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 JUNE 26, 1998
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 July 31, 1998:
11,562,462
Page 1 of 20
3D SYSTEMS CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page Number
-----------
ITEM 1. Financial Statements
Consolidated Balance Sheets,
December 31, 1997 and June 26, 1998 3
Consolidated Statements of Operations
For the Three and Six Month Periods Ended
June 27, 1997 and June 26, 1998 4
Consolidated Statements of Cash Flows
For the Six Month Periods Ended
June 27, 1997 and June 26, 1998 5
Consolidated Statements of Comprehensive Income
For the Three and Six Month Periods Ended
June 27, 1997 and June 26, 1998 6
Notes to Consolidated Financial Statements
December 31, 1997 and June 26, 1998 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security
Holders 19
ITEM 6. Exhibits and Reports on Form 8-K 19
Page 2 of 20
3D SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS December 31, 1997 June 26, 1998
----------------- -------------
Current assets:
Cash and cash equivalents $ 12,694,831 $ 12,524,301
Short-term investments 3,498,265 6,647,458
Accounts receivable, less allowances for doubtful accounts
of $441,399 (1997) and $746,108 (1998) 23,618,237 23,601,506
Current portion of lease receivables 1,257,006 1,393,983
Inventories (Note 2) 12,164,633 10,372,709
Deferred tax assets 3,319,651 2,489,738
Prepaid expenses and other current assets 2,305,163 2,502,186
------------ ------------
Total current assets 58,857,786 59,531,881
Property and equipment, net (Note 3) 16,895,011 15,534,240
Licenses and patent costs, net 5,464,351 5,587,781
Deferred tax assets 3,971,000 3,971,000
Lease receivables, less current portion 3,944,462 4,437,817
Other assets 2,207,109 2,043,102
------------ ------------
$ 91,339,719 $ 91,105,821
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,885,831 $ 3,724,213
Accrued liabilities 8,814,193 7,770,366
Current portion of long-term debt 95,000 95,000
Customer deposits 238,248 293,757
Deferred revenues 6,514,868 8,972,119
------------ ------------
Total current liabilities 20,548,140 20,855,455
Other liabilities 1,491,534 1,727,492
Long-term debt, less current portion 4,705,000 4,655,000
------------ ------------
26,744,674 27,237,947
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 11,450,071 and outstanding 11,425,071
(1997) and issued 11,557,133 and outstanding 11,332,133
(1998) 11,450 11,557
Capital in excess of par value 73,856,965 74,531,972
Notes receivable from officers (Note 4) --- (420,000)
Accumulated deficit (8,897,605) (8,017,582)
Cumulative translation adjustment (210,827) (698,132)
Treasury stock, at cost, 25,000 shares (1997) and 225,000
shares (1998) (Note 5) (164,938) (1,539,941)
------------ ------------
Total stockholders' equity 64,595,045 63,867,874
------------ ------------
$ 91,339,719 $ 91,105,821
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
Page 3 of 20
3D SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Periods Ended Six Month Periods Ended
---------------------------- ----------------------------
Sales: June 27, 1997 June 26, 1998 June 27, 1997 June 26, 1998
------------- ------------- ------------- -------------
Products $ 14,111,466 $ 16,715,008 $ 27,709,322 $ 31,242,357
Services 7,691,979 7,957,544 15,552,935 16,266,552
------------- ------------- ------------- -------------
Total sales 21,803,445 24,672,552 43,262,257 47,508,909
------------- ------------- ------------- -------------
Cost of sales:
Products 7,711,852 8,436,977 14,999,244 16,328,577
Services 5,636,094 5,484,087 11,138,683 11,039,896
------------- ------------- ------------- -------------
Total cost of sales 13,347,946 13,921,064 26,137,927 27,368,473
------------- ------------- ------------- -------------
Gross profit 8,455,499 10,751,488 17,124,330 20,140,436
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative 7,170,603 7,480,037 13,561,294 14,118,569
Research and development 2,011,893 2,568,411 3,941,727 4,880,045
------------- ------------- ------------- -------------
Total operating expenses 9,182,496 10,048,448 17,503,021 18,998,614
------------- ------------- ------------- -------------
Income (loss) from operations (726,997) 703,040 (378,691) 1,141,822
Other income 334,622 205,757 685,670 384,642
Other expense (68,420) (100,128) (127,203) (172,583)
------------- ------------- ------------- -------------
Income before provision for income taxes (460,795) 808,669 179,776 1,353,881
Provision for (benefit from) income taxes (181,114) 283,034 71,911 473,858
------------- ------------- ------------- -------------
Net income (loss) $ (279,681) $ 525,635 $ 107,865 $ 880,023
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income (loss) per common share $ (.02) $ .05 $ .01 $ .08
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares outstanding 11,376,199 11,347,277 11,368,116 11,318,001
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income (loss) per common share
assuming dilution $ (.02) $ .04 $ .01 $ .08
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares outstanding
and dilutive shares 11,524,374 11,756,144 11,643,948 11,726,868
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements.
