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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-288-42
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD TO .
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SPATIAL TECHNOLOGY INC.
(Name of Small Business Issuer in its charter)
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DELAWARE 84-1035353
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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2425 55TH STREET, SUITE 100, BOULDER, COLORADO 80301
(Address of principal executive offices, including zip code)
(303) 449-0649
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $.01
PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: NONE
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to be the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Issuer's revenues for its most recent fiscal year were: $9,711,000.
The aggregate market value of the voting stock held by non-affiliates of
the Issuer was $7,151,000 as of February 28, 1998.*
The number of shares of Common Stock outstanding was 7,782,964 as of
February 28, 1998.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 9, 10, 11 and 12) is
incorporated by reference to portions of the Issuer's definitive proxy statement
for the 1998 Annual Meeting of Stockholders which will be filed with the
Securities and Exchange Commission within 120 days after the fiscal year ended
December 31, 1997.
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* Excludes 3,837,694 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds five percent of the shares
outstanding at February 28, 1998. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Issuer, or that such person is controlled by or under common
control with the Issuer.
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SPATIAL TECHNOLOGY INC.
ANNUAL REPORT ON FORM 10-KSB
DECEMBER 31, 1997
TABLE OF CONTENTS
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PART I
Item 1 Description of Business..................................... 1
Item 2 Description of Property..................................... 7
Item 3 Legal Proceedings........................................... 7
Item 4 Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5 Market for Common Equity and Related Stockholder Matters.... 8
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
Item 7 Financial Statements........................................ 23
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 38
PART II
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act....................................................... 38
Item 10 Executive Compensation...................................... 38
Item 11 Security Ownership of Certain Beneficial Owners and
Management................................................ 38
Item 12 Certain Relationships and Related Transactions.............. 38
Item 13 Exhibits, Lists and Reports on Form 8-K..................... 39
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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, as well as in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Spatial Technology Inc. (Spatial or the Company) was incorporated under the
laws of the State of Delaware on July 7, 1986 to design, develop, and market 3D
modeling software. Spatial has three wholly owned subsidiaries, Spatial
Technology Ltd., Spatial Technology GmbH, and Spatial Technology K.K. located in
England, Germany, and Japan, respectively, that assist in the sales and
licensing of the Company's products.
The Company is a leading developer of three-dimensional modeling software.
The Company licenses its 3D modeling software to software developers, enabling
them to incorporate advanced 3D modeling functionality into their applications.
The Company's 3D modeling software is designed as an open, component-based
software technology that is compatible with a variety of platforms. The
Company's ACIS 3D modeling software products provide core 3D modeling capability
for numerous commercial CAD software applications. In addition, the Company's 3D
modeling software is licensed by leading universities and research institutions.
The mechanical computer-aided design (MCAD), manufacturing (CAM),
engineering (CAE), and architecture (AEC) markets are the largest markets for 3D
modeling software. A key element of the Company's business strategy has been to
focus on these markets and provide advanced 3D modeling functionality to this
customer base. The Company's 3D modeling software technology provides core 3D
modeling capability for numerous commercial CAD software applications including,
AutoCAD and Mechanical Desktop (Autodesk, Inc.), CADKEY (Baystate Technologies,
Inc.) and TurboCAD Solid Modeler (IMSI). In the AEC market the Company provides
3D modeling software technology for MegaCAD (Megatech Software) and ARGOS
(Vertex Systems Oy)
The Company expects the rapid growth of personal computers with advanced 3D
capabilities to open significantly broader markets for 3D modeling software,
including multimedia, technical documentation, virtual reality, animation, and
professional filmmaking. To leverage its existing 3D modeling technology and
broaden the use of ACIS-enabled applications, the Company has introduced two new
software products, which form the ACIS Enterprise Solutions group within the
Company. The first product, ACIS 3D Building Blox is an ActiveX software
development toolkit targeted at visual programming developers. ACIS 3D Building
Blox was first released in the first quarter of 1997 and provides easy-to-use 3D
modeling tools, enabling visual programmers to incorporate 3D capabilities into
their applications. The second product, ACIS 3D Open Viewer, is an end-user
application that allows users to view models created with any ACIS-enabled
application.
THREE DIMENSIONAL MODELING OVERVIEW
3D modeling refers to the ability to create and modify 3D objects on a
computer and manipulate those objects by moving, sizing, rotating, stretching,
intersecting and performing other operations on them. 3D solid modeling uses
mathematical definitions of edges, surfaces and volumes and, in addition, may
integrate other physical attributes such as density, hardness, dimensions and
light reflectance to model an object. As a result, 3D applications employing
solid models incorporate more accurate, lifelike and intuitive modeling
capabilities than other modeling technologies.
Historically, CAD has been the primary market for 3D modeling software, and
the use of 3D modeling for CAD applications has become widespread. Today, 3D
modeling software is extending beyond the CAD market and is increasingly
affecting the way people communicate, work, learn and play. Emerging markets for
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3D modeling software include multimedia, technical documentation, architecture,
virtual reality, animation, and professional filmmaking.
PRODUCTS AND TECHNOLOGY
The Company designs, develops and markets 3D modeling software, which
incorporates a solid modeling engine and component extensions. The ACIS 3D
modeling engine is used for the creation, definition and manipulation of 3D
shapes, while component extensions enhance the modeling engine and provide
optional functionalities. In 1994, the Company introduced the ACIS 3D Toolkit,
which includes a suite of component extensions packaged with the modeling
engine. This packaging allows developers to quickly produce prototype
applications, greatly reducing their development costs and time to market.
The Company's 3D modeling software is designed as an open, component-based
software technology that is compatible with a variety of platforms. Open
architecture allows applications developers to integrate the ACIS 3D modeling
engine and component extensions to mix and match "best of breed" applications
and tools in order to better address the requirements of specific markets,
products and applications and allows end-users to share 3D models generated with
different ACIS-enabled applications.
ACIS 3D MODELING ENGINE
The ACIS 3D modeling engine enables solid, surface and wire-frame modeling
in a single modeling environment. The ACIS 3D modeling engine uses a solid
modeling technique known as boundary-representation modeling, which is a means
of precisely representing the characteristics of a 3D model using mathematical
definitions of edges, surfaces and volumes and, in addition, may integrate other
physical attributes such as density, hardness, dimensions and light reflectance.
This technique offers greater precision than competing 3D modeling techniques,
such as wire-frame and surface modeling techniques, and is better at producing
complex objects with smooth flowing lines, resulting in richer, more robust
models. The completeness of ACIS 3D solid models allows software applications to
calculate other attributes such as strength, center of gravity, mass,
flexibility and momentum. As a result, 3D applications employing ACIS 3D models
can incorporate lifelike and intuitive operations for building and manipulating
3D shapes. In addition, because the ACIS 3D modeling engine defines 3D shapes
using mathematical formulas, the resulting 3D models have relatively compact
data requirements for transmission of rich 3D content, which the Company
believes provides it with significant competitive advantages for low bandwidth
environments such as intranets and the Internet.
ACIS 3D TOOLKIT
The ACIS 3D Toolkit has been designed for rapid, low cost development of 3D
applications and is currently the primary packaging for delivery of the ACIS 3D
modeling engine. The ACIS 3D Toolkit consists of the ACIS 3D modeling engine and
a suite of component extensions that make it easy to create, manipulate,
visualize and interact with 3D models and develop prototype applications.
Component extensions include geometry construction, which facilitates the
creation of geometric shapes, graphical interaction, a graphical user interface
for modeling, and basic rendering, which applies shading, coloring and other
visual features to the model. The ACIS 3D Toolkit also provides a powerful
LISP-based scripting language allowing the Company's customer to quickly create
and prototype ACIS-enabled 3D applications. Applications developers may also
utilize an Applications Procedural Interface and direct C++ access to integrate
the functionality of the ACIS 3D modeling software directly into their 3D
applications.
The Company offers its customers development licenses for the ACIS 3D
Toolkit which range in price depending on the range of functionality and
distribution rights. Optional maintenance services, including product updates,
are available for an annual fee. In addition, most licensees are required by
their license agreements to pay royalties typically based on a percentage of the
net revenue generated by their sales of applications incorporating the ACIS 3D
Toolkit.
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OPTIONAL COMPONENT EXTENSIONS
In addition to the component extensions packaged with the ACIS 3D Toolkit,
the Company offers a series of optional component extensions that increase the
functionality of the ACIS 3D Toolkit. The introduction of new component
extensions by the Company allows it to market new products to new and existing
customers. The open architecture of the ACIS 3D modeling technology also enables
licensees to integrate additional functionality through independently developed
ACIS-compatible component extensions. Optional component extensions are priced
separately from the ACIS 3D Toolkit. Examples of component extensions include:
- Advanced blending. Advanced blending allows users to seamlessly connect
or "blend" two or more different curves or surfaces. This component
extension was developed to meet the advanced design requirements
necessary for consumer product, automotive and aerospace design, where
smooth, flowing surfaces are critical.
- Deformable surfaces. Deformable surfaces allows users to interactively
shape a model by applying forces and constraints much the same as a
sculptor would shape clay. This component extension has applications in
3D markets where natural aesthetics and intuitive modeling are required,
such as consumer product design, animation, filmmaking and graphic arts.
- Local operations. Local operations are an advanced editing tool that
allows developers to easily modify features of a model after it has been
constructed. For example, features such as holes can be relocated on a
model or removed completely. This component extension has broad
applications throughout CAD and particularly in manufacturing design.
- Mesh surfaces. Mesh surfaces provides an alternative method for modeling
a surface in ACIS. The mesh surface represents a surface as a simple
collection of small planar, triangular patches. This simplified approach
enables the mesh surface to model much larger surfaces than alternative
approaches.
- Shelling. Shelling offers the ability to convert a solid volume to a
thin-walled volume by "shelling" out the inside of an object. Since it is
usually faster to model an object as a solid volume and then remove the
interior contents, shelling reduces design time. For example, this
component extension can be used to design thin-walled plastic parts, such
as a computer monitor casing or a telephone handset.
ACIS ENTERPRISE SOLUTIONS
In 1997, the Company formed the ACIS Enterprise Solutions group. This group
is responsible for developing, marketing, and selling ACIS 3D Building Blox and
ACIS 3D Open Viewer to large organizations or enterprises. Organizations spend
large amounts of resources on generating 3D content, but this content is often
used only within the engineering organization. The Enterprise Solutions products
are designed to help move this 3D content into different areas of the
organization. The ACIS 3D Open Viewer allows users to view 3D models generated
by ACIS-enabled applications and ACIS 3D Building Blox allows enterprise
developers to create custom 3D applications which address the specific needs of
their organization. The Enterprise Solutions products create demand for
ACIS-enabled applications and ACIS 3D content, thus driving sales of the
Company's ACIS 3D Toolkit.
ACIS 3D BUILDING BLOX
To leverage its ACIS 3D modeling technology and broaden the use of
ACIS-enabled applications, the Company has introduced ACIS 3D Building Blox
targeted at visual programming developers. This toolkit is packaged and
delivered to developers as an ActiveX control. The Company believes ACIS 3D
Building Blox does not compete with the ACIS 3D Toolkit since it will not allow
direct access to the modeling engine and will have a reduced set of procedural
interfaces, limiting the functionality to those functions appropriate for the
visual programming market. There can be no assurances that the Company will be
successful in further developing and marketing ACIS 3D Building Blox. See
"Management's Discussion and Analysis of Financial
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Condition and Results of Operations -- Risk Factors -- Dependence on New
Products; Delays in Product Releases; Potential Product Errors" and "-- Risks
Associated with the Visual Programming Market."
ACIS 3D Building Blox enables developers to create 3D models using basic
geometry construction and will provide the ability to import and export models
generated by other applications built using the Company's 3D modeling software.
The product also supports real-time rendering, texture mapping and model
manipulation and will include capabilities such as virtual walk-throughs and
animation. The product is delivered with several sample applications that serve
as templates for basic modeling, rendering and object manipulation functions,
easing application development.
The Company believes that the visual programming market mainly consists of
developers within large organizations or enterprises that have a need to develop
custom 3D applications to augment the 3D applications already in use within the
enterprise. Enterprise developers use visual development environments, such as
Microsoft Visual Basic, to develop custom applications. Therefore, ACIS 3D
Building Blox was designed to easily integrate into this environment. By
providing an easy-to-use custom development environment, ACIS 3D Building Blox
drives demand for ACIS-enabled applications as the backbone of 3D content
development in an enterprise.
