Exhibit 99.1
STRATASYS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 2013
(UNAUDITED)
1
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013
(UNAUDITED)
Item | Page | |
Introduction and Use of Certain Terms | 2 | |
Consolidated Balance Sheets | 3 | |
Consolidated Statements of Operations and Comprehensive Income | 4 | |
Consolidated Statements of Cash Flow | 5 | |
Notes to Condensed Consolidated Financial Statements | 6 to 14 |
INTRODUCTION AND USE OF CERTAIN TERMS
On December 1, 2012, we completed a merger with Stratasys, Inc., a Delaware corporation, which we refer to as our merger, the merger or the Objet merger. Pursuant to the merger, Stratasys, Inc. became our indirect, wholly-owned subsidiary and we changed our name from Objet Ltd. to Stratasys Ltd. While Objet Ltd. was the legal acquirer in the merger, Stratasys, Inc. was treated as the acquiring company in the merger for accounting purposes, and the merger has been accounted for as a reverse acquisition under the acquisition method of accounting for business combinations.
Unless otherwise indicated or the context otherwise requires, references to Stratasys, our company, the Company, we, us, and our refer to Stratasys Ltd. (formerly known as Objet Ltd.), and its consolidated subsidiaries. References to Objet generally refer to Objet Ltd. and its consolidated subsidiaries prior to the effective time of the merger on December 1, 2012, and sometimes also are used as references to our current, ongoing products related to the historical Objet that continue following the merger. References to Stratasys, Inc. generally refer to Stratasys, Inc., a Delaware corporation, and its consolidated subsidiaries prior to the effective time of the merger, but sometimes (as the context requires) refer to our current, ongoing products related to historical Stratasys, Inc. that continue following the merger. The historical financial information set forth in this quarterly report on Form 6-K, unless otherwise indicated or the context otherwise requires, reflects the consolidated results of operations and financial position of: (i) Stratasys, Inc. prior to the merger; and (ii) Stratasys Ltd. since the merger (on December 1, 2012).
2
STRATASYS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets | ||||||||
June 30, 2013 | December 31, 2012 | |||||||
in thousands, except per share data | (unaudited) | (audited) | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 148,061 | $ | 133,826 | ||||
Short-term bank deposits | - | 20,063 | ||||||
Restricted deposits | 834 | 929 | ||||||
Accounts receivable: | ||||||||
Trade, net | 81,443 | 64,678 | ||||||
Other | 22,055 | 22,934 | ||||||
Inventories | 64,603 | 67,995 | ||||||
Net investment in sales-type leases, net | 5,687 | 5,134 | ||||||
Prepaid expenses | 3,138 | 2,751 | ||||||
Deferred income taxes | 9,834 | 4,968 | ||||||
Total current assets | 335,655 | 323,278 | ||||||
Non-current assets | ||||||||
Property, plant and equipment, net | 68,256 | 62,070 | ||||||
Other assets | ||||||||
Goodwill | 822,463 | 822,475 | ||||||
Other intangible assets, net | 484,798 | 510,372 | ||||||
Net investment in sales-type leases | 9,206 | 7,872 | ||||||
Amounts funded in respect of employees | ||||||||
rights upon retirement | 2,844 | 2,628 | ||||||
Other non-current assets | 2,928 | 2,818 | ||||||
Total other assets | 1,322,239 | 1,346,165 | ||||||
Total assets | $ | 1,726,150 | $ | 1,731,513 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 24,077 | $ | 35,235 | ||||
Other current liabilities | 41,116 | 41,124 | ||||||
Unearned revenues | 25,140 | 18,068 | ||||||
Total current liabilities | 90,333 | 94,427 | ||||||
Non-current liabilities | ||||||||
Employee rights upon retirement | 4,437 | 4,188 | ||||||
Deferred tax liabilities | 51,194 | 54,693 | ||||||
Unearned revenues - long-term | 3,155 | 3,181 | ||||||
Other non-current liabilities | 6,077 | 2,868 | ||||||
Total liabilities | 155,196 | 159,357 | ||||||
Commitments and contingencies, see note 10 | ||||||||
Equity | ||||||||
Ordinary shares, NIS 0.01 nominal value, authorized 180,000 shares; | ||||||||
39,023 and 38,372 shares issued and outstanding at June 30, | ||||||||
2013 and December 31, 2012, respectively | 102 | 101 | ||||||
Additional paid-in capital | 1,477,121 | 1,459,294 | ||||||
Retained earnings | 94,167 | 112,503 | ||||||
Accumulated other comprehensive loss | (593 | ) | (238 | ) | ||||
Equity attributable to Stratasys Ltd. | 1,570,797 | 1,571,660 | ||||||
Non-controlling interest | 157 | 496 | ||||||
Total equity | 1,570,954 | 1,572,156 | ||||||
Total liabilities and equity | $ | 1,726,150 | $ | 1,731,513 |
See accompanying notes to consolidated financial statements.
