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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended March 31, 1997
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: 0-27302
SPACETEC IMC CORPORATION
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
Massachusetts 3577 04-3116697
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
The Boott Mill, 100 Foot of John Street, Lowell, Massachusetts 01852-1126
(Address of principal executive offices including zip code)
(508) 275-6100
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 Par Value
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 for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The approximate aggregate market value of voting stock held by non-affiliates of
the registrant as of June 20, 1997 was: $17,368,713.
There were 7,266,508 shares of registrant's Common Stock outstanding as of June
20, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the Registrant for the
Registrant's 1997 Annual Meeting of Shareholders to be held in September 1997
which definitive proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant's fiscal year of March
31, 1997, are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
General
Spacetec IMC Corporation ("Spacetec IMC" or the "Company") was incorporated
in Massachusetts in April 1991. The Company's principal executive offices are
located at The Boott Mill, 100 Foot of John Street, Lowell Massachusetts,
01852-1126. The Company's main telephone number is (508) 275-6100.
Spacetec IMC is a leading provider of three-dimensional ("3D") interactive
motion control technology comprised of 3D input hardware controllers and 3D
software for use with 3D graphical applications used on workstations, personal
computers ("PCs") and video game console systems. Unlike traditional one
dimensional ("1D") and two dimensional ("2D") input controllers, such as
keyboards, gamepads, mice, trackballs and joysticks, the Company's products are
designed to enable a user to intuitively manipulate 3D graphical images in real
time, as if the user were moving actual objects or moving through actual scenes
in the real world. Through its technology and products, the Company provides
what it considers the most robust and cost competitive interactive motion
control capability available commercially today.
The Company believes, and industry trends appear to verify, that 3D
functionality is becoming increasingly prevalent on a broader range of
platforms. More powerful and faster microprocessors have become available on a
low-cost basis, resulting in a significant increase in the number of computers
capable of taking advantage of 3D graphics beyond the traditional high-end
graphics terminals and workstations. These include personal computers in the
work environment and at home, and consumer electronics systems such as console
games systems. At the same time, 3D graphics is becoming a standard technology
or gaining broader acceptance in many markets, including the CAD/CAM/CAE fields,
the digital media content creation field with 3D animation, graphic arts,
simulation and visualization functionality and now in browser and authoring
applications for the Internet.
Industry Background
The "user interface", which defines how a user interacts with computers,
has evolved dramatically over the past two decades. From the reliance on
computer punch cards, to the use of text-based key-stroke commands, to the
current use of mouse-operated, 2D graphical user interfaces ("GUIs", such as the
Apple Macintosh or Microsoft Windows operating systems), each evolutionary step
has increased the user's ease of interaction with the computer. As a result, the
practical use of computers has been enhanced, helping to significantly increase
the penetration of computers into business and the home.
It is widely believed that 3D graphics will transform the face of today's
popular two-dimensional computing to a more intuitive 3D environment. 3D
graphics can create user interfaces that have a "real world" look and feel,
resulting in interactive environments that are familiar to users from their
everyday lives. This will make the use of a computer more intuitive and
practical for a broader group of users, and offer software developers increased
design options for their applications.
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Company Strategy
The Company views itself as a leading 3D enabling technology company and as
such its primary strategy is to leverage its technology and technological
competencies into the key application markets through strategic alliances and
partnerships. This involves:
Industrial Sector Dominance - Consolidating Dominance in the Industrial
Market. Although an industry leader in the industrial sector, the Company's
products have yet to penetrate a dominant portion of the CAD/CAM/CAE and
industrial multimedia markets. The Company therefore plans to continue to build
on its industry leading position for industrial 3D motion control technology by
leveraging its existing major end-use customers and original equipment
manufacturer ("OEM"), value added reseller ("VAR") and independent software
vendor ("ISV") relationships and establishing key new relationships for evolving
market opportunities.
Penetrating Mass Markets - Bundling and OEM Distributions in the Consumer
Markets. The Company's strategy for achieving large-scale penetration of
consumer markets is to establish bundling, OEM and specialized distribution
relationships with leading manufacturers of hardware platforms and software
vendors. The Company is at various stages of discussions with a number of these
companies.
Software Initiative - Capitalizing on Motion Control Capability. The
Company is also in the process of adding core technology and consolidating its
specialized interactive 3D motion control software and software modules into a
comprehensive developers' toolkit and library to facilitate the addition of
high-performance interactive and pre-defined motion control to software
applications (including games, 3D graphics and multimedia applications and CAD
packages). This process is designed to result in software revenues independent
of hardware sales.
Based on the strengths of its patented and proprietary technologies and
products, the Company's mission is to be the supplier of choice of 3D graphic
and digital media user interface solutions.
Products
Hardware Products
The Company's hardware products include three classes of motion controllers:
Consumer Products. Spacetec IMC aggressively entered the consumer
electronics market for the Christmas 1996 season with the introduction of the
SpaceOrb 360 RealLife 3D Game Controller. With the SpaceOrb 360, gamers
experience an entirely new way to move in 3D. They can now "strafe, pitch, yaw
or roll" with six degrees of freedom at 1,024 levels of speed. The SpaceOrb 360
is compatible with nearly 25 of today's hottest 3D games, including Quake,
Descent, DOOM, MDK, Redneck Rampage, Duke Nukem 3D, and all Windows 95 games.
Furthermore, the Company has commenced a design effort to develop
equivalent desktop 3D controllers targeted at the "edutainment" and 3D Internet
markets. This effort includes designs for OEM licensing arrangements.
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Professional Products. A mid-range 3D controller, the SpaceController is
targeted at the emerging 3D animation and multimedia markets and also for the
lower-end PC CAD market running on DOS, Windows, Windows 95 and MacIntosh
platforms. Support for these applications is provided through the SpaceWare
RealLife 3D interface software or the specific SpaceWare plug-in modules
mentioned below.
Industrial Products. The Spaceball 2003 and Spaceball 3003 graphics
controllers for Unix-based workstations and high-end Windows NT-based PCs have
become industry leaders in CAD/CAM/CAE applications. Through the use of these
products, designers and engineers can pan, zoom and rotate 3D models as smoothly
and easily as if they were holding them in their hands. The Company believes
that the ability to manipulate 3D models faster with more accuracy can result in
productivity increases of 25-40% or more. With end use customers that include
most of the large Fortune 1000 manufacturing companies, such as General Motors,
General Electric, General Dynamics, Chrysler, Eastman Kodak, Daimler Benz, Honda
Motors and Motorola, the Spaceball line is the largest selling and most widely
used product in this market. Spaceball products are also sold on an OEM basis by
Hewlett-Packard, IBM Corporation, and Digital Equipment.
Software Products
The Company's current software products include:
SpaceWare AniMotion. Motion Picture Animators have a growing need to create
more sophisticated, life-like 3D animation in a timely manner. To put the
ultimate in intuitive 3D interactive motion control capabilities in the hands of
animators, Spacetec IMC has created SpaceWare AniMotion, an advanced 3D
interactive motion control solution for use with 3D Studio MAX, the industry
leader in animation software. By incorporating SpaceWare AniMotion with the
Spaceball SpaceController, animators can dynamically move objects, cameras or
lights, to create sophisticated 3D animations more effectively and faster than
ever before.
SpaceWare 3D-I Always. Spacetec IMC's critically acclaimed SpaceWare 3D-I
Always add-on application for AutoCAD lets users dynamically rotate, pan and
zoom actual AutoCAD 3D models right within their active AutoCAD viewport.
As mentioned earlier, the Company is also in the process of adding core
technology and consolidating its specialized interactive 3D motion control
software and software modules into a comprehensive developers' toolkit and
library to facilitate the addition of high-performance interactive and
pre-defined motion control to software applications (including games, 3D
graphics and multimedia applications and CAD packages).
The Company's plans to develop and commence shipments of new hardware and
software products are forward-looking statements. The timing and completion of
such plans depends on numerous factors, including the continued technical
development of such products; the successful transition of the prototype
products to volume production; and the successful development of sufficient
market demand for such products. There can be no assurance that any new product
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introduction will occur as planned, or that such introduction will prove to be
of financial benefit to the Company.
Markets
The Company's marketing focus is divided into two broad business sectors as
follows:
The Industrial Sector Business:
The Industrial Sector Business comprises the CAD/CAM/CAE,
visualization/simulation, medical imaging, and emerging professional digital
media and content creation markets supported on UNIX and Windows NT workstation
and Windows 95 PC platforms.
The CAD/CAM/CAE Market.
Although this market segment generally consists of all CAD
applications including electronic design and A/E/C (architectural
engineering and construction), the Company focuses on the mechanical
design, manufacturing, and analysis segments where 3D technology is well
accepted and has shown continuous growth.
In this market segment, the combination of increased hardware
performance and advancements in 3D technologies is accelerating the use and
adoption of solids modeling and 3D design tools. The release of several new
Windows NT based applications in this field is also contributing to
widening the market potential. The aerospace, automotive and major
manufacturing industries have adopted real-time interactive 3D graphics as
a standard technology approach providing an expanding on-going core
business for the Company.
The Company serves this market with its Spaceball 2003 and 3003 and
SpaceWare interface software customized to the leading CAD/CAM/CAE
applications, including Parametric Technology Corporation's Pro/Engineer,
IBM/Dassault Systems' CATIA, EDS's Unigraphics, SDRC's I-DEAS Master
Series, SolidWorks' SolidWorks 97, Computervision's CADDS5, Matra
Datavision's Euclid3 and Strim100, Hewlett-Packard's CoCreate, and Baystate
Technologies CADKEY 97. The Company also markets a plug-in application,
3D-I Always for AutoCAD and the AutoCAD Mechanical Desktop applications.
Major industrial end-users of the Company's products include BMW,
Chrysler, Eastman Kodak, Ford, General Dynamics, General Electric, General
Motors, Jaguar, John Deere, Lockheed-Martin, McDonnell Douglas, Motorola,
Opel, Pratt & Whitney Aircraft, Rockwell, Saab, Siemens, 3M, Toyota, TRW,
Volvo, Whirlpool, and Yamaha.
The Professional Digital Media (Multimedia) Market.
The Digital Media market spans a broad spectrum of market segments
where end-users create 3D digital content. This market includes game
developers, film, video and broadcast television animators, industrial
designers, architectural designers, and 3D graphic and promotional artists.
The interest in and application of interactive and pre-determined 3D motion
in application content creation is spawning the need for additional and
improved 3D enabling tools and technologies.
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SpaceWare AniMotion for 3D Studio MAX was the Company's initial entry
into this market. Similar and enhanced functionality is expected to be
added to other popular 3D modeling and rendering applications to further
encourage the introduction of advanced levels of 3D motion control.
The Consumer Sector Business:
The Company believes that the consumer market will continue to present
an important opportunity for future sales of the Company's products. 3D graphics
on PC's, and other entertainment systems have become a standard feature, with an
installed base in the U.S. alone of almost 22 million 3D capable PCs, and over
7.5 million 3D console systems (32 and 64 bit). The Company is targeting these
platforms as specific software market segments which will introduce interactive
3D graphics into their product offerings. In the shorter term this is specific
to the games and "edutainment" titles segment.
PC-Based Games.
The Company believes that the introduction of several very successful
3D game titles such as Quake and Duke Nukem in 1996, has reinforced the
demand for enhanced 3D interactive motion control in the PC game
marketplace. The Company began shipping its SpaceOrb 360 Real-Life 3D game
controller into the retail channel in September 1996.
Optimized SpaceOrb 360 support has been integrated in over 25 leading
3D games titles to date and several more minor titles, with support
commitments from developers for in excess of a further 50 new titles
scheduled for release in 1997. These include Action, Adventure/Role Play
Games and Simulation segments, which collectively represent a significant
quantity of PC games sold annually. Current major titles supported include
Quake, Duke Nukem, MDK, Redneck Rampage, Jedi Knight and X-Wing vs. Tie
Fighter with new game support expected for titles such as Turok and SimCity
3000.
Console Games and Entertainment.
The Company entered into an exclusive licensing, strategic
development, manufacturing and marketing agreement with ASCII Entertainment
in 1996 to bring its Real-Life 3D controller technology to the Sony
Playstation. This product is being developed and manufactured under
contract to ASCII Entertainment by the Company, and is targeted for release
for the Christmas 1997 season. This controller is designed to address
consumer demand for enhanced 3D interactive motion control for the latest
3D games released for the console marketplace. Like the PC Market, target
titles for console systems include the Action, Adventure/Role Play Games
and Simulation segment, which are becoming the majority of titles on this
platform.
Discussions are also continuing with other leading vendors serving the
console game market to bring the Real-Life 3D controller technology to
other console systems platforms
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such as the Nintendo 64 advanced game system. There can be no assurance
that such discussions will result in the Company entering into a definitive
agreement with any such companies or that any such agreement entered into
will prove to be of financial benefit to the Company.
Other Potential Opportunities.
The Company has also begun an initiative to establish co-development
arrangements for its core 3D motion control input hardware and software
technologies in the 3D educational, "edutainment" and creative software markets.
In 1996 it has been reported that as much as 11% of the retail dollars, or $500
million, spent on PC consumer software was devoted to educational titles. The
Company is currently developing core software technology that will make it
easier and therefore decrease the time and expense of creating software titles
with enhanced 3D motion and advanced 3D interactivity. Although this may
represent a good opportunity for the Company to expand its product and customer
base, there can be no assurance that such initiatives will result in a
significant expansion of business.
