<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 1999
----------------------------
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from to
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Commission file number 1-13400
STRATASYS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3658792
--------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
14950 Martin Drive, Eden Prairie, Minnesota 55344
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(Address of Principal Executive Offices)(Zip Code)
(612) 937-3000
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes X No
----- -----
As of November 10, 1999, the Registrant had 6,101,961 shares of
Common Stock, $.01 par value, outstanding.
<PAGE> 2
STRATASYS, INC.
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets as at September 30, 1999
and December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income and Comprehensive Income
for the three months and nine months ended September 30,
1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 6
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
(i)
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
STRATASYS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,572,792 $ 11,243,839
Marketable Securities 20,152 4,593,910
Accounts receivable, less allowance for doubtful
accounts of $485,445 in 1999 and $395,291 in 1998 10,451,907 9,838,836
Inventories 6,129,019 5,035,588
Prepaid expenses 698,459 593,363
Deferred income taxes 243,000 243,000
--------------------------------------------------
Total current assets 26,115,329 31,548,536
--------------------------------------------------
MACHINERY AND EQUIPMENT, less
accumulated depreciation 3,464,539 3,601,829
--------------------------------------------------
OTHER ASSETS
Intangible assets 3,131,523 2,788,769
Deferred income taxes 2,541,883 3,072,000
Other 129,664 179,042
--------------------------------------------------
5,803,070 6,039,811
--------------------------------------------------
$ 35,382,938 $ 41,190,176
==================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Obligations under capitalized leases, current portion 132,008 177,669
Purchased in-process research and development payable 6,464,709
Accounts payable and other current liabilities 3,955,942 3,601,570
Unearned maintenance revenue 3,577,966 2,649,824
--------------------------------------------------
Total current liabilities 7,665,916 12,893,772
--------------------------------------------------
OBLIGATIONS UNDER CAPITALIZED LEASES, less current portion 93,680 193,327
--------------------------------------------------
93,680 193,327
--------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, authorized 15,000,000
shares, issued 6,101,961 shares in 1999
and 6,100,524 shares in 1998 61,020 61,005
Capital in excess of par value 32,712,755 32,710,484
Accumulated deficit (2,863,027) (3,847,529)
Accumulated other comprehensive income (loss) (30,572) (38,956)
Less cost of treasury stock, 545,200 shares in 1999
and 137,300 shares in 1998 (2,256,834) (781,927)
--------------------------------------------------
Total Stockholders' Equity 27,623,342 28,103,077
--------------------------------------------------
$ 35,382,938 $ 41,190,176
==================================================
</TABLE>
See notes to financial statements.
-1-
<PAGE> 4
STRATASYS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $10,359,357 $7,836,247 $26,826,896 $23,100,729
Cost of goods sold 3,311,250 2,948,307 8,953,954 7,859,872
----------------------------------------- --------------------------------------
Gross profit 7,048,107 4,887,940 17,872,942 15,240,857
Costs and expenses
Research and development 1,829,828 1,470,715 5,101,771 4,053,744
Selling, general and administrative 3,826,847 3,507,876 11,558,743 10,873,596
----------------------------------------- --------------------------------------
5,656,675 4,978,591 16,660,514 14,927,340
----------------------------------------- --------------------------------------
Operating income (loss) 1,391,432 (90,651) 1,212,428 313,517
----------------------------------------- --------------------------------------
Other income (expense)
Interest income 125,409 175,857 380,941 483,725
Interest expense (32,862) (8,874) (78,750) (33,973)
----------------------------------------- --------------------------------------
92,547 166,983 302,191 449,752
----------------------------------------- --------------------------------------
Income before income taxes 1,483,979 76,332 1,514,619 763,269
Income taxes 519,392 26,714 530,117 267,142
----------------------------------------- --------------------------------------
Net income $ 964,587 $ 49,618 $ 984,502 $ 496,127
Earnings per common share
Basic $ 0.17 $ 0.01 $ 0.17 $ 0.08
----------------------------------------- --------------------------------------
Diluted $ 0.17 $ 0.01 $ 0.17 $ 0.08
----------------------------------------- --------------------------------------
Weighted average number of common
shares outstanding
Basic 5,658,739 6,058,269 5,847,083 6,074,416
----------------------------------------- --------------------------------------
Diluted 5,660,680 6,109,275 5,849,609 6,191,682
----------------------------------------- --------------------------------------
COMPREHENSIVE INCOME
Net income $ 964,587 $ 49,618 $ 984,502 $ 496,127
Other comprehensive income
Foreign currency translation adjustment #REF! #REF! #REF! #REF!
