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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (fee required) FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to
Commission file number 0-20993
DTM CORPORATION
(Exact Name of Registrant as Specified in its Charter)
TEXAS 74-2487065
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1611 HEADWAY CIRCLE, BUILDING 2, AUSTIN, TEXAS 78754
(Address of Principal Executive Offices) (Zip Code)
(512) 339-2922
(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 shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
AS OF JULY 31, 1998, THE REGISTRANT HAD 6,286,851 OUTSTANDING SHARES OF COMMON
STOCK.
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DTM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenue:
Products $ 6,591 $ 6,076 $ 11,561 $ 13,433
Service and support 888 723 1,752 1,389
--------------------------- ---------------------------
7,479 6,799 13,313 14,822
Costs of sales:
Products 4,595 3,507 7,510 7,560
Service and support 518 544 1,030 1,032
--------------------------- ---------------------------
5,113 4,051 8,540 8,592
--------------------------- ---------------------------
Gross Profit 2,366 2,748 4,773 6,230
Operating expenses:
Selling, general and administrative 2,604 3,066 5,351 6,023
Research and development 855 1,260 1,843 2,393
Provision for litigation settlement 1,700 - 1,700 -
Stock compensation (EAP) - 2,927 - 2,927
--------------------------- ---------------------------
5,159 7,253 8,894 11,343
--------------------------- ---------------------------
Operating loss (2,793) (4,505) (4,121) (5,113)
Other income (expense):
Other income 4 52 6 56
Interest (expense) (18) (113) (26) (417)
--------------------------- ---------------------------
(14) (61) (20) (361)
--------------------------- ---------------------------
Loss before income tax benefit (2,807) (4,566) (4,141) (5,474)
Income tax benefit - (310) - (507)
--------------------------- ---------------------------
Net loss $ (2,807) $ (4,256) $ (4,141) $ (4,967)
=========================== ===========================
Net loss per common share - basic $ (0.45) $ (0.83) $ (0.66) $ (1.17)
=========================== ===========================
Weighted-average number of shares
outstanding 6,286,851 5,214,180 6,286,851 4,234,230
=========================== ===========================
</TABLE>
See accompanying notes.
1
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DTM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,002 $ 2,050
Accounts receivable, net 5,165 4,981
Receivable for litigation settlement 1,500 -
Inventory 2,924 5,839
Prepaid expenses and other 406 404
-------------------------------
Total current assets 11,997 13,274
Property, net 2,716 2,299
Capitalized software development costs, net 746 753
Patent and license fees, net 1,076 1,080
Other noncurrent assets 40 142
-------------------------------
Total assets $ 16,575 $ 17,548
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,452 $ 3,839
Due to BFGoodrich 907 909
Deferred revenues 1,934 1,604
Accrued litigation settlement 3,200 -
Accrued expenses and other liabilities 1,809 1,783
Short-term borrowings 175 175
-------------------------------
Total current liabilities 11,477 8,310
Shareholders' equity:
Preferred stock - -
Common stock, 6,286,851 shares outstanding
at June 30, 1998 and December 31, 1997 1 1
Additional paid-in capital 50,256 50,256
Stock options outstanding 2,905 2,905
Accumulated deficit (47,898) (43,757)
Accumulated other comprehensive loss (166) (167)
-------------------------------
Total shareholders' equity 5,098 9,238
-------------------------------
Total liabilities and shareholders' equity $ 16,575 $ 17,548
===============================
</TABLE>
See accompanying notes.
2
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DTM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
-----------------------------
<S> <C> <C>
Operating activities:
Net loss $ (4,141) $ (4,967)
Adjustments to reconcile net loss to net cash provided by
or (used) in operating activities:
Depreciation and amortization 858 1,225
Provision for obsolescence 675 -
Provision for litigation settlement 1,700 -
Stock compensation (EAP) expense - 2,927
Changes in assets and liabilities used in operating activities:
Accounts receivable (185) 968
Inventory 2,240 (1,976)
Prepaid expenses and current assets 100 381
Accounts payable (387) 192
Due to BFGoodrich (2) 523
Deferred revenues 330 (211)
Accrued expenses and other current liabilities 27 (175)
-----------------------------
Net cash provided by (used in) operating activities 1,215 (1,113)
Investing activities:
Purchases of property (966) (225)
Capitalized software development costs (173) (134)
Patent and license expenditures (125) (341)
-----------------------------
Net cash used in investing activities (1,264) (700)
Financing activities:
Proceeds from public stock offering - 20,706
Proceeds from short-term borrowings 500 371
Repayments of short-term borrowings (500) (965)
Proceeds from notes payable - 800
Repayments of notes payable - (11,840)
Repayment of line of credit from BFGoodrich (2,500)
-----------------------------
Net cash provided by financing activities - 6,572
Effect of foreign exchange rate changes on cash 1 (131)
-----------------------------
Net increase (decrease) in cash (48) 4,628
Cash at the beginning of the period 2,050 329
-----------------------------
Cash at the end of the period $ 2,002 $ 4,957
=============================
Noncash item:
Conversion of BFGoodrich debt to equity $ - $ 1,500
</TABLE>
See accompanying notes.
3
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DTM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTCS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DTM
Corporation ("DTM or the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months and six months ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and related footnotes of the Company for the year ended
December 31, 1997 as disclosed in the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1998.
2. INVENTORY
Inventory consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------------------
<S> <C> <C>
Raw materials and purchased parts $ 2,100 $ 2,863
Finished goods 1,388 3,101
-------------------------
3,488 5,964
Reserve for obsolescence (564) (125)
-------------------------
$ 2,924 $ 5,839
-------------------------
</TABLE>
3. FINANCIAL INSTRUMENTS
The Company uses forward foreign currency exchange contracts, which typically
expire within one year, to hedge payments and receipts of foreign currencies,
related to the purchase and sale of goods overseas. Realized gains and losses on
these contracts are recognized in the same period as the hedged transactions.
The Company had a foreign currency exchange contracts on hand at June 30, 1998,
primarily hedging Yen revenues, totalling $306,000.
4. FACILITIES LEASE
The Company's main facility has been located in Austin, Texas since 1990 and
contains specialized leasehold improvements. A new operating lease for this
facility was executed in April 1998. An additional 20,000 square feet in an
adjacent building was added to the lease in June 1998. The new 20,000 square
foot space has been configured for manufacturing. In addition, off-site
inventory storage in the Austin area has been discontinued and the inventory has
been consolidated into the new space. The future minimum annual payments under
this lease for the approximately 50,000 square feet are $250,000 through 2000,
$275,000 from 2001 through 2003 and $312,500 from 2004 through 2006.
5. COMPREHENSIVE INCOME
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
is effective for fiscal years beginning after December 15, 1997. Comprehensive
income includes net income and other revenues, expenses, gains, and losses that
are excluded from net income but are included as a component of total
shareholders' equity. Comprehensive loss for the three months ended June 30,
1998 and 1997 was $2,751,000 and $4,322,000, respectively. Comprehensive loss
for the six months ended June 30, 1998 and 1997 was $4,140,000 and $5,098,000,
respectively. The difference between comprehensive loss and net loss is
comprised of the
4
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effect of currency translation adjustments and hedging activity in accordance
with Financial Accounting Standards Board Statement No. 52, "Foreign Currency
Translation." The accumulated balance of foreign currency and hedging activity,
excluded from net loss, is presented in the Condensed Consolidated Balance
Sheets as "Accumulated other comprehensive loss."
6. PROPOSED LITIGATION SETTLEMENT
DTM has entered into a proposed settlement of the class action lawsuit. The
settlement fund of $3,000,000 is to be comprised of $2,600,000 in cash and
$400,000 of DTM common stock. The number of newly issued shares to be placed in
the settlement fund will be determined based upon average closing prices of the
stock at the time that the settlement is finalized. DTM has recorded in its
balance sheet the estimated amount recoverable from insurance of $1,500,000 as a
receivable and the estimated amount of its liability, including remaining
defense costs, of $3,200,000 and recorded a charge to operations for the net
expense of $1,700,000. See also Note 7.