3
STRATASYS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations and Comprehensive Income (Unaudited) | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
in thousands, except per share data | ||||||||||||||||
Net sales | ||||||||||||||||
Products | $ | 90,213 | $ | 41,444 | $ | 172,023 | $ | 78,990 | ||||||||
Services | 16,272 | 7,962 | 31,669 | 15,380 | ||||||||||||
106,485 | 49,406 | 203,692 | 94,370 | |||||||||||||
Cost of sales | ||||||||||||||||
Products | 45,731 | 18,651 | 94,774 | 36,462 | ||||||||||||
Services | 10,349 | 4,595 | 21,139 | 8,794 | ||||||||||||
56,080 | 23,246 | 115,913 | 45,256 | |||||||||||||
Gross profit | 50,405 | 26,160 | 87,779 | 49,114 | ||||||||||||
Operating expenses | ||||||||||||||||
Research and development, net | 10,337 | 4,157 | 21,126 | 8,509 | ||||||||||||
Selling, general and administrative | 42,665 | 16,210 | 85,990 | 27,585 | ||||||||||||
53,002 | 20,367 | 107,116 | 36,094 | |||||||||||||
Operating income (loss) | (2,597 | ) | 5,793 | (19,337 | ) | 13,020 | ||||||||||
Other income | 138 | 59 | 652 | 355 | ||||||||||||
Income (loss) before income taxes | (2,459 | ) | 5,852 | (18,685 | ) | 13,375 | ||||||||||
Income taxes (benefit) | 326 | 2,834 | (417 | ) | 5,835 | |||||||||||
Net income (loss) | $ | (2,785 | ) | $ | 3,018 | $ | (18,268 | ) | $ | 7,540 | ||||||
Net income attributable to non-controlling interest | $ | 15 | $ | - | $ | 68 | $ | - | ||||||||
Net income (loss) attributable to Stratasys Ltd. | $ | (2,800 | ) | $ | 3,018 | $ | (18,336 | ) | $ | 7,540 | ||||||
Net income (loss) per ordinary share attributable to Stratasys Ltd. | ||||||||||||||||
Basic | $ | (0.07 | ) | $ | 0.14 | $ | (0.47 | ) | $ | 0.35 | ||||||
Diluted | (0.07 | ) | 0.14 | (0.47 | ) | 0.35 | ||||||||||
Weighted average ordinary shares outstanding | ||||||||||||||||
Basic | 38,781 | 21,312 | 38,637 | 21,289 | ||||||||||||
Diluted | 38,781 | 21,834 | 38,637 | 21,800 | ||||||||||||
Comprehensive Income | ||||||||||||||||
Net income (loss) | $ | (2,785 | ) | $ | 3,018 | $ | (18,268 | ) | $ | 7,540 | ||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustment | 13 | (135 | ) | (355 | ) | (23 | ) | |||||||||
Comprehensive income (loss) | (2,772 | ) | 2,883 | (18,623 | ) | 7,517 | ||||||||||
Less: comprehensive loss attributable to | ||||||||||||||||
non-controlling interest | (454 | ) | - | (339 | ) | - | ||||||||||
Comprehensive income (loss) attributable to Stratasys Ltd. | $ | (2,318 | ) | $ | 2,883 | $ | (18,284 | ) | $ | 7,517 |
See accompanying notes to consolidated financial statements.
