-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JqWsZ5425QHBAHoMTHvv1TuQXUqgT32tQZUrdB2AZmIZVFaervOLfNPMyW/U0TmG q+nF++rvgXqQDUgAEKC5gw== 0000950134-00-002609.txt : 20000411 0000950134-00-002609.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950134-00-002609 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPATIAL TECHNOLOGY INC CENTRAL INDEX KEY: 0000852437 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 841035353 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-28842 FILM NUMBER: 582733 BUSINESS ADDRESS: STREET 1: 2425 55TH STREET STREET 2: STE 100 CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3034490649 MAIL ADDRESS: STREET 1: 2425 55TH STREET STREET 2: STE 100 CITY: BOULDER STATE: CO ZIP: 80301 10KSB 1 FORM 10KSB FOR FISCAL YEAR END DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ 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, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD TO . COMMISSION FILE NUMBER 0-288-42 SPATIAL TECHNOLOGY INC. (Name of Small Business Issuer in its charter) DELAWARE 84-1035353 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
2425 55TH STREET, SUITE 100, BOULDER, COLORADO 80301 (Address of principal executive offices, including zip code) (303) 544-2900 (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. [ ] The Issuer's revenues for its most recent fiscal year were: $14,900,000. The aggregate market value of the voting stock held by non-affiliates of the Issuer was $53,944,000 as of March 1, 2000.* The number of shares of Common Stock outstanding was 11,443,823 as of March 1, 2000. 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 2000 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 1999. - --------------- * Excludes 3,377,414 shares of Common Stock held by directors and officers and stockholders whose beneficial ownership exceeds five percent of the shares outstanding at March 1, 2000. 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SPATIAL TECHNOLOGY INC. ANNUAL REPORT ON FORM 10-KSB DECEMBER 31, 1999 TABLE OF CONTENTS
PAGE ---- PART I Item 1 Description of Business..................................... 1 Item 2 Description of Property..................................... 10 Item 3 Legal Proceedings........................................... 10 Item 4 Submission of Matters to a Vote of Security Holders......... 10 PART II Item 5 Market for Common Equity and Related Stockholder Matters.... 11 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 12 Item 7 Financial Statements........................................ 25 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures................................... 38 PART III 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
i 3 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 GENERAL Spatial Technology Inc. ("Spatial" or the "Company") develops, markets and supports Web-based, business-to-business ("B2B") application services for professional engineers and state-of-the-art component 3D modeling software for companies involved with 3D application development. The Company operates predominantly in the manufacturing industry with special focus on the computer-aided design ("CAD"), manufacturing ("CAM"), engineering ("CAE") and architecture ("AEC") markets for 3D modeling software and services. The year 1999 involved an important strategic transition for Spatial as the Company moved to capitalize on its wealth of proprietary 3D technology and offer 3D Web-based B2B application services in addition to the Company's traditional OEM business. Spatial successfully launched its first B2B application service, 3Dshare.com, for CAD model interoperability in October 1999 and became the manufacturing industry's first Web-based application service for professional engineers. Spatial's 3Dshare.com won several industry awards during the year by addressing the issue of interoperability of 3D models. Spatial created 3DShare.com as the first Application Service under the PlanetCAD umbrella and is planning other B2B application services as part of PlanetCAD. Spatial continued its aggressive development schedule for the Company's flagship product ACIS 3D Toolkit and related component technology throughout 1999 as evidenced by five significant releases: ACIS 5.0, ACIS 5.1, ACIS 5.2, ACIS 5.3, and ACIS 6.0. In addition, two releases of the IntraVision family of viewing products were shipped in 1999: IntraVision 4.0 and IntraVision 4.1. Through 1999, Spatial continues to lead the 3D modeling field with a total of 550 ACIS licensees, more than 210 ACIS-based applications and over 1.5 million end-user seats of ACIS-based products. Spatial also completed two significant acquisitions during the year that brought strategic products and talented people to the Company. In July, Spatial acquired Sven Technologies of Palo Alto, California ("Sven") to extend the Company's line of viewing related products and to secure significant Internet experience. In December, the Company acquired MetroCAD of Saarbrucken, Germany to gain expertise and products for creating 3D digital models from clouds of points gathered from hardware devices such as laser scanners. Entering 2000, the Company now operates two divisions, the PlanetCAD Division and the