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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 For the quarterly period ended March 31, 1999
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the 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 (I.R.S. Employer
of 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 April 30, 1998, the latest practicable date, the Registrant had 6,621,336
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
March 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Products $ 6,991 $ 4,970
Service and support 981 864
---------- ----------
7,972 5,834
Cost of sales:
Products 3,114 2,915
Service and support 580 512
---------- ----------
3,694 3,427
---------- ----------
Gross Profit 4,278 2,407
Operating expenses:
Selling, general and administrative 3,278 2,747
Research and development 662 988
---------- ----------
3,940 3,735
---------- ----------
Operating income (loss) 338 (1,328)
Other income (expense):
Interest expense, net (7) (6)
Gain on sale of assets 50 -
---------- ----------
43 (6)
---------- ----------
Income (loss) before
Income taxes 381 (1,334)
Income tax expense (107) -
---------- ----------
Net income (loss) $ 274 $ 1,334)
========== ==========
Net income (loss) per
common share - basic $ 0.04 $ (0.21)
========== ==========
Weighted-average number of shares
outstanding 6,493,555 6,286,851
========== ==========
</TABLE>
See accompanying notes.
1
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DTM Corporation
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash $ 652 $ 429
Accounts receivable, net 5,344 5,186
Inventory 2,669 3,456
Prepaid expenses and other 191 262
------------ ------------
Total current assets 8,856 9,333
Property, net 1,101 1,388
Capitalized software development costs, net 583 629
Patent and license fees, net 901 956
============ ============
Total assets $ 11,441 $ 12,306
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,105 $ 3,090
Due to shareholder 909 909
Deferred revenues and customer deposits 2,050 2,185
Employee and agent compensation 819 891
Income taxes 107 -
Accrued litigation settlement - stock portion - 400
------------ ------------
Total current liabilities 5,990 7,475
Shareholders' equity:
Common stock, 6,621,336 shares outstanding at March 31, 1999
and 6,286,851 at December 31, 1998 1 1
Additional paid-in capital 53,561 53,161
Accumulated deficit (48,061) (48,335)
Accumulated other comprehensive income (loss) (50) 4
------------ -----------
Total shareholders' equity 5,451 4,831
------------ -----------
Total liabilities and shareholders' equity $ 11,441 $ 12,306
============ ============
</TABLE>
See accompanying notes.
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DTM Corporation
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
----------- ----------
<S> <C> <C>
Operating activities:
Net income (loss) $ 274 $ (1,334)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating
activities:
Depreciation and amortization 354 445
Provision for doubtful accounts 44 -
Provision for obsolesence 24 125
Gain on disposal of equipment (50) -
Changes in assets and liabilities used in operating activities:
Accounts receivable (202) (559)
Inventory 763 1,014
Prepaid expenses and current assets 71 (172)
Accounts payable (985) 381
Due to shareholder - (2)
Deferred revenues (135) 54
Income taxes 107 -
Employee and agent compensation (72) 14
----------- ----------
Net cash provided by (used in) operating activities 193 (34)
Investing activities:
Purchases of property (14) (982)
Capitalized software development costs (21) (87)
Patent and license expenditures (18) (64)
Proceeds from sale of equipment 137 -
----------- ----------
Net cash provided by (used in) investing activities 84 (1,133)
Financing activities:
Proceeds from short-term borrowings - -
Repayments of short-term borrowings - -
----------- ----------
Net cash provided by financing activities - -
Effect of foreign exchange rate changes (54) (55)
----------- ----------
Net change in cash 223 (1,222)
Cash at the beginning of the period 429 2,050
=========== ==========
Cash at the end of the period $ 652 $ 828
=========== ==========
Noncash item:
Conversion of settlement liability into common stock $ 400 $ -
</TABLE>
See accompanying notes.
3
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DTM CORPORATION
Notes to Consolidated Financial Statements
(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 ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial statements
and related footnotes of the Company for the year ended December 31, 1998 as
disclosed in the Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 31, 1999.