4
STRATASYS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Cash Flows (Unaudited) | ||||||||
in thousands | Six Months Ended June 30, | |||||||
2013 | 2012 | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | (18,268 | ) | $ | 7,540 | |||
Adjustments to reconcile net income (loss) to | ||||||||
net cash provided by (used in) operating activities: | ||||||||
Depreciation | 6,569 | 3,262 | ||||||
Amortization | 40,406 | 2,257 | ||||||
Deferred income taxes | (9,393 | ) | - | |||||
Stock-based compensation | 10,851 | 1,113 | ||||||
Other non-cash items | (1,108 | ) | (578 | ) | ||||
Increase (decrease) in cash attributable to changes in | ||||||||
operating assets and liabilities, net of the impact | ||||||||
of acquisition: | ||||||||
Accounts receivable, net | (18,219 | ) | (7,254 | ) | ||||
Inventories | (9,706 | ) | (1,808 | ) | ||||
Net investment in sales-type leases | (1,887 | ) | (1,223 | ) | ||||
Accounts payable and other current liabilities | (10,112 | ) | 7,577 | |||||
Non-current liabilities | 3,442 | - | ||||||
Unearned revenues | 5,816 | 88 | ||||||
Other assets and liabilities | (591 | ) | 965 | |||||
Net cash provided by (used in) operating activities | (2,200 | ) | 11,939 | |||||
Cash flows from investing activities | ||||||||
Decrease in short-term bank deposits | 20,063 | - | ||||||
Acquisition of property and equipment | (9,909 | ) | (6,306 | ) | ||||
Acquisition of intangible and other assets | (611 | ) | (1,234 | ) | ||||
Other investing activities | 38 | - | ||||||
Proceeds from the maturity of investments | - | 4,012 | ||||||
Proceeds from the sale of investments | - | 4,803 | ||||||
Purchase of investments | - | (8,407 | ) | |||||
Net cash provided by (used in) investing activities | 9,581 | (7,132 | ) | |||||
Cash flows from financing activities | ||||||||
Proceeds from exercise of stock options | 5,988 | 1,506 | ||||||
Excess tax benefit from stock options | 986 | 579 | ||||||
Net cash provided by financing activities | 6,974 | 2,085 | ||||||
Effect of exchange rate changes on cash | (120 | ) | (16 | ) | ||||
Net change in cash and cash equivalents | 14,235 | 6,876 | ||||||
Cash and cash equivalents, beginning of period | 133,826 | 20,092 | ||||||
Cash and cash equivalents, end of period | $ | 148,061 | $ | 26,968 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Transfer of fixed assets to inventory | 3,068 | 2,333 |
See accompanying notes to consolidated financial statements.
5
STRATASYS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation and Consolidation
The condensed consolidated interim financial statements include the accounts of Stratasys Ltd. and its wholly and majority owned subsidiaries (collectively, the Company). All intercompany accounts and transactions, including profits from intercompany sales not yet realized outside the Company, have been eliminated in consolidation. The Company owns 51% of Objet Japan Co. Ltd. The minority owners non-controlling interest is included as a component of equity and a reduction to net income and to comprehensive income attributable to Stratasys Ltd. The Company has one reportable segment.
The consolidated interim financial information herein is unaudited; however, such information reflects all adjustments (consisting of normal, recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim period. The results of operations for the six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year. Certain financial information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. The reader is referred to the audited consolidated financial statements and notes thereto for the year ended December 31, 2012, filed as part of the Companys Annual Report on Form 20-F for such year.
The Company is the result of the merger of Stratasys, Inc. and Objet Ltd. (Objet). On December 1, 2012 (the merger date), the two companies completed an all-stock merger (the Objet merger), pursuant to which Stratasys, Inc. became an indirect, wholly-owned subsidiary of Objet. In connection with the Objet merger, Objet changed its name to Stratasys Ltd.
