Unassociated Document
U.S.
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, 2004 or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the
transition period from _______ to _______
Commission
file number 1-13400
STRATASYS,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware |
36-3658792 |
|
(State
or Other Jurisdiction of Incorporation
or Organization) |
(I.R.S.
Employer Identification
No.) |
14950
Martin Drive, Eden Prairie, Minnesota 55344
(Address
of Principal Executive Offices)
(952)
937-3000
(Registrant’s
Telephone Number, Including Area Code)
Securities
Registered Under Section 12(b) of the Act:
|
Title
of Each Class |
Name
of Each Exchange on Which Registered |
Common
stock, $.01 par value |
The
Pacific Exchange Inc. |
Securities
Registered Under Section 12(g) of the Act: None
Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is an accelerated filer (as defined in rule
12b-2 of the Act). Yes x No ¨
The
aggregate market value of the Registrant’s Common Stock held by non-affiliates
of the Registrant as of June 30, 2004, the last business day of the Registrant’s
most recently completed second quarter, was approximately $235,989,838.00. On
such date, the closing price of the Registrant’s Common Stock, as quoted on the
Nasdaq National Market was $28.60.
The
Registrant had 10,465,490 shares of common stock outstanding as of March 4,
2005.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Definitive Proxy Statement to be filed with the Securities
and Exchange Commission with respect to the Registrant’s Annual Meeting of
Stockholders scheduled to be held on May 5, 2005, are incorporated by reference
into Part II, Item 5 and Part III of this Annual Report.
PART
I
Item
1. Business.
General
Development of Business
We
develop, manufacture, and sell a family of rapid prototyping (“RP”) devices,
which includes a line of three dimensional (“3D”) printing devices, all of which
create physical models from computerized designs. We were incorporated in
Delaware in 1989 and our executive offices are located in Eden Prairie,
Minnesota. Our RP systems are based on our core patented fused deposition
modeling (“FDMÒ”)
technology or on our patented GenisysÒ technology,
which we purchased from IBM in 1994. We sold our first product, the 3D
ModelerÒ,
commercially in April 1992 and introduced our second product, the Benchtop, in
June 1993. Other recent significant developments in our business are set forth
below:
| · |
In
February 2002, we introduced Dimension®.
Dimension offers ABS modeling capabilities on a desktop 3D printer
platform. We believe that Dimension, when introduced at $29,900, was the
lowest priced system in the RP and 3D printing
markets. |
| · |
In
March 2002, we introduced Prodigy PlusÔ.
This system incorporates our WaterWorks soluble support system on the
Prodigy platform, and is further enhanced by the addition of our
InSightÔ
software. Commercial shipments commenced in May 2002.
|
| · |
In
July 2003 we introduced FDM VantageÔ.
Vantage utilizes proven FDM technology to build prototypes in either
polycarbonate (“PC”) or ABS, an engineering thermo plastic material named
for its three initial monomers - acrylonitrile, butadiene and styrene. It
is an extension of the FDM TitanÔ
design platform. |
| · |
In
September 2003 we entered into an agreement with Objet Geometries Ltd. to
exclusively distribute their Eden333 RP system in North America, including
Mexico and Canada. The Eden333 uses inkjet technology to jet ultra-fine
layers of UV-cured resin to build RP
models. |
| · |
In
December 2003 we announced significant throughput enhancements for Titan,
offering users a 50% improvement in build speed over the previous
generation of Titan. |
| · |
In
February 2004 we introduced Dimension SSTÔ
and renamed our original Dimension system Dimension BST. Dimension SST
incorporates all the functionality of Dimension with an enhanced soluble
support removal system. This system gives users greater convenience in the
design process while allowing for the creation of models and prototypes
that involve more complex design geometries. Dimension SST’s list price
was $34,900 when introduced, and was reduced to $29,900 in March 2005.
Concurrently with this introduction, we reduced the price of Dimension to
$24,900. |
| · |
In
March 2004 we introduced Triplets, which offers three variations of our
FDM Vantage RP system. Prices range from $99,000 for the base model
Vantage to $195,000 for the fully equipped Vantage SE. The models are
differentiated by the speed at which they build prototypes, by the size of
the build envelope, by additional canister bays, which allow for longer
build cycles, and by price. We commenced shipment of Triplets in the
second quarter of 2004. |
| · |
In
February 2005 we announced that we will distribute another Objet System in
North America, Eden260. It also incorporates inkjet technology, but is
smaller and priced lower than Eden333. |
Description
of Business
We are a
leader in the office prototyping market, since our high performance RP devices
and 3D printers can be used in office environments without expensive facility
modification. We develop, manufacture, market, and service a family of 3D
printers and other RP systems 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. In many industries,
the models and prototypes required in product development are produced
laboriously by hand-sculpting or machining, a traditional process that can take
days or weeks. Our computerized modeling systems use our proprietary technology
to make models and prototypes directly from a designer’s three-dimensional CAD
in a matter of hours.
We
believe that the high performance RP and 3D printing systems using our FDM
technology are the only RP systems commercially available that can produce
prototypes and models from plastic without relying on lasers. This affords our
products a number of significant advantages over other commercially available
three-dimensional rapid prototyping technologies, which rely primarily on lasers
to create models. Such benefits include:
| · |
the
ability to use the device in an office environment due to the absence of
hazardous emissions |
| · |
little
or no post-processing |
| · |
the
need for relatively little set up of the system for a particular
project |
| · |
the
availability of a variety of modeling
materials |
| · |
modeling
in production-grade plastics for functional
testing |
| · |
no
need for costly replacement lasers and laser parts
|
Our
systems can also run virtually unattended, producing models while designers
perform other tasks.
The
process involved in the development of a three-dimensional model using our FDM
systems begins with the creation of a 3D geometric model on a CAD workstation.
The model is then imported into our proprietary software program, which
mathematically slices the CAD model into horizontal layers that are downloaded
into the system. A spool of thin thermoplastic modeling material feeds into a
moving FDM extruding head, which heats the material to a semi-liquid state. This
semi-liquid material is extruded and deposited, one ultra-thin layer at a time,
on a base (the “X-Y Stage”) in a thermally-controlled modeling chamber. As the
material is directed into place by the computer-controlled head, layer upon
layer, the material solidifies, creating a precise and strong laminated model.
We also
believe that Eden333 and Eden260 (the “Eden systems”) provide us with an
additional RP technology that complements our core FDM technology. The Eden
systems offer faster prototype build times, with superior surface finish and
resolution. Like the FDM technology, Eden systems:
| · |
can
be used in the office environment |
| · |
create
models with a one-step process |
| · |
have
a low acquisition price |
Applications
For Rapid Prototyping and 3D Printing
Both
high-end RP systems and 3D printers allow for the physical modeling of a design
using a special class of machine technology. These systems take data created
from CAD data, CT and MRI scan data or 3D digitized data to quickly produce
models, using an additive approach. Traditionally, RP and 3D printing have been
used by organizations to accelerate product development. Many companies use RP
and 3D printing models to test form, fit and function to help improve the time
to market.
Frequently,
users report rapid pay-back times by using RP and 3D printing, as they
accelerate their product development cycle and reduce post-design flaws through
more extensive design verification and testing.
RP also
represents opportunities for rapid manufacturing (“RM”). RM involves the use of
prototypes fabricated directly from the RP system that are subsequently
incorporated into the user’s end product or process. RM is particularly
attractive in applications that require short-run or low volume parts that
require rapid turn-around, and for which tooling would not be appropriate due to
small volumes. Our FDM Titan, Vantage, and Maxum products are well suited for
these types of applications.
An
emerging market segment for RP systems is Rapid Tooling (“RT”). Although not
clearly defined today, RT is driven by RP systems and allows for the production
of molds and fixtures directly from CAD data or indirectly by producing custom
mold inserts.
During
the past three years, the largest growth segment of the RP market has been 3D
printing products. 3D printers are low-cost RP systems (typically under $40,000)
that reside in the design/engineering office environment, allowing product
development organizations quick access to a modeling system. Based upon data and
estimates furnished in the 2004 Wohlers Report, through 2003 we shipped
approximately 27% of all RP systems since the industry’s inception in 1987, an
improvement over the 24% realized through 2002.
We have
shipped over 4,000 systems since our inception. A wide variety of design and
manufacturing organizations use our systems. Current markets
include:
| · Aerospace |
· Automotive |
| · Consumer Products |
· Business Machines |
| · Educational Institutions |
· Electronics |
| · Medical Systems |
· Medical Analysis |
| · Mold Making |
· Tooling |
Additional
future applications include:
| · Architectural design |
· Rapid manufacturing of custom
parts |
| · Free-form graphic design |
· Secondary tooling and
mold-making |
Among
potential medical applications, rapid prototyping is being used to produce
accurate models of internal organs, bones or skulls for pre-operative
evaluations or modeling of prostheses. In such uses, our RP systems serve as a
peripheral device for CT and MRI devices.
Products
Modeling
Equipment
We have
been developing and improving our line of RP products since our inception in
1989. Since our first commercial product was introduced in 1992, we have
enhanced and expanded our product line. We have improved both the speed and
accuracy of our FDM systems, expanded their build envelopes, introduced a number
of new modeling materials and developed and introduced a low-cost 3D printer. We
have also enhanced and upgraded the software that our systems use to read CAD
files and build the prototypes.
Each of
our products is based upon our patented FDM process or technology acquired from
IBM and is sold as an integrated system. The system consists of an RP machine,
the software to convert the CAD designs into a machine compatible format, and
modeling materials. Each of our products is compatible with an office
environment and does not require an operator to be present while it is running.
Our
family of high performance RP and 3D printing systems affords a customer’s
product development team, including engineers, designers and managers, the
ability to create prototypes through all stages of the development cycle. Our
products meet the needs of a very demanding and diverse industrial base by
offering a wide range of capability and price from which to choose. The domestic
list prices of our systems range from $24,900 for Dimension BST to $250,000 for
our high performance FDM Maxum. We also offer special pricing for trade-in
systems and upgrades.
Dimension
BST is a 3D printer that allows a user to create parts in ABS plastic. ABS
offers the part strength required for true form, fit and function testing.
Dimension BST operates in the office, offering speed, ease of use and networking
capabilities at a competitive price. Dimension features our Catalyst®
software, which offers a single push-button operation by automating all of the
required build procedures. We introduced Dimension BST in February 2002,
although commercial shipments to selected resellers commenced in December 2001.
We believe that Dimension BST, at a list price of $24,900, is among the
lowest-priced systems in the 3D printing market. Dimension SST is our newest 3D
printing system, which offers users the benefits of our WaterWorks soluble
support system on the Dimension platform. Introduced in February 2004, it is
priced at $29,900.
The Prodigy Plus is our lowest price FDM System that incorporates our
WaterWorks soluble support system and InSight Software. The patented WaterWorks
process allows for the easy removal of supports from a completed prototype model
by simple immersion into a water-based solution. The support material is
dissolved, resulting in a cleaned prototype that eliminates most post-processing
requirements. Prodigy Plus is further enhanced by the addition of our InSight
software. InSight offers the customer a more flexible array of features allowing
for a range of fully automatic operation to individual and customized functions
for each step of the build process. With the combination of ABS, WaterWorks and
InSight software, the Prodigy Plus offers the customer “hands free” operation of
the entire prototype building process. The Prodigy Plus was introduced in March
2002, and we have sold it to customers in a number of industries since that
time.
The FDM
Titan was introduced in 2001 and provides a unique set of features that
addresses demanding customer requirements. Titan offers users the capability to
model with a wide range of engineering thermoplastic materials including
polycarbonate (“PC”), ABS, polyphenylsulfone (“PPSF”) and other thermoplastic
materials that we expect to release, and also offers WaterWorks. These modeling
materials provide superior strength coupled with heat and chemical resistance.
This combination of properties allows engineers and designers a variety of
options to meet demanding industrial prototyping and design requirements. Titan
has a large build envelope and uses new technology based on “look ahead” motion
profiles that provide faster build speeds. The Titan also incorporates enhanced
ease of use features, such as the InSight software, automatic material loading
and supply changeover.
In
December 2003 we announced a throughput enhancement for Titan users. This new
feature enables Titan users a 50% improvement in build speed over the previous
generation of Titans.
In July
2003 we introduced Vantage. Vantage, which is an extension of the Titan design
platform, offers modeling capabilities in PC and ABS, and is priced lower than
Titan. In March 2004 we introduced three variations of Vantage called Triplets.
Prices range from $99,000 for the base model Vantage to $195,000 for the Vantage
SE. Model build speed, envelope size, and variety of materials account for the
price range.
The FDM
Maxum™ was released in late 2000. It incorporates MagnaDrive technology, which
allows the extrusion head to float on a bed of air while being controlled
through electromagnet devices. Its build envelope is among the largest in the
industry, allowing users to build large prototypes. The Maxum also delivers a
fine feature detail capability allowing customers to make prototypes of very
small parts. This feature was developed in conjunction with Fuji Film Corp. of
Japan. Features as small as .005” x .010” may be built, allowing for increased
prototyping capabilities for the telecommunications, electrical connector and
camera and photography industries.
In
September 2003 we entered into an agreement with Objet Geometries Ltd. to
distribute their Eden333 RP system in North American, including Mexico and
Canada. Eden333 uses inkjet technology to jet ultra-fine layers of UV-cured
resin to build RP prototypes. We added Eden260 in the first quarter of 2005.
Eden systems build prototypes rapidly with excellent surface
resolution.
We
periodically discontinue manufacturing older products. We discontinued sales of
the GenisysXs, FDM 8000 and Prodigy systems at various times in 2002. We
discontinued sales of the FDM 2000 in 2003 and the FDM 3000 in 2004. However, we
continue to support these products in the field.
Modeling
Material
FDM
technology allows the use of a greater variety of production grade plastic
modeling materials than other RP technologies. We continue to develop filament
modeling materials that meet the customer’s needs for increased speed, strength,
accuracy, surface resolution, chemical and heat resistance, and color. These
materials are processed into our patented filament form, which is then fed into
the FDM systems. Our spool-based system has proven to be a significant advantage
for our products over ultraviolet (“UV”) polymer systems, because our system
allows the user to quickly change material by simply mounting the spool and
feeding the desired filament into the FDM devices. Spools weigh from one pound
to ten pounds, and the creation of a model may require from 0.1 pound to more
than one pound of filament. The spool-based system also compares favorably with
the UV polymer systems, because the spool-based system allows the customer to
use it in an office environment and to purchase a single spool, as compared to
an entire vat of UV polymer, thereby reducing the customer’s up-front costs. The
material delivery systems on our newer RP devices use cartridges or canisters
and feature automatic loading capabilities and transition between multiple
canisters or cartridges.
Currently,
we have seven modeling materials commercially available for use with our FDM
technology:
| · |
ABS
is an engineering thermoplastic material (named for its three initial
monomers, acrylonitrile, butadiene, and styrene), which offers a balance
of strength, toughness and thermal resistance and is used commercially to
make products such as cell phones, computer cases and
toys. |
| · |
Polycarbonate
(“PC”) is an engineering thermoplastic material, which is used
commercially for demanding applications in a number of industries; PC
offers superior impact strength coupled with resistance to heat and
corrosive agents. |
| · |
PC-ISO,
a derivative of PC that is translucent, expands the usage of polycarbonate
models and prototypes in various medical
applications. |
| · |
Polyphenylsufone
(“PPSF”) is a specialty thermoplastic material, which offers excellent
mechanical properties while being subjected to demanding thermal and
chemical environments. PPSF is used to prototype parts for numerous
industries, including automotive, fluid and chemical handling, aerospace,
and medical sterilization. |
| · |
ABSi
is a higher grade translucent ABS, which features greater impact strength
than ABS. It can also be used in medical applications, including gamma-ray
sterilization. |
| · |
A
proprietary water-soluble material is used for support during the build
process, which is later dissolved from the finished prototype in products
that employ our WaterWorks system. |
| · |
Other
proprietary release materials are used for support and removed from the
final model. |
We
introduced a new modeling material blend, PC-ABS, in December 2004, with
commercial release expected in the second quarter of 2005.
Each
material has specific characteristics that make it appropriate for various
applications. The ability to use different materials allows the user to match
the material to the end use application of the prototype, whether it is a
pattern for tooling, a concept model, or a functional prototype. ABS is also
offered in numerous colors, including black, red, blue, yellow and green. We
offer a program to create custom colors for unique customer needs.
The
modeling filament used in our material delivery systems is a consumable product
that provides us additional recurring revenue.
Operating
Software
In
addition to the prototyping machines and materials, we offer two software
products that convert the three-dimensional CAD databases into the appropriate
two-dimensional data formats for our family of prototyping machines. The
software products also provide a wide range of features, including automatic
support generation, part scaling, positioning and nesting, as well as geometric
editing capabilities. The software is not sold as a stand-alone
product.
Catalyst
is our entry-level software product that enables users to build prototype parts
at the push of a button. It was introduced in 2000 and is used on Dimension BST
and Dimension SST.
InSight
is used on the remainder of our FDM products - Prodigy Plus, Vantage, Titan and
Maxum. InSight is our preprocessing software that increases build speed and
improves the design engineer’s control and efficiency over the entire build
process. InSight was separately introduced in February 2001 as a replacement for
our QuickSlice software. It has a broad set of features that facilitate the
demanding applications ranging from a single “push button” for automatic
pre-processing to individual editing and manipulation tools for each process
step.
We
continuously improve both products to meet the demands of our sophisticated
customers. Throughput enhancements, advanced build algorithms and features keep
pace with the complex industrial geometric designs while saving valuable
operator time.
