Prospectus Summary
This summary highlights information
contained elsewhere in this prospectus. It does not contain all of the information that you should consider before making an investment decision. We urge you to read the entire prospectus carefully, including the historical consolidated financial
statements and the notes to those financial statements included in this prospectus, as well as the information included in any free writing prospectus that we have authorized for use in connection with this offering, before making an investment
decision. Please read the sections entitled Risk Factors and Forward-Looking Statements for more information about important risks that you should consider before investing in our common stock.
Overview
We are a leading online and
technology-enabled quick-turn manufacturer of custom parts for prototyping and short-run production. We provide Real Parts, Really Fast to product developers worldwide, who are under increasing pressure to bring their finished products
to market faster than their competition. We utilize computer numerical control, or CNC, machining and injection molding to manufacture custom parts for our customers. Our proprietary technology eliminates most of the time-consuming and expensive
skilled labor conventionally required to quote and manufacture parts in low volumes. Our customers conduct nearly all of their business with us over the Internet. We target our services to the millions of product developers who use three-dimensional
computer-aided design, or 3D CAD, software to design products across a diverse range of end-markets. We believe our use of advanced technology enables us to offer significant advantages at competitive prices to many product developers and is the
primary reason we have become a leading supplier of low-volume custom parts.
We believe low-volume manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering
processes required to produce custom parts. Our proprietary technology and sophisticated algorithms have enabled us to automate and integrate the majority of these activities. Our customers typically order low volumes of custom parts because they
need a prototype to confirm the form, fit and function of one or more components of a product under development, or because they need an initial supply of parts to support pilot production while their high-volume production mold is being prepared,
or because their product will only be released in a limited quantity. In each of these instances, we believe our solution provides product developers with an exceptional combination of speed, competitive pricing, ease of use and reliability that
they typically cannot find among conventional custom parts manufacturers. Our technology and manufacturing expertise enable us to ship parts in as little as one business day after receipt of a customers design submission and process a large
number of submissions. As a result of the factors described above, many of our customers tend to return to Proto Labs to meet their ongoing needs, with approximately 77%, 77%, 81%, and 85% of our revenue in 2009, 2010, 2011, and the nine months
ended September 30, 2012, respectively, derived from existing customers who had placed orders with us in prior years.
We have experienced significant growth since our inception in 1999. We have grown our total revenue from $35.9 million in
2007 to $98.9 million in 2011 and $92.4 million in the nine months ended September 30, 2012. We have grown our income from operations from $8.4 million in 2007 to $26.9 million in 2011 and $24.7 million in the nine months ended
September 30, 2012.
Our Industry and
Market Opportunity
We serve
product developers worldwide who bring new ideas to market in the form of products containing one or more custom mechanical parts. Many of these product developers use 3D CAD software to create digital models representing their custom part designs
that are then used to create physical parts for prototyping, functional testing, market evaluation or eventual production.
Custom prototype parts play a critical role in the product development process, as they provide product developers with
the ability to confirm their intended performance requirements and explore design alternatives.
1
Early in the product development process, additive rapid
prototyping processes such as stereolithography, selective laser sintering, fused deposition modeling or 3D printing can be used to quickly produce an approximate physical representation of a part, but these representations often do not meet
product developers requirements for dimensional accuracy, cosmetics and material properties. As an alternative or supplement to additive rapid prototyping, CNC machining can be used to produce low volumes of high-quality custom parts in either
metal or plastic, while for follow-on functional testing, market evaluation and production runs, plastic parts are typically manufactured using injection molding. Both CNC machining and injection molding yield a part with the look, feel and
performance of the finished product.
There are several important trends impacting product developers worldwide, including the increasing use of e-commerce to bring efficiency, collaboration and immediate access to
information, the increasing pressure to accelerate the speed with which they can bring their new products to market, and the increasing adoption of 3D CAD software to facilitate the design of custom mechanical parts.
We know of no published third-party estimates
of our specific addressable markets. Our Protomold injection molding service addresses a subset of the plastic injection molding market, which Plastics Custom Research, a market research firm, estimates was $50.3 billion in North America in 2010.
Our Firstcut CNC machining service addresses a subset of the machine shop services segment, which IBISWorld, a market research firm, estimates was $34.9 billion in the United States in 2010. In addition, according to Jon Peddie Research, a market
research firm, in December 2009 there were approximately 13 million users of CAD software worldwide, of which approximately 41%, or 5.3 million, were users of 3D CAD software. We believe a substantial portion of these 3D CAD users were
product developers working in industries we serve, although we do not serve every application within these industries. From the inception of our company in 1999 through September 30, 2012, we have filled orders for approximately 26,000 product
developers.
Our Solution
We have developed proprietary software and
advanced manufacturing processes that automate much of the skilled labor conventionally required in quoting, production engineering and manufacturing custom parts. We believe our interactive web-based interface and highly automated processes address
the desires of many product developers for a fast, efficient and competitively priced means of obtaining low-volume custom parts. Key elements of our solution include:
Sophisticated Technology that Reduces
Turnaround Time
. Our platform automates many aspects of the entire process from design submission through manufacturability analysis and feedback, quotation, order submission, mold design, tool path generation and mold or part manufacture. As a
result, in many cases we are able to quote orders in minutes and ship parts in as little as one business day.
Enhanced Customer Experience
. Our web-based customer interface provides a straightforward means of submitting 3D
CAD part designs. Our technology can quickly analyze manufacturability and in many cases provides suggested design modifications to enhance manufacturability. Our interactive quotations provide instant visibility into the impact of changing an
orders various parameters such as material, finish, quantity or shipping schedule.
Attractive Low-Volume Pricing
. Based on internal market research, we believe we generally have competitive pricing on low-volume orders. We believe this is a direct result of our
technology and the efficiency of our operations, both of which were designed specifically for low-volume production.
Scale to Process Large Numbers of Unique Part Designs
. Our proprietary, highly scalable quoting technology enables
us to quickly analyze high volumes of 3D CAD part design submissions and provide feedback to our prospective product developer customers. Our proprietary manufacturing automation technology is also highly scalable, enabling us to process large
numbers of unique designs and efficiently manufacture the related parts to meet the needs of product developers.
2
Our Competitive Advantages
We believe our leadership position is based
on a number of distinct competitive advantages:
Advanced Proprietary Technology
. Our proprietary technology automates much of the skilled labor conventionally required to quote and manufacture low-volume custom parts, including
the often time-consuming steps of design submission, manufacturability analysis and feedback, quotation, order submission, mold design, tool path generation, mold or part manufacture, and production management. We believe our competitors typically
lack the expertise and resources to develop similar technology.
Turnaround Speed
. We believe we are generally the fastest provider of low-volume custom CNC machined or injection molded parts. Our solution allows product developers to submit
designs at any time and enables us to ship parts to our customers in as little as one business day. Our competitors often require several days just to generate a price quotation and even longer if the order parameters are subsequently changed by the
product developer.
Operations
Designed for Low-Volume Manufacturing
. Unlike conventional custom parts manufacturers, our operating model is specifically designed for efficient low-volume production. Our customer interactions occur primarily online, and our proprietary
technology eliminates much of the skilled labor that typically accounts for a significant portion of the total costs in the low-volume custom parts manufacturing environment and enables us to quote many thousands of CNC machined or injection molded
part designs per month, which we believe few of our competitors can match.
Marketing and Sales Strength
. We have developed expertise in marketing to product developers, both within our existing customer companies and at companies we have not yet served. We
have also built a professionally-led international sales organization focused on quickly following up on marketing leads and quotation requests, understanding our customers internal initiatives and converting prospects into customers. We
believe that most of our competitors lack the expertise and resources to establish and maintain an organized, international program of similar scale.
Deep Industry Knowledge
. We believe that the volume of new custom part designs we process and the size and
diversity of our customer base give us unique insight into the needs of our prospective customers. This has allowed us to focus our development resources on areas that we believe represent significant opportunities for our business.
Our Growth Strategy
The principal elements of our growth
strategy are to:
Increase
Penetration of Existing Customer Companies
. We plan to expand our customer base to include more product developers within the companies that have already used our services. We believe a significant opportunity exists for us to leverage highly
satisfied product developers to encourage others within the same organization to utilize our services, and we plan to combine these word-of-mouth referrals with the efforts of our marketing and sales force to identify and market our services to the
colleagues of our existing customers.
Acquire New Customer Companies in Existing Geographic Markets
. We plan to use our marketing and sales capabilities to continue to pursue product developers within companies who have
not yet used our services. Our presence in geographic regions that have high populations of 3D CAD users provides us with a broad universe of potential new customer companies on which to focus our marketing and sales efforts.
Expand the Range of Parts We Offer
.
We regularly analyze the universe of customer design submissions that we are currently unable to manufacture and focus a significant portion of our research and development efforts on expanding the size and geometric complexity of the parts we are
able to manufacture and the diversity of materials we are able to support in order to meet the needs of a broader set of product developers and consequently convert a higher number of quotation requests into orders.
3
Introduce New Manufacturing Processes
. We seek to identify
additional manufacturing processes to which we can apply our technology and expertise to meet a greater range of product developers needs. We regularly evaluate new manufacturing processes that may attract new customers and provide us with an
opportunity to cross-sell with our existing services to our existing customer base, and we introduce such services when we are confident that a sufficient market need exists and we can offer the same advantages our customers have come to expect from
us.
Expand into New
Geographic Markets
. We believe there may be opportunities to grow by identifying and expanding into select additional geographic markets. We currently operate in the United States, Europe and Japan, where we believe a substantial portion of the
worlds product developers are located. We believe opportunities exist to serve the needs of product developers in select new geographic regions.
Capitalize on Increasing Customer Expectations for 24/7 Access to Comprehensive, User-Friendly E- Commerce
Capabilities
. We plan to further enhance the functionality and ease of use of our platform and expand the capabilities of our technology in order to further increase automation and meet the evolving needs of product developers worldwide. We will
continue to use the Internet to provide product developers with a standardized interface through which they can upload their 3D CAD models and obtain firm, interactive quotations quickly and efficiently.
Risk Factors
Our business is subject to numerous risks,
as more fully described in the section entitled Risk Factors immediately following this prospectus summary, beginning on page 9. You should read these risks before you invest in our common stock. We may be unable, for many reasons,
including those that are beyond our control, to implement our business strategy. In particular, some of the risks associated with our business include:
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the level of competition in our industry and our ability to compete;
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our ability to continue to sell to existing customers and sell to new customers;
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our ability to respond to changes in our industry;
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our ability to meet the needs of product developers;
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our ability to meet product developers expectations regarding quick turnaround time and price;
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any failure to maintain and enhance our brand;
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our ability to process a large volume of designs and identify significant opportunities in our business;
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the adoption rate of e-commerce and 3D CAD software by product developers;
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the loss of key personnel or failure to attract, integrate and retain additional personnel;
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our ability to effectively grow our business and manage our growth;
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system interruptions at our operating facilities, in particular our Maple Plain, Minnesota location;
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our ability to protect our intellectual property and not infringe others intellectual property; and
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our ability to effectively operate as a public company.
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Corporate Information
Proto Labs, Inc. was incorporated in
Minnesota in 1999. The address of our principal executive offices is 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359, and our telephone number at this address is (763) 479-3680. Our website address is www.protolabs.com. The information
contained in or that can be accessed through our website is not part of this prospectus.
4
Unless the context indicates otherwise, as used in this prospectus, the
terms Proto Labs, we, us and our refer to Proto Labs, Inc. and its subsidiaries taken as a whole.
Proto Labs
®
,
Protomold
®
, Firstcut
®
, ProtoQuote
®
, and
FirstQuote
®
are registered trademarks in the United States and certain other
countries. This prospectus also includes references to trademarks and service marks of other entities, and those trademarks and service marks are the property of their respective owners.
5
The Offering
Common stock offered by us
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100,000 shares
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Common stock offered by selling shareholders
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3,500,000 shares
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Common stock to be outstanding immediately after this offering
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24,402,437 shares
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Option to purchase additional shares
|
Certain of the selling shareholders have granted the underwriters an option to purchase up to 540,000 additional shares of our common stock. This option is exercisable, in whole
or in part, for a period of 30 days from the date of this prospectus.
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Use of proceeds
|
We intend to use the net proceeds to us from this offering to pay the expenses we will incur in connection with this offering and for working capital and general corporate
purposes. We will not receive any of the proceeds from the sale of shares by the selling shareholders. See Use of Proceeds and Principal and Selling Shareholders.
|
Risk factors
|
Investing in our common stock involves a high degree of risk. You should read the Risk Factors section of this prospectus beginning on page 9 and all of the other
information set forth in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.
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New York Stock Exchange listing
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Our common stock is listed on the New York Stock Exchange under the symbol PRLB.
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Outstanding Shares
The number of shares of our common stock
that will be outstanding immediately after this offering is based on 24,302,437 shares outstanding as of September 30, 2012, and excludes as of that date:
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1,762,841 shares of common stock issuable upon the exercise of outstanding options under our 2000 Stock Option Plan, having a weighted
average exercise price of $7.05 per share;
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239,300 shares of common stock issuable upon the exercise of outstanding options under our 2012 Long-Term Incentive Plan, having a
weighted average exercise price of $28.02 per share;
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3,872,266 additional shares of common stock reserved for future issuance under our 2012 Long-Term Incentive Plan; and
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1,500,000 additional shares of common stock reserved for future issuance under our Employee Stock Purchase Plan.
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Except as
otherwise indicated, information in this prospectus assumes no exercise of the underwriters option to purchase additional shares.
6
Summary Consolidated Financial Data
The following tables set forth our summary
consolidated financial data for the periods and at the dates indicated. The summary consolidated financial data for the years ended December 31, 2009, 2010 and 2011 and as of December 31, 2010 and 2011 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data for the nine months ended September 30, 2011 and 2012 and as of September 30, 2012 have been derived from our unaudited
consolidated financial statements included elsewhere in this prospectus.
The historical results presented below are not necessarily indicative of the results to be expected for any future period. The consolidated pro forma data are unaudited, are presented for
informational purposes only and do not purport to represent what our financial results or position actually would have been had the events so described occurred on the dates indicated or to project our financial position as of any future date. Our
unaudited consolidated financial statements for the nine months ended September 30, 2011 and 2012 have been prepared on the same basis as the annual financial statements and include all adjustments, which include only normal recurring
adjustments, necessary for fair presentation of this data in all material respects. Our operating results for interim periods are not necessarily indicative of the results that may be expected for a full-year period. This information should be read
in conjunction with Risk Factors, Selected Consolidated Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the
related notes included elsewhere in this prospectus.
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Year Ended December 31,
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Nine Months Ended
September 30,
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2009
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2010
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2011
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2011
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2012
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(unaudited)
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(in thousands, except share and per share amounts)
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Consolidated Statements of Comprehensive Income Data:
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Revenue
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$
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43,833
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$
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64,919
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$
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98,939
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$
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73,302
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$
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92,375
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Cost of revenue
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18,559
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25,443
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39,324
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28,251
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37,242
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Gross profit
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25,274
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39,476
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59,615
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45,051
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55,133
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Operating expenses:
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Marketing and sales
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8,262
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10,867
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15,752
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11,139
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13,440
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Research and development
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3,140
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4,281
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5,222
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3,639
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6,622
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General and administrative
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5,965
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7,629
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11,772
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8,297
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10,394
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Loss on impairment of foreign subsidiary assets
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773
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Total operating expenses
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17,367
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23,550
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32,746
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23,075
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30,456
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Income from operations
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7,907
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15,926
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26,869
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21,976
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24,677
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Other income (expense), net
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(517
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)
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(213
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)
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(114
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)
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18
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(90
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)
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Income before income taxes
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7,390
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15,713
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26,755
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21,994
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24,587
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Provision for income taxes
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3,167
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4,762
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8,783
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7,252
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7,957
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Net income
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4,223
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10,951
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17,972
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14,742
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16,630
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Less: dividends on redeemable preferred stock
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(4,180
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)
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(4,179
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)
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(4,179
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)
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(3,126
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)
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Less: undistributed earnings allocated to preferred shareholders
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(16
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)
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(2,377
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)
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(4,507
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)
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(3,834
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)
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Net income attributable to common shareholders
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$
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27
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$
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4,395
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$
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9,286
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$
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7,782
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$
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16,630
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Net income per share attributable to common shareholders:
(1)
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Basic
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$
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0.00
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$
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0.40
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$
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0.75
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$
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0.64
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$
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0.72
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Diluted
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$
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0.00
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$
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0.34
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$
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0.67
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$
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0.58
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$
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0.68
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Weighted average shares outstanding:
(1)
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Basic
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10,564,946
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11,079,432
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12,352,004
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12,162,808
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22,975,950
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Diluted
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13,201,762
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13,051,458
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13,939,072
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13,496,238
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24,356,785
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Pro forma net income per share (unaudited)
(1)
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Basic
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$
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0.64
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$
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0.98
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$
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0.81
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$
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0.72
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Diluted
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$
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0.58
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$
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0.90
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$
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0.76
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$
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0.68
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Pro forma weighted average shares outstanding used in computing net income per share (unaudited)
(1)
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Basic
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17,071,222
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18,343,794
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18,154,598
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22,975,950
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Diluted
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19,043,248
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19,930,862
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19,488,028
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24,356,785
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Other comprehensive income (loss), net of tax
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Foreign currency translation adjustments
|
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$
|
152
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$
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(214
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)
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$
|
(280
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)
|
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$
|
(280
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)
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$
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
4,375
|
|
|
$
|
10,737
|
|
|
$
|
17,692
|
|
|
$
|
14,462
|
|
|
$
|
16,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (unaudited)
(2)
|
|
$
|
11,059
|
|
|
$
|
20,513
|
|
|
$
|
32,263
|
|
|
$
|
25,727
|
|
|
$
|
31,419
|
|
7
Stock-based compensation expense included in the statements of
comprehensive income data above is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Stock options and grants
|
|
$
|
245
|
|
|
$
|
331
|
|
|
$
|
1,130
|
|
|
$
|
742
|
|
|
$
|
1,993
|
|
Employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
245
|
|
|
$
|
331
|
|
|
$
|
1,130
|
|
|
$
|
742
|
|
|
$
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
29
|
|
|
$
|
39
|
|
|
$
|
78
|
|
|
$
|
58
|
|
|
$
|
248
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
70
|
|
|
|
84
|
|
|
|
215
|
|
|
|
154
|
|
|
|
300
|
|
Research and development
|
|
|
53
|
|
|
|
73
|
|
|
|
274
|
|
|
|
206
|
|
|
|
346
|
|
General and administrative
|
|
|
93
|
|
|
|
135
|
|
|
|
563
|
|
|
|
324
|
|
|
|
1,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
245
|
|
|
$
|
331
|
|
|
$
|
1,130
|
|
|
$
|
742
|
|
|
$
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2011
|
|
|
As of September 30,
2012
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,135
|
|
|
$
|
36,290
|
|
Working capital
|
|
|
18,138
|
|
|
|
72,078
|
|
Total assets
|
|
|
62,326
|
|
|
|
156,921
|
|
Total liabilities
|
|
|
15,675
|
|
|
|
16,188
|
|
Redeemable convertible preferred stock and redeemable common stock
|
|
|
66,894
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
$
|
(20,243
|
)
|
|
$
|
140,733
|
|
|
(1)
|
|
See Note 3 of Notes to Consolidated Financial Statements for an explanation of the method used to calculate net income per basic and diluted share
attributable to common shareholders, unaudited pro form net income per basic and diluted share and the related weighted average shares outstanding for the years ended December 31, 2010 and 2011 and the nine months ended September 30, 2011
and 2012, respectively.
|
|
(2)
|
|
We define adjusted EBITDA as net income, plus provision for income taxes, other expense, net, depreciation and amortization, loss on impairment of
foreign subsidiary assets and stock-based compensation. See Selected Consolidated Financial DataAdjusted EBITDA for more information and for a reconciliation of adjusted EBITDA to net income, the most directly comparable measure
calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.
|
8
Risk Factors
Investing in our common stock involves a
high degree of risk. You should carefully consider each of the following risk factors and all of the other information set forth in this prospectus, including our consolidated financial statements and related notes, before investing in our common
stock. The following risks and the risks described elsewhere in this prospectus, including in the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations, could materially harm our
business, prospects, financial condition, future results and cash flow. If that occurs, the trading price of our common stock could decline, and you could lose all or part of your investment.
Risks Relating to Our Business
We face significant competition and expect to face
increasing competition in many aspects of our business, which could cause our operating results to suffer.
The market for low-volume custom parts manufacturing is fragmented, highly competitive and subject to rapid and
significant technological change. We compete for customers with a wide variety of custom parts manufacturers and methods. Some of our current and potential competitors include captive in-house services, other custom manufacturers, and alternative
manufacturing vendors such as those utilizing stereolithography, selective laser sintering, fused deposition modeling and 3D printing. Moreover, some of our existing and potential competitors are researching, designing, developing and marketing
other types of products and services. We also expect that future competition may arise from the development of allied or related techniques for custom parts manufacturing 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 technologies. And our competitors may attempt to adopt and improve upon key aspects of our business model, such as development of technology that
automates much of the manual labor conventionally required to quote and manufacture low-volume custom parts, implementation of interactive web-based and automated user interface and quoting systems and/or building scalable operating models
specifically designed for efficient low-volume production. Third-party CAD software companies may develop software that mold-makers, injection molders and CNC machine shops could use to compete with our business model. Additive manufacturers may
develop stronger, higher temperature resins or introduce other improvements that could more effectively compete with us on part quality. We may also, from time to time, establish alliances or relationships with other competitors or potential
competitors. To the extent companies terminate such relationships and establish alliances and relationships with our competitors, our business could be harmed.
Existing and potential competitors may have substantially greater financial, technical, sales and marketing,
manufacturing, distribution and other resources and name recognition than us, as well as experience and expertise in intellectual property rights and operating within certain international locations, any of which may enable them to compete
effectively against us.
Though we
plan to continue to expend resources to develop new technologies, processes and services, we cannot assure you that we will be able to maintain our current position or continue to compete successfully against current and future sources of
competition. Our challenge in developing new services is finding services for which our automated quotation and manufacturing processes offer an attractive value proposition, and we may not be able to find any new services with potential economies
of scale similar to our molding and machining services. If we do not keep pace with technological change and introduce new technologies, processes and services, the demand for our products and services may decline and our operating results may
suffer.
Our success depends on our ability
to deliver products and services that meet the needs of product developers and to effectively respond to changes in our industry.
We derive almost all of our revenue from the manufacture and sale to product developers of quick-turn low volumes of
custom parts for prototyping, support of internal manufacturing and limited quantity product release. Our business has been and we believe will continue to be affected by changes in product developer requirements
9
and preferences, rapid technological change, new product and service introductions and the emergence of new standards and practices, any of which could render our technology, products and
services less attractive, uneconomical or obsolete. To the extent that our customers need for quick-turn parts decreases for any reason, it would likely have a material adverse affect on our business and operating results and harm our
competitive position. In addition, CAD simulation and other technologies may reduce the demand for physical prototype parts. Therefore, we believe that to remain competitive, we must continually expend resources to enhance and improve our
technology, product offerings and services.
In particular, we plan to increase our research and development efforts and to continue to focus a significant portion of those efforts to further develop our technology in areas such as
our interactive user interface and manufacturing processes, potentially introduce new manufacturing processes within the research and development initiative we refer to as Protoworks, and broaden the range of parts that we are able to manufacture.
We believe successful execution of this part of our business plan is critical for our ability to compete in our industry and grow our business, and there are no guarantees we will be able to do so in a timely fashion, or at all. Broadening the range
of parts we offer is of particular importance since limitations in manufacturability are the primary reason we are not able to fulfill many quotation requests. There are no guarantees that the resources devoted to executing on this aspect of our
business plan will improve our business and operating results or result in increased demand for our products and services. Failures in this area could adversely impact our operating results and harm our reputation and brand. And even if we are
successful in executing in these areas, our industry is subject to rapid and significant technological change, and our competitors may develop new technologies, processes and services that are superior to ours.
Any failure to properly meet the needs of
product developers or respond to changes in our industry on a cost-effective and timely basis, or at all, would likely have a material adverse affect on our business and operating results and harm our competitive position.
Our failure to meet our product developers
expectations regarding quick turnaround time would adversely affect our business and results of operations.
We believe many product developers are facing increased pressure from global competitors to be first to market with their
finished products, often resulting in a need for quick turnaround of custom parts. We believe our ability to quickly quote, manufacture and ship custom parts has been an important factor in our results to date. There are no guarantees we will be
able to meet product developers increasing expectations regarding quick turnaround time, especially as we increase the scope of our operations. If we fail to meet our customers expectations regarding turnaround time in any given period,
our business and results of operations will likely suffer.
Our failure to meet our product developers price expectations would adversely affect our business and results of operations.
Demand for our services is sensitive to
price. We believe our competitive pricing has been an important factor in our results to date. Therefore, changes in our pricing strategies can have a significant impact on our business and ability to generate revenue. Many factors, including our
production and personnel costs and our competitors pricing and marketing strategies, can significantly impact our pricing strategies. If we fail to meet our customers price expectations in any given period, demand for our products and
services could be negatively impacted and our business and results of operations could suffer.
The strength of our brand is important to our business, and any failure to maintain and enhance our brand would hurt our ability to retain and expand our customer base as well as
further penetrate existing customers.
Since our products and services are sold primarily through our websites, the success of our business depends upon our ability to attract new and repeat customers to our websites in order
to increase business and grow our revenue. Customer awareness of, and the perceived value of, our brand will depend largely on the success of our marketing efforts, as well as our ability to consistently provide quality custom parts within the
required timeframes and positive customer experiences, which we may not do successfully. A primary component of our
10
business strategy is the continued promotion and strengthening of our brand, and we have incurred and plan to continue to incur substantial expense related to advertising and other marketing
efforts directed toward enhancing our brand. We have initiated marketing efforts through social media, but this method of marketing may not be successful and subjects us to a greater risk of inconsistent messaging and bad publicity. We may choose to
increase our branding expense materially, but we cannot be sure that this investment will be profitable. If we are unable to successfully maintain and enhance our brand, this could have a negative impact on our business and ability to generate
revenue.
Our business depends in part on
our ability to process a large volume of new part designs from a diverse group of product developers and successfully identify significant opportunities for our business based on those submissions.
We believe the volume of new part designs we
process and the size and diversity of our customer base give us valuable insight into the needs of our prospective customers. We utilize this industry knowledge to determine where we should focus our development resources. If the number of new part
designs we process or the size and diversity of our customer base decrease, our ability to successfully identify significant opportunities for our business and meet the needs of product developers could be negatively impacted. In addition, even if
we do continue to process a large number of new part designs and work with a significant and diverse customer base, there are no guarantees that any industry knowledge we extract from those interactions will be successfully utilized to help us
identify significant business opportunities or better understand the needs of product developers.
The loss of one or more key members of our management team or personnel, or our failure to attract, integrate and retain additional personnel in the future, could harm our business
and negatively affect our ability to successfully grow our business.
We are highly dependent upon the continued service and performance of the key members of our management team and other personnel. The loss of any of these individuals, each of whom is
at will and may terminate his or her employment relationship with us at any time, could disrupt our operations, harm our reputation and brand, and significantly delay or prevent the achievement of our business objectives. Moreover, some
of the members of our management are new to our team. We believe that our future success will also depend in part on our continued ability to identify, hire, train and motivate qualified personnel. We conduct our operations in the United States at
our facilities located in the greater metropolitan areas of Minneapolis and St. Paul, Minnesota. A possible shortage of qualified individuals in this region might require us to pay increased compensation to attract and retain key employees,
thereby increasing our costs. In addition, we face intense competition for qualified individuals from numerous companies, many of whom have substantially greater financial and other resources and name recognition than us. We may be unable to attract
and retain suitably qualified individuals who are capable of meeting our growing operational, managerial and other requirements, or we may be required to pay increased compensation in order to do so. Our failure to attract, hire, integrate and
retain qualified personnel could impair our ability to achieve our business objectives.
If we fail to grow our business as anticipated, our net sales and profitability will be adversely affected.
We are attempting to grow our business substantially. To this end, we have made and expect to
continue to make significant investments in our business, including investments in our infrastructure, technology, and sales and marketing efforts. These investments include dedicated facilities expansion and increased staffing, both domestic and
international. If our business does not generate the level of revenue required to support our investment, our net sales and profitability will be adversely affected.
If we are unable to manage our growth and expand our
operations successfully, our reputation and brand may be damaged, and our business and results of operations may be harmed.
Over the past several years, we have experienced rapid growth. For example, we have grown from approximately 230 full-time
employees as of January 1, 2008 to 610 full-time employees as of September 30, 2012. We have expanded internationally, including establishing manufacturing operations in Europe in 2005 and
11
in Japan in late 2009. In 2011, we added a number of key individuals to our organization. We expect this growth to continue and accelerate and the number of countries and facilities from which we
operate to continue to increase in the future. Our ability to effectively manage our anticipated growth and expansion of our operations will require us to do, among other things, the following:
|
|
|
enhance our operational, financial and management controls and infrastructure, human resource policies, and reporting systems and
procedures, in particular as we continue our transition as a public company;
|
|
|
|
effectively scale our operations, including accurately predicting the need for additional staffing;
|
|
|
|
successfully identify, recruit, hire, train, maintain, motivate and integrate additional employees;
|
|
|
|
expand our international resources; and
|
|
|
|
expand our facilities and equipment.
|
These enhancements and improvements will
require significant capital expenditures and allocation of valuable management and employee resources. And our growth, combined with the geographical dispersion of our operations, has placed, and will continue to place, a strain on our operational,
financial and management infrastructure. Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth and expansion. There are no guarantees we will be
able to do so in an efficient or timely manner, or at all. Our failure to effectively manage growth and expansion could have a material adverse effect on our business, results of operations, financial condition, prospects, and reputation and brand,
including impairing our ability to perform to our customers expectations.
We may not timely and effectively scale and adapt our existing technology, processes and infrastructure to meet the needs of our business.
A key element to our continued growth is the
ability to quickly and efficiently quote an increasing number of product developer submissions across geographies and to manufacture the related parts. This will require us to timely and effectively scale and adapt our existing technology, processes
and infrastructure to meet the needs of our business. With respect to our websites and quoting technology, it may become increasingly difficult to maintain and improve their performance, especially during periods of heavy usage and as our solutions
become more complex and our user traffic increases across geographies. Similarly, our manufacturing automation technology may not enable us to process the large numbers of unique designs and efficiently manufacture the related parts in a timely
fashion to meet the needs of product developers as our business continues to grow. Any failure in our ability to timely and effectively scale and adapt our existing technology, processes and infrastructure could negatively impact our ability to
retain existing customers and attract new customers, damage our reputation and brand, result in lost revenue, and otherwise substantially harm our business and results of operations.
If we are unable to maintain our gross margin from sales of our products, our profitability will be
adversely affected.
Our
current business plan entails increasing our sales and the scope of our operations while maintaining relatively high gross margin. However, there is no guarantee we will be successful in doing so. Pricing pressure could require us to lower the
prices we charge our customers. A number of factors may increase our direct costs. Any inability to maintain our gross margin will have an adverse effect on our profitability and may result in a decrease in our stock price.
Numerous factors may cause us not to maintain the
revenue growth that we have historically experienced.
Although our revenue has grown from $35.9 million for the year ended December 31, 2007 to $98.9 million for the year ended December 31, 2011, we likely will not be able to
maintain our historical rate of revenue growth. We believe that our continued revenue growth will depend on many factors, a number of which are out of our control, including among others, our ability to:
|
|
|
retain and further penetrate existing customer companies, as well as attract new customer companies;
|
12
|
|
|
consistently execute on custom part orders in a manner that satisfies product developers needs and provides them with a superior
experience;
|
|
|
|
continually develop new technologies or manufacturing processes, and broaden the range of parts we offer;
|
|
|
|
successfully execute on our international strategy and expand into new geographic markets;
|
|
|
|
capitalize on product developer expectations for access to comprehensive, user-friendly e-commerce capabilities 24 hours per day/7 days
per week;
|
|
|
|
increase the strength and awareness of our brand across geographies;
|
|
|
|
respond to changes in product developer needs, technology and our industry; and
|
|
|
|
react to challenges from existing and new competitors.
|
We cannot assure you that we will be successful in continuing to grow our business and revenue,
and in addressing the factors above.
Our
operating results and financial condition may fluctuate on a quarterly and annual basis.
Our operating results and financial condition may fluctuate from quarter to quarter and year to year, and are likely to continue to vary due to a number of factors, some of which are
outside of our control. And our actual or projected operating results may fail to match our past performance. These events could in turn cause the market price of our common stock to fluctuate. If our operating results do not meet the expectations
of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline.
Our operating results and financial condition may fluctuate due to a number of factors,
including those listed below and those identified throughout this Risk Factors section:
|
|
|
the development of new competitive systems or processes by others;
|
|
|
|
the entry of new competitors into our market whether by established companies or by new companies;
|
|
|
|
changes in the size and complexity of our organization, including our international operations;
|
|
|
|
levels of sales of our products and services to new and existing customers;
|
|
|
|
the geographic distribution of our sales;
|
|
|
|
changes in product developer preferences or needs;
|
|
|
|
changes in the amount that we invest to develop, acquire or license new technologies and processes, which we anticipate will generally
increase and may fluctuate in the future;
|
|
|
|
delays between our expenditures to develop, acquire or license new technologies and processes, and the generation of sales related
thereto;
|
|
|
|
our ability to timely and effectively scale our business during periods of sequential quarterly or annual growth;
|
|
|
|
limitations or delays in our ability to reduce our expenses during periods of declining sequential quarterly or annual revenue;
|
|
|
|
changes in our pricing policies or those of our competitors, including our responses to price competition;
|
|
|
|
changes in the amount we spend in our marketing and other efforts;
|
13
|
|
|
unexpected increases in expenses as compared to our related accounting accruals or operating plan;
|
|
|
|
the volatile global economy;
|
|
|
|
general economic and industry conditions that affect customer demand and product development trends;
|
|
|
|
interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing
processes or other operations;
|
|
|
|
changes in accounting rules and tax and other laws; and
|
|
|
|
plant shutdowns due to a health pandemic or weather conditions (for example, our Maple Plain, Minnesota facilities shut down for three
days in December 2010 due to snow storms).
|
Due to all of the foregoing factors and the other risks discussed in this Risk Factors section, you should not rely on quarter-to-quarter or year-to-year comparisons of our
operating results as an indicator of future performance.
Interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes or other operations could damage our
reputation and brand and substantially harm our business and results of operations.
The satisfactory performance, reliability, consistency, security and availability of our websites and interactive user interface, information technology systems, manufacturing processes
and other operations are critical to our reputation and brand, and our ability to effectively service product developers. Any interruptions or other problems that cause any of our websites, interactive user interface or information technology
systems to malfunction or be unavailable, or negatively impact our manufacturing processes or other operations, may damage our reputation and brand, result in lost revenue, cause us to incur significant costs seeking to remedy the problem and
otherwise substantially harm our business and results of operations.
A number of factors or events could cause such interruptions or problems, including among others: human and software errors, design faults, challenges associated with upgrades, changes or
new facets of our business, power loss, telecommunication failures, fire, flood, extreme weather, political instability, acts of terrorism, war, break-ins and security breaches, contract disputes, labor strikes and other workforce related issues,
capacity constraints due to an unusually large number of product developers accessing our websites or ordering parts at the same time, and other similar events. These risks are augmented by the fact that our customers come to us largely for our
quick-turn manufacturing capabilities and that accessibility and turnaround speed are often of critical importance to these product developers. We are dependent upon our facilities through which we satisfy all of our production demands and in which
we house all of the computer hardware necessary to operate our websites and systems as well as managerial, customer service, sales, marketing and other similar functions, and we have not identified alternatives to these facilities or established
fully redundant systems in multiple locations. We have back-up computing systems for our United States and Japanese operations, but we only have one computing system in the United Kingdom. In the event of a significant shutdown of our United Kingdom
computing system, manufacturing operations in the United Kingdom could be affected for an extended period, delaying shipments and adversely affecting our operating results. In addition, we are dependent in part on third parties for the
implementation and maintenance of certain aspects of our communications and production systems, and therefore preventing, identifying and rectifying problems with these aspects of our systems is to a large extent outside of our control.
Moreover, the business interruption insurance
that we carry may not be sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business, that may result from interruptions in our service as a result of system failures.
14
Global economic conditions may harm our ability to do business, increase our costs and
negatively affect our stock price.
We believe the global recession in 2008 and 2009 was a major factor in our revenue decreasing 1.4% and our income from operations decreasing 25.8% in 2009 compared to 2008. Though we
believe that we are emerging from this global recession, which caused failures of financial institutions and led to government intervention in the United States, Europe, Asia and other regions of the world, we currently face additional global
challenges, including those associated with rising government debt levels in a number of countries. The prospects for economic growth in the United States and other countries remain uncertain and could worsen. Economic concerns and other issues such
as reduced access to capital for businesses may cause product developers to further delay or reduce the product development projects that our business supports. Given the continued uncertainty concerning the global economy, we face risks that may
arise from financial difficulties experienced by our suppliers and product developers and other related risks to our business.
We operate a global business that exposes us to additional risks.
We have established our operations in the United States, Europe and Japan and are seeking to
further expand our international operations. As of September 30, 2012, we had sold products into more than 50 countries. In addition to English, our website is available in British English, French, German, Italian, Japanese and Spanish. Our
international revenue accounted for approximately 26% of our total revenue in each of the years ended December 31, 2010 and 2011, and 25% and 24%, respectively, in the nine months ended September 30, 2011 and 2012. The future growth and
profitability of our international business is subject to a variety of risks and uncertainties. Many of the following factors have adversely affected our international operations and sales to customers located outside of the United States and may
again in the future:
|
|
|
difficulties in staffing and managing foreign operations, particularly in new geographic locations;
|
|
|
|
challenges in providing solutions across a significant distance, in different languages and among different cultures;
|
|
|
|
rapid changes in government, economic and political policies and conditions, political or civil unrest or instability, terrorism or
epidemics, and other similar outbreaks or events;
|
|
|
|
fluctuations in foreign currency exchange rates;
|
|
|
|
differences in product developer preferences and means of procuring parts;
|
|
|
|
compliance with and changes in foreign laws and regulations, as well as U.S. laws affecting the activities of U.S. companies abroad,
including those associated with export controls, tariffs and embargoes, other trade restrictions and antitrust and data privacy concerns;
|
|
|
|
different, complex and changing laws governing intellectual property rights, sometimes affording companies lesser protection in certain
areas;
|
|
|
|
lower levels of use of the Internet or 3D CAD software;
|
|
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seasonal reductions in business activity in certain parts of the world, particularly during the summer months in Europe;
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higher costs of doing business internationally;
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interruptions resulting from any events affecting raw material supply or manufacturing capabilities abroad;
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protectionist laws and business practices that favor local producers and service providers;
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restrictions imposed by local labor practices and laws on our business and operations;
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workforce uncertainty in countries where labor unrest is more common than in the United States;
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transportation delays; and
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increased payment risk and higher levels of payment fraud.
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Our business depends on product developers demand for our services, the general economic
health of current and prospective customers, and companies desire or ability to make investments in new products. A deterioration of global, regional or local political, economic or social conditions could affect potential customers in ways
that reduce demand for our services, disrupt our manufacturing and sales plans and efforts or otherwise negatively impact our business. Acts of terrorism, wars, public health issues and increased energy costs could disrupt commerce in ways that
could impair our ability to get products to our customers and increase our manufacturing and delivery costs. We have not undertaken hedging transactions to cover our foreign currency exposure, and changes in foreign currency exchange rates may
negatively impact reported revenue and expenses. In addition, our sales are often made on unsecured credit terms, and a deterioration of political, economic or social conditions in a given country or region could reduce or eliminate our ability to
collect accounts receivable in that country or region. In any of these events, our results of operations could be materially and adversely affected.
We face risks in connection with changes in energy expenses and availability.
We depend on various energy products in
processes used in our business. Generally, we acquire energy 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 services 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
energy-related expenses increase, both as a result of higher costs of producing, and potentially lower profit margins in selling, our services and because increased energy costs may cause our customers to delay or reduce the product development
projects that our business supports. In addition, events impacting the availability of energy required to operate our business, such as the recent earthquakes and tsunami in Japan, could disrupt our business and negatively impact our operating
results.
If a natural or man-made disaster
strikes any of our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales will decline.
We manufacture all of our products in six manufacturing facilities, three of which are located in Maple Plain, Minnesota
and one of which is located in each of Rosemount, Minnesota, Telford, United Kingdom, and Yamato-Shi, Kanagawa, Japan. These facilities and the manufacturing equipment we use would be costly to replace and could require substantial lead time to
repair or replace. Our facilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes, floods, tornadoes, fires, tsunamis and nuclear disasters. Our Maple Plain facilities are within 25 miles of a nuclear power
plant in Monticello, Minnesota and could be affected by an evacuation or accident at such plant. Recently, the earthquakes and tsunami and subsequent problems affecting nuclear power plants in Japan have dramatically impacted Japans
manufacturing capacity and business activities. These events impacted our operations in Japan. The long-term effect of these events is still uncertain, and we may continue to experience operational challenges in Japan. In addition, if these
circumstances should worsen, our business plan and future revenue and profitability could be further negatively affected.
In the event any of our facilities are affected by a disaster, we may:
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be unable to meet the shipping deadlines of our customers;
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experience disruptions in our ability to process submissions and generate quotations, manufacture and ship parts, provide sales and
marketing support and customer service, and otherwise operate our business, any of which could negatively impact our business;
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be forced to rely on third-party manufacturers;
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need to expend significant capital and other resources to address any damage caused by the disaster; and
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lose customers and we may be unable to regain those customers thereafter.
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Although we possess insurance for damage to
our property and the disruption of our business from casualties, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
We depend on the continued growth of product
developers e-commerce expectations when working with their custom parts manufacturers and their migration from 2D to 3D CAD software.
The business of selling custom parts over the Internet via an interactive web-based and automated user interface and
quoting system is not widespread in our industry. Moreover, many product developers still utilize 2D CAD software. Concerns about privacy and technological and other problems may discourage some product developers from adopting the Internet as the
medium for procuring their custom parts or adopting 3D CAD software, particularly in countries where e-commerce and 3D CAD software are not as prevalent as they are in our current markets or with product developers in industries not well suited to
utilize our services, such as architecture. In order to expand our customer base, we must appeal to and procure customers who historically have used more traditional means of commerce and/or 2D CAD drawings to purchase their customer parts. If
product developers are not sufficiently attracted to the value proposition of or satisfied with our web-based interface and quotation system, or product developers do not continue to migrate to 3D CAD software as we currently anticipate, our
business could be adversely impacted.
If
our present single or limited source suppliers become unavailable or inadequate, our customer relationships, results of operations and financial condition may be adversely affected.
We acquire substantially all of the manufacturing equipment and certain of our materials that
are critical to the ongoing operation and future growth of our business from just a few third parties. We do not have long-term supply contracts with any of our suppliers and operate on a purchase-order basis. While most manufacturing equipment and
materials for our products are available from multiple suppliers, certain of those items are only available from single or limited sources. Should any of our present single or limited source suppliers for manufacturing equipment or materials become
unavailable or inadequate, or impose terms unacceptable to us such as increased pricing terms, we could be required to spend a significant amount of time and expense to develop alternate sources of supply, and we may not be successful in doing so on
terms acceptable to us, or at all. Natural disasters, such as hurricanes, may affect our supply of materials, particularly resins, from time to time, and we may purchase larger amounts of certain materials in anticipation of future shortages or
increases in pricing. For instance, we purchased a two-year supply of carbide blanks, which are used to manufacture end mills used in our CNC machining equipment, because tungsten, a component of carbide, is expected to be in low supply globally for
approximately two years. In the third and fourth quarters of 2011, we placed orders totaling approximately $1.3 million for two years worth of carbide blanks, based on projections at that time, to try to ensure that we have a continuous supply
of end mills, but we may still run short and be required to purchase carbide blanks on the open market at likely much higher prices. In addition, if we were unable to find a suitable supplier for a particular type of manufacturing equipment or
material, we could be required to modify our existing business processes and offerings to accommodate the situation. As a result, the loss of a single or limited source supplier could adversely affect our relationship with our customers and our
results of operations and financial condition.
Our business depends on the development and maintenance of the Internet infrastructure.
The success of our services will depend
largely on the development and maintenance of the Internet infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, and security, as well as timely development of complementary products, for
providing reliable Internet access
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and services. The Internet has experienced, and is likely to continue to experience, significant growth in the numbers of users and amount of traffic. The Internet infrastructure may be unable to
support such demands. In addition, increasing numbers of users, increasing bandwidth requirements, or problems caused by viruses, worms, malware and similar programs may harm the performance of the Internet. The backbone
computers of the Internet have been the targets of such programs. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and it could face outages and delays in the future. These
outages and delays could reduce the level of Internet usage generally as well as the level of usage of our services, which could adversely impact our business.
If the security of our customers confidential information stored in our systems is breached or otherwise subjected to
unauthorized access, our reputation or brand may be harmed, and we may be exposed to liability.
Our system stores, processes and transmits our customers confidential information, including the intellectual
property in their part designs, credit card information and other sensitive data. We rely on encryption, authentication and other technologies licensed from third parties, as well as administrative and physical safeguards, to secure such
confidential information. Any compromise of our information security could damage our reputation and brand and expose us to a risk of loss, costly litigation and liability that would substantially harm our business and operating results. We may not
have adequately assessed the internal and external risks posed to the security of our companys systems and information and may not have implemented adequate preventative safeguards or take adequate reactionary measures in the event of a
security incident. In addition, most states have enacted laws requiring companies to notify individuals and often state authorities of data security breaches involving their personal data. These mandatory disclosures regarding a security breach
often lead to widespread negative publicity, which may cause our existing and prospective customers to lose confidence in the effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputation and
brand and could cause the loss of customers.
We may not be able to adequately protect or enforce our intellectual property rights, which could impair our competitive position.
Our success and future
revenue growth will depend, in part, on our ability to protect our intellectual property. We rely primarily on patents, licenses, trademarks and trade secrets, as well as non-disclosure agreements and other methods, to protect our proprietary
technologies and processes globally. Despite our efforts to protect our proprietary technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes. We
cannot assure you that any of our existing or future patents will not be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide us with meaningful protection. We may not be able to obtain foreign
patents corresponding to our United States patents. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents and other intellectual property do not adequately protect our technology, our
competitors may be able to offer services similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents. Any of the foregoing events would lead to increased competition and lower revenue
or gross margin, which would adversely affect our net income.
We may be subject to infringement claims.
We may be subject to intellectual property infringement claims from individuals, vendors and other companies who have
acquired or developed patents in the fields of CNC machining, injection molding or part production for purposes of developing competing products or for the sole purpose of asserting claims against us. Any claims that our products or processes
infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwise impair our
ability to commercialize new or existing products. If we are unable to effectively defend our processes, our market share, sales and profitability could be adversely impacted.
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Our failure to expand our intellectual property portfolio could adversely affect the
growth of our business and results of operations.
Expansion of our intellectual property portfolio is one of the available methods of growing our revenue and our profits. This involves a complex and costly set of activities with uncertain
outcomes. Our ability to obtain patents and other intellectual property can be adversely affected by insufficient inventiveness of our employees, by changes in intellectual property laws, treaties, and regulations, and by judicial and administrative
interpretations of those laws treaties and regulations. Our ability to expand our intellectual property portfolio could also be adversely affected by the lack of valuable intellectual property for sale or license at affordable prices. There is no
assurance that we will be able to obtain valuable intellectual property in the jurisdictions where we and our competitors operate or that we will be able to use or license that intellectual property.
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 and reputation and brand.
The prototype parts we manufacture and the parts we manufacture in low volumes may contain undetected defects or errors
that are not discovered until after the products have been installed and used by customers. This could result in claims from customers or others, damage to our business and reputation and brand, 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, 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 and reputation and brand, and cause us to fail to retain existing customers or to fail to attract new customers.
Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by
us to comply with these regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the
Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy,
data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of
products and services. It is not clear how existing laws governing issues such as property use and ownership, sales and other taxes, fraud, libel and personal privacy apply to the Internet and e-commerce, especially where these laws were adopted
prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. Those laws that do reference the Internet are being interpreted by the courts and their applicability and reach are
therefore uncertain. The costs of compliance with these regulations may increase in the future as a result of changes in the regulations or the interpretation of them. Further, any failures on our part to comply with these regulations may subject us
to significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may substantially harm our business and results of operations.
Changes in, or interpretation of, tax rules and
regulations may impact our effective tax rate and future profitability.
We are a United States based, multinational company subject to tax in multiple United States and foreign tax jurisdictions. Our future effective tax rates could be adversely affected by
changes in statutory tax rates or interpretation of tax rules and regulations in jurisdictions in which we do business, changes in the amount of
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revenue or earnings in the countries with varying statutory tax rates, or by changes in the valuation of deferred tax assets and liabilities.
In addition, we are subject to audits and
examinations of previously filed income tax returns by the Internal Revenue Service, or IRS, and other domestic and foreign tax authorities. We regularly assess the potential impact of such examinations to determine the adequacy of our provision for
income taxes and have reserved for potential adjustments that may result from the current examinations. We believe such estimates to be reasonable; however, there is no assurance that the final determination of any examination will not have an
adverse effect on our operating results and financial position.
We do not collect state sales, use or other taxes in all states in which we conduct business, which could subject us to liability for past sales and any imposition of an obligation
to do so in the future could negatively impact our financial results.
We do not collect sales, use, or other state or local taxes on all sales of goods shipped to customers located in the United States. We interpret existing judicial rulings to prohibit
states in which we are not physically present, and local tax jurisdictions located in such states, from imposing upon us a requirement to collect sales and use taxes. If our interpretation is not correct, or if legislation or future judicial rulings
alter the law, including bills currently pending in the United States Congress, then we could be required to collect sales and use taxes in the future from all customers. In some cases such obligations could be retroactive. Currently, our customers
may be obligated to file a use tax return and pay use tax on taxable purchases of items that we sell when we do not collect the tax. However, it may often be the case that use tax returns are not filed. Thus, if we were required to collect the tax,
our customers might perceive the tax to be in the nature of a price increase, which would negatively impact our sales. Collecting the tax would also impose additional administrative burdens on us.
We may require additional capital to support business
growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to complement our growth
strategy, increase market share in our current markets or expand into other markets, or broaden our technology, intellectual property or service capabilities. Accordingly, we may need to engage in equity or debt financings to secure additional
funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges
superior to those of holders of our common stock. Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult
for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or
financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.
Any acquisition, strategic relationship, joint venture
or investment could disrupt our business and harm our operating results and financial condition.
Our business and our customer base have been built primarily through organic growth. However, from time to time, we may
selectively pursue acquisitions, strategic relationships, joint ventures or investments that we believe may allow us to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our
technology, intellectual property or service capabilities. We cannot forecast the number, timing or size of such transactions, or the effect that any such transactions might have on our operating or financial results. We have very limited experience
engaging in these types of transactions. And such
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transactions may be complex, time consuming and expensive, and may present numerous challenges and risks including:
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an acquired company, asset or technology not furthering our business strategy as anticipated;
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difficulties entering and competing in new product or geographic markets and increased competition, including price competition;
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integration challenges;
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challenges in working with strategic partners and resolving any related disagreements or disputes;
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overpayment for a company, asset or technology, or changes in the economic or market conditions or assumptions underlying our decision
to make an acquisition;
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significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated
with acquired businesses, assets or technologies; and
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requirements to record substantial charges and amortization expense related to certain purchased intangible assets, deferred stock
compensation and other items, as well as other charges or expenses.
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Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions, strategic relationships, joint ventures or investments after we have expended
resources on them, as well as divert our managements attention. And any failure to successfully address these challenges or risks could disrupt our business and harm our operating results and financial condition. Moreover, any such transaction
may not be viewed favorably by investors or analysts.
In addition, from time to time we may enter into negotiations for acquisitions, relationships, joint ventures or investments that are not ultimately consummated. These negotiations could
result in significant diversion of management time, as well as substantial out-of-pocket costs.
We rely on third parties for certain key services.
We rely on third-party service providers for shipment and certain other services critical to our business, including our
phone system and maintenance of our CNC milling machines. If these third parties experience difficulty meeting our requirements or standards, it could damage our reputation and brand, or make it difficult for us to operate some aspects of our
business. In addition, if such third parties were to cease operations, temporarily or permanently, face financial distress or other business disruption, we could suffer increased costs and delays in our ability to operate our business until an
equivalent provider could be found or we could develop replacement technology or operations, and there is no assurance that we would be able to do so on acceptable financial terms, or at all. In addition, if we are unsuccessful in choosing high
quality partners or we ineffectively manage these partners, it could have an adverse impact on our business and financial performance.
We depend in part on licenses of technologies from third parties in order to deliver our solutions, and, as a result, our business
is dependent in part on the availability of such licenses on commercially reasonable terms.
We currently, and will continue to, license certain technologies from third parties. We cannot be certain that these
third-party content licenses will be available to us on commercially reasonable terms or that we will be able to successfully integrate the technology into our solutions. These third-party in-licenses may expose us to increased risk, including risks
associated with the assimilation of new technology sufficient to offset associated acquisition and maintenance costs. The inability to obtain any of these licenses could result in delays in solution development until equivalent technology can be
identified and integrated. Any such delays in services could cause our business, operating results and financial condition to suffer.
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Our business involves the use of hazardous materials, and we and our suppliers must
comply with environmental laws and regulations, which can be expensive and restrict how we do business.
Our business involves the controlled storage, use and disposal of hazardous materials. We and our suppliers are subject to
federal, state and local as well as foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures utilized by us and our suppliers for
handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal or
foreign authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage. If we are subject to any liability as a result of activities involving hazardous
materials, our business and financial condition may be adversely affected and our reputation and brand may be harmed.
If we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the parts we
manufacture, our business, financial condition or operating results could be harmed.
As a manufacturer of CNC machined and injection molded custom parts, we are required to meet certain regulatory standards, including International Organization for Standardization, or ISO,
9001:2008 for our manufacturing facilities in Minnesota. If any regulatory inspection reveals that we are not in compliance with applicable standards, regulators may take action against us, including issuing a warning letter, imposing fines on us,
requiring a recall of the parts we manufactured or closing our manufacturing facilities. If any of these actions were to occur, it could harm our reputation as well as our business, financial condition and operating results. In addition, we may need
to obtain additional certifications in the future and there are no guarantees we would be able to do so on a timely basis, if at all. Moreover, obtaining and maintaining required regulatory certifications can be costly and divert managements
attention.
We are subject to
payment-related risks.
We accept payments using a variety of methods, including credit card, customer invoicing, physical bank check and payment
upon delivery. As we offer new payment options to our customers, we may be subject to additional regulations, compliance requirements and fraud risk. For certain payment methods, including credit and debit cards, we pay interchange and other fees,
which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards or electronic checks, and it could disrupt our
business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or
be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from
our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.
Risks Relating to this Offering and Ownership of Our
Common Stock
Our principal existing
shareholders will continue to own a large percentage of our voting stock after this offering, which may allow them to collectively control substantially all matters requiring shareholder approval.
As of September 30, 2012, our principal
existing shareholders beneficially owned approximately 14.5 million shares, or 59.8% of our capital stock outstanding as of such date. Upon the completion of this offering, based on the number of shares outstanding on September 30, 2012
and assuming no exercise of the underwriters option to purchase additional shares, our principal existing shareholders will beneficially own approximately 45.6% of our outstanding shares of common stock. As of September 30, 2012, our
principal existing shareholders consist of our founder, Chairman and Chief Technology Officer, Lawrence Lukis; our
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President and Chief Executive Officer, Bradley Cleveland; North Bridge Growth Equity I, L.P., or North Bridge, and Protomold Investment Company, LLC, or PIC, a company affiliated with Private
Capital Management, Inc. Each of our principal existing shareholders either is or has designated one or more members of our board of directors. These shareholders could control us through their board representation or through their ability to
determine the outcome of the election of our directors, to amend our articles of incorporation and by-laws and to take other actions requiring the vote or consent of shareholders, including mergers, going private transactions and other extraordinary
transactions, and the terms of any of these transactions. The ownership positions of these shareholders may have the effect of delaying, deterring or preventing a change in control or a change in the composition of our board of directors. These
shareholders may also use their large ownership positions to address their own interests, which may be different from those of investors in this offering. In addition, sales of shares beneficially owned by these shareholders could be viewed
negatively by third parties and have a negative impact on our stock.
Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price you pay.
Shares of our common
stock were sold in our February 2012 initial public offering at a price of $16.00 per share, and, as of November 15, 2012, our common stock has subsequently traded as high as $41.10 and as low as $24.90. The market for our common stock may
become less active, liquid or orderly, which could depress the trading price of our common stock. Some of the factors, many of which are outside of our control, that may cause the market price of our common stock to fluctuate include:
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fluctuations in our financial condition and operating results;
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our ability to retain and attract customers and increase net sales;
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pricing pressures due to competition or otherwise and changes in gross margins;
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changes in general economic and market conditions, economic uncertainty and changes in product development activity levels;
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announcements by us or our competitors of technological innovations or new product or service offerings or significant acquisitions;
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timing, effectiveness, and costs of expansion and upgrades of our offerings, systems and infrastructure;
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changes in key personnel;
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success in entry into new markets and expansion efforts;
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the publics response to press releases or other public announcements by us or third parties, including our filings with the
Securities and Exchange Commission, or SEC, and announcements relating to litigation;
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the projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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the issuance of new or updated research or reports by any securities or industry analysts who follow our common stock, changes in
analysts financial estimates or ratings, and failure of securities analysts to initiate or maintain coverage of our common stock;
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changes in the market valuations of similar companies;
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significant lawsuits, including patent or shareholder litigation;
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general economic and market conditions;
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changes in laws or regulations applicable to us;
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changes in accounting principles;
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the sustainability of an active trading market for our common stock;
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future sales of our common stock by us or our shareholders, including sales by our officers, directors and significant shareholders;
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share price and volume fluctuations attributable to inconsistent trading levels of our shares;
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the expiration of contractual lock-up agreements; and
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other events or factors, including those resulting from war, acts of terrorism, natural disasters or responses to these events.
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In addition,
the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, shareholders have instituted securities class action litigation
following periods of market volatility. If we were to become involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.
If securities or industry analysts publish inaccurate
or unfavorable research or reports about our business, our stock price and trading volume could decline.
The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who covers us downgrades our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our
business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets,
which could cause our stock price and trading volume to decline.
Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.
Sales of substantial amounts of our common
stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Based on the
number of outstanding shares as of September 30, 2012, upon the completion of this offering, we will have 24,402,437 shares of common stock outstanding.
Of our outstanding shares, all of the shares of common stock offered in this offering, all of the shares of common stock
sold in our initial public offering, and all of the shares of common stock issued pursuant to awards and the exercise of stock options granted under the 2000 Stock Option Plan, 2012 Long-Term Incentive Plan, Employee Stock Purchase Plan, and a
certain stock subscription warrant, each as registered on a Form S-8 as filed with the SEC in February 2012, will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act,
except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in Rule 144 under the Securities Act. Those securities, and the remainder of our outstanding
shares, may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. Therefore, the shares of common stock held by existing shareholders as of the date of this prospectus
will, from time to time after this offering, become eligible to be sold in the public market, subject to limitations imposed under federal securities laws. See Shares Eligible for Future Sale for a more detailed description of the
restrictions on selling shares of our common stock after this offering.
In connection with this offering, we, each of our executive officers and directors, and each of the selling shareholders have agreed, subject to certain exceptions, with the underwriters
of this offering not to dispose of or hedge any shares of common stock or securities convertible into or exchangeable for shares of common stock during a 90-day period continuing through the close of business on the 90th day after the date of this
prospectus.
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Morgan Stanley & Co. LLC and Piper Jaffray & Co., as representatives of the underwriters of this offering, may, in their sole discretion, release some or all of these shares
from these restrictions prior to the expiration of the lock-up period, as permitted by applicable FINRA rules. See Underwriters for a more detailed description of the lock-up arrangements with respect to outstanding shares of our common
stock.
In the future, we may also
issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common
stock.
The market price for
shares of our common stock may drop significantly when the restrictions on resale by our existing stockholders lapse or if those restrictions on resale are waived. A decline in the price of shares of our common stock might impede our ability to
raise capital through the issuance of additional shares of our common stock or other equity securities.
We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less
attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or the JOBS Act,
which was enacted in April 2012. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth
companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our
periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging
growth company for up to five years, although circumstances could cause us to lose that status earlier. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our
common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards issued
subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, will not be subject to the same
new or revised accounting standards as other public companies that are not emerging growth companies.
The requirements of being a public company may strain our resources, divert managements attention and affect our ability to attract and retain qualified board members.
As a public company, we
are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, the listing requirements
of the New York Stock Exchange, or NYSE, and other applicable securities rules and regulations. Compliance with these rules and regulations has increased our legal, financial compliance and other costs, made some activities more difficult,
time-consuming or costly and increased demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act
requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control
over financial reporting to meet this standard, significant resources and management oversight is required. As a result, managements attention may be diverted from other business concerns, which could harm our business and operating results.
Although we have employees responsible for ensuring we comply with these requirements, including our Chief Financial Officer, we may need to hire more employees in the future, which will increase our costs and expenses.
25
In addition, changing laws, regulations and standards relating to corporate
governance and public disclosure are creating uncertainty for public companies, increasing legal, financial and other compliance costs, and making some activities more time consuming. These laws, regulations and standards are subject to varying
interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in
increased general and administrative expenses and a diversion of managements time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the
activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
As a result of being a public company and these new rules and regulations, it is more difficult
and expensive for us to obtain director and officer liability insurance and we are required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These factors could make it more
difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees (particularly our audit committee and compensation committee), and as our executive officers. Furthermore, if we are unable to satisfy
our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
As a result of disclosure of information in
this prospectus and in filings required of a public company, our business and financial condition are visible to the public, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such
claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the
resources of our management and harm our business and operating results.
Compliance with new regulations and customer demands regarding conflict minerals could significantly increase costs and affect the products that we manufacture.
Section 1502 of the
Dodd-Frank Act required the SEC to establish new disclosure and reporting requirements regarding specified minerals originating in the Democratic Republic of the Congo or an adjoining country that are necessary to the functionality or production of
products manufactured by companies required to file reports with the SEC. The final rules implementing these requirements, as released recently by the SEC, could affect sourcing at competitive prices and availability in sufficient quantities of
minerals used in the products that we manufacture. In addition, these rules could result in us incurring additional costs to perform and document supplier due diligence. Moreover, we may encounter challenges to satisfy those customers who require
that all of the components of the products that we manufacture for them be certified as conflict free.
We are obligated to develop and maintain proper and effective internal controls over financial reporting and otherwise comply with Section 404 of the Sarbanes-Oxley Act. This
will require significant expenditures and effort by our management, and may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may
adversely affect investor confidence in our company and, as a result, the value of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act and related rules and regulations, and beginning with our Annual
Report on Form 10-K for the year ending December 31, 2013, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm will be
required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no longer an emerging growth company, which may be up to five years following
the date of our initial public offering. Our status as an
26
emerging growth company is discussed in more detail in Managements Discussion and Analysis of Financial Condition and Results of Operations. The rules governing the standards
that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the very early stages of the costly and challenging
process of reviewing, documenting and testing our internal control over financial reporting. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we
identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. We may encounter problems or delays in completing the implementation of any changes
necessary to make a favorable assessment of our internal control over financial reporting. In addition, in connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in
completing the implementation of any requested improvements and receiving a favorable attestation. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is
unable to express an unqualified opinion on the effectiveness of our internal controls, investors could lose confidence in the accuracy and completeness of our financial information and our stock price could decline.
Anti-takeover provisions in our charter documents and
Minnesota law might discourage or delay acquisition attempts for us that you might consider favorable.
Our third amended and restated articles of incorporation and amended and restated by-laws contain provisions that may make
the acquisition of our company more difficult without the approval of our board of directors. These provisions:
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permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as our
board may designate, including the right to approve an acquisition or other change in our control;
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provide that the authorized number of directors may be changed by resolution of the board of directors;
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provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the
affirmative vote of a majority of directors then in office, even if less than a quorum;
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provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as
directors at a meeting of shareholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a shareholders notice; and
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do not provide for cumulative voting rights.
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We are subject to the provisions of
Section 302A.673 of the Minnesota Statutes, which regulates business combinations. Section 302A.673 generally prohibits any business combination by an issuing public corporation, or any of its subsidiaries, with an interested shareholder,
which means any shareholder that purchases 10% or more of the corporations voting shares within four years following the date the person became an interested shareholder, unless the business combination is approved by a committee composed
solely of one or more disinterested members of the corporations board of directors before the date the person became an interested shareholder.
These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our
company, even if doing so would benefit our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and to cause us to take other corporate
actions you desire.
27
An active public trading market for our common stock may not be sustained following
this offering, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.
We cannot predict the extent to which investor interest in our company will cause an active trading market in our common
stock to continue or how liquid that market will be in the future. An active public market for our common stock may not develop or be sustained after the offering. If an active public market is not sustained, it may be difficult for you to sell your
shares of common stock at a price that is attractive to you, or at all, and that may reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to fund operations by selling shares and my impair our ability
to acquire other companies, technologies or services by using our shares as consideration.
We do not expect to pay any cash dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock, and we do not anticipate that we will pay any such
cash dividends for the foreseeable future. We anticipate that we will retain all of our future earning for use in the business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our
board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this
offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur.
28
Forward-Looking Statements
Some of the statements under Prospectus
Summary, Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, Business and elsewhere in this prospectus are forward-looking statements. In some cases, you
can identify forward-looking statements by the following words: may, will, could, would, should, expect, intend, plan, anticipate,
believe, estimate, predict, project, potential, continue, ongoing or the negative of these terms or other comparable terminology, although not all forward- looking
statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information
expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts
and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:
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the level of competition in our industry and our ability to compete;
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our ability to continue to sell to existing customers and sell to new customers;
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our ability to respond to changes in our industry;
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our ability to meet the needs of product developers;
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our ability to meet product developers expectations regarding quick turnaround time and price;
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any failure to maintain and enhance our brand;
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our ability to process a large volume of designs and identify significant opportunities in our business;
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the adoption rate of e-commerce and 3D CAD software by product developers;
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the loss of key personnel or failure to attract, integrate and retain additional personnel;
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our ability to effectively grow our business and manage our growth;
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our ability to scale our business;
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our ability to maintain our gross margin and revenue growth;
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system interruptions at our operating facilities, in particular our Minnesota locations;
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our ability to maintain supplier relationships and obtain adequate supplies of equipment and materials;
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global economic conditions and the rate of product development by our customers;
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our ability to address global risks associated with our non-U.S. operations;
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our ability to protect our intellectual property and not infringe others intellectual property;
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our ability to effectively operate as a public company; and
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other risk factors included under Risk Factors in this prospectus.
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In addition, you should refer to the
Risk Factors section of this prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors,
we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties
in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all.
The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.
29
Use of Proceeds
We estimate that the net proceeds from our
sale of shares of common stock in this offering will be approximately $2.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares
by the selling shareholders, including any shares sold pursuant to the underwriters option to purchase additional shares.
The principal purposes of this offering are to facilitate an orderly distribution of shares for the selling shareholders
and to increase our public float. We intend to use the net proceeds to us from this offering to pay the expenses we will incur in connection with this offering and for working capital and general corporate purposes.
Price Range of
Common Stock
Our common stock
has traded on the New York Stock Exchange under the symbol PRLB since February 24, 2012. Our initial public offering was priced at $16.00 per share. Prior to that date, there was no public market for our common stock. The following
table sets forth, for the periods indicated, the high and low intraday sales prices for our common stock as reported on the New York Stock Exchange:
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High
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Low
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Fiscal 2012
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First quarter (from February 24, 2012)
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$
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35.93
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$
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25.00
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Second quarter
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$
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39.08
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$
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24.90
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Third quarter
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$
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41.10
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$
|
28.76
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Fourth quarter (through November 15, 2012)
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$
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36.55
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$
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27.96
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On November
15, 2012, the last reported sale price of our common stock on the New York Stock Exchange was $31.78 per share. As of November 15, 2012, we had 16 holders of record of our common stock. The actual number of shareholders is greater than this
number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.
Dividend Policy
We have never declared or paid any cash
dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock
for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual
restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. In addition, unless waived, the terms of our existing debt facilities prohibit us from paying dividends on our common stock.
30
Selected Consolidated Financial Data
The following tables set
forth selected consolidated financial data for the periods and at the dates indicated. The selected consolidated statements of comprehensive income data for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 and selected consolidated
balance sheet data as of December 31, 2007, 2008, 2009, 2010 and 2011 are derived from our audited consolidated financial statements. Our audited consolidated statements of comprehensive income for the years ended December 31, 2009, 2010
and 2011 and our audited consolidated balance sheets as of December 31, 2010 and 2011 are included elsewhere in this prospectus. Our audited consolidated statements of comprehensive income for the years ended December 31, 2007 and 2008 and
our audited consolidated balance sheets as of December 31, 2007, 2008 and 2009 have not been included in this prospectus. The selected consolidated statements of comprehensive income data for the nine months ended September 30, 2011 and
2012 and the selected consolidated balance sheet data as of September 30, 2012 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus.
The historical results presented below are
not necessarily indicative of the results to be expected for any future period. Our unaudited consolidated financial statements for the nine months ended September 30, 2011 and 2012 have been prepared on the same basis as the annual financial
statements and include all adjustments, which include only normal recurring adjustments, necessary for fair presentation of this data. Our operating results for interim periods are not necessarily indicative of the results to be expected for a
full-year period. You should read this selected consolidated financial data in conjunction with the consolidated financial statements and related notes and the information under Managements Discussion and Analysis of Financial Condition
and Results of Operations appearing elsewhere in this prospectus.
31
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Year Ended December 31,
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Nine Months Ended
September 30,
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2007
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2008
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2009
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2010
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|
|
2011
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|
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2011
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2012
|
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(unaudited)
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(in thousands, except share and per share amounts)
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Consolidated Statements of Comprehensive Income Data
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Revenue
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$
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35,914
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|
|
$
|
44,440
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|
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$
|
43,833
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|
|
$
|
64,919
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|
|
$
|
98,939
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|
|
$
|
73,302
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|
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$
|
92,375
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Cost of revenue
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|
|
14,255
|
|
|
|
17,738
|
|
|
|
18,559
|
|
|
|
25,443
|
|
|
|
39,324
|
|
|
|
28,251
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|
|
|
37,242
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|
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|
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|
Gross profit
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|
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21,659
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|
|
|
26,702
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|
|
|
25,274
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|
|
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39,476
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|
|
|
59,615
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|
|
|
45,051
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|
|
|
55,133
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Operating expenses:
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|
|
|
|
|
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|
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Marketing and sales
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5,862
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|
|
|
7,481
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|
|
|
8,262
|
|
|
|
10,867
|
|
|
|
15,752
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|
|
|
11,139
|
|
|
|
13,440
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Research and development
|
|
|
2,293
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|
|
|
3,125
|
|
|
|
3,140
|
|
|
|
4,281
|
|
|
|
5,222
|
|
|
|
3,639
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|
|
|
6,622
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|
General and administrative
|
|
|
5,102
|
|
|
|
5,438
|
|
|
|
5,965
|
|
|
|
7,629
|
|
|
|
11,772
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|
|
|
8,297
|
|
|
|
10,394
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|
Loss on impairment of foreign subsidiary assets
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
773
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total operating expenses
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|
|
13,257
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|
|
|
16,044
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|
|
|
17,367
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|
|
|
23,550
|
|
|
|
32,746
|
|
|
|
23,075
|
|
|
|
30,456
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
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|
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|
|
|
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|
|
Income from operations
|
|
|
8,402
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|
|
|
10,658
|
|
|
|
7,907
|
|
|
|
15,926
|
|
|
|
26,869
|
|
|
|
21,976
|
|
|
|
24,677
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Other income (expense), net
|
|
|
(20
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)
|
|
|
(374
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)
|
|
|
(517
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)
|
|
|
(213
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)
|
|
|
(114
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)
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|
|
18
|
|
|
|
(90
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income before income taxes
|
|
|
8,382
|
|
|
|
10,284
|
|
|
|
7,390
|
|
|
|
15,713
|
|
|
|
26,755
|
|
|
|
21,994
|
|
|
|
24,587
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|
Provision for income taxes
|
|
|
2,878
|
|
|
|
3,421
|
|
|
|
3,167
|
|
|
|
4,762
|
|
|
|
8,783
|
|
|
|
7,252
|
|
|
|
7,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
|
|
|
5,504
|
|
|
|
6,863
|
|
|
|
4,223
|
|
|
|
10,951
|
|
|
|
17,972
|
|
|
|
14,742
|
|
|
|
16,630
|
|
Less: dividends on redeemable preferred stock
|
|
|
|
|
|
|
(1,752
|
)
|
|
|
(4,180
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)
|
|
|
(4,179
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)
|
|
|
(4,179
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)
|
|
|
(3,126
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)
|
|
|
|
|
Less: undistributed earnings allocated to preferred shareholders
|
|
|
|
|
|
|
(786
|
)
|
|
|
(16
|
)
|
|
|
(2,377
|
)
|
|
|
(4,507
|
)
|
|
|
(3,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
(1)
|
|
$
|
5,504
|
|
|
$
|
4,325
|
|
|
$
|
27
|
|
|
$
|
4,395
|
|
|
$
|
9,286
|
|
|
$
|
7,782
|
|
|
$
|
16,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
|
$
|
0.00
|
|
|
$
|
0.40
|
|
|
$
|
0.75
|
|
|
$
|
0.64
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0. 26
|
|
|
$
|
0.26
|
|
|
$
|
0.00
|
|
|
$
|
0.34
|
|
|
$
|
0.67
|
|
|
$
|
0.58
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,990,492
|
|
|
|
13,730,458
|
|
|
|
10,564,946
|
|
|
|
11,079,432
|
|
|
|
12,352,004
|
|
|
|
12,162,808
|
|
|
|
22,975,950
|
|
Diluted
|
|
|
20,997,928
|
|
|
|
16,803,360
|
|
|
|
13,201,762
|
|
|
|
13,051,458
|
|
|
|
13,939,072
|
|
|
|
13,496,238
|
|
|
|
24,356,785
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
(73
|
)
|
|
$
|
(299
|
)
|
|
$
|
152
|
|
|
$
|
(214
|
)
|
|
$
|
(280
|
)
|
|
$
|
(280
|
)
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
5,431
|
|
|
$
|
6,564
|
|
|
$
|
4,375
|
|
|
$
|
10,737
|
|
|
$
|
17,692
|
|
|
$
|
14,462
|
|
|
$
|
16,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (unaudited)
(2)
|
|
$
|
10,798
|
|
|
$
|
13,393
|
|
|
$
|
11,059
|
|
|
$
|
20,513
|
|
|
$
|
32,263
|
|
|
$
|
25,727
|
|
|
$
|
31,419
|
|
32
Stock-based compensation expense included in the statements of comprehensive
income data above is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Stock options and grants
|
|
$
|
474
|
|
|
$
|
123
|
|
|
$
|
245
|
|
|
$
|
331
|
|
|
$
|
1,130
|
|
|
$
|
742
|
|
|
$
|
1,993
|
|
Employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
474
|
|
|
$
|
123
|
|
|
$
|
245
|
|
|
$
|
331
|
|
|
$
|
1,130
|
|
|
$
|
742
|
|
|
$
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
10
|
|
|
$
|
16
|
|
|
$
|
29
|
|
|
$
|
39
|
|
|
$
|
78
|
|
|
$
|
58
|
|
|
$
|
248
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
20
|
|
|
|
48
|
|
|
|
70
|
|
|
|
84
|
|
|
|
215
|
|
|
|
154
|
|
|
|
300
|
|
Research and development
|
|
|
16
|
|
|
|
32
|
|
|
|
53
|
|
|
|
73
|
|
|
|
274
|
|
|
|
206
|
|
|
|
346
|
|
General and administrative
|
|
|
428
|
|
|
|
27
|
|
|
|
93
|
|
|
|
135
|
|
|
|
563
|
|
|
|
324
|
|
|
|
1,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
474
|
|
|
$
|
123
|
|
|
$
|
245
|
|
|
$
|
331
|
|
|
$
|
1,130
|
|
|
$
|
742
|
|
|
$
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of
September 30,
2012
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,475
|
|
|
$
|
2,658
|
|
|
$
|
2,703
|
|
|
$
|
6,101
|
|
|
$
|
8,135
|
|
|
$
|
36,290
|
|
Working capital
|
|
|
5,640
|
|
|
|
5,203
|
|
|
|
4,533
|
|
|
|
10,424
|
|
|
|
18,138
|
|
|
|
72,078
|
|
Total assets
|
|
|
23,162
|
|
|
|
27,389
|
|
|
|
28,797
|
|
|
|
38,354
|
|
|
|
62,326
|
|
|
|
156,921
|
|
Total liabilities
|
|
|
8,525
|
|
|
|
16,543
|
|
|
|
13,297
|
|
|
|
11,730
|
|
|
|
15,675
|
|
|
|
16,188
|
|
Redeemable convertible preferred stock and redeemable common stock
|
|
|
3,369
|
|
|
|
54,357
|
|
|
|
58,536
|
|
|
|
62,715
|
|
|
|
66,894
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
$
|
11,268
|
|
|
$
|
(43,511
|
)
|
|
$
|
(43,036
|
)
|
|
$
|
(36,091
|
)
|
|
$
|
(20,243
|
)
|
|
$
|
140,733
|
|
|
(1)
|
|
See Note 3 of Notes to Consolidated Financial Statements for an explanation of the method used to calculate net income per basic and diluted share
attributable to common shareholders and weighted average shares outstanding for the years ended December 31, 2010 and 2011 and the nine months ended September 30, 2011 and 2012, respectively.
|
|
(2)
|
|
We define adjusted EBITDA as net income, plus provision for income taxes, other expense, net, depreciation and amortization, loss on impairment of
foreign subsidiary assets and stock-based compensation. See Adjusted EBITDA below for more information and for a reconciliation of adjusted EBITDA to net income, the most directly comparable measure calculated and presented in accordance
with GAAP.
|
Adjusted EBITDA
To provide investors with
additional information regarding our financial results, we have disclosed in the table above adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of adjusted EBITDA to net income, the most directly comparable
measure calculated and presented in accordance with GAAP.
We have included adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and
trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons
33
of our core business. Additionally, adjusted EBITDA has been a financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our
executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA has limitations as
an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
|
|
|
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the
future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
|
|
|
|
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
|
adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
|
|
|
|
adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
|
|
|
|
other companies may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
|
Because of
these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA to
net income for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Reconciliation of Adjusted EBITDA to Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,504
|
|
|
$
|
6,863
|
|
|
$
|
4,223
|
|
|
$
|
10,951
|
|
|
$
|
17,972
|
|
|
$
|
14,742
|
|
|
$
|
16,630
|
|
Provision for income taxes
|
|
|
2,878
|
|
|
|
3,421
|
|
|
|
3,167
|
|
|
|
4,762
|
|
|
|
8,783
|
|
|
|
7,252
|
|
|
|
7,957
|
|
Other (income) expenses, net
|
|
|
20
|
|
|
|
374
|
|
|
|
517
|
|
|
|
213
|
|
|
|
114
|
|
|
|
(18
|
)
|
|
|
90
|
|
Depreciation and amortization
|
|
|
1,922
|
|
|
|
2,612
|
|
|
|
2,907
|
|
|
|
3,483
|
|
|
|
4,264
|
|
|
|
3,009
|
|
|
|
4,380
|
|
Loss on impairment of foreign subsidiary assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
474
|
|
|
|
123
|
|
|
|
245
|
|
|
|
331
|
|
|
|
1,130
|
|
|
|
742
|
|
|
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
10,798
|
|
|
$
|
13,393
|
|
|
$
|
11,059
|
|
|
$
|
20,513
|
|
|
$
|
32,263
|
|
|
$
|
25,727
|
|
|
$
|
31,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Managements Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of
our financial condition and results of operations should be read in conjunction with Selected Consolidated Financial Data and the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion
and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward- looking statements as a result of various factors, including those set forth
under Risk Factors and elsewhere in this prospectus. See Forward-Looking Statements.
Overview
We are a leading online and technology-enabled manufacturer of quick-turn CNC machined and injection molded custom parts for prototyping and short-run production. We provide Real
Parts, Really Fast to product developers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We believe low-volume manufacturing has historically been an underserved market due
to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally
required to quote and manufacture parts in low volumes, and our customers conduct nearly all of their business with us over the Internet. We target our services to the millions of product developers who use 3D CAD software to design products across
a diverse range of end-markets. Our primary manufacturing services currently include Firstcut, which is our CNC machining service, and Protomold, which is our plastic injection molding service. Through September 30, 2012, we have received over
940,000 uploaded part designs, sent over 800,000 part quotations and shipped over 190,000 unique parts to approximately 26,000 product developers representing over 12,000 customer companies across a wide range of industries.
We have experienced significant growth since
our inception. Since we first introduced our Protomold injection molding service in 1999, we have steadily expanded the size and geometric complexity of the injection molded parts we are able to manufacture, and we continue to extend the diversity
of materials we are able to support. Similarly, since first introducing our Firstcut CNC machining service in 2007, we have expanded the range of part sizes, design geometries and materials we can support. We are also continually seeking to enhance
other aspects of our technology and manufacturing processes, including our interactive web-based and automated user interface and quoting system. We intend to continue to invest significantly in enhancing our technology and manufacturing processes
and expanding the range of our existing capabilities with the aim of meeting the needs of a broader set of product developers. As a result of the factors described above, many of our customers tend to return to Proto Labs to meet their ongoing
needs, with approximately 77%, 77%, 81%, and 85% of our revenue in 2009, 2010, 2011, and the nine months ended September 30, 2012, respectively, derived from existing customers who had placed orders with us in prior years.
We have established our operations in the
United States, Europe and Japan, which we believe are three of the largest geographic markets where product developers are located. We entered the European market in 2005 and launched operations in Japan in late 2009. Our current international
operations are not profitable in all markets due to the fixed costs associated with commissioning new manufacturing locations, especially in the early stages, such as those associated with managing foreign operations and the hiring and training of
personnel, bringing the manufacturing facility on-line, translation of United States marketing materials to local languages, local brand marketing, compliance costs of laws and regulations, and the generally higher costs of doing business
internationally, particularly as they relate to local labor practices and laws regulating employees costs. In addition, in the early life of new facilities, economies of scale are typically not realized resulting in lower operating margins. We
believe that with revenue growth over time, gross margins in international markets will be generally consistent with those in the United States. As of September 30, 2012, we had sold products into more than 50 countries. Our sales outside of
the United States accounted for approximately 26% of our consolidated
35
sales in each of 2010 and 2011 and 25% and 24%, respectively, in the nine months ended September 30, 2011 and 2012. We intend to continue to expand our international sales efforts and
believe opportunities exist to serve the needs of product developers in select new geographic regions.
We have grown our total revenue from $35.9 million in 2007 to $98.9 million in 2011 and $92.4 million in the nine months
ended September 30, 2012. During this period, our operating expenses increased from $13.3 million in 2007 to $32.7 million in 2011 and $30.5 million in the nine months ended September 30, 2012. We have grown our income from operations from
$8.4 million in 2007 to $26.9 million in 2011 and $24.7 million in the nine months ended September 30, 2012. Our recent growth in revenue and income from operations has been accompanied by increased operating expenses, with the two most
significant components being marketing and sales and increased general and administrative expenses. We expect to increasingly invest in our operations to support anticipated future growth and public company reporting and compliance obligations, as
discussed more fully below.
In
addition, we believe that a number of trends affecting our industry have affected our results of operations and may continue to do so. For example, we believe that many of our target product developer customers have increasing e-commerce
expectations, are facing increased pressure to accelerate the time to market for their products and continue to migrate from using 2D CAD to using 3D CAD for their design needs. We believe we continue to be well positioned to benefit from these
trends, given our proprietary technology that enables us to automate and integrate the majority of activities involved in procuring custom low-volume parts, starting with our elegant web interface through which a product developer submits a 3D CAD
part design. While our business may be positively affected by these trends, our results may also be favorably or unfavorably impacted by other trends that affect product developer orders for custom parts in low volumes, including, among others,
changes in product developer preferences or needs, developments in our industry and among our competitors and factors impacting new product development volume such as economic conditions. For a more complete discussion of the risks facing our
business, see Risk Factors.
Key
Financial Measures and Trends
Revenue
The Companys operations are comprised of three geographically-based operating segments in the United States, Europe
and Japan included in the reportable segments of United States, Europe, and Other. Revenue within these segments is derived from our Firstcut and Protomold services. Firstcut revenue consists of sales of CNC machined custom parts. Protomold revenue
consists of sales of custom injection molds and injection-molded parts. Our revenue is generated from a diverse customer base, with no single customer company representing more than approximately 1% of our total revenue in 2011. Our historical and
current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by increasing marketing and selling activities, offering additional services such as the introduction of our Firstcut service
in 2007, expanding internationally such as the opening of our Japanese office in 2009, improving the usability of our services such as our web-centric applications, and expanding the breadth and scope of our products such as by adding more sizes and
materials to our offerings. During 2011, we sold our services to approximately 3,430 customer companies from our existing customer base, an increase of 38% over the comparable period in 2010, and to approximately 2,600 new customer companies, an
increase of 36% over the comparable period in 2010. During 2010, we sold our services to approximately 2,480 customer companies from our existing customer base, an increase of 37% over 2009, and to approximately 1,910 new customer companies, an
increase of 49% over 2009. During 2009, we sold our services to approximately 1,800 customer companies from our existing customer base, an increase of 34% over 2008, and to approximately 1,280 new customer companies, no change from 2008. During the
nine months ended September 30, 2012, we sold our services to approximately 4,400 customer companies from our existing customer base, an increase of 34% over the comparable period in 2011, and to approximately 2,250 new customer companies, an
increase of 15% over the comparable period in 2011.
36
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue consists primarily of raw
materials, employee salaries, bonuses, benefits, stock-based compensation, equipment depreciation and overhead allocations associated with the manufacturing process for molds and custom parts. We expect cost of revenue to increase in absolute
dollars, but remain relatively constant as a percentage of total revenue.
During 2010 and 2011, we benefited from high utilization in both our factories and manufacturing equipment, especially in the United States. Our business model requires that we invest
in our capacity well in advance of demand to ensure we can fulfill the expectations for quick service from our customers. Therefore, during 2012 we have made significant investments in additional factory space and infrastructure in the United
States and Japan. We expect to continue to grow in future periods, which will result in the need for additional investments in factory space and equipment. We expect that these additional costs for factory and equipment expansion can be
absorbed, and allow gross margins to remain relatively consistent over time.
We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are
affected by many factors, including our pricing, our sales volume, our manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates.
Our gross margins vary between geographic
markets due primarily to the costs associated with starting new factories and our operating maturity in these markets. We believe that over time and with growth and maturity of our international business, gross margins will be generally consistent
through all our markets.
Operating Expenses
Operating expenses consist of marketing and sales, research and development and general and administrative expenses and
loss on impairment of foreign subsidiary assets. Personnel-related costs are the most significant component of the marketing and sales, research and development and general and administrative expense categories.
Our recent growth in operating expenses is
mainly due to higher headcounts to support our growth and expansion, and we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn CNC machined and injection
molded custom parts for prototyping and short-run production. For us to achieve our goals, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses.
Marketing and sales.
Marketing and
sales expense consists primarily of employee salaries, commissions, bonuses, benefits, stock-based compensation, marketing programs such as print and pay-per-click advertising, trade shows, direct mail and other related overhead. We expect sales and
marketing expense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customer base.
Research and development.
Research and
development expense consists primarily of employee salaries, bonuses, benefits, stock-based compensation, depreciation on equipment, outside services and other related overhead. All of our research and development costs have been expensed as
incurred. We expect research and development expense to increase in the future as we seek to enhance and expand our service offerings.
General and administrative.
General and administrative expense consists primarily of employee salaries, bonuses,
benefits, stock-based compensation, professional service fees related to accounting, tax, legal and other related overhead. We expect general and administrative expense to increase on an absolute basis and as a percentage of revenue as we continue
to grow and expand our operations and develop the infrastructure necessary to operate as a public company. These expenses will include increased audit and legal fees, costs of compliance with securities and other regulations, implementation costs
for compliance with the provisions of the Sarbanes-Oxley Act, investor relations expense and higher insurance premiums.
37
Loss on impairment of foreign subsidiary assets
. In 2010, we updated
our forecasts for our Japanese subsidiary in accordance with Accounting Standards Codification (ASC) 360,
Property, Plant and Equipment
(ASC 360). Our original forecasts, prepared in 2008, did not anticipate the global recession and the slow
recovery in Japan and the differences in customer preferences. Therefore, our revenues from our Japanese subsidiary were lower than projected and in accordance with ASC 360, we recorded a loss on impairment of selected property, plant and equipment
in Japan. In the future we will make annual assessments on the carrying value of long-lived assets per ASC 360. If these assessments indicate an impairment exists, we will write down the assets to their fair value. The circumstances that may lead to
future impairment charges are difficult to predict and we do not believe such circumstances currently exist.
Other income (expense), net
Other income (expense), net primarily
consists of foreign currency-related gains and losses, interest income on cash balances and investments, and interest expense on borrowings. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange
rates. Our interest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and the current level of interest rates. Our interest expense will vary based on
borrowings and interest rates.
Provision for income taxes
Provision for income taxes is comprised of
federal, state, local and foreign taxes based on pre-tax income. We expect income taxes to increase as our taxable income increases and our effective tax rate to remain relatively constant.
In the fourth quarter of 2010, we made a qualified subsidiary election for our Japanese
subsidiary. This qualified election resulted in a deemed liquidation of the subsidiary into the parent and created a current tax deduction for United States federal tax purposes during the fourth quarter of 2010. This election enabled us to deduct
prior Japanese net losses and investments. In future periods, we will qualify for additional deductions if our Japanese subsidiary continues to experience net losses.
38
Results of Operations
The following table sets forth a summary of our results of operations and the related changes
for the periods indicated. The results below are not necessarily indicative of the results for future periods, and our operating results for interim periods are not necessarily indicative of the results to be expected for a full-year
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Change
|
|
|
Year Ended
December 31,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
|
|
2009
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
2011
|
|
|
2012
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(dollars in thousands)
|
|
Revenue
|
|
$
|
43,833
|
|
|
$
|
64,919
|
|
|
$
|
21,086
|
|
|
|
48.1
|
%
|
|
$
|
64,919
|
|
|
$
|
98,939
|
|
|
$
|
34,020
|
|
|
|
52.4
|
%
|
|
$
|
73,302
|
|
|
$
|
92,375
|
|
|
$
|
19,073
|
|
|
|
26.0
|
%
|
Cost of revenue
|
|
|
18,559
|
|
|
|
25,443
|
|
|
|
6,884
|
|
|
|
37.1
|
|
|
|
25,443
|
|
|
|
39,324
|
|
|
|
13,881
|
|
|
|
54.6
|
|
|
|
28,251
|
|
|
|
37,242
|
|
|
|
8,991
|
|
|
|
31.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,274
|
|
|
|
39,476
|
|
|
|
14,202
|
|
|
|
56.2
|
|
|
|
39,476
|
|
|
|
59,615
|
|
|
|
20,139
|
|
|
|
51.0
|
|
|
|
45,051
|
|
|
|
55,133
|
|
|
|
10,082
|
|
|
|
22.4
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
8,262
|
|
|
|
10,867
|
|
|
|
2,605
|
|
|
|
31.5
|
|
|
|
10,867
|
|
|
|
15,752
|
|
|
|
4,885
|
|
|
|
45.0
|
|
|
|
11,139
|
|
|
|
13,440
|
|
|
|
2,301
|
|
|
|
20.7
|
|
Research and development
|
|
|
3,140
|
|
|
|
4,281
|
|
|
|
1,141
|
|
|
|
36.3
|
|
|
|
4,281
|
|
|
|
5,222
|
|
|
|
941
|
|
|
|
22.0
|
|
|
|
3,639
|
|
|
|
6,622
|
|
|
|
2,983
|
|
|
|
82.0
|
|
General and administrative
|
|
|
5,965
|
|
|
|
7,629
|
|
|
|
1,664
|
|
|
|
27.8
|
|
|
|
7,629
|
|
|
|
11,772
|
|
|
|
4,143
|
|
|
|
54.3
|
|
|
|
8,297
|
|
|
|
10,394
|
|
|
|
2,097
|
|
|
|
25.3
|
|
Loss on impairment of foreign subsidiary assets
|
|
|
|
|
|
|
773
|
|
|
|
773
|
|
|
|
*
|
|
|
|
773
|
|
|
|
|
|
|
|
(773
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,367
|
|
|
|
23,550
|
|
|
|
6,183
|
|
|
|
35.6
|
|
|
|
23,550
|
|
|
|
32,746
|
|
|
|
9,196
|
|
|
|
39.0
|
|
|
|
23,075
|
|
|
|
30,456
|
|
|
|
7,381
|
|
|
|
32.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7,907
|
|
|
|
15,926
|
|
|
|
8,019
|
|
|
|
101.4
|
|
|
|
15,926
|
|
|
|
26,869
|
|
|
|
10,943
|
|
|
|
68.7
|
|
|
|
21,976
|
|
|
|
24,677
|
|
|
|
2,701
|
|
|
|
12.3
|
|
Other income (expense), net
|
|
|
(517
|
)
|
|
|
(213
|
)
|
|
|
(304
|
)
|
|
|
(58.8
|
)
|
|
|
(213
|
)
|
|
|
(114
|
)
|
|
|
(99
|
)
|
|
|
(46.5
|
)
|
|
|
18
|
|
|
|
(90
|
)
|
|
|
(108
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,390
|
|
|
|
15,713
|
|
|
|
8,323
|
|
|
|
112.6
|
|
|
|
15,713
|
|
|
|
26,755
|
|
|
|
11,042
|
|
|
|
70.3
|
|
|
|
21,994
|
|
|
|
24,587
|
|
|
|
2,593
|
|
|
|
11.8
|
|
Provision for income taxes
|
|
|
3,167
|
|
|
|
4,762
|
|
|
|
1,595
|
|
|
|
50.4
|
|
|
|
4,762
|
|
|
|
8,783
|
|
|
|
4,021
|
|
|
|
84.4
|
|
|
|
7,252
|
|
|
|
7,957
|
|
|
|
705
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,223
|
|
|
$
|
10,951
|
|
|
$
|
6,728
|
|
|
|
159.3
|
%
|
|
$
|
10,951
|
|
|
$
|
17,972
|
|
|
$
|
7,021
|
|
|
|
64.1
|
%
|
|
$
|
14,742
|
|
|
$
|
16,630
|
|
|
$
|
1,888
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Percentage change not meaningful.
|
Stock-based compensation expense included in the statements of comprehensive income data above is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Stock options and grants
|
|
$
|
245
|
|
|
$
|
331
|
|
|
$
|
1,130
|
|
|
$
|
742
|
|
|
$
|
1,993
|
|
Employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
245
|
|
|
$
|
331
|
|
|
$
|
1,130
|
|
|
$
|
742
|
|
|
$
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
29
|
|
|
$
|
39
|
|
|
$
|
78
|
|
|
$
|
58
|
|
|
$
|
248
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
70
|
|
|
|
84
|
|
|
|
215
|
|
|
|
154
|
|
|
|
300
|
|
Research and development
|
|
|
53
|
|
|
|
73
|
|
|
|
274
|
|
|
|
206
|
|
|
|
346
|
|
General and administrative
|
|
|
93
|
|
|
|
135
|
|
|
|
563
|
|
|
|
324
|
|
|
|
1,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
245
|
|
|
$
|
331
|
|
|
$
|
1,130
|
|
|
$
|
742
|
|
|
$
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
The following table sets forth selected statements of comprehensive income
data as a percentage of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
42.3
|
|
|
|
39.2
|
|
|
|
39.7
|
|
|
|
38.5
|
|
|
|
40.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57.7
|
|
|
|
60.8
|
|
|
|
60.3
|
|
|
|
61.5
|
|
|
|
59.7
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
18.9
|
|
|
|
16.7
|
|
|
|
15.9
|
|
|
|
15.2
|
|
|
|
14.5
|
|
Research and development
|
|
|
7.2
|
|
|
|
6.6
|
|
|
|
5.3
|
|
|
|
5.0
|
|
|
|
7.2
|
|
General and administrative
|
|
|
13.6
|
|
|
|
11.8
|
|
|
|
11.9
|
|
|
|
11.3
|
|
|
|
11.3
|
|
Loss on impairment of foreign subsidiary assets
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
39.7
|
|
|
|
36.3
|
|
|
|
33.1
|
|
|
|
31.5
|
|
|
|
33.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18.0
|
|
|
|
24.5
|
|
|
|
27.2
|
|
|
|
30.0
|
|
|
|
26.7
|
|
Other income (expense), net
|
|
|
(1.2
|
)
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
0.0
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
16.8
|
|
|
|
24.2
|
|
|
|
27.0
|
|
|
|
30.0
|
|
|
|
26.6
|
|
Provision for income taxes
|
|
|
7.2
|
|
|
|
7.3
|
|
|
|
8.8
|
|
|
|
9.9
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
9.6
|
%
|
|
|
16.9
|
%
|
|
|
18.2
|
%
|
|
|
20.1
|
%
|
|
|
18.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Nine Months Ended September 30, 2011 and 2012
Revenue
Revenue and the related
changes for the nine months ended September 30, 2011 and 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Change
|
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Protomold
|
|
$
|
55,087
|
|
|
|
75.2
|
%
|
|
$
|
66,697
|
|
|
|
72.2
|
%
|
|
$
|
11,610
|
|
|
|
21.1
|
%
|
First Cut
|
|
|
18,215
|
|
|
|
24.8
|
|
|
|
25,678
|
|
|
|
27.8
|
|
|
|
7,463
|
|
|
|
41.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
73,302
|
|
|
|
100.0
|
%
|
|
$
|
92,375
|
|
|
|
100.0
|
%
|
|
$
|
19,073
|
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by
geographic region, based on the billing location of the end customer, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Change
|
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
54,723
|
|
|
|
74.7
|
%
|
|
$
|
69,887
|
|
|
|
75.7
|
%
|
|
$
|
15,164
|
|
|
|
27.7
|
%
|
International
|
|
|
18,579
|
|
|
|
25.3
|
|
|
|
22,488
|
|
|
|
24.3
|
|
|
|
3,909
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
73,302
|
|
|
|
100.0
|
%
|
|
$
|
92,375
|
|
|
|
100.0
|
%
|
|
$
|
19,073
|
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Our revenue increased $19.1 million, or 26.0%, for the nine months ended
September 30, 2012 compared to the same period in 2011. Of this growth, approximately $5.5 million was attributable to sales to approximately 4,400 existing customer companies, and approximately $13.6 million was attributable to sales to
approximately 2,250 new customer companies gained during the nine months ended September 30, 2012. Our overall revenue growth was driven by a 27.7% increase in U.S. revenue, a 21.0% increase in international revenue, a 21.1% increase in
Protomold revenue and a 41.0% increase in Firstcut revenue, in each case for the nine months ended September 30, 2012 compared to the same period in 2011. Our revenue increases were primarily driven by greater spending on marketing and
increases in selling personnel. The effect of pricing changes on revenue was immaterial for the nine months ended September 30, 2012 compared to the same period in 2011.