Sales and Marketing
The Company has organized its sales and marketing force into two distinct
groups to separately address the industrial market and the consumer market. It
has recently opened a sales office in Germany. The Company also has a
distribution and market development arrangement with Sumisho Electronic Devices
Corporation, a wholly owned subsidiary of Sumitomo Corporation, for the
development of all its business in Japan.
The Company sells its 3D workstation controller systems to industrial OEMs,
VARs and major end-use manufacturers, particularly in the aerospace, automotive
and consumer products fields. The Company has OEM product distribution
agreements with IBM, Hewlett-Packard, and Digital Equipment Corporation and
distribution agreements with Electronic Data Systems Corporation, Sun Express,
Accel Graphics as well as other VARs. In addition, the Company sells directly to
large end-users in automotive, aerospace and other manufacturing industries
through a major accounts and regional sales force.
The Company serves the consumer marketplace through a tiered channels
approach: (i) sales through retail stores in the USA direct to major accounts
and through wholesale distribution in the USA and overseas; (ii) sales of
turnkey product or core components to OEMs; and (iii) technology licensing and
component sales to primary manufacturers of system hardware platforms and
peripheral accessories. These include PC and console game systems manufacturers
or third party providers.
Research and Development
The Company's research and development efforts consist of enhancing the
features and performance of its core 3D motion control technologies and applying
these enhancements to existing products and the development of new products. The
Company's research and development functions are divided into hardware
development and software development groups. The software development group is
further divided into high-end systems, consumer products, and core technology
teams.
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The overall goals of the hardware development group are to continually
enhance the performance, functionality, built-in features and ease-of-use
characteristics of the Company's unique and patented 3D motion control and
sensing core technologies, while reducing the cost of manufacturing of key
components. These enhancements are designed to allow the production of such
components that allow scale-ability, especially reduction in size, enhanced
reliability and broadening the use, all at progressively lower costs of
manufacturing.
The hardware development group is also focused on providing expertise and
engineering services in the implementation of the Company's core hardware input
technologies for the production of 3D controller products both for proprietary
brands and vendor lines. This group is, accordingly, involved in the design and
development of a range of new controller products, including the introduction of
a Universal Serial Bus ("USB") solution, for various market segments and
strategic partners and it is anticipated that requirements in this area will
increase.
The overall goals of the software development group are to enhance the
features, functionality and extensibility of the Company's proprietary SpaceWare
Real-Life 3D motion control software as a body of compelling core 3D enabling
technologies.
This includes ensuring: i) the development and provision of basic
user-friendly driver level support for the Company's Real-Life 3D controllers
for the growing array of 3D applications emerging on all popular operating
systems; ii) the development and provision of toolkits, and a technical support
infra-structure that allows ease of integration and porting of basic 3D motion
control capabilities in 3D application environments; iii) the development and
provision of appropriate add-ons and plug-in software that enhances interactive
3D motion control capabilities of 3D development applications; and iv) the
combining of the above technologies and other specialized interactive 3D motion
control software and software modules into a comprehensive developers' toolkit
and library to facilitate the incorporation of high-performance enhanced
interactive and pre-defined motion to third-party software applications
(including games, multimedia titles, presentation applications, digital media
content creation, CAD/CAM/CAE, visualization and simulation packages).
There can be no assurance that the Company will successfully complete the
development efforts described above or that these product developments will
achieve market acceptance.
Patents and Proprietary Rights
The Company relies on a combination of patents, copyrights and trade
secrets to establish and protect its proprietary rights.
The Company has received eleven patents in the United States, Canada,
Australia, Japan, and certain European countries covering its core technology
relating to the PowerSensor. The Company further has one issued United States
patent and three pending United States patent applications, as well as five
pending international patent applications, covering input sensing technology not
yet incorporated into the Company's products. The Company has provided a
paid-up, perpetual, irrevocable, royalty-free license for the Spaceball input
hardware technology to a company in Australia, Spatial Systems Limited ("SSL"),
to manufacture and distribute products exclusively in
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Australia and New Zealand. This arrangement was made in the acquisition of the
original core hardware technology.
The status of patents involves complex legal and factual questions and the
breadth of claims allowed is uncertain. Accordingly, there can be no assurance
that patent applications filed by the Company will result in patents being
issued or that its patents, and any patents that may be issued to it in the
future, will afford protection against competitors with similar technology. In
addition, patent applications filed in foreign countries are subject to laws,
rules and procedures which differ from those of the United States, and thus
there can be no assurance that foreign patent applications related to issued
United States patents will issue. Furthermore, if these patent applications
issue, some foreign countries provide significantly less patent protection than
the United States.
No assurances can be given that patents issued to the Company will not be
infringed upon or designed around by others or that others will not obtain
patents that the Company would need to license or design around. If existing or
future patents containing broad claims are upheld by the courts, the holders of
such patents could require companies to obtain licenses. Furthermore, although
the Company believes that its products and other proprietary rights do not
infringe the proprietary rights of third parties, there can be no assurance that
other third parties will not assert infringement claims against the Company or
that such claims will not be successful. If the Company is found to be
infringing third party patents, there can be no assurance that licenses that
might be required for the Company's products would be available on reasonable
terms, if at all.
The Company's SpaceWare Real-Life 3D software is protected by copyright
laws, which offer only limited protection for the Company's software. However,
because the software development industry is characterized by rapid
technological change, the Company believes that factors such as the technical
know-how in the interactive 3D motion control field, technological and creative
skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
important to establishing and maintaining a technology leadership position than
the various legal protections available for its software.
In addition to the protection afforded by patent registrations and
copyright laws, each employee of the Company and consultants to the Company have
executed a proprietary information agreement designed to protect the trade
secrets of the Company, inventions created in the course of employment with the
Company and other proprietary information of the Company.
Manufacturing
The Company contracts its hardware manufacturing requirements to outside
sources and expects to continue to do so in the future. The Company's production
engineering and manufacturing staff are responsible for establishing and
managing all manufacturing procedures and processes, and for procurement,
production planning, quality assurance and quality control of all of the
Company's products.
The Company currently uses several United States contractors and an
overseas contractor in the People's Republic of China, for its primary
manufacturing requirements. Final functional testing, calibration and quality
control, as well as final packing and shipping for its industrial products, are
performed by the Company. For its consumer products, all these functions are
provided on a turnkey basis for the Company according to strict ISO 9002
standards. Generally, standard parts and components are used in the
manufacturing of the Company's products with supplies sourced from
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multiple vendors. To date, the Company has been able to obtain adequate supplies
of all components in its products in a timely manner from existing sources.
Competition
The markets for computer hardware and software are highly competitive and
are characterized by continual change and technological improvement. In the
input hardware field, the Company's products currently compete with traditional
1D and 2D input devices, such as the dial box, keyboard, gamepad, mouse,
trackball and joysticks and some pure 3D input devices. On the software side,
there is such a broad range of 3D enabling technologies, but few are closely
aligned with six-degrees-of-freedom ("6D") input hardware devices, which
provides a desirable area of focus for the Company.
The Company recognizes that the market for 3D input devices and software
technologies is likely to become more competitive as the volume of 3D
applications increases, encouraging more companies to enter the market.
There are currently several alternative input device technologies available
that provide various degrees of interactive 3D control capabilities. These
devices range from the traditional 1D dial box, keyboard and gamepad and 2D
mouse, trackball and joysticks that provide interactive 3D motion control with
1, 2 or at most 3 degrees of freedom at a time, to somewhat specialized 3D
devices, including head positioning trackers and products marketed under the
names Flying Mouse, the Bird and the DataGlove. Motion control with the 1D and
2D devices tends to require a great deal of finger or hand dexterity and is
somewhat robotic in nature, while the specialized 3D devices are either
difficult to use or have a difficult software interface. In comparison, the
Company believes its six-degrees-of-freedom (`6D") input device technology, once
learned, allows life-like intuitive 3D motion control.
Logitech Corporation, a leading mouse manufacturer, has introduced a
product similar in functionality to the Company's Spaceball product line for the
industrial market and is showing a prototype desktop product for the consumer
market, using technology licensed from a German company. This technology
operates on a different design approach but achieves a similar end result. The
Logitech products are yet to find broad acceptance or be supported in as many
applications or with as many software titles as is afforded the Company's
Spaceball line of products by the proprietary SpaceWare software.
The Company currently competes principally on the basis of product
performance, the breadth of product compatibility with existing 3D applications,
the speed with which software is developed for new 3D applications, company
reputation, relationships with distributors and quality of professional
services. To the extent that the Company aims to broaden its penetration of
consumer sector business, the Company anticipates that it will compete on the
basis of price in addition to these other factors.
While the Company believes it compares favorably with any competition from
a performance and functionality basis, and the value that it provides through
its superior technology, there can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business and results of operations.
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Employees
As of March 31, 1997, the Company had 68 full-time employees and 0
part-time employees, of whom 32 were engaged in research and development, 24 in
sales and marketing, 8 in administration and finance and 4 in manufacturing
control. The Company's employees are not covered by a collective bargaining
agreement. The Company has never experienced employment-related work stoppages
and believes that it has satisfactory employee relations.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
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Name Age Position
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Dennis T. Gain............................54 Director, President, Chief Executive
Officer and Chairman of the Board
Neil M. Rossen............................51 Chief Financial Officer,
Senior Vice President of Finance
A. Lorne Grant............................52 Senior Vice President, Software
Division
John A. Hilton............................37 Senior Vice President, Chief
Technology Officer - Hardware
James J. Wick.............................36 Senior Vice President, Chief
Technology Officer - Software
Joyce A. Ouellette........................39 Senior Vice President of Sales and
Marketing
</TABLE>
Each officer's term of office extends until the first meeting of the Board
of Directors following the next annual meeting of stockholders and until a
successor is elected and qualified.
Dennis T. Gain has been a director of the Company and has served as
President and Chief Executive Officer of the Company since its incorporation in
1991. Prior to joining the Company, Mr. Gain was President of Focus North
America since 1989 and President of Woolrest North America from 1986 until 1989.
Mr. Gain is also a director and stockholder of Spatial Systems Ltd. which is an
Australian public company that is a shareholder of the Company. Mr. Gain has a
B.E. degree and Post Graduate Associate degree in Metallurgy from the University
of Otago, New Zealand and a B. Comm. degree in Finance from the University of
Auckland, New Zealand.
Neil M. Rossen has served as Senior Vice President and Chief Financial
Officer since November 1996. Mr. Rossen previously held senior financial and
operational positions with Northern Telecom Inc. in Europe from 1978 through
1982, and senior financial positions with Data General Corporation both in
Europe and the United States from 1982 until 1989. Between 1990
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and 1992, Mr. Rossen was the Vice President of Marketing and Sales of PAGG
Corporation, a contract manufacturer. From 1993 through 1996, Mr. Rossen was an
investor in and officer of a privately held interconnect company. Mr. Rossen
holds a Bachelor of Commerce degree from the University of Cape Town, and
qualified as a Chartered Accountant (S.A.).
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A. Lorne Grant has served as Senior Vice President since March 1997. Prior
to joining the Company, Mr. Grant served as Chief Executive Officer of Nexus
Integrated Services Corporation from 1990 through 1995. From 1982 through 1989,
Mr. Grant was Chief Executive Officer for Sytron Corporation, which, under his
direction, became the world-wide standard in archival software.
John A. Hilton has served as Senior Vice President of the Company since its
incorporation in 1991. Mr. Hilton was a director of the Company from April 1991
through January 1994. Prior to joining the Company, Mr. Hilton was Vice
President of Research and Development of Spatial Systems Ltd. since 1988, where
he developed the core technology used in the Company's advanced 3D-I products.
Mr. Hilton holds a B.S. degree in Computer Science, and B.E. and M.E. degrees in
mechanical engineering from the University of Sydney, Australia.
James J. Wick has served as Senior Vice President since September 1995 and
Vice President of Software Engineering since April 1993 and prior to that, was
the Company's Director of SpaceWare Development and Engineering Services since
its incorporation in 1991. Prior to joining the Company, he was a Regional
Support Manager of Spatial Systems Ltd. since June 1989. Prior to joining
Spatial Systems Ltd., Mr. Wick was Manager of Graphics Development at Polygen
Corporation. Mr. Wick holds a B.S. degree in Applied Computer Science from the
University of Wisconsin.
Joyce A. Ouellette has served as Senior Vice President of Sales and
Marketing since September 1995 and as Vice President of Sales and Marketing -
Commercial Markets since June 1993. Prior to that, Ms. Ouellette was the
Company's Director of Strategic Sales and Director of Channel marketing since
incorporation. Prior to 1991, Ms. Ouellette was the Marketing Manager at Spatial
Systems Ltd. since July 1990. Prior to joining Spatial Systems Ltd., Ms.
Ouellette was Marketing Manager for Digital Techniques Inc. since mid-1989 and
held various industry marketing positions at Prime Computer, Inc. from 1985
through 1989. Ms. Ouellette holds a B.S. degree in Business from North Adams
State College.
ITEM 2. PROPERTIES
The Company's corporate offices are located in an approximately 33,300
square foot facility in Lowell, Massachusetts. The Company occupies the Lowell
facility under a sublease which terminates on July 3, 2000, subject to two
successive one year renewal terms at the option of the Company. The Company
believes that its existing facilities, together with additional office space
available to it pursuant to an option under its Lowell lease, are sufficient to
meet its requirements for the near term.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 1997, the Company is not party to any legal proceedings
and is not aware of any material threatened litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on December 6, 1995 on the
Nasdaq National Market under the symbol "SIMC". As of June 20, 1997 there were
143 holders of record of the Company's Common Stock.
