SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-22250
3D SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4431352
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) (Identification No.)
26081 AVENUE HALL, VALENCIA, CALIFORNIA 91355
(Address of Principal Executive Offices) (Zip Code)
(805) 295-5600
(Registrant's Telephone Number, Including Area Code)
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 report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- -------
Shares of Common Stock, par value $0.001, outstanding as of October 31, 1996:
11,342,826 shares
Page 1 0f 17
3D SYSTEMS CORPORATION
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION Number
------
ITEM 1. Financial Statements
Consolidated Balance Sheets,
December 31, 1995 and September 27, 1996 . . . . . . . . . . 3
Consolidated Statements of Operations
For the Three and Nine Month Periods Ended
September 29, 1995 and September 27, 1996 . . . . . . . . . 4
Consolidated Statements of Cash Flows
for the Nine Month Periods Ended
September 29, 1995 and September 27, 1996 . . . . . . . . . 5
Notes to Consolidated Financial Statements,
December 31, 1995 and September 27, 1996 . . . . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 16
Page 2 of 17
3D SYSTEMS CORPORATION
Consolidated Balance Sheets
(Unaudited)
ASSETS December 31, 1995 September 27, 1996
----------------- ------------------
Current assets:
Cash and cash equivalents $38,258,927 $29,745,559
Restricted cash 766,000 722,000
Accounts receivable, less allowances for
doubtful accounts of $368,399 at December 31, 1995 and
$399,376 at September 27, 1996 14,439,863 18,006,985
Current portion of lease receivables 0 374,650
Inventories (Note 2) 6,627,317 11,763,861
Deferred tax assets 5,301,118 3,710,912
Prepaid expenses and other current assets 1,608,203 1,826,780
----------- -----------
Total current assets 67,001,428 66,150,747
Property and equipment, net (Note 3) 8,940,571 14,875,633
Licenses and patent costs, net 3,520,500 3,567,645
Deferred tax assets 1,029,000 1,029,000
Lease receivables, less current portion 0 1,352,938
Other assets 1,059,507 1,527,948
----------- -----------
$81,551,006 $88,503,911
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,305,349 $ 2,945,455
Accrued liabilities 6,672,261 6,841,064
Current portion of long-term debt (Note 5) 0 245,000
Customer deposits 1,233,305 1,239,964
Deferred revenues 3,768,121 4,660,526
----------- -----------
Total current liabilities 16,979,036 15,932,009
Other liabilities 1,621,515 1,554,593
Long-term debt, less current portion (Note 5) 0 4,655,000
----------- -----------
18,600,551 22,141,602
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 5,000,000
shares; none issued
Common stock, $.001 par value. Authorized 25,000,000
shares; issued and outstanding 11,279,232 at
December 31, 1995 and 11,342,826 at September 27, 1996 11,279 11,343
Capital in excess of par value 71,850,602 72,415,049
Accumulated deficit (8,907,788) (5,970,073)
Cumulative translation adjustment (3,638) (94,010)
----------- -----------
Total stockholders' equity 62,950,455 66,362,309
----------- -----------
$81,551,006 $88,503,911
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
Page 3 of 17
3D SYSTEMS CORPORATION
Consolidated Statements of Operations
(Unaudited)
Three Month Periods Ended Nine Month Periods Ended
------------------------------------------- -----------------------------------------
September 29, 1995 September 27, 1996 September 29, 1995 September 27, 1996
------------------ ------------------ ------------------ ------------------
Sales:
Products $11,116,905 $12,594,576 $29,937,340 $38,194,461
Services 4,497,941 7,195,039 13,953,190 19,317,066
------------------ ------------------ ------------------ ------------------
Total sales 15,614,846 19,789,615 43,890,530 57,511,527
------------------ ------------------ ------------------ ------------------
Cost of sales:
Products 5,053,438 5,888,696 13,214,645 17,472,167
Services 2,921,374 4,403,358 8,689,420 12,071,149
------------------ ------------------ ------------------ ------------------
Total cost of sales 7,974,812 10,292,054 21,904,065 29,543,316
------------------ ------------------ ------------------ ------------------
Gross profit 7,640,034 9,497,561 21,986,465 27,968,211
------------------ ------------------ ------------------ ------------------
Operating expenses:
Selling, general and administrative 4,780,687 6,077,601 13,497,977 18,505,355
Research and development 1,404,439 2,220,936 4,257,864 5,872,443
------------------ ------------------ ------------------ ------------------
Total operating expenses 6,185,126 8,298,537 17,755,841 24,377,798
------------------ ------------------ ------------------ ------------------
Income from operations 1,454,908 1,199,024 4,230,624 3,590,413
Interest income 541,392 361,794 724,490 1,194,088
Interest expense (7,989) (34,753) (35,275) (46,251)
------------------ ------------------ ------------------ ------------------
Income before provision for
income taxes 1,988,311 1,526,065 4,919,839 4,738,250
Provision for income taxes (benefit) (2,877,394) 510,661 (2,687,394) 1,800,535
------------------ ------------------ ------------------ ------------------
Net income $ 4,865,705 $ 1,015,404 $ 7,607,233 $ 2,937,715
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Net income per share $ .41 $ .09 $ .73 $ .25
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Weighted average number of shares
outstanding during the period 11,728,940 11,696,778 10,351,183 11,762,742
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
See accompanying notes to consolidated financial statements.