Page 4 of 20
3D SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
For the Six Month Periods Ended June 27, 1997 and June 26, 1998
(Unaudited)
1997 1998
----------- -----------
OPERATING ACTIVITIES:
Net income $ 107,865 $ 880,023
Adjustments to reconcile net income to net cash used for
operating activities:
Deferred income taxes 389,275 829,913
Depreciation and amortization 2,396,129 2,812,885
Increase (decrease) in cash resulting from changes in:
Accounts receivable (2,369,282) (35,474)
Lease receivables (3,618,831) (634,746)
Inventories (3,503,713) 1,774,783
Prepaid expenses and other current assets (426,589) (197,023)
Other assets (11,381) (197,064)
Accounts payable 2,041,074 (1,153,058)
Accrued liabilities (14,976) (1,043,827)
Customer deposits 51,756 55,611
Deferred revenues 1,400,841 2,457,251
Other liabilities (12,747) 235,958
----------- -----------
Net cash (used) provided by operating activities (3,570,579) 5,785,232
INVESTING ACTIVITIES:
Purchase of property and equipment (5,231,578) (1,998,851)
Disposition of property and equipment 519,643 1,334,154
Increase in licenses and patent costs (350,448) (448,331)
Purchase of short-term investments (3,484,182) (6,647,458)
Proceeds from short-term investments 7,243,674 3,498,265
----------- -----------
Net cash provided (used) by investing activities (1,302,891) (4,262,221)
FINANCING ACTIVITIES:
Exercise of stock options and warrants 199,884 255,114
Repayments of note payable (55,000) (50,000)
Purchase of treasury stock (164,938) (1,375,003)
----------- -----------
Net cash used by financing activities (20,054) (1,169,889)
Effect of exchange rate changes on cash (832,819) (523,652)
----------- -----------
Net decrease in cash and cash equivalents (5,726,343) (170,530)
Cash and cash equivalents at the beginning of the period 24,356,441 12,694,831
----------- -----------
Cash and cash equivalents at the end of the period $18,630,098 $12,524,301
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
Page 5 of 20
3D SYSTEMS CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
Six Month Periods Ended
-----------------------------
June 27, 1997 June 26, 1998
------------- -------------
Net income $ 107,865 $ 880,023
Foreign currency translation, net of tax (1,394,298) (487,305)
----------- ---------
Comprehensive (loss) income $(1,286,433) $ 392,718
----------- ---------
----------- ---------
See accompanying notes to consolidated financial statements.
Page 6 of 20
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1997 and June 26, 1998
(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,
1997. The results of the six month period ended June 26, 1998 are not
necessarily indicative of the results to be expected for the full year.
(2) Inventories
December 31, 1997 June 26, 1998
----------------- -------------
Raw materials $ 2,259,504 $ 2,220,261
Work in progress 1,141,702 482,116
Finished goods 8,763,427 7,670,332
----------------- -------------
$ 12,164,633 $ 10,372,709
----------------- -------------
----------------- -------------
(3) Property and Equipment
December 31, 1997 June 26, 1998
----------------- -------------
Land and building $ 4,613,051 $ 4,613,051
Machinery and equipment 15,704,394 15,761,807
Office furniture and equipment 2,713,906 2,739,622
Leasehold improvements 2,100,530 2,327,311
Rental equipment 906,098 635,081
Construction in progress 1,119,065 1,401,143
----------------- -------------
27,157,044 27,478,015
Less accumulated depreciation and
amortization (10,262,033) (11,943,775)
----------------- -------------
$ 16,895,011 $ 15,534,240
----------------- -------------
----------------- -------------
(4) Related Party Transaction
At June 26, 1998, the Company has notes receivable totaling $420,000
from certain executive officers of the Company pursuant to the Executive
Long-Term Stock Incentive Plan (which was adopted under the 1996 Stock
Incentive Plan). The loans were used to purchase an aggregate of 67,333
shares of the Company's common stock at the fair market value on the
date of offer. These notes bear an interest rate of 6% per annum and
mature in the year 2003. The plan calls for the loans to be forgiven,
in part or whole, if certain profitability targets are met. The notes
receivable are shown on the balance sheet as a reduction of
stockholders' equity.
