Table of Contents
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
|☐||REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934|
|☐||SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
Date of event requiring this shell company report........................................
Commission file number: 001-35751
(Exact name of Registrant as specified in its charter)
(Translation of Registrants name into English)
(Jurisdiction of incorporation or Organization)
|c/o Stratasys, Inc.||2 Holtzman Street,|
|7665 Commerce Way||Science Park|
|Eden Prairie,||P.O. Box 2496|
|Minnesota 55344||Rehovot, Israel|
(Address of Principal Executive Offices)
S. Scott Crump, Chairman
of Executive Committee
Tel: (952) 937-3000
7665 Commerce Way
Eden Prairie, Minnesota 55344
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Table of Contents
|Title of each class||Name of each exchange on which registered|
|Ordinary Shares, nominal value NIS 0.01 per share||NASDAQ Global Seect Market|
Securities registered or to
be registered pursuant to Section 12(g) of the Act.
(Title of Class)
Securities for which there
is a reporting obligation pursuant to Section 15(d) of the Act.
(Title of Class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report:
52,082,192 Ordinary Shares, NIS 0.01 nominal value, at December 31, 2015.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
|Large accelerated filer ☒||Accelerated filer ☐||Non-accelerated filer ☐|
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|International Financial Reporting|
|US GAAP ☒||Standards as issued||Other ☐|
|by the International Accounting Standards|
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Table of Contents
This annual report on Form 20-F, or this annual report, is being filed by the registrant, Stratasys Ltd., an Israeli company. As described in its previous filings with the Securities and Exchange Commission, or the SEC, the registrant (formerly known as Objet Geometries Ltd. and then Objet Ltd.) was party to a merger with Stratasys, Inc., a Delaware corporation, that was completed on December 1, 2012, referred to as the Stratasys-Objet merger or the merger. The Stratasys-Objet merger was structured as a reverse merger of Stratasys, Inc. with and into an indirect, wholly owned subsidiary of Objet Ltd., in which Objet Ltd. served as the legal acquirer. For accounting purposes, however, Stratasys, Inc. was treated as the acquiring company, and the Stratasys-Objet merger is 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, the combined company, the registrant, 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 Stratasys-Objet merger on December 1, 2012. We may also use Objet to refer to the line of products previously sold by Objet Ltd. and the related current, ongoing operations that have continued following the Stratasys-Objet merger. References to Stratasys, Inc. generally refer to Stratasys, Inc., a Delaware corporation, and its consolidated subsidiaries prior to the effective time of the Stratasys-Objet merger, but sometimes (as the context requires) refer to the current, ongoing operations of our Stratasys, Inc. subsidiary. The historical financial information set forth in this annual report, 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.
Unless otherwise indicated herein, all numbers and prices in this annual report related to ordinary shares and options of our company that predated the effectiveness of the Stratasys-Objet merger have been adjusted to reflect the 1-for-8.691 reverse stock split that was effected with respect to all of Objets outstanding ordinary shares immediately prior to the effective time of the Stratasys-Objet merger.
Table of Contents
TABLE OF CONTENTS
|TABLE OF CONTENTS|
|CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS||1|
|USE OF TRADE NAMES||2|
|CERTAIN ADDITIONAL TERMS AND CONVENTIONS||2|
|ITEM 1.||IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.||3|
|ITEM 2.||OFFER STATISTICS AND EXPECTED TIMETABLE.||3|
|ITEM 3.||KEY INFORMATION.||3|
|ITEM 4.||INFORMATION ON THE COMPANY.||23|
|ITEM 4A.||UNRESOLVED STAFF COMMENTS.||44|
|ITEM 5.||OPERATING AND FINANCIAL REVIEW AND PROSPECTS.||44|
|ITEM 6.||DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.||65|
|ITEM 7.||MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.||86|
|ITEM 8.||FINANCIAL INFORMATION.||89|
|ITEM 9.||THE OFFER AND LISTING.||90|
|ITEM 10.||ADDITIONAL INFORMATION.||91|
|ITEM 11.||QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.||104|
|ITEM 12.||DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.||105|
|ITEM 13.||DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.||105|
|ITEM 14.||MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
|ITEM 15.||CONTROLS AND PROCEDURES.||105|
|ITEM 16A.||AUDIT COMMITTEE FINANCIAL EXPERT.||106|
|ITEM 16B.||CODE OF ETHICS.||106|
|ITEM 16C.||PRINCIPAL ACCOUNTANT FEES AND SERVICES.||106|
|ITEM 16D.||EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.||107|
|ITEM 16E.||PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.||107|
|ITEM 16F.||CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT.||107|
|ITEM 16G.||CORPORATE GOVERNANCE.||107|
|ITEM 16H.||MINE SAFETY DISCLOSURE.||107|
|ITEM 17.||FINANCIAL STATEMENTS.||108|
|ITEM 18.||FINANCIAL STATEMENTS.||108|
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included or incorporated by reference in this annual report may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are often characterized by the use of forward-looking terminology such as may, will, expect, anticipate, estimate, continue, believe, should, intend, project or other similar words, but are not the only way these statements are identified.
These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections of results of operations or of financial condition and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future.
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.
Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things:
|●||the extent of our success at introducing new or
improved products and solutions that gain market share;|
of growth of the 3D printing market generally; |
impairments of goodwill
or other intangible assets in respect of companies that we acquire;
changes in our overall
strategy, such as related to our cost reduction and reorganization activities
and our capital expenditures;
the extent of our
success at efficiently and successfully integrating the operations of
various companies that we have acquired or may acquire;
|●||the impact of shifts in prices or margins of
the products that we sell or services we provide; |
|●||the impact of competition and new
|●||global market, political and economic
conditions, and in the countries in which we operate in particular;
|●||government regulations and approvals;
|●||infringement of our intellectual property
rights by others (including for replication and sale of consumables for
use in our systems), or infringement of others intellectual property
rights by us; |
|●||the extent of our success at maintaining our
liquidity and financing our operations and capital needs; |
|●||impact of tax regulations on our results of
operations and financial condition; |
allowances that we are required to record against our deferred tax assets;
any additional factors referred to in Item 3.D Key Information - Risk Factors, Item 4 Information on the Company, and Item 5 Operating and Financial Review and Prospects, as well as in this annual report generally.
Readers are urged to carefully review and consider the various disclosures made throughout this annual report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Table of Contents
Any forward-looking statements in this annual report are made as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
USE OF TRADE NAMES
Unless the context otherwise indicates or requires, Stratasys, For a 3D World, Objet, PolyJet, Connex, Eden, FDM, Fortus, Dimension, Uprint, Mojo, FullCure, Stratasys Direct Manufacturing, Solidscape, Solid Concepts, GrabCAD, MakerBot, Thingiverse, Replicator, RedEyE, Harvest Technologies, GrabCAD Workbench, The 3D Solutions Company and all product names and trade names used by us in this annual report are our trademarks and service marks, which may be registered in certain jurisdictions. Although we have omitted the ® and TM trademark designations for such marks in this annual report, all rights to such trademarks and service marks are nevertheless reserved. Furthermore, the Stratasys and Objet design logos are our property. This annual report contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies tradenames, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
CERTAIN ADDITIONAL TERMS AND CONVENTIONS
In this annual report, unless the context otherwise requires:
references to the
Stratasys-Objet merger, or the merger, refer to the merger consummated on December 1,
2012 whereby Stratasys, Inc., a Delaware corporation, merged with and into
an indirect, wholly-owned Delaware subsidiary of Objet Ltd. (now known as
Stratasys Ltd.), an Israeli company, with Stratasys, Inc. surviving the
merger and becoming an indirect, wholly-owned subsidiary of Objet (which
changed its name to Stratasys Ltd. at that time);
references to the
Stratasys-Objet merger agreement refer to the Agreement and Plan of
Merger, dated as of April 13, 2012, as amended, by and among Stratasys,
Inc.; Objet Ltd.; Seurat Holdings Inc., a Delaware corporation and an
indirect, wholly-owned subsidiary of Objet (Holdco); and Oaktree Merger
Inc., a Delaware corporation and a direct, wholly-owned subsidiary of
Holdco, pursuant to which the merger was consummated;
references to the
MakerBot transaction refer to the merger consummated on August 15, 2013
whereby Cooperation Technology Corporation, a Delaware corporation (now
known as Baccio Corporation), or MakerBot, which is the direct parent
company of MakerBot Industries, LLC, merged with and into an indirect,
wholly-owned subsidiary of Stratasys Ltd., with MakerBot becoming an
indirect, wholly-owned subsidiary of Stratasys Ltd.;
references to the Solid
Concepts acquisition or Solid Concepts transaction refer to the
acquisition consummated on July 14, 2014 whereby Stratasys Ltd. acquired
Solid Concepts Inc.;
references to the
Harvest Technologies acquisition refer to the acquisition consummated on
August 1, 2014 whereby Stratasys Ltd. acquired Harvest Technologies Inc.
references to the
GrabCAD acquisition refer to the acquisition consummated on September
22, 2014 whereby Stratasys Ltd. acquired GrabCAD.
references to ordinary
shares, our shares and similar expressions refer to our Ordinary
Shares, nominal value NIS 0.01 per share;
references to dollars,
U.S. dollars, U.S. $ and $ are to United States Dollars;
references to shekels
and NIS are to New Israeli Shekels, the Israeli currency;
references to the
articles or amended articles are to our Amended and Restated Articles
of Association, which became effective upon the closing of the merger, as
references to the
Companies Law are to Israels Companies Law, 5759-1999, as amended;
references to the
Securities Act are to the Securities Act of 1933, as amended;
references to the
Exchange Act are to the Securities Exchange Act of 1934, as
references to NASDAQ
are to the Nasdaq Stock Market; and
references to the SEC are to the United States Securities and Exchange Commission.
Table of Contents
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
ITEM 3. KEY INFORMATION.
A. Selected Financial Data.
As noted above in the Explanatory Note to this annual report, Stratasys, Inc. was treated as the acquiring company in the Stratasys-Objet merger for accounting purposes and the Stratasys-Objet merger was accounted for as a reverse acquisition under the acquisition method of accounting for business combinations. As a result, the historical financial statements of Stratasys, Inc. prior to the effective time of the merger on December 1, 2012 became our historical financial statements. The consolidated financial statements included in this annual report include the operations of Stratasys Ltd. (formerly Objet Ltd.) for the years ended December 31, 2015, 2014 and 2013 and for the month ended December 31, 2012 (as the Stratasys-Objet merger was consummated on December 1, 2012). Therefore, while the balance sheet data presented below reflects the financial position of Stratasys Ltd. as of December 31, 2015, 2014, 2013 and 2012, respectively, the consolidated statement of operations data reflects the results of operations of Stratasys Ltd. for the years ended December 31, 2015, 2014 and 2013 and from December 1 through December 31, 2012, and the results of operations of Stratasys, Inc. from January 1 through November 30, 2012. The below selected consolidated financial data reflects the consolidated results of operations and financial position of Stratasys, Inc. as of, and for the year ended, December 31, 2011.
The historical selected consolidated statement of operations data for the years 2015, 2014 and 2013, and the selected consolidated balance sheet data at December 31, 2015 and 2014 have been derived from our audited consolidated financial statements set forth elsewhere in this annual report. The selected consolidated statements of operations data for 2012 and 2011, and the selected consolidated balance sheet data as of December 31, 2013, 2012 and 2011, have been derived from our previously reported audited consolidated financial statements, which are not included in this annual report. The selected financial data should be read in conjunction with our consolidated financial statements and accompanying notes and Operating and Financial Review and Prospects appearing in Item 5 of this annual report, and are qualified entirely by reference to such consolidated financial statements. Our historical results set forth herein are not necessarily indicative of our future results.
Table of Contents
|Year Ended December 31,|
|(U.S. $ in thousands, except per share data)|
|Statement of Operations Data:|
|Research and development expense, net||122,360||82,270||52,310||19,659||14,360|
|Selling, general and administrative expense||434,619||351,993||202,040||73,130||39,038|
|Change in fair value of obligations in connection with acquisitions||(23,671||)||(26,150||)||754||-||-|
|Operating income (loss)||(1,373,544||)||(148,189||)||(28,931||)||17,122||29,006|
|Net income (loss)||(1,373,511||)||(119,470||)||(26,907||)||8,823||20,626|
|Net income (loss) attributable to Stratasys Ltd.||(1,372,835||)||(119,420||)||(26,954||)||8,491||20,626|
|Net income (loss) per basic share||(26.66||)||(2.39||)||(0.64||)||0.39||0.98|
|Net income (loss) per basic share attributable to Stratasys Ltd.||(26.64||)||(2.39||)||(0.64||)||0.37||0.98|
|Weighted average basic shares outstanding||51,592||50,019||42,079||22,812||21,133|
|Net income (loss) per diluted share||(26.66||)||(2.39||)||(0.68||)||0.37||0.95|
|Net income (loss) per diluted share attributable to Stratasys Ltd.||(26.64||)||(2.39||)||(0.68||)||0.36||0.95|
|Weighted average diluted shares outstanding||51,592||50,019||42,099||23,776||21,653|
|Balance Sheet Data:|
*We adopted a new accounting guidance which requires classification of deferred tax assets and liabilities as noncurrent on the balance sheet on a prospective basis. All deferred taxes are classified as non-current on the balance sheet as of December 31, 2015. Prior periods were not retrospectively adjusted. See Note 1 to our audited financial statements included in Item 18 of this annual report for further information.
In addition to the audited consolidated financial data presented above, we also present below unaudited pro forma combined statement of operations data for our company for the year ended December 31, 2012 that give effect to the Stratasys-Objet merger as if it had been completed on January 1, 2012. This data has been prepared consistent with SEC Regulation S-X, Article 11.
|December 31, 2012|
|(U.S. $ in thousands,|
|except per share data)|
|Statement of Operations Data:|
|Research and development expense||36,923|
|Selling, general and administrative expense||141,232|
|Net loss attributable to Stratasys Ltd.||(21,577||)|
|Net loss per basic share||(0.58||)|
|Net loss per basic share attributable to Stratasys Ltd.||(0.58||)|
|Weighted average basic shares outstanding||36,987|
|Net loss per diluted share||(0.58||)|
|Net loss per diluted share attributable to Stratasys Ltd.||(0.58||)|
|Weighted average diluted shares outstanding||36,987|
B. Capitalization and Indebtedness.
Table of Contents
C. Reasons for the Offer and Use of Proceeds.
D. Risk Factors.
You should carefully consider the risks described below, together with all of the other information in this annual report on Form 20-F. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. If any of these risks actually occurs, our business, financial condition and results of operations could suffer and the price of our shares could decline.
Risks related to our business and financial condition
We may not be able to introduce new 3D printers, high-performance systems and consumables acceptable to customers or to improve the technology, software or consumables used in our current systems in response to changing technology and end-user needs.
We derive most of our revenues from the sale of additive manufacturing systems and related consumables. The markets in which we operate are subject to rapid and substantial innovation and technological change, mainly driven by technological advances and end-user requirements and preferences, as well as the emergence of new standards and practices. Our ability to compete in these markets depends, in large part, on our success in enhancing our existing products and developing new additive manufacturing systems and new consumables that will address the increasingly sophisticated and varied needs of prospective end-users, and respond to technological advances and industry standards and practices on a cost-effective and timely basis or otherwise gain market acceptance.
Even if we successfully enhance our existing systems or create new systems, it is likely that new systems and technologies that we develop will eventually supplant our existing systems or that our competitors will create systems that will replace our systems. As a result, any of our products may be rendered obsolete or uneconomical by our or others technological advances.
Our operating results and financial condition may fluctuate.
The operating results and financial condition of our company may fluctuate from quarter to quarter and year to year and are likely to continue to vary due to a number of factors, many of which will not be within our control. If our operating results do not meet the guidance that we provide to the market place or the expectations of securities analysts or investors, the market price of our ordinary shares will likely decline. Fluctuations in our operating results and financial condition may be due to a number of factors, including those listed below and those identified throughout this Risk Factors section:
|●||the degree of market acceptance of our products
and services; |
|●||the mix of
products and services that we sell during any period;
changes in our overall
strategy, such as related to our cost reduction and reorganization activities
and our capital expenditures;
or difficulties in integrating our acquisitions;
|●||changes in the amount that that we spend to
develop, acquire or license new products, consumables, technologies or
|●||changes in the amounts that we spend to promote
our products and services; |
|●||changes in the cost of satisfying our warranty
obligations and servicing our installed base of systems; |
|●||delays between our expenditures to develop and
market new or enhanced systems and consumables and the generation of sales
from those products; |
development of new
competitive products and services by others;
|●||difficulty in predicting sales patterns and reorder rates that may result from multi-tier distribution strategy associated with new product categories such as entry level desktop 3D printers;|
Table of Contents
impairment charges that we may be required to record in
respect of our goodwill and/or other long-lived assets;
|●||litigation or threats of litigation, including
intellectual property claims by third parties; |
changes in accounting
rules and tax laws;
that we may be required to record against our deferred tax assets;
distribution of our sales;
|●||our responses to price competition; |
|●||general economic and industry conditions that affect
end-user demand and end-user levels of product design and manufacturing;
changes in interest
rates that affect returns on our cash balances and short-term investments;
|●||changes in dollar-shekel and dollar-Euro exchange rates
that affect the value of our net assets, revenues and expenditures from
and/or relating to our activities carried out in those currencies;
failure of a development
partner to continue supporting certain product development efforts it is
the level of research and development activities by our company.
Due to all of the foregoing factors, and the other risks discussed in this annual report, you should not rely on quarter-over-quarter and year-over-year comparisons of our operating results as an indicator of our future performance.
If demand for our products and services does not grow as expected, our revenues may stagnate or decline and our profitability may be adversely affected.
The commercial marketplace for additive manufacturing, which was once dominated by conventional methods that do not involve 3D printing technology, has been undergoing a shift towards 3D printing. This is true with respect to prototype development, and to some extent, with respect to direct digital manufacturing, or DDM, as an alternative to traditional manufacturing. If the commercial marketplace does not continue to transform towards the broader acceptance of 3D printing and DDM as alternatives for prototype development and traditional manufacturing, or if it adopts 3D printing based on technologies other than the technologies that we use, we may not be able to increase or sustain current or future levels of sales of our products and related materials and services, and our results of operations may be adversely affected as a result.
In 2015, the growth rate in the 3D printing and additive manufacturing industries slowed significantly and our revenues declined relative to the previous year. We experienced lower than expected revenues across all regions and most product and service lines. We believe this trend was attributable, in part, to weak investment in capital equipment by customers within key verticals, as well as difficult macroeconomic conditions in certain global regions. These factors, when combined with excess capacity (and accompanying fixed costs) that we have experienced as a result of our significant growth in the years 2013 and 2014, adversely impacted our profitability. To the extent that these trends continue for an extended period of time or macroeconomic conditions worsen further, that could affect our results of operations in a more significant adverse manner.
If additional goodwill or other intangible assets that we have recorded become impaired, we could have to take further significant charges against earnings.
As of December 31, 2014 and 2015, the carrying value of all of our goodwill and other intangible assets, was approximately $1,921.4 million and $636.3 million, respectively. The decrease of the carrying value of our goodwill and other intangible assets was primarily due to impairment charges of $1,220.9 million recorded during 2015. Under accounting principles generally accepted in the United States of America, or GAAP, we are required to review goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. During 2015, we determined that certain indicators of potential impairment existed that required interim goodwill impairment analysis. These indicators included a further significant decline in our market capitalization for a sustained period and weaker than expected operating results of our reporting units for 2015.
Accordingly, we updated our cash flow projections and related assumptions based on the indicators set forth above for each of our reporting units and performed the two-step goodwill impairment tests. Our impairment analysis performed as part of the step two of the goodwill impairment test determined that the carrying amount of goodwill assigned exceeded its implied fair value for each of the Companys reporting units. As a result, we recorded non-cash goodwill impairment charges of $942.4 during 2015. The non-cash impairment charges were recorded in order to reduce the carrying amount of goodwill to its implied fair value. For further information see note 7 to our consolidated financial statements.
Table of Contents
Amortized intangible assets are assessed for impairment in the event of an impairment indicator. During 2015, we tested the recoverability of our purchased intangible assets due to certain indicators of impairment including weaker than expected operating results of our reporting units for 2015, reorganization initiatives for our operations, lower forecasted profitability due to technological and other trends as well as the increased uncertainty in the 3D printing environment. We determined that the carrying values of certain of our intangible assets exceeds their undiscounted cash flows projections and therefore were not recoverable. For those unrecoverable intangible assets that considered to be impaired, we recorded impairment charges of $260.3 million during 2015, in order to reduce the carrying amount of those intangible assets to their estimated fair value. We also reviewed for impairment our indefinite-life intangible, which consists of IPR&D projects and recorded impairment charges of $18.2 million, related to those in-process research and development projects in order to reduce the carrying amount of those intangible assets to their estimated fair value. For further information see note 8 to our consolidated financial statements.
Determining the fair value of our reporting units and intangible assets requires significant judgment, including judgments about the appropriate discount rates, terminal growth rates, weighted average costs of capital and the amount and timing of projected future cash flows. We will continue to monitor the fair value of Stratasys-Objet reporting unit and our intangible assets to determine whether events and changes in circumstances such as further deterioration in the business climate or operating results, further significant decline in our share price, changes in managements business strategy or downward changes of the our cash flows projections, warrant further interim impairment testing.
Declines in the prices of our products and services, or in our volume of sales, together with our relatively inflexible cost structure, may adversely affect our financial results and diminish the impact of the restructuring program that we initiated in 2015.
Our business is subject to price competition. Such price competition may adversely affect our ability to maintain the same degree of profitability, especially during periods of decreased demand. Decreased demand also adversely impacts the volume of our sales, as occurred in 2015, when our sales declined overall relative to 2014. If our business is not able to offset price reductions resulting from these pressures, or decreased volume of sales due to contractions in the market, by improved operating efficiencies and reduced expenditures, then our operating results will be adversely affected.
In 2015, in response to declining sales volume and revenues, we implemented a restructuring program aimed at reducing our costs and improving operating efficiencies. Certain of our operating costs, however, are fixed and cannot readily be reduced, which diminishes the positive impact of our restructuring program on our profitability. In particular, prior to this contraction in our sales, we had increased our manufacturing capacity in anticipation of the growth of the 3D printing market over the long term, which is accompanied by increased fixed costs. To the extent that the growth in the market for our products slows further, or the 3D printing market contracts, we may be faced with excess manufacturing capacity and excess related costs that cannot readily be reduced, which will adversely impact our profitability.
To the extent that other companies are successful in developing or marketing consumables for use in our Idea, Design and Production Series systems, our revenues and profits would likely be adversely affected.
We sell a substantial portion of the consumables used in our Idea, Design and Production Series systems. We attempt to protect against replication of our proprietary consumables through patents and trade secrets and provide that warranties on those systems may be invalid if customers use non-genuine consumables that cause damage to the printer. Other companies have developed and sold, and may continue to develop and sell, consumables that are used with our systems, which may reduce our consumables sales and impair our overall revenues and profitability.
If our product mix shifts too far into lower margin products or our revenues mix shifts significantly towards our AM services business, our profitability could be reduced.
Sales of certain of our existing products have higher margins than others. For instance, our high-end systems and related consumables yield a greater gross margin than our entry-level systems. As we continue to ship entry-level systems including desktop 3D printers, our sales of those systems have grown. Furthermore, some of those sales may displace sales of our other systems. If sales of our entry-level desktop 3D printers have the effect of reducing sales of our higher margin products, or if for any other reason, our product mix shifts too far into lower margin products, and we are not able to sufficiently reduce the engineering, production and other costs associated with those products or substantially increase the sales of those products, our profitability could be reduced. A similar negative impact on our gross margins could result due to a significant shift towards revenues generated by our AM parts service business, which we expanded following our acquisitions of Solid Concepts and Harvest Technologies, and which are characterized by lower margins relative to our products.
Until recently, we have experienced rapid and significant growth in our operations and intend to continue to grow over the long term, and if we cannot adequately adapt our infrastructure and properly integrate the internal or external sources of our growth in order to generate the intended benefits from it, our results of operations will suffer.
Until recently, we have experienced rapid and significant growth in our operations and intend to continue to grow over the long term, both organically and from acquisitions, such as the MakerBot transaction, the Solid Concepts acquisition, the Harvest Technologies acquisition and the GrabCAD acquisition. The continued adaptation of our infrastructure to our growth will require, among other things, development of our financial and management controls and management information systems, including our ongoing implementation of a unified enterprise resource planning system, management of our sales channel, increased capital expenditures, the ability to attract and retain qualified management personnel and the training of new personnel. We cannot be sure that our infrastructure, systems, procedures, business processes and managerial controls will be adequate to support the expected long-term growth in our operations. Any delays in, or problems associated with, implementing, or transitioning to, new or enhanced systems, procedures, or controls to accommodate and support the requirements of our business and operations and to effectively and efficiently integrate acquired operations may adversely affect our ability to meet customer requirements, manage our product inventory, and record and report financial and management information on a timely and accurate basis.
Table of Contents
Additional unforeseen difficulties and expenditures that may result from the integration of a new business or technology include:
difficulty transitioning customers and other business relationships to
|●||problems unifying management following a
the loss of key
employees from our existing or acquired
managements attention to the assimilation of the technology and personnel
of acquired businesses or new product or service lines;
difficulties in coordinating geographically disparate organizations and corporate cultures and integrating management personnel with different business backgrounds.
These potential negative effects could prevent us from realizing the benefits of an acquisition transaction or other growth opportunity. In that event, our competitive position, revenues, revenue growth, financial condition, results of operations and liquidity could be adversely affected, which could, in turn, adversely affect our share price and shareholder value.
The markets in which we participate (especially the lower-end market) are competitive. Our failure to compete successfully could cause our revenues and the demand for our products to decline.
We compete for end-users with a wide variety of producers of systems that create models, prototypes, other 3D objects and end-use parts as well as producers of materials and services for these systems, including both additive and subtractive manufacturing methodologies, such as metal extrusion, computer-controlled machining and manual modeling techniques. Our principal competition currently consists of other manufacturers of systems for prototype development and customized manufacturing processes, including 3D Systems Corporation, EOS GmbH and EnvisionTEC GmbH, and, with respect to our entry-level desktop 3D printers, a multitude of companies such as 3D Systems Corporation, XYZprinting, Tiertime, Ultimaker, and others. The competition with our entry-level desktop 3D printers and our other lower-end products has intensified and was an important factor in the decrease in our sales in 2015. For our broadened AM parts and services business, our chief competitors consist of 3D Systems Corporation, Materialise and many other smaller service providers. In late 2014 HP announced its intention to offer 3D printers targeting similar end-users to ours, and in late 2015 Canon made a similar announcement. If these printers become commercially available they may compete directly with some of our product lines. We may face additional competition in the future from other new entrants into the marketplace, including companies that may have significantly greater resources than we have that may become new market entrants or may enter through acquisition or strategic or marketing partnerships with current competitors.
Some of our current and potential competitors have longer operating histories and more extensive name recognition than we have and may also have greater financial, marketing, manufacturing, distribution and other resources than we have. Current and future competitors may be able to respond more quickly to new or emerging technologies and changes in end-user demands and to devote greater resources to the development, promotion and sale of their products than we can. Our current and potential competitors may develop and market new technologies that render our existing or future products obsolete, unmarketable or less competitive (whether from a price perspective or otherwise). We cannot assure you that we will be able to maintain or enhance our current competitive position or continue to compete successfully against current and future sources of competition.
As part of our growth strategy, we have sought, and will continue to seek, to acquire or to make investments in other businesses, patents, technologies, products or services. Our failure to do so successfully (including, if applicable, to finance such acquisitions or investments on favorable terms and to avoid adverse financial consequences) may adversely affect our financial results.
As part of our growth strategy, we expect to continue to regularly evaluate acquisitions or investments to expand our suite of products and services. Even if we are able to identify a suitable acquisition or investment, we may not be able to consummate any such transaction if we cannot reach an agreement on favorable terms or if we lack sufficient resources to finance the transaction on our own and cannot obtain financing at a reasonable cost or if regulatory authorities prevent such transaction from being consummated. If we proceed with a particular acquisition, we may have to use cash, issue new equity securities with dilutive effects on existing shareholders, incur indebtedness, assume contingent liabilities or amortize assets or expenses in a manner that might have a material adverse effect on our financial condition, results of operations or liquidity. Acquisitions will also require us to record certain acquisition-related costs and other items as current period expenses, which would have the effect of reducing our reported earnings in the period in which an acquisition is consummated. In addition, we could also face unknown liabilities or write-offs due to our acquisitions, which could result in a significant charge to our earnings in the period in which they occur. We will also may be required to record goodwill or other long-lived asset impairment charges in the period in which they occur, which could result in a significant charge to our earnings in that period. Further to that risk, during the years ended December 31, 2015 and December 31, 2014, we recorded impairment charges of $1,219.4 million and $114.1 million and, respectively, related to our goodwill and intangible assets assigned to companies that we have acquired.
Table of Contents
If we are not successful in completing the integration of our constituent companies from our recent acquisitions, the benefits of these later transactions may not be fully realized and the market price of our ordinary shares may be negatively affected.
Since the consummation of the Objet-Stratasys merger in December 2012, we have acquired MakerBot, Solid Concepts, Harvest Technologies, GrabCAD and other companies. While we believe that integration activities have progressed well to date, the ongoing difficulties of coordinating our operations include:
geographically separate organizations;
coordinating sales, distribution and marketing
functions, including integration and management of our constituent
companies sales channels;
financial reporting systems and ERP systems of our constituent companies;
management of a
substantially larger organization, with an increased number of employees
over large geographic distances; and
addressing inconsistencies among the companies in standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with suppliers, distributors, customers and employees.
As a result of these and other factors, we may not successfully complete the integration of our acquired entities. Furthermore, we may not realize all of the benefits and synergies of the acquired entities in the timeframe anticipated. It is also possible that such continuing integration and coordination arrangements could lead to the loss of members of our senior executive team, diversion of the attention of management, or the disruption or interruption of, or the loss of momentum in, our ongoing business, which could adversely affect our business and financial results. The occurrence of such negative results could adversely affect the market price of our ordinary shares.
Our operations, particularly in integrating the operations of our constituent companies, could suffer if we are unable to attract and retain key management or other key employees.
Our success depends upon the continued service and performance of our senior management and other key personnel. Our senior executive team is critical to the management of our business and operations, as well as to the development of our strategy. The loss of the services of any members of our senior executive team could delay or prevent the successful implementation of our growth strategy, or our commercialization of new applications for our systems or other products, or could otherwise adversely affect our ability to manage our company effectively and carry out our business plan. Members of our senior management team may resign at any time. High demand exists for senior management and other key personnel (including scientific, technical and sales personnel) in the additive manufacturing, or AM, industry, and there can be no assurance that we will be able to retain such personnel. We experience intense competition for qualified personnel. While we intend to continue to provide competitive compensation packages to attract and retain key personnel, some of our competitors for these employees have greater resources and more experience, making it difficult for us to compete successfully for key personnel. If we cannot attract and retain sufficiently qualified technical employees for our research and development and manufacturing operations, we may be unable to achieve the synergies expected from mergers and acquisitions that we may effect from time to time, or to develop and commercialize new products or new applications for existing products. Furthermore, possible shortages of key personnel, including engineers, in the regions surrounding our Minnesota, New York, California, Texas, Boston, New Hampshire or Israeli facilities could require us to pay more to hire and retain key personnel, thereby increasing our costs.
Defects in new products or in enhancements to our existing products could give rise to product returns or product liability, warranty or other claims that could result in material expenses, diversion of management time and attention, and damage to our reputation.
Our products are complex and may contain defects or experience failures or unsatisfactory performance due to any number of issues in design, fabrication, packaging, materials, and/or use within a system. These defects or errors could result in significant warranty, support and repair or replacement costs, cause us to lose market share and divert the attention of our engineering personnel from our product development efforts to find and correct the issue.
Table of Contents
This risk of product liability claims may also be greater due to the use of certain hazardous chemicals used in the manufacture of certain of our products. Those hazardous chemicals fall within three different categories (with several of the chemicals falling within multiple categories): irritants, harmful chemicals and chemicals dangerous for the environment. In addition, we may be subject to claims that our 3D printers have been, or may be, used to create parts that are not in compliance with legal requirements or that intellectual property posted by third parties on our Thingiverse and GrabCAD websites infringes the intellectual property rights of others.
Any claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, and damage to our reputation, and could cause us to fail to retain existing end-users or to attract new end-users. Although we maintain product liability insurance, such insurance is subject to significant deductibles and there is no guarantee that such insurance will be available or adequate to protect against all such claims, or we may elect to self-insure with respect to certain matters. Costs or payments made in connection with warranty and product liability claims and product recalls or other claims could materially affect our financial condition and results of operations.
Our AM services business, offering parts used as prototypes, benchmarks and end-use parts in general, and in the case of end-use parts, our sales to customers in the aerospace, medical and automotive industries, in particular, makes us more susceptible to product and other liability claims, which characterize operations in those industries. These activities and our accompanying exposure to claims will increase significantly as a result of our recent acquisitions of Solid Concepts and Harvest Technologies. Any such claims that are not adequately covered by insurance or for which insurance is not available may adversely affect our results of operations and financial condition.
As a result of our recent acquisitions of Solid Concepts and Harvest Technologies, and together with RedEye, our preexisting digital manufacturing service business, we expect to significantly broaden and increase our production and offering of AM parts, which are used by our customers as prototypes, benchmarks and end-use parts, as part of our branded Stratasys Direct Manufacturing, or SDM, service. In particular, we expect to provide these additive manufacturing services to customers in the aerospace, medical and automotive industries. The sale of end use parts in general, and to customers in the foregoing industries in particular, exposes us to possible claims for property damage and personal injury or death, which may result from the use of these end-use parts. We may be potentially liable, in significant amounts, if an aircraft, automotive or medical part, component, or accessory or any other aviation, automotive or medical product that we have sold, produced or repaired fails, or if an aircraft or automobile for which our subsidiaries have provided services or in which their parts are installed crashes and the cause can be linked to those parts or cannot be determined. Our SDM service carries liability insurance in amounts that we believe are adequate for its risk exposure and commensurate with industry norms. While we intend to monitor our insurance coverage as our additive manufacturing services business continues to grow, claims may arise in the future, and that insurance coverage may not be adequate or available to protect our consolidated company in all circumstances. Additionally, we might not be able to maintain adequate insurance coverage for our AM services business in the future at an acceptable cost. Any liability claim against our AM services business that is not covered by adequate insurance could adversely affect our consolidated results of operations and financial condition.
If our relationships with suppliers for our products and services, especially with single source suppliers of components of our products, were to terminate or our manufacturing arrangements were to be disrupted, our business could be interrupted.
We purchase components and sub-assemblies for our systems, raw materials that are used in our consumables, and AM systems, component parts and raw materials for our Stratasys Direct Manufacturing services business, from third-party suppliers, some of whom may compete with us. While there are several potential suppliers of most of these component parts, sub-assemblies and raw materials that we use, we currently choose to use only one or a limited number of suppliers for several of these components and materials. Furthermore, the suppliers of AM systems and materials used in our SDM parts service may refuse to sell us additional AM systems or component parts and materials for AM systems that our SDM service uses. Our reliance on a single or limited number of vendors involves a number of risks, including:
potential shortages of
some key components;
shortfalls, if traceable to particular product components, since the
supplier of the faulty component cannot readily be replaced;
discontinuation of a
product on which we rely;
potential insolvency of
these vendors; and
reduced control over delivery schedules, manufacturing capabilities, quality and costs.
Table of Contents
In addition, we require any new supplier to become qualified pursuant to our internal procedures. The qualification process involves evaluations of varying durations, which may cause production delays if we were required to qualify a new supplier unexpectedly. We generally assemble our systems and parts based on our internal forecasts and the availability of raw materials, assemblies, components and finished goods that are supplied to us by third parties, which are subject to various lead times. If certain suppliers were to decide to discontinue production of an assembly, component or raw material that we use, the unanticipated change in the availability of supplies, or unanticipated supply limitations, could cause delays in, or loss of, sales, increased production or related costs and consequently reduced margins, and damage to our reputation. If we were unable to find a suitable supplier for a particular component, material or compound, we could be required to modify our existing products or the end-parts that we offer to accommodate substitute components, material or compounds.
In particular, we rely on a sole supplier, Ricoh Printing Systems America, Inc., or Ricoh, for the printer heads for our PolyJet 3D printers. Under the terms of our agreement with Ricoh, we purchase printer heads and associated electronic components, and receive a non-transferable, non-exclusive right to assemble, use and sell these purchased products under Ricohs patent rights and trade secrets. Due to the risk of a discontinuation of the supply of Ricoh printer heads and other key components of our products, we maintain excess inventory of those printer heads and other components. However, if our forecasts exceed actual orders, we may hold large inventories of slow-moving or unusable parts or raw materials, which could result in inventory write offs or write downs and have an adverse effect on our cash flow, profitability and results of operations. See Item 4. Information on the CompanyBusiness OverviewManufacturing and SuppliersInventory and SuppliersRicoh Agreement for further discussion of this agreement.
Discontinuation of operations at our manufacturing sites could prevent us from timely filling customer orders and could lead to unforeseen costs for us.