Page 4 of 17
3D SYSTEMS CORPORATION
Consolidated Statements of Cash flows
For the Nine Month Periods Ended September 29, 1995 and September 27, 1996
(Unaudited)
1995 1996
----------- -----------
Cash flows from operating activities:
Net income $ 7,607,233 $ 2,937,715
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Deferred income taxes (3,160,000) 1,590,000
Depreciation of property and equipment 1,175,193 1,725,277
Amortization of licenses and patent costs 368,818 428,101
Amortization of software development costs 319,955 366,752
Changes in operating assets and liabilities:
Accounts receivable (5,326,206) (3,721,706)
Lease receivables 0 (1,727,588)
Inventories (1,756,497) (5,154,647)
Prepaid expenses and other current assets (21,011) (254,286)
Other assets (404,385) (863,989)
Accounts payable 534,307 (2,141,105)
Accrued liabilities 1,283,343 224,353
Customer deposits 694,661 6,251
Deferred revenues 924,797 907,513
Other liabilities (84,397) (47,565)
----------- -----------
Net cash provided by (used for)
operating activities 2,155,811 (5,724,924)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (2,059,156) (8,882,502)
Disposition of property and equipment 115,701 1,198,316
Increase in licenses and patent costs (278,295) (476,907)
----------- -----------
Net cash used for investing activities (2,221,750) (8,161,093)
----------- -----------
Cash flows from financing activities:
Net proceeds from stock offering 31,476,933 0
Exercise of stock options and warrants 250,136 371,486
Proceeds from long-term debt 0 4,900,000
----------- -----------
Net cash provided by financing activities 31,727,069 5,271,486
Effect of exchange rate changes on cash (341,383) 101,163
----------- -----------
Net increase (decrease) in cash and
cash equivalents 31,319,747 (8,513,368)
Cash and cash equivalents at the
beginning of the period 6,423,523 38,258,927
----------- -----------
Cash and cash equivalents at the
end of the period $37,743,270 $29,745,559
----------- -----------
----------- -----------
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 25,274 $ 37,052
----------- -----------
----------- -----------
Income taxes $ 303,014 $ 1,544,273
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statement.
Page 5 of 17
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1995 and September 27, 1996
(Unaudited)
(1) Basis of Presentation.
The accompanying unaudited consolidated financial statements of 3D Systems
Corporation and subsidiaries (the "Company") are prepared in accordance with
instructions to Form 10-Q and, in the opinion of management include all
material adjustments (consisting only of normal recurring accruals) which
are necessary for the fair presentation of results for the interim periods.
The Company reports its interim financial information on a 13 week basis
ending the last Friday of each quarter, and reports its annual financial
information through the calendar year ended December 31. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
The results of the nine month period ended September 27, 1996 are not
necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
(2) Inventories.
December 31, 1995 September 27, 1996
----------------- ------------------
Raw materials $ 2,100,269 $ 6,067,342
Work in progress 2,022,565 1,795,765
Finished goods 2,504,483 3,900,754
----------------- ------------------
$ 6,627,317 $11,763,861
----------------- ------------------
----------------- ------------------
(3) Property and Equipment.
