UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

 

 

 

Commission file number 001-34220

 

3D SYSTEMS CORPORATION

(Exact name of Registrant as specified in our charter)

 

 

333 Three D Systems Circle

Rock Hill, SC 29730

(Address of principal executive offices and zip code)

 

(803) 326-3900

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

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.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes o     No þ

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2009 was $128,911,764. For purposes of this computation, it has been assumed that the shares beneficially held by directors and officers of the registrant were “held by affiliates.” This assumption is not to be deemed an admission by these persons that they are affiliates of the registrant.

 

The number of outstanding shares of the registrant’s common stock as of February 12, 2010 was 22,860,807.

 

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s definitive proxy statement for its 2010 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Form 10-K.

 

 

3D SYSTEMS CORPORATION
Annual Report on Form 10-K for the
Year Ended December 31, 2009

Table of Contents

 

 

 

General

 

3D Systems Corporation (“3D Systems” or the “Company”) is a holding company that operates through subsidiaries in the United States, Europe and the Asia-Pacific region. We design, develop, manufacture, market and service 3-D printing, rapid manufacturing, and prototyping systems and related products and materials that enable complex three-dimensional objects to be produced directly from computer data without tooling. We also operate 3Dproparts^tm, a comprehensive service that offers our customers rapid prototyping and direct rapid manufacturing services for the production of precision parts.

 

Customers who use our proprietary systems are able to produce physical objects from digital data using commonly available computer-aided design software, often referred to as CAD software, or other digital-media devices such as engineering scanners and MRI or CT medical scanners. Our systems’ ability to produce functional parts from digital art enables customers to create detailed prototypes or production-quality parts quickly and effectively without a significant investment in expensive tooling, greatly reducing the time and cost required to produce prototypes or to customize production parts.

 

Our systems use additive part-production processes for applications that require rapid design iterations, prototyping and manufacturing. We believe that our systems enable our customers to develop better quality, higher functionality new products faster and more economically than other more traditional methods.

 

Our product development efforts are focused on expanding our portfolio of 3-D printing and rapid manufacturing solutions, which we believe represents significant growth opportunities for our business. We also believe that our core rapid prototyping business and our parts production service provide us with significant growth opportunities. In recent years, we have worked to develop new systems and materials and have enhanced our overall technology to rejuvenate and reshape our core business while developing new products that address our 3-D printing and rapid manufacturing growth initiatives. With respect to the uses of our systems:

 

 

Our products offer our customers an integrated systems solution consisting of equipment and embedded software, integrated consumable materials and customer service. Our extensive solutions portfolio is based on four distinct and proprietary technology platforms, discussed in greater detail below, that enable us to offer our customers a way to transform the manner in which they design, develop and manufacture their products.

 

Products and Services

 

Our principal technology platforms include our stereolithography or SLA^® equipment, our selective laser sintering or SLS^® equipment, our multi-jet 3-D printing equipment and our film transfer imaging (“FTI”)

equipment. These systems use patented and proprietary stereolithography, selective laser sintering and various 3-D printing and film transfer imaging methods and processes that take digital data input from CAD software or three-dimensional scanning and sculpting devices to fabricate physical objects from our proprietary family of engineered plastic, metal and composite materials.

 

We blend, market and distribute a wide range of proprietary consumable, engineered plastics, composites and materials that we market to produce physical parts from digital art using our systems. We augment and complement our own portfolio of engineered materials with materials that we purchase from third parties under private-label and distribution arrangements.

 

We provide to our customers a comprehensive suite of proprietary software tools that are embedded within our systems and pre-sale as well as post-sale field services, ranging from applications development to installation, warranty and maintenance services.

 

In 2009, we introduced our 3Dproparts^tm service, expanding our distribution channel for rapid prototyping and direct rapid manufacturing parts. 3Dproparts^tm offers a broad range of precision plastic and metal parts and assembly capabilities produced from a wide range of materials using a variety of additive and traditional manufacturing processes.

 

Systems Solutions

 

SLA^® systems and related equipment

 

Stereolithography, or SLA^®, systems convert our engineered materials and composites into solid cross-sections, layer by layer, until the desired fully fused objects are completely produced. Our SLA^® systems are capable of making multiple distinct objects at the same time and are designed to produce highly accurate objects in a wide range of sizes and shapes and material performance characteristics.

 

Stereolithography parts are known for their fine feature detail, resolution and surface quality. Product designers, engineers and marketers in many large manufacturing companies throughout the world use our SLA^® systems for a wide variety of applications, ranging from short production runs of end-use products, to producing prototype parts for automotive, aerospace and various consumer and electronic applications.

 

Our SLA^® systems are capable of rapidly producing tools, fixtures, jigs and end-use parts, including parts for dental, hearing aid, jewelry and motor-sport applications. They are also designed for uses such as building functional models that enable users to share ideas and evaluate concepts; performing form, fit and function testing on working assemblies and building expendable patterns for metal casting.

 

Our family of SLA^® systems offers a wide range of capabilities, including size, speed, accuracy, throughput and surface finish in different formats and price points. We have devoted substantial efforts to introducing new systems with new capabilities. Our iPro^tm family of SLA^® systems includes our iPro^tm 8000 and iPro^tm 9000. The iPro^tm 8000 system is a mid-range SLA^® system. Our iPro^tm 9000 SLA^® Center is a professional stereolithography system for the production of ultra high-definition “Pro-Parts” from our integrated portfolio of proprietary Accura^® Plastics. Our iPro^tm SLA^® Centers are designed to quickly and economically produce durable plastic parts with unprecedented surface smoothness, feature resolution, edge definition and tolerances that rival the accuracy of CNC-machined plastic parts. The iPro^tm systems are our most advanced, flexible, high-capacity stereolithography systems that are designed to enable customers to mass customize and produce high-quality, end-use parts, patterns, wind tunnel models, fixtures and tools consistently and economically using our proprietary and other stereolithography materials. In 2009 we continued to offer the Viper^tm SLA^® system. The Viper^tm SLA^® system operates in a similar fashion as the iPro^tm systems, but has a smaller build area and a lower build throughput rate and is capable of building smaller fine-featured parts.

 

SLS^® systems and related equipment

 

Our selective laser sintering, or SLS^®, additive manufacturing systems convert our proprietary engineered materials and composites by melting and fusing, or sintering, these materials into solid cross-sections, layer-

by-layer, to produce finished parts. SLS^® systems can create parts from a variety of proprietary engineered plastic and metal powders and are capable of processing multiple parts in a single build session.

 

Customer uses of our SLS^® systems include functional test models and end-use parts, which enable our customers to create customized parts economically without tooling. The combination of materials flexibility, part functionality and high throughput of our SLS^® technology makes it well suited for rapid manufacturing of durable parts for applications in various industries, including aerospace, automotive, packaging, machinery and motor-sports applications.

 

Our family of SLS^® systems includes our line of sPro^tm SLS^® systems, automated selective laser sintering manufacturing systems that are designed to enable our customers to mass customize and produce high-quality end-use parts, patterns, fixtures and tools consistently and economically from our proprietary engineered plastics, on-site and on-demand. In 2009 we introduced our new sPro^tm 60 family of SLS^® production systems, which features enhanced productivity and part accuracy within an optimized build volume, new CleanSweep^tm IR sensor technology, the ability to process multiple materials and the flexibility to change materials quickly.

 

We offer the Sinterstation^® Pro^tm SLM direct metal sintering system through a private label arrangement that we entered into with a third-party supplier. These systems are capable of producing fully-dense direct metal parts from a variety of metal powders, including stainless steel, chrome cobalt, titanium and tool steel.

 

3-D printing systems

 

Our expanding line of 3-D printers is ideal for use in engineering design environments for product development, marketing communication groups, rapid manufacturing such as jewelry and dental laboratory direct casting applications and within engineering schools and other educational institutions. Our range of 3-D printers includes our multi-jet equipment as well as our new film transfer imaging-based equipment.

 

All our 3-D printers accept digital input from either a three-dimensional CAD station or a scanned 3-D image, converting this input data one slice thickness at a time, to create a solid part one layer at a time. These printers offer superior finished surfaces, no geometry limitations, plug-and-play installation, point-and-print functionality and best-in-class part resolution in a variety of price points and materials.

 

Our family of multi-jet printers consists of several models, including our ProJet^tm systems which have replaced our family of InVision^® systems. All our printers are designed to produce high-definition, functional and durable models for form, fit and function analysis, including certain models that are capable of ultra-fine resolution for precision dental and jewelry applications. We began shipping our new large format 3-D printer, the ProJet^tm 5000, during the fourth quarter of 2009.

 

During the second quarter of 2009, we commenced commercial shipment of our V-Flash^® Desktop Printer, our first sub-ten thousand dollar desktop printer. As discussed above, we believe that, in addition to our focus on and pursuit of rapid manufacturing opportunities, 3-D printing provides us with a significant opportunity for growth. The V-Flash^® Desktop Printer is the first product based on our new FTI technology platform, and it is designed to build three-dimensional models within hours in a home or an office, enabling designers, engineers, hobbyists and students to imagine, design and build their ideas at their desks.

 

Software

 

As part of our comprehensive and integrated systems solutions, we offer embedded proprietary part-preparation software. This software is designed to enhance the interface between our customers’ digital data and our systems. Digital data, such as a three-dimensional CAD-produced digital image, is converted within our proprietary software so that, depending on the specific software, the image can be viewed, rotated and scaled, and model structures can be added. The software then generates the information that is used by the SLA^® or SLS^® system or by the 3-D printer to create solid objects. From time to time, we also work with third parties to develop complementary software for our systems.

Materials

 

As part of our integrated systems approach to business, we blend, market, sell and distribute consumable, engineered plastic and metal materials and composites under several proprietary brand names for use in all our systems. We market our stereolithography materials under the Accura^® brand, our selective laser sintering materials under the DuraForm^®, CastForm^tm and LaserForm^tm brands, and materials for our 3-D printers under the VisiJet^® brand.

 

Many of our systems have built-in electronic intelligence that communicates vital processing and quality statistics in real time with the systems. For these systems, we furnish materials that are designed for use in those systems and that are packaged in smart cartridges designed to enhance system functionality, up-time, materials shelf life and overall system reliability, with the objective of providing our customers with a built-in quality management system.