ACIS 3D OPEN VIEWER
In 1997, the Company introduced the ACIS 3D Open Viewer. The Viewer is an
end-user application that allows users to view models created in any
ACIS-enabled application. The user can zoom, pan, and rotate the model as well
as perform basic visualization functions such as changing the color of faces or
the background. The ACIS 3D Open Viewer is compatible with Microsoft Office
applications, allowing users to embed 3D content within their documents and
presentations.
The ACIS 3D Open Viewer is available on CD or the Company's web site at no
cost. The Viewer allows supporting organizations within an enterprise to take
advantage of the 3D content generated by designers. For example, a sales person
can install the viewer on a laptop to show a design to a customer at the
customer's site prior to manufacturing or the Viewer can be used to shade a
model for use in technical documentation. The Viewer drives demand for 3D
content generated by ACIS-enabled applications, thus driving demand for
ACIS-enabled applications as the backbone of the 3D content development in an
enterprise.
CUSTOMERS
The Company's customer base of over 400 licensees generally falls into one
of three categories: (i) software application developers who create ACIS-enabled
commercial products, (ii) major companies which use the Company's 3D modeling
software for internal purposes and (iii) leading universities and research
institutions. Software application developers represent the majority of the
Company's current customer base and revenue. The Company's sales to developers
using the ACIS 3D modeling software for internal purposes are important because
they create demand for ACIS 3D modeling technology by encouraging commercial
software developers to produce ACIS-enabled applications. In addition,
universities and research institutions have initiated design ideas incorporated
by the Company and use the software to educate students in ACIS 3D modeling
technology.
In order to encourage the adoption of the ACIS 3D modeling technology by
the CAD market, in June 1991 the Company entered into a strategic relationship
with Autodesk. Pursuant to the Company's agreements with Autodesk, the Company
granted a perpetual nonexclusive license of the ACIS 3D modeling engine for use
in Autodesk's family of products. Autodesk has paid the Company an initial
license fee and is required to pay the Company royalties on a quarterly basis
for products sold which incorporate the Company's ACIS 3D modeling software. In
addition, Autodesk is required to pay maintenance fees which entitle Autodesk to
license product upgrades as they are released. Either party may terminate upon
material breach of the agreement. During 1996 and 1997 Autodesk accounted for
13% of total revenue.
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RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that its continued growth will depend in large part on
its ability to maintain and enhance its current products, develop new products
and maintain technological competitiveness. The Company has built a development
group with specialized expertise in geometric modeling techniques, advanced
mathematics and C++ programming techniques. During 1995, 1996 and 1997 research
and development expenses were $2.9 million, $3.7 million, and $4.0 million,
respectively.
To maintain and improve its competitive position, the Company is committed
to providing its customers technological innovations and product upgrades. In
September 1997, the Company released ACIS 3.0, which introduced a new modular
software architecture and more advanced 3D modeling capabilities, providing
customers with competitive advantages in the 3D marketplace.
The Company identifies customer requirements for product enhancements and
new products through an analysis of current customer requests communicated
through the Technical Support Department and new customer requests communicated
through the Sales and Marketing Department. In order to enhance the level of
communication with its customers, the Company holds an annual developer
conference. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors -- Dependence on New Products; Delays in
Product Releases; Potential Product Errors."
The Company augments its internal development capabilities through a
network of development partners possessing geometric modeling expertise. The
Company has development relationships with recognized leaders in 3D modeling.
The Company typically co-owns the technology with the development partner and
has the exclusive right to market and distribute that technology.
The Company also resells certain rendering component extensions from other
third party software developers. Although the Company has a license to
distribute these products, the developer retains ownership of this software and
there can be no assurance that the Company will be able to control the
development of such extensions.
SALES, MARKETING AND DISTRIBUTION
To date, the Company has focused its sales, marketing and distribution
efforts primarily on the CAD market. The Company has also marketed and sold its
3D modeling software to emerging 3D markets including multimedia, technical
documentation, architecture, virtual reality, animation, and professional
filmmaking. The Company markets its products to application developers worldwide
through a direct sales force serviced by the Company's Boulder, Colorado
facility and its sales offices in Monchengladbach, Germany and Tokyo, Japan. In
1997, the majority of the Company's sales were for the ACIS 3D Toolkit and
approximately 48% of the Company's sales were to customers outside the United
States.
The Company's sales cycle for new customers of its ACIS 3D Toolkit is
generally three to nine months. Following identification of a prospect, the
Company trains prospects in design and programming techniques. The sales cycle
then entails a preliminary agreement that, for a fee, entitles the customer to a
one to three month limited license primarily for product evaluation. Following a
satisfactory evaluation, the Company typically licenses the ACIS 3D modeling
software on a non-exclusive, perpetual use basis. The Company generally ships
products as orders are received and, therefore, has little or no backlog, See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- Fluctuations in Quarterly Results."
The market for ACIS Enterprise Solutions products has significantly
different characteristics than the Company's existing markets. The Company
anticipates a much broader market base in which to sell ACIS Enterprise Solution
products. Visual programmers are often individuals or businesses, which do not
require direct access to the ACIS 3D modeling engine and its comprehensive
functionality. Accordingly, the Company's current application developer
licensing model, which grants licenses for direct access to the modeling engine
and its complete set of procedural interfaces, is not appropriate for the visual
programming market. The Company believes that some of the visual programming
licensees will eventually wish to acquire rights to functionality not currently
available in the ACIS Enterprise solutions product family. These visual
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programmers would be required to upgrade their license to a ACIS 3D Toolkit
license, requiring additional license fees and maintenance payments to the
Company.
As areas outside of engineering departments begin to use 3D content,
organizations will look to purchase end-user licenses for ACIS Enterprise
Solution products in much greater volume than the Company currently experiences
with its ACIS 3D Toolkit. The Company believes that relatively large volume OEM
sales of the ACIS Enterprise Solution products can be achieved. As a broader
market for 3D content evolves, the Company anticipates users will demand
additional functionality. Therefore, as part of the Company's ACIS Enterprise
Solution strategy the ACIS 3D Open Viewer is designed with a plug-in
architecture that will allow it and third-party developers to expand its
functionality with tools, such as translators and photorealistic rendering.
The Company believes that the users targeted for ACIS Enterprise Solutions
products typically purchase a substantial number of tools and products over the
Internet. Accordingly, the Company anticipates marketing ACIS Enterprise
Solution products through the Internet, leading electronic catalogs, feature
story writing for visual programming trade publications, and attendance at key
visual programming conferences.
CUSTOMER SERVICE AND SUPPORT
The Company believes that customer service and support is critical to the
success of its products. Customer phone calls or e-mails are answered and
managed by support professionals who review customer communications with the
appropriate development group and coordinate the response to the customer.
As part of its licensing arrangements for the ACIS 3D Toolkit, the Company
offers maintenance services including technical updates and product support. To
date, a majority of customers have purchased these maintenance services which
are offered on a renewable basis for an annual fee. These services allow
customers full access to the ACIS 3D modeling technology they have licensed,
including all new releases, telephone support and other support required to
utilize the Company's products effectively.
COMPETITION
The markets for the Company's products are highly competitive, subject to
rapid change and characterized by constant demand for new product features and
pressure to accelerate the release of new products and product enhancements and
to reduce prices. A number of companies currently offer products that compete
directly or indirectly with one or more of the Company's products. These
companies include, among others, Shape Data, Ltd. (a subsidiary of Electronic
Data Systems Corp.) and Ricoh Corp. In addition, the Company also competes with
in-house proprietary development programs producing modeling tools and 3D
products. While the Company is not aware of any competitor providing solid
modeling tools to the visual programming market, other companies may have
introduced other modeling technologies to this market. Many of the Company's
competitors or potential competitors have or may have significantly greater
financial, management, technical and marketing resources than the Company. A
variety of potential actions by any of the Company's competitors, including
announcement or accelerated introduction of new or enhanced products or
features, increased promotion or a reduction of product prices could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company's present and future competitors
may be able to develop products comparable or superior to those offered by the
Company or adapt more quickly than the Company to new technologies or evolving
market requirements. The Company believes that the primary competitive factors
affecting the market for the Company's products include performance, features,
quality, name recognition, reputation, access to channels of distribution, the
quality of documentation, customer support and price. Although the Company
believes that it competes favorably with respect to these factors, there can be
no assurance that the Company will be able to continue to compete effectively
with respect to these or any other competitive factors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Competition."
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INTELLECTUAL PROPERTY
The Company regards its technology as proprietary and relies primarily on a
combination of copyright, trademark and trade secret laws, employee and third
party nondisclosure agreements, and other intellectual property protection
methods to protect its products and technology. The Company has no patents with
respect to its ACIS 3D modeling technology. The Company believes that the
ownership of patents is not presently a significant factor in its business and
that its success does not depend on the ownership of patents, but primarily on
the innovative skills, technical competence and marketing abilities of its
personnel. Existing copyright laws afford only limited protection, and it may be
possible for unauthorized third parties to copy the Company's products or to
reverse engineer or obtain and use information that the Company regards as
proprietary. The Company licenses portions of the technology used in the ACIS 3D
modeling engine and component extensions. See "Business -- Research and Product
Development." The Company also resells certain component extensions of third
party software developers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors -- Dependence on
Third Party Developers" and "-- Proprietary Rights Limitations."
While the Company is not aware that any of its products infringe the
proprietary rights of any third parties, there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects that it could increasingly be subject to
such claims as the number of products and competitors in the 3D modeling
software market grows and the functionality of such products overlaps with other
industry segments. See "Risk Factors -- Proprietary Rights Limitations."
EMPLOYEES
As of December 31, 1997, the Company had 71 full-time employees, including
34 in product development, quality assurance and technical support, 25 in sales
and marketing and 12 in administration. The Company's employees are not subject
to any collective bargaining agreements, and the Company believes its relations
with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive office is located at 2425 55th Street,
Suite 100, Boulder, Colorado 80301, where the Company leases approximately
23,500 square feet of office space. Monthly lease payments for this facility are
approximately $28,000. The lease for this facility expires in September 2000. In
addition, the Company leases international sales offices in Monchengladbach,
Germany and Tokyo, Japan. The Company believes that its facilities are adequate
for its current needs and its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company has been involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this filing, the Company is not a party to any legal proceedings, the
adverse outcome of which would, in management's opinion, have a material adverse
effect on the Company's operating results and financial condition.
In 1995 a software developer asserted a claim for additional royalties in
the amount of $551,000 based on its interpretation of the terms of its license
agreement with the Company. The Company disputes the claim and believes that it
has adequately provided for its royalty liability under the agreement as of
December 31, 1997. As of the date of this filing, to the Company's knowledge the
software developer has not initiated legal proceedings against the Company to
recover the additional royalty payments.
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On April 30, 1997, the Company filed a Complaint for Damages and Injunctive
Relief and Jury Demand in the District Court of Boulder County, Colorado against
Rolf Fischer, Ronald E. Davidson and Hyper Tree Technologies, L.L.C. On June 9,
1997, Hyper Tree Technologies, L.L.C. removed the action to the United States
District Court for the District of Colorado. Both Mr. Fischer and Mr. Davidson
were employees of the Company until their resignations effective on March 31,
1997. Additionally, Mr. Davidson served as an executive officer of the Company
as Vice President, Pacific Rim Sales. In the Complaint, the Company alleged that
Messrs. Fischer and Davidson have acted to deprive the Company of its rights to
a technology known as "Lean Design". In January 1998 the Company and Hyper Tree
Technologies, and Mr. Fischer and Mr. Davidson settled the dispute.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Issuer's Common Stock is listed on the over-the-counter market
through the American Stock Exchange under the symbol "STY". The following table
indicates the high and low sale prices per share reported by the American Stock
Exchange for the period indicated. These prices do not include retail markups,
markdowns or commissions.
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1996* 1997
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HIGH LOW HIGH LOW
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First Quarter........................................... n/a n/a $6.13 $2.75
Second Quarter.......................................... n/a n/a $3.13 $2.00
Third Quarter........................................... n/a n/a $2.75 $1.56
Fourth Quarter.......................................... $5.38 $3.75 $2.44 $1.25
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* The issuer's Common Stock began trading publicly on October 18, 1996.
As of February 28, 1997 there were approximately 84 holders of record of
the Common Stock.
The Company has never declared or paid dividends on its Common Stock. The
Company currently intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.
