<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (fee required) For the fiscal year ended December 31, 1999 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)
<TABLE>
<S> <C>
Texas 74-2487065
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
1611 Headway Circle, Building 2, Austin, Texas 78754
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (512) 339-2922
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.0002 Par Value The Nasdaq SmallCap Market
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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.
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of February 25, 2000, the aggregate market value of the voting stock held by
non-affiliates (affiliates for these purposes only being directors, executive
officers and holders of more than 5% of the Registrant's Common Stock) was
approximately $13.6 million based upon the closing price of the Registrant's
Common Stock on such date, $3.88 per share as reported by the The Nasdaq Stock
Market. As of February 25, 2000, the Registrant had 7,020,066 outstanding shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Proxy Statement for the Registrant's Year 2000 Annual Meeting of
Shareholders are incorporated by reference in Part III.
<PAGE>
PART I
This Annual Report contains forward-looking statements, within the meaning
of the Private Securities Litigation Reform Act of 1995, with respect to the
financial condition, results of operations and business of DTM Corporation
("we," "DTM," the "Company" or the "Registrant"). 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: seasonality of customer buying habits,
principally a slower third quarter, may adversely affect stock prices; the
markets being developed by DTM may not develop; price reductions, reduced
margins and loss of market share may occur as a result of competition; quarterly
fluctuations in operating results and the difficulty in predicting results of
operations may adversely affect stock prices; additional capital sufficient to
finance the business may not be available, when needed, or if available might
cause significant dilution; the Company's dependence 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; the Company's intellectual
property and proprietary rights may not be valid or infringe the rights of
others; DTM has significant international operations with the inherent
exposures; actions by controlling shareholder could adversely affect stock
prices; potential liabilities could result from undetected errors or defects in
Company products; and the Company's stock 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. See "Item 7. Risk Factors That May Affect Future
Results and Safe Harbor Statement."
ITEM 1. BUSINESS
Overview
DTM Corporation designs, manufactures, markets and supports, on an
international basis, rapid prototyping and manufacturing systems and related
powdered materials based on proprietary selective laser sintering technology
initially developed by The University of Texas. This technology uses laser
energy to melt and fuse ("sinter") powdered material to create a solid object.
DTM Corporation has an exclusive worldwide license from The University of Texas
to practice selective laser sintering.
Historically, the Company's product line of Sinterstation Systems has been
used for rapid prototyping in the design, development and market introduction of
products. The Company's Sinterstation Systems are increasingly being deployed
for manufacturing applications. Small runs of production-quality parts or custom
parts can be efficiently made in the Sinterstation System, allowing manufactures
to better address low-volume/high value markets. Likewise, these markets can be
addressed with traditional casting or tooling made in the Sinterstation for
casting or molding processes to more quickly make short production runs of
plastic or metal parts. The Company's prototyping and manufacturing customers
represent a wide range of industries, including the automotive, aerospace,
medical, electronic, telecommunications, computer, appliance, footwear, toy and
power tool industries.
DTM offers customers solutions to meet the following challenges:
. Streamlining prototyping and manufacturing processes
. Verifying product designs
. Creating functional prototypes
. Generating production-quality samples or final parts
. Creating tooling used to manufacture 50 to 10,000, or more end use
parts.
1
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DTM's Selective Laser Sintering Technology
The Company's selective laser sintering process uses laser energy to sinter
powdered material to create solid objects from the powdered materials. The steps
to make a part, mold, pattern or tool in a Sinterstation System are as follows:
1. Start with an electronic file containing the product designer's three-
dimensional computer aided design ("CAD ") data for the part.
2. Transfer the file into the Sinterstation system.
3. Spread a layer of powdered material. As the process begins, a precision
roller mechanism automatically spreads a thin layer of powdered SLS
material across the build platform.
4. From the CAD data, a CO2 laser selectively draws a cross section of the
object on the layer of powder. As the laser draws the cross section, it
selectively "sinters" (heats and fuses) the powder creating a solid
mass that represents one cross section of the part.
5. Repeat. The system spreads and sinters layer upon layer, largely
unattended, until the object is completed.
6. Remove the part. Once the part is complete, remove it from the part
build chamber and blow away any loose powder.
7. Finish as desired. Use the part as is--or sand, anneal, coat, or paint
it before using it for its intended application. If this is a metal
part or tool, a furnace cycle is required to replace the plastic binder
with a metal infiltrant.
Functional Models and Prototypes from the Sinterstation System
Today, most of the Sinterstation Systems are primarily used to produce
functional prototypes for use in product development and design. Use of the
Company's Sinterstation Systems in this manner can significantly reduce the time
required to produce models and prototypes for testing actual product fit and
form, ergonomic design and functionality from what otherwise could be months or
weeks to days or, in some cases, hours. Functional models and prototypes are
produced directly from powdered plastic sintering materials with a DTM
Sinterstation System. We believe that selective laser sintering is the leading
rapid-prototyping technology in the world for the functional plastic prototype
application.
During the last year, Sinterstation Systems have been used to produce metal
functional prototypes from a metal powder. Because of this interest, DTM has
commenced the development of new and improved systems that are directly targeted
at the creation of metal functional prototypes from a range of metal powders and
is planning to first introduce such new products in late 2000.
Rapid Manufacturing of Low-volume/High-value Parts Directly in the Sinterstation
System
DTM's Sinterstation Systems are increasingly used for the manufacture of
small lot quantities of plastic or metal parts directly in a DTM Sinterstation
for use as final products by end users in both the consumer and industrial
markets. Existing materials marketed for use in the Sinterstation by DTM are
used to produce plastic and metal parts. Metal part production with a
Sinterstation requires processing with an additional furnace step.
Rapid Manufacturing of Parts with the Sinterstation and with Traditional
Manufacturing Methods
Sinterstation Systems are used to create tools, molds or patterns that are
an intermediate step in most manufacturing processes employed to manufacture
low-volume/high-value end use parts.
2
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DTM's investment casting pattern production capability offers foundries the
ability to automate the pattern-making step of traditional investment casting
processes to manufacture metal parts. Parts investment cast from patterns
produced with a DTM Sinterstation System are used in final product assemblies.
With the early 1999 introduction of CastForm, an improved pattern material,
investment casting is expected to become a more significant component of product
mix. A wide range of metal parts can be cast from CastForm patterns, including
titanium, magnesium, aluminum and stainless steel. Foundries to automate and
speed-up the manufacture of sand molds and cores also use DTM's Sinterstation
Systems. These sand cores and molds are used for the sand casting of metal
parts, primarily for use in automotive and heavy equipment applications.
DTM's tooling systems for plastic injection molding have been enhanced over
a number of years and currently offer the capability to quickly and efficiently
manufacture tooling for the injection molding of quantities of plastic parts.
Tools created in the Sinterstation System require an additional furnace
operation to ready them for use on injection molding machines. Tools created for
this purpose can be used to fabricate 50 to 10,000 parts, or more.
General
DTM Corporation was incorporated in 1987 and in 1990 became a subsidiary of
The B.F.Goodrich Company ("BFGoodrich"). In May 1997, DTM completed its initial
public offering ("IPO"). On February 12, 1999, an investment partnership of
independent investors affiliated with Proactive Finance Group, LLC ("Proactive")
acquired BFGoodrich's remaining interest in DTM. Proactive currently holds a
50.0% interest in DTM.
DTM's executive offices are located at 1611 Headway Circle, Building 2,
Austin, Texas 78754. The Company's telephone number is 512/339-2922 and web page
is www.dtm-corp.com. Information contained on DTM's Web site is not incorporated
----------------
into this Annual Report.
"RapidSteel," "Sinterstation," "SLS", and "RapidTool" are registered
trademarks of the Company in the United States. "DTM", "CastForm" "DuraForm" and
"SandForm" are unregistered trademarks of the Company in the United States.
"Somos" is a registered trademark of E.I. DuPont de Nemours and Company
("DuPont") in the United States. "Windows" is a registered trademark of
Microsoft Corporation in the United States.
Products and Services
DTM derives revenues from the sale and support of Sinterstation Systems and
the supply to the installed base of powdered sintering materials that are
consumed by these systems. DTM's sources of revenues and the percentage to total
revenues for the five years ended December 31, 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Machines and accessories $19,903 $17,928 $18,291 $18,829 $10,858
Sintering materials 8,652 6,240 4,239 3,241 1,774
Services and support 4,494 3,627 2,778 2,309 1,579
-------------------------------------------------------
Total revenues $33,049 $27,795 $25,308 $24,379 $14,211
=======================================================
Machines and accessories 60% 65% 72% 78% 77%
Sintering materials 26% 22% 17% 13% 12%
Services and support 14% 13% 11% 9% 11%
-------------------------------------------------------
Total revenues 100% 100% 100% 100% 100%
=======================================================
</TABLE>
3
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Machines and Accessories
Machines and accessories revenues include the base Sinterstation, material
handling equipment, secondary process equipment, documentation, software
licenses and licenses for using DTM-supplied powdered sintering materials. The
following table presents the cumulative number of Sinterstation Systems sold of
each of the three generations of Sinterstation Systems produced by the Company
through the end of each year in the five-year period ended December 31, 1999:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997 1996 1995
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sinterstation Model 2500/plus/ 87 21 - - -
Sinterstation Model 2500 84 83 54 13 -
Sinterstation Model 2000 136 132 127 119 85
------------------------------------------------
Cumulative Total 307 236 181 132 85
================================================
</TABLE>
DTM's third-generation Sinterstation 2500/plus/ system, first available in
August 1999, features the SLS selective laser sintering process, which includes
the following capabilities:
. Easy to use DTM application software for Windows NT Drag and drop part
placement for easy build setup;
. Part stacking and nesting capabilities for more productivity;
. Ability to create complex parts and features, with no support
structures required;
. Fast part build rate;
. Unattended operation;
. Fast part breakout and clean up;
. Part stability; and
. Fast, easy material conversions.
The Sinterstation is a flexible system that can be configured through
software for use with many different sintering powders, currently including
thermoplastic, foundry sands or metal sintering powders, addressing a range of
applications with a single system. The size and number of objects that can be
built in the build chamber varies depending on the part size, type of sintering
powder used and part configuration. Objects that are larger than the size of the
build chamber can often be built in pieces and then assembled. The build chamber
of the current Sinterstation measures 13" x 15" by 18" deep.
The Company has developed a library of application software designed to
control the selective laser sintering process. This software sets parameters and
directs the various components of the platform hardware based on the type of
material being used in the build process.
4
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Sintering Materials
The Company has developed a range of powdered materials for use in the
Sinterstation System to address a growing list of customer applications. Many of
these materials can be used in multiple customer applications. Uses of selective
laser sintering powders available through DTM for use in its Sinterstation
Systems are as follows:
<TABLE>
<CAPTION>
Product Design Applications Manufacturing Applications
------------------------------------ ----------------------------------------
Injection Injection
Functional Pattern Molding End Use Investment Sand Molding
Parts Masters Tools Parts Casting Casting Tools
----------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DuraForm X X X X X
(Polyamide Powder) X
DuraForm GF X X X X
(Glass Filled
Polyamide)
SOMOS 201 X X
(Electrometric Powder)
RapidSteel 2.0 X X X X
(Metal Powder)
Copper Polyamide X X X
(Polyamide/Copper Powder)
CastForm PS X X
(Styrene Powder)
SandForm X X
(SI & ZR II Foundry Powders)
</TABLE>
All of the above DTM sintering materials can be used in all models of
Sinterstation Systems that have been sold by the Company.