Revenue by reportable segment is summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Change
|
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited, dollars in thousands)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
57,510
|
|
|
|
78.5
|
%
|
|
$
|
72,652
|
|
|
|
78.6
|
%
|
|
$
|
15,142
|
|
|
|
26.3
|
%
|
Europe
|
|
|
13,941
|
|
|
|
19.0
|
|
|
|
16,305
|
|
|
|
17.7
|
|
|
|
2,364
|
|
|
|
17.0
|
|
Other
|
|
|
1,851
|
|
|
|
2.5
|
|
|
|
3,418
|
|
|
|
3.7
|
|
|
|
1,567
|
|
|
|
84.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
73,302
|
|
|
|
100.0
|
%
|
|
$
|
92,375
|
|
|
|
100.0
|
%
|
|
$
|
19,073
|
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For our
United States segment, revenue increased $15.1 million, or 26.3%, for the nine months ended September 30, 2012 compared to the same period in 2011. Of this growth, approximately $6.9 million was attributable to sales to approximately 3,350
existing customer companies, and approximately $8.2 million was attributable to sales to approximately 1,375 new customer companies gained during the nine months ended September 30, 2012. Our United States revenue increase was primarily driven
by greater spending on marketing and increases in selling personnel.
For our Europe segment, revenue increased $2.4 million, or 17.0%, for the nine months ended September 30, 2012 compared to the same period in 2011. This growth was attributable to
approximately $4.1 million in sales to approximately 625 new customer companies gained during the nine months ended September 30, 2012, partially offset by a period-over-period decline of approximately $1.7 million in sales attributable to
approximately 825 existing customer companies. Our Europe revenue increase was primarily driven by greater spending on marketing and increases in selling personnel.
Cost of Revenue, Gross
Profit and Gross Margin
Cost of revenue and gross profit and the related changes for the nine months ended September 30, 2011 and 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Change
|
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
28,251
|
|
|
|
38.5
|
%
|
|
$
|
37,242
|
|
|
|
40.3
|
%
|
|
$
|
8,991
|
|
|
|
31.8
|
%
|
Gross profit
|
|
$
|
45,051
|
|
|
|
61.5
|
%
|
|
$
|
55,133
|
|
|
|
59.7
|
%
|
|
$
|
10,082
|
|
|
|
22.4
|
%
|
Cost of
Revenue.
Cost of revenue increased $9.0 million, or 31.8%, for the nine months ended September 30, 2012 compared to the same period in 2011 due to raw material and production cost increases of $3.1 million to support increased sales
volumes, equipment and facility-related cost increases of $1.4 million and an increase in direct labor headcount resulting in personnel and related cost increases of $4.5 million.
41
Gross Profit and Gross Margin.
Gross profit increased due to
increases in revenue offset by the cost of revenue as discussed above. Gross margin decreased primarily as a result of increases in direct labor personnel and a slight decline in equipment utilization, which resulted from the increase in capacity
related to capital equipment acquisition.
Operating Expenses, Other Income (Expense), net and Provision for Income Taxes
Operating expenses, other income (expense), net and provision for income taxes and the related changes for the nine months
ended September 30, 2011 and 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Change
|
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
$
|
11,139
|
|
|
|
15.2
|
%
|
|
$
|
13,440
|
|
|
|
14.5
|
%
|
|
$
|
2,301
|
|
|
|
20.7
|
%
|
Research and development
|
|
|
3,639
|
|
|
|
5.0
|
|
|
|
6,622
|
|
|
|
7.2
|
|
|
|
2,983
|
|
|
|
82.0
|
|
General and administrative
|
|
|
8,297
|
|
|
|
11.3
|
|
|
|
10,394
|
|
|
|
11.3
|
|
|
|
2,097
|
|
|
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,075
|
|
|
|
31.5
|
|
|
|
30,456
|
|
|
|
33.0
|
|
|
|
7,381
|
|
|
|
32.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
18
|
|
|
|
0.0
|
|
|
|
(90
|
)
|
|
|
(0.1
|
)
|
|
|
(108
|
)
|
|
|
*
|
|
Provision for income taxes
|
|
$
|
7,252
|
|
|
|
9.9
|
%
|
|
$
|
7,957
|
|
|
|
8.6
|
%
|
|
$
|
705
|
|
|
|
9.7
|
%
|
|
*Percentage
|
|
change not meaningful.
|
Marketing and Sales.
Marketing and sales expense increased $2.3 million, or 20.7%, for the nine months ended
September 30, 2012 compared to the same period in 2011 due to a $0.6 million increase in marketing program costs and an increase in headcount resulting in personnel and related cost increases of $1.7 million.
Research and Development.
Our research
and development expense increased $3.0 million, or 82.0%, for the nine months ended September 30, 2012 compared to the same period in 2011 due to an increase in headcount resulting in personnel and related cost increases of $0.9 million,
operating cost increases of $0.6 million and professional services of $1.5 million for outside consulting services.
General and Administrative.
Our general and administrative expense increased $2.1 million, or 25.3%, for the nine
months ended September 30, 2012 compared to the same period in 2011 due to stock-based compensation increases of $1.2 million, an increase in headcount resulting in personnel and related cost increases of $0.4 million, and professional services
of $0.5 million for outside legal and accounting services.
Other Income (Expense), net.
Other income (expense), net decreased $0.1 million for the nine months ended September 30, 2012 compared to the same period in 2011 due to changes in
foreign currency rates.
Provision for Income Taxes.
Our income tax provision increased $0.7 million to $8.0 million while our effective tax
rate decreased to 32.4% for the nine months ended September 30, 2012 compared to our income tax provision of $7.3 million and effective tax rate of 33.0% for the nine months ended September 30, 2011. The decrease in effective tax rate is primarily
attributable to an increase in the deduction for domestic manufacturing activities we are eligible to take in the current year.
42
Segment Income from Operations
Income from operations by segment and the
related changes for the nine months ended September 30, 2011 and 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Change
|
|
|
|
$
|
|
|
% of Segment
Revenue
|
|
|
$
|
|
|
% of Segment
Revenue
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
20,089
|
|
|
|
34.9
|
%
|
|
$
|
22,396
|
|
|
|
30.8
|
%
|
|
$
|
2,307
|
|
|
|
11.5
|
%
|
Europe
|
|
|
3,672
|
|
|
|
26.3
|
|
|
|
4,706
|
|
|
|
28.9
|
|
|
|
1,034
|
|
|
|
28.2
|
|
Other
|
|
|
(1,785
|
)
|
|
|
(96.4
|
)
|
|
|
(2,425
|
)
|
|
|
(70.9
|
)
|
|
|
(640
|
)
|
|
|
(35.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
$
|
21,976
|
|
|
|
30.0
|
%
|
|
$
|
24,677
|
|
|
|
26.7
|
%
|
|
$
|
2,701
|
|
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations for the United States segment increased $2.3 million, or 11.5%, and as a percentage of segment revenue decreased to 30.8% from 34.9%, in each case for the nine months ended September 30, 2012 compared to the same period in 2011.
Income from operations for the United States segment increased due to a 26.3% increase in revenue offset by increased costs as previously discussed.
Income from operations for the Europe segment increased $1.0 million, or 28.2%, and as a percentage of segment
revenue increased to 28.9% from 26.3%, in each case for the nine months ended September 30, 2012 compared to the same period in 2011. Income from operations for the Europe segment increased due to a 17.0% increase in revenue, higher factory
utilization and operating expenses growing at a slower rate than revenue.
Comparison of Years Ended December 31, 2010 and 2011
Revenue
Revenue and the related changes for 2010 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
Change
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Protomold
|
|
$
|
50,690
|
|
|
|
78.1
|
%
|
|
$
|
74,090
|
|
|
|
74.9
|
%
|
|
$
|
23,400
|
|
|
|
46.2
|
%
|
Firstcut
|
|
|
14,229
|
|
|
|
21.9
|
|
|
|
24,849
|
|
|
|
25.1
|
|
|
|
10,620
|
|
|
|
74.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
64,919
|
|
|
|
100.0
|
%
|
|
$
|
98,939
|
|
|
|
100.0
|
%
|
|
$
|
34,020
|
|
|
|
52.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by
geographic region, based on the billing location of the end customer, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
$
|
|
|
% of
Total
Revenue
|
|
|
$
|
|
|
% of
Total
Revenue
|
|
|
Change
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
48,059
|
|
|
|
74.0
|
%
|
|
$
|
73,010
|
|
|
|
73.8
|
%
|
|
$
|
24,951
|
|
|
|
51.9
|
%
|
International
|
|
|
16,860
|
|
|
|
26.0
|
|
|
|
25,929
|
|
|
|
26.2
|
|
|
|
9,069
|
|
|
|
53.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
64,919
|
|
|
|
100.0
|
%
|
|
$
|
98,939
|
|
|
|
100.0
|
%
|
|
$
|
34,020
|
|
|
|
52.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Our revenue increased $34.0 million, or 52.4%, for 2011 compared with 2010.
Of this growth, approximately $15.6 million was attributable to sales to approximately 3,430 existing customer companies, and approximately $18.4 million was attributable to sales to approximately 2,600 new customer companies gained during 2011. Our
overall revenue growth was driven by a 51.9% increase in United States revenue, a 53.8% increase in international revenue, a 46.2% increase in Protomold revenue and a 74.6% increase in Firstcut revenue, in each case for 2011 compared with 2010. Our
revenue increases were primarily driven by greater spending on marketing and increases in selling personnel. International revenue was positively impacted by $0.9 million in 2011 compared to 2010 due to weakening of the United States dollar relative
to certain foreign currencies. The effect of pricing changes on revenue was immaterial for 2011 compared to 2010.
Revenue by reportable segment is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
Change
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
52,222
|
|
|
|
80.4
|
%
|
|
$
|
76,634
|
|
|
|
77.4
|
%
|
|
$
|
24,412
|
|
|
|
46.7
|
%
|
Europe
|
|
|
11,607
|
|
|
|
17.9
|
|
|
|
19,453
|
|
|
|
19.7
|
|
|
|
7,846
|
|
|
|
67.6
|
|
Other
|
|
|
1,090
|
|
|
|
1.7
|
|
|
|
2,852
|
|
|
|
2.9
|
|
|
|
1,762
|
|
|
|
161.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
64,919
|
|
|
|
100.0
|
%
|
|
$
|
98,939
|
|
|
|
100.0
|
%
|
|
$
|
34,020
|
|
|
|
52.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For our
United States segment, revenue increased $24.4 million, or 46.7%, for 2011 compared with 2010. Of this growth, approximately $13.8 million was attributable to sales to approximately 2,750 existing customer companies, and approximately $10.6 million
was attributable to sales to approximately 1,670 new customer companies gained during 2011. Our revenue increase was primarily driven by greater spending on marketing and increases in selling personnel.
For our Europe segment, revenue increased
$7.8 million, or 67.6%, for 2011 compared with 2010. Of this growth, approximately $1.2 million was attributable to sales to approximately 570 existing customer companies, and approximately $6.6 million was attributable to sales to approximately 730
new customer companies gained during 2011. Our revenue increase was primarily driven by greater spending on marketing and increases in selling personnel.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue and gross profit and the related changes for 2010 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
Change
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
25,443
|
|
|
|
39.2
|
%
|
|
$
|
39,324
|
|
|
|
39.7
|
%
|
|
$
|
13,881
|
|
|
|
54.6
|
%
|
Gross profit
|
|
$
|
39,476
|
|
|
|
60.8
|
%
|
|
$
|
59,615
|
|
|
|
60.3
|
%
|
|
$
|
20,139
|
|
|
|
51.0
|
%
|
Cost of
Revenue.
Cost of revenue increased $13.9 million, or 54.6%, for 2011 compared with 2010, primarily due to the increased volume of molds and custom parts we manufactured and shipped driven by greater spending on marketing and increases in selling
personnel.
44
Gross Profit and Gross Margin.
Gross profit increased due to revenue
increasing faster than cost of revenue as discussed above. Gross margin increased primarily as a result of higher factory and equipment utilization and increased productivity.
Operating Expenses, Other Expense, net and
Provision for Income Taxes
Operating expenses, other expense, net and provision for income taxes and the related changes for 2010 and 2011 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
Change
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
$
|
10,867
|
|
|
|
16.7
|
%
|
|
$
|
15,752
|
|
|
|
15.9
|
%
|
|
$
|
4,885
|
|
|
|
45.0
|
%
|
Research and development
|
|
|
4,281
|
|
|
|
6.6
|
|
|
|
5,222
|
|
|
|
5.3
|
|
|
|
941
|
|
|
|
22.0
|
|
General and administrative
|
|
|
7,629
|
|
|
|
11.8
|
|
|
|
11,772
|
|
|
|
11.9
|
|
|
|
4,143
|
|
|
|
54.3
|
|
Loss on impairment of foreign subsidiary assets
|
|
|
773
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
(773
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
23,550
|
|
|
|
36.3
|
%
|
|
$
|
32,746
|
|
|
|
33.1
|
%
|
|
$
|
9,196
|
|
|
|
39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
$
|
213
|
|
|
|
0.3
|
%
|
|
$
|
114
|
|
|
|
0.2
|
%
|
|
$
|
(99
|
)
|
|
|
(46.5
|
)%
|
Provision for income taxes
|
|
$
|
4,762
|
|
|
|
7.3
|
%
|
|
$
|
8,783
|
|
|
|
8.8
|
%
|
|
$
|
4,021
|
|
|
|
84.4
|
%
|
|
*
|
|
Percentage change not meaningful.
|
Marketing and Sales.
Marketing and sales expense increased $4.9 million, or 45.0%, for 2011 compared with 2010 due
to a $2.5 million increase in marketing program costs and an increase in headcount resulting in a $2.4 million increase in personnel and related costs. Marketing and sales expense as a percentage of revenue decreased to 15.9% for 2011 from 16.7% in
2010, primarily due to the fixed nature of certain marketing and sales costs.
Research and Development.
Our research and development expense increased $0.9 million, or 22.0%, for 2011 compared with 2010 due to an increase in headcount.
General and Administrative.
Our
general and administrative expense increased $4.1 million, or 54.3%, for 2011 compared with 2010 due to an increase in headcount resulting in personnel and related cost increases of $2.3 million, administrative costs of $0.6 million,
facilities-related expenses of $0.5 million, recruiting costs of $0.4 million and professional services of $0.3 million for outside legal and accounting.
Other Expense, net.
Other expense, net decreased $0.1 million for 2011 compared with 2010 due to changes in foreign
currency rates.
Provision for
Income Taxes.
Our income tax provision increased $4.0 million for 2011 compared with 2010 due to the increased taxable income. Our effective tax rate increased to 32.8% in 2011 from 30.3% in 2010 due primarily to an election made on our United
States federal tax return during 2010 to treat our Japanese subsidiary as a qualified subsidiary, resulting in a reduction in our 2010 effective tax rate.
45
Comparison of Years Ended December 31, 2009 and 2010
Revenue
Revenue and the related
changes for 2009 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
Change
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Protomold
|
|
$
|
36,794
|
|
|
|
83.9
|
%
|
|
$
|
50,690
|
|
|
|
78.1
|
%
|
|
$
|
13,896
|
|
|
|
37.8
|
%
|
Firstcut
|
|
|
7,039
|
|
|
|
16.1
|
|
|
|
14,229
|
|
|
|
21.9
|
|
|
|
7,190
|
|
|
|
102.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
43,833
|
|
|
|
100.0
|
%
|
|
$
|
64,919
|
|
|
|
100.0
|
%
|
|
$
|
21,086
|
|
|
|
48.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by
geographic region, based on the billing location of the end customer, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
Change
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
33,343
|
|
|
|
76.1
|
%
|
|
$
|
48,059
|
|
|
|
74.0
|
%
|
|
$
|
14,716
|
|
|
|
44.1
|
%
|
International
|
|
|
10,490
|
|
|
|
23.9
|
|
|
|
16,860
|
|
|
|
26.0
|
|
|
|
6,370
|
|
|
|
60.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
43,833
|
|
|
|
100.0
|
%
|
|
$
|
64,919
|
|
|
|
100.0
|
%
|
|
$
|
21,086
|
|
|
|
48.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenue
increased $21.1 million, or 48.1%, for 2010 compared to 2009. Of this growth, approximately $7.0 million was attributable to sales to approximately 2,480 existing customer companies, and approximately $14.1 million was attributable to sales to
approximately 1,910 new customer companies gained during 2010. Our revenue growth was also driven by a 60.7% increase in international revenue, a 44.1% increase in United States revenue, a 37.8% increase in Protomold revenue and a 102.1% increase in
Firstcut revenue, in each case for 2010 compared to 2009. Our revenue increases were primarily driven by greater spending on marketing and increases in selling personnel, and to a lesser extent an expansion in the range of parts we offer. The effect
of foreign currency exchange rates was immaterial on the increase in revenue in 2010 compared to 2009. The effect of pricing changes on revenue was immaterial in 2010 compared to 2009.
Revenue by reportable segment is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
Change
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
35,031
|
|
|
|
79.9
|
%
|
|
$
|
52,222
|
|
|
|
80.4
|
%
|
|
$
|
17,191
|
|
|
|
49.1
|
%
|
Europe
|
|
|
8,723
|
|
|
|
19.9
|
|
|
|
11,607
|
|
|
|
17.9
|
|
|
|
2,884
|
|
|
|
33.1
|
|
Other
|
|
|
79
|
|
|
|
0.2
|
|
|
|
1,090
|
|
|
|
1.7
|
|
|
|
1,011
|
|
|
|
1,279.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
43,833
|
|
|
|
100.0
|
%
|
|
$
|
64,919
|
|
|
|
100.0
|
%
|
|
$
|
21,086
|
|
|
|
48.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
For our United States segment, revenue increased $17.2 million, or 49.1%,
for 2010 compared to 2009. Of this growth, approximately $8.2 million was attributable to sales to approximately 2,077 existing customer companies, and approximately $9.0 million was attributable to sales to approximately 1,335 new customer
companies gained during 2010. Our revenue increase was primarily driven by greater spending on marketing and increases in selling personnel.
For our Europe segment, revenue increased $2.9 million, or 33.1%, for 2010 compared to 2009. Of this growth, approximately
$4.2 million was attributable to sales to approximately 410 new customer companies gained during 2010 and was offset by a decrease of $1.3 million of sales to approximately 378 existing customer companies. Our revenue increase was primarily driven
by greater spending on marketing and increases in selling personnel.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue and gross profit and the related changes for 2009 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
Change
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
18,559
|
|
|
|
42.3
|
%
|
|
$
|
25,443
|
|
|
|
39.2
|
%
|
|
$
|
6,884
|
|
|
|
37.1
|
%
|
Gross profit
|
|
$
|
25,274
|
|
|
|
57.7
|
%
|
|
$
|
39,476
|
|
|
|
60.8
|
%
|
|
$
|
14,202
|
|
|
|
56.2
|
%
|
Cost of
Revenue.
Cost of revenue increased $6.9 million, or 37.1%, for 2010 compared to 2009, due to the increased volume of molds and custom parts manufactured and shipped driven by greater spending on marketing, increases in selling personnel and an
expansion in the range of parts we offer.
Gross Profit and Gross Margin.
Gross profit increased due to revenue increasing faster than cost of revenue as discussed above. Gross margin increased primarily as the result of
higher factory and equipment utilization and increased productivity.
Operating Expenses, Other Expense, net and Provision for Income Taxes
Operating expenses, other expense, net and provision for income taxes and the related changes for 2009 and 2010 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
Change
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
$
|
8,262
|
|
|
|
18.9
|
%
|
|
$
|
10,867
|
|
|
|
16.7
|
%
|
|
$
|
2,605
|
|
|
|
31.5
|
%
|
Research and development
|
|
|
3,140
|
|
|
|
7.2
|
|
|
|
4,281
|
|
|
|
6.6
|
|
|
|
1,141
|
|
|
|
36.3
|
|
General and administrative
|
|
|
5,965
|
|
|
|
13.6
|
|
|
|
7,629
|
|
|
|
11.8
|
|
|
|
1,664
|
|
|
|
27.8
|
|
Loss on impairment of foreign subsidiary assets
|
|
|
|
|
|
|
|
|
|
|
773
|
|
|
|
1.2
|
|
|
|
773
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
17,367
|
|
|
|
39.7
|
%
|
|
$
|
23,550
|
|
|
|
36.3
|
%
|
|
$
|
6,183
|
|
|
|
35.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
$
|
517
|
|
|
|
1.2
|
%
|
|
$
|
213
|
|
|
|
0.3
|
%
|
|
$
|
(304
|
)
|
|
|
(58.8
|
)%
|
Provision for income taxes
|
|
$
|
3,167
|
|
|
|
7.2
|
%
|
|
$
|
4,762
|
|
|
|
7.3
|
%
|
|
$
|
1,595
|
|
|
|
50.4
|
%
|
|
*
|
|
Percentage change not meaningful.
|
47
Marketing and Sales.
Marketing and sales expense increased $2.6
million, or 31.5%, for 2010 compared to 2009 due to an increase in headcount resulting in increased personnel and related costs of $1.4 million, an increase in bonuses of $0.8 million and an increase in marketing programs and other marketing costs
of $0.4 million. Marketing and sales expense as a percentage of revenue decreased to 16.7% in 2010 from 18.9% in 2009, primarily due to the fixed nature of certain marketing and sales costs.
Research and Development.
Our research and development expense increased $1.1 million,
or 36.3%, for 2010 compared to 2009 due to an increase in headcount resulting in increase personnel and related costs of $0.2 million and an increase in bonuses of $0.9 million.
General and Administrative.
Our
general and administrative expense increased $1.7 million, or 27.8%, for 2010 compared to 2009 due to an increase in headcount resulting in personnel and related cost increases of $0.4 million, bonuses of $1.0 million and professional services of
$0.3 million for outside legal and accounting.
Loss on Impairment of Foreign Subsidiary Assets.
During 2010, we recognized an impairment of certain assets in a foreign subsidiary in accordance with ASC 360 and recorded a charge
of $0.8 million.
Other
Expense, net.
Other expense, net decreased $0.3 million for 2010 compared to 2009 due to a gain on foreign currency of $0.2 million and a decrease in interest expense of $0.1 million.
Provision for Income Taxes.
Our income tax provision increased $1.6 million for 2010
compared to 2009 due to increased taxable income offset in part by our effective tax rate decreasing to 30.3% from 42.8%. Our lower tax rate was mainly due to an election made on our United States federal tax return, during the fourth quarter of
2010, to treat our Japanese subsidiary as a qualified subsidiary, which resulted in an 11% reduction in our 2010 effective tax rate.
Segment Income from Operations
Income from operations by segment and the
related changes for 2010 and 2011 compared to 2009 and 2010, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Segment
Revenue
|
|
|
$
|
|
|
%
of Segment
Revenue
|
|
|
Change
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
16,553
|
|
|
|
31.7
|
%
|
|
$
|
24,553
|
|
|
|
32.0
|
%
|
|
$
|
8,000
|
|
|
|
48.3
|
%
|
Europe
|
|
|
2,250
|
|
|
|
19.4
|
|
|
|
4,931
|
|
|
|
25.3
|
|
|
|
2,681
|
|
|
|
119.2
|
|
Other
|
|
|
(2,877
|
)
|
|
|
(263.9
|
)
|
|
|
(2,615
|
)
|
|
|
(91.7
|
)
|
|
|
262
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
$
|
15,926
|
|
|
|
24.5
|
%
|
|
$
|
26,869
|
|
|
|
27.2
|
%
|
|
$
|
10,943
|
|
|
|
68.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations for the United States segment increased $8.0 million, or 48.3%, and as a percentage of segment revenue increased to 32.0% from 31.7%, in each case for 2011 as compared with 2010. Income from operations increased due to a 46.7% increase in
revenue.
Income from operations
for the Europe segment increased $2.7 million, or 119.2%, and as a percentage of segment revenue increased to 25.3% from 19.4%, in each case for 2011 as compared with 2010. Income from operations increased due to a 67.6% increase in revenue, higher
factory utilization and operating expenses growing at a slower rate than revenue.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Segment
Revenue
|
|
|
$
|
|
|
%
of Segment
Revenue
|
|
|
Change
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,105
|
|
|
|
26.0
|
%
|
|
$
|
16,553
|
|
|
|
31.7
|
%
|
|
$
|
7,448
|
|
|
|
81.8
|
%
|
Europe
|
|
|
1,145
|
|
|
|
13.1
|
|
|
|
2,250
|
|
|
|
19.4
|
|
|
|
1,105
|
|
|
|
96.5
|
|
Other
|
|
|
(2,343
|
)
|
|
|
(2,965.8
|
)
|
|
|
(2,877
|
)
|
|
|
(263.9
|
)
|
|
|
(534
|
)
|
|
|
(22.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
$
|
7,907
|
|
|
|
18.0
|
%
|
|
$
|
15,926
|
|
|
|
24.5
|
%
|
|
$
|
8,019
|
|
|
|
101.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations for the United States segment increased $7.4 million, or 81.8%, and as a percentage of segment revenue increased to 31.7% from 26.0%, in each case for 2010 as compared with 2009. Income from operations increased due to a 49.1% increase in
revenue, higher factory and equipment utilization and lower operating expenses due to the fixed nature of certain operating expenses.
Income from operations for the Europe segment increased $1.1 million, or 96.5%, and as a percentage of segment revenue
increased to 19.4% from 13.1%, in each case for 2010 as compared with 2009. Income from operations increased due to a 33.1% increase in revenue, higher factory and equipment utilization and lower operating expenses due to the fixed nature of certain
operating expenses.
49
Selected Quarterly Results of Operations Data
The following tables set forth selected
unaudited quarterly results of operations data since 2010 as well as the percentage that each line item represents of total revenue. This unaudited quarterly information has been prepared on the same basis as our annual audited consolidated
financial statements appearing elsewhere in this prospectus and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary to present fairly the financial information for the fiscal quarters presented. The
quarterly data should be read in conjunction with our selected financial data and consolidated financial statements and the related notes appearing elsewhere in this prospectus. Operating results for any quarter are not necessarily indicative of
results for a full-year period, and the historical results presented below are not necessarily indicative of the results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Mar. 31,
2010
|
|
|
Jun. 30,
2010
|
|
|
Sept. 30,
2010
|
|
|
Dec. 31,
2010
|
|
|
Mar. 31,
2011
|
|
|
Jun. 30,
2011
|
|
|
Sept. 30
2011
|
|
|
Dec. 31,
2011
|
|
|
Mar. 31,
2012
|
|
|
Jun. 30,
2012
|
|
|
Sept. 30,
2012
|
|
|
|
(unaudited, in thousands)
|
|
|
|
|
Consolidated Statements of Comprehensive Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
13,214
|
|
|
$
|
15,731
|
|
|
$
|
17,678
|
|
|
$
|
18,296
|
|
|
$
|
22,335
|
|
|
$
|
24,052
|
|
|
$
|
26,915
|
|
|
$
|
25,637
|
|
|
$
|
29,970
|
|
|
$
|
29,951
|
|
|
$
|
32,454
|
|
Cost of revenue
|
|
|
5,341
|
|
|
|
6,135
|
|
|
|
6,778
|
|
|
|
7,189
|
|
|
|
8,429
|
|
|
|
9,517
|
|
|
|
10,305
|
|
|
|
11,073
|
|
|
|
12,243
|
|
|
|
12,239
|
|
|
|
12,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,873
|
|
|
|
9,596
|
|
|
|
10,900
|
|
|
|
11,107
|
|
|
|
13,906
|
|
|
|
14,535
|
|
|
|
16,610
|
|
|
|
14,564
|
|
|
|
17,727
|
|
|
|
17,712
|
|
|
|
19,694
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
2,369
|
|
|
|
2,621
|
|
|
|
2,710
|
|
|
|
3,167
|
|
|
|
3,215
|
|
|
|
3,924
|
|
|
|
4,001
|
|
|
|
4,612
|
|
|
|
4,441
|
|
|
|
4,557
|
|
|
|
4,442
|
|
Research and development
|
|
|
1,044
|
|
|
|
1,051
|
|
|
|
1,064
|
|
|
|
1,122
|
|
|
|
1,112
|
|
|
|
1,223
|
|
|
|
1,303
|
|
|
|
1,584
|
|
|
|
1,660
|
|
|
|
2,401
|
|
|
|
2,561
|
|
General and administrative
|
|
|
1,626
|
|
|
|
1,716
|
|
|
|
1,903
|
|
|
|
2,384
|
|
|
|
2,506
|
|
|
|
2,753
|
|
|
|
3,038
|
|
|
|
3,475
|
|
|
|
3,988
|
|
|
|
3,288
|
|
|
|
3,118
|
|
Loss on impairment of foreign subsidiary assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,039
|
|
|
|
5,388
|
|
|
|
5,677
|
|
|
|
7,446
|
|
|
|
6,833
|
|
|
|
7,900
|
|
|
|
8,342
|
|
|
|
9,671
|
|
|
|
10,089
|
|
|
|
10,246
|
|
|
|
10,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,834
|
|
|
|
4,208
|
|
|
|
5,223
|
|
|
|
3,661
|
|
|
|
7,073
|
|
|
|
6,635
|
|
|
|
8,268
|
|
|
|
4,893
|
|
|
|
7,638
|
|
|
|
7,466
|
|
|
|
9,573
|
|
Other income (expense), net
|
|
|
(165
|
)
|
|
|
(170
|
)
|
|
|
203
|
|
|
|
(81
|
)
|
|
|
(81
|
)
|
|
|
78
|
|
|
|
21
|
|
|
|
(132
|
)
|
|
|
(577
|
)
|
|
|
173
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,669
|
|
|
|
4,038
|
|
|
|
5,426
|
|
|
|
3,580
|
|
|
|
6,992
|
|
|
|
6,713
|
|
|
|
8,289
|
|
|
|
4,761
|
|
|
|
7,061
|
|
|
|
7,639
|
|
|
|
9,887
|
|
Provision for income taxes
|
|
|
1,025
|
|
|
|
1,551
|
|
|
|
2,083
|
|
|
|
103
|
|
|
|
2,269
|
|
|
|
2,182
|
|
|
|
2,801
|
|
|
|
1,531
|
|
|
|
2,279
|
|
|
|
2,493
|
|
|
|
3,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,644
|
|
|
$
|
2,487
|
|
|
$
|
3,343
|
|
|
$
|
3,477
|
|
|
$
|
4,723
|
|
|
$
|
4,531
|
|
|
$
|
5,488
|
|
|
$
|
3,230
|
|
|
$
|
4,782
|
|
|
$
|
5,146
|
|
|
$
|
6,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Mar. 31,
2010
|
|
|
Jun. 30,
2010
|
|
|
Sept. 30,
2010
|
|
|
Dec. 31,
2010
|
|
|
Mar. 31,
2011
|
|
|
Jun. 30,
2011
|
|
|
Sept. 30,
2011
|
|
|
Dec. 31,
2011
|
|
|
Mar. 31,
2012
|
|
|
Jun. 30,
2012
|
|
|
Sept. 30,
2012
|
|
|
|
(as a percentage of revenue)
|
|
Consolidated Statements of Comprehensive Income Data:
|
|
|
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
40.4
|
|
|
|
39.0
|
|
|
|
38.3
|
|
|
|
39.3
|
|
|
|
37.7
|
|
|
|
39.6
|
|
|
|
38.3
|
|
|
|
43.2
|
|
|
|
40.9
|
|
|
|
40.9
|
|
|
|
39.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
59.6
|
|
|
|
61.0
|
|
|
|
61.7
|
|
|
|
60.7
|
|
|
|
62.3
|
|
|
|
60.4
|
|
|
|
61.7
|
|
|
|
56.8
|
|
|
|
59.1
|
|
|
|
59.1
|
|
|
|
60.7
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
18.0
|
|
|
|
16.6
|
|
|
|
15.3
|
|
|
|
17.4
|
|
|
|
14.4
|
|
|
|
16.3
|
|
|
|
14.9
|
|
|
|
18.0
|
|
|
|
14.8
|
|
|
|
15.2
|
|
|
|
13.7
|
|
Research and development
|
|
|
7.9
|
|
|
|
6.7
|
|
|
|
6.0
|
|
|
|
6.1
|
|
|
|
5.0
|
|
|
|
5.1
|
|
|
|
4.8
|
|
|
|
6.2
|
|
|
|
5.5
|
|
|
|
8.0
|
|
|
|
7.9
|
|
General and administrative
|
|
|
12.3
|
|
|
|
10.9
|
|
|
|
10.8
|
|
|
|
13.0
|
|
|
|
11.2
|
|
|
|
11.4
|
|
|
|
11.3
|
|
|
|
13.5
|
|
|
|
13.3
|
|
|
|
11.0
|
|
|
|
9.6
|
|
Loss on impairment of foreign subsidiary assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
38.2
|
|
|
|
34.2
|
|
|
|
32.1
|
|
|
|
40.7
|
|
|
|
30.6
|
|
|
|
32.8
|
|
|
|
31.0
|
|
|
|
37.7
|
|
|
|
33.6
|
|
|
|
34.2
|
|
|
|
31.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
21.4
|
|
|
|
26.8
|
|
|
|
29.6
|
|
|
|
20.0
|
|
|
|
31.7
|
|
|
|
27.6
|
|
|
|
30.7
|
|
|
|
19.1
|
|
|
|
25.5
|
|
|
|
24.9
|
|
|
|
29.5
|
|
Other income (expense), net
|
|
|
(1.2
|
)
|
|
|
(1.1
|
)
|
|
|
1.1
|
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
(0.5
|
)
|
|
|
(1.9
|
)
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
20.2
|
|
|
|
25.7
|
|
|
|
30.7
|
|
|
|
19.6
|
|
|
|
31.3
|
|
|
|
27.9
|
|
|
|
30.8
|
|
|
|
18.6
|
|
|
|
23.6
|
|
|
|
25.5
|
|
|
|
30.5
|
|
Provision for income taxes
|
|
|
7.8
|
|
|
|
9.9
|
|
|
|
11.8
|
|
|
|
0.6
|
|
|
|
10.2
|
|
|
|
9.1
|
|
|
|
10.4
|
|
|
|
6.0
|
|
|
|
7.6
|
|
|
|
8.3
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12.4
|
%
|
|
|
15.8
|
%
|
|
|
18.9
|
%
|
|
|
19.0
|
%
|
|
|
21.1
|
%
|
|
|
18.8
|
%
|
|
|
20.4
|
%
|
|
|
12.6
|
%
|
|
|
16.0
|
%
|
|
|
17.2
|
%
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash
flows for the years ended December 31, 2009, 2010, 2011 and the nine months ended September 30, 2011 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
|
$
|
8,395
|
|
|
$
|
14,012
|
|
|
$
|
23,535
|
|
|
$
|
19,335
|
|
|
$
|
19,261
|
|
Net cash used in investing activities
|
|
|
(4,773
|
)
|
|
|
(6,041
|
)
|
|
|
(18,503
|
)
|
|
|
(9,583
|
)
|
|
|
(65,540
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(3,407
|
)
|
|
|
(4,229
|
)
|
|
|
(2,845
|
)
|
|
|
(3,408
|
)
|
|
|
74,604
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(170
|
)
|
|
|
(344
|
)
|
|
|
(153
|
)
|
|
|
(92
|
)
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
45
|
|
|
$
|
3,398
|
|
|
$
|
2,034
|
|
|
$
|
6,252
|
|
|
$
|
28,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sources of
Liquidity
Historically we
have financed our operations and capital expenditures through operations, lease financing and the use of bank loans. In addition, we have financed our common stock repurchases through issuance of preferred stock, bank loans and cash balances. In
February 2012, we completed the initial public offering of our common stock, which provided us with $71.5 million of cash, net of underwriting discounts and commissions
51
and offering expenses payable by us. We had cash and cash equivalents of $36.3 million as of September 30, 2012, an increase of $28.2 million from December 31, 2011. The increase in our
cash was due primarily to cash received from the initial public offering of our common stock and generated through operations and partially reduced by investment activity. We had cash and cash equivalents of $8.1 million as of December 31,
2011, an increase of $2.0 million from December 31, 2010. The increase in our cash was due to cash generated by operations. The December 31, 2010 cash balance represented an increase of $3.4 million from the December 31, 2009 cash
balance of $2.7 million, and this increase was also due to cash generated by operations.
Cash Flows from Operating Activities
Cash provided by operating activities was $19.3 million for the nine months ended September 30, 2012. We had net income of
$16.6 million, which included non-cash charges consisting of $4.4 million in depreciation and $2.4 million in stock-based compensation, offset by $2.6 million of excess tax benefit on stock-based compensation. Other uses of cash in operating
activities totaled $1.5 million, which included an increase in accounts receivable of $3.8 million, increase in inventory of $0.5 million, increase in prepaid and other expenses of $0.3 million and a decrease in accounts payable of $0.3 million,
which were partially offset by an increase in income taxes payable of $2.4 million and increase in accrued and other liabilities of $1.0 million. The increase in accounts receivable reflects increases in revenue.
Cash provided by operating activities was
$19.3 million for the nine months ended September 30, 2011. We had net income of $14.7 million, which included non-cash charges consisting of $3.0 million in depreciation, $0.7 million in stock-based compensation expense and $1.5 million in deferred
taxes. Other uses of cash in operating activities totaled $0.6 million, which included an increase in accounts receivable of $4.4 million, an increase in inventory of $1.2 million and an increase in prepaid expenses of $0.1 million, which were
partially offset by an increase in accounts payable of $0.9 million, increase in accrued liabilities of $3.7 million and increase in income taxes of $0.5 million. The increase in accounts receivable reflects increases in revenue.
Cash provided by operating activities was
$23.5 million for the year ended December 31, 2011. We had net income of $18.0 million, which included non-cash charges consisting of $4.3 million in depreciation, $2.2 million in deferred taxes and $1.1 million in stock-based compensation
expense partially offset by excess tax benefit from stock-based compensation of $0.7 million. Other uses of cash in operating activities totaled $1.4 million, which included an increase in accounts receivable of $3.4 million, an increase in
inventory of $2.2 million and an increase in pre-paid expenses of $0.6 million. These were partially offset by an increase in accrued liabilities of $3.3 million and an increase in accounts payable of $1.5 million. The increase in accounts
receivable reflects increases in revenue.
Cash provided by operating activities was $14.0 million for the year ended December 31, 2010. We had net income of $11.0 million, which included non-cash charges consisting of $3.5
million in depreciation, an asset impairment charge of $0.8 million, an increase in deferred income taxes of $0.5 million and $0.3 million in stock-based compensation expense. Other uses of cash in operating activities totaled $2.1 million, which
included an increase in accounts receivable of $3.0 million, an increase of $0.8 million in prepaid expenses, an increase in inventory of $0.5 million and a decrease in income taxes payable of $0.1 million. These were partially offset by an increase
in accrued liabilities of $1.2 million and an increase in accounts payable of $1.1 million. The increase in accounts receivable reflects increased revenue. The increase in accounts payable was due to an increased level of operations.
Cash provided by operating activities was
$8.4 million for the year ended December 31, 2009. We had net income of $4.2 million, which included non-cash charges consisting of $2.9 million in depreciation, an increase in deferred income taxes of $0.7 million, $0.2 million in stock-based
compensation expense and a loss on disposal of fixed assets of $0.1 million. Other sources of cash in operating activities totaled $0.3 million, which included a decrease in accounts payable of $0.5 million, and a decrease in accrued expenses of
$0.3 million. These were partially offset by a decrease in accounts receivable of $0.9 million and an increase in income taxes
52
payable of $0.1 million. The decrease in accounts receivable reflects decreased revenue from new customer acquisitions and decreased revenue to existing customers. The decrease in accounts
payable was due to a decreased level of operations.
Cash Flows from Investing Activities
Cash used in investing activities was $65.5 million for the nine months ended September 30, 2012, consisting of $14.4
million for the purchase of property and equipment and $61.4 million for the purchase of marketable securities, which were partially offset by $10.3 million in proceeds from the sale and call redemption of marketable securities.
Cash used in investing activities was $9.6
million for the nine months ended September 30, 2011, consisting of $10.1 million for the purchase of property and equipment, which was partially offset by a net reduction of short-term investments of $0.5 million.
Cash used in investing activities was $18.5
million for the year ended December 31, 2011, consisting of $19.0 million for the purchase of property and equipment and a net reduction of short-term investments of $0.5 million.
Cash used in investing activities was $6.0 million for the year ended December 31, 2010,
consisting of $7.0 million for the purchase of property and equipment and a net reduction of short-term investments of $1.0 million.
Cash used in investing activities was $4.8 million for the year ended December 31, 2009, consisting of $5.1 million
for the purchase of property and equipment and a net reduction of short-term investments of $0.3 million.
Cash Flows from Financing Activities
Cash provided by financing activities was
$74.6 million for the nine months ended September 30, 2012, consisting of $71.5 million from the initial public offering of our common stock, excess tax benefit on stock-based compensation of $2.6 million and $0.8 million in proceeds from exercises
of stock options and warrants, which were partially offset by $0.3 million for payments of debt.
Cash used in financing activities was $3.4 million for the nine months ended September 30, 2011. The primary use of funds was for net payments on debt of $3.9 million, which was partially
offset by proceeds from stock option and warrant exercises of $0.5 million.
Cash used in financing activities was $2.8 million for the year ended December 31, 2011. The primary use of funds was for net payments on debt of $4.0 million, which was offset by the
excess tax benefit from stock-based compensation of $0.7 million and stock option and warrant exercises of $0.5 million.
Cash used in financing activities was $4.2 million for the year ended December 31, 2010. The primary use of funds was
for payments on debt of $4.3 million, which was partially offset by stock option and warrant exercises of $0.1 million.
Cash used in financing activities was $3.4 million in 2009. The primary use of funds was for payments on debt.
Operating and Capital Expenditure Requirements
We believe, based on our
current operating plan, that the net proceeds received by us from this offering and our recently completed initial public offering, together with our cash balances, cash generated through operations and interest income, will be sufficient to meet
our anticipated cash requirements through at least the next 12 months. From time to time we may seek to sell additional equity or convertible debt securities or enter into credit facilities. The sale of additional equity and convertible debt
securities may result in dilution to our shareholders. If we raise additional funds through the issuance of convertible debt securities or enter into credit facilities, these
53
securities and debt holders could have rights senior to those of our common stock, and this debt could contain covenants that would restrict our operations. We may require additional capital
beyond our currently forecasted amounts. Any such required additional capital may not be available on terms acceptable to us, or at all.
Our future capital requirements will depend on many factors, including the following:
|
|
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the revenue generated by Firstcut and Protomold services;
|
|
|
|
costs of operations, including costs relating to expansion, growth, and operating as a public company;
|
|
|
|
the emergence of competing or complementary technological developments;
|
|
|
|
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual product rights, or participating in
litigation-related activities; and
|
|
|
|
the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of
these types of transactions.
|
Our annual capital expenditures generally have varied between approximately 8% and 19% of annual revenue. We believe future capital expenditures are likely to vary between approximately 8%
and 12% of annual revenue.
Contractual Obligations
As of December 31, 2011, our
contractual obligations and the effect such obligations are expected to have on our liquidity and cash flows in future periods were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than 1
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More than 5
Years
|
|
|
|
(in thousands)
|
|
Operating leases
|
|
$
|
8,372
|
|
|
$
|
1,379
|
|
|
$
|
2,560
|
|
|
$
|
2,034
|
|
|
$
|
2,399
|
|
Capital leases
|
|
|
1,113
|
|
|
|
433
|
|
|
|
526
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,485
|
|
|
$
|
1,812
|
|
|
$
|
3,086
|
|
|
$
|
2,188
|
|
|
$
|
2,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table
above reflects only payment obligations that are fixed and determinable. Our commitments for operating leases relate to one of our United States manufacturing facilities as well as our European and Japanese facilities. Our commitments for capital
leases relate to equipment financing for our European and Japanese operations. There have been no new material lease agreements entered into during the nine months ended September 30, 2012.