 

We work closely with our customers to optimize the performance of our materials in their applications. Our expertise in materials formulation, combined with our process, software and equipment-design strengths, enable us to help our customers select the material that best meets their needs and to obtain optimal results from the material. We also work with third parties to develop different types and varieties of materials designed to meet the needs of our customers.

 

Stereolithography engineered materials and composites

 

Our family of proprietary stereolithography materials and composites offers a variety of plastic-like performance characteristics and attributes designed to mimic specific engineered thermoplastic materials. When used in our SLA^® systems, our proprietary liquid materials turn into a solid surface one layer at a time, and through an additive building process all of the layers bond and fuse together to make a solid part.

 

Our portfolio of Accura^® stereolithography materials includes general-purpose as well as specialized materials and composites that offer our customers the opportunity to choose the material that is best suited for the parts and models that they intend to produce. To further complement and expand the range of materials we offer to our customers, we also distribute SLA^® materials under recognized third-party brand names.

 

In 2009, we introduced our Accura^® e-Stone^tm family of materials developed specifically to produce dental-digital models from data derived from dental intraoral and impression scanners without pouring traditional stone models, saving time and money for dentists and dental laboratories and reducing infection risks.

 

Laser sintering materials and composites

 

Our family of proprietary selective laser sintering materials and composites includes a range of rigid plastic, elastomeric and metal materials as well as various composites of these ingredients. Because of the built-in versatility of our selective laser sintering systems, the same systems can be used to process multiple materials.

 

Our family of DuraForm^® materials includes CastForm^tm and LaserForm^tm proprietary SLS^® materials. In 2009, we began selling DuraForm^® FR 100 Plastic, a new flame-retardant material that meets the requirements of a broad range of aerospace and consumer-product applications.

 

Our SLS^® materials are used to create functional end-use parts, prototypes and durable patterns as well as assembly jigs and fixtures. They are also used to produce flexible, rubber-like parts such as shoe soles, gaskets and seals, patterns for investment casting, functional tooling such as injection molding tool inserts and end-use parts used in customized rapid manufacturing applications. Examples of rapid manufacturing parts produced by our customers using our SLS^® systems include air ducts for aircraft and engine cowling parts for unmanned aerial vehicles. Product designers and developers from major automotive, aerospace and consumer products companies use DuraForm^® parts extensively as functional test models, even in harsh test environment conditions. Aerospace and medical companies use our SLS^® systems to produce end-use parts directly, which enables them to create customized parts economically without tooling. Parts made from DuraForm^® and

LaserForm^tm materials are cost effective and can compete favorably with traditional manufacturing methods, especially where part complexity is high. Competing alternatives to our technology generally involve, among other things, costs for tooling and minimum run quantities of the parts produced.

 

3-D printing materials

 

Our family of VisiJet^® 3-D printing materials includes part-building materials and compatible disposable support materials that are used in the modeling process and facilitate an easily melted away support removal process. These materials are sold to our customers packaged in proprietary smart cartridges that are used to produce parts in our 3-D printers. Our family of proprietary VisiJet^® materials is ideal for study models and form, fit and function engineering studies. Our family of VisiJet^® wax materials and special dissolvable support materials is used for direct casting applications such as custom jewelry manufacturing, dental crowns and bridge work and casting and micro-casting applications.

 

Customer Services

 

We provide a variety of comprehensive customer services and local application and field support on a worldwide basis for all of our stereolithography and selective laser sintering systems. For our 3-D printing systems, we provide these services and field support either directly or through a network of authorized resellers or other sources. We are continuing to build a reseller channel for our line of 3-D printers and to train our resellers to perform installations and services for those printers. We have also entered into arrangements with selected outside service providers to augment our service capabilities with respect to each of our lines of equipment.

 

The services and field support that we provide include installation of new systems at the customers’ sites, system warranties, several maintenance agreement options and a wide variety of hardware upgrades, software updates and upgrades and performance enhancement packages. We also provide services to assist our customers and resellers in developing new applications for our technologies, to facilitate the use of our technology for the customers’ applications, to train customers on the use of newly acquired systems and to maintain our systems at the customers’ sites.

 

New SLS^®, SLA^® and 3-D printer systems are sold with on-site maintenance support that generally covers a warranty period ranging from 90 days to one year. We offer service contracts that enable our customers to continue maintenance coverage beyond the initial warranty period. These service contracts are offered with various levels of support and are priced accordingly. We employ customer-support sales engineers in North America, several countries in Europe and in parts of the Asia-Pacific region to support our worldwide customer base. As a key element of warranty and service contract maintenance, our service engineers provide regularly scheduled preventive maintenance visits to customer sites. We also provide training to our distributors and resellers to enable them to perform these services.

 

We distribute spare parts on a worldwide basis to our customers, primarily from locations in the U.S. and Europe.

 

We also offer upgrade kits for certain of our systems that we sell to existing customers to enable them to take advantage of new or enhanced system capabilities. However, we have discontinued upgrade support for certain of our older legacy systems.

 

We operate a training facility, 3D Systems University, in partnership with York Technical College. The facility operates as part of York Technical College to train our employees, customers, students and others in the use of our systems and technologies. Through this relationship with York Technical College, we outsource a portion of training in the use and operation of our systems that we previously performed.

 

In 2009, with the launch of our 3Dproparts^tm service, we began supplying finished parts to our customers through a global network of parts printing service locations. Customers may procure a complete range of precision plastic and metal parts and assemblies produced using a variety of finishing, molding and casting capabilities utilizing both traditional and additive manufacturing processes. Preferred service providers and leading service bureaus also can use 3Dproparts^tm as their comprehensive order-fulfillment center.

Global Operations

 

We operate in North America and in six countries in Europe and the Asia-Pacific region, and distribute our products in those countries as well as in other parts of the world. Revenue in countries outside the U.S. accounted for 56.6%, 60.6% and 58.2% of consolidated revenue in the years ended December 31, 2009, 2008 and 2007, respectively.

 

In maintaining foreign operations, our business is exposed to risks inherent in such operations, including those of currency fluctuations. Information on currency exchange risk appears in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” and Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K (“Form 10-K”), which information is incorporated herein by reference.

 

Financial information about geographic areas, including revenue and long-lived assets, appears in Note 22 to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K, which information is incorporated herein by reference.

 

Marketing and Customers

 

Our sales and marketing strategy focuses on an integrated systems approach that is directed to providing equipment, materials and services to meet a wide range of customer needs, including traditional prototyping, 3-D printing and rapid manufacturing. This integrated approach includes the sales and marketing of our parts service, either as an adjunct to a customer’s in-house use of additive technologies or to the much broader audience of users who do not have dedicated SLA^® or SLS^® production solutions or 3-D printers. Our sales organization is responsible for the sale of our products on a worldwide basis and for the management and coordination of our growing network of authorized resellers of 3-D printing and certain of our other systems. Our direct sales force consists of salespersons who work throughout North America, Europe and parts of the Asia-Pacific region. Our application engineers provide professional services through pre-sales support and assist existing customers so that they can take advantage of our latest materials and techniques to improve part quality and machine productivity. This group also leverages our customer contacts to help identify new application opportunities that utilize our proprietary processes and access to our professional parts printing service, 3Dproparts^tm. As of December 31, 2009, our worldwide sales, application and service staff consisted of 119 employees.

 

We sell SLA^® and SLS^® systems and our related materials and services through our direct sales organization, which is supported by our dedicated sales, service and application engineers worldwide. In certain areas of the world where we do not operate directly, we have appointed sales agents, resellers and distributors who are authorized to sell on our behalf our SLA^® and SLS^® systems and the materials used in them. Certain of those agents, resellers and distributors also provide services to customers in those geographic areas.

 

Our 3-D printers and our related materials and services are sold worldwide directly and through a network of authorized distributors and resellers who are managed and directed by a dedicated team of channel sales managers.

 

As a complement to our equipment and materials sales, in 2009 we introduced our 3Dproparts^tm service, a global network of parts printing service locations. 3Dproparts^tm is designed to provide our customers and prospects a single source for all of their design to manufacturing needs. Through our 3Dproparts^tm service, we offer access to a wide range of additive and traditional manufacturing technologies, our full line of available materials from plastics to metals and our project management and finishing capabilities through 24/7 on-line quoting and secure ordering.

 

Our customers include major companies in a broad range of industries, including manufacturers of automotive, aerospace, computer, electronic, defense, education, consumer, medical and dental products. Purchasers of our systems include original equipment manufacturers, or OEMs, government agencies and universities that generally use our systems for research activities, and independent service bureaus that provide

rapid prototyping and manufacturing services to their customers for a fee. No single customer accounted for more than 10 percent of our consolidated revenue in the year ended December 31, 2009.

 

Production and Supplies

 

We have outsourced certain of our equipment assembly and refurbishment activities to several selected design and engineering companies and suppliers. These suppliers also carry out quality control procedures on our systems prior to their shipment to customers. As part of these activities, these suppliers have responsibility for procuring the components and sub-assemblies that are used in our systems. This has reduced our need to procure or maintain inventories of raw materials, work-in-process and spare parts related to our equipment assembly and maintenance activities. We purchase finished systems from these suppliers pursuant to forecasts and customer orders that we supply to them. While the outsource suppliers of our systems have responsibility for the supply chain of the components for the systems they assemble, the components, parts and sub-assemblies that are used in our systems are generally available from several potential suppliers.

 

During 2009 we moved the assembly of our ProJet^TM line of 3-D printers and certain other equipment assembly activities, which previously had been outsourced, to our Rock Hill, South Carolina facility, enabling us to better utilize our facility, plan production and lower costs.

 

We produce certain materials at our facilities in Marly, Switzerland and Rock Hill, South Carolina. We also have arrangements with third parties who blend to our specifications certain of the materials that we sell under our own brand names, and as discussed above we purchase other materials from third parties for resale to our customers.

 

Our equipment assembly and blending activities and certain of our research and development activities are subject to compliance with applicable federal, state and local provisions regulating the storage, use and discharge of materials into the environment. We believe that we are in compliance with such regulations as currently in effect in all material respects and that continued compliance with them will not have a material adverse effect on our capital expenditures, results of operations or consolidated financial position.