Services and Support
The Company maintains a staff of field service and support personnel in
Europe, Pacific Rim and North America. The field service organization is
responsible for the installations of new Sinterstation Systems and warranty
service and maintenance programs.
The Company also maintains a staff of applications support personnel in
Europe and North America. The Company's applications support personnel assist
customers with system operation, provide advice and assistance on building
unusually complicated parts, and keeping customers informed of changes and
advancements in the selective laser sintering technology and Sinterstation
System operating procedures.
The Company's customers may extend factory support beyond the limited
warranty period by purchasing various levels of service contracts from DTM. For
those customers choosing not to purchase
5
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full-service contracts, DTM also provides repair and maintenance services on a
time and materials basis and sells replacement parts and components for repairs
performed by customer personnel.
Research and Development
During 1999, 1998 and 1997, the Company expended approximately $2.9
million, $3.5 million and $4.9 million, respectively, for research and
development.
The Company's research and development effort focuses on improving core
technologies that are critical to future growth. These include development of
new powdered sintering materials, as well as improved powder handling
technology, laser beam delivery systems and thermal control systems. The
Company's development efforts are augmented by development arrangements with
research institutions, key customers, materials suppliers and hardware
suppliers.
The chart below depicts the history of material introductions of DTM's
sintering materials:
[CHART APPEARS HERE]
In addition to the specific developments depicted above, the research and
development efforts over the past three years have resulted in a doubling of
part accuracy and the build speed. At the same time, the system platform cost
has been reduced, which has allowed system gross margins to attain targeted
levels.
Longer term, the Company believes that the selective laser sintering
technology is capable of processing an even wider range of materials, thereby
improving the performance of the Company's products in current applications and
advancing the technology into new applications. The Company is developing new
materials for production of metal parts in a range of metal powders and for the
improvement of the metal mold inserts product line.
There can be no assurance that the Company will be able to develop these
new materials or that, if developed, that these materials can be successfully
marketed. The materials and specialized hardware technologies used in the
Sinterstation Systems are based upon materials and hardware developed for other
industries. The Company relies upon the materials research of companies in the
specialty chemicals industry for formulations of powdered materials and
suppliers of specialized hardware technologies to be used in the Company's
Sinterstation Systems. Should the Company find it necessary to internally
research, develop or manufacture its own unique powdered materials or
specialized-hardware technologies it could find the costs to be much higher.
6
<PAGE>
Customers
Manufacturers, service bureaus, universities, and military and defense
organizations purchase the Company's Sinterstation Systems. Commercial and
university-based service bureaus utilize rapid prototyping equipment and often
other equipment to provide services to other organizations involved in product
development. Much of the Company's historical growth has come from the sale of
products to service bureaus around the world. Many of our manufacturing
customers were first introduced to SLS selective laser sintering by these
service providers. The Company has also found that establishment of service
bureau activity has been instrumental to the introduction of new applications
and to the development of new sales territories.
The Company does not consider itself dependent on any particular customer.
In 1999, 1998 and 1997, no customer represented 10% or more of DTM's revenues.
Product Distribution; Foreign Operations
The Company distributes its products globally. The table below presents the
revenues derived from customers located in the area indicated for each of the
five years in the period ended December 31, 1999 (In thousands).
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
North America $ 15,059 $ 13,016 $ 10,064 $ 12,371 $ 9,445
Europe 12,254 10,407 8,615 7,822 2,155
Pacific Rim 5,736 4,372 6,629 4,186 2,611
---------------------------------------------------------------
Total revenues $ 33,049 $ 27,795 $ 25,308 $ 24,379 $ 14,211
===============================================================
North America 46% 47% 40% 51% 67%
Europe 37% 37% 34% 32% 15%
Pacific Rim 17% 16% 26% 17% 18%
---------------------------------------------------------------
Total revenues 100% 100% 100% 100% 100.0%
===============================================================
</TABLE>
The Company fields a direct sales force based in Germany, the United States
and the United Kingdom. The Company employs in-region sales personnel to manage
agent networks in other European countries and in the Pacific Rim countries. The
Company's independent agents are located in France, Italy, Portugal, Spain,
Sweden, Turkey, China, Japan, Singapore, South Korea, Taiwan and Brazil.
Marketing and Sales
The Company's marketing programs utilize a mix of seminars, trade shows,
advertising, direct mailings, literature, web presence, videos, press releases,
brochures and customer and application profiles to identify prospects that match
a typical Sinterstation System user profile.
An internal staff of application specialists is a key part of the marketing
organization effort to provide pre-sales support and to help existing customers
take advantage of the latest materials and techniques to improve part quality
and machine productivity. This group also leverages its customer contact to help
identify new application opportunities that utilize the Company's proprietary
selective laser sintering process.
The Company has also developed a telemarketing capability that enhances the
efficiency of it's sales management process by quickly identifying application
need and budget availability and by
7
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subsequently routing the qualified lead to the appropriate sales and/or
applications personnel within the Company.
The Company's web site has been extensively upgraded. With this improved
web site, we hope to provide prospective customers with valuable insights into
how our existing customers are using the technology to fill their needs,
including in-depth case studies and briefs. The Company intends to further
develop the web site as an essential mechanism to deliver selective laser
sintering knowledge and support to the Company's customers and customers of
rapid-prototyping service providers.
At the end of 1999, the Company's sales compensation plans were changed to
emphasize account management responsibility. Now all Company salesmen and agent
organizations are responsible for continuing business as well as new sales. In
addition, the transition to dedicated agent management is now complete in all
areas of the world. In support of these endeavors, the new management
information system that was implemented in 1999 will support the sales and
marketing teams by tracking customer usage of powdered sintering materials and
services.
Seasonality
North American capital spending patterns have contributed to relatively
stronger fourth quarter sales and sometimes to slower first quarter sales. The
Company typically experiences slowdowns in sales of Sinterstation Systems during
the third quarter as the result of capital spending patterns in the European
markets. The following table presents the quarterly revenues as a percentage of
calendar year revenues and, similarly, the three-year dollar weighted average:
<TABLE>
<CAPTION>
Quarter Ended
March 31 June 30 September 30 December 31
----------------------------------------------------------
<S> <C> <C> <C> <C>
1999 24% 23% 23% 30%
1998 21% 27% 21% 31%
1997 32% 27% 11% 30%
Three year average 25% 25% 19% 30%
</TABLE>
Manufacturing
The Company currently utilizes outside suppliers to produce certain of the
major sub-assemblies of the Sinterstation Systems. Procurement lead-time for the
major sub-assemblies of the Sinterstation Systems can be up to twelve weeks.
Assembly and final testing at the Company's site comprises a three-week cycle.
Due to the Company's long lead-time for major sub-assemblies, it places
orders for such parts on a forecast basis for scheduled deliveries of up to six
months ahead. The Company subcontracts for the manufacture of Sinterstation
System components, powdered sintering materials and accessories from single-
source, third-party suppliers, some of which are the only available suppliers.
During 1999, the Company implemented a new management information system
that includes materials requirements planning capabilities to improve the
information upon which it makes its purchasing decisions and schedules its
production. It is anticipated that manufacturing efficiencies will be generated
by this new system.
The Company believes that it will have sufficient manufacturing capacity to
fulfill demand for its Sinterstation Systems in 2000. See "Item 2. Properties."
8
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Intellectual Property
Researchers at The University of Texas initially developed the selective
laser sintering technology commercialized by DTM. The first selective laser-
sintering patent was issued to The University of Texas in 1989. Currently, the
Company has exclusive rights to 17 U.S. patents issued to The University of
Texas. The main University of Texas patents covering selective laser sintering
expire in 2006. While the original patents expire in 2006, the Company has been
granted patents for improvements to the original inventions. Because of this,
the Company believes that it will continue to enjoy certain protections at least
through 2010. DTM has an exclusive worldwide license from The University of
Texas to use the selective laser sintering technology, the term of which
continues until expiration of the patent rights that are the subject of the UT
License. The UT License includes the original patents plus a right of first
refusal for all improvements thereon. The UT License required that DTM
commercialize the technology, which DTM has done and continues to do in key
markets. Under the UT License, DTM is required to make royalty payments equal to
4% of applicable Net Sales (as defined in the License Agreement).
In 1999, the Company became the licensee under two U.S. patents, which
cover certain metal sintering powders developed by Rockwell Science Center, a
key customer. To date there have been no sales subject to royalties under this
license.
As of December 31, 1999, the Company owned 13 U.S. patents and had
exclusive licenses to 19 U.S. patents. As of the same date the Company owned or
had exclusive license under eight European patents. The Company owned or had
exclusive rights to 25 other issued international patents and had patent
applications pending. The technology covered by such patents included some or
all of the following:
. Fundamental elements of the selective laser sintering process;
. Related inventions on powder delivery, beam delivery, and
thermal control;
. Use of certain sintering powders in the selective laser
sintering process; and
. Certain post-processing steps for part finishing.
New technology developments are continuing and new patent applications are
anticipated. The Company has six trademarks registered with the U.S. Patent and
Trademark Office.
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
competitor currently does and others 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 litigation
in many countries. A failure by the Company to protect its intellectual property
position could have a material adverse effect on its business, financial
condition and results of operations.
Competition
The Company's principal competition for functional prototype and
manufacturing applications are the suppliers of traditional machining, milling
and grinding equipment. Such suppliers are numerous, both international and
regional in scope, and have mature product lines that compete with the Company
in essentially all of its served and targeted markets. Conventional machining
and milling techniques continue to be the most common methods by which plastic
and metal functional prototypes and metal tool inserts are manufactured.
Conventional pattern manufacturing techniques continue to be the most common
methods to
9
<PAGE>
custom manufacture metal parts and by which patterns are made for use in the
casting of metal functional prototypes.
The Company believes that selective laser sintering has become established
as the leading rapid-prototyping technology for the production of functional
plastic prototypes and that the Company has the largest installed base of
selective laser sintering machines in the world. The Company faces direct
competition for selective laser sintering equipment and materials outside the
United States from EOS GmbH of Planegg, Germany. The Company has brought patent
infringement actions against EOS in various international jurisdictions. See
"Item 3 Legal Proceedings." DTM Sinterstation systems are capable of processing
a range of materials, including plastic, metal, or sand material. Whereas, EOS
offers selective laser sintering machines that are designed to process a
specific class of materials - plastic, metal or sand material. The EOS sand and
polystyrene machines are offered with build chambers that are larger than those
in DTM's multiple-purpose machines. Under certain circumstances, EOS
successfully utilizes this size advantage of its machines to compete for
prospective customers.
3D Systems Corporation of Valencia, California offers rapid-prototyping
equipment based upon stereolithography that utilizes ultraviolet light sources
to polymerize liquid monomers into a solid object. Stratasys, Inc. of Eden
Prairie, Minnesota offers rapid prototyping equipment based upon plastic
extrusion. Both 3D Systems and Stratasys offer other equipment that is targeted
at the production of visualization models for product design applications. These
systems, which are based on inkjet technology, are generally lower in price and
targeted for engineering design groups within large companies. Both 3D Systems
and Stratasys have greater revenues and financial resources than DTM.