The following table sets forth for the fiscal periods indicated, the range
of high and low closing prices for the Company's Common Stock on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
Year Ended March 31, 1996
<S> <C> <C>
Third Quarter (beginning December 6, 1995) $12 3/4 $11 1/4
Fourth Quarter $17 1/4 $10 1/4
Year Ended March 31, 1997
First Quarter $20 1/4 $14 1/4
Second Quarter $14 5/8 $ 8
Third Quarter $12 1/8 $ 4
Fourth Quarter $ 6 3/8 $ 3 1/4
</TABLE>
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain all future
earnings, if any, to fund the development and growth of its business and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
14
<PAGE>
Item 6. Selected Consolidated Financial Data
Summary Consolidated Financial Data
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Fiscal Year Ended March 31
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues ................................... $ 9,075 $ 8,132 $5,536 $3,198 $1,920
Income (loss) from operations .............. (4,948) 705 686 467 256
Net income (loss) .......................... (3,722) 628 526 327 182
Net income (loss) per share ................ $ (0.51) $ 0.10 $ 0.09 $ 0.07 $ 0.07
Weighted average shares outstanding ........ 7,283 6,562 6,004 4,680 2,545
BALANCE SHEET DATA:
Working Capital ............................ 13,622 17,503 2,142 2,357 823
Total assets ............................... 16,602 21,108 4,507 3,342 1,195
Long term liabilities, less current portion -- 320 220 99 255
Total shareholders' equity ................. 15,260 19,301 3,339 2,667 703
</TABLE>
15
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors regarding forward-looking statements. In this context, the
discussion in this Item contains forward-looking statements which involve a
certain degree of risk and uncertainty, including statements relating to
liquidity and capital resources. Factors that could cause or contribute to the
actualization of such forward looking statements include, but are not limited
to, the market acceptance of and the demand for the Company's products, the
development of technology and manufacturing capabilities, the expanded presence
in the consumer market, the impact of competitive products on the Company's
profitability and the Company's dependence upon third party suppliers.
Overview
The Company was incorporated in April 1991 to develop and market advanced
3D interactive motion control hardware and software products for the industrial
CAD/CAM/CAE workstation market. Historically, the Company has generated revenues
from sales of bundled hardware and software, and such sales are dependent upon
prior incorporation of the Company's enabling software into 3D applications
developed by ISVs. Product revenues generated by the incorporation of the
Company's software into a specific ISV application may lag six to eighteen
months after the incorporation activity is completed. The Company also generates
revenues from maintenance services, although historically these revenues have
been immaterial. In fiscal 1995, the Company launched its first hardware and
software products aimed at the industrial PC marketplace. Early in fiscal 1996,
the Company began marketing its first stand-alone software product for the PC
CAD marketplace, and commenced limited test-marketing of its first consumer
product, targeted at PC games. In late fiscal 1996, the Company began marketing
the ergonomically improved, cost reduced version of the consumer product to the
OEM marketplace as the initial step in its goal of achieving long-term growth in
the consumer sector. The Company commenced shipments of its new game controller
into the consumer market in the third quarter of fiscal 1997.
For reasons of manufacturing and volume efficiencies, the Company contracts
all of its hardware manufacturing to outside sources. Primary manufacturing of
its products had previously been through multiple domestic contract
manufacturers, with final functional testing and quality control performed by
the Company. Late in fiscal 1996, the Company began directing its manufacturing
to offshore contract manufacturers to reduce the cost of goods through high
volume manufacturing.
Research and development comprises both hardware and software activities.
Hardware development has focused on creating products utilizing the Company's
core hardware technology, but designed for specific end-use markets, and
engineering these components to reduce manufacturing costs. This has resulted in
products for the workstation, PC and consumer markets, and significant cost
reductions in the core technology. In fiscal 1996, the Company began
sampling its new low-cost Eclipse-1 ASIC chip for use in its own proprietary
controllers. The Eclipse-1 ASIC chip is incorporated into the SpaceOrb 360,
which began shipping to customers during fiscal 1997.
16
<PAGE>
The primary activity in software development has been to create specialized 3D
motion control software and software tools to enable the Company's products to
be integrated into specific application software. Software development
activities have increased as the number of 3D applications into which the
Company's software has been integrated has increased, and upon entering the
professional PC multimedia animation market and consumer multimedia
"edutainment" market with 3D interactive software programs.
Results Of Operations
Comparison Of Fiscal Year Ended March 31, 1997 to the Fiscal Year Ended March
31, 1996
Revenues. Revenues increased 11.6% to $9,075,000 for the fiscal year ended
March 31, 1997 ("1997 Fiscal Year") from $8,132,000 for the fiscal year ended
March 31, 1996 ("1996 Fiscal Year"). The increase in revenues is attributable to
the Company's launch of the SpaceOrb 360 RealLife 3D ("SpaceOrb 360") game
controller into the consumer market. This was the first year that the Company
sold a consumer product. Although the SpaceOrb 360 enjoys widespread acceptance
in the early-adopter, hard core gamer market, sales to the mass market have
lagged due to delays in customer acceptance of the product. The Company was
unable to clearly differentiate its product from other lower priced computer
control devices. As a result, management has implemented a strategy of forming
strategic partnerships to more effectively penetrate the consumer market
Sales to the industrial market for the 1997 Fiscal Year were negatively
impacted by slower than expected sales to both domestic and international CAD
and multimedia customers. The Spaceball 3003 ("3003"), a new lower priced input
device for workstation based 3D CAD applications, negatively impacted sales of
the higher priced Spaceball 2003 ("2003"). The Company's expectations that the
lower cost 3003 would encourage bundling by OEM customers and increase unit
sales sufficiently to offset any negative price impact were not met.
Revenues from software and other licensing agreements for the 1997 Fiscal
Year represent sales of Panacea software products, as well as licensing of core
hardware and software technology. A significant portion of the licensing
revenues for the year include one time licensing payments.
Two customers represented 17.0% and 14.8% of the Company's revenues for the
1997 Fiscal Year as compared with two customers representing 24.3% and 9.8% of
sales for the 1996 Fiscal Year. Export sales, all of which are denominated in
U.S. dollars, decreased 18.8% to $2,364,000 for the 1997 Fiscal Year from
$2,913,000 for the 1996 Fiscal Year. In the industrial sector, export sales are
expected to increase at a faster rate than the domestic market.
Gross Profit. Gross profit, representing revenues less cost of revenues
(including costs of materials, costs of manufacturing overhead, royalties and
amortization of capitalized software), decreased 21.4% to $4,639,000 for the
1997 Fiscal Year from $5,903,000 for the 1996 Fiscal Year and represented 51.1%
and 72.6% of revenues, respectively. Gross profit declined mainly due to write-
offs of capitalized software and a write down of inventory to net realizable
value. The Company completed an evaluation of the projected revenue stream
associated with inventory components related to the SpaceOrb 360 and capitalized
software, which indicated that the recoverability of the costs of these assets
was uncertain. Therefore, the Company recognized a $329,000 charge for the write
down of its capitalized software and a $600,000 charge for the write down of its
inventory.
17
<PAGE>
The gross profit was further impacted by the introduction of the SpaceOrb
360, which has significantly lower gross margins than the industrial market
products.
As the Company shifts its sales mix from direct to OEM channels for
industrial products, and increases the percentage of sales derived from consumer
products, it is expected that the gross profit percentage will continue to be
below traditional levels. The decline is expected to be partially offset by
lower costs of manufacturing under volume production. The Company's expectations
regarding the decline in gross profit percentage and decreases in production
costs are forward looking statements. There can be no assurance that such
decreases in profit will not be greater than anticipated or that cost savings
will not be less than anticipated due to numerous factors, including
unanticipated development issues arising with respect to this new technology as
the Company initiates volume production.
Selling and Marketing Expenses. Selling and marketing expenses, which
include personnel costs, advertising and marketing costs, sales commissions and
trade show expenses, increased 82.4% to $4,945,000 for the 1997 Fiscal Year from
$2,711,000 for the 1996 Fiscal Year and represented 54.5% and 33.3% of revenues,
respectively. The increase is primarily due to costs incurred in connection with
the initial marketing program for the SpaceOrb 360, including extensive non-
recurring television advertising and promotion expenses in excess of $1,000,000.
Additional personnel and recruiting costs associated with an expansion of the
sales and marketing infrastructure were also incurred during the year.
Management anticipates selling and marketing expenses to decline as a percentage
of revenues in the fiscal year ending March 31, 1998 ("1998 Fiscal Year"), due
to cost containment programs implemented during the 1997 Fiscal Year. The
Statement concerning the Company's expectations regarding the level of sales and
marketing expenses is a forward looking statement. Such expenses may vary from
expectations due to timing of marketing programs and other factors.
General and Administrative Expenses. General and administrative expenses,
which include the costs of the Company's corporate finance, human resources and
administrative functions, increased 114.9% to $1,726,000 for the 1997 Fiscal
Year from $803,000 for the 1996 Fiscal Year, and represented 19.0% and 9.9% of
sales respectively. The increase is associated with increased personnel costs to
expand the administrative infrastructure as well as increases in professional
fees and filing fees due to additional reporting requirements consequent upon
becoming a public company.
Research and Development Expenses. Research and development expenses, which
consist primarily of personnel and equipment costs required to conduct the
Company's software and hardware development and engineering efforts, increased
73.2% to $2,916,000 for the 1997 Fiscal Year from $1,684,000 for the 1996 Fiscal
Year and represented 32.1% and 20.7% of revenues, respectively. The increase
reflects significant investments in personnel and consultants necessary to
expand software product development efforts, particularly in the Consumer,
Multimedia and PC CAD markets, and engineering efforts designed to lower the
cost of manufacturing of the Company's hardware components. Capitalized software
costs amounted to $224,000 for the 1997 Fiscal Year in comparison to $425,000
for the 1996 Fiscal Year. The Company plans to continue expansion of software
products for the consumer and the industrial marketplaces, as well as to
commence development of specialized 3D interactive motion control stand alone
software for licensing and revenue generation that is independent of the
Company's hardware products. As such, management expects that research and
development expenses will continue to increase in the 1998 Fiscal Year.
Provision for Income Taxes. The current federal tax benefit represents
taxes receivable arising primarily from the carryback of the fiscal 1997 loss to
the three previous years and other refunds.
18
<PAGE>
Comparison Of Fiscal Year Ended March 31, 1996 to the Fiscal Year Ended March
31, 1995
Revenues. Revenues increased 46.9% to $8,132,000 in the 1996 Fiscal Year
from $5,536,000 for the fiscal year ended March 31, 1995 ("1995 Fiscal Year").
This growth represented increased sales to new and existing customers in the
domestic marketplace as well as increased sales to international customers. The
Company had two customers representing 24.3% and 9.8% of the Company's revenues
for the 1996 Fiscal Year as compared to two customers representing 24.3% and
16.8% of sales for the 1995 Fiscal Year. Export sales increased 67.8% to
$2,913,000 for the 1996 Fiscal Year from $1,736,000 for the 1995 Fiscal Year.
Increased revenues reflect, among other factors, the overall growth in the
market for 3D software, greater market availability due to the release of new
applications in which the Company's software is incorporated, and wider
acceptance of the Company's products by end-users.
Gross Profit. Gross profit, representing revenues less cost of revenues
(including costs of materials, costs of manufacturing overhead, royalties and
amortization of capitalized software), increased 42.8% to $5,903,000 for the
1996 Fiscal Year from $4,133,000 for the 1995 Fiscal Year and represented 72.6%
and 74.7% of revenues, respectively. The increase in gross profit was primarily
due to increases in revenues, as well as reductions in the cost of materials and
savings resulting from efficiencies in manufacturing operations. The decrease in
gross profit as a percentage of revenues was primarily due to amortization of
capitalized software expense amounting to $136,000 for the 1996 Fiscal Year
versus $33,000 for the 1995 Fiscal Year.
Selling and Marketing Expenses. Selling and marketing expenses, which
include personnel costs, advertising costs, sales commissions and trade show
expenses, increased 57.3% to $2,711,000 for the 1996 Fiscal Year from $1,723,000
for the 1995 Fiscal Year and represented 33.3% and 31.1% of revenues,
respectively. During the year the Company added major new distribution
agreements with Digital Equipment Corporation and Sun Express, and continued to
increase the number of VARs, especially for the PC CAD and multimedia
marketplace. The increase in expenses reflect, among other factors, the
expansion of activities in existing markets, investments in market development
and sales and marketing infrastructure necessary to penetrate new markets,
especially the PC CAD, multimedia and consumer markets.
General and Administrative Expenses. General and administrative expenses,
which include the costs of the Company's corporate, finance, human resources and
administrative functions, decreased 3.7% to $803,000 for the 1996 Fiscal Year
from $834,000 for the 1995 Fiscal Year, and represented 9.9% and 15.1% of sales
respectively. This reduction reflects increasing economies of scale in
administrative infrastructure, the reduction of non-recurring financial
consulting expenses, and the reduction of legal expenses due to non-recurring
costs associated with the settlement of a lawsuit.