 

Research and Development

 

We maintain an ongoing program of research and development to develop new systems and materials and to enhance our product lines as well as to improve and expand the capabilities of our systems and related software and materials. This includes all significant technology platform developments for SLA^®, SLS^®, 3-D printing and FTI systems and materials. Our development efforts are augmented by development arrangements with research institutions, customers, suppliers of material and hardware and the assembly and design firms that we have engaged to assemble our systems. We also engage third-party engineering companies and specialty materials companies in specific development projects from time to time.

 

Research and development expenses were $11.1 million, $15.2 million and $14.4 million in 2009, 2008 and 2007, respectively.

 

We did not capitalize any internally developed software costs in 2009 or 2008. In 2007, we capitalized $0.4 million of internally developed software costs associated with the V-Flash^® Desktop Printer. See Note 2 to the Consolidated Financial Statements.

 

Intellectual Property

 

At December 31, 2009, we held 353 patents worldwide. At that date, we also had 152 pending patent applications worldwide.

 

The principal issued patents covering our stereolithography processes will expire at varying times through 2022. The principal issued patents covering our selective laser sintering processes will expire at varying times through 2024. The principal issued patents covering our multi-jet 3-D printing processes will expire at varying times through 2024. The principal issued patents covering our FTI processes will expire at varying times

through 2027. We have also filed a number of patent applications covering inventions contained in our recently introduced systems for each of our technology platforms.

 

We are also a party to various licenses that have had the effect of broadening the range of the patents, patent applications and other intellectual property available to us.

 

We believe that, while our patents and licenses provide us with a competitive advantage, our success depends primarily on our marketing, business development and applications know-how and on our ongoing research and development efforts. Accordingly, we believe the expiration of any of the patents, patent applications or licenses discussed above would not be material to our business or financial position.

 

Competition

 

Competition for most of our 3-D printing, prototyping and rapid manufacturing systems is based primarily on process know-how, product application know-how and the ability to provide a full range of products and services to meet customer needs. Competition is also based upon innovations in 3-D printing, rapid prototyping and rapid manufacturing systems and materials. Accordingly, our ongoing research and development programs are intended to enable us to maintain technological leadership. Certain of the companies producing competing products or providing competing services are well established and may have greater financial resources.

 

Our principal competitors are companies that manufacture machines that make, or that use machines to make, models, prototypes, molds and small-volume to medium-volume manufacturing parts. These include suppliers of computer numerically controlled machines and machining centers, commonly known as CNC, suppliers of plastics molding equipment, including injection-molding equipment, suppliers of traditional machining, milling and grinding equipment, and businesses that use such equipment to produce models, prototypes, molds and small-volume to medium-volume manufacturing parts. These conventional machining, plastic molding and metal casting techniques continue to be the most common methods by which plastic and metal parts, models, functional prototypes and metal tool inserts are manufactured.

 

Our competitors also include other suppliers of stereolithography, laser sintering and 3-D printing systems and materials as well as suppliers of alternative additive manufacturing solutions such as suppliers of Fused Deposition Modeling, or FDM, technology and suppliers of vacuum casting equipment. Numerous suppliers of these products operate both internationally and regionally, and many of them have well-recognized product lines that compete with us in a wide range of our product applications.

 

Competition in the parts printing service business is highly fragmented, with most of the services suppliers operating on a local level.

 

We have also entered into licensing or cross-licensing arrangements with various companies in the United States and in other countries that enable those companies to utilize our technology in their products or that enable us to use their technologies in our products. Under certain of these licenses, we are entitled to receive, or we are obligated to pay, royalties for the sale of licensed products in the U.S. or in other countries. The amount of such royalties was not material to our results of operations or consolidated financial position for the three-year period ended December 31, 2009.

 

A number of companies currently sell materials that compete with those we sell, and there are a wide number of suppliers of services for the equipment that we sell.

 

We expect future competition to arise both from the development of new technologies or techniques not encompassed by the patents that we own or license, from the conventional machining, plastic molding and metal casting techniques discussed above, and through improvements to existing technologies, such as CNC and rotational molding. We also expect to see increased competition in parts printing services offerings.

 

Employees

 

At December 31, 2009, we had 387 full-time employees. None of these employees is covered by collective bargaining agreements although some of our employees outside the U.S. are subject to local statutory employment arrangements. We believe that our relations with our employees are satisfactory.

Available Information

 

Our website address is www.3Dsystems.com. The information contained on our website is neither a part of, nor incorporated by reference into, this Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC.

 

Several of our corporate governance materials, including our Code of Conduct, Code of Ethics for Senior Financial Executives and Directors, Corporate Governance Guidelines, the current charters of each of the standing committees of the Board of Directors and our corporate charter documents and by-laws, are also available on our website.

 

 

Forward-Looking Statements

 

Certain statements made in this Form 10-K that are not statements of historical or current facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the cautionary statements and risk factors set forth below as well as other statements made in this Form 10-K that may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from historical results or from any future results expressed or implied by such forward-looking statements.

 

In addition to the statements set forth below that explicitly describe risks and uncertainties to which our business and our financial condition and results of operations are subject, readers are urged to consider statements in future or conditional tenses or that include terms such as “believes,” “belief,” “expects,” “intends,” “anticipates” or “plans” that appear in this Form 10-K to be uncertain and forward-looking. Forward-looking statements may include comments as to our beliefs and expectations as to future events and trends affecting our business. Forward-looking statements are based upon our beliefs, assumptions and current expectations concerning future events and trends, using information currently available to us, and are necessarily subject to uncertainties, many of which are outside our control. We assume no obligation, and do not intend, to update these forward-looking statements, except as required by applicable law. The factors stated under the heading “Cautionary Statements and Risk Factors” set forth below, as well as other factors, could cause actual results to differ materially from those reflected or predicted in forward-looking statements.

 

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from those reflected in or suggested by forward-looking statements. Any forward-looking statement that you read in this Form 10-K reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or to individuals acting on our behalf are expressly qualified in their entirety by this discussion. You should specifically consider the factors identified in this Form 10-K, which would cause actual results to differ from those referred to in forward-looking statements.

 

Cautionary Statements and Risk Factors

 

The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not currently known to us or that we currently deem not to be material also may impair our business operations, results of operations and financial condition. If any of the risks described below or if any other risks and uncertainties not currently known to us or that we currently deem not to be material actually occur, our business, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment in our common stock.

 

The risks discussed below also include forward-looking statements that are intended to provide our current expectations with regards to those risks. There can be no assurance that our current expectations will

be met, and our actual results may differ substantially from the expectations expressed in these forward-looking statements.

 

If we were unable to generate net cash flow from operations or if we were unable to raise additional capital, our financial condition could be adversely affected.

 

In 2009 our unrestricted cash and short-term investments increased by $2.7 million to $24.9 million at December 31, 2009 from $22.2 million at December 31, 2008. During 2009, 2008 and 2007, net cash provided by (used in) operations was $7.7 million, ($3.5) million and $2.6 million, respectively. We cannot assure you that we would generate cash from operations or other potential sources to fund future working capital needs and meet capital expenditure requirements.

 

In early 2009 we repaid the remainder of our outstanding industrial development bonds following the 2008 sale of our Grand Junction facility. From time-to-time we may seek access to external sources of capital to fund working capital needs, capital expenditures, acquisitions and for other general corporate purposes. However, we cannot assure you that capital would be available from external sources such as bank credit facilities, debt or equity financings or other potential sources to fund future operating costs, debt-service obligations and capital requirements.

 

As a result of the recessionary economic conditions that have persisted since 2008, credit markets have tightened significantly such that the ability to obtain new capital has become more challenging and more expensive. In addition, several large financial institutions worldwide have either failed or been dependent upon government assistance to continue to operate as going concerns. If our ability to generate cash flow from operations and our existing cash is inadequate to meet our needs, our options for addressing such capital constraints include, but are not limited to, (i) obtaining a revolving credit facility from bank lenders, (ii) accessing the public capital markets, or (iii) delaying certain of our existing development projects. If it became necessary to access additional capital it is likely that such alternatives in the current market environment would be on less favorable terms than we have historically obtained, which could have a material adverse impact on our consolidated financial position, results of operations or cash flows.

 

The lack of additional capital resulting from any inability to generate cash flow from operations or to raise equity or debt financing could force us to substantially curtail or cease operations and would, therefore, have a material adverse effect on our business and financial condition. Furthermore, we cannot assure you that any necessary funds, if available, would be available on attractive terms or that they would not have a significantly dilutive effect on our existing stockholders. If our financial condition worsens and we become unable to attract additional equity or debt financing or enter into other strategic transactions, we could become insolvent or be forced to declare bankruptcy.

 

Global economic, political and social conditions may harm our ability to do business, increase our costs and negatively affect our stock price.

 

The direction and relative strength of the global economy remains uncertain due to softness in the real estate and mortgage markets, among others, volatility in fuel and other energy costs, difficulties in the financial services sector and credit markets, continuing geopolitical uncertainties and other macroeconomic factors affecting spending behavior. The prospects for economic growth in the United States and other countries remain uncertain, and may cause customers to further delay or reduce technology purchases. These and other macroeconomic factors had an adverse impact on the sales of our products in 2008 and 2009, leading to longer sales cycles, slower adoption of new technologies and increased price competition. The global financial crisis affecting the banking system and financial markets have resulted in a tightening of credit markets, lower levels of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. These conditions have made it more difficult to obtain financing.

Given the continued weakness in the global economy, we face risks that may arise from financial difficulties experienced by our suppliers, resellers or customers, including:

 

 

We have managed through these uncertainties by reducing costs and by the continued introduction of new products and services, but there is no assurance these steps will be sufficient.

 

We have made, and expect to continue to make, strategic acquisitions that may involve significant risks and uncertainties.

 

We completed three acquisitions in 2009, which were not considered significant in accordance with rule 3-05 of Regulation S-X. We intend to continue to evaluate acquisition opportunities in the future in an effort to expand our business and enhance stockholder value. Acquisitions involve certain risks and uncertainties including:

 

 

Our future success may depend on our ability to deliver products that meet changing technology and customer needs.

 

Our business may be affected by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new standards and practices, any of which could render our existing products and proprietary technology and systems obsolete. For that reason, we maintain an ongoing research and development program that is designed to improve our existing products and to develop and introduce new products that enable us to maintain our technological leadership. We believe that to remain competitive we must continually enhance and improve the functionality and features of our products, services and technologies. However, there is a risk that we may not be able to:

 

 

 

We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third-party claims as a result of litigation or other proceedings.