Component Technology Division. The PlanetCAD Division is focused on the development, marketing, sales, support and integration of 3D B2B application services and supporting technology. The Component Technology Division develops, markets and supports 3D component software products for the Company's traditional OEM software market segment and for the Company's PlanetCAD Division. Spatial maintains its corporate office in Boulder, Colorado from which all executive, marketing, finance, administrative and most research and development functions are executed. The Company's PlanetCAD Division is based in San Francisco, California and Boulder, Colorado. The Company has four wholly-owned subsidiaries: Spatial Technology GmbH (Germany), Spatial Technology K.K. (Japan), and Spatial Technology Ltd. (England) each of which assist in regional sales and licensing of the Company's Component Products and PlanetCAD Enterprise Products, internationally, and InterData Access Inc., also located in Boulder. 1 4 PLANETCAD 3DShare.com is the first application services to be marketed through PlanetCAD. 3Dshare.com is a 3D model healing and translation service which enables interoperability among various CAD/CAM/CAE software applications. As of March 2000, 3Dshare.com had more than 6,000 registered users. However, PlanetCAD is designed to become a vertical portal and application service provider (ASP) for manufacturing and design engineers who use mechanical engineering (CAD/CAM/CAE) software. PlanetCAD will provide a business-to-business (B2B) platform for delivering a broad set of Web-hosted software applications, e-commerce, content, and community services to the more than 10 million professional manufacturing and design engineers worldwide and throughout the digital manufacturing supply chain. PlanetCAD will target professional manufacturing and design engineers who use mechanical engineering software and their managers in the manufacturing supply chain. In addition to application services, PlanetCAD will generate revenue from a broad set of hardware, software, and manufacturing services e-commerce opportunities. PlanetCAD's e-commerce initiatives will target several multi-billion dollar market segments which are integral to the digital manufacturing supply chain. PlanetCAD will provide Web-based application and portal services to the professional manufacturing and design engineering community throughout the digital manufacturing supply chain. The division will initially focus in the area of mechanical engineering software, which is relevant to any engineer involved in the design or manufacturing of consumer and business products. PlanetCAD will leverage Spatial's existing base of over 550 component software licensees with an end-user installed base of over 1,500,000 users to market its portal site and Web application services. We anticipate PlanetCAD will generate revenue from four primary sources: - Application Services. The Company's first web-hosted application, 3DShare.com, was launched in the fourth quarter of 1999. It has won three industry awards and has registered over 6,000 users during the first three months in operation. The Company has identified several other manufacturing and design engineering software technologies and products which it intends to bring to the market via its ASP platform. - Enterprise Sales of its Application Services. PlanetCAD intends to embed its web-application services in an "enterprise wrapper" for intranet deployment at large customer sites. The Company will sell the enterprise version, through its own direct sales force, as well as value added resellers and integrators. Partnerships with first tier hardware companies like Hewlett Packard will be leveraged to accelerate sales of the enterprise package. - e-Commerce. The Company anticipates that its PlanetCAD portal will generate e-commerce revenues from sales, auctions and brokerage services of engineering-oriented hardware, software, publications, and services. PlanetCAD's e-commerce initiatives address several multi-billion dollar manufacturing market segments, including automobile, aircraft, computer storage devices and telephone apparatus. - Advertising. It is expected that PlanetCAD will provide an attractive targeted audience for advertisers seeking to sell products and services to manufacturing and design engineers. COMPONENT TECHNOLOGIES Since its inception in 1986, the Company has specialized in the design, development and marketing of the ACIS 3D modeling software and related component technology. Spatial licenses its 3D software products to OEMs for building commercially available 3D software products and to large manufacturing companies for building in-house proprietary 3D applications. The ACIS 3D modeling engine is also broadly licensed to leading universities and research institutions worldwide and is the foundation for many of the Company's other products. The Company licenses its Component Technologies to software developers using a direct sales force headquartered in Boulder, Colorado with sales offices in Monchengladbach, Germany and Tokyo, Japan. Development licenses for the ACIS 3D Software vary in price depending on the licensed functionality and distribution rights. Maintenance