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 JULY 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 August 11, 1999:
11,647,637
Page 1 of 20
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 July 2, 1999 ................................................ 3
Consolidated Statements of Operations
for the Three and Six Month Periods Ended
June 26, 1998 and July 2, 1999 ................................................ 4
Consolidated Statements of Cash Flows
for the Six Month Periods Ended
June 26, 1998 and July 2, 1999 ................................................ 5
Consolidated Statements of Comprehensive Income
for the Six Month Periods Ended
June 26, 1998 and July 2, 1999 ................................................ 6
Notes to Consolidated Financial Statements
December 31, 1998 and July 2, 1999 ................................................ 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................................ 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................ 19
ITEM 4. Submission of Matters to a Vote ................................................ 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, 1998 July 2, 1999
----------------------- -----------------------
Current assets:
Cash and cash equivalents $ 15,911,793 $ 8,831,686
Short-term investments 3,484,641 2,000,000
Accounts receivable, less allowances for
doubtful accounts of $944,144 (1998) and $1,376,883 (1999) 24,486,730 25,956,575
Current portion of lease receivables 2,069,126 1,090,310
Inventories 10,829,346 13,012,133
Deferred tax assets 2,063,163 2,063,163
Prepaid expenses and other current assets 1,916,149 2,450,285
----------------------- -----------------------
Total current assets 60,760,948 55,404,152
Property and equipment, net 16,327,078 15,133,764
Licenses and patent costs, net 5,120,672 9,423,057
Deferred tax assets 5,069,796 6,369,796
Lease receivables, less current portion 5,801,788 2,158,062
Other assets 2,022,316 1,760,251
----------------------- -----------------------
$ 95,102,598 $ 90,249,082
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,849,905 $ 5,245,722
Accrued liabilities 8,161,684 8,773,130
Current portion of long-term debt 100,000 105,000
Customer deposits 330,162 471,563
Deferred revenues 9,013,559 7,574,636
----------------------- -----------------------
Total current liabilities 22,455,310 22,170,051
Other liabilities 1,485,378 4,562,925
Long-term debt, less current portion 4,605,000 4,550,000
----------------------- -----------------------
28,545,688 31,282,976
----------------------- -----------------------
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 11,637,065 and outstanding 11,412,065 (1999) 11,614 11,637
Capital in excess of par value 74,834,225 74,932,464
Notes receivable from officers (360,000) (300,000)
Accumulated deficit (6,765,447) (12,704,344)
Accumulated other comprehensive income (loss) 376,459 (1,433,710)
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 58,966,106
----------------------- -----------------------
$ 95,102,598 $ 90,249,082
======================= =======================
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 26, 1998 July 2, 1999 June 26, 1998 July 2, 1999
----------------- ----------------- ----------------- -----------------
Products $ 16,715,008 $ 14,757,079 $ 31,242,357 $ 30,035,115
Services 7,957,544 7,255,901 16,266,552 14,661,557
----------------- ----------------- ----------------- -----------------
Total sales 24,672,552 22,012,980 47,508,909 44,696,672
----------------- ----------------- ----------------- -----------------
Cost of sales:
Products 8,436,977 8,614,677 16,328,577 17,149,657
Services 5,484,087 5,019,259 11,039,896 9,974,289
----------------- ----------------- ----------------- -----------------
Total cost of sales 13,921,064 13,633,936 27,368,473 27,123,946
----------------- ----------------- ----------------- -----------------
Gross profit 10,751,488 8,379,044 20,140,436 17,572,726
----------------- ----------------- ----------------- -----------------
Operating expenses:
Selling, general and administrative 7,480,037 8,331,440 14,118,569 18,561,509
Research and development 2,568,411 2,432,463 4,880,045 4,875,387
Other 2,700,000 2,700,000
----------------- ----------------- ----------------- -----------------
Total operating expenses 10,048,448 13,463,903 18,998,614 26,136,896
----------------- ----------------- ----------------- -----------------
Income (loss) from operations 703,040 (5,084,859) 1,141,822 (8,564,170)
Interest income 205,757 85,819 384,642 263,177
Interest and other expense (100,128) (82,925) (172,583) (133,733)
----------------- ----------------- ----------------- -----------------
Income before provision for income taxes 808,669 (5,081,965) 1,353,881 (8,434,726)
Provision for (benefit from) income taxes 283,034 (1,422,949) 473,858 (2,495,829)
----------------- ----------------- ----------------- -----------------
Net income (loss) $ 525,635 $ (3,659,016) $ 880,023 $ (5,938,897)
================= ================= ================= =================
Weighted average shares outstanding 11,347,277 11,405,789 11,318,001 11,397,775
================= ================= ================= =================
Net income (loss) per common share $ 0.05 $ (0.32) $ 0.08 $ (0.52)
================= ================= ================= =================
Weighted average shares outstanding
and dilutive shares 11,756,144 11,405,789 11,726,868 11,397,775
================= ================= ================= =================
Net income (loss) per common share
assuming dilution $ 0.04 $ (0.32) $ 0.08 $ (0.52)
================= ================= ================= =================
See accompanying notes to consolidated financial statements.