----------------------------------------- --------------------------------------
Comprehensive income #REF! #REF! #REF! #REF!
----------------------------------------- --------------------------------------
</TABLE>
See notes to financial statements.
-2-
<PAGE> 5
STRATASYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998
(UNAUDITED) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 984,502 $ 496,127
Adjustments to reconcile net income to net
cash used in operating activities:
Deferred taxes 530,117
Depreciation and amortization 942,049 1,013,393
Amortization of intangibles 526,927 696,523
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Accounts receivable (613,071) 4,871,425
Inventories (1,093,431) (153,375)
Prepaid expenses (105,096) (516,008)
Accounts payable and other current liabilities 354,372 (657,900)
Payment for in-process research and development (6,464,709)
Income taxes payable 267,144
Unearned maintenance revenue 928,142 (109,367)
--------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,010,198) 5,907,962
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities 4,573,758
Purchases of marketable securities (184,610)
Acquisition of machinery and equipment (804,759) (884,667)
Payments for other assets (44,001)
Proceeds from other assets 49,378
Payments for intangible assets (869,681) (229,848)
--------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,948,696 (1,343,126)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of obligations under capitalized leases (145,308) (123,908)
Proceeds from the sale of common stock 2,286 36,449
Purchase of stock warrants (1,000,000)
Repurchase of treasury stock (1,474,907) (225,985)
--------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (1,617,929) (1,313,444)
--------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 8,384 (6,421)
--------------------------------------------
NET INCREASE (DECREASE) IN CASH (2,671,047) 3,244,971
CASH AND CASH EQUIVALENTS, beginning of period 11,243,839 9,116,232
--------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 8,572,792 $12,361,203
--------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
cash paid during the period for interest $ 78,750 $ 33,973
--------------------------------------------
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Machinery and equipment acquired under
capital lease obligations $ - $ 268,569
--------------------------------------------
</TABLE>
See notes to financial statements.
-3-
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The financial information herein is unaudited; however, such
information reflects all adjustments (consisting of normal, recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim period. The results of operations for the
three and six months ended September 30, 1999, are not necessarily indicative
of the results to be expected for the full year. Certain financial information
and footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The reader is referred to the audited financial statements and notes
thereto for the year ended December 31, 1998, filed as part of the Company's
Annual Report on Form 10-KSB for such year.
Note 2--- Inventory
Inventories consist of the following at September 30 and December 31,
respectively:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Finished Goods $2,913,831 $3,058,539
Work in process 147,628 145,108
Raw materials 3,067,560 1,831,941
---------- ----------
$6,129,019 $5,035,588
========== ==========
</TABLE>
Note 3--Material Commitment
The Company has signed material commitments with several vendors for
fixed delivery of selected inventory expected to be supplied in the ensuing
twelve month period. These commitments amount to approximately $4,000,000,
some of which contain non-cancellation clauses.
Note 4--Treasury stock
In the nine months ended September 30, 1999, the Company purchased
407,900 shares of the Company's common stock for an aggregate purchase price of
$1,474.009.
