3D Systems Inc. CEO Abe Reichental had his first inkling in last year’s second quarter that the company’s financial reporting might be flawed.
The news couldn’t have come at a busier time for the provider of three-dimensional printing, prototypes, and manufacturing systems for a range of business lines. The headquarters were being moved from southern California to a new Rock Hill, South Carolina, facility. It was outsourcing its global logistics to UPS. And an Oracle Corp. enterprise resource planning system had gone on-stream in the second quarter.
As it turned out, the timing was no coincidence — it was the ERP implementation that was turning up longstanding problems. “I first heard about the problem in working sessions with our management team,” Reichental said in an interview in late January. The company had a new controller, Bill Tennison, “who immediately flagged the problem the moment it became even a mild concern.”
But the growing scope soon made it hard to miss. “We attempted to close the books on the second quarter of 2006, and we detected material weaknesses in our controls,” the CEO said. With difficulty, the quarterly results were reported. The audit committee, the full board, and external auditors BDO Seidman LLP were consulted. The initial reading by the chief executive was that “we may have had some innocent errors here, and some misapplications of certain accounting principles.”
A year later, the assessment about the errors being innocent still seems the same. But the problems have increased during the effort to restate. In February, CFO Fred R. Jones “stepped down by mutual agreement,” and was replaced as interim finance chief by Gerald J. Pribanic, a partner with executive services firm Tatum LLC. Then, a delay in filing the annual 10-K report led to a notice from Nasdaq that 3D Systems’ stock is subject to delisting, although 3D Systems continues to trade while it appeals the notice.
On April 5, the company announced that it would filed its annual 10-K report “as promptly as practicable.”
The CFO’s Role
Jones got involved early on with the process of preparing for the restatement, Reichental said in the January interview. The CFO’s first assignment was “organizing the team and the effort to carry out our investigation and analysis, and to attribute the appropriate adjustments to each period,” the CEO said. Jones also supervised various tests to determine which errors “rose to a level of materiality,” and thus had to be reported as material to the SEC, Reichental said. Consultants were engaged to help with these tasks.
“One of the challenges of a restatement is to make sure the rest of the business goes on uninterrupted,” he said. “For many of us this is uncharted territory. Also, you don’t want to siphon all your resources into the restatement.”
According to an August company news release announcing preliminary third-quarter numbers, 3D Systems “quickly began to experience unforeseen disruptions and delays in operating the system.” Other things were going wrong, too: supply-chain glitches, for example, complicated the entering and processing of customer orders. And in November, 3D Systems announced that it would restate the first two quarters of the year and delay filing its third-quarter 10-Q. Previously announced numbers shouldn’t be relied upon, it said, echoing the language of a Form 8-K that also was filed. Beginning a pattern that it continues to follow, the company followed 8-K filing and the news release with an analyst conference call featuring questions about the restatement plans.