Services
We also
provide a number of services both to our customers and to others in relation to
our rapid prototyping business. We provide maintenance to our customers
under our standard warranties and separate maintenance contracts. We also
lease or rent systems under operating agreements to customers that do
not desire to purchase them or enter into sales-type leases. Our paid parts
service offers both customers and potential customers the ability to
purchase models and prototypes that we make for them from CAD files
that they provide to us. We offer training to our customers, particularly on our
high-performance RP systems. Finally, from time to time we offer contract
engineering services to third parties in connection with the development of
systems and services incorporating our proprietary technology.
Marketing,
Distribution and Customers
Marketing
and Customers
The focus
of our marketing begins with the identification of customer needs. We feature a
broad array of products that allow us to meet the precise needs of engineers,
designers, educators, marketers and manufacturers. Our products range from
Dimension BST, priced at $24,900, to a high-performance FDM Maxum, priced at
$250,000. We currently offer seven other products between these price points,
meeting a variety of material, size and performance criteria.
We have
sold systems to the following representative customers:
|
· General Motors Corporation |
· Harley Davidson |
· Toyota |
|
· Intel |
· Georgia Tech |
· Nike |
|
· The Boeing Company |
· Xerox |
· Mitsubishi Electronics |
|
· University of Wisconsin - Madison
|
· InFocus |
· Pioneer Speaker |
|
· Callaway Golf |
· Lockheed Martin |
· Cornell University |
|
· Lego |
· Lever |
· Toro |
|
· Honda |
· Ford Motor Company |
· Graco |
|
· St. Jude Medical |
· NASA |
· Medtronic-Sofamar
Danek |
We have
also sold systems to service bureaus, universities and distributors in the
United States and abroad. We sell complete RP and 3D printing systems as well as
supplies and services.
No
customer accounted for more than 10% of sales in 2004, 2003, or 2002.
We use a
variety of tactical marketing methods to reach potential customers:
|
· Web-based marketing |
· Print advertisements |
|
· Trade magazine articles |
· Direct mailings |
|
· Brochures |
· Trade show demonstrations |
|
· Telemarketing programs |
· Web sites |
|
· CD’s |
· Broadcast e-mail |
|
· Press releases |
· Webinars |
In
addition, we have developed domestic and international on-site demonstration
capabilities.
FDM
Sales Organization
In early
2003, we consolidated our FDM sales organization by structuring sales, service,
and marketing into one group. The focus of this new organization is on our
high-performance RP systems that feature engineering modeling materials, high
quality surface finish, high accuracy and feature detail, and excellent
throughput. This group markets, sells and services our Maxum, Titan, Vantage,
Prodigy Plus and Eden Systems.
The FDM
sales organization operates worldwide. In 2003, we increased the efficiency of
our dedicated direct sales force in North America by reducing the number of
regions from three to two. Both sales management and support were consolidated.
Regional sales and service offices continue to be located in Southfield,
Michigan and Ontario, California. We further consolidated our North American
territory in 2004 by creating a single region managed by a National Sales
Manager. This organization is also responsible for the sale, installation and
service of the Eden Systems under our exclusive distribution agreement with
Object Geometries Ltd.
Internationally,
our third-party distributors continue to sell and service our FDM products. In
2003, new distributor relationships were established in Taiwan, China, and Latin
America. Sales management and technical support were increased to support the
growth of our international business. International sales and service centers
continue to be located in Frankfurt, Germany, and Bangalore, India.
We have
continued to expand our FDM paid parts business by operating a dedicated FDM
system center at our corporate headquarters. An essential objective of this
operation is to increase the number of high quality FDM parts in the
marketplace, which we believe will support the expansion of our system sales.
Various distribution agreements have been established to accomplish the goals of
this business.
In 2004,
we increased emphasis on the marketing of FDM technology through an integrated
sales and marketing program. Our new FDM sales organization rolled out marketing
programs throughout 2004, with the expectation that we will create a solid base
for expanding our FDM business in the future.
3D
Printing Sales Organization
In
conjunction with the consolidation of our FDM sales organization, we also
consolidated our 3D printing sales organization in 2003. A worldwide Director of
Sales manages four channel managers in North America as well as our
international regional managers for sales of our 3D printers.
We use a
worldwide reseller network to market, sell, and service our 3D printers. Many of
our reseller outlets have Dimension BST and Dimension SST systems that are
available for tradeshows, product demonstration, and other promotional
activities. As of early 2005, we had approximately 145 reseller locations
worldwide. Most resellers enjoy a long-term presence in their respective
territories. In addition to Dimension, most resellers sell and service a 3D
solid CAD software package. Most of our North American territories contain a
reseller devoted to commercial accounts as well as a different reseller devoted
to the education market.
Dimension
can be found at many leading companies. Based on estimates from the 2004 Wohlers
Report, we believe that 3D printers represented approximately 60% of all RP
systems sold in 2004, and that Dimension accounted for about 55% of all 3D
printer systems shipped in 2004.
Customer
Support
Our
Customer Support department provides on-site system installation and maintenance
services and remote technical support to users of our products. We offer
services on a time and material basis as well as through a number of
post-warranty maintenance contracts with varying levels of support and pricing.
Our help desk provides technical support via phone, fax, and e-mail to
international customers, distributors, and resellers, and our field service
personnel. We supply a toll-free telephone number that our domestic customers
can utilize to request technical assistance, schedule service visits, order
parts and supplies, or directly contact a manager within the Customer Support
department.
We employ
a field service organization that performs system installation, basic operation
and maintenance training, and a full range of maintenance and repair services at
customer sites. Field representatives have been trained and certified to service
all of our products. Representatives are strategically located in regional
offices across North America and are equipped with cellular phones and laptop
computers. They have remote access to a customer service database containing
service history and technical documentation to aid in troubleshooting and
repairing systems.
Customer
Support is represented on all cross-functional product development teams within
Stratasys to ensure that products are designed for serviceability and to provide
our internal design and engineering departments with feedback on field issues.
Failure analysis, corrective action, and continuation engineering efforts are
driven by data collected in the field. Ongoing customer support initiatives
include development of advanced diagnostic and troubleshooting techniques and
comprehensive preventative maintenance programs, an expanded training and
certification program for technical personnel, and improved communication
between the field and the factory.
Warranty
and Service
We
provide a 90-day warranty on our commercial systems sold domestically and a
one-year warranty on domestic educational sales and systems sold
internationally. In addition, we offer annual service and maintenance contracts
for our systems. Annual service contracts for our systems are priced from $3,000
to $36,000.
Manufacturing
Our
manufacturing process consists of the assembly of purchased components. We
obtain all parts used in the manufacturing process either from distributors of
standard electrical or mechanical parts or from custom fabricators of our
proprietary designs. Our suppliers are measured by on-time performance and
quality. We currently operate on a build-to-forecast basis.
We
purchase major component parts for our FDM and 3D printing equipment from
various outside suppliers, subcontractors and other sources and assemble them at
our Minnesota facility. Our production floor has been organized using
demand-flow techniques (“DFT”) in order to maximize efficiency and quality.
Using DFT, our production lines are balanced and as capacity constraints arise,
we can avoid the requirements of relaying out our production floor.
Computer-based Material Requirements Planning (“MRP”) is used for reordering to
insure on-time delivery of forecasted parts. All operators and assemblers are
certified and trained on up-to-date assembly and test procedures. At the
completion of assembly, we perform a complete power up and final quality tests
to ensure the quality of our products before shipment to customers. The complete
final quality tests must be run error free before the system can be cleared for
shipment. We maintain a history folder on all products that show revision level
configuration and a complete history during the manufacturing and test process.
All issues on the system during the manufacturing process are logged and tracked
and used to make continuous process improvements of our production processes.
Other manufacturing strengths that are incorporated into our new designs are the
commonality of designs in our different products and the Design For
Manufacturability and Assembly (DFMA) principles.
We
maintain an inventory of most of our necessary supplies, which facilitates the
assembly of products required for production. While most components are
available from multiple suppliers, certain components used in our systems are
only available from single or limited sources. Should our present sole/single
source suppliers become inadequate, we would be required to spend a significant
amount of time and money researching alternate sources. We consider these
suppliers very reliable. Although we believe we maintain adequate inventories of
vendor-specific materials, the loss of a supplier of such vendor-specific
materials or compounds could result in the delay in the manufacture and delivery
of those materials and compounds. The delay could require us to find an
alternate source, which would require us to re-qualify the product supplied by
one or more new vendors. We consider our relationships with our suppliers to be
good.
Research,
Development and Engineering
We
believe that ongoing research, development and engineering efforts are essential
to our continued success. Accordingly, our engineering development efforts will
continue to focus on improvements to the FDM technology and development of new
modeling processes, materials, software, user applications and products. We have
devoted significant time and resources to the development of a universally
compatible and user-friendly software system. We continue to standardize our
product platforms, leveraging each new design so that it will result in multiple
product offerings that are developed faster and at reduced expense. The FDM
Vantage, Prodigy Plus, and Dimension SST products as well as the Catalyst and
InSight software products are examples of this successful strategic initiative.
For the years ended December 31, 2004, 2003 and 2002, our research, development
and engineering expenses were approximately $5.6 million, $5.0 million and $4.7
million, respectively.
Our
filament development and production operation is located at our facility in Eden
Prairie, MN. We regard the filament formulation and manufacturing process as a
trade secret and hold patent claims on filament usage in our
products.
Intellectual
Property
We
consider our proprietary technology to be material to the development,
manufacture, and sale of our products and services and seek to protect our
technology through a combination of patents and confidentiality agreements with
our employees and others. All
patents and patent applications for our rapid prototyping processes and
apparatuses associated with the FDM process have been assigned to us by their
inventors. As part of our purchase of rapid prototyping technology assets from
IBM, we were also assigned the rights and title to three patents developed by
IBM, which were incorporated in our Genisys system and are used in several of
our other product lines. We recorded these patents domestically and are in the
process of recording them in certain foreign countries. The terms of these
patents extend until June 7, 2005, April 12, 2011, and May 17, 2011. The United
States patents covering our proprietary FDM technology expire at various times
between 2009 and 2025. In total, we currently own approximately 175 U.S. and
international patents and patent applications. Other foreign patent applications
have also been filed, including the patent applications assigned to us by
IBM.
Our
registered trademarks include:
|
· Stratasys, Inc. |
· FDM |
· Catalyst |
|
· QuickSlice |
· AutoGen |
· Dimension |
|
· 3D Plotter |
· FDM Quantum |
· Genisys |
|
· Dimension BST |
· Dimension SST |
|
Other
trademarks include:
|
· FDM Maxum |
· FDM Titan |
· SupportWorks |
|
· BASS |
· BuildFDM |
· FDM Vantage |
|
· InSight |
· Touchworks |
· WaterWorks |
|
· Prodigy Plus |
· Prodigy |
|
Each of
the registered trademarks has a duration of 10 years and may be renewed every 10
years while it is in use. Trademark applications have also been filed in Japan
and the European Community.
We have
also registered a number of Internet domain names, including the
following:
|
· prototype.com |
· webmodeling.com |
· buildup.com |
|
· webprototypes.com |
· 3D-fax.com |
· DimensionDirect.com |
|
· 3DPrinter.com |
· Stratasys.com |
·
Dimensionprinting.com |
Backlog
Our total
backlog of system orders at December 31, 2004 was approximately $3.2 million, as
compared with approximately $4.5 million at December 31, 2003. We estimate that
most of our backlog will ship in the first half of 2005.
Seasonality
Historically,
our results of operations have been subject to seasonal factors. Stronger demand
for our products has occurred in our fourth quarter primarily due to our
customers' capital expenditure budget cycles and our sales compensation
incentive programs. Our first quarter has historically been our weakest quarter.
This trend has been muted recently by the successful introduction of new
products coupled with demonstration programs that have granted extended payment
terms to resellers and distributors of our Dimension product line.
Competition
We
compete in a marketplace that is still dominated by conventional methods of
model-making and prototype development. Machinists and engineers working from
blueprints or CAD files and using machining or manual methods generally perform
the prototype development and fabrication. We believe that there is currently no
other commercial producer of 3D modeling devices that uses a single-step,
non-toxic technology similar to our FDM technology. Most of the 3D printing and
other RP systems manufactured by our competitors involve additional
post-processing steps, such as curing the part after construction of the model
or prototype. Our FDM technology does not rely on the laser or light technology
used by other commercial manufacturers in the RP industry.
Our
competitors employ a number of different technologies in their RP devices. 3D
Systems, D-MEC, Mitsui and Teijin Seiki Co. use stereolithography in their
products. 3D Systems introduced the first rapid prototyping product. 3D Systems
and EOS GmbH produce machines that use selective laser sintering (“SLS”) to
harden powdered material. Z Corp. uses inkjet technology to bond powdered
materials. Sanders Prototype, Inc., Solidscape, 3D Systems and Object Geometries
have developed prototyping systems that use inkjet technology to deposit resin
material layer by layer. A smoothing or milling process is often required
between each deposited layer to maintain accuracy in these processes.
Envisiontec utilizes a photopolymer mask and a light process to build models.
Solidimension Ltd. uses plastic sheet lamination that involves adhesives and
multiple sheets of polyvinyl chloride (PVC) to build models. We believe that our
FDM technology has important advantages over our competitors’ products. These
advantages include, but are not limited:
| · |
the
ability to be used in an office environment |
| · |
the
availability of multiple production-grade modeling
materials |
| · |
a
one-step modeling process |
| · |
hands-free
support removal |
Certain
of our competitors have greater financial and marketing resources than we have.
We believe that in both 2003 and 2004 we shipped more units than any other
company in the RP industry, and that we were the second largest in terms of
revenue. Based on data and estimates presented in the 2004 Wohlers Report, we
estimate that we recorded approximately 45% of total units shipped in the
industry in 2004.
Employees
As of
March 9, 2005, we had 264 full-time employees and 15 subcontractors or
temporary employees. While we have separate internal departments, such as
manufacturing, marketing, engineering and sales, many employees perform
overlapping functions within the organization. No employee is represented by a
union, and we have not experienced any work stoppages. We believe our employee
relations are good.
Governmental
Regulation
We are
subject to various local, state and federal laws, regulations and agencies that
affect businesses generally. These include:
| · |
regulations
promulgated by federal and state environmental and health
agencies |
| · |
the
federal Occupational Safety and Health
Administration |
| · |
laws
pertaining to the hiring, treatment, safety and discharge of
employees |
Available
Information
We file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any document
we file at the SEC’s public reference room at Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on
the public reference room. The SEC maintains a website that contains annual,
quarterly and current reports, proxy statements and other information that
issuers (including Stratasys) file electronically with the SEC. The SEC’s
website is www.sec.gov.
Our
website is www.stratasys.com. We make
available free of charge through our Internet site, via a link to the SEC’s
website at www.sec.gov, our
annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on
Form 8-K; Forms 3, 4 and 5 filed on behalf of our directors and executive
officers; and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC.
We make
available on www.stratasys.com our most
recent annual report on Form 10-K, our quarterly reports on Form 10-Q for the
current fiscal year and our most recent proxy statement, although in some cases
these documents are not available on our site as soon as they are available on
the SEC’s site. You will need to have on your computer the Adobe Acrobat Reader
software to view these documents, which are in PDF format. If you do not have
Adobe Acrobat, a link to Adobe’s Internet site, from which you can download the
software, is provided. The information on our website is not incorporated by
reference into this report.
Financial
Information About Operations In the United States and Other
Countries
The
information required by this item is incorporated by reference to our Financial
Statements included elsewhere in this report. (See Part IV, Item 15, Note
13.)
Item
2. Properties.
Our
executive offices and production facilities presently comprise approximately
132,370 square feet in three buildings in Eden Prairie, Minnesota, near
Minneapolis. We occupy a 27,756 square foot facility under a lease that expires
on July 31, 2007. Current monthly base rent on this facility is $13,357, which
will increase in August 2005 to $13,938. This facility is used for R&D,
administrative, marketing, and sales activities.
On August
1, 2001, we purchased our Eden Prairie manufacturing facility and land for
approximately $3.0 million. We had previously leased this facility since October
1996, and prior to 2002 had subleased approximately 25% of this facility. The
facility consists of 62,100 square feet, and is used for machine assembly,
inventory storage, operations, sales support, and administration. The facility
was subject to a mortgage agreement with a bank that provided a loan of
$2,287,500. Monthly payments on this loan were $18,396, and the loan was
collateralized by the property. In October 2003, we paid off the
mortgage.
In March
2004, we purchased an additional 42,500 square foot manufacturing facility for
approximately $1.2 million. The facility is located near our manufacturing
facility in Eden Prairie, Minnesota, and is used for filament manufacturing and
paid parts.
We opened
two regional sales offices in 1997. We occupy 2,889 square feet of space in
Southfield, Michigan, a Detroit suburb. We renewed this lease in June 2004 for a
one-year term that expires on June 14, 2005. Base monthly rent under this lease
is $5,508, which increased from $5,297 per month for a one-year period
commencing in June 2004. We also occupy 2,504 square feet of space in Ontario,
California. We renewed this lease on September 1, 2004, for a one-year period
expiring on August 31, 2005. Monthly base rent on this facility is $3,856, an
increase from $3,505 per month. We are also responsible for real estate taxes,
insurance, utilities, trash removal, and maintenance expenses at these
facilities.
In
November 1997, our German subsidiary entered into a lease to occupy 4,360 square
feet of space in Frankfurt, Germany. We renewed the lease in November 2002 for a
period of three years, with base monthly rent of approximately €5,700.00. A
three-year renewed option is available for this facility.
Item
3. Legal
Proceedings.