 

In connection with the enforcement of our own intellectual property rights, the acquisition of third-party intellectual property rights or disputes related to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be costly and can be disruptive to our business operations by diverting attention and energies of management and key technical personnel, and by increasing our costs of doing business. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes.

 

Third-party intellectual property claims asserted against us could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from manufacturing or licensing certain of our products, subject us to injunctions restricting our sale of products, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements. In addition we may incur significant costs in acquiring the necessary third-party intellectual property rights for use in our products. Any of these could seriously harm our business.

 

We derive a significant portion of our revenue from business conducted outside the U.S and are subject to the risks of doing business outside the U.S.

 

More than 50% of our consolidated revenue is derived from customers in countries outside the U.S. There are many risks inherent in business activities outside the U.S. that, unless managed properly, may adversely affect our profitability, including our ability to collect amounts due from customers. While most of our operations outside the U.S. are conducted in highly developed countries, they could be adversely affected by:

 

 

These uncertainties may make it difficult for us and our customers to accurately plan future business activities and may lead our customers in certain countries to delay purchases of our products and services. More generally, these geopolitical, social and economic conditions could result in increased volatility in global financial markets and economies.

The consequences of terrorism or armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our market opportunities or our business. We are uninsured for losses and interruptions caused by terrorism, acts of war and similar events.

 

While the geographic areas outside the U.S. in which we operate are generally not considered to be highly inflationary, our foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain intercompany transactions that are generally denominated, for example, in U.S. dollars rather than their respective functional currencies. Our operating results, assets and liabilities are subject to the effect of foreign currency translation when the operating results and the assets and liabilities of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements. The assets and liabilities of our foreign subsidiaries are translated from their respective functional currencies into U.S. dollars based on the translation rate in effect at the end of the related reporting period. The operating results of our foreign subsidiaries are translated to U.S. dollars based on the average conversion rate for the related period.

 

Moreover, our operations are exposed to market risk from changes in interest rates and foreign currency exchange rates and commodity prices, which may adversely affect our results of operations and financial condition. We seek to minimize these risks through regular operating and financing activities and, when we consider it to be appropriate, through the use of derivative financial instruments. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.

 

We face significant competition in many aspects of our business, which could cause our revenue and gross profit margins to decline. Competition could also cause us to reduce sales prices or to incur additional marketing or production costs, which could result in decreased revenue, increased costs and reduced margins.

 

We compete for customers with a wide variety of producers of equipment for models, prototypes, other three-dimensional objects and end-use parts as well as producers of materials and services for this equipment. Some of our existing and potential competitors are researching, designing, developing and marketing other types of competitive equipment, materials and services. Many of these competitors have financial, marketing, manufacturing, distribution and other resources substantially greater than ours.

 

We also expect that future competition may arise from the development of allied or related techniques for equipment and materials that are not encompassed by our patents, from the issuance of patents to other companies that may inhibit our ability to develop certain products, and from improvements to existing materials and equipment technologies.

 

We intend to follow a strategy of continuing product development to enhance our position to the extent practicable. We cannot assure you that we will be able to maintain our current position in the field or continue to compete successfully against current and future sources of competition. If we do not keep pace with technological change and introduce new products, we may lose revenue and demand for our products.

 

We depend on a limited number of suppliers for components and sub-assemblies used in our systems and raw materials used in our materials. If these relationships were to terminate, our business could be disrupted while we locate an alternative supplier and our expenses may increase.

 

We have outsourced the assembly of certain of our systems to third-party suppliers, we purchase components and sub-assemblies for our systems from third-party suppliers, and we purchase raw materials that are used in our materials, as well as certain of those materials, from third-party suppliers.

 

While there are several potential suppliers of the components, parts and sub-assemblies for our products, we currently choose to use only one or a limited number of suppliers for several of these components, including our lasers, materials and certain jetting components. Our reliance on a single or limited number of vendors involves many risks including:

 

 

 

While we believe that we can obtain all of the components necessary for our products from other manufacturers, we require any new supplier to become “qualified” pursuant to our internal procedures, which could involve evaluation processes of varying durations. We generally have our systems assembled based on our internal forecasts and the supply of raw materials, assemblies, components and finished goods from third parties, which are subject to various lead times. In addition, at any time, certain suppliers may decide to discontinue production of an assembly, component or raw material that we use. Any unanticipated change in the sources of our supplies, or unanticipated supply limitations, could increase production or related costs and consequently reduce margins.

 

If our forecasts exceed actual orders, we may hold large inventories of slow-moving or unusable parts, which could have an adverse effect on our cash flow, profitability and results of operations.

 

We have engaged selected design and manufacturing companies to assemble certain of our equipment, including our SLA^®, SLS^® and certain 3-D printing systems. In carrying out these outsourcing activities, we face a number of risks, including:

 

 

Costs of certain employee benefits may continue to rise.

 

Although we have taken steps to contain volatility in medical and employee benefits, there are risks that these benefit costs may increase as a result of:

 

 

We face risks in connection with changes in energy-related expenses.

 

We and our suppliers depend on various energy products in manufacturing processes used to produce our products. Generally, we acquire products at market prices and do not use financial instruments to hedge energy prices. As a result, we are exposed to market risks related to changes in energy prices. In addition, many of the customers and industries to whom we market our systems and materials are directly or indirectly dependent upon the cost and availability of energy resources.

 

Our business and profitability may be materially and adversely affected to the extent that our or our customers’ energy-related expenses increase, both as a result of higher costs of producing, and potentially lower profit margins in selling, our products and materials and because increased energy costs may cause our customers to delay or reduce purchases of our systems and materials.

 

The variety of products that we sell could cause significant quarterly fluctuations in our gross profit margins, and those fluctuations in margins could cause fluctuations in operating income or loss and net income or net loss.

 

We continuously work to expand and improve our product offerings, including our systems, materials and services, the number of geographic areas in which we operate and the distribution channels we use to reach various target product applications and customers. This variety of products, applications and channels involves a range of gross profit margins that can cause substantial quarterly fluctuations in gross profit and gross profit

margin depending upon the variety of product shipments from quarter to quarter. We may experience significant quarterly fluctuations in gross profit margins or operating income or loss due to the impact of the variety of products, channels or geographic areas in which we sell our products from period to period. In some quarters, it is possible that results could be below expectations of analysts and investors. If so, the price of our common stock may be volatile or decline.

 

We may be subject to product liability claims, which could result in material expense, diversion of management time and attention and damage to our business reputation.

 

Products as complex as those we offer may contain undetected defects or errors when first introduced or as enhancements are released that, despite testing, are not discovered until after the product has been installed and used by customers. This could result in delayed market acceptance of the product, claims from customers or others, damage to our reputation and business or significant costs to correct the defect or error.

 

We attempt to include provisions in our agreements with customers that are designed to limit our exposure to potential liability for damages arising from defects or errors in our products. However, the nature and extent of these limitations vary from customer to customer, their effect is subject to a variety of legal limitations, and it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or laws enacted in the future.

 

The sale and support of our products entails the risk of product liability claims. Any product liability claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to our business reputation and cause us to fail to retain existing customers or to fail to attract new customers.

 

Historically, our common stock has been characterized by generally low daily trading volume, and our common stock price has been volatile.

 

The price of our common stock ranged from $3.76 to $11.92 per share during 2009. Factors that may have a significant impact on the market price of our common stock include:

 

 

The number of shares of common stock issuable upon the exercise of outstanding stock options could dilute your ownership and negatively impact the market price for our common stock.

 

Approximately 0.9 million shares of common stock were issuable upon the exercise of outstanding stock options at December 31, 2009, all of which were fully vested and remained exercisable at that date.

 

Our Board of Directors is authorized to issue up to 5 million shares of preferred stock.

 

The Board of Directors is authorized to issue up to 5 million shares of preferred stock, of which 1 million shares have been authorized as Series A Preferred Stock. The Board of Directors is authorized to issue these shares of preferred stock in one or more classes or series without further action of the stockholders and in that regard to determine the issue price, rights, preferences and privileges of any such class or series of preferred stock generally without any further vote or action by the stockholders. The rights of the holders of any outstanding series of preferred stock may adversely affect the rights of holders of common stock.

Our ability to issue preferred stock gives us flexibility concerning possible acquisitions and financings, but it could make it more difficult for a third party to acquire a majority of our outstanding common stock. In addition, any preferred stock that is issued may have other rights, including dividend rights, liquidation preferences and other economic rights, senior to the common stock, which could have a material adverse effect on the market value of our common stock.

 

The stockholders’ rights plan adopted by the Board of Directors in 2008 may inhibit takeovers and may adversely affect the market price of our common stock.

 

Our Board of Directors approved the creation of our Series A Preferred Stock and adopted a stockholders’ rights plan pursuant to which it declared a dividend of one Series A Preferred Stock purchase right for each share of our common stock held by stockholders of record as of the close of business on December 22, 2008. The preferred share purchase rights attach to any additional shares of common stock issued after December 22, 2008. Presently these rights are not exercisable and trade with the shares of our common stock. Under the rights plan, these rights generally become exercisable only if a person or group acquires or commences a tender or exchange offer for 15 percent or more of our common stock. If the rights become exercisable, each right permits its holder to purchase one one-hundredth of a share of Series A Preferred Stock for the exercise price of $55.00 per right. The rights plan also contains customary “flip-in” and “flip-over” provisions such that if a person or group acquires beneficial ownership of 15 percent or more of our common stock, each right will permit its holder, other than the acquiring person or group, to purchase shares of our common stock for a price equal to the quotient obtained by dividing $55.00 per right by one-half of the then current market price of our common stock. In addition, if, after a person acquires such ownership, we are later acquired in a merger or similar transaction, each right will permit its holder, other than the acquiring person or group, to purchase shares of the acquiring corporation’s stock for a price equal to the quotient obtained by dividing $55.00 per right by one-half of the then current market price of the acquiring company’s common stock, based on the market price of the acquiring corporation’s stock prior to such merger.

 

The stockholders’ rights plan and the associated Series A Preferred Stock purchase rights may discourage a hostile takeover and prevent our stockholders from receiving a premium over the prevailing market price for the shares of our common stock.

