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