The Objet merger was structured as a merger of Stratasys, Inc. with and into an indirect wholly owned subsidiary of Objet. Stratasys, Inc. stockholders received one ordinary share of Stratasys Ltd. for each share of Stratasys, Inc. common stock they owned. Upon closing of the transaction, the former Stratasys, Inc. stockholders owned approximately 55 percent and the Objet shareholders retained approximately 45 percent of the ordinary shares of the company on a fully diluted basis using the treasury stock method. Accordingly, while Objet was the legal acquirer, Stratasys, Inc. is treated as the acquiring company in the merger for accounting purposes and the merger has been accounted for as a reverse acquisition under the acquisition method of accounting for business combinations. As a result, the financial statements of the Company prior to the merger date are the separate historical financial statements of only Stratasys, Inc., whereas the financial statements of the Company after the merger date reflect the results of the operations of Stratasys, Inc. and Objet on a combined basis. Accordingly, the accompanying statement of operations and comprehensive income and of cash flows for the six months ended June 30, 2013 are on a combined basis and for the six months ended June 30, 2012 are on a separate Stratasys, Inc. basis only.
Note 2. Business Combinations
Objet Merger
The Objet merger was accounted for as a reverse acquisition and accordingly, the total purchase price of $1,341 million was calculated as if Stratasys, Inc. had issued its shares to Objets shareholders and converted options to purchase Objets ordinary shares to options to purchase Stratasys, Inc. common stock (which became exercisable instead for Stratasys Ltd. ordinary shares upon consummation of the merger).
6
STRATASYS LTD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
Under the acquisition method of accounting, the total purchase price was allocated to the net tangible and intangible assets of Objet acquired in the merger, based on their fair values at the merger date. The estimated fair values are preliminary and based on the information that was available as of the merger date. The Company believes that the information provides a reasonable basis for estimating the fair values, but the Company is waiting for additional information necessary to finalize these amounts, particularly with respect to the estimated fair value of intangible assets and property, plant and equipment and deferred taxes related thereto. Thus the preliminary measurements of fair value reflected are subject to changes and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the merger date. There were no changes during the six months ended June 30, 2013 to the preliminary measurements of fair value. The preliminary allocation of the purchase price to assets acquired and liabilities assumed is as follows (in thousands):
Allocation of | ||
Purchase Price | ||
Cash and cash equivalents | $ | 41,524 |
Restricted cash | 845 | |
Short-term bank deposit | 30,062 | |
Accounts receivable - Trade | 23,633 | |
Accounts receivable - Other | 12,477 | |
Prepaid expenses | 1,011 | |
Inventories | 40,364 | |
Deferred income taxes | 1,755 | |
Property, plant and equipment | 15,475 | |
Goodwill | 797,063 | |
Intangible assets | 490,176 | |
Other non-current assets | 2,539 | |
Total assets acquired | 1,456,924 | |
Accounts payable & other liabilities | 49,876 | |
Unearned revenue | 8,674 | |
Deferred tax liabilities | 51,003 | |
Other non-current liabilities | 6,474 | |
Total liabilities assumed | 116,027 | |
Total purchase price | $ | 1,340,897 |
The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of the following intangible assets (in thousands):
Weighted Average | |||||
Amount | Life - Years | ||||
Developed technology | $ | 374,126 | 9.6 | ||
Customer relationships | 72,679 | 10 | |||
Trade name | 15,291 | 9 | |||
In-process R&D | 28,080 | Indefinite | |||
Total intangible assets | $ | 490,176 |
In addition, the allocation of the purchase price resulted in the recognition of backlog, which was valued at $6.3 million. Backlog was included in accounts receivable - other and was fully amortized to selling, general and administrative through the three months ended March 31, 2013 based on the pattern in which the economic benefits of backlog were estimated to be realized.
The Company incurred $3.5 million and $4.5 million of acquisition-related costs related to the Objet merger that were expensed during the three and six months ended June 30, 2012, respectively. These costs are included in selling, general and administrative costs in the Companys consolidated statements of operations.
7
STRATASYS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Pending Merger with MakerBot
On June 19, 2013, the Company and privately held Cooperation Technology Corporation (MakerBot), announced the signing of a definitive merger agreement (MakerBot merger agreement) whereby MakerBot agreed to merge with a subsidiary of the Company in a stock-for-stock transaction.