 

Various provisions of Delaware law may inhibit changes in control not approved by our Board of Directors and may have the effect of depriving our stockholders of an opportunity to receive a premium over the prevailing market price of our common stock in the event of an attempted hostile takeover.

 

One of these Delaware laws prohibits us from engaging in a business combination with any interested stockholder (as defined in the statute) for a period of three years from the date that the person became an interested stockholder, unless certain conditions are met.

 

Our balance sheet contains several categories of intangible assets totaling $52.3 million at December 31, 2009 that we could be required to write off or write down in the event of the impairment of certain of those assets arising from any deterioration in our future performance or other circumstances. Such write-offs or write-downs could adversely impact our future earnings and stock price, our ability to obtain financing and our customer relationships.

 

At December 31, 2009, we had $48.7 million in goodwill capitalized on our balance sheet. Accounting Standards Codification (“ASC”) Section 350, “Intangibles — Goodwill and Other,” requires that goodwill and some long-lived intangibles be tested for impairment at least annually. In addition, goodwill and intangible assets are tested for impairment at other times as circumstances warrant, and such testing could result in write-downs of some of our goodwill and long-lived intangibles. Impairment is measured as the excess of the carrying value of the goodwill or intangible asset over the fair value of the underlying asset. A key factor in determining whether impairment has occurred is the relationship between our market capitalization and our book value. Accordingly, we may, from time to time, incur impairment charges, which are recorded as operating expenses when they are incurred and would reduce our net income and adversely affect our operating results in the period in which they are incurred.

As of December 31, 2009, we had $3.6 million of other net intangible assets, consisting of licenses, patents, and other intangibles that we amortize over time. Any material impairment to any of these items could adversely affect our results of operations and could affect the trading price of our common stock in the period in which they are incurred.

 

For additional information, see Notes 6 and 7 to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Significant Estimates — Goodwill and other intangible and long-lived assets.”

 

 

None.

 

 

We own office and production facilities in Lawrenceburg, Tennessee and lease the remainder of our operating facilities, which are general purpose facilities.

 

We occupy an 80,000 square-foot headquarters and research and development facility in Rock Hill, South Carolina, which we lease pursuant to a lease agreement with KDC-Carolina Investments 3, LP. After its initial term ending August 31, 2021, the lease provides us with the option to renew the lease for two additional five-year terms as well as the right to cause KDC, subject to certain terms and conditions, to expand the leased premises during the term of the lease, in which case the term of the lease would be extended. The lease is a triple net lease and provides for the payment of base rent of $0.7 million annually through 2020, including rent escalations in 2011 and 2016, and $0.5 million in 2021. Under the terms of the lease, we are obligated to pay all taxes, insurance, utilities and other operating costs with respect to the leased premises. The lease also grants us the right to purchase the leased premises and undeveloped land surrounding the leased premises on terms and conditions described more particularly in the lease.

 

We own 35,000 square feet of office and production facilities in Lawrenceburg, Tennessee at which we produce a broad range of finished parts and assemblies.

 

We lease an 11,000 square-foot advanced research and development facility in Valencia, California. We also lease a 9,000 square-foot general purpose facility in Marly, Switzerland at which we blend stereolithography and 3-D printing materials and composites. We lease space in a small manufacturing facility in Goodland, Indiana where we manufacture finished parts for sale to customers. We also lease various sales and service offices in France, Germany, the United Kingdom, Italy and Japan.

 

We believe that the facilities described above are adequate to meet our needs for the foreseeable future.

 

 

On March 14, 2008, DSM Desotech Inc. filed a complaint, as amended, in an action titled DSM Desotech Inc. v. 3D Systems Corporation in the United States District Court for the Northern District of Illinois (Eastern Division) asserting that we engaged in anticompetitive behavior with respect to resins used in large-frame stereolithography machines. The complaint further asserted that we are infringing upon two of DSM Desotech’s patents relating to stereolithography machines. We understand that DSM Desotech estimates the damages associated with its claims to be in excess of $40 million.

 

Following a decision of the Court on our motion to dismiss the non-patent causes of the action, DSM Desotech filed a second amended complaint on March 2, 2009 in which it reasserted causes of action previously dismissed by the Court. We filed an answer to the second amended complaint on March 19, 2009 in which, among other things, we denied the material allegations of the second amended complaint. Discovery is proceeding on the claims pending in this case.

 

We intend to vigorously contest all of the claims asserted by DSM Desotech.

We are also involved in various other legal matters incidental to our business. We believe, after consulting with counsel, that the disposition of these other legal matters will not have a material effect on our consolidated results of operations or consolidated financial position.

 

 

No matters were submitted to a vote of security holders during the fourth quarter of 2009.

 

Executive and Other Officers

 

The information appearing in the table below sets forth the current position or positions held by each of our officers and his age as of February 1, 2010. All our officers serve at the pleasure of the Board of Directors. There are no family relationships among any of our officers or directors.

 

 

We have employed each of the individuals in the foregoing table other than Mr. Gregoire for more than five years.

 

Mr. Gregoire joined us on April 25, 2007 as Vice President and Chief Financial Officer. Previously, he was employed by Infor Global Solutions, Inc., an international software company, as Vice President of Finance since 2006 with responsibility for its Datastream Systems and Customer Relationship Management division. Mr. Gregoire previously served as Corporate Controller of Datastream Systems Inc., a software company, from 2005 until it was acquired by Infor Global Solutions, Inc. in March 2006. From 2001 to 2005, Mr. Gregoire served as Director of Accounting and Financial Analysis of Paymentech, L.P., an international credit card processing company.

 

 

The following table sets forth, for the periods indicated, the range of high and low prices of our common stock, $0.001 par value, as quoted on The NASDAQ Global Market. Our common stock trades under the symbol “TDSC.”

 

 

As of February 12, 2010, our outstanding common stock was held by approximately 337 stockholders.

 

Dividends

 

We do not currently pay, and have not paid, any dividends on our common stock, and we currently intend to retain any future earnings for use in our business. Any future determination as to the declaration of dividends on our common stock will be made at the discretion of the Board of Directors and will depend on our earnings, operating and financial condition, capital requirements and other factors deemed relevant by the Board of Directors, including the applicable requirements of the Delaware General Corporation Law, which provides that dividends are payable only out of surplus or current net profits.

 

The payment of dividends on our common stock may be restricted by the provisions of credit agreements or other financing documents that we may enter into or the terms of securities that we may issue from time to time.

 

Issuer Purchases of Equity Securities

 

We did not repurchase any of our equity securities during the fourth quarter of 2009, except for unvested restricted stock awards repurchased pursuant to our 2004 Incentive Stock Plan. See Note 14 to the Consolidated Financial Statements.

Stock Performance Graph

 

The graph below shows, for the five years ended December 31, 2009, the cumulative total return on an investment of $100 assumed to have been made on December 31, 2004 in our common stock. For purposes of the graph, cumulative total return assumes the reinvestment of all dividends. The graph compares such return with those of comparable investments assumed to have been made on the same date in (a) the NASDAQ Composite — Total Returns Index and (b) the S & P Information Technology Index, which are published market indices with which we are sometimes compared.

 

Although total return for the assumed investment assumes the reinvestment of all dividends on December 31 of the year in which such dividends were paid, we paid no cash dividends on our common stock during the periods presented.

 

Our common stock is quoted on The NASDAQ Global Market (trading symbol: TDSC).

 

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*

Assumes Initial Investment of $100

December 2009

 

 

 

 

 

The selected consolidated financial data set forth below for the five years ended December 31, 2009 has been derived from our historical consolidated financial statements. You should read this information together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, the notes to the selected consolidated financial data, and our consolidated financial statements and the notes thereto for December 31, 2009 and prior years included in this Form 10-K.

 

 

 

 

The effect of these restatements on our operating results for the year ended December 31, 2005 was as follows (in thousands, except per share data):

 

 

 

 

The following discussion and analysis should be read together with the selected consolidated financial data and our consolidated financial statements set forth in this Form 10-K. Certain statements contained in this discussion may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those reflected in forward-looking statements, as discussed more fully in this Form 10-K. See “Forward-Looking Statements” and “Cautionary Statements and Risk Factors” in Item 1A.

 

The forward-looking information set forth in this Form 10-K is provided as of the date of this filing, and, except as required by law, we undertake no duty to update that information.

 

Overview

 

We design, develop, manufacture, market and service 3-D printing, rapid manufacturing and prototyping systems and related products and materials that enable complex three-dimensional objects to be produced directly from computer data without tooling. Our products and materials help to greatly reduce the time and cost required to produce prototypes or customized production parts. In 2009, with the introduction of our 3Dproparts^tm service, we began supplying finished parts to our customers through a network of parts printing service locations. Our consolidated revenue is derived primarily from the sale of our systems, the sale of the related materials used by the systems to produce solid objects and the provision of services and parts to our customers. Revenue from our 3Dproparts^tm service is included in the service revenue line in our consolidated financial statements.

 

Growth strategy

 

We are continuing to pursue a growth strategy that focuses on seven strategic initiatives:

 

 

Improving our customers’ bottom line.  We believe that our success depends on the success of our customers. Understanding our customers’ objectives and businesses should enable us to quickly incorporate their needs into our product offerings and to offer them effective solutions to their business needs. By offering them effective solutions to their needs, we should be able to provide them with solutions that significantly improve their own profitability.

 

Developing significant product applications.  We believe that our ability to focus on industries that provide significant growth opportunities enables us to accelerate the adoption of our business solutions and to create significant new applications for a continually expanding customer base. By focusing our efforts on two significant addressable opportunities, 3-D printing and Rapid Manufacturing, we are working to build a business model that can provide sustained growth. Pursuing these market opportunities also complements our strategy to increase, as a percent of total revenue, the amount of revenue we derive from materials and other consumables. Our materials are used in these systems and provide a recurring revenue stream, which should be less sensitive to cyclical economic behavior.

 

Expanding our range of customer services.  We believe that improving our customers’ bottom line demands the creation of new and innovative services designed to meet specific customer needs. We are

working to establish faster, simpler business practices designed to make our customer experience with us easier and friendlier.

 

Accelerating new product development.  We believe that our growth depends on our ability to bring to market new materials, systems and services through quick and targeted development cycles. Technology and innovation are at the heart of this initiative. As an industry leader, we believe that the only sure way to sustain growth is through our commitment to technological leadership.