Executive Officers
The executive officers of the Company and their ages as of March 1, 2000
are as follows:
<TABLE>
<CAPTION>
Executive Officers Age Position
------------------ --- --------
<S> <C> <C>
John S. Murchison, III 59 Chief Executive Officer and President
Geoffrey W. Kreiger 50 Chief Financial Officer, Treasurer and Secretary
Kevin McAlea 41 Vice President, Marketing and Business Development
</TABLE>
John S. Murchison, III joined the Company as Chief Executive Officer and
President in September 1990. Prior to joining the Company, Mr. Murchison was
General Manager for the Pratt Group, a privately held Australian-based company
with worldwide holdings in packaging, insurance, banking and trading, from 1987
to 1990.
Geoffrey W. Kreiger joined the Company in December 1997 as Controller,
Treasurer and Secretary. On February 19, 1999, he was appointed Chief Financial
Officer. Prior to joining the Company, Mr. Kreiger was Executive Vice President
of Austin Software Foundry, Inc., from 1996 to 1997. Prior to that, he was
President, Datamarine Unit, and Chief Financial Officer and Director of
Datamarine International, Inc., a manufacturer of communications equipment and
consumer electronics, from 1988 to 1995. Mr. Kreiger is a Certified Public
Accountant.
Kevin McAlea, Ph.D. was appointed Vice President, Marketing and Business
Development in 1997. He had been Director of Process and Materials Research
since joining DTM in 1993. Before joining DTM, Dr. McAlea spent more than eight
years in materials research and development for General Electric Company. His
last position was managing the Polymer Physics Program at GE's Corporate
Research and Development Center.
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<PAGE>
Employees
At December 31, 1999, the Company had 113 employees, compared to 116 at the
end of 1998 and 113 at the end of 1997. At December 31, 1999, 78 employees were
located at the corporate offices in Austin, Texas, 10 employees were located at
other U.S. sales and services offices and 25 employees were located in sales and
service offices in Germany, the United Kingdom, Italy, Japan and Singapore. The
Company has no prior experience with a work stoppage and considers its relations
with its employees to be good.
ITEM 2. PROPERTIES
The Company currently leases a 50,000-square foot facility at 1611 Headway
Circle, Buildings 1 and 2, Austin, Texas. The Company also leases off-site sales
and/or service offices located in various areas of the United States and in
Tokyo, Japan, in Singapore, in Birmingham, England and in Hilden, Germany. DTM
expects that such facilities will be sufficient to support the Company's
operations through the remainder of 2000. See "Item 1. Business--Manufacturing."
ITEM 3. LEGAL PROCEEDINGS
The Company has initiated legal proceedings against EOS GmbH Electro
Optical Systems (EOS), to enforce its patent rights in various jurisdictions.
The plastic sintering patent infringement actions against EOS were begun in
France, Germany, and Italy in 1996. In 1997, the Company initiated action
against Hitachi Zosen Joho Systems, the EOS distributor in Japan. The Company
is pursuing injunctive relief and damages where applicable.
In September 1999, the Tokyo court ruled in favor of DTM and granted a
preliminary injunction prohibiting further importation and selling of the
infringing plastic sintering EOS machine.
The legal actions in the three European countries are proceeding. EOS had
challenged the validity of the plastic patents in the European Patent Office
(EPO). The principal patent has now survived the opposition appeals and the
infringement hearings have been re-started.
EOS informed the Company in 1998 that it might bring patent infringement
charges based on certain U.S. patents licensed from 3D Systems. EOS presented
the Company with a letter in January of 2000 again threatening to file
infringement charges against the Company based on these patents. Accordingly,
the Company filed for a declaratory judgment in the federal court in the United
States District Court for the Western District of Texas, Austin Division. The
complaint alleges DTM has been threatened with suit for U.S. patent infringement
by EOS and thus seeks a declaratory judgment that DTM does not infringe on any
valid claim of the U.S. patents as asserted by EOS. The Company believes that
its systems do not infringe any valid claims of these patents, which cover
liquid based photo-polymer systems. The Company is attempting to serve notice to
EOS of the existence of this suit.
There can be no assurance that the foregoing actions will not have a
disruptive effect upon the operations of the Company's business or that the
resolution of the foregoing actions will not have a material adverse effect upon
the Company. See `Item 1. Business--Intellectual Property.'
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS DURING THE FOURTH
QUARTER OF THE FISCAL YEAR COVERED BY THIS REPORT
None.
11
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Stock Prices
The Company's Common Stock is traded on the The Nasdaq SmallCap Market
under the symbol "DTMC." On January 11, 2000 the Company's listing was moved
from Nasdaq's National Market to Nasdaq's SmallCap Market. The high and low
transaction prices for each calendar quarter of the previous two years are set
forth below.
<TABLE>
<CAPTION>
Stock Prices
High Low
---- ---
<S> <C> <C>
1998
----
First Quarter $2.000 $1.250
Second Quarter $2.625 $1.375
Third Quarter $2.000 $1.000
Fourth Quarter $1.375 $0.563
1999
----
First Quarter $2.125 $0.813
Second Quarter $2.000 $0.875
Third Quarter $1.813 $1.188
Fourth Quarter $1.750 $0.750
</TABLE>
As of February 25, 2000, the Company had 7,020,066 shares of Common Stock
outstanding, which were held by approximately 1,300 beneficial owners,
represented by 59 shareholders of record.
Dividend Policy
The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate that it will pay dividends in the foreseeable future.
The Company intends to reinvest any earnings in the development and expansion of
its business. Furthermore, the Company is now restricted from paying dividends
by the terms of its loan agreement with a bank and it expects that this
restriction will be part of future borrowing arrangements.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in conjunction
with the Financial Statements required by Item 8 and Management's Discussion and
Analysis of Financial Condition and Results of Operation included in Item 7.
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues $ 33,049 $ 27,795 $ 25,308 $ 24,379 $ 14,211
Cost of sales 15,892 16,094 14,721 14,445 9,676
Gross margin 51.9% 42.1% 41.8% 40.7% 31.9%
Selling, general and administrative 12,091 11,387 10,579 9,980 6,620
Research and development 2,865 3,538 4,871 4,292 3,521
Provision for litigation settlement - 1,700 - - -
Stock compensation - - 2,927 - -
Interest expense, net 96 48 325 1,066 530
Net gain on sale of assets 129 424 - - -
Cost of discontinued registration - - - 752 -
Tax expense (benefit) 515 30 (827) (1,667) (2,138)
-----------------------------------------------------------
Net income (loss) $ 1,719 $ (4,578) $ (7,288) $ (4,489) $ (3,998)
===========================================================
Net income (loss) per common share -
Basic and diluted $ 0.25 $ (0.73) $ (1.45) $ (1.38) $ (1.23)
===========================================================
Weighted-average number of shares:
Basic 6,785 6,287 5,034 3,243 3,243
Diluted 6,858 6,287 5,034 3,243 3,243
Balance Sheet Data (at period end):
Working capital $ 4,765 $ 1,858 $ 4,964 $ 1,622 $ 236
Total assets 13,681 12,306 17,548 17,897 10,639
Total debt - - 175 15,809 9,076
Total liabilities 6,358 7,475 8,310 26,382 14,557
Shareholders' equity (deficit) 7,323 4,831 9,238 (8,485) (3,918)
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the information set forth under "Selected Financial Data" and the Company's
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 Annual Report on Form
10-K 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,"
"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. See the discussion at the beginning of Part I.
Overview
DTM develops, manufactures, and markets advanced rapid prototyping and
manufacturing systems that include a Sinterstation 2500/plus/. All Sinterstation
systems utilize a process called SLS selective laser sintering and any of
several plastic or metal SLS materials to create three-dimensional objects from
CAD designs. Leading manufacturers throughout the world, in a range of
industries, use Sinterstation systems to rapidly create production-quality
parts, functional prototypes, and tooling for their products.Sinterstation users
can realize numerous benefits as they develop and manufacture products:
. Ability to efficiently produce low-volume/high-value products or to
even customize every product to the customer's exact needs;
. Time savings;
. Lower development costs, more efficient testing;
. Capability to prototype and test more design options; and
. The competitive advantage associated with bringing new products to
market faster.
Additionally, product designers can design complex part shapes that could
not be fabricated under conventional methods. Unlike competing technologies and
systems that are used primarily to create visualization models, DTM's systems
address industry's growing need for rapidly produced, durable, testable
prototypes and end-use parts.
14
<PAGE>
Today, DTM's Sinterstation Systems are primarily used to create functional
plastic prototypes. We believe that SLS selective laser sintering is currently
the leading rapid-prototyping technology in the world for the functional plastic
prototype application. In 1999, DTM licensed metal sintering powder technology
developed by Rockwell Science Center, a key customer. DTM intends to begin to
introduce a range of metal sintering materials in late 2000. We believe that the
metals-based functional prototype market could ultimately be as large for DTM as
its current plastics-based functional prototype market.
A significant and growing use of Sinterstation systems is for manufacturing
low-volume/high-value parts - either directly in the Sinterstation or in
conjunction with traditional casting and molding processes.
An Expanding Base of Selective Laser Sintering Capacity
The ultimate users of Sinterstation capacity are, primarily, manufacturing
companies - either directly owned or contracted through service providers. In
1999, 40% of Sinterstation sales were directly to manufacturing companies and
they now represent 35% of cumulative system sales. The other system sales have
been to the service providers and, to a lesser extent, to universities for
research and education. Approximately 66%, 69% and 60% of the systems sold in
1999, 1998 and 1997, respectively, were to new customer sites. Approximately 25%
of our customer sites now have multiple DTM Sinterstation systems in operation.
By the end of 1999, cumulative sales of DTM Sinterstation systems reached
307 systems at 227 customer sites located in manufacturing centers worldwide.
One rapid-prototyping service bureau deploys six Sinterstation Systems at one
site. One of the world's largest aircraft manufacturers deploys nine
Sinterstation Systems in total at multiple facilities and plants. Many of the
world's automobile manufacturers deploy from one to six Sinterstation Systems
each in total at their design centers and plants.
Machine and Accessories Revenues
Revenues derived from machines and accessories were $19.9 million in 1999,
an increase of 11% from 1998, which represented a decline of 2% from 1997. Such
revenues have not kept pace with unit growth due to decreased prices and the
decline in the sale of accessories.
In 1999, DTM shipped a record 73 Sinterstation Systems, including used and
demonstration units. This represents a total unit increase of 20% compared to
the number of units shipped in 1998, which represented a 15% increase over the
number of units shipped in 1997. Production units comprised 90%, 82% and 83% of
these totals in 1999, 1998 and 1997, respectively.
Machine and accessories revenues per unit sold, both production and
previously owned, averaged approximately $284,000, $332,000 and $345,000 in
1999, 1998 and 1997, respectively, which do not include sintering powders or
services included in the system packages. The Company has experienced a trend
toward lower pricing on its production units, of approximately 5% per year, as
it has attempted to broaden its customer base. The Company offers turnkey
solutions, which include, in addition to the Sinterstation System, third-party
accessories, such as furnaces and material handling equipment. However, there
has been a trend for customers to order the accessories directly from the
manufacturers. Additionally, the quantity of accessories included with a system
is dependent on whether the order is an addition to an existing customer site or
a new site in need of the full compliment of accessory equipment. Volume pricing
is available with multiple-machine orders and the Company anticipates that
multiple-machine orders could become significant as the Company targets more
manufacturing-oriented applications. In the coming year, the Company anticipates
a further 5% price decrease in the average machine and accessories revenue per
sale.