On
October 28, 2004, 3D Systems, Inc. filed an action captioned 3D
Systems, Inc. v. Stratasys, Inc. and Objet Geometries Ltd. in the
United States District Court for the District of New Jersey, alleging that
certain Polyjet products that we distribute on behalf of Objet infringe 3D
Systems’ patent rights. 3D Systems is seeking unspecified damages and an
injunction against the sale of the allegedly infringing products. The complaint
in the action was served on us on November 2, 2004, and we are currently
evaluating the case. However, upon our preliminary review of the complaint, we
believe that the action is without merit, and we intend to vigorously defend it.
Under our North American Distributor Agreement with Objet, Objet is obligated to
defend the action on our behalf and to indemnify us against any damages arising
from the action. We may, however, participate in the defense at our own cost as
permitted in the Distributor Agreement.
Except as
described above, we are not a party to any pending legal or administrative
proceeding, and our property is not subject to any such proceeding, other than
actions arising in the ordinary course of our business, which we believe are not
material.
Item
4. Submission
of Matters To A Vote of Stockholders.
No matter
was submitted to a vote of stockholders, through the solicitation of proxies or
otherwise, during the fourth quarter of the fiscal year ended December 31,
2004.
PART
II
Item
5. Market
For Common Equity and Related Stockholder Matters.
Market
Information
Our
common stock is quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System National Market (“Nasdaq”) under the symbol SSYS and
is traded on The Pacific Exchange Inc. under the symbol SAS.
The
following table sets forth the high and low closing sale prices of our common
stock for each quarter from January 1, 2003 through the fiscal year ended
December 31, 2004 reported on the Nasdaq National Market system, as adjusted,
where appropriate, to reflect the 3-for-2 stock split in the form of a stock
dividend which became effective in December 2003.
| |
|
High |
|
Low |
|
| |
|
Closing
Sale Prices ($) |
|
|
Fiscal
Year Ended December 31, 2003 |
|
|
|
|
|
|
January
1, 2003 - March 31, 2003 |
|
|
8.894 |
|
|
5.62 |
|
|
April
1, 2003 - June 30, 2003 |
|
|
24.44 |
|
|
8.527 |
|
|
July
1, 2003 - September 30, 2003 |
|
|
36.533 |
|
|
19.787 |
|
|
October
1, 2003 - December 31, 2003 |
|
|
38.733 |
|
|
21.50 |
|
| |
|
|
|
|
|
|
|
| Fiscal Year Ended December 31, 2004 |
|
|
|
|
|
|
|
|
January
1, 2004 - March 31, 2004 |
|
|
30.12 |
|
|
16.30 |
|
|
April
1, 2004 - June 30, 2004 |
|
|
28.68 |
|
|
19.05 |
|
|
July
1, 2004 - September 30, 2004 |
|
|
31.74 |
|
|
21.66 |
|
|
October
1, 2004 - December 31, 2004 |
|
|
36.23 |
|
|
28.40 |
|
| |
|
|
|
|
|
|
|
There
were approximately 102 stockholders of record of our common stock as of March 4,
2005.
Dividends
We have
not paid or declared any cash dividends to date and do not anticipate paying any
in the foreseeable future. We intend to retain earnings, if any, to support the
growth of our business.
Recent
Sales of Unregistered Securities
On
November 1, 2004, we sold 9,000 shares of our common stock to one purchaser upon
exercise of a warrant for a total purchase price of $29,970. The foregoing
purchase and sale was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof, on the basis that the transaction did not
involve a public offering.
Shares
Issuable Under Equity Compensation Plans
Information
regarding our equity compensation plans, including both stockholder approved
plans and plans not approved by stockholders, is incorporated herein by
reference to our Definitive Proxy Statement with respect to our Annual Meeting
of Stockholders scheduled to be held May 5, 2005.
Item
6. Selected
Consolidated Financial Data.
The
selected consolidated financial data as of and for the five-year period ended
December 31, 2004, should be read in conjunction with the Consolidated Financial
Statements and related Notes for the year ended December 31, 2004, and the
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
| |
|
Years
Ended December 31, |
|
| |
|
(In
Thousands, Except Per Share Amounts) |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
Statement
of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales |
|
$ |
70,329 |
|
$ |
50,890 |
|
$ |
39,808 |
|
$ |
37,572 |
|
$ |
35,611 |
|
|
Gross
Profit |
|
|
42,330 |
|
|
32,782 |
|
|
24,366 |
|
|
23,001 |
|
|
21,948 |
|
|
Selling,
general and administrative expenses |
|
|
23,692 |
|
|
18,993 |
|
|
16,065 |
|
|
14,598 |
|
|
15,233 |
|
|
Research
and development |
|
|
5,640 |
|
|
5,047 |
|
|
4,688 |
|
|
4,915 |
|
|
6,367 |
|
|
Operating
income |
|
|
12,998 |
|
|
8,742 |
|
|
3,613 |
|
|
3,488 |
|
|
349 |
|
|
Net
income |
|
|
9,129 |
|
|
6,156 |
|
|
3,111 |
|
|
2,513 |
|
|
988 |
|
|
Net
income per basic share |
|
$ |
0.88 |
|
$ |
0.68 |
|
$ |
0.39 |
|
$ |
0.31 |
|
$ |
0.12 |
|
|
Weighted
average basic shares outstanding |
|
|
10,350 |
|
|
9,051 |
|
|
8,005 |
|
|
8,193 |
|
|
8,291 |
|
|
Net
income per diluted share |
|
$ |
0.85 |
|
$ |
0.64 |
|
$ |
0.37 |
|
$ |
0.31 |
|
$ |
0.11 |
|
|
Weighted
average diluted shares outstanding |
|
|
10,726 |
|
|
9,679 |
|
|
8,392 |
|
|
8,239 |
|
|
8,526 |
|
|
Balance
Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
Capital |
|
$ |
67,546 |
|
$ |
60,856 |
|
$ |
23,741 |
|
$ |
21,594 |
|
$ |
20,014 |
|
|
Total
Assets |
|
|
99,199 |
|
|
84,100 |
|
|
43,600 |
|
|
41,951 |
|
|
37,582 |
|
|
Long
term debt (less current portion) |
|
|
-0- |
|
|
-0-
|
|
|
2,157 |
|
|
2,216 |
|
|
130 |
|
|
Stockholders’
equity |
|
|
84,877 |
|
|
73,896 |
|
|
32,766 |
|
|
31,303 |
|
|
29,226 |
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
intended to facilitate an understanding of our business and results of
operations. It should be read in conjunction with our Consolidated Financial
Statements and the accompanying Notes to Consolidated Financial Statements
included elsewhere in this report.
General
We
develop, manufacture, and market a family of rapid prototyping (“RP”) devices,
which includes our 3D printing systems, 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. In 2004,
our sales grew by over 38% on a 57.7% increase in the number of units shipped,
as compared with the levels reported in 2003. This follows our strong
performance in 2003, where revenues grew by 28% on 50.5% unit growth as compared
with 2002.
Our
strategy in 2004 was to expand our position in the 3D printing market through
increased sales of Dimension BST, our low-cost 3D printer, and the Dimension
SST, which we introduced in 2004. In 2004, the unit growth rate of Dimension was
73%, which contributed to a 64% increase in revenues from this product line as
compared with 2003. According to the 2004 Wohlers Report (“Wohlers”), we shipped
more 3D printers than other company in the world in 2003, and based on our
results in 2004, we believe that we have continued that trend in 2004. Our 2004
strategy also included the expansion of our position in the RP market through
the growth of our high performance systems, represented by our Titan, Vantage,
Prodigy Plus and Maxum systems, coupled with Eden333, a system we distribute for
Objet Geometries Ltd. In 2004, unit and revenue growth of these RP products
amounted to 18.8% and 29.2%, respectively. Total net unit shipments in 2004
amounted to 1090 systems compared with the 691 net units shipped in 2003. Based
on data derived from Wohlers, we believe we shipped more total systems than any
other company in the world in 2004 and 2003. Our growth was derived from a
number of industries, including automotive, consumer products, electronics,
general manufacturing, educational, government, and aerospace.
As our
installed base has increased, we have derived an increasing amount of revenue
from the sales of consumables, maintenance contracts, and other services. These
represent recurring revenue for us. In 2004, total non-system revenue increased
by 28%, due principally to growth in our consumable, service, and paid parts
businesses.
A key
objective in 2004 was to improve our operating margins as compared with those
recorded in 2003. While our total revenues increased by more than 38% to $70.3
million from $50.9 million in 2003, our operating margin grew by almost 49% as
compared with 2003. Operating margins amounted to $13 million, or 18.5% of
sales, in 2004, as compared with $8.7 million, or 17.2% of sales, in 2003. We
will continue to focus on improving our operating margins in 2005 as compared
with the results recorded in 2004. We cannot, however, ensure that we will be
successful.
Our
research and development (“R&D”) group finished the development of Dimension
SST, which we introduced in February 2004. Dimension SST is an enhancement of
the original Dimension, which was renamed Dimension BST and offered at a reduced
price of $24,900. We introduced Triplets, which offered three variations of the
FDM Vantage system, in March 2004. Shipments of these systems commenced in the
second quarter of 2004. In December 2004, we introduced a new modeling material
blend, PC-ABS, with commercial release expected in the second quarter of 2005.
The R&D group in 2005 will continue to be focused on new product
development, on new material development, on software improvements, and on the
quality, reliability, functionality, and costs of our existing technology. While
R&D expense in 2004 increased by $.6 million, or 11.7%, to $5.6 million, it
declined to 8.0% of sales from 9.9% in 2003. While we expect R&D expenses to
increase in 2005 from those recorded in 2004, they should continue to decline as
a percentage of sales. We cannot, however, ensure that we will be successful.
With the
successful implementation of our 2004 strategy, we improved our balance sheet.
We expanded our cash position to $55.8 million from $44.5 million as of the end
of 2003, as our cash flows from operations amounted to $15.9 million. We ended
2004 with no debt and total assets of $99.2 million. Total liabilities amounted
to only $14.3 million.
Our
strategy in 2005 will be to continue to expand our position in the 3D printing
market with our Dimension systems. We plan to leverage the strength of our
balance sheet by continuing the leasing and demo programs that have contributed
to the market success of these products. Additionally, we expect to continue to
develop and expand our distribution channel, which should have the effect of
increasing expenses above those incurred in 2004. We believe that the 3D
printing market represents a significant growth area for us, and that Dimension
BST and Dimension SST will continue to have a significant positive impact on our
2005 results and beyond.
We remain
fully committed to our historic core business, which is currently served by our
Titan, Vantage, Prodigy Plus, and Maxum systems. We believe that the growth
rates will be slower than the growth of the 3D printing systems, but that sales
of these systems will be very profitable. Distribution of the Eden systems
should also contribute to the top-line growth, but at lower levels of
profitability. We believe that new opportunities in rapid manufacturing, rapid
tooling, and expansion of traditional rapid prototyping applications will be the
impetus for this growth. Recurring revenue, driven by our growing installed base
of all of our systems, should provide a significant growth opportunity for us.
We also believe that our paid parts business represents a high growth
opportunity. In 2005, we will have to make significant investments in fixed
assets, process improvements, information technology (“I/T”), head count
additions, and human resource development activities that will be required to
maintain our growth rates. Promotional, marketing, and distribution-related
expenses should also exceed the levels reported in the corresponding 2004
period.
We
anticipate that our total expenses will increase in 2005 over the amounts
reported in 2004, but that our revenue growth will exceed that of our expenses.
This should allow for increased operating profits in 2005 as compared with 2004.
Our expense levels are based in part on our expectations of future
revenues. While we
have adjusted, and will continue to adjust, our expense levels based on both
actual and anticipated revenues, fluctuations in revenues in a particular period
could adversely impact our operating results. Whereas
our backlog as of December 31, 2004, was $3.1 million, it would not be
sufficient to meet our budgeted revenue targets should new system orders in 2005
decline.
Our
current and future growth is largely dependent upon our ability to penetrate new
markets and develop and market new rapid prototyping and 3D printing systems,
materials, applications, and services that meet the needs of our current and
prospective customers. Our ability to implement our strategy for 2005 is subject
to numerous uncertainties, many of which are described in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations and in
the section below captioned “Forward Looking Statements and Factors That May
Affect Future Results of Operations.” We cannot ensure that our efforts will be
successful.
Results
of Operations
Twelve
months ended December 31, 2004 compared with twelve months ended December 31,
2003
The
following table sets forth certain statement of operations data as a percentage
of net sales for the periods indicated. All items are included in or derived
from our statement of operations.
| |
|
For
the twelve months ended December 31, |
|
| |
|
2004 |
|
2003 |
|
|
Net
sales |
|
|
100.0 |
% |
|
100.0 |
% |
|
Cost
of sales |
|
|
39.8
|
% |
|
35.6 |
% |
|
Gross
margin |
|
|
60.2
|
% |
|
64.4 |
% |
|
Selling,
general, and administrative expenses |
|
|
33.7 |
% |
|
37.3 |
% |
|
Research
& development expense |
|
|
8.0 |
% |
|
9.9 |
% |
|
Operating
income |
|
|
18.5 |
% |
|
17.2 |
% |
|
Other
income |
|
|
1.2 |
% |
|
0.8 |
% |
|
Income
before taxes |
|
|
19.7 |
% |
|
18.0 |
% |
|
Income
taxes |
|
|
6.7 |
% |
|
5.9 |
% |
|
Net
income |
|
|
13.0 |
% |
|
12.1 |
% |
Net
Sales
Net sales
for the twelve months ended December 31, 2004, were $70.3 million, compared with
net sales of $50.9 million for the
twelve months ended December 31, 2003. This represents an increase of $19.4
million, or 38.2%. Product revenue, derived from sales of our systems and
consumables, increased to $56.8 million in the twelve months ended December 31,
2004, from $40.3 million in the comparable 2003 period. Dimension and T-Class
(Vantage and Titan) system sales were very strong in 2004, and recorded unit
growth rates of 73% and 88%, respectively. Unit shipments of Eden333 system,
introduced in late 2003, were up significantly on a full-year basis. Revenues
derived from our older platforms, such as our Prodigy Plus, however, declined in
2004 as compared with 2003. Revenues from consumables on our larger installed
base increased significantly. Net sales derived from services increased to $13.5
million from $10.5 million recorded in the twelve months ended December 31,
2003. Service revenues are predominately made up of the following components:
maintenance, paid parts, contract engineering services, and rentals. The growth
rate of our service revenue amounted to 28% in 2004 as compared with 15% in
2003.
North
American sales, which include Canada and Mexico, accounted for approximately 57%
of total revenue in the twelve months ended December 31, 2004, as compared with
approximately 59% in the twelve months ended December 31, 2003. Domestic sales
benefited from sales of Eden333 systems, which we distribute only in North
America, as well as higher paid parts sales. However, total North American sales
growth, which includes systems, services, and consumables, grew by almost 34% as
compared with international sales growth of 45%. Europe accounted for
approximately 24% of total revenue for the twelve months ended December 31,
2004, and displayed strength for most of the year. We believe that sales into
our European and North American regions will remain strong throughout 2005, and
that Asia Pacific will improve from the results reported in 2004. However,
declining economic conditions in any of these regions could adversely impact our
future sales and profitability.
Gross
Profit
Gross
profit amounted to $42.3 million, or 60.2% of sales, in the twelve months ended
December 31, 2004, compared with $32.8 million, or 64.4% of sales, in the
comparable period of 2003. This represents an increase of $9.5 million or
29.1%. Gross
profit increased due to higher revenues, material and labor cost reductions to
both Dimension and Prodigy Plus systems, and a favorable mix of higher margin
Titan and Vantage products. Gross profit as a percentage of net sales was
negatively impacted by the high percentage of Dimension systems sold, coupled
with the full year sales of Eden333 systems that were only available for the
last quarter of 2003, both of which are lower margin systems.
Operating
Expenses
SG&A
expenses increased to $23.7 million for the twelve months ended December 31,
2004, from $19.0 million for the comparable period of 2003. This represents an
increase of $4.7 million, or 24.7%. We incurred significant expenses in 2004 for
Sarbanes-Oxley compliance, promotional expenses associated with the Dimension,
T-class, and Eden product lines, channel development expenses, write-off of
delinquent accounts, and projects associated with the expansion of our paid
parts business. Variable commissions, incentives, and travel expenses were also
higher in the 2004 period as a result of increased revenues.
R&D
expenses increased to $5.6 million for the twelve months ended December 31, 2004
from $5.0 million for the twelve months ended December 31, 2003. This amounted
to an increase of $0.6 million, or 11.7%. On higher revenues, R&D expenses
decreased as a percentage of sales to 8.0% in the twelve months ended December
31, 2004, from 9.9% in the 2003 period. Much of the year-over-year increase
occurred in the fourth quarter of 2004, as we decided to commit more resources
to several key initiatives. Higher compensation and benefit expenses accounted
for most of the increase in 2004. We remain committed to maintaining R&D to
design new products and materials, to reduce costs on existing products, and to
improve the quality and reliability of all of our platforms. As a result, we
expect to report higher R&D expense increases in 2005 than we have incurred
in the last several years. However, the increases should still be lower than our
top-line growth rates, which should have the effect of reducing R&D expenses
as a percentage of revenue.
Operating
Income
For the
reasons cited above, our operating income for the twelve months ended December
31, 2004 amounted to $13 million, or 18.5% of sales, compared with operating
income of $8.7 million, or 17.2% of sales, for the twelve months ended December
31, 2003. This represents an increase of $4.3 million, or 48.7%.
Other
Income
Other
income netted to $0.8 million in the twelve months ended December 31, 2004
compared with other income of $0.4 million in the comparable 2003 period.