Under the terms of the MakerBot merger agreement, Stratasys will initially issue approximately 4.76 million shares in exchange for 100% of MakerBots outstanding capital stock. MakerBot stakeholders also qualify for performance-based earn-outs that provide for the issue of up to an additional 2.38 million shares through the end of 2014. Those payments, if earned, will be made in Stratasys shares or cash (in an amount reflecting the value of the Stratasys shares that would have otherwise been issued at the relevant earn out determination date), or a combination thereof, at Stratasys discretion. The MakerBot merger is subject to customary closing conditions, and is expected to close in the third quarter of 2013. The Company incurred $3.8 million of acquisition-related costs during the three months ended June 30, 2013 related to the pending MakerBot merger.
Note 3. Inventories
Inventories consisted of the following at June 30, 2013 and December 31, 2012, respectively (in thousands):
June 30, | December 31, | ||||
2013 | 2012 | ||||
Finished goods | $ | 31,757 | $ | 37,823 | |
Work-in-process | 2,592 | 3,809 | |||
Raw materials | 30,254 | 26,363 | |||
$ | 64,603 | $ | 67,995 |
Note 4. Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying amount of the Companys goodwill for the six months ended June 30, 2013, are as follows (in thousands):
Carrying | |||
Amount | |||
Balance at December 31, 2012 | $ | 822,475 | |
Effect of currency translation | (12 | ) | |
Balance at June 30, 2013 | $ | 822,463 |
8
STRATASYS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
June 30, 2013 | December 31, 2012 | |||||||||||
Gross | Gross | |||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||
Amount | Amortization | Amount | Amortization | |||||||||
Developed technology | $ | 385,760 | $ | 29,292 | $ | 385,735 | $ | 9,058 | ||||
Capitalized software development costs | 16,163 | 13,431 | 15,831 | 12,996 | ||||||||
Patents | 13,808 | 5,732 | 13,533 | 4,952 | ||||||||
Trademarks and trade names | 16,870 | 1,478 | 16,877 | 592 | ||||||||
Customer relationships | 77,779 | 4,977 | 77,779 | 1,172 | ||||||||
Non-compete agreement | 350 | 253 | 350 | 194 | ||||||||
In-process research and development | 29,231 | - | 29,231 | - | ||||||||
539,961 | $ | 55,163 | 539,336 | $ | 28,964 | |||||||
Accumulated amortization | 55,163 | 28,964 | ||||||||||
Net book value of amortizable intangible assets | $ | 484,798 | $ | 510,372 |
Changes in the gross carrying amount of our other intangible assets for the six months ended June 30, 2013, are as follows (in thousands):
Gross | ||
Carrying | ||
Amount | ||
Balance at December 31, 2012 | $ | 539,336 |
Patents, trademarks and capitalized software | 625 | |
Balance at June 30, 2013 | $ | 539,961 |
Amortization expense for the three month periods ended June 30, 2013 and 2012 was $13.1 million and $1.1 million, respectively. Amortization expense for the six month periods ended June 30, 2013 and 2012 was $26.2 million and $2.3 million, respectively.
Estimated amortization expense, for all intangible assets, for the five years subsequent to December 31, 2012 is as follows (in thousands):
Year ending December 31, | |||
2013 | $ | 52,468 | |
2014 | 54,022 | ||
2015 | 54,166 | ||
2016 | 54,023 | ||
2017 | $ | 53,551 |
9
STRATASYS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 5. Earnings (Loss) Per Share
The Company complies with ASC 260, Earnings Per Share, which requires dual presentation of basic and diluted income (loss) per ordinary share attributable to Stratasys Ltd. for all periods presented. Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares outstanding for the reporting periods. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares or resulted in the issuance of shares that then share in the income (loss) of the Company. The difference between the number of shares used to compute basic net income (loss) per share and diluted net income (loss) per share relates to additional shares, if diluted, that would be issued upon the assumed exercise of stock options and warrants, net of the shares that would hypothetically be repurchased using the proceeds received from the original exercise.
The additional ordinary shares amounted to 521,847 and 510,627 for the three and six months ended June 30, 2012, respectively. There were no options excluded from the dilution calculation for the three and six months ended June 30, 2012, since the market price of the Companys shares exceeded the exercise price of all outstanding options. As a result of the net loss in the three and six months ended June 30, 2013, the outstanding stock options were considered antidilutive and, therefore, were excluded from diluted loss per share for this period.
