SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 1998
[ ] 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 30, 1998:
11,581,725
Page 1 of 21
3D SYSTEMS CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page Number
-----------
ITEM 1. Financial Statements
Consolidated Balance Sheets,
December 31, 1997 and September 25, 1998 ................ 3
Consolidated Statements of Operations
For the Three and Nine Month Periods Ended
September 26, 1997 and September 25, 1998 ................ 4
Consolidated Statements of Cash Flows
For the Nine Month Periods Ended
September 26, 1997 and September 25, 1998 ................ 5
Consolidated Statements of Comprehensive Income
For the Three and Nine Month Periods Ended
September 26, 1997 and September 25, 1998 ................ 6
Notes to Consolidated Financial Statements
December 31, 1997 and September 25, 1998 ................ 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ................ 20
Page 2 of 21
3D SYSTEMS CORPORATION
Consolidated Balance Sheets
(Unaudited)
ASSETS December 31, 1997 September 25, 1998
----------------- ------------------
Current assets:
Cash and cash equivalents $ 12,694,831 $ 11,884,360
Short-term investments 3,498,265 4,498,841
Accounts receivable, less allowances for doubtful accounts
of $441,399 (1997) and $1,098,577 (1998) 23,618,237 25,942,350
Current portion of lease receivables 1,257,006 1,583,588
Inventories (Note 2) 12,164,633 11,984,084
Deferred tax assets 3,319,651 2,489,738
Prepaid expenses and other current assets 2,305,163 3,332,957
----------------- ------------------
Total current assets 58,857,786 61,715,918
Property and equipment, net (Note 3) 16,895,011 15,825,845
Licenses and patent costs, net 5,464,351 5,492,271
Deferred tax assets 3,971,000 3,971,000
Lease receivables, less current portion 3,944,462 5,469,291
Other assets 2,207,109 2,074,194
----------------- ------------------
$ 91,339,719 $ 94,548,519
----------------- ------------------
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,885,831 $ 4,990,516
Accrued liabilities 8,814,193 8,671,337
Current portion of long-term debt 95,000 100,000
Customer deposits 238,248 555,402
Deferred revenues 6,514,868 8,128,245
----------------- ------------------
Total current liabilities 20,548,140 22,445,500
Other liabilities 1,491,534 1,948,187
Long-term debt, less current portion 4,705,000 4,605,000
----------------- ------------------
26,744,674 28,998,687
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 11,564,965 and outstanding 11,339,965 (1998) 11,450 11,565
Capital in excess of par value 73,856,965 74,730,572
Notes receivable from officers (Note 4) --- (360,000)
Accumulated deficit (8,897,605) (7,540,661)
Cumulative translation adjustment (210,827) 248,297
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 65,549,832
----------------- ------------------
$ 91,339,719 $ 94,548,519
----------------- ------------------
----------------- ------------------
See accompanying notes to consolidated financial statements.