4
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company develops, manufactures, and markets a family of rapid
prototyping devices that enable engineers and designers to create physical
models, tooling and prototypes out of plastic and other materials directly from
a computer aided design ("CAD") workstation. Historically, the Company's
growth has come from sales to a number of industries, including automotive,
consumer products, electronics, medical, and aerospace. Universities, other
educational institutions, and service bureaus have also been significant
markets for the Company. The Company's current and future growth is largely
dependent upon its ability to penetrate new markets, and develop and market new
rapid prototyping devices and applications that meet the needs of its current
and prospective customers. New product developments will focus on various
rapid prototyping devices, modeling materials, and software enhancements. The
Company's primary business strategy is focusing on expanding international and
domestic sales of its existing family of rapid prototyping devices, while
maintaining on-going development of new rapid prototyping equipment, modeling
materials, and software. In addition, the Company expects to incur
expenditures throughout 1999 for the development of the technology it purchased
in December 1998. The Company does not expect to commercialize this technology
until the latter part of 1999 or early 2000. The Company can give no
assurances that it will successfully develop this technology or that it will
avoid developmental delays that could negatively impact the commercialization
of this technology.
In April 1999 the Company introduced the GenisysXs(R) . This system
offers enhanced performance and speed improvements over the original Genisys(R).
Shipments of the GenisysXs(R) commenced in the third quarter of 1999.
In August 1999 the Company introduced the FDM(R) 3000, a system based
on the Company's core patented Fused Deposition Modeling technology. The
FDM(R) 3000 features a build envelope 60% larger than the Company's earlier
Benchtop systems. In conjunction with the FDM(R) 3000 introduction, the
Company also introduced WaterWorks. The patented Waterworks process allows for
the easy removal of supports from a completed model by simply immersing the part
in a water-based solution. The support material is dissolved, resulting in
cleaned prototype that eliminates most post-processing requirements. The
Company plans to offer WaterWorks to users of its FDM(R) 1650 and FDM(R) 2000
systems in the next quarter.
Net revenue derived from sales of the Company's rapid prototyping
devices, modeling materials, and maintenance has increased each year since
1990. Management expects, but cannot assure, that this trend will continue.
The Company believes that it shipped more rapid prototyping systems than any of
its competitors in 1998, and that it recorded the second highest revenues
within the industry in 1998. It can give no assurances, however, that this
trend will continue. The Company's revenue in the three months ended September
30, 1999, increased significantly over the revenue recorded in the same 1998
period. The Company's successful introduction of the FDM 3000 and WaterWorks
products accounted for much of this growth. The Company has continued to expand
its expenditures on research and development ("R&D") for both new products and
sustaining engineering. R&D expenses increased to $1,829,828 in the third
quarter of 1999 from $1,470,715 recorded in the comparable 1998 period. R&D
expenses are expected to continue at approximately the same level at least
through the end of 1999. Selling, General and Administrative ("SG&A") expenses
declined to 36.9% of sales in the third quarter of 1999 as compared with 44.8%
in 1998. Lower expenses in the Company's administrative and marketing
departments were largely accountable for the declining SG&A expenses. This was
partly offset by increases to the Company's customer service and German office
departments. The Company's headcount has increased from 190 employees and
contractors at the end of the third quarter of 1998 to 195 employees and
contractors at the end of the comparable 1999 period, although headcount has
not grown from the 195 employees recorded at the end of 1998. The future
profitability of the Company will be dependent upon the Company's ability to
control its operating expenses while increasing revenues. The Company does not
believe that meaningful improvements to its gross margins are achievable, and
gross margins could possibly decline in the event that significant price
competition emerges within the industry or if the Company's product mix were to
change dramatically. While
6
<PAGE> 8
the Company believes that profitability will improve in 1999 as compared with
1998 as a result of higher sales coupled with operating expense control, it can
give no assurance that these results will be realized.
The Company believes that the rapid prototyping industry is growing at
approximately 5-10% per year. It believes that there is a trend toward lower
priced rapid prototyping systems capable of producing functional prototypes,
and that a sizable market exists for concept or visualization 3D printers. This
pricing trend should lead to growth in the more traditional functional
prototyping marketplace as companies continue to address in-house rapid
prototyping and concept-modeling needs. Certain market segments in the
industry have not demonstrated pricing sensitivity. These segments are more
interested in modeling envelope size, modeling material variety, throughput,
and part quality, which should allow growth to continue for higher priced rapid
prototyping systems addressing these needs.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1998
The following table sets forth certain statement of operations data
as a percentage of net sales for the periods indicated. All items are included
in or derived from the Company's statement of income.
