3-d Systems, Inc (TDSC) - Description of business
3D Systems Corporation, operating through subsidiaries in the United States, Europe and the Asia-Pacific region, designs, develops, manufactures, markets and services rapid 3-D printing, prototyping and manufacturing systems and related products and materials that enable complex three-dimensional objects to be produced directly from computer data. Our proprietary systems are used by our customers 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 are used 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, thus transforming the way they design, develop and manufacture their new products. We are focusing intensely on expanding our portfolio of 3-D printing and rapid manufacturing solutions, which we believe represent significant growth opportunities for our business. During 2005, we put specific initiatives in place to expand and enhance our manufacturing-capable systems and materials. We also believe that our core rapid prototyping business continues to provide us with significant growth opportunities. Since 2004, we have worked to rejuvenate and reshape our core business while developing new products that address our growing 3-D printing and rapid manufacturing growth initiatives. With respect to the uses of our systems:
· In rapid manufacturing applications, our systems are used to manufacture end-use parts that have the appearance and characteristics of high-quality injection-molded parts. Customers who adopt our rapid manufacturing solutions avoid the significant costs of complex set-ups and changeovers and eliminate the costs and lead-times associated with tooling or hand labor. Rapid manufacturing enables our customers to produce optimized designs since they can design for function, unconstrained by normal design-for-manufacture considerations.
· In 3-D printing applications, our systems are used to produce three-dimensional shapes, primarily for visualizing and communicating concepts and design applications as well as for a variety of other applications, including supply-chain management, modeling, architecture, art, surgical modeling and entertainment.
· In rapid prototyping applications, our systems are used to generate quickly and efficiently product-concept models, functional prototypes, master patterns and expendable patterns for metal casting that are often used as a cost-effective means of evaluating product designs.
Our products offer our customers an integrated systems solution comprised of equipment and related software, consumable materials and customer service. Our extensive solutions portfolio is based on several 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.
On November 3, 2005, we announced a plan to move our corporate headquarters, our principal R&D activities and all other key corporate support functions into a new facility that we have agreed to have constructed and to lease in Rock Hill, South Carolina, in the Greater Charlotte, North Carolina
metropolitan area. This facility is being constructed according to our specifications, and we have agreed to lease it under a 15-year operating lease that we entered into on February 8, 2006.
As we have previously disclosed, once we complete our relocation, we plan to close our current headquarters and R&D facility in Valencia, California and our facility in Grand Junction, Colorado. However, we plan to maintain an advanced research facility in the Valencia, California area to focus on developing future technologies for next-generation products.
We established an initial base of operations in Rock Hill and commenced local operations there in January 2006. We expect to complete our move to the new Rock Hill facility by September 30, 2006.
As previously disclosed, we decided to relocate to the greater Charlotte, North Carolina area after an extensive and thorough review of a number of locations and after considering a variety of key operating and strategic factors, including meeting our growth and expansion requirements within a business-friendly environment, achieving sustained operating-cost reductions in a competitive region of the country, improving employee development and recruitment costs and employee retention by becoming an employer of choice in the Charlotte region, and locating in closer proximity to many of our customers, partners and suppliers.
Products and Services
Our principal technology platforms include our stereolithography or SLA ® equipment, our selective laser sintering or SLS ® equipment, and our 3-D printing or InVision jet and layer-deposition equipment. These systems use patented and proprietary stereolithography, selective laser sintering and 3-D printing 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 metal materials that we market to produce physical parts using our systems. We augment and complement our own portfolio of engineered materials with materials that we purchase from third parties under private-label arrangements and other distribution arrangements.
We provide a comprehensive suite of software tools and field services to our customers, ranging from applications development to installation, warranty and maintenance services.
We are working to accelerate our new product development through quick and targeted development cycles in order to promote our growth and profitability, to sustain our commitment to technological leadership and to meet the needs of our customers for new 3-D printing and rapid manufacturing solutions. From the latter part of 2003 through the end of 2005, our efforts have resulted in the introduction of 29 new products that have expanded and reinvigorated our product line. As discussed in greater detail below, revenue from new products currently accounts for a significant portion of our total revenue.