Page 3 of 21
3D SYSTEMS CORPORATION
Consolidated Statements of
Operations
(Unaudited)
Three Month Periods Ended Nine Month Periods Ended
---------------------------------------- ---------------------------------------
Sales: September 26, 1997 September 25, 1998 September 26, 1997 September 25, 1998
------------------ ------------------ ------------------ ------------------
Products $ 14,615,138 $ 14,665,015 $ 42,324,460 $ 45,907,372
Services 7,678,718 8,676,773 23,231,653 24,943,325
------------------ ------------------ ------------------ ------------------
Total sales 22,293,856 23,341,788 65,556,113 70,850,697
------------------ ------------------ ------------------ ------------------
Cost of sales:
Products 8,637,195 7,628,473 23,636,439 23,957,050
Services 5,231,937 5,631,317 16,370,620 16,671,213
------------------ ------------------ ------------------ ------------------
Total cost of sales 13,869,132 13,259,790 40,007,059 40,628,263
------------------ ------------------ ------------------ ------------------
Gross profit 8,424,724 10,081,998 25,549,054 30,222,434
------------------ ------------------ ------------------ ------------------
Operating expenses:
Selling, general and administrative 7,320,339 7,559,076 20,881,633 21,677,645
Research and development 4,658,723 1,946,984 8,600,450 6,827,029
------------------ ------------------ ------------------ ------------------
Total operating expenses 11,979,062 9,506,060 29,482,083 28,504,674
------------------ ------------------ ------------------ ------------------
Income (loss) from (3,554,338) 575,938 (3,933,029) 1,717,760
operations
Other income 308,663 264,969 994,333 649,611
Other expense (101,123) (139,553) (228,326) (312,136)
------------------ ------------------ ------------------ ------------------
Income before provision for income taxes (3,346,798) 701,354 (3,167,022) 2,055,235
Provision for (benefit from) income taxes (1,212,039) 224,433 (1,140,128) 698,291
------------------ ------------------ ------------------ ------------------
Net income (loss) $ (2,134,759) $ 476,921 $ (2,026,894) $ 1,356,944
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Net income (loss) per common share $ (0.19) $ 0.04 $ (0.18) $ 0.12
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Weighted average shares outstanding 11,410,734 11,362,729 11,382,533 11,333,189
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Net income (loss) per common share
assuming dilution $ (0.19) $ 0.04 $ (0.18) $ 0.12
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Weighted average shares outstanding
and dilutive shares 11,410,734 11,565,468 11,382,533 11,535,928
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
See accompanying notes to consolidated financial statements.
Page 4 of 21
3D SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
For the Nine Month Periods Ended September 26, 1997
and September 25, 1998
(Unaudited)
1997 1998
--------------- ---------------
OPERATING ACTIVITIES:
Net income $ (2,026,894) $ 1,356,944
Adjustments to reconcile net income to net cash used for
operating activities:
Deferred income taxes 442,725 829,913
Depreciation and amortization 3,691,798 4,009,019
Increase (decrease) in cash resulting from changes in:
Accounts receivable (5,406,498) (2,125,875)
Lease receivables 129,222 (1,907,014)
Inventories (2,488,518) 99,091
Prepaid expenses and other current assets (846,881) (1,027,795)
Other assets (1,205,370) (433,691)
Accounts payable 870,342 (12,842)
Accrued liabilities 1,667,405 (142,855)
Customer deposits (330,790) 317,154
Deferred revenues 680,410 1,613,377
Other liabilities (5,318) 456,653
--------------- ---------------
Net cash (used) provided by operating activities (4,828,367) 3,032,079
INVESTING ACTIVITIES:
Purchase of property and equipment (7,408,205) (3,806,882)
Disposition of property and equipment 1,464,585 1,841,918
Increase in licenses and patent costs (2,028,695) (580,520)
Proceeds from short-term investments 3,759,492 5,646,882
Purchase of short-term investments (1,997,422) (6,647,458)
--------------- ---------------
Net cash provided (used) by investing activities (6,210,245) (3,546,060)
FINANCING ACTIVITIES:
Exercise of stock options and warrants 251,445 513,721
Repayments of note payable (100,000) (95,000)
Purchase of treasury stock (164,938) (1,375,003)
--------------- ---------------
Net cash used by financing activities (13,493) (956,282)
Effect of exchange rate changes on cash (1,151,724) 659,792
--------------- ---------------
Net decrease in cash and cash equivalents (12,203,829) (810,471)
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 $ 12,152,612 $ 11,884,360
--------------- ---------------
--------------- ---------------
See accompanying notes to consolidated financial statements.
Page 5 of 21
3D SYSTEMS CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
Nine Month Periods Ended
----------------------------------------
September 26, 1997 September 25, 1998
------------------ -------------------
Net income (loss) $ (2,026,894) $ 1,356,944
Foreign currency translation, net of tax (1,417,091) 459,124
------------------ -------------------
Comprehensive (loss) income $ (3,443,985) $ 1,816,068
------------------ -------------------
------------------ -------------------
See accompanying notes to consolidated financial statements.