Machine and accessories cost of goods sold per unit, both production and
previously owned, averaged approximately $151,000, $214,000 and $211,000 in
1999, 1998 and 197, respectively. From 1998 to 1999, the average cost was
positively impacted by the August 1998 introduction of the Sinterstation
15
<PAGE>
2500/plus/ and, to a lesser extent, fewer sales of accessories and by the 1998
inventory write down. The Company continues to focus on reducing the average
cost of its machines and accessories and believes that further reductions are
possible in the coming year that might offset the anticipated decease in sales
prices. With these costs the average gross margins on machines and accessories
were 47.1%, 35.6% and 38.9% in 1999, 1998 and 1997, respectively.
Continuing Business
The continuing business revenues are becoming more significant to the
Company. The percentage of revenues derived from sales of powdered sintering
materials and services represented 40%, 35% and 28% of total revenues in 1999,
1998 and 1997, respectively.
By the end of 1999, the installed base of Sinterstation Systems had grown
to 307 systems in the field. The average for 1999 was 272, an increase of 30%
from 1998, which represented a 33% increase from 1997. The market for powdered
sintering materials and services is the installed base of Sinterstation Systems.
We calculate DTM's installed base to be the cumulative number of Sinterstation
sales less trade-ins and other re-acquired systems. Sales and service records
indicate that substantially all of these machines are still in use. Over 84% of
the installed base of units has been in the field less than five years.
Revenues derived from the sale of sintering materials were $8.7 million in
1999, an increase of 39% from 1998, which was represented a 47% increase from
1997. Sintering materials revenues averaged $31,900 over the average installed
base in 1999, which represented a 6.7% increase from the average in 1998, which
represented a 10.3% increase from the average in 1997. DuraForm was introduced
in 1997 as a premium high-performance material, which, due to its enhanced
recycling properties, requires lower quantities to operate than the previous
products. DuraForm and the nylon products that it completely replaced in 1999
accounted for over 75% of materials shipments in each year in the three years
ended December 31, 1999. As the changeover to the DuraForm products was
virtually complete in early 1999, growth in revenues in the coming year from
sintering materials should tend to follow the growth in the average installed
base and for this reason average sintering materials per unit in the field may
be more constant.
Revenues derived from services were $4.5 million in 1999, an increase of
24% from 1998, which was a 31% increase from 1997. Services and support
revenues averaged $16,600 over the average installed base in 1999, which
represented a 4.6% decrease for the average amount for 1998, which represented a
2.2% decrease from the average amount in 1997. In late 1999, the Company entered
into an arrangement with one of its sales representatives in a Pacific Rim
country to share responsibility and revenues for front-line support in that
country. The Company may make other such arrangements. Future growth in the
Company's services and support revenues may continue to trail the growth in the
installed base and, correspondingly, average service and support revenues for
DTM may continue to decline.
Revenue Recognition Policies Summary
The Company recognizes revenue only when finished products are shipped,
title and risks of ownership have transferred to the buyer, the Company's
remaining obligations are insignificant and collection of the related receivable
is probable. The Company recognizes service and support revenues when performed
or in the case of service contracts over the contract period. Deferred revenue
equal to the estimated cost of warranty is recorded on each system sale and
recognized as service and support revenue over the warranty period.
16
<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>
Year ended December 31,
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Revenues:
Products 86.4% 87.0% 89.0%
Service and support 13.6 13.0 11.0
-----------------------------------------------
100.0 100.0 100.0
Gross Profit:
Products margin 54.6 42.6 43.1
Service and support margin 34.9 38.9 31.2
-----------------------------------------------
Gross profit 51.9 42.1 41.8
-----------------------------------------------
Operating expenses:
Selling, general and administrative 36.5 41.0 41.8
Research and development 8.7 12.7 19.2
Provision for litigation settlement - 6.1 -
Stock compensation (EAP) - - 11.6
-----------------------------------------------
45.2 59.8 72.6
-----------------------------------------------
Operating income (loss) 6.7 (17.7) (30.8)
Other income (expense):
Interest expense, net (0.3) (0.2) (1.3)
Gain on sale of assets, net 0.4 1.5 -
-----------------------------------------------
0.1 1.3 (1.3)
-----------------------------------------------
Income (loss) before income tax 6.8 (16.4) (32.1)
Income tax (expense) benefit (1.6) (0.1) 3.3
-----------------------------------------------
Net income (loss) 5.2% (16.5)% (28.8)%
===============================================
</TABLE>
Revenues. Revenues increased 18.9% to $33.1 million in 1999 as compared to
an increase of 9.8% to $27.8 million in 1998 and an increase of 3.8% to $25.3
million in 1997. The increases in 1999 and 1998 were primarily due to increased
unit volumes in each year and the introduction of a premium material in late
1997. Machine and accessories revenues realized per unit sold were lowered from
the previous year in 1999 and 1998. Continuing revenues, powdered sintering
materials and services derived from the installed base, grew faster than the
growth in the installed base in 1999 and 1998.
The Company's 1999 international revenues were $18.0 million, or 54.4%, of
total revenues, compared to 53.2% and 60.2% of total revenues in 1998 and 1997,
respectively. Germany and Japan were the only foreign countries from which more
than 10% of the Company's revenues were derived. Revenues derived from German
customers amounted to 17%, 23% and 27% of total revenues in 1999, 1998 and 1997,
respectively. Revenues derived from Japanese customers amounted to 10% of total
revenues in 1999 and were less than 10% in 1998 and 1997. Except for sales
occurring in Germany, Japan and the United Kingdom, the Company's international
revenues were primarily denominated in U. S. dollars. Beginning in 2000, sales
are offered throughout the European Economic Union Countries in euros instead of
U. S. Dollars. The Company does not hedge all of its foreign currency exchange
rate risk. However, the effect of foreign exchange rate fluctuations on exchange
transactions and translation of foreign operations did not have a significant
impact on the Company's operating results in any period. However, in 1999, 1998
and 1997
17
<PAGE>
DTM did experience downward pressure on its international prices as the U.S.
dollar strengthened significantly against most European and Asian currencies. If
this strengthening continues, the Company expects continued downward pressure on
the Company's sales prices in the international markets.
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 was $17.2 million, or 51.9%, of revenue, in
1999, compared to $11.7 million, or 42.1% of revenues in 1998, and $10.6
million, or 41.8% of revenues in 1997. The gross profit increases in 1999 and
1998 were due to sequentially higher worldwide unit volume each year. The
introduction of a cost reduced platform in late 1998 and a premium material in
late 1997 affected the 1999 and 1998 gross margins positively. The 1998 gross
margin was affected negatively by an inventory write down of $675,000 in the
second quarter of 1998 caused by product obsolescence.
The Company believes there is a risk that gross margin percentages may
decline in the face of the strong U.S. dollar. Other factors, including pricing
pressures internationally and 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 $12.1 million or 36.5% of revenues in 1999, compared
to $11.4 million or 41.0% of revenues and $10.6 million or 41.8% of revenues in
1998 and 1997, respectively. The increased spending in both 1999 and in 1998 was
primarily related to the increased costs associated with sales and sales support
staffs and commission expense resulting from higher sales levels. The decreases
in percentage of revenues spent was primarily attributable to cost containment
programs and to more efficient utilization of the overhead infrastructure.
Selling, general and administrative expense may vary as a percentage of revenues
in the future.
Research and Development Expense. Research and development expense
decreased by 19.0% to $2.9 million in 1999, from $3.5 million in 1998 and $4.9
million in 1997. As a percentage of revenues, research and development expense
was 8.7%, 12.7% and 19.2% in 1999, 1998 and 1997, respectively. The higher 1997
expense levels were, primarily, due to outsourcing costs associated with the
initial design and prototype cost associated with multiple significant new
product development projects that commenced in 1997 and culminated in 1998 with
the introduction of several new material systems and the new Sinterstation Model
2500/plus/. Also, over this period the Company has increasingly relied on
external partnerships to develop it's powdered sintering materials and has
realized efficiencies with this approach.
In 2000, the Company plans to focus on specific development initiatives
directed at manufacturing applications and direct metal parts. The Company plans
to increase its spending on research and development in 2000 to approximately
$3.7 million. This planned $800,000 increase in spending is primarily related to
increased outsourcing costs and to one-time prototype costs. Should the planned
increase in revenues not support the planned increase in research and
development planned at a level below 10% of revenues, attempts will be made to
delay the planned investments. 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 affected by other factors.
Provision For Litigation Settlement. In 1998, DTM settled the shareholder
class action lawsuit pending against it. The charge to its second quarter
statement of operations in the amount of $1.7 million consisted of $3.0 million,
the value of the settlement, and $200,000 in other costs, net of the insurance
recovery of $1.5 million.
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
18
<PAGE>
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 was $96,000, $48,000 and $325,000
for 1999, 1998 and 1997, respectively. The increase from 1998 to 1999 reflects
the need to finance growth. The decrease in interest expense from 1997 to 1998
resulted from the repayment of substantially all outstanding indebtedness in May
1997 from the proceeds of the IPO.
Gain on Sale of Assets. In the first quarter of 1999 and the fourth and
third quarters of 1998 the Company sold used Sinterstation Model 2500 and Model
2000 systems under an 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 $129,000 and $424,000 on those
sales in 1999 and 1998, respectively.
Income Taxes. In 1999, the Company provided for income taxes at a 23.1%
effective rate. As a result of the February 1999 change in control of DTM,
utilization of net operating loss carry forwards will be subject to additional
annual limits of approximately $500,000.
In 1997, as a result of its tax sharing arrangement with BFGoodrich, its
then controlling shareholder, the Company was allocated an income tax benefit of
$827,000. In May 1997, BFGoodrich's ownership interest fell below 80% and such
benefits were no longer available to the Company. In the fourth quarter of 1997,
the Company recorded the final accounting for this tax allocation arrangement.
At December 31, 1999, DTM had approximately $8.7 million of federal net
operating loss carry forwards. These net operating loss carry forwards begin to
expire in 2002. DTM has not recognized any benefit from the future use of loss
carry forwards for these periods due to uncertainties regarding the realization
of deferred tax assets based upon the taxable earnings history.
Net Income (Loss). The Company had net income of $1.7 million in 1999. The
$3.9 million improvement from 1998 to 1999 was primarily due to increased
product and service revenues, improved gross margins on a cost-reduced platform
and powdered sintering materials, reduced spending on research and development
and control of other operating expenses.
The Company had net losses, excluding special charges, of $2.2 million and
$5.2 million in 1998 and 1997, respectively. The $3.0 million improvement from
1997 to 1998 was primarily due to increased product and service revenues,
improved gross margins on Sinterstation systems, reduced research and
development expense, reduced interest expense and gains from the sale of
internally used Sinterstation Systems.
Operating results for 1998 included a special charge of $1.7 million for
the estimated cost of settling the shareholder class action litigation and
$675,000 of an inventory write-off relating to new product introductions. The
operating results for 1997 were adversely affected by a special charge of $2.9
million arising from the conversion of stock appreciation rights by DTM
employees in connection with the Company's IPO in May 1997. Additionally,
operating results for 1997 were benefited from $827,000 of tax credits allocated
from the Company's parent at that time. The allocation of income tax benefits
ended with the Company's IPO in May 1997. Net loss, including special charges,
for 1998 was $4.6 million, compared to $7.3 million in 1997.
