<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
<TABLE>
<C> <S>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
For the quarterly period ended September 30, 1996
OR
<TABLE>
<C> <S>
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
For the transition period from to to
Commission file number
SPATIAL TECHNOLOGY INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1035353
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
2425 55TH STREET, BUILDING A, BOULDER,
COLORADO 80301
(address of principal executive offices) (Zip Code)
</TABLE>
(303) 449-0649
(Registrant's telephone number, including area code)
Indicate by check 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 ______ No __x____
As of November 1, 1996, there were outstanding 7,357,642 shares of the
Registrant's Common Stock (par value $0.01 per share).
Transitional Small Business Disclosure Format (check one): Yes _____ No __x__
<PAGE> 2
SPATIAL TECHNOLOGY INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, December 31, 1995 and September 30, 1996..... 3
Condensed Consolidated Statements of Operations, three and nine months ended
September 30, 1995 and 1996...................................................... 4
Condensed Consolidated Statements of Cash Flows, three and nine months ended
September 30, 1995 and 1996...................................................... 5
Notes to Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 7
PART II. OTHER INFORMATION............................................................ 10
Signatures............................................................................ 11
</TABLE>
2
<PAGE> 3
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA(1)
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............................. $ 153 $ 475
Accounts receivable, net of allowance of $34 and
$122............................................... 1,893 1,911
Prepaid expenses and other............................ 179 174
---------- ----------- ----------
Total current assets.......................... 2,225 2,560
Equipment, net.......................................... 377 424
Purchased computer software, net........................ 246 384
Prepaid stock issuance costs............................ -- 315
---------- ----------- ----------
$ 2,848 $ 3,683
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable......................................... 500 130
Accounts payable...................................... 585 533
Accrued royalties payable............................. 455 382
Other accrued expenses................................ 848 1,088
Deferred revenue...................................... 1,220 1,481
---------- ----------- ----------
Total current liabilities..................... 3,608 3,614
Notes payable........................................... 98
---------- ----------- ----------
3,608 3,712
---------- ----------- ----------
Mandatory redeemable convertible preferred stock, $.01
par value; 7,566,324 shares authorized; 6,381,473
shares issued and outstanding; liquidation preference
of $14,154,550........................................ 14,155 14,155 --
Stockholders' deficit
Common stock, $.01 par value; 20,000,000 shares
authorized; 1,060,791 and 1,088,612, shares issued
in 1995 and 1996, respectively, (5,188,210 shares
pro forma)......................................... 11 11 52
Additional paid-in capital............................ 183 419 14,533
Accumulated deficit................................... (14,872) (14,524) (14,524)
Treasury stock at cost; 250,000 shares of common
stock.............................................. (176) -- --
Foreign currency translation adjustment............... (61) (90) (90)
---------- ----------- ----------
Total stockholders' deficit................... (14,915) (14,184) (29)
Commitments and contingency
---------- ----------- ----------
$ 2,848 $ 3,683
========== =========== ==========
</TABLE>
- - ---------------
(1) Reflects the conversion of all preferred shares into 4,099,598 common shares
upon the completion of the initial public offering declared effective by
the Securities and Exchange Commission on October 17, 1996. (See Note B.)
