<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to
Commission file number: 0-20993
DTM CORPORATION
(Exact name of registrant as specified in its charter)
Texas 74-2487065
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1611 Headway Circle, Building 2, Austin, Texas 78754
(Address of principal executive offices) (Zip Code)
(512) 339-2922
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes No _.
As of July 16, 2000, the latest practicable date, the Registrant had 7,047,595
outstanding shares of Common Stock.
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DTM Corporation
Consolidated Statement of Income Three Months Ended
(Unaudited) June 30,
2000 1999
---------------------------
(In thousands, except per
share amounts)
Revenues:
Products $ 8,865 $ 6,657
Service and support 1,468 942
---------------------------
10,333 7,599
Cost of sales:
Products 3,878 2,967
Service and support 989 580
---------------------------
4,867 3,547
---------------------------
Gross profit 5,466 4,052
Operating expenses:
Selling, general and administrative 3,481 2,913
Research and development 840 788
---------------------------
4,321 3,701
---------------------------
Operating income 1,145 351
Other income (expense):
Interest expense, net (36) (21)
Gain on sale of assets - 79
---------------------------
(36) 58
---------------------------
Income before income taxes 1,109 409
Income tax expense 346 114
---------------------------
Net income $ 763 $ 295
===========================
Earnings per share:
Basic earnings per share $ 0.11 $ 0.04
Diluted earnings per share $ 0.11 $ 0.04
See accompanying notes.
1
<PAGE>
DTM Corporation
Consolidated Statement of Income Six Months Ended
(Unaudited) June 30,
2000 1999
----------------------------
(In thousands, except per
share amounts)
Revenues:
Products $ 15,664 $ 13,648
Service and support 2,822 1,923
----------------------------
18,486 15,571
Cost of sales:
Products 7,003 6,081
Service and support 1,902 1,160
----------------------------
8,905 7,241
----------------------------
Gross profit 9,581 8,330
Operating expenses:
Selling, general and administrative 6,177 6,191
Research and development 1,714 1,450
----------------------------
7,891 7,641
----------------------------
Operating income 1,690 689
Other income (expense):
Interest expense, net (55) (28)
Gain on sale of assets - 129
----------------------------
(55) 101
----------------------------
Income before income taxes 1,635 790
Income tax expense 510 221
----------------------------
Net income $ 1,125 $ 569
============================
Earnings per share:
Basic earnings per share $ 0.16 $ 0.09
Diluted earnings per share $ 0.16 $ 0.09
See accompanying notes.
2
<PAGE>
DTM Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited) June 30, December 31,
As of: 2000 1999
---------------------------------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash $ 1,141 $ 1,505
Accounts receivable, net 8,002 6,377
Inventories 2,767 2,652
Prepaid expenses and other 634 589
Total current assets 12,544 11,123
Property, net 1,524 1,406
Capitalized software development costs, net 392 418
Patent and license fees, net 609 734
Total assets $ 15,069 $ 13,681
Liabilities and shareholders' equity
Current liabilities:
Bank line of credit $ 997 $ -
Accounts payable 1,793 2,219
Deferred revenues and customer deposits 2,302 2,128
Employee and agent compensation 966 1,502
Income taxes 440 509
Total current liabilities 6,498 6,358
Shareholders' equity:
Common stock 1 1
Additional paid-in capital 54,172 54,016
Accumulated deficit (45,491) (46,616)
Accumulated other comprehensive loss (111) (78)
Total shareholders' equity 8,571 7,323
Total liabilities and shareholders' equity $ 15,069 $ 13,681
</TABLE>
See accompanying notes.
3
<PAGE>
DTM Corporation
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows Six Months Ended
(Unaudited) June 30,
2000 1999
------------------------------------
(In thousands)
<S> <C> <C>
Operating activities
Net income $ 1,125 $ 569
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 725 757
Provision for doubtful accounts - 44
Provision for obsolescence 56 53
Gain on disposal of equipment - (129)
Changes in assets and liabilities:
Accounts receivable (1,625) (985)
Inventory (171) 646
Prepaid expenses and other assets (45) (121)
Accounts payable and accrued expenses (426) (440)
Deferred service revenues 174 (62)
Income taxes (69) 221
Employee and agent compensation (536) 77
------------------------------------
Net cash (used in) provided by operating activities (792) 630
Investing activities
Purchases of machinery and equipment (659) (144)
Capitalized software development costs (54) (60)
Patent and license expenditures (29) (33)
Proceeds from sale of machinery and equipment 50 281
------------------------------------
Net cash (used in) provided by investing activities (692) 44
Financing activities
Proceeds from exercise of stock options 156 -
Draws on line of credit from financial institutions 3,590 1,300
Repayments on credit lines (2,593) (1,300)
Repayments of due to shareholder - (454)
------------------------------------
Net cash provided by (used in) financing activities 1,153 (454)
Effect of foreign exchange rate changes (33) (160)
------------------------------------
Net change in cash (364) 60
Cash at beginning of period 1,505 429
------------------------------------
Cash at end of period $ 1,141 $ 489
====================================
Non-cash items:
Issuance of common stock in settlement $ - $ 400
Conversion of shareholder debt to equity $ - $ 455
</TABLE>
See accompanying notes.