Interest income increased to $0.7 million in the current twelve-month period,
compared with $0.2 million in the twelve-month period of 2003. The increase in
interest income was primarily due to significantly higher average cash balances,
but negatively impacted by declining interest rates. Interest expense was nil in
2004 compared with $0.1 million in the 2003 period, principally due to a
mortgage on our manufacturing facility. In the twelve months ended December 31,
2004, we recognized a slight loss from foreign currency transactions related to
the euro versus a $0.3 million gain on foreign currency translations related to
the euro in 2003.
Income
Taxes
Income
tax expense amounted to $4.7 million, or 6.7% of sales, in the twelve months
ended December 31, 2004, compared with $3.0 million, or 5.9% of sales, for the
twelve months ended December 31, 2003. The effective tax rate for 2004 amounted
to 34.1% compared with an effective tax rate of 32.7% in 2003. We believe that
our effective tax rate should range between 37% and 39% in 2005.
Net
Income
For the
reasons cited above, our net income for the twelve months ended December 31,
2004, amounted to $9.1 million, or 13.0% of sales, compared with net income of
$6.2 million, or 12.1% of sales, in the comparable 2003 period. This resulted in
earnings per diluted common share of $0.85, on 10.7 million diluted shares
outstanding in the twelve months ended December 31, 2004, compared with earnings
per diluted common share of $0.64 for the comparable period ended December 31,
2003. In 2003, the number of diluted weighted average shares outstanding
increased to 9.7 million, due mostly to a 3:2 stock split that was effective in
December 2003. The corresponding earnings per share and weighted average shares
outstanding have been adjusted in the 2003 and 2002 periods to account for
this.
Twelve
months ended December 31, 2003 compared with twelve months ended December 31,
2002
The
following table sets forth certain statement of operations data as a percentage
of net sales for the periods indicated. All items are included in or derived
from our statement of operations.
| |
|
For
the twelve
months ended
December
31, |
|
| |
|
2003 |
|
2002 |
|
|
Net
sales |
|
|
100.0 |
% |
|
100.0 |
% |
|
Cost
of sales |
|
|
35.6
|
% |
|
38.8 |
% |
|
Gross
margin |
|
|
64.4
|
% |
|
61.2 |
% |
|
Selling,
general, and administrative expenses |
|
|
37.3 |
% |
|
40.4 |
% |
|
Research
& development expense |
|
|
9.9 |
% |
|
11.8 |
% |
|
Operating
income |
|
|
17.2 |
% |
|
9.1 |
% |
|
Other
income |
|
|
0.8 |
% |
|
0.7 |
% |
|
Income
before taxes |
|
|
18.0 |
% |
|
9.8 |
% |
|
Income
taxes |
|
|
5.9 |
% |
|
2.0 |
% |
|
Net
income |
|
|
12.1 |
% |
|
7.8 |
% |
Net
Sales
Net sales
for the twelve months ended December 31, 2003, were $50.9 million, compared with
net sales of $39.8 million for the
twelve months ended December 31, 2002. This represents an increase of $11.1
million, or 27.8%. Dimension, Prodigy Plus, and Titan sales were very strong in
2003, and recorded unit growth rates of 68%, 62%, and 24%, respectively. We also
commenced multiple shipments of Eden333, a product that we distribute in the
United States for Objet Geometries. Revenues derived from our older Benchtop
platform, however, declined in 2003 as compared with 2002, and were phased out
in 2003. Revenues from consumables and services other than maintenance also
increased significantly in the twelve months ended December 31, 2003 as compared
with the same 2002 period. Consumable revenue has increased due to the expansion
of our installed base of systems.
North
American sales, which include Canada and Mexico, accounted for approximately 59%
of total revenue in the twelve months ended December 31, 2003, as compared with
approximately 54% in the twelve months ended December 31, 2002. Sales of systems
were considerably higher in the North American region in 2003, unlike 2002 when
international system sales were higher. Total North American sales, which
include systems, services, and consumables, grew by almost 41% as compared with
international sales growth of approximately 13%. Our coastal region recorded the
highest revenues in 2003, while the central region, dominated by the automotive
industry, continued to be weak. Internationally, our Asia Pacific region, which
comprises Japan, China, the Far East and India, recorded revenues that amounted
to approximately 21% of total sales. Europe accounted for approximately 19% of
total revenue for the twelve months ended December 31, 2003, and displayed
weakness for much of the year.
Gross
Profit
Gross
profit improved to $32.8 million, or 64.4% of sales, in the twelve months ended
December 31, 2003, compared with $24.4 million, or 61.2% of sales, in the
comparable period of 2002. This represents an increase of $8.4 million, or
34.5%. Gross
profit increased due to higher revenues, material and labor cost reductions to
both Dimension and Prodigy Plus systems, control over our fixed overhead costs,
and a favorable mix of higher margin Titan and Vantage products and increased
consumable revenue. Gross profit was negatively impacted by the high percentage
of Dimension systems sold, sales of Eden systems, and write-offs of inventory
principally related to the discontinuation of older products such as our
Benchtop and FDM 8000 systems. These write-offs and inventory adjustments
increased year-over-year by approximately $.5 million and occurred throughout
the year. However, the fourth quarter was impacted by a slightly higher amount
as we have refined our methodology to determine future inventory needs for
discontinued products that are subject to our maintenance contracts.
Operating
Expenses
SG&A
expenses increased to $19.0 million for the twelve months ended December 31,
2003, from $16.1 million for the comparable period of 2002. This represents an
increase of $2.9 million, or 18.2%. We incurred significant expenses in 2003 for
due diligence and promotional activities related to the Objet distribution
arrangement. These expenses were mostly incurred in the second half of the year.
Our expenses for Dimension channel development were also higher in 2003 as
compared with 2002. Variable commissions, incentives, and travel expenses were
higher in the 2003 period as a result of increased revenues. Our investor
relations expense was also significantly higher in 2003 than in 2002.
R&D
expenses increased to $5.0 million for the twelve months ended December 31, 2003
from $4.7 million for the twelve months ended December 31, 2002. This amounted
to an increase of $0.4 million, or 7.7%. On higher revenues, R&D expenses
decreased as a percentage of sales to 9.9% in the twelve months ended December
31, 2003, from 11.8% in the 2002 period. Higher contract labor and professional
fees accounted for much of the increase, as we outsourced certain functions.
Operating
Income
For the
reasons cited above, our operating income for the twelve months ended December
31, 2003 amounted to $8.7 million, or 17.2% of sales, compared with operating
income of $3.6 million, or 9.1% of sales, for the twelve months ended December
31, 2002. This represents an increase of $5.1 million, or almost 142%.
Other
Income
Other
income netted to $0.4 million in the twelve months ended December 31, 2003
compared with other income of $0.3 million in the comparable 2002 period.
Interest income increased to $0.2 million in the current twelve-month period,
compared with $0.15 million in the twelve-month period of 2002. The increase in
interest income was primarily due to higher average cash balances, but
negatively impacted by declining interest rates. Interest expense, primarily due
to the mortgage on our manufacturing facility, declined to $0.1 million in the
twelve months ended December 31, 2003 from $0.2 million in the same period of
2002. We paid off the mortgage in late 2003. In the twelve months ended December
31, 2003, we recognized income from foreign currency transactions related to the
euro of $0.3 million, which compared with income on foreign currency
transactions related to the euro of $0.3 million in the same period of
2002.
Income
Taxes
Income
tax expense amounted to $3.0 million, or 5.9% of sales, in the twelve months
ended December 31, 2003, compared with $0.8 million, or 2% of sales, for the
twelve months ended December 31, 2002. The effective tax rate for 2003, which
benefited from the utilization of R&D tax credits, amounted to 32.7%
compared with an effective tax rate of 20.3% in 2002. The fourth quarter of 2003
was particularly impacted by an adjustment to our effective tax rate, with the
adjustment amounting to approximately $0.5 million. This fourth quarter
adjustment was made because our operating income for the year was significantly
higher that projected in the first three quarters; the adjustment of the tax
benefit of the foreign sales corporation exclusion, R&D tax benefits and
credits being less than anticipated; and the elimination of the estimated tax
benefit resulting from disqualifying dispositions of shares acquired through the
exercise of stock options, which should have been included in additional paid in
capital.
Net
Income
For the
reasons cited above, our net income for the twelve months ended December 31,
2003, amounted to $6.2 million, or 12.1% of sales, compared with net income of
$3.1 million, or 7.8% of sales, in the comparable 2002 period. This resulted in
earnings per diluted common share of $.64 in the twelve months ended December
31, 2003, compared with earnings per diluted common share of $.37 for the
comparable period ended December 31, 2002. In 2003, the number of diluted
weighted average shares outstanding increased to 9,679,435, due mostly to a 3:2
stock split that was effective in December 2003. The corresponding earnings per
share and weighted average shares outstanding have been adjusted in the 2003 and
2002 periods to account for this.
Liquidity
and Capital Resources
We have
increased our cash and cash equivalents balances to $55.8 million at December
31, 2004, from $44.5 million at December 31, 2003, and $14.2 million at December
31, 2002. The net cash provided by our operating activities over the past three
years has amounted to approximately $27.4 million, principally derived from net
income and working capital management.
In 2004,
net cash provided by our operating activities amounted to $15.9 million compared
with $4.5 million in 2003 and $7.0 in 2002. The principal source of cash from
our operating activities has been our net income, as adjusted to exclude the
effects of non-cash charges, and changes in working capital, primarily
inventories and accounts receivable. Net income amounted to $9.1 million, $6.2
million, and $3.1 million in 2004, 2003, and 2002, respectively. Our net
accounts receivable balances declined to $15.0 million in 2004 from $15.8
million in 2003 and were $10.6 million 2002, principally due to tighter controls
in credit and collections. Some of our international distributors, however, have
continued to carry high balances, some of which have exceeded our normal terms.
These delays in payment have adversely impacted our days sales outstanding
(“DSO”). Nevertheless, DSO’s have declined from 116 days in 2003 to 81 days in
2004.
For the
years ended December 31, 2004, 2003, and 2002, our inventory balances have
amounted to $7.5 million, $6.4 million, and $6.5 million, respectively. The
increase in 2004 over 2003 was principally due to additional Eden inventory
maintained due to long lead times for the Eden systems and supplies. We have
instituted better inventory management, but recognize that we have opportunities
to make considerably more improvement to reduce overall inventory and improve
turns. Over the three-year period, inventory turns have improved to 3.5 times in
2004 from 2.4 times in 2002. A significant portion of our inventory is dedicated
to fulfill our service contract and warranty obligations. As we have introduced
several new products over the last several quarters, there are many more
platforms and models to service than in the past, which increases the
requirements to maintain inventory spares. With the introduction of these new
products, older products are discontinued but certain inventory is still
required to fulfill our service contracts. Our procedures for dealing with this
inventory are more fully explained in the section below captioned “Critical
Accounting Policies.”
Investments
in sales-type leases used cash of $2.7 million in 2004 and $1.3 million in 2003.
In mid-2003 we introduced a leasing program that was principally designed for
the Dimension product. The program successfully enabled us to offer an
attractive leasing solution to more than 40 accounts. We continued to offer this
program in 2004, and expanded it to include customers interested in our
high-performance systems. This resulted in over 75 new leases in 2004. We intend
to continue to use this leasing program in 2005.
Prepaid
expenses provided cash of $1.2 million in 2004, but used cash in the amount of
$1.9 million in 2003. Most of the decline was due to receipt of inventory that
was reflected as a prepaid expense under our distributor agreement with Objet
Geometries.
Unearned
revenue, principally due to maintenance contracts or implied maintenance,
provided cash of $2.4 million in 2004 and $0.8 million in 2003. This was
principally due to the larger number of maintenance contracts and increased
implied maintenance due to higher international sales in the second half of
2004.
Our
investing activities used cash of $5.3 million, $4.4 million, and $1.2 million
in the twelve months ended December 31, 2004, 2003, and 2002, respectively.
Property and equipment acquisitions totaled $5.3 million, $2.3 million, and $0.6
million in 2004, 2003, and 2002, respectively. Most of the capital expenditures
in 2004 were for equipment required by the fastest growing components of our
business, including consumable manufacturing and paid parts. In March 2004, due
to the anticipated growth requirements for these two lines of our business, we
purchased a 40,000 sq. ft. building near our current manufacturing facility for
approximately $1.2 million, and subsequently spent approximately $0.5 million
for building improvements. Over the three-year period ended December 31, 2004,
our other principal capital expenditures were for manufacturing or engineering
development equipment, tooling, and leasehold improvements, and for the
acquisition of computer systems and software applications. Payments for
intangible assets, including patents and capitalized software, amounted to $0.9
million, $0.5 million and $0.6 million for the years ended December 31, 2004,
2003, and 2002, respectively. In 2004, repayments of investments provided cash
of $0.9 million, whereas we used cash to purchase investments of approximately
$1.6 million in 2003. These investments are predominately certificates of
deposit that are covered by FDIC insurance and that range in maturities from 4
months to 4 years.
Our
financing activities provided cash of $0.7 million and $30.3 million in the
twelve months ended December 31, 2004 and 2003, respectively, and used cash of
$1.8 million in 2002. The proceeds from the exercise of 174,515 stock options
and 9,000 warrants provided cash of $.8 million in 2004, compared with proceeds
from the exercise of 717,375 stock options which provided cash of $3.1 million
in 2003. In 2002, the proceeds from the exercise of stock options amounted to
$2.1 million. In 2003, net proceeds from the sale of 1,500,000 shares of our
common stock provided cash of $29.4 million. In
conjunction with this transaction, we issued warrants to purchase 225,000 shares
of our common stock. We paid off the mortgage in our manufacturing facility in
2003, which used cash of $2.2 million. In 2004 and 2002, we used cash of $0.03
million and $3.7 million respectively, to purchase outstanding shares under our
stock buyback program.
For 2005,
we expect to use our cash as follows;
| · |
for
improvements to our facilities; |
| · |
for
the continuation of our leasing program; |
| · |
for
working capital purposes; |
| · |
for
information systems (“I/S”) and infrastructure
enhancements; |
| · |
for
new product and materials development; |
| · |
for
sustaining engineering; |
| · |
for
the acquisition of equipment, including production equipment, tooling, and
computers; |
| · |
for
the purchase of intangible assets, including
patents; |
| · |
for
increased selling and marketing activities, especially as they relate to
the continued market and channel development as well as Eden market
development; |
| · |
for
acquisitions and/or strategic alliances;
and |
| · |
for
our common stock buyback program. |
While we
believe that the primary source of liquidity during 2005 will be derived from
current cash balances and cash flows from operations, we have maintained a line
of credit for the lesser of $4.0 million or a defined borrowing base. To date,
we have not borrowed against this credit facility.
As of
December 31, 2004, we had gross accounts receivable of $16.7 million less an
allowance of $1.7 million for returns and doubtful accounts. Certain customers,
especially those that purchased our Maxum or Titan systems, continue to carry
high balances. Additionally, at December 31, 2004, large balances were
concentrated with certain international distributors, and some of these balances
exceed our payment terms. Default by one or more of these distributors or
customers could result in a significant charge against our current reported
earnings. We have reviewed our policies that govern credit and collections, and
will continue to monitor them in light of current payment status and economic
conditions. While we can give no assurances, we believe that most, if not all,
of the accounts receivable balances will ultimately be collected. For further
information, see the section below captioned “Critical Accounting
Policies.”
Our total
current assets amounted to $81.9 million at December 31, 2004, the majority of
which consisted of cash and cash equivalents, inventories and accounts
receivable. Total current liabilities amounted to $14.3 million. We have no
debt. We estimate that we will spend approximately $6.5 million in 2005 for
property and equipment. As of December 31, 2004, we estimate that material
commitments for inventory purchases from selected vendors for the ensuing
twelve-month period ending December 31, 2005, amounts to approximately $7.3
million. We intend to finance these purchases from existing cash or from cash
flows from operations.
Inflation
We
believe that inflation has not had a material effect on our operations or on our
financial condition during the three most recent fiscal years.
Foreign
Currency Transactions
We
invoice sales to certain European distributors in euros. Our reported results
are therefore subject to fluctuations based upon changes in the exchange rates
of that currency in relation to the United States dollar. In the year ended
December 31, 2004, the loss from foreign currency translations amounted to
approximately $.03 million, whereas in the comparable 2003 period we reported
income from foreign currency translations of approximately $0.3 million. In the
year ended December 31, 2004, we hedged approximately €1.0 million of our
accounts receivable that were denominated in euros. The hedge resulted in a
currency exchange gain of approximately $.04 million for this period. We intend
to continue to hedge some of our accounts receivable balances that are
denominated in euros throughout 2004, and will continue to monitor our exposure
to currency fluctuations. Instruments to hedge our risks may include foreign
currency forward, swap, and option contracts. These instruments will be used to
selectively manage risks, but there can be no assurances that we will be fully
protected against material foreign currency fluctuations. We expect to continue
to derive most of our revenue from regions where the transactions are
negotiated, invoiced, and paid in US dollars. Fluctuations in the currency
exchange rates in these other countries may therefore reduce the demand for our
products by increasing the price of our products in the currency of countries in
which the local currency has declined in value.
Critical
Accounting Policies
We have
prepared our financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America. This
has required us to make estimates, judgments, and assumptions that affected the
amounts we reported. Note 1 of Notes to Consolidated Financial Statements
contains the significant accounting principles that we used to prepare our
consolidated financial statements.
We have
identified several critical accounting policies that required us to make
assumptions about matters that were uncertain at the time of our estimates. Had
we used different estimates and assumptions, the amounts we recorded could have
been significantly different. Additionally, if we had used different assumptions
or different conditions existed, our financial condition or results of
operations could have been materially different. The critical accounting
policies that were affected by the estimates, assumptions, and judgments used in
the preparation of our financial statements are listed below.