Research and Development Expenses. Research and development expenses, which
consist primarily of personnel and equipment costs required to conduct the
Company's software and engineering development efforts, increased 89.2% to
$1,684,000 for the 1996 Fiscal Year from $890,000 for the 1995 Fiscal Year and
represented 20.7% and 16.1% of revenues, respectively. The increase in expenses
reflect investments in the personnel necessary to expand software product
development, and engineering efforts designed to lower the cost of manufacturing
the Company's hardware componentry. Capitalized software costs amounted to
$425,000 for the 1996 Fiscal Year in comparison to $269,000 for the 1995 Fiscal
Year.
19
<PAGE>
Provision for Income Taxes. The Company's effective tax rate was 36.1% for
the 1996 Fiscal Year versus 31.9% for the 1995 Fiscal Year. The tax rate was
below the statutory rate in both years due to tax benefits resulting from
research and development credits, which were eliminated at the federal level at
the end of June 1995. The Company utilized all carryforwards related to the
research and development credit in 1996.
20
<PAGE>
Quarterly Operating Results
The following tables set forth certain consolidated quarterly financial
information of the Company, for the 1996 Fiscal Year and 1997 Fiscal Year. This
information has been derived from the quarterly financial statements of the
Company which are unaudited but which, in the opinion of management, have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that management
considers necessary for a fair presentation. This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere herein.
<TABLE>
<CAPTION>
Three Month Period Ended
------------------------------------------------------------------------------
June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31 Mar 31
1995 1995 1995 1996 1996 1996 1996 1997
------- ------- ------ ------ ------- ------- ------ ------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ............................ $1,786 $2,030 $2,047 $2,269 $ 1,852 $ 2,514 $ 2,685 $ 2,024
Gross Profit ........................ 1,391 1,429 1,496 1,587 1,291 1,403 930 1,015
Income (loss) from operations ...... 225 195 216 69 (339) (590) (2,501) (1,518)
Net income (loss) ................... $ 151 $ 134 $ 178 $ 165 $ (93) $ (269) $(2,092) $(1,268)
Net income (loss) per common share... $ 0.03 $ 0.02 $ 0.03 $ 0.02 $ (0.01) $ (0.04) $ (0.29) $ (0.17)
</TABLE>
The Company expects that it will continue to experience fluctuations in its
quarterly operating revenues and gross profit. This variability has been caused
by factors such as the timing of new product introductions and upgrades, the
timing of significant orders, the mix of products sold, and the mix of OEM and
direct sales to end-users.
21
<PAGE>
Liquidity And Capital Resources
To date, the Company has funded its operations and capital expenditures
primarily through cash generated from operations and the proceeds of equity
financing arrangements. As of March 31, 1997 the Company had cash and cash
equivalents and available-for-sale securities of $10,229,000 and working capital
of $13,622,000 versus $16,037,000 and $17,503,000, respectively at March 31,
1996. The Company has no outstanding line of credit or other indebtedness for
borrowed money.
The Company used $4,408,000 to fund operating activities in the current
year versus $451,000 provided by operations in the prior year. The use of funds
is primarily attributable to the net loss of $3,722,000, the increase in
inventory of $1,309,000, and the increase in income taxes receivable, totaling
$438,000. Inventory levels were high as a result of significant purchases made
in order to have the necessary anticipated quantities of the new SpaceOrb 360
ready for shipment for the holiday season. The increase in income taxes
receivable reflects applications made to the Internal Revenue Service for
refunds resulting from the carryback of the 1997 Fiscal Year net operating loss
to the three previous years.
Net cash provided to the Company through investing activities totaled
$4,536,000 during the 1997 Fiscal Year. The increase is attributable to net
proceeds in the amount of $5,607,000, generated from sales of the Company's
available-for-sale securities. The increase was offset by $676,000 for purchases
of furniture and equipment, (primarily computer equipment and additional
investments in tools and dies for high volume, low cost manufacturing of the
Company's hardware components), $171,000 expenditures for intangible assets
(primarily patents) and software development costs totaling $224,000. The
Company anticipates that capital expenditures for the 1998 Fiscal Year will
exceed capital expenditures for the 1997 Fiscal Year, but it has no commitments
or specific plans for any significant purchases. The Company expects that
purchases of computers and related equipment will be required upon the hiring of
additional research and development staff.
Financing activities used $375,000 of net cash in the current year
primarily as a result of the Company repurchasing common stock. The cost was
offset by the proceeds received on the exercise of employee stock options
The Company believes existing cash and investment securities together with
future anticipated funds from operations, will satisfy its projected working
capital and other cash requirements through the end of its fiscal year ending
March 31, 1998. Substantial funds will be required to continue software and
hardware development, as well as to develop the sales and marketing
infrastructure, distribution channels and market awareness in the PC Multimedia
and Consumer marketplaces. The Company believes the level of financial resources
available to it is an important competitive factor in its industry and may seek
additional capital prior to the end of that period. In addition, the Company may
consider potential acquisitions of technologies and businesses complementary to
the Company's business. There are no present agreements or commitments with
respect to any such acquisition; however, any such transaction may affect the
Company's future capital needs.
The Company's capital requirements will depend on many factors, including
the rate at which the Company can develop its products, the market acceptance of
such products, the levels of promotion and advertising required to launch such
products and attain a competitive position in the marketplace, the response of
competitors to the products based on the Company's technology, and capital
necessary for potential acquisitions. Changes in technology or a growth of sales
beyond currently established capabilities will also require further investment.
To the extent that the Company's current financial resources are insufficient to
fund the Company's operating requirements, it may be necessary for the Company
to seek additional funding through public or private financing. There can be no
assurance that
22
<PAGE>
additional financing will be available on acceptable terms or at all. If
additional funds are raised by issuing equity securities, further dilution to
the existing stockholders may result. If adequate funds are not available, the
Company's business would be materially adversely affected, and, as a result, the
Company may be required to curtail its operations significantly.
23
<PAGE>
Item 8. Financial Statements And Supplementary Data
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Auditors.......................................... 25
Consolidated Balance Sheets as of March 31, 1997 and 1996............... 26
Consolidated Statements of Operations for the years ended March 31,
1997, 1996, and 1995................................................ 27
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1997, 1996, and 1995...................................... 28
Consolidated Statements of Cash Flows for the years ended March 31,
1997, 1996, and 1995 ............................................... 30
Notes to Consolidated Financial Statements.............................. 31
</TABLE>
24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Spacetec IMC Corporation
We have audited the accompanying consolidated balance sheets of Spacetec IMC
Corporation as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Spacetec IMC Corporation at March 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
Boston, Massachusetts
May 22, 1997
25
<PAGE>
SPACETEC IMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31
-----------------------------------------
1997 1996
------------------- ------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 170 $ 417
Securities available-for-sale 10,059 15,620
Accounts receivable, less allowance for doubtful accounts of $75 and $80
at March 31, 1997 and 1996, respectively 2,285 2,112
Inventories 1,718 409
Prepaid expenses 275 260
Receivable from employees and officer 19 72
Income taxes receivable 438 -
Deferred income taxes - 100
------------------- ------------------
Total current assets 14,964 18,990
Furniture and equipment, net of accumulated depreciation of $569 and $373 964 870
at March 31, 1997 and 1996, respectively
Intangible assets, net of accumulated amortization of $535 and $303 382 516
at March 31, 1997 and 1996, respectively
Software development costs, net of accumulated amortization of $312 and $172 265 695
at March 31, 1997 and 1996, respectively
Other assets 27 37
------------------- ------------------
1,638 2,118
------------------- ------------------
Total assets $ 16,602 $ 21,108
=================== ==================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,267 $ 1,475
Deferred revenue 75 12
------------------- ------------------
Total current liabilities 1,342 1,487
Deferred income taxes
- 320
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized - -
Common stock, $.01 par value; 20,000,000 authorized shares; 7,366,508
and 7,240,908 shares issued and outstanding at March 31, 1997
and 1996, respectively 74 72
Additional paid-in capital 17,969 17,540
Deferred compensation (40) -
Unrealized gain on available-for-sale securities 46 -
Retained earnings (accumulated deficit) (2,033) 1,689
Treasury stock, at cost; 100,000 shares (756) -
------------------- ------------------
Total shareholders' equity 15,260 19,301
------------------- ------------------
Total liabilities and shareholders' equity $ 16,602 $ 21,108
=================== ==================
</TABLE>
See accompanying notes.
26
<PAGE>
SPACETEC IMC CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 9,075 $ 8,132 $ 5,536
Cost of revenues 4,436 2,229 1,403
------------ ------------ ------------
Gross profit 4,639 5,903 4,133
Operating expenses:
Selling and marketing 4,945 2,711 1,723
Research and development 2,916 1,684 890
General and administrative 1,726 803 834
------------ ------------ ------------
Total operating expenses 9,587 5,198 3,447
------------ ------------ ------------
Income (loss) from operations (4,948) 705 686
Interest income (632) (278) (95)
Interest expense - - 9
------------ ------------ ------------
Income (loss) before income taxes (4,316) 983 772
Income tax provision (benefit) (594) 355 246
------------ ------------ ------------
Net income (loss) $ (3,722) $ 628 $ 526
============ ============ ============
Net income (loss) per share $ (0.51) $ 0.10 $ 0.09
============ ============ ============
Weighted average common shares outstanding 7,283 6,562 6,004
============ ============ ============
</TABLE>
See accompanying notes.
27
<PAGE>
SPACETEC IMC CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock
------------------------- -----------------------
Shares Amount Shares Amount
------------------------- -----------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 1,100,001 $ 110 813,953 $ 81
Issuance of Series A Preferred Stock upon
exercise of options 162,000 16 - -
Issuance of Class B Common Stock upon - -
exercise of options - - - -
Repurchase and retirement of Common Stock - - - -
Issuance of Common Stock in exchange for
shares of Panacea, Inc. - - - -
Net income - - - -
------------------------- -----------------------
Balance at March 31, 1995 1,262,001 126 813,953 81
Issuance of Common Stock upon public
offering, net of underwriters' discount
and other offering costs of $1,916 - - - -
Conversion of Preferred Stock and Class B
Common Stock upon public offering (1,262,001) (126) (813,953) (81)
Net Income - - - -
------------------------- -----------------------
Balance at March 31, 1996 - - - -
Issuance of Common Stock upon exercise
of options - - - -
Payments to repurchase Common Stock - - - -
Additional offering costs - - - -
Issuance of stock options - - - -
Amortization of deferred compensation - - - -
Unrealized gain on available-for-sale - - - -
securities - - - -
Net loss - - - -
------------------------- -----------------------
Balance at March 31, 1997 - $ - - $ -
========================= =======================
</TABLE>
<TABLE>
<CAPTION>
Class B
Common Stock Common Stock
------------------------- -----------------------
Shares Amount Shares Amount
------------------------- -----------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 525,000 $ 5 350,000 $ 97
Issuance of Series A Preferred Stock upon
exercise of options - - - -
Issuance of Class B Common Stock upon
exercise of options - - 45,000 17
Repurchase and retirement of Common Stock (1,000) - - -
Issuance of Common Stock in exchange for
shares of Panacea, Inc. 50,000 1 - -
Net income - - - -
----------------------- ------------------------
Balance at March 31, 1995 574,000 6 395,000 114
Issuance of Common Stock upon public
offering, net of underwriters' discount
and other offering costs of $1,916 1,725,000 17 - -
Conversion of Preferred Stock and Class B
Common Stock upon public offering 4,941,908 49 (395,000) (114)
Net Income - - - -
----------------------- ------------------------
Balance at March 31, 1996 7,240,908 72 - -
Issuance of Common Stock upon exercise
of options 125,600 2 - -
Payments to repurchase Common Stock - - - -
Additional offering costs - - - -
Issuance of stock options - - - -
Amortization of deferred compensation - - - -
Unrealized gain on available-for-sale - - - -
securities - - - -
Net loss - - - -
----------------------- ------------------------
Balance at March 31, 1997 7,366,508 $ 74 - $ -
======================= ========================
</TABLE>
See accompanying notes
28
<PAGE>
SPACETEC IMC CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Retained
Additional Unrealized Earnings
Paid-in Deferred Gain on (Accumulated
Capital Compensation Investments Deficit)
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 $ 1,839 $ - $ - $ 535
Issuance of Series A Preferred Stock upon
exercise of options 42 - - -
Issuance of Class B Common Stock upon
exercise of options - - - -
Repurchase and retirement of Common Stock - - - -
Issuance of Common Stock in exchange for shares of
Panacea, Inc. 70 - - -
Net income - - - 526
--------- ---------- --------- ----------
Balance at March 31, 1995 1,951 - - 1,061
Issuance of Common Stock upon public offering, net of
underwriters' discount and other offering costs of
$1,916 15,317 - - -
Conversion of Preferred Stock and Class B Common
Stock upon public offering 272 - - -
Net Income - - - 628
--------- ---------- --------- ----------
Balance at March 31, 1996 17,540 - - 1,689
Issuance of Common Stock upon exercise of options 384 - - -
Payments to repurchase Common Stock - - - -
Additional offering costs (5) - - -
Issuance of stock options 50 (50) - -
Amortization of deferred compensation - 10 - -
Unrealized gain on available-for-sale securities - - 46 -
Net loss - - - (3,722)
--------- ---------- --------- ----------
Balance at March 31, 1997 $ 17,969 $ (40) $ 46 $ (2,033)
========= ========== ========= ==========
<CAPTION>
Treasury Stock Total
------------------------ Shareholders'
Shares Amount Equity
------------------------ ------------
<S> <C> <C> <C>
Balance at March 31, 1994 - $ - $ 2,667
Issuance of Series A Preferred Stock upon
exercise of options - - 58
Issuance of Class B Common Stock upon
exercise of options - - 17
Repurchase and retirement of Common Stock - - -
Issuance of Common Stock in exchange for shares of
Panacea, Inc. - - 71
Net income
- - 526
------------------------ ----------
Balance at March 31, 1995 - - 3,339
Issuance of Common Stock upon public offering, net of
underwriters' discount and other offering costs of
$1,916 - - 15,334
Conversion of Preferred Stock and Class B Common
Stock upon public offering - - -
Net Income - - 628
------------------------ ----------
Balance at March 31, 1996 - - 19,301
Issuance of Common Stock upon exercise of options - - 386
Payments to repurchase Common Stock (100,000) (756) (756)
Additional offering costs - - (5)
Issuance of stock options - - -
Amortization of deferred compensation - - 10
Unrealized gain on available-for-sale securities - - 46
Net loss - - (3,722)
------------------------ ----------
Balance at March 31, 1997 (100,000) $ (756) $ 15,260
======================== ==========
</TABLE>
See accompanying notes
29
<PAGE>
SPACETEC IMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31
--------------------------------------------------
1997 1996 1995
-------------- --------------- -------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (3,722) $ 628 $ 526
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,063 557 189
Deferred income taxes (220) 50 90
Loss on disposal of assets 488 - -
Changes in operating assets and liabilities:
Accounts receivable, net (173) (840) (436)
Inventories (1,309) (215) (59)
Prepaid expenses and other assets (5) (221) (57)
Due from employees and officer 53 (67) 1
Income taxes receivable (438) - -
Accounts payable and accrued expenses (208) 598 130
Deferred revenue 63 (39) 51
-------------- --------------- -------------
Net cash provided by (used in) operating activities (4,408) 451 435
Investing activities
Net change in securities available-for-sale 5,607 (14,120) (500)
Purchase of furniture and equipment (676) (633) (255)
Purchase of intangible assets (171) (129) (452)
Software development costs (224) (425) (269)
-------------- --------------- -------------
Net cash provided by (used in) investing activities 4,536 (15,307) (1,476)
Financing activities
Proceeds from issuance of common stock, net of costs - 15,334 -
Proceeds from issuance of Class B Common Stock - - 17
Proceeds from issuance of Preferred stock - - 58
Proceeds from exercise of stock options 386 - -
Stock repurchase (756) - -
Additional offering costs (5) - -
Repayment of line of credit - (65) -
Repayment of capital lease obligation - (3) (5)
-------------- --------------- -------------
Net cash provided by (used in) financing activities (375) 15,266 70
-------------- --------------- -------------
Net increase in cash and cash equivalents (247) 410 (971)
Cash and cash equivalents at beginning of period 417 7 978
-------------- --------------- -------------
Cash and cash equivalents at end of period $ 170 $ 417 $ 7
============== =============== =============
Supplemental disclosure of cash flow information:
Income taxes paid $ 336 $ 220 $ 242
============== =============== =============
Interest paid $ - $ 15 $ 9
============== =============== =============
Noncash investing and financing activities:
Acquisition of Panacea, Inc. for common stock $ 71
=============
Adjustment of Pancea Inc. purchase price $ 48
===============
Unrealized gain on available-for-sale securities $ 46
==============
</TABLE>
See accompanying notes.