Earnings per share were $0.25 in 1999. In 1998 and 1997, net loss per share
was $0.73 and $1.45, respectively
19
<PAGE>
Selected Quarterly Results
The following table sets forth certain unaudited quarterly results of
operations for the three-month periods ended March 31, 1998 through December 31,
1999. This information has been presented on substantially the same basis as the
audited consolidated financial statements appearing elsewhere herein. The
unaudited quarterly results of operations should be read in conjunction with the
Company's audited consolidated financial statements and related notes. The
quarterly financial information presented herein should not be relied upon as an
indication of future quarterly performance (In thousands, except per share
amounts).
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------
<S> <C> <C> <C> <C>
1999:
Revenues $ 7,972 $ 7,599 $ 7,636 $ 9,842
Cost of sales 3,694 3,547 4,001 4,650
Gross margin 53.7% 53.3% 47.6% 52.8%
Selling, general and administrative 3,278 2,913 2,654 3,246
Research and development 662 788 706 709
Interest expense, net 7 21 26 42
Net gain on sale of assets 50 79 - -
Tax expense 107 114 68 226
------------------------------------------------
Net income $ 274 $ 295 $ 181 $ 969
================================================
Net income per common share - basic and diluted $ 0.04 $ 0.04 $ 0.03 $ 0.14
================================================
1998:
Revenues $ 5,834 $ 7,479 $ 5,902 $ 8,580
Cost of sales 3,427 5,113 3,381 4,173
Gross margin 41.3% 31.6% 42.7% 51.4%
Selling, general and administrative 2,747 2,604 2,876 3,160
Research and development 988 855 850 845
Provision for litigation settlement - 1,700 - -
Interest expense, net 6 14 10 18
Net gain on sale of assets - - 258 166
Tax expense - - - 30
------------------------------------------------
Net income (loss) $ (1,334) $ (2,807) $ (957) $ 520
================================================
Net income (loss) per common share - basic $ (0.21) $ (0.45) $ (0.15) $ 0.08
================================================
</TABLE>
20
<PAGE>
The table below sets forth the components of revenues and cumulative
systems sold for the same quarterly periods (In thousands, except units):
<TABLE>
<CAPTION>
Quarter ended
---------------------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------------------
<S> <C> <C> <C> <C>
1999:
Machines and accessories $ 4,961 $ 4,521 $ 4,454 $ 5,967
Sintering materials 2,030 2,136 2,114 2,372
Services and support 981 942 1,068 1,503
---------------------------------------------------------
Total revenues $ 7,972 $ 7,599 $ 7,636 $ 9,842
=========================================================
Cumulative units 252 270 285 307
1998:
Machines and accessories $ 3,748 $ 5,276 $ 3,549 $ 5,355
Sintering materials 1,222 1,315 1,514 2,189
Services and support 864 888 839 1,036
---------------------------------------------------------
Total revenues $ 5,834 $ 7,479 $ 5,902 $ 8,580
=========================================================
Cumulative units 191 206 216 236
</TABLE>
Liquidity and Capital Resources
During 1999, operating activities provided $2.5 million in net cash. In
1998 and 1997, operating activities used $1.3 million and $3.0 million in net
cash, respectively. The 1998 cash flows from operating activities would have
been a positive $600,000 had it not been for settlement and legal expenditures
of $1.9 million on the two lawsuits that were settled in 1998. In 1998,
inventory levels returned to normal levels from the higher levels experienced in
1997, as result of a soft North American market in 1997.
Accounts receivable, less allowance, represented approximately 58 days of
quarter sales at December 31, 1999, compared to 54 and 59 days at December 31,
1998 and 1997, respectively. Inventory, less allowance, represented
approximately 51 days on hand at December 31, 1998, compared to 75 and 119 at
December 31, 1998 and 1997, respectively.
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,
prior to 1998, for rental purposes. Capital expenditures amounted to $1.2
million, $1.7 million and $1.8 million in 1999, 1998 and 1997, respectively.
Proceeds from sales of capital equipment, principally demonstration systems,
were $281,000 in 1999 and $1.4 million in 1998.
For 2000, the Company has planned for approximately $1.2 million in capital
expenditures. This includes additions to internally used demonstration systems
to replace units coming off operating leases in 2000 and expansion of our
demonstration part capacity to support growth. The Company intends to fund this
additional investment from operations.
DTM has a $2.5 million credit facility with Silicon Valley Bank. The terms
of this credit facility are interest at prime plus 2% per annum on the
outstanding loan balance and the application of all customer remittances against
any outstanding loans. The corporate assets of DTM collateralize this agreement.
At December 31, 1999, the borrowing base exceeded the loan limit of $2.5 million
and there was no outstanding loan balance.
In the second quarter of 1999, DTM repaid a liability of approximately
$909,000 to DTM Acquisition Company, L.P., which had been acquired from
BFGoodrich. DTM satisfied this liability by making a payment of $454,274 in cash
borrowed under the new credit facility with Silicon Valley Bank and by issuing
352,167 additional shares of DTM common stock.
21
<PAGE>
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, 2000. However, there can be no
assurance that this will be the case.
Effect of Inflation
The Company's business operations are subject to inflationary pressures.
Due to the competitive environment in this industry, there can be no assurance
that the Company will be able to increase prices in the event of increased labor
and material costs.
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." The Company plans to adopt the new Statement effective
January 1, 2000. The Statement requires all 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 does not anticipate that the adoption of this Statement will
have a significant effect on its results of operations or financial position.
However, the Statement could increase volatility in earnings and comprehensive
income.
Year 2000 Computer Problem
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to 2000 was
effective to prevent any problems. Computer experts have warned that there may
still be residual consequences of the change in centuries and any such
difficulties could result in a decrease in sales of our products, an increase in
allocation of resources to address Year 2000 problems of our customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by our customers due to
such Year 2000 problems.
Introduction of the Euro
The Company's financial systems have been converted to full euro readiness.
The Company is able to denominate agreements and hedges in euros as necessary.
Additionally, the Company has recently introduced euro pricing in each of the
European Economic Monetary Union countries where the common currency will become
the official currency in 2001.
22
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND SAFE HARBOR STATEMENT
Emerging Rapid Prototyping and Rapid Manufacturing Markets
The market for rapid prototyping products and services, such as those
marketed by the Company, remains 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 three-dimensional CAD file describe a design and organizations
who are not currently using three-dimensional CAD are not, generally, potential
customers for rapid prototyping products and services. Significant education of
the end user in both three-dimensional 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.
The markets for rapid manufacturing products and rapid tooling products,
such as those marketed by the Company, are in an even earlier stage of
development than rapid prototyping. Participants in these markets, 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 casting
methods for metal parts and traditional-machining methods to make injection-
molding 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 manufacturing technologies and rapid tooling technologies
will evolve to the point that the perceived value will overcome those obstacles.
Competition
The market for rapid prototyping systems is 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 design and manufacturing applications that the Company's products
address applications are currently primarily accomplished using machining,
milling and grinding equipment. The suppliers of such traditional equipment are
large and numerous. Large amounts of capital have already been expended on such
traditional equipment and there exists a cultural bias to its use in many
manufacturing organizations. The principal worldwide competitors in rapid
prototyping are 3D Systems Corporation and Stratasys, Inc. EOS GmbH Electro
Optical Systems is an additional 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.
The Company believes that it may eventually face competition in the supply
of powdered sintering materials and services to Sinterstation users and that
this competition will likely be based upon suitability and upon price. The
Company already experiences competition for technical services to its installed
base as many of its customers have technical skills and resources to effectively
support the equipment without factory assistance. The Company may also face
external competition for such technical services from other service
organizations and such competition for services will likely be based upon
suitability and price.
Quarterly Fluctuations in Operating Results
In prior years, the Company's revenues and operating results have varied at
times 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. The Company's combined procurement and
manufacturing cycle is currently three months. Furthermore, new product
introductions, seasonality of customer buying patterns and other factors can
cause fluctuations in quarterly results. In prior years, these fluctuations have
precluded, and may preclude again, the Company from managing its inventories
effectively from quarter to quarter.
23
<PAGE>
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.
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. The Company
currently plans to fund its self through operations.
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 not sufficient
to meet current or planned operating requirements, the Company will seek to
obtain additional funds through bank credit 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".
Limited Product Company
The Company currently offers one model of Sinterstation Systems for sale.
The sale of Sinterstation Systems comprised the majority of annual revenues for
the Company. The Company's Sinterstation Systems are priced in excess of
$250,000 and a new purchaser must also consider the on going operating expense
commitment associated with the acquisition of such a system. 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 do so again.
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 aggressively seeks patent protection for its
selective laser sintering technology. 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.
The Company is currently involved in significant litigation with EOS GmbH
Electro Optical Systems in Germany, France, Italy and Japan, with regard to the
Company's proprietary rights. If DTM is unsuccessful in their litigation, its
competitive position may be further harmed in those countries.
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.
24
<PAGE>
A European competitor, EOS, currently does and others also may practice
technology believed by DTM to be covered by DTM's patents or other legal or
contractual protections regardless of the fact that it may be legally protected.
Any litigation to enforce the Company's intellectual property rights would be
expensive and time-consuming or adequate to protect the Company's business.
While DTM defends its intellectual 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.
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 European
competitor, EOS, and the Company has filed suit against EOS seeking a
declaratory judgment that it does not infringe any valid claims of the patents
being asserted.
The University of Texas System licenses certain key intellectual property
used in the selective laser sintering process to the Company. 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.
During 1999, customer demand for DuraForm, the Company's most popular
powdered sintering materials, came close to exceeding the supply. The Company
has worked with its supplier to modify the suppliers manufacturing process to
increase the amounts available to DTM's customers for 2000. However demand may
increase again to use up the increased supply.
25
<PAGE>
International Operations
Revenues from customers located outside the U.S. represented the majority
of the Company's total revenues in the recent three years. The Company believes
that continued growth and profitability would 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 against a foreign
competitor 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 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 50.0% 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.
Shares Eligible for Future Sale
Sales of shares of Common Stock into the market by Proactive or employees
exercising options could cause a decline in the price of such stock. Of the
shares of the Common Stock owned by Proactive, approximately 3,157,190 are
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. In addition, the Company has granted Proactive certain demand
registration rights and 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 443,299
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
26
<PAGE>
stock option plans will be freely tradable (subject to compliance with certain
provisions of Rule 144, in the case of affiliates of the Company).
Market Volatility
The Company's Common Stock is listed on The Nasdaq SmallCap Stock 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to quantitative and qualitative disclosure regarding
market risk is set forth under the captions "Marketing and Customers" in Item 1
and in Management's Discussion and Analysis of Financial Condition and Results
of Operations and the risk factors under Item 7 above. Such information is
incorporated herein by reference.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 29
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 30
Consolidated Balance Sheets as of December 31, 1999 and 1998 31
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31,
1999, 1998 and 1997 33
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 34
Notes to Consolidated Financial Statements 35
</TABLE>
28
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
DTM Corporation
We have audited the consolidated balance sheets of DTM Corporation and its
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards generally accepted in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DTM Corporation
and its subsidiaries at December 31, 1999 and 1998, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with standards generally accepted
in the United States.
