805) 294-7966
7
<PAGE>
If to CMET:
-----------
President
NTT DATA CMET INC.
15-8 Kamata 5-Chome
Oota-ku, Tokyo 144-0052, Japan
Telecopier: 011 81 3 3739 6680
If to NTT DATA CORPORATION:
---------------------------
Senior Executive Manager
Third Industrial Systems Division
Industrial Systems Sector
NTT DATA CORPORATION
Toyosu Center Building, 3-3 Toyosu 3-Chome
Koto-ku, Tokyo 135-6033, Japan
Telecopier: 011 81 3 5546 8698
or such other address as either party shall hereafter designate in writing to
the other.
7.7 INVALIDITY OF PROVISION. If any of the provisions of this
Agreement shall be held by a court or administrative agency of competent
jurisdiction to contravene the laws of any country, it is agreed that such
invalidity or illegality should not invalidate the whole Agreement, but this
Agreement shall be construed as if it did not contain the provision or
provisions held to be invalid or illegal in the particular jurisdiction
concerned, and insofar as such construction does not affect the substance of
this Agreement and the rights and obligations of the parties hereto, it shall
be construed and enforced accordingly. In the event, however, that such
invalidity or illegality shall substantially alter the relationship between
the parties hereto, affecting adversely the interest of either party, then
the parties hereto shall negotiate a mutually acceptable alternative
provision not conflicting with such laws.
7.8 ENTIRE AGREEMENT, AMENDMENTS, WAIVERS. This Agreement represents
the entire understanding and agreement between the parties hereto with
respect to the subject matter hereof, and supersedes all prior and
contemporaneous negotiations, representations and agreements made by and
between such parties. The parties acknowledge that they have not relied upon
any representation whatsoever of the other which is not contained in this
Agreement. There are no understandings, obligations, representations or
warranties except as herein provided for and no rights are granted except as
expressly set forth in this Agreement. Any waiver by either party of the
breach or default of any of the terms or conditions of this Agreement by the
other party will not be considered as a continuing waiver or a waiver of any
other prior, contemporaneous or subsequent breach or default, whether the
same as or similar to or different from, the breach or default waived. No
alteration, amendment, variation, supplementation, modification or waiver of
any of the terms or provisions of this Agreement shall be binding or
effective for any purpose unless made pursuant to an instrument in writing
signed by 3D and both CMET and NTT DATA.
8
<PAGE>
7.9 REPRESENTATIONS AND WARRANTIES. Each of the parties represents and
warrants that it has not accepted and will not accept any commitments or
restrictions in respect to its right to grant licenses which will materially
affect the value of the rights granted by it in this Agreement.
7.10 Nothing in this Agreement shall be construed as:
7.10.1 A warranty or representation by either party as to the validity
or scope of any Licensed Patent; or
7.10.2 A warranty or representation that anything made, used, sold or
otherwise disposed of under any license granted in this Agreement is or will
be free from infringement of patents of third persons; or
7.10.3 A requirement that either party shall file any patent
application, secure any patent, or maintain any patent in force; or
7.10.4 [Confidential Treatment Requested]
7.10.5 An obligation to furnish any manufacturing or technical
information, or any information concerning pending patent applications; or
7.10.6 Conferring a right to use in advertising, publicity, or
otherwise any trademark or tradename of another party.
7.11 No party makes any representations, extends any warranties of any
kind, either express or implied, or assumes any responsibilities whatever
with respect to use, sale, or other disposition by the other parties or their
vendees or transferees of products incorporating or made by use of inventions
licensed under this Agreement.
7.12 [Confidential Treatment Requested]
9
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed and duly sealed in triplicate originals by its duly authorized
representative.
3D SYSTEMS, INC.
By
------------------------------
A. Sidney Alpert
Vice President, General Counsel
Attest:
- ------------------
NTT DATA CMET INC.
By
------------------------------
Yoshinobu Tanaka
President
Attest:
- --------------------
NTT DATA CORPORATION
By
------------------------------
Masaharu Watanabe
Senior Executive Manager
Third Industrial Systems Division
Industrial Systems Sector
Attest:
- ---------------------
10
<PAGE>
Exhibit 22.1 Subsidiaries of the Company
The Company has the following subsidiaries:
3D Systems (Canada), Inc., a British Columbia Corporation ("3D Canada"), a
wholly-owned subsidiary of the Company.
and
3D Systems, Inc., a California corporation ("3D California"), a wholly-owned
subsidiary of 3D Canada.
and
3D Systems, Inc. Limited, a U.K. corporation, a wholly-owned subsidiary of 3D
California.
and
3D Systems GmbH, a German corporation, a wholly-owned subsidiary of 3D
California.
and
3D Systems France SARL, a French corporation, a wholly-owned subsidiary of 3D
California.
and
3D Systems Italia Srl, an Italian Corporation, a wholly-owned subsidiary of
3D California and the Company.
and
3D Capital Corporation, a wholly-owned subsidiary of 3D California.
and
3D International, Inc., a wholly-owned subsidiary of 3D California.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of 3D Systems Corporation on Form S-8 of our report dated February
16, 1999 on our audits of the consolidated financial statements and financial
statement schedule of 3D Systems Corporation as of December 31, 1997 and
1998, and for the years ended December 31, 1996, 1997 and 1998, which report
is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Woodland Hills, California
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,911,793
<SECURITIES> 3,484,641
<RECEIVABLES> 25,430,874
<ALLOWANCES> (944,144)
<INVENTORY> 10,829,346
<CURRENT-ASSETS> 60,760,948
<PP&E> 30,096,654
<DEPRECIATION> (13,769,576)
<TOTAL-ASSETS> 95,102,598
<CURRENT-LIABILITIES> 22,455,310
<BONDS> 4,605,000
0
0
<COMMON> 11,614
<OTHER-SE> 66,545,296
<TOTAL-LIABILITY-AND-EQUITY> 95,102,598
<SALES> 65,434,369
<TOTAL-REVENUES> 98,116,956
<CGS> 33,477,086
<TOTAL-COSTS> 55,539,308
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,449,526
<INTEREST-EXPENSE> 482,988
<INCOME-PRETAX> 3,187,385
<INCOME-TAX> 1,055,227
<INCOME-CONTINUING> 2,132,158
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<EPS-DILUTED> .18
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