(b) On December 31, 1997, the Company issued an aggregate of 250,000 shares
of Common Stock to persons affiliated with Three-Space Limited, a limited
company organized under the laws of England ("TSL"). The shares were issued as
partial consideration for the acquisition from TSL of all right, title and
interest to all technology developed, or being developed, by TSL as of December
31, 1997 pursuant to the Development Agreement, by and between the Company and
TSL, dated June 26, 1987, as amended. The sale and issuance of such shares was
deemed to be exempt from registration under the Securities Act of 1933 by virtue
of Section 4(2) thereof. The recipients represented their intention to acquire
the securities for investment only and not with a view to distribute thereof.
Appropriate legends are affixed to the stock certificates issued in such
transaction. All recipients either received adequate information about the
Company or had access to such information.
8
<PAGE> 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data of the Company. The
selected financial data as of and for the years ended December 31, 1993, 1994,
1995, 1996 and 1997 have been derived from the Company's consolidated financial
statements which have been audited by KPMG Peat Marwick LLP, independent
auditors. The data should be read in conjunction with the consolidated financial
statements and related notes included in Item 7 hereof (in thousands except per
share data):
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
License fees........................... $ 3,687 $ 3,087 $ 4,850 $ 4,553 $ 3,981
Royalties.............................. 562 876 1,207 1,925 2,428
Prepaid royalties...................... 1,475 448 -- 182 352
Maintenance and other.................. 1,657 2,137 2,572 2,913 2,950
------- ------- ------- ------- -------
Total revenue............................ 7,381 6,548 8,629 9,573 9,711
Gross profit............................. 6,231 5,843 7,709 8,601 8,920
Operating expenses:
Sales and marketing.................... 3,220 2,710 2,942 3,564 4,108
Research and development............... 3,843 3,166 2,880 3,716 4,017
General and administrative............. 2,076 950 1,210 1,366 2,271
Acquired in-process research and
development......................... -- -- -- -- 621
------- ------- ------- ------- -------
Total operating expenses................. 9,139 6,826 7,032 8,646 11,017
Earnings (loss) from operations.......... (2,908) (983) 677 (45) (2,097)
Earnings (loss) before extraordinary
item................................... (3,011) (1,162) 388 (162) (1,818)
Extraordinary item(1).................... -- 298 -- -- --
------- ------- ------- ------- -------
Net earnings (loss)...................... $(3,011) $ (864) $ 388 $ (162) $(1,818)
======= ======= ======= ======= =======
Earnings (loss) per common share(2):
Basic
Continuing operations............... $ (3.39) $ (1.14) $ 0.38 $ (0.07) $ (0.24)
Extraordinary item.................. -- 0.29 -- -- --
------- ------- ------- ------- -------
Earnings (loss) per common share.... $ (3.39) $ (0.85) $ 0.38 $ (0.07) $ (0.24)
======= ======= ======= ======= =======
Diluted
Continuing operations............... $ (3.39) $ (1.14) $ 0.07 $ (0.07) $ (0.24)
Extraordinary item.................. -- 0.29 -- -- --
------- ------- ------- ------- -------
Earnings (loss) per common share.... $ (3.39) $ (0.85) $ 0.07 $ (0.07) $ (0.24)
======= ======= ======= ======= =======
Weighted average number of common shares
and common equivalent shares
outstanding(2)
Basic.................................. 888 1,017 1,034 2,395 7,449
Diluted................................ 888 1,017 5,210 2,395 7,449
</TABLE>
9
<PAGE> 12
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................ $ 1,812 $ 288 $ 153 $ 8,407 $ 5,736
Working capital (deficit)................ (369) (1,206) (1,383) 7,530 5,385
Total assets............................. 4,441 2,763 2,848 11,071 10,335
Long-term debt and capital lease
obligation............................. 507 500 -- -- --
Redeemable preferred stock(3)............ 14,155 14,155 14,155 -- --
Total stockholders' equity (deficit)..... (14,427) (15,313) (14,915) 8,311 7,167
</TABLE>
- ---------------
(1) The extraordinary item represents a gain on the early extinguishment of
debt.
(2) Diluted earnings per share and weighted average common shares outstanding
for 1995 gives effect to the conversion of all outstanding shares of
mandatory redeemable preferred stock into 4,099,598 shares of common stock
pursuant to the Company's initial public offering in October 1996 as
described in Note 5 of Notes to Consolidated Financial Statements. The
affect of conversion on all other periods presented is antidilutive.
(3) Converted to common stock in 1996. See Note 5 of Notes to Consolidated
Financial Statements
OVERVIEW
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 under "Risk
Factors".
The Company has three sources of revenue: license fees, royalties, and
maintenance and other. License fees consist of fees paid by customers to license
the Company's products for use in customers' product development efforts.
Revenue from license fees is recognized upon completion of a signed contract and
shipment of product. The Company's license agreements generally provide for
royalty payments from customers based on shipment of customers' products, which
incorporate the Company's 3D modeling software. Royalty revenue is generally
recognized upon receipt of payment or according to the payment terms specified
in the contract. Maintenance revenue, consisting of fees received by the Company
for customer support and product upgrades, is generally based on annual
contracts recognized ratably over the period of the contract. Other revenue
consists of training and consulting fees, which are recognized upon completion
of a training class or performance of services, respectively.
For the year ended December 31, 1997, the Company incurred a net loss of
$1.8 million (or $0.24 per share) on total revenue of $9.7 million, as compared
to a net loss of $162,000 (or $0.07 per share) on total revenue of $9.6 million
reported for 1996. The net loss for 1997 includes the effects of three
non-recurring events totaling $1.0 million in operating expense. Included in
operating expenses for the fourth quarter of 1997, is a $621,000 charge for
acquired in-process research and development in connection with the acquisition
of certain intellectual property rights from TSL. During the second quarter of
1997, the Company charged approximately $398,000 to operations related to two
separate events, a $200,000 charge to research and development expense for a
write-down of purchased computer software, which was due to a change in the
Company's development strategy, and a charge of approximately $198,000 to
general and administrative expense in connection with expenses associated with
the resignation of the former president of the Company. (See Notes 1 and 2 of
Notes to Consolidated Financial Statements.)
Excluding the aforementioned non-recurring charges in the second and fourth
quarters of 1997, the Company incurred a net loss of $799,000 (or $0.11 per
share), reflecting a $637,000 increase in the net loss as compared to 1996. The
increased net loss in 1997 as compared to 1996 reflects slightly increased
revenue, lower cost of sales, and increased interest income, offset by increased
operating expenses. More specifically, a downturn in financial performance began
in the fourth quarter of 1996, when the Company incurred a net loss
10
<PAGE> 13
of $510,000 on total revenue of $1.9 million, and continued through the second
quarter of 1997. During the first half of 1997 the Company incurred a net loss
of $817,000 (excluding $398,000 of non-recurring charges) on total revenue of
$4.3 million, reflecting a 15% decline in total revenue over the comparable
period in 1996. As total revenue was declining during this period, operating
expenses increased as the Company increased marketing expenditures in support of
new product offerings, and increased general and administrative expenses to
cover insurance costs, professional fees and other costs associated with the
Company's reporting obligations as a public company. The second half of 1997
reflects improved financial performance, as the Company experienced breakeven
results (excluding the charge for acquired in-process research and development)
on increased revenue. Revenue increased $1.2 million (or 27%) to $5.4 million in
the second half of 1997 as compared to the first half. License fees were the
primary contributor to improved operating results, increasing 54% to $2.4
million in the second half of 1997 as compared to $1.6 million reported for the
first half of 1997. See "Quarterly Results".
A significant factor in the Company's performance in 1997 was the lower
than expected revenue from ACIS 3D Building Blox. To leverage its existing 3D
modeling technology, the Company introduced a 3D modeling software toolkit, ACIS
3D Building Blox, targeted at visual programming developers in the first quarter
of 1997. Shipments of ACIS 3D Building Blox fell below expectations in 1997 due
primarily to two factors: 1) the Company overestimated the market demand for
ACIS 3D Building Blox, and 2) the Company underestimated the requisite
functionality for a 3D modeling software toolkit targeted at visual programming
developers. During the second half of 1997 the Company changed its strategy with
respect to ACIS 3D Building Blox and incorporated this product into the ACIS
Enterprise Solutions product family. ACIS Enterprise Solutions are 3D software
tools designed to be used throughout the enterprise and currently include ACIS
3D Building Blox and ACIS 3D Open Viewer. ACIS 3D Building Blox is a Visual
Basic development toolkit for creating 3D applications for modeling, displaying,
manipulating and querying 3D objects. ACIS 3D Open Viewer is an end-user
application that enables users at all levels in a company to access, view, and
use 3D objects in any OLE-enabled application, such as a company's web page or
Microsoft Office applications like Word or PowerPoint. In connection with the
introduction of ACIS Enterprise Solutions products, the Company has incurred
increased fixed operating expenses and sales and marketing expenses. To the
extent such expenses precede or are not followed by increased revenues, the
Company's business, operating results and financial condition could be
materially and adversely affected. Additionally, there can be no assurance that
commercial acceptance of the Company's products by the visual programming market
will result in profits for the Company. See "Products and Technology -- ACIS
Enterprise Solutions" and "Risk Factors -- Risks Associated with the Visual
Programming Market."
The Company has experienced in the past, and expects to continue to
experience in the future significant fluctuations in quarterly operating results
due to factors within and outside the Company's control. Because the Company's
operating expenses to a large extent are fixed and are based in part on
anticipated revenues, a substantial portion of which may not be generated until
near the end of each quarter, the Company may be unable to adjust spending in
time to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in sales of the Company's products in relation to the
Company's expectations could have a material adverse impact on the Company's
operating results. Additionally, the Company's revenues are historically based
on low volume, high value orders. Software license fees from a single contract
are often in excess of $100,000; therefore, the receipt, delay or cancellation
of a minimal number of customer orders can have a dramatic impact on license fee
revenues in any given period. See "Risk Factors -- Fluctuations in Quarterly
Results."
As of December 31, 1997, the Company had net operating loss carryforwards
totaling $13.9 million, which may be used to reduce future income taxes.
Utilization of these net operating loss carryforwards may be limited under
certain circumstances. See Note 6 of Notes to Consolidated Financial Statements.
11
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain statements
of operations data expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenue:
License fees.............................................. 56% 48% 41%
Royalties................................................. 14 20 25
Prepaid royalties......................................... -- 2 4
Maintenance and other..................................... 30 30 30
--- --- ---
Total revenue..................................... 100 100 100
Gross profit................................................ 89 90 92
Operating expenses:
Sales and marketing....................................... 34 37 42
Research and development.................................. 33 39 41
General and administrative................................ 14 14 24
Acquired in-process research and development.............. -- -- 6
--- --- ---
Total operating expenses.......................... 81 90 113
--- --- ---
Earnings (loss) from operations............................. 8 -- (21)
Net earnings (loss)......................................... 5% (2)% (19)%
</TABLE>
FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenue. For the year ended December 31, 1997, total revenue increased
slightly to $9.7 million from $9.6 million reported for 1996. Decreased license
fees were offset by increased royalties and maintenance and other revenue.
License fees decreased 13% to $4.0 million in 1997 from $4.6 million reported in
1996 primarily due to a decrease in the total number of contracts executed in
1997 as compared to 1996. Royalties and prepaid royalties combined increased 32%
to $2.8 million in 1997 from $2.1 million reported in 1996. Two factors
contributed to increased royalties in 1997 as compared to 1996: 1) an increase
in the number of the Company's customers shipping ACIS-based software
applications, and 2) two customers shipped a product release update during 1997
resulting in approximately $250,000 of royalties. Maintenance and other revenue
increased slightly to $3.0 million for 1997 from $2.9 million reported in 1996.
This modest increase in maintenance and other revenue is a result of a lower
growth rate in the customer base during 1997 as compared to prior periods. This
trend is evidenced by the decrease in the number of contracts executed in 1997
as compared to 1996.
Geographically, increased revenue in the United States, Europe and Japan,
was partially offset by decreased revenue in Canada. Domestic revenue
represented 52% of total revenue in 1997, a slight increase from the 51%
reported for 1996, reflecting a 3% increase to $5.0 million from $4.9 million
reported in 1996. International revenue was unchanged from 1996 and 1995 at $4.7
million. Revenue reported for Europe in 1997 increased 16% to $2.5 million from
$2.2 million reported in 1996. Revenue reported for Japan increased 4% to $1.8
million for 1997 from $1.7 million reported for 1996. Revenue for other
geographic regions, including other parts of Asia and Canada, decreased 56% to
$333,000 for 1997 from $750,000 reported for 1996 due to decreased revenue in
Canada.
