3D Systems Releases Restated Financial Statements


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Total operating expenses increased by $6.0 million to $19.4 million in the third quarter of 2006 compared to $13.4 million in the third quarter of 2005 as restated and by $13.1 million to $50.5 million in the first nine months of 2006 compared to $37.5 million in the first nine months of 2005 as restated.

The increase in operating expenses for the third quarter was due primarily to $3.9 million of higher selling, general and administrative expenses, $1.7 million of severance and restructuring costs related to the relocation of the company's headquarters to Rock Hill, South Carolina, which were generally in line with the company's previously announced expectations, and $0.4 million of higher research and development expenses.

The increase in operating expenses in the first nine months of 2006 was due to $6.2 million of higher selling, general and administrative expenses, $5.7 million of severance and restructuring costs related to the Rock Hill relocation, and $1.3 million of higher research and development expenses.

As the company previously disclosed, the higher research and development expenses in each period related to the company's continuing high level of new product development work, primarily related to its accelerated work on the development of additional desktop 3-D Printers, including the recently announced V-Flash(TM) desktop modeler, and other Rapid Manufacturing solutions. The higher selling, general and administrative expenses in each period resulted mostly from higher consulting expenses primarily related to the company's ERP and relocation projects, higher bad debt expense, and non-cash equity compensation expense related to unvested options.

At the end of the third quarter of 2006, the company had over $5 million of unrestricted cash recorded on its consolidated balance sheet. Unrestricted cash increased to approximately $14 million at December 31, 2006. This includes approximately $8 million that the company had drawn at December 31, 2006 under its $15 million revolving credit line with Silicon Valley Bank, which as reported in a Form 8-K filing on January 25, 2007 has been amended on a basis that the company believes to be beneficial. We believe that both our cash management and our working capital management improved during the fourth quarter of 2006.

"We are very pleased today to be able to bring our third-quarter filing to current status and share with you in detail the scope and magnitude of our restatements and the results of the third quarter," said Abe Reichental, 3D Systems' president and chief executive officer.

"As we have already mentioned in our previous, frequent communications, during the third quarter, we continued to experience a number of challenges relating to our ERP implementation, the start-up of our recently outsourced logistics and warehousing activities, and the relocation of our operations, including the need to hire and train new employees who are not yet fully experienced with our new ERP system and financial accounting practices or fully familiar with our business. As you may recall, we started up our new ERP system in the U.S. on May 1, 2006 and in most of Europe in mid-June 2006. Following the start up of the system, we encountered disruptions in processing transactions in the system that affected our ability to enter and process customer orders, procure and manage inventory, schedule orders for production and shipping and invoice finished products to customers," continued Reichental. "As I shared with you earlier in January, we believe that we have made significant progress in remediating the root causes of these disruptions and fully expect the ERP system to ultimately improve our business processes, efficiency and control environment.

"As we have told you over the past several months, we also experienced significant disruptions in our supply chain activities that led to shortages of parts and materials, resulting in loss of parts and materials' revenue, a consequent loss of service revenue, higher service and expediting costs and the need to compensate customers who were adversely affected by these shortages," continued Reichental. "These shortages also delayed shipments of finished products.

"Also, as we entered the third quarter, our new, sophisticated, advanced manufacturing-capable Sinterstation(R) Pro and Viper(TM) Pro systems, with their broader range of capabilities, continued to require extensive commissioning and training to achieve operating stability and operating potential for some customers. As a result of the high volume of sales of these systems that we have enjoyed in recent quarters, and the continued need for additional commissioning and training time, we have also experienced field service resource constraints and equipment stability issues that delayed the start-up of some systems and impacted our effectiveness in servicing our higher volume 3-D Printing segment," continued Reichental.

"During the third quarter, we continued to address all of these issues, and made meaningful progress by working closely with our customers to resolve system stability issues in a mutually beneficial manner. We also intensified our own internal training and provided more extensive customer training, support and installation activities than the services we traditionally provide with our legacy systems. While we encountered higher warranty and related costs that adversely affected our gross profit in the third quarter and first nine months of 2006, we believe that the remediation efforts we have undertaken throughout the third quarter and subsequently resulted in improved systems and organizational performance since the end of the third quarter. Consequently, we expect to be able to return to normalized operating conditions as we complete the implementation of our corrective action plan," said Reichental.

"Notwithstanding all of these challenges, we are heartened by the fact that we ended the quarter with a significantly larger backlog of new orders compared to our historical experience, which we believe suggests that our lower-than-anticipated results in the third quarter were symptoms of the disruptions we experienced rather than a fundamental problem with our business," continued Reichental.

"We are pleased that, since the beginning of July, the focused execution against the corrective action plan that we have implemented enabled us to process and ship the majority of the new order backlog we had at the end of the third quarter. We believe that the significant backlog and our progress in shipping it suggests, first, that the demand for our products and services remains strong and, but for the temporary problems we experienced in fulfilling orders, would have contributed to a significantly better third quarter than we experienced and, second, that we are making real progress in correcting all of these disruptions. While we are not in a position today to comment in any detail on our performance in subsequent periods, we believe that our fourth-quarter 2006 revenue will reflect the continuation of the improving trend with which we exited the third quarter.

"Despite the disappointments that we encountered in the second and third quarters of 2006, we firmly believe that we have made significant progress in many areas as we continued to invest in infrastructure, products, people and capabilities to achieve our strategic objectives. Specifically, since the beginning of 2006:

-- "We completed the consolidation of our corporate headquarters' and R&D activities in a new state-of-the-art facility in Rock Hill, South Carolina;

-- "We announced an exclusive agreement with Symyx Technologies to discover and commercialize advanced materials for use in our Rapid Prototyping and Rapid Manufacturing solutions;

-- "We entered into an agreement to sell our Grand Junction facility for a $7.0 million cash purchase price, subject to the satisfaction of certain customary conditions. We expect that transaction to be completed by the end of the first quarter of 2007;

-- "All outstanding shares of our Series B Convertible Preferred Stock were converted into 3D Systems' common stock in June, simplifying our capital structure and reducing our dividend expense for the future;

-- "We reported that we have entered into an amendment to the Silicon Valley Bank credit facility;

-- "We are continuing our work to arrange financing for the purchase of our Rock Hill headquarters;

-- "We continued in partnership with York Technical College to develop a world-class training center adjacent to our new headquarters;

-- "We continued to expand our product portfolio consistent with our key initiatives to grow our Rapid Manufacturing and 3-D Printing base; and

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