ERNST & YOUNG LLP
Austin, Texas
January 21, 2000
29
<PAGE>
DTM Corporation
Consolidated Statements of Operations
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Revenue:
Products $ 28,555 $ 24,168 $ 22,530
Service and support 4,494 3,627 2,778
----------------------------------------------------
33,049 27,795 25,308
Cost of sales:
Products 12,968 13,878 12,809
Service and support 2,924 2,216 1,912
----------------------------------------------------
15,892 16,094 14,721
----------------------------------------------------
Gross profit 17,157 11,701 10,587
Operating expenses:
Selling, general and administrative 12,091 11,387 10,579
Research and development 2,865 3,538 4,871
Provision for litigation settlement - 1,700 -
Stock compensation (EAP) - - 2,927
----------------------------------------------------
14,956 16,625 18,377
----------------------------------------------------
Operating income (loss) 2,201 (4,924) (7,790)
Other income (expense):
Interest expense, net (96) (48) (325)
Gain on sale of assets - net 129 424 -
----------------------------------------------------
33 376 (325)
----------------------------------------------------
Income (loss) before income taxes 2,234 (4,548) (8,115)
Income tax (expense) benefit (515) (30) 827
----------------------------------------------------
Net income (loss) $ 1,719 $ (4,578) $ (7,288)
====================================================
Net income (loss) per common share - basic and
diluted $ 0.25 $ (0.73) $ (1.45)
====================================================
Weighted-average number of shares outstanding-
basic 6,785,125 6,286,851 5,034,183
====================================================
Weighted-average number of shares
outstanding-diluted 6,857,975 6,286,851 5,034,183
====================================================
</TABLE>
See accompanying notes.
30
<PAGE>
DTM Corporation
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 1,505 $ 429
Accounts receivable, less allowance of $420 in 1999 and $416 in
1998 6,377 5,186
Inventory 2,652 3,456
Prepaid expenses and other 589 262
--------------------------
Total current assets 11,123 9,333
Property, plant and equipment:
Sinterstation systems 2,248 2,857
Other machinery and equipment 4,191 4,051
Leasehold improvements 1,442 1,428
Office furniture 389 382
--------------------------
8,270 8,718
Accumulated depreciation and amortization 6,864 7,330
--------------------------
1,406 1,388
Capitalized software development costs, net of accumulated
amortization of $864 in 1999 and $872 in 1998 418 629
Patent and license fees, net of accumulated amortization of $792 in
1999 and $496 in 1998 734 956
--------------------------
Total assets $13,681 $12,306
==========================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998
----------------------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,219 $ 3,090
Due to shareholder - 909
Deferred service revenues 2,028 1,830
Other deferred revenues 100 200
Customer deposits - 155
Employee and agent compensation 1,502 891
Accrued litigation settlement - stock portion - 400
Income taxes 509 -
----------------------------
Total current liabilities 6,358 7,475
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value; 3,000,000 shares authorized;
none issued or outstanding - -
Common Stock, $.0002 par value: 60,000,000 shares authorized;
6,973,503 and 6,286,851 issued and outstanding at December 31,
1999 and 1998, respectively
1 1
Additional paid-in capital 54,016 53,161
Accumulated deficit (46,616) (48,335)
Accumulated other comprehensive income (loss) (78) 4
----------------------------
Total shareholders' equity 7,323 4,831
----------------------------
Total liabilities and shareholders' equity $ 13,681 $ 12,306
============================
</TABLE>
See accompanying notes.
32
<PAGE>
DTM Corporation
Consolidated Statements of Shareholders' Equity
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated Other
Additional Paid- Comprehensive
Common in Capital Accumulated Income (Loss)
Shares Stock Deficit Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,243,391 $ 1 $ 28,019 $ (36,469) $ (36) $ (8,485)
Net loss - - - (7,288) - (7,288)
Translation adjustment - - - - (131) (131)
--------
Comprehensive loss (7,419)
--------
Conversion of shareholder debt 187,500 - 1,500 - - 1,500
Issuance of common stock in
public offering 2,852,191 - 20,707 - - 20,707
Stock compensation (EAP) - - 2,927 - - 2,927
Exercise of common stock options 3,769 - 8 - - 8
------------------------------------------------------------------------------------
Balance at December 31, 1997 6,286,851 1 53,161 (43,757) (167) 9,238
Net loss - - - (4,578) - (4,578)
Translation adjustment - - - - 171 171
--------
Comprehensive loss (4,407)
--------
------------------------------------------------------------------------------------
Balance at December 31, 1998 6,286,851 1 53,161 (48,335) 4 4,831
Net income - - - 1,719 - 1,719
Translation adjustment - - - - (82) (82)
--------
Comprehensive loss 1,637
--------
Issuance of common stock 334,485 400 400
Conversion of shareholder debt 352,167 455 455
------------------------------------------------------------------------------------
Balance at December 31, 1999 6,973,503 $ 1 $ 54,016 $ (46,616) $ (78) $ 7,323
====================================================================================
</TABLE>
See accompanying notes.
33
<PAGE>
DTM Corporation
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 1,719 $ (4,578) $ (7,288)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,447 1,929 2,341
Provision for doubtful accounts 55 - 148
Provision for obsolescence 128 675 -
Provision for litigation settlement - noncash portion - 400 -
Stock compensation (EAP) expense - - 2,927
Gain on disposal of equipment (129) (424) -
Changes in assets and liabilities provided by
(used in) operating activities:
Accounts receivable (1,246) (205) 2,076
Inventory 676 1,708 (1,004)
Prepaid expenses and other assets (327) 284 286
Accounts payable and accrued expenses (871) (1,773) (3,097)
Due to shareholder - - 295
Deferred service revenues 198 226 130
Other deferred revenues (100) 200 -
Customer deposits (155) 155 -
Income taxes 509 - -
Employee and agent compensation 611 132 234
--------------------------------------------
Net cash provided by (used in) operating activities 2,515 (1,271) (2,952)
Investing activities
Purchases of machinery and equipment (959) (1,339) (889)
Capitalized software development costs (151) (231) (268)
Patent and license expenditures (74) (152) (620)
Proceeds from sale of machinery and equipment 281 1,376 -
--------------------------------------------
Net cash used in investing activities (903) (346) (1,777)
Financing activities
Proceeds from public stock offering - - 20,707
Proceeds from exercise of stock options - - 8
Proceeds from short-term borrowings - - 371
Repayments of short-term borrowings - (175) (965)
Draws on line of credit from financial institutions 3,875 1,800 800
Repayment on line of credit from financial institutions (3,875) (1,800) (11,840)
Repayments of shareholder debt (454) - (2,500)
--------------------------------------------
Net cash provided by (used in) financing activities (454) (175) 6,581
Effect of foreign exchange rate changes (82) 171 (131)
--------------------------------------------
Net change in cash 1,076 (1,621) 1,721
Cash at beginning of year 429 2,050 329
--------------------------------------------
Cash at end of year $ 1,505 $ 429 $ 2,050
============================================
Noncash items:
Issuance of common stock in settlement $ 400 $ - $ -
Conversion of shareholder debt to equity $ 455 $ - $ 1,500
</TABLE>
See accompanying notes.
34
<PAGE>
DTM Corporation
Notes to Consolidated Financial Statements
December 31, 1999
1. Organization and Significant Accounting Policies
Organization
DTM Corporation (the "Company") designs, develops, manufactures, markets and
supports, on an international basis, rapid prototyping, manufacturing and
tooling systems and related powdered sintering materials and services. The DTM
Corporation Sinterstation Systems and powdered sintering materials are based on
proprietary and patented selective laser sintering technology. DTM Corporation
was formed in November 1987, became a subsidiary of a large specialty chemicals
company in 1990 and completed its initial public offering ("IPO") in May 1997.
On February 12, 1999, the large specialty chemical company, referred to above,
divested its remaining 47% interest in DTM to a partnership of independent
investors, who increased their holdings during 1999 and at December 31, 1999
held a 50.3% interest.
The consolidated financial statements include the accounts of DTM and its
subsidiaries, both of which are wholly-owned sales and service operations
domiciled in Europe. All significant inter-company accounts and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventory
Inventories are carried at the lower of cost or market, with cost determined
using the first-in, first-out ("FIFO") method.
Long-lived Assets
The Company evaluates the carrying values of long-lived assets to determine if
the facts and circumstances suggest that they may be impaired. If this review
indicates that long-lived assets will not be recoverable, as determined based on
the undiscounted cash flows of the entity over the remaining amortization
period, the carrying value of the long-lived assets will be reduced accordingly.
No impairment adjustments have been necessary in 1999 or in previous years.
Property, Plant and Equipment
Internally used Sinterstation Systems and other machinery and equipment are
stated at cost. Depreciation is computed on the straight-line method over the
useful life of each asset, which range from three to five years. Leasehold
improvements are amortized on the straight-line method over the life of the
related lease or the useful life of the respective asset, whichever is shorter.
35
<PAGE>
Capitalized Software Development Costs
The Company's principal products include a software component. Costs incurred in
the development of software, once technological feasibility has been established
but prior to general release to customers, are capitalized. Technological
feasibility is established when a product design and working model of the
software product have been completed and when the completeness of the working
model and its consistency with the product design have been confirmed by
testing. Amortization is provided on a product by product basis at the greater
of amortization based on the estimated revenues of the products or the straight-
line amortization over their estimated economic lives of not more than three
years. DTM capitalized software development costs of $151,000, $231,000 and
$268,000 during 1999, 1998 and 1997, respectively. Amortization expense of
capitalized software development costs is included in cost of product sales in
the consolidated statements of operations and amounted to $362,000, $355,000 and
$363,000 during 1999, 1998 and 1997, respectively.
Patent and License Fees
Patent and license fees represent the costs associated with filing and
maintaining patent applications and obtaining, maintaining and defending rights
under patents under which DTM operates. DTM capitalized patent and license fees
of $74,000, $152,000 and $620,000 during 1999, 1998 and 1997, respectively.
These fees are amortized for accounting purposes over a five-year estimated
economic useful life utilizing the straight-line method and are included in
selling, general and administrative expenses.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with FASB Statement No. 52, Foreign Currency Translation.
All balance sheet accounts have been translated using the exchange rates in
effect at the balance sheet date. Income statement amounts have been translated
using the average exchange rate for the year. The gains and losses resulting
from changes in exchange rates from year to year have been reported in other
comprehensive income. The effect on the statements of income of transaction
gains and losses is insignificant for all years presented.
Foreign Currency Forwards
DTM enters into export sales of Sinterstation Systems to third-party customers
that are denominated in foreign currencies. To hedge against exposures to
changes in foreign currency exchange rates on such committed sales, the Company
enters into foreign currency exchange contracts. This is currently done only on
a sale-by-sale basis and only for contract periods that match the expected
foreign currency collections from the sale.
A forward foreign exchange contract obligates the Company to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates or to make an equivalent U.S. dollar payment equal to
the value of such exchange. For contracts that are designated and effective as
hedges, discounts or premiums (the difference between the spot exchange rate and
the forward exchange rate at inception of the contract) are recognized in
revenues when the sale is recorded. Unrealized gains and losses from foreign
currency exchange contracts resulting from changes in the spot exchange rate are
included in the cumulative translation adjustment account as part of other
comprehensive income.
Recognition of Revenue
Revenues from the sale of products are recognized when title has transferred to
the customer, when the Company's remaining obligations are insignificant and
when collectibility of the related receivable is probable, which is not before
shipment. The Company defers an amount from each Sinterstation System
36
<PAGE>
sale for warranty and preventive maintenance service. 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 initial service and warranty period, which is typically twelve
months. Revenue related to installation services and training services are also
deferred until performed.
Upon expiration of the initial service and warranty period discussed above, the
Company offers for sale to its customers an annual maintenance contract. The
deferred revenues from such maintenance contracts are recognized ratably as
service and support revenue over the related support period.