Cost of Sales. Total cost of sales decreased 19% to $791,000 for 1997, as
compared to $972,000 reported in 1996. Cost of sales consists of royalty
payments by the Company to third party developers, customer support costs,
manufacturing costs (primarily media duplication, manuals, and shipping) and
amortization of purchased computer software. Total cost of sales decreased due
to lower royalty and other manufacturing costs. Royalty expense decreased
$105,000 in 1997 as compared to prior year due to the acquisition of certain
12
<PAGE> 15
intellectual property rights from TSL. As part of this transaction, effective
October 1997, the Company's royalty obligation to TSL was eliminated. (See Note
2 of Notes to Consolidated Financial Statements). Also contributing to decreased
royalty expense was a change in the Company's product mix toward lower royalty
bearing products. Manufacturing costs decreased $65,000 (or 34%) in 1997 as
compared to 1996, reflecting cost savings derived from the Company's transition
to CD-ROM based media as its primary media format and to the use of on-line
documentation. As a percent of total revenue, cost of sales decreased to 8% in
1997 from 10% in 1996.
Sales and Marketing Expense. For the year ended December 31, 1997, sales
and marketing expense increased 15% to $4.1 million from $3.6 million reported
in 1996. Increased sales and marketing expense for 1997 as compared to 1996 was
due to higher spending on marketing, including increased staffing in support of
increased marketing activities in 1997 as compared to 1996. Marketing program
expenses also increased in 1997 as compared to 1996 for public relations,
advertising campaigns, and sales collateral. As a percent of revenue, sales and
marketing expense increased from 37% in 1996 to 42% in 1996.
Research and Development Expense. Research and development expense
increased 8% to $4.0 million for 1997 as compared to $3.7 million reported in
1996. Included in research and development expense for 1997 is a $200,000 charge
for a write-down of purchased computer software. (See "Overview" and Note 1 of
Notes to Consolidated Financial Statements.) As a percent of revenue, research
and development expense increased from 39% in 1996 to 41% in 1997. 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 and Administrative Expense. General and administrative expense
increased 66% to $2.3 million in 1997 from $1.4 million reported in 1996.
Included in this increase was a charge in June 1997 of approximately $198,000 in
connection with expenses associated with the resignation of the former president
of the Company. Additional increases to general and administrative expense for
1997 as compared to 1996 were due to increased spending on insurance,
professional fees and other costs associated with the Company's reporting
obligations as a public company. As a percent of revenue, general and
administrative expense increased from 14% in 1996 to 24% in 1997.
Acquired In-process Research and Development. Acquired in-process research
and development expense was $621,000 in 1997 and relates to the acquisition of
certain intellectual property rights from TSL. Specifically included in this
expense were amounts allocated to projects, which had not reached technological
feasibility and had no probable alternative future uses. (See Note 2 of Notes to
Consolidated Financial Statements.)
Other Income (Expense), Net. Other income reported in 1997 was $375,000 as
compared to $23,000 in 1996, reflecting interest income earned on proceeds from
the Company's initial public offering completed in 1996.
Income Tax Expense. The Company's income tax expense decreased 31% to
$96,000 for 1997 from $140,000 for 1996. Income tax expense for these periods
included only withholding taxes on foreign sales. (See Note 6 of Notes to
Consolidated Financial Statements.)
FISCAL YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue. Total revenue increased 11% to $9.6 million for 1996 from $8.6
million for 1995. This increase was due to increased royalties, prepaid
royalties, and maintenance and other revenue, partially offset by a decrease in
license fees. License fees decreased 6% to $4.6 million for 1996, as compared to
$4.9 million reported for 1995. The decline was attributable to both fewer and
lower value contracts executed in 1996 as compared to 1995. Royalties increased
59%, growing from $1.2 million in 1995 to $1.9 million reported in 1996. The
increase in royalties was a result of an increase in the number of the Company's
customers shipping ACIS-based software applications during 1996. Prepaid
royalties were $182,000 for 1996 as compared to none
13
<PAGE> 16
in 1995. Maintenance and other revenue increased 13% to $2.9 million for 1996
from $2.6 million reported in 1995. The increase in maintenance and other
revenue reflects increased maintenance revenue as a result of an increase in the
customer base.
Domestic revenue represented 51% of total revenue in 1996 as compared to
45% in 1995, reflecting a 25% increase to $4.9 million in 1996 from $3.9 million
reported in 1995. International revenue was unchanged at $4.7 million for 1995
and 1996. Included in international revenue for 1996 was $2.2 million in revenue
for Europe, which represents an 18% increase from the $1.9 million reported in
1995. Japan revenue decreased 6% to $1.7 million for 1996 from $1.8 million for
1995. Revenue from other geographic regions, including other parts of Asia and
Canada, decreased 25% to $750,000 in 1996 from $1.0 million reported in 1995.
Cost of Sales. Total cost of sales increased 6% to $972,000 for 1996 as
compared to $920,000 for 1995. Increased cost of sales was due to higher royalty
expense and purchased computer software amortization, partially offset by lower
manufacturing and shipping expense. Royalty expense increased $61,000 due to
higher revenue. Purchased computer software amortization increased $42,000
reflecting initial amortization of technology included in the Company's update
which began shipping at the end of March 1996. Manufacturing costs decreased due
to the Company's transition to CD-ROM based media as its primary media format
for both software products and documentation. As a percent of revenue, cost of
sales decreased to 10% in 1996 from 11% in 1995.
Sales and Marketing Expense. For the year ended December 31, 1996, sales
and marketing expense increased 21% to $3.6 million from $2.9 million reported
in 1995. The increase was attributable to increased promotional activity and
commission expense needed to support increased revenue. As a percent of revenue,
sales and marketing expense increased from 34% in 1995 to 37% in 1996.
Research and Development Expense. Research and development expense
increased 29% to $3.7 million for 1996 as compared to $2.9 million reported in
1995. The increase was primarily due to increased staffing, as well as increased
utilization of contract programmers by the company, in support of growing
development efforts to enhance the existing ACIS product line, and to develop
ACIS 3D Building Blox. As a percent of revenue research and development expense
increased from 33% in 1995 to 39% in 1996. 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 and Administrative Expense. General and administrative expense was
$1.4 million in 1996, increasing 13% from $1.2 million reported in 1995.
Increased expense was attributable to increased bad debt provisions in 1996 as
compared to 1995. As a percent of revenue, general and administrative expense
was 14% for 1995 and 1996.
Other Income (Expense), Net. Other income reported in 1996 was $23,000 as
compared to an expense of $115,000 in 1995, reflecting interest income earned on
proceeds from the initial public offering described in "Liquidity and Capital
Resources" below. Additionally, costs related to financing in 1995 did not recur
in 1996.
Income Tax Expense. The Company's income tax expense decreased 20% to
$140,000 for 1996 from $174,000 for 1995. Income tax expense for these periods
included only withholding taxes on foreign sales. See Note 6 of Notes to
Consolidated Financial Statements.
14
<PAGE> 17
QUARTERLY RESULTS
The following table sets forth certain quarterly financial data for the
periods indicated. This quarterly information is unaudited. In the opinion of
management, such unaudited information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation for the
periods. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31
1996 1996 1996 1996 1997 1997 1997 1997
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License fees.......................... $ 951 $1,397 $1,462 $ 743 $ 614 $ 956 $1,208 $1,203
Royalties............................. 718 410 400 397 672 478 587 691
Prepaid royalties..................... -- 100 -- 82 95 54 93 110
Maintenance and other................. 716 745 745 707 709 697 722 822
------ ------ ------ ------ ------ ------ ------ ------
Total revenue........................... 2,385 2,652 2,607 1,929 2,090 2,185 2,610 2,826
Gross profit............................ 2,079 2,397 2,384 1,741 1,897 2,003 2,384 2,636
Operating expenses:
Sales and marketing................... 735 939 899 991 923 977 978 1,230
Research and development.............. 861 894 949 1,012 888 1,116 968 1,045
General and administrative............ 330 437 329 270 574 820 480 397
Acquired in-process research and
development......................... -- -- -- -- -- -- -- 621
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses................ 1,926 2,270 2,177 2,273 2,385 2,913 2,426 3,293
Earnings (loss) from operations......... 153 127 207 (532) (488) (910) (42) (657)
Net earnings (loss)..................... $ 59 $ 125 $ 164 $ (510) $ (411) $ (804) $ 10 $ (613)
</TABLE>
Until the fourth quarter of 1996, the Company experienced nine consecutive
quarters of profitability. The net loss for three consecutive quarters beginning
the quarter ended December 31, 1996 through the quarter ended June 30, 1997 is
attributable to a shortfall in revenue, primarily from license fees. Also
contributing to the net losses over these periods were higher operating expenses
due to increased marketing activities, and increased general and administrative
expenses related to spending on insurance, professional fees and other costs
associated with the Company's reporting obligations as a public company.
Additionally, for the quarter ended June 30, 1997, the Company charged
approximately $398,000 to operations related to two non-recurring events as
discussed above. See "Overview".
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 2,100,000 shares of its common
stock for net proceeds of approximately $8.7 million after deducting
underwriting discounts and commissions and other offering expenses.
Additionally, a portion of the net proceeds from the initial public offering was
used to reduce certain liabilities totaling approximately $625,000, consisting
of outstanding notes payable and certain other accrued liabilities.
As of December 31, 1997, the Company had $5.7 million in cash and cash
equivalents, reflecting a decrease of $2.7 million from 1996. The decrease in
cash and cash equivalents during 1997 is due to cash used by operating and
investing activities. Cash increased $8.3 million in 1996 due to proceeds from
the Company's initial public offering.
Net cash used by operating activities was $1.2 million in 1997, reflecting
the net loss, offset by non-cash and other adjusting items in operating
activities including, depreciation, amortization, acquired in-process research
and development, and write-down of purchased computer software. Additionally,
increased accounts receivable were partially offset by increased accrued
expenses. Net cash used by operating activities was $24,000 in 1996. The net
loss for 1996, increased prepaid expenses, and decreased accounts payable and
accrued expenses were partially offset by decreased accounts receivable and
increased deferred revenue. Net
15
<PAGE> 18
cash provided by operating activities was $104,000 for the year ended December
31, 1995, as net income and increased accounts payable were partially offset by
decreased deferred revenue.
Cash used by investing activities was $1,797,000, $435,000, and $249,000,
for the years ended December 31, 1997, 1996 and 1995, respectively. Net cash
used by investing activities in 1997 includes $946,000 used for capital
equipment purchases, including, furniture, personal computers and networking
equipment to upgrade the Company's infrastructure. Additionally, the Company
used $851,000 during 1997 in connection with the acquisition of TSL. (See Note 2
of Notes to Consolidated Financial Statements.) Net cash used by investing
activities in 1996 reflects $235,000 for equipment purchases and $200,000 for
additions to purchased computer software. Cash used by investing activities in
1995 was for equipment purchases.
Net cash provided by financing activities was $319,000 in 1997 as compared
to $8.7 million in 1996 and $41,000 in 1995. Net cash provided by financing
activities in 1997 reflects proceeds from exercise of common stock options and
common stock issued under the employee stock purchase plan. Net cash provided by
financing activities in 1996 reflects $8.7 million in proceeds from the
Company's initial public offering and $525,000 provided from the exercise of
common stock warrants and options, partially offset by $500,000 used for
payments on notes payable. Net cash provided by financing activities in 1995
reflects proceeds from exercise of common stock options and warrants.
As of December 31, 1997, the Company had accounts receivable of
approximately $2.4 million for license fees and maintenance and other fees.
Typically, the Company's terms for payment on its accounts receivable are net 30
days from invoicing and shipment, and the Company typically experiences
collection cycles of 30 to 60 days domestically, and longer periods for
international accounts. The Company generally recognizes a substantial portion
of its revenue near the end of each quarter and, as a result, the accounts
receivable outstanding at the end of each quarter have averaged less than 30
days.
As of December 31, 1997, the Company's principal source of liquidity was
cash and cash equivalents totaling $5.7 million. The Company also has a
revolving line of credit with a bank providing for maximum borrowings of
$1,000,000. The line of credit bears interest at the bank's prime rate plus
0.25% and matures in May 1998. As of February 28, 1998, the Company had no
outstanding borrowings under this line of credit.