7. CONTINGENCIES
In the ordinary course of business, the Company becomes involved in legal
proceedings and claims. In one such instance, DTM filed an action in the United
States District Court for the Eastern District of Wisconsin in October 1995
against three parties who are operating a selective laser sintering system
manufactured by the Company. DTM alleges that the defendants willfully infringed
a DTM patent. In June 1996, DTM amended its lawsuit to also assert that one of
the defendants breached an oral settlement agreement. The Company seeks
injunctive relief, damages and attorneys' fees. The defendants have denied
infringement and the existence of an oral settlement agreement, and the
defendants seek attorneys' fees. The defendants have also asserted the
affirmative defenses of patent invalidity, implied license, and failure to mark
patented articles, patent unenforceability and invalidity of the oral settlement
agreement. Discovery commenced in late 1995. In a subsequent filing, one of the
defendants also has asserted claims against DTM and BFGoodrich for violation of
state and federal antitrust laws. That defendant seeks injunctive relief as well
as damages and attorneys fees. In July 1997, this court granted a temporary
summary judgment that these particular defendants had been given an implied
license by DTM. The Company has filed an appeal of this ruling. The contract
claim against the defendants and the antitrust claim against DTM and BFGoodrich
remain for trial unless this case is settled in the meantime. It is not possible
at this time to predict the outcome of these proceedings, although DTM and
BFGoodrich have indicated that they believe that the subsequent counter and
cross claims for violation of antitrust laws are without merit. However, a
ruling unfavorable to the Company could have a material adverse effect on the
Company's business and financial performance.
The Company has initiated patent infringement litigation in France, Germany and
Italy against a competitor and against one of that competitor's customers. The
Company also initiated patent infringement litigation in Japan against the
competitor's distributor in the Pacific Rim. In each of these cases, the Company
alleges that the competitor is selling rapid prototyping systems in Europe and
Japan that make unauthorized use of selective laser sintering technology covered
by the European and Japanese patents under which the Company has exclusive
rights. The Company seeks injunctive relief plus damages. It is anticipated that
this litigation will be pursued in conjunction with European and Japanese
proceedings in which the competitor has opposed the validity of those European
and Japanese patents. Hearings have begun in the German, French, Italian and
Japanese lawsuits. It is not possible at this time to predict the outcome of
these proceedings.
DTM has been informed by this competitor that it has obtained the worldwide
right to enforce certain U.S. patents and that it may bring patent infringement
litigation against the Company in U.S. courts. It is not possible at this time
to predict the outcome of this possible action, although the Company has
conducted a review of the patents in question and believes that it is not
infringing or would have valid defenses to claims such competitor may make
selective laser sintering. If such a lawsuit is filed, the Company intends to
defend itself vigorously. However, a ruling that would have the effect of
allowing the competitor to sell
5
<PAGE>
DTM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
rapid prototyping systems in the U.S. without a license from DTM could have a
material adverse effect on the Company's business and financial performance.
A lawsuit has been filed against the Company whereby certain plaintiffs claim
that the Company in connection with the initial public offering of its stock
made material misstatements or omissions. The Company has entered into a
proposed settlement of this lawsuit as more fully discussed in Footnote 5.
NEW ACCOUNTING STANDARDS
In June 1998, the Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. The Statement permits
early adoption as of the beginning of any fiscal quarter after its issuance.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair market value of the derivative will either be offset against the change
in fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of the derivative's change in
fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of statement No. 133 will be
on its earnings and financial position and has not yet determined the timing or
method of adoption. However, the Statement could increase volatility in earnings
and comprehensive income.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion and analysis should be read in conjunction with
the information set forth under the Company's Unaudited Condensed Consolidated
Financial Statements and notes thereto as well as the section below under the
heading "Risk Factors That May Affect Future Results and Safe Harbor Statement."
The Company's future operating results may be affected by various trends and
factors, which are beyond the Company's control. These include, among other
factors, changes in general economic conditions, rapid or unexpected changes in
technologies and uncertain business conditions that affect the rapid prototyping
and rapid tooling industry. Accordingly, past results and trends should not be
used by investors to anticipate future results or trends.
With the exception of historical information, the matters discussed below
under the heading "Results of Operations" and "Liquidity and Capital Resources"
may include forward-looking statements that involve risks and uncertainties. The
Company wishes to caution readers that a number of important factors, including
those identified in the section entitled "Risk Factors That May Affect Future
Results and Safe Harbor Statement" as well as factors discussed elsewhere in
this report and in the Company's other reports filed with the Securities and
Exchange Commission, could affect the Company's actual results and cause actual
results to differ materially from those forward-looking statements.
OVERVIEW
DTM Corporation designs, develops, manufactures, markets and supports, on an
international basis, rapid prototyping and rapid tooling systems and related
powdered sintering materials and services. The Company's Sinterstation Systems
and powdered sintering materials are based on proprietary and patented selective
laser sintering technology.
7
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income
statement data as a percentage of total revenues and certain cost of sales data
as a percentage of respective product revenues and service and support revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Revenue:
Products 88.1% 89.4% 86.8% 90.6%
Service and support 11.9 10.6 13.2 9.4
----------------------------- -----------------------------
100.0 100.0 100.0 100.0
Gross Profit:
Products margin 30.3 42.3 35.0 43.7
Service and support margin 41.7 24.8 41.2 25.7
----------------------------- -----------------------------
Gross profit 31.6 40.4 35.9 42.0
----------------------------- -----------------------------
Operating expenses:
Selling, general and administrative 34.8 45.1 40.2 40.7
Research and development 11.4 18.5 13.8 16.1
Provision for litigation settlement 22.7 - 12.8 -
Stock compensation (EAP) - 43.1 - 19.7
----------------------------- -----------------------------
Total 68.9 106.7 66.8 76.5
----------------------------- -----------------------------
Operating loss (37.3) (66.3) (30.9) (34.5)
Other income (expense):
Interest income - 0.8 - 0.4
Interest (expense) (0.2) (1.7) (0.2) (2.8)
----------------------------- -----------------------------
Total (0.2) (0.9) (0.2) (2.4)
----------------------------- -----------------------------
Loss before income tax benefit (37.5) (67.2) (31.1) (36.9)
Income tax benefit - (4.6) - (3.4)
----------------------------- -----------------------------
Net loss (37.5)% (62.6)% (31.1)% (33.5)%
----------------------------- -----------------------------
</TABLE>
Revenues. Revenues increased 10.0% to $7.5 million in second quarter of
1998, compared to $6.8 million in the second quarter of 1997. This increase was
primarily attributable to a strong North American market as revenues derived
from international customers were flat in total and declined in the Pacific Rim
countries. Revenues derived from customers in North America increased by
approximately 30% to $3.5 million. Unit volumes of Sinterstation Systems and
powdered materials increased in the second quarter of 1998 over the second
quarter of 1997.
Revenues decreased 10.2% to $13.3 million in the six months ended June 30,
1998, compared to $14.8 million in the comparable period of 1997. Revenues
derived from customers in North America increased by approximately 12.5% to $6.1
million, while revenues derived from international customers declined, primarily
in the Pacific Rim countries.
In July 1998, DTM announced the August 1998 availability of its new, lower-
cost selective laser sintering system platform, named the Sinterstation
2500plus. Manufacture of the two previous system platforms was discontinued in
July 1998. The Company believes that the $299,000 list price of the new base
system and system packages with list prices from $349,000 to $399,000 more
closely reflects market
8
<PAGE>
pricing than the previous list prices. With the introduction of the Model
2500plus, DTM has over the past year introduced a completely new generation of
platforms, sintering materials and sintering processes. The Company believes
that the increased demand for its products in the second quarter of 1998 is a
result of the new sintering materials that were introduced in the previous seven
months. However, there can be no assurance that this increased demand will
continue.
Revenues in past periods may not be indicative of revenues in the future,
which may be affected by other business environment and risk factors previously
discussed, as well as other factors included elsewhere herein.