New products introduced since the beginning of 2005 include the following new systems:
· Our Viper Pro SLA ® system, an advanced, flexible, high-capacity stereolithography system . This system is 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 stereolithography materials. Designed for around-the-clock operation, the Viper Pro system facilitates maximum capacity utilization and superior part production. This system is currently available in two configurations, including a dual vat configuration that enables customers to build
parts from different materials simultaneously, and we expect to introduce in 2006 a third configuration with a single extra-large vat that will enable customers to build large parts.
· Our Sinterstation ® Pro SLS ® system, an automated selective laser sintering manufacturing system . These systems 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. We have introduced two models of this system, the Sinterstation ® Pro 230 SLS ® system and the Sinterstation ® Pro 140 SLS ® system, which differ primarily in the size of their build platforms. The Sinterstation ® Pro series is designed as an alternative rapid manufacturing solution to traditional injection molding, casting and machining methods.
· Our InVision LD 3-D Printer . During 2005, we entered into an OEM supply agreement with Solidimension Ltd. under which we began offering these systems as part of our InVision family of 3-D printers in the third quarter of 2005. This desk-top 3-D printer uses a layered deposition technology that builds complex geometrical shapes one slice thickness at a time and is designed for communication and concept modeling applications.
· Our ProCure UV Curing Systems. This new line of ovens cures parts produced on all SLA ® systems. Designed for hands-free operation, these systems have a built-in stand and storage cabinet and feature closed-loop time and temperature controls, self monitoring intelligence and an automated push-button front door for convenient loading and unloading of parts.
· Our Lightyear 1.5 and Buildstation 5.5 Software. This new software for SLA ® systems has many features that make SLA ® systems more productive and enhance part quality. Key features include support for the Windows ® XP operating system, the ability to change recoat and build parameters on the fly, the ability to delete parts during a build and a high-fidelity slicer that can significantly improve the smoothness of parts. Customers owning certain legacy SLA ® systems can upgrade to this software by purchasing a new or upgraded electronics package.
During 2005, in order to further expand our offering of total system solutions, we also introduced the following new materials that are designed for use with our systems and are sold together with our systems to differentiate our systems and materials from those supplied by others:
· DuraForm ® FR plastic, a new flame retardant material . This material is designed for exclusive use in our new Sinterstation ® Pro SLS ® systems. It is the first laser sintering material to be packaged specifically for the Sinterstation ® Pro system, and it has passed FAA and airline burn, smoke and toxicity tests, making it ideal for aerospace manufacturers and customers in other industries to produce end-use parts for a variety of applications directly in our SLS ® systems. We began shipping DuraForm ® FR plastic in the fourth quarter of 2005.
· DuraForm ® Flex Plastic . This is a rubber-like, tear-resistant, flexible plastic that can be used in our selective laser sintering systems to produce functional prototypes and end-use parts for which rubber-like, flexible characteristics are useful.
· DuraForm ® AF Plastic . This is a cast-aluminum-like engineered composite for use in our selective laser sintering systems that has the appearance of aluminum, the excellent surface finish and fine feature definition of our proprietary un-reinforced DuraForm ® plastics and the superior stiffness of an engineered composite. DuraForm ® AF plastic is designed to provide our customers with materials suited for applications such as aerodynamic models, jigs and fixtures, household appliances, casting patterns and functional prototypes such as cases and metal enclosures.
· DuraForm ® EX Plastic. This advanced, engineered, production-grade plastic, designed for use in our Sinterstation ® Pro SLS ® and Sinterstation ® HiQ systems, targets rapid manufacturing
applications. DuraForm ® EX plastic provides the toughness of injection-molded plastic that aerospace, automotive and motorsports customers require for demanding prototyping and low-volume to mid-volume manufacturing applications. Because of its stiffness, heat-resistance, long-term stability and durability, DuraForm ® EX plastic is ideal for a wide variety of parts manufacturing, including environmental ducts, electronics enclosures, manifolds, dashboards and bumpers.