The Company believes that existing cash, 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.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
("SFAS 128") was issued in February 1997. SFAS 128, which supersedes APB Opinion
No. 15 ("APB 15") and AICPA Accounting Interpretations 1-102 of APB 15,
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. This Statement simplifies the standards for computing earnings per share
previously found in APB 15, and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
Basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior period EPS data
presented. Primary and fully diluted EPS previously reported for 1996 was a loss
of $0.03 per share, and under SFAS 128 basic and diluted EPS was a loss of $0.07
per share. Primary and fully diluted EPS previously reported for 1995 was a loss
of $0.07 per share, and under SFAS 128 basic EPS is $0.38 per share.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition", was
issued by the AICPA in October 1997. SOP 97-2 supersedes SOP 91-1, provides
guidance on when revenue should be recognized, and in what amounts, for
licensing, selling, leasing, or otherwise marketing computer software. If the
arrangement to deliver software does not require significant production,
modification or customization of the software,
16
<PAGE> 19
revenue should be recognized when the following criteria are met: a) persuasive
evidence of an arrangement exists, b) delivery has occurred, c) the vendor's fee
is fixed and determinable, and d) collectibility is probable. As software
arrangements may consist of multiple elements, the vendor's fee must be
allocated among these elements according to vendor-specific objective evidence
of the relative fair values of the elements. The portion of the fee allocated to
each element of the arrangement is recognized when all the revenue recognition
criteria applicable to that element have been met. SOP 97-2 is effective for
fiscal years beginning after December 15, 1997. The Company believes the effect
on operating results of adopting SOP 97-2 will not be significant given the
Company's current policy of utilizing standard contracts and allocating revenue
to each element in a given contract based on an established price list.
RISK FACTORS
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
factors that affect two of the Company's principal sources of revenue: license
fees and royalties. Quarterly revenues from license fees depend on 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. Sales of the Company's products
also may be negatively affected by delays in the introduction or availability of
hardware and software products from third parties. The Company's license fee
revenues also may vary as a result of seasonal factors, such as the timing of
new product releases, year-end purchasing and trade shows. In addition, timing
of the Company's license fees is subject to quarterly fluctuations because the
Company generally ships products as orders are received and, therefore, has
little or no backlog, and because the Company's sales cycle is generally three
to nine months or longer from initial inquiry to order. Quarterly revenues from
royalties may also fluctuate significantly from quarter to quarter. The
Company's royalty revenues are based on sales by the Company's customers of
products incorporating the ACIS 3D modeling software and, as a result, quarterly
royalty revenues are subject to fluctuations in the sales of these products by
the Company's software developer customers. As a result of the quarterly
fluctuations in license fees and royalties, the Company's quarterly operating
results are subject to substantial fluctuations and are difficult to predict.
In addition, the Company has generally shipped products and recognized most
of its license fee revenues near the end of each quarter, with a substantial
portion of license fee revenue recognized in the last few days of a quarter. The
Company's operating expenses are to a large extent fixed and are based in part
on anticipated revenues. As a result, it is difficult for the Company to reduce
expenses in time to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in sales of the Company's products in
relation to the Company's expectations could have a material adverse impact on
the Company's operating results.
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. In such event, the market price of the Common Stock
could be materially and adversely affected.
Product and Market Concentration
The Company generates substantially all of its revenues from license fees,
royalties and maintenance and training contracts relating to the ACIS 3D
modeling software. Continued market acceptance of the ACIS 3D modeling software
is, therefore, critical to the Company's future success. Any decline in demand
for the ACIS 3D modeling software or failure to achieve market acceptance of any
new version of the ACIS 3D modeling software as a result of competition,
technological change, failure of the Company to release on a
17
<PAGE> 20
timely basis new versions of the ACIS 3D modeling software, or otherwise, could
have a material adverse effect on the business, operating results and financial
condition of the Company.
Historically, the Company's revenues have been generated primarily from
sales to large CAD software developers such as Autodesk, Inc., Baystate
Technologies, Inc. and Visionary Design Systems, Inc. The Company's growth
strategy includes targeting smaller software developers of 3D applications.
Sales to these customers may result in lower profit margins and higher credit
risks than the Company has experienced previously. There can be no assurance
that revenues from the Company's current customers will continue at the same
levels, or that the Company will be able to expand its customer base at
profitable levels.
Dependence on New Products; Delays in Product Releases; Potential Product
Errors
The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, changes in customer
requirements and computer operating environments and frequent new product
introductions and enhancements. As a result, the Company's success depends
substantially upon its ability to continue to enhance its existing products,
develop and introduce in a timely manner new products incorporating
technological advances and meet increasing customer expectations. Due to the
inherent uncertainties of software development, the Company cannot predict the
exact timing of shipment of a new product or version release on any particular
platform, and the Company has experienced delays in the development of certain
new products and product versions. The Company also utilizes third party
development partners to facilitate the development of product enhancements and
new component extensions for the Company. Consequently, factors beyond the
Company's control may also affect the ability of the Company's partners to
deliver product enhancements and new component extensions on a timely basis and
to deliver products which meet the demands of the marketplace. In addition,
negative reviews of the Company's new products or product versions could have a
material adverse effect on market acceptance. There can be no assurance that the
Company will be successful in developing and marketing new products or
enhancements to its existing products on a timely basis or that any new or
enhanced products will adequately address the changing needs of the marketplace.
If the Company is unable to develop and introduce enhancements to existing
products or new products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition could be materially and adversely affected. There can be
no assurance that the announcement of a new product or new version by the
Company will not result in delays in license fee revenue as a consequence of
licensees anticipating the availability of such new product or version release.
Software products offered by the Company may contain undetected errors when
first introduced or as new versions are released. The Company has in the past
discovered software errors in certain of its new products and enhancements after
their introduction. There can be no assurance that errors will not be found in
new products or releases after commencement of commercial shipments, resulting
in a loss of or delay in market acceptance, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
Although the Company has not experienced product liability claims by customers
as a result of product errors, there can be no assurance that such claims will
not be brought against the Company in the future. See "Business -- Research and
Product Development."
Risks Associated with the Visual Programming Market
One component of the Company's strategy involves marketing certain of its
3D modeling software to visual programming software developers. There can be no
assurance that a market will develop for 3D modeling tools for these software
developers or that the Company's 3D modeling software will be accepted by these
software developers. The Company believes the emergence of this market for its
products is dependent on a number of variables, including the demand for
applications incorporating 3D models, preferences of software developers, the
installed base of personal computers with powerful processing capabilities and
the further development of the Internet. See "Business -- Products and
Technology -- ACIS Enterprise Solutions."
18
<PAGE> 21
The Company plans to license 3D Building Blox to the visual programming
market using a substantially different business model than the Company applies
to its current customers. Any failure to create market acceptance of the
Company's 3D modeling software among visual programming developers, or respond
effectively to the evolving requirements of this market, would negatively impact
the ability of the Company to penetrate this emerging market. Even if the
Company's products are well received in this market, there can be no assurance
that the Company will develop the ability to distribute its products to these
consumers. The Company intends to distribute its visual programming toolkit
through third party distributors and there can be no assurance that the Company
will be able to negotiate distribution agreements on terms acceptable to the
Company. Failure to enter into distribution agreements or to develop independent
means of distributing its visual programming toolkit could have a material
adverse effect on the Company's operating results. See "Business -- Sales,
Marketing and Distribution."
3D Building Blox incorporates a lower level of functionality than the
Company's current products, is priced at levels substantially lower than the
products currently offered by the Company to other markets and may face downward
pricing pressure over time. The Company has increased its fixed operating
expenses to introduce the 3D modeling software to the visual programming market,
increased its sales and marketing operations and expanded distribution channels.
To the extent such expenses precede or are not followed by increased revenues,
the Company's business, operating results and financial condition could be
materially and adversely affected. Additionally, there can be no assurance that
commercial acceptance of the Company's products by the visual programming market
will result in profits for the Company. Although the Company believes the
products developed for the visual programming market will not compete with the
Company's current line of products, it is uncertain what impact, if any, the
introduction of the visual programming toolkit by the Company will have on the
Company's current customer base and on its prospective customers of the ACIS 3D
Toolkit. See "Business -- Products and Technology -- ACIS Enterprise Solutions."
Competition
The markets for the Company's products are highly competitive, subject to
rapid change and characterized by constant demand for new product features, and
pressure to accelerate the release of new products and product enhancements and
to reduce prices. Many of the Company's competitors or potential competitors
have significantly greater financial, managerial, technical and marketing
resources than the Company. A variety of potential actions by any of the
Company's competitors, including a reduction of product prices, increased
promotion, announcement or accelerated introduction of new or enhanced products
or features, acquisitions of software applications or technologies from third
parties, product giveaways or product bundling could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, the Company's present and future competitors may be able to develop
products comparable or superior to those offered by the Company or adapt more
quickly than the Company to new technologies or evolving market requirements.
Accordingly, there can be no assurance that the Company will be able to continue
to compete effectively in its markets, that competition will not intensify or
that future competition will not have a material adverse effect on the Company's
business, operating results and financial condition. See
"Business -- Competition."
Dependence on Key Personnel
The Company is substantially dependent on its executive officers and key
employees. The Company has not entered into employment agreements with any of
its U.S.-based executive officers except for the President and Chief Operating
Officer. The Company is also dependent on its ability to attract, retain and
motivate high quality personnel, especially its management, highly skilled
development personnel and sales personnel. Competition for highly skilled
development personnel with specialized experience and training applicable to the
Company's technologies is intense. In connection with the growth of its sales
force, the Company has experienced turnover among its U.S. sales force that has,
in some cases, delayed sales. The loss of the services of any of its executive
officers or other key employees or the inability of the Company to identify and
recruit new executive officers or key sales, management or development personnel
could have a material adverse effect on the Company's business, operating
results and financial condition.
19
<PAGE> 22
Dependence on Third Party Developers
The Company relies on a number of development partners and third party
licensors for portions of the ACIS 3D modeling software. These development
partners have contributed and continue to contribute to the development of the
Company's products, including the initial development of, and enhancements made
to, the ACIS 3D modeling engine and certain component extensions. The Company's
plans for the future development of the ACIS 3D modeling technology place
continued reliance on these development partners and third party licensors for
further product enhancements and extensions. The Company shares ownership of, or
rights to, the technology developed with certain development partners, and in
certain limited circumstances, such parties may use such technology to compete
with the Company. All of the Company's agreements with its development partners
and third party licensors are terminable by the other party under certain
circumstances, including upon default by the Company. There can be no assurance
that the Company will be able to continue to use the services of its development
partners to augment its development capabilities or the technologies of third
party licensors in its products, or that the Company could replace those
services or technologies in a timely manner, if necessary. The loss of or
inability to maintain any third party licenses could also result in delays or
cancellations in product shipments until equivalent software can be identified,
licensed or developed, and integrated with the Company's products. See
"Business -- Research and Product Development."
Ability to Manage Growth
The Company has experienced significant growth in its operations that has
placed substantial demands on the Company's managerial, operational and
financial resources. The Company's future success will depend upon its ability
to continue to enhance its core 3D modeling technologies, commercialize products
using such technologies, respond to competitive developments, expand its sales
and marketing efforts and attract, train, motivate and retain qualified
management and engineering personnel. Although the Company believes that its
systems and controls are adequate for the current level of operations, the
Company anticipates that it may need to add additional personnel and expand and
upgrade its systems and controls to manage possible future growth. The Company's
failure to do so could have a materially adverse effect upon the Company's
business, operating results and financial condition. In the future, the Company
may make acquisitions of complementary companies, products or technologies.
Managing acquired businesses entails numerous operational and financial risks,
including difficulties in assimilating acquired operations, diversion of
management's attention to other business concerns, and potential loss of key
employees or customers of acquired operations. There can be no assurance that
the Company will be able to achieve growth, or to effectively manage growth, and
failure to do so could have a material adverse effect on the Company's operating
results.
Proprietary Rights Limitations
The Company's success and ability to compete is dependent in part upon its
proprietary technologies. The Company relies on trade secret and copyright laws
to protect its proprietary technologies, including its source code, but there
can be no assurance that such laws will provide sufficient protection to the
Company, that others will not develop technologies that are similar or superior
to the Company's, or that third parties will not copy or otherwise obtain and
use the Company's technologies without authorization. The Company has no patents
with respect to the ACIS 3D modeling technology. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries.
The Company generally enters into confidentiality or license agreements
with its employees, consultants, and customers, and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology or that such agreements will be enforceable. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of
20
<PAGE> 23
resources and could have a material adverse effect on the Company's business,
operating results and financial condition.
There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. Any such third party
claims, whether or not they are meritorious, could result in costly litigation
or require the Company to enter into royalty or license agreements. Such royalty
or license agreements, if required, may not be available with terms acceptable
to the Company, or at all. If the Company were found to have infringed upon the
proprietary rights of third parties, it could be required to pay damages, cease
sales of the infringing products and redesign or discontinue such products, any
of which could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Intellectual
Property."