Page 4 of 20
3D SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Six Month Periods Ended
------------------------------------------------
June 26, 1998 July 2, 1999
--------------------- ---------------------
OPERATING ACTIVITIES:
Net income (loss) $ 880,023 $ (5,938,897)
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Deferred income taxes 829,913 (1,300,000)
Depreciation and amortization 2,812,885 2,697,270
Increase (decrease) in cash resulting from changes in:
Accounts receivable (35,474) (4,392,652)
Lease receivables (634,746) 4,622,542
Inventories 1,774,783 (3,039,146)
Prepaid expenses and other current assets (197,023) (534,136)
Other assets (197,064) 188,168
Accounts payable (1,153,058) 612,182
Accrued liabilities (1,043,827) 611,446
Customer deposits 55,611 141,401
Deferred revenues 2,457,251 (1,438,923)
Other liabilities 235,958 3,077,547
--------------------- ---------------------
Net cash provided by (used for) operating activities 5,785,232 (4,693,198)
INVESTING ACTIVITIES:
Purchase of property and equipment (1,998,851) (3,265,418)
Disposition of property and equipment 1,334,154 2,168,618
Purchase of licenses and patents (448,331) (4,635,644)
Purchase of short-term investments (6,647,458) (497,598)
Proceeds from short-term investments 3,498,265 1,982,239
--------------------- ---------------------
Net cash used for investing activities (4,262,221) (4,247,803)
FINANCING ACTIVITIES:
Exercise of stock options and warrants 255,114 158,262
Repayments of note payable (50,000) (50,000)
Purchase of treasury stock (1,375,003) -
--------------------- ---------------------
Net cash (used for) provided by financing activities (1,169,889) 108,262
Effect of exchange rate changes on cash (523,652) 1,752,632
--------------------- ---------------------
Net decrease in cash and cash equivalents (170,530) (7,080,107)
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 $ 12,524,301 $ 8,831,686
===================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
In July 1999, the Company acquired 9,619 shares of common stock owned
by a former officer of the Company. The Company forgave a Promissory Note
in the amount of $60,000 that had been used by the former officer to
purchase those shares of stock.
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 26, 1998 July 2, 1999
----------------------- ------------------------
Net income (loss) $ 880,023 $ (5,938,897)
Foreign currency translation (487,305) (1,810,169)
----------------------- ------------------------
Comprehensive income (loss) $ 392,718 $ (7,749,066)
======================= ========================
See accompanying notes to consolidated financial statements.
Page 6 of 20
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998 and July 2, 1999
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of 3D
Systems Corporation and its 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 six month period ended July 2, 1999 are not necessarily
indicative of the results to be expected for the full year.
(2) Inventories
December 31, 1998 July 2, 1999
----------------- -----------------
Raw materials $ 1,138,415 $ 2,681,406
Work in progress 818,839 1,235,850
Finished goods 8,872,092 9,094,877
----------------- -----------------
$ 10,829,346 $ 13,012,133
================= =================
(3) 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.
