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 APRIL 2, 1999
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)
(661) 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 May 7, 1999:
11,405,575
Page 1 of 18
3D SYSTEMS CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NUMBER
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1998 and April 2, 1999 ........................ 3
Consolidated Statements of Operations
for the Three Month Periods Ended
March 27, 1998 and April 2, 1999 ........................... 4
Consolidated Statements of Cash Flows
for the Three Month Periods Ended
March 27, 1998 and April 2, 1999 ........................... 5
Consolidated Statements of Comprehensive Income
for the Three Month Periods Ended
March 27, 1998 and April 2, 1999 ........................... 6
Notes to Consolidated Financial Statements ................. 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 .................... 17
Page 2 of 18
3D SYSTEMS CORPORATION
Consolidated Balance Sheets
As of December 31, 1998 and April 2, 1999
(Unaudited)
ASSETS December 31, 1998 April 2, 1999
----------------- -------------
Current assets:
Cash and cash equivalents $ 15,911,793 $ 9,575,855
Short-term investments 3,484,641 3,982,239
Accounts receivable, less allowances for
doubtful accounts of $944,144 (1998) and $1,170,748 (1999) 24,486,730 24,473,665
Current portion of lease receivables 2,069,126 1,965,999
Inventories 10,829,346 11,558,428
Deferred tax assets 2,063,163 2,063,163
Prepaid expenses and other current assets 1,916,149 2,638,349
------------ ------------
Total current assets 60,760,948 56,257,698
Property and equipment, net 16,327,078 15,768,526
Licenses and patent costs, net 5,120,672 5,006,241
Deferred tax assets 5,069,796 5,069,796
Lease receivables, less current portion 5,801,788 5,380,066
Other assets 2,022,316 3,430,557
------------ ------------
$ 95,102,598 $ 90,912,884
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,849,905 $ 5,047,960
Accrued liabilities 8,161,684 6,782,623
Current portion of long-term debt 100,000 105,000
Customer deposits 330,162 684,626
Deferred revenues 9,013,559 8,630,457
------------ ------------
Total current liabilities 22,455,310 21,250,666
Other liabilities 1,485,378 1,980,525
Long-term debt, less current portion 4,605,000 4,550,000
------------ ------------
28,545,688 27,781,191
------------ ------------
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 11,614,317 and outstanding 11,389,317 (1998)
and issued 11,630,575 and outstanding 11,405,575 (1999) 11,614 11,630
Capital in excess of par value 74,834,225 74,917,160
Notes receivable from officers (360,000) (360,000)
Accumulated deficit (6,765,447) (9,045,328)
Accumulated other comprehensive income (loss) 376,459 (851,828)
Treasury stock, at cost, 225,000 shares (1998) and 225,000 shares (1999) (1,539,941) (1,539,941)
------------ ------------
Total stockholders' equity 66,556,910 63,131,693
------------ ------------
$ 95,102,598 $ 90,912,884
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
Page 3 of 18
3D SYSTEMS CORPORATION
Consolidated Statements of Operations
Three Month Periods Ended March 27, 1998 and April 2, 1999
(Unaudited)
For the Three Month Periods Ended
------------------------------------
March 27, 1998 April 2, 1999
-------------- -------------
Sales:
Products $ 14,527,349 $ 15,278,036
Services 8,309,008 7,405,656
------------ ------------
Total sales 22,836,357 22,683,692
------------ ------------
Cost of sales:
Products 7,891,600 8,534,980
Services 5,555,809 4,955,030
------------ ------------
Total cost of sales 13,447,409 13,490,010
------------ ------------
Gross profit 9,388,948 9,193,682
Operating expenses:
Selling, general and administrative 6,638,532 10,230,069
Research and development 2,311,634 2,442,924
------------ ------------
Total operating expenses 8,950,166 12,672,993
------------ ------------
Income (loss) from operations 438,782 (3,479,311)
Interest income 178,885 177,358
Interest and other expense (72,455) (50,808)
------------ ------------
Income (loss) before provision for income taxes 545,212 (3,352,761)
Provision for income taxes (benefit) 190,824 (1,072,880)
------------ ------------
Net income (loss) $ 354,388 $ (2,279,881)
------------ ------------
------------ ------------
Weighted average shares outstanding 11,287,023 11,389,847
------------ ------------
------------ ------------