services, which include product updates, are available for an annual fee. Most 2 5 licensees also pay royalties based on a percentage of net revenue received from applications incorporating the ACIS 3D Software. The ACIS 3D modeling software is an open, object-oriented technology that provides state-of-the-art modeling capabilities to numerous popular CAD/CAM/CAE software applications. The software has been developed in C++ and employs a modern "plug-in" architecture that lowers the cost for customer integration and for Spatial's in-house development. Spatial's software runs on Microsoft(R) Windows NT(TM), Windows(R) and the major Unix(R) operating system platforms. In 1999, Spatial introduced five product releases of the ACIS 3D Toolkit and introduced several component software products, including Pro/E(R) and Catia(R) data translators to ACIS SAT, and JetScream(TM) for client-based high quality visualization. Today, there are over 550 ACIS licensees worldwide and over 210 ACIS-enabled applications that serve more than 1.5 million end-users, making ACIS one of the most widely used 3D modeling kernels in the world. ACIS end-users can interchange models with other ACIS end-users via the ACIS SAT(TM) file format. The ACIS SAT file format is key to 3D model interoperability among ACIS-enabled applications, including ABAQUS/CAE by Hibbit, Karlsson & Sorensen, Inc., Alibre Design by Alibre Inc., AutoCAD, Inventor and Mechanical Desktop by Autodesk, Inc., CADKEY by Cadkey, Inc., Space-E by Hitachi Zosen Information Systems, GSCAD by Intergraph Corporation, IronCAD by Visionary Design Systems, Inc., Maxwell 3D Field Simulation by Ansoft Corporation, and Vellum Solids by Ashlar Inc. PRODUCTS AND TECHNOLOGY Spatial develops 3D modeling software, complementary products and consulting services. Spatial's products and services help optimize engineering processes in companies by enabling commercial software companies to create more advanced, less expensive product modeling software products, and by enabling cost-effective access, exchange and sharing of product data throughout the manufacturing enterprise. The Company's principal products include the ACIS 3D modeling engine and associated optional component extensions. The ACIS 3D modeling engine, often referred to as the ACIS "Kernel", is used for the creation, definition and manipulation of 3D shapes. ACIS component extensions, also called "Husks", enhance the modeling engine by providing optional, more advanced or targeted functionality. The ACIS 3D Toolkit provides a suite of component extensions packaged with the modeling engine. This packaging allows developers to shorten the overall development process for 3D software applications, reducing their development costs and time to market. The Company's ACIS 3D modeling software is designed as an open, component-based software technology that is compatible with the most popular computing platforms. Open architecture allows commercial or corporate software developers to integrate the ACIS 3D modeling engine and component extensions with other "best of breed" applications and tools. This allows these developers to better address the requirements of specific markets, products and applications. In addition, the ACIS SAT data format has become established as a de-facto industry standard that allows end-users to share 3D models created with different ACIS-enabled applications. The Company's Interoperability Solutions provide product data viewing and exchange software for end-users in large manufacturing companies. Interoperability Solutions and consulting services enable customers to optimize engineering processes by providing efficient methods of sharing and accessing product data throughout the design and manufacturing process. In addition, the Company provides consulting services to assist software developers in the effective use, implementation and deployment of products based on their enabling products. ACIS 3D Modeling Engine The ACIS 3D modeling engine is the Company's flagship product and provides the foundation for many of the Company's other products. ACIS enables solid, surface and wire-frame modeling in a single modeling environment. The ACIS 3D modeling engine uses a boundary-representation data format to accurately represent 3 6 the volume of a 3D model and uses a mathematical definitions of curves and surfaces to model the shape of a model. This technique offers greater precision than other 3D modeling techniques, such as wire-frame, planar-facet and surface modeling techniques, and is better at producing complex objects with smooth flowing lines, resulting in richer, more physically realistic models. The informational completeness of ACIS models allows software applications to calculate many other physical properties such as strength, center of gravity, mass, flexibility and momentum. As a result, 3D applications employing ACIS 3D models can incorporate many operations for building, manipulating and analyzing 3D shapes. ACIS Component Toolkits ACIS 3D TOOLKIT The ACIS 3D Toolkit has been designed for rapid, low cost development of 3D software applications. The ACIS 3D Toolkit consists of the ACIS 3D modeling engine and a suite of component extensions to prototype