Page 6 of 21
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1997 and September 25, 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 nine month period ended September 25, 1998 are
not necessarily indicative of the results to be expected for the full year.
(2) Inventories
December 31, 1997 September 25, 1998
----------------- ------------------
Raw materials $ 2,259,504 $ 2,624,328
Work in progress 1,141,702 900,538
Finished goods 8,763,427 8,459,218
----------------- ------------------
$ 12,164,633 $ 11,984,084
----------------- ------------------
----------------- ------------------
(3) Property and Equipment
December 31, 1997 September 25, 1998
----------------- ------------------
Land and building $ 4,613,051 $ 4,613,051
Machinery and equipment 15,704,394 17,063,169
Office furniture and equipment 2,713,906 2,557,521
Leasehold improvements 2,100,530 2,357,678
Rental equipment 906,098 430,446
Construction in progress 1,119,065 1,644,348
----------------- ------------------
27,157,044 28,666,213
Less accumulated depreciation and
amortization (10,262,033) (12,840,368)
----------------- ------------------
$ 16,895,011 $ 15,825,845
----------------- ------------------
----------------- ------------------
(4) Related Party Transaction
At September 25, 1998, the Company has remaining notes receivable totaling
$360,000 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 original loans of $420,000, of which $60,000 has
been repaid, 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 21
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1997 and September 25, 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 21
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 1997 and September 25, 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 nine month
period ended September 26, 1997 and September 25, 1998:
1997 1998
------------------ ----------------
NUMERATOR:
Net income - numerator for net income per common share and
net income per common share assuming dilution $ (2,026,894) $ 1,397,560
DENOMINATOR:
Denominator for net income per common share - weighted
average shares 11,382,533 11,333,189
EFFECT OF DILUTIVE SECURITIES:
Stock options --- 202,739
DENOMINATOR FOR NET INCOME PER COMMON SHARE, ASSUMING DILUTION:
Adjusted weighted average shares and assumed conversions 11,382,533 11,535,928
Common shares related to stock options and stock warrants that are
antidilutive amounted to approximately 986,367 shares and 980,354 shares
for the nine months ended September 26, 1997 and September 25, 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 21
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 1997 and September 25, 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 September 25, 1998, activity under the plan since inception was
immaterial.
Page 10 of 21
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 Nine Month Periods Ended
----------------------------------------- -----------------------------------------
Sales: September 26, 1997 September 25, 1998 September 26, 1997 September 25, 1998
-------------------- -------------------- -------------------- --------------------
Products 65.6% 62.8% 64.6% 64.8%
Services 34.4% 37.2% 35.4% 35.2%
-------------------- -------------------- -------------------- --------------------
Total sales 100.0% 100.0% 100.0% 100.0%
-------------------- -------------------- -------------------- --------------------
Cost of Sales:
Products 38.7% 32.7% 36.1% 33.8%
Services 23.5% 24.1% 25.0% 23.5%
-------------------- -------------------- -------------------- --------------------
Total cost of sales 62.2% 56.8% 61.1% 57.3%
-------------------- -------------------- -------------------- --------------------
Total gross profit 37.8% 43.2% 39.0% 42.7%
Gross profit - products 40.9% 48.0% 44.2% 47.8%
Gross profit - services 31.9% 35.1% 29.5% 33.2%
Selling, general and administrative expenses 32.8% 32.4% 31.9% 30.6%
Research and development expenses 20.9% 8.3% 13.1% 9.6%
Income (loss) from operations (15.9)% 2.5% (6.0%) 2.4%
Interest income, net 0.9% 0.5% 1.2% 0.5%
Provision for (benefit from) income taxes (5.4%) 1.0% (1.7%) 1.0%
Net income (loss) (9.6%) 2.0% (3.1%) 1.9%
Page 11 of 21
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 27, 1997 September 25, 1998 September 27, 1997 September25, 1998
------------------ ------------------ ------------------ -----------------
Products: (in thousands except percentages)
Systems, and related equipment $ 9,770 $ 10,407 $ 29,282 $ 32,046
Materials 3,829 3,582 9,761 11,019
Other 1,016 676 3,281 2,842