Net income (loss) per common share $ 0.03 $ (0.20)
------------ ------------
------------ ------------
Weighted average shares outstanding
and dilutive shares 11,536,702 11,389,847
------------ ------------
------------ ------------
Net income (loss) per common share
assuming dilution $ 0.03 $ (0.20)
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
Page 4 of 18
3D SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
Three Month Periods Ended March 27, 1998 and April 2, 1999
(Unaudited)
1998 1999
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 354,388 $ (2,279,881)
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Deferred income taxes 829,965 --
Depreciation and amortization 1,345,662 1,338,309
Increase (decrease) in cash resulting from changes in:
Accounts receivable (46,831) (1,439,494)
Lease receivables (351,458) 524,849
Inventories 1,410,702 (1,256,904)
Prepaid expenses and other current assets (381,817) (722,200)
Other assets (170,953) (1,356,551)
Accounts payable (1,142,901) 339,750
Accrued liabilities (1,428,735) (1,379,062)
Customer deposits 53,134 354,464
Deferred revenues 1,073,758 (383,102)
Other liabilities 13,896 495,147
------------ ------------
Net cash provided by (used) operating activities 1,558,810 (5,764,675)
INVESTING ACTIVITIES:
Purchase of property and equipment (1,315,112) (1,426,263)
Disposition of property and equipment 863,784 848,982
License and patent costs (330,634) (88,046)
Proceeds from short-term investments (2,999,003) (497,598)
Purchase of short-term investments 3,498,265 --
------------ ------------
Net cash (used for) investing activities (282,700) (1,162,925)
FINANCING ACTIVITIES:
Exercise of stock options and warrants 191,329 82,951
Repayments of note payable (50,000) (50,000)
Purchase of treasury stock (1,375,003) --
------------ ------------
Net cash provided by (used for) financing activities (1,233,674) 32,951
Effect of exchange rate changes on cash (151,284) 558,711
------------ ------------
Net decrease in cash and cash equivalents (108,848) (6,335,938)
Cash and cash equivalents at the beginning of the period 12,694,831 15,911,793
------------ ------------
Cash and cash equivalents at the end of the period $ 12,585,983 $ 9,575,855
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
Page 5 of 18
3D SYSTEMS CORPORATION
Consolidated Statements of Comprehensive Income
Three Month Periods Ended March 27, 1998 and April 2, 1999
(Unaudited)
1998 1999
----------- -----------
Net income (loss) $ 354,388 $(2,279,881)
Foreign currency translation (189,582) (1,228,287)
----------- -----------
Comprehensive income (loss) $ 164,806 $(3,508,168)
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
Page 6 of 18
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998 and April 2, 1999
(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, 1998. The results of the three month period ended April 2, 1999 are
not necessarily indicative of the results to be expected for the full
year.
(2) Inventories
December 31, 1998 April 2, 1999
----------------- -------------
Raw materials $ 1,138,415 $ 2,128,160
Work in progress 818,839 567,610
Finished goods 8,872,092 8,862,658
------------ ------------
$ 10,829,346 $ 11,558,428
------------ ------------
------------ ------------
(3) Property and Equipment
December 31, 1998 April 2, 1999
----------------- -------------
Land and building $ 4,637,262 $ 4,637,262
Machinery and equipment 18,415,758 19,844,012
Office furniture and equipment 2,888,896 2,686,909
Leasehold improvements 2,517,495 1,885,894
Rental equipment 451,553 545,782
Construction in progress 1,185,690 471,189
------------ ------------
30,096,654 30,071,048
Less accumulated depreciation and
amortization (13,769,576) (14,302,522)
------------ ------------
$ 16,327,078 $ 15,768,526
------------ ------------
------------ ------------
(4) 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 the first quarter of 1998,
the Company purchased 200,000 of its own shares for approximately
$1,375,000. 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.
Page 7 of 18
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998 and April 2, 1999
(Unaudited)
(5) 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.
(6) 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 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 April 2, 1999, 54,000 shares have been
purchased through this plan.