30
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements
Years Ended March 31, 1997 and 1996
1. Basis of Presentation
Description Of Business
Spacetec IMC Corporation (the "Company") is a Massachusetts corporation,
organized in April 1991. The Company manufactures and markets real time three
dimensional ("3D") interactive motion control ("IMC") input hardware controllers
and integration software for the industrial CAD/CAM/CAE and consumer markets in
the domestic and international arenas.
Principles Of Consolidation
The consolidated financial statements include the accounts of the Company and
through March 1996, its wholly-owned subsidiary, Panacea, Inc. ("Panacea"). Upon
consolidation, all significant intercompany accounts have been eliminated.
Panacea was merged into the Company on March 22, 1996.
Risks And Uncertainties
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make significant estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions by
management affect the Company's allowance for doubtful accounts, reserve for
inventory obsolescence and certain accrued expenses. Actual results could differ
from those estimates.
2. Significant Accounting Policies
Cash Equivalents and Securities Available-for-Sale
The Company considers all highly liquid financial instruments with a maturity at
the date of acquisition of three months or less to be cash equivalents. At March
31, 1997 and 1996, these securities consist principally of commercial paper and
debt securities maturing within one year or less. Given the short-term nature of
these investments and their availability for use in the Company's current
operations, these amounts are classified as "available-for-sale". Available-for-
sale securities are carried at fair market value and unrealized gains and losses
are reported as a separate component of shareholders' equity. Unrealized gains
included in shareholders' equity totaled $46,000 at March 31, 1997. At
March 31, 1996, the fair market value of these investments approximated cost.
31
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies - (Continued)
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents, securities
available-for-sale and trade receivables. Cash equivalents and securities
available-for-sale consist of temporary investments in money market funds with
maturity dates of three months or less when purchased, commercial paper and debt
securities with maturity dates of one year or less when purchased, and have
limited credit exposure.
Concentrations of credit risk with respect to trade receivables arise as a
significant portion of the Company's customer base is comprised of high
technology manufacturers. The Company had two customers representing
approximately 17% and 15% of 1997 sales, two customers representing
approximately 24% and 10% of 1996 sales and two customers representing
approximately 24% and 17% of 1995 sales. Although the Company's exposure to
credit risk associated with nonpayment by high technology manufacturers is
affected by conditions or occurrences within the high technology industry, trade
receivables from the high technology manufacturers were current at
March 31, 1997. The Company's write-offs related to the collection of trade
accounts receivable amounted to $76,000 and $27,000 in 1997 and 1996,
respectively, and were immaterial in 1995.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined
using the first in, first out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets. The useful lives of furniture and equipment range from three to
seven years. Leasehold improvements are stated at cost and amortized over the
remaining life of the building lease.
Intangible Assets
Intangible assets consist of acquired technology, patents, license and
non-compete agreements. Acquired technology and patents are amortized on a
straight-line basis over three to five years. Non-compete agreements pertain to
payments in fiscal 1995 of $325,000 to certain former employees of Panacea.
Remaining amounts related to non-compete agreements are being amortized over the
terms of the respective agreements, which are five years.
Management periodically reviews the Company's intangible assets for impairment
based on an assessment of future operations to ensure that they are
appropriately valued.
32
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies - (Continued)
Revenue Recognition
The Company accounts for software revenue in accordance with Statement of
Position 91-1, Software Revenue Recognition, issued by the American Institute of
Certified Public Accountants. Specifically, revenue from licenses to end-users
is recognized upon product shipment, provided post-sale vendor obligations are
insignificant. If vendor obligations are significant, revenue is deferred until
the obligations are fulfilled. Revenue from maintenance agreements is recognized
ratably over the term of the agreement.
The Company provides customers with a twelve month warranty from the date of
sale. Estimated warranty obligations are provided at the time of sale of the
Company's products based on historical and anticipated warranty costs. Warranty
costs during 1997, 1996 and 1995 were immaterial.
Research And Development Costs
Research and development costs are expensed as incurred. Software development
costs incurred after the establishment of technological feasibility and until
the product is available for general release are capitalized, provided
recoverability is reasonably assured.
Technological feasibility is defined as the establishment of a working prototype
or a detail program design. Amortization of software development costs is the
greater of the amount computed using (i) the ratio of current gross revenues to
the total of current and anticipated future gross revenues of each product or
(ii) the straight-line method over the expected useful life of the product,
which generally does not exceed three years. Amortization of software
development costs in 1997, 1996 and 1995 was approximately $654,000, $136,000
and $33,000, respectively, and is included in cost of sales. In 1997, management
determined that the recoverability of certain costs associated with the
capitalized software was uncertain and recorded a charge of $329,000 for the
write down of the software. This amount is included in amortization expense for
the year ended March 31, 1997.
Income Taxes
The Company provides for income taxes under the liability method prescribed by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred income taxes are recognized for the future
tax consequences of differences between the tax and financial accounting of
assets and liabilities at each year end. Deferred income taxes are based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to effect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
33
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies - (Continued)
Stock-based Compensation
The Company has adopted the disclosure provisions only of Financial Accounting
Standards No. 123, "Accounting For Stock-based Compensation" ("FAS 123") and
will continue to account for its stock option plans in accordance with the
provisions of APB 25, Accounting for Stock issued to Employees. In certain
cases, options issued to non-employees are accounted for under FAS 123, and
compensation expense has been recognized.
Net Income/Loss Per Share
Net income/loss per share is computed using the weighted average number of
common shares and equivalents outstanding during each period. Common stock
equivalents are excluded from the computation when their effect is
anti-dilutive.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods and earlier application is not
permitted. The pro forma effect of adopting SFAS 128 for the period ending
March 31, 1997 and 1996 is not material.
Reclassifications
Certain amounts in prior year financial statements have been reclassified to
conform with current classifications.
3. Acquisition
On January 1, 1995, the Company issued 50,000 shares of its Common Stock to a
former shareholder of Panacea in exchange for all outstanding shares of Panacea.
This transaction has been accounted for as a purchase. The fair value of the
issued shares totaled $71,000 and has been allocated to the fair market value of
the assets acquired and liabilities assumed with any excess applied to goodwill
(approximately $71,000). The results of operations of Panacea have been included
in the consolidated financial statements from the date of acquisition.
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31,
1997 1996
--------------------------------
(in thousands)
<S> <C> <C>
Materials $1,133 $150
Work-in-process 31 136
Finished goods 554 123
--------------------------------
$1,718 $409
================================
</TABLE>
34
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
5. Accounts Payable And Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31
-----------------------------
1997 1996
-----------------------------
(in thousands)
<S> <C> <C>
Trade payables $1,055 $1,124
Commission and royalties 130 247
Accrued compensation 27 -
Income taxes - 80
Other 55 24
-----------------------------
$1,267 $1,475
=============================
</TABLE>
6. Commitments
Operating Leases
The Company leases office equipment and certain office space under various
agreements which expire through the fiscal year 2001. The agreement pertaining
to office space is subject to rent escalation clauses. Future minimum lease
payments under these noncancelable operating lease agreements are as follows:
<TABLE>
<S> <C>
Year
----
1998 $ 266,000
1999 283,000
2000 282,000
2001 71,000
---------------
$ 902,000
===============
</TABLE>
Total rent expense for the years ended March 31, 1997, 1996 and 1995 amounted to
approximately $272,000, $136,000 and $79,000, respectively.
Royalty Agreements
In May 1991, the Company entered into a royalty agreement (the "Agreement") with
a shareholder of the Company. Pursuant to the Agreement, the Company is obliged
to pay one-half of one percent (0.5%) of all net revenues received by the
Company with respect to technology covered by certain existing patents which
relate to the Company's hardware products. The Agreement will remain in effect
until the last of such patents expire.
35
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
6. Commitments - (Continued)
Pursuant to the acquisition of Panacea (Note 3), the Company is obligated to pay
royalties on net revenues received from the sales of certain of the Company's
products which contain purchased technology. Royalties are paid at fifteen
dollars per five hundred seats sold on one product and at eight percent (8%) of
net revenues for another product.
The Company incurred royalty expenses of approximately $74,000, $67,000 and
$24,000 under these agreements in fiscal years 1997, 1996 and 1995,
respectively.
7. Segment Information And Export Sales
The Company operates in one industry segment: the manufacturing and marketing of
real time 3D IMC hardware input controllers and integration software for the
industrial CAD/CAM/CAE and consumer electronics market. Export sales, all of
which are denominated in U.S. dollars, totaled approximately 26%, 36% and 31% of
total sales, for the years ended March 31, 1997, 1996 and 1995, respectively.
8. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended March 31
-------------------------------------------
1997 1996 1995
-------------------------------------------
Deferred Method Liability
Method
(in thousands)
<S> <C> <C> <C>
Currently payable:
Federal $(318) $265 $132
State (56) 40 24
-------------------------------------------
(374) 305 156
Deferred:
Federal (187) 42 68
State (33) 8 22
-------------------------------------------
(220) 50 90
-------------------------------------------
$(594) $355 $246
===========================================
</TABLE>
36
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
8. Income Taxes - (Continued)
A reconciliation of the federal statutory rate to the effective income tax rate
follows:
<TABLE>
<CAPTION>
Years ended March 31
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate (34.0)% 34.0% 34.0%
State taxes, net of federal benefit (6.0) 6.3 6.3
Research and development credits (4.1) (4.7) (8.4)
Other, net (.1) .5 -
Increase in valuation allowance 30.4 - -
------------------------------------
(13.8)% 36.1% 31.9%
====================================
</TABLE>
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
March 31
--------------------------------
1997 1996
--------------------------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 568 $ -
R&D credit carryforward 367 -
Inventory obsolescence reserve 290 31
Allowance for doubtful accounts 59 32
Accrued vacation 19 37
Deferred revenue 30 -
Uniform capitalization 5 16
Covenant not to compete 48 31
Other (3) 3
Valuation allowance (1,156) -
--------------------------------
227 150
Deferred tax liabilities:
Software development costs (132) (274)
Patents (50) (79)
Tax over book depreciation (45) (17)
--------------------------------
Total deferred tax liabilities (227) (370)
--------------------------------
$ - $(220)
================================
</TABLE>
37
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
9. Related Party Transactions
During the fiscal years 1997, 1996, and 1995, the Company sold its products to
Spatial Systems, Limited, a shareholder of the Company whose Chairman is also a
Director of the Company. Sales to Spatial Systems Limited for the years ended
March 31, 1997, 1996, and 1995, amounted to approximately $278,000, $140,000,
and $110,000, respectively. Accounts receivable at March 31, 1997, 1996 and 1995
from Spatial Systems Limited were approximately $149,000, $79,000 and $28,000,
respectively.