December 31, 1995 September 27, 1996
----------------- ------------------
Land $ 435,600 $ 435,600
Building --- 4,362,141
Machinery and equipment 8,829,827 12,468,768
Office furniture and equipment 1,861,702 2,040,894
Leasehold improvements 1,617,215 1,797,572
Rental equipment 622,483 727,329
Construction in progress 2,133,289 378,361
----------------- ------------------
15,500,116 22,210,665
Less accumulated depreciation
and amortization (6,559,545) (7,335,032)
----------------- ------------------
$ 8,940,571 $14,875,633
----------------- ------------------
----------------- ------------------
Page 6 of 17
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1995 and September 27, 1996
(Continued)
(4) Acquisition.
On September 9, 1996, 3D Systems, Inc., an indirect wholly-owned subsidiary
of the Company, purchased substantially all of the assets and business
operations of Keltool, Inc. ("Keltool"), of St. Paul, Minnesota, a Company
which produces steel tooling for plastic injection molding machines based
on a patented process using sintered powdered steel. Acquired in-process
technology valued at $430,000 was expensed immediately. The purchase price
paid by the Company included $1,740,000 payable in cash (of which $875,000
was paid on September 9, 1996 and $865,000 paid on October 10, 1996), the
assumption of certain liabilities ($13,000) and the value of warrants to
purchase 50,000 shares at an exercise price of $14.75 per share ($193,000).
The warrants were issued at fair market value and expire on September 9,
1999.
The allocation of the purchase consideration for Keltool are as follows:
Trade receivables $ 72,000
Inventory 46,000
Equipment 505,000
In process research and development projects 430,000
Intangible assets 893,000
----------
$1,946,000
----------
----------
The results of operations relating to Keltool from September 9, 1996
through September 27, 1996 are included with those of the Company and were
not significant.
(5) Long-Term Debt.
On August 20, 1996, the Company completed a $4.9 million variable rate
industrial development bond financing of its Colorado facility. Interest
on the bonds are payable monthly (the interest rate at September 27, 1996
was 3.76%). Principal payments are payable in equal semi-annual
installments of $122,500 beginning in February 1997 through August 2016.
The bonds are collateralized by an irrevocable standby letter of credit
issued by Norwest Bank Minnesota, N.A. which is further collateralized by
the building and related machinery and equipment as well as a standby
letter of credit issued by Silicon Valley Bank in the amount of
approximately $1.3 million. The terms of the letters of credit require the
Company to maintain specific levels of minimum tangible net worth, debt to
equity ratios and quick ratio. Annual maturities of long-term debt are as
follows:
1997 $ 250,000
1998 250,000
1999 250,000
2000 250,000
2001 250,000
thereafter 3,650,000
---------
Total $4,900,000
---------
---------
Page 7 of 17
3D SYSTEMS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains trend analysis and other forward
looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended and Section 21A of the Securities Act of
1933, as amended. Actual results could differ from those projected in the
forward looking statements as a result of the cautionary statements and risk
factors set forth below and in Item 1 of the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
RESULTS OF OPERATIONS
The Company's revenues are generated by product and services sales.
Product sales are comprised of the sale of Stereolithography Apparatus ("SLA")
systems and related equipment, resins, software, and other component parts,
as well as rentals of SLA systems. Service sales include revenues from
maintenance, services provided by the Company's Technology Centers, and
customer training.