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1995 1996 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
License fees.......................................... $1,173 $1,462 $3,559 $3,810
Royalties............................................. 234 400 861 1,628
Maintenance and training.............................. 652 745 1,925 2,206
------ ------ ------ ------
Total revenue................................. 2,059 2,607 6,345 7,644
------ ------ ------ ------
Cost of sales:
License fees.......................................... 73 122 194 270
Royalties............................................. 31 39 112 152
Maintenance and training.............................. 118 27 215 169
------ ------ ------ ------
Total cost of sales........................... 222 188 521 591
------ ------ ------ ------
Gross margin............................................ 1,837 2,419 5,824 7,053
------ ------ ------ ------
Operating expenses:
Sales and marketing................................... 684 899 2,190 2,573
Research and development.............................. 796 984 2,291 2,897
General and administrative............................ 256 329 916 1,096
------ ------ ------ ------
Total operating expenses...................... 1,736 2,212 5,397 6,566
------ ------ ------ ------
Earnings (loss) from operations............... 101 207 427 487
Other income (expense)
Interest income....................................... 5 6 17 18
Interest expense...................................... (20) (13) (60) (77)
Other, net............................................ 3 10 1 11
------ ------ ------ ------
Total other income (expense).................. (12) 3 (42) (48)
------ ------ ------ ------
Earnings before income taxes.................. 89 210 385 439
Income tax expense...................................... 18 46 115 91
------ ------ ------ ------
Net earnings.................................. $ 71 $ 164 $ 270 $ 348
====== ====== ====== ======
Pro forma earnings per common share(1).................. $ 0.01 $ 0.03 $ 0.05 $ 0.07
====== ====== ====== ======
Pro forma weighted average number of common shares and
common equivalent shares outstanding (1).............. 5,207 5,346 5,208 5,317
====== ====== ====== ======
</TABLE>
- - ---------------
(1) Reflects the conversion of all preferred shares into 4,099,598 common shares
upon the completion of the initial public offering declared effective by
the Securities and Exchange Commission on October 17, 1996. (See Note B.)
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
----- -----
<S> <C> <C>
Cash flows from operating activities
Net earnings............................................................ $ 270 $ 348
Adjustments to reconcile net earnings to net cash provided (used) by
operating activities:
Depreciation and amortization...................................... 125 176
Common stock issued for services................................... -- 20
Changes in operating assets and liabilities:
Accounts receivable.............................................. 58 (18)
Prepaid expenses and other....................................... (32) 5
Accounts payable................................................. 143 (52)
Accrued expenses................................................. (164) 167
Deferred revenue................................................. (347) 261
----- -----
Net cash provided by operating activities..................... 53 907
----- -----
Cash flows from investing activities:
Additions to equipment................................................ (148) (161)
Additions to purchased computer software.............................. -- (200)
----- -----
Net cash used by investing activities......................... (148) (361)
----- -----
Cash flows from financing activities:
Principal payments on notes payable and capital leases................ (7) (522)
Proceeds from notes payable........................................... -- 250
Proceeds from exercise of common stock options and warrants........... 35 392
Prepaid stock offering expenses....................................... -- (315)
----- -----
Net cash provided (used) by financing activities.............. 28 (195)
----- -----
Foreign Currency translation adjustment affecting cash.................. (22) (29)
----- -----
Net increase (decrease) in cash and cash equivalents.......... (89) 322
Cash and cash equivalents at beginning of period........................ 288 153
----- -----
Cash and cash equivalents at end of period.............................. $ 199 $ 475
===== =====
Supplemental disclosures:
Cash paid for interest................................................ $ 30 $ 34
===== =====
Cash paid for income taxes............................................ $ 117 $ 91
===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
A. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated interim financial
statements of the Company have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes the disclosures included in the condensed consolidated interim
financial statements, when read in conjunction with the Company's consolidated
financial statements as of December 31, 1995 and the notes thereto, included in
the Company's Registration Statement on Form SB-2 declared effective by the
Securities and Exchange Commission on October 17, 1996 (Registration No.
333-5416-D), are adequate to make the information presented not misleading. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the year ending December 31, 1996.
B. INITIAL PUBLIC OFFERING
In October 1996, the Company completed an initial public offering (the
"Offering") of 3,000,000 shares of common stock. The Offering consisted of
2,100,000 shares sold by the Company and 900,000 shares sold by existing
stockholders, at a price of $5.00 per share. Net proceeds to the Company were
approximately $8,850,000, after deducting underwriting discounts and commissions
and other offering expenses.
C. NOTES PAYABLE
As of December 31, 1995, the Company had $500,000 outstanding on a
revolving line of credit with a bank providing for maximum borrowings of
$500,000 through April 30, 1996. Advances under the line of credit were secured
by accounts receivable and substantially all the assets of the Company, and bore
interest at the bank's prime rate plus 2%. Subsequent to December 31, 1995,
borrowings under the line of credit were converted into advances under an
accounts receivable factoring agreement. In July 1996, the Company amended this
revolving line of credit. The amended line of credit bears interest at the
bank's prime rate plus 1.75% and matures in June 1997. As of September 30, 1996,
the Company had no borrowings under this line of credit. The Company also
obtained equipment financing for $250,000 in July 1996, bearing interest at the
bank's prime rate plus 2.25% and due in June 1998. This note was paid in full in
October 1996.