<TABLE>
<CAPTION>
For the quarters ended September 30,
1999 1998
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 32.0% 37.6%
Gross margin 68.0% 62.4%
Selling, general, and administrative expenses 36.9% 44.8%
Research and development expense 17.7% 18.8%
Operating income (loss) 13.4% (1.2%)
Other income 0.9% 2.1%
Income before taxes 14.3% 1.0%
Income taxes 5.0% 0.3%
Net income 9.3% 0.6%
</TABLE>
NET SALES
Net sales for the quarter ended September 30, 1999 were $10,359,357,
compared with net sales of $7,836,247 for the quarter ended September 30, 1998.
This represents an increase of $2,523,110, or 32.2%. Sales of the
newly-introduced FDM(R) 3000 and WaterWorks were strong. Sales of Quantum,
FDM(R) 2000 and Genisys(R) Systems also contributed. The Company's
FDM(R)enchtop systems (including the FDM(R) 3000), including refurbished and
upgraded systems , and Quantum systems continued to account for a majority of
the Company's revenue in the quarter ended September 30, 1999. Consumable and
maintenance revenue increased significantly in the quarter ended September 30,
1999 as compared with the same 1998 period, increasing to 22.2% of total
revenue. Maintenance and materials revenues were enhanced by the larger
installed base of systems, customer satisfaction with ABS, WaterWorks and other
material selections, and increased emphasis on the sale of maintenance
contracts.
Unit shipments increased by almost 43% in the third quarter of 1999 as
compared to 1998. System sales included sales of all systems, including
trade-in and upgrade systems. The average selling price of the Company's
systems declined in the current quarter as compared with the 1998 comparable
period, due to increased shipments of the GenisysXs(R) and lower-priced Benchtop
systems.
7
<PAGE> 9
Domestic sales accounted for approximately 55% of total revenue in the
quarter ended September 30, 1999, which was below the 61% recorded in the
comparable period in 1998. In the United States, the central region, dominated
by the automotive industry, was the strongest domestic revenue. Europe
accounted for approximately 19% of total revenue in the third quarter of 1999,
up from approximately 12% of revenue in the comparable 1998 quarter. The
Company's combined Asia-Pacific region, which comprises Japan, China, Korea,
Southeast Asia, and India, accounted for approximately 26% of total revenue,
down slightly from approximately 27% attained in 1998. Historically, the
Company has derived a larger percentage of its revenues from its domestic
regions. The Company believes that 1999 sales into the Southeast Asian
countries that have been most impacted by currency and economic turbulence will
be weak. These countries include Singapore, Thailand, Indonesia, and Malaysia.
Sales in the remainder of the Asia Pacific countries are expected to remain
strong in 1999, while sales into its domestic territories are expected to
improve over the results recorded in the third quarter of 1999. No assurances,
however, can be given that future sales and profitability will not be adversely
impacted by the economic conditions of these regions, or those sales into the
Company's weaker domestic territories will improve to prior levels.
GROSS PROFIT
Gross profit increased to $7,048,107, or 68.0% of sales, in the
quarter ended September 30, 1999, compared with $4,887,940, or 62.4% of sales,
in the quarter ended September 30, 1998. This represents an increase of
$2,160,167, or 44.2%. Gross profit was impacted in the 1999 period by
significantly higher revenues, favorable product mix, and slower growth of
manufacturing overhead.
OPERATING EXPENSES
SG&A expenses increased to $3,826,847 for the quarter ended September
30, 1999, from $3,507,876 for the quarter ended September 30, 1998. This
represents an increase of $318,971, or 9.1%, significantly below the 32.2%
growth in revenue. Lower administration and marketing expenses accounted for
much of the reduced SG&A expenses, while expenses incurred by Company's
customer service and German office departments caused selling expenses to
expand in the 1999 period.
R&D expenses increased to $1,829,828 for the quarter ended September
30, 1999 from $1,470,715 for the quarter ended September 30, 1998. The
increase in 1999 over 1998 amounted to $359,113, or 24.4%. Payroll related
expenses, materials, and professional services accounted for much of the
increase in R&D expenses in 1999 as compared with 1998. The Company believes
that R&D expenses will continue to be high throughout 1999 as the Company
proceeds with its new product development efforts, including efforts designed
to commercialize the technology that the Company purchased in December 1998.