 

Optimizing cash flow and supply chain.  We believe that our profitability, competitiveness and cash flow should be enhanced by our ability to optimize our overall manufacturing operations and supply chain. Through the implementation of lean order-to-cash operations, coupled with selective strategic outsourcing, we are working to derive tangible operating improvements and to improve our overall return on assets.

 

Creating a performance-based ethical culture.  We believe that the success of our strategic initiatives will depend on our ability to execute them within the framework of a performance-based culture dedicated to meeting the needs of our customers, stockholders and other constituencies, supported by a corporate culture that is committed to strong principles of business ethics and compliance with the law. We recognize the need to align our performance with our organizational capabilities and practices and our strategic vision to enable us to grow at the rate we expect, to drive operating improvements at the rate we expect and to make the progress against targets necessary to create the necessary alignment.

 

Developing people and opportunities.  We believe that our success depends heavily on the skill and motivation of our employees and that we must therefore invest in the skills that our employees possess and in those that we need to accomplish our strategic initiatives.

 

We intend to accomplish this growth organically and, as opportunities present themselves, through selective acquisitions. As with any growth strategy, there can be no assurance that we will succeed in accomplishing our strategic initiatives.

 

Summary of 2009 Financial Results

 

As discussed in greater detail below, revenue for 2009 declined primarily due to lower sales across all revenue categories. Our revenue decreased by 18.8% to $112.8 million in 2009 from $138.9 million in 2008, after having decreased from $156.5 million in 2007. These results largely reflected the recessionary business conditions that became apparent in 2008 and continued throughout 2009.

 

Our gross profit for 2009 decreased by 10.5% to $49.7 million from $55.6 million in 2008. Our lower gross profit for 2009 arose primarily from a lower volume of systems and materials sales. Costs associated with the initial commercialization of our V-Flash^® Desktop Printer also negatively affected our gross margin. These negative impacts were partially offset by supply chain efficiencies and productivity improvements. Gross profit was also favorably affected by higher service margins due to systems upgrades and improved margins on maintenance contracts. Our gross margin percentage improved to 44.1% in 2009 from 40.0% in 2008.

 

Our total operating expenses declined by $14.4 million in 2009 from 2008, reflecting lower SG&A and R&D expenses, reflecting the strategic actions that we have taken to reshape our organization. We expect to continue to manage expenses and drive down our costs where possible without impairing our ability to operate and service our customers. We expect operating expenses for 2010 to fall in the range of $46 million to $52 million.

 

For 2009, our operating income improved by $8.6 million to $3.1 million compared to an operating loss of $5.5 million in 2008. This was primarily due to lower total operating expenses and the increase in our gross margin noted above.

 

Our operating income for 2009 included $8.5 million of non-cash expenses, which primarily consisted of depreciation and amortization, stock-based compensation and the provision for bad debts; this compared to $8.9 million of non-cash expenses in 2008.

A number of actions or events occurred in 2009 that affected our liquidity and our balance sheet including the following:

 

 

Based upon current economic conditions, we expect 2010 to continue to be challenging. Softness in demand in key industries we serve may result in a continued decline in revenue from our Direct Rapid Manufacturing systems during the next several quarters. As previously disclosed, in connection with our commercialization of our V-Flash^® Desktop Printer in the second quarter of 2009, we expect our earnings per share to be negatively impacted in the range of $0.02 to $0.04 per share for each of the initial four quarters of commercial activity.

 

Results of Operations for 2009, 2008 and 2007

 

Table 1 below sets forth revenue and percentage of revenue by class of product and service.

 

Table 1

 

 

Consolidated revenue

 

Consolidated revenue decreased in both 2009 and 2008 due primarily to decreased volume across all sales categories as a result of weakened economic conditions. These decreases are explained in more detail in the Revenue by class of product and service and Revenue by geographic region sections below.

 

Systems orders and sales tend to fluctuate on a quarterly basis as a result of a number of factors, including the types of systems ordered by customers, customer acceptance of newly-introduced products, the timing of product orders and shipments, global economic conditions and fluctuations in foreign currency exchange rates. Our customers generally purchase our systems as capital equipment items, and their purchasing decisions may have long lead times.

 

Due to the relatively high list prices of certain systems and the overall low unit volume of systems sales in any particular period, the acceleration or delay of orders and shipments of a small number of systems from one period to another can significantly affect revenue reported for our systems for a particular period. Revenue

reported for systems sales in any particular period is also affected by revenue recognition rules prescribed by generally accepted accounting principles.

 

Backlog has historically not been a significant factor in our business, reflecting our relatively short production and delivery lead times. We had approximately $1.4 million of booked orders outstanding at December 31, 2009, of which $0.5 million was related to 3-D printers. We expect to ship all of these orders in 2010. At December 31, 2008 and 2007, respectively, our backlog was approximately $1.4 million and $3.1 million.

 

Revenue by class of product and service

 

2009 compared to 2008

 

Sales volumes of new products and services declined by $11.8 million in 2009, while the volume of legacy products sold declined by $2.5 million compared to 2008. Table 2 sets forth our change in revenue by class of product and service for 2009 compared to 2008:

 

Table 2

 

 

We earn revenue from the sales of systems and other products, materials and services. On a consolidated basis, revenue for 2009 decreased by 18.8% to $112.8 million from $138.9 million for 2008 as a result of lower volume and a shift in price/mix of systems and other products related to lower levels of large-frame system sales, all of which we believe is reflective of the continued weak global economic conditions during 2009.

 

The decline in revenue from systems and other products that is due to volume for 2009 compared to 2008 was primarily the result of lower sales of large-frame and mid-frame systems that were only partially offset by an increase in unit volume of 3-D printers. Sales of systems consisted of:

 

 

Due to the relatively high list price of certain systems, our customers’ purchasing decisions may have long lead times; combined with the overall low unit volume of systems sales in any particular period, the acceleration or delay of orders and shipments of a small number of systems from one period to another can

significantly affect revenue reported for our systems sales for the period involved. Revenue reported for systems sales in any particular period is also affected by revenue recognition rules prescribed by generally accepted accounting principles.

 

Revenue from materials was also adversely impacted by lower large-frame systems sales, which are typically accompanied by significant initial materials purchases to charge up new systems and commence production, and decreased demand in the global marketplace due to the continued overall economic downturn. Sales of integrated materials represented 31% of total materials revenue in 2009, compared to 26% in 2008. After bottoming at $10.6 million in the first quarter of 2009, materials revenue increased sequentially each subsequent quarter of 2009 to end the fourth quarter at $14.8 million.

 

The decrease in services revenue reflects a reduction in maintenance revenue and the trailing 12-month cumulative impact of the decline in large-frame systems sales on warranty revenue. The decrease was partially offset by an increase in sales of upgrades and sales from our 3Dproparts^tm service, which we introduced in October 2009. Services revenue increased 12.1% sequentially during the fourth quarter of 2009.

 

In addition to changes in sales volumes, there are two other primary drivers of changes in revenue from one period to another: the combined effect of changes in product mix and average selling prices, sometimes referred to as price and mix effects, and the impact of fluctuations in foreign currencies.

 

As used in this Management’s Discussion and Analysis, the price and mix effects relate to changes in revenue that are not able to be specifically related to changes in unit volume. Among these changes are changes in the product mix of our materials and our systems as the trend toward smaller, more economical systems has continued and the influence of new systems and materials on our operating results has grown. Our reporting systems are not currently configured to produce more quantitative information regarding the effect of price and mix changes on revenue.

 

2008 compared to 2007

 

As shown in Table 3, the $17.6 million decrease in consolidated revenue in 2008 compared to 2007 reflects the effect of a $16.9 million decrease in systems revenue and a $1.0 million decrease in services revenue in 2008. Sales of new products and services introduced within the last three years decreased by $19.4 million in 2008. Unit sales volume of legacy products declined by $2.3 million in 2008. Favorable price/mix effects increased revenue by $0.3 million and favorable foreign currency translation effects increased by $3.9 million.

 

Table 3

 

As set forth in Table 1 and Table 3:

 

 

This decrease was derived primarily from an $18.2 million decrease in sales of large-frame systems, which we believe is due to overall weak economic conditions, partially offset by a $1.0 million positive impact from foreign currency translation.

 

 

Declines in volume of new services in 2008 reflected the impact of lower systems revenue partially offset by a $0.3 million increase in legacy services and the $1.0 million favorable impact of foreign currency translation on service revenue.

 

Revenue by geographic region

 

2009 compared to 2008

 

Each geographic region experienced lower levels of revenue in 2009 compared to 2008. This was principally caused by continued weak economic conditions in 2009 which we believe led to lower levels of large-frame system sales, and in the case of Europe, the impact of volatility in currencies on foreign currency translation. Table 4 sets forth the change in revenue by geographic area for 2009 compared to 2008:

 

Table 4

 

 

As shown in Table 4:

 

 

 

2008 compared to 2007

 

The United States and Europe contributed to our lower level of revenue in 2008, while Asia-Pacific revenue declined by a relatively modest $0.1 million compared to 2007.

 

Table 5 sets forth the change in revenue by geographic area for 2008 compared to 2007:

 

Table 5

 

 

As shown in Table 5:

 

 

This decrease was due primarily to lower volume of large-frame system sales, for reasons discussed above, compared to that which we experienced in 2007.

 

 

Foreign currency translation partially offset our revenue decrease in 2008. Excluding the $3.9 million favorable effect of foreign currency translation, revenue from operations outside the U.S. would have decreased 11.8% for 2008 compared to 2007 and would have been 59.5% of consolidated revenue for 2008.

 

 

 

Gross profit and gross profit margins

 

Although gross profit decreased in both 2008 and 2009 as our revenue decreased, our gross profit margin improved in 2009 as shown in Table 6 below. On a consolidated basis, gross profit for 2009 decreased by $5.9 million to $49.7 million compared to $55.6 million and $63.4 million for 2008 and 2007, respectively:

 

Table 6

 

 

To conform to our 2009 presentation, we reclassified $0.4 million of foreign exchange gain in 2008 and a nominal amount of foreign exchange gain in 2007, which had previously been included in product cost of sales, to interest and other expense, net in our consolidated statements of operations. This had the effect of decreasing our previously reported gross profit and interest and other expense, net by $0.4 million for 2008 and by a nominal amount in 2007. This also increased the operating loss for those years by the same amount.