------------------ ------------------ ------------------ -----------------
Total products 14,615 14,665 42,324 45,907
------------------ ------------------ ------------------ -----------------
Services:
Maintenance 6,207 7,599 18,720 21,408
Other 1,472 1,078 4,512 3,536
------------------ ------------------ ------------------ -----------------
Total services 7,679 8,677 23,232 24,944
------------------ ------------------ ------------------ -----------------
Total sales $ 22,294 $ 23,342 $ 65,556 $ 70,851
------------------ ------------------ ------------------ -----------------
------------------ ------------------ ------------------ -----------------
Products:
Systems, and related equipment 43.8% 44.6% 44.7% 45.2%
Materials 17.2% 15.3% 14.9% 15.6%
Other 4.6% 2.9% 5.0% 4.0%
------------------ ------------------ ------------------ -----------------
Total products 65.6% 62.8% 64.6% 64.8%
------------------ ------------------ ------------------ -----------------
Services:
Maintenance 27.8% 32.6% 28.5% 30.2%
Other 6.6% 4.6% 6.9% 5.0%
------------------ ------------------ ------------------ -----------------
Total services 34.4% 37.2% 35.4% 35.2%
------------------ ------------------ ------------------ -----------------
Total sales 100.0% 100.0% 100.0% 100.0%
------------------ ------------------ ------------------ -----------------
------------------ ------------------ ------------------ -----------------
Page 12 of 21
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
THREE MONTH PERIOD ENDED SEPTEMBER 25, 1998 COMPARED TO THE THREE MONTH PERIOD
ENDED SEPTEMBER 26, 1997.
SALES. Sales during the three month period ended September 25, 1998 (the "third
quarter of 1998") were $23.3 million, an increase of 4% over the $22.3 million
recorded during the three month period ended September 26, 1997 (the "third
quarter of 1997").
Product sales during the third quarter of 1998 ($14.7 million) increased
approximately 1% compared to the third quarter of 1997 ($14.6 million). The
increase in the dollar value of product sales was due primarily to improved
average selling prices for an improved product. The Company sold a total of
50 systems in the third quarter of 1998, compared to 55 systems in the third
quarter of 1997. The decrease in total systems sold in the third quarter of
1998 is largely attributable to a reduction in sales into Asia Pacific due to
the economic conditions in that region, coupled with the impact of a strong
U.S. dollar. In addition, unit sales were adversely impacted by a large number
of unit orders with shipments in future periods. System sales fluctuate from
quarter to quarter and the Company does not believe that the reduced number
of unit sales from 1997 to 1998 is necessarily 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 currently 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 and the economic conditions in Asia Pacific may improve.
Orders for the Company's systems in the third quarter of 1998 compared to the
third quarter of 1997 were up 6% due primarily to a substantial increase in
European orders. The U.S. order rate improved slightly, while orders were
down significantly in Asia-Pacific when comparing the third quarter of 1998
to 1997. As a result of the increased order rate, total system backlog at the
end of the third quarter of 1998 is up substantially as compared to the third
quarter of 1997 and up approximately 40% from the second quarter of 1998. The
Company anticipates that orders should continue to increase slightly 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 fluctuating currency markets could cause delays in
customer orders which could lead to orders being lower in 1998 than 1997.
In addition, the Company believes that system orders and resultant 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 third quarter of 1998 ($8.7 million) increased
approximately 13% compared to the third quarter of 1997 ($7.7 million),
primarily as a result of an increase in "out of warranty" field maintenance work
provided on a "time and materials" basis. Such periodic spikes can occur from
time to time, but management believes are not indicative of a new trend in the
Service sales growth rate. The Company expects Service sales to be in the $8
million range for the fourth quarter. These are forward looking statements and,
as with other such statements, are subject to uncertainties. For example, the
exact timing of field maintenance work, or the fluctuations in use of the
Company's Technology and Training centers can significantly impact the results
on a quarter to quarter basis.