The Company's operating profit for the quarter ended September 30,
1999 amounted to $1,391,432, or 13.4% of sales, compared with an operating loss
of $90,651, or (1.2%) of sales, for the quarter ended September 30, 1998.
OTHER INCOME
Other income and expense netted to $92,547 in the quarter ended
September 30, 1999 compared with $166,983 in the same 1998 period. Interest
income amounted to $125,409 compared with interest income of $175,857 recorded
in 1998. The lower interest income in the 1999 period resulted from lower
average cash and cash equivalent balances in the 1999 period as compared with
1998. Interest expense increased by $23,988 to $32,862 in the quarter ended
September 30, 1999 due to the Company's higher average balance of its
capitalized leases.
NET INCOME
Net income for the quarter ended September 30, 1999 amounted to
$964,587 compared with net income of $49,618 in the same 1998 period. This
resulted in earnings per diluted common and common equivalent share of $.17,
8
<PAGE> 10
compared with income per diluted common and common equivalent share of $.01 in
the period ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
The following table sets forth certain statement of operations data as
a percentage of net sales for the periods indicated. All items are included in
or derived from the Company's statement of income.
<TABLE>
<CAPTION>
For the nine months ended September 30,
1999 1998
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 33.4% 34.0%
Gross margin 66.6% 66.0%
Selling, general, and administrative expenses 43.1% 47.1%
Research and development expense 19.0% 17.5%
Operating income (loss) 4.5% 1.4%
Other income 1.1% 1.9%
Income before taxes 5.6% 3.3%
Income taxes 2.0% 1.2%
Net income 3.7% 2.1%
</TABLE>
NET SALES
Net sales for the nine months ended September 30, 1999 were
$26,826,896, compared with net sales of $23,100,729 for the nine months ended
September 30, 1998. This represents an increase of $3,726,167, or 16.1%. Sales
of the FDM(R) Quantum, FDM(R) 2000, and the FDM(R) 3000 Systems were strong in
the period. The Company's FDM(R) Benchtop systems, including refurbished and
upgraded systems, and Quantum systems continued to account for a majority of the
Company's revenue in the nine months ended September 30, 1999. Consumable and
maintenance revenue increased significantly in the nine months ended September
30, 1999 as compared with the 1998 period, increasing to almost 23% of total
revenue. Maintenance and materials revenues were enhanced by the larger
installed base of systems, customer satisfaction with ABS and other material
selections, and increased emphasis on the sale of maintenance contracts.
Unit shipments increased by approximately 14% in the nine months
ended September 30, 1999 as compared with the 1998 period. The average selling
price of the Company's systems decreased slightly in the nine months ended
September 30, 1999, as compared with the 1998 period. This was impacted
primarily by product mix, as the Company mix shifted slightly to include more
used and GenisysXs systems. Domestic sales accounted for approximately 51% of
total revenue in the nine months ended September 30, 1999, which was below the
approximately 60% recorded in the comparable period in 1998. In the United
States, the central region, dominated by the automotive industry, recorded the
most revenue. Europe accounted for approximately 18% of total revenue in the
nine months ended September 30, 1999, equal to the 18% of revenue recorded in
the comparable 1998 period. The European territory recovered from a weak first
quarter in 1999 to record improved revenues in the second and third quarter of
1999. The Company's combined Asia-Pacific region, which comprises Japan,
China, Korea, Southeast Asia, and India, accounted for approximately 26% of
total revenue, up from approximately 21% attained in comparable 1998 period.
Currency and economic turbulence in the Company's Southeast Asia territory
negatively impacted sales in the 1998 period. The Company believes that 1999
sales in the Southeast Asian countries that have been most impacted by currency
and economic turbulence will be weak. These countries include Singapore,
Thailand, Indonesia, and Malaysia. Sales in the remainder of the Asia Pacific
countries are expected to remain strong in 1999. Historically, the Company has
derived
9
<PAGE> 11
a larger percentage of its revenues from its domestic regions. Sales in its
domestic territories are expected to improve over the results recorded in the
nine months ended September 30, 1999. No assurances, however, can be given that
future sales and profitability will not be adversely impacted by the economic
conditions of these regions, or that sales into the Company's domestic
territories will improve to historical levels.