2. Inventory
Inventory consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------------------------
<S> <C> <C>
Raw materials and purchased parts $ 1,746 $ 1,809
Finished goods
1,076 1,776
----------------------------
2,822 3,585
Reserve for obsolesence (153) (129)
----------------------------
$ 2,669 $ 3,456
============================
</TABLE>
3. Geographic and Customer Information
The Company and its subsidiaries operate in one industry segment: the
development, manufacturing and service of selective laser sintering systems and
related products. Operations outside of the United States consist principally of
sales, marketing and customer support. Revenues are attributed to geographic
areas based upon the location of the customers. The following is a summary of
geographic area data for the for the interim periods (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues from external customers:
North America $ 4,008 $ 2,533
Europe 2,829 2,004
PacRim 1,135 1,297
============= =============
$ 7,972 $ 5,834
============= =============
</TABLE>
4. Comprehensive Income
Comprehensive income (loss) for the three months ended March 31, 1999 and
1998 was $220,000 and $(1,389,000), respectively. The difference between
comprehensive loss and net loss is comprised of the 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
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DTM CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
currency and hedging activity, excluded from net loss, is presented in the
Condensed Consolidated Balance Sheets as "Accumulated other comprehensive loss."
5. Contingencies
In the ordinary course of business, the Company becomes involved in legal
proceedings and claims. In one such instance, 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, and in each case the
Company is seeking injunctive relief and 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
regarding 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 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.
6. New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 of
Financial Accounting Standards 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.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANNALYSIS 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. All statements, trends and other information contained in this
Quarterly Report on Form 10-Q relative to markets for the Company's products and
trends in revenue, gross margin and anticipated expense levels constitute
forward-looking statements. These forward-looking statements generally can be
identified by the use of words such as "anticipate", "believe", "plan",
"estimate", "expect", "intend", "may", and "should" and other similar
terminology. 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. DTM was incorporated in 1987 and completed
its initial public offering ("IPO") of Common Stock in May 1997. Since 1992, DTM
has shipped over 250 Sinterstation Systems worldwide.
The Company's selective laser sintering process uses laser energy to
sinter powdered material to create solid objects that aid in the design and
manufacture of products. The Company's Sinterstation Systems employ a
combination of software and hardware to produce functional models, patterns,
injection-molding tooling and metal parts from a variety of powdered materials.
Customers input designs into the Sinterstation Systems in the form of CAD
drawings. The functional models are used to verify a design's form and fit. The
patterns can, in turn, be used for secondary processes such as the production of
non-durable molds and investment casting. The Company's RAPIDTOOL process
employs selective laser sintering along with a furnace cycle to produce
steel/copper composite mold inserts that are used by the injection molder to
produce production parts in quantity. A variant of the RAPIDTOOL process is the
production of mold inserts in the Sinterstation System from a copper-reinforced
thermoplastic-based material system, without the need for a furnace cycle. These
inserts produced with this product are used by the injection molder to produce
short-run production parts. Sinterstation Systems also can be used in
combination with the Company's RAPIDTOOL process with a furnace cycle to produce
metal parts.
The Company's Sinterstation Systems are purchased by manufacturers,
universities, military and defense organizations and by service bureaus. These
service bureaus utilize rapid prototyping equipment to provide services to other
companies involved in product development. The Company distributes its products
in the United States, Canada, Western Europe and certain Pacific Rim and South
American countries. In the United States and Canada, the Company employs a
direct sales force. In Germany, DTM GmbH, a wholly owned subsidiary, distributes
DTM's products. DTM GmbH is a sales and service organization whose efforts are
augmented by sales agents in France, Italy, Portugal, Spain and Sweden. In
6
<PAGE>
the United Kingdom, DTM (UK) LTD., a wholly owned subsidiary, distributes and
services DTM's products. The Company also distributes its goods and provides
services in the Pacific Rim and South America through a network of independent
agents, including agents in Brazil, China, India, Japan, Singapore, South Korea
and Taiwan.