Gross Profit. Gross profit, before charges for inventory write-downs
amounting to $550,000, was $2.9 million, or 39.0% of revenue, in the second
quarter of 1998, compared to $2.7 million, or 40.4% of total revenue, in the
second quarter of 1997. The increase in gross profit primarily was due to higher
unit volumes of Sinterstation Systems and increased services. The gross margin
percentage decrease in the second quarter of 1998 was caused primarily by lower
average selling prices on Sinterstation Systems, without a corresponding
decrease in average unit costs. In the second quarter of 1998 the Company
included in its consolidated statement of operations a provision for
obsolescence of $550,000. The charges for inventory write-downs, in connection
with the phaseout of the Sinterstation Models 2500 and 2000 and certain
sintering materials, reduced the overall gross margin to 31.6% of revenue. There
was no such provision in 1997. In the second quarter of 1998, service and
support margins improved to 41.7%, compared to 24.8% in the comparable period of
1997, due to reduced travel costs of servicing certain international customers
as a result of the use of more on-site employees.
Gross profit, before charges for inventory write-downs amounting to
$675,000, was $5.5 million, or 40.9% of revenue, in the six months ended June
30, 1998, compared to $6.2 million, or 42.0% of revenues, in the comparable
period of the prior year. The gross profit decrease primarily was due to lower
volumes of Sinterstation Systems in the first six months of 1998.
The introduction of the new Sinterstation System Model 2500plus discussed
above was the culmination of a year long project to design a lower cost system
to be more price competitive while attempting to maintain gross profit per sale.
Until the existing inventory of the Model 2000 and Model 2500 are depleted,
sales in the coming quarter or quarters will be a mix of the old and new models.
The older models are being offered at reduced prices, with correspondingly lower
gross margins.
The Company believes there is a risk that gross margin percentages may
continue to decline in the face of the soft North American and Pacific Rim
markets and the strong U.S. dollar. Other factors, including changes in material
and labor costs, may also have an adverse effect on gross margins. Past gross
margins are not necessarily indicative of future gross margins.
Selling, General and Administrative Expense. Selling, general and
administrative expense was $2.6 million, or 34.8% of revenues, in the second
quarter of 1998, compared to $3.0 million, or 45.1% of revenues, in the second
quarter of 1997. The decrease in 1998 was primarily related to lower personnel
costs and fewer sales subject to agent commissions. This category of expense was
$5.4 million, or 40.2% of revenues, in the six months ended June 30, 1998,
compared to $6.0 million, or 40.7% of revenues, in the comparable period of the
prior year. Selling, general and administrative expense may vary as a percentage
of revenues in the future.
Research and Development Expense. Research and development expense was
$855,000, or 11.4% of revenues, in the second quarter of 1998, compared to $1.3
million, or 18.5% of revenues, in the second quarter of 1997. This category of
expense was $1.8 million, or 13.8% of revenues, in the six months ended June 30,
1998, compared to $2.4 million, or 16.1% of revenues, in the comparable period
of the prior year. The Company plans to continue its commitment to research and
development in 1998, as the Company believes that the markets for its products
are characterized by technological innovation for hardware, software and
powdered materials. Research and development expense may increase in absolute
dollars in future periods, and such expenditures may vary as a percentage of
sales. There can be no assurance that the
9
<PAGE>
Company's research and development efforts will result in commercially
successful new technology and products in the future, and those efforts may be
affected by other factors.
Provision For Litigation Settlement. DTM has entered into a proposed
settlement of the shareholder class action lawsuit pending against it The charge
to its statement of operations in the amount of $1.7 million, consists of $3.0
million, the approxiamate value of the settlement offer, and $200,000 in
estimated legal costs, net of the expected insurance recovery of $1.5 million.
This charge was recorded in the second quarter of 1998. See Item 5. Other
Information "Settlement of Shareholder Class Action Lawsuit."
Stock Compensation (EAP). In connection with the 1997 IPO, the Company
incurred a one-time non-cash stock compensation expense of approximately $2.9
million as a result of previously outstanding stock appreciation rights
converting by formula into immediately vested stock options at exercise prices
below the market value of the common stock. This charge was recorded in the
second quarter of 1997.
Interest Expense. Net interest expense for the second quarter of 1998 was
$18,000, compared to interest expense of $113,000 for the second quarter of 1997
and $26,000 and $417,000 for the six months ended June 30, 1998 and 1997,
respectively. The higher year earlier expense resulted from a greater
outstanding debt. In May 1997 the Company repaid substantially all of its then
outstanding indebtedness out of the proceeds of an initial public offering of
common stock.
Income Taxes. As a result of its tax sharing arrangement with The
B.F.Goodrich Company ("BFGoodrich"), the Company was allocated an income tax
benefit of $310,000 in the second quarter of 1997. In May 1997, BFGoodrich's
ownership interest fell below 80% and such benefits are no longer available to
the Company. In the fourth quarter of 1997 the Company recorded the final
accounting for this tax allocation arrangement.
Net Loss. The Company had net losses, including special charges, of $2.8
million and $4.3 million in the second quarter of 1998 and 1997, respectively.
The Company had losses, including special charges, of $4.1 million and $5.0
million in the six months ended June 30, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities (before working capital changes) was
$908,000 in the six months ended June 30, 1998, compared to $815,000 in the
comparable period of 1997. Working capital employed in operating activities
provided cash of $2.1 million in the six months ended June 30, while $298,000 in
cash was used for such purpose in the comparable period of 1997. Inventory
balances were reduced by 50% in the six months ended June 30, 1998, in part due
to the transition of the Sinterstation models at June 30, 1998.
The Company's investing activities include expenditures for patents and
licenses, capitalized software costs and furniture and equipment, principally
consisting of the Company's Sinterstation Systems built for internal use and
rental purposes. Net cash used by investing activities was approximately $1.3
million and $700,000 in the six months ended June 30, 1998 and 1997,
respectively. The increased investment in 1998 was primarily for Sinterstation
Systems for internal use in development and customer support activities.
The Company currently has a $2.0 million line of credit with Chase Bank,
Texas NA, with no amounts outstanding, expiring in April 1999. Borrowings under
this line of credit bear interest at prime plus 1.5%. Borrowings under this line
must be approved in advance by BFGoodrich , which has guaranteed the line of
credit. There can be no assurance that BFGoodrich will approve such bank loans
when and if requested by DTM. In addition BFGoodrich has expressed its intention
to divest its interest in the Company. If BFGoodrich were to divest its interest
in the Company, it is unlikely that it would subject itself to additional
guarantee exposures under the line of credit.
10
<PAGE>
The Company has a current liability to BFGoodrich in the amount of
approximately $907,000, which arose in 1997 as the result of certain payments
made by BFGoodrich on behalf of DTM. This liability is currently non-interest
bearing and is due on demand. Although BFGoodrich has not yet set a time frame
for its repayment, it could do so at any time. Additionally, BFGoodrich could
require that the liability bear interest at any time.
In connection with the proposed settlement of the pending shareholder class
action lawsuit, the Company will establish a settlement fund on or before
September 1, 1998 by depositing the $2.6 million cash portion into an escrow
account. Insurance proceeds of $1.5 million are expected to be available at that
time. The Company anticipates funding the remaining $1.1 million of the cash
portion of the proposed settlement from its cash balances and, if necessary,
borrowings under its bank line of credit. BFGoodrich has indicated to to the
Company that BFGoodrich will approve and guarantee a borrowing for this purpose
by the Company under the the Company's bank line of credit. See Item 5. Other
Information "Settlement of Shareholder Class Action Lawsuit."
Future capital requirements of the Company will depend on its growth rate,
profitability, working capital requirements, and level of investment in long-
term assets. BFGoodrich has been a significant source of debt and equity funding
in the past. BFGoodrich has indicated that it has no plans to provide future
funding to DTM.
The Company believes that it has the financial resources needed to meet
business requirements, including capital expenditures, working capital
requirements, the debt obligations outstanding and operating lease commitments
for facilities through the next twelve months, assuming the availability of the
bank line of credit. However, there can be no assurance that this will be the
case.