GROSS PROFIT
Gross profit increased to $17,872,942, or 66.6% of sales, in the nine
months ended September 30, 1999, compared with $15,240,857, or 66.0% of sales,
in the nine months ended September 30, 1998. This represents a increase of
$2,632,085, or 17.3%. The improvement to gross profit was due to higher
revenues and favorable product mix.
OPERATING EXPENSES
SG&A expenses increased to $11,558,743 for the nine months ended
September 30, 1999, from $10,873,596 for the nine months ended September 30,
1998. This represents an increase of $685,147, or 6.3%. In the 1999 period,
lower administration and marketing expenses were offset by upgrade programs for
the Company's Genisys(R) and Quantum products, and by increased expenses
incurred by the Company's German office and customer service department.
R&D expenses increased to $5,101,771 for the nine months ended
September 30, 1999 from $4,053,744 for the comparable 1998 period. The
increase in 1999 over 1998 amounted to $1,048,027, or 25.9%. Payroll related
expenses, materials, and professional services accounted for much of the
increase in R&D expenses in 1999 as compared with 1998. The Company believes
that R&D expenses will continue to be high throughout 1999 and as the Company
proceeds with its new product development efforts, including those designed to
commercialize the technology that the Company purchased in December 1998.
The Company's operating income for the nine months ended September 30,
1999 amounted to $1,212,428, or 4.5% of sales, compared with an operating
profit of $313,517, or 1.4% of sales, for the nine months ended September 30,
1998.
OTHER INCOME
Other income and expense netted to $302,191 in the nine months ended
September 30, 1999 compared with $449,752 in the same 1998 period. Interest
income amounted to $380,941, a decrease from the $483,725 recorded in 1998,
primarily due to lower average balance of cash and cash equivalents. Interest
expense increased by $44,777 to $78,750 in the nine months ended September
30,1999 due primarily to the Company's higher average balance of its
capitalized leases.
NET INCOME
Net income for the nine months ended September 30, 1999 amounted to
$984,502 compared with net income of $496,127 in the comparable 1998 period.
This resulted in earnings per diluted common and common equivalent share of
$.17 for the nine months ended September 30, 1999, compared with income per
diluted common and common equivalent share of $.08 in the nine-month period
ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities during the nine months ended September 30, 1999
used cash of $4,010,198, primarily reflecting the payment of $6,464,709 for the
December 1998 purchase of in-process research and development, and an increase
in accounts receivable and inventories of $613,071 and $1,093,431,
respectively. Increases to accounts
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<PAGE> 12
payable and unearned maintenance revenue of $354,372 and $928,142,
respectively, favorably impacted cash flow in the period. In the nine months
ended September 30, 1998, cash provided by operating activities amounted to
$5,907,962, primarily reflecting the reduction to accounts receivable of
$4,871,425, which was partially offset by the use of cash due to increases in
prepaid expenses and decreases in accounts payable of $516,008 and $657,900,
respectively. Cash provided by investing activities amounted to $2,948,696 in
the period ended September 30, 1999. The proceeds from the sale of marketable
securities resulted in a net increase in cash of $4,573,758, while the Company
used cash of $804,759 and $869,681 for the acquisition of machinery and
equipment and for payments for intangible assets, respectively. The Company
used cash of $1,343,126 in its investing activities in the comparable 1998
period, including $884,667 for the acquisition of machinery and equipment and
$229,848 for the purchase of intangible assets. In the 1999 period, the
Company's financing activities used net cash of $1,617,926, which included
$1,474,907 for the purchase of treasury stock under its stock buyback program
and $145,308 for repayments of obligations under capitalized leases. In 1998,
financing activities used net cash of $1,313,444, including $1,000,000 for the
purchase of stock warrants, $225,985 for the purchase of treasury stock, and
$123,908 used for payments under capitalized leases. The net decrease in cash
for the nine months ended September 30, 1999 amounted to $2,671,047 as compared
with a net increase of $3,244,971 for the comparable 1998 period. The
Company's ending cash and cash equivalents balances as of September 30, 1999
and 1998 were $8,572,792 and $12,361,203, respectively.