Page 8 of 18
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 1998 and April 2, 1999
(Unaudited)
(7) Computation of Earnings Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", 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 antidilutive.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) computations for the three
month periods ended March 27, 1998 and April 2, 1999:
1998 1999
------------ ------------
NET INCOME (LOSS): numerator for net income (loss) per common share and
net income (loss) per common share assuming dilution $ 354,388 $ (2,279,881)
WEIGHTED AVERAGE SHARES: denominator for net income (loss) per common
share-weighted average shares 11,287,023 11,389,847
EFFECT OF DILUTIVE SECURITIES FROM STOCK OPTIONS: assumed conversions 249,679 --
ADJUSTED WEIGHTED AVERAGE SHARES AND ASSUMED CONVERSIONS:
Denominator for net income (loss) per common share, assuming dilution 11,536,702 11,389,847
Common shares related to stock options and stock warrants that are
antidilutive amounted to approximately 874,885 shares and 1,974,765 shares
for the three months ended March 27, 1998 and April 2, 1999, respectively.
Page 9 of 18
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998 and April 2, 1999
(Unaudited)
(8) Geographic Segment Information
All of the Company's assets are devoted to the manufacture and sale of
Company systems, together with related supplies and services. The Company
attributes revenues to geographic areas based on shipment in the country
of origination.
Summarized data for the Company's operations are as follows:
Rest of
USA Germany Europe Asia Eliminations Total
-------------------------------------------------------------------------------------
(In thousands)
For the period ended March 27, 1998:
Sales to unaffiliated customers 12,249 4,079 5,458 898 -- 22,684
Inter-area sales (4,624) (858) -- -- 5,482 --
Income (loss) from operations (4,557) 489 897 -- (308) (3,479)
For the period ended April 2, 1999:
Sales to unaffiliated customers 11,947 4,363 4,057 2,469 -- 22,836
Inter-area sales (3,259) -- -- -- 3,259 --
Income (loss) from operations (408) 468 856 -- (478) 438
Inter-area sales to the Company's foreign subsidiaries are recorded at
amounts consistent with prices charged to distributors, which are above
cost.
Page 10 of 18
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, 1998 contained in the Company's 1998 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 1998 Form 10-K under the section entitled "Cautionary
Statements and Risk Factors."
OVERVIEW
The Company develops, manufactures and markets worldwide solid imaging systems
designed to rapidly produce physical objects from the digital output of solid or
surface data from computer aided design and manufacturing ("CAD/CAM") and
related computer systems. The Company's solid imaging systems include SLA
Industrial Systems ("SLA") and Solid Object Printers. The SLA Industrial Systems
use the Company's proprietary stereolithography technology, 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 Solid Object Printers, sold as the Actua
2100 and ThermoJet, utilize hot melt ink jetting 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 1,200 solid imaging 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,
customer training, services provided by the Company's Technology Centers and 3D
Keltool licensing and support services.
During the first quarter of 1999, the Company made a series of significant
product introductions. In February 1999, the Company launched the SLA 7000, a
large frame high-end solid imaging system. The SLA 7000 provides significantly
faster speeds than the next fastest SLA and improved performance and part
quality, capable of producing parts resolution at .001 inch layer thickness. In
March 1999, the Company announced the ThermoJet Solid Object Printer, the
successor to the Actua 2100, offering a significant improvement in speed, up to
300% faster. The ThermoJet was launched at a list price 23% below its
predecessor. In addition, during the first quarter 1999, the Company announced
availability of a series of new solid imaging materials and 3D Lightyear part
preparation software, which exploits the power of the Windows NT operating
system.