International Expansion
International sales represented 48% of the Company's total revenue for the
year ended December 31, 1997. The Company believes that international sales will
continue to represent a significant portion of its total revenue, and that it
will be subject to the inherent risks of conducting business internationally,
such as unexpected changes in regulatory requirements, problems and delays in
collecting accounts receivable, export license requirements, tariffs and other
trade barriers, difficulties in staffing and managing foreign operations,
political instability, fluctuations in currency exchange rates, seasonal
reductions in business activity and potentially adverse tax consequences, which
could adversely impact the success of the Company's international operations.
Sales of products by the Company currently are denominated principally in U.S.
dollars. Accordingly, any increase in the value of the U.S. dollar as compared
to currencies in the Company's principal overseas markets would increase the
foreign currency-denominated cost of the Company's products, which may
negatively affect the Company's sales in those markets. The Company has not
engaged in any currency exchange hedging practices. In addition, effective
copyright and trade secret protection may be limited or unavailable under the
laws of certain foreign jurisdictions, subjecting the Company to the risk of
intellectual property piracy in those markets. There can be no assurance that
one or more of such factors will not have a material adverse effect on the
Company's international operations and, consequently, on the Company's business,
operating results and financial condition. See "Business -- Sales, Marketing and
Distribution."
Year 2000 Capability
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements.
The Company has evaluated Year 2000 compliance issues and believes that
with respect to the Company's products and internal management information
systems it will not be materially adversely impacted by such issues. The
Company's software products do not incorporate date-sensitive algorithms. Any
date codes contained in the Company's software do not affect the functionality
of the products. The Company also incorporates third party software with its
core product. The Company has concluded that any date codes contained in such
third party software will not materially adversely impact the Company's
products. In addition, the Company has evaluated whether its management
information systems are Year 2000 compliant and has concluded that they are.
Moreover, the number of transactions that the Company manages is relatively low
because it depends on low volume, high value orders. As a result, the Company
believes that any date-sensitive material contained in its software would not
have a material adverse effect on the Company's management information systems
software. However, to the extent that any of the Company's foregoing assessments
are incorrect, there can be no assurance that the cost necessary to update the
performance of software will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Moreover, there can be no assurance that Year 2000 compliance issues
affecting the Company's customers products and internal management information
systems will not have a material adverse effect on
21
<PAGE> 24
the Company's business, financial condition and results of operations. As an OEM
provider the Company's products may be incorporated directly into its customers'
products, which may contain date-sensitive processes that may affect the ability
of the Company's customers to sell end-user products.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
22
<PAGE> 25
ITEM 7. FINANCIAL STATEMENTS
SPATIAL TECHNOLOGY INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 24
Financial Statements:
Consolidated Balance Sheets, as of December 31, 1996 and
1997................................................... 25
Consolidated Statements of Operations, years ended
December 31, 1995, 1996 and 1997....................... 26
Consolidated Statements of Stockholders' Equity (Deficit),
years ended December 31, 1995, 1996 and 1997........... 27
Consolidated Statements of Cash Flows, years ended
December 31, 1995, 1996 and 1997....................... 28
Notes to Consolidated Financial Statements................ 29
</TABLE>
23
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Spatial Technology Inc.:
We have audited the accompanying consolidated balance sheets of Spatial
Technology Inc. and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 financial position of Spatial
Technology Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Boulder, Colorado
January 23, 1998
24
<PAGE> 27
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARES)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 8,407 $ 5,736
Accounts receivable, net of allowance of $50 and $82 in
1996 and 1997, respectively............................ 1,542 2,415
Prepaid expenses and other................................ 341 402
-------- --------
Total current assets.............................. 10,290 8,553
Equipment, net (note 3)..................................... 423 1,112
Purchased computer software, net (note 2)................... 358 670
-------- --------
$ 11,071 $ 10,335
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 314 $ 209
Accrued royalties payable................................. 366 317
Other accrued expenses.................................... 755 1,172
Deferred revenue.......................................... 1,325 1,470
-------- --------
Total current liabilities......................... 2,760 3,168
-------- --------
Stockholders' Equity (note 5):
Common stock, $.01 par value; 22,500,000 shares
authorized; 7,369,888 and 7,741,348, shares issued and
outstanding in 1996 and 1997, respectively............. 74 77
Additional paid-in capital................................ 23,351 24,057
Accumulated deficit....................................... (15,034) (16,852)
Foreign currency translation adjustment................... (80) (115)
-------- --------
Total stockholders' equity........................ 8,311 7,167
Commitments and contingencies (note 7)
-------- --------
$ 11,071 $ 10,335
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenue:
License fees............................................ $ 4,850 $ 4,553 $ 3,981
Royalties............................................... 1,207 1,925 2,428
Prepaid royalties....................................... -- 182 352
Maintenance and other................................... 2,572 2,913 2,950
------- ------- -------
Total revenue................................... 8,629 9,573 9,711
------- ------- -------
Cost of sales:
License fees............................................ 287 338 285
Royalties............................................... 145 192 152
Prepaid royalties....................................... -- 6 11
Maintenance and other................................... 488 436 343
------- ------- -------
Total cost of sales............................. 920 972 791
------- ------- -------
Gross profit.............................................. 7,709 8,601 8,920
------- ------- -------
Operating expenses:
Sales and marketing..................................... 2,942 3,564 4,108
Research and development................................ 2,880 3,716 4,017
General and administrative.............................. 1,210 1,366 2,271
Acquired in-process research and development (note 2)... -- -- 621
------- ------- -------
Total operating expenses........................ 7,032 8,646 11,017
------- ------- -------
Earnings (loss) from operations................. 677 (45) (2,097)
Other income (expense):
Interest income......................................... 21 91 380
Interest expense........................................ (83) (83) (2)
Other, net.............................................. (53) 15 (3)
------- ------- -------
Total other income (expense).................... (115) 23 375
------- ------- -------
Earnings (loss) before income taxes............. 562 (22) (1,722)
Income tax expense (note 6)............................... 174 140 96
------- ------- -------
Net earnings (loss)............................. $ 388 $ (162) $(1,818)
======= ======= =======
Earnings (loss) per common share:
Basic................................................... $ 0.38 $ (0.07) $ (0.24)
Diluted................................................. $ 0.07 $ (0.07) $ (0.24)
Weighted average number of common shares and common
equivalent shares outstanding...........................
Basic................................................... 1,034 2,395 7,449
Diluted................................................. 5,210 2,395 7,449
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY TOTAL
------------------ PAID-IN- ACCUMULATED TREASURY TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK ADJUSTMENT EQUITY (DEFICIT)
--------- ------ ---------- ----------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995........... 1,023,208 $10 $ 143 $(15,260) $(176) $ (30) $(15,313)
Exercise of common stock options for
cash................................. 37,583 1 40 -- -- -- 41
Net earnings.......................... -- -- -- 388 -- -- 388
Foreign currency translation
adjustment........................... -- -- -- -- -- (31) (31)
--------- --- ------- -------- ----- ----- --------
Balances at December 31, 1995......... 1,060,791 11 183 (14,872) (176) (61) (14,915)
Common stock issued in initial public
offering, net of offering costs (note
5)................................... 2,100,000 21 8,629 -- -- -- 8,650
Conversion of preferred stock (note
5)................................... 4,099,598 41 14,114 -- -- -- 14,155
Exercise of common stock warrants for
cash................................. 155,821 2 503 -- -- -- 505
Exercise of common stock options for
cash................................. 13,678 -- 20 -- -- -- 20
Common stock issued for services...... 8,333 -- 20 -- -- -- 20
Common stock issued for cash.......... 15,000 -- 57 -- -- -- 57
Retirement of treasury stock.......... (83,333) (1) (175) -- 176 -- --
Net loss.............................. -- -- -- (162) -- -- (162)
Foreign currency translation
adjustment........................... -- -- -- -- -- (19) (19)
--------- --- ------- -------- ----- ----- --------
Balances at December 31, 1996......... 7,369,888 74 23,351 (15,034) -- (80) 8,311
Exercise of common stock options for
cash................................. 64,496 1 168 -- -- -- 169
Common stock issued under the employee
stock purchase plan.................. 56,964 -- 150 -- -- -- 150
Common stock issued for purchased
computer software.................... 250,000 2 388 -- -- -- 390
Net loss.............................. -- -- -- (1,818) -- -- (1,818)
Foreign currency translation
adjustment........................... -- -- -- -- -- (35) (35)
--------- --- ------- -------- ----- ----- --------
Balances at December 31, 1997......... 7,741,348 $77 $24,057 $(16,852) $ -- $(115) $ 7,167
========= === ======= ======== ===== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ 388 $ (162) $(1,818)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization.......................... 174 277 365
Common stock issued for services....................... -- 20 --
Acquired in-process research and development........... -- -- 621
Write-down of purchased computer software.............. -- -- 200
Changes in operating assets and liabilities:
Accounts receivable.................................. (151) 351 (873)
Prepaid expenses and other........................... 6 (162) (61)
Accounts payable..................................... 306 (271) (105)
Accrued expenses..................................... (113) (182) 368
Deferred revenue..................................... (506) 105 145
------- ------- -------
Net cash provided (used) by operating
activities...................................... 104 (24) (1,158)
------- ------- -------
Cash flows from investing activities:
Additions to equipment.................................... (249) (235) (946)
Additions to purchased computer software.................. -- (200) (851)
------- ------- -------
Net cash used by investing activities............. (249) (435) (1,797)
------- ------- -------
Cash flows from financing activities:
Principal payments on notes payable....................... (100) (500) --
Proceeds from issuance of common stock, net............... -- 8,707 --
Proceeds from exercise of common stock options and
warrants and purchase of common stock for cash......... 41 525 319
Proceeds from notes payable............................... 100 -- --
------- ------- -------
Net cash provided by financing activities......... 41 8,732 319
------- ------- -------
Foreign currency translation adjustment affecting cash...... (31) (19) (35)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents..................................... (135) 8,254 (2,671)
Cash and cash equivalents at beginning of period............ 288 153 8,407
------- ------- -------
Cash and cash equivalents at end of period.................. $ 153 $ 8,407 $ 5,736
======= ======= =======
Supplemental disclosures:
Cash paid for interest.................................... $ 76 $ 38 $ 1
======= ======= =======
Cash paid for income taxes................................ $ 127 $ 91 $ 145
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 31
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Financial Statement Presentation
Spatial Technology Inc. (Spatial or the Company) was incorporated under the
laws of the State of Delaware on July 7, 1986 to design, develop, and market 3D
modeling software. Spatial has three wholly owned subsidiaries, Spatial
Technology Ltd., Spatial Technology GmbH, and Spatial Technology K.K. located in
England, Germany, and Japan, respectively, that assist in the sales and
licensing of the Company's products.
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Earnings Per Share
Effective for the year ending December 31, 1997 the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128) which requires that basic and diluted earnings per share (EPS) be presented
in place of primary and fully diluted EPS under Accounting Principles Board No.
15. SFAS 128 requires additional informational disclosures, makes certain
modifications to applicable EPS calculations, and requires restatement of EPS
for all prior periods reported. Primary and fully diluted EPS previously
reported for 1996 was a loss of $0.03 per share, and under SFAS 128 basic and
diluted EPS was a loss of $0.07 per share. Primary and fully diluted EPS
previously reported for 1995 was $0.07 per share, and under SFAS 128 basic EPS
is $0.38 per share. Potential common stock instruments have been excluded from
the calculation of EPS for 1996 and 1997, as the effect would be antidilutive.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investment instruments purchased
with an original maturity of three months or less to be cash equivalents.
(d) Foreign Currency Translation
Assets and liabilities of the Company's international subsidiaries are
translated into U.S. dollars using current exchange rates in effect at the
balance sheet date, and revenue and expense accounts are translated using a
weighted average exchange rate during the period. Net exchange gains and losses
resulting from such translation are included as a separate component of
stockholders' equity (deficit) and reported as a separate line item in the
consolidated statements of cash flows. Gains and losses from foreign currency
transactions, when applicable, are included in other income (expense). There
were no significant gains or losses on foreign currency transactions during the
years ended December 31, 1995, 1996 and 1997.
