<PAGE>
================================================================================
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 September 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 [X] No__
There were 7,074,651 shares of our common stock outstanding on November 11,
2000.
================================================================================
<PAGE>
DTM Corporation
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
NUMBER
------
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Statement of Income for the
three months ended September 30, 2000 and 1999 1
Condensed Consolidated Statement of Income for the
nine months ended September 30, 2000 and 1999 2
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Part II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DTM Corporation
Consolidated Statement of Income
Three Months Ended
Unaudited
<TABLE>
<CAPTION>
September 30,
------------------------------
2000 1999
(In thousands, except per
share amounts)
<S> <C> <C>
Revenues
Products $ 8,100 $ 6,568
Service and support 1,554 1,068
------------------------------
9,654 7,636
Cost of sales:
Products 3,588 3,090
Service and support 1,020 911
------------------------------
4,608 4,001
------------------------------
Gross profit 5,046 3,635
Operating expenses:
Selling, general and administrative 3,430 2,654
Research and development 655 706
------------------------------
4,085 3,360
------------------------------
Operating income 961 275
Other income (expense)
Interest expense, net (36) (26)
------------------------------
(36) (26)
------------------------------
Income before income taxes 925 249
Income tax expense 300 68
------------------------------
Net income $ 625 $ 181
------------------------------
Earnings per share:
Basic earnings per share $ 0.09 $ 0.03
Diluted earnings per share $ 0.09 $ 0.03
Weighted average shares outstanding:
Basic 7,059 6,974
Diluted 7,385 6,989
</TABLE>
See accompanying notes.
1
<PAGE>
DTM Corporation
Consolidated Statement of Income
Nine Months Ended
Unaudited
<TABLE>
<CAPTION>
September 30,
2000 1999
------------------------------
(In thousands, except
per share amounts)
<S> <C> <C>
Revenues
Products $ 23,764 $ 20,216
Service and support 4,376 2,991
------------------------------
28,140 23,207
Cost of sales:
Products 10,590 9,171
Service and support 2,923 2,071
------------------------------
13,513 11,242
------------------------------
Gross profit 14,627 11,965
Operating expenses:
Selling, general and administrative 9,607 8,845
Research and development 2,369 2,156
------------------------------
11,976 11,001
------------------------------
Operating income 2,651 964
Other income (expense):
Interest expense, net (91) (54)
Gain on sale of assets -- 129
------------------------------
(91) 75
------------------------------
Income before income taxes 2,560 1,039
Income tax expense 810 289
------------------------------
Net income $ 1,750 $ 750
------------------------------
Earnings per share:
Basic earnings per share $ 0.25 $ 0.11
Diluted earnings per share $ 0.24 $ 0.11
Weighted average shares outstanding:
Basic 7,032 6,722
Diluted 7,260 6,737
</TABLE>
See accompanying notes.
2
<PAGE>
DTM Corporation
Consolidated Balance Sheets
Unaudited
<TABLE>
<CAPTION>
September 30, December 31
2000 1999
-----------------------------------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash $ 1,406 $ 1,505
Accounts receivable, net 8,276 6,377
Inventories 3,253 2,652
Prepaid expenses and other 336 589
-----------------------------------
Total current assets 13,271 11,123
Property, net 1,774 1,406
Capitalized software development costs, net 366 418
Patent and license fees, net 549 734
-----------------------------------
Total assets $ 15,960 $ 13,681
-----------------------------------
Liabilities and shareholders' equity
Current liabilities:
Bank line of credit $ -- $ --
Accounts payable 3,075 2,219
Deferred revenues and customer deposits 2,416 2,128
Employee and agent compensation 1,313 1,502
Income taxes 75 509
-----------------------------------
Total current liabilities 6,879 6,358
Shareholders' equity:
Common stock - 7,068,823 shares
outstanding at September 30, 2000 2 1
Additional paid-in capital 54,214 54,016
Accumulated deficit (44,866) (46,616)
Accumulated other comprehensive loss (269) (78)
-----------------------------------
Total shareholders' equity 9,081 7,323
-----------------------------------
Total liabilities and shareholders' equity $ 15,960 $ 13,681
-----------------------------------
</TABLE>
See accompanying notes.