(4) 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 7 of 20
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998 and July 2, 1999
(Unaudited)
(5) Computation of Earnings Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", the following is a reconciliation of the numerator and
denominator of the basic and diluted earnings per share share (EPS)
computations for the six month periods ended June 26, 1998 and July 2, 1999:
1998 1999
------------- --------------
NET INCOME (LOSS): numerator for net income (loss) per common share and
net income (loss) per common share assuming dilution $ 880,023 $ (5,938,897)
WEIGHTED AVERAGE SHARES: denominator for net income (loss) per common
share-weighted average shares 11,318,001 11,397,775
EFFECT OF DILUTIVE SECURITIES FROM STOCK OPTIONS: assumed conversions 408,867 ---
ADJUSTED WEIGHTED AVERAGE SHARES AND ASSUMED CONVERSIONS:
Denominator for net income (loss) per common share, assuming dilution 11,726,868 11,397,775
Common shares related to stock options and stock warrants that are
antidilutive amounted to approximately 562,967 shares and 2,212,611
shares for the six months ended June 26, 1998 and July 2, 1999,
respectively.
(6) 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 June 26, 1998:
Sales to unaffiliated customers 14,039 5,576 3,965 1,093 --- 24,673
Inter-area sales (1,393) (115) --- --- 1,508 ---
Income (loss) from operations (1,089) 50 704 --- 1,038 703
For the period ended July 2, 1999:
Sales to unaffiliated customers 9,988 5,964 4,807 1,254 --- 22,013
Inter-area sales (6,162) (795) --- --- 6,957 ---
Income (loss) from operations (5,595) 428 187 --- (105) (5,085)
Long lived assets at July 2, 1999 22,921 1,806 991 232 367 26,317
Inter-area sales to the Company's foreign subsidiaries are recorded at
amounts consistent with prices charged to distributors, which are above
cost.
Page 8 of 20
3D SYSTEMS CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 1998 and July 2, 1999
(Unaudited)
(7) Other Operating Expenses
Other operating expenses are comprised of litigation and settlement costs
and costs associated with a formal restructuring plan of the Company as
noted in the table below:
Activity to Date
-------------------------------------------------------------------------
Provision Costs Accrual as of
Recorded Incurred July 2, 1999
---------------- --------------- ------------------
Litigation and Settlement Costs $ 407,000 $ 112,000 $ 295,000
Restructuring Costs
Employee Related Costs 645,000 95,000 550,000
Exit Plan Costs 1,648,000 193,000 1,455,000
---------------- --------------- ------------------
Total $ 2,700,000 $ 400,000 $ 2,300,000
================ =============== ==================
The litigation and settlement costs of $407,000 relate to a complaint
filed against the Company by Centuri Corp. and Cox Acquisition Corp.
(the "Centuri Litigation") on September 16, 1997. At a settlement
hearing on July 1, 1999 the parties to the Century Litigation agreed to
settle the case pursuant to an agreement which provides for the
confidentiality of the settlement terms. The settlement agreement is
subject to the court's approval of its terms. No liability of any party
was admitted.
During May 1999, the Company completed a review of its operations to
identify opportunities to improve operating effectiveness. As a result of
this review, management initiated a formal restructuring plan, with the
concurrence of the Board of Directors, and the Company recorded a pretax
restructuring charge to operations of approximately $2.3 million. The
restructuring charge was comprised of employee related costs and exit plan
costs resulting primarily from the Company's plan to exit certain legal
structures and facilities. The employee related costs reflect the costs
associated with the restructuring of several management positions. Exit
plan costs include $600,000 of asset impairments, $578,000 of legal
structure exit costs and $470,000 of estimated net losses on subleases or
lease cancellation penalties. The restructuring plan specifically
identified five facilities to be closed, including one operations facility
and four sales offices worldwide. The Company expects to complete
implementation of the plan by the end of the first quarter of 2000.
Page 9 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, 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; the Company's ability to realize efficiencies from its formal
restructuring plan, 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 nearly 1,400 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
and royalties received from the licensing of the Company's technology. 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 second quarter of 1999, the Company expanded its global customer
support program. The new and expanded array of service programs are key elements
of far-reaching global support initiatives intended to provide current and
prospective customers with new ways to maximize the value, productivity and
flexibility of the Company's solid imaging products. These new programs are the
initial foundation of a comprehensive Customer Support Strategy developed by the
Company.