4
<PAGE>
DTM Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of DTM Corporation ("DTM") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended June 30, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000. For
further information, refer to the consolidated financial statements and related
footnotes of the Company for the year ended December 31, 1999 as disclosed in
the Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 30, 2000.
2. Earnings per share
Basic earnings per share are computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings per share
presented herein is computed on the basis of the weighted average number of
common shares outstanding plus the effect of outstanding stock options using the
"treasury stock" method.
<TABLE>
<CAPTION>
2000 1999
----------------------------------
<S> <C> <C>
For the Three Months Ended June 30:
Net income (A) $ 763,000 $ 295,000
Average shares of common stock outstanding (B) 7,030,000 6,717,000
Dilutive effect of employee and director stock 192,000 -
options
----------------------------------
Common stock and common stock equivalents (C) 7,222,000 6,717,000
==================================
Earnings per share:
Basic (A/B) $ 0.11 $ 0.04
Diluted (A/C) $ 0.11 $ 0.04
For the Six Months Ended June 30:
Net income (A) $1,125,000 $ 569,000
Average shares of common stock outstanding (B) 7,018,000 6,594,000
Dilutive effect of employee and director stock 204,000 22,000
options
----------------------------------
Common stock and common stock equivalents (C) 7,222,000 6,616,000
==================================
Earnings per share:
Basic (A/B) $ 0.16 $ 0.09
Diluted (A/C) $ 0.16 $ 0.09
</TABLE>
5
<PAGE>
3. Inventory
Inventory consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
As of: 2000 1999
------------------------------------
(In thousands)
<S> <C> <C>
Raw materials and purchased parts $ 2,303 $ 2,050
Finished goods 752 834
------------------------------------
3,055 2,884
Reserve for inventory obsolescence (288) (232)
------------------------------------
$ 2,767 $ 2,652
====================================
</TABLE>
4. Comprehensive Income
Comprehensive income for the interim periods was as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------
(In thousands)
<S> <C> <C>
For the Three Months Ended June 30:
Net income $ 763 $ 295
Foreign currency translation 37 (106)
------------------------------------
Comprehensive Income $ 800 $ 189
====================================
For the Six Months Ended June 30:
Net income $ 1,125 $ 569
Foreign currency translation (33) (160)
------------------------------------
Comprehensive Income $ 1,092 $ 409
====================================
</TABLE>
5. Contingencies
Beginning in 1996, we initiated patent infringement litigation in
France, Germany and Italy against a competitor and against one of that
competitor's customers. In this interim period, the German judge ruled that an
expert be hired to advise the court on the technical issues. In 1997, we also
initiated patent infringement litigation in Japan against the same competitor's
distributor in the Pacific Rim. We seek injunctive relief plus damages. Hearings
have begun in each of these lawsuits. In September 1999, the Japanese court
issued a preliminary injunction barring sale of the competitor's infringing
product in Japan. In this interim period, the competitor filed an appeal of the
preliminary injunction. It is not possible at this time to predict the final
outcome of the proceedings in Japan or the proceedings throughout Europe.
In several communications made to us, this same competitor has alleged
that our products are infringing on patents which it licenses from a third-
party. In January 2000, we initiated litigation in the U.S. courts seeking a
declaratory judgment that our products do not infringe on any valid claims of
the U.S. patents licensed by this competitor.
6
<PAGE>
6. New Accounting Standards
Effective January 1, 2000, we adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement requires
derivatives that are not hedges to be adjusted to fair value through earnings.