3
<PAGE>
DTM Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---------------------------
(In thousands)
<S> <C> <C>
Operating activities
Net income $ 1,750 $ 750
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,166 1,063
Provision for doubtful accounts - 44
Provision for obsolescence 86 91
Gain on disposal of equipment - (129)
Changes in assets and liabilities:
Accounts receivable (1,899) (1,212)
Inventory (687) (127)
Prepaid expenses and other assets 253 (204)
Accounts payable and accrued expenses 856 (206)
Deferred service revenues 288 (45)
Income taxes (434) 289
Employee and agent compensation (189) (8)
---------------------------
Net cash provided by operating activities 1,190 306
Investing activities
Purchases of machinery and equipment (1,161) (667)
Capitalized software development costs (139) (99)
Patent and license expenditures (47) (49)
Proceeds from sale of machinery and equipment 50 281
---------------------------
Net cash used by investing activities (1,297) (534)
Financing activities
Proceeds from exercise of stock options 199 -
Draws on line of credit from financial institutions 3,693 3,025
Repayments on credit lines (3,693) (2,100)
Repayments of due to shareholder - (454)
---------------------------
Net cash provided by financing activities 199 471
Effect of foreign exchange rate changes (191) (1)
---------------------------
Net change in cash (99) 242
Cash at beginning of period 1,505 429
---------------------------
Cash at end of period $ 1,406 $ 671
===========================
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 September 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 September 30:
Net income (A) $ 625,000 $ 181,000
Average shares of common stock outstanding (B) 7,059,000 6,974,000
Dilutive effect of employee and director stock options 326,000 15,000
----------------------------------
Common stock and common stock equivalents (C) 7,385,000 6,989,000
==================================
Earnings per share:
Basic (A/B) $ 0.09 $ 0.03
Diluted (A/C) $ 0.09 $ 0.03
For the Nine Months Ended September 30:
Net income (A) $1,750,000 $ 750,000
Average shares of common stock outstanding (B) 7,032,000 6,722,000
Dilutive effect of employee and director stock options 227,000 15,000
----------------------------------
Common stock and common stock equivalents (C) 7,259,000 6,737,000
==================================
Earnings per share:
Basic (A/B) $ 0.25 $ 0.11
Diluted (A/C) $ 0.24 $ 0.11
</TABLE>
5
<PAGE>
3. Inventory
Inventory consisted of the following:
September 30, December 31,
2000 1999
--------------------------------
(In thousands)
Raw materials and purchased parts $ 3,031 $ 2,050
Finished goods 540 834
--------------------------------
3,571 2,884
Reserve for inventory obsolescence (318) (232)
--------------------------------
$ 3,253 $ 2,652
================================
4. Comprehensive Income
Comprehensive income for the interim periods was as follows:
2000 1999
----------------------------
(In thousands)
For the Three Months Ended September 30:
Net income $ 625 $ 181
Foreign currency translation (158) 159
----------------------------
Comprehensive Income $ 467 $ 340
============================
For the Nine Months Ended September 30:
Net income $ 1,750 $ 750
Foreign currency translation (191) (1)
----------------------------
Comprehensive Income $ 1,559 $ 749
============================
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 considered
recommended experts 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. In September 1999, the Japanese
court issued a preliminary injunction barring sale of the competitor's
infringing product in Japan. The competitor has brought suit to overturn our
Japanese patents. In this interim period, there was no change in the Japanese
proceedings. 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. In this interim period, the action
was stayed through October 31, 2000. On October 31, 2000, we dropped this suit.
It is not possible at this time to predict the final outcome of these threatened
proceedings.
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.