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 26, 1998 July 2, 1999 June 26, 1998 July 2, 1999
---------------- ---------------- ---------------- ----------------
Products 67.8% 67.0% 65.8% 67.2%
Services 32.2% 33.0% 34.2% 32.8%
---------------- ---------------- ---------------- ----------------
Total sales 100.0% 100.0% 100.0% 100.0%
---------------- ---------------- ---------------- ----------------
Cost of Sales:
Products 34.2% 39.1% 34.4% 38.4%
Services 22.2% 22.8% 23.2% 22.3%
---------------- ---------------- ---------------- ----------------
Total cost of sales 56.4% 61.9% 57.6% 60.7%
---------------- ---------------- ---------------- ----------------
Total gross profit 43.6% 38.1% 42.4% 39.3%
Gross profit - products 49.6% 41.6% 47.7% 42.9%
Gross profit - services 31.1% 30.8% 32.1% 32.0%
Selling, general and administrative expenses 30.3% 37.8% 29.7% 41.5%
Research and development expenses 10.4% 11.0% 10.3% 10.9%
Income (loss) from operations 2.8% -23.1% 2.4% -19.2%
Interest income, net 0.4% 0.0% 0.5% 0.3%
Provision for (benefit from) income taxes 1.1% -6.5% 1.0% -5.6%
Net income (loss) 2.1% -16.6% 1.9% -13.3%
Page 10 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
----------------------------------- -----------------------------------
June 26, 1998 July 2, 1999 June 26, 1998 July 2, 1999
---------------- ---------------- ---------------- ----------------
Products: (in thousands except percentages)
Systems, and related equipment $ 11,843 $ 9,338 $ 21,639 $ 20,393
Materials 4,144 4,524 7,437 8,445
Other 728 895 2,166 1,197
---------------- ---------------- ---------------- ----------------
Total products 16,715 14,757 31,242 30,035
---------------- ---------------- ---------------- ----------------
Services:
Maintenance 6,898 6,348 13,809 12,836
Other 1,060 908 2,458 1,826
---------------- ---------------- ---------------- ----------------
Total services 7,958 7,256 16,267 14,662
---------------- ---------------- ---------------- ----------------
Total sales $ 24,673 $ 22,013 $ 47,509 $ 44,697
================ ================ ================ ================
Products:
Systems, and related equipment 48.0% 42.4% 45.6% 45.6%
Materials 16.8% 20.6% 15.7% 18.9%
Other 3.0% 4.1% 4.5% 2.7%
---------------- ---------------- ---------------- ----------------
Total products 67.8% 67.1% 65.8% 67.2%
---------------- ---------------- ---------------- ----------------
Services:
Maintenance 28.0% 28.8% 29.0% 28.7%
Other 4.2% 4.1% 5.2% 4.1%
---------------- ---------------- ---------------- ----------------
Total services 32.2% 32.9% 34.2% 32.8%
---------------- ---------------- ---------------- ----------------
Total sales 100.0% 100.0% 100.0% 100.0%
================ ================ ================ ================
Page 11 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
THREE MONTH PERIOD ENDED JULY 2, 1999 COMPARED TO THE THREE MONTH PERIOD ENDED
JUNE 26, 1998.
SALES. Sales during the three month period ended July 2, 1999 (the "second
quarter of 1999") were $22.0 million, a decrease of 11% from the $24.7 million
recorded during the three month period ended June 26, 1998 (the "second quarter
of 1998").
Product sales during the second quarter of 1999 ($14.8 million) decreased
approximately 12% compared to the second quarter of 1998 ($16.7 million). The
Company sold a total of 71 systems in the second quarter of 1999 and compared to
62 systems in the second quarter of 1998. 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 second quarter of 1999 as
compared to the same period a year ago. The Company believes this decrease was
due, in part, to the continued delay in orders as customers evaluate the new SLA
7000 launched in the first quarter of 1999. System sales fluctuate 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 however 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 the
future.