Financing Arrangements
In June 2007, we
received a $3.0 million loan, or equipment note, from Wells Fargo Equipment Finance, Inc. to finance previously purchased equipment. The equipment note was payable in monthly principal payments of $50,000 plus interest, which is calculated using an
interest rate equal to the sum of the daily one-month London Interbank Offered Rate, or LIBOR, and 1.4%. The outstanding principal amounts under the equipment note were $0.9 million, $0.0 million and $0.0 million at December 31,
2010, December 31, 2011, and September 30, 2012, respectively. The equipment note was secured by a first lien against certain equipment.
In August 2008, we established a $5.0 million revolving credit facility, or revolving note, and a $10.0 million term loan,
or term note, with Wells Fargo Bank, N.A. In November 2009, we amended the credit agreement, revolving note, and term note, which then had an outstanding principal amount of $6.7 million. We paid off the term note in May 2011, and we have had no
borrowings under the revolving note during 2009, 2010, 2011, or the first nine months of 2012. The revolving note bears interest at either (i) the fixed rate equal to the
54
sum of 2.0% per annum and LIBOR, in effect from time to time, or (ii) the fluctuating rate equal to the sum of 2.0% per annum and the daily one-month LIBOR in effect from time to
time. The revolving note is secured by a first lien on substantially all of our personal property and on the real property at our Maple Plain, Minnesota facility. The credit agreement contains covenants limiting capital expenditures and investments
in foreign subsidiaries and includes certain financial thresholds. On December 31, 2010, we were in violation of the covenant limiting capital expenditures, which violation was subsequently waived. We do not believe that our operations would
have been limited if we were unable to obtain a waiver to enable us to access funds from our revolving credit facility because our cash position and operations were adequate to fund our operations and because we were not interested in accessing such
funds at that time. In September 2011, we amended and restated the credit agreement and revolving note, increasing the maximum amount that can be borrowed under the note to $10.0 million. The amended revolving note bears interest at either
(i) the fixed rate equal to the sum of 1.5% per annum and LIBOR, in effect from time to time, or (ii) the fluctuating rate equal to the sum of 1.5% per annum and the daily one-month LIBOR in effect from time to time. The amended
credit agreement does not contain a covenant limiting capital expenditures but does limit investments in foreign subsidiaries exceeding $10.0 million. The amended credit agreement also includes certain financial thresholds such as requiring us to
maintain tangible net worth as of the end of each quarter of not less than $20.0 million and net income after taxes each quarter of not less than $0.5 million. On September 30, 2012, there were no advances outstanding under the amended
revolving note and we were in compliance with all terms and conditions of the amended credit agreement. Our amended revolving note terminates on September 30, 2013.
The following table summarizes our financing
arrangements as of December 31, 2009, 2010 and 2011 and September 30, 2012:
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|
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|
|
|
|
|
|
December 31,
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|
|
September 30,
2012
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Equipment note payable to a bank with interest at daily one-month LIBOR plus 1.4%, due in monthly principal
payments of $50 plus interest, through June 2012, secured by certain assets of the Company
|
|
$
|
1,500
|
|
|
$
|
900
|
|
|
$
|
|
|
|
$
|
|
|
Term note payable to a bank with interest at daily one-month LIBOR plus 2.0%, due in quarterly principal payments
of $833 plus interest monthly, through September 2011, secured by certain assets of the Company
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|
|
5,833
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
Various obligations under capital leases, with interest rates from 4.5% to 10.3%, dues in various monthly
installments, including interest, through various dates through April 2015, secured by equipment
|
|
|
1,963
|
|
|
|
1,632
|
|
|
|
1,003
|
|
|
|
736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,296
|
|
|
|
5,032
|
|
|
|
1,003
|
|
|
|
736
|
|
Less current portion
|
|
|
4,605
|
|
|
|
3,742
|
|
|
|
390
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,691
|
|
|
$
|
1,290
|
|
|
$
|
613
|
|
|
$
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
Arrangements
Since our
inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
Critical Accounting Policies and Use of Estimates
The discussion and analysis
of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates,
55
judgments and assumptions that affect the reported amount of assets, liabilities, revenue, expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, the allowance for doubtful accounts, inventory valuation, stock-based compensation and income taxes. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to
occur from period to period. Management has discussed the development, selection and disclosure of these estimates with the audit committee of our board of directors. Our actual results may differ significantly from these estimates under different
assumptions or conditions.
We
believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements. See Notes to Consolidated Financial Statements included in this prospectus for additional
information about these critical accounting policies, as well as a description of our other accounting policies.
Revenue Recognition
We recognize revenue in accordance with ASC
605,
Revenue Recognition
(ASC 605) which states that revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services
have been rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is reasonably assured.
Revenue is generally recognized upon transfer of title and risk of loss, which for us is upon shipment of parts.
Allowance for Doubtful
Accounts
We carry our
accounts receivable at their face amount less an allowance for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts based on a combination of specific customer circumstances and
credit conditions taking into account the history of write-offs and collections. A receivable is considered past due if payment has not been received within the period agreed upon in the invoice. Accounts receivable are written off after all
collection efforts have been exhausted. To date, we have not incurred any write-offs of accounts receivable significantly different than the amounts reserved. We believe appropriate reserves have been established, but they may not be indicative of
future write-offs. Our allowance for doubtful accounts as of December 31, 2009, 2010, 2011 and September 30, 2012 was $0.2 million, $0.2 million, $0.1 million and $0.2 million, respectively. Our allowance for doubtful accounts has
decreased as a percentage of accounts receivable due to improvements in account aging driven by stronger credit policies.
The following table summarizes changes to the allowance for doubtful accounts for the years ended December 31, 2009,
2010 and 2011 and for the nine months ended September 30, 2012.
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|
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|
|
|
|
|
|
|
|
Balance at
Beginning
of Period
|
|
|
Charged to
Expenses
|
|
|
Write-
offs
|
|
|
Balance at
End of
Period
|
|
|
|
(in thousands)
|
|
Nine months ended September 30, 2012 (unaudited)
|
|
$
|
97
|
|
|
$
|
85
|
|
|
$
|
24
|
|
|
$
|
158
|
|
Year ended December 31, 2011
|
|
$
|
158
|
|
|
$
|
71
|
|
|
$
|
132
|
|
|
$
|
97
|
|
Year ended December 31, 2010
|
|
$
|
205
|
|
|
$
|
45
|
|
|
$
|
92
|
|
|
$
|
158
|
|
Year ended December 31, 2009
|
|
$
|
190
|
|
|
$
|
67
|
|
|
$
|
52
|
|
|
$
|
205
|
|
We also
record a provision for estimated product returns and allowances in the period in which the related revenue is recorded. This provision against current gross revenue is based principally on historical rates of sales returns.
56
Inventory Valuation and Inventory Reserves
Inventory consists primarily of raw
materials, which are recorded at the lower of cost or market, using the average- cost method, which approximates first-in, first-out, or FIFO, cost. We periodically review our inventory for slow- moving, damaged and discontinued items and provide
reserves to reduce such items identified to their recoverable amounts. Our inventory allowance for obsolescence is not material as of December 31, 2009, 2010 or 2011 or September 30, 2012.
Stock-Based Compensation
We determine our
stock-based compensation in accordance with ASC 718,
CompensationStock Compensation (
ASC 718) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee
directors based on the grant date fair value of the award.
Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of highly subjective assumptions. We use the Black-Scholes option
pricing model to value our stock option awards. Stock-based compensation expense is significant to our consolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of
managements judgment. Significant estimates include our expected term, stock price volatility and forfeiture rates. If different estimates and assumptions had been used, our common stock valuations could be significantly different and related
stock-based compensation expense may be materially impacted.
The Black-Scholes option pricing model requires inputs such as the risk-free interest rate, expected term, expected volatility and expected dividend yield. We base the risk-free interest
rate that we use in the Black-Scholes option pricing model on zero coupon U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The expected term represents the weighted average period that our stock
options are expected to be outstanding. The expected term is based on the observed and expected time to post-vesting exercise of options by employees and non-employee directors and considers the impact of post-vesting award forfeitures. As we
operated as a private company with a limited market for our stock from our inception to the completion of our initial public offering on February 29, 2012, we have estimated the volatility of stock price using outside valuation services and an
estimate of the volatility of our common stock based on volatility of a peer group of comparable publicly traded companies for which historical information is available. We have never paid and do not anticipate paying any cash dividends in the
foreseeable future and, therefore, we use an expected dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, we are required to estimate pre-vesting forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If our actual
forfeiture rate is materially different from our estimate, stock-based compensation expense could be significantly different from what has been recorded.
The fair value of each new employee and non-employee director option awarded was estimated on the date of grant for the
periods below using the Black-Scholes option pricing model with the following assumptions:
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|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Nine Months Ended
September 30,
2012
|
|
|
2009
|
|
2010
|
|
2011
|
|
Risk-free interest rate
|
|
3.05 3.44%
|
|
3.35%
|
|
3.68%
|
|
0.95 1.16%
|
Expected term (years)
|
|
5.0 10.0
|
|
10.0
|
|
5.0
|
|
5.5 6.5
|
Expected volatility
|
|
39.00 48.22%
|
|
38.05%
|
|
47.32%
|
|
53.00 53.14%
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
Weighted average grant date fair value
|
|
$3.16
|
|
$4.27
|
|
$8.99
|
|
$14.44
|
57
If in the future we determine that another method for calculating the fair
value of our stock options is more reasonable, or if another method for calculating the above input assumptions is prescribed by authoritative guidance, the fair value calculated for our employee stock options could change significantly.
There are significant differences among
option valuation models, and this may result in a lack of comparability with other companies that use different models, methods and assumptions. If factors change and we employ different assumptions in the application of ASC 718 in future periods,
or if we decide to use a different valuation model, such as a lattice model, the stock-based compensation expense that we record in the future under ASC 718 may differ significantly from what we have recorded using the Black-Scholes option pricing
model and could materially affect our operating results.
We allocate stock-based compensation expense on a straight-line basis over the requisite service period. We recorded stock-based compensation expense of $0.2 million, $0.3 million and $1.1
million during the years ended December 31, 2009, 2010 and 2011, respectively and $0.7 million and $2.4 million during the nine months ended September 30, 2011 and 2012, respectively. As of September 30, 2012, we had $5.8 million of
unrecognized stock-based compensation costs related to unvested stock options, net of estimated forfeitures, that is expected to be recognized over a weighted average period of 3.0 years. We issued options to purchase 658,000, 224,000 and 239,800
shares of our common stock in 2010, 2011 and the nine months ended September 30, 2012, respectively.
In future periods, our stock-based compensation expense is expected to increase due to the issuance additional stock-based
awards to continue to attract and retain employees and non-employee directors and our existing unrecognized stock-based compensation.
Income Taxes
We account for income taxes in accordance with ASC 740,
Income Taxes
(ASC 740). Under this method, we determine tax
assets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable
income. The tax consequences of most events recognized in the current years financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their
recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and
their reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or liability and its reported
amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability.
ASC 740 also clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial statements by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an
enterprises financial statements. Additionally, ASC 740 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have established a liability for
uncertain tax positions of $0.4 million as of December 31, 2011.
Recent Accounting Pronouncements
In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or JOBS Act, which establishes a
new category of issuer called an emerging growth company. Under the JOBS Act, an emerging growth company is defined as an issuer with total annual gross revenues less than $1 billion during its most recently completed fiscal year. An issuer
continues to be eligible for emerging growth company status until the earliest of (1) the last day of the fiscal year during which it had total annual gross revenues of $1 billion or more (as indexed for inflation in the manner set forth in the
JOBS Act), (2) the last day of the fiscal year of the
58
issuer following the fifth anniversary of the date of its initial public offering, (3) the date on which it issued more than $1 billion in non-convertible debt in the previous three-year
period, or (4) the date on which it became a large accelerated filer as defined in Rule 12b-2 of the Exchange Act.
The JOBS Act exempts an emerging growth company from the following requirements during the period of eligibility:
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Having an independent auditor assess its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act.
However, an emerging growth company would still have to comply with the Section 404(a) requirement that management assess its internal control over financial reporting, generally beginning with its second annual report on Form 10-K.
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|
Adopting new or revised accounting standards that are effective for public companies. Instead, the effective dates of such accounting
standards for private companies would apply.
|
|
|
|
Complying with say-on-pay vote requirements under the Dodd-Frank Act. An emerging growth company would satisfy executive
compensation disclosures in a manner consistent with a smaller reporting company.
|
|
|
|
Complying with future changes to Public Company Accounting Oversight Board auditing standards related to mandatory audit firm rotation
and an Auditors Discussion & Analysis statement (if adopted). Other new standards would not apply to audits of emerging growth companies unless the SEC decides that they should after considering the protection of investors and whether the
action will promote efficiency, competition and capital formation.
|
With the exception of the treatment for accounting standards, each of these exemptions is voluntary and an emerging growth company may choose to operate as an emerging growth company as it
deems appropriate. Section 107(b) of the JOBS Act permits an emerging growth company to opt out of the exemption to adopt new or revised accounting standards when they are effective for private companies and instead apply such
standards on the same basis as a public company. Under section 107(b)(3), such decision to opt-out is irrevocable, and the emerging growth company must continue to comply with such standards to the same extent that a public company is required for
as long as the company remains an emerging growth company.
Under the JOBS Act, we meet the definition of an emerging growth company. During the period we continue to be eligible for emerging growth company status, we will apply new or revised
accounting standards following the effective dates for private companies.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This accounting update generally aligns the
principles for fair value measurements and the related disclosure requirements under U.S. GAAP and International Financial Reporting Standards. From a U.S. GAAP perspective, the amendments are largely clarifications, but some could have a
significant effect on certain companies. A number of new disclosures also are required. Except for certain disclosures, the guidance applies to public and nonpublic companies and is to be applied prospectively. For public and nonpublic companies,
the amendments are effective during interim and annual periods beginning after December 15, 2011. We adopted this accounting guidance effective January 1, 2012. The adoption of ASU 2011-04 did not result in a material impact to our
financial statements.
In June
2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. This accounting update requires entities to present items of net income and other comprehensive income either in a single continuous statement, or in separate, but consecutive,
statements of net income and other comprehensive income. The new requirements do not change which components of comprehensive income are recognized in net income or other comprehensive income, or when an item of other comprehensive income must be
reclassified to net income. However, the current option under existing standards to report other comprehensive income and its components in the statement of changes in equity is eliminated. In December 2011, the FASB issued ASU
59
2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update
No. 2011-05 (ASU 2011-12). The updated guidance defers the requirement in ASU 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net
income and other comprehensive income. The amendments apply to public and nonpublic companies and are to be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2011. We adopted this accounting guidance effective January 1, 2012 and have presented the items of net income and other comprehensive income in a single continuous statement in this prospectus. The adoption of
ASU 2011-05 and ASU 2011-12 did not result in a material impact to our financial statements.
Quantitative and Qualitative Disclosure of Market Risks
Our exposure to market risk is confined to our cash and cash equivalent balances and short-term investments. The primary
goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and cash equivalent balances. We also seek to maximize income from our investments without assuming significant risk. To achieve
our goals, we maintain a portfolio of short-term and highly liquid time deposits. The time deposits in our portfolio, due to their very short-term nature, are subject to minimal interest rate risk. In future periods, we will continue to evaluate our
investment policy in order to continue our overall goals.
Foreign Currency Risk
As a result of our foreign operations, we have revenue and expenses, assets and liabilities that are denominated in foreign currencies. A number of our employees are located in Europe and
Japan. Therefore, a portion of our payrolls and operating expenses are paid and incurred in the British Pound, Euro and Yen. Our operating results and cash flows are adversely impacted when the United States dollar depreciates relative to other
foreign currencies. As we expand internationally, our results of operations and cash flows will become increasingly subject to changes in foreign exchange rates. We have not used any forward contracts or currency borrowings to hedge our exposure to
foreign currency exchange risk. Foreign currency risk can be quantified by estimating the change in cash flows resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would not have a material impact on
our results of operations.
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Business
Our Company
We are a leading online and
technology-enabled quick-turn manufacturer of custom parts for prototyping and short-run production. We provide Real Parts, Really Fast to product developers worldwide, who are under increasing pressure to bring their finished products
to market faster than their competition. We utilize computer numerical control, or CNC, machining and injection molding to manufacture custom parts for our customers. Our proprietary technology eliminates most of the time-consuming and expensive
skilled labor conventionally required to quote and manufacture parts in low volumes. Our customers conduct nearly all of their business with us over the Internet. We target our services to the millions of product developers who use three-dimensional
computer-aided design, or 3D CAD, software to design products across a diverse range of end-markets. We have established our operations in the United States, Europe and Japan, which we believe are three of the largest geographic markets where these
product developers are located. We believe our use of advanced technology enables us to offer significant advantages at competitive prices to many product developers and is the primary reason we have become a leading supplier of low-volume custom
parts.
We believe low-volume
manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our customers typically order low volumes of
custom parts because they need a prototype to confirm the form, fit and function of one or more components of a product under development, or because they need an initial supply of parts to support pilot production while their high-volume production
mold is being prepared, or because their product will only be released in a limited quantity. In each of these instances, we believe our solution provides product developers with an exceptional combination of speed, competitive pricing, ease of use
and reliability that they typically cannot find among conventional custom parts manufacturers. Our technology enables us to ship parts in as little as one business day after receipt of a customers design submission.
Our proprietary technology enables us to
automate and integrate the majority of activities involved in procuring custom low-volume parts, starting with our web interface through which a product developer submits a 3D CAD part design. We have developed complex algorithms to quickly analyze
the geometry of the design to analyze its manufacturability. In many cases, our software provides suggested design modifications to enhance manufacturability, presented to the product developer in a color-coded 3D representation of the part. Our
automated pricing algorithm generates a firm price that is incorporated into a highly interactive web-based quotation, which allows the product developer to change a variety of parameters and instantly receive an updated price. Once the order is
entered online, our manufacturing software calculates the required instructions for a CNC machine to make the part or related mold. Our system is highly scalable and capable of processing a large number of design submissions. As a result of the
factors described above, we have significantly reduced many of the inefficiencies involved in serving the low-volume manufacturing market, while scaling our business to generate quotations on over 230,000 design submissions in the first nine months
of 2012. And, as a further result, many of our customers tend to return to Proto Labs to meet their ongoing needs, with approximately 77%, 77%, 81% and 85% of our revenue in the years ended December 31, 2009, 2010, 2011 and the nine months
ended September 30, 2012, respectively, derived from existing customers who had placed orders with us in prior years.
Our manufacturing services currently include CNC machining and plastic injection molding. We continually seek to expand
the range of size and geometric complexity of the parts we can make with these processes, to extend the variety of materials we are able to support and to identify additional manufacturing processes to which we can apply our technology in order to
better serve the evolving preferences and needs of product developers. See Risk FactorsIf our present single or limited source suppliers become unavailable or inadequate, our customer relationships, results of operations and financial
condition may be adversely affected for a discussion of the sourcing and availability of materials. We also plan to grow our business by further penetrating the universe of product developers at the customer companies we have already served,
attracting new customer companies in the geographic markets in which we already have an established presence, and selectively entering new geographic markets.
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We have experienced significant growth since our inception in 1999. We have
grown our total revenue from $35.9 million in 2007 to $98.9 million in 2011 and $92.4 million in the nine months ended September 30, 2012. During this period, our operating expenses increased from $13.3 million in 2007 to $32.7 million in 2011
and $30.5 million in the nine months ended September 30, 2012. We have grown our income from operations from $8.4 million in 2007 to $26.9 million in 2011 and $24.7 million in the nine months ended September 30, 2012.
Industry Overview
Our Industry
We serve product developers worldwide who
bring new ideas to market in the form of products containing one or more custom mechanical parts. Many of these product developers use 3D CAD software to create digital models representing their custom part designs that are then used to create
physical parts for prototyping, functional testing, market evaluation or eventual production.
Custom prototype parts play a critical role in the product development process, as they provide product developers with the ability to confirm their intended performance requirements and
explore design alternatives. Early in the product development process, product developers often leverage their use of 3D CAD to obtain prototype parts from a manufacturer using one of the additive rapid prototyping processes such as
stereolithography, selective laser sintering, fused deposition modeling or 3D printing. While these processes can quickly produce an approximate physical representation of a part, these representations often do not meet product developers
requirements for dimensional accuracy, cosmetics and material properties.
As an alternative or supplement to additive rapid prototyping, CNC machining can be used to produce low volumes of high-quality custom parts in either metal or plastic. CNC machining is a
process by which a block of the required material is cut to a specified shape by a machine under computer commands, which are referred to as tool paths. For follow-on functional testing, market evaluation and production runs, plastic parts are
typically manufactured using injection molding. Injection molding is a process of injecting molten plastic into a pre-made mold to form a part with the shape of the mold cavity. Both CNC machining and injection molding yield a part with the look,
feel and performance of the finished product.
Our Market Opportunity
We know of no published third-party estimates of our specific addressable markets. Our Protomold injection molding service addresses a subset of the plastic injection molding market, which
Plastics Custom Research, a market research firm, estimates was $50.3 billion in North America in 2010. Our Firstcut CNC machining service addresses a subset of the machine shop services segment, which IBISWorld, a market research firm, estimates
was $34.9 billion in the United States in 2010.
Another way to gauge our market opportunity is by the number of product developers who use 3D CAD software. According to Jon Peddie Research, a market research firm, in December 2009 there
were approximately 13 million users of CAD software worldwide, of which approximately 41%, or 5.3 million, were users of 3D CAD software. We believe a substantial portion of these 3D CAD users were product developers working in industries
we serve, such as the medical, design, machinery, consumer and electronics industries, although we do not serve every application within these industries. From the inception of our company in 1999 through September 30, 2012, we have filled orders
for approximately 26,000 product developers.
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Trends Affecting the Product Development Process
There are several important trends impacting
product developers worldwide.
Increasing E-Commerce Expectations
The Internet is a tool that is deeply
integrated into the everyday activities of product developers, many of whom have come to expect a comprehensive set of integrated web-based capabilities and 24 hours a day, seven days a week access from their vendors. As product developers
increasingly work with partners and vendors across various geographies and time zones, the Internet allows them to work collaboratively and immediately access information at anytime and from anywhere in the world.
Accelerating Time to Market
Product developers are
facing increased pressure from global competitors to be first to market with their finished products. In addition, rapid advances in technology and consumer demand for the latest products are driving shorter product life cycles in many industries.
This makes it ever more critical to obtain prototype parts quickly and identify problems in a product design early to minimize delays.
Increasing Adoption of 3D CAD Software
For product developers involved in
mechanical part design, 3D CAD has inherent advantages over 2D CAD because it provides a complete description of the parts geometric design. As a result, many of these product developers continue to migrate from using 2D CAD to using 3D CAD
for their design needs. According to Jon Peddie Research, the number of CAD users increased from approximately 11.5 million as of December 2007 to almost 13 million by the end of 2009, with 3D CAD users growing from 30% to 41% of active
CAD software users during the same time period.
Challenges Confronting Product Developers
The trends affecting our industry create a variety of challenges for product developers.
Inadequate Turnaround Time
We believe most conventional custom parts
manufacturers do not have the automated capability to analyze a design and then quote, manufacture and ship custom parts fast enough to satisfy the time-to-market needs of many product developers. Quotation and order placement from these custom
parts manufacturers can take anywhere from a few days to weeks, and frequently require face-to-face interaction. In addition, once an order is placed, conventional custom parts manufacturers typically require a significant amount of manual
engineering before manufacturing can begin.
Difficulty in Sourcing Low-Volume Custom Parts
We believe many custom parts manufacturers prefer the higher asset utilization inherent in high-volume production and
therefore may decline or assign a lower priority to low-volume orders. In addition, those custom parts manufacturers that do take low-volume orders often lack the scale to produce significant numbers of different parts at the same time. This is
particularly problematic for product developers with products requiring multiple custom parts, as these developers consequently may need to disperse and coordinate orders among several manufacturers.
Most Custom Parts Manufacturers Lack an
Interactive Web-Based Interface
We believe most custom parts manufacturers lack the technology to offer an interactive web-based interface and quoting system, which can result in significant inconveniences for product
developers. Business can typically
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be transacted only during the business day, frequently requires face-to-face interactions and is generally conducted without the web-centric convenience that product developers have come to
expect in other aspects of their professional and personal lives.
High Cost
Many product developers find low-volume custom parts manufacturing to be expensive due to the manufacturers significant up-front non-recurring engineering costs and the additional
costs incurred to support high-volume production, both of which must be absorbed over a small quantity of parts. Therefore, we believe most custom parts manufacturers are not well equipped to fulfill significant numbers of low-volume orders at
competitive prices.
Our
Solution
We have
developed proprietary software and advanced manufacturing processes that automate much of the skilled labor conventionally required in quoting, production engineering and manufacturing custom parts. We believe our interactive web-based interface and
highly automated processes address the desires of many product developers for a fast, efficient and cost-effective means of obtaining low-volume custom parts. We also believe the use of our advanced technology to bring speed and efficiency at
competitive prices to product developers is the primary reason we have become a leading supplier of low-volume custom CNC-machined and injection molded parts.
Key elements of our solution include:
Sophisticated Technology that Reduces
Turnaround Time
Our
web-based interface and proprietary software automate many of the manual and time-consuming processes typically required to obtain custom CNC machined or injection molded parts from conventional suppliers. Our platform automates many aspects of the
entire process from design submission through manufacturability analysis and feedback, quotation, order submission, mold design, tool path generation and mold or part manufacture. Our prospective customers upload a 3D CAD file of their required part
through our website, and often within minutes our software analyzes the manufacturability of the product and, if we are able to make the part, returns a firm price quotation with any recommendations for design modifications. Our quoting system is
highly interactive, enabling our prospective customers to change the material, finish, quantity or shipping schedule of orders, and to instantly receive an updated quotation. Once an order is received, our software automates much of the mold design,
tool path generation and mold or part manufacture that normally require skilled labor. As a result, in many cases we are able to quote orders in minutes and ship parts in as little as one business day.
Enhanced Customer Experience
Our web-based customer
interface provides a straightforward means of submitting 3D CAD part designs. Our proprietary manufacturability analysis then quickly analyzes whether a part design falls within our manufacturing capabilities. In many cases, our software provides
suggested design modifications to enhance manufacturability, presented to the product developer in an interactive quotation containing a color-coded 3D representation of the part. This allows product developers to quickly determine the
manufacturability of their parts, what they will cost and when they can be shipped. Our interactive quotations provide instant visibility into the impact of changing an orders various parameters such as material, finish, quantity or shipping
schedule. As a result, we provide product developers with an easy-to-use and consistent means of obtaining custom parts.
Attractive Low-Volume Pricing
Based on internal market research, we
believe we generally have competitive pricing on low-volume orders. We believe this is a direct result of our technology and the efficiency of our operations, both of which were
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designed specifically for low-volume production. By automating and integrating many of the manual processes conventionally involved in quoting and manufacturing low-volume custom CNC machined and
injection molded parts, we have significantly reduced or eliminated most of the non-recurring engineering labor costs associated with these processes. These costs are typically a significant portion of the total costs in the low-volume custom parts
manufacturing environment, and as a result, we can typically offer product developers competitive prices on low-volume custom manufactured parts.
Scale to Process Large Numbers of Unique Part Designs
Our proprietary, highly scalable quoting technology addresses the manual processes
conventionally involved in submitting a design, analyzing its manufacturability, making design revision recommendations and generating price quotations. This enables us to quickly analyze high volumes of 3D CAD part design submissions and provide
feedback to our prospective product developer customers. In the first nine months of 2012 alone, we generated quotations for over 230,000 design submissions. Our proprietary manufacturing automation technology is also highly scalable, enabling us to
process large numbers of unique designs and efficiently manufacture the related parts to meet the needs of product developers.
Our Competitive Advantages
We believe our leadership position is based on a number of distinct competitive advantages:
Advanced Proprietary Technology
Our proprietary
technology automates much of the skilled labor conventionally required to quote and manufacture low-volume custom parts, including the often time-consuming steps of design submission, manufacturability analysis and feedback, quotation, order
submission, mold design, tool path generation, mold or part manufacture, and production management. This technology has been developed and continually expanded and refined over our 13 years of providing custom mold and part manufacturing services to
our customers. We believe our proprietary technology gives us significant advantages over our competitors, who typically lack the expertise and resources to develop similar technology. See Selected Consolidated Financial Data for
disclosure of our historical research and development expenses.
Turnaround Speed
We believe we are generally the fastest provider of low-volume custom CNC machined or injection molded parts.
By automating many of the manual and
time-consuming steps conventionally required to obtain low-volume custom parts, we have established a unique advantage over our competitors that lack similar capabilities. Our proprietary technology and advanced manufacturing processes allow product
developers to submit designs at any time and enable us to ship parts to our customers in as little as one business day. Our competitors often require several days just to generate a price quotation and may take even more time if the order parameters
are subsequently changed by the product developer.
Operations Designed for Low-Volume Manufacturing
Unlike conventional custom parts manufacturers, our operating model is specifically designed for efficient low- volume
production. Our customer interactions occur primarily online, and our proprietary technology eliminates much of the skilled labor conventionally required for manufacturability analysis and feedback, quotation, order submission, mold design, tool
path generation and mold or part manufacture. These functions typically account for a significant portion of the total costs in the low-volume custom parts manufacturing environment. Our automation enables us to quote many thousands of CNC machined
or injection molded part designs per month, which we believe few of our competitors can match.
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Marketing and Sales Strength
We have developed expertise in marketing to
product developers, both within our existing customer companies and at companies we have not yet served. We attract customers by using a variety of marketing tactics, resulting in both lead generation and brand reinforcement. Through
September 30, 2012, we have generated a database of over 275,000 product developers that represent current or potential future users of our services.
We have also built a professionally-led international sales organization focused on quickly following up on marketing
leads and quotation requests, understanding our customers internal initiatives, converting prospects into customers by conveying our value proposition, and finding additional leads within our existing customer companies. We believe that our
marketing and sales organization is a key competitive advantage and that most of our competitors lack the expertise and resources to establish and maintain an organized, international program of similar scale.
Deep Industry Knowledge
We believe that the
volume of new custom part designs we process and the size and diversity of our customer base give us unique insight into the needs of our prospective customers. This has allowed us to focus our development resources on areas that we believe
represent significant opportunities for our business. Through September 30, 2012, we have received over 940,000 uploaded part designs, sent over 800,000 part quotations and shipped over 190,000 unique parts to approximately 26,000 product
developers representing over 12,000 customer companies across a wide range of industries.
Our Growth Strategy
The principal elements of our growth strategy are to:
Increase Penetration of Existing Customer Companies
We plan to expand our customer base to
include more product developers within the companies that have already used our services. Individual product developers typically make or influence the choice of vendor when sourcing low-volume custom parts. We believe a significant opportunity
exists for us to leverage highly satisfied product developers to encourage others within the same organization to utilize our services. We have historically generated a significant number of new customers through word-of-mouth referrals from other
product developers, and we plan to combine these referrals with the efforts of our marketing and sales force to identify and market our services to the colleagues of our existing customers.
Gain New Customer Companies in Existing Geographic Markets
We plan to use our marketing and sales
capabilities to continue to pursue product developers within companies who have not yet used our services. Our presence in geographic regions that have high populations of 3D CAD users provides us with a broad universe of potential new customer
companies on which to focus our marketing and sales efforts.
Expand the Range of Parts We Offer
We regularly analyze the universe of customer design submissions that we are currently unable to manufacture and focus a
significant portion of our research and development efforts on expanding the range of parts that we can produce. Since we first introduced our Protomold injection molding service in 1999, we have steadily expanded the size and geometric complexity
of the injection molded parts we are able to manufacture, and we continue to extend the diversity of materials we are able to support. Similarly, since first introducing our Firstcut CNC machining service in 2007, we have expanded the range of part
sizes, design geometries and
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materials we can support. As we expand the range of our existing process capabilities, we believe we will meet the needs of a broader set of product developers and consequently convert a higher
number of quotation requests into orders.
Introduce New Manufacturing Processes
We seek to identify additional manufacturing processes to which we can apply our technology and expertise to meet a
greater range of product developers needs. Introducing new manufacturing processes can both attract new customers and provide us with a significant opportunity to cross-sell with our existing services to our existing customer base. As an
example of a new manufacturing process, our Firstcut service was first introduced in the United States in 2007 and has grown to represent 25% of our total revenue in the year ended December 31, 2011. We regularly evaluate new manufacturing
processes to offer product developers and introduce them when we are confident that a sufficient market need exists and that we can offer the same advantages our customers have come to expect from us.
Expand into New Geographic Markets
We believe there may be
opportunities to grow by identifying and expanding into select additional geographic markets. We currently operate in the United States, Europe and Japan where we believe a substantial portion of the worlds product developers are located. We
entered the European market in 2005, and by 2011, this region had grown to represent approximately 20% of our total revenue. We launched operations in Japan in late 2009 and, while still in the development stage, have achieved enough growth there to
prompt a move into a larger facility in early 2012. While we currently do not have specific plans to expand into any particular geographic markets, we believe opportunities exist to serve the needs of product developers in select new geographic
regions and we will continue to evaluate such opportunities if and when they arise.
Capitalize on Increasing Customer Expectations for 24/7 Access to Comprehensive, User-Friendly E- Commerce Capabilities
We plan to further enhance the functionality
and ease of use of our platform and expand the capabilities of our technology in order to further increase automation and meet the evolving needs of product developers worldwide. We believe product developers have come to expect advanced web-based
tools and a fully integrated Internet platform from their vendors. We will continue to use the Internet to provide product developers with a standardized interface through which they can upload their 3D CAD models and obtain firm, interactive
quotations quickly and efficiently.
Our
Services
Our Firstcut and
Protomold services offer many product developers the ability to quickly and efficiently outsource their low-volume, quick-turn custom parts manufacturing. See Managements Discussion and Analysis of Financial Condition and Results of
Operations for the historical revenue generated by each of Firstcut and Protomold.
Firstcut
Our Firstcut service uses commercially-available CNC machines to cut plastic or metal blocks into one or more custom parts based on the 3D CAD model uploaded by the product developer. Our
efficiencies derive from the automation of the programming of these machines and a proprietary fixturing process. The Firstcut service is well suited to produce small quantities, typically in the range of one to ten parts.
Protomold
Our Protomold service uses our 3D CAD-to-CNC
machining technology for the automated design and manufacture of aluminum injection molds, which are then used to produce custom injection-molded plastic parts
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on commercially-available equipment. Our Protomold service is used for both prototype and short-run production. Prototype quantities typically range from 25 to 100 parts. Because we retain
possession of the molds, customers who need short-run production often come back to Protomold for additional quantities typically ranging up to 10,000 parts. They do so either to support pilot production while their tooling for high-volume
production is being prepared or because their product will only be released in a limited quantity. These additional part orders typically occur on approximately 50% of the molds that we make, typically accounting for approximately half of our total
Protomold revenue.
The process
for both Firstcut and Protomold begins when the product developer uploads one or more 3D CAD models representing the desired part geometry. Our proprietary software uses complex algorithms to analyze the 3D CAD geometry, analyze its
manufacturability and support the creation of an interactive, web-based quotation containing pricing and manufacturability information. A link to the quotation is then e-mailed to the product developer, who can access the quotation, change a variety
of order parameters and instantly see the effect on price before finalizing the order. For Firstcut, the tool paths are then reviewed and routed to our high-speed CNC machining centers for execution. In the case of Protomold, our proprietary
software supports the creation of the mold design and the tool paths required to manufacture the mold components, which are then routed to our CNC machining centers for execution. Once the mold is assembled, it is placed in one of our injection
molding presses to create the required parts. For both our Firstcut and Protomold services, we ship parts in as little as one business day from design submission. We ship our parts via small parcel common carriers on standard terms and conditions.
The following diagram summarizes
the technology-enabled processes described above:
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Our Technology
Our technology eliminates much of the
skilled labor conventionally associated with quoting and preparing a new part design for manufacture. Our proprietary software largely automates the areas of manufacturability analysis and feedback, price quotation, order submission, mold design,
tool path generation, mold or part manufacture and production management. The more computationally intensive aspects of this software utilize a proprietary parallel processing software environment running on our in-house compute cluster servers.
Manufacturability Analysis
Our proprietary software
analyzes the 3D CAD models submitted by our customers to determine the extent to which they are suitable for our standardized manufacturing processes. In the case of CNC machining, this manufacturability analysis identifies features that may be too
fragile to be machined and areas that cannot be machined at all. For injection molding, problematic features such as undercuts, thin areas, thick areas and areas requiring geometry adjustments to allow the part to be ejected from the mold are
identified. Many of our customers find this analysis particularly helpful, as it diagnoses and prevents potential problems prior to manufacturing. We can also provide a flow analysis to identify parts that may be so thin and large that plastic will
solidify before the mold can be completely filled. Our manufacturability analysis plays a major role in our automated pricing algorithms.
Web-Based Quotation
We have branded our Firstcut and Protomold
automated quotation systems as FirstQuote and ProtoQuote. Both deliver an interactive graphical quotation to the customer in the form of a web page that includes a color-coded 3D representation of the part highlighting features relevant to
manufacturability. In some cases, features are indicated that must be changed to be compatible with our process. We also highlight and recommend design improvements that might be made to improve the manufacturability of the part, or to indicate any
possible deviations between the part as it was designed and how it will be manufactured. The web-based quotation allows the customer to change material, finish, quantity or shipping schedule of orders. Pricing indicated on the web-based quote
instantly updates after each of these changes.
Mold Design
Our software technology and mold manufacturing system have co-evolved over more than 13 years of development, resulting in a standardized and efficient process for taking a customers
3D CAD model and creating the physical mold needed to make plastic parts. Our software enables our mold designers to quickly create the mold geometry specific to the customers part and automates the design of most other mold features, thus
eliminating much of the skilled labor normally associated with mold design in a conventional environment.
Automated Tool Path Generation
In support of both our Firstcut and
Protomold services, our proprietary software automates much of the skilled labor conventionally needed to generate the tool paths necessary to machine the required parts and mold components. Our software automation allows our users to do in minutes
what can often require hours or days of labor for manufacturers using commercial computer-aided manufacturing, or CAM, software.
Parallel Processing
The mathematical algorithms required to
analyze manufacturability and generate tool paths are computationally intensive. We have developed a proprietary parallel processing software environment to accelerate the processing of individual jobs and allow straightforward scalability to a
large number of jobs. This software system typically runs on a cluster of industry-standard 64-bit computers connected to each other and to our internal users computers over an isolated gigabit Ethernet local area network. We currently have
clusters in multiple manufacturing facilities, two in the United States and one each in the United Kingdom and Japan.
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Monitoring and Control
We have developed a proprietary,
intranet-based monitoring and control system that allows us to monitor key aspects of our entire worldwide operations in real time using an easy to understand management dashboard. This system provides us with the ability to quickly react to new
information across our organization.
Marketing
Our international,
integrated marketing effort generates leads for our sales teams and seeks to strengthen our reputation as a leader in the field of quick turn, low-volume custom manufacturing. Much of our marketing activities occur over the Internet. We use
marketing automation software to enhance the productivity of our sales and marketing teams and to track results of all campaigns to enhance our marketing return on investment.
We maintain brand awareness with product
developers through the regular distribution of technical information including design guidelines, engineering white papers and a quarterly journal targeted at product developers. We also send out product giveaways that highlight technical aspects of
injection molding we feel would be of interest to product developers. We believe these educational materials are key aspects of our lead generation efforts. In our Cool Idea! marketing program, we plan to award up to a total of $100,000 of our
services to entrepreneurs with cool ideas. In addition to supporting entrepreneurs and innovative product development, we believe this program can generate good will, press coverage and word-of-mouth brand awareness.
Sales and Customer Service
We maintain an internal sales team trained
in the basics of part design and the capabilities of our manufacturing services, as well as the key advantages of our services over alternative methods of low-volume custom parts manufacturing. We organize our sales team into two complementary
roles: business development and account management, the former focused on selling to new customer companies and the latter focused on expanding sales within existing customer companies. We believe our sales staff is adept at researching customer
companies and networking to find additional product developers that may have a need for our services. We also have a team of customer service engineers who can support highly technical engineering discussions with product developers as required
during the sales process.
Competition
The market for low-volume
custom parts manufacturing is fragmented, highly competitive and subject to rapid and significant technological change. Our potential competitors include:
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Captive in-house services
. Many larger companies undertaking product development have established CNC machining, injection
molding or additive rapid prototyping capabilities internally to support the prototyping requirements of their product developers.
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Other custom manufacturers.
There are thousands of machine shops and plastic injection molding suppliers worldwide. The size and
scale of these businesses range from very small specialty shops to large, high-volume production manufacturers.
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Alternative manufacturing vendors
. Various manufacturing processes, other than CNC machining and injection molding, are offered
by other vendors. We generically refer to the most well known of these processes as additive rapid prototyping, which have been commercialized under labels such as stereolithography, selective laser sintering, fused deposition modeling
and 3D printing.
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We believe that the key competitive factors in our industry include:
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Speed: turnaround time for quotations and parts;
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Price: mold and piece part pricing;
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Quality: dimensional accuracy, surface finish, material properties, color and cleanliness;
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Capability: size and dimensional complexity of the part, materials supported and post-processing provided;
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Capacity: ability to support multiple part designs in parallel; and
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Service: overall customer experience, from web interface to post-sales support.
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We believe that we have competitive strengths
that position us favorably and have enabled us to become a leader in our markets. We also believe that substantially all of our current direct competitors are relatively small in terms of size of operations, revenue, number of customers and volume
of parts sold, and generally lack our technological capabilities. However, our industry is evolving rapidly and other companies, including potentially larger and more established companies with developed technological capabilities, may begin to
focus on low-volume custom parts manufacturing. These companies could more directly compete with us, along with our existing competitors, and both could also launch new products and services that we do not offer that may quickly gain market
acceptance. Any of the foregoing could adversely affect our ability to attract customers.
Intellectual Property
We regard our patents, trademarks, service marks, trade dress, trade secrets, copyrights, domain names and other intellectual property as valuable to our business and rely on patent,
trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, vendors and others to protect our proprietary rights. We register our patents, trademarks and service marks in the
United States and other jurisdictions, as we deem appropriate. As of September 30, 2012, we own and have applications pending for patents relating to various aspects of our quoting and manufacturing processes as follows:
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Jurisdiction
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Issued Patents
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Applications Pending
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United States
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14
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United Kingdom
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Germany
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Our patents
have expiration dates ranging from 2022 to 2029. We also own approximately 11 registered United States trademarks or service marks as of September 30, 2012, with corresponding registered protection in Europe and Japan for the most important of
these marks such as PROTO LABS, PROTOMOLD, FIRSTCUT, PROTOQUOTE, FIRSTQUOTE and PROTOFLOW and corresponding registered protection in Australia, Canada and Mexico for PROTOMOLD. There can be no assurance that the steps we take to protect our
proprietary rights will be adequate or that third parties will not infringe or misappropriate such rights. We have been subject to claims and expect to be subject to legal proceedings and claims from time to time in the ordinary course of our
business. In particular, we may face claims from third parties that we have infringed their patents, trademarks or other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and
managerial resources. Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business and harm our operating results.
Employees
As of September 30, 2012, we had 610
full-time employees. None of our employees is covered by a collective bargaining agreement. We consider our current relationship with our employees to be good. We also regularly use independent contractors and other temporary employees across the
organization to augment our regular staff. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel.
71
Properties
United States
Our corporate headquarters are located in
Maple Plain, Minnesota in a facility we own encompassing approximately 95,000 square feet of office and manufacturing space. We also own a nearby facility encompassing approximately 35,000 square feet of manufacturing space. We lease an additional
facility on a property adjacent to our headquarters that encompasses approximately 40,000 square feet of manufacturing space. The lease for this facility expires in 2017, subject to our option to renew for up to two additional five-year terms. In
the fourth quarter of 2011, we purchased for $3.95 million property in Rosemount, Minnesota that includes a facility encompassing approximately 128,000 square feet of manufacturing and office space. With the addition of this property, we believe
that our United States facilities will provide sufficient space for our United States operations for the foreseeable future.
Europe
Our European operations are headquartered in Telford, United Kingdom in a leased facility encompassing approximately
135,000 square feet of office and manufacturing space. The lease for this facility expires in 2016.
We also lease office space in Mosbach, Germany and Chambery, France for sales and customer service and technical support staff. We expect that the existing European production facilities
will provide sufficient space for our European operations for the foreseeable future.
Japan
Our Japan operations are headquartered in Yamato-Shi, Kanagawa, Japan (southwest of Tokyo) in a leased facility encompassing approximately 32,000 square feet of office and manufacturing
space. The lease expires in November 2021 and has a cancellation clause with six months prior notice without penalty. We believe that this facility will provide sufficient space for our Japan operations for the foreseeable future.
Legal Proceedings
From time to time, we are subject to various
legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of this prospectus, we do not believe we are party to any
litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business.
72
Management
Executive Officers and Directors
The following table sets forth information
regarding our executive officers and directors as of October 15, 2012:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
Lawrence J. Lukis
|
|
|
64
|
|
|
Chairman and Chief Technology Officer
|
Bradley A. Cleveland
|
|
|
52
|
|
|
President, Chief Executive Officer and Director
|
Edward E. Bolton
|
|
|
46
|
|
|
Vice President of Culture
|
William M. Dietrick
|
|
|
56
|
|
|
Vice President of Marketing
|
John R. Judd
|
|
|
56
|
|
|
Chief Financial Officer
|
Donald G. Krantz
|
|
|
57
|
|
|
Chief Operating Officer
|
Thomas H. Pang
|
|
|
52
|
|
|
Managing Director of Proto Labs G.K.
|
Jacqueline D. Schneider
|
|
|
47
|
|
|
Vice President of Sales and Customer Service
|
John B. Tumelty
|
|
|
42
|
|
|
Managing Director of Proto Labs, Limited
|
Rainer Gawlick
(1)
|
|
|
44
|
|
|
Director
|
John B. Goodman
(2)(3)
|
|
|
52
|
|
|
Director
|
Douglas A. Kingsley
(1)
|
|
|
50
|
|
|
Director
|
Douglas W. Kohrs
(1)
|
|
|
54
|
|
|
Director
|
Margaret A. Loftus
(3)
|
|
|
68
|
|
|
Director
|
Brian K. Smith
(2)
|
|
|
53
|
|
|
Director
|
Sven A. Wehrwein
(2)(3)
|
|
|
61
|
|
|
Director
|
|
(1)
|
|
Member of Compensation Committee
|
|
(2)
|
|
Member of Audit Committee
|
|
(3)
|
|
Member of Nominating and Governance Committee
|
Lawrence J. Lukis
. Mr. Lukis founded our company in 1999 and has served as our Chairman and Chief
Technology Officer since November 2001. In 1985, Mr. Lukis co-founded LaserMaster Corp. (later ColorSpan), an innovator in laser printing products for desktop publishers and large format color inject printers, and served as a director and Chief
Technology Officer from 1985 to 1997. ColorSpan was acquired by MacDermid Inc. in 2000 and was subsequently resold to Hewlett-Packard in 2007. Mr. Lukis currently serves on the board of directors of Karbon Kinetics Ltd., a manufacturer of electric
bicycles.
Mr. Lukiss
institutional knowledge and his operational and technical experience allow him to provide guidance and leadership in his role as our Chairman. We believe his in-depth understanding of our companys strategic plan, technology, global business,
and history enable Mr. Lukis to serve as an effective Chairman of our board of directors.
Bradley A. Cleveland
. Mr. Cleveland has served as our President and Chief Executive Officer since November 2001. Prior to November 2001, Mr. Cleveland co-founded
and was Vice President of AeroMet Corporation, a laser additive manufacturing subsidiary of MTS Systems Corporation.
Mr. Cleveland has gained meaningful leadership experience and institutional knowledge in his 10 years at our company.