Net Income Per Share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128). Basic net income per share is
computed by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding during the period. The
computation of diluted net income per share is similar to basic net income per
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potentially
dilutive common shares had been issued.
For 1999, 1998 and 1997, the numerator used in the calculation of net income
(loss) per share is the same for the calculation of basic and diluted. For 1999,
1998 and 1997, the weighted average shares outstanding were 6,857,975, 6,286,851
and 5,034,183, respectively. Common stock equivalents for 1999, which are the
effect of in-the-money options, were 72,850. There were no securities with a
dilutive effect in 1998 or 1997.
Accumulated Other Comprehensive Income
The sole component of accumulated other comprehensive income for all periods
presented was currency translation adjustments.
Advertising Costs
The cost of advertising is expensed as incurred. The Company incurred $787,000,
$675,000 and $482,000 in advertising costs during 1999, 1998 and 1997,
respectively.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair market value of the shares at the date of
the grant. The Company accounts for stock option grants in accordance with the
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"), and related Interpretation. The Company has chosen this method because the
Company believes that the alternative fair value accounting provided for under
FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock option grants equals the market price of the underlying
stock on the date of the grant, no compensation expense is recognized.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company expects to adopt the new
Statement effective January 1, 2000. The Statement will require the Company to
recognize all derivatives on the balance sheets at fair value. The Company does
not anticipate that the adoption of this Statement will have a significant
effect on its results of operations or financial position.
37
<PAGE>
2. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts related to its trade
accounts receivable. The activity in this allowance account for the years ended
December 31, is as follows (in thousands):
<TABLE>
<CAPTION>
Balance at Charges to Costs
Beginning of and Expenses Balance at End of
Period Write-Offs Period
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $640 $148 $293 $495
1998 495 - 79 416
1999 416 55 51 420
</TABLE>
3. Inventory
Inventory at December 31 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
Raw materials and purchased parts $ 2,050 $ 1,809
Finished goods 834 1,776
------------------------
2,884 3,585
Reserve for inventory obsolescence (232) (129)
------------------------
$ 2,652 $ 3,456
========================
</TABLE>
4. Patent and License Agreements
On December 3, 1987, the Company entered into a patent license agreement with
the Board of Regents of The University of Texas System, whereby the Company is
licensed to make, have made and sell products utilizing the selective laser
sintering technology. In consideration of rights granted in the license
agreement, the Company issued 20,442 shares of its common stock to The
University of Texas System.
The agreement provides for royalty payments in the amount of 4% of the Company's
net sales for products covered by the license agreement (gross receipts net of
commissions, returns, freight, discounts and sales taxes). Royalty expense,
included in cost of sales, was $630,000, $618,000 and $552,000 during 1999, 1998
and 1997, respectively.
5. Financing Arrangements
In June 1999, DTM entered into a $2.5 million credit facility with a bank. This
line of credit is collateralized solely by the Company's assets. Borrowings
under this line of credit bear interest at the bank's prime rate plus 2% and
mature in June 2000. All customer remittances are applied against any
outstanding borrowings. The borrowing base includes a percentage of eligible
domestic and international trade accounts receivable and finished goods
inventories of the parent company. The inclusion of inventories in the borrowing
base is further limited to $500,000. At December 31, 1999, the borrowing base
exceeded the loan limit of $2.5 million and there was no outstanding loan
balance.
This line of credit requires the Company to maintain at least $3.2 million in
tangible net worth. At December 31, 1999, the Company's tangible net worth, as
defined in the loan agreement, was approximately $6.2 million. This line of
credit prohibits the payment of dividends.
Interest paid was approximately $96,000 in 1999, $32,000 in 1998 and $471,000 in
1997. Amounts paid for interest to the Company's then controlling shareholder
were approximately $118,000 in 1997.
38
<PAGE>
6. Commitments and Contingencies
DTM leases facilities and equipment under noncancelable operating leases. Total
rent expense incurred under these leases was approximately $462,000, $462,000
and $378,000 during 1999, 1998 and 1997, respectively. Future minimum payments
under these leases are as follows (in thousands):
2000 $ 432
2001 275
2002 275
2003 275
2004 313
Thereafter 625
---------
$ 2,195
=========
As of December 31, 1999 and 1998, the Company had purchase commitments for
inventory totaling approximately $3,300,000 and $1,800,000, respectively.
In the ordinary course of business, the Company becomes involved in legal
proceedings and claims. Beginning in 1996, the Company initiated patent
infringement litigation in France, Germany and Italy against a competitor and
against one of that competitor's customers. In 1997, the Company also initiated
patent infringement litigation in Japan against the competitor's distributor in
the Pacific Rim. The Company seeks injunctive relief plus damages. Hearings have
begun in each of these lawsuits. In September 1999, the Japanese court issued
preliminary injunction barring sale of the competitor's infringing product in
Japan. It is not possible at this time to predict the outcome of these
proceedings.
In January 2000, the Company initiated litigation in the U.S. courts seeking a
declaratory judgement against this competitor that the Company does not infringe
any valid claims of the U.S patents as asserted by the competitor. It is not
possible at this time to predict the outcome of this proceeding. However, an
adverse ruling could have a material adverse effect on the Company's business
and financial performance.
7. Common Stock
At December 31, 1999, the Company had reserved 1,258,619 shares of common stock
for issuance in connection with the 1999 Stock Option Plan (907,755 shares) and
for exercise of outstanding options issued in connection with the IPO in May
1997 under a prior plan (350,864 shares). The 1999 Stock Option Plan was
approved by Shareholders at the May 25, 1999 Annual Meeting.
On February 4, 1999, the Company issued 334,485 shares of common stock in
satisfaction of the final $400,000 portion of the 1998 settlement of the
shareholder class action litigation.
On June 11, 1999, the Company issued 352,167 shares of common stock in
satisfaction of a $455,000 portion of its Due to Shareholder obligation.
Beginning in April 1999, the Company has retained an affiliate of its majority
shareholder to perform certain financial advisory services. These related party
fees and are included in selling, general and administrative expenses and
amounted to $108,000 in 1999.
39
<PAGE>
8. Financial Instruments
Off-Balance Sheet Risk
The Company enters into forward exchange contracts to hedge certain firm sales
commitments denominated in foreign currencies. The purpose of the Company's
foreign currency hedging activities is to protect the Company from risk that the
eventual dollar cash flows resulting from the sale of products to international
customers will be adversely affected by changes in exchange rates. At December
31, 1999, the Company had forward exchange contracts, all having maturities of
less than three months, to exchange various foreign currencies for U.S. dollars
in the amount of $421,000. The table below summarizes, by currency, contractual
amounts of the Company's forward exchange contracts at December 31, 1999 (in
thousands):
Forward Unrealized
Contracts Gain/(Loss)
--------------------------
Currency:
British Pound $ 421 $ (3)
-------------------------
Total $ 421 $ (3)
=========================
There were no realized gains or losses deferred from hedging firm sales
commitments at December 31, 1999, 1998 or 1997.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on foreign exchange contracts, but the Company does not
anticipate nonperformance by any of these counterparties. The amount of such
exposure is generally the unrealized gains in such contracts.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant credit
risk consist principally of cash investments and trade accounts receivable.
The Company maintains cash with various financial institutions. These financial
institutions are located in the United States, Germany and the United Kingdom.
The Company performs periodic evaluations of the relative credit standing of
those financial institutions that are considered in the Company's investment
strategy.
Concentrations of credit risk with respect to trade accounts receivable is
somewhat limited due to the number of entities comprising the Company's customer
base and the diverse industries in which they operate. However, the value of a
single sale of a Sinterstation System is material to the Company. It is the
Company's policy to perform a credit evaluation at the time of each sale of a
Sinterstation System. The Company relies upon customer provided deposits and
financial statements, reports from external credit reporting agencies and
comfort letters from financial institutions providing customer finance. The
Company also employs Uniform Commercial Code liens on certain equipment sold
into North America, and confirmed letters of credit on certain export sales.
Fair Value of Financial Investments
The Company believes that the carrying amount of its financial instruments,
including cash, accounts receivable, accounts payable, short-term debt and
forward currency exchange contracts, approximates fair value. Fair value for
forward currency exchange contracts is estimated based on quoted market prices
for similar instruments.
40
<PAGE>
9. Stock Option Plans
Options that are granted under the 1999 Stock Option Plan are exercisable at
market price at the date of the grant. The options, subject to termination of
employment, expire ten years from the date of grant, are not transferable other
than on death, and are generally exercisable in three annual installments
commencing one year from the date of grant.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of the grant using a
Black-Scholes option pricing model. The following weighted average assumptions
were used in these calculations for 1999, 1998 and 1997, respectively: risk-free
interest rate of 6%; no expected dividends; a volatility factor of the expected
market price of the Company's common stock of .60 to .73 and a weighted-average
expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $ 1,517 $ (4,834) $ (8,048)
===============================================
Pro forma net income (loss) per common share -
basic $ 0.22 $ (0.77) $ (1.60)
===============================================
</TABLE>
41
<PAGE>
A summary of the Company's stock option activity, and related information for
the years ended December 31, follows (options in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 635 $ 3 610 $ 4 - $ -
Granted at fair market value 383 1 182 2 97 8
Granted below fair market value - - - - 507(a) 2
Granted above fair market value - - - - 117(a) 14
Exercised - - - - (4) 2
Canceled (81) 4 (157) 3 (107) 12
------------------------------------------------------------------
Outstanding at end of year 937 $ 2 635 $ 3 610 $ 4
=================================================================
Options exercisable at year-end 443 $ 3 417 $ 3 553 $ 3
Weighted-average fair value of
options granted during the year:
Granted at fair market value $ 1 $ 2 $ 4
Granted below fair market value - - 6(a)
Granted above fair market value - - 3(a)
</TABLE>
(a) Represents options issued at the time of the IPO pursuant to the terms of
the stock appreciation rights agreements. Due to the terms and conditions
of the SAR Plan, the SARs or stock options then outstanding were accounted
for by the Company as compensation expense in the amount of $2,927,000 to
record the appreciation in the value of the SARs through the date of the
IPO. The IPO triggered the change in control provision of the SAR Plan.
Thus, all outstanding SARs were converted into vested options that are
exercisable for ten years from the date of the original SAR grant.
A summary of information about stock options outstanding and exercisable at
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted-Average
Weighted-Average Remaining Contractual
Exercise Price Options Outstanding Life Options Exercisable
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1.25 - $ 1.50 375,100 9.3 -
$ 2.00 - $ 2.25 488,550 8.0 369,885
$ 8.00 - $ 9.00 53,000 7.4 53,000
$ 13.00 - $ 16.00 20,414 7.4 20,414
-------------- -------------
937,064 443,299
============== =============
</TABLE>
10. Management Incentive Plan
In January 1996, the Company's Board of Directors approved a DTM Corporation
Management Incentive Plan (the "MIP Plan"). The MIP Plan provides for the grant
of incentive compensation to key management employees who have the potential to
positively influence the performance of the Company as a reward for levels of
performance above the ordinary performance standards compensated by base salary.
42
<PAGE>
Under the MIP Plan, each participant is assigned a "cash bonus target" of 10 to
50% of base salary and the Compensation Committee of the Board of Directors
creates personal and corporate performance targets, as well as minimum
thresholds. If the minimum thresholds are met, the bonus payable will be between
50 and 200% of the participant's cash bonus target. In 1999, the expense related
to the MIP Plan was $282,000. No expense was recognized in connection with the
MIP Plan in 1998 or 1997.