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 adoption of this
Statement has had no effect on reported results of operations at this time.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB Opinion No. 25. Interpretation No. 44
has an effective date of July 1, 2000. We do not believe Interpretation No. 44
will affect our accounting for transactions involving stock-based compensation.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin, or SAB, No. 101, entitled "Revenue
Recognition in Financial Statements", which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. In
June 2000, the Staff delayed the effective date of SAB No. 101 until October
2000. The Staff has disclosed that it is preparing a questions and answers guide
related to SAB No. 101. Because we have complied with generally accepted
accounting principles for our historical revenue recognition, the change, if
any, in our revenue policy resulting from SAB No. 101 would be reported as a
change in accounting principle in the quarter ended December 31, 2000. If this
change were required, it will likely be material. Until the Staff issues the
questions and answers guide we will not be fully able to evaluate their impact.
7. Common Stock
Activity in the interim period in DTM's common stock was as follows:
Shares
Outstanding
--------------
Issued and outstanding at the beginning of the year 6,973,503
Shares issued under stock plans 74,092
Issued and outstanding at June 30, 2000 7,047,595
==============
At June 30, 2000, there were 1,167,878 shares of common stock reserved
for issuance in connection with the 1999 Stock Option Plan (892,090 shares) and
for exercise of outstanding options issued in connection with a prior plan
(275,788 shares).
Beginning in April 1999, we have retained an affiliate of one of our
major shareholders to perform certain financial advisory services. These related
party fees are included in selling, general and administrative expenses and
amounted to $64,500 and $36,000 in the six-month periods ended June 30, 2000 and
1999, respectively.
7
<PAGE>
8. Stock Options
A summary of the stock option activity, and related information for
the interim period is as follows:
<TABLE>
<CAPTION>
2000
------------------------------------
Weighted Average
Exercise Price
Stock Options
------------------------------------
<S> <C> <C>
Outstanding at beginning of year 937,064 $ 2.393
Granted at fair market value 82,700 2.373
Exercised (74,092) 2.115
Canceled (63,158) 4.063
------------------------------------
Outstanding at June 30, 2000 887,514 $ 2.296
====================================
</TABLE>
A summary of information about stock options outstanding and
exercisable at June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted-Average Weighted-Average
Exercise Options Remaining Options
Price Outstanding Contractual Life Exercisable
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1.250 291,600 8.7 102,068
$ 1.470 54,000 8.9
16,500
$ 1.750 47,600 9.6 -
$ 2.000 85,000 7.5 59,500
$ 2.0625 53,850 7.9 53,850
$ 2.230 256,316 6.9 256,316
$ 2.438 5,000 9.9 -
$ 2.500 13,000 9.9 -
$ 3.625 22,100 9.7 -
$ 8.030 49,000 6.9 49,000
$ 13.530 6,908 6.9 6,908
$ 14.670 3,140 6.9 3,140
----------------- -------------------
887,514 547,282
================= ===================
</TABLE>
8
<PAGE>
9. Geographic and Customer Information
We operate in one industry segment: the development, manufacturing and
service of selective laser sintering systems and related products. Operations
outside of the United States consist principally of sales, marketing and
customer support. Revenues are attributed to geographic areas based upon the
location of the customers. The following is a summary of geographic area data
for the for the interim periods:
<TABLE>
<CAPTION>
2000 1999
------------------------------------
(In thousands)
<S> <C> <C>
For the Three Months Ended June 30:
Revenues from external customers:
North America $ 4,444 $ 3,513
Europe 3,924 2,256
Pacific Rim 1,965 1,830
------------------------------------
$ 10,333 $ 7,599
====================================
For the Six Months Ended June 30:
Revenues from external customers:
North America $ 8,620 $ 7,521
Europe 6,841 5,085
Pacific Rim 3,025 2,965
------------------------------------
$ 18,486 $ 15,571
====================================
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Business Environment and Risk Factors
The following discussion and analysis should be read in conjunction with
the information set forth under the heading Unaudited Condensed Consolidated
Financial Statements and notes thereto, as well as the section below under the
heading "Risk Factors That May Affect Future Results and Safe Harbor Statement."
Our future operating results may be affected by various trends and factors,
which are beyond our control. These include, among other factors, changes in
general economic conditions, rapid or unexpected changes in technologies and
uncertain business conditions that affect the rapid prototyping and rapid
tooling industry. Accordingly, past results and trends should not be used by
investors to anticipate future results or trends.
With the exception of historical information, the matters discussed below
under the heading "Results of Operations" and "Liquidity and Capital Resources"
may include forward-looking statements that involve risks and uncertainties. All
statements, trends and other information contained in this Quarterly Report on
Form 10-Q relating to markets for our products and trends in revenue, gross
margin and anticipated expense levels constitute forward-looking statements.