· Accura ® 25 Plastic. This opaque, white, engineered material is available for all solid-state-equipped SLA ® systems, including our new Viper Pro SLA ® systems. Accura ® 25 plastic mimics the look and feel of molded polypropylene and delivers excellent accuracy, speed and shape-memory, making it suitable for functional prototypes as well as master patterns. Its durability and flexibility make Accura ® 25 plastic ideal for automotive and electronics applications, including prototyping and design of trim components and fascia and testing of connectors, wiring harnesses and enclosures.
· VisiJet ® HR 200 material for the InVision HR 3-D Printer. Introduced in October 2005, this material is designed for use in our InVision HR 3-D printers. This new material is primarily intended for applications, such as jewelry manufacturing and dental labs, that require intricate, high-resolution capability to produce feature-rich models, patterns and parts that are used as master patterns for casting into gold, white gold or silver.
· VisiJet ® SR 200 plastic for the InVision SR 3-D Printer . Introduced in October 2005, this material is designed for use in our InVision SR 3-D printers. Parts built from VisiJet ® SR 200 plastic offer the same outstanding feature detail and surface finish as parts built with the existing VisiJet ® M100 material but are about 2 to 3 times stiffer and stronger, mimicking the general performance characteristics of high-volume thermoplastics such as polypropylene and ABS. While this new material is primarily intended for design communication and concept modeling applications, it is also suitable for pattern making and can be used for functional testing.
· VisiJet ® LD100 plastic for the InVision LD 3-D Printer. Introduced in April 2005, this material is designed for use in our InVision LD 3-D printers. Parts made from this engineered plastic can be used for a variety of design communication and concept modeling applications for designers, engineers and marketers as well as educators in universities, technical colleges and high school engineering and industrial design departments.
SLA ® systems and related equipment
Stereolithography, or SLA ® , systems convert proprietary engineered materials and composites into solid cross-sections, layer by layer, until the desired fully fused objects are complete. Our SLA ® systems are capable of making multiple objects at the same time and are designed to produce objects in a wide range of sizes and shapes.
Parts produced through stereolithography are known for their durability, 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 other uses, to creating new designs for testing in consumer focus groups.
Our SLA ® systems are capable of producing tools, fixtures, jigs and end-use parts in rapid manufacturing applications, including 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 master 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. In addition to our Viper Pro SLA ® systems, our family of SLA ® systems includes the Viper system, the SLA ® 5000 system, the SLA ® 7000 system and the Viper Ô HA SLA ® , a manufacturing-capable dual-vat system that we introduced in 2004 for the production of in-the-ear hearing aid shells.
With the introduction of our new-from-the-ground-up Viper Pro series, we decided to retire our older generation SLA ® 5000 and SLA ® 7000 systems, which have been in our product line since the late 1990s. We plan to fully retire these systems from our product line as soon as we fulfill prior orders for them that were placed by customers during 2005 for delivery during 2006. We discontinued accepting new orders for these models as of the end of 2005.
SLS ® systems and related equipment
Our selective laser sintering, or SLS ® , systems convert 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 engineered plastic and metal powders and are capable of processing multiple parts in a single build session.
In addition to our Sinterstation ® Pro SLS ® systems, our line of selective laser sintering systems includes the Sinterstation ® HiQ Ô SLS ® system and the Sinterstation ® HiQ high-speed or HS SLS ® system , manufacturing-capable systems that we introduced in 2004 to succeed our Vanguard Ô and Vanguard Ô HS systems.
All of our SLS ® systems create durable parts from proprietary engineered plastic and metal materials and composites that we market primarily under the DuraForm ® brand name. Examples of rapid manufacturing parts produced by our customers using our SLS ® systems include air ducts for aircraft, engine cowling parts for unmanned aerial vehicles (UAVs) and in-the-ear hearing aid shells. 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 also use our SLS ® systems to produce end-use parts directly, which enables them to create customized parts economically without tooling. When used in conjunction with a high-temperature oven, our SLS ® systems can also create metal parts from several proprietary engineered metal composites that we sell. These parts can be used as tools, functional test models and end-use parts.