We assemble and test the systems that we sell, and produce consumables for our systems, at single facilities in various locations that are specifically dedicated to separate categories of systems and consumables. We similarly rely on a single facility for assembly of the component parts and materials for AM systems that our SDM service uses. Because of our reliance on all of these production facilities, a disruption at any of those facilities could materially damage our ability to supply 3D printers, other systems or consumable materials to the marketplace in a timely manner. Depending on the cause of the disruption, we could also incur significant costs to remedy the disruption and resume product shipments. Such disruptions may be caused by, among other factors, earthquakes, fire, flood and other natural disasters. Accordingly, any such disruption could result in a material adverse effect on our revenue, results of operations and earnings, and could also potentially damage our reputation.
A loss of, or reduction in revenues from, a significant number of our resellers and our independent sales agents would impair our ability to sell our products and services and could reduce our revenues and adversely impact our operating results.
We rely heavily on our network of resellers and independent sales agents to sell and (in the case of resellers) to service our products for end-users in their respective geographic regions. These resellers and sales agents may not be as effective in selling our products or servicing our end-users as we are. Further, if a significant number of these resellers and sales agents were to terminate their relationship with us or otherwise fail or refuse to sell our products, we may not be able to find replacements that are as qualified or as successful in a timely manner, if at all. If these resellers and independent sales agents do not perform as anticipated or if we are unable to find qualified and successful replacements, our sales will suffer, which would have an adverse effect on our revenues and operating results. Additionally, a default by one or more resellers that have a significant receivables balance could have an adverse financial impact on our financial results.
Our business model is predicated in part on building an end-user base that will generate a recurring stream of revenues through the sale of our consumables. If that recurring stream of revenues does not develop as expected, or if our business model changes as the industry evolves, our operating results may be adversely affected.
Our business model is dependent in part on our ability to maintain and increase sales of our proprietary consumables as they generate recurring revenues. Existing and future end-users of our systems may not purchase our consumables at the same rate at which end-users currently purchase those consumables. In addition, our entry-level systems generally use a lower volume of consumables relative to our higher end systems. If our current and future end-users purchase a lower volume of our consumables, or if our entry level systems represent an increasing percentage of our future installed base mix uses less consumables than our current installed base, our recurring revenue stream relative to our total revenues would be reduced, and our operating results would be adversely affected.
Table of Contents
Global economic, political and social conditions have adversely impacted our sales, and may continue to affect us more significantly in the future.
The uncertain direction and relative strength of the global economy, difficulties in the financial services sector and credit markets, continuing geopolitical uncertainties and other macroeconomic factors all affect spending behavior of potential end-users of our products and services. The prospects for economic growth in some of the regions in which we sell our products remain uncertain, and may cause end-users to further delay or reduce technology purchases. In particular, a portion of our sales are made to customers in countries in Europe, which have been and may continue to be affected by significant economic difficulties. These and other macroeconomic factors had an adverse impact on the sales of the products and services of our constituent companies following the global financial downturn in late 2008, leading to reduced revenues from sales and longer sales cycles. While we experienced growth in revenues from sales of our systems and consumables since 2010, that growth was not sustained in 2015, when our sales decreased. We also face risks that may arise from financial difficulties experienced by our end-users, suppliers and distributors, which may be exacerbated by continued uncertainty in the global economy, including:
reduced end-user demand
for products and reduced manufacturing activity levels;
end-users may be unable to obtain credit financing to finance purchases of
suppliers may be unable
to obtain credit financing to finance purchases of sub-assemblies used to
build components of products or purchases of raw materials to produce
distributors may face financial difficulties or may become insolvent,
which could lead to our inability to obtain payment for our products; and
key suppliers of raw materials, finished products or components used in our products and consumables may face financial difficulties or may become insolvent, which could lead to disruption in the supply of systems, consumables or spare parts to our end-users.
Our existing and planned international operations currently expose us and will continue to expose us to additional market and operational risks, and failure to manage these risks may adversely affect our business and operating results.
We expect to derive a substantial percentage of our sales from international markets. We derived 41% of our sales in 2015 from countries outside of North America. Accordingly, we face significant operational risks from doing business internationally, including:
|●||fluctuations in foreign currency exchange rates;
potentially longer sales
and payment cycles;
difficulties in collecting accounts receivable;
potentially adverse tax
|●||reduced protection of intellectual property rights in
certain countries, particularly in Asia and South America;
|●||difficulties in staffing and managing foreign operations;
|●||laws and business practices favoring local competition;
|●||costs and difficulties of customizing products for foreign
|●||compliance with a wide variety of complex foreign laws,
treaties and regulations; |
|●||tariffs, trade barriers and other regulatory or contractual
limitations on our ability to sell or develop our products in certain
foreign markets; and|
being subject to the laws, regulations and the court systems of many jurisdictions.
Our failure to manage the market and operational risks associated with our international operations effectively could limit the future growth of our business and adversely affect our operating results.
Table of Contents
Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
A significant invasion, interruption, destruction or breakdown of our information technology systems and/or infrastructure by persons with authorized or unauthorized access could negatively impact our business and operations. We could also experience business interruption, information theft and/or reputational damage from cyber attacks, which may compromise our systems and lead to data leakage either internally or at our third party providers. Our systems have been, and are expected to continue to be, the target of malware and other cyber attacks. Although we have invested in measures to reduce these risks, we cannot assure you that these measures will be successful in preventing compromise and/or disruption of our information technology systems and related data.
Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
We generally enter into non-competition agreements with our employees. These agreements prohibit our employees from competing directly with us or working for our competitors or clients for a limited period after they cease working for us. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefiting from the expertise that our former employees or consultants developed while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer that have been recognized by the courts, such as the secrecy of a companys confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished. In addition in California, where many employees of our SDM parts service are located, non-competition agreements with employees are generally unenforceable after termination of employment.
As a public company with significant operations in several countries, we are subject to regulation and must comply with reporting and other requirements in a number of jurisdictions and, to the extent that regulatory authorities assert that we are not in compliance, we could be subject to sanctions which, if material, could materially and adversely affect our business.
As a public company with significant operations in Israel, the United States and many other countries, we are subject to regulation and must comply with reporting and other requirements in a number of jurisdictions. In particular, we are subject to the rules and regulations of the SEC and FINRA, which may elect from time to time to review or investigate our operations, various aspects of our financial statements, our disclosure practices and other matters. As such reviews progress, the regulating agencies may determine that we are and have been in compliance with applicable rules, or they may determine to pursue enforcement actions or other sanctions against us for alleged noncompliance. As an example, on March 3, 2016, the SEC enforcement division issued a subpoena to us requesting a number of documents in connection with an investigation relating to the valuations and other calculations used by us to assess the impairment of goodwill and/or intangible assets included in the balance sheet contained in our filings with the SEC. This matter is at a very preliminary stage, and we intend to cooperate fully with the SEC.
Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation could result in fines, criminal penalties and an adverse effect on our business.
We operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws. We are subject, however, to the risk that our affiliated entities or our and our affiliates respective officers, directors, employees and agents (including distributors of our products) may take action determined to be in violation of such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the U.K. Bribery Act of 2010, as well as trade sanctions administered by the Office of Foreign Assets Control and the U.S. Department of Commerce. Any violation by any of these persons could result in substantial fines, sanctions, civil and/or criminal penalties, or curtailment of operations in certain jurisdictions, and might adversely affect our results of operations. In addition, actual or alleged violations could damage our reputation and ability to do business.
We own a number of our manufacturing and office facilities, which may limit our ability to move those operations. If we were to move some or all of those operations, we could incur unforeseen charges.
We own buildings in Eden Prairie, Minnesota, which we use to conduct our FDM manufacturing and assembly operations, as well as our manufacturing facility in Kiryat Gat, Israel. We are also in the process of constructing our new office facility in Rehovot, Israel, which we also own. Ownership of these buildings and facilities may adversely affect our ability to move some or all of those operations to other locations that may be more favorable. If we were to move any of those operations to other locations, we may have difficulty selling or leasing the property that we vacate. This risk also applies to the facilities that we lease under non-cancellable lease agreements, where we cannot freely vacate the facilities. These limitations on our ability to move could result in an impairment charge, as occurred in 2015 in respect of some of our leased facilities, which negatively impacted our results of operations, and could, in future periods, once again have an adverse effect on our results of operations.
If we do not generate sufficient future taxable income, we may be required to recognize additional deferred tax asset valuation allowances, which would have a further adverse effect on our results of operations.
The value of our deferred tax assets depends, in part, on our ability to use them to offset taxable income in future years. If we are unable to generate sufficient future taxable income in the U.S. and certain other jurisdictions, or if there are significant changes in tax laws or the tax rates or the period within which the underlying temporary differences become taxable or deductible, we could be required to record valuation allowances against our deferred tax assets. Over the course of 2015, we recorded a valuation allowance of $152.1 million against our deferred tax assets, as it is more likely than not that those deferred tax assets will not be realized in future periods. We will continue to monitor whether the realization of our remaining deferred tax assets is more likely than not. Such valuation allowance resulted, and any required future valuation allowance would result, in an increase in our effective tax rate, thereby having a negative impact on our operating results. If, on the other hand, our estimated future taxable income is increased, the valuation allowances for our deferred tax assets may be reduced, thereby impacting our operating results in a positive manner. These adverse and favorable changes may therefore contribute to the volatility of our consolidated financial results.
Table of Contents
Default in payment by one or more resellers or customers from which we have large account receivable balances could adversely impact our results of operations and financial condition.
From time to time, our accounts receivable balances have been concentrated with certain resellers or customers. Default by one or more of these resellers or customers could result in a significant charge against our current reported earnings. We have reviewed our policies that govern credit and collections, and will continue to monitor them in light of current payment status and economic conditions. In addition, we try to reduce the credit exposures of our accounts receivable by credit limits and credit insurance for many of our customers. However, there can be no assurance that our efforts to identify potential credit risks will be successful. Our inability to timely identify resellers and customers that are credit risks could result in defaults at a time when such resellers or customers have high accounts receivable balances with us. Any such default would result in a significant charge against our earnings and adversely affect our results of operations and financial condition.
We are subject to extensive environmental, health and safety laws and regulations that could have a material adverse effect on our business, financial condition and results of operations.
Our operations use chemicals and produce waste materials. We are subject to extensive environmental, health and safety laws, regulations and permitting requirements in multiple jurisdictions governing, among other things, the generation, use, storage, registration, handling and disposal of chemicals and waste materials, the presence of specified substances in electrical products, the emission and discharge of hazardous materials into the ground, air or water, the cleanup of contaminated sites, including any contamination that results from spills due to our failure to properly dispose of chemicals and other waste materials and the health and safety of our employees. Under these laws, regulations and requirements, we could also be subject to liability for improper disposal of chemicals and waste materials, including those resulting from the use of our systems and accompanying materials by end-users. These or future laws and regulations could potentially require the expenditure of significant amounts for compliance and/or remediation. If our operations fail to comply with such laws or regulations, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to hazardous substances that we generate, use, store, handle, transport, manufacture or dispose of), property damage or contribution claims. Some environmental laws allow for strict, joint and several liabilities for remediation costs, regardless of fault. We may be identified as a potentially responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.
We are subject to environmental laws due to the import and export of our products, which could subject us to compliance costs and/or potential liability in the event of non-compliance.
The export of our products internationally from our production facilities subjects us to environmental laws and regulations concerning the import and export of chemicals and hazardous substances such as the United States Toxic Substances Control Act, or TSCA, and the Registration, Evaluation, Authorization and Restriction of Chemical Substances, or REACH. These laws and regulations require the testing and registration of some chemicals that we ship along with, or that form a part of, our systems and other products. If we fail to comply with these or similar laws and regulations, we may be required to make significant expenditures to reformulate the chemicals that we use in our products and materials or incur costs to register such chemicals to gain and/or regain compliance. Additionally, we could be subject to significant fines or other civil and criminal penalties should we not achieve such compliance.
We are currently subject to a number of lawsuits. These and any future lawsuits to which we become subject may have a material adverse impact on our capitalization, business and results of operations.
We have been sued by five current or former minority shareholders and former directors of our company who demand that we amend the capitalization table of our company such that certain share issuances prior to the Stratasys-Objet merger to certain of our shareholders named as defendants would be cancelled, with a consequent issuance of additional shares to the plaintiffs to account for the subsequent dilution to which they have been subject. The lawsuits, which were brought in an Israeli district court in March 2013, also name as defendants certain of our directors, officers and shareholders who previously held those positions prior to the Stratasys-Objet merger. While the court has dismissed the lawsuit of one of the former directors due to lack of cause, the other lawsuits are in the midst of pre-trial hearings.
Table of Contents
We are also subject to four additional lawsuits, styled as class actions of our shareholders, which were initiated in the United States District Courts for the District of Minnesota, the Southern District of New York, and the Eastern District of New York on February 5, 9, and 20, 2015, and March 25, 2015, and which name the Company and certain of our officers as defendants. The lawsuits allege violations of the Exchange Act in connection with allegedly false and misleading statements concerning our business and prospects. The plaintiffs seek damages and an award of reasonable costs and expenses, including attorneys fees. On April 15, 2015, the cases were consolidated for all purposes, and on April 24, 2015, the court entered an order appointing lead plaintiffs and approving their selection of lead counsel for the putative class. On July 1, 2015, lead plaintiffs filed their consolidated complaint. On August 31, 2015, the defendants moved to dismiss the consolidated complaint for failure to state a claim. The court heard the motion on December 11, 2015, but has not rendered a decision. We intend to mount vigorous defenses to these lawsuits.
We can provide no assurance as to the outcome of these or any future matters or actions, and any such matters or actions may result in judgments against us for significant damages and/or the issuance of options to acquire shares of our capital stock, the exercise of which would result in dilution to our shareholders. Resolution of these matters can be prolonged and costly, and the ultimate results or judgments are uncertain due to the inherent uncertainty in litigation and other proceedings. Moreover, our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements. Regardless of the outcome, litigation has resulted in the past, and may result in the future, in significant legal expenses and require significant attention and resources of management. As a result, current and any future litigation could result in losses, damages and expenses that have a material adverse effect on our business.
We rely on our management information systems for inventory management, distribution, and other key functions. If our information systems fail to adequately perform these functions, or if we experience an interruption in their operation, our business and operating results could be adversely affected.
The efficient operation of our business is dependent on our management information systems. We rely on our management information systems: to, among other things, effectively manage our accounting and financial functions, including maintaining our internal controls; to manage our manufacturing and supply chain processes; and to maintain our research and development data. The failure of our management information systems to perform properly could disrupt our business and product development, which may result in decreased sales, increased overhead costs, excess or obsolete inventory, and product shortages, causing our business and operating results to suffer. Although we take steps to secure our management information systems, including our computer systems, intranet and internet sites, email and other telecommunications and data networks, the security measures we have implemented may not be effective and our systems may be vulnerable to theft, loss, damage and interruption from a number of potential sources and events, including unauthorized access or security breaches, natural or man-made disasters, cyber-attacks, computer viruses, power loss, or other disruptive events. Our reputation, brand, and financial condition could be adversely affected if, as a result of a significant cyber event or otherwise, our operations are disrupted or shut down; our confidential, proprietary information is stolen or disclosed; we incur costs or are required to pay fines in connection with stolen customer, employee, or other confidential information; we must dedicate significant resources to system repairs or increase cyber security protection; or we otherwise incur significant litigation or other costs.
Compliance with disclosure rules regarding conflict minerals may require us to incur expenses or modify our products or operations and may also adversely affect the demand for some of our products and our operating results.
As required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, in August 2012 the SEC promulgated final rules regarding disclosure of the use of certain minerals (tin, tantalum, tungsten, and gold), and certain of their derivatives, known as conflict minerals, which are mined from the Democratic Republic of the Congo and adjoining countries, as well as procedures regarding a manufacturers efforts to prevent the sourcing of such minerals and metals produced from those minerals. As required by these new rules, in 2013, we commenced due diligence efforts to determine our use of conflict minerals, and we made our initial two annual conflict mineral filings with the SEC (for calendar years 2013 and 2014) on June 2, 2014 and June 1, 2015, respectively. The rules require us to make subsequent disclosures no later than May 31 of each following year. A court ruling has overturned part of these SEC rules, by characterizing the required identification of products as DRC conflict free, having not been found to be DRC conflict free or DRC conflict undeterminable as compelled speech that violates the First Amendment in the United States. Nevertheless, the SEC has appealed the courts ruling, and the conflict minerals disclosures will remain in place for the report that we will need to submit in 2016 (in respect of the 2015 year). We expect that we will continue to incur additional costs and expenses, which may be significant, in order to comply with these rules. Since our supply chain is complex, ultimately we may not be able to sufficiently verify the origins for any conflict minerals and metals used in our products through the due diligence procedures that we implement, which may adversely affect our reputation with our customers, shareholders, and other stakeholders. In such event, we may also face difficulties in satisfying customers who require that all of our products are certified as conflict mineral free. If we are not able to meet such requirements, customers may choose not to purchase our products, which could adversely affect our sales and the value of portions of our inventory. Furthermore, there may be only a limited number of suppliers offering conflict free minerals and, as a result, we cannot be sure that we will be able to obtain metals, if necessary, from such suppliers in sufficient quantities or at competitive prices. Any one or a combination of these various factors could harm our business, reduce market demand for our products, and adversely affect our profit margins, net sales, and overall financial results.
Table of Contents
Risks related to our intellectual property
As our patents expire, additional competitors using our technology could enter the market, which could offer competitive printers and consumables, require us to reduce our prices for our products and result in lost sales. Competitors introduction of lower quality products using our technology could also negatively affect the reputation and image of our products in the marketplace.
Some of our patents have expired and others will expire in coming years. Upon expiration of those patents, our competitors have introduced, and are likely to continue to introduce, products using the technology previously protected by the expired patents, which products may have lower prices than those of our products. To compete, we may need to reduce our prices for those products, which would adversely affect our revenues, margins and profitability. Additionally, the expiration of our patents could reduce barriers to entry into AM systems, which could result in the reduction of our sales and earnings potential. If competitors using technology previously protected by our expired patents were to introduce products of inferior quality, our potential customers may view our products negatively, which would have an adverse effect on our image and reputation and on our ability to compete with systems using other AM technologies.
If we are unable to obtain patent protection for our products or otherwise protect our intellectual property rights, our business could suffer.
We rely on a combination of patent and trademark laws in the United States and other countries, trade secret protection, confidentiality agreements and other contractual arrangements with our employees, end-users and others to maintain our competitive position. In particular, our success depends, in part, on our ability, and the ability of our licensors, to obtain patent protection for our and their products, technologies and inventions, maintain the confidentiality of our and their trade secrets and know-how, operate without infringing upon the proprietary rights of others and prevent others from infringing upon our and their proprietary rights.
Despite our efforts to protect our proprietary rights, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies, inventions, processes or improvements. We cannot assure you that any of our existing or future patents or other intellectual property rights will not be challenged, invalidated or circumvented, or will otherwise provide us with meaningful protection. Our pending patent applications may not be granted, and we may not be able to obtain foreign patents or pending applications corresponding to our U.S. patents. The laws of certain countries, such as China, may not provide the same level of patent protection and intellectual property right enforcement as in the United States, so even if we enforce our intellectual property rights or obtain additional patents in China or elsewhere outside of the United States, effective enforcement of such rights may not be effective. If our patents and other intellectual property do not adequately protect our technology, our competitors may be able to offer additive manufacturing systems, consumables or other products similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents, and we may not be able to detect the unauthorized use of our proprietary technology or take appropriate steps to prevent such use.
If we attempt enforcement of our intellectual property rights, we may be (as we have been in the past) subject or party to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation, regardless of merit, can be costly and disruptive to our business operations by diverting attention and energies of management and key technical personnel, and by increasing our costs of doing business. Any of the foregoing could adversely affect our operating results.
We may be subject to claims that we are infringing, misappropriating or otherwise violating the intellectual property rights of others.
Our products and technology, including the technology that we license from others, may infringe, misappropriate or otherwise violate the intellectual property rights of third parties. Patent applications in the United States and most other countries are confidential for a period of time until they are published, and the publication of discoveries in scientific or patent literature typically lags actual discoveries by several months or more. As a result, the nature of claims contained in unpublished patent filings around the world is unknown to us, and we cannot be certain that we were the first to conceive inventions covered by our patents or patent applications or that we were the first to file patent applications covering such inventions. Furthermore, it is not possible to know in which countries patent holders may choose to extend their filings under the Patent Cooperation Treaty or other mechanisms. In addition, we may be subject to intellectual property infringement claims from individuals, vendors and other companies, including those that have acquired patents in the fields of 3D printing or consumable production for the sole purpose of asserting claims against us. In addition to patent infringement claims, we may be subject to other intellectual property claims, such as claims that we are infringing trademarks or misappropriating trade secrets. We may also be subject to claims relating to the content on our websites, including third-party content posted on our Thingiverse.com or GrabCAD.com websites. Any intellectual property claims, 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. Resolution of such claims may, among other things, require us to redesign infringing technology, enter into costly settlement or license agreements on terms that are unfavorable to us, or require us to indemnify our distributors and end-users. Any infringement by us or our licensors of the intellectual property rights of third parties may have a material adverse effect on our business, financial condition and results of operations.
Table of Contents
If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us, in particular in developing consumables that could be used with our printing systems in place of our proprietary consumables.
We have devoted substantial resources to the development of our technology, trade secrets, know-how and other unregistered proprietary rights. While we enter into confidentiality and invention assignment agreements intended to protect such rights, such agreements can be difficult and costly to enforce or may not provide adequate remedies if violated, and we may not have entered into such agreements with all relevant parties. Such agreements may be breached and confidential information may be willfully or unintentionally disclosed, or our competitors or other parties may learn of the information in some other way. The disclosure to, or independent development by, a competitor of any of our trade secrets, know-how or other technology not protected by a patent or other intellectual property system could materially reduce or eliminate any competitive advantage that we may have over such competitor.
This concern could manifest itself in particular with respect to our proprietary consumables that are used with our systems. Portions of our proprietary consumables may not be afforded patent protection. Chemical companies or other producers of raw materials used in our consumables may be able to develop consumables that are compatible to a large extent with our systems, whether independently or in contravention of our trade secret rights and related proprietary and contractual rights. If such consumables are made available to owners of our systems, and are purchased in place of our proprietary consumables, our revenues and profitability would be reduced and we could be forced to reduce prices for our proprietary consumables.
Risks related to operations in Israel
Our Israeli headquarters and manufacturing and other significant operations may be adversely affected by political, economic and military instability in Israel.
One of our dual corporate headquarters, as well as all of our PolyJet-related system manufacturing and research and development facilities, one of our two PolyJet consumables manufacturing facilities, one of our FDM manufacturing facilities, and some of our suppliers, are located in central and southern Israel. In addition, many of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. During the winter of 2008-2009, in November 2012 and once again in the summer of 2014, Israel has been engaged in armed conflict with Hamas, a militia group and political party that controls the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas where some of our manufacturing facilities are located, and negatively affected business conditions in Israel. Any armed conflicts, terrorist activities or political instability in the region, including those related to the recent unrest in Syria, could adversely affect business conditions and could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, parties with whom we have agreements involving performance in Israel may claim that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements due to the political or security situation in Israel.
Furthermore, many of our male employees in Israel, including members of our senior management, are obligated to perform one month, and in some cases longer periods, of annual military reserve duty until they reach the age of 45 (or older, for citizens who hold certain positions in the Israeli armed forces reserves), and, in the event of a military conflict (such as the last conflict with Hamas), may be called to active duty. In response to increases in terrorist activity from time to time and as a result of the last conflict with Hamas, there have been periods of significant call-ups of military reservists, and some of our Israeli employees have been called up in connection with armed conflicts. It is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of Israeli employees or of one or more of our key Israeli employees. Such disruption could materially adversely affect our business and operations.
Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by our Israeli operations could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions generally and could harm our results of operations.
Table of Contents
Your rights and responsibilities as a shareholder will be governed by Israeli law, which may differ in some respects from the rights and responsibilities of shareholders of U.S. companies.
We are organized under Israeli law. The rights and responsibilities of the holders of our ordinary shares are governed by our amended and restated articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on matters such as amendments to a companys articles of association, increases in a companys authorized share capital, mergers and acquisitions and interested party transactions requiring shareholder approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the implications of these provisions that govern shareholders actions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a companys issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the companys outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions.
Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.
These and other similar provisions could delay, prevent or impede an acquisition of our company or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.
Exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel, the Euro, the Yen and other non-U.S. currencies may negatively affect the earnings of our operations.
We report our financial results and most of our revenues are recorded in U.S. dollars. However, substantially all of the manufacturing, research and development expenses of our Israeli operations, as well as a portion of the cost of revenues, selling and marketing, and general and administrative expenses of our Israeli operations, are incurred in New Israeli Shekels. As a result, we are exposed to exchange rate risks that may adversely affect our financial results. If the New Israeli Shekel appreciates against the U.S. dollar or if the value of the New Israeli Shekel declines against the U.S. dollar at a time when the rate of inflation in the cost of Israeli goods and services exceeds the rate of decline in the relative value of the New Israeli Shekel, then the U.S. dollar cost of our operations in Israel would increase and our results of operations would be adversely affected Our Israeli operations also could be adversely affected if we are unable to effectively hedge against currency fluctuations in the future. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the New Israeli Shekel against the U.S. dollar. The Israeli annual rate of inflation (deflation) amounted to (1.0%), (0.2%) and 1.8% for the years ended December 31, 2015, 2014 and 2013, respectively. The annual appreciation (devaluation) of the New Israeli Shekel in relation to the U.S. dollar amounted to (0.3%), (12. 0%) and 6.5% for the years ended December 31, 2015, 2014 and 2013, respectively.
Table of Contents
We also have substantial revenues and expenses that are denominated in non-US currencies other than the New Israeli Shekel, particularly the Euro. Therefore, our operating results and cash flows are also subject to fluctuations due to changes in the relative values of the U.S. dollar and those foreign currencies. These fluctuations could negatively affect our operating results and could cause our revenues and net income or loss to vary from quarter to quarter. Furthermore, to the extent that our revenues increase in regions such as Asia Pacific, where our sales are denominated in U.S. dollars, a strengthening of the dollar against other currencies could make our products less competitive in those foreign markets and collection of receivables more difficult.
From time to time we engage in currency hedging activities. These measures, however, may not adequately protect us from material adverse effects due to the impact of inflation in Israel or from fluctuations in the relative values of the U.S. dollar and other foreign currencies in which we transact business, and may result in a financial loss. For further information, please see Item 11. Quantitative And Qualitative Disclosures About Market Risk in this annual report.
Calculating our income tax rate is complex and subject to uncertainty. We currently receive Israeli government tax benefits in respect of our Israeli operations. If we do not meet several conditions for receipt of those benefits, or if the Israeli government otherwise decides to eliminate those benefits, they may be terminated or reduced, which would impact our income tax rate and increase our costs.
The computation of income taxes is complex because it is based on the laws of numerous taxing jurisdictions and requires significant judgment on the application of complicated rules governing accounting for tax provisions under GAAP. Income taxes for interim quarters are based on a forecast of our effective tax rate for the year, which includes forward-looking financial projections. Such financial projections are based on numerous assumptions, including the expectations of profit and loss by jurisdiction. It is difficult to accurately forecast various items that make up the projections, and such items may be treated as discrete accounting. Examples of items that could cause variability in our income tax rate include our mix of income by jurisdiction, tax deductions for share option expense, the application of transfer pricing rules, and tax audits. Future events, such as changes in our business and the tax law in the jurisdictions where we do business, could also affect our rate.
One important assumption that goes into calculation of our tax rate is the tax benefit that we receive in respect of some of our operations in Israel, referred to as Approved Enterprise and Beneficiary Enterprise, under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law. Based on an evaluation of the relevant factors under the Investment Law, including the level of foreign (that is, non-Israeli) investment in our company, we have estimated that our effective tax rate to be paid with respect to all Israeli operations under these benefit programs is 7% to 12%, based on the current balance of activity between our Rehovot, Israel and Kiryat Gat, Israel facilities and the available level of benefits under the law. If we do not meet the requirements for maintaining these benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax at the standard rate, which is currently set at 25% (in 2015 the corporate tax rate was 26.5%). In addition to being subject to the standard corporate tax rate, we would be required to refund any tax benefits that we have already received as adjusted by the Israeli consumer price index, plus interest or other monetary penalties. Even if we continue to meet the relevant requirements, the tax benefits that our current Approved Enterprise and Beneficiary Enterprise receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which may cause our effective tax rate to be materially different than our estimates and could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, via acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs, and that could also adversely affect our effective tax rate and our results of operations.
The Israeli government may furthermore independently determine to reduce, phase out or eliminate entirely the benefit programs under the Investment Law, regardless of whether we then qualify for benefits under those programs at the time, which would also adversely affect our effective tax rate and our results of operations.
Certain Israeli government grants that we received for certain of our research and development activities in Israel may restrict our ability to transfer manufacturing operations or technology outside of Israel, and failure to satisfy the conditions of those grants with respect to such transfers may require us to obtain a pre-approval from the relevant authorities and pay penalties.
Our Israeli-based research and development efforts were and are financed in part, through grants that we received from Israels Office of the Chief Scientist of the Ministry of Economy, or OCS. Through 2006, Objet received approximately $1.5 million, which it repaid in its entirety (including interest thereon) by the end of 2007. More recently, we have received additional funding of approximately $1.4 million, in the aggregate (as of December 31, 2015), under several R&D programs to support certain research and development projects in Israel. Such funding is not subject to royalty obligations on our part.
Table of Contents
We must comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development, 1984, and related regulations, or the Research Law, with respect to those current and past grants. When a company develops knowhow, technology or products using OCS grants, the terms of these grants and the Research Law restrict the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside of Israel, without the prior approval of the OCS. Therefore, if aspects of our technologies are deemed to have been developed with OCS funding, the discretionary approval of an OCS committee would be required for any transfer to third parties outside of Israel of know-how or manufacturing or manufacturing rights related to those aspects of such technologies. We may not receive those approvals. Furthermore, the OCS may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel.
The transfer of OCS-supported technology or know-how outside of Israel may involve the payment of significant amounts, depending upon the value of the transferred technology or know-how, the amount of OCS support, the time of completion of the OCS-supported research project and other factors. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the OCS.
It may be difficult to enforce a U.S. judgment against us and our officers and directors in Israel or the United States, or to serve process on our officers and directors.
We are organized in Israel. Most of our officers and half of our directors (as of December 31, 2015) reside outside of the United States, and a majority of our assets are located outside of the United States. Therefore, a judgment obtained against us or any of our executive officers and directors in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel.
Risks related to an investment in our ordinary shares
If certain of our shareholders sell a substantial number of our ordinary shares, the market price of our ordinary shares could decline.
Former MakerBot stockholders and certain MakerBot employees, former Solid Concepts stockholders and option holders, and certain Solid Concepts employees, and certain Harvest Technologies employees and former stockholders, may resell the ordinary shares that we issued or may issue to them pursuant to the MakerBot transaction, Solid Concepts acquisition or Harvest Technologies acquisition, as applicable, under our Form F-3 registration statement that we filed, which covers the resale of the foregoing groups of shares. Under the terms of the MakerBot and Solid Concepts merger agreements, and the Harvest Technologies stock purchase agreement, we issued at the closing of the transactions on August 15, 2013, July 14, 2014 and August 1, 2014, respectively, 3,921,660 ordinary shares, 978,601 ordinary shares and 175,456 ordinary shares (after withholding certain shares for taxes, where applicable), which may be sold or may have already been sold, in whole or part, to the public following the closings. Those shares together constituted approximately 10% of our issued and outstanding shares, in the aggregate, as of the closing date of the Harvest Technologies acquisition (following the issuance of the shares in the Harvest Technologies acquisition). During 2015, we have issued since the respective closings, an additional 635,939, 236,400 and 26,614 ordinary shares to the selling shareholders and/or employees pursuant to the MakerBot transaction, Solid Concepts acquisition or Harvest Technologies acquisition, respectively, which may be subsequently resold without restriction (assuming that the related registration statement that we have filed remains in effect). We may also issue up to an additional, approximately 741,000 ordinary shares and approximately 69,000 (based on our share price as of December 31, 2015) ordinary shares to the selling shareholders and/or employees in respect of periods through mid-2017 and early 2018 pursuant to the terms of the Solid Concepts merger agreement and Harvest Technologies stock purchase agreement, respectively, which may be subsequently resold without restriction (assuming that the related registration statement that we have filed remains in effect). Sales of a significant number of the foregoing shares in a short period of time could have the effect of depressing the market price of our ordinary shares.
The market price of our ordinary shares may be subject to fluctuation, regardless of our operating results and financial condition. As a result, our shareholders could incur substantial losses.
The market price of our ordinary shares since the Stratasys-Objet merger has been subject to substantial fluctuation. During 2015 and the early part of 2016 (through February 29, 2016), our ordinary shares have traded with closing prices that have ranged from $15.24 to $81.05. It is likely that the price of our ordinary shares will continue to be subject to substantial fluctuation regardless of our operating results or financial condition due to a number of factors, including:
Table of Contents
|●||whether we achieve the perceived benefits of
the mergers or acquisitions that we consummate as rapidly or to the extent
anticipated by financial or industry analysts;|
|●||whether the effects on our business and
prospects of the mergers or acquisitions that we consummate are consistent
with the expectations of financial or industry analysts;|
|●||variations in our and our competitors results
of operations and financial condition;|
|●||market acceptance of our
|●||the mix of products that we sell, and related
services that we provide, during any period;|
|●||changes in earnings estimates or
recommendations by securities analysts;|
|●||development of new competitive systems and
services by others;|
|●||our announcements of technological innovations
or new products;|
|●||delays between our expenditures to develop and
market new or enhanced systems and consumables and the generation of sales
from those products;|
|●||developments concerning intellectual property
|●||changes in the amount that we spend to develop,
acquire or license new products, technologies or
|●||changes in our expenditures to promote our
products and services; |
|●||changes in the cost of satisfying our warranty
obligations and servicing our installed base of systems;|
|●||success or failure of research and development
projects of the combined company or its competitors;|
|●||the general tendency towards volatility in the
market prices of shares of technology companies; and|
|●||general market conditions and other factors, including factors unrelated to our operating performance.|
These factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses being incurred by our shareholders.
Market prices for securities of technology companies historically have been very volatile. The market for these securities has from time to time experienced significant price and volume fluctuations for reasons unrelated to the operating performance of any one company. In the past, following periods of market volatility, public company shareholders have often instituted securities class action litigation. Such securities litigation could result in substantial costs and divert the resources and attention of our management from our business.
Raising additional capital by issuing securities may cause dilution to our shareholders, and may furthermore be difficult in the current market environment.
We may need or desire to raise substantial capital in the future. Our future capital requirements will depend on many factors, including, among others:
|●||the extent to which we acquire or invest in
businesses, products or technologies and other strategic
|●||our degree of success in capturing a larger
portion of additive manufacturing demand;|
|●||the costs of establishing or acquiring sales,
marketing and distribution capabilities for our products;|
|●||the costs of preparing, filing and prosecuting
patent applications, maintaining and enforcing our issued patents and
defending intellectual property-related claims; and|
|●||the costs of financing unanticipated working capital requirements and responding to competitive pressures.|
Table of Contents
If we raise funds by issuing equity or convertible debt securities, it will reduce the percentage ownership of our then-existing shareholders, and the holders of such new securities may have rights, preferences or privileges senior to those possessed by our then-existing shareholders.
The current market price for our ordinary shares, which has declined significantly since its all-time high in periods following the Stratasys-Objet merger, also adversely impacts our ability to raise funds in the capital markets.
We do not anticipate paying any cash dividends in the foreseeable future. Therefore, if our share price does not appreciate, our shareholders may not recognize a return, and could potentially suffer a loss, on their investment in our ordinary shares.
We intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be investors sole source of a return on their investment for the foreseeable future.
Even if we decide to pay dividends on our ordinary shares, we may be restricted from doing so or payment of such dividends may have adverse consequences for our company.
Under the Companies Law, dividends may only be paid out of our profits and other surplus funds (as defined in the Companies Law) as of the end of the most recent year or as accrued over a period of the most recent two years, whichever amount is greater, provided that there is no reasonable concern that payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. In the event that we do not meet the profit and surplus funds criteria, we can seek the approval of an Israeli court in order to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable concern that the payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Due to the acquisition method of accounting utilized for the Stratasys-Objet merger and the MakerBot transaction under GAAP, pursuant to which we were deemed to have acquired Objets assets, we have incurred and will continue to incur significant annual amounts of depreciation and amortization expense in respect of those assets (see note 2 to our consolidated financial statements appearing in this annual report for more information on the method of accounting for the MakerBot transaction). We are also subject to the risk of impairment charges from time to time to our acquired assets, as occurred in 2015, when we incurred over $1.2 billion in impairment charges. These significant annual expenses under GAAP have reduced, and may continue to reduce or eliminate, our profits and surplus funds as determined under the Companies Law, and, hence, may restrict our ability to pay dividends (absent court approval).