These forward-looking statements generally can be identified by the use of words
such as "anticipate", "believe", "plan", "estimate", "expect", "intend", "may",
and "should" and other similar terminology. We wish 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 other reports filed
with the Securities and Exchange Commission, could affect our actual results and
cause actual results to differ materially from those forward-looking statements.
Overview
DTM develops, manufactures, and markets advanced rapid prototyping and
manufacturing systems that include a Sinterstation(R) 2500/plus/. All
Sinterstation systems utilize a process called SLS(R) 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,
including but not limited to the following:
. 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.
10
<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, we licensed metal sintering powder technology
developed by Rockwell Science Center, which is one of our key customers. We
intend 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 us as our 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
the first six months of 2000, 33% of Sinterstation sales were made directly to
manufacturing companies, and these companies represent 35% of cumulative system
sales. The other system sales have been to service providers and, to a lesser
extent, to universities for research and education. Systems sold to new customer
sites represented approximately 76%, 66% and 69% of system sales sold in the
first six months of 2000 and in full-year 1999 and 1998, respectively. As of
June 30, 2000, approximately 25% of our customer sites now have multiple DTM
Sinterstation systems in operation.
As of June 2000, 346 DTM Sinterstation systems had been sold to 259
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 at multiple
facilities and plants. Many of the world's automobile manufacturers deploy from
one to six Sinterstation Systems each at their design centers and plants.
Machine and Accessories Revenues
Revenues derived from machines and accessories were $10.1 million in the
six months ended June 30, 2000, an increase of 7% from the comparable period of
1999.
In the six months ended June 30, 2000, we shipped 42 Sinterstation Systems,
including used and demonstration units, an increase of 24% in unit volume over
the comparable period of 1999.
Machine and accessories revenues per unit sold, both production and
previously owned, averaged approximately $253,200 and $296,300 in the six months
ended June 30, 2000 and 1999, respectively, not including sintering powders or
services included in the system packages.
Machine and accessories cost of goods sold per unit, both production and
previously owned, averaged approximately $133,700 and $157,500 for the six
months ended June 30, 2000 and 1999, respectively. With these average costs, the
average gross margins on machines and accessories were 47.2% and 46.8% for the
six months ended June 30, 2000 and 1999, respectively.
Continuing Business
Revenue from continuing business is becoming more significant. The
percentage of revenues derived from sales of powdered sintering materials and
services represented 45%, 40% and 35% of total revenues in the first six months
of 2000 and in full-year 1999 and 1998, respectively. For the six months ended
June 30, 2000, the average installed base of Sinterstation Systems had grown to
327 systems in the field, an increase of 29% from the comparable period of 1999.
The market for powdered sintering materials
11
<PAGE>
and services is the installed base of Sinterstation Systems. We calculate our
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 $5.5 million in
the first six months of 2000, an increase of 33% from the first six months of
1999. Sintering materials revenues averaged $17,000 over the average installed
base in the first six months of 2000, which represented a 3.0% increase from the
average in the first six months of 1999.
Revenues derived from services were $2.8 million in the first six months of
2000, an increase of 47% from the first three months of 1999. Services and
support revenues averaged $8,600 over the average installed base in the first
six months of 2000, which represented a 13.7% increase from the average in the
first six months of 1999. In late 1999, we entered into an arrangement with a
sales representative in Japan to share responsibility and revenues for front-
line support in that country. We may make other such arrangements. Future
revenue growth from services and support may again trail the growth in the
installed base and, correspondingly, average service and support revenues may
again decline.
Revenue Recognition Policies Summary
We recognize revenue only when finished products are shipped, title and
risks of ownership have transferred to the buyer, the remaining obligations are
insignificant and collection of the related receivable is probable. We recognize
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.
12
<PAGE>
Results Of Operations
Key operating results for interim periods of 2000 versus the comparable
periods in 1999 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999 2000 vs. 1999
---- ---- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Second Quarter Ended June 30:
Revenues $10,333 $ 7,599 Up $2,734 Up 36.0%
Operating income $ 1,145 $ 351 Up $ 794 Up 226.2%
Net income $ 763 $ 295 Up $ 468 Up 158.6%
Diluted earnings per share $ 0.11 $ 0.04 Up $ 0.07 Up 175.0%
Six Months Ended June 30:
Revenues $18,486 $15,571 Up $2,915 Up 18.7%
Operating income $ 1,690 $ 689 Up $1,001 Up 145.3%
Net income $ 1,125 $ 569 Up $ 556 Up 97.7%
Diluted earnings per share $ 0.16 $ 0.09 Up $ 0.07 Up 77.8%
</TABLE>
Comparison of the Three months ended June 30, 2000 to the Three months ended
June 30, 1999
Revenues. Revenues increased 36.0% to $10.3 million in the second quarter
of 2000, compared to $7.6 million in the second quarter of 1999.