The following table sets forth certain operating amounts and ratios as a
percentage of total sales except as otherwise indicated:
Three Month Periods Ended Nine Month Periods Ended
-------------------------------------- --------------------------------------
September 29, 1995 September 27, 1996 September 29, 1995 September 27, 1996
------------------ ------------------ ------------------ ------------------
(in thousands except percent data)
Sales:
Products $ 11,117 $ 12,595 $ 29,938 $ 38,195
Services 4,498 7,195 13,953 19,317
------------------ ------------------ ------------------ ------------------
Total sales 15,615 19,790 43,891 57,512
------------------ ------------------ ------------------ ------------------
Cost of sales:
Products 5,054 5,889 13,215 17,473
Services 2,921 4,403 8,689 12,071
------------------ ------------------ ------------------ ------------------
Total cost of sales 7,975 10,292 21,904 29,544
------------------ ------------------ ------------------ ------------------
Total gross profit 7,640 9,498 21,987 27,968
% of total sales 48.9% 48.0% 50.1% 48.6%
Gross profit - products 6,063 6,706 16,723 20,722
% of total product sales 54.5% 53.2% 55.9% 54.3%
Gross profit - services 1,577 2,792 5,264 7,246
% of total service sales 35.1% 38.8% 37.7% 37.5%
Selling, general and
administrative expenses 4,781 6,078 13,498 18,505
% of total sales 30.6% 30.7% 30.8% 32.2%
Research and development expenses 1,404 2,221 4,258 5,872
% of total sales 9.0% 11.2% 9.7% 10.2%
------------------ ------------------ ------------------ ------------------
Income from operations 1,455 1,199 4,231 3,590
% of total sales 9.3% 6.1% 9.6% 6.2%
Interest income, net 534 327 689 1,148
% of total sales 3.4% 1.6% 1.6% 2.0%
Provision for income taxes (benefit) (2,877) 511 (2,687) 1,801
% of total sales 18.5% (2.6%) 6.1% (3.1%)
------------------ ------------------ ------------------ ------------------
Net income 4,866 1,015 7,607 2,938
% of total sales 31.2% 5.1% 17.3% 5.1%
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Page 8 of 17
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The following table sets forth for the periods indicated total revenues
attributable to each of the Company's major products and services groups, and
those revenues as a percentage of total sales:
Three Month Periods Ended Nine Month Periods Ended
-------------------------------------- --------------------------------------
September 29, 1995 September 27, 1996 September 29, 1995 September 27, 1996
------------------ ------------------ ------------------ ------------------
Products: (in thousands)
SLA systems and related
equipment $ 7,794 $ 9,355 $20,840 $27,275
Resins 2,031 2,503 5,597 7,581
Software, other components
parts and rentals 1,292 737 3,501 3,339
------------------ ------------------ ------------------ ------------------
Total products 11,117 12,595 29,938 38,195
------------------ ------------------ ------------------ ------------------
Services:
Maintenance 3,258 5,808 10,513 15,482
Technology Centers 1,060 1,107 3,089 3,167
Training 180 280 351 668
------------------ ------------------ ------------------ ------------------
Total services 4,498 7,195 13,953 19,317
------------------ ------------------ ------------------ ------------------
Total sales $15,615 $19,790 $43,891 $57,512
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Products:
SLA systems and related
equipment 49.9% 47.3% 47.5% 47.4%
Resins 13.0 12.6 12.8 13.2
Software, other components
parts and rentals 8.3 3.7 7.9 5.8
------------------ ------------------ ------------------ ------------------
Total products 71.2 63.6 68.2 66.4
------------------ ------------------ ------------------ ------------------
Services:
Maintenance 20.9 29.4 24.0 26.9
Technology 6.8 5.6 7.0 5.5
Training 1.1 1.4 .8 1.2
------------------ ------------------ ------------------ ------------------
Total services 28.8 36.4 31.8 33.6
------------------ ------------------ ------------------ ------------------
Total sales 100.0% 100.0% 100.0% 100.0%
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Page 9 of 17
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
THREE MONTH PERIOD ENDED SEPTEMBER 27, 1996 COMPARED TO THE THREE MONTH
PERIOD ENDED SEPTEMBER 29, 1995.
SALES. Sales during the three month period ended September 27, 1996 (the
"third quarter of 1996") were $19.8 million, an increase of 27% over the
$15.6 million recorded during the three month period ended September 29, 1995
(the "third quarter of 1995").
Product sales during the third quarter of 1996 increased $1.5 million or 13%
to $12.6 million compared to $11.1 million during the third quarter of 1995.
The increase was primarily the result of increased shipments of SLAs in
Europe, which management believes is the result of increased sales and
marketing efforts in Europe. The Company sold a total of 34 SLA systems in
the third quarter of 1996, comprised of 1 SLA-190, 9 SLA-250's, 15
SLA-350's (the Company's newest SLA system which features the new Zephyr-TM-
recoater, a solid state laser and an automatic resin re-filling system) and 9
SLA-500's (the Company's largest and highest priced system). During the third
quarter of 1995, the Company sold 32 SLAs, comprised of 2 SLA-190's, 14
SLA-250's and 16 SLA-500's. Orders for the Company's SLA systems
significantly declined (in both the U.S. and Europe) in the third quarter of
1996 compared to the third quarter of 1995, and SLA systems backlog at the
end of the third quarter of 1996 was lower than the end of the third quarter
of 1995.