In general, the payment of dividends may also be subject to Israeli withholding taxes. In addition, because we receive certain benefits under the Israeli law relating to Approved Enterprise and Beneficiary Enterprise, our payment of dividends (out of tax-exempt income) may subject us to certain Israeli taxes to which we would not otherwise be subject. See Risks related to our operations in IsraelThe government tax benefits that we currently receive require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs.
We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act and are permitted to file less information with the SEC than a domestic U.S. reporting company, which will reduce the level and amount of disclosure that you receive.
As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act; and are not required to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our ordinary shares. Accordingly, you receive less information about our company and trading in our shares by our affiliates than you would receive about a domestic U.S. company, and are afforded less protection under the U.S. federal securities laws than you would be afforded in holding securities of a domestic U.S. company.
As a foreign private issuer, we are also permitted, and have begun, to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. We have informed NASDAQ that we follow home country practice in Israel with regard to, among other things, composition of our board of directors (whereby a majority of the members of our board of directors need not be independent directors, as is generally required for domestic U.S. issuers), director nomination procedure and approval of compensation of officers. In addition, we have opted to follow home country law instead of the Listing Rules of the NASDAQ Stock Market that require that a listed company obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on The NASDAQ Global Select Market may provide our shareholders with less protection than they would have as shareholders of a domestic U.S. company.
Table of Contents
Our status as a foreign private issuer is subject to an annual review and test, and will be tested again as of June 30, 2016 (the last business day of our second fiscal quarter of 2016). If we lose our status as a foreign private issuer, we will no longer be exempt from such rules. Among other things, beginning on January 1, 2017, we would be required to file periodic reports and financial statements on a periodic basis (including both an annual report in respect of 2016 and quarterly reports in respect of each of the quarters of 2017) as if we were a company incorporated in the U.S., which, among other things, could result in increased compliance and reporting costs to us.
If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as they apply to a foreign private issuer, or if our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned and our share price may suffer.
We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404, which requires a company that is subject to the reporting requirements of the U.S. securities laws to conduct a comprehensive evaluation of its and its subsidiaries internal controls over financial reporting. To comply with this statute, we are required to document and test our internal control procedures, and our management is required to assess and issue a report concerning our internal controls over financial reporting, in each case on an annual basis. In addition, our independent registered public accounting firm is required to issue an opinion on the effectiveness on our internal control over financial reporting pursuant to Section 404.
We have prepared for compliance with Section 404 by strengthening, assessing and testing our system of internal controls to provide the basis for our managements report. The continuous process of strengthening our internal controls and complying with Section 404 is complicated and time-consuming. If our business continues to grow internationally, our internal controls will become more complex and will require significantly more resources and attention to ensure that they remain effective overall. Over the course of testing our internal controls, our management may identify material weaknesses, which may not be remedied in a timely manner on an ongoing basis. If our management cannot favorably assess the effectiveness of our internal controls over financial reporting, or if our independent registered public accounting firm identifies material weaknesses in our internal controls, investor confidence in our financial results may weaken, and our share price may suffer.
If we are classified as a passive foreign investment company, or PFIC, our U.S. shareholders may suffer adverse tax consequences.
Generally, if for any taxable year, after applying certain look-through rules, 75% or more of our gross income is passive income, or at least 50% of the value of our assets are held for the production of, or produce, passive income, we may be characterized as a PFIC for U.S. federal income tax purposes. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. If we are a PFIC, gain realized by a U.S. shareholder on the sale of our ordinary shares may be taxed as ordinary income (rather than as capital gain income), and an interest charge added to the tax. Rules similar to those applicable to the taxation of gains realized on the disposition of our stock would apply to distributions exceeding certain thresholds.
Although we do not believe that we were a PFIC in 2015, we cannot assure you that the IRS will agree with that conclusion or that we will not become a PFIC in 2016 or in a subsequent year. The tests for determining PFIC status are applied annually, and it is difficult to make accurate predictions of our future income and the future value of our assets. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see Item 10.E, Additional InformationTaxationU.S. Federal Income Tax ConsiderationsTax Consequences if We Are a Passive Foreign Investment Company.
ITEM 4. INFORMATION ON THE COMPANY.
A. History and Development of the Company
Our legal and commercial name is Stratasys Ltd., and we are the product of the 2012 merger of two leading additive manufacturing companies, Stratasys, Inc. and Objet Ltd. Stratasys, Inc. was incorporated in Delaware in 1989, and Objet Ltd. was incorporated in Israel in 1998, under the name Objet Geometries Ltd., which was changed in 2011 to Objet Ltd. On December 1, 2012, the two companies completed the Stratasys-Objet merger, pursuant to which Stratasys, Inc. became an indirect, wholly-owned subsidiary of Objet Ltd., and Objet Ltd. changed its name to Stratasys Ltd. Also, as part of that transaction, the ordinary shares of Stratasys Ltd. were listed on the NASDAQ Global Select Market under the trading symbol SSYS, in place of the listing of the common stock of Stratasys, Inc., which had also traded under that symbol. On August 15, 2013 we acquired Cooperation Technology Corporation, or MakerBot, which was the direct parent company of MakerBot Industries, LLC, a leader in desktop 3D printing, and which owned and operated Thingiverse.com, a website dedicated to the sharing of user-created digital design files. The business of MakerBot (including Thingiverse.com) is now operated by a subsidiary of our company. In July 2014 and August 2014, we completed the acquisitions of Solid Concepts and Harvest Technologies, respectively, two leading providers of additive manufacturing services. Following those last two acquisitions, in 2015, we introduced our branded Stratasys Direct Manufacturing, or SDM, service, which significantly broadened and increased our production and offering of AM parts, which are used by our customers as prototypes, benchmarks and end-use parts.
Table of Contents
We have dual headquarters. Our registered office and one of our two principal places of business is located at 2 Holtzman Street, Science Park, P.O. Box 2496, Rehovot 76124, Israel, and our telephone number at that office is (+972)-74-745-4314. Our other principal place of business is located at 7665 Commerce Way, Eden Prairie, Minnesota, and our telephone number there is (952) 937-3000. Our agent in the United States is S. Scott Crump, our Chairman of the Executive Committee, whose address is c/o Stratasys Inc. at the address of our Eden Prairie, Minnesota headquarters. Our World Wide Web address is www.stratasys.com. The information contained on that web site (or on our other web sites, including www.objet.com) is not a part of this annual report. As an Israeli company, we operate under the provisions of Israels Companies Law, 5759-1999.
In 2015, 2014 and 2013, our capital expenditures amounted to $87.0 million, $62.3 million and $39.7 million, respectively, of which $84.3 million, $60.5 million and $33.3 million, respectively, which was principally related to the purchase of property, plant and equipment. During 2015, our principal property and equipment purchase was our new property in Rehovot, Israel, which we own, and where we are currently constructing a new facility. This new facility, towards which we paid $39.1 million during 2015, will house our new Israeli headquarters, research and development facilities and certain manufacturing activities. Our remaining capital expenditures in 2015 related primarily to manufacturing and engineering development equipment, leasehold improvements and computer systems and software applications.
Other purchases of property and equipment that we have made over 2014 and 2013 have been mainly for facilities expansion, research and development, manufacturing equipment and information technology, primarily for our facilities in the United States, Israel and Germany. These expenditures were financed internally from our working capital.
B. Business overview
We are a leading global provider of 3D printing and additive manufacturing, or AM, solutions for the creation of parts used in the processes of designing and manufacturing products and for the direct manufacture of end parts. Our solutions include products ranging from entry-level desktop 3D printers to systems for rapid prototyping, or RP, and large production systems for direct digital manufacturing, or DDM. We also develop, manufacture and sell materials for use with our systems and provide related services offerings. We believe that the range of 3D printing consumable materials that we offer, consisting of 14 Fused Deposition Modeling, or FDM, cartridge-based materials, 25 PolyJet cartridge-based materials, five Smooth Curvature Printing, or SCP, inkjet-based materials and 158 non-color digital materials, and over 1,500 color variations, as well as our four SolidScape non-toxic thermoplastic modeling materials, is the widest in the industry. Our services offerings include Stratasys Direct Manufacturing printed parts service as well as our professional services.
3D printing, which is also referred to as additive manufacturing, is transforming prototype development manufacturing processes and is displacing (or, in certain cases, complementing) certain segments of traditional, or subtractive, manufacturing methodologies such as metal extrusion, computer-controlled machining and manual modeling techniques. With respect to product design and prototype development, 3D printing significantly improves the design process, reduces the time required for product development and facilitates creativity, while keeping the most or all of the design process in-house. 3D printing also enables the direct manufacture of parts that are subsequently incorporated into a users end product. In addition, manufacturers are increasingly using 3D printing systems to produce manufacturing tools and fixtures that aid in their production and assembly processes. While 3D printing has historically been focused on design and manufacturing applications, 3D printing is beginning to show signs of broader adoption through simplification, with the growth of entry-level desktop 3D printers.
Our products and services are used in different applications by customers in a broad array of industries, including aerospace, automotive, consumer electronics, consumer goods, medical processes and medical devices, education, dental, jewelry and more. Our customers range from individuals and smaller businesses to large, global enterprises, and we include a number of Fortune 100 companies among our customers.
Table of Contents
We offer a broad range of systems, consumables and services for 3D printing and additive manufacturing. Our wide range of solutions, based on our proprietary 3D printing technologies and materials, enhance the ability of designers, engineers and manufacturers to:
|●||visualize and communicate product ideas and designs;|
|●||verify the form, fit and function of prototypes;|
|●||manufacture tools, jigs, fixtures, casts and injection molds used in the process of manufacturing end-products;|
|●||manufacture customized and short-run end-products more efficiently and with greater agility; and|
|●||produce objects that could not otherwise be manufactured through subtractive manufacturing methodologies.|
The primary focus of our 3D printing solutions has been for use for prototyping, tooling and manufacturing, and within the vertical markets of auto, aero, medical, dental, jewelry and education. Our product portfolio consists of five series of 3D printing systems and the consumables used in those systems. These series are the MakerBot desktop series, the Idea Series, the Design Series, the Production Series and the Dental Series. Collectively, this portfolio offers a variety of performance options for our customers, depending on their desired application, as well as on the nature and size of the designs, prototypes or end-products they seek to produce. Our wide range of systems allows us to offer our customers systems at a number of different price points, depending on the features that our customers desire.
As of December 31, 2015, we have sold approximately 146,024 systems globally, including approximately 98,579 sold by MakerBot, on a pro-forma combined basis. We benefit from recurring revenues from the sale of resin and plastic consumables and related services. We provide products and services to our global customer base throughout our offices in North America and internationally, including: Frankfurt, Germany; Hong Kong; Mexico; São Paulo, Brazil; Shanghai, China; St. Gallen, Switzerland; and Tokyo, Japan, as well as through our worldwide network of more than 200 agents and resellers. Additionally, through the MakerBot transaction, we have added an online sales channel. We have more than 2,700 employees and hold more than 800 granted patents or pending patent applications worldwide.
Historically, prototype development and customized manufacturing have been performed by traditional methods using metal extrusion, computer-controlled machining and manual modeling techniques, in which blocks of material are carved or milled into specific objects. These subtractive manufacturing methodologies have numerous limitations. They often require specialist technicians and can be time- and labor-intensive. The time intensity of traditional modeling can leave little room for design error or subsequent redesign without meaningfully impacting a products time-to-market and development cost. As a result, prototypes have traditionally been created only at selected milestones late in the design process, which prevents designers from truly visualizing and verifying the design of an object in the preliminary design stage. The inability to iterate a design rapidly hinders collaboration among design team members and other stakeholders and reduces the ability to optimize a design, as time-to-market and optimization become necessary trade-offs in the design process.
3D printing addresses the inherent limitations of traditional modeling technologies through its combination of functionality, quality, ease of use, speed and cost. 3D printing can be significantly more efficient and effective than traditional model-making techniques for use across the design process, from concept modeling and design review and validation, to fit and function prototyping, pattern making and tooling, to direct manufacturing of repeatable, cost-effective parts, short-run parts and customized end products. Introducing 3D modeling earlier in the design process to evaluate fit, form and function can result in faster time-to-market and lower product development costs.
For customized manufacturing, 3D printers eliminate the need for complex manufacturing set-ups and reduce the cost and lead-time associated with conventional tooling. DDM involves the use of 3D production systems for the direct manufacture of parts that are subsequently incorporated into the users end product or manufacturing process. DDM is particularly attractive in applications that require short-run or low-volume parts or rapid turn-around, and for which tooling would not be appropriate due to small volumes. DDM also enables the production of objects that have been topologically designed, or designed on the basis of a computerized determination of where to place the key components of the object and how to connect them, a process that is generally unavailable using conventional subtractive manufacturing methodologies.
The first commercial 3D printers were introduced in the early 1990s, and since the early 2000s, 3D printing technology has evolved significantly in terms of price, variety and quality of materials, accuracy, ability to create complex objects, ease of use and suitability for office environments. 3D printing is already replacing traditional prototype development methodologies across various industries such as architecture, automotive, aerospace and defense, electronics, medical, footwear, toys, educational institutions, government and entertainment, underscoring its potential suitability for an even broader range of industries. Additionally, 3D printing has created new applications for model-making in certain new market categories, such as: education, where institutions are increasingly incorporating 3D printing into their engineering and design course programs; dental and orthodontic applications, where 3D printed models are being used as replacements for traditional stone models, implants and surgical guides and for crowns and bridges for casting; and jewelry, where 3D printers are being used to produce custom-designed pieces of jewelry. Furthermore, 3D printing is being used in many industries for the direct digital manufacturing of end-use parts.
Table of Contents
Desktop 3D printer usage has shown rapid growth, with the introduction and adoption of affordable entry-level 3D printers and increased availability of content. These entry-level desktop printers are driving substantially increased market adoption by professional designers, education institutes, as well as by domestic users. We expect that the adoption of 3D printing will continue to increase over the next several years, in terms of design applications, on the one hand, and DDM applications, on the other hand. We believe that the expansion of the market will be spurred by increased proliferation of 3D content and 3D authoring tools (3D computer-aided-design, or CAD, and other simplified 3D authoring tools), as well as increased availability of 3D scanners. We also believe that increased adoption of 3D printing will be facilitated by continued improvements in 3D printing technology and greater affordability of entry-level systems. We have taken an active role in the facilitation of the growth of the 3D printing market via our strategic partnerships and alliances in bringing intuitive, design-to-3D print solutions to the market, such as through our GrabCAD community, which provides engineers and designers a resource for CAD models helping them communicate ideas and share designs. We also believe that the increasing adoption of 3D printing in manufacturing processes serves as an important source of growth in the 3D printing industry.
Range of solutions
We provide an integrated solutions offering that includes compatible products and services that are designed to meet our customer needs in an efficient manner, consisting of a broad range of systems, consumables and services for additive manufacturing. Our solutions address our customers needs for 3D printing, including printing systems, a compatible scanner, consumables, software, paid parts, strategic consulting and professional services, and 3D content.
Our solutions allow our end-users to print 3D objects that enhance their ability to visualize, verify and communicate product designs, thereby improving the design process and reducing time-to-market. Our systems create visual aids for concept modeling and functional prototyping to test fit, form and function, permitting rapid evaluation of product designs. Using presentation models developed with our systems, designers and engineers can typically conduct design reviews and identify potential design flaws and improvements before incurring significant costs due to re-tooling and re-work, allowing them to optimize a design rapidly and cost-effectively.
Our systems also aid in the communication of ideas otherwise communicated in abstract or 2D media. For example, a model produced with our systems may be used as a sales tool, as a model or part display or simply for use in conducting a focus group. It may also be used for collaboration in the product design and manufacturing cycles at multiple locations more quickly, enabling visualization, touch and feel, which can be critical to the product evaluation or sales process.
Our solutions also empower our end-users to engage in DDM via the use of our systems for the quick and efficient direct manufacture of parts that are subsequently incorporated into the users manufacturing processes or end product. For instance, our solutions enable the production of manufacturing tools, jigs, fixtures, casts and injection molds that aid in the customers production and assembly process. DDM is also particularly attractive in applications that require short-run or low-volume parts that require rapid turn-around, and for which tooling would not be appropriate due to small volumes, such as dental and jewelry applications. Our solutions also enable the production of objects that generally could not otherwise be manufactured through subtractive manufacturing methodologies.
Our solutions offering is characterized by the following distinguishing qualities:
|●||material properties of printed objects, such as heat resistance, toughness, brittleness, elongation-to-break, color and flexibility;|
|●||quality of printed objects measured by, among other things, resolution, accuracy and surface quality;|
|●||multiple production-grade modeling materials;|
|●||reliability of printing systems;|
|●||speed of printing, including a one-step automated modeling process;|
|●||ability to be used in an office environment;|
|●||ease of use; and|
|●||automatic, hands-free support removal.|
Table of Contents
Range of technologies and differentiating factors
Our solutions are driven by our proprietary technologies, brought together through the combination of our constituent companies, each of which was a leader in the 3D printing industry. We hold more than 800 granted or pending patents internationally, and our 3D printing systems utilize our patented FDM® and inkjet-based PolyJet technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3D CAD files or other 3D content. We believe that our broad range of product and service offerings is a function of our 3D printing technology leadership.
A key attribute of our FDM® 3D printing technology is its ability to use a variety of production grade thermoplastic building materials that feature surface resolution, chemical and heat resistance, color, and mechanical properties necessary for production of functional prototypes and parts for a variety of industries with specific demands and requirements. Use of these materials also enables the production of highly durable end parts as well as objects with soluble cores for the manufacture of hollow parts, the manufacture of which were previously dependent on slower and more expensive subtractive manufacturing technologies.
We believe that this technology is differentiated by a number of factors that make it appropriate for 3D printing and DDM. These factors include:
|●||the ability to use FDM® systems in an office environment due to the absence of hazardous emissions;|
|●||the relative absence of post-production processing;|
|●||minimal material waste;|
|●||better processing and build repeatability;|
|●||ease of use, with minimal system set up requirements;|
|●||no need for costly replacement lasers and laser parts; and|
|●||a high degree of precision and reliability.|
We believe that our inkjet-based 3D printing technology is primarily differentiated from other competing technologies in its ability to scale and deliver high-resolution and multi-material, multi-color 3D printing. Our easy-to-use, high-speed PolyJet 3D printers create high-resolution, smooth surface finish models that have the look, feel and functionality of the final designed product. We offer a wide variety of office-friendly resin consumables, including rigid and flexible (rubber-like) materials and bio-compatible materials for medical applications. Using our PolyJet Matrix technology, our solutions also offer the only 3D printing systems that deposit multiple materials simultaneously. This enables users, in a single build process, to print parts and assemblies made of multiple materials that each retain their distinct mechanical and physical properties. For example, users can print objects with both rigid and flexible portions in a single build, or mix different base colors in order to achieve desired color tone. The PolyJet Matrix technology also enables on-demand mixing of a wide variety of resins to create a wide range of pre-defined digital materials, which are composite materials with modified physical or mechanical and color properties that result from the combination of multiple materials. The wide range of colors in which objects can be printed (over 1,500, as noted below) is another one of the key differentiating attributes for our 3D printers.
Our PolyJet inkjet-based 3D printing technology is also currently distinguished by its ability to offer transparent material printing in an office environment system. Transparency is a desired feature in the design and engineering phases of product development and is applicable in automotive, consumer products and consumer electronics. The main applications are lighting components, tubing and piping, package optimization, and fluid analysis.
We also offer Smooth Curvature Printing, or SCP, thermoplastic ink-jetting technology through our Solidscape brand to produce wax-like patterns for lost-wax casting, investment casting and mold making applications. The SCP printer creates solid 3D parts through an additive, layer-by-layer process, using our SCP thermoplastic ink-jetting technology and high-precision milling of each layer. The parts produced are extremely high resolution with very precise details and fine surface finish, making our SCP systems well-suited for DDM.
We offer 14 FDM cartridge-based materials, 25 PolyJet cartridge-based materials, five SCP inkjet-based materials and 158 non-color digital materials, and over 1,500 color variations for our 3D printers, which we believe is the widest range of materials in the industry.
We have a diverse set of customers worldwide, with no single customer or group of affiliated customers nor any individual sales agent or group of affiliated sales agents accounting for more than 10% of our sales in 2015, 2014 or 2013. Our solutions are used across a wide array of applications in a variety of different industries.
Table of Contents
Our competitive strengths
We believe that the following are our key competitive strengths:
|●||Differentiated product offerings with
superior model quality. Our
portfolio of 3D printing systems is differentiated through a combination
of superior printing qualities, accuracy, print speed, the ability to
print a range of materials with varying levels of strength, chemical and
heat resistance, color and mechanical properties, the ability to print
multiple materials simultaneously and suitability for office environments.
Our offering spans the spectrum from entry-level desktop printers to
high-end solutions for complex operations. Our FDM-based systems enable
highly precise printing of 14 different durable thermoplastic materials,
enabling a wide range of DDM applications with little or no
post-production processing. Our PolyJet inkjet-based systems jet
ultra-thin layers of material that enable significant accuracy, high
resolution and smooth finish to printed models. For use with these systems
we offer a wide variety of office-friendly resin consumables, including
rigid, flexible (rubber-like), transparent and color materials. We believe
that we offer the only printing system that utilizes the simultaneous
jetting of three materials to enable end-users to print models with rigid,
flexible and color materials, in virtually unlimited combinations, in a
single build. Our SolidScape SCP thermoplastic ink-jetting technology
offers high-precision milling of each printed layer, enabling extremely
high resolution with precise details and fine surface finish. We also
offer the only multi-color, multi-material 3D printing system in the
|●||Integrated solutions offering/ecosystem. We provide an integrated solutions offering that includes compatible products and services that are designed to meet the full gamut of our clients needs in an efficient manner, consisting of a broad range of systems, consumables and services, including:|
|●||Parts on demand|
|●||Partnerships and alliances|
|●||Enhanced collaboration among industry professionals, via our GrabCAD community, which provides engineers and designers a resource for CAD models and helps them communicate ideas and share designs.|
|●||Proprietary technology platforms with
multidisciplinary technological expertise. We believe that our proprietary 3D FDM and
3D inkjet-based PolyJet printing engines offer end users the versatility
and differentiated features necessary for a wide variety of current and
potential applications. We combine our proprietary hardware platforms,
featuring widely-deployed inkjet printer heads or easy-to-use extrusion
heads with integrated software and 39 proprietary materials to develop and
produce leading 3D printing systems. This allows us to offer a spectrum of
3D printers and printing systems of varying features, capacities and price
points, and to migrate the advanced features of our high-end products to
our entry-level products with greater efficiency. Our 3D printing
solutions integrate innovations in a wide range of scientific disciplines,
such as physics, chemistry, and mechanical and electrical engineering, as
well as software development. We have made significant investments in
developing and integrating technologies into our hardware platform,
software and proprietary consumables. We believe that we have a strong
base of technology know-how. Our patent portfolio consists of more than
800 granted or pending patents internationally. We believe that we have a
culture of innovation, and we expect to continue to enhance our solutions
both to further drive market adoption of 3D printing and to broaden our
|●||Leading Direct Manufacturing Business.
Our newly branded Stratasys
Direct Manufacturing service business, which comprises our legacy RedEye
parts business combined with the recently acquired Solid Concepts and
Harvest Technologies, is one of the largest and leading AM parts service
providers globally. This units knowledge of and experience in AM,
including materials and systems know-how, and AM end-use parts production
is expected to enhance our DDM offering suite. This unit offers a wide
array of underlying printing technologies and materials. Furthermore,
Stratasys Direct Manufacturing enables us to offer a broader solution to
our customers, catering to more of their 3D printing needs, whether by
supply of 3D printers or of 3D printed parts. We believe this offering
creates better customer intimacy and a competitive advantage for
|●||Large and growing installed base.
Our differentiated offerings
have led to a large and growing installed base. As of December 31, 2015,
we have sold approximately 146,024 systems globally, including
approximately 98,579 sold by MakerBot, on a pro-forma combined basis. The significant installed base has
resulted in greater distribution reach and enhanced opportunities for
cross selling, given the significantly broadened and complementary product
offerings. It furthermore presents us with an opportunity to generate
recurring revenues from sales of consumables to the installed
|●||Leading position in desktop 3D printing. With the acquisition of MakerBot, we have expanded our solutions for 3D printing, encompassing accessible desktop 3D printers and materials and leading content creation and sharing solutions. We believe that this category is poised for significant growth driven by broader adoption of 3D printing and an increase the in number of applications where 3D printing is used. We believe our installed base, brand awareness and portfolio of solutions in this category positions us well to capitalize on the continued growth of this category.|
Table of Contents
|●||Diverse, global customer base.
We have a broad customer
base, ranging from global market leading brands to small businesses and
professionals and individuals. Our end-users include companies across a
wide range of industries and applications, including automotive,
aerospace, architecture, consumer products, educational institutions,
defense, medical analysis, medical systems, electronics, and heavy
|●||Extensive global reach. With more than 200 channel partners around
the world, we are well positioned to leverage the extensive geographic
reach of our marketing and sales organization to serve customers and grow
awareness of 3D printing for RP and DDM. The merger between Stratasys and
Objet has already resulted in greater distribution reach and enhanced
opportunities for cross selling into our combined companys installed
base, given the significantly broadened and complementary product
offerings the merger produced. In addition, through the MakerBot
transaction we have added an online sales channel.|
|●||Readily accessible technology for customers. Some of our 3D printing systems may be accessed through PTC and Adobe computerized design solutions, which enable wider adoption of our 3D printing solutions by designers and manufacturers in a simplified and more accessible manner.|
Our growth strategy
The key elements of our strategy for growth include the following:
|●||Identifying new vertical applications
for our proprietary 3D printing technologies. We believe that the proliferation of 3D
content, advancements in AM technology platforms and the introduction of
improved materials will continue to drive growth in 3D printing. We intend
to invest in the identification of new applications (especially DDM
applications) for which our proprietary printing technologies and
materials are appropriate. In addition, we seek relevant niche
applications where AM can provide substantial value, and develop a
comprehensive solution to address these opportunities. We also intend to
encourage existing and potential customers to identify new applications in
part by increasing awareness of the features of our technology and product
|●||Increasing adoption of AM manufacturing
solutions. We believe that
the adoption of 3D printing for manufacturing applications can be
accelerated through working intimately with our customers and the 3D
printing ecosystem, to reduce the complexity of using our solutions. We
are investing in developing professional services capabilities to enhance
our customers ability to use our solutions. In addition, we collaborate
with strategic partners in our ecosystem to streamline the integration of
3D printing solutions into the business processes of our
|●||Driving further adoption through
desktop systems. We expect to
drive market adoption through increased sales of our desktop systems.
These systems are expected to penetrate a broad and largely untapped
addressable market, targeting small design teams within large
organizations, small and medium-sized businesses, educational institutes
and individuals. We expect to leverage our growing Thingiverse community
to accelerate adoption. We expect to incorporate certain additional
features of our high-end series of printers into our entry-level series
|●||Leveraging our global reach to expand
the customer base and further penetrate existing customers. We have a network of more than 200 resellers
and selling agents around the world and various online channels. We will
seek to increase the penetration of our existing customer base by enabling
customers to streamline purchasing processes and by increasing
cross-selling into our installed base. We intend to reach new customers
and increase sales to existing customers by providing access to new
solutions that address customers specific needs. These solutions include
those offered by our Stratasys Direct Manufacturing service. As part of
this strategy we intend to grow awareness of 3D printing solutions for RP
and DDM and to develop industry specific sales channels as part of our
effort to commercialize a broader range of new DDM applications.
Additionally, we expect to significantly expand our online presence and
leverage our sales channel to the broader public.|
|●||Maintaining and extending our technology lead. Our multidisciplinary technological leadership, as evidenced by our more than 800 granted or pending patents internationally, underpins our proprietary hardware, integrated software and range of 3D printing materials, which consist of range of 39 PolyJet/FDM cartridge-based materials, five SCP inkjet-based materials and 158 non-color digital materials, and over 1,500 color variations. We will seek to extend our technological capabilities by continuing to invest in our R&D efforts, which focus on enhancing our 3D PolyJet and FDM printing technologies as well as developing new innovative solutions for 3D printing. In addition, we will continue developing consumables that offer an even broader array of physical, mechanical and aesthetic properties, thereby broadening user applications. We believe that by enhancing our AM technological capabilities and by developing and introducing new materials for our 3D printing and production systems, we will be able to increase both the size of, and our share of, the 3D printing marketplace.|
Table of Contents
|●||Continuing servicing our installed
base. Today our company has
the largest AM solutions installed base in the industry. We consider the
relationship with our customers to be a valuable asset, as reflected in
our customer satisfaction surveys. We plan to continue nurturing these
relationships to enhance the intimacy with our customers, which will allow
us to address their needs better through innovative and holistic
prototyping and manufacturing solutions of printers and materials, AM
printed parts service and advanced professional services. |
|●||Growing through complementary
acquisitions. We intend to
selectively pursue acquisitions to expand our product offerings, go to
market and overall growth and market penetration. Accordingly, we may
consider acquisitions and investments in order to effect and accelerate
our other growth strategies. |
|●||Strategic consulting. We help customers to develop their 3D
printing and additive manufacturing vision and strategies, and assist them
in implementation. |
offering. Due in major part
to a series of acquisitions, we have in place an offering of solutions
that includes a complete gamut of compatible systems, consumables and
services (parts on-demand, professional services and strategic consulting)
that are designed to meet our clients needs in an integrated, complete
manner. We intend to leverage that as a basis for generating additional
sales and revenues from existing customers and attracting new customers.
|●||Enhanced collaboration. Our GrabCAD community, which fosters collaboration among engineers and designers and helps them to communicate ideas and share designs, enhances the likelihood that we can draw from these new collaborations and enhance awareness, and, as a result, sales, of our integrated solutions.|
Products and services
Our product portfolio consists of five series of 3D printing systems and the consumables used by those systems. Our product series comprise the MakerBot desktop series, the Idea Series, the Design Series, the Production Series and the Dental Series. Collectively, this portfolio of products offers a broad range of performance options for users, depending on their desired application, as well as on the nature and size of the designs, prototypes or end-products they seek to produce. Our products are available at a variety of different price points and include entry-level desktop 3D printers, a range of systems for RP, and large production systems for DDM. We also offer a range of 3D printing materials consisting of 14 FDM cartridge-based materials, 25 PolyJet cartridge-based materials, five SCP, inkjet-based materials and 158 non-color digital materials, and over 1,500 color variations. The performance of our different systems varies in terms of capabilities, which are related to the following features:
|●||resin cartridge capacity and filament spool size;|
|●||maximum model (or tray) size; and|
|●||duty cycle, or the number of parts that a printer can produce over a given period of time without requiring maintenance.|
Our systems also integrate our software and are supported by services that we provide to our customers, both directly and through our reseller channel.
Our 3D printing systems are described below:
Design Series: Our Design Series includes the Dimension and Objet brands. The Dimension brand features our FDM technology and the Objet brand features our PolyJet technology. The technology available in this series makes it well suited for all aspects of RP, from design visualization and communication to form and fit verification to model building for functional testing. This series also offers a variety of products that provide customers with a broad range of choices of features such as printing capacity, production speed and price. The Dimension product line allows users to create parts in ABSplus plastic. This material enables production of parts with the strength required for true form, fit and functional testing. The Connex Systems are our most advanced PolyJet-based printer line featuring the highest capacity and offering the broadest set of features, including the ability to jet three materials simultaneously, with rigid, flexible and color characteristics, in virtually unlimited combinations, in a single build. These systems are most fit for manufacturing processes such as jigs and fixtures, injection molding and tooling applications.
Production Series: The Production Series includes our Fortus, PolyJet and Solidscape brands, all of which are typically used for DDM applications. 3D Production Systems driven by PolyJet technology work by jetting state-of-the-art photopolymer materials in ultra-thin layers onto a build tray, layer by layer, until the part is complete. The intuitive Objet Studio software manages the process. And, with multi-material 3D production systems, you can combine different material properties in the same part, in a single print gaining ultimate versatility. Our proven FDM technology is the foundation for the Fortus 3D Production Systems. Durable, production-grade thermoplastic is heated in an extrusion head and deposited in thin layers on a modeling base. The part is built, layer upon layer, with exactness from the bottom up. Insight software provides advanced control over build parameters. When the part is complete, the soluble or breakaway support material is removed, leaving an accurate, durable part thats environmentally stable. We also offer our Solidscape line of 3D printers for DDM applications. This line of products combines patent-protected, SCP thermoplastic ink-jetting technology and high-precision milling of each layer, with our proprietary graphical front-end ModelWorks software. Objects created with these systems feature extremely high pattern resolution and accuracy and are used primarily for jewelry products and dental applications.
Table of Contents
MakerBot Replicator series: Our MakerBot Replicator series represents our desktop 3D printers, compact, and professional-grade 3D printers. Our desktop and compact 3D printers are affordable, and designed for easy, desktop use and are typically used by individuals operating alone or within an enterprise. Our larger, professional 3D printer has a large build volume ideal for industrial prototypes, models and products. We acquired MakerBot in August 2013 to enhance our desktop offerings. In addition to the Replicator 3D printer series, our MakerBot portfolio includes the Digitizer, which is a 3D scanner that allows customers to scan an object and convert it into a digital file that can subsequently be printed.
Idea Series: The Idea Series includes our lower capacity, affordable set of 3D printers for professional use. This series comprises the MoJo and uPrint product families, both of which are FDM-based. These products are designed for easy use in an office environment and produce professional grade parts using our ABS line of thermoplastics.
Dental Series: Each Dental Series 3D printer runs on one of two patented, industry-leading technologies to build models, dental appliances and casting wax-ups in-house, directly from digital files. Our PolyJet technology enables the production of surgical guides, fitting models, veneer try-ins and orthodontic appliances from materials specially engineered for dental applications. Our wax-deposition-modeling, or WDM, technology drives 3D printers that enable the production of crowns, bridges and partial dentures.
We sell a broad range of 3D printing materials, consisting of 14 FDM cartridge-based materials, 25 PolyJet cartridge-based materials, five SCP inkjet-based materials and 158 non-color digital materials, and over 1,500 color variations for use in our 3D printers and production systems. The sale of these materials provides us with a recurring revenue stream from users of our 3D printers and production systems.
The materials we sell are described below:
The modeling and support filament used in the FDM-based 3D printers and production systems features a wide variety of production grade thermoplastic materials. We continue to develop filament modeling materials that meet our customers needs for increased speed, strength, accuracy, surface resolution, chemical and heat resistance, color, and mechanical properties. These materials are processed into our proprietary filament form, which is then utilized by our FDM systems. Our spool-based system has proven to be a significant advantage for our products, because it allows the user to quickly change material by simply mounting the lightweight spool and feeding the desired filament into the FDM devices that are office friendly. Currently, we have a variety of build materials in multiple colors commercially available for use with our FDM technology.
Each material has specific characteristics that make it appropriate for various applications. The ability to use different materials allows the user to match the material to the end use application, whether it is a pattern for tooling, a concept model, a functional prototype, a manufacturing tool, or a DDM end use part.
Our resin consumables, which consist of our PolyJet family of proprietary acrylic-based photopolymer materials, are designed for use with our PolyJet printing systems and enable users of those products to create highly accurate, finely detailed 3D models and parts for a wide range of prototype development and customized manufacturing applications. The wide variety of resins within the PolyJet family is characterized by transparent, colored, or opaque visual properties and flexible, rigid or other physical properties. Support materials that are used together with the model materials enable the 3D printing of models with a wide array of complex geometries. Our PolyJet materials are produced in-house and are specially designed for our printing systems.
We have invested significant research and development efforts in optimizing our PolyJet materials for use with inkjet technology. These efforts are reflected in the properties of these materials, which enable them to be packaged, stored, combined and readily cured upon printing. Our PolyJet materials are packaged in cartridges for safe handling and are suitable for use in office environments. The polymerized materials can also be machined, drilled, chrome-plated or painted in most cases.
Table of Contents
SCP inkjet-based materials
Our Solidscape 3D materials are non-toxic thermoplastic materials featuring excellent lost wax casting qualities, including fast melt out, no ash or residue, and no thermal expansion. Currently, we have three modeling materials commercially available for use with our Solidscape technology. These include materials formulated specifically for particular industries, such as a thermalpolyester formula developed to help retail jewelers and manufacturers meet the demand for finished goods using less precious materials and a thermalpolyester material formulated to deliver high casting yields for dental applications.
We offer suites of integrated software with our various 3D printing systems; each is designed to make the process of creating high-quality, highly detailed and accurate models more efficient. Our software supports commonly used 3D file formats and converts three-dimensional CAD databases into the appropriate code to operate our 3D printing systems. Our software also provides a wide range of features, including automatic support generation, part scaling, positioning and nesting, as well as geometric editing capabilities.
Our different software suites are specifically designed for our different 3D printing systems and their different applications. Accordingly, certain software focuses on increasing build speed and improving the design engineers control and efficiency over the entire build process. Other software suites offer simple click & build preparation and print tray editing, and provide easy, accurate job timing estimation and full job control, including queue management. Similarly, we offer software that allows users to make adjustments to 3D printing properties. For example, for our Connex line of 3D printers, our software enables users to change the color and material mix in the printing process, allowing users to quickly modify the properties of the model being printed.