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
------------------------------
Sales: March 27, 1998 April 2, 1999
-------------- -------------
Products 63.6% 67.4%
Services 36.4% 32.6%
----- -----
----- -----
Total sales 100.0% 100.0%
----- -----
----- -----
Cost of Sales:
Products 34.6% 37.6%
Services 24.3% 21.8%
----- -----
----- -----
Total cost of sales 58.9% 59.4%
----- -----
----- -----
Total gross profit 41.1% 40.5%
Gross profit - products 45.7% 44.1%
Gross profit - services 33.1% 33.1%
Selling, general and administrative expenses 29.1% 45.1%
Research and development expenses 10.1% 10.8%
Income (loss) from operations 1.9% (15.3)%
Interest income and interest and other expense, net 0.5% 0.6%
Provision for (benefit from) income taxes 0.8% (4.7)%
Net income (loss) 1.6% (10.1)%
Page 11 of 18
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
March 27, 1998 April 2, 1999
------------------ -----------------
Products: (in thousands except for percentages)
Systems, and related equipment $ 9,796 $ 11,056
Materials 3,293 3,920
Other 1,438 302
--------- ---------
Total products 14,527 15,278
--------- ---------
Services:
Maintenance 6,911 6,488
Other 1,398 918
--------- ---------
Total services 8,309 7,406
--------- ---------
Total sales $ 22,836 $ 22,684
--------- ---------
--------- ---------
Products:
Systems, and related equipment 42.9% 48.8%
Materials 14.4% 17.3%
Other 6.3% 1.3%
--------- ---------
--------- ---------
Total products 63.6% 67.4%
--------- ---------
--------- ---------
Services:
Maintenance 30.3% 28.6%
Other 6.1% 4.0%
--------- ---------
Total services 36.4% 32.6%
--------- ---------
Total sales 100.0% 100.0%
--------- ---------
--------- ---------
Page 12 of 18
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
THREE MONTH PERIOD ENDED APRIL 2, 1999 COMPARED TO THE THREE MONTH PERIOD ENDED
MARCH 27, 1998.
SALES. Sales during the three month period ended April 2, 1999 (the "first
quarter of 1999") were $22.7 million, a slight decrease from the $22.8 million
recorded during the three month period ended March 27, 1998 (the "first quarter
of 1998"), as product sales increased $.8 million, offset by a decline in
service sales.
Product sales of $15.3 million for the first quarter of 1999 increased
approximately 5% as compared to the first quarter of 1998 ($14.5 million). The
increase in the dollar value of product sales was due primarily to the growth in
material revenues (approximately 19%) resulting from the increased size of the
installed systems base and the sales of systems and related equipment
(approximately 13%), partially offset by a decline in other products. The first
quarter of 1998 included in other products sales of materials and related
special equipment to the initial two customers of the 3D Keltool technology
licensing program.
The increase in total systems sold is attributable to growth in sales of small
size solid imaging systems, while sales of large frame SLA industrial systems
decreased in the first quarter of 1999 as compared to the same period a year
ago. The Company believes this decrease was due, in part, to a delay in orders
as customers evaluate the new SLA 7000 launched in the middle of the first
quarter of 1999. System sales fluctuate from quarter to quarter and the Company
does not believe that the increased total system sales or the decline in large
frame SLA Industrial Systems is necessarily indicative of sales in any future
quarter. These are forward looking statements and are subject to uncertainties.
For example, the exact timing of customer requirements and the extended
procurement cycle of large dollar capital procurements in certain companies may
significantly impact product sales in future quarters.
Orders for the Company's systems in the first quarter of 1999 declined
approximately 35% from the first quarter of 1998. Orders were down in the U.S.
and Europe and down significantly in Asia/Pacific. This dollar value decline in
orders was due primarily to a significant reduction in orders for large frame
SLA Industrial Systems, as noted above. Accordingly, backlog declined in the
first quarter of 1999 from the 1998 year end level, but was down only slightly
compared to the backlog at the end of the first quarter of 1998. The Company
expects the order rate in Asia/Pacific to remain weak, while orders in Europe
are expected to increase. These are forward looking statements, and, as with
other such statements, are subject to uncertainties. For example, a change in
European economic and political conditions could cause delays in customer orders
which could lead to a lower order level.
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,
acceptance of new products 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 1999 are the sales mix of the
Company's products as well as the mix of channels and markets in which the
Company distributes its products.
Service sales during the first quarter of 1999 ($7.4 million) decreased
approximately 11% compared to the first quarter of 1998 ($8.3 million),
primarily as a result of a delay in service contract renewals as the Company
launched a new tiered pricing program for annual maintenance contracts. In
addition, Technology Center revenues remained at the low levels experienced in
the second half of 1998, and, in the first quarter of 1999, the Company sold the
St. Paul, Minnesota 3D Keltool inserts operations to Rapid Tooling Technologies,
a subsidiary of Rapid Design Technologies, causing a decline in insert revenues
in the period.