As Chief Executive Officer, he is responsible for determining our strategy, articulating priorities and managing our continued growth. These capabilities make him uniquely qualified to serve on our board of directors.
Edward E. Bolton
.
Mr. Bolton has served as our Vice President of Culture since September 2011. From September 2006 to September 2011, Mr. Bolton served as Corporate Human Resources Director at Ryt-Way Industries, LLC, a packaging company.
73
William M. Dietrick
. Mr. Dietrick has served as our Vice
President of Marketing since May 2008 and as an interim President of our subsidiary in Japan from April 2010 to October 2010. From June 2005 to May 2008, Mr. Dietrick was a partner with Premise Immersive Marketing, a marketing consulting firm.
From December 2005 to February 2008, Mr. Dietrick served as General Manager of Witt Vending Co., a vending and catering company. From 2002 to 2005, Mr. Dietrick was Vice President and General Manager of Landscape Structures, a commercial
playground equipment manufacturer.
John R. Judd
. Mr. Judd has served as our Chief Financial Officer since June 2011. From June 2006 to
June 2011, Mr. Judd served as Chief Financial Officer of Compellent Technologies, Inc., a network-storage company. From October 2003 to July 2006, Mr. Judd served as Chief Financial Officer of ATS Medical, Inc., a medical device
manufacturer. From June 2000 to October 2003, Mr. Judd served as Controller of American Medical Systems Holdings, Inc., a medical device manufacturer. From 1997 to 1999, Mr. Judd served as Chief Financial Officer of the Autoglass Division
of Apogee Enterprises, Inc., a glass technology company.
Donald G. Krantz
. Dr. Krantz has served as our Chief Operating Officer since January 2007. From November 2005 to January 2007, Dr. Krantz served as our Vice
President of Development. Prior to joining our company, Dr. Krantz served in various roles at MTS Systems, Inc., a builder of custom precision testing and advanced manufacturing systems, including as a business unit Vice President, Vice
President of Engineering, and most recently, Chief Technology Officer. Dr. Krantz was an Engineering Fellow at Alliant Techsystems and Honeywell, Inc., and was named the 2005 Distinguished Alumnus of the Department of Computer Science and
Engineering at the University of Minnesota.
Thomas H. Pang
. Dr. Pang has served as the Managing Director of Proto Labs G.K. (Japan) since November 2010. Dr. Pang leads our companys operations in Japan.
From June 1999 to November 2010, Dr. Pang held various positions at 3D Systems, Inc., a 3D content-to-print solutions company, most recently as Managing Director and as General Manager and Vice President of Asia-Pacific Operations at 3D Systems
Japan K.K. and 3D Systems, Inc., respectively.
Jacqueline D. Schneider
. Ms. Schneider has served as our Vice President of Sales and Customer Service since February 2007. From November 2005 to February 2007,
Ms. Schneider served as National Sales Director for Comm-Works, LLC, a global technology provider.
John B. Tumelty
. Mr. Tumelty has served as the Managing Director of Proto Labs, Limited, our subsidiary
in the United Kingdom, since its inception in July 2005. Mr. Tumelty leads our companys operations in Europe. From March 1997 to June 2005, Mr. Tumelty held various positions at Western Thomson Plastics Ltd, an automotive systems
supplier, most recently as Managing Director.
Rainer Gawlick
. Dr. Gawlick has served as a director of our company since September 2008 and serves as the chair of the compensation committee. Since April 2012,
Dr. Gawlick has been the Chief Marketing Officer and Executive Vice President of North America Sales for IntraLinks, Inc., a computer software company providing virtual data rooms and other content management services. From August 2008 to April
2012, Dr. Gawlick served as Chief Marketing Officer of Sophos Ltd, a computer security company providing endpoint, network and data protection software. From April 2005 to August 2008, Dr. Gawlick served as Vice President of Worldwide
Marketing and Strategy at SolidWorks Corp., a CAD software company. He also has held a variety of executive positions in other technology businesses and was a consultant with McKinsey & Company.
Dr. Gawlick has extensive marketing and
product-management experience in the technology industry. Dr. Gawlick offers expertise in building brand awareness, managing marketing on a global scale and developing growth strategies, which enables him to counsel our company on its global
expansion.
John B.
Goodman
. Mr. Goodman has served as a director of our company since 2001 and serves as a member of the audit committee and as chair of the nominating and governance committee. Since 2007,
74
Mr. Goodman has been a director of Separation Kinetics Inc., a membrane company. From December 1982 to October 2010, Mr. Goodman held various positions at Entegris, Inc., a materials
supplier, most recently as Senior Vice President and Chief Technology & Innovation Officer.
Mr. Goodmans technical background and experiences in supply chain networks, logistics and financial planning
and reviews enable Mr. Goodman to provide guidance and counsel on our strategic plan, research and development, supplier relationships and finance functions.
Douglas A. Kingsley
.
Mr. Kingsley has served as a director of our company since August 2008 and serves as a member of the compensation committee. Since January 2007, Mr. Kingsley has been a General Partner at North Bridge, a venture capital firm. From January
1990 to December 2006, Mr. Kingsley held various positions at Advent International Corporation, a private equity firm, most recently as Special Partner. Mr. Kingsley also served as a director of Veeco Instruments Inc. from May 2000 to May
2009.
Mr. Kingsleys
extensive experience in the financial industry allows him to provide guidance and counsel on financial matters and in his role on our compensation committee. His experiences working with growth companies in the course of his role at North Bridge, as
well as his experience serving on the boards of directors of public and private companies, enables Mr. Kingsley to provide insight on strategic plans relating to our business and guidance on corporate governance.
Douglas W. Kohrs
.
Mr. Kohrs has served as a director of our company since April 2012 and serves as a member of the compensation committee. From July 2006 to November 2012, Mr. Kohrs was the President, Chief Executive Officer and a director of Tornier N.V.,
a publicly held medical device company. Prior to joining Tornier, he served as President and Chief Executive Officer of American Medical Systems Holdings, Inc., a publicly held medical device company, from April 1999 until January 2005 and
served as Chairman of the Board of American Medical Systems Holdings, Inc. until May 2006. Prior to joining American Medical Systems Holdings, Inc., Mr. Kohrs was General Manager of Sulzer Spine-Tech Inc., an orthopaedic implant
manufacturer of which he was a founding member beginning in August 1991. Mr. Kohrs has served on the board of directors of ev3 Inc. and Kyphon, Inc., both publicly held medical device companies. Since July 2012 he has served on the board
of directors of Pioneer Surgical Technology, Inc. a designer and manufacturer of spinal and orthopedic implants and instruments.
Mr. Kohrs is qualified to serve on our board because he has knowledge of financial matters and, due to serving as the
Chief Executive Officer of American Medical Systems Holdings, Inc. at the time of its initial public offering and his experience as Chief Executive Officer at Tornier, he has expertise with the requirements involved with being a public company.
Margaret A. Loftus
.
Ms. Loftus has served as a director of our company since April 2001 and serves as a member of the nominating and governance committee. Since June 1998, Ms. Loftus has been a director of Datalink Corporation, a data-center support company.
She currently serves as Datalink Corporations governance committee chair. Since 1991, Ms. Loftus has been the chair of the board of directors of Unimax Systems Corporation, a provider of voice-administration software. She also serves as
Unimax Systems Corporations audit committee chair. Ms. Loftus has provided consulting services to technology companies since 1989. Prior to 1989, she served as Vice President of Software for Cray Research, Inc., a supercomputer company.
Ms. Loftus also served as a director of Analysts International Corp. from 1993 to 2008.
Ms. Loftus has public and private board and consulting experiences in the technology industry, which allow her to provide counsel on strategy and corporate governance and guidance in
her role on our nominating and governance committee.
Brian K. Smith
. Mr. Smith has served as a director of our company since June 2005 and serves as a member of the audit committee. Since December 1998, Mr. Smith has
been President and an owner of Private Capital
75
Management, Inc., a registered investment advisor. In his capacity as President of Private Capital Management, Inc., Mr. Smith has acted as a principal and director of approximately fifteen
middle-market portfolio companies. From 1994 to 1998, Mr. Smith was the Managing Partner of Northland Business Capital, LLP, a private equity partnership, and Senior Vice President of The Northland Company, a financial services firm. Prior to
1994, Mr. Smith spent 15 years in the banking industry.
Mr. Smith has knowledge of financial matters, merger and acquisition activities and capital markets and experience in leadership positions with companies at a variety of stages.
Mr. Smiths experiences enable him to provide oversight concerning general business matters and risk management and counsel on financial matters in his role on our audit committee.
Sven A. Wehrwein
. Mr. Wehrwein has served as a director of our company since
June 2011 and serves as chair of the audit committee and as a member of the nominating and governance committee. Mr. Wehrwein has been an independent financial consultant to emerging companies since 1999. He has more than 35 years of experience
as an investment banker, chief financial officer and certified public accountant (inactive). He currently serves on the board of directors of SPS Commerce, Inc., a supply-chain management software company, and Uroplasty, Inc., a medical device
company, and previously served on the board of directors of Image Sensing Systems, Inc., a vehicle-detection software company, all of which are publicly-traded companies. Mr. Wehrwein also served on the board of directors of Compellent
Technologies, Inc. from April 2007 until its acquisition by Dell Inc. in February 2011, on the board of directors of Synovis Life Technologies, Inc. from December 2004 until its acquisition by Baxter International Inc. in February 2012, and on the
board of directors of Vital Images, Inc. from May 1997 until its acquisition by Toshiba Medical Systems Corp. in June 2011.
Mr. Wehrweins qualifications to serve on our board of directors include, among other skills and qualifications,
his capabilities in financial understanding, strategic planning and auditing expertise, given his experiences in investment banking and in financial leadership positions. As chairman of the audit committee, Mr. Wehrwein also keeps the board
abreast of current audit issues and collaborates with our independent auditors and senior management team.
Director Independence
Our board of directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, our board has
determined that, with the exception of Mr. Cleveland and Mr. Lukis, all of the directors are independent directors as defined by Section 303A.02 of the NYSE Listed Company Manual.
Board Committees
Our board of directors has established an
audit committee, a compensation committee and a nominating and governance committee. The charters of these committees are posted on our website. Our website is not part of this prospectus.
The composition and responsibilities of each committee are described below. Members serve on
these committees until their resignation or until otherwise determined by our board.
|
|
|
|
|
Audit Committee
|
|
Compensation Committee
|
|
Nominating and
Governance Committee
|
Sven A. Wehrwein (chair)
|
|
Rainer Gawlick (chair)
|
|
John B. Goodman (chair)
|
John B. Goodman
|
|
Douglas A. Kingsley
|
|
Margaret A. Loftus
|
Brian K. Smith
|
|
Douglas W. Kohrs
|
|
Sven A. Wehrwein
|
76
Audit Committee
Among other matters, our audit committee:
|
|
|
oversees managements processes for ensuring the quality and integrity of the companys consolidated financial statements,
the companys accounting and financial reporting processes, and other financial information provided by the company to an governmental body or to the public;
|
|
|
|
evaluates the qualifications, independence and performance of the companys independent auditor and internal audit function; and
|
|
|
|
supervises managements processes for ensuring compliance by the company with legal, ethical and regulatory requirements.
|
Each of the
members of our audit committee meets the requirements for financial literacy under the applicable rules and regulations of the SEC and the NYSE. Our board of directors has determined that Sven A. Wehrwein is an audit committee financial expert, as
defined under the applicable rules of the SEC. Each member of our audit committee satisfies the general NYSE independence standards and, except for Mr. Smith, the independence standards of Rule 10A-3(b)(1) under the Exchange Act. Mr. Smith
will serve for up to one year from the date of our initial public offering in compliance with the applicable phase-in rules or potentially longer if he satisfies the independence standards of Rule 10A-3(b)(1) prior to the first anniversary of our
initial public offering.
Nominating and Governance Committee
Among other matters, our nominating and
governance committee:
|
|
|
identifies qualified individuals to become board members;
|
|
|
|
determines the composition of the boards committees and assesses and enhances the effectiveness of the board and individual
directors;
|
|
|
|
develops and implements corporate governance guidelines for the company; and
|
|
|
|
ensures that succession planning takes place for critical senior management positions.
|
Each member of our nominating and governance
committee satisfies the NYSE independence standards.
Compensation Committee
Among other matters, our compensation committee:
|
|
|
reviews and approves compensation and employment arrangements for executive officers;
|
|
|
|
administers compensation plans for employees; and
|
|
|
|
determines the compensation of non-employee directors.
|
Each member of our compensation committee satisfies current NYSE independence standards, as
well as the current version of the proposed NYSE rules that would enhance independence standards for compensation committee members.
Board Leadership Structure
Our board of directors is led by Mr. Lukis in his role as Chairman. Mr. Lukis is also our founder and the Chief
Technology Officer, or CTO. Our board also has designated Mr. Wehrwein as the lead independent director to complement the Chairmans role and to serve as the principal liaison between the independent directors and the Chairman.
77
Our board of directors believes that its current structure is the
appropriate one for Proto Labs at this time. Specifically, our board believes that its current leadership structure provides independent board leadership and engagement while deriving the benefit of having our founder and CTO also serve as Chairman
of the board. As the individual with primary responsibility for managing the companys technology and with in-depth knowledge and understanding of the company, he is best positioned to chair regular board meetings as the directors discuss key
business and strategic issues. Coupled with a lead independent director, this combined structure provides independent oversight while avoiding unnecessary confusion regarding the boards oversight responsibilities and the day-to-day management
of business operations. Our board continues to separately evaluate Mr. Lukis annually in each of his roles. Our board also believes that its lead independent director position effectively balances any risk of concentration of authority that may
exist with a combined Chairman/CTO position.
Mr. Wehrwein functions as our lead independent director. As lead independent director, Mr. Wehrwein:
|
|
|
presides at all meetings of the board of directors at which the Chairman is not present, including executive sessions of the
independent directors;
|
|
|
|
acts as a key liaison between the Chairman and the independent directors;
|
|
|
|
conducts the annual performance review of the Chief Executive Officer, with input from the other independent directors;
|
|
|
|
assists the Chairman in setting the board agenda and frequency of meetings; and
|
|
|
|
has the authority to convene meetings of the independent directors at every meeting.
|
Role of the Board in Risk Oversight
Our management is responsible for defining
the various risks facing the company, formulating risk management policies and procedures, and managing the companys risk exposures on a day-to-day basis. The boards responsibility is to monitor the companys risk management
processes by using board meetings, management presentations and other opportunities to educate itself concerning the companys material risks and evaluating whether management has reasonable controls in place to address the material risks; the
board is not responsible, however, for defining or managing the companys various risks. The full board is responsible for monitoring managements responsibility in the area of risk oversight. In addition, the audit committee and
compensation committee have risk oversight responsibilities in their respective areas of focus, which they report on to the full board. Management reports from time to time to the full board, audit committee and compensation committee on risk
management. The board focuses on the material risks facing the company, including operational, credit, liquidity, and legal risks, to assess whether management has reasonable controls in place to address these risks.
Code of Conduct
We have adopted a code of business conduct
and ethics relating to the conduct of our business by our employees, officers and directors, which is posted on our website.
Compensation Committee Interlocks and Insider Participation
During 2011, Dr. Gawlick,
Mr. Goodman, Mr. Kingsley, Ms. Loftus, and Mr. Smith served as the members of our compensation committee, and none of the members of the compensation committee during 2011 have served as employees or officers of the company. No
executive officer of the company served as a member of the board of directors or compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another
entity that had any of its executive officers serving as a member of our board of directors or compensation committee during 2011.
78
Director Compensation
Directors who are also our employees receive no additional compensation for serving on our
board of directors. Prior to the completion of our initial public offering in February 2012, each of our non-employee directors who was not affiliated with our significant shareholders at that time received a meeting fee of $1,000 for each board
meeting attended in person, and $500 for each such meeting attended by telephone, and received one or more stock awards during his or her term of service as a director. The only stock award made to non-employee directors during 2011 was an award of
2,800 shares of our common stock to Mr. Wehrwein when he joined the board in June 2011. We have also from time to time paid non-employee directors who are not affiliated with our significant shareholders $1,000 per day for time spent consulting
with company management outside of board or committee meetings. One director received such payments during 2011.
The following table sets forth information concerning annual compensation for our non-employee directors during the year
ended December 31, 2011:
Non-Employee Director Compensation for 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees Earned or
Paid in Cash ($)
|
|
|
Stock Awards
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Rainer Gawlick
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
John B. Goodman
(1)
|
|
|
3,500
|
|
|
|
|
|
|
|
6,000
|
(1)
|
|
|
9,500
|
|
Douglas A. Kingsley
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margaret A. Loftus
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Brian K. Smith
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sven A. Wehrwein
(3)
|
|
|
2,000
|
|
|
|
56,200
|
(3)
|
|
|
24,000
|
(3)
|
|
|
82,200
|
|
|
(1)
|
|
Mr. Goodman received $6,000 for consulting with company management outside of board or committee meetings.
|
|
(2)
|
|
At December 31, 2011, Messrs. Kingsley and Smith were affiliated with significant shareholders and therefore did not receive compensation for
service as non-employee directors of the company.
|
|
(3)
|
|
Mr. Wehrwein first became a director of the company in June 2011. In connection with the commencement of his service as a director and as chair of
the audit committee, he was granted 2,800 fully vested shares of our common stock with a grant date fair value of $56,200, or $20.07 per share, an amount equal to the then current fair market value of our common stock. See Managements
Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies and Use of Estimates for a discussion regarding the determination of the fair market value of our common stock. In connection with this
equity award, Mr. Wehrwein also received a $24,000 tax gross-up payment.
|
The following table summarizes for each of our non-employee directors the number of shares underlying unexercised option awards as of December 31, 2011, the end of our most recent
year. These options were granted during the period from 2004 to 2009.
|
|
|
|
|
Name
|
|
Number of Shares
Underlying
Unexercised
Options
|
|
Rainer Gawlick
|
|
|
35,000
|
|
John B. Goodman
|
|
|
21,000
|
|
Douglas A. Kingsley
|
|
|
|
|
Margaret A. Loftus
|
|
|
91,000
|
|
Brian K. Smith
|
|
|
|
|
Sven A. Wehrwein
|
|
|
|
|
79
Prior to the completion of our initial public offering in February 2012,
stock option awards to our non-employee directors were made pursuant to our 2000 Stock Option Plan. These option awards have a ten-year term, are generally scheduled to ratably vest and become exercisable over a two- to five-year period and are
subject to accelerated vesting and exercisability if the director dies or becomes disabled or if there is a change in control of our company. In certain circumstances in connection with a change in control of our company, the 2000 Stock Option Plan
and the applicable award agreements provide our compensation committee with the discretion to cancel outstanding stock options in exchange for a cash payment to the option holder, or to act to protect outstanding options by substituting for them
options or voting common stock of the corporation (or its parent) surviving the change in control transaction. For a more complete description of these circumstances and what constitutes a change in control, see Executive
CompensationPotential Payments Upon Termination or Change in Control.
In November 2011, our board of directors approved a revised compensation program for our non-employee directors who are not affiliated with our significant shareholders. This program
became effective following the completion of our initial public offering in February 2012. The revised compensation program consists of the following elements:
|
|
|
Annual cash retainer:
|
|
$30,000
|
|
|
Annual cash retainer for lead independent director:
|
|
$15,000
|
|
|
Annual cash retainer for committee chairs:
|
|
Audit Committee: $15,000
Compensation Committee: $10,000
Nominating Committee: $7,500
|
|
|
Annual cash retainer for other committee members:
|
|
Audit Committee: $7,500
Compensation Committee: $5,000
Nominating Committee: $3,750
|
|
|
Annual equity award:
|
|
Stock option with $70,000 grant date fair value, becoming vested and exercisable in full on the first anniversary of the grant date
|
|
|
New director equity award:
|
|
Fully-vested shares of common stock with a value of $100,000 granted on the date the director is first elected to the board
|
|
|
Meeting fees:
|
|
Generally none, but compensation committee has the discretion to provide for meeting fees if the number of board of directors meetings exceeds eight per year or
if the number of meetings of any committee exceeds six per year
|
At the same
time, our board of directors also approved stock ownership guidelines for our non-employee directors who are not affiliated with our significant shareholders. Each such director is expected to own shares of our common stock with a fair market value
of at least three times the amount of the annual board member retainer, and to achieve this ownership level within three years after first joining our board of directors. Until a director has satisfied this ownership guideline, the director may not
dispose of any shares of our common stock, except for sales whose proceeds will be used to pay the exercise price in connection with an option exercise or to pay applicable income taxes in connection with the vesting, exercise or payout of any
equity-based award. For purposes of this guideline, shares subject to an unvested or unexercised equity-based award will not be counted as owned shares.
Our board of directors also approved an award of shares equivalent to a new director equity award as described above to be
made to each of our non-employee directors not affiliated with our significant
80
shareholders, such awards were made in connection with our initial public offering. As a result, Messrs. Gawlick, Goodman, and Wehrwein and Ms. Loftus each received 6,250 fully vested shares
of our common stock.
In
accordance with our revised non-employee director compensation program, on May 7, 2012, each non-employee director not affiliated with our significant shareholders at that time was granted a stock option for 4,672 shares of our common stock. As
a result, Messrs. Gawlick, Goodman, Kohrs and Wehrwein and Ms. Loftus each received a stock option grant for 4,672 shares of our common stock. The stock options have an exercise price of $30.58 per share, which was the closing price of our
common stock on the NYSE on May 7, 2012, and vest in full on May 7, 2013.
81
Executive Compensation
Compensation Discussion and Analysis
Overview
The compensation provided to our named
executive officers for 2011 is set forth in detail in the 2011 Summary Compensation Table and the other tables, accompanying footnotes and narrative that follow this section. This section explains our executive compensation philosophy, objectives
and design, our compensation-setting process, our executive compensation program components and the decisions made in 2011 affecting the compensation of our named executive officers.
Throughout this section, we refer to the following individuals as our named executive
officers:
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Bradley A. Cleveland, Chief Executive Officer, or CEO
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John R. Judd, Chief Financial Officer, or CFO
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Donald G. Krantz, Chief Operating Officer
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William R. Langton, Executive Vice President of Finance and former CFO
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Lawrence J. Lukis, Chairman and Chief Technology Officer
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Thomas H. Pang, Managing Director, Proto Labs G.K.
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Mr. Judd began employment as our CFO in June 2011. Mr. Langton assumed the position
of Executive Vice President of Finance in connection with the commencement of Mr. Judds employment.
Executive Compensation Philosophy and Objectives
We believe our success depends in large measure on our ability to attract, retain and motivate
a talented senior management team to effectively lead our company in a dynamic and changing business environment, and that a competitive executive compensation program is critical to that effort. We believe that our executive compensation program
should support our short-and long-term strategic and operational objectives, and reward corporate and individual performance that contributes to creating value for our shareholders.
Consistent with this philosophy, our executive compensation program incorporates the following
key principles and objectives:
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Provide a competitive total cash compensation opportunity that includes target bonus goals that are reasonably achievable yet represent
appreciable and appropriate improvement over prior periods;
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Utilize equity-based awards in a manner designed to emphasize their retentive function;
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Recognize and reward the achievement of company and business unit goals as well as individual performance;
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Provide compensation commensurate with the level of business performance achieved;
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Provide greater compensation opportunities for individuals who have the most significant responsibilities and therefore the greatest
ability to influence our achievement of strategic and operational objectives;
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Structure the compensation program so that it is understandable and easily communicated to executives, shareholders and other
constituencies;
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Structure the compensation program so as to align the interests of our executive officers with those of our shareholders and our
employees generally;
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82
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Place increasing emphasis on incentive/variable compensation for positions of increasing responsibility; and
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Make benefit programs available to executive officers consistent with those provided to salaried employees.
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Compensation
Decisions and Processes
The
compensation committee of our board of directors, which currently consists solely of non-employee directors, has generally been responsible for overseeing our executive compensation program, including annually reviewing the ongoing compensation
arrangements for each of our executive officers, including our President and CEO, Bradley A. Cleveland, and our Chairman and Chief Technology Officer, Lawrence J. Lukis. Our compensation committee approves all awards under our equity-based
compensation plan, with awards then ratified by our board of directors, which had approved all such awards prior to our initial public offering.
Our compensation committee has regularly received and considered input from Mr. Cleveland regarding the compensation
and performance of executive officers other than himself and Mr. Lukis, including recommendations as to compensation levels that he believes are commensurate with an individuals job performance, skills, experience, qualifications,
criticality to the company and development/career opportunities, as well as with our compensation philosophy, external market data and considerations of internal equity. In developing these recommendations, Mr. Cleveland consults with
Mr. Lukis. With the assistance of our CFO and following review by and input from Mr. Lukis, Mr. Cleveland also provides recommendations to the compensation committee regarding the establishment of performance goals for the annual
bonus plan based on the operating budget approved by our board of directors. The compensation committee meets with Mr. Lukis to consider and approve compensation actions for Mr. Cleveland and Mr. Lukis. Mr. Cleveland regularly
attends meetings of our compensation committee, except where his own compensation is being considered. Mr. Cleveland makes no recommendations to the compensation committee regarding his own compensation or that of Mr. Lukis. The
compensation committee communicates its views and decisions regarding compensation arrangements for our executive officers to Mr. Cleveland and Mr. Lukis, who are generally responsible for implementing the arrangements.
In determining executive compensation, our
compensation committee reviews and considers a number of factors, including individual and corporate performance, input from Mr. Cleveland and Mr. Lukis, compensation market data and the committees collective experience and
knowledge. We have not historically benchmarked total compensation or individual elements of compensation against specific comparable companies, but we have utilized market data about executive compensation levels obtained from third-party
compensation surveys to provide a framework for our decisions regarding base salary and target total cash compensation (base salary plus target annual bonus). We have used market data primarily as a reference point to assess whether our compensation
practices are reasonable, competitive and likely to achieve our objectives, and actually deliver compensation in amounts that are consistent with the compensation committees assessment of our companys relative performance. As part of
these assessments, we assumed that base salary and target total cash compensation levels were likely to be reasonable and competitive if they approximated the market median we calculated from the surveys we utilized, which for us generally meant a
range between 80% and 120% of the market median. The utilization of a range is largely in recognition of the limitations of survey data that include companies with varying degrees of comparability to our company and position titles that may
encompass positions with responsibilities that differ to varying degrees from the responsibilities of a similarly titled position within our company. As a result, we did not establish specific compensation amounts or parameters for any executive
officer position based on market data, recognizing that factors unique to each individual will ultimately determine that individuals compensation, which may not necessarily be within the median range.
For compensation provided in 2010 and 2011,
we obtained market data about executive compensation levels and practices from third-party compensation surveys national in scope, such as the Watson Wyatt Top Management Compensation Survey and the Employers Association National Executive
Compensation Survey,
83
as well as surveys that are geographically targeted on areas such as the upper-Midwest United States and the United Kingdom. We focused primarily on the compensation practices of those
organizations considered most comparable to our company in terms of annual revenue, industry, number of employees and geographic location.
In June 2011, we engaged DolmatConnell & Partners to conduct a competitive analysis of our executive compensation
program from both a private and public company perspective and to provide recommendations as to an executive compensation framework as a public company. In assessing competitiveness from a public company perspective, DolmatConnell considered public
company market data drawn from a peer group of 20 companies identified by DolmatConnell as representative of the market for executive talent in which we compete, as well as from a composite of proprietary survey sources reflecting
appropriately-sized companies by revenue. For the peer group companies, annual revenue ranged from $100 million at the 25th percentile to $152 million at the 75th percentile, and market capitalization ranged from $358 million at the 25th percentile
to $736 million at the 75th percentile. The peer group was comprised of the following companies:
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3D Systems Corporation
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Magma Design Automation, Inc.
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Sourcefire, Inc.
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Accelrys, Inc.
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Monotype Imaging Holdings, Inc.
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Stratasys, Inc.
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BroadSoft, Inc.
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OPNET Technologies, Inc.
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Sun Hydraulics Corporation
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Dynamic Materials Corporation
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Perceptron, Inc.
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X-Rite Incorporated
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Echelon Corporation
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PROS Holdings, Inc.
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Zoltek Companies, Inc.
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FARO Technologies, Inc.
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Rudolph Technologies, Inc.
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Zygo Corporation
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LogMeln, Inc.
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SIFCO Industries, Inc.
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In assessing
the competitiveness of our executive compensation for 2011 from a public company perspective, DolmatConnell reported that base salaries were positioned on average at the 25th percentile of the public company market data, that target total
compensation was positioned on average between the 25th and 50th percentiles of the public company market data and that actual cash compensation for 2011 (based on then-current projections) was generally positioned at the 75th percentile of the
public company market data, reflecting bonus payouts projected to be substantially above target.
84
Elements of Executive Compensation
Our executive compensation program has
historically been comprised of three elementsbase salary, annual bonus and equity-based long-term incentives. While all elements of our executive compensation program are intended to collectively achieve our overriding purpose of attracting,
retaining and motivating talented executives, the table below identifies the form and additional specific purposes of each element.
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Compensation
Component
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Form of Compensation
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Purpose
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Base Salary
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Cash
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Compensate each named executive officer relative to individual responsibilities,
experience and performance
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Provide steady cash flow not contingent on short-term variations in company
performance
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Annual Bonus
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Cash
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Align compensation with our annual corporate financial performance
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Reward achievement of short-term financial objectives
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Provide participants with a meaningful total cash compensation opportunity (base salary
+ annual bonus)
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Long-Term Incentives
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Incentive and Non-
Qualified Stock Options
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Encourage long-term retention
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Create a long-term performance focus
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Align compensation with our long-term returns to shareholders
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Provide executive ownership opportunities
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Our
compensation committee has not adopted a formal or informal policy for allocating compensation among the various elements, or between cash and non-cash elements or between long-and short-term compensation. As noted earlier, however, we do place
greater emphasis on incentive and variable forms of compensation for executives with more significant responsibilities, reflecting their greater capacity to affect our performance and results.
Base Salaries
At the time an executive officer is first
hired, his or her base salary is generally established through individual negotiations between us and the executive officer, taking into account judgments as to the executive officers qualifications, experience, responsibilities, prior salary
and internal pay equity considerations.
The compensation committee annually reviews the base salaries of our executive officers near the end of each year and bases any adjustments for the following year on merit and market
considerations. Merit-based adjustments primarily reflect a subjective assessment of an individuals performance. Any market-based adjustments reflect an assessment of the competitive positioning of an individuals salary with comparable
positions in the market.
85
In December 2010, the compensation committee approved annual base salaries
for 2011 in the amounts shown in the following table for the named executive officers other than Mr. Judd. The compensation committee approved the annual base salary for Mr. Judd prior to his commencement of employment in June 2011,
reflecting negotiations with Mr. Judd regarding compensation terms. Dr. Pang, as Managing Director of our Japanese subsidiary, is paid in Japanese yen. All U.S. dollar amounts shown for Dr. Pang, including in the table below, have
been converted from yen into dollars using the average currency conversion rate for 2011 of 79.75031 yen per dollar.
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Name
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2011 Annualized
Base Salary ($)
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Increase (Decrease)
from 2010
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Bradley A. Cleveland
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241,084
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15
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%
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John R. Judd
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240,000
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N/A
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Donald G. Krantz
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212,539
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16
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%
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William R. Langton
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182,342
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15
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%
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Lawrence J. Lukis
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125,000
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(17
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)%
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Thomas H. Pang
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160,087
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0
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%
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Base salary
increases for Messrs. Cleveland, Krantz and Langton in 2011 reflected merit-based increases of up to 6% and market-based increases of up to 12% from 2010 annualized base salary levels. The merit-based salary increases were based on subjective
evaluations of each named executive officers performance during 2010 and were not based on the achievement of any pre-established goals for the year. Mr. Lukis had recommended, and the compensation committee agreed, that his base salary
be reduced in light of his less than full-time status. The compensation committee did not adjust Dr. Pangs base salary since he had commenced employment with the Company in November 2010.
Annual Bonuses
All of our employees other than commissioned
salespeople participate in our annual incentive bonus program. The 2011 program approved by our compensation committee in December 2010 provided our employees, including our named executive officers, with an incentive compensation opportunity based
on our revenue growth from 2010 to 2011. A target bonus payout expressed as a percentage of annual base salary was established for each named executive officer, with a 60% target payout established for Mr. Cleveland and Mr. Lukis (whose
bonus was based on Mr. Clevelands annualized base salary rather than his own) and a 50% target payout established for each of the other named executive officers, levels that were unchanged from 2010. Threshold performance objectives were
established below which no payouts could be earned, but no maximum payout levels were specified.
Revenue growth was selected as the financial objective that would determine the size of annual incentive bonus payouts because our primary objective is to grow our company. The 2011
program was also structured to provide an additional incentive for revenue growth above target-level objectives by increasing the payout factor for above-target revenue performance.
86
In structuring the 2011 annual incentive bonus program, the compensation
committee approved 2011 revenue objectives for our company as a whole and for each of our major geographic business units (the United States, the European Union and Japan). Including business unit performance objectives enables us to tailor annual
bonus opportunities so as to reward each executive officer for the performance of those portion(s) of our company for which the officer had the most direct responsibility. The following table summarizes the allocation of each named executive
officers 2011 annual bonus opportunity among the various revenue objectives:
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Portion of Annual Bonus Dependent on Achievement
of:
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Name
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Company-
wide Revenue
Goal
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U.S.
Revenue
Goal
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European
Union
Revenue
Goal
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Japan
Revenue
Goal
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Bradley A. Cleveland
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100
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%
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John R. Judd.
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100
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%
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Donald G. Krantz
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70
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%
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20
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%
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10
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%
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William R. Langton
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70
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%
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20
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%
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10
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%
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Lawrence J. Lukis
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100
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%
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Thomas H. Pang
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100
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%
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For 2011, the
compensation committees decisions regarding the numerical goals associated with the revenue growth objectives were consistent with the committees stated philosophy of designating target objectives that are reasonably achievable but still
reflect appreciable growth over the previous year. As a result, the compensation committee approved threshold revenue objectives for 2011 equal to actual revenue results for 2010, and target revenue objectives that reflected 26% revenue growth
company-wide, 25% in the U.S., 26% in the European Union and 67% in Japan. The following table summarizes the company-wide revenue objectives for 2011, as well as our actual performance during 2011:
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Performance Levels ($ millions)
(1)
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Objective
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Threshold
(50%
payout)
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Target
(100%
payout)
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Actual
Performance
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Final
Payout
Factor
(2)
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Revenue
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$
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64.9
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$
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81.8
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$
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99.0
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189.8
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%
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(1)
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For revenue performance between threshold and target, the payout factor would increase proportionately between 50% and 100%, or about 3 percentage
points for each $1 million in additional revenue. For revenue performance above target, the payout factor would increase more rapidly, about 5.4 percentage points for each $1 million in additional revenue, with no maximum payout specified.
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(2)
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The final payout factor represents the percentage of the target payout that would be made based on the actual company-wide revenue performance for 2011.
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With respect to our
geographic business units, the 2011 revenue growth in the U.S. was proportionate to that for our company as a whole, while 2011 revenue growth in both the European Union and Japan was more than twice the target level-rate of growth.
87
Based on the factors described above, our compensation committee approved
the following annual incentive bonuses to our named executive officers for 2011:
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Name
|
|
Target Bonus
as a % of
Base Salary
|
|
|
Actual Bonus
Amount ($)
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|
Actual Bonus
Amount as % of
Base Salary
|
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|
Actual Bonus
Amount as % of
Target Payout
|
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Bradley A. Cleveland
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60
|
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273,331
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|
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|
113.9
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189.8
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|
John R. Judd
(1)
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50
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|
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|
129,648
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|
|
|
94.9
|
|
|
|
189.8
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|
Donald G. Krantz
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50
|
|
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|
210,597
|
|
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|
99.3
|
|
|
|
198.7
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|
William R. Langton
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50
|
|
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|
180,702
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|
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|
99.4
|
|
|
|
198.7
|
|
Lawrence J. Lukis
(2)
|
|
|
60
|
|
|
|
274,546
|
|
|
|
113.9
|
|
|
|
189.8
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|
Thomas H. Pang
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|
50
|
|
|
|
195,543
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|
|
|
120.7
|
|
|
|
241.4
|
|
|
(1)
|
|
Mr. Judds bonus amount was calculated based on the base salary he actually received after beginning employment with our company in June 2011.
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|
(2)
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|
Mr. Lukis bonus amount is based on Mr. Clevelands annualized base salary for 2011, rather than on the base salary actually paid.
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At the time
Dr. Pang joined our company in 2010, we agreed with him that he would eligible for up to four supplemental bonus payments, each in an amount of yen then equivalent to $48,750, in connection with the vesting of the last four tranches of the
stock option award he received upon commencement of his employment. These bonus payments are intended to compensate Dr. Pang for the difference between the exercise price of the option as granted and the lower exercise price that Dr. Pang
was told he could expect at the time his compensation arrangements were being negotiated. The first of these four vesting events occurred during 2011 when our Japanese subsidiary achieved a 200 million yen revenue milestone, and the first of
these bonus payments was made to Dr. Pang.
Long-Term Equity-Based Compensation
To date, we have used stock options exclusively as the equity-based element of our executive compensation program. Stock
options were the only form of award authorized under our 2000 Stock Option Plan, or the 2000 Plan. Our compensation committee believes that stock options serve as an effective retention tool due to vesting requirements that are based on continued
service with us, and also serve to align the interests of our executives with those of our shareholders by enabling our executives to participate in any future appreciation in our stock and obtain an ownership interest in our company.
Historically, we have not utilized a
formulaic approach to determine the size of individual stock awards to our named executive officers. Instead, our compensation committee has generally determined the size of individual grants using its collective business judgment and experience,
taking into account factors such as the role and responsibility of the individual executive officer, the size and value of the unvested portion of existing option awards and of existing holdings of our common stock, an evaluation of the expected and
actual performance of each executive officer, internal pay equity considerations and compensation market conditions. Neither our CEO, Mr. Cleveland, nor our Chairman, Mr. Lukis, have received any stock options to date in light of their
existing holdings of our common stock.
Similarly, we have not in the past made stock option awards on a fixed schedule to our named executive officers. Instead, our compensation committee has typically chosen to make option
awards in connection with an individuals initial employment with us, upon promotions or other changes in responsibilities, in recognition of significant achievements and generally when it believes that the number of unvested option shares held
by a key employee is insufficient to constitute an effective retention tool.
In June 2011, Mr. Judd received a stock option award for 175,000 shares, reflecting the negotiation of his initial compensation arrangements upon joining our company. No other named
executive officer received a stock option award during 2011, and no named executive officer exercised a stock option during 2011.
88
Option grants to our named executive officers generally provide for ratable
vesting over a period of years, with accelerated vesting occurring in the event of termination of employment due to death or disability and potentially in connection with a change in control of our company, as described more fully in the section
Potential Payments Upon Termination or Change in Control. It has been our practice, which we expect to continue, that stock options will be granted with an exercise price that is not less than the fair market value of a share of our
common stock on the date the grant is made.
We have adopted a 2012 Long-Term Incentive Plan, or the 2012 Plan, which replaced our 2000 Plan and which authorizes our compensation committee to award various forms of equity-based
compensation in addition to stock options. Pursuant to the 2012 Plan, our compensation committee may consider the use of alternative forms of equity-based compensation, such as restricted stock or restricted stock units, or a mix of equity-based
awards, for our executive officers.
Other Executive Benefits
Our named executive officers generally receive health and welfare benefits under the same programs and subject to the same
terms as our other salaried employees. These benefits include medical, dental and vision benefits, short-and long-term disability insurance, accidental death and dismemberment insurance and basic life insurance. Our named executive officers are also
eligible to participate in our 401(k) retirement plan, under which our company provides a matching contribution in an amount equal to 100% of the first 3% of compensation contributed by a participant and 50% of the next 2% of compensation
contributed.
Similarly, other
benefits or perquisites provided on occasion to our named executive officers are also available to our salaried employees generally, such as reimbursement of spousal travel costs in connection with extended overseas assignments and withholding taxes
associated with discretionary bonuses.
We also provide supplemental benefits to our executive officers who are based outside of the United States as part of compensation packages that are intended to be competitive in the
respective local markets. Consistent with this approach, and in connection with the negotiation of his initial compensation arrangements upon joining our company, we agreed with Dr. Pang that we would reimburse him for his commuting expenses,
tuition and related expenses for his children to attend private school in Japan, personal tax preparation expenses and cash flow shortfalls for up to 36 months associated with the subletting and maintenance of his house in the United States while he
is based in Japan. The amount of these personal benefits is included in the All Other Compensation column of the Summary Compensation Table below.
Employment Agreements, Severance and Change in Control Benefits
We have typically not entered into
employment, severance or change in control agreements with our named executive officers. However, in September 2010, we did enter into a letter agreement with Dr. Pang setting forth the initial terms of his employment with us, including his
annual base salary, target bonus plan participation, initial stock option award and benefits, including the personal benefits described above associated with being based in Japan. In addition, in June 2011, we entered into an employment agreement
with Mr. Judd, our CFO, largely in recognition of the need to provide him certain protection if his employment should be involuntarily terminated without cause or terminated by him for good reason after a change in control of our
company. We believe that this protection was necessary to induce him to leave his current employment, forego other opportunities and assume a critical position in our organization. The employment agreement also provided, among other things, that
Mr. Judd would receive a $75,000 cash bonus on the earlier of the completion of our initial public offering or March 15, 2012. We completed our initial public offering on February 29, 2012, and subsequently paid the bonus amount to
Mr. Judd. For a summary of the material terms and conditions of this employment agreement, see the section Potential Payments Upon Termination or Change in Control.
Our existing stock option award agreements under the 2000 Plan generally provide for
accelerated vesting and exercisability of awards if an executive officers employment terminates due to death or disability, or upon a
89
change in control of our company. The choice of single trigger acceleration upon a change in control reflects the belief that in the context of a privately held company, such
arrangements would help insure that executive officers would be effectively incented to obtain the highest value possible in a change in control transaction and be subject to a strong retention device during the uncertain times preceding the
transaction.
Under the 2012 Plan
the compensation committee has been provided with greater discretion in specifying the impact on outstanding equity awards of a change in control transaction, including providing in appropriate circumstances that vesting and exercisability of an
outstanding award will not be accelerated if the award is continued, assumed or replaced in connection with a change in control transaction and the participants employment does not end within a specified period of time after the change in
control as a result of an involuntary termination without cause or a termination by the participant for good reason. This double trigger acceleration of vesting and exercisability, requiring both a change in control and
either a failure to continue, assume or replace outstanding awards or a termination of employment, would enable the compensation committee to avoid an unintended windfall to executives who retain their employment and their equity awards in the event
of a friendly change in control, while still providing them appropriate incentives to cooperate in negotiating any change in control in which they believe they could lose their jobs. The form of stock option award agreement approved by the
compensation committee for use under the 2012 Plan incorporates this double trigger feature. For a more complete summary of the material terms and conditions of awards under the 2000 Option Plan and of the relevant provisions of the proposed 2012
Plan, see Equity-Based Compensation Plans.
Compensation Actions Taken for 2012
In December 2011, our compensation committee approved annual base salaries for 2012 as well as the 2012 annual incentive
bonus program for our employees, including our named executive officers. Its actions reflected a decision on the part of the compensation committee that base salaries should generally approximate the 25th percentile of the public company market data
provided to the committee and that total cash compensation should approximate the 75th percentile of the public company market data if bonus payouts at two times target amounts are warranted. Base salaries for our named executive officers for 2012
are summarized in the following table.
|
|
|
|
|
|
|
|
|
Name
|
|
2012 Annualized
Base Salary ($)
|
|
|
Increase (Decrease)
from 2011
|
|
Bradley A. Cleveland
|
|
|
241,084
|
|
|
|
0
|
%
|
John R. Judd
|
|
|
240,000
|
|
|
|
0
|
%
|
Donald G. Krantz
|
|
|
229,542
|
|
|
|
8.0
|
%
|
William R. Langton
|
|
|
193,283
|
|
|
|
6.0
|
%
|
Lawrence J. Lukis
|
|
|
100,000
|
|
|
|
(20.0
|
)%
|
Thomas H. Pang
|
|
|
174,206
|
|
|
|
8.8
|
%
|
Although
Mr. Clevelands base salary is below the 25th percentile, the compensation committee chose to maintain his base salary at its 2011 level while increasing his target bonus payout from 60% to 90% of his base salary in recognition of his
expressed preference for placing increased emphasis on variable elements of compensation. The compensation committee also adopted Mr. Lukis recommendation that his base salary be decreased in connection with an increase in his target
bonus payout to 100% of base salary. Base salary increases for Messrs. Krantz and Langton and Dr. Pang reflected merit-based increases, and in the case of Mr. Krantz a 2% market-based increase, while Mr. Judds base salary was
maintained at its current level in light of its positioning above the 25th percentile.
On March 20, 2012, our board of directors approved an amendment to our 2012 annual incentive bonus program in which all employees other than commissioned sales people participate. As
amended, the 2012 program provides that bonus payouts will be a function of not only revenue growth during 2012, as was previously the case, but also adjusted operating income for 2012. For these purposes, adjusted operating income is defined as
operating income before stock based compensation expense. The amended 2012 program contains
90
revenue and adjusted operating income objectives for Proto Labs as a whole and for each of its major geographic business units (the United States, the European Union and Japan). A
participants bonus payout will be determined by multiplying his or her target payout amount (which is specified by our compensation committee as a percentage of the individuals annual base salary) by both the applicable revenue and
adjusted operating income payout factors. Target bonus payouts as a percentage of base salary for 2012 were unchanged from 2011 for each of the named executive officers, except for Mr. Cleveland as described above. The revenue payout factor is
zero for 2012 revenue below specified threshold amounts for Proto Labs and each of its business units, is 50% at those threshold amounts, and increases (with no maximum) in amounts specified by the compensation committee to the degree revenue
exceeds the respective threshold amounts. The revenue payout threshold for our European Union business unit was reduced in October 2012 to reflect our adjusted performance expectations for this business unit due to the economic climate in the
European Union. The adjusted operating income factor is zero for adjusted operating income (expressed as a percentage of revenue) below specified threshold amounts for Proto Labs and each of its business units, and increases on a linear basis to
100% for adjusted operating income at or above specified maximum amounts.
On May 7, 2012, certain of our employees, including certain of our named executive officers, were granted stock options. The stock options have an exercise price of $30.58 per share,
which was the closing price of our common stock on the NYSE on May 7, 2012, and vest in equal installments on each May 7
th
for the first five years after May 7, 2012. The grants made to our named executive officers were
as follows:
|
|
|
|
|
Name
|
|
Stock Option Award
(# shares)
|
|
John R. Judd
|
|
|
13,570
|
|
Donald G. Krantz
|
|
|
13,570
|
|
William R. Langton
|
|
|
8,480
|
|
Thomas H. Pang
|
|
|
8,480
|
|
Tax
Treatment of Compensation
Section 162(m) of the Internal Revenue Code, or Section 162(m), disallows a federal income tax deduction for any
publicly held corporation with respect to individual compensation exceeding $1 million in any taxable year paid to the corporations chief executive officer and each of the corporations three other most highly compensated executive
officers, other than its chief financial officer, unless the compensation is performance-based as defined under Section 162(m). In addition, in the case of a privately held corporation that becomes a public corporation, the $1
million limit generally does not apply for a limited period of time to compensation paid pursuant to a compensation plan or agreement that existed prior to the initial public offering. The time period during which this limit will not apply cannot
extend longer than the corporations first shareholders meeting at which directors are to be elected that occurs after the close of the third calendar year after the year in which the corporations initial public offering occurred.
The compensation committee
considers the effects of Section 162(m) on the compensation paid to our named executive officers and the degree to which it would be advisable to structure the amount and form of compensation to our named executive officers so as to maximize
our ability to deduct it, but it retains the discretion to provide compensation in an amount or form that would not be deductible under Section 162(m) in circumstances where it believes the exercise of such discretion is in the best interests
of Proto Labs.