The software designed for our PolyJet inkjet-based 3D printers enables users to work in parallel and send jobs from any network computer to the server. Jobs enter the queue either according to the parameters configured by the system administrator, or in chronological order. The queue is therefore easily managed, as each user has access to his or her jobs and the administrator can set and adjust parameters and access permissions. In configurations of multiple printing systems on the network, each user automatically receives the parameters of the selected system, such as tray size, loaded materials, and queue status, helping ensure easy, error-free tray setup.
Thingiverse is our online community for sharing downloadable, digital 3D designs. The Thingiverse platform enables users to share and customize their digital designs. We believe that Thingiverse is the largest repository of free 3D printable content available to consumers. Thingiverse includes more than 1 million public designs available for downloading. We have had more than one million uploads and more than 200 million downloads of designs via this platform.
We operate the GrabCAD Community for mechanical engineers and designers, where members can upload and download free CAD models, post and answer mechanical engineering questions, and participate in design challenges. This community had more than 2.7 million members at the end of 2015. The GrabCAD community provides engineers and designers a resource for CAD models helping them communicate ideas and share designs. As of December 31, 2015, there were 1.18 million CAD files available on, and there had been approximately 3.5 million downloads from, the GrabCAD community.
Table of Contents
Support services and warranty
Our customer support department provides on-site system installation, basic and advanced operation training, a full range of maintenance and repair services and remote technical support to users of our products. We provide support to our customers directly and through our resellers, ensuring that support and parts may be readily obtained worldwide. We also offer training to our customers, particularly on our high-performance systems. Our support network consists of the following:
|●||More than 500 trained, Stratasys-certified
engineers providing worldwide, on-site installation, training and support.
|●||Direct support engineers through our company.
|●||Indirect support engineers through certified
partners, including third-party service organizations or selected
resellers who provide support for our systems. |
|●||Phone and direct on-site company support in
eight languages, and resellers indirect support in local languages.
|●||Service logistics in key regional centers.
|●||Training facilities and resources in regional
|●||Computerized management system and knowledge
distribution platform to ensure high-quality support for our customers,
including secure remote access to a customer service database containing
service history and technical documentation to aid in troubleshooting and
repairing systems. |
|●||Support, tools and up-to-date information to our direct customer and distribution channels from our product support engineering team.|
Our goal is to ensure maximum uptime and productivity for our AM systems. In order to do so, we regularly update the technical documentation related to our systems, offer extensive training courses for operators and promote proactive knowledge sharing designed to help users maximize the value of their equipment and to expand the applications for which they employ our 3D printing and production systems.
We offer services on a time and materials basis as well as through a number of post-warranty maintenance contracts with varying levels of support and pricing, as described below under Extended support programs.
Customer support is represented on cross-functional product development teams within our company to ensure that products are designed for serviceability and to provide our internal design and engineering departments with feedback on field issues. Failure analysis, corrective action, and continuation engineering efforts are driven by data collected in the field. Ongoing customer support initiatives include development of advanced diagnostic and troubleshooting techniques and comprehensive preventative maintenance programs, an expanded training and certification program for Stratasys and Stratasys partners technical personnel, and improved communication between the field and the factory.
Our printing systems are sold with warranties that range from 90 days to one year from installation, depending upon the product line and geographic location. Warranties are generally accompanied by on-site maintenance support. Receipt of maintenance and repair services after the warranty period is subject to the terms of our extended support programs, to the extent purchased by the end-user, as described below.
Extended support programs
Recognizing that our end-users have varying support needs, we offer a range of support programs that enable our end-users to continue to receive maintenance services beyond the initial warranty period. These support programs contain varying degrees of the support services described above and are priced accordingly.
We offer our customers the option to lease or rent 3D printers and 3D production systems. We also offer a Try Before You Buy program, which provides businesses the ability to try out a 3D printer prior to deciding whether or not its the right fit for their company. The potential purchasers of a 3D printer receive customer support from our company during the trial period.
Table of Contents
Professional Services and Strategic Consulting
Stratasys Strategic Consulting is designed to help customers build their 3D printing and additive manufacturing vision and strategy, support implementation and optimize 3D printing workflows. For many companies, the rapid growth and development of 3D printing has created a gap in corporate knowledge, understanding and strategic ownership. Stratasys Strategic Consulting spans the entire supply chain, from raw materials to retail, developing new products, services and business models. Working with the worlds biggest brands, we empower organizations to transform the way they imagine, design and make things using 3D printing.
We combine our expert consulting and thought leadership with a unique set of software tools and methodologies. We help organizations build a 3D strategy that will address the needs of their customers, adding significant value to the business and the bottom line. This generally occurs via three steps:
1. Opportunity Analysis & Identification. We gain a clear understanding of our customers strategic imperatives and what external drivers are influencing an organization. We consider the global mega-trends impacting the product portfolio and help conceptualize products and services to be delivered using 3D printing.
2. Solution Identification. In order to find the most appropriate technology solution, we consider a wide range of factors, including materials feasibility, production economics, scalability, environmental impact and return on investment, or ROI. Many of our 3D printed business concepts can then be tested using the unparalleled capacity of our own production facility.
3. Strategy Development. Our strategic plans consider the most appropriate capital investment or out-sourcing models, or the technology development roadmap needed to launch a future 3D printed product to the market. We help to identify potential shortfalls in current technologies, highlighting areas for collaborative research and development.
When organizations bring additive manufacturing into their facilities, Stratasys Professional Services helps to build a smooth, unified workflow with existing manufacturing resources and practices. Stratasys Professional Services were built to help customers navigate the additive manufacturing ecosystem and ensure that they are maximizing the systems and solutions to their fullest potential. Each customer is unique and requires a different tailor-made solution. Each engagement starts with an assessment process to perfectly match the right solution to the customer. Our approach is modular and can be adapted to any size manufacturer, bringing additive manufacturing into Product Lifecycle Management - from Concept through Manufacturing.
Stratasys Direct Manufacturing paid-parts service
Stratasys Direct Manufacturing was formed on January 1, 2015 from our three AM service companies RedEye (formerly a business unit of Stratasys, Inc.) and newly acquired Harvest Technologies and Solid Concepts and is a provider of 3D printing and custom AM services. Stratasys Direct Manufacturing offers AM capabilities encompassing a wide range of technologies allowing for plastic and metal parts for rapid prototyping and production processes. Our Stratasys Direct Manufacturing paid-parts service produces prototypes and end-use parts for customers from a customer-provided CAD file. This allows the customer to benefit from our process-related knowhow, capitalize on the variety of materials and machine types available through our service center, and take advantage of additional capacity using the latest in proven RP and DDM technologies and processes. Our Stratasys Direct Manufacturing business operates a website service, www.stratasysdirect.com, which enables our customers to obtain quotes and order parts around the clock, seven days a week.
Marketing, sales and distribution
Our marketing strategies are focused on increasing awareness of our key solutions and services, strengthening our leadership brand positions, accelerating and supporting sales growth, and increasing customer loyalty. We initiate marketing programs and campaigns to drive demand and lead generation throughout the countries in which we and our resellers and agents operate. We are also investing in programs to support our strategic account and select vertical industry sales efforts.
We use a variety of inbound and outbound marketing methods to reach potential customers. Examples of inbound methods include digital marketing demand and lead generation programs including blogs, social media, search marketing (Search Engine Optimization and Pay-Per-Click advertising), lead nurturing with, webinars, white papers etc. Outbound channel examples include digital and print communication programs, press relations, direct mail and e-mail campaigns, tradeshows, newsletters, industry associations and referrals. In addition, we have built and maintain on-site product and technology demonstration capabilities in certain regional offices across the world.
We measure and analyze the success of various marketing initiatives and strive to identify current and future customer needs. Based on our analysis, we create and update our product roadmaps and individual marketing plans to help optimize distribution while helping ensure a smooth process of release, ramp-up and sales of our products.
Table of Contents
Sales distribution methods
Our sales organization sells, distributes and provides follow-up support services with respect to our AM systems and related consumables, through a worldwide sales and marketing infrastructure. We generally use three methods for distribution and support: (i) sales to resellers who purchase and resell our products and through whom follow-up support and maintenance services and replacement parts are provided to end-users; (ii) sales of systems that are arranged by a network of independent sales agents worldwide, pursuant to which we sell directly to end-users, pay commissions to such agents, and directly handle the sale of consumables and provision of follow-up support services; and (iii) direct sales of systems or services to end-users without the involvement of any intermediaries, for which all aspects of our sales and follow-up services are handled exclusively by our company. In certain instances, the same individual or company can serve as a reseller with respect to certain of our products while acting as an independent sales agent for other products. Our resellers and independent sales agents are overseen by regional managers and operate on a non-exclusive basis, although we believe that most do not sell competing AM systems.
Almost all of the reseller and independent sales agent locations that distribute our products have our AM systems available for tradeshows, product demonstrations, and other promotional activities. Additionally, many of them enjoy a long-term presence and offer third-party 3D CAD software packages in their respective territories, enabling them to cross-sell our systems to customers who purchase those other products.
In addition to our direct and indirect seller network, we also offer our MakerBot Replicator series and related consumables and services through our online and retail channels.
Geographical structure of sales organization
The primary sales organization for our 3D printers and production systems including related consumables, materials and services is divided into groups based on the following geographical regions: North America; Europe and Middle East; Asia Pacific; and Latin America. This structure allows us to align our sales and marketing resources with our diverse customer base. Our sales organization in each region provides sales support to the network of independent reseller and sales agent locations throughout the particular region. We also operate sales and service centers in various locations throughout North America and internationally, including: Frankfurt, Germany; Hong Kong; Mexico; São Paulo, Brazil; Shanghai, China; St. Gallen, Switzerland; and Tokyo, Japan.
Manufacturing and suppliers
The manufacturing process for our 3D printing and production FDM and PolyJet systems consists of assembling those systems using both off-the-shelf and customized components manufactured specifically for us, and producing and packaging the consumables products to be used by those systems. Our core competencies include FDM and PolyJet printing systems assembly, systems integration, software installation and resin and filament manufacturing, all of which are done internally at our facilities. We currently operate on a build-to-forecast basis and obtain all parts used in the FDM and PolyJet systems manufacturing process from either distributors of standard electrical or mechanical parts or custom fabricators of our proprietary designs. Our manufacturers and suppliers are periodically assessed by us based on their on-time performance and quality.
We purchase major component parts for our FDM and PolyJet systems from various suppliers, subcontractors and other sources, and assemble them in our U.S. and Israeli facilities. Our production floors have been organized using demand-flow techniques, or DFT, in order to achieve efficiency, quality and balance of our production lines. As capacity constraints arise, because of our use of DFT, we can avoid the requirements of reconfiguring our production floor.
Computer-based Material Requirements Planning, or MRP, is used for reordering to better ensure on-time delivery of parts and raw materials. Operators and assemblers are trained on assembly and test procedures including Assembly Requirement Documents, which originate in engineering. In the manufacturing processes for our FDM and PolyJet systems, we employ a Quality Management System, or QMS, that meets international quality standards including ISO 9001:2008 and ISO 13485:2003, which relates to medical devices. We also outsource the manufacture of main subassemblies up to fully assembled systems ready for integration.
The system assembly process for our FDM and PolyJet systems includes semi-automated functional tests of key subassemblies. Key functional characteristics are verified through these tests, and the results are stored in a statistical database.
Upon completion of the assembly of our 3D printing and production FDM and PolyJet systems, we perform a complete power up and final quality tests to help ensure the quality of those products before shipment to customers. The final quality tests must be run error-free before the FDM and PolyJet systems can be cleared for shipment. We maintain a history log of all FDM and PolyJet products that shows revision level configuration and a complete history during the manufacturing and test process. All identified issues on the FDM and PolyJet systems during the manufacturing process are logged, tracked and used to make continuous production process improvements. The commonality of designs among our different FDM and PolyJet product families eases the transition to manufacturing new designs.
Table of Contents
Our filament production uses Factory Physics® techniques to manage critical buffers of time, capacity and inventory to ensure product availability. We also use the 5S method (Sort, Set-in-order, Shine, Standardize and Sustain) as part of our lean manufacturing initiatives to improve organization and efficiency.
Inventory and suppliers
We maintain an inventory of parts to facilitate the timely assembly of products required by our production plan. While most components are available from multiple suppliers, certain components used in our systems and consumables are only available from single or limited sources. In particular, the printer heads for our PolyJet 3D printing systems are supplied by a sole supplier, Ricoh. We consider our single and limited-source suppliers (including Ricoh) to be reliable, but the loss of one of these suppliers could result in the delay of the manufacture and delivery of the relevant components (and, ultimately, of our products). This type of delay could require us to find and re-qualify the component supplied by one or more new vendors. Although we consider our relationships with our suppliers to be good, we continue to develop risk management plans for these critical suppliers. In order to hedge against the risk of a discontinuation of the supply of our inkjet printer heads in particular, we maintain a reasonable supply of excess inventory of printer heads.
We purchase the printer heads for our inkjet 3D printing systems from Ricoh pursuant to an OEM Purchase and License Agreement with Ricoh, effective as of May 5, 2011, or the Ricoh Agreement. The current Ricoh Agreement replaced our original agreement with Ricoh that had been entered into in June 2000 and amended on various occasions subsequently, and which expired upon the effectiveness of the new Ricoh Agreement.
Under the Ricoh Agreement, we place orders for print heads and associated electronic components, or the Ricoh Products. Together with provision of these items, Ricoh provides us with a non-transferable, non-exclusive right to assemble, use and sell the Ricoh Products under Ricohs patent rights and trade secrets.
Pricing under the Ricoh Agreement depends on the quantity of Ricoh Products that we purchase during any given month, and to the extent that we commit to a certain annual minimum prior to an upcoming year, we receive a set, discounted price for all Ricoh Products ordered during that upcoming year.
The Ricoh Agreement runs for an initial term of five years and automatically renews for additional one-year periods thereafter unless either party provides the other six months advance written notice of termination prior to the end of the then-current term. The Ricoh Agreement may be cancelled by either party if (i) the other party substantially breaches any material provision of the agreement and has not cured such breach within 30 days of receipt of written notice thereof, or (ii) upon the occurrence of certain bankruptcy events, and may furthermore be cancelled by Ricoh if we fail to cure a breach of an undisputed payment obligation within thirty (30) days of the breach.
At any time during the term of the Ricoh Agreement, Ricoh may discontinue the manufacture and supply of a print head model, so long as it provides us with at least eighteen (18) months prior written notice of such discontinuance and honors all of our purchase orders for the subject print head model within the notice period. During the period of five years from the earlier of either the termination of the Ricoh Agreement or the date of discontinuance of the manufacture of Ricoh Products (that is, following the 18-month notice period described in the previous sentence), we are entitled to purchase additional Ricoh Products for the sole purpose of providing replacements for the installed base of Ricoh Products, including one final purchase order that we may place in the final year of such five-year period and that must be filled by Ricoh within twelve months of when it is placed.
The Ricoh Agreement may not be assigned by either party without the other partys prior written consent, which may not be unreasonably withheld.
Research and development
We maintain an ongoing program of research and development, or R&D, to develop new systems and materials and to enhance our existing product lines, as well as to improve and expand the capabilities of our systems and related software and materials. This includes significant technology platform developments for our FDM, PolyJet and SCP technologies, our AM systems, including our integrated software, and our family of proprietary acrylic-based photopolymer materials for PolyJet printing and family of proprietary thermoplastic materials for FDM printing. Our research aims to develop improved and more affordable products. Our engineering development efforts also focus on customer requested enhancements, and development of new modeling processes, software and user applications. In particular, we have devoted significant time and resources to the development of a universally compatible and user-friendly software system.
Table of Contents
Our R&D department is divided into groups based on scientific disciplines and product lines. We are committed to designing products using the principles of Six Sigma. We continue to standardize our product platforms, leveraging each new design so that it will result in multiple product offerings that are developed faster and at reduced expense.
We invest a significant amount of our resources in R&D, because we believe that superior technology is a key to maintaining a leading market position. Our net R&D expenses were approximately $122.4 million, $82.3 million and $52.3 million in the years ended December 31, 2015, 2014 and 2013, respectively.
Our consumable materials development and production operations for our FDM and PolyJet systems are located at our facilities in Eden Prairie, MN, and Kiryat Gat, Israel. The development and production facility for our Solidscape operations are located in Merrimack, New Hampshire, whereas the facilities for our MakerBot operations are located in various locations in NY. We regard the consumable materials formulation and manufacturing process as a trade secret and hold patent claims related to these products. We purchase and formulate raw materials for our consumables production from various polymer resin and thermoplastic materials suppliers with different levels of processing and value-add applied to the raw materials.
We consider our proprietary technology to be important to the development, manufacture, and sale of our products and seek to protect such technology through a combination of patents, trade secrets, and confidentiality agreements and other contractual arrangements with our employees, consultants, customers and others. All patents and patent applications for rapid prototyping processes and apparatuses associated with our technology were assigned to us by those inventors. The principal granted patents relate to our FDM systems, our PolyJet and PolyJet Matrix technologies, our 3D printing processes and our consumables, certain of which have already expired and certain of which have expiration dates ranging from 2016 to 2035.
We are also a party to various licenses and other arrangements that allow us to practice and improve our technology under a broad range of patents, patent applications and other intellectual property, including a cross-license agreement with 3D Systems Corporation under which each party licensed certain patents of the other party, and an assignment of rights to us related to UV polymer-based U.S. patents, which underlie certain technologies that compete with ours.
In addition, we own certain registered trademarks and make use of a number of additional registered and unregistered trademarks, including Stratasys, For a 3D World, Objet, PolyJet, Connex, Eden, FDM, Fortus, Dimension, Uprint, Mojo, FullCure, Stratasys Direct Manufacturing, Solidscape, Solid Concepts, GrabCAD, MakerBot, Thingiverse, Replicator, RedEyE, Harvest Technologies, GrabCAD Workbench and The 3D Solutions Company.
We believe that, while our patents provide us with a competitive advantage, our success depends primarily on our marketing, business development, applications know-how and ongoing research and development efforts. Accordingly, we believe that the expiration of any single patent, or the failure of any of single patent application to result in an issued patent, would not be material to our business or financial position. In any event, there can be no assurance that our patents or other intellectual property rights will afford us a meaningful competitive advantage. Please see the risk factor related to the expiration of our patents in Item 3.D Risk Factors Risks related to our intellectual property.
Our principal competitors consist of other developers of additive manufacturing systems as well as other companies that use FDM and inkjet-based technologies to compete in additive manufacturing. A variety of additive manufacturing technologies compete with our proprietary technologies, including:
|●||Selective Laser Sintering;|
|●||Powder Binding; and|
|●||Digital Light Projection.|
The companies that use these technologies to compete with us include 3D Systems Corporation, EOS GmbH and EnvisionTEC GmbH.
Table of Contents
These technologies, which compete for additive manufacturing users, possess various competitive advantages and disadvantages relative to one another within the key categories upon which competition centers, including resolution, accuracy, surface quality, variety and properties of the materials they use and produce, capacity, speed, color, transparency, the ability to print multiple materials and others. Due to these multiple categories, end-users usually make purchasing decisions as to which technology to choose based on the characteristics that they value most. This decision is often application specific. The competitive environment that has developed is therefore intense and dynamic, as players often position their technologies to capture demand in various verticals simultaneously.
For our entry-level and lower-end systems and materials, we face competition from a variety of sources, including FDM, SLA and DLP companies such as 3D Systems Corporation, XYZ Printing and Ultimaker. The competing offerings in the lower-end categories vary based on cost, printer and part quality, support materials, speed, ease of use, software ecosystem and reliability.
We are positioned to compete in our industry mainly on the following bases, which we view as competitive strengths:
|●||material properties of printed objects, such as heat resistance, toughness, brittleness, elongation-to-break, color and flexibility;|
|●||quality of printed objects measured by, among other things, resolution, accuracy and surface quality;|
|●||multiple production-grade modeling materials;|
|●||reliability of printing systems;|
|●||speed of printing, including a one-step automated modeling process;|
|●||ability to be used in an office environment;|
|●||ease of use; and|
|●||automatic, hands-free support removal.|
We offer a wide range of systems with varying features, capacities and price points. We believe that this enables us to compete with the other additive manufacturing technologies for a wide range of customers with a variety of applications and goals for their additive manufacturing.
We also compete with companies that use traditional prototype development and customized manufacturing technologies, and expect future competition to arise from the development of new technologies or techniques.
Historically, our results of operations have been subject to seasonal factors. Stronger demand for our products has historically occurred in our fourth quarter primarily due to our customers capital expenditure budget cycles and our sales compensation incentive programs. Our first and third quarters have historically been our weakest quarters for overall unit demand. Although the first quarter has had higher volumes in recent years from the successful introduction of new products, it is typically a slow quarter for capital expenditures in general. The third quarter is typically when we see our largest volume of educational related sales, which normally qualify for special discounts as part of our long-term penetration strategy.
We furthermore experience seasonality within individual fiscal quarters, as a substantial percentage of our system sales often occur within the last month of each fiscal quarter. This trend has the potential to expose our quarterly or annual operating results to the risk of unexpected, decreased revenues in the case of our inability to build systems, consummate sales and recognize the accompanying revenues prior to the end of a given quarter.
We have offices in Brazil, China, Germany, Hong Kong, Israel, Japan, Korea, Mexico, Switzerland, the United Kingdom and the United States, and organize our operations by geographic region, focusing upon the following key regions: North America; Europe; Asia Pacific; and Latin America. Our products are distributed in each of these regions, as well as in other parts of the world. Our customers are dispersed geographically, and we are not reliant on any single country or region for most of our product sales and services revenues, although 59% of our 2015 sales were made in North America and our SDM printed parts services are based in the United States and therefore reliant on United States customers. A breakdown of our consolidated revenues by geographic markets and by categories of operations (that is, products and services) for the years ended December 31, 2015, 2014 and 2013 is provided in Item 5.A Operating and Financial Review and ProspectsOperating Results.
In maintaining global operations, our business is exposed to risks inherent in such operations, including currency fluctuations, market conditions, and inflation in the primary locations in which our operating expenditures are incurred. Information on currency exchange risk, market risk, and inflationary risk appears elsewhere in this annual report in Item 3.D Risk Factors and in Item 11. Quantitative and Qualitative Disclosure About Market Risk Foreign Currency Exchange Risk.
Table of Contents
The total number of our full-time equivalent employees, and the distribution of our employees (i) geographically and (ii) within the divisions of our company, in each case as of December 31, 2015, 2014 and 2013, are set forth in this annual report in Item 6.D Directors, Senior Management and Employees Employees.
We are subject to various local, state and federal laws, regulations and agencies that affect businesses generally. These include:
|●||regulations promulgated by federal and state environmental and health agencies;|
|●||foreign environmental regulations, as described under Environmental matters immediately below;|
|●||the federal Occupational Safety and Health Administration;|
|●||the U.S. Foreign Corrupt Practices Act;|
|●||laws pertaining to the hiring, treatment, safety and discharge of employees;|
|●||export control regulations for U.S. made products; and|
|●||CE regulations for the European market.|
We are subject to various environmental, health and safety laws, regulations and permitting requirements, including those governing the emission and discharge of hazardous materials into ground, air or water; noise emissions; the generation, storage, use, management and disposal of hazardous waste; the import, export and registration of chemicals; the cleanup of contaminated sites; and the health and safety of our employees. Based on information currently available to us, we do not expect environmental costs and contingencies to have a material adverse effect on our operations. The operation of our facilities, however, entails risks in these areas. Significant expenditures could be required in the future to comply with environmental or health and safety laws, regulations or requirements.
Under such laws and regulations, we are required to obtain environmental permits from governmental authorities for certain operations. In particular, in Israel, where we assemble our inkjet-based PolyJet 3D printing systems and manufacture our resin consumables, businesses storing or using certain hazardous materials, including materials necessary for our Israeli manufacturing process, are required, pursuant to the Israeli Dangerous Substances Law 5753-1993, to obtain a toxin permit from the Ministry of Environmental Protection. Our two toxin permits will remain in effect until November 2016 and February 2017, respectively.
In the European marketplace, electrical and electronic equipment is required to comply with the Directive on Waste Electrical and Electronic Equipment, which aims to prevent waste by encouraging reuse and recycling, and the Directive on Restriction of Use of Certain Hazardous Substances, which restricts the use of six hazardous substances in electrical and electronic products. Our products and certain components of such products put on the market in the European Union (EU) (whether or not manufactured in the EU) are subject to these directives. Additionally, we are required to comply with certain laws, regulations and directives, including TSCA in the United States and REACH in the EU, governing chemicals. These and similar laws and regulations require the testing and registration of certain chemicals that we use and ship.
Israeli Tax Considerations and Government Programs
Tax regulations also have a material impact on our business, particularly in Israel where we are organized and have one of our headquarters. The following is a summary of certain aspects of the current tax structure applicable to companies in Israel, with special reference to its effect on us (and our operations, in particular). The following also contains a discussion of the Israeli government programs benefiting us. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities or the courts will accept the views expressed in this discussion. This discussion does not address all of the Israeli tax provisions that may be relevant to our Company. For a discussion of the Israeli tax consequences related to ownership of our capital stock, please see Israeli Taxation Considerations in Item 10.E below.
General Corporate Tax Structure in Israel
Generally, Israeli companies are subject to corporate tax on their taxable income. As of 2016, the corporate tax rate is 25% (in 2014 and 2015, the corporate tax rate was 26.5%). However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Beneficiary Enterprise or a Preferred Enterprise, as further discussed below, may be considerably lower. See Law for the Encouragement of Capital Investments in this Item below. Capital gains derived by an Israeli company are generally subject to the prevailing regular corporate tax rate.
Table of Contents
Besides being subject to the general corporate tax rules in Israel, we have also, from time to time, applied for and received certain grants and tax benefits from, and participate in, programs sponsored by the Government of Israel, described below.
Law for the Encouragement of Capital Investments
The Law for the Encouragement of Capital Investments, 5719-1959, to which we refer as the Investment Law, provides certain incentives for capital investments in a production facility (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, which may be either an Approved Enterprise, a Beneficiary Enterprise or a Preferred Enterprise, is entitled to benefits as discussed below. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the location of the facility in which the investment and manufacture activity are made. In order to qualify for these incentives, an Approved Enterprise, a Beneficiary Enterprise or a Preferred Enterprise is required to comply with the requirements of the Investment Law.
The Investment Law has been amended several times over the recent years, with the two most significant changes effective as of April 1, 2005, to which we refer as the 2005 Amendment, and as of January 1, 2011, to which we refer as the 2011 Amendment. Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment, remain in force, but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the 2011 Amendment, yet companies entitled to benefits under the Investment Law as in effect up to January 1, 2011, were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and elect for the benefits of the 2011 Amendment.
The following discussion is a summary of the Investment Law prior to its amendments as well as the relevant changes contained in the new legislations.
Tax benefits for Approved Enterprises approved before April 1, 2005.
Under the Investment Law prior to the 2005 Amendment, a company that wished to receive benefits on its investment program that is implemented in accordance with the provisions of the Investment Law, to which we refer as an Approved Enterprise, had to receive an approval from the Investment Center of the Israeli Ministry of Economy (formerly known as the Ministry of Industry, Trade and Labor), to which we refer as the Investment Center. Each certificate of approval for an Approved Enterprise relates to a specific investment program, delineated both by the financial scope of the investment, including sources of funds, and by the physical characteristics of the facility or other assets.
An Approved Enterprise may elect to forego any entitlement to the cash grants otherwise available under the Investment Law and, instead, participate in an alternative benefits program. We have chosen to receive the benefits through the alternative benefits program. Under the alternative benefits program, a companys undistributed income derived from an Approved Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location within Israel of the Approved Enterprise, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as detailed below. The benefits commence on the date in which that taxable income is first earned. The benefits period under Approved Enterprise status is limited to 12 years from the year in which the production commenced (as determined by the Investment Center), or 14 years from the year of receipt of the approval as an Approved Enterprise, whichever ends earlier. If a company has more than one Approved Enterprise program or if only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates. The tax benefits available under any certificate of approval relate only to taxable income attributable to the specific program and are contingent upon meeting the criteria set out in the certificate of approval. Income derived from activity that is not integral to the activity of the Approved Enterprise will not enjoy tax benefits. Our entitlement to the above benefits is subject to fulfillment of certain conditions, according to the law and related regulations.
A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors Company, to which we refer as an FIC. An FIC eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether or not a company qualifies as an FIC is made on an annual basis. An FIC that has an Approved Enterprise program will be eligible for an extension of the period during which it is entitled to tax benefits under its Approved Enterprise status (so that the benefits period may be up to ten years) and for further tax benefits if the level of foreign investment exceeds 49%. If a company that has an Approved Enterprise program is a wholly owned subsidiary of another company, then the percentage of foreign investments is determined based on the percentage of foreign investment in the parent company.
Table of Contents
The corporate tax rates and related levels of foreign investments with respect to an FIC that has an Approved Enterprise program are set forth in the following table:
|Percentage of non-Israeli ownership||Tax Rate|
|Over 25% but less than 49%||25%|
|49% or more but less than 74%||20%|
|74% or more but less than 90%||15%|
|90% or more||10%|
A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the portion of its facilities that have been granted Approved Enterprise status during the tax exemption period will be subject to tax in respect of the amount of dividend distributed (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate that would have been otherwise applicable if such income had not been tax-exempted under the alternative benefits program. This rate generally ranges from 10% to 25%, depending on the level of foreign investment in the company in each year, as explained above.
In addition, dividends paid out of income attributed to an Approved Enterprise (or out of dividends received from a company whose income is attributed to an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at a lower rate provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at the lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply.
The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program in the first five years of using the equipment. This benefit is an incentive granted by the Israeli government regardless of whether the alternative benefits program is elected.
The benefits available to an Approved Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval, as described above. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, adjusted to the Israeli consumer price index and interest, or other monetary penalty.
We have received the requisite approval, including a final approval, for all of our Approved Enterprise investment programs, in accordance with the Investment Law. The above-described benefits that accompany these investment programs and our Beneficiary Enterprise investment programs (for which accompanying benefits are described below) have had the effect, both historically and in 2013, 2014 and 2015, of reducing our (and before the Stratasys-Objet merger, Objets) effective consolidated tax rates considerably lower than the statutory Israeli corporate tax rate of 25.0% in 2013 and 26.5% in 2014 and 2015.
Tax benefits under the 2005 Amendment that became effective on April 1, 2005.
The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. However, the 2005 Amendment limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise.
An enterprise that qualifies under the new provisions is referred to as a Beneficiary Enterprise, rather than Approved Enterprise. The 2005 Amendment provides that the approval of the Investment Center is required only for Approved Enterprises that receive cash grants. As a result, a company is no longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative benefits program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. A company that has a Beneficiary Enterprise may, at its discretion, approach the Israel Tax Authority for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law.
Table of Contents
Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities) which are generally required to derive more than 25% of their business income from export to specific markets with a population of at least 14 million in 2012 (such export criteria will further be increased in the future by 1.4% per annum). In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets certain conditions set forth in the amendment for tax benefits and which exceeds a minimum amount specified in the Investment Law. Such investment entitles a company to receive a Beneficiary Enterprise status with respect to the investment, and may be made over a period of no more than three years ending in the year in which the company chose to have the tax benefits apply to the Beneficiary Enterprise. Where a company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered to be a Beneficiary Enterprise and the companys effective tax rate will be the weighted average of the applicable rates. In such case, the minimum investment required in order to qualify as a Beneficiary Enterprise must exceed a certain percentage of the value of the companys production assets before the expansion.
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Beneficiary Enterprise depends on, among other things, the geographic location within Israel of the Beneficiary Enterprise. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Beneficiary Enterprise within Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as explained above.
Dividends paid out of income attributed to a Beneficiary Enterprise will be treated similarly to payment of dividends by an Approved Enterprise under the alternative benefits program. Therefore, dividends paid out of income attributed to a Beneficiary Enterprise (or out of dividends received from a company whose income is attributed to a Beneficiary Enterprise) are generally subject to withholding tax at the rate of 15% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The reduced rate of 15% is limited to dividends and distributions out of income attributed to a Beneficiary Enterprise during the benefits period and actually paid at any time up to 12 years thereafter except with respect to an FIC, in which case the 12-year limit does not apply.
Furthermore, a company qualifying for tax benefits under the 2005 Amendment, which pays a dividend out of income attributed to its Beneficiary Enterprise during the tax exemption period, will be subject to tax in respect of the amount of the dividend distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable.
As of December 31, 2015, we had accumulated tax-exempt income of approximately $156 million that is attributable to our various Approved and Beneficiary Enterprise programs. If such tax exempt income were to be distributed, it would be taxed at the reduced corporate tax rate applicable to such income, which would have amounted to approximately $15.6 million of tax liability as of December 31, 2015.
The benefits available to a Beneficiary Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index and interest, or other monetary penalty.
Tax benefits under the 2011 Amendment that became effective on January 1, 2011.
The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a Preferred Company through its Preferred Enterprise (as such terms are defined in the Investment Law) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by a governmental entity, or (ii) a limited partnership that: (a) was registered under the Israeli Partnerships Ordinance and; (b) all of its limited partners are companies incorporated in Israel, but not all of them are governmental entities; which has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company was entitled to a reduced corporate tax rate of 15% with respect to its preferred income attributed to its Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise was located in a certain development zone, in which case the rate was 10%. Such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and was increased to 16% and 9%, respectively, in 2014 and thereafter. Income derived by a Preferred Company from a Special Preferred Enterprise (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or to 5% if the Special Preferred Enterprise is located in a certain development zone.
Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply).
Table of Contents
The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions;. (ii) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, that had participated in an alternative benefits program, before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a Beneficiary Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met.
We have examined the possible effect, if any, of these provisions of the 2011 Amendment on our financial statements and have decided, at this time, not to opt to apply the new benefits under the 2011 Amendment.
C. Organizational Structure.
Our corporate structure includes Stratasys Ltd., our Israeli parent company, and the following main active wholly-owned subsidiary entities: Stratasys, Inc., a Delaware corporation, which was formerly a publicly held company and which became our indirect, wholly-owned subsidiary as a result of the Stratasys-Objet merger; Baccio Corporation (formerly known as Cooperation Technology Corporation), to which we refer as MakerBot, a Delaware corporation which is the direct parent company of MakerBot Industries, LLC, which we acquired in August 2013; Stratasys Direct, Inc. (our service bureau business unit), a California corporation; GrabCAD, Inc., a Delaware corporation; Stratasys AP Limited, a Hong Kong limited company, which together with several other subsidiaries (including Stratasys Japan Co. Ltd., our Japanese subsidiary), carries out most of our operations in the Asia Pacific region; and Stratasys GMBH, a German limited liability company, which together with other subsidiaries (including Stratasys Schweiz AG (Stratasys Switzerland Ltd.), our Swiss subsidiary) carries out our European operations. We also formed Stratasys Latin America Representacao De Equipamentos Ltd., a Brazilian subsidiary, which has commenced our Brazilian operations. Please see the list of subsidiaries appended to this annual report as Exhibit 8 for a complete list of our subsidiaries as of the date of this annual report.
D. Property, Plants and Equipment.
We have dual headquarters, in Eden Prairie, Minnesota and Rehovot, Israel. Our Eden Prairie, Minnesota headquarters (near Minneapolis) comprises executive offices and production facilities presently encompassing approximately 377,090 square feet, of which we own 295,544 square feet, in four buildings. These four buildings serve the following respective purposes: system assembly, inventory storage, operations and sales support; manufacturing for one of our Stratasys Direct Manufacturing paid parts service locations; research and development, filament manufacturing, and administrative, marketing and sales activities; and expansion of our production capacity for systems and consumables. Our Rehovot, Israel headquarters, which we lease pursuant to a lease agreement with a term of five years that expires on December 31, 2016, comprise approximately 115,942 square feet of space. Our lease payments, for these facilities are approximately $2.4 million annually. These facilities house our Israeli administrative headquarters, our research and development facilities, and certain manufacturing activities. At the expiration of the lease agreement for our current Rehovot, Israel headquarters, we will be moving into new facilities in Rehovot, where we purchased the real property in 2015 and are currently constructing facilities with approximately 121,033 square feet that will house all of the same functions as at our current Rehovot facilities.
During 2015, we also terminated our lease of certain facilities in the United States, which comprised an aggregate of approximately 167,000 square feet, which termination was part of our restructuring and cost reduction initiative. Those facilities had served as manufacturing facilities and office space.
As of December 31, 2015, we leased office space (except with respect to our Eden Prairie headquarters facilities and our Kiryat Gat, Israel facilities, where we own the property) for various purposes, as set forth in the table below. Unless otherwise stated, all of our facilities are fully utilized. We have no material tangible fixed assets apart from the properties described below.
Table of Contents
|Location:||Primary Usage:||Area (Sq. Feet)|
|Eden Prairie, Minnesota||U.S. headquarters||377,090|
|Brooklyn, New York||Local headquarters and warehouses||226,830|
|Valencia, California||Local headquarters and warehouses||71,286|
|San Diego, CA||Facilities||56,383|
|River Falls, Wisconsin||Office space||40,998|
|Belton, Texas||Local headquarters and warehouses||40,000|
|Merrimack, New Hampshire||Facilities, including manufacturing||35,643|
|Billerica, Massachusetts||Office space||22,323|
|Other facilities in North America:||Office space, stores and warehouses||136,327|
|Europe and the Middle East:|
|Kiryat Gat, Israel||Factory and laboratories||285,070|
|Rehovot, Israel||Israeli headquarters||115,942|
|Rheinmünster, Germany||EMEA headquarters||53,992|
|Swiss office||Office space||205|
|Other facilities in EMEA:||EMEA headquarters and office space||31,533|
|Hong Kong||Office space||23,475|
|Other facilities in Asia Pacific:||Office space||54,150|
|Other countries:||Office space||9,773|
ITEM 4A. UNRESOLVED STAFF COMMENTS.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included in this annual report. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in Cautionary Note Regarding Forward-Looking Statements and in Item 3.D Key Information Risk Factors, above.