DTM's Sinterstation Systems typically include hardware, material
handling equipment, documentation, licenses for using DTM supplied software,
licenses for using DTM-supplied powdered sintering materials and installation.
They can be configured for use with a single sintering powder or for any
combination of thermoplastic, foundry sands or metal sintering powders. DTM
typically offers its Sinterstation Systems packaged with a 12-month warranty and
preventive maintenance contract, installation services, training services and an
initial supply of sintering materials. DTM offers a wide range of proprietary
sintering materials and software that optimizes their use in the Sinterstation
System.
The total value of a packaged offering is allocated among its various
components: systems and related equipment sintering materials, immediate
services and deferred services. Revenues from the sale of products are
recognized when title has transferred to the customer, the Company's remaining
obligations are insignificant and collection of the related receivable is
probable, which, typically, is upon shipment. The Company defers from three to
six percent of the revenues, excluding certain accessories, from each
Sinterstation System sale to cover the cost of a one-year warranty period. This
deferred amount represents the Company's estimate of the cost of providing such
warranty and preventive maintenance service and is recognized ratably as service
and support revenue over the 12-month warranty period. Upon expiration of the
12-month warranty period discussed above, the Company offers for sale to its
customers an annual maintenance contract, the revenues from which are recognized
ratably as service and support revenue over the related support period.
The introduction of the new Sinterstation 2500 /plusTM/ in August of
1998 was the culmination of a year-long project to design a system with a lower
manufactured cost that would permit the Company to be more price competitive
while improving its gross margins. Mainly as a result of the Sinterstation 2500
plus, total gross margins improved to approximately 50% beginning in the fourth
quarter of 1998. These higher gross margins allowed the Company to become
profitable beginning in the fourth quarter of 1998.
On February 12, 1999, an investment partnership of independent
investors affiliated with Proactive Finance Group, LLC ("Proactive") acquired
BFGoodrich's remaining 47.7% interest in DTM. DTM now operates as an independent
company.
7
<PAGE>
Results Of Operations
The following table sets forth for the periods indicated certain income
statement data as a percentage of our total revenues and certain sales data.
<TABLE>
<CAPTION>
First First
Quarter Quarter
1999 1998
---- ----
<S> <C> <C>
Revenues 100.0% 100.0%
Gross profit 53.7 41.3
Selling, general and administrative 41.1 47.1
Research and development 8.3 16.9
Operating income 4.2 (22.8)
Gain on sales of equipment 0.6 -
Interest expense (0.1) (0.1)
Income (loss) before income taxes 4.8 (22.9)
Income tax expense (1.3) -
Net income (loss) 3.4 (22.9)
Revenues components:
Product sales 87.7 85.2
Service and support revenues 12.3 14.8
Total 100.0 100.0
Gross margin details:
Products 55.5 41.3
Service and support 40.9 40.7
Total 53.7 41.3
Revenues from external customers:
North America 50.3 43.4
Europe 35.5 34.4
PacRim 14.2 22.2
Total 100.0 100.0
</TABLE>
Revenues. Revenues increased 36.6% to $8.0 million in first quarter of
1999, compared to $5.8 million in the first quarter of 1998. This increase was
primarily attributable to improved demand in North America and Europe. Revenues
derived from customers in North America increased by approximately 58.2% to $4.0
million. The increase was primarily due to higher unit volumes of Sinterstation
Systems and powdered materials in the first quarter of 1999 over the first
quarter of 1998.
Revenues in past periods may not be indicative of revenues in the
future, which may be affected by other business environment and risk factors
discussed below, as well as other factors included elsewhere herein.
Gross Profit. Gross profit was $4.3 million, or 53.7% of revenue, in
the first quarter of 1999, compared to $2.4 million, or 41.3% of total revenue,
in the first quarter of 1998. The increase in gross profit primarily was due to
higher unit volumes of Sinterstation Systems and sintering materials and to an
increase in services. The increase in gross margin to over 50% was primarily due
to the decreased manufactured cost of the Sinterstation 2500/plus/(TM) that was
introduced in August of 1998 and replaced both previous models.