11. Unusual Charges
In connection with the settlement of the shareholder class action lawsuit
against the Company, the Company charged operations $1,700,000 in the second
quarter of 1998. In connection with the 1997 IPO, the Company incurred a
one-time noncash stock compensation expense of approximately $2,927,000 as a
result of previously outstanding stock appreciation rights converting into
immediately vested stock options at exercise prices below the market value of
the common stock. This charge was recorded in May 1997 (see Note 9).
12. Income Taxes
Pretax income (loss) for the years ended December 31 was taxed in the following
jurisdictions (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Domestic $ 1,875 $ (4,963) $ (7,727)
Foreign 359 415 (388)
-----------------------------------------------
$ 2,234 $ (4,548) $ (8,115)
===============================================
</TABLE>
Significant components of the provision for income tax expense (benefit) are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 362 $ - $ -
Allocation from then parent - - (849)
Foreign 121 30 22
State 32 - -
-----------------------------------------------
$ 515 $ 30 $ (827)
===============================================
</TABLE>
Significant components of the Company's deferred tax liabilities and assets are
comprised of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards (for periods prior to October 31,
1990) $ 1,346 $ 1,569
Net operating loss carryforwards subsequent to
May 22, 1997 1,877 2,195
Stock options 774 774
Book over tax depreciation and amortization 465 370
Deferred revenue 705 693
Allowance for doubtful accounts 127 144
Other 178 102
--------------------------
Total deferred tax assets 5,472 5,847
Valuation allowance for deferred tax assets (5,472) (5,847)
--------------------------
Net deferred tax assets $ - $ -
==========================
</TABLE>
43
<PAGE>
The Company's provision for income taxes differs from the expected tax expense
(benefit) amount computed by applying the statutory federal income tax rate of
34% to income before income taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $ 760 34.0% $ (1,592) 35.0% $ (2,759) 34.0%
Non-deductible settlement expenses - - 626 (13.8)% - -
Net operating loss (used) not
utilized (205) (9.2)% 1,086 (23.9)% 1,880 (23.2)%
Other - net (40) (1.7) (90) 2.0 52 (0.6)%
-----------------------------------------------------------------
$ 515 23.1% $ 30 (0.7)% $ (827) 10.2%
=================================================================
</TABLE>
The Company has established a valuation allowance equal to the net deferred tax
asset due to uncertainties regarding the realization of deferred tax assets. The
valuation allowance decreased by approximately $375,000 during the year ended
December 31, 1999.
During the period from October 31, 1990 to May 21, 1997, the Company was
included in the consolidated federal tax return of its then controlling
shareholder. The Company recorded the tax benefit allocated to it by its then
controlling shareholder during that period, which credited the Company with a
tax benefit approximating the benefit derived from the consolidation of the
Company. Such benefits were paid to the Company on a current basis. As a result
of the IPO, in May 1997, the then controlling shareholder's ownership interest
fell below 80% and such benefits are no longer available to the Company. Based
on the tax sharing agreement, if the then controlling shareholder loses part of
the tax benefit of any losses previously utilized or has to report additional
income as the result of a federal tax audit of the Company, the Company will be
required to reimburse any additional taxes paid.
DTM has net operating loss carryforwards totaling approximately $3,637,000 for
federal income tax purposes that were incurred from inception to October 31,
1990. These carryforwards expire in the years 2002 to 2004. In addition, the
Company has net operating loss carryforwards totaling approximately $5,073,000
for federal income tax purposes that were incurred from May 1997 to December
1998. These carryforwards begin to expire in the year 2012. Although available
to the Company, these carryforwards are subject to significant annual
limitations due to changes in the Company's ownership.
44
<PAGE>
13. 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. Identifiable assets are those
assets that can be directly associated with a particular geographic area. The
following is a summary of geographic area data for the years ended December 31
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Revenues from external customers:
North America $ 15,059 $ 13,015 $ 10,064
Europe 12,254 10,407 8,615
PacRim 5,736 4,373 6,629
----------------------------------------------
$ 33,049 $ 27,795 $ 25,308
==============================================
Long-lived assets by area:
North America $ 2,298 $ 2,438 $ 3,608
Europe 260 535 524
PacRim - - -
----------------------------------------------
$ 2,558 $ 2,973 $ 4,132
==============================================
</TABLE>
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company is set forth in
the Proxy Statement to be delivered to shareholders in connection with the
Company's Annual Meeting of Shareholders to be held during 2000 (the "Proxy
Statement") under the heading "Nominees for Director," which information is
incorporated herein by reference.
The name, age and position of each executive officer of the Company is
set forth under the heading "Executive Officers of the Registrant" in Item 1 of
this report, which information is incorporated herein by reference.
The information required by Item 405 of Regulation S-K is set forth in
the Proxy Statement under the heading "Compliance with Section 16(a) of the
Securities Exchange Act of 1934", which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning management compensation and transactions with
management is set forth in the Proxy Statement under the heading "Executive
Compensation and Other Information," which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial
owners and management is set forth in the Proxy Statement under the heading
"Ownership of Securities," which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the heading "Executive
Compensation and Other Information," which information is incorporated herein by
reference.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. Financial Statements:
The financial statements filed as a part of this report are listed in
the "Index to Consolidated Financial Statements and Financial Statement
Schedules" at item 8.
2. Financial Statement Schedules:
None. Schedules have been omitted since the required information is not
present, or not present in amounts sufficient to require submission of
the schedule, or because the information is included in the above
listed financial statements.
3. Exhibits:
The exhibits filed as part of this report are listed under "Exhibits"
at subsection (c) of this Item 14
(b) Reports on Form 8-K:
No reports on Form 8-K were filed on behalf of the Registrant during
the last quarter of the Company's 1999 calendar year.
(c) Exhibits:
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Amended and Restated Articles of Incorporation of Registrant.
(Filed as exhibit 3.1 to Registration Statement on Form S-1, dated
May 21, 1996 (Reg. No. 333-04173) (" Form S-1") and incorporated by
reference hereto)
3.2 Amended and Restated Bylaws of Registrant. (Filed as exhibit 3.2 to
Registration Statement on Form S-1 and incorporated by reference
hereto)
4.1 Form of Stock Certificate of Registrant. (Filed as exhibit 4.1 to
Registration Statement on Form S-1 and incorporated by reference
hereto)
4.2 Registration Rights Agreement between DTM Corporation and DTM
Acquisition Company, L.P., dated June 11, 1999. (Filed as exhibit
4.2 to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999 and incorporated by reference hereto)
10.1 DTM Corporation Equity Appreciation Plan. (Filed as exhibit 10.1 to
Registration Statement on Form S-1 and incorporated by reference
hereto)
10.2 Form of Supplemental Phantom Stock Appreciation Rights Agreement.
(Filed as exhibit 10.2 to Registration Statement on Form S-1 and
incorporated by reference hereto)
10.3 Patent License Agreement between DTM Corporation and the Board of
Regents, The University of Texas, effective as of December 3, 1987.
(Filed as exhibit 10.5 to Registration
47
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
Statement on Form S-1 and incorporated by reference hereto)
10.4 Supplement to Patent License Agreement between DTM Corporation and
the Board of Regents, The University of Texas, dated March 20,
1992. (Filed as exhibit 10.6 to Registration Statement on Form S-1
and incorporated by reference hereto)
10.5 Amendment to Patent License Agreement between DTM Corporation and
the Board of Regents of The University of Texas, dated as of
October 27, 1994 (Filed as exhibit 10.13 to Registration Statement
on Form S-1 and incorporated by reference hereto)
10.6 Agreement between DTM Corporation and John S. Murchison, III, dated
October 9, 1997. (Filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1997 and
incorporated by reference hereto)
10.7 Lease Agreement between DTM Corporation and Glenborough Properties,
L.P. for facilities in Austin, Texas,. dated as of March 26, 1998.
(Filed as exhibit 10.12 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated by reference
hereto).
10.8 1999 Management Incentive Plan adopted March 17, 1999. (Filed as
exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1999 and incorporated hereto)
10.9 DTM 1999 Employee Stock Incentive Plan adopted by the Shareholders
on May 25, 1999. (Filed as exhibit 99.1 to the Company's
Registration Statement on Form S-8 filed November 5, 1999)
10.10 Loan and Security Agreement (Domestic) between DTM Corporation and
Silicon Valley Bank, dated June 8, 1999. (Filed as exhibit 10.21 to
the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999 and incorporated hereto)
10.11 Loan and Security Agreement (EXIM) between DTM Corporation and
Silicon Valley Bank, dated June 8, 1999. (Filed as exhibit 10.21 to
the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999 and incorporated hereto
21.1* Subsidiaries of the Registrant.
23.1* Consent of Independent Auditors, Ernst & Young LLP.
27.1* Current Financial Data Schedule for year ended December 31, 1999.
___________________________
* Filed herewith
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Austin,
Texas, on March 30, 2000.
DTM Corporation
By: /s/ John S. Murchison, III
-----------------------------
Chief Executive Officer and
President
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the following persons on behalf of the registrant and in the capacities and on
the dates indicated have signed this report below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Lawrence Goldstein Director March 30, 2000
- --------------------------
Lawrence Goldstein
/s/ Anthony Mariotti Director March 30, 2000
- --------------------------
Anthony Mariotti
/s/ John S. Murchison, III Chief Executive Officer, March 30, 2000
- --------------------------
John S. Murchison, III President and Director
(Principal Executive Officer)
/s/ Thomas G. Ricks Director March 30, 2000
- --------------------------
Thomas G. Ricks
/s/ James B. Skaggs Director March 30, 2000
- --------------------------
James B. Skaggs
/s/ Geoffrey W. Kreiger Chief Financial Officer, March 30, 2000
- --------------------------
Geoffrey W. Kreiger Treasurer and Secretary
(Principal Financial and
Accounting Officer)
</TABLE>
49
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
DTM GmbH
Incorporated under the laws of Germany Corporate office at Otto-Hahn-
Strasse 6, Hilden, Germany 100% owned by DTM Corporation
DTM (UK) Ltd.
Incorporated under the laws of the United Kingdom Corporate office at 1301
Stratford Rd., Holgreen, Birmingham, United Kingdom 100% owned by DTM
Corporation
50
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the Equity Appreciation Plan and the 1999 Stock
Incentive Plan of DTM Corporation of our report dated January 21, 2000, with
respect to the consolidated financial statements of DTM Corporation included in
the Annual Report (Form 10-K) for the year ended December 31, 1999.
Ernst & Young LLP
Austin, Texas
March 29, 2000
51
<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 FORM
10-K 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> DEC-31-1999
<CASH> 1,505
<SECURITIES> 0
<RECEIVABLES> 6,797
<ALLOWANCES> 420
<INVENTORY> 2,652
<CURRENT-ASSETS> 11,123
<PP&E> 8,270
<DEPRECIATION> 6,864
<TOTAL-ASSETS> 13,681
<CURRENT-LIABILITIES> 6,358
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 54,016
<TOTAL-LIABILITY-AND-EQUITY> 13,681
<SALES> 28,555
<TOTAL-REVENUES> 33,049
<CGS> 12,968
<TOTAL-COSTS> 15,892
<OTHER-EXPENSES> 14,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> 2,234
<INCOME-TAX> 515
<INCOME-CONTINUING> 1,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,719
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
</TABLE>