A. Operating Results.
We are a leading global provider of additive manufacturing, or AM, solutions for the creation of parts used in the processes of designing and manufacturing products and for the direct manufacture of end parts.
We have been at the forefront of 3D printing innovation for more than 25 years. We offer a broad mix of technologies, deep industry expertise and the most flexible implementation options to meet our customers needs. We offer complete solutions for 3D printing, including printing systems, consumables, paid parts and professional services, and 3D content.
Our 3D printers include systems ranging from entry-level desktop 3D printers to systems for rapid prototyping, or RP, and large production systems for direct digital manufacturing, or DDM. We also develop, manufacture and sell materials for use with our systems and provide related services offerings. We offer a powerful range of additive manufacturing materials, including clear, rubberlike and biocompatible photopolymers, and tough high-performance thermoplastics. We believe that the range of 3D printing consumable materials that we offer, consisting of 14 Fused Deposition Modeling, or FDM, cartridge-based materials, 25 Polyjet cartridge-based materials, five Smooth Curvature Printing, or SCP, inkjet-based materials and 158 non-color digital materials, and over 1,500 color variations, is the widest in the industry. Our service offerings include Stratasys Direct Manufacturing, or SDM, printed parts services which offers AM capabilities encompassing a wide range of technologies allowing for plastic and metal parts for rapid prototyping and production processes, as well as related professional services.
Table of Contents
We conduct our business globally and provide products and services to our global customer base through our main operational facilities which are located in Israel, the United States, Germany and Hong Kong as well through our offices in China, Italy, Brazil, India, Japan, Korea and Singapore. Our extensive global reach is well-positioned through a network of more than 200 resellers and selling agents around the world and an online channel. We have more than 2,700 employees and hold more than 800 granted or pending additive manufacturing patents globally.
We may make investments in strategic acquisitions, strategic alliances, property, plant and equipment, new technologies, process improvements, information technology, research and development projects, and human resource activities that we believe will help us pursue our product and solutions strategies and support future growth.
2015 Financial Highlights
Goodwill and Other Intangible Assets Impairment Charges
We review goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. During 2015, we determined that certain indicators of potential impairment existed that required interim goodwill impairment analysis. These indicators included a further significant decline in our market capitalization for a sustained period and weaker than expected operating results of our reporting units for 2015. These indicators along with certain reorganization initiatives for the Companys operations and the increased uncertainty in the 3D printing environment resulted in changes of the Companys near-term cash flows projections. The lower near-term cash flows projections reflected changes in assumptions related to organic revenue growth rates, negative effect of exchange rate differences, costs and operating structure, the expected timing of synergies resulted from acquisitions and the timing of utilization of strategic opportunities in light of the overall weakness in the uncertain 3D printing marketplace. Accordingly, we updated our cash flow projections and related assumptions based on the indicators set forth above for each of our reporting units and performed the two-step goodwill impairment tests. Our impairment analysis performed as part of the step two of the goodwill impairment test determined that the carrying amount of goodwill assigned exceeded its implied fair value for each of the Companys reporting units. As a result, we recorded non-cash goodwill impairment charges of $942.4 million during 2015. The non-cash impairment charges were recorded in order to reduce the carrying amount of goodwill to its implied fair value. For further information see note 7 to our consolidated financial statements.
In addition, during 2015, we tested the recoverability of our purchased intangible assets due to certain indicators of impairment including weaker than expected operating results of our reporting units for 2015, reorganization initiatives for our operations, lower forecasted profitability due to technological and other trends as well as the increased uncertainty in the 3D printing environment. We assessed the recoverability of our definite-life intangibles assets based on their projected undiscounted future cash flows expected to result from each intangible asset. Based on the results of the recoverability assessment, we determined that the carrying values of certain of our intangible assets exceeds their undiscounted cash flows projections and therefore were not recoverable. For those unrecoverable intangible assets that considered to be impaired, we recorded impairment charges of $260.3 million during 2015, in order to reduce the carrying amount of those intangible assets to their estimated fair value. We also reviewed for impairment our indefinite-life intangible, which consists of IPR&D projects and recorded impairment charges of $18.2 million, related to those in-process research and development projects in order to reduce the carrying amount of those intangible assets to their estimated fair value. For further information see note 8 to our consolidated financial statements.
Determining the fair value of our reporting units and intangible assets requires significant judgment, including judgments about the appropriate discount rates, terminal growth rates, weighted average costs of capital and the amount and timing of projected future cash flows. We will continue to monitor the fair value of Stratasys-Objet reporting unit and intangible assets to determine whether events and changes in circumstances such as further deterioration in the business climate or operating results, further significant decline in our share price, changes in managements business strategy or downward changes of the our cash flows projections, warrant further interim impairment testing.
On March 3, 2016, the SEC enforcement division issued a subpoena to us requesting a number of documents in connection with an investigation relating to the valuations and other calculations used by us to assess the impairment of goodwill and/or intangible assets included in the balance sheet contained in our filings with the SEC. This matter is at a very preliminary stage, and we intend to cooperate fully with the SEC.
In April 2015, we initiated certain restructuring actions that are intended to focus efforts on adjusting our cost and operating structure to better align with the current market environment, improving and iterating products, developing new 3D printing solutions and expanding our presence in the market. These restructuring actions included a reduction in our global workforce, consolidation of certain facilities, closing of three retail stores and other actions designed to streamline our operating structure and better align with the current market environment.
During 2015 we incurred restructuring charges of $26.2 million, including a $10.4 million charge related to workforce reductions and a $15.8 million charge related to facilities consolidation (primarily MakerBot facilities) and impairments of associated long-lived assets. $9.9 million, $1.5 million and $14.8 million of these restructuring charges were included in cost of sales, research and development, net and selling, general and administrative expenses, respectively.
Table of Contents
On July 1, 2015 we acquired 100% of the outstanding shares of RTC Rapid Technologies GmbH , or RTC, which has been a key channel partner in Germany. This acquisition is expected to increase our presence in Germany, Switzerland and Austria, and should enable us to offer the full suite of Stratasys 3D printing solutions and services to the installed base of RTC as well as work with its regional resellers to further capitalize on growth opportunities in selected verticals in the region.
On February 10, 2015, we acquired certain assets and assumed certain liabilities of Intelligent CAD/CAM Technology Ltd., a Hong Kong company. This acquisition is expected to enable us to expand our operations in the Chinese market.
Stratasys Direct Manufacturing
On January 1, 2015, we formed Stratasys Direct Manufacturing, or SDM, a paid-parts service from our three AM service companies (i) Solid Concepts and (ii) Harvest Technologies which we acquired during the third quarter of 2014 and (iii) RedEye, our preexisting digital manufacturing service business. SDM is a provider of 3D printing and custom AM services, offering AM capabilities encompassing a wide range of technologies allowing for plastic and metal parts for rapid prototyping and production processes.
We believe that the acquisitions of Solid Concepts and Harvest, combined with our RedEye service, created a leading strategic platform to meet a broad range of customers additive manufacturing needs and provide us with opportunities to leverage our direct manufacturing services capabilities. These acquisitions have also enabled us to enhance our expertise in parts production, as well as materials and systems know-how. We believe that the integration of the three companies enables us to provide our customers with broad offerings that provide a variety of technologies and custom manufacturing solutions, and supports our expansion into end-use-parts production and vertical market applications.
Key measures of our performance
Our consolidated revenues result primarily from sales of (i) our products, which include both our AM systems and related consumable materials, (ii) provision of related services and (iii) our direct manufacturing service. We effect sales and deliver services principally through the following channels:
|●||sales to resellers, who purchase and resell our
products and who provide support services for our printing systems;
|●||sales of systems that are marketed by
independent sales agents, pursuant to which we sell directly to end-users,
pay commissions to such agents, and directly handle the sale of
consumables and provision of support services; and |
|●||sales of systems (and all related products and services) as well as our direct manufacturing solutions service that we effect and/or provide to our customers directly.|
There is overlap among the channels as some independent sales agents for our higher-end products also serve as distributors of our other products. Besides the above methods of product distribution, we also sell products directly through an online store and through additional retail sales channels.
Table of Contents
Product revenues are influenced by a number of factors, including, among other things, (i) the adoption rate of our products, (ii) end-user product design application and manufacturing activity, and (iii) the capital expenditure budgets of end-users and potential end-users, all of which may be significantly influenced by macroeconomic factors. Purchases of our 3D printing and production systems, especially our higher-end, higher-priced systems, typically involve longer sales cycles.
Product revenues also depend upon the volume of consumables that we sell. Sales of our consumable materials are linked to the number of AM systems that are installed and active worldwide. Sales of consumables are also driven by system usage, which is generally a function of the size of the particular system and the level of design and/or manufacturing activity and budget of the particular end-user. Larger systems generally use greater amounts of consumables due to their greater capacity and the higher levels of design and production.
Services revenues derive from (i) our direct manufacturing parts services that provide a variety of technologies and custom manufacturing solutions; (ii) installation, training, maintenance and warranty; and (iii) other service contracts. In addition, in connection with direct sales, we generally charge separately for installation and training. Additional services revenues are generated from services contracts most often entered into directly with end-users subsequent to the expiration of the initial warranty period.
Costs of revenues
Our costs of revenues consist of costs of products and costs of services. Costs of products consist primarily of components and subassemblies purchased for the manufacture of our AM systems and raw materials, such as thermoplastic and photopolymer materials, for the manufacture of our consumables, as well as any royalties paid with respect to sales of certain of those consumables. Costs of products also include manufacturing and manufacturing-related labor costs, indirect production costs and amortization expense related mainly to developed technology assets acquired as part of our business combinations.
Our costs of services revenues consist primarily of costs of our service personnel, material and other production costs of our direct manufacturing service business and installation costs which include engineers dedicated to on-site training and support and travel costs of these engineers. Both costs of products and costs of services include related facilities costs.
Our most significant components of cost of revenues are costs of materials used for our printers, wages and related benefits costs, which together accounted for approximately 85% our total direct cost of sales. Cost of sales during the year ended December 31, 2015 included impairment charges of certain of our long-lived assets which amounted to approximately $197.8 million. An additional significant item of our cost of revenues is the amortization expense that we incur in connection with developed technology assets acquired as part of our business combinations. This amortization expense varies based on the timing and type of acquisitions, and was $51 million, $56 million and $55 million for the years ended December 31, 2015, 2014 and 2013, respectively.
At December 31, 2015, a hypothetical 10% rise in commodity prices for raw materials would cause an approximate $21 million increase in cost of revenues in our Consolidated Statement of Income and Comprehensive Income. As to wages and related benefits, a 10% increase in wages due to wage inflation would cause an approximate $2 million increase in cost of revenues in our Consolidated Statement of Income and Comprehensive Income. During 2015, we did not notice particular trends that changed, or were expected to change in the near future, the absolute or relative significance of the components of our costs of revenues in a material manner. We also believe that inflation has not had a material effect on our operations or on our financial condition during the three most recent fiscal years.
Currently, we do not foresee a significant change in either the raw materials used for production or wage inflation that would materially impact our business. For further information, please see Item 11. Quantitative And Qualitative Disclosures About Market Risk in this annual report.
The gross profit and gross margin for our products are influenced by a number of factors. The most important of these is the mix of our products sold. Specifically, the gross margins on our high-end Production series and Design series of AM systems, as well as on our consumables, are typically higher than the gross margins on our Idea series and MakerBot desktop printers. Accordingly, an increase in the percentage of sales of our entry-level products could cause our profit margins to decrease. Furthermore, we believe that as our worldwide installed base of AM systems increases, subsequent sales of our proprietary consumables will also increase. We will also seek to reduce our costs of revenues by improving our ability to use less costly components and increasing engineering efficiencies in the production of our lower-priced systems. In addition, we will also seek to achieve lower material costs and leverage our overall capabilities in our direct manufacturing service business.
Table of Contents
Products gross margins are also impacted by the mix of revenues generated from sales to resellers as opposed to sales that are facilitated by independent sales agents. We rely principally upon a reseller network that is divided based on geographical areas. In addition to our reseller network, we have a significant number of independent selling agents who focus exclusively on selling our lower priced systems.
Service gross margins are influenced mainly by the volume of revenues generated from our direct manufacturing service business as well as the ratio of service engineers to our installed base in a given geographic area, as that ratio impacts travel costs and efficiency of our service engineers.
Our operating expenses consist of (i) research and development expenses, (ii) selling, general and administrative expenses, (iii) goodwill impairment charges and (iv) changes in fair value of obligations in connection with acquisitions.
Research and development expenses
Our research and development activities consist of projects aimed at developing new printing systems and materials and projects aimed at enhancing our existing product lines. We also seek to develop disruptive technologies and other process improvement solutions in the additive manufacturing ecosystem. Our research and development expenses consist primarily of employee compensation and employee-related personnel expenses, materials, laboratory supplies, costs for related software, and costs for facilities and equipment. Expenditures for research, development and engineering of products and manufacturing processes are expensed as incurred. Our investments in research and development are essential to our future growth and our ability to remain competitive in the AM market. We work closely with existing and potential customers, distribution channels and major resellers, who provide significant feedback for products development and innovation.
We are also entitled to reimbursements from certain government funding plans and from other collaborative agreements. These reimbursements are recognized as a reduction of expenses as the related cost is incurred. We are not required to pay royalties on sales of products developed using our government funding.
Selling, general and administrative expenses
Our selling, general and administrative expenses include employee compensation and employee-related expenses for marketing, sales and other sales-support employees, and for managerial and administrative personnel, including executive officers, accounting, legal, information technology and human resources. This category of expenses also covers commissions, advertising and promotions expenses, related facilities costs, integration and other post-merger related costs, professional service fees, impairment charges of certain of our intangible assets, as well as the amortization expenses related to acquired assets as part of our business combinations.
Commissions consist of sales-based commissions to independent sales agents and internal sales personnel. Commission rates vary, depending on the geographic location of the agent and on the achievement of certain performance targets. Our advertising and promotion expenses consist primarily of media advertising costs, trade and consumer marketing expenses and public relations expenses.
Facilities costs that are included in our selling, general and administrative expenses include a portion of the occupancy costs for our facilities in countries where sales, marketing and administrative personnel are located. Professional service fees for accounting and legal services and reserves for specific legal proceedings referred to elsewhere in this annual report are also included in selling, general and administrative expenses.
Table of Contents
Goodwill reflects the excess of the consideration transferred plus the fair value of any non-controlling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. Goodwill is not amortized but rather is tested for impairment annually at the reporting unit level, or whenever events or circumstances present an indication of impairment. We apply the Financial Accounting Standards Board, or FASB, guidance of testing goodwill for impairment. During 2015, we determined that certain indicators of potential impairment that required goodwill impairment analysis for all of our reporting units existed. Accordingly, we performed a quantitative two-step assessment for goodwill impairment for each of our reporting units. As a result, we recorded a non-cash impairment charge of $942.4 million during 2015. The non-cash impairment charges were recorded in order to reduce the carrying amount of goodwill to its estimated fair value. Refer to Note 7 to our audited financial statements included in Item 18 of this annual report for further information.
Determining the fair value of our reporting units requires significant judgment, including judgments about the appropriate discount rates, terminal growth rates, weighted average costs of capital and the amount and timing of projected future cash flows. Projected future cash flows are based on the our most recent budgets, forecasts and strategic plans as well as certain growth rate assumptions for periods subsequent to the current strategic plans period. Failure to execute our strategic plans for our reporting units could negatively impact the fair value of our reporting units, and increase the risk of an additional goodwill impairment in the future. We will continue to monitor the fair value our Stratasys-Objet reporting unit to determine whether events and changes in circumstances such as further deterioration in the business climate or operating results, further significant decline in our share price, changes in managements business strategy or downward changes of our cash flows projections, warrant further interim impairment testing.
Change in fair value of obligations in connection with acquisitions
As part of the Solid Concepts transactions we recognized a deferred payments obligation. This obligation was recognized as part of the consideration transferred and it is re-measured at fair-value in each reporting period. The fair value of this obligation was measured using specific valuation models, which were based on unobservable inputs. Changes in fair value of these obligations are presented in our operating expenses in a separate line item. The deferred payments for the Solid Concepts transaction are recognized as liabilities at fair value in our consolidated balance sheets and are classified under short-term and long-term obligations in connection with acquisitions. The fair value is determined based on the closing market price of our ordinary shares at the applicable date, adjusted to reflect a discount for lack of marketability for the applicable periods. The discount for lack of marketability was calculated based on the historical volatility of our share price and thus represents a Level 3 measurement within the fair value hierarchy. Refer to Note 2 and Note 3 to our audited financial statements included in Item 18 of this annual report for further information.
The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws and tax rates in the jurisdictions in which we operate. We are subject to income taxes in Israel, the U.S. other foreign jurisdictions. A significant portion of our income after the Stratasys-Objet December 1, 2012 merger date is taxed in Israel. We have realized and expect to continue to realize significant tax savings based on the determination that some of our industrial projects that have been granted Approved Enterprise and Beneficiary Enterprise status, which provides certain benefits, including tax exemptions for undistributed income and reduced tax rates. Income not eligible for Approved Enterprise and Beneficiary Enterprise benefits is taxed at the regular corporate rates, which were 26.5% in 2015 and 2014 and 25% in 2013. We are also a Foreign Investors Company, or FIC, as defined by the Israeli Investment Law. FICs are entitled to further reductions in the tax rate normally applicable to Approved Enterprises and Beneficiary Enterprises, depending on the level of foreign ownership. In addition, we are an Industrial Company as defined by the Israeli Law for the Encouragement of Industry (Taxation), 1969, and, as such, are entitled to certain tax benefits.
Our entitlement to the above benefits is subject to our fulfilling the conditions stipulated by the Investment Law and regulations. Should we fail to meet such requirements in the future, income attributable to our Approved Enterprise and Beneficiary Enterprise programs could be subject to the statutory Israeli corporate tax rate and we could be required to refund a portion of the tax benefits already received with respect to such programs.
Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of temporary differences between the carrying amount and tax bases of assets and liabilities under the applicable tax laws, and on effective tax rates in effect when the deferred taxes are expected to be settled or realized. Deferred taxes for each jurisdiction are presented as a net asset or liability, net of any valuation allowances. Significant judgment required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we considered all available evidence, including past operating results, the most recent projections for taxable income, and prudent and feasible tax planning strategies. We reassess our valuation allowance periodically and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.
In addition, our effective tax rate is also impacted by the geographical mix of income and non-taxable items.
Table of Contents
Critical Accounting Policies and Estimates
We have prepared our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America. This has required us to make estimates, judgments, and assumptions that affected the amounts we reported. Note 1 to our consolidated financial statements included in Item 18 of this annual report contains the significant accounting principles that we used to prepare our consolidated financial statements.
We have identified critical accounting policies that required us to make assumptions about matters that were uncertain at the time of our estimates. Had we used different estimates and assumptions, the amounts we recorded could have been significantly different. Additionally, if we had used different assumptions or different conditions existed, our financial condition or results of operations could have been materially different. For additional information regarding our accounting policies and estimates please refer to Note 1 to our consolidated financial statements included in Item 18 of this annual report.
Results of Operations
We are providing within this section a supplemental discussion that compares historical statement of operations data in accordance with accounting principles generally accepted in the United State of America, or GAAP, for the years ended December 31, 2015, 2014 and 2013. Refer to note 2 to our consolidated financial statements included in Item 18 of this annual report for certain pro forma information for the Solid Concepts transaction and MakerBot transaction.
The following table sets forth, certain financial data derived from our U.S. GAAP financial statements presented as percentages of our net sales for the periods indicated:
|Year ended December 31,|
|Cost of sales||85.3||%||51.7||%||53.3||%|
|Research and development, net||17.6||%||11.0||%||10.9||%|
|Selling, general and administrative||62.4||%||46.9||%||41.7||%|
|Change in fair value of obligations in connection|
|Financial expense, net||-1.5||%||-0.9||%||-0.1||%|
|Loss before income taxes||-198.8||%||-20.7||%||-6.1||%|
|Net loss attributable to Stratasys Ltd.||-197.2||%||-15.9||%||-5.6||%|
Table of Contents
Discussion of Results of Operations
Net sales of our products and services for the last three years, as well as the percentage change from year to year, were as follows:
|Year Ended December 31,|
|% Change||% Change|
|U.S. $ in thousands|
Net sales in 2015 were $696.0 million as compared to net sales of $750.1 million in 2014, representing a decrease of 7.2%. Our revenues for 2015 were lower than expected across all regions and most product and service lines. We believe that the current slowdown is primarily due to a continuation of the challenging AM environment, driven primarily by weak investment in capital equipment by customers within key verticals. Net sales were also negatively impacted by foreign currency exchange fluctuations. Net sales decreased by approximately 3.5% on a constant currency basis when using prior periods exchange rates.
2015 Compared to 2014
Revenues derived from products (including AM systems, consumable materials and other products) decreased by $108.2 million in 2015, or 17.7%, as compared to 2014. The decrease in products net sales was primarily driven by a decrease in MakerBot revenues, overall market weakness and a negative impact from foreign currency exchange fluctuations, which were partially offset by an increase in our sales of consumables offerings which increased by 5.1% as compared to 2014.
The decrease in systems and other products revenue reflects lower sales across all product lines, primarily our MakerBot desktop systems and our Connex design-series systems.
The number of systems shipped during 2015 decreased to 24,363 units as compared to 45,843 units shipped in 2014. The decrease in the number of systems shipped was primarily due to a decrease in MakerBot unit sales.
Consumables revenues increased in 2015 by 5.1% as compared to 2014. The increase in consumables revenues, despite overall market weakness, was primarily due to the favorable effect of our growing installed base of systems and high performance consumable materials offerings for use in new applications, offset by the unfavorable impact of foreign currency exchange fluctuations.
2014 Compared to 2013
Revenues derived from products increased by $197.3 million in 2014, or 47.6%, as compared to 2013. The number of systems shipped increased to 45,843 units as compared to 19,317 units shipped in 2013. The increase in both revenue and number of units shipped primarily reflected an organic growth in our products sales of $130.8 million in 2014, or 31.5% as compared to 2013, as well as the inclusion of a full year of MakerBot revenues which contributed $66.5 million to the increase of our product revenues.
Consumables revenues increased in 2014 by 32.5% as compared to 2013. The increase was driven by acceleration in customer usage and our growing installed base of systems. In particular, the strong sales of our Production series and high-end Design series systems in prior periods contributed to strong consumables sales growth given their relatively higher consumable utilization rates.
2015 Compared to 2014
Services revenues (including SDM, maintenance and other services) increased by $54.1 million in 2015, or 39.2%, as compared to 2014. The increase in services revenues was primarily attributable to the increase in our SDM revenues, which increased by $40.0 million or 73.7% as compared to 2014 primarily due to the inclusion for the full year of Solid Concepts and Harvest revenues after their respective transaction dates.
Services revenues also increased organically from maintenance contracts and service parts, reflecting our growing installed base of systems.
Table of Contents
2014 Compared to 2013
Services revenues increased by $68.4 million in 2014, or 98.4%, as compared to 2013. The increase in services revenues was primarily attributable to the increase in our SDM services revenues, which increased by $41.0 or 250.2% as compared to 2013, due to the inclusion of Solid Concepts and Harvest revenues after their respective transaction dates.
Revenues by Region
Revenues and the percentage of net sales by region for the last three years, as well as the percentage change, were as follows:
|Year Ended December 31,|
|U.S. $ in||% of net||U.S. $ in||% of net||U.S. $ in||% of net|
|thousands||sales||thousands||sales||thousands||sales||Change in %||Change in %|
2015 Compared to 2014
Net sales in the North America region increased by $7.1 million, or 1.8% to $413.0 million in 2015 as compared to $405.9 million in 2014. The increase was driven primarily by an increase in services revenues, due to the inclusion of a full year of SDM revenues in 2015 as well as an increase of our consumables offerings net sales, partially offset by lower net sales of our systems.
Net sales in the EMEA region decreased by $35.3 million, or 19.2%, to $148.2 million in 2015 as compared to $183.5 million in 2014. This decrease was due primarily to lower sales of our systems. In local currencies terms, net sales of the EMEA region in 2015 decreased by 6.3% as compared to 2014. Net sales in the EMEA region were negatively impacted by approximately $23.8 million primarily due to the devaluation of the Euro against the U.S. dollar, on a constant currency basis when using prior periods exchange rates.
Net sales in the Asia Pacific region decreased by $28.2 million, or 18.8%, to $122.3 million in 2015 as compared to $150.5 million in 2014. This decrease was due primarily to lower sales of our systems, partially offset by an increase of our consumables offerings net sales.
2014 Compared to 2013
Net sales in all regions increased in 2014 as compared to 2013 and reflected strong sales growth across all product lines as well as the inclusion of a full year of MakerBot revenues in 2014 and Solid Concepts and Harvest revenues commencing on their respective transaction dates.
Table of Contents
Gross profit for our products and services for the last three years, as well as the percentage change from year to year, was as follows:
|Year Ended December 31,|
|U.S. $ in thousands||Change in %||Change in %|
|Gross profit attributable to:|
Gross profit as a percentage of net sales for our products and services for the last three years, as well as the percentage change from year to year, was as follows:
|Year Ended December 31,|
|Change in %||Change in %|
|Gross profit as a percentage of revenues from:|
|Total gross profit||14.7%||48.3%||46.7%||-69.6%||3.5%|
2015 Compared to 2014
Gross profit attributable to products sales decreased by $271.6 million, or 87.8%, to $37.7 million in 2015 as compared to $309.3 million in 2014. Gross profit attributable to products sales as a percentage of revenues decreased to 7.5% in 2015 as compared to 50.5% in 2014. The decrease in gross profit attributable to products sales was primarily due to impairment charges of $191.4 million related to certain of our developed technology intangible assets in 2015, as compared to $11.6 million in 2014. The decrease in gross profit was also attributable to a decrease in products net sales, as discussed above, as well as changes in product mix that favored relatively lower-margin systems net sales.
Gross profit attributable to services revenues increased by $11.4 million, or 21.4%, to $64.4 million in 2015 as compared to $53.1 million in 2014. Gross profit from services as a percentage of services revenues in 2015 decreased to 33.6% as compared to 38.5% in 2014. The changes in gross profit from services revenues primarily reflect the inclusion for a full year of Solid Concepts and Harvest Technologies operations in 2015, which resulted in an increase of $10.1 million in 2015 as compared to 2014.
2014 Compared to 2013
Gross profit attributable to products sales increased by $107.9 million, or 53.6%, to $309.3 million in 2014 as compared with $201.4 million in 2013. The increase was attributable to sales growth discussed above. Gross profit attributable to products sales as a percentage of revenues increased to 50.5% in 2014 as compared to 48.6% in 2013, mainly due to product mix sales that favored our higher-margin Production series and high-end Design series systems, as well as flat intangible asset amortization expenses.
Gross profit attributable to services revenues increased by $28.3 million, or 114.5%, to $53.1 million in 2014 as compared with $24.7 million in 2013. The increase was attributable primarily to sales growth discussed above, as well as the inclusion of Solid Concepts and Harvest Technologies operations. Gross profit from services as a percentage of services revenues in 2014 increased to 38.5% from 35.6% in 2013 mainly due to changes in mix of services and economies of scale.
Table of Contents
The amount of each type of operating expense for the last three years, as well as the percentage change between such annual periods, and total operating expenses as a percentage of our total sales in each such annual period, was as follows:
|Year Ended December 31,|
|U.S. $ in thousands||Change in %||Change in %|
|Research and development, net||$||122,360||$||82,270||$||52,310||48.7%||57.3%|
|Selling, general & administrative||434,619||351,993||202,040||23.5%||74.2%|
|Change in fair value of obligations in|
|connection with acquisitions||(23,671||)||(26,150||)||754||-9.5%||-3568.2%|
2015 Compared to 2014
Research and development expenses, net increased by $40.1 million, or 48.7%, in 2015 as compared to 2014. The increase was primarily due to the inclusion of a full year of GrabCad operations, following the acquisition of GrabCad in September, 2014, which added $8.1 million and an increase in headcount to support new research and development initiatives, as well as impairment charges of $18.2 million related to certain of our in-process research and development projects in 2015 as compared to $3.0 million in 2014.
Research and development expense, net as a percentage of sales increased to 17.6% in 2015 as compared to 11.0% in 2014. This increase reflects our intention to continue to invest in research and development in order to bring a broad range of hardware, materials and software solutions to create a leading 3D printing ecosystem.
Selling, general and administrative expenses in 2015 amounted to $434.6 million, compared to $352.0 million in 2014. Selling, general and administrative expenses in 2015 as a percentage of net sales were 62.4% as compared to 46.9% in 2014. The increase of our selling, general and administrative expenses was primarily attributed to impairment charges related to intangible assets of $68.9 million, certain reorganization and other related charges, as well as strategic and marketing activities, including branding and IT related costs.
During the year ended December 31, 2015, we recorded goodwill impairment charges of $942.4 million related to all of our reporting units. During 2015, we determined that certain indicators of potential impairment that required an interim goodwill impairment analysis for all of our reporting units existed. These indicators included a further significant decline in the Companys market capitalization for a sustained period and weaker than expected operating results of its reporting units for 2015, which resulted in changes to the Companys near-term cash flows projections, which reflect, among other things, the increased uncertainty in the 3D printing environment. Accordingly, we performed a quantitative two-step assessment for goodwill impairment for each of our reporting units. As part of the two-step impairment test, we performed calculation for the implied fair value of goodwill of our reporting units and determined that the carrying amount of goodwill assigned to certain of our reporting units exceeded its fair value. As a result, we recorded a non-cash impairment charge of $942.4 million, in order to reduce the carrying amount of goodwill to its implied fair value. We will continue to monitor our reporting units to determine whether events and circumstances warrant further interim impairment testing. For further information, refer to note 7 to our consolidated financial statements included in Item 18 of this annual report.
During the year ended December 31, 2015, we recorded a gain of $23.7 million, compared to a gain of $26.2 million for the year ended December 31, 2014, due to the revaluation of obligations in connection with acquisitions. The gain recorded during the year ended December 31, 2015 was due to the downward revaluation of the deferred payments liability in connection with the Solid Concepts transaction which was mainly attributable to changes in our share price. For further information, see note 2 to our consolidated financial statements included in Item 18 of this annual report.
2014 Compared to 2013
Research and development expenses, net increased by $30.0 million, or 57.3%, during 2014 as compared to 2013. The increase was primarily due to the inclusion of a full year of MakerBot operations, which resulted in an increase of $15.2 million in our research and development expenses and due to an increase in headcount to support new research and development initiatives. Research and development expense as a percentage of sales increased to 11.0% in 2014 as compared to 10.8% in 2013.
Selling, general and administrative expenses increased by 74.2% in 2014 as compared to 2013. The increase in our selling, general and administrative expenses was primarily attributable to the inclusion of Solid Concepts operating results together with related merger, retention and other integration expense of $38.9 million, the inclusion of a full year of MakerBot operations of $30.0 million and an increase in amortization of acquired intangible assets of $7.9 million. The additional increase of our selling, general and administrative expenses was attributed to various strategic and marketing activities, other acquisitions related expenses.
During the year ended December 31, 2014, we recorded a goodwill impairment charge of $102.5 million related to our MakerBot reporting unit. The main factors for this non-cash and non-tax deductible expense were a slower growth of MakerBot product and service revenues, challenges associated with the introduction and scaling of its new product platform, changes in timing of implementation of certain initiatives and changes in MakerBots distribution model.
Table of Contents
During 2014, we recorded a gain of $26.2 million due to changes in fair value of obligations in connection with acquisitions. The gain recorded during the year ended December 31, 2014 was due to the downward revaluations of deferred payments liability in connection with the Solid Concepts transaction and the earn-out liability in connection with the MakerBot transaction which amounted to $7.9 million and $18.3 million, respectively.
Operating loss and operating loss as a percentage of our total net sales for the last three years, as well as the percentage change in operating income between those years, were as follows:
|Year Ended December 31,|
|U.S. $ in thousands||Change in %||Change in %|
|Percentage of sales||-197.3||%||-19.8||%||-6.0||%|
2015 Compared to 2014
Operating loss for the year ended December 31, 2015 was $1,374 million as compared to an operating loss of $148.2 million for the year ended December 31, 2014. The increase in operating loss was primarily attributable to goodwill and other intangible assets impairment charges of $1,221 million.
2014 Compared to 2013
Operating loss for the year ended December 31, 2014 was $148.2 million as compared to an operating loss of $28.9 million for the year ended December 31, 2013. The increase in operating loss was primarily attributable to goodwill and other intangible assets impairment charges of $117.1 million and higher merger, retention and integration expenses, mainly due to the Solid Concepts transaction.
Financial expense, net
2015 Compared to 2014
Financial expenses, net, which were primarily comprised of foreign currencies effects and interest expense, net, amounted to $10.3 million for the year ended December 31, 2015, compared to a financial expense, net of $6.5 million for the year ended December 31, 2014. The increase in financial expense, net was primarily due to costs related to the termination of our revolving credit facility during September 2015 in an amount of $2.7 million, as well as foreign currency translation losses due to changes in the rate of exchange between the U.S. dollar and the local currencies in the markets in which we operate (primarily the Euro).
2014 Compared to 2013
Financial expenses, net, which comprised of mainly foreign currencies effects and interest expense, net, amounted to $6.5 million for the year ended December 31, 2014, compared to a financial expense, net of $0.5 million for the year ended December 31, 2013. The increase is mainly due to foreign currency translation losses.
Table of Contents
Income taxes and income taxes as a percentage of net income before taxes for the last three years, as well as the percentage change in income taxes between those years, were as follows:
|Year Ended December 31,|
|U.S. $ in thousands||Change in %||Change in %|
|As a percent of|
|loss before income taxes||0.7||%||22.8||%||8.4||%||-96.7%||170.7%|
2015 Compared to 2014
Our effective tax rate for the year ended December 31, 2015 was 0.7% as compared to 22.8% tax rate for the year ended December 31, 2014. Our effective tax rate has varied significantly due to the changes in the mix of income (loss) between the U.S. and Israel.
Our effective tax rate for the year ended December 31, 2015, was impacted by goodwill impairment of $942.4 million, as described in note 7 to our consolidated financial statements included in Item 18 of this annual report, which is non-tax deductible, and therefore had a significant impact on the effective tax rate for that period. In addition, the impairment of certain intangible assets and tax deductible goodwill, as described in note 8 to our consolidated financial statements, resulted in a reversal of related deferred tax liabilities amounting to $116.5 million for the year ended December 31, 2015. We also recorded a valuation allowance of $152.1 million against deferred tax assets in respect of deferred tax assets as it is more likely than not that those deferred tax assets will not be realized in the near-term. We will continue to monitor whether the realization of our remaining deferred tax assets is more likely than not.
In addition, during 2015, we adjusted our estimate of long-term tax rates in Israel. As a result, we recorded $4.2 million of income taxes and deferred tax liabilities associated with the amortization of the intangible assets.
2014 Compared to 2013
Favorable factors that impacted our effective tax rate for the year ended December 31, 2014 included income of $18.3 million attributable to the change in fair value of our earn-out, while a goodwill impairment charge of approximately $102.5 million had an unfavorable effect on our effective tax rate. Both of the foregoing were not tax deductible, and therefore had a significant impact on our effective tax rate for the year ended December 31, 2014. In addition, during the third quarter of 2014, we adjusted our estimate of long-term tax rates in Israel. As a result, we recorded an approximately $3.2 million in our income tax expense and an increase in our deferred tax liabilities associated with the amortization of the intangible assets.
In future periods, our effective tax rate is expected to fluctuate as a result of various factors, including changes in the products and geographical distribution of our income, changes in valuation allowance, significant non-tax deductible items, the effect of any mergers and acquisitions, and the effects of statutes of limitations and provisions for uncertain tax positions. We expect that the tax rate in future years will be higher than 2015, as a result of the product mix projected for these years and the changes of the Israeli incentives regime we currently benefit from.
Table of Contents
Net Loss and Net Loss Per Share Attributable to Stratasys Ltd.
Net loss and net loss as a percentage of our total revenues for the last three years, as well as the percentage change in net income between those years, were as follows:
|Year Ended December 31,|
|U.S. $ in thousands||Change in %||Change in %|
|Net loss attributable to Stratasys Ltd.||$||(1,372,835||)||$||(119,420||)||$||(26,954||)||1049.6%||343.1%|
|Percentage of Sales||-197.2||%||-15.9||%||-5.6||%|
|Diluted net loss||$||(26.64||)||$||(2.39||)||$||(0.68||)||1016.0%||251.1%|
2015 Compared to 2014
Net loss attributable to Stratasys Ltd. for the year ended December 31, 2015 was $1,373 million as compared to $119.4 million for the year ended December 31, 2014. This increase of the net loss attributable to Stratasys Ltd was due to the factors that were previously discussed, primarily the increase in goodwill and other intangible assets impairment charges and the decrease in net sales.