10. Capital Stock
On March 31, 1995, the Board of Directors approved a two-for-one stock split in
the form of a dividend to Class A Common shareholders on record on March 31,
1995. In September 1995, the Board of Directors approved an amendment to the
Company's Articles of Organization to (i) authorize 8,500,000 shares of Common
Stock, $0.01 par value ("Common Stock"); (ii) convert each outstanding share of
Class A Common to a share of Common Stock; (iii) eliminate the authorized shares
of Class A Common and (iv) to provide for the automatic conversion of each share
of nonvoting Class B Common Stock to two shares of Common Stock and eliminate
the authorized shares of Class B Common Stock upon the Company's initial public
offering. All references to capital stock, shares and per share amounts have
been restated to retroactively reflect the stock split and terms of the
amendment. Also in September 1995, the Company's Board of Directors approved a
restatement and further amendment to the articles of organization to replace the
authorized capital stock with 20,000,000 shares of Common Stock, $0.01 par value
and 1,000,000 shares of preferred stock, $0.01 par value, effective upon the
closing of the Company's initial public offering. Both amendments were approved
by the Company's shareholders on October 6, 1995 with the first becoming
effective on October 12, 1995, and the second on December 6, 1995.
As a result, with the closing date of the Company's initial public offering in
Decmeber 1995, each share of the Company's Series A Preferred Stock and
Series B Preferred Stock automatically converted into two shares of the
Company's Common Stock and the authorized shares associated with the Series A
and B Preferred Stock were eliminated. (Net proceeds of the public offering,
after deduction of $1,916,000 for underwriters' fees and other offering costs,
amounted to $15,334,000.)
38
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
10. Capital Stock - (Continued)
In July 1996, the Board of Directors authorized the repurchase, from time to
time, of up to 100,000 shares of the Company's Common Stock. Repurchases under
this program were completed in December 1996 at a cost of $756,000.
11. Stock Options
On December 4, 1996, the Board of Directors of the Company adopted, subject to
shareholder approval, the Amended and Restated 1995 Director Stock Option Plan
(the "Director Plan)" in which all directors who are not employees of the
Company (the "Eligible Directors") participate. The Company has reserved 225,000
shares of Common Stock for issuance under the Director Plan. Upon initial
election to the Board of Directors, each new Eligible Director is to be granted
an option to purchase 10,000 shares of Common Stock. On each December 31st
thereafter, any eligible director serving as such on that date will be granted
options ("Annual Options") to purchase 10,000 shares. Options become exercisable
with respect to 3,000 shares on the date of grant, 3,000 shares on the second
anniversary of the date of grant and 4,000 shares on the third anniversary of
the date of grant, if the optionholder is a member of the Board at the opening
of business on that date. The options have a term of ten years and an exercise
price equal to the fair market value of the Common Stock on the date of grant.
In addition to the Annual Options, the Director Plan allowed for the grant of
20,000 options to each of two current directors and 14,000 options to a third
director ("Initial Options"). The Initial Options become exercisable with
respect to 30% on the date of grant, 30% on the second anniversary of the date
of grant, and 40% on the third anniversary of the date of grant.
The Company's Amended and Restated 1993 Stock Option Plan (the "1993 Plan") was
readopted by the Board of Directors on September 29, 1995. The 1993 Plan
authorized the grant of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended ("ISOs") and non-qualified
stock options. The 1993 Plan allows for the purchase of an aggregate of
1,600,000 shares (subject to adjustment for stock splits and similar capital
changes) of common stock to employees of the Company and, in the case of
non-qualified stock options, to consultants of the Company or any Affiliate (as
defined in the 1993 Plan) capable of contributing to the Company's performance.
The Board of Directors has appointed the Compensation Committee to administer
the Plan.
The purchase price per share of stock deliverable upon the exercise of a stock
option is determined by the Compensation Committee provided that the exercise
price for ISOs shall not be less than the fair market value of the stock on the
date of grant. Each option granted under the Plan is exercisable either in full
or in installments as set forth in each recipient's option agreement. Incentive
stock options generally vest over a five-year period. All options expire ten
years after the date of grant.
39
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
11. Stock Options - (Continued)
Pursuant to the requirements of FAS 123, the following are the pro forma net
income or loss and net income or loss per share for the years ended March 31,
1997 and 1996, as if the compensation expense for the options plans had been
determined based on the fair value at the grant date for grants during fiscal
years 1997 and 1996, consistent with the provisions of FAS 123:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
As Reported Pro Forma As Reported Pro Forma
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net income (loss) (in 000's)........ $(3,722) $(4,335) $628 $86
Net income (loss) per share......... $(0.51) $(0.60) $0.10 $0.01
</TABLE>
The fair value of options granted under the Company's stock option plans was
estimated using the Black-Scholes multiple option model with the following
assumptions:
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Expected term in years (from vest
date)................................ 1.0 1.0
Volatility.................................. 70.0% 70.0%
Interest rate............................... 5.92%-6.30% 4.63%-6.27%
</TABLE>
The Company has never declared nor paid dividends on any of its capital stock
and does not expect to in the foreseeable future.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The effects on 1997 and 1996 pro forma net income or loss per share of expensing
the estimated fair value of stock options are not necessarily representative of
the effects on reporting the results
40
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
11. Stock Options - (Continued)
of operations for future years as the periods presented include only one and two
years of option grants under the Company's plans.
The following table presents the combined activity of the 1993 Plan and the
Director Plan for the years ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------------- -----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Outstanding beginning of period............ 873,050 $4.05 183,000 $0.61
Granted................................. 267,150 6.90 708,550 4.97
Canceled................................ (141,730) 5.83 (18,500) 6.10
Exercised............................... (125,600) 3.07 - -
----------------------------------- -----------------------------------
Outstanding at end of year................. 872,870 $4.76 873,050 $4.05
=================================== ===================================
Options exercisable at year end............ 225,904 $3.47 162,000 $2.58
=================================== ===================================
Available for grant at end of year 826,530 951,950
================= =================
Weighted average fair value per share of
options granted during the year $3.44 $2.61
================== ==================
</TABLE>
41
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
11. Stock Options - (Continued)
The following table presents weighted average price and life information for
significant option groups outstanding at March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- -------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
- ------------------------------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C>
$0.05- $1.10 163,200 6.17 $0.63 77,600 $0.57
$2.84- $3.12 217,500 7.32 $2.88 68,700 $2.87
$4.00-$11.00 492,170 9.07 $6.98 79,604 $6.81
-------------- ----------------
872,870 225,904
============== ================
</TABLE>
12. Employee Stock Purchase Plan
In September 1995, the Company approved an Employee Stock Purchase Plan (the
"Purchase Plan") under which employees may purchase shares of Common Stock at a
discount from fair market value. There are 100,000 shares of Common Stock
reserved for issuance under the Purchase Plan. To date, there have been no
shares issued under the Plan. The Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Internal
Revenue Code. Rights to purchase Common Stock under the Purchase Plan are
granted at the discretion of the Compensation Committee, which determines the
frequency and duration of individual offerings under the Plan and the dates when
stock may purchased. Eligible employees participate voluntarily and may withdraw
from any offering at any time before stock is purchased. Participation
terminates automatically upon termination of employment. The purchase price per
share of Common Stock in an offering is 85% of the lesser of its fair market
value at the beginning of the offering period or on the applicable exercise date
and may be paid through payroll deductions, periodic lump sum payments or a
combination of both. The Purchase Plan terminates on September 29, 2005. The
first offering period commenced April 1, 1997.
42
<PAGE>
Spacetec IMC Corporation
Notes to Consolidated Financial Statements (continued)
13. Subsequent Events
Stock Option Repricing
On April 11, 1997, the Board of Directors approved a repricing of all options
granted to current employees of the Company. Options meeting qualification were
repriced at $3.25 per share which equaled the fair market value of the Company's
Common Stock on that date.
Stock Repurchase
On May 15,1997, the Board of Directors authorized the repurchase of up to
1,000,000 shares of the Company's Common Stock.
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption
"Executive Officers of the Registrant" in Part I, Item 1A hereof and the
remainder is incorporated herein by reference from the discussion responsive
thereto under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement relating to its
Annual Meeting of Stockholders scheduled for September 1997 (the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Share Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption, "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement.
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The financial statements are listed under Item 8 of this report.
2. FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. EXHIBITS
The exhibits are listed below under Part IV, Item 14(c) of this
report.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal 1997.
(C) EXHIBITS
<TABLE>
<CAPTION>
Number Footnote Description
- --------------------------------------------------------------------------------
<S> <C> <C>
3.1 1 Restated Articles of Organization.
3.3 2 Restated By-Laws of Registrant.
4.1 3 Specimen certificate for shares of
Common Stock of the Registrant.
10.1 3 Amended and Restated Stock Option
Plan.*
10.2 Amended and Restated 1995 Director
Stock Option Plan.* Filed herewith.
10.3 3 1995 Employee Stock Purchase Plan.*
10.4 4 Real Estate Lease Agreement between
the Registrant and Wannalancit Office
and Technology Center Trust dated
April 19, 1991, as amended.
10.5 5 Sublease Agreement between the
Registrant and TRC Environmental
Corporation dated December 26, 1995.
10.6 5 Recognition, Non-Disturbance and
Attornment Agreement between the
Registrant and Historic Boott Mill
Limited Partnership dated December
26, 1995.
</TABLE>
45
<PAGE>
10.7 3 Royalty Agreement dated May 29, 1991
between the Registrant and John A.
Hilton.*
10.8 3 License Agreement dated May 29, 1991
between the Registrant and Spatial
Systems Ltd.
10.9 3 Form of indemnification agreement
between the Registrant and each of
its directors.
10.10 3,6 Resale Agreement dated as of May 1,
1991 between the Registrant and
Electronic Data Systems Corporation
(as successor to McDonnell Douglas
Corporation), as amended by
Amendment No. 1 dated December 23,
1993 and Amendment No. 2 dated
October 6, 1994.
10.11 3,6 Distribution and Marketing Agreement
dated April 28, 1994 between the
Registrant and Sumisho Electronic
Devices Corporation.
10.12 3 Adoption Agreement for Aetna Life
Insurance and Annuity Company
Standardized 401(k) Profit Sharing
Plan and Trust (Spacetec IMC
Corporation 401(k) Plan) dated June
7, 1995.*
10.13 3 Form of Confidentiality and
Inventions Agreement between the
Registrant and its employees.
10.14 3 Form of Non-Disclosure Agreement
between the Registrant and its
consultants.
10.15 3 Guaranty by Dennis T. Gain dated
April 19, 1991 of the Registrant
under the real estate lease filed as
Exhibit 10.4.
10.16 5,6 Basic Order Agreement between the
Registrant and Digital Equipment
Corporation dated March 19, 1996.
11.1 Statement Re: Computation of Per
Share Earnings (Loss). Filed
herewith.
21.1 Subsidiary of the Registrant. Filed
herewith.
23.1 Consent of Ernst & Young LLP. Filed
herewith.
27.1 Financial Data Schedule. Filed
herewith.
99.1 Important Factors Regarding Forward-
Looking Statements. Filed herewith.
- --------------------------------
46
<PAGE>
* Identifies a management contract or compensatory plan or an agreement in
which an executive officer or director of the Company participates.
(1) Filed as Exhibit 3.2 to the Spacetec IMC Corporation Registration Statement
on Form S-1 (Commission File No. 33-98064) and incorporated herein by
reference.
(2) Filed as Exhibit 3.4 to the Spacetec IMC Corporation Registration Statement
on Form S-1 (Commission File No. 33-98064) and incorporated herein by
reference.
(3) Filed as an exhibit with the same number to the Spacetec IMC Corporation
Registration Statement on Form S-1 (Commission File No. 33-98064) and
incorporated herein by reference.
(4) Filed as Exhibit 10.5 to the Spacetec IMC Corporation Registration Statement
on Form S-1 (Commission File No. 33-98064) and incorporated herein by
reference.
(5) Filed as an exhibit with the same number to the Spacetec IMC Corporation
Annual Report on Form 10-K for the fiscal year ended March 31, 1996 and
incorporated herein by reference.
(6) Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to Rule
406 of the Securities Act of 1933, as amended, and Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on behalf of
the undersigned.