Revenue
Recognition
We
recognize revenue, consistent with SAB 104 and EITF 00-21, when 1) persuasive
evidence of a final agreement exists, 2) delivery has occurred or services have
been rendered, 3) the selling price is fixed or determinable, and 4)
collectability is reasonably assured. Our standard terms are FOB shipping point,
and as such most of our revenue from system sales is primarily recognized at
time of shipment if the shipment conforms to the terms and conditions of the
purchase agreement. Exceptions to this policy occur only if a customer’s
purchase order indicates an alternative term or provides that the equipment sold
would be subject to certain contingencies, such as formal acceptance. In these
instances, revenues would be recognized only upon satisfying the conditions
established by the customer in its purchase order to us. Revenue from sales-type
leases of our FDM systems is recognized at the time of lessee acceptance, which
follows installation. Revenue from sales-type leases of our Dimension systems is
recognized at time of shipment, since either the customer or the reseller
performs the installation. We recognize revenue from sales-type leases at the
net present value of future lease payments. Revenue from operating leases is
recognized ratably over the lease period. Revenue from maintenance contracts is
recognized ratably over the term of the contract, usually one year. On certain
sales that require a one-year warranty rather than our standard 90-day warranty,
a percentage of the selling price that represents the fair value of the extended
warranty is deferred and recognized ratably over the period of the extended
warranty as an implied maintenance contract. This has had the effect of
deferring, as of December 31, 2004, approximately $2.4 million of revenue that
will be recognized in future periods.
We assess
collectability as part of the revenue recognition process. We evaluate a number
of factors to assess collectability, including an evaluation of the credit
worthiness of the customer, past payment history, and current economic
conditions. If it is determined that collectiblity cannot be reasonably assured,
we would decline shipment, request a down payment, or defer recognition of
revenue until ultimate collectability is more determinable. We also record a
provision for estimated product returns and allowances in the period in which
the related revenue is recorded. This provision against current gross revenue is
based principally on historical rates of sales returns, but also factors in
changes in the customer base, geographic economic conditions, and changes in the
financial conditions of our customers. If past trends were to change, we would
potentially have to increase or decrease the amount of the provision for these
returns. We have little history as to potential returns under our lease
programs. We will monitor our lease sales in the future, and if necessary will
record a provision for returns on leased systems. As of December 31, 2004, our
allowance for returns was $0.2 million, a slight increase from the balance as of
December 31, 2003.
Allowance
for Doubtful Accounts
While we
evaluate the collectability of a sale as part of our revenue recognition
process, we must also make judgments regarding the ultimate realization of our
accounts receivable. A considerable amount of judgment is required in assessing
the realization of these receivables, including the aging of the receivables and
the creditworthiness of each customer. We may not be able to accurately and
timely predict changes to our customer’s financial condition. In 2004, we
increased the net reserve for bad debts and allowance by almost $1.0 million. In
2003, we did not experience a large write-off, and directly wrote-off smaller
balances that in the aggregate amounted to $0.2 million. If a customer’s
financial condition should suddenly deteriorate, calling into question our
ability to collect the receivable, our estimates of the realization of our
receivables could be adversely affected. We might then have to record additional
allowances for doubtful accounts, which could have an adverse effect on our
results of operations in the period affected.
Our
allowance for doubtful accounts is adjusted quarterly using two methods. First,
our overall reserves are based on a percentage applied to certain aged
receivable categories that are predominately based on historical bad debt
write-off experience. Then, we make an additional evaluation of overdue customer
accounts, for which we specifically reserve. In our evaluation we use a variety
of factors, such as past payment history, the current financial condition of the
customer, and current economic conditions. We also evaluate our overall
concentration risk, which assesses the total amount owed by each customer,
regardless of its current status.
Certain
of our international distributors have carried large balances that have become
overdue. Most of these distributors have continued to pay down their balances
and are still considered performing. A default by one or more of these
distributors could have a material effect, ranging from $.2 million to $1.0
million, on our reported operating results in the period affected. As of
December 31, 2004, our allowance for doubtful accounts amounted to $1.5 million,
an increase from the December 31, 2003, balance of $0.6 million.
Inventories
Our
inventories are recorded at the lower of cost or market, with cost based on a
first-in, first-out basis. We periodically assess this inventory for
obsolescence and potential excess by reducing the difference between our cost
and the estimated market value of the inventory based on assumptions about
future demand and historical sales patterns. Our inventories consist of
materials and products that are subject to technological obsolescence and
competitive market conditions. If market conditions or future demand are less
favorable than our current expectations, additional inventory write downs or
reserves may be required, which could have an adverse effect on our reported
results in the period the adjustments are made. Additionally, engineering or
field change orders (“ECO” and “FCO”, respectively) introduced by our
engineering group could suddenly create extensive obsolete and/or excess
inventory. Although our engineering group considers the estimated effect that an
ECO or FCO would have on our inventories, a mandated ECO or FCO could have an
immediate adverse affect on our reported financial condition if they required
the use of different materials in either new production or our service
inventory.
Some of
our inventory is returned to us by our customers and refurbished. This
refurbished inventory, once fully repaired and tested, is functionally
equivalent to new production and is utilized to satisfy many of our requirements
under our warranty and service contracts. Upon receipt of the returned material,
this inventory is recorded at a discount from original cost, and further reduced
by estimated future refurbishment expense. While we evaluate this service
material in the same way as our stock inventory (i.e., we periodically test for
obsolescence and excess), this inventory is subject to changing demand that may
not be immediately apparent. Adjustments to this service inventory, following an
obsolescence or excess review, could have an adverse effect on our reported
financial condition in the period when the adjustments are made. In 2003 and
throughout 2004, we began to review the requirements for service inventory for
discontinued products using the number of active maintenance contracts per
product line as the key determinant for inventory levels and composition. A
sudden decline in the number of customers renewing service agreements in a
particular period could lead to an unanticipated write down of this service
inventory for a particular product line.
Income
Taxes
We comply
with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred
tax assets and liabilities be recognized using enacted tax rates for the effect
of temporary differences between the book and tax bases of recorded assets and
liabilities. SFAS 109 also requires a valuation allowance if it is more likely
than not that a portion of the deferred tax asset will not be realized. We have
determined that it is more likely than not that our future taxable income will
be sufficient to realize our deferred tax assets.
Our
provision for income taxes is based on our effective income tax rate. The
effective rate is highly dependent upon a number of factors, including our total
earnings, the geographic location of sales, the availability of tax credits, and
the effectiveness of our tax planning strategies. We monitor the effects of
these variables throughout the year and adjust our income tax rate accordingly.
However, if our actual results differ from our estimates, we could be required
to adjust our effective tax rate or record a valuation adjustment on our
deferred tax assets. This could have an adverse effect on our financial
condition and 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”, “estimate” or “believe” or other similar
words are forward-looking statements that we deem to be covered by and to
qualify for the safe harbor protection covered by the Private Securities
Litigation Reform Act of 1995 (the “1995 Act”). Investors and prospective
investors in our Company should understand that several factors govern whether
any forward-looking statement herein will be or can be achieved. Any one of
these factors could cause actual results to differ materially from those
projected herein.
These
forward-looking statements include the expected increases in net sales of RP and
3D printing systems, services and consumables, and our ability to maintain our
gross margins on these sales. The forward-looking statements include our
assumptions about the size of the RP and 3D printing market, and our ability to
penetrate, compete, and successfully sell our products in these markets. They
include our plans and objectives to introduce new products, to control expenses,
to improve the quality and reliability of our systems, to respond to new or
existing competitive products, and to improve profitability. The forward-looking
statements included herein are based on current expectations that involve a
number of risks and uncertainties. These forward-looking statements are based on
assumptions, among others, that we will be able to:
| · |
continue
to introduce new RP and 3D printing systems and materials acceptable to
the market, and to continue to improve our existing technology and
software in our current product offerings; |
| · |
successfully
develop the 3D printing market with our Dimension BST and Dimension SST
systems, and that the market will accept these systems;
|
| · |
maintain
our revenues and gross margins on our present products;
|
| · |
control
our operating expenses; |
| · |
expand
our manufacturing capabilities to meet the expected demand generated by
Dimension BST, Dimension SST, paid parts, and our consumable products;
|
| · |
successfully
and profitably distribute and service the Eden product line that is
governed by our distributor agreement with Objet
Geometries; |
| · |
successfully
commercialize new materials, and that the market will accept these new
materials; and |
| · |
recruit,
retain, and develop employees with the necessary skills to produce,
create, commercialize, market, and sell our products.
|
Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, geo-political, competitive, market and technological
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of those assumptions could prove
inaccurate, and therefore there is and can be no assurance that the results
contemplated in any such forward-looking statement will be realized. The impact
of actual experience and business developments may cause us to alter our
marketing plans, our capital expenditure budgets, or our engineering, selling,
manufacturing or other budgets, which may in turn affect our results of
operations or the success of our new product development and introduction. We
may not be able to alter our plans or budgets in a timely manner, resulting in
reduced profitability or losses.
Due to
the factors noted above and elsewhere in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations, our future earnings
and stock price may be subject to significant volatility, particularly on a
quarterly basis. Additionally, we may not learn of revenue or earnings
shortfalls until late in a fiscal quarter, since we frequently receive a
significant number of orders very late in a quarter. This could result in an
immediate and adverse effect on the trading price of our common stock. Past
financial performance should not be considered a reliable indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Interest
Rate Risk
Our cash
and cash equivalent investments are exclusively in short-term money market,
auction rate certificates, and sweep instruments with maturities of less than 90
days. These are subject to limited interest rate risk. A 10% change in interest
rates would not have a material effect on our financial condition or results of
operations. Our short- and long-term investments are invested in certificates of
deposit that bear interest at fixed rates of 2.7% to 3.7%. An immediate 10%
change in interest would have no material effect on our financial condition or
results of operations.
Foreign
Currency Exchange Rate Risk
We have
not historically hedged sales from or expenses incurred by our European
operations that are conducted in euros. Therefore, a hypothetical 10% change in
the exchange rates between the U.S. dollar and the euro could increase or
decrease our earnings before taxes by less than $0.15 million for the continued
maintenance of our European facility. Throughout 2004 we hedged €1.0 million of
our accounts receivable balances that were denominated in euros. A hypothetical
10% change in the exchange rates between the US dollar and the euro could
increase or decrease earnings before taxes by between $0.1 million and $0.3
million.
Item
8. Financial
Statements and Supplementary Data.
The
information that appears following Item 15 of this report and is incorporated
herein by reference.
Item
9. Changes
In and Disagreements With Accountants On Accounting and Financial
Disclosure.
We did
not have any changes in or disagreements with our accountants on accounting and
financial disclosure.
Item
9A. Controls and Procedures.
Disclosure
Controls and Procedures. Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report (the “Evaluation Date”). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded as of the Evaluation Date that our
disclosure controls and procedures were effective such that the information
relating to us required to be disclosed in our Securities and Exchange
Commission (“SEC”) reports (i) is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and
(ii) is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Internal
Control over Financial Reporting. Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we are responsible for
establishing and maintaining an adequate system of internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934). Our management has conducted an assessment of
our internal control over financial reporting based on the framework established
by the committee of Sponsoring Organizations of the Treadway Commission in
Internal Control - Integrated Framework. There have not been any changes in our
internal control over financial reporting identified in connection with the
assessment that occurred during the fourth quarter of 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. Management’s annual report on internal control over
financial reporting and the related attestation report of Rothstein, Kass &
Company, P.C., our independent registered public accounting firm, have not been
filed with this report as permitted by the SEC’s exemptive order set forth in
Securities Exchange Act Release No. 34-50754. We plan to file the required
reports and related certifications in an amendment to this report within the
time period required by such SEC exemptive order.
PART
III
Item
10. Directors
and Executive Officers of the Registrant.
Incorporated
herein by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Stockholders scheduled to be held May 5, 2005.
Item
11. Executive
Compensation.
Incorporated
herein by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Stockholders scheduled to be held May 5, 2005.
Item
12. Security
Ownership of Certain Beneficial Owners and Management.
Incorporated
herein by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Stockholders scheduled to be held May 5, 2005.
Item
13. Certain
Relationships and Related Transactions.
Incorporated
herein by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Stockholders scheduled to be held May 5, 2005.
Item
14. Principal
Accountants Fees and Service.
Incorporated
herein by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Stockholders scheduled to be held May 5, 2005.
PART
IV
Item
15. Exhibits,
Financial Statement Schedules and Reports on Form 8-K.
(a)
Documents
| |
|
|
|
1.
Financial Statements — |
|
|
|
|
| |
|
|
|
|
Independent
Auditors Report |
|
|
F-1 |
|
Consolidated
Balance Sheets December 31, 2004 and 2003 |
|
|
F-2 |
|
Consolidated
Statements of Operations Years Ended December 31, 2004, 2003 and
2002 |
|
|
F-3 |
|
Consolidated
Statements of Stockholders’ Equity Years Ended December 31, 2004, 2003 and
2002 |
|
|
F-4 |
|
Consolidated
Statements of Cash Flows Years Ended December 31, 2004, 2003 and
2002 |
|
|
F-5
to F-6 |
|
Notes
to Consolidated Financial Statements |
|
|
F-7
to F-24 |
|
| |
|
|
|
|
2.
Financial Statement Schedule — |
|
|
|
|
| |
|
|
|
|
Schedule
II — Valuation and Qualifying Accounts and Reserves |
|
|
F-25 |
|
Notes
All other
schedules called for under Regulation S-X are not submitted because they are not
applicable or not required, or because the required information is included in
the financial statements or notes thereto.
Separate
financial statements of the Registrant have been omitted because the Registrant
is primarily an operating company. All subsidiaries included in the consolidated
financial statements are majority owned, and none of the subsidiaries have
indebtedness that is not guaranteed by the Registrant.
3.
Exhibits
|
EXHIBIT
NO. |
|
DESCRIPTION |
| |
|
|
|
3.1 |
|
Restated
Certificate of incorporation of the Company..(2) |
| |
|
|
|
3.2 |
|
Amendment
to Certificate of Incorporation of the Company..(4) |
| |
|
|
|
3.3 |
|
By-Laws
of the Company.(1) |
| |
|
|
|
4.1 |
|
Form
of Warrant, dated August 22, 2003, issued to Mainfield Enterprises, Inc.
and Smithfield Fiduciary LLC.
(13) |
| |
|
|
|
4.2 |
|
First
Amendment to Warrants, dated as of August 22, 2003, among the Registrant,
Mainfield Enterprises, Inc. and Smithfield Fiduciary LLC.
(13) |
| |
|
|
|
4.3 |
|
Second
Amendment to Warrants, dated as of August 22, 2003, among the Registrant,
Mainfield Enterprises, Inc. and Smithfield Fiduciary LLC.
(13) |
| |
|
|
|
4.4 |
|
Form
of Warrant, dated August 22, 2003, issued to Smithfield Fiduciary LLC and
Cranshire Capital, L.P.
(13) |
| |
|
|
|
4.5 |
|
First
Amendment to Warrants, dated as of August 22, 2003, among the Registrant,
Smithfield Fiduciary LLC and Cranshire Capital, L.P.
(13) |
| |
|
|
|
EXHIBIT
NO. |
|
DESCRIPTION |
| |
|
|
|
10.1 |
|
Non-Competition
Agreement between the Company and S. Scott Crump, dated October 15,
1990.(1) |
| |
|
|
|
10.2 |
|
Non-Competition
Agreement between the Company and S. Lisa Crump, dated October 15,
1990.(1) |
| |
|
|
|
10.3 |
|
Employee
Confidentiality Agreement between the Company and S. Scott Crump, dated
October 15, 1990.(1) |
| |
|
|
|
10.4 |
|
Employee
Confidentiality Agreement between the Company and Lisa Crump, dated
October 15, 1990.(1) |
| |
|
|
|
10.5 |
|
Amended
and Restated Stratasys, Inc. 1994 Stock Plan.(2) |
| |
|
|
|
10.6 |
|
Second
Amended and Restated Stratasys, Inc. 1994-2 Stock Plan.(6) |
| |
|
|
|
10.7 |
|
Stratasys,
Inc. 1998 Incentive Stock Option Plan.(7) |
| |
|
|
|
10.8 |
|
Stratasys,
Inc. 2000 Incentive Stock Option Plan.(8) |
| |
|
|
|
10.9 |
|
Stratasys,
Inc. 2002 Long-Term Performance and Incentive Plan.(10) |
| |
|
|
|
10.10 |
|
Form
of Option Agreement |
| |
|
|
|
10.11 |
|
Assignment,
dated October 23, 1989, from S. Scott Crump to the Company with respect to
a patent application for an apparatus and method for creating
three-dimensional objects.(5) |
| |
|
|
|
10.12 |
|
Assignment,
dated June 5, 1992, from S. Scott Crump to the Company with respect to a
patent application for a modeling apparatus for three dimensional
objects.(5) |
| |
|
|
|
10.13 |
|
Assignment,
dated June 1, 1994, from S. Scott Crump, James W. Comb, William R.