NEW ACCOUNTING STANDARD
In June 1998, the Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. The Statement permits
early adoption as of the beginning of any fiscal quarter after its issuance.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair market value of the derivative will either be offset against the change
in fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of the derivative's change in
fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of statement No. 133
will be on its earnings and financial position and has not yet determined the
timing or method of adoption. However, the Statement could increase volatility
in earnings and comprehensive income.
YEAR 2000 PLAN
The Company believes that its Sinterstation Systems have no exposures with
respect to the year 2000 issue.
The Company has begun to develop a plan to upgrade or replace its
information technology to recognize the year 2000 and begun to evaluate packaged
software solutions. The Company currently expects the project to be
substantially completed by early 1999 and to cost between $50,000 and $150,000.
This estimate includes internal costs, but excludes the costs to upgrade and
replace systems in the normal course of business. The Company does not expect
this project to have a significant effect on operations. As of June 30, 1998
approximately $10,000 was expensed.
11
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND SAFE HARBOR STATEMENT
Investors are cautioned that this Quarterly Report on Form 10-Q contains
forward-looking statements that involve risks and uncertainties, including the
following: (i) the Company's plans, strategies, objectives, expectations and
intentions are subject to change at any time at the discretion of management and
the Board of Directors; (ii) the Company's plans and results of operations will
be affected by the Company's ability to manage its growth and working capital;
and (iii) the Company's business is highly competitive and the entrance of new
competitors or the expansion of the operations by existing competitors in the
Company's markets could adversely affect the Company's plans and results of
operations. In addition, the Company identifies the risk factors discussed below
which may affect the Company's actual results and may cause actual results to
differ materially from those contained in forward looking statements.
LIMITED OPERATING HISTORY AND LACK OF PROFITABILITY. The Company was
incorporated in 1987, and prior to shipment of its first Sinterstation Systems
in 1992, it derived revenues solely from a rapid prototyping service bureau that
it operated in Austin, Texas. The Company has been unprofitable from its
inception; most recently recognizing a net loss of approximately $7.3 million
for the year ended December 31, 1997. There can be no assurance that the Company
can achieve, or if it achieves, maintain, profitability in the future.
EMERGING RAPID PROTOTYPING MARKET. The market for rapid prototyping products and
services is in an early stage of development and includes multiple, competing
technologies, many of which are not yet fully developed. Participants in this
market are moving to address new applications, many of which may not yet be
known or accepted by potential users. Rapid prototyping requires that a computer
aided design ("CAD") file describe a design. Organizations who are not using CAD
are not, generally, potential customers for rapid prototyping products and
services. Significant education of the end user in both CAD modeling and rapid
prototyping in general has in some cases been a prerequisite to product
acceptance. It is not clear at this time which one or more technologies will
gain broad market acceptance. There can be no assurance that DTM will emerge as
a market leader, or even a major market participant, as the market matures.
EMERGING RAPID TOOLING MARKET. The market for rapid tooling products and
services is even in an earlier stage of development than rapid prototyping.
Participants in this market are moving to address new applications, many of
which may not yet be known or accepted by potential users. The companies who
make tooling using traditional machining methods have made large capital
investments in traditional equipment and have mature infrastructures for doing
so. They may be highly resistant both on financial and cultural basis to
adopting new technologies. There can be no assurance that rapid tooling
technologies will evolve to the point that the perceived value will overcome
those obstacles. There can be no assurance that DTM will emerge as a market
leader, or even a major market participant, as the market matures.
PENDING CLASS ACTION LITIGATION. The Company is the defendant in a matter styled
as a class action that is pending in a Texas State court. The plaintiffs seek
recission of the May 1997 IPO and the return to certain shareholders the
proceeds of that IPO of approximately $22.8 million, plus interest and costs. An
adverse judgment may have a material adverse effect on the Company's business
and financial performance. A proposed $3.0 million settlement in this matter has
been reached. However, there can be no assurance that the settlement will be
finalized or, if finalized, certain investors may opt-out of the settlement and
bring individual actions against the Company. See Item 1. Financial Statements -
- - Note 5 to Notes to Consolidated Financial Statements and Item 5. Other
Information "Settlement of Shareholder Class Action Lawsuit."
COMPETITION. The market for rapid prototyping systems is intensely competitive.
In marketing its Sinterstation Systems, the Company experiences competition from
many sources. Certain of the Company's competitors are better known and have
greater financial, research and development, production and marketing resources
than DTM. Competition has increased as a result of the introduction of new
products or product enhancements by these competitors or the entry into the
industry by other companies. Industry analysts have estimated that the worldwide
market for rapid prototyping grew in 1997 by 20%. In 1997, the
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<PAGE>
Company's revenues lagged the overall industry and grew by only 4%. Increased
competition has resulted in price reductions, reduced margins and loss of market
share, all of which has materially adversely affected the Company's business and
financial results and may continue to do so.
LIMITED PRODUCT COMPANY. The Company currently offers one model of Sinterstation
Systems for sale. The sale of Sinterstation Systems comprised 68% of revenues in
the six months ended June 30, 1998 and 66% of revenues in the years ended
December 31 1997 and 1996, respectively. The remaining revenues were comprised
of sales of powdered sintering materials, spare parts and services to the
installed base of Sinterstation owners. The Sinterstation Systems are priced at
the premium end of the range of today's rapid prototyping products and are sold
on the basis of performance and suitability to specific applications. In a
downturn or even in a soft market the Company's dependance upon a limited range
of products, as opposed to a wide range of products at different price points,
has caused the Company's financial performance to be adversely affected and may
continue to do so.
CAPITAL RESOURCES. The Company's future capital requirements will depend on a
number of factors, including its profitability, growth rate, working capital
requirements, expenses associated with protection of its patents and other
intellectual property and costs of future research and development activities.
It is typical of developing technology companies to need large amounts of
capital to fund growth. BFGoodrich, the Company's majority shareholder, has been
a significant source of debt and equity funding in the past. BFGoodrich has
indicated to the Company that BFGoodrich has no plans to provide future funding
and in fact intends to divest its position in the Company. Future operating
results will depend, in part, on the Company's ability to obtain and manage
capital sufficient to finance its business. The inability of the Company to
secure capital funding sufficient to meet its needs could have a material
adverse effect on the Company's business and financial performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. Protection of the Company's
intellectual property is an important factor in its ability to be successful in
a highly competitive market that is subject to rapid technological changes.
However, it is expensive and consumes a significant portion of time of DTM's
officers.
In pursuing protection for its proprietary rights in its Sinterstation
Systems, materials and related technology, the Company currently relies on a
combination of patent, copyright, trademark and trade secret rights, as well as
contractual provisions. The Company typically seeks patent protection for its
selective laser sintering technology, including, where deemed appropriate, the
selective laser sintering process, its Sinterstation Systems and the materials
used in its Sinterstation Systems. However, patent protection may not always be
available. There can be no assurance that patents will be issued under any or
all of the patent applications to which the Company has rights. In addition, the
laws of various countries in which the Company's products may be sold may not
protect the Company's products and intellectual property rights to the same
extent as the laws of the United States.
Furthermore, the Company can give no assurance that the issued patents to
which it holds rights will be adequate to protect its interests or, if
challenged, held valid. The Company's competitors could develop non-infringing
systems, materials or technologies that are equivalent or superior to those of
the Company. Competitors currently do and also may practice technology covered
by DTM's patents or other legal or contractual protections regardless of the
fact that it is legally protected, forcing the Company to engage in costly
litigation to defend its interests. While DTM defends its intellectual property
vigorously, there can be no assurance that it will be successful in its various
litigations in many countries. If the Company were unsuccessful in enforcing its
intellectual property rights or other contractual rights in the context of
third-party offers to sell selective laser sintering systems or sintering
powders or if the Company were found to have violated state or federal antitrust
laws, the Company's future revenues might be adversely affected. In 1997, a
court granted a temporary summary judgment, ruling that a customer had been
given an implied personal license by DTM to one of DTM's patented sintering
materials. This ruling has been appealed by the Company. The inability of the
Company to successfully establish and defend its intellectual property rights
could have a material adverse effect on the Company's business and financial
performance.