and/or develop applications that make it easy to create, manipulate, visualize and interact with 3D models. Component extensions internal to the 3D Toolkit 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 provides a powerful LISP-based scripting language allowing the Company's customers to quickly prototype ACIS-enabled 3D applications. Applications developers may also utilize an Applications Procedural Interface and direct C++ access to tightly integrate the functionality of the ACIS 3D modeling software into their 3D applications. The Company offers its customers development licenses for the ACIS 3D Toolkit which range in price depending on the licensed 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. OPTIONAL COMPONENT EXTENSIONS ("HUSKS") In addition to the component extensions packaged with the ACIS 3D Toolkit, the Company offers a series of optional component extensions, or "Husks", that provide more advanced and specifically targeted functionality for the ACIS 3D Toolkit. The introduction of new component extensions also enables the Company to market new products to new and existing customers. Optional component extensions are priced separately from the ACIS 3D Toolkit. Examples of component extensions include: - ACIS Advanced Blending Husk. ACIS Advanced Blending Husk extends the functionality of ACIS 3D Toolkit's standard blending capabilities by providing the functionality to perform a wide variety of complex blending operations. It supports a wider variety of blend types for models with increased topological and geometric complexity. The blend types include constant radius blends, edge blends, elliptical blends, fixed width blends, variable radius blends, rounded chamfer cross-sections, entity-entity blends, and more. - ACIS Advanced Rendering Husk. ACIS Advanced Rendering Husk is a powerful rendering and visualization tool. The Husk enables a high-degree of shading realism and functionality. It also permits more advanced manipulation of backgrounds, foregrounds, lights, materials, texture spaces, and shaders. This Husk is ideal for ACIS-enabled applications that are used to design products, cars, and aircraft; for virtual reality; and for many other 3D design and modeling applications. - ACIS Advanced Surfacing Husk. This Husk provides various techniques for fitting a surface through a set of curves. Skinning, lofting, and net surfaces are related techniques for creating a face from a wireframe or group of edges. Skinning passes a surface through a disjoint set of edges. Lofting starts with a surface and extends this surface to pass through a disjoint set of edges. Net surfaces stretches a surface across a set of bi-directional curves, and supports curve directional alignment and simplification to a plane, when appropriate. 4 7 - ACIS AEC Husk. The ACIS AEC Husk provides a means to simplify the representation of a model in memory and in the SAT file format. This husk is intended strictly for architecture, engineering, and construction applications, where most of the data consists of points and straight line edges. - ACIS Cellular Topology Husk. The ACIS Cellular Topology Husk offers the functionality to decompose a model into smaller subregions or cells. The benefit of this is that unique information, such as material properties, can be associated with these cells. Then the material properties can be tracked as the model changes. - ACIS Deformable Modeling Husk. ACIS Deformable Modeling Husk brings powerful, easy-to-use deformable modeling functionality to ACIS-enabled applications. The Husk is an interactive sculpting tool for creating and manipulating free-form curves and surfaces. Its local and global editing features allow you to easily manipulate B-spline and NURB curves and surfaces to achieve a very high level of artistic design while retaining the ability to generate a precise machinable surface. - ACIS Healing Husk. Many 3D models from legacy systems and models that have been transferred through neutral file formats can have varying levels of precision. These models can be inaccurate and, consequently, unusable in many high-performance modeling applications. ACIS Healing Husk provides the ability to "heal" (correct) these models. The Husk detects and corrects a large percentage of tolerance inaccuracies in a model's geometry. Healing allows you to turn these inaccurate models into precise ACIS models that can easily be shared between different design environments or with downstream applications that require exact models, such as CAE and CAM. - ACIS JetScream Husk. The ACIS JetScream Husk delivers a continuous level of detail rendering acceleration technology for fast, high-level visual quality in 3D viewers, large CAD models, complex scenes, and more. By combining polygon decimation and adaptive polygon refinement, the ACIS JetScream Husk optimizes the number of polygons displayed, providing real-time speed and smooth, realistic 3D renderings. - ACIS Local Operations Husk. ACIS Local Operations Husk provides the functionality to locally manipulate the geometry of a face or a set of faces in a prescribed way, with minimal changes to model topology. The Husk supports moving faces, offsetting faces, rotating faces, tapering faces, tweaking