Past gross margins are not necessarily indicative of future gross
margins. Currency changes, changes in mix and changes in material and labor
costs, may have an adverse effect on gross margins
8
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Selling, General and Administrative Expense. Selling, general and
administrative expense was $3.3 million, or 41.1% of revenues, in the first
quarter of 1999, compared to $2.7 million, or 47.1% of revenues, in the first
quarter of 1998. The decrease as a percentage of total revenues during the
comparable 1998 periods primarily was due to a proportionately higher growth in
total revenues, while holding selling, general and administrative expense
relatively flat. Selling, general and administrative expense may vary as a
percentage of revenues in the future.
Research and Development Expense. Research and development expense was
$662,000, or 8.3% of revenues, in the first quarter of 1999, compared to $1.0
million, or 16.9% of revenues, in the first quarter of 1998. The higher 1998
expense levels were, primarily, due to costs associated with multiple
significant new product development projects that were commenced in 1997 and
culminated in 1998 with the introduction of several new material systems and the
new Sinterstation Model 2500plusTM. The Company plans to continue its commitment
to research and development at approximately the current level of spending, 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 Company's research and development efforts will result in commercially
successful new technology and products in the future, and those efforts may be
already affected by other factors which are beyond the Company's control.
Gain on Sale of Assets. In the first quarter of 1999, the Company
continued to sell used Sinterstation 2500 and 2000 Systems under a previously
announced program to sell systems that had been used internally for development
and support activities or under a discontinued rental program. The Company
recognized a net gain of $50,000 on those sales in the first quarter of 1999.
Interest Expense. Net interest expense for the first quarter of 1999
was $7,000, compared to interest expense of $6,000 for the first quarter of
1998.
Income Taxes. As a result the recent change in control, utilization of
net operating loss carryforwards will be subject to additional annual limits. In
the first quarter of 1999, the Company provided for income taxes at an estimated
28% annual effective rate.
Net Income (Loss). The Company had net income of $274,000 in the first
quarter of 1999, compared to a net loss of $1.3 million in the first quarter of
1998. This $1.6 million change was primarily due to increased product revenue;
substantially higher product gross margins, and reduced research and development
expense.
Liquidity and Capital Resources
During the three months ended March 31, 1999, operating activities
provided $193,000 in net cash, compared to a use for such purposes of $34,000 in
the comparable period of 1998.
Accounts receivable, less allowance, represented approximately 60 days
of quarter sales at March 31, 1999, compared to 54 days at December 31, 1998.
Inventory, less allowance, represented approximately 65 days on hand at March
31, 1999, compared to 75 at December 31, 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. Capital expenditures for the three months ended March 31, 1999
were less than the proceeds from fixed asset sales.
For 1999, the Company has planned for approximately $800,000 in capital
expenditures. This includes an additional Sinterstation 2500/plus/(TM) System to
support the new platform and Year 2000 compliance expenditures. The Company
intends to fund this additional investment from operations as well as from any
proceeds from the sale of older model internally used systems. The Company
continues to market its refurbished Model 2000/2500 program. Any income
resulting from these sales will be recognized as proceeds from the sale of
assets.
9
<PAGE>
During the first quarter of 1999, the Company did not utilize any bank
financing. At March 31, 1999, the Company had a temporary spot factoring line of
credit arrangement with a bank. The Company is in negotiations with a bank to
enter into a more traditional line of credit arrangement.
In connection with the February 12, 1999 change in control, Proactive,
the new shareholder, informed the Company that it had acquired the Company's
liability to BFGoodrich in the amount of approximately $909,000. This liability
is currently non-interest bearing and is due on demand. Proactive has informed
the Company that it intends to require formalization of this indebtedness on
commercial terms.
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 and equipment through December 31, 1999. However, there can be no
assurance that this will be the case.
New Accounting Standard
In June 1998, the Accounting Standards Board issued Statement of
Financial Accounting Standards 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 of
Financial Accounting Standards 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
Many currently installed computer systems and software products are
coded to accept only two-digit entries in date code fields. These date code
fields will need to accept four-digit entries to distinguish 21st century dates
from 20th century dates. As a result, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists concerning the potential effects
associated with such compliance.