The Company expects service contract revenues to increase from first quarter of
1999 levels, returning to the modest growth rates experienced in 1998. This is a
forward looking statement and, as with other such statements, is subject to
uncertainties. For example, the exact timing of field maintenance work and
contract renewal, 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 18
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
COST OF SALES. Cost of sales increased slightly to $13.5 million (59% of sales)
in the first quarter of 1999 from $13.4 million (59% of sales) in the first
quarter of 1998 as the product cost of sales increase of $.6 million was offset
by a decline in service cost of sales.
Product cost of sales as a percentage of product sales increased to
approximately 56% in the first quarter of 1999 from approximately 54% in the
first quarter of 1998. This increase in the percentage of product costs to
product sales was due primarily to sales revenue changes as a result of
shipments in the lower end of the product line which generated lower aggregate
selling prices coupled with a decline in overall selling prices. The Company
does not believe this shift in product mix is indicative of the mix of products
to be sold in future periods. 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 first quarter of 1999.
Service cost of sales as a percentage of service sales remained at approximately
67% for both the first quarter of 1999 and the first quarter of 1998, as service
costs were reduced in line with the reduction in service revenues. The Company
expects service cost of sales to increase due to the increasing installed base
of the Company's systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased approximately $3.6 million or 54% in
the first quarter of 1999 compared to the first quarter of 1998. The increase
was primarily the result of costs associated with the launch of new products
along with the overall growth of the sales and marketing department that
occurred during 1998. In addition, the Company incurred costs in SG&A associated
with the sale of its St. Paul, Minnesota 3D Keltool insert operations. The
Company expects SG&A expenses to return to spending levels in line with the
second half of 1998. However, this is a forward looking statement and is subject
to uncertainties. For example, a significant increase in unit shipments could
cause a further increase in commissions or the acceleration of litigation costs
associated with the protection of the Company's patents could result in a
substantial increase in SG&A expenses.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses
during the first quarter of 1999 increased approximately $.1 million or 6%
compared to the first quarter of 1998, and expenditures for both periods were
approximately 10 percent of revenues. 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 loss for the first quarter of 1999 was 10% of total
sales compared to operating income of 2% of total sales in the first quarter of
1998. This is primarily attributable to increased sales and marketing expenses
related to the new product launches, lower sales of large frame, high-end SLA
Industrial Systems, an increased mix of lower-end solid imaging systems and
lower average selling prices.
INTEREST INCOME AND INTEREST AND OTHER EXPENSE. Net other income increased
approximately 19% in the first quarter of 1999 ($127,000) compared to the
first quarter 1998 ($106,000), due primarily to an increase in interest
income. This increase is the result of the higher investment balances and a
larger equipment lease portfolio in 1999 as compared to 1998.
Page 14 of 18
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
December 31, 1998 April 2, 1999
------------------- ---------------
Cash and cash equivalents $15,911,793 $ 9,575,855
Short-term investments 3,484,641 3,982,239
Working capital 38,305,638 35,007,032
Three Month Periods Ended
-----------------------------------------
March 27, 1998 April 2, 1999
-------------- -------------
Cash provided by (used for) operating activities $ 1,558,810 $(5,764,675)
Cash (used for) investing activities (282,700) (1,162,925)
Cash provided by (used for) financing activities (1,233,674) 32,951
Operating activities in the first quarter of 1999 had a net use of cash of $5.8
million compared to net cash provided of $1.6 million in the year ago quarter.
The reduction in cash flow for the first quarter of 1999 is a result of a net
loss ($2.3 million); coupled with a $2.0 million cash payment for prepaid
royalties and the acquisition of intellectual property rights related to solid
object printing reflected in prepaid expenses and other assets, and a growth in
inventories ($1.2 million) due to lower shipments of large frame SLA Industrial
Systems.
Net cash used for investing activities during the first quarter of 1999 totaled
$1.2 million and was primarily the result of net additions to property and
equipment and license and patent costs ($.7 million) along with an increase in
short term investments of ($.5 million).
Net cash provided by financing activities during the first quarter of 1999 was
primarily the result of the exercise of stock options and warrants.