faces, and offsetting bodies. Local operation results are fast, easy, accurate, and predictable. - ACIS Mesh Surfaces Husk. The Mesh Surface Husk provides a surface type capable of modeling large-scale surfaces without the performance overhead involved in solid modeling topology. By representing a surface as a network of planar polygonal elements that share vertices, the Mesh Surface Husk provides efficient representations of gridded data sets and large polygonal models for prototyping, geoscience surface modeling, and animation. - ACIS Precise Hidden Line Husk. ACIS Precise Hidden Line Husk detects and removes hidden lines in solids, surfaces, and wires modeled in ACIS-enabled applications, while maintaining the precision of underlying geometry. While ACIS 3D Toolkit includes the Faceted Hidden Line component for quick hidden-line representations, this optional Husk provides a very advanced degree of drawing precision for a variety of applications, such as dimensioning or drafting. - ACIS Shelling Husk. ACIS Shelling Husk is a special type of local operation that provides the means to create a shelled (thin walled) solid by offsetting the faces of a sheet or solid body. It defines a "thin walled" solid model by offsetting all of a solid model's faces by a specified distance. Adjacent faces, which when offset are no longer touching, are extended and re-intersected to define the boundary edges and vertices. Additionally, the Husk provides the functionality to thicken a single-sided sheet to form a 3D body. The shelling algorithm handles the disappearance of features that are no longer required, such as blends. Shelled models are used extensively in any industry manufacturing injection molded parts. ACIS Local Operations Husk is required in order to use the ACIS Shelling Husk. - ACIS Space Warping Husk. This Husk provides the tools for dynamically modifying a model from an OpenGL view. It overlays a body with a frame containing handles that can be grabbed with the mouse for 5 8 dynamically twisting a body. This Husk uses the exclusive ACIS Laws Symbolic Math Interface. Laws are mathematical functions used for solving complex, global modeling problems. OPTIONAL TRANSLATOR HUSKS - ACIS (Direct) CATIA Translator Husk. The ACIS CATIA Translator Husk converts native CATIA files directly into the ACIS SAT file format. This optional plug-in component for ACIS also performs limited cleanup and repair of models and provides user-controlled options to tune the import of CATIA files. - ACIS IGES Translator Husk. ACIS IGES Translator Husk provides the functionality for exchanging geometric data in IGES format, between heterogeneous proprietary applications and precision ACIS-enabled applications. The IGES (Initial Graphics Exchange Standard) Husk performs limited cleanup and repair of models, and compensates for some of the subtle differences between IGES implementations by the various CAD applications. It provides user-controlled options to tune the import and export of IGES files. - ACIS (Direct) Pro/E Translator Husk. The ACIS Pro/E Translator Husk converts native Pro/ENGINEER files directly into the ACIS SAT(TM) format. This optional plug-in component for the ACIS 3D Toolkit(TM) also performs limited cleanup and repair of models and provides user-controlled options to tune the import of Pro/ENGINEER files. - ACIS STEP Translator Husk. ACIS STEP Translator Husk provides the functionality for exchanging geometric data in STEP format, between heterogeneous proprietary CAD/CAM/CAE products and ACIS-enabled applications. STEP (Standard for the Exchange of Product model data) is an international standard that defines a neutral file format for the exchange of geometric, topological, and annotation data. The ACIS STEP Translator Husk imports and exports STEP AP203 and STEP AP214. - ACIS VDA-FS Translator Husk. ACIS VDA-FS Translator Husk provides the functionality for exchanging geometric data in VDA-FS file format, between heterogeneous, proprietary applications and precision ACIS-enabled applications. The Husk performs limited cleanup and repair of the model, and compensates for some of the subtle differences between VDA-FS implementations by the various CAD applications. It provides user-controlled options to tune the import and export of VDA-FS files. Spatial Deformable Modeler Spatial Deformable Modeler brings powerful, easy-to-use deformable modeling functionality to non-ACIS applications. This product is an interactive sculpting tool for creating and manipulating free-form curves and surfaces. Its local and global editing features allow you to easily manipulate B-spline and NURB curves and surfaces to achieve a very high level of artistic design while retaining the ability to generate a precise machinable surface. ACIS Interoperability Solutions The Company develops and markets interoperability solutions to both its traditional OEM's and to large manufacturing organizations. These Interoperability Solutions are designed to help customers use and share 3D content in different areas of an organization. In addition, Interoperability Solutions create demand for ACIS-enabled applications and ACIS 3D content, thus driving sales of the Company's ACIS 3D Toolkit and generating royalty revenues for the Company. 