Priedeman, Jr., and Robert Zinniel to the Company with respect to a patent
application for a process and apparatus of support removal for
three-dimensional modeling.(5) |
| |
|
|
|
10.14 |
|
Lease
between the Company and Welsh Edenvale Partners ‘86, dated October 9,
1992.(1) |
| |
|
|
|
10.15 |
|
Amendment
#4 to Lease between the Company and Welsh Edenvale Partners ‘86, dated
October 9, 1992, between the Company and Carpenter Land Company LLP, dated
July 27, 1998.(9) |
| |
|
|
|
10.16 |
|
Asset
Purchase Agreement between the Company and IBM dated January 1,
1995.(3) |
| |
|
|
|
10.17 |
|
Securities
Purchase Agreement, dated as of August 17, 2003, among the Company,
Mainfield Enterprises, Inc. and Smithfield Fiduciary LLC.(11) |
| |
|
|
|
10.18 |
|
Securities
Purchase Agreement, dated August 22, 2003, among the company Cranshire
Capital L.P. and Smithfield Fiduciary LLC.(12) |
| |
|
|
|
EXHIBIT
NO. |
|
DESCRIPTION |
|
10.19 |
|
North
American Distributor Agreement, dated August 28, 2003, between Stratasys,
Inc. and Objet Geometries, Ltd. [Portions omitted pursuant to a request
for confidential treatment.](14) |
| |
|
|
|
21.1 |
|
Subsidiaries
of the Company. |
| |
|
|
|
23.1 |
|
Consent
of Rothstein, Kass & Company, P.C. |
| |
|
|
|
31.1 |
|
Certification
pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
| |
|
|
|
31.2 |
|
Certification
pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
| |
|
|
|
32.1 |
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
| |
|
|
|
32.2 |
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
| |
|
|
|
(1) |
Incorporated
by reference from the Company’s Registration Statement on Form SB-2 (File
No. 33-83638-C) filed September 2, 1994. |
| |
|
|
(2) |
Incorporated
by reference from the Company’s Form 10-KSB for the ended December 31,
1994. |
| |
|
|
(3) |
Incorporated
by reference from the Company’s Form 8-K, Amendment No. 2, dated January
1, 1995. |
| |
|
|
(4) |
Incorporated
by reference from the Company’s Form 10-QSB for the nine months ended
September 30, 1995. |
| |
|
|
(5) |
Incorporated
by reference from Amendment No. 1 to the Registration Statement on Form
SB-2 (File No. 33-99108) filed December 20, 1995. |
| |
|
|
(6) |
Incorporated
by reference from the Company’s definitive Proxy Statement on Schedule 14A
with respect to the Company’s 1997 Annual Meeting of
Stockholders. |
| |
|
|
(7) |
Incorporated
by reference from the Company’s definitive Proxy Statement on Schedule 14A
with respect to the Company’s 1998 Annual Meeting of
Stockholders. |
| |
|
| |
|
|
(8) |
Incorporated
by reference from the Company’s Registration Statement on Form S-8 (File
No. 333-32782) filed March 17, 2000. |
| |
|
|
(9) |
Incorporated
by reference from the Company’s Form 10-K for the year ended December 31,
1999. |
| |
|
|
(10) |
Incorporated
by reference from the Company’s definitive Proxy Statement on Schedule 14A
with respect to the Company’s 2002 Annual Meeting of
Stockholders. |
| |
|
|
(11) |
Incorporated
by reference from the Company’s Form 8-K filed on August 19,
2003. |
| |
|
|
(12) |
Incorporated
by reference from the Company’s form 8-K filed on August 25,
2003. |
| |
|
|
(13) |
Incorporated
by reference from the Company’s Registration Statement on Form S-3 (File
No. 333-108816) filed September 15, 2003. |
| |
|
|
(14) |
Incorporated
by reference from Amendment No. 1 to the Company’s Registration Statement
on Form S-3 (File No. 333-108816) filed October 16,
2003. |
| |
|
(b)
Reports
on Form 8-K
Current
Report on Form 8-K dated October 28, 2004 reporting under Item 2.02 that the
Registrant issued a press release announcing its third quarter fiscal year 2004
earnings.
STRATASYS,
INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AND
INDEPENDENT
AUDITORS' REPORT
DECEMBER
31, 2004 AND 2003
STRATASYS,
INC. AND SUBSIDIARIES
|
Report
of Independent Registered Public Accounting
Firm |
F-1 |
| |
|
|
Consolidated
Financial Statements |
|
| |
|
|
Balance
Sheets |
F-2 |
| |
|
|
Statements
of Operations |
F-3 |
| |
|
|
Statements
of Changes in Stockholders' Equity |
F-4 |
|
|
|
|
Statements
of Cash Flows |
F-5-F-6 |
| |
|
|
Notes
to Financial Statements |
F-7-F-24 |
| |
|
|
Schedule
II - Valuation and Qualifying Accounts and Reserves |
F-25 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board of
Directors
Stratasys,
Inc.
We have
audited the accompanying consolidated balance sheets of Stratasys, Inc and
Subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2004 and 2003, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2004, in conformity
with United States generally accepted accounting principles.
In
connection with our audits of the financial statements referred to above, we
audited the financial schedule listed under Schedule II - Valuation and
Qualifying Accounts and Reserves. In our opinion, this financial schedule, when
considered in relation to the financial statements taken as a whole, presents
fairly, in all material respects, the information stated therein.
Roseland,
New Jersey
February
1, 2005
STRATASYS,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31, |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
ASSETS |
|
|
|
|
|
| |
|
|
|
|
|
Current
assets |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
55,849,845 |
|
$ |
44,544,341 |
|
|
Short-term
investments |
|
|
|
|
|
950,000
|
|
Accounts
receivable, less allowance for returns and doubtful accounts of
$1,731,830 in 2004 and $767,367 in 2003 |
|
|
14,951,350
|
|
|
15,788,095
|
|
|
Inventories |
|
|
7,520,422
|
|
|
6,423,658
|
|
|
Net
investment in sales-type leases |
|
|
1,324,499
|
|
|
398,207
|
|
|
Prepaid
expenses |
|
|
1,756,494
|
|
|
2,809,541
|
|
|
Deferred
income taxes |
|
|
455,000
|
|
|
146,000
|
|
|
Total
current assets |
|
|
81,857,610
|
|
|
71,059,842
|
|
|
Property
and equipment, net |
|
|
10,043,657
|
|
|
6,544,663
|
|
| |
|
|
|
|
|
|
|
|
Other
assets |
|
|
|
|
|
|
|
|
Intangible
assets, net |
|
|
2,551,581
|
|
|
2,496,593
|
|
|
Net
investment in sales-type leases |
|
|
2,693,830
|
|
|
888,367
|
|
|
Deferred
income taxes |
|
|
354,000
|
|
|
2,124,000
|
|
|
Long-term
investments |
|
|
720,000
|
|
|
625,000
|
|
|
Other |
|
|
978,339
|
|
|
361,761
|
|
| |
|
|
7,297,750
|
|
|
6,495,721
|
|
|
Total
assets |
|
$ |
99,199,017 |
|
$ |
84,100,226 |
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
|
|
|
Accounts
payable and other current liabilities |
|
$ |
6,643,620 |
|
$ |
4,940,055 |
|
|
Unearned
revenues |
|
|
7,668,362
|
|
|
5,263,962
|
|
|
Total
current liabilities |
|
|
14,311,982
|
|
|
10,204,017
|
|
| |
|
|
|
|
|
|
|
|
Stockholders'
equity |
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 15,000,000 shares; issued
12,211,835 shares in 2004 and 12,028,320 shares in
2003 |
|
|
122,118
|
|
|
120,283
|
|
|
Capital
in excess of par value |
|
|
71,762,100
|
|
|
69,924,093
|
|
|
Retained
earnings |
|
|
20,193,048 |
|
|
11,063,092 |
|
|
Accumulated
other comprehensive income (loss) |
|
|
5,910
|
|
|
(41,274 |
) |
Less
cost of treasury stock, 1,770,026 and 1,768,856 shares in 2004 and
2003, respectively |
|
|
(7,196,141 |
) |
|
(7,170,795 |
) |
|
Total
stockholders' equity |
|
|
84,887,035 |
|
|
73,896,209 |
|
|
Total
liabilities and stockholders' equity |
|
$ |
99,199,017 |
|
$ |
84,100,226 |
|
See
accompanying notes to consolidated financial statements.
STRATASYS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Years
Ended December 31, |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
Net
sales |
|
|
|
|
|
|
|
|
Product |
|
$ |
56,832,959 |
|
$ |
40,346,107 |
|
$ |
30,636,355 |
|
|
Services |
|
|
13,495,546
|
|
|
10,543,754
|
|
|
9,171,534
|
|
| |
|
|
70,328,505
|
|
|
50,889,861
|
|
|
39,807,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales |
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
24,110,537
|
|
|
15,738,265
|
|
|
13,468,665
|
|
|
Services |
|
|
3,888,239
|
|
|
2,369,315
|
|
|
1,972,783
|
|
| |
|
|
27,998,776
|
|
|
18,107,580
|
|
|
15,441,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit |
|
|
42,329,729
|
|
|
32,782,281
|
|
|
24,366,441
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses |
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
5,640,216
|
|
|
5,047,207
|
|
|
4,687,673
|
|
|
Selling,
general and administrative |
|
|
23,692,008
|
|
|
18,992,636
|
|
|
16,065,320
|
|
| |
|
|
29,332,224
|
|
|
24,039,843
|
|
|
20,752,993
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
|
12,997,505
|
|
|
8,742,438
|
|
|
3,613,448
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense) |
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
726,558
|
|
|
231,040
|
|
|
153,323
|
|
|
Interest
expense |
|
|
|
|
|
(123,924 |
) |
|
(178,431 |
) |
|
Foreign
currency translation |
|
|
(26,102 |
) |
|
342,877
|
|
|
320,448
|
|
|
Other |
|
|
149,034
|
|
|
(47,618 |
) |
|
(6,904 |
) |
| |
|
|
849,490
|
|
|
402,375
|
|
|
288,436
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes |
|
|
13,846,995
|
|
|
9,144,813
|
|
|
3,901,884
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
taxes |
|
|
4,717,849
|
|
|
2,989,299
|
|
|
791,102
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$ |
9,129,146 |
|
$ |
6,155,514 |
|
$ |
3,110,782 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
per common and common equivalent share |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.88 |
|
$ |
0.68 |
|
$ |
0.39 |
|
|
Diluted |
|
$ |
0.85 |
|
$ |
0.64 |
|
$ |
0.37 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent shares
outstanding |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
10,350,043
|
|
|
9,050,668
|
|
|
8,005,193
|
|
|
Diluted |
|
|
10,725,901
|
|
|
9,679,435
|
|
|
8,392,304
|
|
See
accompanying notes to consolidated financial statements.
STRATASYS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
| Years
Ended December 31, 2004, 2003, and 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Common
Stock |
|
|
|
|
|
Retained |
|
|
|
|
|
Treasury |
|
|
|
|
|
Comprehensive |
|
| |
|
|
Shares |
|
|
Amount |
|
|
Par
Value |
|
|
Earnings |
|
|
(Loss) |
|
|
Stock |
|
|
Total |
|
|
Income |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2002 |
|
|
9,199,941
|
|
$ |
91,999 |
|
$ |
32,913,308 |
|
$ |
1,797,606 |
|
$ |
(72,084 |
) |
$ |
(3,427,816 |
) |
$ |
31,303,013 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options |
|
|
577,359
|
|
|
5,774
|
|
|
2,079,514
|
|
|
|
|
|
|
|
|
|
|
|
2,085,288
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
3,110,782
|
|
|
|
|
|
|
|
|
3,110,782
|
|
$ |
3,110,782 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, cumulative
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,105
|
|
|
|
|
|
10,105
|
|
|
10,105
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,120,887 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of 658,255 shares of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,742,979 |
) |
|
(3,742,979 |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2002 |
|
|
9,777,300
|
|
|
97,773
|
|
|
34,992,822
|
|
|
4,908,388
|
|
|
(61,979 |
) |
|
(7,170,795 |
) |
|
32,766,209
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options and warrants |
|
|
751,020
|
|
|
7,510
|
|
|
3,078,818
|
|
|
|
|
|
|
|
|
|
|
|
3,086,328
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax reductions relating to exercise of
stock options |
|
|
|
|
|
|
|
|
2,429,322
|
|
|
|
|
|
|
|
|
|
|
|
2,429,322
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of common stock |
|
|
1,500,000
|
|
|
15,000
|
|
|
29,423,131
|
|
|
|
|
|
|
|
|
|
|
|
29,438,131
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
6,155,514
|
|
|
|
|
|
|
|
|
6,155,514
|
|
$ |
6,155,514 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, cumulative
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,705
|
|
|
|
|
|
20,705
|
|
|
20,705
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,176,219 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2003 |
|
|
12,028,320
|
|
|
120,283
|
|
|
69,924,093
|
|
|
11,063,902
|
|
|
(41,274 |
) |
|
(7,170,795 |
) |
|
73,896,209
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants, net of
issuance expenses |
|
|
183,515
|
|
|
1,835
|
|
|
754,415
|
|
|
|
|
|
|
|
|
|
|
|
756,250
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax reductions relating to exercise of
stock options |
|
|
|
|
|
|
|
|
1,083,592
|
|
|
|
|
|
|
|
|
|
|
|
1,083,592
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of 1,170 shares of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,346 |
) |
|
(25,346 |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
9,129,146
|
|
|
|
|
|
|
|
|
9,129,146
|
|
$ |
9,129,146 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, cumulative
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,184
|
|
|
|
|
|
47,184
|
|
|
47,184
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,176,330 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2004 |
|
|
12,211,835
|
|
$ |
122,118 |
|
$ |
71,762,100 |
|
$ |
20,193,048 |
|
$ |
5,910 |
|
$ |
(7,196,141 |
) |
$ |
84,887,035 |
|
|
|
|
See
accompanying notes to consolidated financial statements.
STRATASYS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
Ended December 31, |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
Cash
flows from operating activities |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
9,129,146 |
|
$ |
6,155,514 |
|
$ |
3,110,782 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes |
|
|
2,544,592
|
|
|
2,459,322
|
|
|
309,000
|
|
|
Depreciation
|
|
|
1,876,608
|
|
|
1,614,466
|
|
|
1,502,374
|
|
|
Amortization |
|
|
810,472
|
|
|
919,277
|
|
|
898,833
|
|
|
Loss
on disposal of property and equipment |
|
|
227,473
|
|
|
17,877
|
|
|
|
|
|
Loss
on write-off of intangible assets |
|
|
27,626
|
|
|
53,894
|
|
|
|
|
|
Increase
(decrease) in cash attributable to changes in assets and
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
591,495
|
|
|
(5,147,644 |
) |
|
1,492,287
|
|
|
Inventories |
|
|
(972,908 |
) |
|
222,759
|
|
|
(485,619 |
) |
|
Net
investment in sales-type leases |
|
|
(2,731,755 |
) |
|
(1,286,574 |
) |
|
|
|
|
Prepaid
expenses |
|
|
1,153,711
|
|
|
(1,889,019 |
) |
|
(361,899 |
) |
|
Other
assets |
|
|
61,464
|
|
|
(242,025 |
) |
|
147,527
|
|
|
Accounts
payable and other current liabilities |
|
|
833,539
|
|
|
822,956
|
|
|
420,314
|
|
|
Unearned
revenues |
|
|
2,379,343
|
|
|
789,681
|
|
|
(36,470 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities |
|
|
15,930,806
|
|
|
4,490,484
|
|
|
6,997,129
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
Repayments
of (purchase of) investments |
|
|
855,000
|
|
|
(1,575,000 |
) |
|
|
|
|
Acquisition
of property and equipment |
|
|
(5,289,672 |
) |
|
(2,339,561 |
) |
|
(602,711 |
) |
|
Payments
for intangible assets |
|
|
(893,086 |
) |
|
(516,363 |
) |
|
(564,012 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities |
|
|
(5,327,758 |
) |
|
(4,430,924 |
) |
|
(1,166,723 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
Payments
of obligations under capital leases |
|
|
|
|
|
|
|
|
(130,320 |
) |
|
Payments
of mortgage payable |
|
|
|
|
|
(2,218,362 |
) |
|
(52,615 |
) |
|
Proceeds
from sale of common stock |
|
|
|
|
|
29,438,131
|
|
|
|
|
|
Proceeds
from exercise of stock options and warrants |
|
|
756,250
|
|
|
3,086,328
|
|
|
2,085,288
|
|
|
Purchases
of treasury stock |
|
|
(25,346 |
) |
|
|
|
|
(3,742,979 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities |
|
|
730,904
|
|
|
30,306,097
|
|
|
(1,840,626 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash |
|
|
(28,448 |
) |
|
(14,906 |
) |
|
(7,588 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents |
|
|
11,305,504
|
|
|
30,350,751
|
|
|
3,982,192
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning
of year |
|
|
44,544,341
|
|
|
14,193,590
|
|
|
10,211,398
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end
of year |
|
$ |
55,849,845 |
|
$ |
44,544,341 |
|
$ |
14,193,590 |
|
See
accompanying notes to consolidated financial statements.
STRATASYS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
|
Years
Ended December 31, |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information,
cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
— |
|
$ |
137,390 |
|
$ |
177,739 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
taxes |
|
$ |
1,491,617 |
|
$ |
1,151,005 |
|
$ |
1,180,637 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing and financing
activities: |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment transferred from inventory |
|
$ |
1,770,404 |
|
$ |
— |
|
$ |
825,755 |
|
| |
|
|
|
|
|
|
|
|
|
|
Inventory
transferred from machinery and equipment |
|
$ |
236,690 |
|
$ |
108,971 |
|
$ |
— |
|
See
accompanying notes to consolidated financial statements.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of operations and summary of significant accounting
policies
Nature
of Operations
Stratasys,
Inc. and Subsidiaries (collectively the “Company”) develops, manufactures and
markets a family of rapid prototyping systems (“RPS”) and devices that permit
engineers and designers to create physical models and prototypes, made of
various materials, utilizing three dimensional Computer Aided Design (“3D CAD”)
files at a CAD workstation. The Company sells these devices and the related
consumable materials and maintenance worldwide.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Stratasys, Inc. and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
Fair
Value of Financial Instruments
The fair
value of the Company’s assets and liabilities, which qualify as financial
instruments under Statement of Financial Accounting Standards (“SFAS”) No. 107,
“Disclosures About Fair Value of Financial Instruments,” approximate the
carrying amounts presented in the consolidated balance sheets.
