10-Q 1 d10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 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 7,127,642 shares of our common stock outstanding on April 27, 2001. ================================================================================ DTM Corporation FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 TABLE OF CONTENTS

PART 1 FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DTM Corporation Consolidated Statement of Income Three Months Ended March 31, Unaudited 2001 2000 ---------------------------- (In thousands, except per share amounts) Revenues Products $ 7,945 $ 6,799 Service and support 1,677 1,354 ---------------------------- 9,622 8,153 Cost of sales: Products 4,037 3,125 Service and support 1,484 913 ---------------------------- 5,521 4,038 ---------------------------- Gross profit 4,101 4,115 Operating expenses: Selling, general and administrative 2,917 2,696 Research and development 957 874 ---------------------------- 3,874 3,570 ---------------------------- Operating income 227 545 Other income (expense): Interest expense, net (13) (19) Loss on fixed asset disposals (18) -- ---------------------------- (31) (19) ---------------------------- Income before income taxes 196 526 Income tax expense 64 164 ---------------------------- Net income $ 132 $ 362 ============================ Earnings per share: Basic earnings per share $ 0.02 $ 0.05 Diluted earnings per share $ 0.02 $ 0.05 Weighted average shares outstanding: Basic 7,087 7,005 Diluted 7,388 7,270 See accompanying notes. 1 DTM Corporation Consolidated Balance Sheets Unaudited March 31, December 31 2001 2000 ------------------------------ (In thousands) Assets Current assets: Cash $ 1,159 $ 2,529 Accounts receivable, net 8,221 8,411 Inventories 3,907 3,643 Prepaid expenses and other 483 502 Deferred income taxes 611 611 ------------------------------ Total current assets 14,381 15,696 Property, net 1,891 1,842 Capitalized software development costs, net 442 360 Patent and license fees, net 432 489 ------------------------------ Total assets $ 17,146 $ 18,387 ============================== Liabilities and shareholders' equity Current liabilities: Bank line of credit $ -- $ - Accounts payable 2,447 3,062 Deferred revenues and customer deposits 2,330 2,432 Employee and agent compensation 1,021 1,582 Income taxes 524 501 ------------------------------ Total current liabilities 6,322 7,577 Shareholders' equity: Common stock - 7,090,989 shares outstanding at March 31, 2001 1 1 Additional paid-in capital 54,270 54,241 Accumulated deficit (43,156) (43,288) Accumulated other comprehensive loss (291) (144) ------------------------------ Total shareholders' equity 10,824 10,810 ------------------------------ Total liabilities and shareholders' equity $ 17,146 $ 18,387 ============================== See accompanying notes. 2

See accompanying notes. 3 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 March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and related footnotes of the Company for the year ended December 31, 2000 as disclosed in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2001. 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.

3. Inventory Inventory consisted of the following:

4 4. Comprehensive Income Comprehensive income for the interim periods was as follows: 2001 2000 -------------------------- (In thousands) For the Three Months Ended March 31: Net income $ 132 $ 362 Foreign currency translation (147) (70) -------------------------- Comprehensive Income $ (15) $ 292 ========================== 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 received the report from an expert 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. In this interim period, the Tokyo High Court ruled that the rulings of the Japanese Patent Office were in error. We are appealing this to the Tokyo Supreme Court. It is not possible at this time to predict the final outcome of the proceedings in Japan or the proceedings throughout Europe. For several years, this same competitor has alleged that our products are infringing on patents that it licenses from a third-party. In December 2000, this competitor filed a patent infringement suit against us in federal court in California. They allege that we have infringed and continue to infringe certain U.S. patents. In a February 2001 press release, this competitor claimed damages of $20 million. It is not possible at this time to predict the final outcome of these proceedings. 6. 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 7,076,780 Shares issued under stock plans 14,209 ------------- Issued and outstanding at March 31, 2001 7,090,989 ============= At March 31, 2001, there were 1,114,746 shares of common stock reserved for issuance in connection with the 1999 Stock Option Plan (883,015 shares) and for exercise of outstanding options issued in connection with a prior plan (231,731 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 $29,000 and $36,000 in the three-month periods ended March 31, 2001 and 2000, respectively. 5 7. Stock Options A summary of the stock option activity, and related information for the interim period is as follows: 2001 ---------------------------------- Weighted Average Exercise Stock Options Price ---------------------------------- Outstanding at beginning of year 953,834 $ 2.517 Granted at fair market value 75,000 3.479 Exercised (14,209) 2.157 Canceled (724) 7.239 ---------------------------------- Outstanding at March 31, 2001 1,013,901 $ 2.590 ================================== A summary of information about stock options outstanding and exercisable at March 31, 2001 is as follows:

6 8. 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 interim periods: 2001 2000 -------------------------------- (In thousands) For the Three Months Ended March 31: Revenues from external customers: North America $ 3,520 $ 4,176 Europe 4,759 2,917 Pacific Rim 1,343 1,060 -------------------------------- $ 9,622 $ 8,153 ================================ 9. Tender Offer By 3D Systems Corporation 3D Systems Corporation (Nasdaq:TDSC) has made a tender offer to purchase all of the outstanding shares of common stock of DTM for $5.80 per share in cash. 3D has set May 29, 2001 as the tender offer deadline. 3D's offer is conditioned upon it receiving tenders for 67% of our shares by the deadline and its ability to close the financing necessary to fund the transaction. 3D has announced that it has received a commitment from a bank for a loan sufficient to allow it to fund this transaction. 7 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. DTM's systems address industry's growing need for rapidly produced, durable, testable prototypes and end-use parts. 8 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. Results Of Operations Key operating results for interim periods of 2001 versus the comparable periods in 2000 are summarized as follows: 2001 2000 2001 vs. 2000 ---- ---- ------------- (In thousands, except per share amounts) First Quarter Ended March 31: Revenues $9,622 $8,153 Up $1,469 Up 18.0% Operating income $227 $545 Down $318 Down 58.4% Net income $132 $362 Down $230 Down 63.5% Diluted earnings per share $0.02 $0.05 Down $0.03 Down 60.0% Comparison of the Three months ended March 31, 2001 to the Three months ended March 31, 2000 Revenues. Revenues increased 18.0% to $9.6 million in the first quarter of 2001, compared to $8.2 million in the first quarter of 2000. The components of revenues were as follows: 2001 2000 2001 vs. 2000 ---- ---- ------------- (In thousands, except per share amounts) First Quarter Ended March 31: Machines and accessories $4,429 $4,033 Up $396 Up 9.8% Sintering materials $3,516 $2,766 Up $750 Up 27.1% Services and support $1,677 $1,354 Up $323 Up 23.9% System volume in machine and accessories Revenues 17 15 Up 2 Up 13.3% Average systems in the field 396 315 Up 81 Up 25.7% 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 less than the rise in average installed base. Our international revenues for the first quarter of 2001 were $6.1 million or 63.4% of total revenues, compared to 48.8% in the first quarter of 2000. Our revenues derived form North America customers contracted by 15.7% in the first quarter of 2001 compared to the first quarter of 2000. 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. 9 Gross Profit. Gross profit was $4.1 million, or 42.6% of revenue, in the first quarter of 2001, compared to $4.1 million, or 50.5% of total revenue, in the first quarter of 2000. A program to expedite delivery of certain sintering materials from our supplier in Europe to our facilities in Austin negatively impacted product margins. This program to use expedited delivery was put in place to address tightness in supplies. We returned to more normal delivery practices in the second quarter of 2001. Product margins were also negatively impacted by supplier price increases in our plastic sintering materials. Product margins were benefited by higher-margin sintering materials revenues becoming a larger portion of product revenues. Service and Support gross margins decreased from the prior year period due to investments we have made to improve our response times and capabilities to address the low-volume manufacturing opportunities. In addition, service margins were negatively impacted in the first quarter of 2001 by higher than anticipated parts costs. 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 $2.9 million, or 30.3% of revenues, in the first quarter of 2001, compared to $2.7 million, or 33.1% of revenues, in the first quarter of 2000. Selling, general and administrative expenses may vary as a percentage of revenues in the future. Research and Development Expenses. Research and development expenses were $957,000, or 10.0% of revenues in the first quarter of 2001, compared to $874,000, or 10.7% of revenues, in the first quarter of 2000. In 2001, 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 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 first quarter of 2001 was $13,000, compared to interest expense of $19,000 for the first quarter of 2000. Income Taxes. The estimated effective tax rate in the first quarter of 2001 was 32.7%, compared to 31.2% in the first quarter of 2000. 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, 2000, we had approximately $6.8 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, 2000, we also had other long-term deferred tax assets totaling $1.3 million that also are fully reserved for the same reason. Net Income. We had net income of $132,000 in the first quarter of 2001, compared to net income of $362,000 in the first quarter of 2000. This $230,000 decrease was primarily due increases in our cost of sales relating to our plastic sintering materials and service and support. 