The Company believes that the decline in the U.S. orders in the third quarter
of 1996 (when compared to the third quarter of 1995) was due primarily to the
performance, and termination , of a number of the Company's independent
domestic sales representatives ("agents"), and, to a lesser extent, to
competitive pressures. The Company's domestic marketing strategy has focused
on a strong internal sales organization, as well as the utilization of agents
(primarily, independent sales representatives in the machine tools industry).
Because of a reduction in the performance of these agents, in August 1996,
the Company determined to significantly reduce its use of these agents, and
terminated its arrangements with all of them. Concurrently, the Company began
actively to recruit additional personnel to bolster its internal sales and
support organization. The Company currently plans to complete its recruiting
efforts during the fourth quarter of 1996, and has offered its agents the
opportunity to enter into new arrangements with the Company, at lower
commission rates than under their prior agreements with the Company. Because
of the long cycle for SLA systems sales, the Company does not anticipate that
the additions to its internal sales organization will significantly increase
domestic sales in the fourth quarter of 1996. While historically there has
not always been a good correlation between orders and ending backlog in one
quarter and revenues in the following quarter, the decline in U.S. orders in
the third quarter of 1996, coupled with potential inefficiencies caused by
the recent changes in the Company's domestic sales organization, could
negatively impact domestic revenues in the fourth quarter of 1996. The
Company anticipates that European orders should increase in the fourth
quarter of 1996 as compared to the third quarter of 1996.
The Company believes that SLA system sales may also fluctuate on a quarterly
basis as a result of a number of other factors, including the status of world
economic conditions, fluctuations in foreign currency exchange rates and the
timing of product shipments (the U.S. list price of an SLA-500, for example,
exceeds $400,000; thus the acceleration or delay of a small number of
shipments from one quarter to another can significantly affect the results of
operations for the quarters involved). Other factors which may impact
quarterly sales include the introduction in 1996 of one new product, the
SLA-350 Series 10, a new, advanced SLA system and the announcement of
another, the low-priced Actua 2100 office modeler (which uses a technology
completely different from stereolithography), designed for operation in
engineering and design offices. During May, the Company began commercial
shipments of the SLA-350. The Company is presently continuing its
development efforts in connection with the Actua 2100 and shipments of the
Actua will be delayed until certain technical issues have been resolved.
While shipments are currently scheduled to commence prior to the end to the
current fiscal year, the possibility exists that first shipments may be
further delayed. The possibility exists that the announcement and
introduction of these new products may have caused, and may cause in the
future, potential customers of the Company who were considering the purchase
of one of the Company's current models to defer their purchase decision until
further information is available as to the performance and reliability of the
new
Page 10 of 17
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
products. Further delays in shipments of new products may also occur as a
result of unexpected problems encountered in actual use. In addition, the
Company relocated its manufacturing operations from Valencia, California to
Grand Junction, Colorado during the third quarter of 1996. If the Company
experiences problems in connection with this relocation (including
difficulties in the timely hiring and training of new employees), shipment of
certain of the Company's products may be delayed.
Service sales during the third quarter of 1996 increased $2.7 million, or
60%, compared to the third quarter of 1995, primarily as a result of
increased maintenance revenues due to the larger installed base of SLA
systems in the U.S. and Europe as well as from greater sales (approximately
$625,000) of SLA upgrades (primarily Zephyr upgrades) to existing SLA
customers. The Company anticipates that sales of Zephyr upgrades in future
quarters should be lower than the amount recorded in the third quarter of
1996.
COST OF SALES. Cost of sales increased to $10.3 million or 52% of sales in
the third quarter of 1996 from $8.0 million or 51% of sales in the third
quarter of 1995.