Cash
and Cash Equivalents
The
Company considers all highly-liquid debt instruments purchased with maturities
of three months or less to be cash equivalents. As of December 31, 2004, and at
various times during the year, balances of cash at financial institutions
exceeded the federally insured limit. The Company has not experienced any losses
in such accounts and believes it is not subject to any significant credit risk
on cash and cash equivalents.
Short-term
and Long-term Investments
Short-term
and long-term investments consist of certificates of deposit with maturities
ranging from April 2005 through September 2008 at December 31, 2004 and from
April 2004 through November 2007 at December 31, 2003.
Accounts
Receivable
The
Company carries its accounts receivable at cost less an allowance for returns
and doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts based on a history
of past write-offs and collections and current credit conditions.
Inventories
Inventories
are stated on the first-in, first-out method, at the lower of cost or market.
Inventory costs consist of material, direct labor and overhead.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of operations and summary of significant accounting policies
(continued)
Impairment
of Long-Lived Assets
The
Company periodically assesses the recoverability of the carrying amounts of
long-lived assets, including intangible assets. A loss is recognized when
expected undiscounted future cash flows are less than the carrying amount of the
asset. The impairment loss is the difference by which the carrying amount of the
asset exceeds its fair value.
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation and amortization.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets ranging from 2 to 30
years.
Intangible
Assets
Intangible
assets are being amortized over their estimated useful or economic lives using
the straight-line method as follows:
|
RPS
technology |
11
years |
|
Capitalized
software development costs |
3
years |
|
Patents |
10
years |
|
Trademarks |
5
years |
The costs
of software development, including significant product enhancements, incurred
subsequent to establishing technological feasibility have been capitalized in
accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed.” Costs incurred prior to establishment of
technological feasibility are charged to research and development
expense.
Warranty
Policy and Methodology
The
Company services and supports customers by providing warranties for its
products. The standard warranty is three months, however, educational and
international customers are granted a 12-month warranty. In all cases, three
months of expected warranty costs will be accrued in the same period as the
product revenues. These expected warranty costs are based on historical costs of
supporting the Company’s products. When the warranty period exceeds the standard
three-month warranty period, an accrual of expected costs for the three-month
standard warranty period is made and the portion of revenue applicable to the
remaining nine months of extended warranty coverage will be deferred. The amount
deferred is based on the fair market value of a purchased maintenance agreement
for the same product and term of coverage. The expenses of maintaining the
products under the extended warranty periods are treated as period costs, as
they are expected to be incurred evenly throughout the same period and reflect a
proper matching of revenue and expenses.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of operations and summary of significant accounting policies
(continued)
Unearned
Maintenance Revenues
Maintenance
revenues are recognized on a straight-line basis over the term of the related
maintenance contracts, which are typically one to two years.
The
Company services and supports customers by providing warranty and selling
maintenance agreements for its products. Unearned maintenance revenues comprise
purchased maintenance agreements, covering future periods, and deferred implied
maintenance, as discussed in the Warranty Policy and Methodology footnote.
Implied maintenance is recognized as earned maintenance revenue in equal
installments over the extended nine-month warranty period (months 4 through 12).
The purchased maintenance is deferred in whole and amortized over the period of
coverage ranging from one to two years.
Revenue
Recognition
The
Company derives revenue from sales of rapid prototyping (“RP”) systems,
consumables, and services. The Company recognizes revenue when (1) persuasive
evidence of a final agreement exists, (2) delivery has occurred or services have
been rendered, (3) the selling price is fixed or determinable, and (4)
collectibility is reasonably assured. The Company’s standard terms are FOB
shipping point, and as such most of the revenue from the sale of RP machines and
consumables are recognized when shipped. Exceptions to this policy occur only if
a customer’s purchase order indicates an alternative term or provides that the
equipment sold would be subject to certain contingencies, such as formal
acceptance. In these instances, revenues would be recognized only upon
satisfying the conditions established by the customer as contained in its
purchase order to the Company. Revenue from sales-type leases for the Company’s
FDM systems is recognized at the time of lessee acceptance, which follows
installation. Revenue from sales-type leases for the Company’s Dimension systems
is recognized at the time of shipment, since either the customer or the reseller
performs the installation. The Company recognizes revenue from sales-type leases
at the net present value of future lease payments. Revenue from operating leases
is recognized ratably over the lease period.
Service
revenue is derived from sales of maintenance contracts, installation, services,
and training. Service revenue from maintenance contracts is recognized ratably
over the term of the contract, usually one year. On certain sales that require a
one-year warranty rather than the standard 90-day warranty, the extended
warranty is treated for revenue purposes as a maintenance agreement. The fair
value of this maintenance agreement is deferred and recognized ratably over the
period of the extended warranty as an implied maintenance contract. Installation
service revenues are recognized upon completion of installation. Training
revenues are recognized upon completion of training.
In
accordance with Emerging Issues Task Force No. 00-21, “Revenue Arrangements with
Multiple Deliverables,” when two or more product offerings are contained in a
single arrangement, revenue is allocated between the elements based on their
relative fair value, provided that each element meets the criteria for treatment
as a separate unit of accounting. An item is considered a separate unit of
accounting if it has value to the customer on a stand-alone basis and there is
objective and reliable evidence of the fair value of the undelivered items. Fair
value is generally determined based upon the price charged when the element is
sold separately. In the absence of fair value for a delivered element, revenue
is allocated first to the fair value of the undelivered elements and then the
residual revenue is allocated to the delivered elements. In the absence of fair
value for an undelivered element, the arrangement is accounted for as a single
unit of accounting, resulting in a delay of revenue recognition for the
delivered elements until all undelivered elements have been
fulfilled.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of operations and summary of significant accounting policies
(continued)
Revenue
Recognition (continued)
Revenues
from training and installation are unbundled and are recognized after the
services have been performed. Both of these services are optional to the
customer. The majority of the Company’s products are sold through distribution
channels, with training and installation services offered by the resellers or
distributors. For the Dimension product neither installation nor training is
offered. Consistent with SAB 104, the equipment the Company manufactures and
sells is subject to factory testing that should replicate the conditions under
which the customers intend to use the equipment. All of the systems are sold
subject to published specifications, and all systems sales involve standard
models.
The
Company assesses collectability as part of the revenue recognition process. The
Company also evaluates a number of factors to assess collectability, including
an evaluation of the creditworthiness of the customer, past payment history, and
current economic conditions. If it is determined that collectability cannot be
reasonably assured, the Company will decline shipment, request a down payment,
or defer recognition of revenue until ultimate collectability is more
determinable.
The
Company also records a provision for estimated product returns and allowances in
the period in which the related revenue is recorded. This provision against
current gross revenue is based principally on historical rates of sales returns,
but also factors in changes in the customer base, geographic economic
conditions, and changes in the financial conditions of the Company’s customers.
If past trends were to change, the Company would potentially have to increase or
decrease the amount of the provision for these returns. The Company has a very
limited history as to potential returns under the lease programs. The Company
has continued to monitor its lease sales, and if necessary will record a
provision for returns on leased systems. As of December 31, 2004, the allowance
for returns was $223,313, as compared with $198,481 as of December 31,
2003.
Advertising
Advertising
costs are charged to operations as incurred and were approximately $1,675,000,
$1,105,000, and $854,000 for 2004, 2003 and 2002, respectively.
Research
and Development Costs
Expenditures
for research, development and engineering of products and manufacturing
processes are expensed as incurred.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of operations and summary of significant accounting policies
(continued)
Income
Taxes
The
Company complies with SFAS No. 109, “Accounting for Income Taxes,” which
requires an asset and liability approach to financial reporting of income taxes.
Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future, based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
the deferred income tax assets to the amount expected to be
realized.
Common
Stock
In
November 2003, the Board of Directors of the Company approved a three-for-two
stock split in the form of a stock dividend, to all shareholders of record on
November 20, 2003. The Company’s shares began trading post split effective
December 22, 2003. All transactions and disclosures in the consolidated
financial statements, related to the Company’s common stock, have been adjusted
to reflect the effects of the stock split.
Income
Per Common Share
The
Company complies with SFAS No. 128, “Earnings Per Share.” SFAS No. 128 requires
dual presentation of basic and diluted income per share for all periods
presented. Basic income per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then share in the income of the Company. The
difference between the number of shares used to compute basic income per share
and diluted income per share relates to additional shares to be issued upon the
assumed exercise of stock options and warrants, net of shares hypothetically
repurchased at the average market price with the proceeds of exercise. The
shares amounted to 378,588, 628,767 and 387,111 in 2004, 2003 and 2002,
respectively.
Stock-Based
Compensation
The
Company follows SFAS No. 123 “Accounting for Stock-Based Compensation.” The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in APB Opinion 25, “Accounting for Stock Issued to Employees” (“APB 25”),
but disclose the pro forma effect on net income (loss) had the fair value of the
options been expensed. The Company has elected to continue to apply APB 25 in
accounting for its stock option incentive plans.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of operations and summary of significant accounting policies
(continued)
Stock-Based
Compensation (continued)
Had
compensation cost for the Company’s five stock option plans been determined
based on the fair value at the grant or issue date in 2004, 2003 and 2002 and
consistent with the provisions of SFAS No. 123, the Company’s net income and
income per share would have been reduced to the pro forma amounts indicated
below:
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Net
income, as reported |
|
$ |
9,129,146 |
|
$ |
6,155,514 |
|
$ |
3,110,782 |
|
Deduct:
Total stock-based compensation expense determined under the
fair value method for all awards, net of related tax
effect |
|
|
(2,526,000 |
) |
|
(854,000 |
) |
|
(457,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
income, pro forma |
|
$ |
6,603,146 |
|
$ |
5,301,514 |
|
$ |
2,653,782 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
|
|
Basic
income per share -
as reported |
|
$ |
0.88 |
|
$ |
0.68 |
|
$ |
0.39 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted
income per share -
as reported |
|
$ |
0.85 |
|
$ |
0.64 |
|
$ |
0.37 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic
income per share -
pro forma |
|
$ |
0.64 |
|
$ |
0.59 |
|
$ |
0.33 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted
income per share -
pro forma |
|
$ |
0.62 |
|
$ |
0.55 |
|
$ |
0.32 |
|
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Comprehensive
Income
The
Company complies with SFAS No. 130, “Reporting Comprehensive Income.” SFAS No.
130 establishes rules for the reporting and display of comprehensive income and
its components. SFAS No. 130 requires the Company’s change in the foreign
currency translation adjustment to be included in other comprehensive
income.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of operations and summary of significant accounting policies
(continued)
Recently
Issued Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123(R), “Accounting for Stock-Based Compensation (Revised).” SFAS No. 123(R)
supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity instruments. SFAS No. 123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award the requisite service period (usually the vesting period). No compensation
costs are recognized for equity instruments for which employees do not render
the requisite service. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments (unless observable market prices
for the same or similar instruments are available). If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification. The
Company has not completed its evaluation of SFAS No. 123(R) but expects the
adoption of this new standard will have an impact on operating results due to
the Company’s use of options as employee incentives.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs-an amendment of
ARB No. 43, Chapter 4”. SFAS No. 151 has been issued to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage), which requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of “so
abnormal.” In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Management of the Company does not believe the
effects of SFAS No. 151 have a material effect on the consolidated financial
statements, as the Company has not incurred any inventory costs that meet the
definition of “so abnormal.”
2. Inventories
Inventories
consist of the following at December 31:
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Finished
goods |
|
$ |
4,057,327 |
|
$ |
2,991,198 |
|
|
Raw
materials |
|
|
3,463,095
|
|
|
3,432,460
|
|
| |
|
$ |
7,520,422 |
|
$ |
6,423,658 |
|
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
3. Net
investment in sales-type leases
In 2003,
the Company began leasing certain of its machines under agreements accounted for
as sales-type leases. Included in revenues for the year ended December 31, 2004
and 2003 are approximately $3,416,000 and $1,366,000, respectively, of revenues
related to sales-type leases. These non-cancelable leases expire over the next
two to four years.
The
following lists the components of the net investment in sales-type leases as of
December 31, 2004 and 2003:
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Net
minimum lease payments receivable |
|
$ |
4,238,313 |
|
$ |
1,320,398 |
|
|
Less
unearned interest income |
|
|
(219,984 |
) |
|
(33,824 |
) |
| |
|
|
|
|
|
|
|
|
Net
investment in sales-type leases |
|
$ |
4,018,329 |
|
$ |
1,286,574 |
|
| |
|
|
|
|
|
|
|
|
Sales-type
leases consist of: |
|
|
|
|
|
|
|
|
Net
investment in sales-type leases - short term |
|
$ |
1,324,499 |
|
$ |
398,207 |
|
|
Net
investment in sales-type leases - long term |
|
|
2,693,830
|
|
|
888,367
|
|
| |
|
|
|
|
|
|
|
|
Net
investment in sales-type leases, as above |
|
$ |
4,018,329 |
|
$ |
1,286,574 |
|
Future
minimum lease payments due from customers under sales-type leases as of December
31, 2004, are as follows:
Year
ending December 31, |
|
|
|
|
2005 |
|
$ |
1,363,406 |
|
|
2006 |
|
|
1,285,585
|
|
|
2007 |
|
|
1,086,558
|
|
|
2008 |
|
|
502,764
|
|
| |
|
$ |
4,238,313 |
|
The
interest income for sales-type leases amounted to approximately $56,000 and
$4,000 for the years ended December 31, 2004 and 2003,
respectively.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
4. Property
and equipment
Property
and equipment consists of the following at December 31:
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Machinery
and equipment |
|
$ |
9,445,945 |
|
$ |
7,004,574 |
|
|
Building
and improvements |
|
|
3,195,495
|
|
|
2,330,953
|
|
|
Land
and improvements |
|
|
1,065,393
|
|
|
694,876
|
|
|
Computer
equipment and software |
|
|
4,750,906
|
|
|
3,820,668
|
|
|
Office
equipment |
|
|
1,113,849
|
|
|
914,558
|
|
|
Leasehold
improvements |
|
|
1,977,033
|
|
|
1,474,575
|
|
| |
|
|
|
|
|
|
|
| |
|
|
21,548,621
|
|
|
16,240,204
|
|
| |
|
|
|
|
|
|
|
|
Accumulated
depreciation and |
|
|
|
|
|
|
|
|
amortization
|
|
|
11,504,964
|
|
|
9,695,541
|
|
| |
|
|
|
|
|
|
|
| |
|
$ |
10,043,657 |
|
$ |
6,544,663 |
|
5. Intangible
assets
Intangible
assets consist of the following at December 31:
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Amortization |
|
|
RPS
technology |
|
$ |
3,018,732 |
|
$ |
2,450,705 |
|
$ |
2,858,532 |
|
$ |
2,178,247 |
|
|
Capitalized
software |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
costs |
|
|
4,322,803
|
|
|
3,640,877
|
|
|
4,003,547
|
|
|
3,310,144
|
|
|
Patents |
|
|
2,022,917
|
|
|
919,304
|
|
|
1,850,023
|
|
|
734,917
|
|
|
Trademarks |
|
|
231,693
|
|
|
33,678
|
|
|
18,584
|
|
|
10,785
|
|
| |
|
|
9,596,145
|
|
$ |
7,044,564 |
|
|
8,730,686
|
|
$ |
6,234,093 |
|
|
Accumulated
amortization |
|
|
7,044,564
|
|
|
|
|
|
6,234,093
|
|
|
|
|
| |
|
$ |
2,551,581 |
|
|
|
|
$ |
2,496,593 |
|
|
|
|
|
Aggregate
amortization expense |
|
$ |
810,472 |
|
|
|
|
$ |
919,277 |
|
|
|
|
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
5. Intangible
assets (continued)
For the
years ended December 31, 2004, 2003 and 2002, amortization of capitalized
software development costs charged to operations was $330,733, $473,926 and
$473,280, respectively.
Estimated
amortization expense for the five years subsequent to December 31, 2004 is
approximately as follows:
Year
ending December 31, |
|
|
|
2005 |
|
$ |
802,000 |
|
2006 |
|
|
500,000
|
|
2007 |
|
|
403,000
|
|
2008 |
|
|
304,000
|
|
2009 |
|
|
227,000
|
|
6. Credit
line
The
Company has an available line of credit from a financial institution for the
lesser of $4,000,000 or a defined borrowing base. The credit line bears interest
at defined rates based upon two different indexes and expires in June 2005. No
amounts were outstanding at December 31, 2004 and 2003.
7. Accounts
payable and other current liabilities
Accounts
payable and other current liabilities consist of the following at December
31:
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Trade |
|
$ |
1,895,923 |
|
$ |
1,062,560 |
|
Compensation,
commissions and related benefits |
|
|
3,074,894
|
|
|
2,811,095
|
|
|
Reserve
for warranty expenses |
|
|
190,645
|
|
|
131,806
|
|
|
Other |
|
|
1,482,158
|
|
|
934,594
|
|
| |
|
$ |
6,643,620 |
|
$ |
4,940,055 |
|
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
8. Unearned
revenues
Unearned
revenues consist of the following at December 31:
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Maintenance
contracts |
|
$ |
5,082,488 |
|
$ |
3,737,988 |
|
|
Implied
maintenance contracts |
|
|
1,818,870
|
|
|
1,446,299
|
|
|
Other |
|
|
767,004
|
|
|
79,675
|
|
| |
|
$ |
7,668,362 |
|
$ |
5,263,962 |
|
9. Mortgage
payable
In August
2001, the Company obtained a mortgage from a bank of $2,287,500 for the purchase
of land and building used in the Company’s manufacturing operations, which was
previously leased. The loan was collateralized by the property and payable in
monthly installments of $18,396, including interest of 7.38% per annum, with a
final payment due in July 2006. In October 2003, the Company repaid the
remaining balance of approximately $2,171,000.