3DSHARE.COM 3Dshare.com, is the CAD/CAM/CAE industry's first-ever Web-based software application for translating, repairing and improving 3D models. This application service provides engineers with a cost-effective Web solution for enhancing translated models, making them more usable in multiple engineering processes, including design, analysis, and manufacturing. 6 9 INTRAVISION(R) IntraVISION provides users with a single tool to access various forms of product data (legacy information, plot files, documents and CAD models) produced from a variety of different applications, enabling them to share, communicate and review data used in the creation, support and maintenance of manufactured products. IntraVISION preserves the intelligence found in the native CAD/CAM file. This enables users the ability to view, measure, markup and manipulate the accurate data of original designs and concurrent engineering processes. INTRAVISION SOFTWARE DEVELOPER'S KIT (IVSDK) IVSDK is an OEM-enabled version of Spatial's IntraVISION enterprise-wide viewing solution. IVSDK offers you the ability to embed multi-format viewing, markup, measurement, and conversion functionality in your software applications; build your own viewer; create an Internet viewer plug-in; or even add support for your proprietary file formats. IGES QUALITY CONTROL AND DEVELOPMENT TOOLS Composed of three products, the IGES Toolkit provides tools for developing high-level IGES engineering applications. These components are IGESVIEW, IGES Parser/Verifier, and IGESXpert. IGESVIEW is a graphics viewer for the display, interrogation and manipulation of IGES files in their graphical form. The IGES Parser/ Verifier is a detailed analysis utility for checking conformance of an IGES file to the IGES specification and to the CALS and JAMA subsets. IGESXpert is a powerful IGES file browser and editor for the examination, flavoring, and repair of IGES files. ACIS 3D OPEN VIEWER The ACIS 3D Open Viewer is an end-user application that allows users to view models created by any ACIS-enabled application. ACIS 3D Open Viewer provides basic visualization functions for 3D CAD models and serves as a "bridge" to Microsoft Office applications, allowing users to embed 3D content within their documents and presentations. Development Consulting Services Spatial provides consulting services to both Toolkit and Interoperability products customers to help the full spectrum of Spatial customers integrate Spatial's products into their enterprise or customize Spatial's products to address their unique requirements. Training Spatial offers comprehensive basic and advanced training classes in the use of OEM and interoperability products. Seminars and focused training materials are being developed for component extensions (Husks) to the ACIS 3D toolkit. OEM Consulting Expert consultants are available to further accelerate the delivery of ACIS-enabled applications to market by our OEM customers. These services include assistance with application design, prototype product and code reviews, and shared development. Product Data Consulting Interoperability customers can avail themselves of our extensive background in developing and providing a variety of custom solutions to product data integration problems. Coupled with our Interoperability solutions, Spatial offerings include: - Data exchange services - Viewing and PDM integration 7 10 - Enterprise data modeling - Development and implementation of data sharing environments CUSTOMERS The Company's customer base of over 2,350 licensees, including 550 OEM customers, falls into one of four categories: (i) software developers who create commercial ACIS-enabled products for resale (ii) large enterprise manufacturing companies who use the Company's Component Toolkits for internal development of interoperability or 3D modeling applications (iii) large enterprise manufacturing companies who use the Company's Interoperability Solutions to access, exchange and share product data throughout their engineering and manufacturing processes, to reduce their cost of innovation and product development (iv) leading universities and research institutions. Software application developers represent the majority of the Company's current customer base and revenue from Component Toolkits. The Company's Component Toolkit sales to enterprise developers are important because they create demand for ACIS 3D modeling technology by encouraging additional commercial software developers to produce more ACIS-enabled applications. In addition, sales to universities and research institutions have served valuable roles as (i) a training ground for future software developers for both the commercial software and enterprise manufacturing industries, (ii) a "global incubator" for design ideas incorporated by the Company, and (iii) a useful mechanism to educate staff and students in ACIS 3D modeling technology and motivate its use in academic research. 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 Inc. 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 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 1997, 1998 and 1999 Autodesk accounted for 11%, 11%, and 10% of total revenue, respectively. 