<TABLE>
<CAPTION>
2000 1999 2000 vs. 1999
---- ---- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Second Quarter Ended June 30:
Machines and accessories $ 6,094 $ 4,521 Up $1,573 Up 34.8%
Sintering materials $ 2,771 $ 2,136 Up $ 635 Up 29.7%
Services and support $ 1,468 $ 942 Up $ 526 Up 55.8%
System volume in machine and accessories
revenues 23 15 Up 8 Up 53.3%
Average systems in the field 335 261 Up 74 Up 28.4%
</TABLE>
Machine and accessories revenues increased due to increased unit volume.
Sales of powdered sintering materials and services and support revenues
increased somewhat faster than the rise in average installed base.
Revenues in past periods may not be indicative of revenues in the future,
which may be affected by other business environment and risk factors discussed
below, as well as other factors included elsewhere herein.
Gross Profit. Gross profit was $5.5 million, or 52.9% of revenue, in the
second quarter of 2000, compared to $4.1 million, or 53.3% of total revenue, in
the second quarter of 1999.
There is a risk that the increasing strength of the U.S. dollar may cause
gross margin percentages to decline. Other factors, including pricing pressures
internationally and changes in material and labor
13
<PAGE>
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 Expenses. Selling, general and
administrative expenses were $3.5 million, or 33.6% of revenues, in the second
quarter of 2000, compared to $2.9 million, or 38.3% of revenues, in the second
quarter of 1999. The decrease 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 expenses may
vary as a percentage of revenues in the future.
Research and Development Expenses. Research and development expenses were
$840,000, or 8.1% of revenues in the second quarter of 2000, compared to
$788,000, or 10.4% of revenues, in the second quarter of 1999. In 2000, we are
focusing on specific development initiatives directed at manufacturing
applications and direct metal parts. Should the planned increase in revenues not
support the planned increase in research and development, which is restricted to
a level below 10% of revenues, we will attempt 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 our 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.
Interest Expense. Net interest expense for the second quarter of 2000 was
$36,000, compared to interest expense of $21,000 for the second quarter of 1999.
Gain on Sale of Assets. In the second quarter of 2000, there was no gain on
the sale of assets. In the second quarter of 1999, a net gain of $79,000 was
recognized from the sale of an internally used Sinterstation System.
Income Taxes. The estimated effective tax rate in the second quarter of
2000 was 31.2%, compared to 27.9% in the second quarter of 1999.
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. At December 31, 1999, we had approximately $8.7 million
of federal net operating loss carry forwards. These net operating loss carry
forwards begin to expire in 2002. We have 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. At December 31, 1999, we also had other deferred tax assets totaling
$2.2 million that also are fully reserved.
Net Income (Loss). We had net income of $763,000 in the second quarter of
2000, compared to net income of $295,000 in the second quarter of 1999. This
$468,000 increase was primarily due to increased shipments of machines and
accessories. Also, revenues from sintering materials and services and support,
were both driven by a larger installed base of systems owned by customers.
Selling, general and administrative expenses continue to be controlled. This was
partially offset by system price reductions and the increase in research and
development expenses.
Liquidity and Capital Resources
At June 30, 2000, we had a cash balance of $1,141,000 and had $2.5 million
available under our line of credit.
During the six months ended June 30, 2000, operating activities used
$792,000 in net cash, compared to $630,000 of net cash provided by operating
activities in the comparable period of 1999. The
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use of cash in operations during the six months ended June 30, 2000 was due to
investments in working capital, primarily an increase in accounts receivable.
Accounts receivable, less allowance, represented approximately 70 days of
quarter sales at June 30, 2000, compared to 58 days at December 31, 1999. This
increase in days of sales was primarily attributable to an unusual percentage of
sales occurring at end of the second quarter of 2000 compared to the fourth
quarter of 1999. Inventory, less allowance, represented approximately 51 days on
hand at June 30, 2000, compared to 51 days at December 31, 1999.
Investing activities include expenditures for patents and licenses,
capitalized software costs and furniture and equipment, principally consisting
of our Sinterstation Systems built for internal use. For 2000, we have planned
for approximately $1.2 million in capital expenditures, of which $692,000 was
incurred in the six months ended June 30, 2000. The majority of these capital
expenditures include additions to internally used demonstration systems to
replace units coming off operating leases in 2000 and to support growth. We
intend to fund this additional investment from operations.