91
Summary Compensation Table
The following table summarizes the compensation provided to or earned by our named executive
officers during 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
(1)
|
|
|
Option
Awards
($)
(2)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
(3)
|
|
|
All Other
Compensation
($)
(4)
|
|
|
Total ($)
|
|
Bradley A. Cleveland
|
|
|
2011
|
|
|
|
240,017
|
|
|
|
|
|
|
|
|
|
|
|
273,331
|
|
|
|
|
|
|
|
513,347
|
|
Chief Executive Officer
|
|
|
2010
|
|
|
|
194,050
|
|
|
|
|
|
|
|
|
|
|
|
261,262
|
|
|
|
|
|
|
|
455,312
|
|
John R. Judd
(5)
|
|
|
2011
|
|
|
|
136,615
|
|
|
|
100
|
|
|
|
1,515,816
|
|
|
|
129,648
|
|
|
|
58
|
|
|
|
1,782,238
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald G. Krantz
|
|
|
2011
|
|
|
|
211,975
|
|
|
|
200
|
|
|
|
|
|
|
|
210,597
|
|
|
|
9,108
|
|
|
|
431,880
|
|
Chief Operating Officer
|
|
|
2010
|
|
|
|
185,210
|
|
|
|
200
|
|
|
|
447,844
|
|
|
|
207,800
|
|
|
|
11,244
|
|
|
|
852,298
|
|
William R. Langton
|
|
|
2011
|
|
|
|
181,884
|
|
|
|
200
|
|
|
|
|
|
|
|
180,702
|
|
|
|
7,889
|
|
|
|
370,676
|
|
Executive Vice President of Finance
|
|
|
2010
|
|
|
|
158,323
|
|
|
|
5,200
|
|
|
|
149,281
|
|
|
|
190,422
|
|
|
|
20,787
|
|
|
|
524,013
|
|
Lawrence J. Lukis
|
|
|
2011
|
|
|
|
125,481
|
|
|
|
200
|
|
|
|
|
|
|
|
274,546
|
|
|
|
5,795
|
|
|
|
406,022
|
|
Chairman and Chief Technology Officer
|
|
|
2010
|
|
|
|
150,010
|
|
|
|
200
|
|
|
|
|
|
|
|
282,309
|
|
|
|
7,189
|
|
|
|
439,708
|
|
Thomas H. Pang
(6)
|
|
|
2011
|
|
|
|
161,979
|
|
|
|
|
|
|
|
|
|
|
|
243,223
|
|
|
|
103,625
|
|
|
|
508,827
|
|
Managing Director, Proto Labs G.K.
|
|
|
2010
|
|
|
|
21,704
|
|
|
|
|
|
|
|
298,562
|
|
|
|
9,575
|
|
|
|
93,144
|
|
|
|
422,985
|
|
|
(1)
|
|
Bonuses awarded for services during 2011 and 2010 were part of a discretionary bonus program for U.S. employees generally.
|
|
(2)
|
|
Amounts shown in this column represent the grant date fair values of stock option awards granted during 2011 and 2010 computed in accordance with ASC
Topic 718,
CompensationStock Compensation
(ASC 718) utilizing the assumptions discussed in Note 8 of Notes to Consolidated Financial Statements for the year ended December 31, 2011 and disregarding the effects of any estimates of
forfeitures related to service-based vesting.
|
|
(3)
|
|
Amounts shown in this column represent amounts earned during 2011 and 2010 under our annual incentive bonus program and paid to the executives in early
2012 and early 2011, respectively. The amount shown for Dr. Pang in 2011 also includes $47,680 in a special bonus tied to the achievement of a revenue milestone in Japan.
|
|
(4)
|
|
Amounts shown in this column for 2011 include company contributions to our 401(k) retirement plan, tax gross-up payments in connection with the bonus
payments discussed in Note 1 above and the reimbursement of Dr. Pangs commuting expenses, tuition and related expenses for his children to attend private school in Japan, personal tax preparation expenses and cash flow shortfalls
associated with the subletting and maintenance of his house in the United States while he is based in Japan. The reimbursement amounts to Dr. Pang are based on the amounts he has paid to third-party providers. The amounts shown in this column
for 2011 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Contributions to
401(k) Plan
|
|
|
Tax
Gross-
Ups
|
|
|
Commuting
Expenses
|
|
|
Private
School
Expenses
|
|
|
Tax
Preparation
Expenses
|
|
|
Housing
Expenses
|
|
John R. Judd
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald G. Krantz
|
|
|
8,991
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Langton
|
|
|
7,772
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence J. Lukis
|
|
|
5,678
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas H. Pang
|
|
|
|
|
|
|
|
|
|
|
12,258
|
|
|
|
67,711
|
|
|
|
6,351
|
|
|
|
17,305
|
|
|
(5)
|
|
Mr. Judd joined our company in June 2011.
|
|
(6)
|
|
Dr. Pang is paid in Japanese yen, and the U.S. dollar amounts shown in the Salary, Non-Equity Incentive Plan Compensation
and All Other Compensation columns for Dr. Pang have been converted from yen to U.S. dollars using the average currency conversion rate of 79.75031 and 86.96800 yen per dollar for 2011 and 2010, respectively. Option awards are
valued in U.S. dollars and therefore no foreign currency conversion occurs. Dr. Pang joined our company in November 2010.
|
92
Grants of Plan-Based Awards in 2011
The following table presents the plan-based
awards made to our named executive officers during 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Grant
Date
|
|
|
Estimated Future Payouts Under
Non-Equity Incentive Plan
Awards
(1)
|
|
|
All Other
Option
Awards:
Number
of
Securities
Underlying
Options
(2)
(#)
|
|
|
Exercise or
Base Price
of Option
Awards
($/Sh)
|
|
|
Grant Date
Fair Value of
Stock and
Option
Awards
(3)
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maximum
($)
|
|
|
|
|
Bradley A. Cleveland
|
|
|
|
|
|
|
72,005
|
|
|
|
144,010
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
John R. Judd
|
|
|
6/22/11
|
|
|
|
34,154
|
|
|
|
68,308
|
|
|
|
|
(4)
|
|
|
175,000
|
|
|
|
20.07
|
|
|
|
1,515,816
|
|
Donald G. Krantz
|
|
|
|
|
|
|
52,994
|
|
|
|
105,988
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Langton
|
|
|
|
|
|
|
45,471
|
|
|
|
90,942
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence J. Lukis
|
|
|
|
|
|
|
72,325
|
|
|
|
144,650
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas H. Pang
(5)
|
|
|
|
|
|
|
40,495
|
|
|
|
80,990
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts associated with these awards represent possible payouts under our 2011 annual incentive bonus program. The actual payouts for 2011 under
this program are shown in the Summary Compensation Table in the column entitled Non-Equity Incentive Plan Compensation. Additional information regarding the design of the 2011 annual incentive bonus program, including a description of
the performance objectives applicable to the 2011 awards and the actual payouts for 2011, is provided above in the section Compensation Discussion and AnalysisAnnual Bonuses.
|
|
(2)
|
|
The stock option award shown in this column is a non-qualified stock option granted under our 2000 Stock Option Plan. The award will expire after ten
years, and will vest and become exercisable as to 20% of the shares subject to the award on the grant date and on each of the first four anniversaries of the grant date, assuming the recipients continued employment. Termination of employment
results in the forfeiture of the unvested portion of the option, unless the termination is due to death or disability, in which case vesting of the option is accelerated in full. To the extent an option is exercisable at the time employment is
terminated, it will remain exercisable after such termination for one year if termination is due to death or disability, or for three months if termination is for any other reason. In no event, however, will an option remain exercisable past its
scheduled expiration date. The effect of a change in control on this option award is described below under the caption Potential Payments Upon Termination or Change in Control.
|
|
(3)
|
|
The grant date fair value of this option award was computed in accordance with ASC 718, as described in Note 2 to the Summary Compensation Table.
|
|
(4)
|
|
Payouts under our 2011 annual incentive bonus program were not limited to any maximum amount.
|
|
(5)
|
|
Amounts shown do not include amounts payable to Dr. Pang in connection with a special bonus arrangement established in 2010 calling for payments to Dr.
Pang if and when our Japanese subsidiary achieves specified revenue milestones.
|
93
Outstanding Equity Awards at 2011 Year-End
The following table provides information on
each named executive officers outstanding equity awards as of December 31, 2011, the last day of our most recent fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Name
|
|
Option
Grant
Date
(1)
|
|
|
Number
of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
Bradley A. Cleveland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John R. Judd
|
|
|
6/22/11
|
|
|
|
|
|
|
|
175,000
|
|
|
|
20.07
|
|
|
|
6/22/21
|
|
Donald G. Krantz
|
|
|
11/21/05
|
|
|
|
98,000
|
|
|
|
|
|
|
|
1.79
|
|
|
|
11/21/15
|
|
|
|
|
12/21/10
|
|
|
|
21,000
|
|
|
|
84,000
|
|
|
|
7.86
|
|
|
|
12/21/20
|
|
William R. Langton
|
|
|
9/11/06
|
|
|
|
210,000
|
|
|
|
|
|
|
|
2.66
|
|
|
|
9/11/16
|
|
|
|
|
12/21/10
|
|
|
|
7,000
|
|
|
|
28,000
|
|
|
|
7.86
|
|
|
|
12/21/20
|
|
Lawrence J. Lukis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas H. Pang
|
|
|
12/21/10
|
|
|
|
28,000
|
|
|
|
42,000
|
|
|
|
7.86
|
|
|
|
12/21/20
|
|
|
(1)
|
|
The option awards with a grant date of 12/21/10 vest as to 20% of the shares subject to each award on each of the first five anniversaries of the grant
date except for Dr. Pangs award, which vests as to 20% of the shares subject to his award on the achievement of each of five revenue milestones in Japan. The option award with a grant date of 6/22/11 vests as to one-third of the shares
subject to the award on each of the first three anniversaries of the grant date.
|
Potential Payments Upon Termination or Change in Control
Other than our employment agreement with Mr. Judd and the arrangements involving option awards described below, we
are not parties to any agreement, plan or arrangement providing for payments or benefits to our named executive officers upon termination of employment or in connection with a change in control of our company.
In June 2011, we entered into an employment
agreement with Mr. Judd, our CFO. The agreement has a one-year term and will automatically be renewed for successive one-year periods unless either party provides a notice of non-renewal to the other at least 90 days before the end of any
one-year period. The agreement provides that Mr. Judds employment is at will and sets forth the elements of his initial compensation. See Compensation Discussion and Analysis for information regarding
Mr. Judds compensation. The agreement also provides that if, within 18 months after a change in control of our company, we terminate Mr. Judds employment without cause, or Mr. Judd terminates his employment for good
reason, then he will be entitled to severance benefits so long as he complies with an ongoing confidentiality obligation and a two-year non-competition obligation. The severance benefits available to Mr. Judd consist of (i) a lump
sum cash payment in an amount equal to his annual base salary in effect immediately prior to the change in control plus his target annual bonus for the year in which the change in control occurs, and (ii) our continued payment for 12 months
after such termination of the employers portion of the premiums for group health plan coverage for Mr. Judd and his dependents if he elects continued COBRA coverage under our plan.
For purposes of Mr. Judds employment agreement, change in control is
defined in a manner substantially similar to that in our 2000 Plan, as described below. Cause for termination is generally defined to include (i) conviction of a felony; (ii) gross negligence or willful misconduct injurious to
our company; (iii) willful violation of directions of our board of directors; (iv) excessive absenteeism; (v) material failure to comply with the employment agreement; (vi) failure to cooperate with us in any investigation or
formal proceeding; and (vii) any act of fraud injurious to our company. Good reason for termination is generally defined to include
94
(i) a material reduction or diminution in his responsibilities or duties; (ii) a material reduction in his base salary; (iii) the relocation of his primary work location to a
location more than 75 miles from the location of his prior primary work location; and (iv) the failure of any successor to or assignee of us to perform, in any material respect, our obligations under the employment agreement.
Under the 2000 Plan and the option award
agreements under that plan, upon the death or disability of a named executive officer, all outstanding options vest in full, and the options remain exercisable until the earlier of (1) one year after the date employment ends or (2) the
expiration date of the option. If employment ends for a reason other than death or disability, an option will remain exercisable until the earlier of (1) three months after the date employment ends or (2) the expiration date of the option,
and may be exercised to the extent it was exercisable at or before employment ended. Comparable provisions apply to the options awarded under the 2012 Plan.
The 2000 Plan provides that stock option awards may become fully vested and exercisable upon the occurrence of a change in
control of our company, as defined below, if provided in the award agreement or by the compensation committee. Generally, stock option award agreements under our 2000 Plan provide that option awards to employees will become fully vested and
exercisable upon the occurrence of a change in control of our company. The 2000 Plan also provides our compensation committee with the discretion to cancel some or all outstanding stock options in connection with a change in control that does not
involve a change in the majority of the members of our board of directors, and pay each holder of a canceled option an amount in cash equal to the excess of the fair market value of the shares subject to the option immediately prior to the change in
control over the aggregate exercise price of the shares subject to the option, which we refer to as the option spread. In addition, in the event of a merger, consolidation or statutory share exchange involving our company, a sale of
substantially all of its assets, or its liquidation or dissolution, any of which are referred to as an event, then our compensation committee will have the discretion to declare, prior to the event, that the exercisability of all options
will be accelerated prior to the event and that all options will be canceled at the time of the event. The compensation committee may also, in such circumstances, pay each holder of a canceled option an amount in cash equal to the option spread,
calculated using the value of the per share proceeds to be received by our shareholders upon the occurrence of the event. Alternatively, if the event is a merger, consolidation or statutory share exchange, our compensation committee may act to
protect outstanding options by substituting for them either options to purchase voting common stock of the surviving corporation (or its parent) or voting common stock of the surviving corporation (or its parent) that have a fair market value equal
to the option spread, calculated using the value of the per share proceeds to be received by our shareholders upon the occurrence of the event.
Under the 2000 Plan, a change in control generally occurs if (1) any person or group becomes the
beneficial owner of 50% or more of the voting power of our equity securities (30% or more for options granted prior to January 22, 2007); (2) a majority of our board of directors no longer consists of individuals who were directors as of
the effective date of the 2000 Plan or for whose election proxies have been solicited by our board of directors or who were appointed by our board of directors to fill a vacancy caused by death or resignation or a newly-created directorship;
(3) our shareholders approve a merger, reorganization, consolidation or statutory share exchange involving our company, or a sale of all or substantially all of our companys assets (unless more than 70% of the voting power of the then
outstanding shares of voting stock of the buyer or surviving party in the transaction is beneficially owned in substantially the same proportions by persons who were beneficial owners of our voting securities before the transaction); or (4) our
shareholders approve a complete liquidation or dissolution of our company.
The 2000 Plan provides that in the event any payments or benefits provided under our 2000 Plan taken together with other payments an individual may receive in connection with a change in
control may constitute a parachute payment under Section 280G of the Internal Revenue Code, such payments or benefits may be reduced to provide the individual with the best after-tax result. Specifically, the individual will receive
either a reduced amount so that the excise tax imposed under Section 4999 of the Internal Revenue Code is not triggered, or the individual will receive the full amount of the payments and benefits and then be liable for any excise tax.
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The general effect of a change in control upon awards which may be granted
under the 2012 Plan is described in the description of the 2012 Plan in the Equity-Based Compensation Plans section below.
The following table shows the value of stock option awards whose vesting would have been accelerated under the 2000 Plan
and the applicable award agreements if the named executive officer had died or become disabled on December 31, 2011, the last day of our most recent fiscal year, or if the vesting of such awards had been accelerated on that date in connection
with a change in control of our company. The table also shows the severance and benefits continuation amounts that would have been paid to Mr. Judd under his employment agreement if, on December 31, 2011 and in connection with a change in
control, his employment would have been involuntarily terminated without cause or he would have resigned for good reason. In addition to the amounts shown in the table, each named executive officer would receive payments for amounts of base salary
and vacation time accrued through the date of termination and payment for any reimbursable business expenses incurred prior to the date of termination.
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Name
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Severance
Payment ($)
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Benefits
Continuation ($)
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Value Realized on
Accelerated Option
Vesting ($)
(1)
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Bradley A. Cleveland
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John R. Judd
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308,308
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7,273
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Donald G. Krantz
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1,026,000
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William R. Langton
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342,000
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Lawrence J. Lukis
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Thomas H. Pang
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513,000
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(1)
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Amounts shown are equal to the value of stock option awards whose vesting and exercisability would have been accelerated. The value of each option award
for these purposes is calculated based on the difference between the fair market value of our common stock on December 31, 2011 ($20.07) and the exercise price of that option. See Managements Discussion and Analysis of Financial
Condition and Results of OperationsCritical Accounting Policies and Use of Estimates for a discussion regarding the determination of the fair market value of our common stock.
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Equity-Based Compensation Plans
2012 Long-Term Incentive Plan
The 2012 Plan became
effective on February 23, 2012 and will terminate on the earliest of (i) the tenth anniversary of its effective date, (ii) the date on which all shares subject to the 2012 Plan are distributed, or (iii) the date our board of
directors terminates the 2012 Plan. The purposes of the 2012 Plan are to attract and retain the best available personnel, to provide them with additional incentives and to align their interests with those of our shareholders. The material terms of
the 2012 Plan are summarized below.
Share Reserve.
An aggregate of 3,500,000 shares of our common stock is initially reserved for issuance pursuant to
the 2012 Plan, plus 612,066 shares that remained available for future awards under our 2000 Plan on the effective date of the 2012 Plan.
The number of shares of our common stock reserved for issuance under the 2012 Plan will automatically increase on
January 1 of each year following the effective date of the 2012 Plan and continuing through January 1, 2021, by the lesser of (a) 3% of the total number of shares of our common stock outstanding on December 31 of the preceding
calendar year or (b) such number of shares of our common stock as determined by our board of directors. The aggregate number of shares subject to stock options and stock appreciation rights granted during any calendar year to any one
participant will not exceed 700,000 shares. As of September 30, 2012, options to purchase a total of 239,300 shares of our common stock with a weighted exercise price of $28.02 were outstanding under the 2012 Plan.
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Shares subject to awards under the 2012 Plan or the 2000 Plan that are
forfeited, expire or are settled for cash will, to the extent of such forfeiture, expiration or cash settlement, again become available for grant under the 2012 Plan. Shares that are tendered by a participant or withheld by the company to pay the
exercise price of an option or withholding taxes in connection with an award, shares repurchased by us with proceeds received from the exercise of a stock option and shares subject to a stock appreciation right that are not issued in connection with
the stock settlement of that right will not again become available for awards under the 2012 Plan. No further awards may be made under the 2000 Plan.
Administration of Plan.
The 2012 Plan is administered by two or more non-employee directors designated by our board
of directors who (i) satisfy the independence requirements for applicable stock exchange listing rules, (ii) are non-employee directors for the purposes of Rule 16b-3 under the Exchange Act and (iii) are outside
directors within the meaning of Section 162(m) of the Internal Revenue Code. Our board of directors has designated our compensation committee to administer the 2012 Plan, except that our board of directors will administer the 2012 Plan in
connection with awards made to non-employee directors. Subject to the terms of the 2012 Plan, the compensation committee has the authority to, among other things, interpret the 2012 Plan and determine who will be granted awards under the 2012 Plan,
the types of awards granted and the terms and conditions of the awards, including the number of shares covered by awards, the exercise price of awards and the vesting schedule or other restrictions applicable to awards. The compensation committee
also has the power to make any determinations and take any action necessary or desirable for the administration of the 2012 Plan.
To the extent permitted by law and stock exchange rules, the 2012 Plan permits the compensation committee to delegate its
authority under the 2012 Plan to one or more of its members or, with respect to awards made to individuals who are neither non-employee directors nor executive officers of our company, to one or more of our executive officers.
Eligibility.
Our employees,
non-employee directors and consultants and advisors who provide services to us are eligible to receive awards under the 2012 Plan. Incentive stock options may be granted only to our employees.
Awards.
The 2012 Plan allows us to grant stock options, stock appreciation rights, or
SARs, restricted stock, stock units, other stock-based awards and cash incentive awards. Each award will be evidenced by an agreement with the award recipient setting forth the terms and conditions of the award, except for awards that involve only
the immediate issuance of unrestricted shares of our common stock. Awards under the 2012 Plan will have a maximum term of ten years from the date of grant. The compensation committee may provide that the vesting or payment of any award will be
subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements, and the compensation committee will determine whether such measures have been achieved. The compensation committee may
generally amend the terms of any award previously granted, except that no stock option or SAR may be amended to decrease its exercise price or in any other way be repriced without the approval of our shareholders, and no award may be
amended in a way that materially impairs the rights of a participant without the participants consent (unless the amendment is necessary to comply with applicable law or stock exchange rules or any compensation recovery policy adopted by our
board of directors or the compensation committee).
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Stock Options.
Stock options permit the holder to purchase a specified number of shares of our common stock at a set price
during a specified period of time. Options granted under the 2012 Plan may be either incentive or nonqualified stock options. The per-share exercise price of options granted under the 2012 Plan generally may not be less than the fair market value of
a share of our common stock on the date of grant.
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Stock Appreciation Rights.
SARs provide for payment to the holder of all or a portion of the excess of the fair market value of
a specified number of shares of our common stock on the date of exercise over a specified exercise price. The per share exercise price of SARs granted under the 2012 Plan generally
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may not be less than the fair market value of a share of our common stock on the date of grant. Payment of an SAR may be made in cash or shares of our common stock or a combination of both, as
determined by the compensation committee.
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Restricted Stock.
Restricted stock awards are awards of shares of our common stock that are subject to transfer restrictions and
forfeiture conditions until such time as the shares vest, as determined by the compensation committee. Recipients of a restricted stock award will have the rights of a shareholder except as limited by the 2012 Plan or the award agreement.
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Stock Units.
Stock units provide the holder with the right to receive, in cash or shares of our common stock or a combination of
both, the fair market value of a share of our common stock and will be subject to such vesting and forfeiture conditions and other restrictions as the compensation committee determines.
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Other Stock-Based Awards.
The compensation committee, in its discretion, may grant stock and other awards that are valued by
reference to and/or payable in whole or in part in shares of our common stock under the 2012 Plan. The compensation committee will set the terms and conditions of such awards.
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Cash Incentive Awards.
A cash incentive award is to be a performance-based award the payment of which is contingent upon the
degree to which one or more specified performance goals have been achieved over the relevant performance period. Payment of a cash incentive award may be made in cash, in shares of our common stock, in other forms of awards under the 2012 Plan, or
in some combination of these alternatives.
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Dividends and Dividend Equivalents.
Dividends or distributions on unvested shares of restricted stock will generally be subject to the same restrictions as the underlying shares,
but the compensation committee may permit the payment of unrestricted regular cash dividends on restricted stock awards. Stock unit awards and other stock- based awards may, at the discretion of the compensation committee, provide the holder with
the right to receive dividend equivalent payments with respect to the units or other share equivalents subject to the award based on dividends actually declared on outstanding shares.
Substitute Awards.
The compensation committee may grant awards under the 2012 Plan in
substitution for awards granted by another entity acquired by our company or with which our company combines, and such awards will not count against the 2012 Plans share reserve. The terms and conditions of these substitute awards will be
comparable to the terms of the awards replaced, and may therefore differ from the terms and conditions otherwise set forth in the 2012 Plan.
Performance Awards.
Under the 2012 Plan, our compensation committee may structure any full value award
(an award other than an option, SAR or cash incentive award) or any cash incentive award in a manner designed to qualify the award as performance-based compensation that is not subject to the $1,000,000 limitation on the federal income tax
deductibility of compensation paid to any covered executive officer that is imposed by Section 162(m) of the Internal Revenue Code. To so qualify these awards, our compensation committee will condition the vesting and payment of the awards on
the achievement of pre-established performance goals during a designated performance period. The number of shares of our common stock that may be the subject of such performance-based full value awards granted to a participant in any calendar year
may not exceed 280,000 shares. The amount payable with respect to any such performance-based cash incentive awards and performance- based full value awards denominated other than in shares or share equivalents that are granted to any participant in
any calendar year may not exceed $5,000,000 multiplied by the number of full or partial years in the applicable performance period.
Transferability.
Awards granted under the 2012 Plan generally are not transferable except by will or the laws of
descent and distribution or to an appropriately designated beneficiary. The compensation committee may, however, permit the transfer of awards other than incentive stock options pursuant to a qualified domestic relations order or by way of gift to a
family member.
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Termination of Service.
Unless otherwise provided in an award
agreement or in connection with a change in control of our company, the effect of a termination of a participants service with our company will be as described in this paragraph. Upon termination for cause, all unvested awards and all
unexercised stock options and SARs will be forfeited. Upon termination due to death or disability, any award will immediately become vested and exercisable in full and options and SARs will remain exercisable for twelve months after the date of
termination. Upon termination for any other reason, the then currently vested and exercisable portion of any option or SAR will remain exercisable for three months after termination (unless the participant dies during that three-month period, in
which case the post-termination exercise period will be extended to twelve months). Any post-termination exercise period may, however, be extended by the compensation committee if the issuance of shares upon such exercise would then violate
applicable registration requirements under the Securities Act. Any such post-termination exercise period may not, however, extend beyond the expiration date of any option or SAR. After giving effect to any accelerated vesting as provided above, all
unvested and unexercisable portions of outstanding awards will be forfeited in connection with a termination of service.
Change in Control.
Unless otherwise provided in an award agreement, if a change in control, as defined below,
occurs that involves a sale of all or substantially all of our assets or a merger, consolidation, reorganization or statutory share exchange involving our company, our board of directors or compensation committee are to take one or more of the
following actions with respect to outstanding awards under the 2012 Plan:
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Arrange for the surviving or successor entity to continue, assume or replace some or all of the outstanding awards under the 2012 Plan.
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Accelerate the vesting and exercisability of outstanding awards prior to and conditioned upon the occurrence of the event and provide
that unexercised options and SARs will be terminated at the effective time of the event.
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Cancel any outstanding award in exchange for payment to the holder of the amount of the consideration that would have been received in
the event for the number of shares subject to the award, less the aggregate exercise price (if any) of the award.
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Provide that if an award is continued, assumed or replaced in connection with such an event and if within 18 months after the event a
participant experiences an involuntary termination of service other than for cause, the participants outstanding awards will vest in full, will immediately become fully exercisable and will remain exercisable for one year following
termination.
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Make adjustments to awards as described below under the caption Adjustment of Awards.
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In the event of a change in control that does
not involve a merger, consolidation, reorganization, statutory share exchange or sale of all or substantially all of our companys assets, our board of directors or compensation committee, in its discretion, may provide that any outstanding
award will become fully vested and exercisable upon the change in control or upon the termination of the participants service without cause within 18 months after the change in control, that any outstanding option or SAR will remain
exercisable during all or some specified portion of its remaining term, or that any outstanding award will be canceled in exchange for payment to the participant of the amount of the consideration that would have been received in the change in
control for the number of shares subject to the award less the aggregate exercise price (if any) of the award.
The form of option award agreement approved by the compensation committee for use under the 2012 Plan provides that if,
within 12 months of a change in control, an optionees employment is involuntarily terminated without cause or the optionee resigns for good reason and if the option or a replacement thereof then remains outstanding, it will immediately become
exercisable in full and remain exercisable for one year following termination.
Under the 2012 Plan, a change in control generally occurs if (i) any person or group becomes the beneficial owner of more than 50% of the voting power of our equity
securities; (ii) a majority of our board of directors no longer consists of (1) individuals who are members of our board of directors on the effective date of
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the 2012 Plan or (2) individuals who are elected subsequent to the effective date and whose initial election or nomination was approved by at least a majority of the directors described in
clause (1) or (2); or (iii) the consummation of any reorganization, merger, consolidation or statutory share exchange involving us or a sale or other disposition of all or substantially all of our assets, unless more than 50% of the voting
power of the then outstanding shares of voting stock of the buyer or surviving party in the transaction is beneficially owned in substantially the same proportions by persons who were beneficial owners of our voting securities before the
transaction.
The 2012 Plan
provides that in the event any payments or benefits provided under our 2012 Plan taken together with other payments an individual may receive in connection with a change in control may constitute a parachute paymentunder
Section 280G of the Internal Revenue Code, such payments or benefits may be reduced to provide the individual with the best after-tax result. Specifically, the individual will receive either a reduced amount so that the excise tax imposed under
Section 4999 of the Internal Revenue Code is not triggered, or the individual will receive the full amount of the payments and benefits and then be liable for any excise tax.
Dissolution or Liquidation
. Unless
otherwise provided in an award agreement, in the event our shareholders approve our complete dissolution or liquidation, all outstanding awards will vest and become fully exercisable, and will terminate immediately prior to the consummation of such
dissolution or liquidation.
Adjustment of Awards.
In the event of an equity restructuring that affects the per share value of our common stock,
including a stock dividend, stock split, spinoff, rights offering or recapitalization through an extraordinary dividend, the compensation committee will make appropriate adjustment to: (1) the number and kind of securities reserved for issuance
under the 2012 Plan, (2) the number and kind of securities subject to outstanding awards under the 2012 Plan, (3) the exercise price of outstanding options and SARs, and (4) any maximum limitations prescribed by the 2012 Plan as to
grants of certain types of awards or grants to individuals with respect to certain types of awards. The compensation committee may also make similar equitable adjustments in the event of any other change in our companys capitalization,
including a merger, consolidation, reorganization or liquidation.
Amendment and Termination.
Unless earlier terminated, the 2012 Plan will automatically terminate ten years after its effective date. In addition, our board of directors may
terminate, suspend or amend the 2012 Plan at any time, but, in general, no termination, suspension or amendment may materially impair the rights of any participant with respect to outstanding awards without the participants consent (unless
such action is necessary to comply with applicable laws or stock exchange rules). Awards that are outstanding on the 2012 Plans termination date will remain in effect in accordance with the terms of the 2012 Plan and the applicable award
agreements. Shareholder approval of any amendment of the 2012 Plan will be obtained if required by applicable law or the rules of the NYSE.
Registration.
We filed with the SEC a registration statement on Form S-8 covering the shares of our common stock
issuable under the 2012 Plan in February 2012.
2000 Stock Option Plan
Our 2000 Plan provided for the grant of nonqualified stock options to our employees, non-employee directors, and other consultants and advisors who provide services to us. Upon the
effective date of the 2012 Plan, awards can no longer be made under the 2000 Plan and the 612,066 shares that were available for issuance under the 2000 Plan on the effective date of the 2012 Plan are available for issuance under the 2012 Plan. A
total of 6,650,000 shares of our common stock, as adjusted to reflect our 14-for-1 forward stock split that occurred on February 21, 2011, were reserved for issuance under the 2000 Plan. As of September 30, 2012, options to purchase a
total of 1,762,841 shares of our common stock with a weighted average exercise price of $7.05 per share were outstanding under the 2000 Plan. All awards outstanding under the 2000 Plan will remain in effect and will continue to be governed by their
existing terms after the completion of this offering.
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Administration of Plan
. Our compensation committee generally
administered the 2000 Plan and the awards granted under it with authority and discretion comparable to that described above in connection with the 2012 Plan. Option awards to non-employee directors, however, were administered by our board of
directors.
Awards
. Only
stock options were awarded under the 2000 Plan, and no incentive stock option awards were able to be made under the 2000 Plan since its tenth anniversary on January 15, 2010. The stock options that are outstanding under the 2000 Plan generally
have a 10 year term, a per share exercise price equal to the fair market value of a share of our common stock on the date of grant, and vest and become exercisable as to 20% of the shares subject to an option on the grant date and on each of the
first four anniversaries of the grant date.
Termination of Service
. The effect of a termination of service upon a participants stock option under the 2000 Plan is generally described in the Potential Payments upon
Termination or Change in Control section above.
Transferability
. Options granted under the 2000 Plan generally are not transferable except by will or the laws of descent and distribution, although nonqualified options may also be
transferred pursuant to a qualified domestic relations order.
Change in Control
. The effect of a change in control upon a participants stock option as provided in the 2000 Plan and related award agreements is generally described in the
Potential Payments upon Termination or Change in Control section above.
Adjustment of Awards
. In the event of any stock dividend, stock split, spinoff, recapitalization, merger, consolidation, reorganization or other change in corporate structure
or shares of our company, the compensation committee may make appropriate adjustments to the number and kind of securities reserved for issuance under the 2000 Plan, the number and kind of securities subject to outstanding options under the 2000
Plan, and the exercise price of outstanding options.
Registration
. We filed with the SEC a registration statement on Form S-8 covering the shares of our common stock reserved for issuance pursuant to stock option awards
outstanding under the 2000 Plan in February 2012.
Employee Stock Purchase Plan
Our Employee Stock Purchase Plan, or ESPP, became effective on February 23, 2012 and was amended on March 7,
2012, and will terminate on the earlier of (i) the date on which all shares subject to the ESPP are distributed or (ii) the date our board of directors terminates the ESPP. The purpose of the ESPP is to provide our employees with a
convenient means of purchasing shares of our common stock at a discount to market prices through the use of payroll deductions. The material terms of the ESPP are summarized below.
Share Reserve
. An aggregate of
1,500,000 shares of our common stock is initially reserved for issuance under the ESPP. If there is any change to our outstanding common stock, such as a recapitalization, stock split or similar event, appropriate adjustments will be made to the
number and class of shares available under the ESPP and to the number, class and purchase price of shares subject to each outstanding purchase right. As of September 30, 2012, 1,500,000 shares of our common stock are available for issuance
under the ESPP.
Administration
. Our board of directors has designated our compensation committee to administer the ESPP. The
compensation committee will have full authority to adopt rules and procedures to administer the ESPP, to interpret the provisions of the ESPP, to determine the terms and conditions of offerings under the ESPP, and to designate which of our
subsidiaries may participate in the ESPP. All costs and expenses incurred for ESPP administration are paid by our company.
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Eligibility and Participation
. All of our employees (including those
of any participating subsidiary) other than those subject to the 5% ownership limitation described below are eligible to participate in the ESPP. Eligible employees may enroll in the ESPP and begin participating at the start of any purchase period.
Purchase Periods
. Shares
of our common stock will be offered under the ESPP through a series of offerings, each of which consists of a single purchase period of six months, or such other duration (up to 27 months) as the compensation committee may prescribe. The initial
purchase period began on the effective date of the ESPP and will continue to November 15, 2012. We expect future purchase periods will be six months in length and commence on May 16 and November 16 each year. Purchases under the ESPP
are expected to occur on the last trading day of each purchase period.
Purchase Price
. The purchase price of our common stock acquired on each purchase date will be no less than 85% of the lower of (i) the closing market price per share of our
common stock on the first day of the applicable purchase period or (ii) the closing market price per share of our common stock on the purchase date at the end of the applicable six-month purchase period.
Payroll Deductions and Stock
Purchases
. Each participant may elect to have a percentage of eligible compensation between 1% and 15% withheld as a payroll deduction per pay period. Payroll deduction contribution percentages may change for each purchase period if a
participant desires, and may be decreased but not increased during a purchase period. The accumulated deductions will automatically be applied on each purchase date to the purchase of shares of our common stock at the purchase price in effect for
that purchase date. No more than 1,250 shares of our common stock may be purchased by an ESPP participant on any purchase date. For purposes of the ESPP, eligible compensation means the gross cash compensation paid to a participant, including base
salary, bonuses, commissions and overtime pay, but excludes company 401(k) contributions and income with respect to equity-based awards.
Special Limitations
. The ESPP imposes certain limitations upon a participants right to acquire our common
stock, including the following:
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Purchase rights may not be granted to any individual who owns stock (including stock purchasable under any outstanding purchase rights)
possessing 5% or more of the total combined voting power or value of all classes of our stock or the stock of any of our subsidiaries.
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A participant may not be granted rights to purchase more than $25,000 worth of our common stock (valued at the time each purchase right
is granted) for each calendar year in which such purchase rights are outstanding.
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Withdrawal or Termination of Purchase Rights
. A participant may withdraw from the ESPP at any time, and his or her accumulated payroll deductions will be promptly refunded. A
participants purchase right will immediately terminate upon his or her cessation of employment for any reason. Any payroll deductions that the participant may have made for the purchase period in which such cessation of employment occurs will
be refunded and will not be applied to the purchase of common stock.
Transferability
. No purchase rights will be assignable or transferable by the participant, except by will or the laws of inheritance following a participants death.
Corporate Transactions.
If
our company is acquired by merger or through the sale of all or substantially all its assets, our board of directors may provide that (i) each right to acquire shares on any purchase date scheduled to occur after the date of the consummation of
the acquisition transaction shall be continued or assumed or an equivalent right shall be substituted by the surviving or successor corporation or its parent or subsidiary, (ii) the ESPP shall be terminated, or (iii) the purchase period
then in progress shall be shortened by setting a new purchase date.
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Share Proration
. Should the total number of shares of common stock to
be purchased pursuant to outstanding purchase rights on any particular purchase date exceed the number of shares remaining available for issuance under the ESPP at that time, then the compensation committee will make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each participant not used to purchase shares will be refunded.
Amendment
. Our board of directors may at any time amend or suspend the ESPP. However, our board of directors may
not, without shareholder approval, amend the ESPP to (i) increase the number of shares issuable under the ESPP or (ii) effect any other change in the ESPP that would require shareholder approval under applicable law or to maintain compliance with
Code Section 423.
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Certain Relationships and Related Party
Transactions
Since
January 1, 2008, we have engaged in the following transactions with certain of our executive officers, directors, holders of more than 5% of our voting securities and their affiliates and immediate family members:
2008 Financing and Recapitalization
In August 2008, we issued and sold to North
Bridge a total of 427,985 shares of our Series A preferred stock, at a price per share of $122.06, for total proceeds to the company of $52.2 million. We used the proceeds from the sale of Series A shares, together with cash on hand and borrowings
from Wells Fargo, to repurchase a total of $66.3 million worth of our outstanding common stock, common stock options and common stock warrants from existing security holders in August 2008. We paid $121.00 per share for these repurchases (less the
applicable exercise price in the case of options and warrants), which represented the Series A purchase price less $1.06 per share in expenses incurred by the company in connection with the transactions. The existing security holders from whom we
repurchased securities included certain of our directors, executive officers and beneficial owners of 5% or more of our voting securities. Those directors and executive officers, and the proceeds they received, were as follows: Bradley Cleveland
(who is also a greater than 5% holder), $7.38 million; John Goodman, $0.06 million; Donald Krantz, $0.77 million; Mark Kubicek, $2.59 million (who remains employed with us, but ceased being an executive officer in October 2012); Margaret Loftus,
$0.71 million; Lawrence Lukis (who is also a greater than 5% holder) and his wife Donna Lukis, $25.67 million; and John Tumelty, $0.72 million. Those beneficial owners of 5% or more of our voting securities, and the proceeds they received, were as
follows: Gregg Bloom (who ceased to be a 5% holder following this transaction), $7.30 million; and Protomold Investment Company, LLC or PIC, $14.38 million. In connection with these transactions, we entered into a number of agreements, each as
described in more detail below.
Investors Rights Agreement
In August 2008, we entered into an
investors rights agreement with North Bridge and PIC. Under this agreement, we granted to North Bridge and PIC certain registration, information, preemptive and other customary investor rights. In addition, we granted PIC a put
right whereby it may require us to repurchase its shares of our common stock anytime after August 2, 2018. The agreement was amended in July 2011 to also grant registration rights to Lawrence Lukis, Bradley Cleveland, the KEC 2011
Irrevocable Gift Trust, the JMC 2011 Irrevocable Gift Trust, Donald Krantz, and Mark Kubicek and to provide that the PIC put right terminated upon the completion of our initial public offering. The registration rights and related provisions are
described in more detail under Description of Capital Stock. Other than certain of the registration rights and related provisions, all material provisions under the investors rights agreement terminated upon the completion of our
initial public offering.
We also
entered into a management rights agreement with North Bridge in August 2008. This agreement, which provides North Bridge with certain additional management and information rights, terminated upon the completion of our initial public offering.
Right of First Refusal and
Co-Sale Agreement
In
August 2008, we entered into a right of first refusal and co-sale agreement with North Bridge, PIC, Lawrence Lukis, Bradley Cleveland and certain of our other security holders. Pursuant to the agreement, all parties except for North Bridge, PIC,
Mr. Lukis, and Mr. Cleveland granted the company a right of first refusal (and granted North Bridge, PIC, Mr. Lukis and Mr. Cleveland a secondary right of refusal) with respect to certain proposed transfers of our capital stock.
North Bridge and PIC were also given a co-sale right that permits them each to participate on a pro-rata basis in any proposed transfer for which the refusal rights apply, but are not exercised. In addition, all parties agreed to a lockup provision
that restricts their ability to transfer our capital stock for 180 days following our initial public offering. Except for this lockup provision, all material provisions under this agreement terminated upon the completion of our initial public
offering. The lockup provision has also expired.
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The directors, current and former executive officers and beneficial holders
of 5% or more of our voting securities that were parties to this agreement are: North Bridge, PIC, Lawrence Lukis, Bradley Cleveland, Gregg Bloom, Mark Kubicek, Margaret Loftus, Donald Krantz, John Goodman, and John Tumelty.
Voting Agreement
In August 2008, we entered into a voting
agreement with North Bridge, PIC, Lawrence Lukis and Yuri Dreizin. The agreement was subsequently amended in June 2011. Pursuant to the agreement, as amended, the parties agreed to vote their shares of our capital stock in favor of maintaining a
board consisting of eight members, of whom two shall be designated by North Bridge (one of whom was initially Doug Kingsley), one shall be designated by PIC (initially Brian Smith), one shall be designated by a majority of the shares held by PIC,
Lawrence Lukis, Yuri Dreizin and Gustavus Adolphus College (initially Lawrence Lukis), one shall be the CEO (initially Bradley Cleveland), and three shall be unaffiliated with the company and mutually acceptable to the other members of the board
(initially John Goodman, Margaret Loftus, and Sven Wehrwein). All of our current directors, other than Mr. Gawlick and Mr. Kohrs, were first elected to serve as directors pursuant to this agreement, which terminated upon the completion our
initial public offering.
Participation in Our
Initial Public Offering
North Bridge, a principal shareholder that is affiliated with a board member, purchased 430,000 shares of our common stock
in our initial public offering at the initial public offering price of $16 per share.
Indemnification of Directors and Officers
We are subject to Minnesota Statutes Chapter 302A, the Minnesota Business Corporation Act, or the Corporation Act.
Section 302A.521 of the Corporation Act provides in substance that, unless prohibited by its articles of incorporation or by-laws, a corporation must indemnify an officer or director who is made or threatened to be made a party to a proceeding
by reason of the former or present official capacity of the person against judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable
expenses, including attorneys fees and disbursements, incurred by such person in connection with the proceeding, if certain criteria are met. These criteria, all of which must be met by the person seeking indemnification, are (a) that
such person has not been indemnified by another organization or employee benefit plan for the same judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan,
settlements, and reasonable expenses, including attorneys fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions; (b) that such person must have acted in good faith;
(c) that no improper personal benefit was obtained by such person and such person satisfied certain statutory conflicts of interest provisions, if applicable; (d) that in the case of a criminal proceeding, such person had no reasonable
cause to believe that the conduct was unlawful; and (e) that, in the case of acts or omissions occurring in such persons performance in an official capacity, such person must have acted in a manner such person reasonably believed was in
the best interests of the corporation or, in certain limited circumstances, not opposed to the best interests of the corporation. In addition, Section 302A.521, subd. 3, requires payment by us, upon written request, of reasonable expenses in
advance of final disposition in certain instances. A decision as to required indemnification is made by a majority of the disinterested board of directors present at a meeting at which a disinterested quorum is present, or by a designated committee
of disinterested directors, by special legal counsel, by the disinterested shareholders, or by a court.
We also maintain a director and officer insurance policy to cover our company, our directors and our officers against
certain liabilities.
Related Party Transaction
Approval Policy
Our board of
directors has adopted a written statement of policy regarding transactions with related persons, which we refer to as our related person policy. Subject to the exceptions described below, our related person policy requires our audit committee to
review and approve any proposed related person transaction and all
105
material facts with respect thereto. In reviewing a transaction, our audit committee will consider all relevant facts and circumstances, including (1) whether the terms are fair to the
company, (2) whether the transaction is material to the company, (3) the role the related person played in arranging the transaction (4) the structure of the transaction, (5) the interests of all related persons in the
transaction, and (6) whether the transaction has the potential to influence the exercise of business judgment by the related person or others. Our audit committee will not approve or ratify a related person transaction unless it determines
that, upon consideration of all relevant information, the transaction is beneficial to our company and shareholders and the terms of the transaction are fair to our company. No related person transaction will be consummated without the approval or
ratification of our audit committee. It will be our policy that directors interested in a related person transaction will recuse themselves from any vote relating to a related person transaction in which they have an interest. Under our related
person policy, a related person includes any of our directors, director nominees, executive officers, any beneficial owner of more than 5% of our common stock and any immediate family member of any of the foregoing. Related party transactions exempt
from our policy include payment of compensation by the company to a related person for the related persons service to the company as an employee, director or executive officer, transactions available to all of our employees and shareholders on
the same terms and transactions between us and the related person that, when aggregated with the amount of all other transactions between us and the related person or its affiliates, involve $120,000 or less in a year. We did not have a formal
review and approval policy for related party transactions at the time of any transaction described in this Certain Relationships and Related Party Transactions section. Pursuant to our approval policy, the audit committee approved this
offering, including the participation by certain of our selling shareholders in this offering.
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Principal and Selling Shareholders
The following table sets
forth information as of September 30, 2012 regarding the beneficial ownership of our common stock (1) immediately prior to and (2) as adjusted to give effect to this offering by:
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each person or group who is known by us to own beneficially more than 5% of our outstanding shares of common stock;
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each of our named executive officers;
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each of our directors and each director nominee;
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our other shareholders participating in this offering; and
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all of the executive officers, directors and director nominees as a group.
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For further information regarding material
transactions between us and certain of our shareholders, see Certain Relationships and Related Party Transactions.
Beneficial ownership for the purposes of the following table is determined in accordance with the rules and regulations of
the SEC. These rules generally provide that a person is the beneficial owner of securities if such person has or shares the power to vote or direct the voting thereof, or to dispose or direct the disposition thereof or has the right to acquire such
powers within 60 days. Common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of September 30, 2012 are deemed to be outstanding and beneficially owned by the person holding the options or
warrants. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Percentage of beneficial ownership is based on 24,302,437 shares of common stock outstanding as of
September 30, 2012 and, based on the number of outstanding shares as of September 30, 2012, 24,402,437 shares of common stock to be outstanding after the completion of this offering.
Except as disclosed in the footnotes to this table and subject to applicable community property
laws, we believe that each shareholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the shareholder. Unless otherwise indicated in the table or footnotes below, the
address for each beneficial owner is c/o Proto Labs, Inc., 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359.
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Beneficial Ownership Prior to
this Offering
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Number of
Shares
Offered
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Beneficial Ownership After
this Offering
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Name and Address of Beneficial Owner
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Number
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Percent
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Number
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Percent
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Greater than 5% shareholders:
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North Bridge Growth Equity I, L.P
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4,821,790
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(1)
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19.84
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%
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1,200,000
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3,621,790
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14.84
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%
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Protomold Investment Company, LLC
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1,415,171
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5.82
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%
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700,000
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715,171
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2.93
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%
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Directors and named executive officers:
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Bradley A. Cleveland
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1,400,182
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(2)
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5.76
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%
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300,000
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(11)
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1,100,182
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4.51
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%
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Rainer Gawlick
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27,250
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(3)
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*
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27,250
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*
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John B. Goodman
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27,250
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(4)
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*
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27,250
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*
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Douglas A. Kingsley
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4,826,766
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(5)
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19.86
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%
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1,200,000
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(12)
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3,626,766
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(13)
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14.86
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%
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Douglas W. Kohrs
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3,270
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*
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3,270
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*
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Lawrence J. Lukis
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6,899,340
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28.39
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%
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1,200,000
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5,699,340
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23.36
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%
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Margaret A. Loftus
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101,250
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*
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101,250
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*
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Brian K. Smith
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254,277
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1.05
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%
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100,000
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154,277
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*
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Sven A. Wehrwein
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9,050
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*
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9,050
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*
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John R. Judd
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58,333
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(6)
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*
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58,333
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*
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Donald G. Krantz
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119,000
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(7)
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*
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119,000
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*
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William R. Langton
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217,000
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(8)
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*
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217,000
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*
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Thomas H. Pang
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42,000
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(9)
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*
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42,000
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*
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All directors and executive officers as a group (18 persons)
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14,275,968
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(10)
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57.28
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%
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2,800,000
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11,475,968
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45.86
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%
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*
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Represents beneficial ownership of less than one percent.