The combination of materials flexibility, part functionality and high throughput of our SLS ® technology makes it well suited to rapid manufacturing applications, and much of our current development work is directed at developing applications of our equipment for this environment and expanding the range of applications through the use of proprietary engineered materials.
3-D Printing systems
Our line of InVision Ô 3-D Printers are advanced, user-friendly office modeling, design communication and precision-casting systems. They accept digital input from a three-dimensional CAD station, convert the digital file one thickness slice at a time, and create a solid part in an additive layer-by-layer build up.
Our family of 3-D printers includes our standard-resolution InVision Ô SR 3-D Printer model, launched in late 2003, and our high-resolution model, launched in mid-2004. Our high-resolution InVision Ô HR 3-D Printers can create intricate and complex geometrical shapes that are investment-casting ready for jewelry, dental molding, medical implant and precision casting applications. We also market worldwide our InVision LD 3-D Printer, which is discussed above.
InVision Ô 3-D Printers offer superior finished surfaces, plug-and-play installation, point-and-print functionality and best-in-class part resolution. InVision Ô 3-D Printers operate much like a desktop two-dimensional printer and are priced economically, responding to a growing demand from customers for affordable parts for design communication and shape analysis. 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.
Together with our VisiJet ® materials, InVision Ô 3-D Printers enable designers, engineers, architects and marketers to communicate their concepts quickly and frequently, and substantially reduce the time it takes to bring new products to market.
Other systems-related products
To help our customers produce ready-to-use parts and functional prototypes, we market several ancillary devices for post-processing and curing of parts produced on our SLA ® systems, including our ProCure stainless steel part-curing system, which is described above. We also market the InVision Ô Finisher for our 3-D Printers.
As part of our comprehensive and integrated systems solutions, we offer proprietary part-preparation software for personal computers and engineering workstations designed to enhance the interface between their available digital data and our systems. Digital data, such as a three-dimensional CAD-produced digital image, is converted within our proprietary software package so that, depending on the specific software package, the image can be viewed, rotated and scaled, and model structures can be added. The software then generates the information to be used by the SLS ® system, SLA ® system or 3-D Printer to create the solid objects. From time to time, we also work with third parties to develop complementary software for our systems.
As part of our integrated systems approach to our business, we blend, market, sell and distribute consumable, engineered plastic and metal materials and composites under several proprietary brand names for use in all of our systems. We market our stereolithography materials under the Accura ® brand, our selective laser sintering materials under the DuraForm ® , CastForm Ô and LaserForm Ô brands, and materials for our 3-D Printers under the VisiJet ® brand.
Our family of engineered materials and composites includes proprietary SLA ® materials used in our stereolithography systems, photocurable plastics, engineered plastic films and adhesives used in our 3-D printer systems, and various proprietary plastic, composite and metal materials used in our selective laser sintering systems. Our extensive family of proprietary materials is specifically designed for use with our systems to produce high-quality models, prototypes and manufactured parts. To enhance materials shelf life, system functionality, up-time and total materials usage and to provide our customers with a built-in quality management system, all of our new materials for our new Viper Pro, Sinterstation ® Pro and for all of our InVision printers come packaged in smart, proprietary materials cartridges with built-in electronic intelligence that communicates vital processing and quality statistics in real time with these systems materials delivery systems.
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 from time to time to develop different types and varieties of materials designed to meet the needs of our customers. 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 particular, we distribute a full range of Somos ® branded SLA ® materials produced by DSM Somos under a non-exclusive global distribution arrangement that we entered into in 2004.
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, the proprietary liquid materials that we market and sell 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.
During 2004, we launched several new stereolithography materials including Accura ® 50, an ABS-like material, and Accura ® 45 material, a specialty fast-build material designed for our SLA ® legacy systems. We also commercialized several new proprietary plastic and engineered nano-composite materials designed to deliver certain desired plastic parts attributes and performance characteristics, our special high-strength engineered nano-composite Bluestone Ô material and our Amethyst Ô special precious-metal casting material for jewelry manufacturing.