DTM has a secured line of credit, which was recently renewed through May
2001. The line of credit was increased from $2.5 million to $3.5 million and the
interest rate was reduced from 2% to 1.5% over prime. Customer remittances are
applied against any outstanding loans. At June 30, 2000, the borrowing base
exceeded the loan limit of $3.5 million, and there was a $997,000 loan
outstanding. The loan was used to fund the investments in working capital and
capital expenditures during the first six months of 2000.
We believe that we have 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.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB Opinion No. 25. Interpretation No. 44
has an effective date of July 1, 2000. We do not believe Interpretation No. 44
will affect our accounting for transactions involving stock-based compensation.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin, or SAB, No. 101, entitled "Revenue
Recognition in Financial Statements", which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. In
June 2000, the Staff delayed the effective date of SAB No. 101 until October
2000. The Staff has disclosed that it is preparing a questions and answers guide
related to SAB No. 101. Our initial assessment was that we complied with SAB No.
101. However, we have become aware the Staff is considering guidance that may
cause us to reach the opposite conclusion. We ship our Sinterstation Systems
calibrated at the factory and ready for customer installation. The customer is
responsible for placing the equipment in his facility and providing electricity
and nitrogen. We generally offer an initial three day on-site setup and check
calibration service with our Sinterstation Systems, which cannot be performed
until the customer facility is ready. We treat this service as a separate
component and recognize the related revenues when we perform them, but recognize
as revenues the value of the products when shipped, assuming the other criteria
are met. A substantial majority of our Sinterstation System sales are not ready
for us to perform the initial setup and to check calibration until the quarter
following the one in which they are shipped and recognized as product revenues.
SAB No. 101 may consider our setup and check calibration service is an essential
portion of the earnings process and require that no revenues from our sale of a
Sinterstation System be recognized until our initial setup and check calibration
service is performed. Because we have complied with generally accepted
accounting principles for our historical revenue recognition, the change, if
any, in our revenue
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policy resulting from SAB No. 101 will be reported as a change in accounting
principle in the quarter ended December 31, 2000. Until the Staff issues the
questions and answers guide, we will not be fully able to evaluate SAB No. 101's
impact. We are also considering potential changes to the terms of our sales
agreements for equipment sales that could mitigate the impact of SAB No. 101. In
addition, we may need to renegotiate the financial covenant under our credit
agreement. While SAB No. 101 would not affect the fundamental aspects of our
operations as measured by product shipments and cash flows, implementation of
SAB No. 101 could have a material adverse effect on our reported results of
operations for year 2000.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND SAFE HARBOR STATEMENT
Investors are cautioned that this Quarterly Report on Form 10-Q contains
forward-looking statements that involve risks and uncertainties, including the
following: (i) our plans, strategies, objectives, expectations and intentions
are subject to change at any time at the discretion of management and the Board
of Directors; (ii) our plans and results of operations will be affected by our
ability to manage growth and working capital; and (iii) our business is highly
competitive and the entrance of new competitors or the expansion of the
operations by existing competitors in the Company's markets could adversely
affect our plans and results of operations. In addition, we identify the risk
factors discussed below which may affect our actual results and may cause actual
results to differ materially from those contained in forward looking statements.
We Depend on Markets that Are in their Early Stages of Development
The market for rapid prototyping products and services, such as those
marketed by DTM, 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 which 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 of the competing technologies will gain broad market acceptance.
The markets for rapid manufacturing products and rapid tooling products,
such as those marketed by DTM, are in an even earlier stage of development than
rapid prototyping. Participants in these markets, including DTM, 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 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 perceived risks.
Our Market Is Highly Competitive
The market for rapid prototyping systems is competitive. In marketing our
Sinterstation Systems, we experience competition from many sources. Certain of
our competitors are better known and have greater financial, research and
development, production and marketing resources than us. Currently, the design
and manufacturing applications that our products address are 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 a significant competitor in Europe and in
the Pacific Rim countries. 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 our business and financial results.
We believe that we 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. We already
experience competition for technical services to our installed base as many of
our customers have technical skills and resources to effectively support the
equipment without factory
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assistance. We 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.
Our Operating Results Have Fluctuated Substantially from Quarter to Quarter and
Are Likely to Continue
In prior years, our revenues and operating results have varied at times
substantially from quarter to quarter and may continue to do so. We typically
experience a relatively long lead-time, often from six to 24 months, to complete
a Sinterstation System sale. Our 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, us from managing inventories effectively from quarter to quarter.