In January 1996, a bank provided a revolving line of credit for $125,000
secured by a guarantee from an existing stockholder. Advances under the line of
credit were secured by accounts receivable and substantially all the assets of
the Company, bore interest at the bank's prime rate plus 1% per annum an matured
on June 30, 1996. In February 1996, the Company issued a promissory note for
$100,000 to an exiting stockholder. The note bore interest at 10% per annum and
matured on June 30, 1996. Borrowings under the line of credit and promissory
note were paid in full in June 1996.
D. EARNINGS PER SHARE
Pro forma earnings per share is computed using the weighted average number
of shares of common and common equivalent shares resulting from outstanding
options, and reflects the conversion of all preferred shares into 4,099,598
common shares upon completion of the initial public offering discussed in Note
B. Fully diluted earnings per share is the same as primary earnings per share.
6
<PAGE> 7
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section.
RESULTS OF OPERATIONS
Revenue
Total revenue for the quarter ended September 30, 1996 increased 27% to
$2,607,000 from $2,059,000 reported for the quarter ended September 30, 1995.
This increase resulted from increased revenue in each revenue category. License
fees increased 25% to $1,462,000 for the third quarter of 1996 from $1,173,000
reported in the third quarter of 1995. Royalties increased 71%, growing to
$400,000 for the third quarter of 1996 from $234,000 for the same quarter in
1995. One customer accounted for $123,000 of the increased royalty revenue for
the third quarter of 1996 as compared to the third quarter of 1995. Maintenance
and training revenue increased 14% to $745,000 for the quarter ended September
30, 1996 as compared to $652,000 reported for the quarter ended September 30,
1995. International revenue represented 57% of total revenue for the third
quarter of 1996 as compared to 53% for the third quarter of 1995.
Total revenue for the nine month period ended September 30, 1996 increased
20%, growing to $7,644,000 from $6,345,000 reported in the comparable prior year
period. License fees increased 7% to $3,810,000 as compared to $3,559,000
reported in prior year. Royalty fees increased 89% for the nine month period
ended September 30, 1996 as compared to the comparable prior year period,
growing to $1,628,000 from $861,000. Increased royalty revenue reflects
increased shipments by customers of software applications incorporating the
Company's products. Three customers accounted for $370,000, $200,000 and
$100,000, respectively, of the increase in royalty revenue in the nine months
ended September 30, 1996 as compared to the same period in 1995. Maintenance and
training revenue increased 15% to $2,206,000 for the nine month period ended
September 30, 1996 as compared to $1,925,000 reported in the comparable prior
year period. This increase reflects the Company's increased customer base.
International revenues represented 48% of total revenue for the nine month
period ended September 30, 1996, as compared to 53% for the corresponding period
in 1995.
Cost of Sales
Cost of sales consists of royalty payments by the Company to third party
developers, manufacturing costs (primarily media duplication, manuals, and
shipping) and amortization of purchased computer software. Total cost of sales
decreased 15% to $188,000 for the quarter ended September 30, 1996 from $222,000
reported in the comparable prior year period. The decrease reflects lower
manufacturing costs as a result of the Company's transition to CD-ROM based
media as its primary media format and on-line documentation. This decrease is
partially off-set by increased royalty expense and amortization of purchased
computer software. Total cost of sales increased 13% to $591,000 for the nine
months ended September 30, 1996 from $521,000 for the same period in 1995. The
increase is due to higher royalty expense and purchased software amortization,
partially off-set by lower manufacturing costs. As a percent of total revenue,
cost of sales decreased to 7% for the quarter ended September 30, 1996 from 11%
reported for the comparable period in 1995. For each of the nine month periods
ended September 30, 1996 and 1995, cost of sales was 8% of total revenue.