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(1)
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North Bridge Growth Equity I, L.P. directly owns 4,821,790 shares of our common stock. NBGE Manager, LLC, the managing manager of NBGE GP, LLC, or NBGE,
which is the sole general partner of North Bridge Growth Management, L.P., which is the sole general partner of North Bridge Growth Equity I, L.P., has sole vesting and dispositive power over these shares. Douglas A. Kingsley, a director of our
company, is a founding managing director of NBGE. Voting and investment power over such shares are vested in the managers of NBGE Manager, LLC, Edward T. Anderson and Richard A. DAmore. Mr. Anderson, Mr. DAmore and
Mr. Kingsley disclaim beneficial ownership of such shares, except to the extent of any pecuniary interest in them. The amount reflected in this table does not include 1,126 shares, 610 shares, and 585 shares of our common stock that Mr.
Andersen, Mr. DAmore, and the Angel 2011 Dynasty Trust (a trust for the benefit of Mr. Andersens immediate family members) received pursuant to a pro rata distribution of shares by North Bridge Growth Equity I, L.P. to its general and
limited partners without consideration.
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(2)
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Includes 1,206,182 shares held by Bradley A. Cleveland, as Trustee of the Bradley A. Cleveland Declaration of Trust dated October 10, 2008, and
97,000 shares held by each of (a) Patricia M. Cleveland and Cornerstone Private Asset Trust Company, LLC, as Co-Trustees of the JMC 2011 Irrevocable Gift Trust, or JMC Trust, and (b) Patricia M. Cleveland and Cornerstone Private Asset
Trust Company, LLC, as Co-Trustees of the KEC 2011 Irrevocable Gift Trust, or KEC Trust. Mr. Cleveland disclaims beneficial ownership over the shares of the JMC Trust and the KEC Trust and has no voting rights over such shares.
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(3)
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Includes 21,000 shares that Dr. Gawlick has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock
options.
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(4)
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Includes 21,000 shares that Mr. Goodman has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock
options.
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(5)
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Includes the shares referred to in footnote (1) above plus 4,976 shares held directly by Mr. Kingsley. Mr. Kingsley disclaims beneficial
ownership of the shares in footnote (1), except to the extent of his pecuniary interest therein.
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(6)
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Includes 58,333 shares that Mr. Judd has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock
options.
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(7)
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Includes 119,000 shares that Dr. Krantz has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock
options.
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(8)
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Includes 217,000 shares that Mr. Langton has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock
options.
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(9)
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Includes 42,000 shares that Dr. Pang has the right to acquire from us within 60 days of the date of the table pursuant to the exercise of stock
options.
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(10)
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Includes 619,333 shares held by our executive officers and directors, in the aggregate, that can be acquired from us within 60 days of the date of the
table pursuant to the exercise of stock options.
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(11)
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Includes 230,000 shares being sold by Bradley A. Cleveland, as Trustee of the Bradley A. Cleveland Declaration of Trust dated October 10,
2008, and 35,000 shares being sold by each of the JMC Trust and KEC Trust. Mr. Cleveland disclaims beneficial ownership over the shares of the JMC Trust and KEC Trust and has no voting rights over such shares.
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(12)
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Consists of shares listed in footnote (1) above, which are held by North Bridge Growth Equity I, L.P. Mr. Kingsley disclaims beneficial ownership of
these shares, except to the extent of his pecuniary interest therein.
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(13)
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Includes the shares referred to in footnotes (1) and (12) above plus 4,976 shares held directly by Mr. Kingsley. Mr. Kingsley disclaims beneficial
ownership of the shares referred to in footnotes (1) and (12) above, except to the extent of his pecuniary interest therein.
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108
Description of Capital Stock
The following is a description of the
material terms of our third amended and restated articles of incorporation and amended and restated by-laws. They may not contain all of the information that is important to you. To understand them fully, you should read our third amended and
restated articles of incorporation and amended and restated by-laws, copies of which are filed with the SEC as exhibits to the registration statement, of which this prospectus is a part.
Authorized Capitalization
Our authorized capital stock consists of
150,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock. As of September 30, 3012, there were 24,302,437 shares of common stock and no shares of preferred stock outstanding. As of November 15, 2012, there
were 16 holders of record of our common stock. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in street name by brokers and other
nominees.
Common Stock
Voting Rights
Each share of common stock
entitles the holder to one vote with respect to each matter presented to our shareholders on which the holders of common stock are entitled to vote. Our common stock votes as a single class on all matters relating to the election and removal of
directors on our board of directors and as provided by law. Holders of our common stock will not have cumulative voting rights. Except in respect of matters relating to the election and removal of directors on our board of directors and as otherwise
provided in our third amended and restated articles of incorporation or required by law, all matters to be voted on by our shareholders must be approved by a majority of the shares present in person or by proxy at the meeting and entitled to vote on
the subject matter. In the case of election of directors, all matters to be voted on by our shareholders must be approved by a plurality of the votes entitled to be cast by all shares of common stock.
Dividend Rights
Subject to preferences that may be
applicable to any outstanding series of preferred stock, the holders of our common stock will receive ratably any dividends declared by our board of directors out of funds legally available for the payment of dividends. It is our present intention
not to pay dividends on our common stock for the foreseeable future. Our board of directors may, at its discretion, modify or repeal our dividend policy. Future dividends, if any, with respect to shares of our common stock will depend on, among
other things, our results of operations, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our board of directors deems relevant. Our credit facilities currently limit our ability
to pay cash dividends. See Dividend Policy.
Liquidation Rights
In the event of our liquidation, dissolution or winding-up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of preferred stock, if any, then outstanding. The holders of our common stock have no preemptive or other subscription rights.
Listing
Our common stock is listed on the NYSE under the symbol PRLB.
Transfer Agent and Registrar
The transfer agent and
registrar for our common stock is Wells Fargo Shareowner Services.
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Preferred Stock
On September 30, 2012, there were no
shares of preferred stock outstanding. We may issue up to 10,000,000 shares of preferred stock in one or more series as may be determined by our board of directors. Our board has broad discretionary authority with respect to the rights of any new
series of preferred stock and may establish the following with respect to the shares to be included in each series, without any vote or action of the shareholders:
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the designations, preferences and relative rights, including voting rights, dividend rights, conversion rights, redemption privileges
and liquidation preferences; and
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any qualifications, limitations or restrictions.
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We believe that the ability of our board to
issue one or more series of preferred stock will provide us with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that may arise. The authorized shares of preferred stock, as well as
authorized and unissued shares of common stock, will be available for issuance without action by our shareholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our
securities may be listed or traded.
Our board may authorize, without shareholder approval, the issuance of preferred stock with voting and conversion rights
that could adversely affect the voting power and other rights of holders of common stock. Although our board has no current intention of doing so, it could issue a series of preferred stock that could, depending on the terms of such series, impede
the completion of a merger, tender offer or other takeover attempt of our company. Our board could also issue preferred stock having terms that could discourage an acquisition attempt through which an acquirer may be able to change the composition
of our board, including a tender offer or other transaction that some, or a majority, of our shareholders might believe to be in their best interests or in which shareholders might receive a premium for their stock over the then-current market
price. Any issuance of preferred stock therefore could have the effect of decreasing the market price of our common stock.
Our board will make any determination to issue such shares based on its judgment as to our best interests of our company
and shareholders. We have no current plan to issue any preferred stock after this offering.
Registration Rights
In August 2008, we entered into an investors rights agreement with North Bridge and PIC. Under this agreement, we granted to North Bridge and PIC certain registration rights. In
addition, the agreement was amended in July 2011 to also grant registration rights to Lawrence Lukis, Bradley Cleveland, Donald Krantz, and Mark Kubicek. The terms of the registration rights are described below.
Prior to the completion of our initial public
offering, certain holders of our common stock were entitled to registration rights pursuant to the amended and restated investors rights agreement described in Certain Relationships and Related Party Transactions. After the
completion of this offering, based on the number of shares outstanding on September 30, 2012, the holders of approximately 11.1 million shares of our common stock will continue to hold those registration rights.
Demand Registration Rights
We are obligated to
effect up to three registrations on Form S-1, and up to two registrations on Form S-3 in any 12-month period, as requested by the holders of our common stock having registration rights. A request for registration on Form S-1 for which the aggregate
offering price, net of selling expenses, is reasonably expected to be at least $5,000,000 may be made by any holder of registrable securities.
After we become eligible to file a registration statement on Form S-3, one or more holders of then outstanding registrable
securities may request that the company effect a registration on Form S-3 of a number of registrable securities for which the aggregate offering price, net of selling expenses, is reasonably expected to be
110
at least $3,000,000. We may delay the filing of a registration statement in connection with a demand registration for a period of up to 105 calendar days if our board of directors determines in
its good faith judgment that the filing of such registration would be materially detrimental to the company. If the managing underwriter advises us that the number of shares to be included in a demand registration should be limited due to market
conditions or otherwise, all shares other than registrable securities will initially be excluded from the registration, and if additional shares must be excluded from the registration, holders of registrable securities will share pro rata in the
number of shares to be excluded from the registration based on the respective numbers of registrable securities owned by such holders.
Piggyback Registration Rights
In the event that we propose to register any
of our securities under the Securities Act, including this offering, but excluding the registration of securities (i) to be offered pursuant to a stock option or other employee benefit plan or a registration on any form that does not include
substantially the same information as would be required to be included in a registration statement covering the sale of the registrable securities, (ii) relating to an SEC Rule 145 transaction, or (iii) for which the only common stock
being registered is common stock issuable upon conversion of debt securities that are also being registered, we are required to include in these registrations all securities with respect to which we have received written requests for inclusion under
our amended and restated investors rights agreement, subject to certain limitations. If the managing underwriter advises us that the number of shares to be included in such a registration should be limited due to market conditions or
otherwise, and we initiated the registration, all shares other than registrable securities, excluding shares to be issued by us, will initially be excluded from the registration, and if additional shares must be excluded from the registration,
holders of registrable securities will share pro rata in the number of shares to be excluded from the registration based on the respective numbers of registrable securities owned by such holders, and if further additional shares must be excluded
from the registration, shares to be issued by us will be excluded.
We are obligated to pay up to $50,000 of registration expenses of the holders of the shares registered pursuant to the demand and piggyback registrations described above.
Anti-takeover Effects of Minnesota Law and Our Third
Amended and Restated Articles of Incorporation and Amended and Restated By-laws
Certain provisions of our third amended and restated articles of incorporation and our amended and restated by- laws may make it less likely that our management would be changed or someone
would acquire voting control of our company without our boards consent. These provisions may delay, deter or prevent tender offers or takeover attempts that shareholders may believe are in their best interests, including tender offers or
attempts that might allow shareholders to receive premiums over the market price of their common stock.
Preferred Stock
Our board of directors can at any time, and without shareholder approval, issue one or more new series of preferred stock.
In some cases, the issuance of preferred stock without shareholder approval could discourage or make more difficult attempts to take control of our company through a merger, tender offer, proxy contest or otherwise. Preferred stock with special
voting rights or other features issued to persons favoring our management could stop a takeover by preventing the person trying to take control of our company from acquiring enough voting shares necessary to take control.
By-laws
Our amended and restated by-laws provide
that any action required or permitted to be taken by the shareholders of the company may be effected only at a meeting of shareholders and prohibits shareholder action by less than unanimous written consent in lieu of a meeting.
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Special Meetings of Shareholders
Our amended and restated by-laws provide
that special meetings of shareholders may be called only by the board, any two or more directors, the Chief Executive Officer, the Chief Financial Officer or one or more shareholders holding 10% or more of the voting power of all shares entitled to
vote. Special meetings of shareholders called by shareholders for the purpose of considering any action to facilitate a business combination, including any action to affect the composition of the board for that purpose, must be called by
shareholders holding 25% or more of the voting power of all shares entitled to vote. Further, business transacted at any special meeting of shareholders is limited to matters relating to the purpose or purposes stated in the notice of the meeting.
Business Combinations
Several provisions of
Minnesota law may deter potential changes in control of us that some shareholders may view as beneficial or that may provide a premium on our stock price. Under Section 302A.673 of the Minnesota Business Corporation Act, a shareholder that
beneficially owns 10% or more of the voting power of our outstanding shares (an interested shareholder) generally cannot consummate a business combination with us, or any subsidiary of ours, within four years following the time the interested
shareholder crosses the 10% stock ownership threshold, unless the business combination is approved by a committee of disinterested members of our board before the time the interested shareholder crosses the 10% stock ownership threshold.
Section 302A.675 of the Minnesota
Business Corporation Act generally prohibits an offeror from acquiring our shares within two years following the offerors last purchase of our shares pursuant to a takeover offer with respect to that class, unless our shareholders may sell
their shares to the offeror upon substantially equivalent terms as those provided in the earlier takeover offer. This provision does not apply if the share acquisition is approved by a committee of disinterested members of our board before the
purchase of any shares by the offeror pursuant to the earlier takeover offer.
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Shares Eligible for Future Sale
No prediction can be made as to the effect,
if any, future sales of shares, or the availability of shares for future sales, will have on the market price of our common stock prevailing from time to time. The sale of substantial amounts of our common stock in the public market, or the
perception that such sales could occur, could harm the prevailing market price of our common stock.
Sale of Restricted Shares
Upon the completion of this offering, based upon the number of shares of our common stock outstanding as of September 30, 2012, and assuming no exercise of outstanding options, we
will have 24,402,437 shares of our common stock outstanding. Of the outstanding shares, all of the shares of our common stock sold in this offering, all of the shares of common stock sold in our initial public offering, and all of the shares of
common stock issued pursuant to awards and the exercise of stock options granted under the 2000 Stock Option Plan, 2012 Long-Term Incentive Plan, Employee Stock Purchase Plan, and a certain stock subscription warrant, each as registered on a Form
S-8 as filed with the SEC in February 2012, will be freely tradable without restriction under the Securities Act except for any shares of our common stock held by our affiliates, as that term is defined in Rule 144 under the Securities Act, which
would be subject to the limitations and restrictions described below.
The remaining shares of our common stock outstanding upon the completion of this offering are deemed restricted securities, as that term is defined under Rule 144 of the Securities Act.
Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act, which rules are described below.
Rule 144
Under Rule 144, in general, persons who hold
our common stock may not sell their shares until the expiration of a six-month holding period, if we have been subject to the reporting requirements of the Exchange Act and have filed all required reports for at least 90 days prior to the date of
the sale.
At the expiration of
the six-month holding period, a person who was not one of our affiliates at any time during the three months preceding a sale would be entitled to sell an unlimited number of shares of our common stock provided current public information about us is
available, and a person who was one of our affiliates at any time during the three months preceding a sale would be entitled to sell within any three-month period only a number of shares of common stock that does not exceed the greater of either of
the following:
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1% of the number of shares of our common stock then outstanding, which will equal approximately 244,024 shares immediately after this
offering, assuming no exercise of the underwriters option to purchase additional shares, based on the number of shares of common stock outstanding as of September 30, 2012; or
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the average weekly trading volume of our common stock on the NYSE during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale, which would equal approximately 824,775 shares based on the average weekly trading volume of our common stock on the NYSE for the four-week period ended September 30, 2012.
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Provided, in each case, that we are subject
to Exchange Act periodic reporting requirements for at least 90 days before the sale. Sales under Rule 144 by our affiliates are also subject to manner of sale provisions and notice requirements and to the availability of current public information
about us.
Rule 701
Rule 701 under the Securities Act, as in
effect on the date of this prospectus, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our employees, executive officers or directors
who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701.
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Options
As of September 30, 2012, stock options
to purchase a total of 2,002,141 shares of our common stock were outstanding with a weighted average per share exercise price of $9.56. We have reserved 3,872,266 shares of common stock for issuance pursuant to our 2012 Long-Term Incentive Plan.
This number is subject to increase on an annual basis and subject to increase for shares of stock subject to awards under our prior equity plans that expire unexercised or otherwise do not result in the issuance of shares subject to the award. As of
September 30, 2012, we did not have any warrants outstanding. We have filed registration statements on Form S-8 under the Securities Act to register shares of our common stock issued or reserved for issuance under our 2000 Stock Option Plan and
2012 Long-Term Incentive Plan. Shares registered under this registration statement are available for sale in the open market, unless such shares are subject to vesting restrictions with us or Rule 144 restrictions applicable to our affiliates.
Lock-Up Agreements
In connection with this
offering, we, each of our executive officers and directors, and each of the selling shareholders have agreed, subject to certain exceptions, with the underwriters of this offering not to dispose of or hedge any shares of common stock or securities
convertible into or exchangeable for shares of common stock prior to the close of business on the
90
th
day after the date of
this prospectus, without the prior written consent of Morgan Stanley & Co. LLC and Piper Jaffray & Co., the representatives of the underwriters of this offering, except, in our case, for the issuance of common stock upon either the
exercise of outstanding warrants or the exercise of options under existing option plans, the grant of equity awards under existing option plans, and certain other exceptions. Morgan Stanley & Co. LLC and Piper Jaffray & Co. may, in
their sole discretion, release any of these shares from these restrictions at any time upon providing notice as required by applicable FINRA rules. Morgan Stanley & Co. LLC and Piper Jaffray & Co. have advised us that there are no
specific criteria for the waiver of the lock-up restrictions. See Underwriters for a more detailed description of the lock-up arrangements with respect to outstanding shares of our common stock.
10b5-1 Plans
Some of our employees, including our named
executive officers, have entered into 10b5-1 trading plans regarding sales of shares of our common stock. These plans permit the automatic trading of our common stock by an independent person (such as a stockbroker) who is not aware of material,
nonpublic information at the time of the trade and generally provide for sales to occur from time to time.
Registration Rights
Certain of our shareholders have registration rights pursuant to an amended and restated investors rights agreement between us and those shareholders. See Description of
Capital Stock for a more detailed description of registration rights.
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Certain U.S. Federal Income Tax Consequences to
Non-U.S. Holders
The
following is a summary of material U.S. federal income and estate tax consequences of the purchase, ownership and disposition of our common stock to a non-U.S. holder that purchases shares of our common stock in this offering. For purposes of this
summary, a non-U.S. holder means a beneficial owner of our common stock that is, for U.S. federal income tax purposes a:
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nonresident alien individual;
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foreign corporation or an entity treated as a foreign corporation for U.S. federal income tax purposes;
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In the case of a holder that is classified as a partnership for U.S. federal income tax purposes, the tax treatment of a
partner in such partnership generally will depend upon the status of the partner and the activities of the partner and the partnership. If you are a partner in a partnership holding our common stock, then you should consult your own tax advisor.
This summary is based upon the
provisions of the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the Code, the Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof. Those authorities
may be changed, perhaps retroactively, so as to result in U.S. federal income tax consequences different from those summarized below. We cannot assure you that a change in law will not alter significantly the tax considerations that we describe in
this summary. We have not sought and do not plan to seek any ruling from the U.S. Internal Revenue Service, which we refer to as the IRS, with respect to statements made and the conclusions reached in the following summary, and there can be no
assurance that the IRS or a court will agree with our statements and conclusions.
This summary does not address all aspects of U.S. federal income taxes that may be relevant to non-U.S. holders in light of their personal circumstances, and does not deal with federal
taxes other than the U.S. federal income tax or estate tax or with non-U.S., state or local tax considerations. Special rules, not discussed here, may apply to certain non-U.S. holders, including:
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controlled foreign corporations;
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passive foreign investment companies;
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corporations that accumulate earnings to avoid U.S. federal income tax; and
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investors in pass-through entities that are subject to special treatment under the Code.
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Such non-U.S. holders should consult their
own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them.
This summary applies only to a non-U.S. holder that holds our common stock as a capital asset (within the meaning of
Section 1221 of the Code).
If you are considering the purchase of our common stock, you should consult your own tax advisor concerning the particular
U.S. federal income tax consequences to you of the purchase, ownership and disposition of our common stock, as well as the consequences to you arising under U.S. tax laws other than the federal income tax law or under the laws of any other taxing
jurisdiction.
Dividends
As discussed under the section entitled
Dividend Policy above, we do not currently anticipate paying dividends. In the event that we do make a distribution of cash or property with respect to our common stock, any such distributions will be treated as a dividend for U.S.
federal income tax purposes to the extent paid from our
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current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Dividends paid to you generally will be subject to withholding of U.S. federal income tax at a
30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with your conduct of a trade or business within the United States and, if required by an applicable income tax
treaty, are attributable to a United States permanent establishment, are not subject to the withholding tax, provided certain certification and disclosure requirements are satisfied, including delivery of a properly executed W-8 ECI. Instead, such
dividends are subject to U.S. federal income tax on a net income basis in the same manner as if you were a United States person as defined under the Code. Any such effectively connected dividends received by a foreign corporation may be subject to
an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
If the amount of a distribution paid on our common stock exceeds our current and accumulated earnings and profits, such
excess will be allocated ratably among each share of common stock with respect to which the distribution is paid and treated first as a tax-free return of capital to the extent of your adjusted tax basis in each such share, and thereafter as capital
gain from a sale or other disposition of such share of common stock that is taxed to you as described below under the heading Gain on Disposition of Common Stock.
If you wish to claim the benefit of an
applicable treaty rate to avoid or reduce withholding of U.S. federal income tax for dividends, then you must (a) provide the withholding agent with a properly completed IRS Form W-8BEN (or other applicable form) and certify under penalties of
perjury that you are not a U.S. person as defined under the Code and are eligible for treaty benefits, or (b) if our common stock is held through certain foreign intermediaries, satisfy the relevant certification requirements of applicable U.S.
Treasury regulations. Special certification and other requirements apply to certain non-U.S. holders that act as intermediaries (including partnerships).
If you are eligible for a reduced rate of U.S. federal income tax pursuant to an income tax treaty, then you may obtain a
refund of any excess amounts withheld by filing timely an appropriate claim for refund with the IRS.
Gain on Disposition of Common Stock
You generally will not be subject to U.S. federal income tax with respect to gain realized on the sale or other taxable
disposition of our common stock, unless:
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the gain is effectively connected with your trade or business in the United States (and, if required by an applicable income tax
treaty, is attributable to your United States permanent establishment);
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if you are an individual, you are present in the United States for 183 days or more in the taxable year of the sale or other taxable
disposition, and certain other conditions are met; or
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we are or have been during a specified testing period a U.S. real property holding corporation for U.S. federal income tax
purposes, and certain other conditions are met.
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We believe that we have not been and are not, and we do not anticipate becoming, a U.S. real property holding corporation for U.S. federal income tax purposes.
If you are an individual non-U.S. holder
described in the first bullet point immediately above, you will be subject to tax on the net gain derived from the sale at generally applicable United States federal income tax rates, subject to an applicable income tax treaty providing otherwise.
If you are an individual non-U.S. holder described in the second bullet point immediately above, you will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by United States source capital losses, even though you are
not considered a resident of the United States. If a non-U.S. holder that is a foreign corporation falls under the first bullet point immediately above, it will be subject to tax on its net gain in the same manner as if it were a United States
person as defined under the Code and, in addition, if a corporation, may be subject to the branch profits tax equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax
treaty.
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Federal Estate Tax
Common stock held by an individual non-U.S. holder at the time of death will be included in
such holders gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding Tax
We must report annually to the IRS and to
you the amount of dividends paid to you and the amount of tax, if any, withheld with respect to such dividends, regardless of whether withholding was required. The IRS may make this information available to the tax authorities in the country in
which you are resident.
In
addition, you may be subject to information reporting requirements and backup withholding tax (currently at a rate of 28%) with respect to dividends paid on, and the proceeds of disposition of, shares of our common stock, unless, generally, you
certify under penalties of perjury (usually on IRS Form W-8BEN) that you are not a U.S. person or you otherwise establish an exemption. Additional rules relating to information reporting requirements and backup withholding tax with respect to
payments of the proceeds from the disposition of shares of our common stock are as follows:
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If the proceeds are paid to or through the U.S. office of a broker, the proceeds generally will be subject to backup withholding tax
and information reporting, unless you certify under penalties of perjury (usually on IRS Form W-8BEN) that you are not a U.S. person (and we do not have actual knowledge or reason to know that you are a U.S. person) or you otherwise establish an
exemption.
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If the proceeds are paid to or through a non-U.S. office of a broker that is not a U.S. person and is not a foreign person with certain
specified U.S. connections (a U.S.-related person), information reporting and backup withholding tax generally will not apply.
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If the proceeds are paid to or through a non-U.S. office of a broker that is a U.S. person or a U.S.-related person, the proceeds
generally will be subject to information reporting (but not to backup withholding tax), unless you certify under penalties of perjury (usually on IRS Form W-8BEN) that you are not a U.S. person or you otherwise establish an exemption.
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Any amounts
withheld under the backup withholding tax rules may be allowed as a refund or a credit against your U.S. federal income tax liability, provided the required information is timely furnished by you to the IRS.
Additional Withholding Requirements
Under recently enacted legislation, the
relevant withholding agent may be required to withhold 30% of any dividends and the proceeds of a sale of our common stock paid after December 31, 2012 to (i) a foreign financial institution unless such foreign financial institution agrees
to verify, report and disclose its U.S. accountholders to the IRS and meets certain other specified requirements or is otherwise exempt from such withholding or (ii) a non- financial foreign entity that is the beneficial owner of the payment
unless such entity certifies with the relevant withholding agent that it does not have any substantial United States owners or provides the name, address and taxpayer identification number of each substantial United States owner and such entity
meets certain other specified requirements, or is otherwise exempt from withholding. Under proposed regulations, this withholding will not apply (i) to dividend income on stock that is paid on or before December 31, 2013, or (ii) to
gross proceeds from the disposition of stock paid on or before December 31, 2014. Potential purchasers of common stock should consult with their own tax advisors regarding the impact of this legislation and the proposed regulations.
THE SUMMARY OF MATERIAL U.S. FEDERAL
INCOME AND ESTATE TAX CONSEQUENCES ABOVE IS INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. POTENTIAL PURCHASERS OF OUR COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX
CONSIDERATIONS OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON STOCK.
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Underwriters
Under the terms and subject to the conditions
in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. LLC and Piper Jaffray & Co. are acting as representatives, have severally agreed to purchase, and we and
the selling shareholders have agreed to sell to them, severally, the number of shares indicated below:
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Name
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Number of
Shares
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Morgan Stanley & Co. LLC
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1,512,000
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Piper Jaffray & Co.
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1,188,000
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William Blair & Company, L.L.C.
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360,000
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Needham & Company, LLC
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252,000
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Craig-Hallum Capital Group LLC
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216,000
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Dougherty & Company LLC
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72,000
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Total
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3,600,000
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The
underwriters and the representatives are collectively referred to as the underwriters and the representatives, respectively. The underwriters are offering the shares of common stock subject to their acceptance of the shares
from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain
legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required
to take or pay for the shares covered by the underwriters option to purchase additional shares described below.
The underwriters initially propose to offer part of the shares of common stock directly to the public at the offering
price listed on the cover page of this prospectus and part to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.
Certain of the selling shareholders have
granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 540,000 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting
discounts and commissions. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the
underwriters name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.
The following table shows the per share and
total public offering price, underwriting discounts and commissions, and proceeds before expenses to us and the selling shareholders. These amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase up
to an additional 540,000 shares of common stock.
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Total
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Per
Share
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No
Exercise
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Full
Exercise
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Public offering price
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$
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31.00
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$
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111,600,000
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$
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128,340,000
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Underwriting discounts and commissions to be paid by:
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Us
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$
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1.488
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$
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148,800
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$
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148,800
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The selling shareholders
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$
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1.488
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$
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5,208,000
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$
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6,011,520
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Proceeds, before expenses, to us
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$
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29.512
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$
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2,951,200
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$
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2,951,200
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Proceeds, before expenses, to selling shareholders
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$
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29.512
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$
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103,292,000
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$
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119,228,480
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The estimated offering expenses payable by us, exclusive of the underwriting
discounts and commissions, are approximately $0.5 million.
Our common stock is listed on the New York Stock Exchange under the trading symbol PRLB.
We, all of our directors and executive
officers and each of the selling shareholders have agreed that, without the prior written consent of Morgan Stanley & Co. LLC and Piper Jaffray & Co. on behalf of the underwriters and subject to certain exceptions, we and they will
not, as applicable, during the period ending at the close of trading on the date that is 90 days after the date of this prospectus (the restricted period):
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directly or indirectly sell (including, without limitation, any short sale), offer, contract or grant any option to sell, pledge,
transfer or establish an open put equivalent position within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce the offering of, any shares of our common stock or options, rights or
warrants to acquire shares of our common stock or securities exchangeable or exercisable for or convertible into shares of our common stock;
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file any registration statement (except for a registration statement on Form S-8) under the Securities Act in respect of any shares of
our common stock or options, rights or warrants to acquire shares of our common stock or securities exchangeable or exercisable for or convertible into shares of our common stock; or
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publicly announce the intention to do any of the foregoing.
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The restrictions described in the immediately preceding paragraph to do not apply to:
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the sale of shares to the underwriters;
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in the case of a natural person, the transfer of shares by gift, will or intestate succession to a member of the immediate family of
the transferor or to a trust, the beneficiary of which is exclusively the transferor or a member of the transferors immediate family;
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the transfer of shares by gift to a charitable organization for purposes of personal tax planning;
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in the case of a non-natural person, distributions of shares to general or limited partners or stockholders or members of the
transferor;
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in the case of certain of the selling shareholders, transactions relating to shares of our common stock or securities exchangeable or
exercisable for or convertible into shares of our common stock acquired in open market transactions after the completion of this offering; or
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transfers pursuant to any contract, instruction or plan that satisfies all of the requirements of Rule 10b5-1(c)(1)(i)(B) under the
Exchange Act.
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In addition, we may issue shares of our common stock or options to purchase shares of our common stock, or issue shares of
our common stock upon exercise of options, pursuant to our 2000 Plan, 2012 Plan, Employee Stock Purchase Plan, or any other arrangement described in this prospectus.
In order to facilitate the offering of the
common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting
agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the option to purchase additional shares. The underwriters can close out a
covered short sale by exercising the option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared
to the price available under the option. The underwriters may also sell shares in excess of the option,
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creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this
offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels
or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time.
We, the selling shareholders and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
A prospectus in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The
representatives may agree to allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet
distributions on the same basis as other allocations.
Selling Restrictions
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State) an offer to the public of any
shares of our common stock may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any shares of our common stock may be made at any time under the following exemptions under the Prospectus
Directive, if they have been implemented in that Relevant Member State:
(a) to any legal entity which is a qualified investor as defined in the Prospectus Directive;
(b) to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending
Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or
(c) in any other circumstances
falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares of our common stock shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of
this provision, the expression an offer to the public in relation to any shares of our common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and
any shares of our common stock to be offered so as to enable an investor to decide to purchase any shares of our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State,
the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in
the Relevant Member State, and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
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United Kingdom
Each underwriter has represented and agreed
that:
(a) it has only
communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the
issue or sale of the shares of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us; and
(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in
relation to the shares of our common stock in, from or otherwise involving the United Kingdom.
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Market and Industry Data
Unless otherwise indicated, information
contained in this prospectus concerning our industry, including our market opportunity, is based on information from independent industry analysts, third-party sources and management estimates. Management estimates are derived from
publicly-available information released by independent industry analysts and third party sources, as well as data from our internal research, and are based on assumptions made by us based on such data and our knowledge of such industry and market,
which we believe to be reasonable. In addition, while we believe the market opportunity information included in this prospectus is generally reliable and is based on reasonable assumptions, such data involves risks and uncertainties and are subject
to change based on various factors, including those discussed under the heading Risk Factors.
Legal Matters
The validity of the common stock offered
hereby will be passed upon for us by Faegre Baker Daniels LLP, Minneapolis, Minnesota. Cooley LLP, San Francisco and San Diego, California, is counsel to the underwriters in connection with this offering.
Experts
The consolidated financial
statements of Proto Labs, Inc. at December 31, 2010 and 2011, and for each of the three years in the period ended December 31, 2011, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP,
independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The market data of Jon Peddie Research
appearing in this prospectus and registration statement is included in reliance upon The Worldwide CAD Market Report 2010 by Jon Peddie Research given on the authority of such firm as experts in market research.
Where You Can
Find Additional Information
We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our
common stock to be sold in this offering. The registration statement, including the attached exhibits, contains additional relevant information about us and our common stock. The rules and regulations of the SEC allow us to omit from this document
certain information included in the registration statement.
You may read and copy the reports and other information we file with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also
obtain copies of this information by mail from the public reference room of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. You may obtain information regarding the operation of the public reference room by calling
1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy statements and other information about issuers, like us, who file electronically with the SEC. The address of that website is http://www.sec.gov. This reference to the
SECs website is an inactive textual reference only and is not a hyperlink.
We are subject to the reporting, proxy and information requirements of the Exchange Act and, as a result, are required to file periodic reports, proxy statements and other information with
the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SECs public reference room and the website of the SEC referred to above, as well as on our website, www.protolabs.com.
This reference to our website is an inactive textual reference only and is not a hyperlink. The contents of our website are not part of this prospectus, and you should not consider the contents of our website in making an investment decision with
respect to our common stock.
122
PROTO LABS, INC.
Index to Consolidated
Financial Statements
F-1
Report of Independent Registered Public
Accounting Firm
The Board of Directors and
Shareholders
Proto Labs, Inc.
We have audited the accompanying consolidated balance sheets of Proto Labs, Inc. as of December 31, 2010 and 2011,
and the related consolidated statements of operations and comprehensive income, shareholders equity (deficit), and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of Proto Labs, Inc. at December 31, 2010 and 2011 and the consolidated results of its operations and its cash flows for each of the three years in
the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 1, 2012, except for the retrospective application of the stock split as described in Note 2, as to which the date is
February 21, 2012, and except for the retrospective adoption of the amendments to the new standard relating to reporting and display of comprehensive income as described in Note 2, as to which the date is October 30, 2012
F-2
For the fiscal year ended September 30, 2012
Proto Labs, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
2012
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,101
|
|
|
$
|
8,135
|
|
|
$
|
36,290
|
|
Short-term marketable securities
|
|
|
750
|
|
|
|
250
|
|
|
|
21,704
|
|
Accounts receivable, net of allowance for doubtful accounts of $158, $97, and $158 as of December 31,
2010, December 31, 2011 and September 30, 2012, respectively
|
|
|
8,373
|
|
|
|
11,533
|
|
|
|
15,304
|
|
Inventory
|
|
|
1,606
|
|
|
|
3,797
|
|
|
|
4,343
|
|
Prepaid expenses and other current assets
|
|
|
1,835
|
|
|
|
3,430
|
|
|
|
3,997
|
|
Deferred tax assets
|
|
|
222
|
|
|
|
932
|
|
|
|
930
|
|
Income taxes receivable
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,887
|
|
|
|
28,077
|
|
|
|
82,813
|
|
Property and equipment, net
|
|
|
19,467
|
|
|
|
34,249
|
|
|
|
44,457
|
|
Long-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
29,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
38,354
|
|
|
$
|
62,326
|
|
|
$
|
156,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, redeemable convertible stock and shareholders equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,755
|
|
|
$
|
4,431
|
|
|
$
|
4,159
|
|
Accrued compensation
|
|
|
1,706
|
|
|
|
4,767
|
|
|
|
5,516
|
|
Accrued liabilities and other
|
|
|
260
|
|
|
|
318
|
|
|
|
725
|
|
Income taxes payable
|
|
|
|
|
|
|
33
|
|
|
|
|
|
Current portion of long-term debt obligations
|
|
|
3,742
|
|
|
|
390
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,463
|
|
|
|
9,939
|
|
|
|
10,735
|
|
Deferred tax liability
|
|
|
1,311
|
|
|
|
4,252
|
|
|
|
4,252
|
|
Long-term debt obligations
|
|
|
1,290
|
|
|
|
613
|
|
|
|
401
|
|
Other
|
|
|
666
|
|
|
|
871
|
|
|
|
800
|
|
Redeemable convertible stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, $0.001 par value, authorized, issued and outstanding 427,985 shares as of
December 31, 2010 and 2011, respectively; and 0 shares authorized, issued and outstanding as of September 30, 2012
|
|
|
61,896
|
|
|
|
66,075
|
|
|
|
|
|
Redeemable common stock, $0.001 par value, issued and outstanding 3,189,648 shares as of December 31, 2010
and 2011, respectively; and 0 shares issued and outstanding as of September 30, 2012
|
|
|
819
|
|
|
|
819
|
|
|
|
|
|
Shareholders equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock; $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of
December 31, 2010, December 31, 2011 and September 30, 2012, respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 8,013,250, 9,706,270, and
24,302,437 shares as of December 31, 2010, December 31, 2011, and September 30, 2012, respectively
|
|
|
8
|
|
|
|
10
|
|
|
|
24
|
|
Additional paid in capital
|
|
|
5,896
|
|
|
|
8,229
|
|
|
|
138,075
|
|
Accumulated equity (deficit)
|
|
|
(41,537
|
)
|
|
|
(27,744
|
)
|
|
|
3,175
|
|
Accumulated other comprehensive loss
|
|
|
(458
|
)
|
|
|
(738
|
)
|
|
|
(541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
(36,091
|
)
|
|
|
(20,243
|
)
|
|
|
140,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock, redeemable common stock and shareholders equity
(deficit)
|
|
$
|
38,354
|
|
|
$
|
62,326
|
|
|
$
|
156,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these consolidated financial statements.
F-3
Proto Labs, Inc.
Consolidated Statements of Comprehensive Income
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Statements of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
43,833
|
|
|
$
|
64,919
|
|
|
$
|
98,939
|
|
|
$
|
73,302
|
|
|
$
|
92,375
|
|
Cost of revenue
|
|
|
18,559
|
|
|
|
25,443
|
|
|
|
39,324
|
|
|
|
28,251
|
|
|
|
37,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,274
|
|
|
|
39,476
|
|
|
|
59,615
|
|
|
|
45,051
|
|
|
|
55,133
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
8,262
|
|
|
|
10,867
|
|
|
|
15,752
|
|
|
|
11,139
|
|
|
|
13,440
|
|
Research and development
|
|
|
3,140
|
|
|
|
4,281
|
|
|
|
5,222
|
|
|
|
3,639
|
|
|
|
6,622
|
|
General and administrative
|
|
|
5,965
|
|
|
|
7,629
|
|
|
|
11,772
|
|
|
|
8,297
|
|
|
|
10,394
|
|
Loss on impairment of foreign subsidiary assets
|
|
|
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,367
|
|
|
|
23,550
|
|
|
|
32,746
|
|
|
|
23,075
|
|
|
|
30,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7,907
|
|
|
|
15,926
|
|
|
|
26,869
|
|
|
|
21,976
|
|
|
|
24,677
|
|
Other income (expense), net
|
|
|
(517
|
)
|
|
|
(213
|
)
|
|
|
(114
|
)
|
|
|
18
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,390
|
|
|
|
15,713
|
|
|
|
26,755
|
|
|
|
21,994
|
|
|
|
24,587
|
|
Provision for income taxes
|
|
|
3,167
|
|
|
|
4,762
|
|
|
|
8,783
|
|
|
|
7,252
|
|
|
|
7,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,223
|
|
|
|
10,951
|
|
|
|
17,972
|
|
|
|
14,742
|
|
|
|
16,630
|
|
Less: dividends on redeemable preferred stock
|
|
|
(4,180
|
)
|
|
|
(4,179
|
)
|
|
|
(4,179
|
)
|
|
|
(3,126
|
)
|
|
|
|
|
Less: undistributed earnings allocated to preferred shareholders
|
|
|
(16
|
)
|
|
|
(2,377
|
)
|
|
|
(4,507
|
)
|
|
|
(3,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
27
|
|
|
$
|
4,395
|
|
|
$
|
9,286
|
|
|
$
|
7,782
|
|
|
$
|
16,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.40
|
|
|
$
|
0.75
|
|
|
$
|
0.64
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.34
|
|
|
$
|
0.67
|
|
|
$
|
0.58
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,564,946
|
|
|
|
11,079,432
|
|
|
|
12,352,004
|
|
|
|
12,162,808
|
|
|
|
22,975,950
|
|
Diluted
|
|
|
13,201,762
|
|
|
|
13,051,458
|
|
|
|
13,939,072
|
|
|
|
13,496,238
|
|
|
|
24,356,785
|
|
Pro forma net income per share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
$
|
0.64
|
|
|
$
|
0.98
|
|
|
$
|
0.81
|
|
|
$
|
0.72
|
|
Diluted
|
|
|
|
|
|
$
|
0.58
|
|
|
$
|
0.90
|
|
|
$
|
0.76
|
|
|
$
|
0.68
|
|
Pro forma weighted average shares outstanding used in computing net income per share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
17,071,222
|
|
|
|
18,343,794
|
|
|
|
18,154,598
|
|
|
|
22,975,950
|
|
Diluted
|
|
|
|
|
|
|
19,043,248
|
|
|
|
19,930,862
|
|
|
|
19,488,028
|
|
|
|
24,356,785
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
152
|
|
|
$
|
(214
|
)
|
|
$
|
(280
|
)
|
|
$
|
(280
|
)
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
4,375
|
|
|
$
|
10,737
|
|
|
$
|
17,692
|
|
|
$
|
14,462
|
|
|
$
|
16,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these consolidated financial statements.
F-4
Proto Labs, Inc.
Consolidated Statements of Shareholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
(in thousands, except share amounts)
|
|
Balance at January 1, 2009
|
|
|
7,327,922
|
|
|
$
|
7
|
|
|
$
|
5,230
|
|
|
$
|
(48,352
|
)
|
|
$
|
(396
|
)
|
|
$
|
(43,511
|
)
|
Common shares issued upon exercise of options
|
|
|
70,000
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,180
|
)
|
|
|
|
|
|
|
(4,180
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,223
|
|
|
|
|
|
|
|
4,223
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
7,397,922
|
|
|
|
7
|
|
|
|
5,510
|
|
|
|
(48,309
|
)
|
|
|
(244
|
)
|
|
|
(43,036
|
)
|
Common shares issued upon exercise of options
|
|
|
615,328
|
|
|
|
1
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,179
|
)
|
|
|
|
|
|
|
(4,179
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
331
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,951
|
|
|
|
|
|
|
|
10,951
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
8,013,250
|
|
|
|
8
|
|
|
|
5,896
|
|
|
|
(41,537
|
)
|
|
|
(458
|
)
|
|
|
(36,091
|
)
|
Common shares issued upon exercise of options
|
|
|
166,838
|
|
|
|
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
706
|
|
Common shares issued upon exercise of warrants
|
|
|
1,526,182
|
|
|
|
2
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,179
|
)
|
|
|
|
|
|
|
(4,179
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
1,130
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,972
|
|
|
|
|
|
|
|
17,972
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(280
|
)
|
|
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
9,706,270
|
|
|
|
10
|
|
|
|
8,229
|
|
|
|
(27,744
|
)
|
|
|
(738
|
)
|
|
|
(20,243
|
)
|
Common shares issued upon initial public offering
|
|
|
4,945,000
|
|
|
|
5
|
|
|
|
71,525
|
|
|
|
|
|
|
|
|
|
|
|
71,530
|
|
Common shares issued upon conversion of redeemable convertible preferred stock
|
|
|
5,991,790
|
|
|
|
6
|
|
|
|
66,069
|
|
|
|
|
|
|
|
|
|
|
|
66,075
|
|
Common shares issued upon conversion of redeemable common stock
|
|
|
3,189,648
|
|
|
|
3
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
819
|
|
Common shares issued upon exercise of options and other
|
|
|
469,729
|
|
|
|
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
|
728
|
|
Excess tax benefit from stock option
exercises
|
|
|
|
|
|
|
|
|
|
|
2,635
|
|
|
|
|
|
|
|
|
|
|
|
2,635
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
(14,289
|
)
|
|
|
14,289
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
2,362
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,630
|
|
|
|
|
|
|
|
16,630
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012 (unaudited)
|
|
|
24,302,437
|
|
|
$
|
24
|
|
|
$
|
138,075
|
|
|
$
|
3,175
|
|
|
$
|
(541
|
)
|
|
$
|
140,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these consolidated financial statements.
F-5
Proto Labs, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine
Months
Ended
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
(unaudited)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,223
|
|
|
$
|
10,951
|
|
|
$
|
17,972
|
|
|
$
|
14,742
|
|
|
$
|
16,630
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,907
|
|
|
|
3,483
|
|
|
|
4,264
|
|
|
|
3,009
|
|
|
|
4,380
|
|
Stock-based compensation expense
|
|
|
245
|
|
|
|
331
|
|
|
|
1,130
|
|
|
|
742
|
|
|
|
2,362
|
|
Deferred taxes
|
|
|
679
|
|
|
|
561
|
|
|
|
2,230
|
|
|
|
1,463
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(657
|
)
|
|
|
|
|
|
|
(2,635
|
)
|
Loss on impairment of foreign subsidiary assets
|
|
|
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of property and equipment
|
|
|
84
|
|
|
|
26
|
|
|
|
(10
|
)
|
|
|
(11
|
)
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
920
|
|
|
|
(2,993
|
)
|
|
|
(3,457
|
)
|
|
|
(4,423
|
)
|
|
|
(3,777
|
)
|
Inventories
|
|
|
(44
|
)
|
|
|
(537
|
)
|
|
|
(2,195
|
)
|
|
|
(1,252
|
)
|
|
|
(513
|
)
|
Prepaid expenses and other
|
|
|
34
|
|
|
|
(801
|
)
|
|
|
(591
|
)
|
|
|
(93
|
)
|
|
|
(256
|
)
|
Income taxes
|
|
|
82
|
|
|
|
(104
|
)
|
|
|
37
|
|
|
|
524
|
|
|
|
2,350
|
|
Accounts payable
|
|
|
(462
|
)
|
|
|
1,148
|
|
|
|
1,545
|
|
|
|
941
|
|
|
|
(312
|
)
|
Accrued liabilities and other
|
|
|
(273
|
)
|
|
|
1,174
|
|
|
|
3,267
|
|
|
|
3,693
|
|
|
|
1,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
8,395
|
|
|
|
14,012
|
|
|
|
23,535
|
|
|
|
19,335
|
|
|
|
19,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
61
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(5,086
|
)
|
|
|
(7,069
|
)
|
|
|
(19,003
|
)
|
|
|
(10,083
|
)
|
|
|
(14,435
|
)
|
Purchases of marketable securities
|
|
|
(5,750
|
)
|
|
|
(1,504
|
)
|
|
|
|
|
|
|
|
|
|
|
(61,395
|
)
|
Proceeds from sale of marketable securities
|
|
|
6,002
|
|
|
|
2,502
|
|
|
|
500
|
|
|
|
500
|
|
|
|
10,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,773
|
)
|
|
|
(6,041
|
)
|
|
|
(18,503
|
)
|
|
|
(9,583
|
)
|
|
|
(65,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,530
|
|
Proceeds from issuance of debt
|
|
|
1,015
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on debt
|
|
|
(4,457
|
)
|
|
|
(4,702
|
)
|
|
|
(4,049
|
)
|
|
|
(3,955
|
)
|
|
|
(289
|
)
|
Proceeds from exercises of warrants and stock options
|
|
|
35
|
|
|
|
56
|
|
|
|
547
|
|
|
|
547
|
|
|
|
728
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
657
|
|
|
|
|
|
|
|
2,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(3,407
|
)
|
|
|
(4,229
|
)
|
|
|
(2,845
|
)
|
|
|
(3,408
|
)
|
|
|
74,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(170
|
)
|
|
|
(344
|
)
|
|
|
(153
|
)
|
|
|
(92
|
)
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
45
|
|
|
|
3,398
|
|
|
|
2,034
|
|
|
|
6,252
|
|
|
|
28,155
|
|
Cash and cash equivalents, beginning of period
|
|
|
2,658
|
|
|
|
2,703
|
|
|
|
6,101
|
|
|
|
6,101
|
|
|
|
8,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,703
|
|
|
$
|
6,101
|
|
|
$
|
8,135
|
|
|
$
|
12,353
|
|
|
$
|
36,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
347
|
|
|
$
|
256
|
|
|
$
|
140
|
|
|
$
|
124
|
|
|
$
|
50
|
|
Cash paid for taxes
|
|
$
|
2,338
|
|
|
$
|
4,663
|
|
|
$
|
5,358
|
|
|
$
|
4,043
|
|
|
$
|
6,018
|
|
The accompanying notes are
an integral part of these consolidated financial statements.