Page 7 of 20
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1997 and June 26, 1998
(Unaudited)
(5) Treasury Stock
On May 6, 1997, the Company announced that its Board of Directors had
authorized the Company to buy up to 1.5 million of its shares in the open
market and through private transactions. During 1997, and in the first
quarter of 1998, the Company purchased 25,000 and 200,000, respectively, of
its own shares for approximately $165,000 and $1,375,003, respectively.
The Company may continue to acquire additional shares from time to time at
the prevailing market price, at a rate consistent with the combination of
corporate cash and market conditions.
(6) Other income and other expense
Other income and expense primarily consists of interest income, interest
expense and other expenses related to investment and leasing activities.
Page 8 of 20
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 1997 and June 26, 1998
(Unaudited)
(7) Computation of Earnings Per Share
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, Earnings Per Share for the year ended December 31, 1997, and has
restated earnings per common share for all periods presented in accordance
with the new standard. Net income (loss) per common share is computed by
dividing net income (loss) by the weighted average number of shares of
common stock outstanding during the period. Net income (loss) per common
share assuming dilution is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding plus the
number of additional common shares that would have been outstanding if all
dilutive potential common shares had been issued. Potential common shares
related to stock options and stock warrants are excluded from the
computation when their effect is anti-dilutive.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) computations for the six month
period ended June 27, 1997 and June 26, 1998:
1997 1998
NUMERATOR: ------------ -------------
Net income - numerator for net income per common
share and net income per common share assuming dilution $ 107,865 $ 880,023
DENOMINATOR:
Denominator for net income per common share -
weighted average shares 11,368,116 11,318,001
EFFECT OF DILUTIVE SECURITIES:
Stock options 275,832 408,867
DENOMINATOR FOR NET INCOME PER COMMON SHARE,
ASSUMING DILUTION:
Adjusted weighted average shares and assumed
conversions 11,643,948 11,726,868
Common shares related to stock options and stock warrants that are
antidilutive amounted to approximately 1,508,658 shares and 562,967
shares for the six months ended June 27, 1997 and June 26, 1998,
respectively.
(8) Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which requires prominent disclosure of
comprehensive income, as defined in the SFAS, including comparative
disclosure in interim financial statements. Under provisions of the
statement, the Company has included a financial statement presentation of
comprehensive income to meet the objectives of these new requirements.
Page 9 of 20
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 1997 and June 26, 1998
(Unaudited)
(9) Employee Stock Purchase Plan
In May 1998, the Company established the 1998 Employee Stock Purchase Plan
to provide eligible employees the opportunity to acquire limited amounts of
the Company's common stock. Under the plan, participants will receive
options to purchase shares which are exercisable no later than one year
from the date of grant. The exercise price of each option will be the
lesser of (I) 85% of the fair market value of the shares on the date the
option is granted or (II) 85% of the fair market value of the shares on the
last day of the period during which the option is outstanding. An
aggregate of 600,000 shares of common stock have been reserved for issuance
under the plan. As of June 26, 1998, activity under the plan since
inception was immaterial.
Page 10 of 20
3D SYSTEMS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in Item 1 of this Quarterly
Report and the audited consolidated financial statements and notes thereto,
Management's Discussion and Analysis of Results of Operations and Financial
Condition, and Cautionary Statements and Risk Factors for the year ended
December 31, 1997 contained in the Company's 1997 Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's future results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include, but are not specifically limited to: the ability to
develop and introduce cost effective new products in a timely manner;
developments in current or future litigation; the Company's ability to
successfully manufacture and sell significant quantities of equipment on a
timely basis; as well as the other risks detailed in this report and in the
Company's 1997 Form 10-K under the section entitled Cautionary Statements and
Risk Factors.