Operating Expenses
Sales and marketing expense increased 31% to $899,000 for the fiscal
quarter ended September 30, 1996 as compared to $684,000 reported in the fiscal
quarter ended September 30, 1995. For the nine month period ended September 30,
1996 sales and marketing expense increased 17% to $2,573,000 from $2,190,000
reported for the same period in 1995. For both periods, the increase is
attributable to increased staffing, commission expense and promotional activity
needed to support increased revenue. As a percent of total revenue, sales and
marketing expense increased slightly to 34% for the quarter ended September 30,
1996 as compared to 33% for
7
<PAGE> 8
the comparable prior year period. For the nine month period ended September 30,
1996 sales and marketing expenses as a percent of total revenue decreased
slightly to 34% from 35% for the same period in 1995.
Research and development expense increased 24% to $984,000 for the quarter
ended September 30, 1996 from $796,000 reported in the same prior year quarter.
The increase is primarily due to increased staffing in support of growing
development efforts. As a percent of total revenue, research and development
decreased slightly to 38% for the quarter ended September 30, 1996 from 39% for
the comparable prior year quarter. For the nine month period ended September 30,
1996 research and development expense increased 26% to $2,897,000 from
$2,291,000 reported in the comparable prior year period. The increase is due to
increased staffing, as well as increased utilization of contract programmers by
the Company. As a percent of total revenue, research and development expense
increased to 38% for the nine month period ended September 30, 1996 as compared
to 36% for the comparable prior year period. The Company accounts for research
and development expense in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, under which the Company is required to capitalize
software development costs after technological feasibility is established.
Capitalizable software development costs incurred to date have not been
significant; therefore, the Company has expensed all of these costs in the
periods incurred.
General & administrative expense increased 29% to $329,000 for the quarter
ended September 30, 1996 from $256,000 reported for the same quarter in 1995.
For the nine month period ended September 30, 1996 general and administrative
expense increased 20% to $1,096,000 from $916,000 reported in the comparable
prior year period. For both periods the increase is attributable to increased
staffing in support of increased operations. As a percent of total revenue,
general and administrative expense increased slightly to 13% for the third
quarter of 1996 as compared to 12% for the third quarter of 1995. For each of
the nine month periods ended September 30, 1996 and 1995, general and
administrative expense was 14% of total revenue.
Other Income (Expense), net
Other income increased to $3,000 for the quarter ended September 30, 1996
as compared to an expense of $12,000 reported for the quarter ended September
30, 1995. Increased other income reflects lower interest expense in the third
quarter of 1996 as compared to the third quarter of 1995. For the nine month
period ended September 30, 1996 other expense increased slightly to $48,000 from
$42,000 reported in the comparable prior year period.
Income Tax Expense
Income tax expense increased to $46,000 for the fiscal quarter ended
September 30, 1996 from $18,000 reported for the same quarter in 1995. For the
nine month period ended September 30, 1996, income tax expense decreased to
$91,000 as compared to $115,000 reported for the comparable prior year period.
Income tax expense for these periods included only withholding taxes on foreign
sales, as the Company was able to offset tax expense related to domestic
operations through the reduction in the valuation allowance for deferred tax
assets related to the Company's net operating loss carryforward.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced in the past and expects to continue to
experience significant fluctuations in quarterly operating results due to a
number of factors that are difficult to forecast, including, among others, the
volume of orders received within a quarter, demand for the Company's products,
the product mix purchased by the Company's customers, competing capital budget
considerations of the Company's customers, introduction and enhancement of
products by the Company and its competitors, market acceptance of new products,
reviews in the industry press concerning the products of the Company or its
competitors, changes or anticipated changes in pricing by the Company or its
competitors and general economic conditions. Due to the foregoing factors, it is
possible that the Company's operating results for some future quarters may fall
below the expectations of securities analysts and investors.