Effective July 1, 2000, we adopted Financial Accounting Standards
Board Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB Opinion No. 25. The adoption of this
Interpretation has had no effect on reported results of operations at this time
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 no later
than our quarter ended December 31, 2000. On October 12, 2000, the Staff issued
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. At
this time we have not been 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 95,320
-----------
Issued and outstanding at September 30, 2000 7,068,823
===========
At September 30, 2000, there were 1,137,226 shares of common stock
reserved for issuance in connection with the 1999 Stock Option Plan (885,395
shares) and for exercise of outstanding options issued in connection with a
prior plan (251,831 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 $94,000 and $72,000 in the nine-month periods ended September 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:
2000
-------------------------------
Weighted
Average Exercise
Stock Options Price
-------------------------------
Outstanding at beginning of year 937,064 $ 2.393
Granted at fair market value 126,100 3.249
Exercised (95,320) 2.087
Canceled (66,563) 3.917
--------------------------------
Outstanding at September 30, 2000 901,281 $ 2.433
================================
A summary of information about stock options outstanding and
exercisable at September 30, 2000 is as follows:
Weighted-Average Weighted-Average
Exercise Options Remaining Options
Price Outstanding Contractual Life Exercisable
--------------------------------------------------------------------------------
$ 1.250 284,870 8.5 99,705
$ 1.470 54,000 8.6 16,500
$ 1.750 47,600 9.3 --
$ 2.000 85,000 7.3 59,500
$ 2.0625 51,180 7.6 35,826
$ 2.230 241,783 6.6 241,783
$ 2.438 5,000 9.6 --
$ 2.500 13,000 9.6 --
$ 3.625 21,400 9.4 --
$ 5.250 38,400 10.0 --
$ 8.030 49,000 6.6 49,000
$ 13.530 6,908 6.6 6,908
$ 14.670 3,140 6.6 3,140
--------- --------
901,281 512,362
========= ========
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:
2000 1999
----------------------
(In thousands)
For the Three Months Ended September 30:
Revenues from external customers:
North America $ 5,058 $ 3,206
Europe 3,056 2,951
Pacific Rim 1,540 1,479
----------------------
$ 9,654 $ 7,636
======================
For the Nine Months Ended September 30:
Revenues from external customers:
North America $ 13,678 $10,727
Europe 9,897 8,036
Pacific Rim 4,565 4,444
----------------------
$ 28,140 $23,207
======================
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANNALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Business Environment and Risk Factors
The following discussion and analysis should be read in conjunction with
the information set forth under the 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;
. design complex part shapes that could not be fabricated under conventional
methods;
. ability 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.
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.
Our Systems are beginning to be used to directly manufacture end use
plastic parts, primarily low-volume/high-value parts or custom parts. We are
working with several key customers on this application. We have completed a
market needs assessment and are developing strategies to penetrate the direct
manufacture of end use plastic parts application.
In 1999, we introduced our second-generation plastic material for the
investment casting industry. Our system produces expendable patterns that are
used by foundries to cast metal parts, primarily low-volume/high-value parts or
custom parts. Our revenues from this application are exceeding our targets.
This quarter we released our third-generation material for the injection
molding industry. Our system, with a new impregnation oven cycle, produces
prototype metal tooling for the manufacture of plastic parts. The majority of
the systems sold this quarter were configured to use this new material.
The steel sintering material that we just introduced, with an impregnation
oven cycle, can be used to directly manufacture prototype steel parts with
tolerances at least as good as those achieved by investment casting. We are
developing other metal materials and strategies to penetrate the direct
prototype metal part application.
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 nine months of 2000, 31% 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 74%, 66% and 69% of system sales sold in the
first nine months of 2000 and in full-year 1999 and 1998, respectively. As of
September 30, 2000, approximately 25% of our customer sites now have multiple
DTM Sinterstation systems in operation.
As of September 2000, 364 DTM Sinterstation systems had been sold to 272
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 at their design centers and plants.
Machine and Accessories Revenues
Revenues derived from machines and accessories were $14.8 million in the
nine months ended September 30, 2000, an increase of 6% from the comparable
period of 1999.
In the nine months ended September 30, 2000, we shipped 61 Sinterstation
Systems, including used and demonstration units, an increase of 20% in unit
volume over the comparable period of 1999.