OVERVIEW
The Company develops, manufactures and markets in the United States and
internationally both its stereolithography apparatus (SLA) and its Actua 2100
systems, each designed to rapidly produce three-dimensional objects from
computer-aided design and manufacturing generated solid or surface data.
Stereolithography is a solid imaging process whereby a laser beam exposes and
solidifies successive layers of photosensitive resin until the desired object
is formed to precise specifications in hard plastic. The Actua 2100 utilizes
Multi-Jet Modeling technology to print models in successive layers with a
special thermopolymer material. These objects can be used for concept models,
engineering prototypes, patterns and masters for molds and other
applications.
The Company has sold over 1,000 systems since 1988 and its customers include
major corporations in a broad range of industries including manufacturers of
automotive, aerospace, computer, electronic, consumer and medical products.
The Company's revenues are generated by product and service sales. Product
sales are comprised of sales of systems and related equipment, materials,
software, and other component parts, as well as rentals of systems. Service
sales include revenues from a variety of on-site maintenance services,
services provided by the Company's Technology Centers and customer training.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain items
from the Company's Statement of Operations and Total Revenues:
Percentage of Total Revenues
Three Month Periods Ended Six Month Periods Ended
------------------------------------------------------------
Sales: June 27, 1997 June 26, 1998 June 27, 1997 June 26, 1998
------------- ------------- ------------- -------------
Products 64.7% 67.8% 64.0% 65.8%
Services 35.3% 32.2% 36.0% 34.2%
------ ------ ------ ------
Total sales 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Cost of Sales:
Products 35.4% 34.2% 34.7% 34.4%
Services 25.8% 22.2% 25.7% 23.2%
------ ------ ------ ------
Total cost of sales 61.2% 56.4% 60.4% 57.6%
------ ------ ------ ------
Total gross profit 38.8% 43.6% 39.6% 42.4%
Gross profit - products 45.3% 49.6% 45.9% 47.7%
Gross profit - services 26.7% 31.1% 28.4% 32.1%
Selling, general and administrative expenses 32.9% 30.3% 31.4% 29.7%
Research and development expenses 9.2% 10.4% 9.1% 10.3%
Income (loss) from operations (3.3)% 2.8% (0.9)% 2.4%
Interest income, net 1.2% 0.4% 1.3% 0.5%
Provision for (benefit from) income taxes (0.8)% 1.1% 0.2% 1.0%
Net income (loss) (1.3)% 2.1% 0.2% 1.9%
Page 11 of 20
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 Six Month Periods Ended
---------------------------- ----------------------------
Sales: June 27, 1997 June 26, 1998 June 27, 1997 June 26, 1998
------------- ------------- ------------- -------------
Products: (in thousands except percentages)
Systems, and related equipment $ 9,698 $ 11,843 $ 19,512 $ 21,639
Materials 3,113 4,144 5,932 7,437
Other 1,300 728 2,265 2,166
-------- -------- -------- --------
Total products 14,111 16,715 27,709 31,242
-------- -------- -------- --------
Services:
Maintenance 6,246 6,898 12,513 13,809
Other 1,446 1,060 3,040 2,458
-------- -------- -------- --------
Total services 7,692 7,958 15,553 16,267
-------- -------- -------- --------
Total sales $ 21,803 $ 24,673 $ 43,262 $ 47,509
-------- -------- -------- --------
-------- -------- -------- --------
Products:
Systems, and related equipment 44.4% 48.0% 45.1% 45.6%
Materials 14.3% 16.8% 13.7% 15.7%
Other 6.0% 3.0% 5.2% 4.5%
-------- -------- -------- --------
Total products 64.7% 67.8% 64.0% 65.8%
-------- -------- -------- --------
Services:
Maintenance 28.7% 28.0% 29.0% 29.0%
Other 6.6% 4.2% 7.0% 5.2%
-------- -------- -------- --------
Total services 35.3% 32.2% 36.0% 34.2%
-------- -------- -------- --------
Total sales 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
-------- -------- -------- --------
Page 12 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
THREE MONTH PERIOD ENDED JUNE 26, 1998 COMPARED TO THE THREE MONTH PERIOD
ENDED JUNE 27, 1997.