10. Income
taxes
The
components of the Company’s deferred tax assets (liabilities) at December 31,
2004 and 2003 are as follows:
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Depreciation |
|
$ |
(595,000 |
) |
$ |
(101,000 |
) |
|
Amortization |
|
|
219,000
|
|
|
128,000
|
|
|
Allowance
for doubtful accounts |
|
|
424,000
|
|
|
212,000
|
|
|
Reserve
for warranty expenses |
|
|
71,000
|
|
|
49,000
|
|
|
Reserve
for sales returns, net |
|
|
83,000
|
|
|
74,000
|
|
|
Unrealized
gain on foreign currency |
|
|
(123,000 |
) |
|
(189,000 |
) |
Federal
minimum tax credit carryforwards |
|
|
156,000
|
|
|
156,000
|
|
|
Other |
|
|
22,000
|
|
|
159,000
|
|
Research
and development tax credit carryforwards |
|
|
552,000
|
|
|
1,782,000
|
|
| |
|
|
|
|
|
|
|
| |
|
$ |
809,000 |
|
$ |
2,270,000 |
|
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
10. Income
taxes (continued)
At
December 31, 2004, the Company had research and development tax credit
carryforwards of approximately $552,000, which can be utilized against future
federal income tax and expire in various years through 2023.
Income
(loss) before income taxes for the years ended December 21, 2004, 2003 and 2002
are as follows:
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
United
States |
|
$ |
13,885,542 |
|
$ |
9,030,998 |
|
$ |
3,758,912 |
|
|
Foreign |
|
|
(38,547 |
) |
|
113,815
|
|
|
142,972
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
13,846,995 |
|
$ |
9,144,813 |
|
$ |
3,901,884 |
|
The
components of income taxes for the years ended December 31, 2004, 2003 and 2002
are as follows:
| |
|
2004 |
|
2003 |
|
2002 |
|
Current |
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,924,173 |
|
$ |
396,432 |
|
$ |
409,369 |
|
|
State |
|
|
165,167
|
|
|
75,488
|
|
|
33,325
|
|
|
Foreign |
|
|
83,917
|
|
|
58,057
|
|
|
39,408
|
|
| |
|
|
2,173,257
|
|
|
529,977
|
|
|
482,102
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
2,179,338
|
|
|
2,379,676
|
|
|
214,000
|
|
|
State |
|
|
365,254
|
|
|
79,646
|
|
|
95,000
|
|
| |
|
|
2,544,592
|
|
|
2,459,322
|
|
|
309,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
4,717,849 |
|
$ |
2,989,299 |
|
$ |
791,102 |
|
Deferred
income tax expense includes $1,083,592 and $2,429,322 for the years ended
December 31, 2004 and 2003, respectively, for income tax reductions relating to
the disqualifying disposition of shares acquired through the exercise of stock
options, the benefit of which has been recorded as paid in capital.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
10. Income
taxes (continued)
A
reconciliation of the statutory federal income tax rate and the effective tax
rate for the years ended December 31, 2004, 2003 and 2002 are as
follows:
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Federal
statutory rate |
|
|
34.0
|
% |
|
34.0
|
% |
|
34.0
|
% |
Foreign
sales corporation exclusion |
|
|
(1.0 |
) |
|
(0.6 |
) |
|
(2.0 |
) |
Earnings
of subsidiaries taxed at other than U.S. statutory
rate |
|
|
0.3
|
|
|
(0.2 |
) |
|
0.2
|
|
State
income taxes, net of federal effect |
|
|
1.3
|
|
|
0.6
|
|
|
1.1
|
|
|
Permanent
differences and other |
|
|
(0.5 |
) |
|
(0.1 |
) |
|
(8.7 |
) |
Utilization
of research and development tax credit |
|
|
|
|
|
(1.0 |
) |
|
(4.3 |
) |
|
Effective
income tax rate |
|
|
34.1
|
% |
|
32.7
|
% |
|
20.3
|
% |
11. Commitments
The
Company rents certain of its facilities under leases, which expire through
2009.
Aggregate
future minimum annual rental payments in the years subsequent to December 31,
2004 are approximately as follows:
Year
ending December 31, |
|
|
|
|
2005 |
|
$ |
319,000 |
|
|
2006 |
|
|
197,000
|
|
|
2007 |
|
|
129,000
|
|
|
2008 |
|
|
27,000
|
|
|
2009 |
|
|
27,000
|
|
Rent
expense for the years ended December 31, 2004, 2003 and 2002 was approximately
$576,000, $604,000 and $521,000, respectively.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
12. Common
stock
In August
2003, the Company sold 1,500,000 shares of common stock through a private
investment in public equity financing transaction (the “Transaction”),
generating cash of approximately $29,438,000, net of related expenses. In
connection with the Transaction, the Company also issued warrants to purchase
225,000 shares of common stock at exercise prices ranging from $23.11 to
$27.63.
13. Stock
options and warrants
The
Company has various stock option plans that have been approved by shareholders.
The plans provide for the granting of options to purchase up to 3,825,000 shares
of the Company’s common stock to qualified employees of the Company, independent
contractors, consultants, and other persons. Of the 3,825,000 options available
for grant, 2,990,892 options have been granted, leaving 834,108 options as of
December 31, 2004 left to be granted by the Company. No stock-based employee
compensation cost is reflected in net income, as all options under the plans are
granted at a price not less than the fair market value of the Company’s common
stock at the date of grant. Options principally vest over five years and are
exercisable over ten years.
|
|
|
Number
of
Shares |
|
|
Per
Share
Option Price |
|
|
Weighted
Average
Option
Price |
|
Shares
under option at January 1, 2002 |
|
|
2,187,866
|
|
|
$1.06
-
$14.54
|
|
$ |
4.49 |
|
|
Granted
in 2002 |
|
|
84,750
|
|
|
3.33 - 6.25
|
|
|
4.39
|
|
|
Exercised
in 2002 |
|
|
(577,359 |
) |
|
1.94 - 5.33
|
|
|
3.61
|
|
|
Expired
in 2002 |
|
|
(340,680 |
) |
|
3.33 - 14.29
|
|
|
6.00
|
|
|
Forfeited
in 2002 |
|
|
(21,782 |
) |
|
1.94 - 13.75
|
|
|
5.34
|
|
Shares
under option at December 31, 2002 |
|
|
1,332,795
|
|
|
1.06 - 14.54
|
|
|
3.37
|
|
|
Granted
in 2003 |
|
|
324,250
|
|
|
6.35 - 29.33
|
|
|
27.23
|
|
|
Exercised
in 2003 |
|
|
(717,375 |
) |
|
1.84 - 10.00
|
|
|
4.37
|
|
|
Expired
in 2003 |
|
|
(41,625 |
) |
|
3.17 - 21.79
|
|
|
14.45
|
|
|
Forfeited
in 2003 |
|
|
(15,690 |
) |
|
1.06 - 13.09
|
|
|
8.64
|
|
Shares
under option at December 31, 2003 |
|
|
882,355
|
|
|
1.84 - 29.33
|
|
|
12.44
|
|
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
13. Stock
options and warrants (continued)
|
|
|
|
|
|
Weighted
Average
Option
Price |
|
| Granted
in 2004 |
|
|
200,750 |
|
|
8.70
-
36.40 |
|
|
27.93 |
|
|
Exercised
in 2004 |
|
|
(174,515 |
) |
|
2.00
-
29.33
|
|
|
4.21
|
|
|
Expired
in 2004 |
|
|
(76,680 |
) |
|
2.19
-
13.42
|
|
|
8.20
|
|
|
Forfeited
in 2004 |
|
|
(20,070 |
) |
|
2.00
-
16.59 |
|
|
3.65
|
|
Shares
under option at December 31, 2004 |
|
|
811,840
|
|
|
$1.84
-
$36.40
|
|
|
$19.20
|
|
Options
exercisable at December 31, 2004 |
|
|
455,020
|
|
|
$1.84
-
$36.40
|
|
|
$18.77
|
|
Options
exercisable at December 31, 2003 |
|
|
467,175
|
|
|
$1.84
-
$28.60
|
|
|
$12.27
|
|
Options
exercisable at December 31, 2002 |
|
|
925,395
|
|
|
$1.06
-
$14.54
|
|
|
$
3.45 |
|
The
following table summarizes information about stock options outstanding at
December 31, 2004:
| |
|
|
Options
Outstanding |
|
Options
Exercisable |
|
| |
Exercise
Prices |
|
|
|
|
|
Weighted-
Average
Remaining
Contractual
Life |
|
|
Weighted-
Average
Exercise
Price |
|
|
Number
Exercisable
at
December
31, 2004 |
|
|
|
|
|
$ |
1.84
- 3.98 |
|
|
221,960
|
|
|
2.7
years |
|
$ |
2.45 |
|
|
134,870 |
|
$ |
2.65 |
|
| |
4.04
- 8.71 |
|
|
76,940
|
|
|
2.9
years |
|
|
5.09
|
|
|
35,210 |
|
|
4.62
|
|
| |
10.00-23.01 |
|
|
28,990
|
|
|
4.6
years |
|
|
20.86
|
|
|
2,190 |
|
|
11.09
|
|
| |
25.40-36.40 |
|
|
483,950
|
|
|
4.9
years |
|
|
28.31
|
|
|
282,750 |
|
|
28.56
|
|
| |
|
|
|
811,840
|
|
|
|
|
|
|
|
|
455,020 |
|
|
|
|
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
13. Stock
options and warrants (continued)
The
Company, as part of sales of common stock and other agreements, has issued
warrants to purchase the Company’s common stock. The following summarizes the
information relating to warrants issued and the activity during 2004, 2003 and
2002:
|
|
|
Number
of
Shares |
|
Per
Share
Warrant Price |
|
Weighted
Average
Warrant
Price |
|
| |
|
|
|
|
|
|
|
|
|
|
Shares
under warrants at January 1, 2002 |
|
|
322,500
|
|
|
$2.40
-
$9.25
|
|
$ |
6.71 |
|
|
Expired
in 2002 |
|
|
(259,500 |
) |
|
3.33
-
9.25
|
|
|
7.71
|
|
Shares
under warrants at December 31, 2002 |
|
|
63,000
|
|
|
2.40
-
3.33
|
|
|
2.53
|
|
|
Issued
in 2003 |
|
|
225,000
|
|
|
23.11
-
27.63
|
|
|
24.47
|
|
|
Exercised
in 2003 |
|
|
(33,645 |
) |
|
3.33
-
3.33
|
|
|
3.33
|
|
|
Expired
in 2003 |
|
|
(20,355 |
) |
|
2.40
-
2.40
|
|
|
2.40
|
|
Shares
under warrants at December 31, 2003 |
|
|
234,000
|
|
|
3.33
-
27.63
|
|
|
23.65
|
|
|
Exercised
in 2004 |
|
|
(9,000 |
) |
|
3.33
-
3.33
|
|
|
3.33
|
|
Shares
under warrants at December 31, 2004 |
|
|
225,000
|
|
|
$23.11
-
$27.63
|
|
$ |
24.47 |
|
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
13. Stock
options and warrants (continued)
The
Company used the Black-Scholes option-pricing model to determine the fair value
of grants made in 2004, 2003 and 2002. The following assumptions were applied in
determining the pro forma compensation cost:0
| |
2004 |
2003 |
2002 |
| |
|
|
|
|
Risk-free
interest rate |
2.40
- 3.69% |
3.07
- 3.97% |
4.19
- 4.49% |
|
Expected
option term |
5-6
years |
5-6
years |
5-6
years |
|
Expected
price volitility |
77% |
83% |
83% |
|
Dividend
yield |
— |
— |
— |
14. Litigation
The
Company is a party to various legal matters, the outcome of which, in the
opinion of management, will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
15. Export
sales
Export
sales were as follows for the years ended December 31:
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Europe |
|
$ |
16,489,155 |
|
$ |
9,914,413 |
|
$ |
8,817,770 |
|
|
Asia
Pacific |
|
|
12,621,639
|
|
|
10,333,708
|
|
|
9,091,108
|
|
|
Other |
|
|
3,142,690
|
|
|
2,338,497
|
|
|
1,512,068
|
|
| |
|
$ |
32,253,484 |
|
$ |
22,586,618 |
|
$ |
19,420,946 |
|
At
December 31, 2004 and 2003, accounts receivable included balances due from
foreign entities of approximately $8,308,000 and $7,832,000,
respectively.
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
16. Quarterly
results (unaudited)
| |
|
|
|
|
|
|
|
Fourth
Quarter |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
$ |
15,846,175 |
|
$ |
17,315,648 |
|
$ |
17,721,182 |
|
$ |
19,445,500 |
|
|
Gross
profit |
|
|
9,706,135
|
|
|
10,479,553
|
|
|
10,444,179
|
|
|
11,699,862
|
|
|
Net
income |
|
|
1,905,109
|
|
|
2,392,018
|
|
|
2,534,131
|
|
|
2,297,888
|
|
Income
per common and common equivalent share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.19
|
|
|
0.23
|
|
|
0.24
|
|
|
0.22
|
|
|
Diluted |
|
|
0.18
|
|
|
0.22
|
|
|
0.24
|
|
|
0.21
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
$ |
10,677,641 |
|
$ |
12,073,761 |
|
$ |
12,898,673 |
|
$ |
15,239,786 |
|
|
Gross
profit |
|
|
6,857,571
|
|
|
7,915,524
|
|
|
8,481,368
|
|
|
9,527,818
|
|
|
Net
income |
|
|
1,142,573
|
|
|
1,516,530
|
|
|
1,985,317
|
|
|
1,510,094
|
(a) |
Income
per common and common equivalent share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.14
|
|
|
0.18
|
|
|
0.21
|
|
|
0.15
|
(a) |
|
Diluted |
|
|
0.13
|
|
|
0.17
|
|
|
0.20
|
|
|
0.14
|
(a) |
(a) Net
income for the fourth quarter of 2003 was reduced by approximately $500,000 or
$.06 and $.05 per common share on a basic and diluted basis respectively as a
result of the effective tax rate for 2003 being higher than estimated during the
first three quarters. The increased tax rate resulted from operating income for
the total year being significantly higher than originally projected in the first
three quarters; the tax benefit of the foreign sales corporation exclusion and
research and development credits being less than anticipated; and, the
elimination of the estimated income tax benefit from the disqualifying
dispositions of shares acquired through exercise of stock options which should
have been included in paid-in capital.
STRATASYS,
INC. AND SUBSIDIARIES
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS AND RESERVES
|
Years
Ended December 31, 2004, 2003, and 2002 |
|
| |
|
|
|
|
|
|
|
|
|
COLUMN
A |
|
Column
B |
|
Column
C |
|
Column
D |
|
Column
E |
|
| |
|
|
|
|
|
|
|
|
|
DESCRIPTION |
|
|
|
Additions
-
Charged to
Income |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Reserve
for bad debts and allowances |
|
$ |
568,886 |
|
$ |
1,138,222 |
|
$ |
198,591 |
|
$ |
1,508,517 |
|
|
Reserve
for sales returns and other allowances |
|
$ |
198,481 |
|
$ |
24,832 |
|
$ |
- |
|
$ |
223,313 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for bad debts and allowances |
|
$ |
338,893 |
|
$ |
231,058 |
|
$ |
1,065 |
|
$ |
568,886 |
|
|
Reserve
for sales returns and other allowances |
|
$ |
198,481 |
|
$ |
- |
|
$ |
- |
|
$ |
198,481 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for bad debts and allowances |
|
$ |
317,955 |
|
$ |
281,732 |
|
$ |
260,794 |
|
$ |
338,893 |
|
|
Reserve
for sales returns and other allowances |
|
$ |
244,933 |
|
$ |
102,366 |
|
$ |
148,818 |
|
$ |
198,481 |
|
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| |
|
|
| |
STRATASYS,
INC. |
|
|
|
|
By: |
/s/ S. Scott
Crump |
| |
|
| |
S.
Scott Crump
President |
| Dated: March 14, 2005 |
|
In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
|
/s/
S. Scott Crump |
|
|
|
|
|
S.
Scott Crump |
|
Chairman
of the Board of Directors, President, Chief Executive Officer, Treasurer,
(Principal Executive Officer) |
|
March
14, 2005 |
| |
|
|
|
|
|
/s/
Thomas W. Stenoien |
|
|
|
|
|
Thomas
W. Stenoien |
|
Executive
Vice President and Chief Financial Officer (Principal Financial and
Accounting Officer) |
|
March
14, 2005 |
| |
|
|
|
|
|
/s/
Ralph E. Crump |
|
Director |
|
March
14, 2005 |
|
Ralph
E. Crump |
|
|
|
|
| |
|
|
|
|
|
/s/
Edward J. Fierko |
|
Director |
|
March
14, 2005 |
|
Edward
J. Fierko |
|
|
|
|
| |
|
|
|
|
|
/s/
Clifford H. Schwieter |
|
Director |
|
March
14, 2005 |
|
Clifford
H. Schwieter |
|
|
|
|
| |
|
|
|
|
|
/s/
Arnold J. Wasserman |
|
Director |
|
March
14, 2005 |
|
Arnold
J. Wasserman |
|
|
|
|
| |
|
|
|
|
|
/s/
Gregory L. Wilson |
|
Director |
|
March
14, 2005 |
|
Gregory
L. Wilson |
|
|
|
|
| |
|
|
|
|