Machine and accessories revenues per unit sold, both production and
previously owned, averaged approximately $250,600 and $290,300 in the nine
months ended September 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 $133,900 and $153,100 for the nine
months ended September 30, 2000 and 1999,
11
<PAGE>
respectively. With these average costs, the average gross margins on machines
and accessories were 46.6% and 47.3% for the nine months ended September 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 47%, 40% and 35% of total revenues in the first nine months
of 2000 and in calendar years 1999 and 1998, respectively. For the nine months
ended September 30, 2000, the average installed base of Sinterstation Systems
had grown to 336 systems in the field, an increase of 29% from the comparable
period of 1999. The market for powdered sintering materials 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 $9.0 million in
the first nine months of 2000, an increase of 43% from the first nine months of
1999. Sintering materials revenues averaged $26,750 over the average installed
base in the first nine months of 2000, which represented a 11.0% increase from
the average in the first nine months of 1999. We believe that this increase in
the average sintering material revenues per machine was due to increased
consumption as our prices in local currencies have been stable in the periods
discussed. This increase was in spite of the negative effect on our revenues
from the depreciation in the euro currency versus the U.S. dollar over this
period.
Revenues derived from services were $4.4 million in the first nine months
of 2000, an increase of 46% from the first nine months of 1999. Services and
support revenues averaged $13,000 over the average installed base in the first
nine months of 2000, which represented a 13.7% increase from the average in the
first nine months of 1999. We believe that this increase in average services and
support revenues per machine was due to increased utilization of our services as
our prices in local currencies have stable in the periods discussed. This
increase was in spite of the negative effect on our revenues from the
depreciation in the euro currency versus the U.S. dollar over this period.
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>
Third Quarter Ended September 30:
Revenues $ 9,654 $ 7,636 Up $2,018 Up 26.4%
Operating income $ 961 $ 275 Up $ 686 Up 249.5%
Net income $ 625 $ 181 Up $ 444 Up 245.3%
Diluted earnings per share $ 0.09 $ 0.03 Up $ 0.06 Up 200.0%
Nine Months Ended September 30:
Revenues $28,140 $23,207 Up $4,933 Up 21.3%
Operating income $ 2,651 $ 964 Up $1,687 Up 175.0%
Net income $ 1,750 $ 750 Up $1,000 Up 133.3%
Diluted earnings per share $ 0.24 $ 0.11 Up $ 0.13 Up 118.2%
</TABLE>
Comparison of the Three months ended September 30, 2000 to the Three months
ended September 30, 1999
Revenues. Revenues increased 26.4% to $9.7 million in the third quarter of
2000, compared to $7.6 million in the third quarter of 1999. The components of
revenues were as follows:
<TABLE>
<CAPTION>
2000 1999 2000 vs. 1999
---- ---- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Third Quarter Ended September 30:
Machines and accessories $4,661 $4,454 Up $ 207 Up 4.7%
Sintering materials $3,439 $2,114 Up $1,325 Up 62.7%
Services and support $1,554 $1,068 Up $ 486 Up 45.5%
System volume in machine and accessories
Revenues 19 16 Up 3 Up 18.8%
Average systems in the field 355 278 Up 77 Up 27.7%
</TABLE>
Machine and accessories revenues increased due to increased unit volume.
Sales of powdered sintering materials increased faster than the rise in average
installed base, primarily due to greater consumption rates in the installed
base. 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 $5.0 million, or 52.3% of revenue, in the
third quarter of 2000, compared to $3.6 million, or 47.6% of total revenue, in
the third quarter of 1999. The overall gross margin improvement was primarily a
result of higher-margin sintering materials revenues becoming a larger
13
<PAGE>
portion of total revenues. In addition, Service and Support gross margins
improved from the prior year period.
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 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 $3.4 million, or 35.5% of revenues, in the third
quarter of 2000, compared to $2.7 million, or 34.8% of revenues, in the third
quarter of 1999. Selling, general and administrative expenses may vary as a
percentage of revenues in the future.