The Company has evaluated its Sinterstation Systems and believes that
it will have no exposures with respect to the Year 2000 issue.
The Company has begun to develop a plan to upgrade or replace its
internal information technology to comply with Year 2000 requirements and begun
to evaluate packaged software solutions to assess Year 2000 compliance. The
Company currently expects this compliance project to be substantially completed
by mid-1999 and to cost between $90,000 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 its operations. As of March 31, 1999, approximately
$60,000 has been expensed in regard to this project. Such expenses are being
funded through operating cash flows. In a worst case scenario, the Company
believes its information systems might not properly account for amounts due from
customers or due to suppliers at the end of 1999 and the preparation of its
financial statements may be delayed.
10
<PAGE>
The Company has performed an evaluation of its non-information systems
(embedded technology such as microcontrollers) and does not believe that it has
material exposures in this area with respect to the Year 2000 issue.
The Company has not made inquires of its key venders as to their status
with respect to the Year 2000 compliance issues. There can be no assurance that
Year 2000 compliance issues at these venders may not cause these venders to
disrupt the Company's production plans.
Based upon available information, the Company does not believe any
material exposure to significant business interruption exists as a result of
Year 2000 compliance issues, or that the cost of the remedial actions will have
a material adverse effect on its business, financial condition or results of
operations of the Company. Accordingly, the Company has not adopted any formal
contingency plan in the event its Year 2000 compliance project is not completed
in a timely manner.
The estimates and conclusions set forth herein regarding Year 2000
compliance contain certain forward-looking statements and are based on
management's estimates of future events and information provided by third
parties. There can be no assurance that such estimates and information provided
will prove to be accurate. Risks to completing the Year 2000 compliance project
include the availability of resources, the Company's ability to discover and
correct potential Year 2000 problems and the ability of suppliers and other
third parties to bring their systems into Year 2000 compliance.
11
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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 Profitability
The Company was incorporated in 1987 and shipped its first
Sinterstation Systems in 1992. The Company realized its first profitable quarter
in the fourth quarter of 1998. Prior to the fourth quarter of 1998, the Company
had been unprofitable from its inception; most recently recognizing net losses
of approximately $7.3 million for the year ended December 31, 1997 and $5.1
million for the nine months ended September 30, 1998. There can be no assurance
that the Company can maintain profitability in the future.
Possible Delisting of Securities from The Nasdaq National Market; Limited
Liquidity of Trading Market
Shares of the Company's Common Stock are quoted on the National Market
System ("NMS") of The Nasdaq Stock Market ("Nasdaq"). Nasdaq has recently
promulgated new rules that make continued listing of companies on the NMS more
difficult and has significantly increased its enforcement efforts with regard to
the Nasdaq standards for such listing. The Company has been having difficulty
maintaining one such standard, the $5.0 million market value of public float
requirement. Public float is defined for purposes of this calculation as shares
that are not held directly or indirectly by any officer or director of the
Company or any person who is the beneficial owner of more than 10 percent of the
total shares outstanding. On March 31, 1999, the Company's public float was
believed to be no less than 3,464,146 shares of Common Stock and the minimum bid
price was $1.125 per share. This resulted in a market value of public float of
$3,897,000. Since March 31, 1999, the minimum bid price has risen to $1.50 on
May 10, 1999. At that level, the market value of the Company's public float met
the $5.0 million standard. The Company plans to seek an appeal of any attempt by
Nasdaq to delist the Company's securities. However, there can be no assurance
that such an appeal would be successful and, therefore, that the Company could
avoid having its securities delisted.
In addition, Nasdaq also requires companies whose stock is included for
quotation on the NMS maintain $4,000,000 in net tangible assets and a minimum
bid price of $1.00. As of March 31, 1999, the Company had net tangible assets of
$5,451,000, for such purpose and the minimum bid price was in excess of $1.00.