The dollar value of orders for the Company's systems in the second quarter of
1999 declined approximately 17% from the second quarter of 1998, due to the
reduction in orders of large frame SLA industrial systems as noted above. The
decline in the dollar value of orders was primarily due to a significant
reduction in the U.S., while Europe was off slightly, and in Asia/Pacific,
which represents less than 10% of the Company's overall business, orders were
up substantially. Resulting dollar value backlog was up 20% from a year ago
quarter and up slightly from the prior quarter. The Company expects the order
rate in the U.S. to increase while Europe may experience normal seasonal
softening. This is a forward looking statement and, as with other such
statements, is subject to uncertainties. For example, a change in U.S.
economic conditions or a shift 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 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 1999
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 1999 ($7.3 million) decreased
approximately 9% compared to the second quarter of 1998 ($8.0 million),
primarily as a result of decreased maintenance revenues due to the shift in mix
to sales of small size solid imaging systems. Service sales during the quarter
also experienced a decrease in time and material revenues due to a reduction in
sales of solid state laser replacements for the Company's large frame SLA
industrial systems.
The Company expects service revenues to remain at second quarter of 1999
levels in the third quarter, and return to the modest growth rates
experienced in 1998 in the fourth quarter of 1999. 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,
a continued decline in large frame SLA sales, 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 12 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
COST OF SALES. Cost of sales decreased to $13.6 million (62% of sales) in the
second quarter of 1999 from $13.9 million (56% of sales) in the second quarter
of 1998 as the service cost of sales decrease of $.5 million was offset by an
increase in product cost of sales.
Product cost of sales as a percentage of product sales increased to
approximately 58% in the second quarter 1999 from approximately 50% in the
second quarter of 1998. This increase in the percentage of product costs to
product sales was due primarily to a change in mix, as shipments of the
Company's small size solid imaging systems increased and large frame SLA
industrial systems declined. 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 second
quarter of 1999.
Service cost of sales as a percentage of service sales remained at approximately
69% for both the second quarter of 1999 and the second 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 ("S,G&A") expenses increased approximately $.9 million or 11% in
the second quarter of 1999 compared to the second quarter of 1998. The increase
was primarily the result of costs associated with the growth of the sales and
marketing department that occurred in the fourth quarter of 1998 and additional
legal expenses for an ongoing matter related to the infringement of the
Company's patented SLA technologies. The Company expects S,G&A expenses to
remain at current spending levels. 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 S,G&A expenses.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses
during the second quarter of 1999 decreased approximately $.1 million or 5%
compared to the second 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%.
OTHER. Other expenses increased $2.7 million during the second quarter of
1999 compared to second quarter of 1998. These costs are litigation and
settlement costs related to the Centuri Litigation and non-recurring charges
associated with a formal restructuring plan involving certain employee
related costs and exit plan costs. (See note 7 - Notes to Consolidated
Financial Statements.)
OPERATING INCOME. Operating loss for the second quarter of 1999 was 23% of total
sales compared to operating income of 3% of total sales in the second quarter of
1998. This is primarily attributable to lower sales of large frame SLA
industrial systems, the non-recurring charge to operations of $2.7 million, and
the increased sales and marketing expenses.
Page 13 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
INTEREST INCOME AND INTEREST AND OTHER EXPENSES. Net other income decreased
approximately 97% in the second quarter of 1999 ($3,000) compared to the second
quarter 1998 ($106,000) due primarily to a decrease in interest income. This
decrease is the result of the lower investment balances and a smaller equipment
lease portfolio in 1999 as compared to 1998, as the Company sold off $2.2
million of its lease portfolio in May of 1999.
Page 14 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
SIX MONTH PERIOD ENDED JULY 2, 1999 COMPARED TO THE SIX MONTH PERIOD ENDED JUNE
26, 1998.
SALES. Sales during the six month period ended July 2, 1999 (the "first half of
1999") were $44.7 million, a decrease of approximately 6% from the $47.5 million
recorded during the six month period ended June 26, 1998 (the "first half of
1998").