Diluted loss per share for the years ended December 31, 2015 and 2014 was $26.64 and $2.39, respectively. The weighted average fully diluted share count for the year ended December 31, 2015 was 51.6 million, compared to 50.0 million for the year ended December 31, 2014. In computing our loss per share for the year ended December 31, 2015, we adjusted the net loss attributable to Stratasys Ltd. by $1.8 million due to excess redemption amount of redeemable non-controlling interest.
2014 Compared to 2013
Net loss attributable to Stratasys Ltd. for the year ended December 31, 2014 was $119.4 million as compared to $27.0 million for the year ended December 31, 2013. Diluted loss per share for the years ended December 31, 2014 and 2013 was $2.39 and $0.68, respectively.
Non-GAAP Financial Measures
The following non-GAAP data, which excludes the categories of expenses described below, are non-GAAP financial measures. Our management believes that these non-GAAP financial measures are useful information for investors and shareholders of our company in gauging our results of operations (x) on an ongoing basis after excluding merger and acquisition related expense, reorganization-related charges, and (y) excluding non-cash charges such as share-based compensation, amortization of intangible assets, impairment charges of goodwill and other long-lived assets and non-recurring changes of non-cash valuation allowance on deferred tax assets that either do not reflect actual cash outlays that impact our liquidity and our financial condition or have a non-recurring impact on the income statement, as assessed by management. These non-GAAP financial measures are presented to permit investors to more fully understand how management assesses our performance. The limitations of using these non-GAAP financial measures as performance measures are that they provide a view of our results of operations without including all events during a period, such as the effects of impairment charges, non-cash compensation and other charges, and may not provide a comparable view of our performance to other companies in our industry. The presentation of these non-GAAP measures is not meant to be considered in isolation or as an alternative to any measure of financial performance calculated in accordance with GAAP.
Table of Contents
Reconciliation of GAAP and Non-GAAP Results of Operations
|Year ended December 31, 2015|
|(U.S. dollars and shares in thousands,|
|except per share amounts)|
|Gross profit (1)||$||102,172||$||259,545||$||361,717|
|Operating income (loss) (1,2)||(1,373,544||)||1,357,577||(15,967||)|
|Net income (loss) attributable to|
|Stratasys Ltd. (1,2,3)||(1,372,835||)||1,382,789||9,954|
|Net income (loss) per diluted share attributable|
|to Stratasys Ltd. (4)||$||(26.64||)||$||26.83||$||0.19|
|(1)||Acquired intangible assets amortization expense||50,353|
|Impairment charges of other intangible assets||191,534|
|Non-cash stock-based compensation expense||5,381|
|Reorganization and other related costs||10,949|
|Merger and acquisition related expense||1,328|
|Acquired intangible assets amortization expense||22,436|
|Non-cash stock-based compensation expense||24,629|
|Impairment charges of other intangible assets||86,937|
|Change in fair value of obligations in connection with acquisitions||(23,671||)|
|Reorganization and other related costs||16,955|
|Merger and acquisition related expense||28,338|
|(3)||Credit facility termination related costs||2,705|
|Corresponding tax effect and other tax adjustments||22,507|
|(4)||Weighted average number of ordinary|
|shares outstanding- Diluted||51,592||52,824|
Table of Contents
|Year ended December 31, 2014|
|(U.S. dollars and shares in thousands,|
|except per share amounts)|
|Gross profit (1)||$||362,394||$||76,877||$||439,271|
|Operating income (loss) (1,2)||(148,189||)||256,452||108,263|
|Net income (loss) attributable to Stratasys Ltd. (1,2,3)||(119,420||)||223,049||103,629|
|Net income (loss) per diluted share attributable to Stratasys Ltd. (4)||$||(2.39||)||$||4.39||$||2.00|
|(1)||Acquired intangible assets amortization expense||56,470|
|Impairment charges of other intangible assets||11,636|
|Non-cash stock-based compensation expense||4,493|
|Merger and acquisition related expense||4,278|
|(2)||Acquired intangible assets amortization expense||24,952|
|Non-cash stock-based compensation expense||25,714|
|Impairment charges of other intangible assets||3,000|
|Change in fair value of obligations in connection with acquisitions||(26,150||)|
|Merger and acquisition related expense||49,589|
|(3)||Corresponding tax effect||(33,403||)|
|(4)||Weighted average number of ordinary|
|shares outstanding- Diluted||50,019||51,805|
Table of Contents
|Year ended December 31, 2013|
|(U.S. dollars and shares in thousands,|
|except per share amounts)|
|Gross profit (1)||$||226,173||$||62,717||$||288,890|
|Operating income (loss) (1,2)||(28,931||)||126,613||97,682|
|Net income (loss) attributable to Stratasys Ltd. (1,2,3)||(26,954||)||108,913||81,959|
|Net income (loss) per diluted share attributable to Stratasys Ltd. (4)||$||(0.68||)||$||2.52||$||1.84|
|(1)||Acquired intangible assets amortization expense||59,343|
|Non-cash stock-based compensation expense||2,980|
|Merger and acquisition related expense||394|
|(2)||Acquired intangible assets amortization expense||17,066|
|Non-cash stock-based compensation expense||21,282|
|Change in fair value of obligations in connection with acquisitions||9,867|
|Merger and acquisition related expense||15,681|
|(3)||Corresponding tax effect||(17,575||)|
|Depreciation and amortization expense attributable to noncontrolling interest||(125||)|
|(4)||Weighted average number of ordinary|
|shares outstanding- Diluted||42,099||44,511|
Forward-looking Statements and Factors That May Affect Future Results of Operation
See Cautionary Note Regarding Forward-looking Statements at the beginning of this annual report (following the table of contents).
Variability of Operating Results
Our sales and profitability may vary in any given year, and from quarter to quarter, depending on the number and mix of products sold and the average selling price of the products, and are also affected by the seasonality of our business. In addition, due to competition, uncertain market acceptance and other factors, we may be required to reduce prices for our products in the future.
Our future results will be affected by a number of factors, including our ability to: increase the number of units sold; develop, introduce and deliver new products on a timely basis; accurately anticipate customer demand patterns; and manage future inventory levels in line with anticipated demand. Our results may also be affected by competitive factors, the extent to which our cost reduction program succeeds, the availability of working capital, results of litigation, the enforcement of intellectual property rights, currency exchange rate fluctuations, commodity prices and economic conditions in the geographic areas in which we operate. Macro factors, such as the extent of growth of the 3D printing market generally, may also impact our operating results. There can be no assurance that our historical performance in sales, gross profit and net income (loss) will improve or even continue, or that sales, gross profit and net income (loss) in any particular quarter will improve over those of preceding quarters, including comparable quarters of previous years. See Item 3.D - Risk Factors above.
Effective Corporate Tax Rate
See Israeli Tax Considerations and Government Programs General Corporate Tax Structure in Israel in Item 4.B above for a discussion of the general tax structure in Israel and applicable corporate tax rates.
Table of Contents
In 2015, we derived a significant portion of our income from facilities granted Approved or Beneficiary Enterprise status, and therefore our effective tax rate was significantly reduced from the historic rate of Stratasys, Inc. See Israeli Tax Considerations and Government Programs The Law for the Encouragement of Capital Investments in Item 4.B above. Income tax expense in our historical financial statements prior to 2013 related primarily to the income taxes of non-Israeli subsidiaries, as income from Objet Ltd. was included only for the month of December, 2012, subsequent to the Stratasys-Objet merger.
In the event we have taxable income in Israel, derived from sources other than Approved or Beneficiary Enterprises, such income would be taxable at the regular Israeli corporate tax rates described above.
As part of the process of preparing our consolidated financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. This process involves our estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final tax examinations and reviews.
Effects of Government Regulations and Location on our Business
For a discussion of the effects of Israeli governmental regulation and our location in Israel on our business, see Israeli Tax Considerations and Government Programs in Item 4.B above and the Risks related to operations in Israel in Item 3.D above.
We believe that inflation has not had a material effect on our operations or on our financial condition during the three most recent fiscal years.
Foreign Currency Transactions
See Foreign Currency Exchange Risk in Item 11 below for a discussion of foreign currency transactions.
Table of Contents
B. Liquidity and Capital Resources
A summary of our statement of cash flows for the three years ended December 31, 2015 is as follows:
|Year ended December 31,|
|U.S. $ in thousands|
|Goodwill and other long-lived assets impairment charges||1,231,385||117,106||-|
|Depreciation and amortization||108,395||109,429||92,436|
|Deferred income taxes||(19,129||)||(53,887||)||(19,449||)|
|Change in fair value of obligations in connection with|
|Foreign currency transactions loss and other non-cash items||8,629||10,602||(4,340||)|
|Change in working capital and other items||15,982||(54,021||)||(34,727||)|
|Net cash provided by (used in) operating and other activities||(21,910||)||13,816||32,029|
|Net cash used in investing activities||(93,102||)||(27,439||)||(226,751||)|
|Net cash provided by (used in) financing activities||(67,004||)||44,941||474,915|
|Effect of exchange rate changes on cash and cash equivalents||(2,533||)||(3,265||)||69|
|Net change in cash and cash equivalents||(184,549||)||28,053||280,262|
|Cash and cash equivalents, beginning of year||442,141||414,088||133,826|
|Cash and cash equivalents, end of year||$||257,592||$||442,141||$||414,088|
Our cash and cash equivalents balance decreased to $257.6 million at December 31, 2015 compared to $442.1 million at December 31, 2014. The decrease in cash and cash equivalents in 2015 was due to cash flows used in operating activities in an amount of $21.9 million, cash flows used in investing activities of $93.1 million and cash used in financing activities in the amount of $67.0 million.
Our cash and cash equivalents balance increased to $442.1 million at December 31, 2014 compared to $414.1 million at December 31, 2013.
Cash flow from operating activities
We used $21.9 million of cash for our operating activities during 2015. The net loss of $1,374 million was adjusted due to non-cash impairment charges of goodwill and other long-lived assets of $1,231 million and depreciation and amortization of $108.4 million. Changes in the deferred income taxes negatively affected our cash flow used in operating activities in an amount of $19.1 million. Changes in working capital and other items of $16.0 million favorably affected our cash flow used in operating activities. Changes in working capital items that favorably affected our cash flow used in operating activities were primarily attributable to decrease in accounts receivable of $25.1 million and an increase of $10.1 million of our deferred revenue liabilities. The changes in our inventories balance negatively affected our working capital in $12.4 million. The changes in working capital reflect the improvement in the efficiency of our working capital management.
We generated cash from operating activities of $13.8 million during 2014. The net loss of $119.5 million was favorably adjusted due to noncash charges for goodwill and other intangible assets impairment of $117.1 million, depreciation and amortization of $109.4 million and stock-based compensation expense of $30.2 million offset mainly by the changes in the deferred income taxes of $53.9 million and in working capital items of $54.0 million.
We generated cash from operating activities of $32.0 million during 2013. The net loss of $26.9 million was favorably adjusted due to noncash charges for depreciation and amortization of $92.4 million and stock-based compensation expense of $24.3 million offset mainly by the changes in the deferred income taxes of $19.4 million and in working capital items of $34.7 million.
Cash flow from investing activities
We used $93.1 million of cash in our investing activities during 2015. Cash was primarily used to purchase property and equipment in an amount of $84.3 million as well as $9.9 million of cash used for acquisitions.
Table of Contents
Property, plant and equipment purchases were $84.3 million in 2015. Our principal property and equipment purchases were for our new facility in Rehovot, Israel which is currently under construction. The new facility in Rehovot, Israel, which we paid approximately $39.1 million for during 2015, will house the Companys Israeli headquarters, research and development facilities and certain marketing activities. Other property and equipment purchases were primarily for the enhancement of our manufacturing capabilities of our facilities in the United States.
Other cash used in our investing activities included $12.7 million of cash used for acquisitions as well as purchases of intangible assets, partially offset by $4.5 million of cash provided by changes in investments in short-term bank deposits, net.
We used $27.4 million of cash in our investing activities during 2014. We used $151.1 million of cash to fund our acquisitions. In addition, we also used non-cash consideration to fund our acquisitions. For further details, see our supplemental disclosure of cash flow information of our consolidated statement of cash flow and note 2 to our consolidated financial statements included in Item 18 of this annual report. Property, plant and equipment purchases totaled $60.5 million and the net changes in our short-term bank deposits provided $189.8 million of cash from investing activities.
We used $226.8 million of cash in our investing activities during 2013. The cash used for investing activities in 2013 primarily related to the purchase of short-term bank deposits, which used cash of $180.3 million, and the purchase of property, plant and equipment of $33.3 million.
Cash flow from financing activities
Net cash used in our financing activities was $67.0 million during 2015. Cash used in financing activities was mainly attributed to net repayment of $50.0 million in connection of the termination of our credit facility. In addition, $19.9 million of cash were used to finance our payments for obligations in connection with acquisitions and was partially offset by proceeds of $2.9 million from the exercise of stock options.
Net cash provided by financing activities was $44.9 million in 2014. Cash provided by financing activities was mainly attributed to our borrowing of $50.0 million under our credit facility during 2014, proceeds of $7.9 million from the exercise of stock options and were partially offset by the cash payment of the first earn-out period obligation in connection with MakerBot transaction in the amount of $10.8 million.
Net cash provided by financing activities was $474.9 million in 2013. Cash provided by financing activities was mainly attributed to net proceeds of $462.9 million from public offering of 5,175,000 of our ordinary shares. Proceed from the exercise of stock options provided cash of $12.5 million to our financing activities.
Capital resources and capital expenditures
Our total current assets amounted to $547.1 million as of December 31, 2015, of which $258.2 million consisted of cash and cash equivalents and short-term bank deposits. Total current liabilities amounted to $172.7 million as of December 31, 2015. Most of our cash and cash equivalents and short-term bank deposits are held in banks in Israel, Switzerland and the U.S., with only minor amounts subject to any restrictions on movement of balances within our company and our subsidiaries.
Our credit risk of our accounts receivable is limited due to the relatively large number of customers and their wide geographic distribution. In addition, we try to reduce the credit exposures of our accounts receivable by credit limits, credit insurance for many of our customers, ongoing credit evaluation and account monitoring procedures.
We believe that we will have adequate cash and cash equivalents to fund our ongoing operations and that these sources of liquidity will be sufficient to satisfy our capital expenditure requirements for the next twelve months.
Revolving credit facility
In September 2015, we terminated our revolving credit facility. In connection with the termination of the revolving credit facility, we repaid all of our outstanding short-term debt thereunder, in an amount of approximately $175 million. That payment was made from our available cash balances. As a result of the termination of our short-term debt under the revolving credit facility, we recorded an additional non-recurring financial expense of $2.7 million which included write-off of unamortized deferred issuance costs and fees paid for certain creditors and other third parties. The termination of our revolving credit facility was executed as part of our assessment of our policies with respect to our working capital and cash management and will enable us to reduce our future interest expenses. We expect to have sufficient liquidity to fund our operations and working capital needs following the termination of the revolving credit facility.
Table of Contents
As discussed in note 2 to our condensed consolidated financial statements, we acquired Solid Concepts on July 14, 2014. At the closing, we paid approximately $162 million as part of the purchase price and other related expenses, of which $60 million was paid in cash and $98 million was paid in our shares; an additional $4 million of the initial purchase price was deferred for six months and was paid in cash during January 2015. The remaining related payments, including deferred consideration and retention bonus payments, are subject to certain adjustments based on our share price. Subject to certain requirements for cash payments, we retain the discretion to settle any of the amounts payable under the Solid Concepts transaction in our shares, cash or any combination of the two. During July 2015, we issued 236,400 ordinary shares in the amount of $8.2 million and paid cash of $3.7 million to settle the first annual installment of the deferred payments and the deferred retention payments. Based on our share price as of December 31, 2015, the total undiscounted amount of the deferred payments consideration and retention bonus amounted to approximately $18.1 million. We believe that our existing cash reserves will be adequate to permit us to make the cash payments if we choose to pay the remaining amount in cash.
As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our cash reserves and other liquid assets may be inadequate to consummate such acquisitions and it may be necessary for us to issue shares or raise substantial additional funds in the future to complete future transactions.
For information concerning our material commitments as of December 31, 2015, see Item 5.F below (Tabular Disclosure of Contractual Obligations).
C. Research and Development, Patents and Licenses, Etc.
For a discussion of our research and development policies, see Research and Development and Regulation Israeli Tax Considerations and Government Programs Law for the Encouragement of Capital Investments in Item 4.B above and the Risks related to operations in Israel in Item 3.D above.
D. Trend Information.
For trend information, see the Risk Factors described in Item 3.D above, the Overview and Operating Results sections of this Item 5 - Operating and Financial Review and Prospects and Item 4 - Information on the Company above.
E. Off-Balance Sheet Arrangements.
Except for standard operating leases, we have not engaged in any off-balance sheet arrangements, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
We do not believe that our off-balance sheet arrangements and commitments have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
F. Tabular Disclosure of Contractual Obligations.
The following table summarizes our material known contractual obligations and commitments as of December 31, 2015 that we expect to require significant cash outlays in future periods:
|Payments Due by Period|
|Less Than||1-3||3-5||More Than|
|Total||1 Year||Years||Years||5 Years|
|U.S. $ in thousands|
|Operating lease obligations (1)||$||60,287||$||12,928||$||18,172||$||12,968||$||16,219|
|Purchase obligations (including|
(1) Includes lease obligations for facilities.
Table of Contents
The total amount of unrecognized tax benefits for uncertain tax positions was $13.9 million as of December 31, 2015. Payment of these obligations would result from settlements with taxing authorities. Due to the difficulty in determining the timing of resolution of audits, these obligations are not included in the above table.
In addition, the Company has obligations in connection with acquisitions, mainly due to the Solid Concepts transaction. For further information refer to Note 2 to our consolidated financial statements included in Item 18 of this annual report.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
A. Directors and Senior Management.
The following table lists the names and ages of our current directors, as well as the names, ages and positions of the current members of our senior management, as of the filing date of this annual report:
|Elchanan Jaglom||74||Chairman of the Board of Directors|
|S. Scott Crump||62||Chairman of the Executive Committee and Chief Innovation Officer|
|David Reis||55||Chief Executive Officer and Director|
|Edward J. Fierko||74||Director|
|John J. McEleney||53||Director|
|Clifford H. Schwieter||69||Director|
|Victor Leventhal||71||External Director*|
|Erez Simha||53||Chief Financial Officer and Chief Operating Officer|
|Joshua Claman||54||Chief Business Officer|
|Tal Dilian||54||Executive V.P., Technology and Products|
|Avi Jacoby||54||Executive V.P., Global Human Resources/Training|
|Dan Yalon||44||Executive V.P., Strategy, Business Development and Vertical Solutions|
*Under the Companies Law, we are required to have two external directors serving on our board of directors. Our board (based on the recommendation of the executive committee thereof) will be nominating a candidate for election as our second external director for a three-year term (to serve alongside Mr. Leventhal, who will also be subject to election) at the 2016 annual general meeting of shareholders. We intend to publish notice and distribute related proxy materials for that shareholder meeting in the near future. The three-year term of Eyal Desheh, our prior external director, expired on February 25, 2016, and he has decided not to continue in that position for an additional term.
Elchanan Jaglom has served as Chairman of the Board of Directors since February 2015. From the Stratasys-Objet merger until February 2015, Mr. Jaglom served as the Chairman of the Executive Committee of our company. Prior to the Stratasys-Objet merger, he served as Chairman of Objects board of directors from 2001 until the Stratasys-Objet merger. Mr. Jaglom also served as the Chairman of Diamond Capital Management Ltd., the investment manager of the Diamond Group of investment funds, until January 2, 2014. In parallel to his involvement with these entities, Mr. Jaglom has been involved in investment management of funds, private equity and venture capital investment since the early 1980s, focusing primarily on early-stage technology companies. He is currently a member of the Board of Trustees of the Tel Aviv Museum of Art and the Ben Gurion University of the Negev. He holds a bachelors degree in economics and statistics from the Hebrew University in Jerusalem and an M.B.A. from New York University.
S. Scott Crump has served as Chairman of the Executive Committee of the Board of Directors since February 2015 and as our Chief Innovation Officer since February 2013. Mr. Crump previously served as Chairman of the Board of Directors from the Stratasys-Objet merger until February 2015, as Chief Executive Officer, President, Treasurer and a director of Stratasys, Inc. from its inception in 1988 until the Stratasys-Objet merger, and as Chief Financial Officer of Stratasys from February 1990 to May 1997. Mr. Crump was, with Lisa H. Crump, his wife, a co-founder of Stratasys, Inc., and he is the inventor of our FDM technology. During the period from 1982 to 1988, Mr. Crump was a co-founder and Vice President of Sales of IDEA, Inc., which later changed its name to SI Technologies, Inc., a leading manufacturer of force, load and pressure transducers. Mr. Crump continued to be a director and shareholder of that company until its sale to Vishay Intertechnologies, Inc. (NYSE: VSH) in April 2005. Mr. Crump holds a B.S. in mechanical engineering from Washington State University.
Table of Contents
David Reis has served as our (and, prior to the Stratasys-Objet merger, as Objets) Chief Executive Officer since March 2009 and as a director since June 2013. He also served as a director of Objet from 2003 until the closing of the Stratasys-Objet merger. Previously, he served as Chief Executive Officer and President of NUR Macroprinters Ltd. (NURMF.PK), a wide format printer manufacturer that was acquired by HP, from February 2006 to March 2008. Prior to joining NUR, Mr. Reis served as the Chief Executive Officer and President of ImageID, an automatic identification and data capture solution provider, and of Scitex Vision (NASDAQ & TASE: SCIX), a developer and manufacturer of wide-format printers. Mr. Reis holds a B.A. in Economics and Management from the Technion-Israel Institute of Technology and an M.B.A. from the University of Denver.
Edward J. Fierko, who has served as a director of our company since the Stratasys-Objet merger, also served in that capacity for Stratasys, Inc. from February 2002 until the merger. Since May 2003, Mr. Fierko has been President of EJF Associates, a consulting firm. From March 2003 to May 2003, Mr. Fierko was Vice President of GE Osmonics, Inc., a manufacturer of reverse osmosis water filtration devices. From November 1999 through February 2003, he served as President and Chief Operating Officer of Osmonics, and from November 1998 to September 1999 he served as Executive Vice President of Osmonics. From September 1987 to August 1998, Mr. Fierko was President and CEO of Ecowater International, a holding company with operating companies in the water, waste and special process treatment industry. Prior to that, Mr. Fierko held several management positions over a 23-year career at General Electric Company (NYSE: GE). He holds a B.S. in Accounting from La Salle University.
Ilan Levin has served as a director of our company since 2000. Mr. Levin was appointed as President and Vice Chairman of the Objet board in February 2011, in which position he remained until the Stratasys-Objet merger. He has been involved in venture capital and private equity investment activity since 1997, acting as a member of the board of directors and as an advisor for a wide variety of technology-related companies, as well as a director for Vision Sigma Ltd. (TLV: VISN:IT). From 2003 through 2009, he served as Chief Executive Officer of CellGuide Ltd. He holds a B.A.Sc. from the University of Toronto and an LL.B. from Tel Aviv University.
John J. McEleney, who has served as a director of our company since the Stratasys-Objet merger, served as a director of Stratasys, Inc. from 2007 until the Stratasys-Objet merger. He is the Chief Executive Officer of Onshape Inc. a venture backed start-up company focused on applying modern computing to the 3D product design market. Prior to Onshape he was the Chief Executive of Cloud Switch, which was acquired by Verizon. He served as a director of SolidWorks Corporation, a wholly owned subsidiary of Dassault Systemes S.A. (NASDAQ: DASTY), from June 2000 to May 2008, and also served as its Chief Executive Officer from 2001 until June 2007. Mr. McEleney joined SolidWorks in 1996, serving in several capacities, including Chief Operating Officer and Vice President, Americas Sales. Prior to joining SolidWorks, Mr. McEleney held several key management positions at CAD software pioneer Computervision and at defense contractor Raytheon. Mr. McEleney also serves as a director of Newforma, a privately held software company. He holds a B.S. in Mechanical Engineering from the University of Rochester, an M.S. in Manufacturing Engineering from Boston University and an M.B.A. from Northeastern University.
Clifford H. Schwieter has been a director of our company since the Stratasys-Objet merger, after having served in that same capacity for Stratasys, Inc. from 1994 until the merger. Since 2009, Mr. Schwieter has been the President and a Managing Director of C.H. Schwieter and Associates, LLC, a management and financial consulting firm; he also served in that capacity from 1994 to 2002. From 2002 to 2009, Mr. Schwieter was the President and Chief Executive Officer of Concise Logic, Inc., a software development company focused on semiconductor design tools. From July 1992 to March 1994, he served as President, Chief Executive Officer and a director of Centric Engineering Systems, Inc., which was engaged in the development of mechanical design and analysis software for computing systems ranging from workstations to mainframes and massively parallel networked computing environments. Mr. Schwieter was Vice President and General Manager of the Electronic Imaging Systems Division of the DuPont Company (NYSE: DD) from 1986 to 1991. From 1971 to 1986, Mr. Schwieter was with the General Electric Company (NYSE: GE), where he served as Vice President of GEs Calma Company from 1985 to 1986 and was responsible for that subsidiarys worldwide business in the mechanical design and factory automation arena. He was President and Representative Director of GE Industrial Automation, Ltd., a joint venture between GE and C. Itoh & Company located in Tokyo, from 1982 to 1985. He holds a B.S. in Industrial Management from the University of Cincinnati.
Ziva Patir has served as our director since June 2013, when she was elected as an unclassified director pursuant to an amendment to our amended articles that was adopted in June 2013. Since February 2014, Ms. Patir serves on the board of directors of ELTA Systems Ltd., an Israeli provider of defense products and services. She also serves as a member of the board of Lahav at Tel-Aviv University, the leading provider of executive education in Israel, a position that she has held since 2003, and as member of the board of Kardan Vehicle Ltd., the Israeli licensee of Avis. Ms. Patir served as the Vice President of Standards, Policy and Sustainability for Better Place, an infrastructure electrical vehicles company providing technology design and service for switchable battery cars, a position that she held from 2008 until May 2013. From 2008 to 2010, she served as Chair of the Board of the Road Safety Authority (RSA) in Israel. From 1996 to 2008, Ms. Patir held the position of Director General of the Standard Institution of Israel (SII). From 1985 to 1996, Ms. Patir served as the Director of the Quality and Certification Division of SII and held various managerial positions in the Industry and Standardization Divisions from 1976 to 1985. From 2004 to 2008, Ms. Patir served as Vice President of the International Organization for Standardization (ISO), as well as chair of the Technical Management Board, leading overall management of ISO technical work. ISO is the worlds largest developer and publisher of international standards. From 1998 to 2000, Ms. Patir was a member of the International Electrotechnical Commission Council Board. Ms. Patir is a Certified Quality Engineer and holds a B.Sc. in Chemistry from Tel-Aviv University and a M.Sc. in Chemistry/Polymer Science from the Weizmann Institute of Science.
Table of Contents
Victor Leventhal serves as an external director of our company. His appointment to that position was effective upon the closing of the Stratasys-Objet merger, on December 1, 2012, and was ratified by our shareholders in February 2013. Mr. Leventhal has served as a consultant to SolidWorks Corporation, a 3D CAD software company, since 2006. From 2001 to 2006, he was a Group Executive for Dassault Systemes S.A. (NASDAQ: DASTY), the parent company of SolidWorks, where he served on the Global Management Committee. From 1995 to 2001, Mr. Leventhal was the Chief Operating Officer of SolidWorks, where he was responsible for growing the business from its inception. From 1990 to 1995, Mr. Leventhal was the Chief Executive Officer of CAD Solutions, LLC, a leading reseller of 2D and 3D CAD products, which he helped grow from a $5 million company to a $32 million company. From 1985 to 1990, he held numerous executive positions, including serving as the Executive Vice President of Computerland, the largest computer retailer at the time, where he was responsible for franchise development, major account sales, marketing, training, purchasing and vendor relations. Prior to that time, he held various administrative, operations, marketing and financial positions at IBM for 18 years. He has also served on the boards of directors of Solido, a 3D printing company, Graphisoft, an architectural software company, and 3D Express, a startup company in the rapid prototyping industry. Mr. Leventhal received a B.B.A. from the University of Texas.
Erez Simha, who joined Objet in November 2011 as its Chief Operations Officer and Chief Financial Officer, has served as our Chief Financial Officer and as our Chief Operating Officer (Israel) (and, since January 2014, the Chief Operating Officer of our entire company) since the Stratasys-Objet merger. Previously, he served as Corporate Vice President and Chief Financial Officer of Orbotech Ltd. (NASDAQ GS: ORBK), a developer of automated optical inspection systems and imaging solutions, from July 2009 to March 2011, prior to which he had served in several other capacities at Orbotech and its affiliates, including as Corporate Vice President for Finance from September 2008 to June 2009, Vice President of Finance and Operations at Orbotech Pacific Ltd. from April 2007 to August 2008 and Vice President of Finance, Operations and Customer Support at Orbotech S.A. from May 2004 to March 2007. Prior to joining Orbotech, Mr. Simha served as Chief Financial Officer of Wiseband Communications Ltd., a developer of digital multi carrier power amplifiers for the wireless communications industry, from 2000 to 2004; as the general manager of a private company engaged in the import and distribution of professional and technical equipment for the building and metal industries, from 1994 to 2000; and as the controller of MishkanHapoalim Mortgage Bank, from 1990 to 1994. Mr. Simha is a certified public accountant and holds a B.A. in economics and accounting and an M.B.A. from Tel Aviv University.
Joshua Claman began serving as our Chief Business Officer in April 2015. Mr. Claman is responsible for overseeing Stratasys Global Sales, Channel, Marketing and Service organizations. He formerly served as president of ReachLocal from July 2012 to May 2014 and as a long term executive of Dell from 2002 to 2012. He has extensive experience managing large global businesses, and has lived in Japan, Australia and the UK. Mr. Claman is a graduate of the University of Illinois with an MBA from the University of South Carolina, and an AMP from Oxford University, UK.
Tal Dilian has served as the Executive Vice President of Global Products and Technology of our company since February 2014. He is responsible for the overall product lifecycle, including global R&D and product marketing. Mr. Dilian served as a board member for Objet from 2010 until the Stratasys-Objet merger in December 2012. Previously, Mr. Dilian served as a special advisor to the chairman of Punj Lloyd from 2010 to 2012, and as Chief Security Architect at AGT from 2008 to 2009. Beginning in 2005, Mr. Dilian founded several startup companies, including SolarEdge and Vidyo. In 2000, he cofounded and served as CEO of Atidim, a nonprofit institution dedicated to educating disadvantaged youth. Mr. Dilian participated in the Interdisciplinary Program for Outstanding Students at Tel-Aviv University, where he earned BA, LLB and MBA degrees.
Avi Jacoby (Jack) joined our company in November 2013 and has served as the Executive Vice President of Global Human Resources and Training of our company since February 2014. Mr. Jacoby plays a lead role in shaping global organizational culture and the continual development of HR processes and infrastructure. Before joining our company, he held three executive management positions at Better Place, from January 2011 to April 2013. Mr. Jacoby holds a masters degree in Diplomacy and Security from Tel Aviv University and a bachelors degree in Architecture and Town Construction from the Technion- Israel Institute of Technology, where he was honored with the Presidents Award of Distinction.
Dan Yalon has served as the Executive Vice President of Strategy, Business Development and Vertical Solutions of our company (previously Objet) since June 2012. Mr. Yalon is responsible for strategy planning, mergers and acquisitions, strategic alliances, and all corporate business development, as well as developing Stratasys long-term vision of dedicated vertical solutions offering. Previously, Mr. Yalon was Chief Strategy Officer at NICE Systems from November 2007 to February 2012 and was head of Strategy and New Business Initiatives at Amdocs from May 2003 to October 2007. He also served on the board of directors of Alvarion Ltd. (formerly NASDAQ:ALVR) during 2012. Mr. Yalon is a graduate of Harvard Business Schools executive education Advanced Management Program and holds a dual bachelors degree in business and law from the Hebrew University in Jerusalem.
Table of Contents
Arrangements for Election of Directors and Members of Management; Family Relationships
Since the expiration of the initial two year term following the Stratasys-Objet merger on December 1, 2014 and the election of our board of directors at an extraordinary general meeting of shareholders that was held on February 3, 2015, there are no longer any classifications or arrangements related to the election of our board of directors. Under the amendments to our articles of association that were adopted at that February 2015 shareholders meeting, our board members are elected at each annual general meeting of shareholders for a one year term (other than our external directors, who are elected every three years for a three year term, in accordance with the Companies Law). For additional information, please see Election of Directors in Item 10.B (Memorandum and Articles of Association) below. There are also no family relationships among any directors or members of our senior management.
The following table presents all compensation that we paid, or accrued, during the year ended December 31, 2015 to all persons who served as a director or as a member of senior management of our company at any time during the year. The table does not include any amounts that we paid to reimburse any of these persons for costs incurred in providing us with services during that period.
|Salaries, Fees, Bonuses||Pension,|
|Related Benefits Paid||and Other Similar|
|or Accrued (1)||Benefits Accrued|
|All directors and members of senior management as a group,|
|consisting of 15 persons (2)||$||3,894,021(3)||$||221,993|
|(1)||Does not include the value attributable to stock option grants. For a discussion of stock option grants to our directors and members of senior management, see below.|
|(2)||Comprised of the 14 current directors and senior management members listed in the table under Directors and Senior Management in Item 6.A above, and including, in addition, Eyal Desheh, who served as an external director during 2015 but whose term has subsequently expired.|
|(3)||This compensation amount for the year ended December 31, 2015 excludes an aggregate of $1.0 million of bonuses that were paid in 2015 in respect of services that had been performed during the previous year.|
Pursuant to the Companies Law, the fees payable to our directors and our chief executive officer require approval by (i) the compensation committee of our board, (ii) the board of directors and (iii) our shareholders (in that order). Please see Compensation Policy and Committee in Item 6.C (Board Practices) below for further information regarding the requirements under the Companies Law in connection with the compensation of directors.
Table of Contents
The following table sets forth the directors fees, salary or other compensation (excluding value attributable to stock option grants and excluding reimbursement for reasonable expenses incurred in connection with services) that was paid in respect of the year ended December 31, 2015 to each of our directors who served during that year:
Per Meeting Fee
|Name of Director||Fee/Salary(1)||Telephonic)|
|S. Scott Crump||$||272,964||(3)|
|Edward J. Fierko||$||68,750||(5)||$1,500/ $250|
|John J. McEleney||$||69,250||(7)||$1,500/ $250|
|Clifford H. Schweiter||$||58,500||$1,500/ $250|
|Ziva Patir||$||38,251||(8)||NIS3,750/ NIS2,250|
|Victor Leventhal||$||42,658||NIS3,750/ NIS2,250|
|Eyal Desheh(9)||$||49,346||NIS3,750/ NIS2,250|
|(1)||The amounts reflected in the Annual Fee/Salary column for our directors include all per-meeting fees paid to the directors in respect of their participation in meetings of the Board and committees on which the directors served in 2015 (which fees are identified in the right-hand column of the table).|
|(2)||Constitutes salary payable in respect of the consulting and director services provided by an entity affiliated with Mr. Jaglom. Does not include Israeli value added tax, or VAT, that is due on the salary payable to Mr. Jaglom.|
|(3)||Constitutes the aggregate salary payable to Mr. Crump for all of the services that he provides to our company, including in respect of his roles as Chairman of the Executive Committee and Chief Innovation Officer of our company. Our shareholders have also approved a bonus target of $178,740 for Mr. Crump. Mr. Crump declined his full bonus for the 2014 year (which would have been paid during 2015), as a one-time event, due to our financial results in 2015.|
|(4)||Constitutes the aggregate salary (excluding VAT) payable to Mr. Reis for all of the services that he provides to our company, including in respect of his role as Chief Executive Officer.|
|(5)||This amount includes a flat fee of $2,500 paid to Mr. Fierko in respect of his service on the Audit Committee of the Board.|
|(6)||These amounts exclude other benefits that are provided for by Israeli law or that are customary for senior executives in Israel, including the right to use (and all related fixed and variable costs in respect of) a leased car that we provide to Mr. Levin.|
|(7)||This amount includes a flat fee of $2,500 paid to Mr. McEleney in respect of his service on the Executive Committee of the Board.|
|(8)||Does not include VAT that is due on the fees payable to Ms. Patir.|
|(9)||Mr. Desheh served as an external director of our company throughout the year ended December 31, 2015. His term has subsequently expired, on February 25, 2016, and he has decided not to be nominated for re-election.|
Table of Contents
Director/Officer Equity Compensation
During the year ended December 31, 2015, we granted stock options to purchase an aggregate of 174,615 of our ordinary shares to members of our senior management (and no options to our directors).
Members of our senior management are eligible for bonuses each year. The bonuses are payable upon meeting objectives and targets that are set annually by our Chief Executive Officer and approved by our compensation committee and our board of directors, in that order. These same corporate bodies also set the bonus targets for our Chief Executive Officer. In accordance with a December 2012 amendment to the Companies Law, we have adopted a compensate*on policy that governs the compensation of our directors and senior management and which has been approved by (i) the compensation committee of our board, (ii) the board of directors and (iii) our shareholders (in that order). Please see Compensation Policy and Committee in Item 6.C (Board Practices) below for further information.