Product cost of sales as a percentage of product sales increased to 47%
during the third quarter of 1996 compared to 45% during the third quarter of
1995. The increase in 1996 was primarily the result of the stronger dollar
in the third quarter of 1996, as compared to the third quarter of 1995;
greater discounting of European SLA system sales in 1996 due to competition;
and increased manufacturing expenses as a result of certain inefficiences
caused by the transition of the Company's manufacturing activities from
Valencia, California to its new manufacturing facility in Grand Junction,
Colorado. These factors were partially offset by lower commission payments to
domestic agents as a result of fewer domestic sales of SLAs during the third
quarter of 1996, as compared to the third quarter of 1995, and by the
termination of the agent relationships described above. The Company's gross
profit margins on product sales are affected by several factors including,
among others, sales mix, distribution channels and fluctuations in foreign
currency exchange rates and, therefore, may vary in future periods from those
experienced during the third quarter of 1996. Additionally, the Company
anticipates that the gross margins related to the Actua 2100 system (which
are not currently expected to constitute a material portion of the Company's
sales in the current fiscal year) will be lower than margins on its SLA
systems, and, if revenues from the sales of Actua 2100 represent a material
portion of the Company's product sales, gross margins from product sales
would be reduced. The Company also anticipates that gross margins related to
the Actua 2100 will be lower during the initial phases of production as a
result of certain inefficiencies and anticipates, in the event of increased
production, that Actua 2100 gross margins could increase as a result of lower
per unit material costs (due to greater purchasing economies) and increased
manufacturing efficiencies.
Service cost of sales as a percentage of service sales decreased to 61%
during the third quarter of 1996 compared to 65% during the third quarter of
1995, primarily as a result of the more profitable Zephyr upgrades delivered
in 1996 compared to those upgrades offered in the third quarter of 1995. The
improved margins from field service operations were partially offset,
however, by lower margins from the Company's U.S. Technology Center due to
the Technology Center's testing of both new hardware and software products as
well as the increased use of outside vendors for certain rapid prototyping
applications in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("S,G&A") expenses increased $1.3 million or 27 % in the
third quarter of 1996 compared to the third quarter of 1995, primarily as a
result of expanded sales and marketing programs in both Europe and the U.S.
The Company currently anticipates that S,G&A expenses for the fourth quarter
of 1996 will be slightly higher than the third quarter of 1996 due primarily
to the expansion of the Company's U.S. direct sales distribution channel.
The Company currently anticipates that if its revenues continue to grow,
S,G&A expenses as a percentage of total sales in future quarters should begin
to decline, primarily as a result of economies of scale. However, these are
forward looking statements and as with other such statements are subject to
uncertainties. For example, if sales do not continue to grow over the
period, it is less likely that S,G&A expenses as a percentage of total sales
would decline.
Page 11 of 17
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses
during the third quarter of 1996 increased approximately $816,000 or 58%
compared to the third quarter of 1995. The increase in R&D expenses in 1996
was primarily the result of the write-off during the third quarter of 1996 of
acquired in-process technology valued at $430,000 in connection with the
Keltool acquistion (see Note 4 of Notes to Consolidated Financial Statements)
as well as the Company's efforts towards the development of the Actua
2100 and certain other development projects. Based on the Company's
historical expenditures related to research and development and its current
development goals, the Company anticipates for the foreseeable future,
research and development expenses will be equal to approximately ten percent
of sales. However, this is a forward-looking statements and, as with any
such statement , is subject to uncertainties. For example, if total sales of
the Company for any particular period do not meet the anticipated sales of
the Company for that period, research and development expenses as a
percentage of sales may exceed 10%.
OPERATING INCOME. Operating income for the third quarter of 1996 was 6.1% of
total sales compared to 9.3% of total sales in the third quarter of 1995.
The decrease in the percentage of operating income to total sales in 1996 was
primarily attributable to the increases in product cost of sales and R&D
expenses in 1996, as described above.
OTHER INCOME AND EXPENSES. Interest income decreased to $361,794 during the
third quarter of 1996 from $541,392 during the third quarter of 1995,
primarily as a result of the lower investment balances due to cash used for
operating activities in 1996.
Interest expense increased to $34,753 during the third quarter of 1996 from
$7,989 in the third quarter of 1995 primarily as a result of the Company's
financing of its Colorado facilty which was effected August 20, 1996 (see
Note 5 of Notes to Consolidated Financial Statements).
PROVISION FOR INCOME TAXES (BENEFITS). For the third quarter of 1996, the
Company's tax expense was $510,661 or 33% of pre-tax income, compared to a
tax benefit of $2.9 million for the third quarter of 1995, which included a
deferred tax benefit resulting from the recognition of deferred tax assets of
$3.0 million (related primarily to net operating loss carryforwards
attributable to the Company's domestic operations).