The failure to complete a particular Sinterstation System sale in any given
quarter may have a material adverse effect on our business and financial
performance for that quarter, and quarterly fluctuations could cause a material
adverse effect on the price at which our Common Stock trades. The tendency for a
large number of our sales made during a quarter to be completed at or near the
end of the quarter also hinders our ability to predict sales, control sales
prices and enforce its standard terms.
We May Not Obtain Sufficient Capital to Fund Our Needs and Additional Funding
May Be Dilutive to Current Security Holders
Our future capital requirements will depend on a number of factors,
including our profitability, growth rate, working capital requirements, expenses
associated with protection of our patents and other intellectual property, and
costs of future research and development activities. We currently plan to fund
these activities through operations.
Future operating results will depend, in part, on our ability to obtain and
manage capital sufficient to finance our business. To the extent that funds
expected to be generated from operations are not sufficient to meet current or
planned operating requirements, we will seek to obtain additional funds through
bank credit facilities, equity or debt financing, collaborative or other
arrangements with corporate partners and from other sources. Additional funding
may not be available when needed or on acceptable terms, which could have a
material adverse effect on our business, financial condition and results of
operations. If adequate funds are not available, we may be required to delay or
to eliminate certain expenditures or to license to third parties the rights to
commercialize technologies that we would otherwise seek to develop ourselves. In
addition, in the event that we obtain any additional funding, such financing may
have a substantially dilutive effect on the holders of our securities.
We have Limited Product Offerings
We currently offer one model of Sinterstation Systems for sale. The sale of
Sinterstation Systems comprised the majority of our annual revenues. The
Sinterstation Systems are priced in excess of $250,000, and a new purchaser must
also consider the ongoing operating expense commitment associated with the
acquisition of such a system. In a downturn or a soft market, our dependence
upon a limited range of products, as opposed to a wide range of products at
different price points, has caused our financial performance to be adversely
affected and may do so again.
We are Heavily Dependant on Our Intellectual Property And Proprietary Rights and
We are Currently Involved in Litigation Regarding these Rights
In pursuing protection for our proprietary rights in our Sinterstation
Systems, materials and related technology, we currently rely on a combination of
patent, copyright, trademark and trade secret rights, as well as contractual
provisions. We aggressively seek patent protection for our selective laser
sintering
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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 we have rights. In addition, the laws of various countries
in which our products may be sold may not protect our products and intellectual
property rights to the same extent as the laws of the United States.
We are currently involved in significant litigation with EOS GmbH Electro
Optical Systems in Germany, France, Italy and Japan, with regard to our
proprietary rights to selective laser sintering technology. If we are
unsuccessful in this litigation, our competitive position may be adversely
affected in those countries.
In addition, we can give no assurance that the issued patents to which we
hold rights will be adequate to protect our interests or, if challenged, held
valid. Our competitors could develop non-infringing systems, materials or
technologies that are equivalent or superior to ours. Others may also practice
technology believed by us to be covered by our patents or other legal or
contractual protections regardless of the fact that it may be legally protected.
Any litigation to enforce our intellectual property rights would be expensive
and time-consuming. While we defend our intellectual property vigorously, there
can be no assurance that we will be successful in our various litigation in many
countries. If we were unsuccessful in enforcing our 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 we were found to
have violated state or federal antitrust laws, our future revenues might be
adversely affected.
Furthermore, unrelated third parties hold many patents and pending patent
applications under which we are 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 us, and if we were not successful in
defending such litigation or in obtaining a license, the business and financial
performance could be materially adversely affected. EOS has threatened us with
such litigation, and we have filed suit against EOS seeking a declaratory
judgment that we do not infringe on 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 us. As a licensee, our rights
to practice the technology are not absolute. The University of Texas could
terminate, attempt to terminate or amend the license if we could be shown to be
in material default of the terms of the license. Even if we had a basis for
objection, defense of our 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 our business and financial performance.
We Depend on a Limited Number of Management and Key Personnel
Our 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 our business and financial performance. Our
success also depends on our 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 we are attempting to recruit
personnel. We have put in place incentive compensation plans intended to provide
motivation for continued employment of key employees. We can give no assurance
that we will be able to retain employees or continue to attract, assimilate and
retain other skilled personnel.
We Depend on a Limited Number of Third Party Suppliers
We subcontract 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 our sales or
reputation for timely delivery, and, hence, on our business, financial
performance and results of operations.
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During 1999 and into 2000, customer demand for DuraForm(R), our popular
powdered sintering materials, came close to exceeding the supply. We have worked
with our supplier to modify the suppliers manufacturing process to increase the
amounts available to our customers for 2000. However, until such time that raw
stock capacity is increased, which is not expected until 2001, demand may
outstrip the increased supply.