F-6
Proto Labs, Inc.
Notes to Consolidated Financial Statements
1. Nature of Business
Organization and business
Proto Labs, Inc. and its
subsidiaries (Proto Labs, the Company, we, us, or our) is an online and technology-enabled manufacturer of quick-turn computer numerical control (CNC) machined and injection molded custom parts for prototyping and short-run production. The
Companys customers are product developers worldwide who require a faster and less expensive way to obtain low volumes of parts. The Companys proprietary technology eliminates most of the time-consuming and expensive skilled labor
conventionally required to quote and manufacture parts in low volumes, and its customers conduct nearly all of their business with the Company over the Internet. The Company targets its services to the millions of product developers who use
three-dimensional (3D) computer-aided design (CAD) software to design products across a diverse range of end-markets. The Company has established operations in the United States, Europe and Japan, which the Company believes, are three of the
largest geographic markets where these product developers are located. The Companys primary manufacturing services currently include Firstcut, which is a CNC machining service, and Protomold, which is a plastic injection molding service. Proto
Labs, Inc. is located in Maple Plain, Minnesota. The Companys subsidiaries, Proto Labs Limited and Proto Labs G.K. are located in Telford, United Kingdom and Yamato-Shi, Kanagawa, Japan, respectively.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Proto Labs Limited and Proto Labs G.K. All significant intercompany accounts and transactions have been eliminated in consolidation.
Initial public offering
In February 2012, the Company issued
4.9 million shares of common stock (including the exercise of the underwriters over-allotment shares) in conjunction with its initial public offering (IPO). The public offering price of the shares sold in the offering was $16.00 per
share. The total gross proceeds from the IPO to the Company were $79.1 million. After deducting underwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company totaled
approximately $71.5 million. As of September 30, 2012, all offering costs have been recorded.
In August 2008, the Company entered into an investors rights agreement with Protomold Investment Company, LLC (PIC), which included a put right whereby PIC may require
the Company to repurchase its shares of common stock any time after August 2, 2018. Upon completion of the IPO, the put rights of PIC terminated. Also in August 2008, the Company entered into a management rights agreement with North Bridge
Growth Equity I, L.P. (North Bridge), which provides North Bridge with certain additional management and information rights. This management agreement terminated upon completion of the IPO.
Immediately prior to the consummation of the IPO, all outstanding shares of redeemable
convertible preferred stock and redeemable common stock were converted into shares of common stock. Shares of redeemable convertible preferred stock were converted into 5,991,790 shares of common stock. All previously accrued dividends on the
preferred stock have been released back into retained earnings as of September 30, 2012. Shares of redeemable common stock were converted into 3,189,648 shares of common stock.
Stock split
On February 21, 2012, the Company
executed a 14-for-1 forward stock split of the Companys common stock. The consolidated financial statements for all periods and dates presented give retroactive effect to the stock split.
F-7
2. Summary of Significant Accounting Policies (continued)
Comprehensive income
Components of comprehensive income include
net income and foreign currency translation adjustments. Comprehensive income is disclosed in the accompanying consolidated statements of comprehensive income and consolidated statements of shareholders equity (deficit).
Effective January 1, 2012, the Company
adopted Accounting Standards Update (ASU) 2011-05,
Presentation of Comprehensive Income
(ASU 2011-05). ASU 2011-05 requires entities to present items of net income and other comprehensive income either in a single continuous statement, or in
separate, but consecutive, statements of net income and other comprehensive income, and is to be applied retrospectively. The Company has elected to present the items of net income and other comprehensive income in a single continuous statement.
Adoption of this accounting standard update did not impact previously reported financial statements. Refer to
Recent accounting pronouncements
within this footnote for additional information related to ASU 2011-05.
Accounting estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Information
The accompanying consolidated balance sheet
as of September 30, 2012, the consolidated statements of comprehensive income and cash flows for the nine months ended September 30, 2011 and 2012 and the consolidated statements of shareholders equity (deficit) for the nine months
ended September 30, 2012 are unaudited.
The unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. These statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Companys statement of financial position, results of operations and cash flows for
the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.
Cash and cash equivalents
Cash and cash equivalents include cash and
other highly liquid investments with maturities of three months or less at the date of purchase. Cash equivalents are stated at fair value. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured
limits. The Company has not experienced any losses on such accounts.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are
reported at face amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances and
credit conditions taking into account the history of write-offs and collections. A receivable is considered past due if payment has not been received within the period
F-8
2. Summary of Significant Accounting Policies (continued)
agreed upon in the invoice. Accounts receivable are written off after all collection efforts have been exhausted. Recoveries of trade receivables previously written off are recorded when
received. The Company also records a provision for estimated product returns and allowances in the period in which the related revenue is recorded. This provision against current gross revenue is based principally on historical rates of sales
returns.
Inventory
Inventory consists primarily of raw
materials, which are recorded at the lower of cost or market, using the average-cost method, which approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and
provides allowances to reduce such items identified to their recoverable amounts.
Property, equipment and leasehold improvements
Property, equipment and
leasehold improvements are stated at cost. Major improvements that substantially extend an assets useful life are capitalized. Repairs, maintenance and minor improvements are charged to operations as incurred. Depreciation, including
amortization of leasehold improvements and assets recorded under capital leases, is calculated using the straight-line method over the estimated useful lives of the individual assets and ranges from 3 to 39 years. Manufacturing equipment is
depreciated over 3 to 7 years, office furniture and equipment are depreciated over 3 to 7 years, computer hardware and software are depreciated over 3 to 5 years, building costs are depreciated over 39 years, leasehold
improvements are depreciated over the estimated lives of the related assets or the life of the lease, whichever is shorter, and building and land improvements are depreciated over 10 to 39 years. Assets not in service are not depreciated until the
related asset is put into use.
Accounting for long-lived assets
The Company periodically reviews the
carrying amount of its property, equipment and leasehold improvements to determine if circumstances exist indicating an impairment or if depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the
Company will prepare a projection of the undiscounted future cash flows of the specific assets to determine if the assets are recoverable. If an impairment exists based on these projections, an impairment adjustment will be made to reduce the
carrying amount of the specific assets to fair value.
Revenue recognition
The Company recognizes revenue when it is
realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is
reasonably assured. Revenue is recognized upon transfer of title and risk of loss, which is generally upon the shipment of parts. Mold revenue is recognized upon the shipment of the parts made from the mold. Freight billed to customers is included
in revenues, and all freight expenses paid by the Company are included in cost of revenue.
Income taxes
The Company accounts for income taxes in
accordance with Accounting Standards Codification (ASC) 740,
Income Taxes
(ASC 740). Under this method, the Company determines tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax
basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current years financial statements are
included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their
F-9
2. Summary of Significant Accounting Policies (continued)
recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year
and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because the Company assumes that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference
between the tax basis of an asset or liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are
recovered, giving rise to a deferred tax asset or liability.
ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements by defining a criterion that an individual tax position must
meet for any part of the benefit of that position to be recognized in an enterprises financial statements. Additionally, ASC 740 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.
Stock-based compensation
The Company accounts for stock-based
compensation in accordance with ASC 718,
CompensationStock Compensation
(ASC 718). Under the fair value recognition provisions of ASC 718, the Company measures stock-based compensation cost at the grant date fair value and recognizes
the compensation expense over the requisite service period, which is the vesting period, using a straight-line attribution method. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that
are ultimately expected to vest. The Company estimates pre-vesting award forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately,
the total expense recognized over the vesting period will only be for those awards that vest. The Companys awards are not eligible to vest early in the event of retirement, however, the awards vest early in the event of a change in control.
In determining the compensation
cost of the options granted, the fair value of options granted has been estimated on the date of grant using the Black-Scholes option-pricing model.
Advertising costs
Advertising is expensed as incurred and was approximately $3.5 million, $3.6 million and $5.8
million for the years ended December 31, 2009, 2010 and 2011, respectively, and $4.2 million and $4.6 million for the nine month periods ended September 30, 2011 and 2012, respectively.
Research and development
Research and development expenses consist
primarily of personnel and outside service costs related to the development of new processes and services, enhancement of existing services, quality assurance, and testing. The Company follows ASC 350-40,
Internal Use Software
(ASC
350-40), in accounting for internally developed software. At December 31, 2009, 2010 and 2011 and September 30, 2011 and 2012, all internal use software projects were in the post-implementation/operation stage and therefore, no software
development costs were capitalized.
Foreign currency translation/transactions
The Company translated
the balance sheets of its foreign subsidiaries, Proto Labs Limited and Proto Labs G.K., at period-end exchange rates and the income statement at the average exchange rates in effect throughout the period. The Company has recorded the translation
adjustment as a separate component of consolidated shareholders equity (deficit). Foreign currency transaction gains and losses are recognized in the consolidated statements of comprehensive income.
F-10
2. Summary of Significant Accounting Policies (continued)
Recent accounting pronouncements
In April 2012, President Obama signed into
law the Jumpstart Our Business Startups Act, or JOBS Act, which establishes a new category of issuer called an emerging growth company. Under the JOBS Act, an emerging growth company is defined as an issuer with total annual gross revenues less than
$1 billion during its most recently completed fiscal year. An issuer continues to be eligible for emerging growth company status until the earliest of (1) the last day of the fiscal year during which it had total annual gross revenues of $1
billion or more (as indexed for inflation in the manner set forth in the JOBS Act), (2) the last day of the fiscal year of the issuer following the fifth anniversary of the date of its IPO, (3) the date on which it issued more than $1
billion in non-convertible debt in the previous three-year period, or (4) the date on which it became a large accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934.
The JOBS Act exempts an emerging growth
company from the following requirements during the period of eligibility:
|
|
|
Having an independent auditor assess its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act
of 2002. However, an emerging growth company would still have to comply with the Section 404(a) requirement that management assess its internal control over financial reporting, generally beginning with its second annual report on Form 10-K.
|
|
|
|
Adopting new or revised accounting standards that are effective for public companies. Instead, the effective dates of such accounting
standards for private companies would apply.
|
|
|
|
Complying with say-on-pay vote requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. An
emerging growth company would satisfy executive compensation disclosures in a manner consistent with a smaller reporting company.
|
|
|
|
Complying with future changes to Public Company Accounting Oversight Board auditing standards related to mandatory audit firm rotation
and an Auditors Discussion & Analysis statement (if adopted). Other new standards would not apply to audits of emerging growth companies unless the SEC decides that they should after considering the protection of investors and whether the
action will promote efficiency, competition and capital formation.
|
With the exception of the treatment for accounting standards, each of these exemptions is voluntary and an emerging growth company may choose to operate as an emerging growth company as it
deems appropriate. Section 107(b) of the JOBS Act permits an emerging growth company to opt out of the exemption to adopt new or revised accounting standards when they are effective for private companies and instead apply such
standards on the same basis as a public company. Under section 107(b)(3), such decision to opt-out is irrevocable, and the emerging growth company must continue to comply with such standards to the same extent that a public company is required for
as long as the company remains an emerging growth company.
Under the JOBS Act, we meet the definition of an emerging growth company. During the period we continue to be eligible for emerging growth company status, we will apply new or revised
accounting standards following the effective dates for private companies.
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04,
Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRS
(ASU 2011-04). This accounting update generally aligns the principles for fair value measurements and the related disclosure requirements under U.S. GAAP and International Financial Reporting Standards. From a
U.S. GAAP perspective, the amendments are largely clarifications, but some could have a significant effect on certain companies. A number of new disclosures also are required. Except for certain disclosures, the guidance applies to public and
nonpublic companies and is to be applied prospectively. For
F-11
2. Summary of Significant Accounting Policies (continued)
public and nonpublic companies, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company adopted this accounting guidance effective
January 1, 2012. The adoption of ASU 2011-04 did not result in a material impact to the Companys financial statements.
In June 2011, the FASB issued ASU 2011-05,
Presentation of Comprehensive Income
(ASU 2011-05). This accounting
update requires entities to present items of net income and other comprehensive income either in a single continuous statement, or in separate, but consecutive, statements of net income and other comprehensive income. The new requirements do not
change which components of comprehensive income are recognized in net income or other comprehensive income, or when an item of other comprehensive income must be reclassified to net income. However, the current option under existing standards to
report other comprehensive income and its components in the statement of changes in equity is eliminated. In December 2011, the FASB issued ASU 2011-12,
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of
Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
(ASU 2011-12). The updated guidance defers the requirement in ASU 2011-05 to present on the face of the financial statements the effects of
reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. The amendments apply to public and nonpublic companies and are to be applied retrospectively. For public entities, the
amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this accounting guidance effective January 1, 2012 and has presented the items of net income and
other comprehensive income in a single continuous statement in this report. The adoption of ASU 2011-05 and ASU 2011-12 did not result in a material impact to the Companys financial statements.
3. Net income per common share
Basic and diluted net
income or loss per common share is presented in conformity with the two-class method required for participating securities. Prior to the Companys IPO, the Company had redeemable convertible preferred stock outstanding. The holder of the
Companys redeemable convertible preferred stock was entitled to receive cumulative dividends at the rate of 8% per annum, payable prior and in preference to any dividends on any shares of the Companys common stock. In addition, in
the event a dividend was paid on common stock, the holder of redeemable convertible preferred stock was entitled to a proportionate share of any such dividend as if it was a holder of common stock (on an as-if converted basis). The Company
considered its redeemable preferred stock to be participating securities and, in accordance with the two-class method, earnings allocated to preferred stock have been excluded from the computation of basic and diluted net income or loss per common
share.
Basic net income per share
is computed based on the weighted average number of common shares outstanding. Diluted net income per share is computed based on the weighted average number of common shares outstanding, increased by the number of additional shares that would have
been outstanding had the potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common
stock include stock options and other stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.
F-12
3. Net income per common share (continued)
The following table presents the calculation of net income per basic and
diluted share attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Net Income
|
|
$
|
4,223
|
|
|
$
|
10,951
|
|
|
$
|
17,972
|
|
|
$
|
14,742
|
|
|
$
|
16,630
|
|
Less: dividends on redeemable preferred stock
|
|
|
(4,180
|
)
|
|
|
(4,179
|
)
|
|
|
(4,179
|
)
|
|
|
(3,126
|
)
|
|
|
|
|
Less: undistributed earnings allocated to preferred shareholders
|
|
|
(16
|
)
|
|
|
(2,377
|
)
|
|
|
(4,507
|
)
|
|
|
(3,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
27
|
|
|
$
|
4,395
|
|
|
$
|
9,286
|
|
|
$
|
7,782
|
|
|
$
|
16,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic net income per share
|
|
|
10,564,946
|
|
|
|
11,079,432
|
|
|
|
12,352,004
|
|
|
|
12,162,808
|
|
|
|
22,975,950
|
|
Diluted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of potentially dilutive options and warrants
|
|
|
2,636,816
|
|
|
|
1,972,026
|
|
|
|
1,587,068
|
|
|
|
1,333,430
|
|
|
|
1,380,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute diluted net income per share
|
|
|
13,201,762
|
|
|
|
13,051,458
|
|
|
|
13,939,072
|
|
|
|
13,496,238
|
|
|
|
24,356,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.40
|
|
|
$
|
0.75
|
|
|
$
|
0.64
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.34
|
|
|
$
|
0.67
|
|
|
$
|
0.58
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted
shares excludes redeemable convertible preferred stock as it was anti-dilutive for all periods presented.
F-13
3. Net income per common share (continued)
The following table sets forth the calculation of unaudited pro forma
net income per basic and diluted share which gives effect to the conversion of all outstanding shares of redeemable convertible preferred stock as if the conversion had occurred on January 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Net income attributable to common shareholders, as reported
|
|
$
|
4,395
|
|
|
$
|
9,286
|
|
|
$
|
7,782
|
|
|
$
|
16,630
|
|
Dividends on redeemable convertible preferred shares
|
|
|
4,179
|
|
|
|
4,179
|
|
|
|
3,126
|
|
|
|
|
|
Undistributed earnings allocated to preferred shareholders
|
|
|
2,377
|
|
|
|
4,507
|
|
|
|
3,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
10,951
|
|
|
$
|
17,972
|
|
|
$
|
14,742
|
|
|
$
|
16,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding, as reported
|
|
|
11,079,432
|
|
|
|
12,352,004
|
|
|
|
12,162,808
|
|
|
|
22,975,950
|
|
Add: common shares from conversion of redeemable convertible preferred shares
|
|
|
5,991,790
|
|
|
|
5,991,790
|
|
|
|
5,991,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic weighted-average shares outstanding
|
|
|
17,071,222
|
|
|
|
18,343,794
|
|
|
|
18,154,598
|
|
|
|
22,975,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of potentially dilutive options and warrants
|
|
|
1,972,026
|
|
|
|
1,587,068
|
|
|
|
1,333,430
|
|
|
|
1,380,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted weighted-average shares outstanding
|
|
|
19,043,248
|
|
|
|
19,930,862
|
|
|
|
19,488,028
|
|
|
|
24,356,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
|
$
|
0.98
|
|
|
$
|
0.81
|
|
|
$
|
0.72
|
|
Diluted
|
|
$
|
0.58
|
|
|
$
|
0.90
|
|
|
$
|
0.76
|
|
|
$
|
0.68
|
|
4. Fair value measurements
ASC 820,
Fair Value
Measuremen
t (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be
used to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities.
Level 2
Observable inputs
other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities.
The Companys cash consists of bank deposits. The Companys cash equivalents measured at fair value as of September 30, 2012 consist of money market mutual funds and
marketable securities with a maturity date of less than 90 days at the time of purchase. The Companys short-term marketable securities measured at fair value as of December 31, 2010 and 2011, respectively, consisted of domestic
certificates of deposits at various banks and treasury notes. The Company determines the fair value of these financial assets using Level I inputs.
F-14
4. Fair value measurements (continued)
A summary of financial assets measured at fair value on a recurring
basis is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2011
|
|
|
September 30, 2012
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual fund
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,756
|
|
|
$
|
|
|
|
$
|
|
|
U.S. municipal securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,670
|
|
|
|
|
|
|
|
|
|
Short-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and treasury notes
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
750
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
250
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,426
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2010, the Company
determined certain equipment held by Proto Labs G.K. was impaired. In accordance with ASC 360,
Property, Plant and Equipment
(ASC 360), the Company adjusted these assets to their estimated fair value. The non-recurring fair value measurement
was determined under the market approach using Level II inputs, including estimated selling prices and costs to sell assets of similar age and condition. These assets have been reported at their estimated fair value of $1.3 million at
December 31, 2010.
5. Property and Equipment
Property and equipment
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
2012
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Land
|
|
$
|
1,730
|
|
|
$
|
2,830
|
|
|
$
|
2,830
|
|
Buildings and improvements
|
|
|
4,679
|
|
|
|
8,794
|
|
|
|
13,100
|
|
Machinery and equipment
|
|
|
19,325
|
|
|
|
29,671
|
|
|
|
39,471
|
|
Computer hardware and software
|
|
|
3,130
|
|
|
|
4,102
|
|
|
|
5,166
|
|
Leasehold improvements
|
|
|
1,809
|
|
|
|
1,811
|
|
|
|
3,028
|
|
Construction in progress
|
|
|
841
|
|
|
|
2,521
|
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,514
|
|
|
|
49,729
|
|
|
|
64,476
|
|
Accumulated depreciation and amortization
|
|
|
(12,047
|
)
|
|
|
(15,480
|
)
|
|
|
(20,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
19,467
|
|
|
$
|
34,249
|
|
|
$
|
44,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization expense for the years ended December 31, 2009, 2010 and 2011 was $2.9 million, $3.5 million and $4.3 million, respectively. Depreciation and amortization expense for the nine months ended September 30, 2011 and 2012 was $3.0
million and $4.4 million, respectively.
During 2010, the Company determined that certain equipment held by Proto Labs G.K. was impaired. This resulted in an impairment charge of $0.8 million for the year ended December 31,
2010.
F-15
6. Inventory
Inventory consists
primarily of raw materials, which are recorded at the lower of cost or market using the average-cost method, which approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued
items and provides allowances to reduce such items identified to their recoverable amounts.
The Companys inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
2012
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
1,509
|
|
|
$
|
3,463
|
|
|
$
|
4,080
|
|
Work in process
|
|
|
154
|
|
|
|
418
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
|
1,663
|
|
|
|
3,881
|
|
|
|
4,427
|
|
Allowance for obsolescence
|
|
|
(57
|
)
|
|
|
(84
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory, net of allowance
|
|
$
|
1,606
|
|
|
$
|
3,797
|
|
|
$
|
4,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Marketable Securities
The Company invests in
short-term and long-term agency, municipal, corporate commercial paper and other debt securities. The securities are categorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the
Companys ability and intent to hold these securities to maturity. Information regarding the Companys short-term and long-term marketable securities as of September 30, 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(in thousands, unaudited)
|
|
U.S. government agency securities
|
|
$
|
20,011
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
20,012
|
|
Corporate debt securities
|
|
|
12,487
|
|
|
|
22
|
|
|
|
(8
|
)
|
|
|
12,501
|
|
Commercial paper
|
|
|
2,499
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
2,494
|
|
U.S. municipal securities
|
|
|
11,662
|
|
|
|
3
|
|
|
|
(5
|
)
|
|
|
11,660
|
|
Certificates of deposit/time deposits
|
|
|
4,696
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
4,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
51,355
|
|
|
$
|
27
|
|
|
$
|
(23
|
)
|
|
$
|
51,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values for the U.S.
municipal and corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair values for the U.S. government agency securities, certificates of deposit and commercial paper are primarily determined using dealer
quotes or quoted market prices for similar securities (Level 2).
The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The Company intends, and has the
ability, to hold the investments to maturity and recover the full principal.
Classification of marketable securities as current or non-current is based upon the securitys maturity date as of the date of these financial statements.
F-16
7. Marketable Securities (continued)
The September 30, 2012 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actual maturities may differ from
contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
|
|
|
|
|
|
|
September 30,
2012
|
|
|
|
(in thousands,
unaudited)
|
|
Due in one year or less
|
|
$
|
21,704
|
|
Due after one year through three years
|
|
|
29,651
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
51,355
|
|
|
|
|
|
|
8. Financing Obligations
The Companys debt
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
2012
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Equipment note payable to a bank with interest at daily one-month LIBOR plus 1.4%, due in monthly principal
payments of $50 plus interest, through June 2012, secured by certain assets of the Company
|
|
$
|
900
|
|
|
$
|
|
|
|
$
|
|
|
Term note payable to a bank with interest at daily one-month LIBOR plus 2.0%, due in quarterly principal payments
of $833 plus interest monthly, through September 2011, secured by certain assets of the Company
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
Various obligations under capital leases, with interest rates from 4.5% to 10.3%, dues in various monthly
installments, including interest, through various dates through April 2015, secured by equipment
|
|
|
1,632
|
|
|
|
1,003
|
|
|
|
736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,032
|
|
|
|
1,003
|
|
|
|
736
|
|
Less current portion
|
|
|
3,742
|
|
|
|
390
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,290
|
|
|
$
|
613
|
|
|
$
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities on long-term debt obligations at
December 31, 2011 are as follows:
|
|
|
|
|
Years Ending December 31,
|
|
(in thousands)
|
|
2012
|
|
$
|
390
|
|
2013
|
|
|
284
|
|
2014
|
|
|
180
|
|
2015
|
|
|
138
|
|
2016
|
|
|
11
|
|
|
|
|
|
|
|
|
$
|
1,003
|
|
|
|
|
|
|
The Company has a revolving
line of credit expiring September 30, 2013 (revolving note), if not renewed. Under this revolving line of credit, the Company can borrow a maximum amount of $10,000,000 at an interest rate equal to LIBOR plus 1.5% (1.72% on September 30,
2012). The revolving line of credit is secured by substantially all assets of the Company. The revolving line of credit does not contain a covenant limiting capital expenditures but does limit investments in foreign subsidiaries exceeding
$10,000,000 and includes certain financial thresholds such as net income and tangible net worth. As of September 30, 2012, there were no advances outstanding under the revolving line of credit.
F-17
9. Employee Benefit Plans
The Company maintains a
401(k) retirement plan that covers most of its employees. Under the plan, a full-time or regular part-time (over 20 hours/week) employee becomes a participant after completing six months of employment. Employees may elect to contribute up to 50
percent of regular gross pay, subject to federal law limits on the dollar amount that participants may contribute to the plan, each calendar year. The Company matches part of the employee contributions and may make a discretionary contribution to
the plan. Total employer contributions were approximately $0.3 million for each of the years ended December 31, 2009 and 2010, $0.4 million for the year ended December 31, 2011, $0.3 million for the nine months ended September 30,
2011 and $0.5 million for the nine months ended September 30, 2012.
The Company also sponsors a defined contribution retirement plan that covers the employees of Proto Labs Limited. Total employer contributions were approximately $32,000 and $57,000 for
the years ended December 31, 2010 and 2011, respectively. There were no employer contributions to this plan during 2009. Contributions to the plan were immaterial in the nine months ended September 30, 2011 and 2012, respectively.
10. Stock-Based Compensation
The Company has two
equity incentive plans: the 2000 Stock Option Plan (2000 Plan) and the 2012 Long-Term Incentive Plan (2012 Plan). Upon the adoption of the 2012 Plan on February 21, 2012, all shares that were reserved under the 2000 Plan but not issued were
assumed by the 2012 Plan. No additional shares will be issued under the 2000 Plan. Under the 2012 Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, stock units, other stock-based awards and
cash incentive awards. Awards under the 2012 Plan will have a maximum term of ten years from the date of grant. The compensation committee may provide that the vesting or payment of any award will be subject to the attainment of specified
performance measures in addition to the satisfaction of any continued service requirements, and the compensation committee will determine whether such measures have been achieved. The per share exercise price of stock options and SARs granted under
the 2012 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant.
The Companys 2012 Employee Stock Purchase Plan (ESPP) became effective on February 23, 2012. The ESPP allows
eligible employees to purchase shares of the Companys common stock at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP generally provides for six-month offering
periods, and at the end of each offering period, employees are able to purchase shares at 85 percent of the lower of the fair market value of the Companys common stock on the first trading day of the offering period or on the last trading day
of the offering period. Due to the timing of the IPO, the initial offering period under the ESPP will run approximately eight-and-a-half months from the offering date of February 23, 2012 to November 15, 2012.
The Company determines its stock-based
compensation in accordance with ASC 718,
CompensationStock Compensation
(ASC 718), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors
based on fair value.
Determining
the appropriate fair value model and calculating the fair value of stock option grants requires the input of highly subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. Stock-based
compensation expense is calculated using our best estimates, which involve inherent uncertainties and the application of managements judgment. Significant estimates include its expected term, fair value of Company common stock, stock price
volatility and forfeiture rates.
F-18
10. Stock-Based Compensation (continued)
The expected term represents the weighted average period that the
Companys stock options are expected to be outstanding. The expected term is based on the observed and expected time to post-vesting exercise of options by employees and non-employee directors and considers the impact of post-vesting award
forfeitures. Prior to its IPO the Company estimated the fair value of its common stock using the assistance of an independent third-party valuation specialist using the income and market approach. As the Company operated as a private company with a
limited market for its stock from the Companys inception to the completion of its IPO on February 29, 2012, the Company based its assumptions on the volatility of stock price using outside valuation services and an estimate of the volatility
of its common stock based on volatility of a peer group of comparable publicly traded companies for which historical information is available. The Company bases the risk-free interest rate that it uses in the Black-Scholes option pricing model on
U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The Company has never paid and does not anticipate paying, any cash dividends in the foreseeable future and, therefore, the Company uses an
expected dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, the Company is required to estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if
actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting forfeitures and record stock-based compensation expense for those awards that are expected to vest. If the Companys actual forfeiture rate
is materially different from its estimate, stock-based compensation expense could be significantly different from what has been recorded. The Company allocates stock-based compensation expense on a straight-line basis over the requisite service
period.
Total share-based
compensation expense was $0.2 million, $0.3 million and $1.1 million for the years ended December 31, 2009, 2010 and 2011, respectively, and $0.7 million and $2.4 million for the nine months ended September 30, 2011 and 2012, respectively.
The following table provides the
assumptions used in the Black-Scholes option pricing model for the years ended December 31, 2009, 2010 and 2011 and the nine months ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Nine Months Ended September 30,
|
|
|
2009
|
|
2010
|
|
2011
|
|
2011
|
|
2012
|
|
|
|
|
|
|
|
|
(unaudited)
|
Risk-free interest rate
|
|
3.05 3.44%
|
|
3.35%
|
|
3.68%
|
|
3.68%
|
|
0.95 1.16%
|
Expected life (years)
|
|
5.0 10.0
|
|
10.0
|
|
5.0
|
|
5.0
|
|
5.5 6.5
|
Expected volatility
|
|
39.00 48.22%
|
|
38.05%
|
|
47.32%
|
|
47.32%
|
|
53.00 53.14%
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Weighted average grant date fair value
|
|
$3.16
|
|
$4.27
|
|
$8.99
|
|
$8.99
|
|
$14.44
|
F-19
10. Stock-Based Compensation (continued)
The following table summarizes stock
option activity and the weighted average exercise price for the years ended December 31, 2009, 2010 and 2011 and the nine months ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Weighted Average
Exercise Price
|
|
Options outstanding at January 1, 2009
|
|
|
1,965,866
|
|
|
$
|
1.50
|
|
Granted
|
|
|
231,000
|
|
|
|
5.56
|
|
Exercised
|
|
|
(70,000
|
)
|
|
|
0.50
|
|
Cancelled
|
|
|
(46,200
|
)
|
|
|
7.43
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2009
|
|
|
2,080,666
|
|
|
|
1.83
|
|
Granted
|
|
|
658,000
|
|
|
|
7.86
|
|
Exercised
|
|
|
(615,328
|
)
|
|
|
0.09
|
|
Cancelled
|
|
|
(84,000
|
)
|
|
|
4.02
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2010
|
|
|
2,039,338
|
|
|
|
5.25
|
|
Granted
|
|
|
224,000
|
|
|
|
20.07
|
|
Exercised
|
|
|
(164,038
|
)
|
|
|
0.29
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2011
|
|
|
2,099,300
|
|
|
|
6.18
|
|
Granted
|
|
|
239,800
|
|
|
|
28.03
|
|
Exercised
|
|
|
(336,459
|
)
|
|
|
1.60
|
|
Cancelled
|
|
|
(500
|
)
|
|
|
30.58
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2012 (unaudited)
|
|
|
2,002,141
|
|
|
|
9.56
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2012 (unaudited)
|
|
|
1,014,774
|
|
|
$
|
4.81
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value
of options exercised during the years ended December 31, 2009, 2010 and 2011 was $0.4 million, $3.4 million and $2.5 million, respectively. The aggregate intrinsic value represents the cumulative difference between the fair market value of the
underlying common stock and the option exercise prices.
The outstanding options generally have a term of 10 years. For employees, options granted become exercisable ratably over the vesting period, which is generally a 5-year period, beginning
on the first anniversary of the grant date, subject to the employees continuing service to the Company. For directors, options generally become exercisable in full on the first anniversary of the grant date.
The following table summarizes information about stock options outstanding at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding, Vested and Expected to
Vest
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average Remaining
Contractual Life
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
$0.07 to $0.71
|
|
|
396,200
|
|
|
|
2.10
|
|
|
$
|
0.55
|
|
|
|
396,200
|
|
|
$
|
0.55
|
|
$1.79 to $3.37
|
|
|
343,000
|
|
|
|
4.51
|
|
|
|
2.49
|
|
|
|
336,000
|
|
|
|
2.47
|
|
$3.67 to $4.27
|
|
|
170,100
|
|
|
|
5.34
|
|
|
|
3.75
|
|
|
|
135,100
|
|
|
|
3.76
|
|
$4.54 to $5.00
|
|
|
147,000
|
|
|
|
6.29
|
|
|
|
4.76
|
|
|
|
88,200
|
|
|
|
4.76
|
|
$5.56
|
|
|
161,000
|
|
|
|
7.35
|
|
|
|
5.56
|
|
|
|
64,400
|
|
|
|
5.56
|
|
$7.86
|
|
|
658,000
|
|
|
|
8.98
|
|
|
|
7.86
|
|
|
|
131,600
|
|
|
|
7.86
|
|
$20.07
|
|
|
224,000
|
|
|
|
9.48
|
|
|
|
20.07
|
|
|
|
|
|
|
|
|
|
F-20
10. Stock-Based Compensation (continued)
The fair value of share-based payment transactions is recognized in the
statements of comprehensive income. As of September 30, 2012, there was $5.8 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 3.0 years. The
total fair value of options vested was $0.5 million, $1.2 million and $5.6 million for the years ended December 31, 2009, 2010 and 2011, respectively.
The
following table presents the assumptions used to estimate the fair value of the ESPP during the nine months ended September 30, 2012:
|
|
|
|
|
|
|
Nine months ended
September 30, 2012
|
|
|
|
(unaudited)
|
|
Risk-free interest rate
|
|
|
0.16
|
%
|
Expected life (months)
|
|
|
8.5
|
|
Expected volatility
|
|
|
53.00
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
11. Commitments
The Company leases
property from third parties. The Company leases a portion of its U.S. facilities, and the lease term expires in July 2017. The Company leases office and manufacturing space in the United Kingdom, and the initial term expires in February 2016. The
Company leases an office and manufacturing space in Japan, and the initial term expires in November 2021. The Company has the ability to terminate this lease, with no penalty, upon six months notice.
As a condition of the lease of the UK
facility, the Company received a rent holiday for the full year of 2011. The expense related to the full term of the lease is being recognized on a straight-line basis in accordance with ASC 840,
Leases
(ASC 840).
The Company has acquired capital equipment
under capital leases.
Future
minimum commitments under non-cancelable leases at December 31, 2011, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
|
(in thousands)
|
|
Years ending:
|
|
|
|
|
|
|
|
|
2012
|
|
$
|
433
|
|
|
$
|
1,379
|
|
2013
|
|
|
319
|
|
|
|
1,293
|
|
2014
|
|
|
207
|
|
|
|
1,267
|
|
2015
|
|
|
144
|
|
|
|
1,267
|
|
2016 and thereafter
|
|
|
10
|
|
|
|
3,166
|
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
1,113
|
|
|
$
|
8,372
|
|
|
|
|
|
|
|
|
|
|
Less interest cost
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net present value of minimum lease payments
|
|
$
|
1,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense was
approximately $0.8 million, $0.9 million and $0.8 million for the years ended December 31, 2009, 2010 and 2011, respectively and $1.0 million and $1.0 million for the nine months ended September 30, 2011 and 2012, respectively.
F-21
12. Income Taxes
The Company is subject to
income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the years ended December 31, 2009, 2010, and 2011 the Company recorded an income tax provision of $3.2 million, $4.8
million, and $8.8 million, respectively. For the nine months ended September 30, 2011 and 2012 the Company recorded an income tax provision of $7.3 million and $8.0 million, respectively. The income tax provision is based on the estimated
annual effective tax rate for the year applied to pre-tax income. The effective income tax rate for the years ended December 31, 2009, 2010, and 2011 was 42.8 percent, 30.3 percent, and 32.8 percent, respectively. The effective income tax rate
for the nine months ended September 30, 2011 and 2012 was 33.0 percent and 32.4 percent, respectively.
The provision for income taxes is based
on income (loss) before income taxes reported for financial statement purposes. The components of income (loss) before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
United States
|
|
$
|
8,933
|
|
|
$
|
17,073
|
|
|
$
|
26,699
|
|
International
|
|
|
(1,543
|
)
|
|
|
(1,360
|
)
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,390
|
|
|
$
|
15,713
|
|
|
$
|
26,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of
the provision for income taxes for the following periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,379
|
|
|
$
|
3,493
|
|
|
$
|
5,561
|
|
State
|
|
|
113
|
|
|
|
185
|
|
|
|
291
|
|
Foreign
|
|
|
231
|
|
|
|
528
|
|
|
|
700
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
379
|
|
|
|
627
|
|
|
|
2,211
|
|
State
|
|
|
30
|
|
|
|
8
|
|
|
|
9
|
|
Foreign
|
|
|
(987
|
)
|
|
|
(1,227
|
)
|
|
|
(1,018
|
)
|
Valuation allowance
|
|
|
1,022
|
|
|
|
1,148
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,167
|
|
|
$
|
4,762
|
|
|
$
|
8,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
12. Income Taxes (continued)
A reconciliation of the federal statutory income tax rate to the
effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
Federal tax statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
35.0
|
%
|
State tax (net of federal benefit)
|
|
|
2.1
|
|
|
|
1.0
|
|
|
|
0.7
|
|
Qualified subsidiary election
|
|
|
0.0
|
|
|
|
(11.0
|
)
|
|
|
(3.8
|
)
|
Research and development credit
|
|
|
(2.8
|
)
|
|
|
(0.9
|
)
|
|
|
(0.3
|
)
|
Valuation allowance against deferred tax assets
|
|
|
13.8
|
|
|
|
7.3
|
|
|
|
3.8
|
|
Foreign rate differential
|
|
|
(2.9
|
)
|
|
|
(1.7
|
)
|
|
|
(0.7
|
)
|
Tax reserves
|
|
|
0.0
|
|
|
|
2.3
|
|
|
|
0.0
|
|
Domestic manufacturing deduction
|
|
|
(2.1
|
)
|
|
|
(1.9
|
)
|
|
|
(1.7
|
)
|
Provision to return
|
|
|
(0.6
|
)
|
|
|
0.5
|
|
|
|
(0.1
|
)
|
Miscellaneous
|
|
|
1.3
|
|
|
|
0.7
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
42.8
|
%
|
|
|
30.3
|
%
|
|
|
32.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of
deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
$
|
108
|
|
|
$
|
151
|
|
Warrants and stock options
|
|
|
120
|
|
|
|
353
|
|
Intangibles
|
|
|
103
|
|
|
|
110
|
|
Inventories
|
|
|
118
|
|
|
|
127
|
|
Net operating loss
|
|
|
2,241
|
|
|
|
3,270
|
|
Less valuation allowance
|
|
|
(2,241
|
)
|
|
|
(3,270
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
449
|
|
|
|
741
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,538
|
)
|
|
|
(4,061
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,538
|
)
|
|
|
(4,061
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(1,089
|
)
|
|
$
|
(3,320
|
)
|
|
|
|
|
|
|
|
|
|
The Company has recorded no
U.S. deferred taxes related to the undistributed earnings of its non-U.S. subsidiaries as of September 30, 2012. Such amounts are intended to be reinvested outside of the United States indefinitely. It is not practicable to estimate the amount
of additional tax that might be payable on the foreign earnings. At December 31, 2009, 2010 and 2011, the Company had accumulated undistributed earnings in non-U.S. subsidiaries of $0.7 million, $1.7 million and $3.6 million, respectively.
The valuation allowances
established for foreign subsidiaries are due to lack of sufficient positive evidence to realize the deferred tax assets associated with the net operating losses. At December 31, 2009, 2010 and 2011, the Company has operating loss carry forwards
of $2.7 million, $5.5 million, and $8.0 million, respectively, which expire at various times beginning in 2013 through 2018. The Company has established a valuation allowance against these net operating loss carry forwards as it does not believe
they will be realizable before expiration. Of these net operating loss carry forwards, $2.5 million have been recognized as a benefit in the U.S. based on a qualified subsidiary election.
F-23
12. Income Taxes (continued)
A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
|
|
|
$
|
392
|
|
Gross increases for tax positions of current year
|
|
|
392
|
|
|
|
|
|
Gross increases for tax positions of prior years
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Balance at period end
|
|
$
|
392
|
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
13. Warrants
At December 31, 2009
and 2010, the Company had issued and outstanding fully vested warrants for the purchase of up to 1,526,182 shares of common stock at an exercise price of $0.33 per share and for the purchase of up to 105,000 shares at an exercise price of $1.79 per
share. These warrants were held by two executive officers. During 2011, certain of these warrants with an exercise price of $0.33 per share were exercised, resulting in the issuance of 1,526,182 shares of common stock. As of September 30, 2012,
no common stock warrants remained outstanding.
14. Redeemable Convertible Preferred Stock and Redeemable Common Stock
In August 2008, the
Company sold 427,985 shares of redeemable convertible preferred stock. Upon completion of its IPO in February 2012, these shares were converted to common stock. Refer to Note 2 for additional information.
During 2008, the Company executed an
Investors Rights Agreement with certain investors that supplements the Stock Purchase Agreement executed in 2005. The Investors Rights Agreement provides the investors certain rights, including the right to require the Company to redeem
the 3,189,648 shares of common stock owned by the investor at the then current fair market value. Upon completion of its IPO in February 2012, these redemption rights expired and the shares of redeemable common stock were converted into common
stock.
15. Litigation
From time to time, the
Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe it is a party to
any litigation the outcome of which, if determined adversely, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business.
16. Segment and Geographic Information
The Companys
operations are comprised of three geographically-based operating segments in the United States, Europe and Japan included in the reportable segments of United States, Europe and Other. Each operating segment generates revenue by providing low-volume
custom parts to product developers worldwide. Operations included in the category Other are not considered significant.
Certain operating expenses and total assets managed by the Company on a global basis are included in the United States
segment. As a result, reportable segment income from operations is not representative of the income from operations of the geographies in the reportable segments.
During 2010, the Company determined that
certain equipment held by Proto Labs G.K. was impaired. This resulted in an impairment charge of $0.8 million for the year ended December 31, 2010, which is included in the Other segment income from operations, below.
F-24
16. Segment and Geographic Information (continued)
Revenue, income from operations, depreciation and amortization,
provision for income taxes, capital expenditures and total assets by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
35,031
|
|
|
$
|
52,222
|
|
|
$
|
76,634
|
|
|
$
|
57,510
|
|
|
$
|
72,652
|
|
Europe
|
|
|
8,723
|
|
|
|
11,607
|
|
|
|
19,453
|
|
|
|
13,941
|
|
|
|
16,305
|
|
Other
|
|
|
79
|
|
|
|
1,090
|
|
|
|
2,852
|
|
|
|
1,851
|
|
|
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
43,833
|
|
|
$
|
64,919
|
|
|
$
|
98,939
|
|
|
$
|
73,302
|
|
|
$
|
92,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,105
|
|
|
$
|
16,553
|
|
|
$
|
24,553
|
|
|
$
|
20,089
|
|
|
$
|
22,396
|
|
Europe
|
|
|
1,145
|
|
|
|
2,250
|
|
|
|
4,931
|
|
|
|
3,672
|
|
|
|
4,706
|
|
Other
|
|
|
(2,343
|
)
|
|
|
(2,877
|
)
|
|
|
(2,615
|
)
|
|
|
(1,785
|
)
|
|
|
(2,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
7,907
|
|
|
$
|
15,926
|
|
|
$
|
26,869
|
|
|
$
|
21,976
|
|
|
$
|
24,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,952
|
|
|
$
|
2,247
|
|
|
$
|
3,055
|
|
|
$
|
2,126
|
|
|
$
|
3,360
|
|
Europe
|
|
|
804
|
|
|
|
1,024
|
|
|
|
1,024
|
|
|
|
747
|
|
|
|
722
|
|
Other
|
|
|
151
|
|
|
|
212
|
|
|
|
185
|
|
|
|
136
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
2,907
|
|
|
$
|
3,483
|
|
|
$
|
4,264
|
|
|
$
|
3,009
|
|
|
$
|
4,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,901
|
|
|
$
|
4,304
|
|
|
$
|
8,071
|
|
|
$
|
6,612
|
|
|
$
|
7,420
|
|
Europe
|
|
|
266
|
|
|
|
449
|
|
|
|
712
|
|
|
|
640
|
|
|
|
537
|
|
Other
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
3,167
|
|
|
$
|
4,762
|
|
|
$
|
8,783
|
|
|
$
|
7,252
|
|
|
$
|
7,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
2012
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
5,764
|
|
|
$
|
15,409
|
|
|
$
|
11,196
|
|
Europe
|
|
|
1,008
|
|
|
|
2,217
|
|
|
|
1,706
|
|
Other
|
|
|
297
|
|
|
|
1,377
|
|
|
|
1,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
7,069
|
|
|
$
|
19,003
|
|
|
$
|
14,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
29,551
|
|
|
$
|
47,710
|
|
|
$
|
139,438
|
|
Europe
|
|
|
7,351
|
|
|
|
10,719
|
|
|
|
12,089
|
|
Other
|
|
|
1,452
|
|
|
|
3,897
|
|
|
|
5,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
38,354
|
|
|
$
|
62,326
|
|
|
$
|
156,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
16. Segment and Geographic Information (continued)
The Companys revenue is derived from two product lines, Protomold
injection molding and Firstcut CNC machining. Total revenue by product line is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Protomold
|
|
$
|
36,794
|
|
|
$
|
50,690
|
|
|
$
|
74,090
|
|
|
$
|
55,087
|
|
|
$
|
66,697
|
|
Firstcut
|
|
|
7,039
|
|
|
|
14,229
|
|
|
|
24,849
|
|
|
|
18,215
|
|
|
|
25,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
43,833
|
|
|
$
|
64,919
|
|
|
$
|
98,939
|
|
|
$
|
73,302
|
|
|
$
|
92,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue to external
customers based on the billing location of the end user customer and long-lived assets by geography are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
33,343
|
|
|
$
|
48,059
|
|
|
$
|
73,010
|
|
|
$
|
54,723
|
|
|
$
|
69,887
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
8,723
|
|
|
|
11,607
|
|
|
|
19,453
|
|
|
|
13,941
|
|
|
|
16,305
|
|
Other
|
|
|
1,767
|
|
|
|
5,253
|
|
|
|
6,476
|
|
|
|
4,638
|
|
|
|
6,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
10,490
|
|
|
|
16,860
|
|
|
|
25,929
|
|
|
|
18,579
|
|
|
|
22,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
43,833
|
|
|
$
|
64,919
|
|
|
$
|
98,939
|
|
|
$
|
73,302
|
|
|
$
|
92,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
2012
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
16,476
|
|
|
$
|
28,831
|
|
|
$
|
36,667
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
2,231
|
|
|
|
3,377
|
|
|
|
4,532
|
|
Other
|
|
|
760
|
|
|
|
2,041
|
|
|
|
3,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
2,991
|
|
|
|
5,418
|
|
|
|
7,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
19,467
|
|
|
$
|
34,249
|
|
|
$
|
44,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
Proto Labs (NYSE:PRLB)
Gráfico Histórico do Ativo
De Jul 2024 até Ago 2024
Proto Labs (NYSE:PRLB)
Gráfico Histórico do Ativo
De Ago 2023 até Ago 2024