Note 6. Income Taxes
The Companys tax expense was 13.3% on the loss before income taxes for the three months ended June 30, 2013 and the tax benefit was 2.2% on the loss before income taxes for the six months ended June 30, 2013. The effective tax rate for the three and six months ended June 30, 2012 was 48.4% and 43.6%, respectively, on the income before income taxes in those periods. The incomes tax rate in Israel is significantly lower than the income tax rate in the U.S. The Companys effective tax rate has varied significantly since the merger due to the lower tax rate in Israel, and changes in mix of income (loss) between the U.S. and Israel, as well as the impact of the lower Israel rates on tax benefit as a result of the realization of the deferred tax liability associated with the amortization of the intangible assets. Income tax expense increased in the three months ended June 30, 2013 due to a lower tax benefit as a result of lower realization of the deferred tax liability associated with the amortization of the intangible assets and the reinstatement of 2012 federal research credit on January 2, 2013, of which a credit of approximately $350,000 was recorded in the first quarter of 2013.
The total research credit for the three and six months ended June 30, 2013 was $120,000 and $580,000, respectively. In addition, during the second quarter of 2013, the Company adjusted its long-term tax rates due to obtaining an approval from the Israeli Tax Authorities under the Approved Enterprise and Privileged Enterprise programs. As a result, the Company recorded a reduction of approximately $1.3 million in its income tax expense and in its deferred tax liabilities associated with the amortization of the intangible assets.
Note 7. Fair Value Measurements
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. A hierarchy has been established for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available under the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
10
STRATASYS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At June 30, 2013, the Company had foreign exchange forward contracts in effect for the conversion of €22.8 million into $30.0 million and $22.6 million into NIS 88.4 million. These contracts are not designated for hedge accounting. The fair value of these contracts at June 30, 2013 of $1.9 million was included in accounts receivable-other. The fair value is based on level 2 inputs. During the second quarter of 2013, the Company entered into $30.0 million and $4 million foreign exchange forward contracts against the Euro and the NIS, respectively. The Company has no other significant measurements of assets or liabilities at fair value on a recurring or nonrecurring basis subsequent to their initial recognition.
Note 8. Collaborative Arrangements
The Company has agreements with two manufacturing companies to jointly advance certain of its proprietary technology with each of those two companies. The agreements entitle the Company to receive reimbursement payments of costs actually incurred under joint development projects. During the three months ended June 30, 2013 and 2012, approximately $1.0 million and $166,000, respectively, of research and development expenses were offset by payments that were received from these companies. During the six months ended June 30, 2013 and 2012, approximately $2.1 million and $317,000, respectively, of research and development expenses were offset by payments that were received from these companies.
Note 9. Stock Options
Stock-based compensation expense was allocated as follows for the periods ended June 30 (in thousands):
Three Months Ended | Six Months Ended | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Cost of sales | $ | 632 | $ | - | $ | 1,266 | $ | - | ||||
Research and development, net | 846 | - | 1,746 | - | ||||||||
Selling, general and administrative | 3,881 | 632 | 7,838 | 1,113 | ||||||||
Total stock-based compensation expenses | $ | 5,359 | $ | 632 | $ | 10,850 | $ | 1,113 |
There were 228,761 options granted in the three and six months ended June 30, 2013. There were 338,750 options granted in the three and six months ended June 30, 2012. During the three months ended June 30, 2013 and 2012 the Company issued 354,859 and 46,745 shares, respectively, upon the exercise of stock options. This resulted in an increase in equity of $2.4 million and $692,000 for the three months ended June 30, 2013 and 2012, respectively. During the six months ended June 30, 2013 and 2012 the Company issued 647,667 and 92,140 shares, respectively, upon the exercise of stock options. This resulted in an increase in equity of $6.0 million and $1.5 million for the six months ended June 30, 2013 and 2012, respectively.