Research and Development Expenses. Research and development expenses were
$655,000, or 6.8% of revenues in the third quarter of 2000, compared to
$706,000, or 9.2% of revenues, in the third quarter of 1999. In 2000, we are
focusing on specific development initiatives directed at manufacturing
applications and direct metal parts. In the third quarter of 2000, planned
external expenditures were avoided by finding other methods to achieve our
project goals. Should the planned increase in revenues not support the planned
increase in research and development, which is targeted 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 third quarter of 2000 was
$36,000, compared to interest expense of $26,000 for the third quarter of 1999.
Income Taxes. The estimated effective tax rate in the third quarter of 2000
was 32.4%, compared to 27.3% in the third 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. We had net income of $625,000 in the third quarter of 2000,
compared to net income of $181,000 in the third quarter of 1999. This $444,000
increase was primarily due to the greater consumption of our sintering materials
and services by the installed base of systems owned by customers and also by to
increased shipments of machines and accessories. Selling, general and
administrative expenses continue to be managed under an ongoing cost containment
effort. This was partially offset by system price reductions and a higher
effective tax rate.
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Liquidity and Capital Resources
At September 30, 2000, we had a cash balance of $1.4 million and had
$3.5 million available under our line of credit.
During the nine months ended September 30, 2000, operating activities
provided $1.2 million in net cash, compared to $306,000 of net cash provided by
operating activities in the comparable period of 1999.
Accounts receivable, less allowance, represented approximately 78 days
of quarter sales at September 30, 2000, compared to 78 days at December 31,
1999. Inventory, less allowance, represented approximately 64 days on hand at
September 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 planned for
approximately $1.2 million in capital expenditures, which was incurred in the
nine months ended September 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.
DTM has a $3.5 million secured line of credit through May 2001. The
interest rate is 1.5% over prime. Customer remittances are applied against any
outstanding loans. At September 30, 2000, the borrowing base exceeded the loan
limit, and there was no loan outstanding.
We believe that we have the financial resources needed to meet business
requirements, including capital expenditures, working capital requirements 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
Effective July 1, 2000, we adopted the Financial Accounting Standards
Board Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB Opinion No. 25. Our adoption of the
Interpretation No. 44 had no affect our current 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 no later
than the quarter ended December 31, 2000. On October 12, 2000, the Staff has
issued 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. Historically, 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
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for our historical revenue recognition, the change, if any, in our revenue
policy resulting from SAB No. 101 will be reported as a change in accounting
principle in the quarter ended December 31, 2000. We have not yet been able to
fully evaluate the recently issued Staff questions and answers guide to
determine 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.
While we historically have not faced competition in the supply of
powdered sintering materials and services to Sinterstation users, we eventually
face competition 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 assistance. We may also
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face external competition for such technical services from other service
organizations, and such competition for services will likely be based upon
capability 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 seek patent protection for our selective laser sintering
technology.
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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. We believe that we do not infringe on any valid claims
of the patents being asserted by EOS.
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. Earlier this year we gave
notice to The University of Texas System of changes we had made in our royalty
calculations to reflect business practices we adopted in the Fall of 1999. We
informed them that these changes had the effect of reducing the average royalty
due them per machine sold. They have communicated in writing to us that they do
not accept these changes. We are currently meeting with representatives of The
University of Texas System to provide them a better understanding of our
position and of the methodologies that we now use in our calculation of
royalties due them. 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.
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We Depend on a Limited Number of Third Party Suppliers
We subcontract for manufacture of major 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.
During 1999 and into 2000, customer demand for DuraForm(R), our popular
powdered sintering materials, has at times come 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. However, until such time
that raw stock capacity is increased, which is not expected until late 2001,
demand may outstrip the 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 49.7% 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.
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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, we have granted Proactive certain demand registration
rights. Also, 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 514,762
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 3.6 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 27.1 - Current Financial Data Schedule for the quarter
ended September 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: November 12, 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
------ -----------
27.1 Financial Data Schedule for the quarter ended September 30, 2000
24