10 Liquidity and Capital Resources At March 31, 2001, we had a cash balance of $1.2 million and had $3.5 million available under our line of credit. During the three months ended March 31, 2001, operating activities used $859,000 in net cash, compared to a use of $1.6 million in the comparable period of 2000. Accounts receivable, less allowance, represented approximately 76 days of quarter sales at March 31, 2001, compared to 64 days at December 31, 2000. Inventory, less allowance, represented approximately 64 days on hand at March 31, 2001, compared to 56 days at December 31, 2000. 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 2001, we have incurred $461,000 of capital expenditures, compared to $359,000 in the comparable period of 2000. 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 March 31, 2001, 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, 2001. However, there can be no assurance that this will be the case. 11 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. CERTAIN RISKS THAT MAY CAUSE THE PURCHASE OF OUR SHARES BY 3D SYSTEMS --------------------------------------------------------------------- CORPORATION TO BE DELAYED OR TO FALL THROUGH -------------------------------------------- The Merger Is Subject To Conditions. If these Conditions Are Not Met, the Acquirer May Decide Not Buy DTM Shares Or Reimburse Us For Our Expenses. 3D Systems Corporation (Nasdaq:TDSC) and DTM Corporation announced on April 3, 2001 that the companies had signed a definitive merger agreement under which 3D Systems will attempt to purchase all of the outstanding shares of common stock of DTM for $5.80 per share in cash in a tender offer. This price represents a substantial premium over the $3.50 trading range that existed just prior to the merger announcement. The ability of the parties to consummate the tender offer and the other transactions contemplated by the merger agreement are subject to a number of significant risks and uncertainties. In particular, in the event that 3D Systems fails to maintain financing commitments in an amount sufficient to fund the acquisition and provide for its ongoing working capital needs, 3D Systems would be unable to complete the tender offer. Such failure to complete the tender offer likely would cause DTM's stock price to decline to levels at or below where it was prior to the announcement of the transactions contemplated by the merger agreement. Accordingly, investors should proceed with caution before engaging in transactions in DTM's stock in contemplation of the tender offer or the merger with 3D Systems. In addition, DTM has incurred, and will continue to incur, substantial expenses in connection with the transactions contemplated by the merger agreement. Our expenses are expected to exceed $600,000 even if the merger does not go through. In the event that 3D Systems fails to obtain sufficient financing to complete the tender offer, 3D Systems would not be obligated to reimburse DTM for such expenses. As a result, DTM's operating results and financial condition, both in current and future periods, would be adversely affected. Regulatory Authorities May Delay Or Stop The Merger. The Antitrust Division of the United States Department of Justice has contacted us seeking information about the offer and the merger. The Antitrust Division lawyers have indicated that their inquiry is directed to whether there are likely to be any anticompetitive effects resulting from the transaction. We are cooperating fully with the inquiry. The Antitrust Division and the Federal Trade Commission frequently scrutinize the legality under the antitrust laws of transactions such as the proposed acquisition of DTM. At any time before or after the acquisition of the shares of common stock of DTM pursuant to the offer, the Antitrust Division or the Federal Trade Commission could take any action under the antitrust laws that it deems necessary or desirable in the public interest, including seeking to enjoin the purchase of the shares pursuant to the offer or the consummation of the merger or seeking the divestiture of shares acquired by 3D or the divestiture of substantial assets of DTM, or its subsidiaries, or 3D. Private parties may also bring legal action under the 12 antitrust laws under certain circumstances. We cannot assure you that a challenge to the offer on antitrust grounds will not be made or, if a challenge is made, of the result of that challenge. Certain Parties Have Filed a Lawsuit Against Us Seeking, Among Other Relief, To Stop The Merger and We May Incur Substantial Costs Defending This and Any Other Similar Lawsuit. On April 6, 2001, a purported class action lawsuit under the caption Spinner v. Goldstein was filed in the 200th Judicial District Court of Travis County, Austin, Texas, naming us, certain of our directors and 3D Systems Corporation as defendants. The complaint was amended on May 2, 2001. The complaint as amended asserts that the $5.80 cash consideration to be paid in the merger is inadequate and does not represent the value of the assets and the future prospects of DTM. The amended complaint also alleges that the individual defendants breached their fiduciary obligations to the public shareholders of DTM in approving the merger agreement and that the tender offer documents distributed to the shareholders of DTM in connection with the tender fail to disclose material information. The complaint seeks, among other things, preliminary and permanent injunctive relief prohibiting us from consummating the merger, and if the merger