At September 30, 1999, the Company's cash, cash equivalents, and
marketable securities balances totaled $8,592,944. These assets will be used by
the Company for working capital purposes, for improvement to facilities, for
acquisitions, for new product development and tooling, for acquisition of
production equipment and computers, for increased selling and marketing
activities, and for engineering costs required to develop and commercialize the
in-process research and development acquisition. Additionally, in July 1999 the
Company's Board of Directors authorized management to increase its stock
repurchase plan to purchase up to 1,000,000 shares of its common stock. Under
this authorization, in July 1999 the Company repurchased 300,000 shares of its
common stock for an aggregate purchase price of $1,050,000 in a private block
transaction. Management believes that the Company's revenue from operations,
its current cash and cash equivalents balances, and the proceeds from the sale
of short-term marketable securities should provide sufficient cash resources to
finance its operations for at least 24 months.
Except for 1998, the Company has historically been unable to finance
its growth from cash generated from operations. Furthermore, the Company's
working capital requirements may significantly increase if revenue growth
slows, if R&D expenses related to new product development accelerate, including
development of the in-process research and development that the Company
recently acquired, or if significant operating losses occur. No assurances can
be given as to the adequacy of the Company's working capital to support the
Company's operations following a period of losses. If the existing cash
balances are insufficient or if working capital requirements are greater than
estimated, the Company could be required to raise additional capital. There
can be no assurance that the Company will be able to raise additional capital
or that the terms upon which such capital will be available to the Company will
be acceptable.
As of September 30, 1999, the Company had gross accounts receivable of
$10,937,352, less an allowance of $485,445 for returns and doubtful accounts.
Historically, the Company's bad debt expense has been minimal. However, at
September 30, 1999, large balances were concentrated with certain international
distributors. While the Company can give no assurances, it believes that most,
if not all, the accounts receivable balances ultimately will be collected.
The Company's total current assets amounted to $26,115,329 at
September 30, 1999, the majority of which consisted of cash, cash equivalents,
marketable securities, inventories and accounts receivable. Total current
liabilities amounted to $7,665,916. The Company's debt is minimal, consisting
primarily of principal payments due under capital leases of $225,688. The
Company estimates that it will spend approximately $1,400,000 in 1999 for
facility improvements, production and R&D equipment, computers and integrated
software, and tooling. As of September 30, 1999, material commitments for
inventory purchases from selected vendors for the ensuing twelve-month period
ending September 30, 2000 amount to approximately $4,000,000.
11
<PAGE> 13
INFLATION
Management believes that inflation has not had a material effect on
the Company's operations or on its financial condition.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of the Company's transactions are negotiated,
invoiced, and paid in US dollars. Fluctuations in the currency exchange rates
in other countries may therefore reduce the demand for the Company's products
by increasing the price of the Company's products in the currency of countries
in which the local currency has declined in value.
YEAR 2000 ISSUES
The Company defines Year 2000 compliance as the ability to function
properly without interruption before, during, and after January 1, 2000. The
Company believes that all its products, including its propriety software, meet
this definition of Year 2000 compliance. The Company believes that its products
are not "date-dependant" or "date-aware", meaning they do not rely upon
calendar dates for internal operations or overall product functionality.
Furthermore, the Company's products do not pass dates onto other computers, as
dates are only used for display purposes. The Company's internal accounting and
manufacturing software was upgraded in 1998 to a version that the vendor has
represented to be Year 2000 compliant. The Company has tested this software
during 1999 and has not encountered any problems. The Company will continue to
test this software throughout 1999. The Company is currently working with its
vendors to determine whether they are Year 2000 compliant. The Company may be
required to change vendors that are determined not to be in compliance.