SALES. Sales during the three month period ended June 26, 1998 (the "second
quarter of 1998") were $24.7 million, an increase of 13% over the $21.8
million recorded during the three month period ended June 27, 1997 (the
"second quarter of 1997").
Product sales during the second quarter of 1998 ($16.7 million) increased
approximately 18% compared to the second quarter of 1997 ($14.1 million).
The Company sold a total of 62 systems in the second quarter of 1998,
compared to 68 systems in the second quarter of 1997. The slight decrease in
total systems sold in the second quarter of 1998 is largely attributable to a
decrease in the number of Actua 2100 systems sold in that quarter as compared
to the second quarter of 1997. In addition, the Company was impacted by a
reduction of sales into Asia Pacific due to the economic conditions in that
region, coupled with the impact of a strong U.S. dollar. System sales
fluctuate from quarter to quarter and the Company does not believe that the
reduced number of Actua's sold, nor the change in system unit sales from 1997
to 1998, is indicative of sales in any future quarter. While sales into Asia
Pacific make up less than 10% of total product sales, the Company does
believe the trend in Asia Pacific will continue, and is expecting overall
sales in that region to be flat or slightly down in 1998 as compared to 1997.
These are forward looking statements however and are subject to
uncertainties. For example, the exact timing of customer requirements may
significantly impact product sales in future quarters. The increase in the
dollar value of product sales was due to improved average selling prices,
improved product mix and an increase in material sales.
Orders for the Company's systems in the second quarter of 1998 compared to
the second quarter of 1997 increased substantially in Europe and the U.S.,
and were down significantly in Asia Pacific. Total system backlog at the end
of the second quarter of 1998 is up approximately 20% as compared to the
second quarter of 1997. The increase in system orders in the second quarter
of 1998 was due primarily to a significant improvement in Europe coupled with
improved productivity of the domestic sales force, as compared to a soft
second quarter of 1997. The Company anticipates that orders should increase
in the U.S. and Europe during 1998 as compared to 1997 primarily as a result
of increased productivity of the domestic sales force and the assimilation of
the EOS acquisition. This is a forward looking statement and, as with other
such statements, is subject to uncertainties. For example, European economic
conditions and the strong U.S. dollar could cause delays in customer orders
which could lead to orders being lower in 1998 than 1997.
In addition, the Company believes that system sales may fluctuate on a
quarterly basis as a result of a number of factors, including world economic
conditions, fluctuations in foreign currency exchange rates and the timing of
product shipments. Due to the price of certain systems, along with overall
low shipment volumes, 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 during 1998 are the sales mix of the Company's products as
well as the channels and markets in which the Company distributes its
products.
Service sales during the second quarter of 1998 ($8.0 million) increased
approximately 3% compared to the second quarter of 1997 ($7.7 million),
primarily as a result of increased maintenance revenues due to the larger
installed base of systems in the U.S. and Europe. Sales of Other Services in
the second quarter of 1998 ($1.1 million) were down from the second quarter
of 1997 ($1.4 million) and the first quarter of 1998 ($1.4 million). This
decrease is primarily attributable to a reduction in sales of Technology
Center services. The Company expects that sales of Technology Center services
will remain at this lower level for the balance of 1998.
Page 13 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
COST OF SALES. Cost of sales increased to $13.9 million (56% of sales) in
the second quarter of 1998 from $13.3 million (61% of sales) in the second
quarter of 1997.
Product cost of sales as a percentage of product sales improved to
approximately 50% in the second quarter 1998 from approximately 55% in the
second quarter of 1997. This improvement was due primarily to increased
average selling prices in Europe and significant reductions in the cost of
factory operations in 1998 as compared to 1997. The Company also benefited
from a more balanced product mix in the second quarter of 1998 as compared to
the second quarter of 1997. The Company believes that the benefits from
improved average selling prices have been optimized and will not increase
further. In addition, while the Company expects reductions in factory costs
to continue, the rate of improvement may decrease slightly. These are
forward looking statements however and are subject to uncertainties. For
example, the impact of competition or changing economic conditions in Europe
or the U.S. may dramatically impact average selling prices. In addition, the
Company's costs of product sales and corresponding gross profit margins are
affected by several factors including, but not limited to sales mix,
distribution channels, and fluctuations in foreign currency exchange rates
and, therefore, may vary in future periods from those experienced during the
second quarter of 1998.