Laser sintering materials and composites
Our family of proprietary selective laser sintering materials and composites includes a range of plastic, composite and metal materials as well as various composites of these ingredients. Because of the built-in versatility of our selective laser sintering systems, multiple materials can be processed through the same sintering system.
In addition to the DuraForm ® materials discussed above that we introduced in 2005, our DuraForm ® PA and DuraForm ® GF materials are used to create rapid manufacturing end-use parts, examples of which include air ducts for aerospace applications and in-the-ear hearing aid shells. These materials are also used to produce functional prototypes and durable patterns as well as assembly jigs and fixtures. Our CastForm Ô investment-casting material is used to create patterns for casting. Customers use our metal LaserForm Ô ST-100, ST-200 and A6 steel powders to produce functional prototype parts, such as actuators, gears and manifolds, for tooling such as injection molding tooling, and for end-use parts in customized rapid manufacturing applications. Parts made from DuraForm ® and LaserForm Ô materials are cost-effective and can compete favorably with traditional manufacturing methods, especially where part complexity is high and required quantity is moderate.
3-D printing materials
Our materials for our InVision Ô standard-resolution and high-resolution 3-D Printers include our VisiJet ® model material and a compatible VisiJet ® disposable support material, first introduced in 2003, that is used in the printing process and then discarded when the model is complete. Both of these materials are distributed to customers in the form of proprietary smart cartridges that are loaded into an InVision Ô standard-resolution or high-resolution 3-D Printer in a stack where they are automatically pierced, pumped and ejected sequentially as the printer consumes material. We have specifically developed these materials to meet the consumption, speed and cost requirements of three-dimensional printing applications. Our materials for our InVision LD 3-D Printers include VisiJet ® LD100 plastics, which are discussed above.
We provide a suite of comprehensive customer services and local field support on a worldwide basis for all of our stereolithography and selective laser sintering systems. We are working to build a reseller channel for our line of InVision 3-D Printers and to train our resellers to perform installations and service for those printers.
Such services and support include extended system warranties, an extensive menu of annual service agreement options, and a wide variety of software and hardware upgrades and performance enhancement packages. Since 2004, we have introduced several service contract alternatives to offer additional, flexible service contract options to our customers.
Our customer support begins before a system sale with applications development provided by our applications engineering team. This same group works to ensure that our systems satisfy customer expectations through customer training and system start-up support. Our global services customer support team co-ordinates system installation, maintenance and call-center hotline support in an effort to ensure that our systems continue to deliver high value to our customers.
We provide services to assist our customers and resellers in developing new applications for our technologies, to facilitate adaptation 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 site.
Our applications engineers, who possess technical knowledge in various fields such as casting, molding and tooling, develop applications of our various technologies that are designed to meet specific customer needs. They work with our customers and resellers to determine which of our technologies would best meet their requirements. They also consult with customers and resellers to develop rapid manufacturing applications for our systems.
We also install new systems at the customers site, provide warranty and maintenance services and provide the customer with technical support. New SLS ® , SLA ® and 3-D Printer systems are sold with on-site hardware and software maintenance service 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 depending on various factors, including the materials that are included and the response time for the service. As a key element of warranty and service contract maintenance, our sales engineers provide regularly scheduled preventative maintenance visits to customer sites.
We have customer-support sales engineers in North America, several countries in Europe and in parts of Asia to support our worldwide customer base. We also provide training to our distributors and resellers to enable them to perform these services.
Our customer support group maintains call-center hotlines in the United States and in Europe that are staffed with technical representatives. These hotlines are available during business hours in the U.S. and Europe. These call centers are further supplemented by support from the applications engineering group.
We distribute spare parts on a worldwide basis to our customers from locations in the United States, Europe, Hong Kong and Japan.
We also offer systems upgrade kits for sale to existing customers to enable them to take advantage of new or enhanced system capabilities. Our current family of upgrade kits includes kits to upgrade the installed base of our stereolithography equipment and an upgrade kit for our former Vanguard Ô SLS ® systems that improves productivity. We view upgrade kits for our existing systems as an important part of the value that we provide to new customers when they are considering the purchase of our systems. However, we have begun discontinuing upgrade support for certain of our legacy systems.