While the Company believes it is currently in compliance with these standards,
if the Company fails to continue to satisfy these requirements, its Common Stock
may be delisted from the NMS.
If the Company is delisted from the NMS, it may choose to list its
Common Stock on the Nasdaq SmallCap Market, the OTC Bulletin Board or some other
quotation medium, such as the Pink Sheets, depending on its ability to meet the
specific listing requirements. If the Company is delisted from the NMS, it is
unlikely that the Company would be able to have its Common Stock included for
quotation on the Nasdaq SmallCap Market. As a result, an investor would find it
more difficult to dispose of, or to obtain accurate quotations of the price of,
the Company's Common Stock.
Additionally, if the Company's Common Stock is not traded on a national
securities exchange or on Nasdaq, it may be subject to so-called "penny stock"
rules that impose additional sales practice and market-making requirements on
broker-dealers who sell or make a market in such securities. Consequently, the
delisting of the Company's Common Stock from the NMS could adversely affect the
ability or willingness of broker-dealers who sell or make a market in the
Company's Common Stock and
12
<PAGE>
the ability of investors of the Company's Common Stock to sell their securities
in the secondary market. Such delisting may also have the adverse effect of
reducing the visibility, liquidity and prestige of the Company's Common Stock.
Future Capital Needs; Uncertainty of Additional Financing; Possibility of
Significant Dilution
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. Developing
technology companies such as DTM typically need large amounts of capital to fund
growth. However, the Company's cash requirements may vary materially from those
now planned as a result of unforeseen changes that could consume a significant
portion of the available resources before that time.
Future operating results will depend, in part, on the Company's ability
to obtain and manage capital sufficient to finance its business. To the extent
that funds expected to be generated from the Company's operations are
insufficient to meet current or planned operating requirements or to maintain
its listing on the Nasdaq NMS, the Company will seek to obtain additional funds
through bank facilities, equity or debt financing, collaborative or other
arrangements with corporate partners and others from other sources. Additional
funding may not be available when needed or on terms acceptable to the Company,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. If adequate funds are not available, the
Company may be required to delay or to eliminate certain expenditures or to
license to third parties the rights to commercialize technologies that the
Company would otherwise seek to develop itself. In addition, in the event that
the Company obtains any additional funding, such financing may have a
substantially dilutive effect on the holders of the Company's securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
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, often from six to 24 months, 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 precluded, and may continue to preclude, the Company from
managing its inventories effectively from quarter to quarter. Further, a
majority of the sales of the Company's Sinterstation Systems occur at the end of
the quarter, often in the last weeks of the quarter. Accordingly, the Company's
ability to forecast the timing and amount of specific sales is limited, and the
deferral or loss of one or more significant sales could materially adversely
affect operating results in a particular quarter. The current 12-week
manufacturing cycle of the new Sinterstation System Model 2500plusTM negatively
impacts the Company's ability to control its inventories. 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. 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.
Emerging Rapid Prototyping Market
The market for rapid prototyping products and services, such as those
marketed by the Company, 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 CAD file describe a design and organizations who are not
currently 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
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<PAGE>
DTM will emerge as a market leader, or even a major market participant, as the
market evolves and matures.
Emerging Rapid Tooling Market
The market for rapid tooling products and services, such as those
marketed by the Company, is in an even earlier stage of development than rapid
prototyping. Participants in this market, including the Company, are moving to
address new applications, many of which may not yet be known or accepted by
potential users. The companies who use traditional-machining methods to make
tooling 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 bases 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 evolves and matures.
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. The principal worldwide competitors are 3D Systems Corporation and
Stratasys, Inc. EOS GmbH is a significant competitor outside of North America.
Competition has increased as a result of the introduction of new products or
product enhancements by these competitors and the entry into the industry by
other companies. Increased competition has in the past resulted, and may in the
future continue to result, in price reductions, reduced margins and loss of
market share, all of which have materially adversely affected the Company's
business and financial results.