Page 13 of 21
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
COST OF SALES. Cost of sales decreased to $13.3 million (57% of sales) in the
third quarter of 1998 from $13.9 million (62% of sales) in the third quarter of
1997 as the Company experienced improvements in both Product and Service costs.
Product cost of sales as a percentage of product sales improved to
approximately 52% in the third quarter 1998 from approximately 59% in the
third 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 believes that the
benefits from improved average selling prices in 1998 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 third quarter of 1998.
Service cost of sales as a percentage of service sales decreased to 65% during
the third quarter of 1998 compared to 68% during the third quarter of 1997. This
improvement is primarily attributable to the benefit of the time and materials
work noted above, along with a continued trend of steady improvement in overall
field service costs due to the enhanced reliability of the Company's systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("S,G&A") expenses increased approximately $230,000 or 3% in the
third quarter of 1998 compared to the third quarter of 1997. The third quarter
of 1997 included a $500,000 non-recurring charge for severance benefits related
to a restructuring plan. The increase was due primarily to an increase in
selling costs related to the staffing of the direct sales organization in the
U.S., as well as an expansion in certain administrative expenses. The Company
intends to increase expenditures in selective sales and marketing programs. As a
result, the Company expects S,G&A expenses to increase in the fourth quarter of
1998, as compared to the third quarter of 1998 by 6 to 8%. This is a forward
looking statement and is subject to uncertainties. As examples, a significant
increase in revenues in the fourth quarter of 1998 could cause a further
increase in commissions and bonuses, and 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 third quarter of 1998 decreased approximately $2,700,000 or 58%
compared to the third quarter of 1997, due primarily to the fact that 1997
included a $2,100,000 non-recurring write off of in-process technology in
connection with the EOS acquisition. In addition, the third quarter of 1998
benefited from one time (for the year) factors, such as the capitalization of
certain development costs. 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 third quarter of 1998 was 2.4% of
total sales compared to a loss of 15.9% of total sales in the third quarter of
1997. The improvement in operating income in 1998 was primarily attributable to
the increase in the dollar value of product sales, the reductions in overall
factory costs, and the improved returns on service revenues as described above.
In addition, the third quarter 1997 loss included approximately $2,600,000
(11.7% of sales) in non-recurring expenses related to restructuring and the EOS
acquisition, as noted above.
Page 14 of 21
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 $82,000 or
39% in the third quarter 1998 ($125,000) compared to the third quarter 1997
($207,000), 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 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 21
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
NINE MONTH PERIOD ENDED SEPTEMBER 25, 1998 COMPARED TO THE NINE MONTH
PERIOD ENDED SEPTEMBER 26, 1997.
SALES. Sales during the nine month period ended September 25, 1998 (the "first
nine months of 1998") were $70.9 million, an increase of approximately 8% over
the $65.6 million recorded during the nine month period ended September 26, 1997
(the "first nine months of 1997").
Product sales during the first nine months of 1998 ($45.9 million) increased
approximately 8% from the $42.3 million in product sales in the first nine
months of 1997. The increase in the dollar value of product sales was due
primarily to improved average selling prices and an improved product mix. The
Company sold a total of 161 systems in the first nine months of 1998, compared
to 189 systems in the first nine months of 1997.
Orders for the Company's systems in the first nine months of 1998 as compared to
the first nine months 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 nine months of 1998 increased $1.7 million, or
approximately 7% compared to the first nine months of 1997 primarily as a result
of increased maintenance revenues due to the larger installed base of systems in
the U.S. and Europe.
COST OF SALES. Cost of sales increased to $40.6 million or 57% of sales in the
first nine months of 1998 from $40.0 million or 61% of sales in the first nine
months of 1997.