LIQUIDITY AND CAPITAL RESOURCES
In October 1996, the Company completed its initial public offering and its
common stock began trading on the American Stock Exchange under the symbol
"STY." Through the offering, the Company sold
8
<PAGE> 9
2,100,000 shares of its common stock for net proceeds of approximately
$8,850,000, based on the initial public offering price of $5.00 per share and
after deducting underwriting discounts and commissions and other offering
expenses. A portion of the net proceeds from the initial public offering have
been used to reduce certain liabilities of the Company outstanding at September
30, 1996, totaling approximately $625,000. Such liabilities included outstanding
notes payable and other accrued liabilities.
As of September 30, 1996, the Company had $475,000 in cash and cash
equivalents. Cash and cash equivalents increased $322,000 for the nine months
ended September 30, 1996, as compared to a decrease in cash and cash equivalents
of $89,000 for the comparable prior year period. For 1996 cash provided by
operating activities was partially offset by cash used by investing and
financing activities.
Net cash provided by operating activities increased to $907,000 for the
nine month period ended September 30, 1996 as compared to $53,000 for the same
nine month period in 1995. 1996 operating cash reflects increased deferred
revenue and accrued expenses, partially offset by decreased accounts payable and
increased accounts receivable. Net cash provided by operating activities in 1995
includes net earnings, depreciation and amortization, and increased accounts
payable, partially offset by decreased deferred revenue and accrued expenses.
Net cash used by investing activities was $361,000 for the nine month
period ended September 30, 1996 as compared to $148,000 in the same 1995 period.
Both nine month periods reflect cash used for capital equipment purchases, and
1996 includes $200,000 used for investments in purchased computer software.
Net cash used by financing activities was $195,000 for the nine months
ended September 30, 1996, reflecting cash used for principal payments on notes
payable and prepaid offering expenses, partially offset by proceeds from
issuance of stock in connection with the exercise of common stock options and
warrants and proceeds from notes payable. Net cash provided by financing
activities in the nine month period ended September 30, 1995 in the amount of
$28,000 was due to proceeds from issuance of stock in connection with the
exercise of common stock options and warrants, partially offset by principal
payments on capital leases.
The Company has a revolving line of credit with a bank providing for
maximum borrowings of $500,000 through June 1997. The line of credit bears
interest at the bank's prime rate plus 1.75%. As of September 30, 1996, the
Company had no borrowings under this line of credit. The Company also obtained
equipment financing for $250,000 in July 1996, bearing interest at the bank's
prime rate plus 2.25% and due in June 1998. This note was paid in full in
October 1996.
The Company believes that the net proceeds from the initial public
offering, together with existing credit facilities and cash generated from
operations, will be sufficient to meet the Company's operating and capital
requirements for the foreseeable future including at least the next twelve
months.
9
<PAGE> 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
None
Item 2. Changes in Securities:
None
Item 3. Defaults on Senior Securities:
Not Applicable
Item 4. Submission of Matters to Vote of Security Holders:
None
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K:
a) Exhibits
27 -- Financial Data Schedule
b) Reports on Form 8-K
None
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned threunto duly authorized.
Spatial Technology Inc.
Date November 26, 1996 /s/ MARK C. VELLEQUETTE
------------------------------------
Mark C. Vellequette
Vice President, Finance and
Administration and Secretary
(Principal Financial and
Accounting Officer)
11
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 475
<SECURITIES> 0
<RECEIVABLES> 2,033
<ALLOWANCES> (122)
<INVENTORY> 0
<CURRENT-ASSETS> 2,560
<PP&E> 2,143
<DEPRECIATION> (1,719)
<TOTAL-ASSETS> 3,683
<CURRENT-LIABILITIES> 3,614
<BONDS> 98
14,155
0
<COMMON> 11
<OTHER-SE> (14,195)
<TOTAL-LIABILITY-AND-EQUITY> 3,683
<SALES> 0
<TOTAL-REVENUES> 7,644
<CGS> 0
<TOTAL-COSTS> 591
<OTHER-EXPENSES> 6,391
<LOSS-PROVISION> 175
<INTEREST-EXPENSE> (48)
<INCOME-PRETAX> 439
<INCOME-TAX> 91
<INCOME-CONTINUING> 348
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 348
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