In connection with our plans to move our corporate headquarters and principal research and development facilities to Rock Hill, South Carolina, we are working with York Technical College in Rock Hill to develop a new training center that the College will operate to train our employees, customers, students and others in the use of our systems and technologies. Through this relationship, we expect to outsource a large portion of the training in the use and operation of our systems that we currently perform.
We operate in North America and in seven countries in Europe and the Asia-Pacific region, and we distribute our products in those countries as well as in other parts of the world. Sales of our products and services outside of the U.S. are a material part of our business, and they accounted for more than 50% of our consolidated revenue in each year in the three-year period ended December 31, 2005. Revenue in countries outside of the United States accounted for 52.7%, 58.5% and 52.8% of consolidated revenue in the years ended December 31, 2005, 2004 and 2003, respectively. See Note 24 to the Consolidated Financial Statements for the year ended December 31, 2005.
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 of this Annual Report on Form 10-K, which information is incorporated herein by reference.
Financial information about geographic areas, including net sales and long-lived assets, for the years in the period ended December 31, 2005 appears in Note 24 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, which information is incorporated herein by reference.
Marketing and Customers
Our SLA ® and SLS ® systems, materials and services are sold through our direct sales organization, which is supported by our dedicated sales and service engineers and our sales application engineers worldwide. In certain areas of the world where we do not operate directly, we have appointed sales agents 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 and distributors also provide service to customers in those geographic areas.
Our InVision Ô 3-D Printers, materials and services are sold worldwide through a network of authorized distributors and resellers who are managed and directed by a dedicated team of channel sales managers.
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 model, mold and prototyping, 3-D printing and rapid manufacturing. Our sales organization is responsible for the sale of our products on a worldwide basis and for the management and co-ordination of our growing network of authorized 3-D printing resellers and certain of our other systems. Our direct sales force consists of sales persons who work throughout North America, Europe and parts of the Asia-Pacific region. Our application engineers provide professional services through pre-sales support and help 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. As of December 31, 2005, our worldwide sales, application and service staff consisted of 187 employees.
Our marketing programs also utilize seminars, trade shows, advertising, direct mailings, electronic marketing, telemarketing, literature, web presence, videos, press releases, brochures and customer and application profiles to identify prospects that match a typical user profile. We co-founded and participate
in global user groups, whose members include a substantial number of our customers. These user groups organize annual conferences in the United States, at which we make presentations relating to updates in our technologies and equipment and materials offerings and future ideas and programs we intend to pursue.
Our customers include major companies in a broad range of industries, including manufacturers of automotive, aerospace, computer, electronic, defense, education, consumer and medical 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 5% of our consolidated revenue in the year ended December 31, 2005.
Production and Supplies
In July 2004, we began to engage selected design and engineering companies to assemble our equipment portfolio. By the end of 2004, we had outsourced substantially all of our equipment assembly activities to several of these suppliers. They also carry out quality control procedures on our systems prior to their shipment to customers. As part of these activities, during 2005, those suppliers took over the responsibility of 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.
The components, parts and sub-assemblies that are used in our systems are generally available from several potential suppliers although in the past we have chosen to use only one or a limited number of suppliers for several of the major components, parts and sub-assemblies of our systems, including certain lasers and print heads. As the outsource suppliers of our systems have taken over responsibility for the supply chain of components for the systems they assemble, they have either retained our existing suppliers or with our approval chosen alternate component suppliers that are able to meet the specifications for our equipment.
Before the end of 2005, we produced the VisiJet ® materials used in certain of our InVision Ô 3-D Printers at our facilities in Grand Junction, Colorado. Late in 2005, we moved our VisiJet ® production facilities to our facilities in Marly, Switzerland, where we also produce some of our Accura ® stereolithography materials. We also have arrangements with third parties that 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.
Although there are several potential suppliers for the raw materials used in the materials and composites that we produce, we have chosen to use selected suppliers for these raw materials. If we were required in the future to enter into relationships with alternative suppliers, our cost of sales could increase and consequently our gross profit margin could decline.