13
<PAGE>
Unrelated third parties hold many patents and pending patent applications
under which the Company is not a licensee that relate to the design and
manufacture of rapid prototyping systems and materials. If such a third party
brought infringement litigation against the Company, and if the Company was not
successful in defending such litigation or in obtaining a license, the Company's
business and financial performance could be materially adversely affected. The
Company has been threatened with such litigation by a competitor.
Certain key intellectual property used in the selective laser sintering
process is licensed to the Company by The University of Texas System. As a
licensee, the Company's rights to practice the technology are not absolute. The
University of Texas could terminate, attempt to terminate or amend the license
if the Company could be shown to be in material default of the terms of the
license. Even if DTM has a basis for objection, defense of its rights as a
licensee could be costly and the outcome would be uncertain. Loss of significant
rights as a licensee under this license could have a material adverse effect on
the Company's business and financial performance.
MANAGEMENT OF VARYING OR NOMINAL GROWTH. DTM has experienced varying revenue
growth or contractions since 1991. DTM experienced increases in total net
revenues from approximately $1.1 million in 1991 to approximately $25.3 million
in 1997. In the third quarter of 1997, however, revenues began to contract
overall and this contraction has continued until the second quarter of 1998.
Throughout 1997, the Company's revenues derived from North America contracted
while its revenues derived from international markets expanded rapidly. In the
second quarter of 1998, revenues derived from North America expanded while
revenues derived from international markets became flat. There can be no
assurance that the revenue growth experienced in the second quarter of 1998 will
continue, or that this trend will not reverse itself. Since 1997 the Company's
revenues from customers directly involved in product development expanded while
its revenues derived from service bureaus contracted. This varying or nominal
growth has, from time to time, strained its management resources and systems.
DTM's ability to manage its varying growth effectively will depend on, among
other things, its ability to increase the capability and quality of its
operational, financial and management information systems and controls and to
train, motivate, in some cases re-deploy, manage and retain its employees. There
can be no assurance that the Company will experience future growth or be
successful in managing any future growth. Failure to manage or enter into any
future growth could have a material adverse affect on the Company's business and
financial performance.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The Company's revenues and
operating results have varied substantially from quarter to quarter and may
continue to do so. DTM typically experiences a relatively long lead-time to
complete a Sinterstation System sale and has historically experienced no
backlog. Furthermore, new product introductions, seasonality of customer buying
patterns and other factors can cause fluctuations in quarterly results. These
fluctuations have and may continue to preclude the Company from managing its
operating results effectively from quarter to quarter. Further, a majority of
the sales of the Company's Sinterstation Systems occur at the end of the
quarter. As the of the current 12-week manufacturing cycle of the new
Sinterstation System Model 2500plus reduces the Company's ability to control its
inventories. The tendency for a large number of the Company's sales made during
a quarter to be completed at or near the end of the quarter also hinders the
Company's ability to predict sales, control sales prices and enforce its
standard terms. The failure of the Company to complete a particular
Sinterstation System sale in any given quarter can have a material adverse
effect on the Company's business and financial performance for that quarter and
quarterly fluctuations could cause a material adverse effect on the price at
which the Company's Common Stock trades. Moreover, the Company has had limited
experience in determining the sales cycle time of its Sinterstation 2500plus due
to its recent introduction.
NEW PRODUCTS; ENGINEERING TESTING DELAYS. The Company's ability to achieve and
maintain a significant market share depends heavily on its ability to improve
the perceived value of its Sinterstation Systems, through a combination of lower
installed cost, lower operating costs, higher productivity and improved ease of
use. In addition, DTM must introduce new and innovative products that facilitate
increased use and more specialized applications of existing products. DTM cannot
predict with any
14
<PAGE>
certainty the degree to which its ongoing research and development efforts in
the areas of Sinterstation System and materials enhancements will be successful
or, if so, when. In addition, the Company can provide no assurance of its future
success in selecting, developing, manufacturing and marketing new products. When
the Company or its competitors announce new products with capabilities or
technologies that have the potential to replace the Company's existing product
offerings, customers sometimes defer or forego purchases of Company products.
This could materially adversely affect the Company's business and financial
performance. While the Company performs testing prior to releasing new product
designs or product enhancements, products may contain unforeseen errors or
performance problems. The correction of errors and problems in new products
could cause delays in product introductions or shipments, require design
modifications to previously shipped products or cause adverse publicity, any of
which can adversely affect the Company's business and financial performance.
The Company has announced that in July 1998 it discontinued the manufacture
of its previous models and announced a new model to be available in August 1998.
Should there be a prolonged delay with the new model introduction, the Company
will be without saleable products for a significant period given it would take
over 19 weeks to deliver new production of the discontinued models.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a substantial
extent on certain key employees. Losing the services of one or more key
employees could have a material adverse effect on the Company's business and
financial performance. The Company's success also depends on its ability to
continue to attract highly talented technical personnel. Candidates with
appropriate training and expertise may be in short supply in the geographic
areas where the Company is attempting to recruit personnel. The Company has put
in place incentive compensation plans intended to provide motivation for
continued employment of key employees. However, the exercise prices of employee
stock options are currently above market value and, management incentive goals
have not been met for the past two years and certain sales force incentive goals
were not met last year. This has resulted in reduced incentive compensation for
Company employees. During the last half of 1997, several executive officers left
the Company. The Company can give no assurance that it will be able to retain
employees or continue to attract, assimilate and retain other skilled personnel.
DEPENDENCE ON THIRD-PARTY SUPPLIERS. The Company subcontracts for manufacture of
Sinterstation System components, powdered sintering materials and accessories
from single-source, third-party suppliers. A disruption in supply or failure of
a supplier to remain competitive in functionality or price could have a material
adverse effect on the Company's sales or reputation for timely delivery, and,
hence, on the Company's business and financial performance.
INTERNATIONAL OPERATIONS. The Company competes on an international basis through
its wholly owned subsidiary located in Germany and through export sales derived
from its United States sales operations, principally to the Pacific Rim, Europe
(excluding Germany) and South America. In the year ended December 31, 1997 and
the six months ended June 30, 1998, respectively, approximately 62% and 54% of
the Company's sales were made to customers outside of the United States. The
Company expects that sales to customers in countries outside of the United
States will continue to constitute a significant percentage of total sales.
Fluctuations in exchange rates as well as interest rates have significantly
affected DTM's sales in foreign markets. In particular, a strengthening U.S.
dollar has adversely affected the price competitiveness of DTM's products and
services in the international markets. The Company also maintains a subsidiary
for sales and technical support in Europe. In addition, exchange rates have
adversely affected the value of receivables arising from foreign sales. The
Company does engage in some hedging to limit the currency exchange risk related
to some sales. There can be no assurance that the Company's exposure to risks
associated with international operations will not continue to have a material
adverse effect on its liquidity, capital resources and results of operations.
The regulatory environment, including import/export laws, protective trade
policies and currency controls of foreign governments, also could materially
adversely affect the Company's business and financial performance.
CONTROL OF THE COMPANY. BFGoodrich currently owns approximately 50.2% of the
outstanding Common Stock. At this percentage, BFGoodrich could control elections
of the Company's Board of Directors and could control or substantially affect
the outcome of certain matters submitted to the
15
<PAGE>
Company's shareholders for their vote or consent. BFGoodrich could also cause,
prevent or delay a change in control of the Company. BFGoodrich has advised the
Company that its interest in DTM is primarily financial and that it intends to
divest its interest in the Company. The Company cannot predict the effect of a
sale of a controlling interest in the Company; although, depending on the
identity of the purchaser and its reason for acquiring control of the Company,
minority shareholders could be adversely affected. The proposed settlement of
the shareholder class action lawsuit will result in the issuance of $400,000
worth of Company Common Stock. If approved, this would likely result in
BFGoodrich's ownership percentage dropping slightly below 50%. In that event,
BFGoodrich would no longer have absolute voting control, but would still be
likely to have sufficient voting power to control the outcome of most matters
submitted to shareholders.