(e) Revenue Recognition
Revenue from products or services is recognized based upon shipment of
products or performance of services. License fee revenue is recognized upon
completion of a signed contract and shipment of the software. Revenue from
royalties is recognized upon receipt of payment or according to the payment
terms specified in the contract. Prepaid royalties represent non-refundable
amounts paid for use of the Company's software for which the Company has no
obligation to refund or return upon non-delivery of products. Revenue from
maintenance contracts is deferred and recognized ratably over the period of the
agreement. Training revenue is recognized upon completion of the training course
by the customer.
29
<PAGE> 32
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Equipment and Purchased Computer Software
Equipment is recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the respective assets, which range
from five to seven years. Purchased computer software represents software
enhancements acquired from third parties, and is amortized over its estimated
useful life of three to seven years, beginning when the software is incorporated
into the Company's products.
(g) Stock-Based Compensation
The Company accounts for its stock-based employee and non-employee director
compensation plans using the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations (APB 25). The Company has provided pro
forma disclosures of net earnings (loss) and earnings (loss) per share as if the
fair value based method of accounting for these plans, as proscribed by
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), had been applied. See note 5.
(h) Impairment of Long-Lived Assets
The Company accounts for long lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121") which requires that long-lived assets and certain identifiable
intangibles, including goodwill, held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. An impairment loss is
recognized when estimated undiscounted future cash flows expected to be
generated by the asset is less than its carrying value. Measurement of the
impairment loss is based on the fair value of the asset, which is generally
determined using valuation techniques such as discounted present value of
expected future cash flows. In June 1997 the Company charged $200,000 to
operations related to the write-down of purchased computer software as a result
of a change in the Company's product development strategy, and such amount is
included in research and development expense in the accompanying consolidated
financial statements.
(i) Research and Development Costs
Costs to establish the technological feasibility of computer software
products are expensed as incurred. Generally, products are ready for sale upon
establishment of technological feasibility. Accordingly, no software development
costs have been capitalized by the Company in 1995, 1996 and 1997.
(j) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109). SFAS 109 requires the use of
the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory rates
applicable to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
(j) Presentation
Certain 1995 and 1996 amounts items have been reclassified to conform to
the 1997 presentation.
(2) ACQUISITION OF COMPUTER SOFTWARE AND IN-PROCESS RESEARCH AND DEVELOPMENT
In December 1997, the Company purchased certain intellectual property
rights from Three-Space Limited (TSL) for $1,241,000, consisting of $851,000 in
cash and 250,000 shares of common stock. The transaction eliminated TSL's joint
ownership rights in ACIS, including the Company's royalty obligation to
30
<PAGE> 33
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TSL. The purchase price was allocated to the technology acquired based on their
estimated fair values, including $620,000 of purchased computer software and
$621,000 of in-process research and development projects. The purchased computer
software will be amortized over seven years. The Company charged the in-process
research and development to operations at the date of acquisition, as such
technology had not reached technological feasibility and had no probable
alternative future use by the Company.
(3) EQUIPMENT
Equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Computer equipment....................................... $ 1,853 $ 2,184
Furniture and office equipment........................... 300 733
Leasehold improvements................................... 64 181
------- -------
2,217 3,098
Less accumulated depreciation............................ (1,794) (1,986)
------- -------
$ 423 $ 1,112
======= =======
</TABLE>
(4) NOTES PAYABLE
In May 1997 the Company amended its revolving line of credit from a bank
providing for advances of up to $1,000,000. The line of credit is secured by
accounts receivable, bears interest at the bank's prime rate plus 0.25% and
matures in May 1998. The Company also obtained equipment financing of up to
$500,000, bearing interest at the bank's prime rate plus 0.75% and is due in
February 2001. As of December 31, 1997, the Company had no borrowings under the
line of credit or equipment financing agreement.
In July 1996, the Company obtained a revolving line of credit from a bank
of up to $500,000. This line of credit was secured by accounts receivable,
bearing interest at the bank's prime rate plus 0.75% and matured in June 1997.
Borrowings under the line of credit were paid in full during 1996. In July 1996,
the Company also obtained equipment financing for $250,000, bearing interest at
the bank's prime rate plus 2.25% and was due June 1998. The equipment financing
was paid in full during 1996.
In January 1996, the Company issued a promissory note for $125,000 to a
bank bearing interest at prime rate plus 1% per annum and maturing on June 30,
1996, secured by a guarantee from an existing stockholder. In connection with
these transactions, the Company issued a warrant to purchase 12,500 shares of
common stock with an exercise price of $8.22 per share. The warrant expires in
January 2003. In February 1996, the Company issued a promissory note for
$100,000 to an existing stockholder bearing interest at 10% per annum and
maturing on June 30, 1996, and issued a warrant to purchase 10,000 shares of
common stock with an exercise price of $8.22 per share. The warrant expires in
February 2003. Both notes were paid in full during 1996.
(5) STOCKHOLDERS' EQUITY
Initial Public Offering
In October 1996, the Company completed an initial public 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 $8,650,000,
after deducting underwriting discounts and commissions and other offering
expenses.
31
<PAGE> 34
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock
Effective upon the closing of the initial public offering described above,
all 6,381,473 shares of outstanding mandatory redeemable preferred stock were
converted into 4,099,598 shares of common stock.
In June 1996, the Board of Directors of the Company authorized, at their
discretion, the issuance of up to 2,500,000 shares of preferred stock in one or
more series and to fix the rights, preferences, and privileges of such series.
As of December 31, 1997, no shares of preferred stock were outstanding.
Stock Options
In June 1996, the Board of Directors of the Company approved the 1996
Equity Incentive Plan (1996 Plan). Up to 1,000,000 shares of Common Stock may be
issued pursuant to the 1996 Plan. Under the 1996 Plan the Company may issue
incentive stock options and nonqualified stock options. Incentive stock options
are granted at an exercise price not less than the fair market value of the
stock on the date of grant, vest over a four-year employment period, and are
exercisable over a maximum ten-year employment period. The Company also grants
nonqualified stock options under the 1996 Plan that vest over a four-year period
or upon specific performance objectives, and are exercisable over a maximum
ten-year period or upon completion of such objectives. As of December 31, 1997
options to purchase 914,939 shares of common stock under the 1996 Plan were
outstanding at a weighted average exercise price of $3.07.
In June 1996, the Board of Directors approved the 1996 Non-Employee
Directors' Stock Option Plan (Directors' Plan). Up to 250,000 shares of Common
Stock may be issued pursuant to the Directors' Plan. Stock options granted under
the Directors' Plan are granted at not less than the fair market value of the
stock on the date of grant, are immediately exercisable, are subject to
repurchase by the Company, vest in four equal annual installments, and are
exercisable over a ten-year period from date of grant. As of December 31, 1997
options to purchase 81,000 shares of common stock under the Directors' Plan were
outstanding at a weighted average exercise price of $3.98.
In August 1996, the Company's Board of Directors approved the termination,
effective upon the initial public offering described above, of the Amended and
Restated 1987 Stock Option Plan (1987 Plan). Under the 1987 Plan the Company
issued incentive stock options and nonqualified stock options. Incentive stock
options were granted at an exercise price not less than the fair market value of
the stock on the date of grant, vest over a four-year employment period, and are
exercisable over either a five-year or ten-year employment period. The Company
also granted nonqualified stock options under the 1987 Plan that vest over a
four-year period or upon specific performance objectives, and are exercisable
over a five-year period or upon completion of such objectives. As a result of
such termination, no additional options may be issued under the 1987 Plan. The
options to purchase 174,710 shares of Common Stock at a weighted average
exercise price of $3.38 outstanding as of December 31, 1997 will remain
exercisable until they expire or terminate pursuant to their terms.
32
<PAGE> 35
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's fixed option plans as of December
31, 1995, 1996 and 1997 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 307,213 $2.56 329,505 $2.81 889,809 $4.29
Granted....................... 107,154 3.00 657,872 4.81 606,825 1.97
Exercised..................... (35,578) 1.00 (17,010) 1.57 (64,496) 2.55
Forfeited..................... (49,284) 2.84 (80,558) 3.06 (261,489) 4.32
------- ------- ---------
Outstanding at end of year.... 329,505 2.81 889,809 4.29 1,170,649 3.18
======= ======= =========
Weighted-average fair value of
options granted during the
year at exercise price equal
to market price at grant
date........................ $ 1.62 $ 2.56 $ 1.18
======= ======= =========
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ---------------------------------
WEIGHTED-
NUMBER AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING EXERCISABLE AT
EXERCISE DECEMBER 31, CONTRACTUAL WEIGHTED-AVERAGE DECEMBER 31, WEIGHTED-AVERAGE
PRICES 1997 LIFE EXERCISE PRICE 1997 EXERCISE PRICE
- ---------- -------------- ----------- ---------------- -------------- ----------------
<C> <C> <S> <C> <C> <C>
$1.75-2.00 504,331 9.6 years $1.84 359,000 $1.82
$2.13-3.00 214,111 5.5 2.72 112,978 2.87
$3.84-5.00 452,207 8.8 4.89 336,484 4.89
--------- -------
1,170,649 8.5 3.18 808,462 3.88
========= =======
</TABLE>
The fair value of options granted during 1995, 1996 and 1997 was estimated
on the date of grant using the Black-Scholes multiple option pricing model with
the following weighted average assumptions used for grants in 1995, 1996 and
1997:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Risk free interest rate................................. 5.875% 5.875% 5.750%
3 3 4
Expected life........................................... years years years
Volatility.............................................. 58% 58% 55%
</TABLE>
33
<PAGE> 36
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma financial information assuming the use of SFAS 123 in accounting
for stock based compensation is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
----- ------ -------
<S> <C> <C> <C>
Net earnings (loss):
As reported.................................... $ 388 $ (162) $(1,818)
Adjusted pro forma............................. 348 (483) (2,417)
Basic earnings (loss) per share:
As reported.................................... $0.38 $(0.07) $ (0.24)
Adjusted pro forma............................. 0.34 (0.20) (0.32)
Diluted earnings (loss) per share:
As reported.................................... $0.07 $(0.07) $ (0.24)
Adjusted pro forma............................. 0.07 (0.20) (0.32)
</TABLE>
Employee Stock Purchase Plan
In June 1996, the Board of Directors approved the Employee Stock Purchase
Plan. Up to 100,000 shares of common stock may be issued pursuant to the plan.
Employees may elect to withhold up to 15% of their compensation for the purchase
of the Company's common stock. The amounts withheld are used to purchase the
Company's common stock at a price equal to 85% of the fair market value of
shares. During 1997 the Company issued 56,964 shares at an average price of
$2.24.
Warrants
In October 1996, in connection with the initial public offering described
above, the Company issued a warrant to the underwriter to purchase 210,000
shares of common stock at an exercise price of $6.50. This warrant is
exercisable at the holder's option through its expiration in 2001.
During 1995, the Company issued additional warrants to purchase 6,666
shares of common stock at an exercise price of $8.22 per share in connection
with the Company's debt financing. These warrants are exercisable at the
holder's option through their expiration in 2000.
During 1994, the Company issued warrants to purchase 227,492 shares of
common stock at an exercise price of $8.22 per share in connection with the
Company's debt financing. During 1995, 60,827 of these warrants were canceled.
As of December 31, 1997 the remaining warrants to purchase 166,665 shares of
common stock at a price of $8.22 per share are exercisable at the holder's
option through their expiration in 2001.
During 1993, in connection with the issuance of preferred stock, the
Company issued warrants to purchase 42,915 shares of common stock at $.03 per
share. These warrants are exercisable at the holders' option from February 2,
1993 through their expiration in 1999. During 1994, a warrant for 3,435 shares
of common stock, held by an existing stockholder was exercised at $.03 per
share. During 1996, two warrants for 4,091 and 19,741 shares of common stock,
held by existing stockholders were exercised at $.03 per share. At December 31,
1997 15,648 shares of authorized, but unissued, common stock has been reserved
for the exercise of the remaining outstanding warrants.
34
<PAGE> 37
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
Tax expense for 1995, 1996, and 1997 is comprised solely of withholding
taxes on foreign sales.