Limited Product Company
The Company currently offers one model of Sinterstation Systems for
sale. The sale of Sinterstation Systems comprised 61% of revenues in the year
ended December 31, 1998 and 66% of revenues in each of the years ended December
31, 1997 and 1996. The remaining revenues were comprised of sales of powdered
sintering materials, spare parts and services to the installed base of
Sinterstation owners. 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 a soft
market, the Company's dependence 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.
Intellectual Property And Proprietary Rights
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.
In addition, 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. A competitors currently does and others also may practice
technology covered by DTM's patents or other legal or contractual protections
regardless of the fact that it is legally protected. Any litigation to enforce
the Company's intellectual property rights would be expensive, time-consuming,
may divert management resources and may not be adequate to protect the Company's
business. While DTM defends its intellectual
14
<PAGE>
property vigorously, there can be no assurance that it will be successful in its
various litigation 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. For
example, a court granted a temporary summary judgment against the Company in
1997, ruling that a customer had been given an implied personal license by DTM
to one of DTM's patented sintering materials. Although the summary judgment was
stayed in connection with a settlement agreement in this case, there can be no
assurance that intellectual property claims against the Company in the future
will not have a material adverse effect on the Company's business, financial
performance and results of operations.
Furthermore, 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.
Dependence on Key Personnel
The Company's success depends to a substantial extent on a relatively
few key management 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. 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, financial performance and results of operations.
International Operation
Revenues from customers located outside the U.S. represented 53%, 60%
and 50% of the Company's total revenues in 1998, 1997 and 1996, respectively.
The Company believes that continued growth and profitability will require
expansion of its sales in international markets. This expansion may be costly
and time-consuming and may not generate returns for a significant period of
time, if at all.
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. A significant and
increasing portion of international sales are denominated in currencies other
than U.S. dollars, thereby exposing the Company to gains and losses on non-U.S.
currency transactions. There can be no assurance that any hedging activity by
the Company to limit currency exchange risk will be successful in avoiding
exchange-related losses. Nor
15
<PAGE>
can there be 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
Proactive currently controls approximately 47.7% of the outstanding
Common Stock. At this percentage, Proactive could control elections of the
Company's Board of Directors and could control or substantially affect the
outcome of most matters submitted to the Company's shareholders for their vote
or consent. Proactive could also cause, prevent or delay a change in control of
the Company.
Product Liability
Products as complex as those offered by the Company may contain
undetected defects or errors when first introduced or as enhancements are
released that, despite testing by the Company, are not discovered until after
the product has been installed and used by customers, which could result in
delayed market acceptance of the product or damage to the Company's reputation
and business. The Company attempts to include provisions in its agreements with
customers that are designed to limit the Company's exposure to potential
liability for damages arising out of defects or errors in the Company's
products. However, the nature and extent of such limitations vary from customer
to customer and it is possible that such limitations may not be effective as a
result of unfavorable judicial decisions or laws enacted in the future. The sale
and support of the Company's products entails the risk of product liability
claims. Any such claim brought against the Company, regardless of its merit,
could result in material expense to the Company, diversion of management time
and attention, and damage to the Company's business reputation and its ability
to retain existing customers or attract new customers.
Year 2000 Compliance
The Company has begun an evaluation of its internal information
technology and non-information systems to assess Year 2000 compliance and has a
plan to bring all such systems into compliance by mid-1999. There can be no
assurance that the project will identify and address all significant Year 2000
problems in a prompt and cost-effective manner. Furthermore, the Company has not
adopted any formal contingency plan in the event its Year 2000 project is not
completed in a timely manner. A delay in completion of the Company's compliance
project or any unforeseen Year 2000 problems, if not fixed, could have a
material adverse effect on the Company's business financial condition and
results of operations.
Possible Issuance of Preferred Stock
The Company's Articles of Incorporation authorize the issuance of up to
3,000,000 shares of Preferred Stock, $0.001 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.