Note 10. Litigation
Claims and Proceedings
1) On June 29, 2012, a purported class action complaint was filed in the District Court, Fourth Judicial District, Hennepin County, Minnesota (the Minnesota Court), naming Stratasys, Inc., the members of its board of directors, and Objets two indirect, wholly-owned subsidiaries party to the merger agreement (Seurat Holdings Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Objet, or Holdco, and Oaktree Merger Inc., a Delaware corporation, or Merger Sub) as defendants. On July 2, 2012, another purported class action complaint was filed in the Court of Chancery of the State of Delaware (the Delaware Court), naming the same persons as well as Objet as defendants. A third purported class action was filed on July 17, 2012, also in the Minnesota Court naming the same parties (except for Objet) as defendants. The complaints generally allege that, in connection with approving the merger, the Stratasys, Inc. directors breached their fiduciary duties owed to Stratasys, Inc. stockholders and that Stratasys, Inc., Objet, Holdco and Merger Sub knowingly aided and abetted the Stratasys, Inc. directors breaches of their fiduciary duties. The complaints sought, among other things, certification of the case as a class action, an injunction against the consummation of the transaction, a judgment against the defendants for damages, and an award of fees, expenses and costs to plaintiffs and their attorneys.
11
STRATASYS LTD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
While the Company and the other defendants believe that each of the aforementioned lawsuits is without merit and that the Company has valid defenses to all claims, in an effort to minimize cost and expense of any litigation relating to such lawsuits, on September 6, 2012, the Company and other defendants entered into a memorandum of understanding (MOU) with the parties to the actions pending in the Chancery Court and the Minnesota Court, pursuant to which the Company and such parties agreed in principle, and subject to certain conditions, to settle those stockholder lawsuits. Subject to approval of the appropriate court and further definitive documentation, the MOU establishes a framework to resolve the allegations against the Company and other defendants in connection with the merger agreement and contemplates a release and settlement by the plaintiffs of all claims against the Company and other defendants and their affiliates and agents in connection with the Merger Agreement. In exchange for such release and settlement, pursuant to the terms of the MOU, the parties agreed, after arms-length negotiations, that Stratasys, Inc. would file a Current Report on Form 8-K amending and supplementing the applicable disclosure in the joint proxy statement/prospectus, dated August 8, 2012, which had been sent to Stratasys, Inc. stockholders.
The plaintiffs have completed confirmatory discovery with respect to the disclosures made in the proxy statement/prospectus. The parties are presently engaged in negotiating a final settlement agreement, which will be submitted to the Delaware Court for approval. However, if the conditions set forth in the MOU are not satisfied or the Delaware Court fails to approve the settlement, the litigation will proceed, and the Company intends to continue to vigorously defend these actions.
The Company recorded a provision in 2012 for probable losses, which are reasonably estimable, arising from this claim, as estimated by management. Management believes that there is no material exposure to loss in excess of the amount accrued.
2) In October 2007, a former supplier of Objet brought an action against Objet and the former directors of its European subsidiary (one of whom, Ilan Levin, is a current director of the Company) in a Brussels commercial court, claiming damages of €566,000 ($738,000), plus interest and related legal and litigation costs. On April 26, 2010, the court held Objet and its subsidiarys former directors jointly and severally liable for the full amount claimed. Objet along with its subsidiarys former directors filed an appeal of the judgment in May 2010, with respect to which the final judgment is expected to be rendered in 2013. In keeping with required procedures related to the litigation, in July 2011, the Company deposited the full amount of the original judgment in favor of the former supplier, plus interest and litigation costs (€690,000, or $900,000, in total) into a blocked, state-owned account in the Companys name, to be held pending the outcome of the appeal.
Objet recorded a provision in 2007 and 2008 for probable losses, which are reasonably estimable, arising from this claim, as estimated by management. Management believes that there is no material exposure to loss in excess of the amount accrued.