Income tax expense differs from the amount computed by applying the
statutory federal income tax rate to earnings (loss) before income taxes and
extraordinary item as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Expected income tax expense (benefit)...................... $ 191 $ (7) $(642)
Non deductible expenses, net............................... 10 7 11
Increase (decrease) in deferred tax valuation allowance.... (201) -- 750
Withholding taxes on foreign sales......................... 174 140 96
Other, net................................................. -- -- (119)
----- ----- -----
Income tax expense......................................... $ 174 $ 140 $ 96
===== ===== =====
</TABLE>
The tax effects of significant temporary differences that result in
deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Accounts receivable, primarily due to differences in
accounting for
bad debts................................................. 19 30
Property and equipment, primarily due to differences in
depreciation.............................................. (1) (24)
Deferred revenue, due to differences in revenue recognition
for financial statement and income tax purposes........... 28 19
Accrued expenses, primarily due to difference in the period
of recognition for financial statement and income tax
purposes.................................................. 57 101
Purchased software, primarily due to differences in carrying
values for financial statement and income tax purposes.... 58 (37)
Research and development and other tax credits.............. 943 1,117
Net operating loss carryforwards............................ 4,895 5,543
------ ------
Total deferred tax assets......................... 5,999 6,749
Less valuation allowance.................................... 5,999 6,749
------ ------
Net deferred tax assets........................... $ -- $ --
====== ======
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
regular income tax purposes of approximately $13,856,000, which if not utilized,
expire in the years 2004 through 2012. Approximately $2,996,000 of the total net
operating loss carryforward at December 31, 1997 is subject to limitation under
Section 382 of the Internal Revenue Code. Should a subsequent change in
ownership occur, the remaining net operating loss carryforward may also be
subject to limitation.
The Company also has research and development credit carryforwards for
income tax purposes available totaling approximately $1,106,000, which if not
utilized, expire in the years 2001 through 2012. Approximately $284,000 of the
total credit carryforward is also subject to limitation under Section 382 of the
Internal Revenue Code.
35
<PAGE> 38
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and various office equipment under
noncancelable operating leases. Future minimum rental payments on these leases
are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................ $ 370
1999................................................ 377
2000................................................ 301
2001................................................ 26
2002................................................ 7
------
$1,081
======
</TABLE>
Rent expense was approximately $405,000, $419,000 and $457,000 in 1995,
1996 and 1997, respectively.
The Company executed a long-term development agreement with Three-Space
Limited, a United Kingdom corporation (TSL), in 1989 (the 1989 Development
Agreement) obligating the Company to pay approximately $30,000 per month for
specified research and marketing activities. In connection with the acquisition
discussed in Note 2, the Company terminated the 1989 Development Agreement and
entered into a Software Consulting Agreement with substantially the same
financial obligation to the Company. Expenses under the 1989 Development
Agreement were approximately $350,000, $408,000 and $327,000 in 1995, 1996 and
1997, respectively. The 1989 Development Agreement also required the Company to
pay a royalty to TSL on the sale of specific products, certain components of
which resulted from the research activities. Royalty expense under this
agreement totaled approximately $249,000, $275,000 and $216,000 in 1995, 1996
and 1997, respectively. As a result of the acquisition discussed in Note 2,
effective October 1997 the Company has no future royalty obligation.
The Company has entered into various other licensing agreements, which
require the Company to pay royalties on each sale of the licensed software
products. Royalty expense under these agreements is included in costs of sales
and totaled approximately $152,000, $187,000 and $140,000 in 1995, 1996 and
1997, respectively.
In connection with one such licensing agreement, a software developer has
asserted a claim for additional royalties totaling $551,000. The Company
disputes the claim and believes that it has adequately provided for its royalty
liability under the agreement as of December 31, 1997.
36
<PAGE> 39
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) REVENUE, SIGNIFICANT CUSTOMERS AND CONCENTRATION OR CREDIT RISK
Revenue by geographic area is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
United States......................................... $ 3,913 $ 4,882 $ 5,021
Europe................................................ 1,870 2,199 2,541
Japan................................................. 1,846 1,742 1,816
Other................................................. 1,000 750 333
------- ------- -------
Total....................................... $ 8,629 $ 9,573 $ 9,711
======= ======= =======
</TABLE>
Earnings (loss) from operations by geographic area is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
United States......................................... $ 2,674 $ 3,409 $ 3,630
Europe................................................ 976 1,120 1,304
Japan................................................. 836 591 755
Other................................................. 641 450 255
------- ------- -------
5,127 5,570 5,944
Unallocated corporate expenses........................ (4,450) (5,615) (8,041)
------- ------- -------
Total....................................... $ 677 $ (45) $(2,097)
======= ======= =======
</TABLE>
Substantially all of the company's identifiable assets relate to domestic
operations.
During 1996 and 1997, one customer accounted for 13% of the Company's
revenue in each year.
The Company is exposed to potential concentrations of credit risk from its
accounts receivable with its various customers. The Company's accounts
receivable are from both large multinational corporate customers and smaller
companies in a variety of industries, with no concentration in a single
industry. However, the Company is subject to credit risk due to economic events
or circumstances in the various international and domestic markets in which the
Company operates. To reduce this risk, the Company evaluates the
creditworthiness of its customers prior to the shipment of software or
performance of services.
37
<PAGE> 40
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information concerning directors and executive officers is set forth in
the Proxy Statement under the headings "Proposal 1 -- Election of Directors" and
"Management", which information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management", which information is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Transactions",
which information is incorporated herein by reference.
38
<PAGE> 41
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3(i).1* -- Restated Certificate of Incorporation.
3(i).2* -- [Intentionally Omitted]
3(i).2(a)* -- Certificate of Correction to the Restated Certificate of
Incorporation.
3(i).2(b)* -- Certificate of Amendment to the Restated Certificate of
Incorporation.
3(i).2(c)* -- Certificate of Amendment to the Restated Certificate of
Incorporation.
3(i).2(d)* -- Certificate of Amendment to the Restated Certificate of
Incorporation.
3(i).3* -- Form of Restated Certificate of Incorporation to be
effective upon the closing of this offering to which this
Registration Statement relates.
3(ii).4* -- By-laws of the Registrant, as amended.
3(ii).5* -- Form of By-laws to be effective upon the closing of this
offering to which this Registration Statement relates.
4.1* -- Reference is made to Exhibits 3(i).1 through 3(ii).2.
4.2 -- [Intentionally Omitted]
10.1* -- Form of Indemnification Agreement entered into between
the Registrant and its directors and officers, with
related schedule.
10.2* -- Investment Agreement, dated as of August 12, 1986.
10.3* -- Investors' Rights Agreement, dated as of February 4,
1993.
10.4* -- 1996 Amended and Restated 1987 Stock Option Plan of the
Registrant (the "Restated Plan"), including form of
Incentive Stock Option and Nonstatutory Stock Option
under the Restated Plan.
10.5* -- 1996 Equity Incentive Plan (the "Incentive Plan"),
including form of Incentive Stock Option and Nonstatutory
Stock Option under the Incentive Plan of the Registrant.
10.6* -- 1996 Non-Employee Directors' Stock Option Plan of the
Registrant (the "Directors' Plan"), including form of
Nonstatutory Stock Option under the Directors' Plan.
10.7* -- Employee Stock Purchase Plan of the Registrant and
related offering document.
10.8* -- Employment Agreement between the Registrant and Karlheinz
Peters, dated as of May 5, 1993.
10.9 -- [Intentionally omitted]
10.10* -- Lease Agreement between the Registrant and Cottonwood
Development Partners, dated June 29, 1990, as amended.
10.11 -- [Intentionally omitted]
10.12 -- [Intentionally omitted]
10.13* -- Warrant to Purchase 15,648 shares of Common Stock issued
by the Registrant to New York Life Insurance Company.
10.14 -- [Intentionally omitted]
10.15* -- Warrant to Purchase 100,000 shares of Next Preferred
Stock issued by the Registrant to New York Life Insurance
Company.
10.16* -- Warrant to Purchase 200,000 shares of Next Preferred
Stock issued by the Registrant to Nazem & Company II,
L.P.
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.17* -- Warrant to Purchase 200,000 shares of Next Preferred
Stock issued by the Registrant to Benefit Capital
Management Corporation.
10.18* -- Warrant to Purchase 20,000 shares of Next Preferred Stock
issued by the Registrant to Silicon Valley Bank.
10.19* -- Warrant to Purchase 37,500 shares of Next Preferred Stock
issued by the Registrant to Benefit Capital Management
Corporation.
10.20* -- Warrant to Purchase 30,000 shares of Next Preferred Stock
issued by the Registrant to New York Life Insurance
Company.
10.21* -- Development Agreement between the Registrant and
Three-Space Limited, dated June 26, 1987, as amended.
10.22* -- Marketing Agreement between the Registrant and
Three-Space Limited, dated May 31, 1989, as amended.
10.23* -- Consultancy Agreement between the Registrant and D-Cubed
Ltd., dated June 19, 1991, as amended.
10.24* -- Technology Development and Royalty Agreement between the
Registrant and Autodesk, Inc., dated June 27, 1991, as
amended.
10.25* -- Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank, dated as of
August 15, 1995, as amended.
10.26* -- Ninth Amendment to the Development Agreement between the
Registrant and Three-Space Limited, dated June 26, 1987,
as theretofore amended (Exhibit 10.21 to this
Registration Statement) dated September 11, 1996.
10.27** -- Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank, dated as of
August 15, 1995, as amended.
10.28** -- Separation and Release Agreement between the Registrant
and Jerry T. Sisson, dated as of June 23, 1997.
10.29** -- Employment Agreement between the Registrant and R. Bruce
Morgan, dated as of July 1, 1997.
10.30*** -- Technology Purchase Agreement, by and between the Company
and TSL, dated as of December 31, 1997.
10.31*** -- Registration Rights Agreement, by and between the Company
and TSL, dated as of December 31, 1997.
10.32*** -- Software Consulting Agreement, by and between the Company
and TSL, dated December 31, 1997.
21.1* -- List of Subsidiaries of the Registrant.
27 -- Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference to the Issuer's Registration Statement on Form
SB-2, File No. 333-5416-D, as amended.
** Incorporated by reference to the Issuer's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1997.
*** Incorporated by reference to the Issuer's Report on Form 8-K dated December
31, 1997.
40
<PAGE> 43
(b) Reports on Form 8-K
A Report on Form 8-K was filed with the Securities and Exchange Commission
on January 15, 1998 in connection with the acquisition of certain intellectual
property rights pursuant to the terms of the Technology Purchase Agreement
(Exhibit 10.30), by and between the Company and Three-Space Limited (TSL), dated
as of December 31, 1997. In accordance with the terms of the Technology Purchase
Agreement, the Company and TSL entered into a Registration Rights Agreement
(Exhibit 10.31) granting certain registration rights to TSL. In addition,
pursuant to the terms of the Software Consulting Agreement (Exhibit 10.32),
executed by and between the Company and TSL, TSL will provide certain consulting
services to the Company.
41
<PAGE> 44
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Issuer
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPATIAL TECHNOLOGY INC.
By: /s/ RICHARD M. SOWAR
----------------------------------
Richard M. Sowar
Chief Executive Officer and
Director
By: /s/ R. BRUCE MORGAN
----------------------------------
R. Bruce Morgan
President, Chief Operating
Officer, and
Director (Principal Financial and
Accounting Officer)
March 23, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Issuer and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ FRED F. NAZEM Chairman of the Board and March 23, 1998
- ----------------------------------------------------- Director
Fred F. Nazem
/s/ RICHARD M. SOWAR Chief Executive Officer and March 23, 1998
- ----------------------------------------------------- Director (Principal
Richard M. Sowar Executive Officer)
/s/ R. BRUCE MORGAN President, Chief Operating March 23, 1998
- ----------------------------------------------------- Officer and Director
R. Bruce Morgan (Principal Financial and
Accounting Officer)
/s/ PHILIP E. BARAK Director March 23, 1998
- -----------------------------------------------------
Philip E. Barak
/s/ H. ROBERT GILL Director March 23, 1998
- -----------------------------------------------------
H. Robert Gill
/s/ M. THOMAS HULL Director March 23, 1998
- -----------------------------------------------------
M. Thomas Hull
</TABLE>
42
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
Ex. 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1997
<CASH> 5,736
<SECURITIES> 0
<RECEIVABLES> 2,497
<ALLOWANCES> (82)
<INVENTORY> 0
<CURRENT-ASSETS> 8,553
<PP&E> 3,098
<DEPRECIATION> (1,986)
<TOTAL-ASSETS> 10,335
<CURRENT-LIABILITIES> 3,168
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 7,090
<TOTAL-LIABILITY-AND-EQUITY> 10,335
<SALES> 0
<TOTAL-REVENUES> 9,711
<CGS> 0
<TOTAL-COSTS> 791
<OTHER-EXPENSES> 10,880
<LOSS-PROVISION> 137
<INTEREST-EXPENSE> 375
<INCOME-PRETAX> (1,722)
<INCOME-TAX> 96
<INCOME-CONTINUING> (1,818)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,818)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