 

On a consolidated basis, gross profit for 2009 decreased by $5.9 million to $49.7 million from $55.6 million for 2008. This decrease is the result of lower volume of material sales and lower large-frame systems revenue, partially offset by operational efficiencies, as well as the previously disclosed negative impact on margin of sales of our V-Flash^® Desktop Printer. This decline was partially offset by higher margins on services from systems upgrades and improved margins on maintenance contracts.

 

Consolidated gross profit margin in 2009 increased by 4.1 percentage points to 44.1% of revenue from 40.0% of revenue for the 2008 period. Countering the adverse impact of our lower revenue, the increase in gross profit margin reflected the effect of various cost savings initiatives that we pursued in 2008 and 2009, which included certain supply chain efficiencies, the movement of certain third-party logistics activities in-house, the sale of systems upgrades and a reduction in field service costs. The gross profit margin was adversely affected by the previously disclosed negative impact on margin of sales of our V-Flash^® Desktop Printer.

 

Systems and other products gross profit declined by 1.8% to $7.8 million in 2009 from $8.0 million in 2008, while the gross profit margin improved by 6.4 percentage points in 2009 to 25.7% of revenue. This improvement in gross profit margin resulted from increased supply chain efficiencies and lower costs to refurbish system components. The improvement was partially offset by the decline in volume discussed above resulting in the absorption of fixed costs over fewer units and the previously disclosed negative impact on margin of V-Flash^® Desktop Printer sales.

 

Gross profit margin for materials declined by 24.4% to $29.7 million, with the gross profit margin decreasing 4.0 percentage points to 59.0% of revenue from 63.0% in 2008. This is primarily due to the decline in sales volume of materials, which was adversely affected by the cumulative effect of lower levels of large-frame system sales, resulting in overhead absorption over lower revenue.

 

Gross profit for services increased by 46.9% to $12.2 million compared to $8.3 million in 2008, while the gross margin improved by 14.6 percentage points to 38.2% of revenue. The improved gross profit is due to the

combined effect of a decline in fixed costs associated with our decision to cease servicing certain legacy products, resolution of the premature failure of certain system components and reductions in field service costs initiated in 2008.

 

Operating expenses

 

As shown in Table 7, total operating expenses decreased by $14.4 million or 23.6% to $46.7 million for 2009 from $61.1 million for 2008 and $68.6 million for 2007 as cost savings initiatives that we initiated have gained traction. This is evidenced by sequential declines in our quarter-over-quarter operating expenses in each of the last ten quarters. This decrease consists of $10.4 million of lower selling, general and administrative expenses and $4.1 million in lower research and development expenses, both of which are discussed below. Accordingly, we expect our SG&A expenses in 2010 to fall into the range of $36 million to $40 million, and our 2010 R&D expenses to fall in a range of $10 million to $12 million without slowing down the rate of planned new product introductions.

 

Table 7

 

 

Selling, general, and administrative costs

 

2009 compared to 2008

 

Selling, general and administrative expenses declined by $10.4 million or 22.5% to $35.5 million in 2009 from $45.9 million in 2008 after decreasing by $8.3 million in 2008 compared to $54.2 million in 2007. Selling, general and administrative expenses, as a percentage of revenue, were 31.5%, 33.0% and 34.6% in 2009, 2008 and 2007, respectively.

 

The $10.4 million decrease in selling, general and administrative expenses in 2009 was primarily due to:

 

 

2008 compared to 2007

 

Selling, general and administrative expenses declined by $8.3 million or 15.3% to $45.9 million in 2008 from $54.2 million in 2007. As a percentage of revenue, selling, general and administrative expenses were 33.0% and 34.6% of consolidated revenue in 2008 and 2007, respectively.

 

The $8.3 million decrease in selling, general and administrative expenses in 2008 was primarily due to:

 

 

 

Partially offsetting the decline were:

 

 

Research and development expenses

 

Research and development expenses decreased by 26.8% to $11.1 million in 2009 and increased by 5.3% to $15.2 million in 2008 from $14.4 million in 2007. The decrease in 2009 was principally due to a $2.4 million decrease in outside consulting services in 2009 and the reduction in costs for 2009 following commercialization of certain new products in 2008 including, among others, our ProJet^tm 3-D printers, iPro^tm SLA^® systems, sPro^tm SLS^® systems, the V-Flash^® Desktop Printer and other new product development activities, including the new products that we introduced in 2009.

 

Income (loss) from operations

 

In 2009, we achieved operating income of $3.1 million, compared to operating losses of $5.5 million in 2008 and $5.2 million in 2007, including the effect of the 2009 reclassification of foreign exchange gain (loss) discussed above, as our lower revenue and gross profit were more than offset by our lower level of total operating expenses in 2009. See Gross profit and gross profit margins above.

 

The following table sets forth operating income (loss) from operations by geographic area for 2009, 2008 and 2007:

 

Table 8

 

 

On a geographic basis:

 

 

 

With respect to the U.S., in 2009, 2008 and 2007, the changes in operating loss by geographic area reflected the same factors relating to our consolidated operating loss that are discussed above. As most of our operations outside of the U.S. are conducted through sales and marketing subsidiaries, the changes in operating income in our operations outside of the U.S. in each of 2009, 2008 and 2007 resulted primarily from changes in sales volume, transfer pricing and foreign currency translation.

 

Interest and other expenses, net

 

Interest and other expenses, net, which consist primarily of interest income and interest expense, amounted to $1.2 million of net expense for 2009, $0.4 million of net expense for 2008 and $1.1 million of net expense for 2007. The 2009 increase resulted from lower interest income on investments in 2009 as we shifted our short-term investments into Treasury funds in September 2008, partially offset by reduced interest expense related to the redemption of the remaining outstanding industrial revenue bonds. The 2008 decrease resulted from interest income generated by higher average cash balances in 2008 and lower interest expense due to the absence in 2008 of bank borrowings and other outstanding debt that we discharged in 2007, partially offset by lower interest rates on investments that prevailed in 2008.

 

In December 2008, we completed the sale of our Grand Junction facility for $5.5 million, which included $3.5 million of cash (before closing costs) and a $2.0 million non-interest bearing note receivable with a five-year maturity. The carrying value of the facility was $3.5 million, and after deducting certain closing costs, we realized an initial gain on the sale of $1.6 million.

 

We discounted this note receivable by approximately $1.0 million to reflect imputed interest, and offset this amount against the initial gain, reducing the net gain to $0.6 million. In accordance with ASC Section 360.20, “Real Estate Sales,” we have recognized no gain on the sale of our Grand Junction facility as of December 31, 2009. The carrying value of the long-term receivable, net of the discount and deferred gain, is recorded in “Other assets, net” on the balance sheet at December 31, 2009 and 2008. See Note 10 to the Consolidated Financial Statements.

 

We do not expect to incur additional borrowings during 2010, and consequently expect that interest and other expense (income), net will not be a material factor in our operating results during 2010.

 

Provisions for income taxes

 

We recorded $0.8 million, $0.3 million and $0.5 million of provisions for income taxes in 2009, 2008 and 2007, respectively. In each year, these provisions primarily reflect tax expense associated with income taxes in foreign jurisdictions.

 

Our $0.8 million provision for income taxes in 2009 increased from 2008 principally due to the absence in 2009 of the $1.2 million benefit in 2008 arising from the settlement of a foreign tax audit for the years 2000 through 2005. The impact of the absence of this benefit is offset by a $0.6 million decrease in tax expense due to the reduction in foreign income.

 

Our $0.3 million provision for income taxes in 2008 included a $1.2 million benefit arising from the settlement of a foreign tax audit for the years 2000 through 2005, as amounts owing under the settlement were less than the amounts we previously estimated. The settlement allowed us to recognize tax loss carry-forwards, resulting in a $0.9 million increase in our foreign deferred tax asset. The benefit of the favorable tax settlement amounted to $0.05 per share. See Note 21 to the Consolidated Financial Statements.

 

A substantial portion of our deferred income tax assets results from available net operating loss carry-forwards in the jurisdictions in which we operate. Certain of these net operating loss carry-forwards for U.S. state income tax purposes began to expire in 2006, and certain of them will begin to expire in later years for foreign and U.S. federal income tax purposes. See Note 21 to the Consolidated Financial Statements. Our

level of U.S. losses for the years ended December 31, 2009, 2008 and 2007 may be viewed as evidence that we will not be able to utilize all these net operating loss carry-forwards before they expire.

 

Net income (loss); net income (loss) available to 3D Systems common stockholders

 

In 2009 we generated net income of $1.1 million, compared to net losses of $6.2 million in 2008 and $6.7 million in 2007.

 

The principal reasons for our higher net income in 2009, which are discussed in more detail above, were:

 

 

The principal reasons for our lower net loss in 2008, which are discussed in more detail above, were:

 

 

Net income (loss) available to common stockholders was $1.1 million for 2009, ($6.2) million for 2008 and ($6.7) million for 2007. On a per share basis, our basic net income per share available to the common stockholders was $0.05 in 2009, and our fully diluted net income per share available to common stockholders was $0.05. This is an improvement over our net loss per share available to the common stockholders, on both a basic and fully diluted basis, of $0.28 per share in 2008 and $0.33 per share in 2007.

 

The dilutive effects of outstanding securities were excluded from the calculation of diluted income per share in 2008 and 2007 as they would have been anti-dilutive, that is, they would have increased net income per share or reduced net loss per share. See Note 18 to the Consolidated Financial Statements.

 

Liquidity and Capital Resources

 

During 2010, we intend to continue to rely upon our unrestricted cash and cash flow from operations to meet our liquidity needs. While we believe that the actions taken in 2008 and 2009 to reduce our operating costs, improve our gross profit margin and manage working capital should continue to benefit us in 2010, there can be no assurance in these uncertain economic times that those actions will be sufficient. Following the redemption of our remaining outstanding industrial development bonds in January 2009, we had no outstanding debt for borrowed money, and our principal contractual commitments consisted of the capital leases on our Rock Hill facility, which are discussed in greater detail below.

 

Working capital

 

Our net working capital increased by $1.4 million to $36.7 million at December 31, 2009 from $35.3 million at December 31, 2008. Table 9 provides a summary of the net changes in working capital items from December 31, 2008 to December 31, 2009.