SPACETEC IMC CORPORATION
Dated: June 27, 1997
By:/s/ Dennis T. Gain
-------------------------
Dennis T. Gain, President
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dennis T. Gain President, Chief Executive Officer June 27, 1997
- ------------------------------ and Chairman of the Board of
Dennis T. Gain Directors (Principal Executive Officer)
/s/ Neil M. Rossen Chief Financial Officer, Senior June 27, 1997
- ------------------------------ Vice President of Finance
Neil M. Rossen (Principal Financial and Accounting
Officer)
/s/ Morton E. Goulder Director June 27, 1997
- ------------------------------
Morton E. Goulder
/s/ J. Grant Jagelman Director June 27, 1997
- ------------------------------
J. Grant Jagelman
/s/ Jerry H. Loyd Director June 27, 1997
- ------------------------------
Jerry H. Loyd
/s/ Patrick J. Sullivan Director June 27, 1997
- ------------------------------
Patrick J. Sullivan
</TABLE>
48
<PAGE>
SPACETEC IMC CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended March 31, 1997, 1996, and 1995
(in thousands)
<TABLE>
<CAPTION>
Balance at Charge to Balance at
Beginning Costs and End of
of Period Expenses Write-offs Period
---------------------------------------------------
<S> <C> <C> <C> <C>
1997
Allowance for doubtful
accounts $80 $71 $76 $75
1996
Allowance for doubtful
accounts $10 $97 $27 $80
1995
Allowance for doubtful
accounts $ 7 $ 3 $ - $10
</TABLE>
<PAGE>
EXHIBIT 10.2
SPACETEC IMC CORPORATION
Amended and Restated 1995 Director Stock Option Plan
----------------------------------------------------
As amended by the Board of Directors on December 4, 1996
subject to Stockholders' approval
The purpose of this Amended and Restated 1995 Director Stock Option Plan
(the "Plan") of Spacetec IMC Corporation (the "Company") is to attract and
retain highly qualified non-employee directors of the Company and to encourage
ownership of stock of the Company by such Directors so as to provide additional
incentives to promote the success of the Company.
1. ADMINISTRATION OF THE PLAN.
Grants of stock options under the Plan shall be automatic as provided in
Section 6. However, all questions of interpretation with respect to the Plan
and options granted under it shall be determined by the Board of Directors of
the Company (the "Board") or by a committee consisting of one or more directors
appointed by the Board and such determination shall be final and binding upon
all persons having an interest in the Plan.
2. PERSONS ELIGIBLE TO PARTICIPATE IN THE PLAN.
Each director of the Company who is not an employee of the Company or of
any subsidiary of the Company shall be eligible to participate in the Plan
unless such director irrevocably elects not to participate.
3. SHARES SUBJECT TO THE PLAN.
(a) The aggregate number of shares of the Company's Common Stock which may
be optioned under this Plan is 225,000 shares. Shares issued under the Plan may
consist in whole or in part of authorized but unissued shares or treasury
shares.
(b) In the event of a stock dividend, split-up, combination or
reclassification of shares, recapitalization or other similar capital change
relating to the Company's Common Stock, the maximum aggregate number and kind of
shares or securities of the Company as to which options may be granted under
this Plan and as to which options then outstanding shall be exercisable, and the
option price of such options shall be appropriately adjusted so that the
proportionate number of shares or other securities as to which options may be
granted and the proportionate interest of holders of outstanding options shall
be maintained as before the occurrence of such event.
<PAGE>
(c) In the event of a consolidation or merger of the Company with another
corporation where the Company's stockholders do not own a majority in interest
of the surviving or resulting corporation, or the sale or exchange of all or
substantially all of the assets of the Company, or a reorganization or
liquidation of the Company, any deferred exercise period shall be automatically
accelerated and each holder of an outstanding option shall be entitled to
receive upon exercise and payment in accordance with the terms of the option the
same shares, securities or property as he would have been entitled to receive
upon the occurrence of such event if he had been, immediately prior to such
event, the holder of the number of shares of Common Stock purchasable under his
or her option; provided, however, that in lieu of the foregoing the Board may
upon written notice to each holder of an outstanding option or right under the
Plan, provide that such option or right shall terminate on a date not less than
20 days after the date of such notice unless theretofore exercised.
(d) Whenever options under this Plan lapse or terminate or otherwise
become unexercisable the shares of Common Stock which were subject to such
options may again be subjected to options under this Plan. The Company shall at
all times while this Plan is in force reserve such number of shares of Common
Stock as will be sufficient to satisfy the requirements of this Plan.
4. NON-STATUTORY STOCK OPTIONS.
All options granted under this Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
5. FORM OF OPTIONS.
Options granted hereunder shall be in substantially the form of the
attached Exhibit A or in such other form as the Board or any committee appointed
---------
pursuant to Section 1 above may from time to time determine.
6. GRANT OF OPTIONS AND OPTION TERMS.
(A) AUTOMATIC GRANT OF OPTIONS. On December 31, 1996, each of Morton E.
Goulder and Jerry H. Loyd shall be granted an option to purchase 20,000 shares
of Common Stock, provided such individuals are serving as directors of the
Company on that date. Also on December 31, 1996, J. Grant Jagelman shall be
granted an option to purchase 14,000 shares of Common Stock, provided such
individual is serving as director of the Company on that date. Upon the
election of any new eligible director of the Company, such new director shall be
granted an option to purchase 10,000 shares of Common Stock (the options granted
to Messrs. Goulder, Loyd, Jagelman and any such new director are hereinafter
collectively referred to as the "Initial Options"). Upon each December 31st
thereafter, any eligible director serving as such on that date shall
automatically be granted options to purchase 10,000 shares of Common Stock (the
"Annual Options"). No options shall be granted
-2-
<PAGE>
hereunder after ten years from the date on which this Plan was initially
approved and adopted by the Board.
(B) DATE OF GRANT. The "Date of Grant" for the Initial Options granted
under this Plan shall be December 31, 1996 in the case of Messrs. Goulder, Loyd
and Jagelman and the date of election in the case of any new eligible director.
The "Date of Grant" for the Annual Options granted under this Plan shall be
December 31 of each year that the eligible director is serving as such.
(C) OPTION PRICE. The option price for each option granted under this Plan
shall be the current fair market value of a share of Common Stock of the Company
as determined by the last sale price for the Company's Common Stock as reported
by the National Association of Securities Dealers Automated Quotations National
Market for the business day immediately preceding the Date of Grant.
(D) TERM OF OPTION. The term of each option granted under this Plan shall
be ten years from the Date of Grant.
(E) EXERCISABILITY OF OPTIONS. (i) The Initial Options granted under this
Plan shall become exercisable with respect to thirty percent (30%) of the shares
granted on the Date of Grant, thirty percent (30%) of the shares granted on the
second anniversary of the Date of Grant and forty percent (40%) of the shares
granted on the third anniversary of the Date of Grant if and only if the option
holder is a member of the Board at the opening of business on that date (i.e.,
the Initial Options to purchase 20,000 shares of Common Stock granted upon the
adoption of this Plan will become exercisable with respect to 6,000 shares
immediately on the Date of Grant, 6,000 shares of Common Stock on the second
anniversary of the Date of Grant and 8,000 shares of Common Stock on the third
anniversary of the Date of Grant). (ii) The Annual Options granted under this
Plan shall become exercisable with respect to 3,000 shares on the Date of Grant,
3,000 shares on the second anniversary of the Date of Grant and 4,000 shares on
the third anniversary of the Date of Grant if and only if the option holder is a
member of the Board at the opening of business on that date.
(F) GENERAL EXERCISE TERMS. Directors holding exercisable options under
this Plan who cease to serve as members of the Board may, during their lifetime,
exercise the rights they had under such options at the time they ceased being a
director for the full unexpired term of such option. Any rights that have not
yet become exercisable shall terminate upon cessation of membership on the
Board. Upon the death of a director, those entitled to do so shall have the
right, at any time within twelve months after the date of death, to exercise in
whole or in part any rights which were available to the director at the time of
his or her death. The rights of the option holder may be exercised by the
holder's guardian or legal representative in the case of disability and by the
beneficiary designated by the holder in writing delivered to the Company or, if
none has been designated, by the holder's estate or his or her transferee on
death in accordance with this Plan, in the case of death. Options granted under
the Plan shall terminate, and no rights thereunder may be exercised, after the
expiration of the applicable exercise period. Notwithstanding the foregoing
provisions of this section, no rights under any options may be exercised after
the expiration of ten years from their Date of Grant.
-3-
<PAGE>
(G) METHOD OF EXERCISE AND PAYMENT. Options may be exercised only by
written notice to the Company at its head office accompanied by payment of the
full option price for the shares of Common Stock as to which they are exercised.
The option price shall be paid in cash or by check or in shares of Common Stock
of the Company, or in any combination thereof. Shares of Common Stock
surrendered in payment of the option price shall have been held by the person
exercising the option for at least six months, unless otherwise permitted by the
Board. The value of shares delivered in payment of the option price shall be
their fair market value, as determined in accordance with Section 6(c) above, as
of the date of exercise. Upon receipt of such notice and payment, the Company
shall promptly issue and deliver to the optionee (or other person entitled to
exercise the option) a certificate or certificates for the number of shares as
to which the exercise is made.
(H) LIMITATIONS ON TRANSFERABILITY. Options shall not be transferable by
the recipient other than by will or the laws of descent and distribution and are
exercisable during such person's lifetime only by such person or by such
person's guardian or legal representative; provided that the Board or any
committee appointed by the Board may in its discretion waive such restriction in
any case.
7. LIMITATION OF RIGHTS.
(A) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the
granting of an option or any other action taken pursuant to the Plan, shall
constitute an agreement or understanding, express or implied, that the Company
will retain an option holder as a director for any period of time or at any
particular rate of compensation.
(B) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. A director shall have no rights
as a stockholder with respect to the shares covered by options until the date
the director exercises such options and pays the option price to the Company,
and no adjustment will be made for dividends or other rights for which the
record date is prior to the date such option is exercised and paid for.
8. AMENDMENT OR TERMINATION.
The Board may amend or terminate this Plan at any time. The Board may
amend or modify any outstanding option in any respect, provided that the
optionee's consent to such action shall be required unless the Board determines
that the action, taking into account any related action, would not materially
and adversely affect the optionee.
9. STOCKHOLDER APPROVAL.
This Plan as amended and restated by the Board on December 4, 1996 is
subject to approval by the stockholders of the Company by the affirmative vote
of the holders of a majority of the shares of Common Stock of the Company
present, or represented and entitled to vote, at a meeting duly held in
accordance with the laws of the State of Massachusetts. In the event such
approval is not obtained, all options granted under this Plan shall be void and
without effect.
-4-
<PAGE>
10. GOVERNING LAW.
This Plan shall be governed by and interpreted in accordance with the laws
of the State of Massachusetts.
-5-
<PAGE>
Exhibit 11.1
Statement Re: Computation of Per Share Earnings (Loss)
<TABLE>
<CAPTION>
Year Ended March 31
1997 1996 1995
---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C>
Weighted average shares outstanding 7,283 3,230 1,224
Net dilutive effect of stock options-based on
the treasury stock method using average
market price in 1996 and IPO price in 1995 - 512 504
Effect of convertible preferred stock-assumed
converted at date of issuance - 2,820 3,828
Effect of common and common equivalent shares
issued by the Company during the twelve month
period immediately preceding the Company's initial
public offering (using the treasury stock method) - - 448
-----------------------------------------------
Totals 7,283 6,562 6,004
=========== ============ ============
Net income (loss) $ (3,722) $ 628 $ 526
=========== ============ ============
Per share amount $ (0.51) $ 0.10 $ 0.09
=========== ============ ============
</TABLE>
<PAGE>
EXHIBIT 21.1
Spacetec IMC Securities Corporation, incorporated in Massachusetts.
Spacetec IMC International Corporation, incorporated in the U.S. Virgin Islands
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 333-04991) pertaining to the 1995 Director Stock Option Plan, the
Registration Statement (Form S-8, No. 333-04997) pertaining to the Amended and
Restated 1993 Stock Option Plan and the Registration Statement (Form S-8, No.
333-05001) pertaining to the 1995 Employee Stock Purchase Plan, of our report
dated May 22, 1997, with respect to the consolidated financial statements of
Spacetec IMC Corporation included in the Annual Report (Form 10-K) for the year
ended March 31, 1997.
ERNST & YOUNG LLP
Boston, Massachusetts
June 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 170
<SECURITIES> 10,059
<RECEIVABLES> 2,360
<ALLOWANCES> 75
<INVENTORY> 1,718
<CURRENT-ASSETS> 14,964
<PP&E> 1,533
<DEPRECIATION> 569
<TOTAL-ASSETS> 16,602
<CURRENT-LIABILITIES> 1,342
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 15,186
<TOTAL-LIABILITY-AND-EQUITY> 16,602
<SALES> 9,075
<TOTAL-REVENUES> 9,075
<CGS> 4,436
<TOTAL-COSTS> 4,436
<OTHER-EXPENSES> 9,587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,316)
<INCOME-TAX> (594)
<INCOME-CONTINUING> (3,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,722)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
<PAGE>
EXHIBIT 99.1
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
June 1997
From time to time, Spacetec IMC through its management may make
forward-looking public statements, such as statements concerning then expected
future revenues or earnings or concerning projected plans, performance, product
development and commercialization as well as other estimates relating to future
operations. Forward-looking statements may be in reports filed under the
Securities Exchange Act of 1934, as amended, in press releases or in oral
statements made with the approval of an authorized executive officer. The words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933,
as enacted by the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
these forward-looking statements which speak only as of the date on which they
are made. In addition, the Company wishes to advise readers that the factors
listed below, as well as other factors not currently identified by management,
could affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.
The Company will not undertake and specifically declines any obligation
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events which may cause management to re-evaluate such forward-looking
statements.
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements of the Company made by or on behalf of the Company.
Reliance on 3D Graphical Interface Market. The Company's future success
will continue to depend on sales of its hardware and software products designed
to be used with 3D graphical user interfaces. The Company's ability to increase
sales of its products depends in part on the continued growth of the development
of products incorporating a 3D graphical interface. There can be no assurance
that the market for such user interfaces will continue to grow or that the
Company will be able to respond effectively to the evolving requirements of such
market.