Product sales during the first half of 1999 ($30.0 million) decreased
approximately 4% from the $31.2 million in product sales in the first half of
1998. The Company sold a total of 131 systems in the first half of 1999,
compared to 111 systems in the first half of 1998. The decrease in the dollar
value of product sales was due primarily to growth in sales of small size solid
imaging systems, while large frame SLA industrial systems decreased in the first
half of 1999 compared to the same period a year ago. System sales fluctuate
period to period and the Company does not believe that the increased total
system sales or decline in large frame SLA industrial systems is necessarily
indicative of sales in any future quarter. These are forward looking statements
however 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 the
future.
Orders, on a dollar value basis, for the Company's systems in the first half of
1999 as compared to the first half of 1998 decreased substantially due to the
reduction in orders of large frame SLA industrial systems. The Company expects
the order rate in to increase in the U.S. and Europe during the second half of
1999. This is a forward looking statement and, as with other such statements, is
subject to uncertainties. For example, a change in U.S. economic conditions or a
shift in European economic and political conditions could cause delays in
customer orders which could lead to a lower order level.
Service sales during the first half of 1999 decreased $1.6 million, or
approximately 10% compared to the first half of 1998, primarily as a result
of a delay in service contract renewals as the Company launched a new tiered
pricing program for annual maintenance contracts and the shift in product mix
to the small size solid imaging systems. In addition, Technology Center
revenues remained at the low levels experienced in the second half of 1998
and, in the first half of 1999, the Company sold the St. Paul, Minnesota 3D
Keltool inserts operation to Rapid Tooling Technologies, a subsidiary of
Rapid Design Technologies, causing a decline in insert revenues in the
period. The Company expects service sales to grow modestly in the second half
of 1999. However, this is a forward looking statement and is subject to
uncertainties. For example, the exact timing of field maintenance work and
contract renewal, a continued decline in large frame SLA sales, or the
fluctuations in use of the Company's Technology and Training centers can
significantly impact the results on a quarter to quarter basis.
COST OF SALES. Cost of sales decreased slightly to $27.1 million or 61% of sales
in the first half of 1999 from $27.4 million or 58% of sales in the first half
of 1998.
Product cost of sales as a percentage of product sales increased to 57% in the
first half of 1999 compared to 52% in the first half of 1998. The increase in
the percentage of product costs to product sales was due primarily to a change
in mix, as shipments of the Company's small size solid imaging systems increased
and large frame SLA industrial systems declined. 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 half of 1999.
Service cost of sales as a percentage of service sales remained at 68% for both
the first half of 1999 and the first half 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. However, this is a forward looking statement and is subject to
uncertainties. For example, the reliability of new products in the market or a
change in the demand or market pricing of Technology Center services, could
cause a resulting change in the service costs of sales.
Page 15 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative ("S,G&A") expenses increased approximately $4.4 million or 31%
in the first half of 1999 compared to the first half of 1998, primarily as a
result of costs associated with the launch of new products along with the
overall growth of the sales and marketing department that occurred during
fourth quarter of 1998. In addition, the Company incurred S,G&A costs
associated with the sale of its St. Paul, Minnesota 3D Keltool insert
operations and legal expenses associated with the protection of certain
patents owned by the Company. The Company expects S,G& A expenses to remain
at levels experienced in the second quarter of 1999. 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
S,G&A expenses.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses ($4.9
million) remained at the same level for the first half of 1999 as compared to
the first half of 1998, which was approximately 10% 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%.
OTHER. Other expenses increased $2.7 million during the second half of 1999
compared to second half of 1998. These costs are litigation and settlement
costs related to the Centuri Litigation and non-recurring charges associated
with a formal restructuring plan involving certain employee related costs and
exit plan costs. (See Note 7 - Notes to Consolidated Financial Statements.)
OPERATING INCOME (LOSS). Operating loss for the first half of 1999 was 13% of
total sales compared to operating income of 2% of total sales in the first
half of 1998. This is primarily attributable to increased sales and marketing
expenses related to new product launches, lower sales of large frame,
high-end SLA Industrial Systems, an increased mix of lower-end solid imaging
systems, and the non-recurring charge to operations of $2.7 million.