For a description of the terms of our stock option and share incentive plans, see Share Ownership - Stock Option and Share Incentive Plans in Item 6.E below.
Office Holder Compensation
The table below outlines the compensation actually paid to our five most highly compensated senior office holders during or with respect to the year ended December 31, 2015, in the disclosure format of Regulation 21 of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. We refer to the five individuals for whom disclosure is provided herein as our Covered Executives.
For purposes of the table and the summary below, and in accordance with the above mentioned securities regulations, compensation includes base salary, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation.
Table of Contents
Summary Compensation Table
Information Regarding the Covered Executive (1)
|Name and Principal||Base||Variable||Benefit and||Equity-Based||Equity-Based||Total|
|Bre Pettis, Former|
|head of innovation|
|Erez Simha, CFO &|
|Dan Yalon, EVP|
|Scott Crump, Chief|
|Tal Dilian, EVP|
|(1)||All amounts reported in the table are in terms of cost to the Company, as recorded in our financial statements.|
|(2)||All current executive officers listed in the table are full-time employees or consultants of our company. Cash compensation amounts denominated in currencies other than the U.S. dollar were converted into U.S. dollars at the average conversion rate for 2015.|
|(3)||Amounts reported in this column refer to commission, incentive and bonus payments, which were paid with respect to 2015.|
|(4)||Amounts reported in this column include benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car allowance, medical insurances and benefits, risk insurances (e.g., life, disability, accident), convalescence pay, payments for social security, tax gross-up payments and other benefits and perquisites consistent with our guidelines.|
|(5)||Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2015 with respect to equity-based compensation. Equity-based compensation is determined based on the awards' fair value on their grant date. Assumptions and key variables used in the calculation of such amounts are described in note 11 to our audited consolidated financial statements, which are included in Item 18 of this annual report.|
C. Board Practices.
Board of Directors
Under the Companies Law, the management of our business is vested in our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our Chief Executive Officer is appointed by, and serves at the discretion of, our board of directors, subject to the employment agreement that we have entered into with him. All other executive officers are also appointed by our board of directors, subject to the terms of any applicable employment agreements that we may enter into with them.
Table of Contents
Under our amended articles, our board of directors must consist of at least seven and not more than 11 directors, including at least two external directors required to be elected under the Companies Law. Following the expiration of the initial two year term following the Stratasys-Objet merger on December 1, 2014 and the adoption by our shareholders of amendments to our articles at the extraordinary general meeting of shareholders that was held in February 2015, each of our directors is elected annually, at our annual general meeting of shareholders (other than our external directors, who are elected for three year terms every three years in accordance with the requirements of the Companies Law). The vote required for the election of each director (other than external directors) is a majority of the voting power represented at the meeting and voting on the election proposal. The current members of our board consist of the Chairman Elchanan Jaglom, the Chairman of the Executive CommitteeS. Scott Crump, Edward J. Fierko, Ilan Levin, John J. McEleney, Ziva Patir, David Reis, Clifford H. Schwieter and our external directorVictor Leventhal. For more information, please see Election of Directors in Item 10.B (Memorandum and Articles of Association) below.
Our board of directors may appoint directors to fill vacancies on the board, for a term of office equal to the remaining period of the term of office of the director(s) whose office(s) have been vacated. Following their initial three-year term, our external directors may be elected for up to two additional three-year terms under the circumstances described below and potentially for additional incremental three-year terms if additional requirements are met. External directors may be removed from office only under the limited circumstances set forth in the Companies Law. See External Directors in this Item 6.C below.
In accordance with the exemption available to foreign private issuers under the NASDAQ Listing Rules, we do not follow the requirements of the NASDAQ rules with regard to the process of nominating directors. Instead, we follow Israeli law and practice, in accordance with which our board of directors (based on the recommendation of the executive committee thereof) is authorized to recommend to our shareholders director nominees for election. Under the Companies Law and our amended articles, nominations for directors may also be made by any shareholder holding at least one percent (1%) of our outstanding voting power. However, any such shareholder may make such a nomination only if a written notice of such shareholders intent to make such nomination (together with certain documentation required under the Companies Law) has been delivered to our registered Israeli office within seven days after we publish notice of our upcoming annual general meeting (or within 14 days after we publish a preliminary notification of an upcoming annual general meeting).
In addition to its role in making director nominations, under the Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and financial expertise. Under applicable regulations, a director with accounting and financial expertise is a director who, by reason of his or her education, professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. See External Directors in this Item 6.C below. He or she must be able to thoroughly comprehend the financial statements of the company and initiate debate regarding the manner in which financial information is presented. In determining the number of directors required to have such expertise, our board of directors must consider, among other things, the type and size of our company and the scope and complexity of its operations. Our board of directors has determined that our company requires one director with such expertise.
Under the Companies Law, the boards of directors of companies whose shares are publicly traded, including companies with shares listed on the NASDAQ Global Select Market, are required to include at least two members who qualify as external directors. Victor Leventhal serves as one of our external directors, and he has been nominated by our board of directors for election for an additional term by our shareholders at our upcoming 2016 annual general meeting of shareholders. The term of Eyal Desheh, who served as an external director of our company, expired on February 25, 2016, and he has decided not to be nominated for re-election at that upcoming shareholder meeting. We intend to nominate a second external director for election at that upcoming shareholder meeting in the near future.
The Companies Law provides that external directors must be elected by a majority vote of the shares present and voting at a shareholders meeting, provided that either:
the majority voted in
favor of election includes a majority of the shares held by
non-controlling shareholders who do not have a personal interest in the
election of the external director (other than a personal interest not
deriving from a relationship with a controlling shareholder) that are
voted at the meeting, excluding abstentions, which we refer to as a
disinterested majority; or
the total number of shares held by non-controlling, disinterested shareholders (as described in the previous bullet-point) voted against the election of the director does not exceed two percent (2%) of the aggregate voting rights in the company.
The term controlling shareholder is defined in the Companies Law as a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager.
Table of Contents
After an initial term of three years, external directors may be reelected to serve in that capacity for up to two additional three-year terms, provided that either (i) his or her service for each such additional term is recommended by one or more shareholders holding at least one percent (1%) of the companys voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested shareholders voting for such reelection exceeds two percent (2%) of the aggregate voting rights in the company; or (ii) his or her service for each such additional term is recommended by the board of directors and is approved at a shareholders meeting by the same disinterested majority required for the initial election of an external director (as described above). The term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the NASDAQ Global Select Market, may be extended indefinitely in increments of additional three-year terms, in each case provided that the audit committee and the board of directors of the company confirm that, in light of the external directors expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company, and provided that the external director is reelected subject to the same shareholder vote requirements as if elected for the first time (as described above). Prior to the approval of the reelection of the external director at a general shareholders meeting, the companys shareholders must be informed of the term previously served by him or her and of the reasons why the board of directors and audit committee recommended the extension of his or her term.
If an external directorship becomes vacant and there are fewer than two external directors on the board of directors at the time, then the board of directors is required under the Companies Law to call a shareholders meeting immediately to appoint a replacement external director.
Each committee of the board of directors that exercises the powers of the board of directors must include at least one external director, except that the audit committee and compensation committee must include all external directors then serving on the board of directors. Under the Companies Law, external directors of a company are prohibited from receiving, directly or indirectly, any compensation from the company other than for their services as external directors pursuant to applicable regulations. Compensation of an external director is determined prior to his or her appointment and may not be changed during his or her term subject to certain exceptions.
The Companies Law provides that a person is not qualified to serve as an external director if (i) the person is a relative of the controlling shareholder of the company, or (ii) if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly subject, or any entity under the persons control, has or had, during the two years preceding the date of appointment as an external director: (a) any affiliation or other prohibited relationship with the company or, with any person or entity controlling the company of a relative of such person, with any entity controlled by or under common control with the company; or (b) in the case of a company with no controlling shareholder, any affiliation or other prohibited relationship with a person serving as chairman of the board, chief executive officer, a substantial shareholder or the most senior office holder in the companys finance department.
The term relative is defined as a spouse, sibling, parent, grandparent or descendant; spouses sibling, parent or descendant; and the spouse of each of the foregoing persons. The term affiliation and the similar types of prohibited relationships include (subject to certain exemptions):
a business or
professional relationship even if not maintained on a regular basis
(excluding insignificant relationships);
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an external director following the public offering.
The term office holder is defined under the Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions, regardless of that persons title.
In addition, no person may serve as an external director if that persons position or professional or other activities create, or may create, a conflict of interest with that persons responsibilities as a director or otherwise interfere with that persons ability to serve as an external director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. A person may furthermore not continue to serve as an external director if he or she received direct or indirect compensation from the company for his or her role as a director. This prohibition does not apply to compensation paid or given in accordance with Companies Law regulations or amounts paid pursuant to indemnification and/or exculpation contracts or commitments and insurance coverage.
Table of Contents
Following the termination of an external directors service on a board of directors, such former external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholders control. This includes engagement as an executive officer or director of the company or a company controlled by its controlling shareholder or employment by, or provision of services to, any such company for consideration, either directly or indirectly, including through a corporation controlled by the former external director. This restriction extends for a period of two years with regard to the former external director and his or her spouse or child and for one year with respect to other relatives of the former external director.
If at the time at which an external director is appointed all members of the board of directors not otherwise affiliated with the company are of the same gender, the external director must be of the other gender. A director of one company may not be appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time.
According to regulations promulgated under the Companies Law, a person may be appointed as an external director only if he or she has professional qualifications or if he or she has accounting and financial expertise (each, as defined below). In addition, at least one of the external directors must be determined by our board of directors to have accounting and financial expertise. However, if at least one of our other directors (i) meets the independence requirements under the Exchange Act, (ii) meets the standards of the NASDAQ Listing Rules for membership on the audit committee and (iii) has accounting and financial expertise as defined under Israeli law, then neither of our external directors is required to possess accounting and financial expertise as long as both possess other requisite professional qualifications.
A director with accounting and financial expertise is a director who, due to his or her education, experience and skills, possesses an expertise in, and an understanding of, financial and accounting matters and financial statements, in such a manner which allows him or her to understand the financial statements of the company and initiate a discussion about the presentation of financial data. A director is deemed to have professional qualifications if he or she has any of (i) an academic degree in economics, business management, accounting, law or public service, (ii) an academic or other degree or has completed other higher education, all in the field of business of the company or relevant for his/her position, or (iii) at least five years of experience as either a senior managing officer in the companys line of business with a significant volume of business, a public office or a senior position in the companys main line of business.
Our board of directors has determined that Victor Leventhal possesses professional qualifications as required under the Companies Law. Our board has furthermore determined that Edward Fierko meets the independence requirements under the Exchange Act, meets the standards of the NASDAQ Listing Rules for membership on the audit committee and has accounting and financial expertise, as defined under Israeli law. Therefore, pursuant to the above-described Companies Law regulations, neither of our external directors is required to possess accounting and financial expertise.
Under the Companies Law, the board of directors of a public company must appoint an audit committee. The audit committee must consist of at least three directors, including all of the external directors, one of whom must serve as chairman of the committee. The audit committee may not include the chairman of the board, or any director employed by or otherwise providing services to the company or to a controlling shareholder or any entity controlled by a controlling shareholder.
Under the Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated directors. An unaffiliated director is defined as either an external director or as a director who meets the following criteria:
he or she meets the
qualifications for being appointed as an external director, except for (i)
the requirement that the director be an Israeli resident (which does not
apply to companies such as ours whose securities have been offered outside
of Israel or are listed outside of Israel) and (ii) the requirement for
accounting and financial expertise or professional qualifications; and
he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than two years in the service shall not be deemed to interrupt the continuation of the service.
The members of our audit committee consist of Victor Leventhal (who will be nominated for an additional term as an external director), and Edward J. Fierko, and, will also include (assuming his election) the nominee to serve as our second external director at our upcoming annual general meeting of shareholders. Our board of directors has determined that each of Messrs. Leventhal and Fierko meets the independence requirements set forth in the Listing Rules of the NASDAQ Stock Market and in Rule 10A-3 under the Exchange Act, as well as the independence criteria under the Companies Law.
Table of Contents
Our board of directors has determined that Mr. Fierko qualifies as an audit committee financial expert, as defined under Item 16A of the SECs Form 20-F, and has the requisite financial sophistication set forth in the NASDAQ rules and regulations.
Our board of directors has adopted an audit committee charter that sets forth the responsibilities of the audit committee consistent with the rules of the SEC and the Listing Rules of the NASDAQ Stock Market, as well as the requirements for such committee under the Companies Law, including the following:
oversight of our
independent registered public accounting firm and recommending the
engagement, compensation or termination of engagement of our independent
registered public accounting firm to the board of directors in accordance
with Israeli law;
engagement or termination of the person filling the office of our internal
recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our board of directors.
Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent of management.
Under the Companies Law, our audit committee is responsible for (i) determining whether there are deficiencies in the business management practices of our company, including in consultation with our internal auditor or the independent auditor, and making recommendations to the board of directors to improve such practices, (ii) determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest and whether such transaction is extraordinary) (see Approval of related party transactions under Israeli Law below in this Item 6.C), (iii) determining standards and policies for determining whether a transaction with a controlling shareholder or a transaction in which a controlling shareholder has a personal interest is deemed insignificant or not and the approval requirements (including, potentially, the approval of the audit committee) for transactions that are not insignificant including the types of transactions that are not insignificant, (iv) where the board of directors approves the working plan of the internal auditor, to examine such working plan before its submission to the board and propose amendments thereto, (v) examining our internal controls and internal auditors performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities, (vi) examining the scope of our auditors work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor and (vii) establishing procedures for the handling of employees complaints as to the management of our business and the protection to be provided to such employees. Our audit committee may not approve an action or a related party transaction, or take any other action required under the Companies Law, unless at the time of approval a majority of the committees members are present, which majority consists of unaffiliated directors including at least one external director.
Upon the closing of the Stratasys-Objet merger, our board of directors appointed an executive committee. The roles of this committee are (i) to oversee the implementation of the business strategy of our company, subject to board approval for matters outside of the ordinary course of business (as is required under the Companies Law), and (ii) to exercise such other duties as the board may resolve from time to time. The members of the executive committee consist of Messrs. S. Scott Crump, who serves as chairman of the executive committee, Elchanan Jaglom, John McEleney and Ilan Levin. Mr. David Reis, by virtue of his role as our Chief Executive Officer, serves in an observer capacity on the committee.
Compensation Policy and Committee
Under a December 2012 amendment to the Companies Law, we have appointed a compensation committee and established a policy regarding the terms of engagement of office holders, or a compensation policy. Such compensation policy was set by our board, after considering the recommendations of our newly-appointed compensation committee, and was approved by our shareholders in September 2013.
Table of Contents
The compensation policy serves as the basis for decisions concerning the financial terms of employment or engagement of our office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy also relates to certain factors, including advancement of our objectives, our business and our long-term strategy, and creation of appropriate incentives for executives. It also considers, among other things, our risk management, size and the nature of our operations. The compensation policy furthermore considers the following additional factors:
the knowledge, skills,
expertise and accomplishments of the relevant director or executive;
the directors or
executives roles and responsibilities and prior compensation agreements
with him or her;
the relationship between
the terms offered and the average compensation of the other employees of
our company, including those (if any) employed through manpower companies;
the impact of
disparities in salary upon work relationships in our company;
the possibility of
reducing variable compensation at the discretion of the board of
directors; and the possibility of setting a limit on the exercise value of
non-cash variable compensation; and
as to severance compensation, the period of service of the director or executive, the terms of his or her compensation during such service period, our companys performance during that period of service, the persons contribution towards our companys achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving our company.
The compensation policy also includes the following principles:
the link between
variable compensation and long-term performance and measurable criteria;
the relationship between
variable and fixed compensation, and the ceiling for the value of variable
the conditions under
which a director or executive would be required to repay compensation paid
to him or her if it was later shown that the data upon which such
compensation was based was inaccurate and was required to be restated in
our financial statements; and
the minimum holding or vesting period for variable, equity-based compensation.
The compensation policy must also consider appropriate incentives from a long-term perspective and maximum limits for severance compensation.
Under the December 2012 amendment to the Companies Law, our compensation committee is responsible for recommending the compensation policy to our board of directors for its approval (and subsequent approval by our shareholders) and is charged with duties related to the compensation policy and to the compensation of our office holders as well as functions related to approval of the terms of engagement of office holders, including:
recommending whether our
compensation policy should continue in effect, if the then-current policy
has a term of greater than three (3) years (approval of the continuation of an existing compensation policy
for a company such as ours must in any case occur every three years);
recommending to our
board periodic updates to the compensation policy;
of the compensation policy; and
determining whether the compensation terms of the chief executive officer of our company need not be brought to approval of the shareholders (under special circumstances).
The compensation committee must consist of at least three (3) members, including all of our external directors. Each remaining compensation committee member must be a director whose compensation does not exceed an amount that may be paid to an external director. The compensation committee is subject to the same Companies Law restrictions as the audit committee as to (a) committee membership and (b) who may not be present during committee deliberations (as described under Approval of Related Party Transactions Under Israeli LawFiduciary Duties of Directors and Executive OfficersDisclosure of Personal Interests of an Office Holder below).
Table of Contents
The NASDAQ Listing Rules also require that the compensation of the chief executive officer and all other executive officers of our company be determined, or be recommended to the board for determination, either by a majority of the independent directors, or by a compensation committee consisting solely of independent directors. We have opted to follow home country (that is, Israeli) practice (in keeping with the Companies Law requirements described above) for our compensation committee in lieu of these NASDAQ requirements, given that the two sets of requirements are not identical. See Item 16.G of this annual report (Corporate Governance) below.
We appointed our compensation committee in mid-2013. The committee currently consists of Victor Leventhal and Ziva Patir, and, will also include our second external director upon (and assuming) his election as an external director at our upcoming annual general shareholder meeting. Once the full three member committee is duly constituted, it will appoint a chairman of the committee. After the compensation committee recommended approval of our compensation policy, our board of directors approved the policy in August 2013 and our shareholders approved it on September 12, 2013.
Our board of directors does not currently have a nominating committee, as director nominations are made in accordance with the terms of our articles, as described in Board of Directors above. We rely upon the exemption available to foreign private issuers under the Listing Rules of the NASDAQ Stock Market from the NASDAQ listing requirements related to independent director oversight of nominations to our board of directors and the adoption of a formal written charter or board resolution addressing the nominations process. Also see Item 16.G Corporate Governance below.
Under the Companies Law, the board of directors of an Israeli public company must appoint an internal auditor recommended by the audit committee and nominated by the board of directors. An internal auditor may not be:
a person (or a relative
of a person) who holds more than 5% of the companys outstanding shares or
a person (or a relative
of a person) who has the power to appoint a director or the general
manager of the company;
an office holder
(including a director) of the company (or a relative thereof); or
a member of the companys independent accounting firm, or anyone on his or her behalf.
The role of the internal auditor is to examine, among other things, our compliance with applicable law and orderly business procedures. Moshe Cohen of Chaikin Cohen Rubin & Co. has served as our internal auditor since his appointment effective upon the Stratasys-Objet merger.
Approval of Related Party Transactions Under Israeli Law
Fiduciary Duties of Directors and Executive Officers
The Companies Law codifies the fiduciary duties that office holders owe to a company. Each person listed in the table under Item 6.A Directors and Senior Management is an office holder under the Companies Law.
An office holders fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty requires that an office holder act in good faith and in the best interests of the company. The duty of care includes a duty to use reasonable means to obtain:
information on the
advisability of a given action brought for his or her approval or
performed by virtue of his or her position; and
all other important information pertaining to these actions.
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:
refrain from any
conflict of interest between the performance of his or her duties to the
company and his or her other duties or personal affairs;
refrain from any
activity that is competitive with the company;
refrain from exploiting
any business opportunity of the company to receive a personal gain for
himself or herself or others; and
disclose to the company any information or documents relating to the companys affairs which the office holder received as a result of his or her position as an office holder.
Table of Contents
Disclosure of Personal Interests of an Office Holder
The Companies Law requires that an office holder promptly disclose to the board of directors any personal interest that he or she may have and all related material information known to him or her and any documents concerning any existing or proposed transaction with the company. An interested office holders disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. A personal interest includes an interest of any person in an act or transaction of a company, including a personal interest of ones relative or of a corporate body in which such person or a relative of such person is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager, but excluding a personal interest stemming from ones ownership of shares in the company. A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the interest of the office holder with respect to his or her vote on behalf of the shareholder for whom he or she holds a proxy even if such shareholder itself has no personal interest in the approval of the matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction. Under the Companies Law, an extraordinary transaction is defined as any of the following:
a transaction other than
in the ordinary course of business;
a transaction that is
not on market terms; or
a transaction that may have a material impact on a companys profitability, assets or liabilities.
If it is determined that an office holder has a personal interest in a transaction, approval by the board of directors is required for the transaction, unless the companys articles of association provide for a different method of approval. Further, so long as an office holder has disclosed his or her personal interest in a transaction, the board of directors may approve an action by the office holder that would otherwise be deemed a breach of duty of loyalty. However, a company may not approve a transaction or action that is adverse to the companys interest or that is not performed by the office holder in good faith. Approval first by the companys audit committee and subsequently by the board of directors is required for an extraordinary transaction with an office holder. Compensation of, or an undertaking to indemnify or insure, an office holder, requires approval by the compensation committee, the board of directors and, in certain cases (for directors, the chief executive officer, and any executive officer whose compensation terms do not conform to the then-existing compensation policy) the shareholders, in that order. Compensation of an individual office holder, including the chief executive officer (but excluding a director), that does not conform to the companys compensation policy may be adopted under special circumstances despite failure to obtain shareholder approval if,following the relevant shareholder vote, the compensation committee followed by the board once again approves the compensation, based on renewed and specific analysis of relevant factors.
Generally, a person who has a personal interest in a matter which is considered at a meeting of the board of directors, the audit committee or compensation committee may not be present at such a meeting or vote on that matter unless a majority of the board, audit committee or compensation committee (as appropriate) has a personal interest in the matter, or unless the chairman of the board, audit committee or compensation committee (as appropriate) determines that he or she should be present in order to present the transaction that is subject to approval. If a majority of the members of the board, audit committee or compensation committee has a personal interest in the approval of a transaction, then all directors may participate in discussions of the board of directors, audit committee or compensation committee on such transaction and the voting on approval thereof, but shareholder approval is also required for such transaction.
Disclosure of Personal Interests of Controlling Shareholders
Pursuant to Israeli law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. In the context of a transaction involving a shareholder of the company, a controlling shareholder also includes any shareholder who holds 25% or more of the voting rights if no other shareholder holds more than 50% of the voting rights. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be a single shareholder and may be deemed a controlling shareholder for the purpose of approving such transaction. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, or a transaction with a controlling shareholder or his or her relative, directly or indirectly, require the approval of the audit committee, the board of directors and the shareholders of the company, in that order. In addition, the shareholder approval must fulfill one of the following requirements:
the votes of shareholders who have no personal interest in the transaction and who are present and voting, in person, by proxy or by voting deed at the meeting, and who vote against the transaction may not represent more than two percent (2%) of the voting rights of the company.
Table of Contents
To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every three years, unless the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.
The engagement of a controlling shareholder as an office holder or employee requires the same approvals as are described immediately above, except that the approval of the compensation committee, rather than the audit committee, is required.
Pursuant to the Companies Law, a shareholder has a duty to act in good faith and in a customary manner toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at the general meeting of shareholders and at class shareholder meetings with respect to the following matters:
an amendment to the
companys articles of association;
an increase of the
companys authorized share capital;
a merger; or
the approval of interested party transactions and acts of office holders that require shareholder approval.
In addition, a shareholder also has a general duty to refrain from discriminating against other shareholders.
In addition, certain shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that it has the power to determine the outcome of a shareholder vote or a shareholder class vote and any shareholder who has the power to appoint or to prevent the appointment of an office holder of the company or other power towards the company. The Companies Law does not define the substance of this duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is inserted in its articles of association. Our amended articles include such a provision. The company may not exculpate in advance a director from liability arising out of a prohibited dividend or distribution to shareholders.
Under the Companies Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed by him or her as an office holder, either in advance of an event or following an event, provided its articles of association include a provision authorizing such indemnification:
incurred by or imposed on him or her in favor of another person pursuant
to a judgment, including a settlement or arbitrators award approved by a
court. However, if an undertaking to indemnify an office holder with
respect to such liability is provided in advance, then such an undertaking
must be limited to events which, in the opinion of the board of directors,
can be foreseen based on the companys activities when the undertaking to
indemnify is given, and to an amount or according to criteria determined
by the board of directors as reasonable under the circumstances, and such
undertaking shall detail the abovementioned foreseen events and amount or
expenses, including attorneys fees, incurred by the office holder as a
result of an investigation or proceeding instituted against him or her by
an authority authorized to conduct such investigation or proceeding,
provided that (i) no indictment was filed against such office holder as a
result of such investigation or proceeding; and (ii) no financial
liability was imposed upon him or her as a substitute for the criminal
proceeding as a result of such investigation or proceeding or, if such
financial liability was imposed, it was imposed with respect to an offense
that does not require proof of criminal intent; and
reasonable litigation expenses, including attorneys fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for an offense that does not require proof of criminal intent.
Table of Contents
Under the Companies Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the companys articles of association:
a breach of the duty of
loyalty to the company, provided that the office holder acted in good
faith and had a reasonable basis to believe that the act would not harm
a breach of duty of care
to the company or to a third party, to the extent such a breach arises out
of the negligent conduct of the office holder; and
a financial liability imposed on the office holder in favor of a third party.
Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
a breach of fiduciary
duty, except for indemnification and insurance for a breach of the duty of
loyalty to the company to the extent that the office holder acted in good
faith and had a reasonable basis to believe that the act would not
prejudice the company;
a breach of duty of care
committed intentionally or recklessly, excluding a breach arising out of
the negligent conduct of the office holder;
an act or omission
committed with intent to derive illegal personal benefit; or
a fine or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by our compensation committee and our board of directors and, with respect to directors or controlling shareholders, their relatives and third parties in which such controlling shareholders have a personal interest, also by the shareholders. See Approval of Related Party Transactions Under Israeli LawFiduciary Duties of Directors and Executive Officers above in this Item 6.C.
Our amended articles permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted by the Companies Law.
We have obtained directors and officers liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Companies Law. In addition, we have entered into agreements with each of our office holders undertaking to indemnify them to the fullest extent permitted by Israeli law. Furthermore, until the sixth anniversary of the effective time of the Stratasys-Objet merger, we are covering the directors and officers of Stratasys, Inc. and its subsidiaries with respect to acts or omissions occurring prior to the effective time of the merger. The limits, terms and conditions of this coverage are at least as favorable as the limits, terms and conditions in the policy that Stratasys, Inc. maintained up to the effective time of the Stratasys-Objet merger.
Directors Service Contracts
For a description of service contracts that we have entered into with our directors that provide for benefits upon termination of employment or other service, please see Item 7.B, Related Party Transactions Employment and Consulting Agreements with Directors and Executive Officers below.
The number of our full-time equivalent employees, and the distribution of employees (i) geographically and (ii) within the divisions of our company, in each case as of December 31, 2015, 2014 and 2013 are set forth in the two tables below.
Table of Contents
|Number of full-time equivalent employees|
|by region as of December 31,|
|Number of full-time equivalent employees|
|by function as of December 31,|
|Operations and support||929||1,178||541|
|Research and development||543||517||267|
|Sales and marketing||558||600||515|
|General and administrative||403||412||280|
During the years covered by the above tables, we did not employ a significant number of temporary employees.
The moderate decrease in the size of our workforce in 2015 was due to our implementation of operational efficiencies, which included elimination of excess employees in certain divisions of our company. The large increase in the size of our workforce in 2014 was primarily due to our acquisition of Solid Concepts, Harvest Technologies, GrabCAD, and other companies.
While none of our employees is party to a collective bargaining agreement, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists Associations) are applicable to our employees in Israel by order of the Israel Ministry of Labor. These provisions primarily concern the length of the workday, minimum daily wages for professional workers, pension fund benefits for all employees, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums.
We have never experienced any employment-related work stoppages. We believe that our relationship with our employees is good.
The employees of our subsidiaries are subject to local labor laws and regulations that vary from country to country.
E. Share Ownership.
The following table lists, as of February 15, 2016, the number of our ordinary shares owned, and stock options held, by each of our directors and members of our senior management who served as such during the year ended December 31, 2015:
Table of Contents
|Shares of Stratasys(1)||Stratasys stock options(3)|
|Percent of||Number held(4)|
|Name||owned (2)||owned(2)||within 60 days||within 60 days||share||date|
Chairman of the Board
|See table in Item 7. A Major Shareholders below.|
|S. Scott Crump||360,873||(5)||*||18,000||||$||25.50||August 29, 2017|
|Chairman of the Executive Committee||10,800||7,200||$||46.87||June 18, 2018|
|68,749||31,251||$||82.15||June 21, 2023|
|David Reis||237,498||*||172,436||||$||6.52||December 31, 2017|
|Chief Executive Officer and Director|
|Edward J. Fierko||92,925||(6)||*||18,000||||$||25.50||August 29, 2017|
|Director||10,800||7,200||$||46.87||June 18, 2018|
|15,125||6,875||$||82.15||June 21, 2023|
|8,250||13,750||$||103.30||August 8, 2020|
|Ilan Levin||144,344||*||100,062||||$||7.82||December 31, 2017|
|Director||24,782||||$||2.21||December 31, 2017|
|John J. McEleney||26,975||*||3,600||7,200||$||46.87||June 18, 2018|
|Director||15,125||6,875||$||82.15||June 21, 2023|
|8,250||13,750||$||103.30||August 8, 2020|
|Clifford H. Schwieter||31,437||*||7,200||7,200||$||46.87||June 18, 2018|
|Director||15,125||6,875||$||82.15||June 21, 2023|
|8,250||13,750||$||103.30||August 8, 2020|
|Ziva Patir||20,338||(7)||*||20,338||9,244||$||82.15||June 21, 2023|
|Eyal Desheh||16,180||*||16,180||1,079||$||7.82||December 1, 2022|
|Victor Leventhal||15,957||*||12,957||6,222||$||74.95||December 1, 2022|
|Chief Financial Officer (9)|
|Chief Business Officer (9)|
|Executive V.P., Technology and Products (9)|
|Executive VP Global Human
Resources/ Training (9)
|EVP Strategy, Marketing & BD (9)|
|*||Constitutes less than 1% of our outstanding shares.|
|(1)||All of our shares (including shares held by directors and members of senior management) have identical voting rights.|
|(2)||In accordance with Rule 13d-3 under the Exchange Act, the number of shares and the percentages shown for individual persons or groups include any ordinary shares underlying stock options held by such person or group that were exercisable within 60 days of February 1, 2015 and that are also reflected in the column titled Stratasys stock options Number held Exercisable within 60 days. Further in keeping with such Rule 13d-3, the computation of percentage ownership is based upon 52,102,594 ordinary shares outstanding at February 15, 2016, plus such number of ordinary shares as such person (but not any other person or group) had the right to receive upon the exercise of stock options within 60 days thereof.|
|(3)||For a description of Stratasys stock option plans, please see Stock Option and Share Incentive Plans in this Item below. All options granted under such plans have been granted without payment of any cash consideration therefor by the grantees thereof.|
|(4)||Each stock option is exercisable for one ordinary share.|
|(5)||Includes 196,294 ordinary shares owned of record by Mr. Crumps wife.|
|(6)||Includes 40,750 ordinary shares held jointly by Mr. Fierko and his wife.|
|(7)||Includes 255 ordinary shares held by Ms. Patirs husband.|
|(8)||Mr. Desheh served as an external director of our company throughout the year ended December 31, 2015. His term has subsequently expired, on February 25, 2016, and he has elected not to be nominated for re-election.|
|(9)||Because each of Messrs. Simha, Claman, Dilian, Jacoby and Yalon beneficially owns less than 1% of our outstanding ordinary shares and his beneficial ownership has not previously been disclosed to our shareholders or otherwise made public, it is being omitted from this annual report pursuant to an allowance provided by the SECs Form 20-F.|
Stock Option and Share Incentive Plans
The following sets forth certain information with respect to our current stock option and share incentive plans. The following description is only a summary of the plans and is qualified in its entirety by reference to the full text of the plans, which are exhibits to this annual report.
Upon the expiration of our stock option and share incentive plans, no further grants may be made thereunder, although any existing awards will continue in full force in accordance with the terms under which they were granted.
Amended and Restated 2004 Omnibus Stock Option and Restricted Stock Incentive Plan
Our Amended and Restated 2004 Omnibus Stock Option and Restricted Stock Incentive Plan, or the 2004 Plan, which was adopted by our board of directors on August 15, 2004 and amended and restated by the board of directors on July 9, 2007 and again on May 30, 2011, provides for the grant of options, restricted shares or other share-based awards to our and our subsidiaries respective directors, employees, officers, office holders, subcontractors and consultants. Awards under the 2004 Plan may be granted until August 15, 2014, ten years from the date on which the 2004 Plan was originally adopted by the board of directors.
Table of Contents
Our 2004 Plan is administered by our board of directors, which shall determine, subject to Israeli law, the grantees of awards and various terms of the grant. The 2004 Plan provides for granting options in compliance with Section 102 of the Income Tax Ordinance, 1961, to which we refer as the Tax Ordinance.
Options granted under the 2004 Plan to Israeli employees have been granted under the capital gains track of Section 102 of the Tax Ordinance. In order to comply with the terms of the capital gains track, all options that have been granted under the 2004 Plan (grants were not made until the 2006 fiscal year) pursuant and subject to the provisions of Section 102 of the Tax Ordinance, as well as the shares issued upon exercise of these options and other shares received subsequently following any realization of rights with respect to such options, such as a result of a share dividend or share split, are granted to a trustee for the benefit of the relevant employee, director or officer and are held by the trustee for at least two years after the date of grant.
Unless otherwise provided by our board of directors, options granted under the 2004 Plan vest over a four-year period that commences on the date of grant such that 25% vest after one year and an additional 6.25% vest at the end of each subsequent three-month period over the following 36 months. Unless a shorter term is set by our board with respect to a specific award, options, other than certain incentive share options, expire 10 years from the grant date. Incentive share options granted to a person holding more than 10% of our voting power expire within five years from the date of the grant. All options that have been granted to date under the 2004 Plan expire on December 31, 2017.
If we terminate a grantees employment or service for cause, all of the grantees vested and unvested options expire on the date of termination. If a grantees employment or service terminates due to death, disability, or retirement, the grantees vested options may be exercised by him or her, or by his or her estate (as the case may be), for one year, following the death or disability, or three months following retirement. If a grantees service or other relationship to our company terminates for any other reason, the grantee may exercise his or her vested options until the 90th day after the date of such termination (or such different period as our board shall prescribe). In addition to the shares reserved under the 2004 Plan, any options granted under the 2004 Plan that are terminated or forfeited for any reason without having been exercised, return to the pool under the plan and enlarge the reserved shares under the plan. Shares subject to options granted under the 2004 Plan that terminate or are forfeited for any reason without having been exercised will be added to the pool of shares available for awards under our 2012 Omnibus Equity Incentive Plan, or the 2012 Plan, and enlarge the reserved shares thereunder.
In the event of a merger or consolidation of our company, or sale of all or substantially all of our shares or assets, then without the consent of the option holder, the board may but is not required to (i) use its best efforts to cause that any outstanding award shall be assumed or an equivalent award shall be substituted by such successor corporation or (ii) in case the successor corporation refuses to assume or substitute the award (a) provide the grantee with the option to exercise the award as to all or part of the shares or (b) cancel the option against payment to the grantee in an amount equal to the fair market value of such shares as reflected under the terms of such merger or sale minus the exercise price per share for each such share. Notwithstanding the foregoing, the board may upon such event amend or terminate the terms of any award, including conferring the right to purchase any other security or asset that the board shall deem, in good faith, as appropriate.
We will not be making any further awards under the 2004 Plan, as the 2012 Plan has taken its place for future awards. A total of 626,940 ordinary shares are issuable upon exercise of outstanding options that are vested and currently exercisable under the 2004 Plan.
2012 Omnibus Equity Incentive Plan
Our 2012 Omnibus Equity Incentive Plan, which became effective at the effective time of the Stratasys-Objet merger, provides for the grant of options, restricted shares, restricted share units and other share-based awards to our and our subsidiaries respective directors, employees, officers, consultants, and advisors and to any other person whose services are considered valuable to our company or any of our affiliates. Following the approval of the 2012 Plan by the Israeli tax authorities, we will only grant options or other equity incentive awards under the 2012 Plan, although previously-granted options and awards will continue to be governed by the 2004 Plan. Under the 2012 Plan, there were 2,500,000 ordinary shares originally reserved for issuance, none of which was granted prior to the effectiveness of the merger. Upon the adoption of an amendment to the 2012 Plan at our extraordinary general meeting of shareholders in February 2013, the reserved pool under the plan consisted of 4,000,000 shares, which was to be automatically increased annually on January 1 (beginning on January 1, 2014) by a number of ordinary shares equal to the lower of (i) 500,000 shares, subject to adjustment due to certain changes as provided under the 2012 Plan, and (ii) a number of shares determined by our board of directors, if so determined prior to the January 1 on which the increase will occur. Pursuant to that provision, on each of January 1, 2014, January 1, 2015 and January 1, 2016, the pool of shares under the 2012 Plan was automatically increased by 500,000 shares, to 4,500,000 shares, 5,000,000 and 5,500,000 shares total, respectively.