However, none of the Company's key vendors have identified material Year 2000
issues, and have represented their Year 2000 compliance to us. The Company's
customers use a variety of CAD packages and hardware platforms. Many of these
customers will be required to upgrade these CAD packages and operating systems
to new versions that are Year 2000 compliant in order to operate their systems.
Those customers and future customers that do not elect to upgrade their systems
may be unable to generate certain required files and thus use or purchase our
products. This could have the potential to reduce future revenue, although the
Company believes that the overall impact on revenue will not be material. The
cost to the Company to determine its Year 2000 compliance has not been material
and has been included in its operating results. The Company does not believe
that future costs associated with this issue will be material to its financial
condition or its results of operations.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS
All statements herein that are not historical facts or that include
such words as expect, anticipate, project, estimates or believes or other
similar words are forward-looking statements deemed by the Company to be
covered by and to qualify for the safe harbor protection covered by the safe
harbor protection provided by the Private Securities Litigation Reform Act of
1995 (the "1995 Act"). Investors and prospective investors in the Company
should understand that several factors govern whether any forward-looking
statement herein will be or can be achieved. Any one of these factors could
cause actual results to differ materially from those projected herein. These
forward-looking statements include the expected increases in net sales of rapid
prototyping systems and services, the ability of the Company to maintain its
gross margins on these sales, and the plans and objectives of management to
introduce new products, control expenses, improve profitability, and develop
and commercialize the purchased in-process technology. The forward-looking
statements included herein are based on current expectations that involve a
number of risks and uncertainties. These forward-looking statements are based
on assumptions, among others, that the Company (1) will be able to continue to
introduce new rapid prototyping systems acceptable to the market and improve
existing technology and software in its current product offering, including the
Genisys (R) rapid prototyping system that has been especially affected by
technological problems,(2)
12
<PAGE> 14
will be able to maintain its gross margins on its present products, (3) will be
able to control its operating expenses, (4) will be able to retain and recruit
employees with the necessary skills to produce, develop, market, and sell its
products, and (5) will be able to further develop and commercialize the
purchased in-process research and development that the Company acquired in
December 1998. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive, market and
technology conditions and future business decisions, all of which are difficult
or impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of those
assumptions could prove inaccurate, and therefore there is and can be no
assurance that the results contemplated in any such forward-looking statement
will be realized. The impact of actual experience and business developments may
cause the Company to alter its marketing plans, its capital expenditure
budgets, or its engineering , selling or other budgets, which may in turn affect
the Company's results of operations or the success of its engineering efforts.
Due to the factors noted above and elsewhere in the Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Company's future
earnings and stock price may be subject to significant volatility, particularly
on a quarterly basis. Additionally, the Company may not learn of revenue or
earnings shortfalls until late in a fiscal quarter, since the Company frequently
receives the majority of its orders very late in a quarter. This could result
in an immediate and adverse effect on the trading price of the Company's common
stock. Past financial performance should not be considered a reliable indicator
of future performance, and investors should not use historical trends to
anticipate results or trends in future periods.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Selected Financial Data.
(b) Reports on Form 8-K.
None
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: November 15, 1999 STRATASYS, INC.
By: /s/Thomas W. Stenoien
------------------------
Thomas W. Stenoien
Chief Financial Officer
(Principal Financial Officer)
15
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,572,792
<SECURITIES> 20,152
<RECEIVABLES> 10,937,352
<ALLOWANCES> (485,445)
<INVENTORY> 6,129,019
<CURRENT-ASSETS> 26,115,329
<PP&E> 7,300,920
<DEPRECIATION> (3,836,381)
<TOTAL-ASSETS> 35,382,938
<CURRENT-LIABILITIES> 7,665,916
<BONDS> 0
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<COMMON> 61,020
<OTHER-SE> 27,562,322
<TOTAL-LIABILITY-AND-EQUITY> 35,382,938
<SALES> 26,826,896
<TOTAL-REVENUES> 26,826,896
<CGS> 8,953,954
<TOTAL-COSTS> 16,660,514
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,750
<INCOME-PRETAX> 1,514,619
<INCOME-TAX> 530,117
<INCOME-CONTINUING> 984,502
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