LOSS OF TAX ALLOCATION AGREEMENT AND OTHER BENEFITS FROM BFGOODRICH. As a result
of the IPO, the ownership of outstanding Common Stock by BFGoodrich decreased to
less than 80%. BFGoodrich is no longer able to include DTM's income or loss in
BFGoodrich's consolidated federal income tax return. Consequently, DTM lost the
benefit of the tax allocation agreement between DTM and BFGoodrich effective May
1997. Without the tax benefit allocated from BFGoodrich, the Company's net loss
for 1997 would have increased from approximately $7.3 million to approximately
$8.1 million. To the extent the Company incurs future losses, the resulting tax
loss carryforward would be deferred until sufficient income is generated by DTM
to utilize the carryforward.
Historically, DTM has received certain tangible and intangible benefits
from BFGoodrich. For example, BFGoodrich currently provides DTM participation in
a group program for various types of business insurance. This arrangement is on
terms that could be considered more favorable to the Company than those that
would be available to DTM in arms-length transactions with unrelated vendors,
principally because DTM is able to take advantage of cost efficiencies
experienced by BFGoodrich due to the size of its operations. DTM will be
ineligible to take part in any BFGoodrich insurance programs once BFGoodrich no
longer owns a majority of the outstanding common stock of DTM. Either party has
the option to terminate any of such arrangements at any time. The proposed
settlement of the class action lawsuit will, if completed as currently
contemplated, cause BFGoodrich to no longer be a majority shareholder of the
outstanding common stock of DTM. Therefore the Company expects to lose these
benefits effective with the of the $400,000 worth of common stock pursuant to
the proposed settlement of the shareholder class action lawsuit.
In addition, at June 30, 1998, DTM had a current liability to BFGoodrich in
the amount of $907,000. This amount is currently non-interest bearing and is due
on demand. The balance is the result of certain payments made by BFGoodrich on
behalf of DTM in 1997. BFGoodrich could require interest on its advance or
require the advance to be repaid at any time.
POSSIBLE ISSUANCE OF PREFERRED STOCK. The Company's Articles of Incorporation
authorize the issuance of up to 3,000,000 shares of preferred stock, $.001 par
value ("Preferred Stock"), the terms of which would be determined by the Board
of Directors at the time of issuance, without further shareholder approval. The
Board of Directors would determine whether these shares would carry voting
rights, preferences in the payment of dividends, sinking fund provisions and
liquidation, redemption or conversion rights, if any. The Company has no current
plans to issue Preferred Stock. However, if such stock is issued in the future,
the rights of the holders of Common Stock could be materially adversely
affected. It is possible that the Board of Directors could grant future holders
of Preferred Stock rights that could restrict the Company's ability to merge or
sell its assets to a third party, resulting in preservation of the control of
the Company by its then current owners. The Preferred Stock provisions of the
Company's Articles of Incorporation could inhibit a third party from acquiring a
significant amount of the Common Stock, thereby delaying or preventing changes
of the management or control of the Company, and possibly materially adversely
affecting the Common Stock price as a result.
SHARES ELIGIBLE FOR FUTURE SALE. All shares of the Common Stock owned by
BFGoodrich are freely tradeable, subject to volume limitations of Rule 144. In
addition, BFGoodrich has rights to require the Company to register sales of its
shares of Common Stock under the Securities Act in certain circumstances.
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<PAGE>
DTM employees hold immediately exercisable options to purchase 553,150
shares of Common Stock under the Equity Appreciation Plan. The Company
registered the issuance and the sale of the shares of Common Stock that would be
issued upon exercise of options under the Equity Appreciation Plan on a Form S-8
Registration Statement. As a result, the Common Stock acquired by employees of
DTM upon exercise of options outstanding under the Equity Appreciation Plan will
be freely tradeable (subject to compliance with certain provisions of Rule 144,
in the case of affiliates of the Company).
Sales of shares of Common Stock into the market by BFGoodrich or employees
exercising options could cause a decline in the price of such stock.
MARKET VOLATILITY. The Company is listed for quotation of the Common Stock on
the Nasdaq National Market. Historically, the stock market has experienced
volatility that has particularly affected the market price of common stock of
technology-related companies. That volatility sometimes has been unrelated to
the operating performance of such companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information related to quantitative and qualitative disclosures regarding
market risk is set forth in Managements Discussion and Analysis of Financial
Condition and Results of Operations and the risk factors under Item 2 above.
Such information is incorporated by reference herein.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the 1998 Annual Meeting of the Shareholders of DTM the following matters were
voted as follows:
PROPOSAL 1: To elect six directors to the Company's Board of Directors
to serve until the next annual meeting or until their
respective successors are duly elected and qualified as
follows:
<TABLE>
<CAPTION>
# of Shares # of Shares
--------------- ---------------
<S> <C> <C> <C> <C>
D. Lee Tobler For 5,852,526 Withheld Authority 58,971
John S. Murchison, III For 5,837,858 Withheld Authority 73,639
Marshall O. Larsen For 5,853,426 Withheld Authority 58,071
Alexander MacLachlan For 5,850,426 Withheld Authority 61,071
Thomas G. Ricks For 5,853,226 Withheld Authority 58,271
Les C. Vinney For 5,852,726 Withheld Authority 58,771
</TABLE>
PROPOSAL 2: To approve the adoption of the DTM Corporation 1998 Stock
Option Plan:
<TABLE>
<CAPTION>
# of Shares # of Shares # of Shares
--------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
For 5,690,485 Against 151,895 Abstain 41,250
</TABLE>
PROPOSAL 3: To ratify the appointment of Ernst & Young LLP as
independent auditors of DTM Corporation for the fiscal year
ending December 31, 1998:
<TABLE>
<CAPTION>
# of Shares # of Shares # of Shares
--------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
For 5,879,246 Against 5,181 Abstain 27,070
</TABLE>
17
<PAGE>
ITEM 5. OTHER INFORMATION.
SETTLEMENT OF SHAREHOLDER CLASS ACTION LAWSUIT
On August 4, 1998 the Company entered into a Memorandum of
Understanding with respect to the settlement of the pending shareholder class
action lawsuit styled John H. Danielson and Thomas E. Harding v DTM Corporation,
that is currently pending in the District Court of Bexar County, Texas. The
principal terms of the agreement call for the establishment of a settlement fund
initially consisting of $2.6 million in cash, of which $1.5 million is to be
paid by the Company's insurance carrier and the remaining $1.1 million is to be
paid by the Company, and the later addition of $400,000 worth of shares of the
Company's Common Stock. The number of shares to be issued is to be based upon
the average closing price of the stock for the 15 days preceding the date of
final Court approval. Completion of the proposed settlement is subject to
various terms and conditions, including, but not limited to, execution of
definitive settlement documents and Court approval. A copy of the press release
announcing these matters is attached as Exhibit 99.1 hereto, and is incorporated
herein by this reference .
CHANGE IN BOARD OF DIRECTORS
Effective July 14, 1998, D. Lee Tobler retired from BFGoodrich and
concurrently resigned as director of the Company. Les C. Vinney, elected to the
Board on May 13, 1998, was elected Chairman of the Board to replace Mr. Tobler.
Robert D. Koney, Jr., Vice President and Controller of BFGoodrich, has been
elected to serve on the Company's Board of Directors to fill the vacancy created
by Mr. Tobler's resignation. Mr. Tobler, Mr. Vinney and Mr. Koney are or were
employees of BFGoodrich, the Company's majority shareholder. A copy of the press
release announcing these matters is attached as Exhibit 99.2 hereto, and is
incorporated herein by this reference.
SHAREHOLDER PROPOSALS
As more fully set forth in the Proxy Statement dated April 14, 1998,
related to the Company's 1998 Annual Meeting of Shareholders, proposals of
shareholders must be received at the Company's principal executive offices not
later than December 15, 1998 in order to be included in the Company's 1999
Annual Meeting of Shareholders.