In August 1998, 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, 1999, the Company can borrow from SVB up to
$10,000,000, at the bank's prime interest rate. The Credit Facility contains
certain financial covenants including the maintenance of certain financial
ratios, working capital, tangible net worth as well as covenants limiting
mergers, acquisitions, recapitalization, dividends, loans to others, and
hypothecation of assets or corporate guarantees.
As of April 2, 1999, the Company has yet to utilize the Credit 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 complementary 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. The Company expects that its internal systems that will be affected by the
initial introduction of the Euro will be Euro capable by third quarter 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 position nor result in any
material increase in costs to the Company. While the Company will
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3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
continue to evaluate the impact of the Euro introduction over time, based on
currently available information, management does not believe 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. Computer-based systems that require date/time calculations
to operate correctly are subject to miscalculations and system failures on and
after the year 2000. This is known as the Y2K problem. The Y2K problem affects
systems that were developed to accept two digit entries for the year in the date
code field. After midnight on December 31, 1999, these systems may recognize a
date using '00' as the year 1900 rather than the year 2000. Another known issue
is that many systems will not recognize the year 2000 as a leap year. The Y2K
problem is pervasive in that it goes beyond internal systems to involve supply
and distribution chains and extends to both public and private infrastructure
services including water, gas, electricity, transportation and communication.
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. Current information on the Company's Y2K status
can be found on the Internet at http://www.3dsystems.com. In the fourth quarter
of 1998, the Company completed the evaluation of substantially all its products,
and the necessary upgrade pathways to its customers was completed during the
first quarter of 1999. The Company plans to have the actual software patches
that may be required available for customers by the third quarter 1999. The
Company believes that all products will meet basic functionality requirements,
however, since all specific customer situations and uses cannot be anticipated,
the Company 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 of
financial condition.
The Company is continuing the comprehensive evaluation of its internal business
systems. Certain critical infrastructure and information systems are being
upgraded to meet Year 2000 requirements. These upgrades will also have the
benefit of meeting the Euro currency requirements and expanding the capability
of the Company. At the completion of these current projects, the Company will be
conducting transaction testing to evaluate compliance of the overall system
infrastructure. To date, the Company has completed the risk analysis on all
U.S.-based systems and has substantially completed all infrastructure upgrades
in the U.S. In the first quarter 1999, the Company completed the implementation
of the Year 2000 compliance upgrades for its core enterprise wide systems, has
substantially completed the risk analysis of foreign operations, began
implementation of infrastructure upgrades in Europe and Asia/Pacific, and
launched software upgrade projects for its European sites that will be Year 2000
and Euro compliant. In the second quarter of 1999, the Company will complete the
majority of offshore infrastructure upgrades and begin testing on the European
software implementation which the Company expects to complete in the third
quarter of 1999. The Company believes that the vast majority of Y2K-related
issues with respect to internal business systems will be inventoried, analyzed,
and resolved by the third quarter 1999 and that certification and/or testing
will be completed by the end of the third quarter 1999.
Since the majority of the efforts related to Year 2000 compliance are being
performed by internal resources, and are part of an overall plan to upgrade the
overall capability of the Company and meet Euro currency requirements, there is
no exact program budget or cost associated exclusively with Year 2000 efforts.
The Company believes costs related to Year 2000 compliance are less than
$900,000, and estimates that costs for the worldwide program will not exceed
$1.5 million. The Company believes that funds generated from operations will be
sufficient to satisfy Year 2000 compliance costs.
The Company is continuing to review its critical suppliers to determine that the
suppliers' operations and the products and services they provide are Year 2000
compliant. The Company has completed a survey of key suppliers and evaluated
their individual risk potential as well as the risk potential of their
suppliers. In addition, the Company has conducted site surveys of certain
critical or sole source suppliers. The Company began evaluating next tier
suppliers in the first quarter of 1999, and will complete these reviews by the
third quarter of 1999. Currently, the Company's contingency strategies include
seeking alternative sources of supplies or acquiring sufficient material to
support the Company's operations for the first half of 2000. Though the Company
believes it has sufficient alternatives and liquidity to meet this contingency
strategy, such failures of suppliers remain a possibility and could have a
material 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.
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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 February 24, 1999 to announce Fourth Quarter 1998
results.
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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 5/17/99
- --------------------------------------------------- ------------
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 18 of 18