Rapid Technological Change; Dependence on New Product Development. The
electronics industry in general, and the markets for the Company's products in
particular, are characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions, short product life cycles and
significant competition. The introduction of products embodying new technologies
and the emergence of new industry standards present opportunities for current
and potential competitors of the Company to gain market share and can quickly
render the Company's products less attractive or obsolete and unmarketable. In
order to keep pace with this rapidly changing market environment, the Company
must continually develop and incorporate into its products new technological
advances and features desired by the marketplace at acceptable prices. The
successful development and commercialization of new products involves many
risks, including the identification of new product opportunities, the timely
completion of the development process, the control and recoupment of development
and production costs and acceptance by customers of the Company's products.
There can be no assurance that the Company will be successful in identifying,
developing, manufacturing and marketing new products in a timely and cost
effective manner, that
1
<PAGE>
the Company's products will be accepted in the marketplace, or that products or
technologies developed by others will not render the Company's products or
technologies uncompetitive.
Reliance on Large Customers. The Company had two customers representing
24.3% and 9.8% of revenues for the fiscal year ended March 31, 1996 and two
customers representing 17.0% and 14.8% of revenues for the fiscal year ended
March 31, 1997. The Company expects that these customers will continue to
represent a significant percentage of its revenues for the foreseeable future,
although it expects that sales to them will generally decline as a percentage of
total revenues. None of these customers is obligated to purchase any specific
amount of the Company's products. There can be no assurance that the Company
will be able to retain any of these companies as customers or, in the event of a
reduction or loss of business with any such customer, that the Company could
establish other satisfactory relationships for sales of its products. Purchases
by these customers are governed by the terms of purchase orders submitted to the
Company and by written agreements covering other terms of the sale, including
pricing, shipping, quality and warranty. Generally, a customer has the right to
cancel or modify quantities and deliveries, without cost, subject to notice
requirements. In the event of a cancellation or rescheduling of orders by any
customer, the Company may not be able to replace such orders with other sales.
The occurrence of any such events could have a material adverse effect on the
Company's operating results.
Reliance on Third-Party Distribution Channels. While the Company
currently markets and sells a significant portion of its products directly to
end-users, the Company expects that the portion of its product sales through
third- party distribution channels, including original equipment manufacturers
("OEMs"), value added resellers ("VARs"), system integrators and distributors,
will increase as its products gain market acceptance. Such OEMs and VARs are not
under the control of the Company. Although these customers in turn sell to a
wide variety of end-users, the Company is subject not only to the risk that its
customers will discontinue selling and marketing its products, but also to the
risk that the end-users supplied by the Company's customers will alter their
preferences in a manner that has a material adverse effect on the Company's
operations. There can be no assurance that the Company will be able to retain
its current resellers or expand its distribution channels by entering into
arrangements with new resellers.
Consumer Marketplace. The Company commenced retail shipments of its
SpaceOrb 360 during the fiscal year ended March 31, 1997 into the consumer
market. Retail distribution channel sales require significantly greater
marketing and sales expenditures and post-sale support costs. Penetration of
this market is dependent to a significant extent on building relationships with
distributors and retailers. An increasing number of vendors compete for access
to these distributors and retailers, which generally offer products of several
different companies, including products competitive with the Company's products.
The Company anticipates that it will commit substantial resources to increase
penetration of this distribution channel. In the future, the Company intends to
reach the consumer marketplace through three channels strategies: (i) retail
sell-through, (ii) sales of turnkey product or core components to OEMs, and
(iii) technology licensing and component sales to producers of hardware
platforms, such as console game systems and PCs. There can be no assurance that
the Company will be successful in implementing any of these marketing strategies
in the consumer marketplace or in launching any new products into these markets,
or that any negotiations with leading manufacturers, OEMs or distributors in
this marketplace will be successfully completed on terms favorable to the
Company.
If the Company is successful in penetrating this sales channel, the
Company believes that its gross margins would decrease due to the anticipated
prices for the Company's products in the retail market, where the Company
believes it must price its products below certain levels to penetrate this
market, and anticipated cost of revenues in the retail market. The Company
further anticipates that its results from sales to retail channels will be
significantly affected by seasonality due primarily to the increased demand for
3D game and entertainment applications and related products during the year-end
holiday buying season. Retail distributors typically expect that they will be
permitted to return inventory to the Company for credit against other purchases
on negotiated terms. In addition, the Company anticipates that retail
distributors will require price protection clauses in agreements with
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the Company pursuant to which the Company will be obligated to grant credits if
the Company reduces selling prices on products previously purchased by the
distributor. Moreover, to the extent the Company generates significant sales to
retail distribution channels relative to its sales to OEMs, there is a greater
risk of increased product returns and warranty claims. The Company has
established reserves for product returns and warranty claims based on its
previous experiences and future expectations. If the Company is successful in
penetrating retail distribution channels, there can be no assurance that these
reserves will be adequate or that product returns and warranty claims and price
protection adjustments will not have a material adverse effect on future
operating results.
Competition. The market for computer products is intensely competitive
and rapidly changing. The Company's products currently compete against
established products and no assurance can be given that the Company's products
will not be rendered obsolete by technological advances of others. The Company
expects that competition from existing competitors will increase and that new
competitors will enter the 3D motion control market. Many of the existing and
potential competitors have experienced management, larger technical staffs, more
established and larger marketing and sales organizations, better developed
distribution systems and significantly greater financial resources than the
Company. The Company anticipates that its competitors will ultimately develop
hardware products based on technology that does not infringe on the patent
rights of the Company, which may provide capabilities similar or superior to
those of the Company's products. Increased competition could result in price
reductions and loss of market share for the Company. There can be no assurance
that the Company will be able to compete successfully or that competition will
not have a material adverse effect on the Company's business, operating results
and financial condition.
Expansion of Operations and Management of Growth. The Company has
recently experienced a period of rapid growth and has added new personnel in
various areas of its business. Due to the level of technical and management
expertise necessary to support growth, the Company must recruit and retain
highly qualified and well- trained personnel. The number of available persons
with the requisite skills to serve in these positions may be limited, and it may
become increasingly difficult for the Company to hire such personnel over time.
The Company's expansion may also significantly strain operational, management,
financial and other resources. To manage growth effectively, the Company must
continue to enhance its systems and controls and successfully expand, train and
manage its employee base. There can be no assurance that the Company will be
able to manage this expansion effectively, including providing a satisfactory
level of customer service and technical support under the stresses exerted by
continued growth. There can be no assurance that the Company will be able to
recruit, train and retain sufficient additional customer service employees to
improve its service and satisfactorily respond to the support requests of an
increased customer base. Any failure to manage the Company's future growth
properly could have a material adverse effect on the Company's operating
results.
Limited Operating History; Variability of Quarterly Operating Results.
The Company was incorporated in April 1991 and began commercial shipments of its
products in June 1991. During this time, the Company has experienced
fluctuations in quarterly operating results due to factors such as competition,
variations in customer demand, changes in average selling prices due to volume
discounts, entering new markets and international operations, changes in the mix
of products sold, unforeseen production difficulties and the introduction of new
products. The Company anticipates that its increased sales in the consumer
marketplace will likely result in increasing seasonality of its revenues,
reflecting consumer purchasing patterns. In view of the Company's significant
growth in the past fiscal years, the Company believes that period-to-period
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance. There can be no
assurance that revenue growth or profitable operations can be sustained on a
quarterly or annual basis in the future.
Patents and Proprietary Technology. The Company's success is heavily
dependent upon its proprietary hardware and software technology. The Company
relies on a combination of patent, trade
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secret, copyright and trademark law, software license agreements, non-disclosure
agreements, and technical measures to protect its rights pertaining to its
products. Such protection may not preclude competitors from developing products
with features similar to the Company's products. The Company's success will
depend in part on its ability to obtain and defend United States and foreign
patent protection for its products and preserve its trade secrets. There can be
no assurance that the Company's issued patents, or any future patents, will
provide the Company with significant protection against competitive products or
otherwise be commercially valuable. Moreover, there can be no assurance that any
patents issued to or licensed by the Company will not be infringed upon by
others. In the case of infringement of the Company's technologies, there can be
no assurance that the Company would be able to afford the expense of any
litigation that may be necessary to enforce its proprietary rights.
In addition to seeking patent protection, in some cases the Company may
rely on contractual arrangements or trade secrets to protect its proprietary
technology. There can be no assurance that trade secrets will be developed and
maintained, that secrecy obligations will be honored, or that others will not
independently develop similar or superior technology. Disputes as to the
ownership of such information may arise if consultants, key employees, or other
third parties apply technological information independently developed by them or
by others to Company projects, and such disputes may not be resolved in favor of
the Company. Due to the importance of patent and trade secret protections and
the competitive nature of its industry, the Company may also be subject to
claims that its technologies infringe on the proprietary rights of other
companies. There can be no assurance that such claims will not arise, that the
Company will have sufficient resources to pursue any resulting litigation to a
final judgment, or that the Company will prevail in such litigation.
Dependence on Suppliers. The Company relies on outside suppliers for
substantially all of its parts, components and manufacturing supplies. The
microprocessor currently used in the manufacture of one of the Company's
hardware products is obtained from a single source supplier. The disruption or
termination of the supply of microprocessors from this source would have a
material adverse effect on the Company's operations and could cause delays in
the delivery of such products. Further, even with respect to "off- the-shelf"
components which are available from a large number of suppliers, there can be no
assurance that the Company's suppliers will continue to meet all of the
Company's needs on a timely basis.
Dependence on Contract Manufacturers, Including Overseas Manufacturers.
The Company has and will continue to rely on outside vendors to manufacture
hardware devices among the Company's products. Although the Company's hardware
devices are relatively simple devices to manufacture, and the Company has not
encountered any delays in obtaining adequate products from its outside
contracting organizations, there can be no assurance that delays incurred or
quality problems caused by any of the contract manufacturing organizations will
not have a material adverse effect on the Company's ability to fill customer
orders. In 1996, the Company entered into a manufacturing contract with a entity
located in the People's Republic of China. The Company's reliance on outside
manufacturers involves several risks, including a potential inability to obtain
an adequate supply of required products, and reduced control over the price,
timeliness of delivery, reliability and quality of finished products. Certain of
the Company's contract manufacturers have relatively limited financial and other
resources. Any inability to obtain timely deliveries of products and services
having acceptable qualities or any other circumstance that would require the
Company to seek alternative sources of contract manufacturing services or to
manufacture its own hardware devices internally, could delay the Company's
ability to ship its products. Any such delay could damage relationships with
customers and such delay could have a material adverse effect on the Company.
The use of a foreign manufacturer, most significantly in a country with
an emerging commercial base, subjects the Company to additional risks, including
unexpected changes in regulatory requirements and tariffs and difficulties in
communications with such foreign entity. Finally, the laws of certain countries
do not protect the Company's products and intellectual property
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rights to the same extent as do the laws of the United States. There can be no
assurance that these factors will not have a material adverse effect on the
Company. Finally, to the extent that such foreign manufacturer fails to perform
in accordance with its contract with the Company or to the extent the Company
has other claims against such manufacture, it may be difficult to enforce such
claims in the Peoples Republic of China.
Attraction and Retention of Key Employees. The Company is dependent on
the principal members of its management, including Dennis Gain, President and
Chief Executive Officer, John Hilton, Senior Vice President and Chief Technology
Officer, Hardware, and James Wick, Senior Vice President and Chief Technology
Officer, Software. The loss of the services of one or more key employees could
have a material adverse effect on the Company. The Company believes that its
future success will be affected by its ability to attract and retain skilled
technical, managerial and marketing personnel. Although the Company has not
experienced difficulty to date, there can be no assurance that the Company will
be successful in attracting or retaining the personnel it requires to continue
to grow and operate profitably. The Company maintains life insurance on the
lives of Messrs. Gain, Hilton and Wick in the amounts of $2,250,000, $500,000
and $500,000, respectively.
Future Capital Needs. The Company's capital requirements will depend on
many factors, including the rate at which the Company can develop its products,
the market acceptance of such products, the levels of promotion and advertising
required to launch such products and attain a competitive position in the
marketplace, the response of competitors to the products based on the Company's
technology, and capital necessary for potential acquisitions. Changes in
technology or a growth of sales beyond currently established capabilities will
also require further investment. To the extent that internally generated funds
are insufficient to fund the Company's operating requirements, it may be
necessary for the Company to seek additional funding through public or private
financing. There can be no assurance that additional financing will be available
on acceptable terms or at all. If additional funds are raised by issuing equity
securities, further dilution to the existing stockholders may result. If
adequate funds are not available, the Company's business would be materially
adversely affected, and, as a result, the Company may be required to curtail its
operations significantly.
Risks Associated with International Operations. International sales
accounted for 26.0% and 35.8% of revenues for the fiscal years ended March 31,
1997 and 1996 respectively, and the Company expects that international sales
will continue to represent a significant portion of its net sales. While most of
the Company's international sales are U.S. dollar-denominated, decreases in the
value of foreign currencies relative to the U.S. dollar could make the Company's
products less price competitive. International sales and operations may also be
materially adversely affected by the imposition of government controls, export
license requirements, restrictions on the export of critical technology,
political and economic instability, trade restrictions, changes in tariffs and
taxes, difficulties in staffing and managing international operations and
general economic conditions. Any inability to meet foreign regulatory approvals
on a timely basis could have a material adverse effect on the Company's
operating results. In addition, the Company's business may be affected by lower
sales levels which typically occur during the summer months in Europe and other
parts of the world.
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