Product cost of sales as a percentage of product sales declined to 52% in the
first nine months of 1998 compared to the 56% in the first nine months 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. The Company currently anticipates that product cost of sales
as a percentage of sales should remain lower than the 1997 percentage rate of 56
percent. This is, of course, a forward looking statement, and as such is subject
to risks and uncertainties. For example: competitive pressures, product mix,
channel and markets could cause a fluctuation in sales price and the
consequences on the cost of sales percentage can not be accurately predicted.
Service cost of sales as a percentage of service sales declined to 67% in the
first nine months of 1998 compared to 70% during the first nine months of 1997.
This improvement is primarily attributable to a steady improvement in overall
field service costs due to the enhanced reliability of the Company's systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling general and administrative
("S,G&A") expenses increased approximately $.8 million or 4% in the first nine
months of 1998 compared to the first nine months 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 nine months of 1997
did include a $.5 million non-recurring charge for severance benefits related to
a restructuring plan.
Page 16 of 21
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during
the first nine months of 1998 decreased approximately $1.8 million or 21%
compared to the first nine months of 1997, due primarily to the fact that
1997 included a $2.1 million non-recurring write-off of in process technology
in connection with the EOS acquisition. The Company anticipates the research
and development expenses for the foreseeable future will be approximately 10
percent 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 anticipated sales of the
Company for that period, research and development expenses as a percentage of
sales may exceed the 10 percent level.
OPERATING INCOME (LOSS). Profitability from operations increased by $5.7 million
in the first nine months of 1998, reaching 2.4% of total sales as compared to a
loss of 5.9% of total sales in the first nine months of 1997. The improvement in
operating income in 1998 is primarily attributable to the increase in product
sales and the reduction in overall factory costs as described above. In
addition, the first nine months of 1997 loss included a non-recurring charge of
$2.6 million.
OTHER INCOME AND EXPENSES. Other income and expenses decreased approximately
$.4 million in the first nine months of 1998 compared to the first nine
months of 1997 due primarily to a decrease in interest income. This decrease
is the result of the lower investment balances in the first nine months of
1998 as compared to the first nine months 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 21
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
December 31, 1997 September 25, 1998
--------------------- ----------------------
Cash and cash equivalents $ 12,694,831 $ 11,884,360
Short-term investments 3,498,265 4,498,841
Working capital 38,309,646 39,270,418
Nine Month Periods Ended
-----------------------------------------------
September 26, 1997 September 25, 1998
--------------------- ----------------------
Cash provided by (used for) operating activities $ (4,828,367) $ 3,032,079
Cash provided by (used for) investing activities (6,210,245) (3,546,060)
Cash used for financing activities (13,493) (956,282)
Net cash provided by operating activities of $3.0 million is a significant
improvement of $7.8 million over the net cash used of $4.8 million in 1997.
The improved cash flow for the first nine months of 1998 compared to the
similar period of 1997 resulted from improvements in net income ($3.4
million), better inventory management ($2.6 million) and a more modest growth
in accounts receivable ($3.2 million) due to improved collections.
Net cash used for investing activities during the first nine months of 1998
totaled $3.5 million and was primarily the result of net additions to property
and equipment and license and patent costs ($2.5 million) along with an increase
in short term investments of $1.0 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.
The Company renewed its credit facility with Silicon Valley Bank ("SVB") (the
"Credit Facility") that was established in June 1993. Under the terms of the
agreement, which remain in effect until the third quarter of 1999, 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 and at all times through
September 25, 1998, the Company has been in compliance with all financial
covenants then in effect and 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. From
time to time the Company considers the acquisition of businesses, products or
technologies complimentary to the Company's current business although it has
no current commitments or agreements with respect to any such transactions.
Should the company decide to pursue such a transaction, the Company may
require additional funds.