is consummated, an order rescinding the merger and awarding damages to the purported class. The complaint also seeks unspecified damages, attorney fees and other relief. The plaintiffs have requested document production from 3D Systems Corporation and us on an expedited basis. None of the defendants have filed an answer to the complaint. We have reached an agreement in principle with the representative of the purported class in this lawsuit, providing for the settlement of the action. The terms of the settlement are confidential, but, in general, are not expected to have a material adverse effect on us or otherwise delay the completion of the offer or the merger. In connection with the agreement, the plaintiff has cancelled his request for expedited discovery. At the date of this filing, we have not yet entered into a written agreement embodying the terms of our understanding but expect to do so shortly. We cannot assure you that we will enter into an agreement to settle the class action or that any written agreement entered into to settle the action will reflect the terms of our agreement in principle. If we do not settle the action, a court may determine to enjoin the offer and the merger or subject us to an adverse judgment in a substantial amount. In addition, the litigation process is costly and may divert management's attention from our daily operations. If a court permanently enjoins the offer or requires us to pay damages, we will not be entitled to recoup our transaction costs associated with the offer and our business may be materially adversely affected. Alternatively, if a court temporarily enjoins the offer, we also may incur substantial litigation costs, the closing of the offer and merger will be delayed, which will increase our transaction costs and our operations and financial condition may be materially adversely affected. CERTAIN RISKS ASSOCIATED WITH OUR BUSINESS ------------------------------------------ We are Heavily Dependent 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. 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 13 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 filed a patent infringement suit against us in federal court in California. In a February 2001 press release related to the filing of the suit, EOS claimed damages of $20 million. Our defense in this suit will be time consuming and costly. Should we not prevail in this suit our operations will be materially affected. We License Key Intellectual Property and We Are Currently Having a Royalty Payment Dispute with the Licensor 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. Early last 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 met 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. We are currently in discussions with them to resolve our differences. 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 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, 14 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 is 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 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 our 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. 15 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 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 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. 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 Dependent 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 16 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 currently controls approximately 49.2% 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 3,509,357 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 633,784 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). 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- 17 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. 18 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See notes to financial statements and Risk Factors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits None (b) Reports on Form 8-K The following reports on Form 8-K were filed during the quarter ended March 31, 2001: REPORT DATED MARCH 16, 2001 - Item 5, Other Events. On January 23, 2001, our board of directors appointed Dr. Paul W. Murill to serve as a director until the next election of directors. REPORT DATED APRIL 6, 2001 - Item 5, Other Events. On April 2, 2001, we entered into an agreement and plan of merger with 3D Systems Corporation and Tiger Deals, Inc., a wholly-owned subsidiary of 3D Systems pursuant to which 3D Systems would acquire DTM in a cash tender offer. The commencement of the tender offer is subject to 3D Systems' ability to secure financing. The merger agreement provides that 3D Systems will commence a tender offer for any and all outstanding shares of DTM's common stock at a purchase price of $5.80 per share, upon the terms and subject to the conditions set forth in the merger agreement, no later than five business days after receiving financing commitments in an amount sufficient to fund the acquisition and to provide for 3D Systems' ongoing working capital needs. On March 30, 2001, DTM entered into severance agreements with: John S. Murchison, III, DTM's Chief Executive Officer, and Geoffrey W. Kreiger, Patrick Lordi, Kevin McAlea and Ronald K. Skaggs, each of which is a Vice President of DTM. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 15, 2001 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 20

DTM CORP /TX/ 10-Q