The 2012 Plan is administered by our board of directors or by a committee designated by the board, which determines, subject to Israeli law, the grantees of awards and the terms of the grant, including, exercise prices, vesting schedules, acceleration of vesting and the other matters necessary in the administration of the 2012 Plan. The 2012 Plan enables our company to issue awards under various tax regimes including, without limitation, pursuant to Sections 102 and 3(9) of the Tax Ordinance and Section 422 of U.S. Internal Revenue Code of 1986, to which we refer as the Code.
Table of Contents
Section 102 of the Tax Ordinance allows employees, directors and officers who are not controlling shareholders and are considered Israeli residents to receive favorable tax treatment for compensation in the form of shares or options. Our Israeli non-employee service providers and controlling shareholders may only be granted options under Section 3(9) of the Tax Ordinance, which does not provide for similar tax benefits. Section 102 of the Tax Ordinance includes two alternatives for tax treatment involving the issuance of options or shares to a trustee for the benefit of the grantees and also includes an additional alternative for the issuance of options or shares directly to the grantee. Section 102(b)(2) of the Tax Ordinance, the most favorable tax treatment for grantees, permits the issuance to a trustee under the capital gains track. However, under this track we will not be allowed to deduct an expense with respect to the issuance of the options or shares. Options granted under the 2012 Plan to U.S. residents may qualify as incentive stock options within the meaning of Section 422 of the Code. The exercise price for incentive stock options must not be less than the fair market value on the date on which an option is granted, or 110% of the fair market value if the option holder holds more than 10% of our share capital.
Under the 2012 Plan, we are expected to grant options to our employees, directors and officers who are not controlling shareholders and are considered Israeli residents, under the capital gains track. In order to comply with the terms of the capital gains track, all options granted under the 2012 Plan pursuant and subject to the provisions of Section 102 of the Tax Ordinance, as well as the ordinary shares to be issued upon exercise of these options and other shares received subsequently following any realization of rights with respect to such options, such as share dividends and share splits, must be granted to a trustee for the benefit of the relevant employee, director or officer and should be held by the trustee for at least two years after the date of the grant.
Awards under the 2012 Plan may be granted until September 16, 2022, ten years from the date on which the 2012 Plan was approved by our shareholders.
Options granted under the 2012 Plan generally vest over four years commencing on the date of grant such that 25% vest after one year and an additional 6.25% vest at the end of each subsequent three-month period thereafter for 36 months. Options, other than certain incentive share options, that are not exercised within ten years from the grant date expire, unless otherwise determined by the board or its designated committee, as applicable. Incentive share options granted to a person holding more than 10% of the combined companys voting power expire within five years from the date of the grant. In case of termination for reasons of death, disability, or retirement, the grantee or his legal successor may exercise options that have vested prior to termination within a period of one year from the date of disability or death, or within three months following retirement. If we terminate a grantees employment or service for cause, all of the grantees vested and unvested options will expire on the date of termination. If a grantees employment or service is terminated for any other reason, the grantee may exercise his or her vested options within 90 days of the date of termination. Any expired or unvested options return to the pool for reissuance.
In the event of a merger or consolidation of our company, or a sale of all, or substantially all, of our shares or assets or other transaction having a similar effect, then without the consent of the option holder, the board or its designated committee, as applicable, may but is not required to (i) cause any outstanding award to be assumed or an equivalent award to be substituted by such successor corporation or (ii) in case the successor corporation refuses to assume or substitute the award (a) provide the grantee with the option to exercise the award as to all or part of the shares or (b) cancel the options against payment in cash in an amount determined by the board or the committee as fair in the circumstances. Notwithstanding the foregoing, the board or its designated committee may upon such event amend or terminate the terms of any award, including conferring the right to purchase any other security or asset that the board shall deem, in good faith, appropriate.
Stratasys, Inc. Plans
Pursuant to the Stratasys-Objet merger agreement, upon the consummation of the Stratasys-Objet merger, each option exercisable for one share of Stratasys, Inc. common stock converted into an option to purchase one ordinary share of Stratasys Ltd. Furthermore, we assumed the obligations of Stratasys, Inc. related to the issuance of shares underlying those options under its then-existing option plans, consisting of the Stratasys, Inc. 1998 Incentive Stock Option Plan, Stratasys, Inc. 2000 Incentive Stock Option Plan, Stratasys, Inc. 2002 Long-Term Performance and Incentive Plan, and Stratasys, Inc. 2008 Long-Term Performance and Incentive Plan, which we refer to collectively as the Stratasys, Inc. plans. Each option so assumed pursuant to the Stratasys-Objet merger agreement remains governed by the terms and conditions of the relevant grant instrument as well as the Stratasys Inc. plan under which it was granted (with appropriate changes to reflect Stratasys Ltd. as the company whose shares are issuable upon exercise of the option). A total of 148,075 ordinary shares are issuable upon exercise of options that are vested and currently exercisable under the Stratasys, Inc. plans.
Table of Contents
The following table presents certain option data information for the above-described stock option and share incentive plans as at February 1, 2016:
|Reserved||Number of||Number of||Price of|
|Plan||Grants||Granted out of Reserve||for Future Grants||Outstanding||Options|
|2004 Plan||||||None||660, 535||$||11.46|
|Stratasys, Inc. Plans||||||None||234,875||$||40.69|
On December 3, 2012, we filed a registration statement on Form S-8 to register the issuance of ordinary shares in respect of then-outstanding options to directors, officers, employees and eligible consultants under the 2004 Plan and the Stratasys, Inc. plans. On September 3, 2013, we filed a registration statement on Form S-8 to register the issuance of ordinary shares underlying options granted or to be granted under the 2012 Plan.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. Major Shareholders
Ownership by Major Shareholders
The following table presents the beneficial ownership of our ordinary shares by each person who is known by us to be the beneficial owner of 5% or more of our outstanding ordinary shares (to whom we refer as our major shareholders), based on the most recent beneficial ownership reports filed with the SEC by such persons on or before February 15, 2016. The data presented is based on information provided to us, or disclosed in public filings with the SEC, by the major shareholders.
Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares for which a person exercises sole or shared voting or investment power, or for which a person has or shares the right to receive the economic benefit of ownership of the shares. The table below includes the number of shares underlying options that are exercisable within 60 days after February 15, 2015. Shares issuable upon the exercise of such options are deemed to be outstanding for the purpose of computing the ownership percentage of the person, entity or group holding such options, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person, entity or group. The ownership percentages reflected below are based on 52,102,594 ordinary shares outstanding as of February 15, 2015.
Except where otherwise indicated, and except pursuant to community property laws, we believe, based on information furnished by such owners, that the beneficial owners of the shares listed below have sole investment and voting power with respect to, and the sole right to receive the economic benefit of ownership of, such shares. The shareholders listed below do not have any different voting rights from any of our other shareholders. We know of no arrangements that would, at a subsequent date, result in a change of control of our company.
|Beneficial Owner||Shares||within 60 Days||Ownership||Ownership|
|Roy J. Zuckerberg||3,234,227||(1)||||3,234,227||6.2%|
|Samson Capital LLC||2,699,787||(3)||||2,699,787||5.2%|
|PRIMECAP Management Company||3,285,000||(4)||||3,285,000||6.3%|
|T. Rowe Price Associates, Inc.||2,762,172||(5)||||2,762,172||5.3%|
|(1)||Represents shares beneficially owned as of December 31, 2015, as indicated in the amended statement of beneficial ownership on Schedule 13G/A filed jointly by Samson Capital, LLC and Roy J. Zuckerberg on February 11, 2016. Consists of 13,602 ordinary shares held by Zuckerberg Investment Partners, LP, 2,699,787 ordinary shares held by Samson Capital, LLC, with respect to which Roy J. Zuckerberg may be deemed to share beneficial ownership and 520,838 ordinary shares held by Hancock LLC, a limited liability company organized under the laws of the State of California, with respect to which Roy J. Zuckerberg may be deemed to share beneficial ownership as a result of the Roy J. Zuckerberg Family Trusts 39.4% ownership of the membership interests of Hancock LLC. Mr. Zuckerberg is party to an agreement with respect to the ordinary shares held by Samson Capital, LLC that provides him with the right to independently make decisions as to voting and disposition of 1,720,649 of those ordinary shares, without having to consult with any other person. The Roy J. Zuckerberg Family Trust is party to an agreement pursuant to which it has the right to independently make decisions as to the voting and disposition of 202,286 of the ordinary shares held by Hancock LLC, without having to consult with any other person. Mr. Zuckerberg disclaims beneficial ownership of all of the ordinary shares that may be deemed to be beneficially owned by him except to the extent of his pecuniary interest therein.|
Table of Contents
|(2)||Represents shares beneficially owned as of December 31, 2015, as indicated in the amended statement of beneficial ownership on Schedule 13G/A filed by Elchanan Jaglom on February 11, 2016. Consists of (i) 2,699,787 ordinary shares held by Samson Capital, LLC, with respect to which Mr. Jaglom may be deemed to share beneficial ownership and (ii) the 520,838 ordinary shares held by Hancock LLC, a California limited liability company of which 61.2% of the membership interests are held by a company (which we refer to as the Hancock Member) of which Mr. Jaglom is a director. Mr. Jaglom is party to an agreement with respect to the ordinary shares held by Samson Capital, LLC that provides him with the right to independently make decisions as to voting and disposition of 979,138 of those ordinary shares, without having to consult with any other person. The Hancock Member is party to an agreement pursuant to which it has the right to independently make decisions as to voting and disposition of 318,552 of the ordinary shares held by Hancock LLC, without having to consult with any other person. Mr. Jaglom disclaims beneficial ownership of the ordinary shares held by each of Samson Capital, LLC and Hancock LLC except to the extent of his pecuniary interest therein.|
|(3)||Represents shares beneficially owned as of December 31, 2015, as indicated in the amended statement of beneficial ownership on Schedule 13G/A filed jointly by Samson Capital, LLC and Roy J. Zuckerberg on February 11, 2016. Samson Capital, LLC is a limited liability company organized under the laws of the State of Delaware. The outstanding membership interests of Samson Capital, LLC are held by Roy J. Zuckerberg (74.1% interest), Michael Jaglom (18.5% interest) and an entity holding membership interests for the benefit of Elchanan Jaglom and members of his family. Michael Jaglom and Elchanan Jaglom are cousins. Roy J. Zuckerberg and Elchanan Jaglom are the managing members of Samson Capital, LLC and, by virtue of such roles, may be deemed to possess shared power to direct the voting and disposition of, and thus shared beneficial ownership with respect to, the ordinary shares held by Samson Capital, LLC. Each of Roy J. Zuckerberg and Elchanan Jaglom disclaims beneficial ownership of the ordinary shares held by Samson Capital, LLC except to the extent of his pecuniary interest therein. Please see notes (1) and (2) above regarding arrangements concerning decisions as to voting and disposition of the ordinary shares held by this shareholder.|
|(4)||Represents shares beneficially owned as of December 31, 2015, as indicated in the amended statement of beneficial ownership on Schedule 13G/A filed by PRIMECAP Management Company on February 12, 2016.|
|(5)||Represents shares beneficially owned as of December 31, 2015, as indicated in the amended statement of beneficial ownership on Schedule 13G/A filed by T. Rowe Price Associates, Inc., or Price Associates, on February 9, 2016. Price Associates is an investment adviser registered under Section 203 of the Investment Advisers Act of 1940. Price Associates does not serve as custodian of the assets of any of its clients; accordingly, in each instance only the client or the clients custodian or trustee bank has the right to receive dividends paid with respect to, and proceeds from the sale of, the ordinary shares held by Price Associates. Not more than 5% of the class of ordinary shares is owned by any one client subject to the investment advice of Price Associates.|
Changes in Percentage Ownership by Major Shareholders
During 2014 and 2013, there were decreases in the percentage ownership of each of our pre-existing major shareholders, consisting of Samson Capital, LLC, Roy J. Zuckerberg and Elchanan Jaglom. The decreases were due to, in the case of the some of the major shareholders, market sales by the major shareholders themselves. The decreases were also due to our issuance of a substantial number of additional ordinary shares in various transactions, including the Solid Concepts acquisition and Harvest Technologies acquisition in July 2014 and August 2014, respectively, the MakerBot transaction in August 2013, and our follow-on public offering in September 2013. In 2015, the percentage ownership of those shareholders increased, due to market purchases of additional ordinary shares by Samson Capital, LLC (which increased the percentage ownership of all three of those shareholders).
The percentage ownership of those shareholders decreased during 2013 and 2014, and increased during 2015, as follows: (i) Samson Capital, LLCfrom 11.1% to 6.4% to 4.8%, and back up to 5.2%; (ii) Roy J. Zuckerbergfrom 12.6% to 7.6% to 5.9%, and back up to 6.2%; and (iii) Elchanan Jaglomfrom 12.5% to 7.5% to 5.8%, and back up to 6.2%. In addition, three additional shareholders who held more than 5% of our ordinary shares as of the end of 2012-- AGM Holding BV, Philippe J. Setton and FMR LLC ceased to be major shareholders as of the end of 2013, due to a combination of market sales and issuances of additional ordinary shares by us.
During 2014, four new major shareholders Morgan Stanley, Baillie Gifford & Co, T. Rowe Price Associates, Inc. and Edgewood Management LLCacquired over 5% of our outstanding ordinary shares. During 2015, Morgan Stanley, Baillie Gifford & Co. and Edgewood Management LLC ceased to be major shareholders, as their percentage ownership dropped to 1.5%, 4.6% and 0%, respectively. During 2015, a new major shareholder, PRIMECAP Management Company, acquired 6.3% of our outstanding ordinary shares.
Based upon a review of the information provided to us by our transfer agent, as of February 15, 2016, there were 114 holders of record of our shares, of which 85 record holders holding 52,090,580, or approximately 99.99%, of our outstanding ordinary shares, had registered addresses in the United States. These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside, since many of these shares were held of record by brokers or other nominees. As of the said date, CEDE & Co, the nominee company of the Depository Trust Company (with a registered address in the United States), held of record 50,995,892 ordinary shares on behalf of hundreds firms of brokers and banks in the United States, who in turn held such shares on behalf of several thousand clients and customers.
Table of Contents
B. Related Party Transactions.
Except as described below or elsewhere in this annual report, since January 1, 2015, we have had no transaction or loan, nor do we have any presently proposed transaction or loan, involving any related party described in Item 7.B of Form 20-F promulgated by the SEC.
Our amended articles permit us to exculpate, indemnify and insure each of our directors and office holders to the fullest extent permitted by the Companies Law. Effective upon the effective time of the merger, we entered into indemnification agreements with each of our current directors and other office holders, under which we undertook to indemnify them to the fullest extent permitted by Israeli law, including with respect to liabilities resulting from the merger to the extent that these liabilities are not covered by insurance. We also put into place Directors and Officers liability insurance for each of our directors and other office holders upon the effectiveness of the Stratasys-Objet merger.
Employment and Consulting Agreements with Directors and Executive Officers
Employment agreement with David Reis
Under an employment agreement, dated September 15, 2008, that we entered into with our Chief Executive Officer, David Reis, Mr. Reis is entitled to a gross monthly salary of NIS 126,600 (approximately $32,450). Mr. Reis is also entitled to an annual performance bonus subject to the discretion of our board of directors, based on our achievement of specific goals set by the board. On October 9, 2015, our shareholders approved the payment of a cash bonus of $480,645 (approximately NIS 1,885,000) to Mr. Reis in respect of his performance for the year ended December 31, 2014, as determined and approved by the compensation committee of our board of directors and by our board pursuant to the employment agreement. Besides base salary and bonus, Mr. Reis receives under the agreement other benefits that are provided for by Israeli law or that are customary for senior executives in Israel, including reimbursement for reasonable expenses incurred in connection with his services, and the right to use (and all related fixed and variable costs in respect of) a leased car and cellular telephone. Mr. Reis is furthermore entitled to company contributions equivalent to 5%, 8.33%, 2.5%, and 7.5% of his gross monthly salary towards certain pension, severance, disability and tax-advantaged savings funds (known as a managers insurance policy, severance compensation fund, disability insurance, and a study fund, respectively) (Mr. Reis also contributes 5% and 2.5% of his gross monthly salary towards the managers insurance policy and study fund, respectively). The employment engagement is terminable by either party upon six months prior written notice, and contains customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. As required under Israeli law, the terms of Mr. Reis engagement with our company were approved by our board of directors and shareholders (while we were still a private company).
Mr. Reis has furthermore been granted an aggregate of 591,936 options to purchase ordinary shares, of which 172,436 are currently outstanding, all of which are fully vested and which have an exercise price of $6.52 per share, and expire on December 31, 2017. All of the shares underlying the 172,436 options described above are subject to an agreement with our company under which they may only be disposed of (subject to minor exceptions involving the payment of taxes) in an orderly fashion, on a pro-rata basis over the course of a five-year period commencing in 2012. These restrictions governing the disposition of such shares supplement, and do not replace, any additional applicable restrictions under our share option and incentive plans.
Employment agreement with Ilan Levin
Pursuant to an employment agreement, dated June 27, 2011, Ilan Levin provides services to us as a full-time employee who leads special corporate executive functions. Under the agreement, Mr. Levin receives a gross monthly salary of NIS 27,000 (approximately $6,950) and other benefits that are provided for by Israeli law or that are customary for senior executives in Israel, including reimbursement for reasonable expenses incurred in connection with his services, and the right to use (and all related fixed and variable costs in respect of) a leased car. The foregoing salary is in addition to and independent of the $19,400 per month plus Israeli value added tax, or VAT, that Mr. Levin is entitled to for continued service as a member of the board.
Under the employment agreement, Mr. Levin is furthermore entitled to company contributions equivalent to 5%, 8.33%, 2.5%, and 7.5% of his gross monthly salary towards certain pension, severance, disability and tax-advantaged savings funds (known as a managers insurance policy, severance compensation fund, disability insurance, and a study fund, respectively) (Mr. Levin also contributes 5% and 2.5% of his gross monthly salary towards the managers insurance policy and study fund, respectively). The employment engagement is terminable by either party upon three months prior written notice, and contains customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. As required under Israeli law, the terms of Mr. Levins engagement with our company were approved by our board of directors and shareholders.
Table of Contents
Mr. Levin has furthermore been granted an aggregate of 419,344 options to purchase ordinary shares, of which 124,844 are currently outstanding, all of which are fully vested. 100,062 of such options have an exercise price of $7.82 per share and 24,782 of such options have an exercise price of $2.208 per share. All of such options expire on December 31, 2017. All of the 124,844 ordinary shares underlying the foregoing options are subject to an agreement between Mr. Levin and our company under which they may only be disposed of (subject to minor exceptions involving the payment of taxes) in an orderly fashion, on a pro rata basis over the course of a five year period commencing in 2012. These restrictions governing the disposition of these shares supplement, and do not replace, any additional applicable restrictions under our share option and incentive plans.
Consulting arrangement with an entity affiliated with Elchanan Jaglom
An entity affiliated with Elchanan Jaglom, the Chairman of the board of directors, has provided consulting and director services to us pursuant to an oral arrangement that was approved by our board of directors and shareholders. The monthly amount payable to that entity under this arrangement is $35,000, plus VAT, currently. The consulting arrangement, which is not recorded in a written agreement, has no set term and may be terminated by either party at will upon written notice.
C. Interests of Experts and Counsel.
ITEM 8. FINANCIAL INFORMATION.
A. Consolidated Statements and Other Financial Information.
The consolidated financial statements and other financial information for our company required by SEC are included in this annual report beginning on page F-1.
The following table presents total export sales by Stratasys, Ltd for each of the fiscal years indicated (in thousands):
|Total Export Sales*||$||280,021||$||341,395||$||219,837|
|as a percentage of Total Sales||40.2||%||45.5||%||45.4||%|
|*||Export sales, as presented, are defined as sales to customers located outside of North America and Israel (where our dual headquarters are located).|
We are a party to various legal proceedings incident to our business. Based upon the status of such cases, as determined with the advice of counsel, we have recorded provisions in our financial statements for amounts (if any) judged to be both quantifiable and probable to be paid. Except as noted below, there are no legal proceedings pending or threatened against us that we believe are likely to have, or that have had in the recent past, significant effects on our financial condition or profitability.
Claims Related to Company Equity
On March 4, 2013, five current or former minority shareholders and former directors of our company filed two lawsuits against our company in an Israeli central district court. The lawsuits demand that we amend the capitalization table of our company 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. The lawsuits also name as defendants Elchanan Jaglom, the Chairman of the board of directors, David Reis, our Chief Executive Officer, various shareholders of ours who were also shareholders of Objet, and, in one of the lawsuits, Ilan Levin, one of our directors. 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 we 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 dateas late as 2009.
Table of Contents
We filed our statement of defense in response to these claims in May 2013, denying the claims. The court has dismissed the lawsuit of one of the former directors due to lack of cause. The suits are currently at the stage of pre-trial hearings.
Securities Law Class Actions
On February 5, 2015, a lawsuit styled as a class action was commenced in the United States District Courts for the District of Minnesota, naming the Company and certain of our officers and directors as defendants. Similar actions were filed on February 9 and 20, 2015, and on March 25, 2015, in the Southern District of New York, the Eastern District of New York, and the District of Minnesota, respectively. The lawsuits allege violations of the Exchange Act in connection with allegedly false and misleading statements concerning our business and prospects. The plaintiffs seek damages and awards of reasonable costs and expenses, including attorneys fees. On April 15, 2015, the cases were consolidated for all purposes, and on April 24, 2015, the court entered an order appointing lead plaintiffs and approving their selection of lead counsel for the putative class. On July 1, 2015, the lead plaintiffs filed their consolidated complaint. On August 31, 2015, the defendants moved to dismiss the consolidated complaint for failure to state a claim. The Court heard the motion on December 11, 2015, but has not rendered a decision. We intend to mount vigorous defenses to these lawsuits.
We have never paid cash dividends on our ordinary shares and do not anticipate that we will pay any cash dividends on our ordinary shares in the foreseeable future.
We intend to retain our earnings to finance the development of our business. Any future dividend policy will be determined by our board of directors based upon conditions then existing, including our earnings, financial condition, tax position and capital requirements, as well as such economic and other conditions as our board of directors may deem relevant. Pursuant to our articles of association, dividends may be declared by our board of directors. Dividends must be paid out of our profits and other surplus funds, as defined in the Companies Law, as of the end of the most recent year or as accrued over a period of the most recent two years, whichever amount is greater, provided that there is no reasonable concern that payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. In addition, because we have received certain benefits under Israeli law relating to Approved Enterprises and Beneficiary Enterprises, our payment of dividends (out of tax-exempt income) may subject us to certain Israeli taxes to which we would not otherwise be subject. We are also restricted under our credit agreement with Bank of America from paying dividends. Please see the risk factors captioned We do not anticipate paying any cash dividends in the foreseeable future. Therefore, if our share price does not appreciate, our shareholders may not recognize a return, and could potentially suffer a loss, on their investment in our ordinary shares, and Even if we decide to pay dividends on our ordinary shares, we may be restricted from doing so or payment of such dividends may have adverse consequences for our company in Item 3.D Risk FactorsRisks related to an investment in our ordinary shares above.
For a discussion of the applicable rates of withholding tax on dividends paid out of income derived from an Approved Enterprise or a Beneficiary Enterprise, see Israeli Tax Considerations and Government Programs The Law for the Encouragement of Capital Investments in Item 4.B above.
B. Significant Changes.
Other than as otherwise described in this annual report, no significant change has occurred in our operations since the date of our consolidated financial statements included in this annual report.
ITEM 9. THE OFFER AND LISTING.
A. Listing Details.
Since December 3, 2012 (the first trading day after the effective time of the merger), our ordinary shares have traded (and, prior to that time, Stratasys, Inc. common stock was traded) on the NASDAQ Global Select Market under the trading symbol SSYS. The following table sets forth the high and low closing sale prices of our ordinary shares (and for periods preceding the merger, Stratasys, Inc. common stock) for the fiscal periods indicated below, as reported on the NASDAQ Global Select Market.
Table of Contents
|Fiscal Period:||(U.S. $)||(U.S. $)|
|Six most recent months:|
|Two most recent full financial years and subsequent periods, by quarter:|
|Fiscal Year Ending December 31, 2016|
|January 1, 2016 - February 29, 2016 only||24.56||15.24|
|Fiscal Year Ending December 31, 2015|
|October 1, 2015 - December 31, 2015||31.90||22.58|
|July 1, 2015 - September 30, 2015||37.73||26.17|
|April 1, 2015 - June 30, 2015||61.43||34.66|
|January 1, 2015 - March 31, 2015||81.05||52.78|
|Fiscal Year Ending December 31, 2014|
|October 1, 2014 - December 31, 2014||122.57||78.64|
|July 1, 2014 - September 30, 2014||129.28||97.13|
|April 1, 2014 - June 30, 2014||113.63||88.04|
|January 1, 2014 - March 31, 2014||136.46||103.64|
|Five most recent full financial years|
Our ordinary shares, nominal value NIS 0.01 per share, are registered on the books of our transfer agent, Continental Stock Transfer & Trust Company. There are no transfer restrictions apart from the requirement that any transfers comply with applicable securities laws and the rules of the NASDAQ Stock Market or any other securities exchange on which our ordinary shares may be listed in the future.
ITEM 10. ADDITIONAL INFORMATION.
A. Share Capital.
B. Memorandum and Articles of Association.
Purposes and Objects of the Company
We are a public company registered under Israels Companies Law as Stratasys Ltd., registration number 51-260769-8. Under our memorandum of association, our purpose includes every lawful purpose.
Powers of Directors
Under the provisions of the Companies Law and our amended articles, the management of the business of the Company is vested in our board of directors, which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do. For certain approval requirements, disclosure obligations and limitation on participation of members of our board in board meetings, see Fiduciary Duties of Officer Holders Approval of Specified Related Party Transactions with Office Holders Under Israeli Law in Item 6.C Board Practices above, and the remainder of this Item 10.B below.
Table of Contents
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except to the same degree as any other transaction into which we may enter.
Our amended articles do not impose any mandatory retirement or age-limit requirements on our directors, and our directors are not required to own shares in our company in order to qualify to serve as directors.
Rights Attached to Shares
Our authorized share capital consists of 180,000,000 ordinary shares of a nominal value of NIS 0.01 each. All outstanding ordinary shares are validly issued, fully paid and non-assessable.
The rights attached to the ordinary shares are as follows:
Dividend Rights. Our board of directors may, in its discretion, declare that a dividend be paid pro rata to the holders of ordinary shares. Dividends must be paid out of our profits and other surplus funds, as defined in the Companies Law, as of the end of the most recent year or as accrued over a period of two years, whichever is greater, provided that there is no reasonable concern that payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of a company unless the companys articles of association provide otherwise. Our amended articles provide that our board of directors may declare and distribute dividends without the approval of the shareholders.
Rights to Share in the Companys Profits. Our shareholders have the right to share in our profits distributed as a dividend or via any other permitted distribution. See Rights Attached to Shares Dividend Rights, in this Item 10.B above.
Rights to Share in Surplus in the Event of Liquidation. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to the nominal value of their holdings. This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Limited Liability. Our company is a limited liability company, and therefore, each shareholders liability for our obligations is limited to the payment of the nominal value of the shares held by such shareholder, subject to the provisions of the Companies Law.
Limitations on Any Existing or Prospective Major Shareholder. See Board Practices - Approval of Specified Related Party Transactions with Office Holders Under Israeli Law in Item 6.C above.
Voting Rights. Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Shareholders may vote at a shareholders meeting either in person or by proxy. Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. There are currently no preferred shares outstanding.
The Companies Law imposes certain duties on our shareholders. A shareholder, in exercising his or her rights and performing his or her obligations to our other shareholders and us, must act in good faith and in an acceptable manner, and avoid abusing his or her powers. This duty is required when voting at general meetings on matters such as changes to our articles of association, increases to our registered capital, mergers and related party transactions. A shareholder also has a general duty to refrain from depriving any other shareholder of his or her rights as a shareholder. In addition, any controlling shareholder, any shareholder who knows that his or her vote can determine the outcome of a shareholder vote and any shareholder who, under our amended articles, can appoint or prevent the appointment of an office holder, is required to act fairly towards our company. The Companies Law does not specifically define the duty of fairness, but provides that the remedies generally available upon a breach of contract will apply also in the event of a breach of the duty to act with fairness. There is no binding case law that addresses this subject directly. Any voting agreement among shareholders is also subject to these duties.
Election of Directors
Directors of our company, other than external directors, are elected each year at our annual general meeting of shareholders by a vote of the holders of a majority of the voting power represented at the meeting. See Item 6.C Board PracticesBoard of Directors above. Our ordinary shares do not have cumulative voting rights for this purpose. As a result, holders of our ordinary shares that represent more than 50% of the voting power represented at a shareholders meeting at which a quorum is present will have the power to elect any or all of our directors whose positions are being filled at that meeting, subject to the special approval requirements for external directors described under Board PracticesExternal Directors in Item 6.C above.
Table of Contents
In addition, pursuant to the Companies Law and our amended articles, any shareholder holding at least one percent (1%) of our outstanding voting power may make nominations for directors only if a written notice of such shareholders intent to make such nomination (together with certain documentation required under the Companies Law) has been delivered to our registered Israeli office within seven days after we publish notice of our upcoming annual general meeting (or within 14 days after we publish a preliminary notification of an upcoming annual general meeting).
Annual and Extraordinary Meetings
Our board of directors must convene an annual general meeting of shareholders at least once every calendar year, within fifteen months of the last annual general meeting.
All meetings other than the annual general meeting of shareholders are referred to as extraordinary general meetings. Our board of directors may call extraordinary general meetings whenever it sees fit, at such time and place, within or outside of Israel, as it may determine. In addition, the Companies Law and our amended articles provide that our board of directors will be required to convene an extraordinary general meeting upon the written request of (i) any two of our directors or one-quarter of our board of directors or (ii) one or more shareholders holding, in the aggregate, either (a) 5% of our outstanding issued shares and 1% of our outstanding voting power or (b) 5% of our outstanding voting power. The chairman of the board of directors presides at each of our general meetings. The chairman of the board of directors will not be entitled to vote at a general meeting in his capacity as chairman.
Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders that will be entitled to participate and vote at general meetings are the shareholders of record on a date decided by our board of directors, which may be between four and 40 days prior to the date of the meeting. Furthermore, the Companies Law and our amended articles require that resolutions regarding the following matters must be passed at a general meeting of our shareholders:
|●||amendments to the amended
|●||appointment or termination of our auditors;
|●||appointment of directors and appointment and
dismissal of external directors; |
|●||approval of acts and transactions involving
related parties, as defined by the Companies Law or pursuant to our
amended articles; |
|●||director compensation; |
|●||increases or reductions of our authorized share
|●||a merger; and |
|●||the exercise of our board of directors powers by a general meeting, if the board of directors is unable to exercise its powers and the exercise of any of its powers is required for our proper management.|
The Companies Law and the amended articles require that a notice of any annual general meeting or extraordinary general meeting be published and provided to shareholders at least 21 days prior to the meeting, and if the agenda of the meeting includes the appointment or removal of directors, the approval of transactions with office holders or interested or related parties, or an approval of a merger, notice must be published at least 35 days prior to the meeting.
The quorum required for a general meeting of our shareholders consists of at least two shareholders present in person, by proxy or written ballot who hold or represent between them at least twenty-five percent (25%) of the total outstanding voting rights. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place, or to a later time/date if so specified in the summons or notice of the meeting. At the reconvened meeting, if the original meeting was convened upon requisition under the Companies Law, the required quorum consists of one or more shareholders, present in person or by proxy, and holding the number of shares required for making such requisition, and, in any other reconvened meeting, the quorum that is required is any two shareholders present in person or by proxy (regardless of how many shares they hold).
Table of Contents
Adoption of Resolutions
Our amended articles provide that all resolutions of our shareholders require the approval of a majority of the voting power present and voting at a general meeting, unless otherwise required by the Companies Law or by the amended articles. Under the Companies Law and the amended articles, shareholders are not permitted to take action via written consent in lieu of a meeting. Under the Companies Law, each of (i) the approval of an extraordinary transaction with a controlling shareholder and (ii) the terms of employment or other engagement of the controlling shareholder of the company or such controlling shareholders relative (even if not extraordinary) require, in addition to approval by the compensation committee (in the case of terms of employment) or audit committee (in the case of some other engagement) and the board of directors, approval by a special majority of the shareholders that fulfills one of the following requirements:
|●||a disinterested majority; or
|●||the votes of shareholders who have no personal interest in the transaction and who are present and voting, in person, by proxy or by voting deed at the meeting, and who vote against the transaction may not represent more than two percent (2%) of the voting rights of the company.|
Under our amended articles, if the share capital is divided into classes, the alteration of the rights, privileges, preferences or obligations of any class of share capital requires approval by a simple majority of the class so affected (or such other percentage of the relevant class that may be set forth in the governing documents relevant to such class), in addition to the ordinary majority vote of all classes of shares voting together as a single class at a general meeting, as required under the Companies Law.
Further exceptions to the simple majority vote requirement are a resolution for the voluntary winding up, or an approval of a scheme of arrangement or reorganization, of the company pursuant to Section 350 of the Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting, in person, by proxy or by voting deed and voting on the resolution.
Israeli law provides that a shareholder of a public company may vote in a meeting and in a class meeting by means of a voting deed in which the shareholder indicates how he or she votes on resolutions relating to the following matters:
|●||appointment or removal of directors;
|●||approval of transactions with office holders or
interested or related parties; |
|●||approval of a merger or any other matter in
respect of which there is a provision in the articles of association
providing that decisions of the general meeting may also be passed by
voting deed; |
|●||approval of an arrangement or reorganization of
the company pursuant to Section 350 of the Israeli Companies Law; and
|●||other matters which may be prescribed by Israels Minister of Justice.|
The provision allowing the vote by voting deed does not apply if, to the best knowledge of the company at the time of calling the general shareholders meeting, a controlling shareholder will hold on the record date for such shareholders meeting, voting power sufficient to determine the outcome of the vote.
Changing Rights Attached to Shares
The rights attached to any class of shares, such as voting, liquidation and dividend rights, may be amended by adoption of a resolution by the holders of a majority of the shares of that class present at a separate class meeting, or otherwise in accordance with the rights attached to such class of shares, as set forth in our amended articles.
Limitations on the Rights to Own Securities in Our Company
Neither our memorandum of association nor our amended articles, nor the laws of the State of Israel, restrict in any way the ownership or voting of shares by non-residents, except with respect to citizens of countries that are in a state of war with Israel.
Table of Contents
Provisions Restricting Change in Control of Our Company
Full Tender Offer
A person wishing to acquire shares of a public Israeli company and who could as a result hold over 90% of the target companys issued and outstanding share capital or voting rights is required by the Companies Law to make a tender offer to all of the companys shareholders for the purchase of all of the issued and outstanding shares of the company. A person wishing to acquire shares of a public Israeli company and who could as a result hold over 90% of the issued and outstanding share capital or voting rights of a certain class of shares is required to make a tender offer to all of the shareholders who hold shares of the relevant class for the purchase of all of the issued and outstanding shares of that class. If the shareholders who do not accept the offer hold less than 5% of the issued and outstanding share capital and voting rights of the company or of the applicable class, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law (provided that a majority of the offerees that do not have a personal interest in such tender offer shall have approved it, which condition shall not apply if, following consummation of the tender offer, the acquirer would hold at least 98% of all of the companys outstanding shares and voting rights (or shares and voting rights of the relevant class)). However, shareholders may, at any time within six months following the completion of the tender offer, petition the court to alter the consideration for the acquisition. Even shareholders who indicated their acceptance of the tender offer may so petition the court, unless the acquirer stipulated that a shareholder that accepts the offer may not seek appraisal rights). If the shareholders who did not accept the tender offer hold 5% or more of the issued and outstanding share capital or voting rights of the company or of the applicable class, the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the companys issued and outstanding share capital or voting rights or 90% of the shares or voting rights of the applicable class, from shareholders who accepted the tender offer.
Special Tender Offer
The Companies Law provides that an acquisition of shares of a public Israeli company must be made by means of a special tender offer if as a result of the acquisition the purchaser could become a holder of 25% or more of the voting rights in the company, unless one of the exemptions in the Companies Law (as described below) is met. This rule does not apply if there is already another holder of at least 25% of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser could become a holder of more than 45% of the voting rights in the company, if there is no other shareholder of the company who holds more than 45% of the voting rights in the company, unless one of the exemptions in the Companies Law is met.
A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares representing more than 5% of the voting power attached to the companys outstanding shares, regardless of how many shares are tendered by shareholders. A special tender offer may be consummated only if (i) at least 5% of the voting power attached to the companys outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
If a special tender offer is accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a merger with the target comp