Service cost of sales as a percentage of service sales decreased to 69%
during the second quarter of 1998 compared to 73% during the second quarter
of 1997, primarily as a result of increased parts costs under field
maintenance contracts and certain inefficiencies attributable to the
Company's Keltool operations which occurred during the second quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("S,G&A") expenses increased approximately $300,000 or 4% in
the second quarter of 1998 compared to the second quarter of 1997, which
included a $500,000 non-recurring charge for severance benefits related to a
restructuring plan. The increase was due primarily to an increase in
commissions and bonus expenses due to higher sales and profits, costs
associated with other selling and incentive programs, and costs related to
expanded efforts in marketing and communications programs. The Company
expects S,G&A expenses to increase slightly in the second half of 1998. This
is a forward looking statement and is subject to uncertainties. As examples,
a significant increase in revenues in the second half of 1998 could cause a
further increase in commissions and bonuses, or the impact of litigation
costs associated with the protection of the Company's patents could result in
a substantial increase in S,G&A expenses.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses
during the second quarter of 1998 increased approximately $560,000 or 28%
compared to the second quarter of 1997. The increase in R&D expenses in 1998
was primarily the result of increased personnel and materials related to
certain 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 10% of sales. However, this is a
forward looking statement 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 second quarter of 1998 was 2.8%
of total sales compared to a loss of 3.3% of total sales in the second
quarter of 1997. The improvement in operating income in 1998 was primarily
attributable to the significant increase in product sales and the substantial
reductions in overall factory costs as described above. In addition, the
second quarter 1997 loss included a non-recurring charge of $500,000.
Page 14 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
OTHER INCOME AND EXPENSES. Net other income decreased approximately $160,000
in the second quarter 1998 ($106,000) compared to the second quarter 1997
($266,000) due primarily to a decrease in interest income. This decrease is
the result of the lower investment balances in 1998 as compared to 1997 due
to cash used for operating activities and investment activities since the
second quarter of 1997 along with the funding of certain lease receivables
that occurred in the third quarter of 1997.
Page 15 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
SIX MONTH PERIOD ENDED JUNE 26, 1998 COMPARED TO THE SIX MONTH PERIOD ENDED
JUNE 27, 1997.
SALES. Sales during the six month period ended June 26, 1998 (the "first half
of 1998") were $47.5 million, an increase of approximately 10% over the $43.3
million recorded during the six month period ended June 27, 1997 (the "first
half of 1997").
Product sales during the first half of 1998 ($31.2 million) increased
approximately 13% from the $27.7 million in product sales in the first half
of 1997. The Company sold a total of 111 systems in the first half of 1998,
compared to 133 systems in the first half of 1997.
Orders for the Company's systems in the first half of 1998 as compared to the
first half of 1997, increased substantially in both the U.S. and Europe,
while orders were down in Asia Pacific. In 1997, the U.S. market was
impacted by potential inefficiencies caused by the changes in the domestic
sales organization.
Service sales during the first half of 1998 increased $.7 million, or
approximately 5% compared to the first half of 1997. The lower growth rate
is primarily attributable to a decrease in Technology Center revenues of $.3
million in the first half of 1998, as compared to the first half of 1997.
COST OF SALES. Cost of sales increased to $27.4 million or 58% of sales in
the first half of 1998 from $26.1 million or 60% of sales in the first half
of 1997.
Product cost of sales as a percentage of product sales declined to 52% in the
first half of 1998 compared to the 54% in the first half of 1997. The
improvement in 1998 was due primarily to increased average selling prices in
Europe and significant reductions in the cost of factory operations in 1998
as compared to 1997.
Service cost of sales as a percentage of service sales declined to 68% in the
first half of 1998 compared to 72% during the first half of 1997, primarily
as a result of increased part costs under field maintenance contracts and
certain inefficiencies attributable to the Company's Keltool operations
during the first half of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling general and
administrative ("S,G&A") expenses increased approximately $.6 million or 4% in
the first half of 1998 compared to the first half of 1997, primarily as a
result of increased commissions and bonus expenses due to higher sales and
profits, costs associated with selling and incentive programs in 1998, and
costs related to expanded marketing and communications programs. The first
half of 1997 did include a $.5 million non-recurring charge for severance
benefits related to a restructuring plan.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during
the first half of 1998 increased approximately $.9 million or 24% compared to
the first half of 1997. The increase in research and development expenses in
1998 was primarily the result of increased personnel and materials related to
certain development projects.