Pursuant to new amendments to Rule 15a-4(c) of the Securities Exchange
Act of 1934, as amended, if a shareholder who intends to present a proposal at
the Company's 1999 Annual Meeting of Shareholders does not notify the Company of
such proposal on or prior to February 27, 1999, then management proxies would be
allowed to use their discretionary voting authority to vote on the proposal when
the proposal is raised at the 1999 Annual Meeting, even though there is no
discussion of the proposal in the Company's Proxy Statement related to the 1999
Annual Meeting of Shareholders.
Although no date has been set, the Company currently believes that the
1999 Annual Meeting of Shareholders will be held during mid-May 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.23 Memorandum of Understanding regarding settlement of
shareholder class action lawsuit, dated August 4, 1998
Exhibit 27.1 Current Financial Data Schedule for the quarter ended
June 30, 1998
Exhibit 99.1 Press Release dated August 5, 1998 regarding proposed
settlement of shareholder class action lawsuit
Exhibit 99.2 Press Release dated July 22, 1998 regarding changes in
the Company's Board of Directors
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<PAGE>
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.
Dated: August 7, 1998
DTM Corporation
(Registrant)
By: /s/ John S. Murchison, III
---------------------------------------------
John S. Murchison, III
President and Chief Executive Officer
By: /s/ Geoffrey W. Kreiger
---------------------------------------------
Geoffrey W. Kreiger
Vice President, Controller, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
19
<PAGE>
Index to Exhibits
-----------------
Number Description
- ------ -----------
10.23 Memorandum of Understanding regarding settlement of class action,
dated August 4, 1998
27.1 Financial Data Schedule for the quarter ended June 30, 1998
99.1 Press Release dated August 5, 1998 regarding proposed settlement of
shareholder class action lawsuit
99.2 Press Release dated July 22, 1998 regarding changes in the Company's
Board of Directors
<PAGE>
EXHIBIT 10.23
IN RE DTM CORP
SECURITIES LITIGATION
MEMORANDUM OF UNDERSTANDING
All parties in the class action filed in the District Court for the State of
Texas, Bexar County, under the caption In re DTM Corp. Securities Litigation,
Case No. 97-CI-16633 (the "Action"), have agreed in principle to settle the
Action. This Memorandum of Understanding sets forth the essential terms and
conditions of that agreement:
1. The settlement amount is $3.0 million ("Settlement Amount") and shall be
paid as set forth below.
2. This settlement is subject to approval by the Court in the Action and
entry of a final judgment of dismissal with prejudice of the Action.
3. The settlement will fully and finally resolve all claims that have been or
that could have been brought against any and all of the Released Parties (as
defined below), including but not limited to: (i) all federal statutory and
common law claims, including but not limited to claims under the Securities Act
of 1933 (the "1933 Act") and the Securities Exchange Act of 1934 (the "1934
Act"); (ii) all state statutory and common law claims, including but not limited
to state securities law claims, claims under the law of fraud and deceit, false
advertising and unfair competition claims, and claims sounding in negligence;
and (iii) all claims that are derivative in nature (the "Settled Claims"). The
term "Settled Claims" as used above and throughout this Memorandum of
Understanding means claims actually made in the Action and all claims that could
have been brought, either in the Action or in another proceeding. The term
<PAGE>
Settled Claims as used herein and throughout this Memorandum of Understanding
also includes unknown claims. In entering into this settlement, plaintiffs
expressly agree that they are also resolving all unknown claims, if any,
and waive and relinquish to the fullest extent possible any state or federal law
or protection concerning the release of unknown claims.
4. As to all Settled Claims, plaintiffs will fully and finally release all
defendants named in the Action, as well as all of defendants' current and former
officers, directors, employees and agents, and all professionals advising
defendants in any capacity, including but not limited to, DTM's underwriters,
accountants, financial advisors, insurers, reinsurers and attorneys (the
"Released Parties"). The release shall include all Released Parties without
regard to whether the Complaint actually names such persons or entities as
defendants or identifies them in any way. The Stipulation of Settlement,
described below, will contain a form of release acceptable to all parties.
5. In exchange for the payment described herein, plaintiffs will release all
claims against all Released Parties.
6. In exchange for the settlement and release, DTM shall pay $3.0 million to
the plaintiffs. Specifically, DTM shall deposit $2.6 million of the Settlement
Amount in cash into an interest bearing escrow account as directed by
plaintiffs' counsel on or before September 1, 1998, but not prior to signing the
Stipulation of Settlement. Further, on or before 10 days after the scheduled
Final Approval hearing date, DTM shall deliver a number of shares of DTM stock
to plaintiffs' counsel in an amount equal to $400,000 based on the average
trading price of the 15 trading days closing price prior to Final Approval. If
the cash portion of the settlement amount is not paid into the
2
<PAGE>
plaintiffs' escrow account on or before September 1, 1998, this settlement may,
at the sole option of plaintiffs' counsel, be declared void or plaintiffs'
counsel may require that on any portion of the settlement amount not paid by
that date, interest will accrue at 8% per annum from September 1, 1998, until
that portion of the settlement amount is deposited into escrow.
7. The parties will memorialize this settlement in a Stipulation of
Settlement which shall be executed within 30 days of the execution of this
Memorandum of Understanding. The parties will jointly seek the Court's
preliminary approval of the settlement, approval of notice to the class of the
settlement and certification of a settlement class. Plaintiffs' counsel shall
submit a first draft of such papers, including a Stipulation of Settlement,
Preliminary Approval Order, Notice of Pendency, Proof of Claim Form, and Order
of Final Approval and Final Judgment of Dismissal, and any other documents
required, to counsel for defendants no later than 15 days from execution of the
Memorandum of Understanding or such later or earlier date as agreed by the
parties.
8. The parties will stipulate to certification of a class for the purpose of
the settlement and the class period shall be May 2, 1997 to June 19, 1997,
inclusive.
9. The Stipulation of Settlement or a separate supplemental agreement will
contain a customary provision to be negotiated by the parties allowing DTM to
terminate the settlement if class members beneficially owning more than a
specified percentage of the total publicly-traded stock of DTM opt-out of the
settlement.
10. All costs of class notice and administration of the settlement shall be
paid out of the Settlement Amount maintained in escrow by plaintiffs' counsel.
The
3
<PAGE>
costs of notice and administration shall not be subject to recapture or
repayment by the defendants in the event final approval is not ordered by the
Court (including by reason of DTM terminating the settlement) or if final
approval of the settlement is overturned on appeal.
11. The parties agree that the settlement described herein was reached in
good faith following substantial arm's-length negotiations. While retaining
their right to deny that the claims advanced in the litigation were meritorious,
and with the understanding that the Stipulation of Settlement will contain such
a denial, defendants agree that the litigation was filed in good faith and in
compliance with Rule 13 of the Texas Rules of Civil Procedure ("TRCP") or its
Federal law equivalent. The final judgment will contain a statement that the
parties agree that, during the course of the litigation, the parties and their
respective counsel at all times complied with the requirements of TRCP Rule 13
and its Federal law equivalent. The final judgment also will contain a
statement that the relative contributions of the defendants is fair and
reasonable.
12. The parties agree to file a joint motion in the Action to obtain complex
designation of the Action for the purposes of obtaining judicial approval and
administration of the Settlement.
13. Attorneys' fees and costs awarded to plaintiffs, which shall be paid
solely out of and shall not be in addition to the escrow fund, shall (with the
Court's approval) be paid to plaintiffs' counsel immediately upon award, subject
to the obligation of plaintiffs' counsel to repay any amount they receive for
attorneys' fees and costs in
4
<PAGE>
excess of the amounts finally approved (including the final resolution of any
objection, appeal, remand or collateral attack), plus accrued interest.
14. The Settlement is further conditioned upon receiving final judicial
approval of all settlement terms, after notice and a fairness hearing, and a
final judgment of dismissal with prejudice of the Action. In the event the
parties do not obtain judicial approval, the parties agree that this MOU and the
Stipulation will be void and of no effect; and that nothing in this MOU or the
Stipulation will prejudice any of the parties from asserting any of their
respective claims or defenses in the Action.