Page 12 of 17
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
NINE MONTH PERIOD ENDED SEPTEMBER 27, 1996 COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 29, 1995.
SALES. Sales during the nine month period ended September 27, 1996 (the
"first nine months of 1996") were $57.5 million, an increase of 31%
over the $43.9 million recorded during the nine month period ended September
29, 1995 (the "first nine months of 1995").
Product sales during the first nine months of 1996 increased $8.3 million to
$38.2 million, compared to $29.9 million during the first nine months of
1995, an increase of 28%. The increase was primarily the result of
increased shipments of SLA systems in both the U.S. and Europe, which
management believes is the result of increased acceptance by industry of
rapid prototyping equipment and technology as well as increased sales and
marketing efforts in Europe. The Company sold a total of 107 SLA systems in
the first nine months of 1996 which were comprised of 5 SLA-190's, 38
SLA-250's, 25 SLA-350's and 39 SLA-500's. During the first nine months of
1995, the Company sold 84 SLAs which were comprised of 3 SLA-190's, 46
SLA-250's and 35 SLA-500's.
Service sales during the first nine months of 1996 increased $5.4 million or
38% compared to the first nine months of 1995, primarily as a result of
increased maintenance revenues due to the larger installed base of SLA
systems in the U.S. and Europe.
COST OF SALES. Cost of sales increased to $29.5 million or 51% of sales in
the first nine months of 1996 from $21.9 million or 50% in the first nine
months of 1995.
Product cost of sales as a percentage of product sales increased to 46%
during the first nine months of 1996 compared to 44% during the
first nine months of 1995. The increase in 1996 was primarily the result of
an increase in commission payments to independent sales agents in 1996, as
compared to the first nine months of 1995 (see discussion above), as well as
the stronger U.S. dollar in the first nine months of 1996, as compared to the
first nine months of 1995. This increase was partially offset, however, by
the increase in SLA system sales during the first nine months of 1996. Profit
margins on SLA systems and related software are typically greater than
margins achieved on other product sales (related hardware, parts and
polymers).
Service cost of sales as a percentage of service sales was 62% for both the
first nine months of 1996 and 1995. Although service margins were equal, the
Company did experience improved field service margins which was due to the
more profitable Zephyr upgrades delivered in 1996 compared to those upgrades
offered in 1995. The improved margins from field service operations were
completely offset, however, by lower margins from the Company's U.S.
Technology Center as a result of the Technology Center's testing of both new
hardware and software products and the increased use of outside vendors for
certain rapid prototyping applications in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. S,G&A expenses for the first
nine months of 1996 were 32% of sales compared to 31% in the first nine
months of 1995. S,G&A expenses increased $5.0 million or 37% in 1996
compared to the first nine months of 1995, primarily as a result of expanded
sales and marketing programs in both the U.S. and Europe.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses during the first nine months
of 1996 increased approximately $1.6 million or 38% compared to the first
nine months of 1995. The increase in R&D expenses in 1996 was primarily the
result of the Company's efforts towards the development of the Actua 2100,
the SLA-350 and certain other development projects as well as the write-off
during the third quarter of 1996 of acquired in-process technology valued at
$430,000 in connection with the Keltool acquisition.
OPERATING INCOME. Operating income for the first nine months of 1996 was
6.2% of total sales compared to 9.6% of total sales in the first nine months
of 1995. The decrease in the percentage of operating income to total sales in
1996 was
Page 13 of 17
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
primarily attributable to the lower product gross margins in 1996, increased
S,G&A expenses in 1996 and increased R&D expenses in 1996, as described
above.
OTHER INCOME AND EXPENSES. Interest income increased to $1.2 million during
the first nine months of 1996 compared to $724,490 during the first nine
months of 1995, primarily as a result of the investment of funds from the
Company's stock offering which was completed in June 1995.
Interest expense increased to $46,251 during the first nine months of 1996
from $35,275 in the first nine months of 1995 primarily as a result of the
Company's financing of its Colorado facility which was effected August 20,
1996.
PROVISION FOR INCOME TAXES. For the first nine months of 1996, the Company's
tax rate was 38% of pre-tax income compared to a tax benefit of $2.7 million
for the first nine months of 1995. During the third quarter of 1995, the
Company realized a net income tax benefit of $2.9 million which included a
deferred tax benefit resulting from the recognition of deferred tax assets of
$3.0 million (related primarily to net operating loss carryforwards
attributable to the Company's domestic operations).