Table 9

 

 

Our unrestricted cash and cash equivalents increased by $2.7 million to $24.9 million at December 31, 2009 from $22.2 million at December 31, 2008. This increase resulted from the net of $7.7 million of cash provided by operating activities, $5.2 million of cash used in investing activities and $0.3 million of cash provided by financing activities.

 

Accounts receivable, net decreased by $1.5 million to $23.8 million at December 31, 2009 from $25.3 million at December 31, 2008. This decline was primarily attributable to lower sales and a decrease in days sales outstanding to 60 days at December 31, 2009 from 66 days at December 31, 2008. Accounts receivable more than 90 days past due was 5.9% of gross receivables at December 31, 2009 and December 31, 2008.

 

Bad debt expense was $0.9 million for 2009 compared to $0.8 million in 2008. This amount includes a provision for the large Japanese customer who filed for reorganization in February 2009. All amounts due from this customer, who emerged from reorganization in late 2009, have been fully reserved as of December 31, 2009. The overall bad debt expense was positively affected by our focus on improving collections. Bad debt expense totaled $0.1 million in 2007. Our allowance for doubtful accounts declined to $1.8 million at December 31, 2009 from $2.0 million at December 31, 2008. This decline resulted primarily from the write-down of uncollectible receivables and a reduction in receivables over 90 days past due.

Components of inventories were as follows:

 

Table 10

 

 

Inventories decreased by $2.6 million to $18.4 million at December 31, 2009 from $21.0 million at December 31, 2008. This decrease resulted primarily from a $3.8 million reduction in finished goods inventory as a result of our inventory reduction initiatives, partially offset by an increase in inventory as we moved production of our ProJet^tm line of 3-D printers in-house.

 

As shown in Table 10 above, with the outsourcing of substantially all our large-frame and mid-frame equipment assembly and refurbishment activities, the majority of our inventory now consists of finished goods, including primarily systems, materials and service parts, as our third-party assemblers have taken over supply-chain responsibility for the assembly and refurbishment of large-frame and mid-frame systems. As a result, we generally no longer hold in inventory most parts for large-frame and mid-frame systems production or refurbishment.

 

In calculating inventory reserves, which declined to $2.7 million at December 31, 2009 from $3.2 million at December 31, 2008, we make an assessment of spare parts that we hold in inventory and that we expect to use over the expected life cycles of the related systems, of inventory related to the blending of our engineered materials and composites and of our ability to sell items that are recorded in finished goods inventory.

 

The components of prepaid expenses and other current assets were:

 

Table 11

 

 

Our prepaid expenses and other current assets increased by $0.8 million to $2.4 million at December 31, 2009 from $1.6 million at December 31, 2008. The non-trade receivables shown in Table 11, the inventory held by assemblers shown in Table 10 and a related accrued liability in an amount that corresponds to the book value of inventory held by assemblers included in accrued liabilities on our Consolidated Balance Sheet relate to the accounting for our outsourcing arrangements pursuant to ASC 470.40, “Product Financing Arrangements.”

 

Accounts payable declined by $4.1 million to $13.0 million at December 31, 2009 from $17.1 million at December 31, 2008. The decline was primarily due to lower payables that corresponded to lower cost of sales in 2009 compared to 2008 and the impact of our continuing cost reduction initiatives.

 

Customer deposits decreased by $0.5 million from $1.1 million at December 31, 2008 to $0.6 million at December 31, 2009 as a result of lower sales of systems and other products in 2009. Deferred revenue decreased by $0.9 million to $8.5 million at December 31, 2009 from $9.4 million at December 31, 2008 primarily due to a net decrease in maintenance contracts, installation, training and warranty revenue in 2009.

Accrued liabilities increased by $3.0 million to $11.1 million at December 31, 2009 from $8.1 million at December 31, 2008; this increase is primarily due to higher accruals for employee bonuses and taxes.

 

The changes in 2009 that comprise the other components of working capital not discussed above arose in the ordinary course of business.

 

Differences between the amounts of working capital item changes in the cash flow statement and the amounts of balance sheet changes for those items are primarily the result of foreign currency translation adjustments.

 

Cash flow

 

Table 12 summarizes the cash provided by or used in operating activities, investing activities and financing activities, as well as the effect of changes in foreign currency exchange rates on cash, for the years ended December 31, 2009, 2008 and 2007.

 

Table 12

 

 

We generated $2.7 million of net cash in 2009 and finished the year with $24.9 million of unrestricted cash, compared to $22.2 million of unrestricted cash at December 31, 2008. This included $7.7 million of cash generated from operating activities, consisting of our $1.1 million net income in 2009 and $8.5 million of non-cash charges that were included in our net income, partially offset by $1.9 million of cash consumed by net changes in operating accounts. We also used $5.2 million of cash in investing activities, and $0.3 million of cash was provided by financing activities in 2009. See Working capital, Cash flow and Outstanding debt and capitalized lease obligations.

 

Cash flow from operations

 

2009 compared to 2008

 

For the year ended December 31, 2009, we generated $7.7 million of net cash from operating activities. This change in cash primarily consisted of our $1.1 million net income and $8.5 million of non-cash charges that were included in our net income, partially offset by $1.9 million of cash consumed by net changes in operating accounts.

 

The principal changes in non-cash items that favorably affected operating cash flow included $5.9 million of depreciation and amortization expense, $1.2 million of stock-based compensation expense and $0.9 million of bad debt expense.

 

Depreciation and amortization decreased to $5.9 million in 2009 from $6.7 million in 2008, which decreased from $7.0 million in 2007. The decrease in depreciation and amortization in 2009 was primarily due to lower levels of capital expenditures. The decrease in depreciation and amortization in 2008 was primarily due to the absence of amortization for acquired technology, which was fully amortized during 2007.

 

Changes in working capital that resulted in a source of cash included the following:

 

 

Changes in working capital that resulted in a use of cash included the following:

 

 

See “Working capital” above for a discussion of the reasons for these changes in working capital items.

 

2008 compared to 2007

 

For the year ended December 31, 2008, we used $3.5 million of net cash in operating activities. This change in cash primarily consisted of our $6.2 million net loss and $6.2 million of cash consumed by net changes in operating accounts, which was partially offset by $8.9 million of non-cash items included in our net loss.

 

The principal changes in non-cash items that favorably affected operating cash flow included $6.7 million of depreciation and amortization expense, $1.4 million of stock-based compensation expense and $0.8 million of bad debt expense.

 

Changes in working capital that resulted in a source of cash included the following:

 

 

Changes in working capital that resulted in a use of cash included the following:

 

 

Cash flow from investing activities

 

Net cash used in investing activities in 2009 increased to $5.2 million from $2.7 million in 2008. In 2009 this consisted of $4.1 million related to acquisitions and $1.2 million of net purchases of property and equipment and additions to license and patent costs. See Notes 3, 5 and 6 to the Consolidated Financial Statements.

 

Net cash used in investing activities in 2008 increased to $2.7 million from $2.2 million in 2007. In 2008 this consisted of $6.1 million related to purchases of property and equipment and additions to license and patent costs, partially offset by $3.5 million of asset dispositions, principally the sale of the Grand Junction facility. See Notes 5 and 6 to the Consolidated Financial Statements.

 

Capital expenditures were $1.0 million in 2009, $5.8 million in 2008 and $0.9 million in 2007. Capital expenditures in 2009 primarily consisted of expenditures for tooling and systems associated with our new product development efforts and leasehold improvements and equipment to support our 3Dproparts^tm service.

 

Cash flow from financing activities

 

Net cash provided by financing activities improved to $0.3 million in 2009 from a net use of $1.4 million in 2008. Net cash provided by financing activities was $14.7 million in 2007. This change in 2009 resulted primarily from the release of restricted cash, partially offset by debt repayments and lower stock option exercise activity.

 

The decrease in 2008 resulted primarily from the absence of any significant financing activities and the $2.1 million increase in restricted cash used to collateralize the redemption of the remaining outstanding industrial development bonds following the sale of the Grand Junction facility. Net proceeds from stock option exercises and equity compensation awards declined to $1.1 million in the 2008 period from $2.9 million in 2007, primarily reflecting lower option exercise activity.

Outstanding debt and capitalized lease obligations

 

At December 31, 2009, total debt and capitalized lease obligations decreased to $8.5 million from $11.7 million at December 31, 2008 due to the redemption of the outstanding industrial development bonds discussed below and principal payments on capitalized lease obligations. Our capitalized lease obligations were $8.5 million at December 31, 2009 and $8.7 million at December 31, 2008.

 

Our outstanding debt and capitalized lease obligations at December 31, 2009 and December 31, 2008 were as follows:

 

Table 13

 

 

Industrial development bonds

 

Our Grand Junction, Colorado facility was financed by industrial development bonds in the original aggregate principal amount of $4.9 million. At December 31, 2008 the outstanding principal amount of these bonds was $3.1 million. Interest on the bonds accrued at a variable rate of interest and was payable monthly. The interest rate at December 31, 2008 was 1.28%.

 

Following the sale of our Grand Junction facility in December 2008, we fully collateralized the repayment of the industrial development bonds, including interest and other amounts due through the redemption date, with a portion of the cash proceeds of the sale and $1.2 million of restricted cash previously held by the trustee. In January 2009, the remaining outstanding bonds of $3.1 million, plus accrued and unpaid interest, were redeemed utilizing the restricted cash. Following the redemption of the industrial development bonds, we have no debt for borrowed money outstanding.

 

Capitalized lease obligations

 

Our principal contractual commitments consist of capitalized lease obligations of $8.5 million and $8.7 million at December 31, 2009 and 2008, respectively.

 

Our outstanding capitalized lease obligations relate to two lease agreements that we entered into during 2006 with respect to our Rock Hill facility, one of which covers the facility itself and the other of which covers certain furniture and fixtures that we acquired for use in the facility. The carrying values of the headquarters facility lease and the furniture and fixture lease at December 31, 2009 and 2008, respectively, were $8.5 million and $8.7 million. See Note 12 to the Consolidated Financial Statements.

 

Stockholders’ equity

 

Stockholders’ equity increased by $2.5 million to $104.7 million at December 31, 2009 from $102.2 million at December 31, 2008. This increase was primarily attributable to the $1.1 million of net income in 2009,

partially offset by the $0.1 million of other comprehensive income and a $1.5 million increase in additional paid-in-capital consisting of:

 

 

Commitments