Page 16 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
OPERATING INCOME (LOSS). Profitability from operations increased by $1.5
million in the first half of 1998, reaching 2.4% of total sales as compared
to a loss of .9% of total sales in the first half of 1997. The improvement
in operating income in the first half of 1998 is primarily attributable to
the significant increase in product sales and and the substantial reductions
in overall factory costs as desribed above. In addition, the first half of
1997 loss included a non-recurring charge of $.5 million.
OTHER INCOME AND EXPENSES. Other income and expenses decreased approximately
$.3 million in the first half of 1998 ($.2 million) compared to the first
half of 1997 ($.6 million) due primarily to a decrease in interest income.
This decrease is the result of the lower investment balances in the first
half of 1998 as compared to the first half of 1997 due to cash used for
operating and investment activities since the second quarter of 1997 along
with the funding of certain lease receivables that occurred in the third
quarter of 1997.
Page 17 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
December 31, 1997 June 26, 1998
----------------- -------------
Cash and cash equivalents $12,694,831 $12,524,301
Short-term investments 3,498,265 6,647,458
Working capital 38,309,646 38,676,426
Six Month Periods Ended
---------------------------------
June 27, 1997 June 26, 1998
----------------- -------------
Cash provided by (used for) operating activities $(3,570,579) $ 5,785,232
Cash provided by (used for) investing activities (1,302,891) (4,262,221)
Cash used for financing activities (20,054) (1,169,889)
Net cash provided by operating activities during the first half of 1998 was
$5.8 million. The positive cash flow from operations during the first half
of 1998 was comprised primarily of a significant increase in deferred
revenues ($2.5 million), a decrease in inventories ($1.8 million), and
increased net income ($.9 million).
Net cash used for investing activities during the first half of 1998 totaled
$4.3 million and was primarily the result of increases in short term
investments of $3.2 million along with the net additions to property and
equipment and license and patent costs ($1.1 million).
Net cash used for financing activities during the first half of 1998 was
primarily the result of the Company's purchase of 200,000 shares of its own
stock ($1.4 million). The Company may continue to acquire additional shares
from time to time at the prevailing market price, at a rate consistent with
the combination of corporate cash and market conditions.
In August 1997, 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 August 18, 1998, the Company can borrow from SVB up
to $10,000,000, at the prevailing prime rate of interest. The Credit
Facility, which is unsecured, contains certain financial 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 June 26, 1998, the
Company has been in compliance with all financial covenants then in effect
and has not utilized the facility. It is the Company's intention to renew
this 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.
YEAR 2000 ISSUE. Many computer systems experience problems handling dates
beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional.
The Company is assessing both the internal readiness of its computer systems
and the compliance of its computer products and software sold to customers
for handling the year 2000. The Company expects to implement successfully
the systems programming changes necessary to address year 2000 issues, and
does not believe that the cost of such actions will have a material effect on
the Company's results of operations or financial condition. There can be no
assurance, however, that there will not be a delay in, or increased costs
associated with the implementation of such changes, and the inability to
implement such changes could have an adverse effect on future results of
operations.
Page 18 of 20
3D SYSTEMS CORPORATION
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 22, 1998, the Company held its Annual Meeting of Stockholders.
The following sets forth the identity of the directors elected as
Class II Directors to hold office for three years and until their
respective successors have been elected and voting results as well as
the voting results of the approval of the Company's 1998 Employee
Stock Purchase Plan.
1. Election of Class II Directors
Yes No Abstain Broker Non
--------- --- ------- ----------
Arthur B. Sims 9,699,999 932 87,432 0
Richard D. Balanson 9,695,557 400 87,258 0
Miriam V. Gold 9,705,898 632 81,725 0
2. The approval of the 1998 Employee Stock Purchase Plan
Yes No Abstain Broker Non
--------- ------ ------- ----------
4,022,736 99,094 38,057 5,613,468
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial data schedule.
(b) Report on Form 8-K dated April 23, 1998 to announce First Quarter
1998 results.
Page 19 of 20
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/ Frank J. Spina August 10, 1998
- ------------------------------------------ ---------------
Frank J. Spina Date
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
(Duly authorized to sign on behalf of Registrant)
Page 20 of 20