3D Systems has established a team to address the issues raised by the
introduction of the Single European Currency ("Euro") for initial implementation
as of January 1, 1999 and during the transition period through to January 1,
2002. 3D Systems expects that its internal systems that will be affected by the
initial introduction of the Euro will be Euro capable by July 1, 1999 and does
not expect the costs of system modifications to be material. The Company does
not presently expect that the introduction and use of the Euro will materially
affect the Company's foreign exchange or will result in any material increase in
costs to the Company. While 3D Systems will continue to evaluate the impact of
the Euro introduction over time, based on currently available information,
management does not believe
Page 18 of 21
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
that the introduction of the Euro currency will have a material adverse impact
on the Company's financial condition or overall trends in results of operations.
YEAR 2000 COMPLIANCE. Many computer systems experience problems handling dates
after 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
has been addressing this issue during the last nine months by evaluating the
Company's software and systems dedicated to its customers, internal systems used
in its operations, and the systems used by its suppliers. The Company has taken
measures in each of these areas and will continue to evaluate the assessment of
all areas on an ongoing basis throughout 1998 and 1999.
The Company believes its current products are Year 2000 compliant. In addition,
the Company has been evaluating all products sold since inception for Year 2000
readiness, and is providing the results of the analysis and potential impacts
and resolutions to its customers. The Company anticipates all products will be
evaluated by the end of 1998 and plans to offer any necessary software and
hardware upgrade pathways to its customers by the end of the first quarter of
1999. The Company believes that all products will meet basic functionality
requirements, however, since all specific customer situations and uses cannot be
anticipated, 3D Systems may see an increase in warranty and other claims as a
result of the Year 2000 transition. For these reasons, the impact of customer
claims could have a material adverse impact on the Company's results of
operations or financial condition.
The Company is in the process of completing a comprehensive evaluation of its
internal systems and equipment. Certain critical infrastructure and management
systems are already in the process of being upgraded to meet with Year 2000
requirements. These upgrades will also have the benefit of meeting Euro dollar
requirements and expanded capability for the Company. At the completion of these
current projects, the Company will be conducting transaction testing in the
first half of 1999 to evaluate compliance of the overall system infrastructure.
The Company has not identified alternative remediation plans if upgrade or
replacement is not feasible. The Company will consider the need for such
remediation plans as it continues to assess the Year 2000 risk.
The costs incurred to date related to these programs are less than $500,000.
The Company expects to conclude its estimate of cost by the end of the first
quarter of 1999. While the Company expects to incur additional expenses to
complete the programs, it does not believe the implementation of the Year
2000 programs discussed above will have a material adverse impact on the
Company's financial condition or results of operations. As stated in the
Liquidity and Capital Resources section, the Company believes that funds
generated from operations will be sufficient to satisfy costs incurred to
date and future Year 2000 compliance costs.
3D Systems is in the process of conducting a review of its critical suppliers
to determine that the suppliers' operations and the products and services
they provide are Year 2000 compliant. The Company believes the review of its
suppliers will be complete during the second quarter of 1999. Based upon this
assessment and where practicable, the Company will attempt to mitigate its
risks with respect to any suppliers that may not meet the requirements,
including seeking alternative sources of supplies. However, such failures and
conditions remain a possibility and could have an adverse impact on the
Company's results of operations or financial condition.
Year 2000 compliance is an issue for virtually all businesses, whose computer
systems and applications may require significant hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a substantial portion of their capital spending to fund such upgrades and
modifications and divert spending away from capital manufacturing equipment
spending. Such changes in customers' spending patterns could have a material
adverse impact on the Company's sales, operating results or financial condition.
Page 19 of 21
3D SYSTEMS CORPORATION
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial data schedule.
(b) Report on Form 8-K dated July 23, 1998 to report second quarter earnings
for 1998.
(c) Report on Form 8-K dated Sept. 22, 1998 to announce the election of a new
director to the Board.
Page 20 of 21
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 11/9/98
- -------------------------------------- -------------
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 21 of 21