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 material compliance with such regulations as currently in effect 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 on-going program of research and development to develop new systems and materials 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 ® and 3-D printing 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 $12.2 million, $10.5 million and $9.0 million in 2005, 2004 and 2003, respectively. We expect that in 2006 our annual research and development expenses will be in the range of $11.5 million to $13.0 million.
At December 31, 2005, we held 387 patents, which included 184 patents in the United States, 146 patents in Europe, 29 patents in Japan and 28 patents in other countries. At that date, we also had 142 pending patent applications, which included 53 in the United States, 43 in Japan, 37 in European countries and 9 in other countries.
The principal patents covering our stereolithography processes expire at varying times ranging from 2006 to 2022. The principal patents covering our selective laser sintering processes expire at varying times ranging from 2006 to 2024. The principal patents covering our 3-D printing processes expire at varying times ranging from 2008 to 2022.
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 that is available to us.
We believe that, while our patents and licenses provide us with a competitive advantage, our success depends primarily on our marketing and applications know-how and on our on-going 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 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. Since competition is also based upon innovations in 3-D printing, rapid prototyping and rapid manufacturing systems, our on-going research and development programs are intended to enable us to maintain technological leadership. Certain of the companies producing competing products are well established and may have greater financial resources than we have.
Our principal competitors with respect to our systems are companies that manufacture machines that 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, and plastics molding equipment, suppliers of traditional machining, milling and grinding equipment, suppliers of Fused Deposition Modeling or FDM technology, suppliers of vacuum casting equipment, and manufacturers of other stereolithography, laser sintering and three-dimensional printing systems based on various technologies. 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. 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.
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. Included among these arrangements is a license agreement that we granted to Sony Corporation with respect to our stereolithography technology in 2001, a license that we granted to EOS GmbH with respect to our selective laser sintering technology in 2004, and a license that we granted to Objet Geometries, Ltd. in 2005 with respect to certain of our patents related to 3-D printing equipment. Under certain of these licenses, we are entitled to receive royalties for the sale of licensed products in the United States. The amount of such royalties was not material to our results of operations or consolidated financial condition for the three-year period ended December 31, 2005.
A number of companies currently sell materials that either complement or 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, and through improvements to existing technologies, such as CNC and rotational molding.
At December 31, 2005, we had 351 full-time employees. None of these employees is covered by labor agreements. We believe that our relations with our employees are satisfactory.
We expect approximately 45 of our current employees from our Valencia, California and our Grand Junction, Colorado facilities either to relocate to our new headquarters and research and development facility in Rock Hill, South Carolina, or to remain in our Valencia-based advanced research facility. We are in the process of recruiting approximately 100 new employees to join us at our new Rock Hill facility. We have offered many of our current Valencia and Grand Junction employees who will not be relocating to Rock Hill the opportunity to remain with us until their jobs are relocated to South Carolina.
Our website address is www.3DSystems.com. The information contained on our website is neither a part of, nor incorporated by reference into, this Annual Report on 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 Securities and Exchange Commission.
Various of our corporate governance materials, including our Code of Conduct, Code of Ethics for Senior Financial Executives and Directors, our Corporate Governance Guidelines, the current charters of each of the committees of the Board of Directors and our charter documents and By-Laws, are also available on that website.
Item 1A. Risk Factors.
For a discussion of certain risks associated with our business, the industry in which we operate and the ownership interests of holders of our Common Stock and other equity securities, and other considerations that may affect our results of operations and financial condition, please see the section entitled Cautionary Statements and Risk Factors in Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below.
Item 1B. Unresolved Staff Comments
We have on file with the Securities and Exchange Commission a pending registration statement on Form S-3 that we filed to register for resale certain shares of our Common Stock that were issued in connection with various private placements or are issuable upon conversion of certain of our privately placed outstanding convertible securities. W e have received from the Staff of the SEC written comments pertaining to such registration statement and to certain current and periodic reports previously filed under the Exchange Act that we are in the process of responding to and resolving as part of the registration process. We believe that these unresolved comments are not material to our results of operations or financial condition. However, there can be no assurance that the Staff of the SEC will concur in our assessment.