Page 14 of 17
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
December 31, 1995 September 27, 1996
----------------- ------------------
Cash and cash equivalents(1) $39,024,927 $30,467,559
Working capital(1) 50,022,392 50,218,738
Nine Month Periods Ended
--------------------------------------------
September 29, 1995 September 27, 1996
------------------ ------------------
Cash provided by (used for)
operating activities $ 2,155,811 $ (5,724,924)
Cash used for investing
activities (2,221,750) (8,161,093)
Cash provided by financing
activities 31,727,069 5,271,486
- -----------------------------
(1) Includes $766,000 and $722,000 of restricted cash at December 31, 1995
and September 27, 1996, respectively.
Net cash used for operating activities during the first nine months of 1996
was $5.7 million. The negative cash flow from operations during the first
nine months of 1996, comprised primarily of an increase in inventory ($5.1
million) as a result of a higher level of production and build-up of
inventory components to facilitate the move of manufacturing operations to
Colorado, an increase in accounts receivable ($3.6 million) as a result of
the increase in sales during the third quarter of 1996 and a decrease in
accounts payable ($2.4 million), was partially offset by net income ($2.9
million), non cash depreciation and amortization ($2.5 million), and a
decrease in deferred tax assets ($1.6 million).
Net cash used for investing activities during the first nine months of 1996
totaled $8.2 million and was primarily the result of construction
expenditures related to the Company's Grand Junction, Colorado facility ($3.9
million), SLA equipment manufactured for use as demonstration equipment ($1.1
million), and the purchase of computers and manufacturing equipment due to an
increase in personnel and increased production capacity.
Net cash provided by financing activities during the first nine months of
1996 was the result of the Company's financing of its Colorado facility
through the issuance of $4.9 million in tax-exempt industrial revenue
development bonds and by the exercise of stock options by employees.
In July 1996, the Company extended its credit facility with Silicon Valley
Bank ("SVB") (the "Credit Facility"). Under the terms of the agreement,
which remains in effect through July 5, 1997, the Company can borrow from SVB
up to $4,000,000, at prime. The Credit Facility, which is unsecured,
contains certain financial covenants including the maintenance of certain
financial ratios, working capital, tangible net worth as well as covenants
limiting mergers, acquisitions, recapitalizations, dividends, loans to
others, and hypothecation of assets or corporate guarantees. Since inception
of the Credit Facility (June 1993) and at all times through September 27,
1996, the Company has not utilized the facility.
The Company believes that funds generated from operations, existing working
capital and its current line of credit will be sufficient to satisfy its
anticipated operating requirements for at least the next twelve months.
Page 15 of 17
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities.
On September 9, 1996, the Company issued to Wayne O. Deuscher
warrants to purchase up to 50,000 shares of the Common Stock, par
value $0.001 per share, of the Company. The warrants are exercisable
at any time, and from time to time, prior to September 9, 1999 at a
cash exercise price of $14.75 per share, the fair market value at the
date of issuance. The warrants were issued in connection with the
acquisition by the Company of Keltool, Inc. (see Note 4 of Notes to
Consolidated Financial Statements). No underwriter was involved in the
transaction. The issuance of the warrants was exempt from the
registration and prospectus delivery requirements of the Securities
Act of 1933, as amended, pursuant to Section 4 (2) thereof, as a
transaction not involving any public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Asset Purchase Agreement dated as of August 30, 1996 by and between
3D Systems, Inc., a California corporation, Keltool, Inc. a Minnesota
corporation and Wayne Duescher.
10.2 Warrant Agreement dated September 9, 1996 by and between 3D Systems,
Inc., a California corporation and Keltool, Inc., a Minnesota
corporation.
10.3 Non-Competition Agreement dated September 9, 1996 by and between 3D
Systems, Inc., a California corporation and Wayne O. Duescher.
11. Computation of per share earnings.
(b) Reports on Form 8-K
None
Page 16 of 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Gordon L. Almquist 11/1/96
- ------------------------------------------ -----------
Gordon L. Almquist Date
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
(Duly authorized to sign on behalf of Registrant)
Page 17 of 17