15. This document may be signed in counterparts and signature pages may be
exchanged among the parties hereto by telecopier.
DATED: AUGUST 4, 1998 BINGHAM & LEA, P.C.
By:/s/ Royal B. Lee
------------------
Royal B. Lea, P.C.
333 Convent Street
San Antonio, TX 78205
(210) 224-1819
DATED: AUGUST 4, 1998 MILBERG WEISS BERSHAD HYNES &
LERACH LLP
By: Kirk B. Hulett
--------------------
Kirk B. Hulett
Darren J. Robbins
600 W. Broadway, Suite 1800
San Diego, CA 92101
(619) 231-1058
Attorneys for Plaintiffs
5
<PAGE>
DATED: JULY 21, 1998 BROBECK, PHLEGER & HARRISON LLP
By:/s/ Paul R. Bessette
------------------------
Paul R. Bessette
Kevin P. Muck
Stephen M. Knaster
Spear Street Tower, One Market
San Francisco, CA 94105
(415) 442-0900
Attorneys for Defendants DTM Corp.,
Lee Tobler, John Murchison, III,
Marshall Larsen and Steven Rolls
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THIS QUARTERLY REPORT
ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,002
<SECURITIES> 0
<RECEIVABLES> 5,661
<ALLOWANCES> 496
<INVENTORY> 2,924
<CURRENT-ASSETS> 11,997
<PP&E> 10,140
<DEPRECIATION> 7,424
<TOTAL-ASSETS> 16,575
<CURRENT-LIABILITIES> 11,477
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 58,259
<TOTAL-LIABILITY-AND-EQUITY> 16,575
<SALES> 6,591
<TOTAL-REVENUES> 7,479
<CGS> 4,595
<TOTAL-COSTS> 5,113
<OTHER-EXPENSES> 3,459
<LOSS-PROVISION> 1,700
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> (2,807)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,807)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,807)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
<PAGE>
EXHIBIT 99.1
PRESS RELEASE
FOR IMMEDIATE RELEASE Contact:
August 5, 1998 Geoff Kreiger +1.512.339.2922
DTM/(TM)/ CORPORATION REPORTS PROPOSED SETTLEMENT OF CLASS ACTION LAWSUIT
AUSTIN, TEXAS: AUGUST 5, 1998 DTM Corporation (NASDAQ: DTMC) today announced
that it had reached an agreement in principle with plaintiffs to settle the
pending shareholder class action suit against the company and certain of its
officers and directors in District Court of Texas, Bexar County. The principal
terms of the agreement call for the establishment of a settlement fund
consisting of: (a) $2,600,000, to be paid in part by DTM's insurance carrier;
and (b) $400,000 worth of shares of DTM's common stock. The agreement is subject
to execution of definitive settlement documents and Court approval.
DTM President and Chief Executive Officer John Murchison, lll commented,
"Although we were prepared to defend the lawsuit vigorously, we concluded that
it was in the best interests of the company and its shareholders to resolve the
litigation in light of the inherent uncertainties of complex litigation and to
avoid both substantial legal fees and the continued unnecessary demands on
management time."
***more***
<PAGE>
Page 2
DTM Corporation develops, manufactures and markets the Sinterstation/(R)/ family
of rapid prototyping products for application in the rapid manufacturing
marketplace. The Sinterstation/(R)/ systems and materials are based on
proprietary and patented SLS/(R)/ selective laser sintering technology. The
Company's systems are used to accelerate the design, development and market
introduction of products in an expanding range of industries.
The market statements are forward looking statements that involve risks and
uncertainties that could cause actual results to differ materially. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially and adversely from those set forth in the
forward-looking statements, including, without limitation: DTM may not emerge as
a market leader, or even a major market participant and its markets may not
develop; price reductions, reduced margins and loss of market share may occur as
a result of increasing competition; the Company's dependance on a single product
that is priced at the high end of the range for today's rapid prototyping
products has caused it to be adversely affected in a soft market; class action
litigation is pending against the Company; capital sufficient to finance the
business may not be obtained; intellectual property and proprietary rights may
not be protected; DTM may fail to manage or experience future growth; quarterly
fluctuations in operating results may adversely affect stock prices; the
difficulty in predicting results of operations may have a material adverse
effect on the price at which the Common Stock trades; necessary new products may
not be developed; key personnel may leave; suppliers may cause disruptions;
actions by foreign governments may limit sales; a controlling shareholder has an
interest in liquidating its interest in the Company; certain tax benefits
obtained from a controlling shareholder are no longer available ; possible
issuance of preferred stock could impact common stockholders; sales of a large
block of stock and sales of shares issuable pursuant to employee stock options
could decrease stock prices; and market price could be volatile, regardless of
DTM's financial performance. The Company cautions that the foregoing list of
important factors is not exclusive. The Company does not undertake to update any
written or oral forward-looking statement that may be made from time to time by
or on behalf of the Company.
Copyright 1998, DTM/(TM)/ Corporation, all rights reserved. SLS/(R)/ and
Sinterstation/(R)/ are registered trademarks of DTM.
FOR MORE INFORMATION, CONTACT:
DTM Corporation
1611 Headway Circle, Building 2, Austin, TX, USA 78754
Phone +1.512.339.2922; Fax +1.512.339.0634
###
<PAGE>
EXHIBIT 99.2
FOR IMMEDIATE RELEASE Contact:
July 22, 1998 Kristen Melby +1.512.339.2922
AS TOBLER RESIGNS, DTM(TM) BOARD OF DIRECTORS ELECTS
NEW CHAIRMAN, ADDS ONE NEW MEMBER
Austin, Texas July 22, 1998: DTM Corporation (NASDAQ: DTMC) today announced the
resignation of D. Lee Tobler as Chairman of the Board and Director of DTM. Mr.
Tobler served as the company's chairman since 1996 and as a Director since 1993.
Having reached mandatory retirement age under BFGoodrich personnel policies, Mr.
Tobler has resigned from The BFGoodrich Company, the company's majority
shareholder, where he has had a distinguished carrier as Executive Vice
President and Chief Financial Officer since 1985.
Les C. Vinney has been elected by the DTM Board of Directors to serve as
Chairman of the Board of Directors. Mr. Vinney, 49, was elected to the board on
May 13, 1998 at the DTM annual shareholders meeting. Mr. Vinney has held senior
financial and operating positions with BFGoodrich since 1991. He now serves as
Senior Vice President and Chief Financial Officer of The BFGoodrich Company.
<PAGE>
Robert D. Koney, Jr. has been elected to serve on the DTM Board of Directors.
Mr. Koney, 41, was elected to fill the vacancy created by Mr. Tobler's
resignation. Mr. Koney's prior experience includes several senior accounting
and business controllership positions with BFGoodrich since 1986. He now serves
as the Vice President and Controller for The BFGoodrich Company.
DTM Corporation develops, manufactures, and markets the Sinterstation(R) family
of rapid prototyping products for application in the growing rapid manufacturing
marketplace. The company's products are sold, serviced, and supported directly
through DTM in North America, England and Germany, and through agents and
distributors worldwide.
####
FOR MORE INFORMATION, CONTACT:
NORTH AMERICA: DTM CORPORATION
1611 Headway Circle, Building 2, Austin, TX, USA 78754
Phone +1.512.339.2922; Fax +1.512.832.6753
EUROPE: DTM GMBH
Otto-Hahn-Strasse 6, 40721, Hilden Germany
Phone +49.2103.95770; Fax +49.2103.52265
ASIA PACIFIC: DTM CORPORATION
9 Temasek Boulevard, 31-02 Suntec Tower Two, Singapore, 038989
Phone +65.434.5770; Fax +65.434.5771
WORLD WIDE WEB: http://www.dtm-corp.com
Copyright 1998, DTM/(TM)/ Corporation, all rights reserved.
Sinterstation/(R)/ is a registered trademark of DTM.