INTEREST INCOME AND INTEREST AND OTHER EXPENSES. Net other income decreased
approximately 39% in the first half of 1999 ($.1 million) compared to the
first half of 1998 ($.2 million) due primarily to a decrease in interest
income. This decrease is the result of the lower investment balances and a
smaller equipment lease portfolio in the first half of 1999 as compared to
the first half of 1998, as the Company sold off $2.2 million of its lease
portfolio in May of 1999.
Page 16 of 20
3D SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
December 31, 1998 July 2, 1999
---------------------- ----------------------
Cash and cash equivalents $ 15,911,793 $ 8,831,686
Short-term investments 3,484,641 2,000,000
Working capital 38,305,638 33,234,101
Six Month Periods Ended
-------------------------------------------------
June 26, 1998 July 2, 1999
---------------------- ----------------------
Cash provided by (used for) operating activities $ 5,785,232 $ (4,693,198)
Cash (used for) investing activities (4,262,221) (4,247,803)
Cash provided by (used for) financing activities (1,169,889) 108,262
Operating activities in the first half of 1999 had a net use of cash of $4.7
million compared to net cash provided of $5.8 million in the same period a
year ago. The change in cash flow for the first half of 1999 as compared to
the first half of 1998 is primarily the result of the change from a profit in
the first half of 1998 to a loss in the first half of 1999 ($6.8 million, net
change), increased inventories ($4.8 million, net change) and a reduction in
deferred revenues ($3.9 million, net change) both due to lower shipments of
large frame SLA industrial systems, partially offset by a decrease in lease
receivables ($4.6 million) primarily due to the sale of $2.2 million of the
Company's lease portfolio.
Net cash used for investing activities during the second quarter of 1999
totaled $4.2 million and was primarily the result of net additions to
property and equipment ($1.1 million) and license and patent costs ($4.6
million) partially offset by the liquidation of short term investments ($1.5
million).
Net cash provided by financing activities during the second 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 July 2, 1999, the
Company has yet to utilize the Credit Facility. It is the Company's
expectation that this line of credit will be extended; however this is a
forward looking statement, and as such, has certain risks. For example, a
change in the financial condition of the Company could cause disapproval of
the credit line extension.
The Company believes that funds generated from operations and existing
working capital 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 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 those of 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
Page 17 of 20
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 evaluated all products sold since inception for
Year 2000 readiness and has provided 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. Since
all specific customer situations and uses cannot be anticipated, however, 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 and
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 first
quarter of 1999, the Company substantially completed the majority of offshore
infrastructure upgrades and began 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 $1.1 million, 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 second 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.
Page 18 of 20
3D SYSTEMS CORPORATION
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company was served with a complaint filed September 16, 1997 in
the Centuri Litigation. At a settlement hearing on July 1, 1999 the
parties to the Centuri Litigation agreed to settle the case
pursuant to an agreement which provides for the confidentiality of
the settlement terms. The settlement agreement is subject to the
court's approval of its terms. No liability of any party was
admitted.
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 20, 1999, the Company held its Annual Meeting of
Stockholders. The following sets forth the identity of the
directors elected as Class III Directors to hold office for three
years and until their respective successors have been elected, the
voting results of the approval to amend the Company's 1996 Stock
Incentive Plan, and the voting results of the rejected proposal to
amend the Executive Incentive Compensation Plan.
1. Election of Class II Directors
Yes No Abstain Broker Non
----------------- ----------------- ----------------- ----------------
Charles W. Hull 8,408,214 0 746,871 0
Ian L. White-Thomson 8,402,904 0 752,091 0
2. The approval to amend the 1996 Stock Incentive Plan
Yes No Abstain Broker Non
----------------- ----------------- ----------------- ----------------
3,055,760 1,089,116 31,611 0
3. The rejection of the proposal to amend the Executive Incentive
Compensation Plan
Yes No Abstain Broker Non
----------------- ----------------- ----------------- ----------------
339,035 3,775,359 62,093 0
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial data schedule.
(b) Report on Form 8-K dated April 20, 1999 to announce First Quarter 1999
results.
(c) Report on Form 8-K dated June 22, 1999 to announce Management changes.
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 8/16/99
- ------------------------------------------------ ------------------------
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 20 of 20