16
<PAGE>
Shares Eligible for Future Sale; Probable Resale of Common Stock Issued in
connection with Settlement of Shareholder Class Action Litigation
Sales of shares of Common Stock into the market by Proactive, employees
exercising options or recipients of shares to be distributed in settlement of
the Company's shareholder class action litigation escrow could cause a decline
in the price of such stock. The shares of the Common Stock owned by Proactive
will be freely tradable, subject to the resale limitations of Rule 144, as
promulgated by the U.S. Securities and Exchange Commission, that are applicable
to an affiliate of the Company, after a minimum of one year has elapsed from the
date on which Proactive acquired such shares. In addition, if the Company
proposes to register any of its securities under the Securities Act of 1933,
whether for its own account, for the account of other shareholders or for both,
Proactive is entitled to notice of such registration and is entitled to include
its shares of the Company's Common Stock in the registration.
DTM employees hold immediately exercisable options to purchase 417,000
shares of Common Stock. The Company registered the issuance and the sale of the
shares of Common Stock that would be issued upon exercise of options under the
stock option plans on a Form S-8 Registration Statements. As a result, the
Common Stock acquired by employees of DTM upon exercise of options outstanding
under the stock option plans will be freely tradeable (subject to compliance
with certain provisions of Rule 144, in the case of affiliates of the Company).
The non-cash component of the settlement of the shareholder class
action resulted in the issuance of 334,485 shares of the Company's Common Stock
into a settlement escrow on February 4, 1999. Such shares are freely tradable.
The escrow agent has advised the Company, that the escrow agent intends to sell
such shares prior to the planned May 1999 distribution to the recipients of the
settlement. Sales of Common Stock into the market by the escrow agent or, if
distributed, the recipients of the settlement could cause a decline in the price
of such stock.
Market Volatility
The Company's Common Stock is listed on the Nasdaq National Market
System. 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 Management's 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.
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27.1 - Current Financial Data Schedule for the quarter
ended March 31, 1999
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the
quarter ended March 31, 1999:
REPORT DATED JANUARY 19, 1999 - Item 1, Change in Control of
Registrant. On January 5, 1999, Proactive Finance Group, LLC, a Texas
limited liability company and The B.F.Goodrich Company, a New York
corporation, notified Registrant that they had entered into a Stock
Purchase Agreement dated as of January 2, 1999, which, if consummated,
would result in a change in control of Registrant.
REPORT DATED FEBRUARY 24, 1999 - Item 1, Change in Control of
Registrant. Registrant has been notified that on February 12, 1999, DTM
Acquisition Co., L.P., an affiliate of Proactive Finance Group, LLC,
acquired from The B.F.Goodrich Company ("BFGoodrich") all of the
3,157,190 shares (the "Goodrich Shares") of the Common Stock of
Registrant currently held by BFGoodrich, as well as all right, title
and interest in a $907,000 receivable due to BFGoodrich from
Registrant. As of February 12, 1999 and after giving effect to the
issuance of 334,485 shares of Common Stock pursuant to the terms of
settlement of the shareholder class action against Registrant styled
Danielson, et al. v. DTM Corporation, et al., Civ. No. 97-CI-16633, the
Goodrich Shares represent approximately 47.68% of the outstanding
Common Stock of Registrant.
18
<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: May 14, 1999
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 of Finance,
Treasurer and Secretary
19
<PAGE>
Index to Exhibits
-----------------
Number Description
- ------ -----------
27.1 Financial Data Schedule for the quarter ended March 31, 1999
20
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<PAGE>
<ARTICLE> 5
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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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 652
<SECURITIES> 0
<RECEIVABLES> 5,757
<ALLOWANCES> 413
<INVENTORY> 2,669
<CURRENT-ASSETS> 8,856
<PP&E> 8,510
<DEPRECIATION> 7,409
<TOTAL-ASSETS> 11,441
<CURRENT-LIABILITIES> 5,990
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0
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<TOTAL-LIABILITY-AND-EQUITY> 5,451
<SALES> 7,972
<TOTAL-REVENUES> 3,114
<CGS> 2,779
<TOTAL-COSTS> 3,694
<OTHER-EXPENSES> 3,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 381
<INCOME-TAX> 107
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