3) In December 2008, an employee of Objet, whose employment with Objet was subsequently terminated, filed a claim against Objet demanding that, based on an alleged undertaking Objet had made, Objet issue to him an option that would allow him to maintain an equity interest of 1.45% in Objet, as well as reimburse salary reductions he had suffered in an aggregate sum of NIS 552,000 ($152,000). In July 2009, Objet filed its statement of defense, rejecting the claims raised by the former employee. Together with the former employee, Objet initiated mediation of the dispute, but did not reach a settlement. The former employee later amended his initial pleading to seek an additional NIS 441,000 ($121,000) on account of alleged wrongful termination by Objet, and consequently, Objet filed an amended statement of defense on June 2011. The former employee later amended his statement of claim for the second time, so that it will include a claim that Objet never granted him options.
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STRATASYS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The action is currently ongoing and is being litigated in an Israeli labor court. Evidentiary hearings took place on February 7, 2013 and April 4, 2013. The former employee submitted his summation briefs on June 5, 2013 and the Company is to submit its summation briefs by September 29, 2013. The former employee may submit answer summations by October 6, 2013.
Objet recorded a provision in 2008 for probable losses, which are reasonably estimable, arising from this claim, as estimated by management.
It is reasonably possible that the loss arising from this claim will be greater than the amount accrued, up to the entire amount claimed.
4) On April 15, 2012, the Company and a former distributor signed a mediation / arbitration agreement in order to either amicably resolve or arbitrate, in Israel, a dispute related to a distributorship agreement with the former distributor that the Company had terminated for cause. Without waiving any of its rights, and for the purpose of mediation, the former distributor has claimed compensation of $1.5 million for, among other things, its alleged investment in building a market for the Companys products, while the Company has claimed approximately $0.5 million (under a similar reservation of rights), for amounts owed to it by the distributor under the distributorship agreement, damages to the Companys reputation and lost profits. The first mediation meeting under the mediation / arbitration agreement was held on July 18, 2012, and it has been followed by additional meetings that the mediator has held with each of the parties separately. As of the date of these financial statements the mediation has been discontinued. Neither party has so far initiated arbitration proceedings.
Management does not believe that the allegations made by the former distributor will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
5) On March 4, 2013, the Company was notified of two lawsuits purportedly filed in an Israeli district court against the Company by four current or former minority shareholders and former directors of Objet. The lawsuits purportedly demand that the Company amend its capitalization table such that certain shares previously issued to Objet shareholders named as defendants would be recognized as being owned by the plaintiffs with a consequent reduction of the share ownership of the named defendants and issuance of new shares to the plaintiffs. The lawsuits also name as defendants Elchanan Jaglom, Chairman of the Executive Committee of the Companys board of directors, David Reis, Chief Executive Officer, various shareholders of the Company who were also shareholders of Objet, and, in one of the lawsuits, Ilan Levin, a director. The lawsuits allege in particular that a series of investments in Objet during 2002 and 2003 was effected at a price per share that was below fair market value, thereby illegally diluting those shareholders that did not participate in the investments. The plaintiffs also allege that a portion of the amount invested in those transactions was actually invested by an investor who was already a shareholder of Objet and allegedly acting in concert with Mr. Jaglom, and that the interest of these two shareholders in these transactions was not properly disclosed to the minority shareholders at the time. The lawsuits furthermore claim that Objet effectively engaged in backdating the issuance of certain shares, in that shares that Objet reported as having been issued in 2006 and 2007 were actually issued at a subsequent date - as late as 2009. The Company and named defendants have filed motions with the court, seeking to strike the lawsuits on certain grounds and requesting that the court order the plaintiffs to pay court fees according to the actual value of the remedies sought, instead of limited fees for declaratory remedies. The plaintiffs have filed their responses, and the Company and named defendants have filed their answer. On July 1, 2013, a pre-trial hearing was held, in which the court decided that it will first rule on the motion regarding court fees and only later will proceed, if necessary, to rule on the other motions.
The Company believes that these claims are all entirely baseless and that the transactions in question were conducted in accordance with applicable law. Management does not believe that these lawsuits will have a material adverse effect on our operations or financial condition, and the Company intends to vigorously defend these lawsuits.
13
STRATASYS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company is a party to various other legal proceedings, in the normal course of its business. The Company accrues for a loss contingency when it determines that it probable, after consultation with management, that a liability has been incurred and the amount of such loss can be reasonably estimated. At this time, the Company believes that the outcome of these legal proceedings, either individually or in the aggregate, will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
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