Our Operating Results Are Heavily Dependant on Sales to Customers Located
Outside the U.S.
Revenues from customers located outside the U.S. represented the majority
of our total revenues in the recent three years. We believe that continued
growth and profitability requires expansion of 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 our sales in foreign markets. In particular, a strengthening U.S.
dollar has adversely affected the price competitiveness against a major foreign
competitor of our 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 us to limit currency exchange risk will be successful in
avoiding exchange-related losses. Nor can there be assurance that the exposure
to risks associated with international operations will not continue to have a
material adverse effect on our 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 our business and financial performance.
Proactive Finance Group, LLC has Significant Influence on All Shareholder Votes
Proactive Finance Group, LLC and its affiliates ("Proactive") currently
controls approximately 49.9% of our outstanding Common Stock. At this
percentage, Proactive could control elections of the Board of Directors and
could control or substantially affect the outcome of most matters submitted to
the shareholders for their vote or consent. Proactive could also cause, prevent
or delay a change in control.
We May Be Subject to Product Liability Claims
Products as complex as those we offer may contain undetected defects or
errors when first introduced or as enhancements are released that, despite our
testing, 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 our reputation and business. We attempt to include provisions in our
agreements with customers that are designed to limit the exposure to potential
liability for damages arising out of defects or errors in our 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 our products entails the risk of product liability claims. Any such
claim brought against us, regardless of its merit, could result in material
expense to us, diversion of management time and attention, and damage to our
business reputation and ability to retain existing customers or attract new
customers.
Our Stock Price May Be Affected when Additional Shares Are Sold
Sales of shares of our Common Stock into the market by Proactive or
employees exercising options could cause a decline in the price of our stock.
All of the 3,513,357 shares of our Common Stock currently owned by Proactive 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 a
company. In addition,
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we have granted Proactive certain demand registration rights, and if we propose
to register any of our securities under the Securities Act of 1933, whether for
our 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
Common Stock in the registration.
Our employees hold immediately exercisable options to purchase 542,943
shares of our Common Stock. We 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 upon exercise of options outstanding under
the stock option plans will be freely tradable (subject to compliance with
certain provisions of Rule 144, in the case of our affiliates).
The Recent Issuance by the SEC of an Accounting Bulletin Related to Revenue
Recognition, SAB 101, May Have a Material Adverse Impact On Our Financial
Performance
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. SAB No. 101 summarizes the SEC staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. In addition to other uncertain risks
related to SAB No. 101, it is possible that SAB No. 101 could result in
increased fluctuations in our quarterly operating results and increase the
likelihood that we may fail to meet the expectations of securities analysts for
any period. We are currently in the process of evaluating SAB No. 101 and what
effect it may have on our financial statements. As of this date, we have not
determined whether SAB No. 101 will have a material impact on our financial
position or results of operations; however, we believe that it may require a
portion of our year 2000 revenues to be deferred. In the event that the
implementation of SAB No. 101 requires us to report a change in accounting
principles related to our revenue recognition policy, we would be required to
report such change no later than the quarter ending December 31, 2000. In
addition, we may need to renegotiate the financial covenants under our credit
agreement. While SAB No. 101 would not affect the fundamental aspects of our
operations as measured by product shipments and cash flows, implementation of
SAB No. 101 could have a material adverse effect on our reported results of
operations for year 2000.
Our Market Price Is Volatile
Our 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. Moreover, our stock is thinly traded, and we have a relatively small
public float of only approximately 3.5 million shares. These factors may cause
our stock price to be even more variable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information related to quantitative and qualitative disclosures regarding
market risk is set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the risk factors under Item 2 above.
Such information is incorporated by reference herein.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See notes to financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.1 - Amendment of Loan and Security Agreements between
DTM Corporation and Silicon Valley Bank, dated May 30, 2000
Exhibit 27.1 - Current Financial Data Schedule for the quarter
ended June 30, 2000
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 28, 2000
DTM CORPORATION
(Registrant)
By: /s/ John S. Murchison, III
-------------------------------------
John S. Murchison, III
President and Chief Executive Officer
By: /s/ Geoffrey W. Kreiger
-------------------------------------
Geoffrey W. Kreiger
Vice President of Finance, Treasurer and Secretary
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Index to Exhibits
Number Description
------ -----------
10.1 Amendment of Loan and Security Agreements between DTM Corporation and
Silicon Valley Bank, dated May 30, 2000
27.1 Financial Data Schedule for the quarter ended June 30, 2000
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