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. Spatial finished 1999 with 83 people in product development, including third party developers, 25 of whom have doctorates. The development organization is recognized as one of the technology centers of excellence for 3D modeling worldwide. During 1997, 1998, and 1999 research and development expenses were $4.6 million, $5.7 million, and $7.7 million, respectively. During 1999, the Company grew its research and development staff by 47%, principally to design, develop and implement the Company's Internet based business strategy. The development effort began in June 1999 and included core product, middleware and user interface development. The Company's first Web based product, 3DShare.com was released in November 1999. To maintain and improve its competitive position, the Company is committed to providing its customers with technological innovations and product upgrades. In January 1999, the Company released ACIS 5.0, which extended the functionality and performance of the product and provided customers with additional competitive advantages in the 3D marketplace. The Company maintains an aggressive schedule of follow-up releases, approximately every two to three months, to extend its position in the marketplace. In December 1999, the Company released version 6.0 of the ACIS 3D Toolkit, again extending the functionality and performance of its 8 11 flagship product. 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 -- We Depend on Swift and Timely Introductions of New Products, -- Our Products May Contain Undetected 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 software 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 Component Toolkits to software 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. The Company's sales cycle for new customers of its Component Toolkits 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 and other components 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 -- Our Operating Results Fluctuate Substantially." The Company believes that users targeted for ACIS Interoperability Solutions will purchase substantial numbers of products and services over the Internet. Accordingly, the Company markets ACIS Interoperability Solutions products and services through the Internet via PlanetCAD, feature story writing for visual programming trade publications, and attendance at key conferences. Furthermore, the Company provides add-on Component Products ("plug-ins") through its web site for purchase and download directly by prospects with little or no intervention. The market for the Company's ACIS Interoperability Solutions has significantly different characteristics than the Component Toolkits. In addition, the Company anticipates a much broader market base for ACIS Interoperability Solutions. Spatial uses a multi-channel distribution model for Interoperability Solutions, employing a combination of the Company's existing direct sales force and value-added resellers who provide local sales and support, worldwide. The Company's sales cycle for Interoperability Solutions is generally shorter than for Component Toolkits. Smaller unit purchases are often made in a few weeks, while larger purchases are generally more "corporate" in nature and often follow the implementation of database, product data management (PDM) and related software purchases. These large corporate agreements often take many months to unfold but are typically large in scale and scope. For its Interoperability Solutions, the Company uses all common merchandising techniques, such as advertising, direct mail and trade shows, with good return on marketing investments. The Company also uses extensively a web-based distribution model for demonstration versions of its Interoperability Solutions. A typical 9 12 prospect contacts Spatial either by responding to its direct marketing, or personally accesses and downloads demonstration versions of one or more products, after which contact is made to the Company's sales force or VAR channel. Spatial's PlanetCAD division primarily targets its marketing efforts at manufacturing and design engineers. PlanetCAD's marketing efforts are designed to create brand awareness of PlanetCAD and its various application services, to attract end users to the PlanetCAD website, and to encourage customers to use the site. PlanetCAD engaged in a limited set of marketing activities in 1999. These activities included online and offline advertising, direct e-mail campaigns, promotions, and public relations. Currently, PlanetCAD customers pay for its Web-hosted application services using a credit card via a secure server. Currently PlanetCAD charges its customers on a pay-per-use basis. 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 all products, 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 products 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. Component Toolkit Competition 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 Unigraphics.) 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 In Our Industry Is Intense." 10 13 Internet B2B Competition PlanetCAD faces potential competition from several fronts, including both larger mechanical engineering software companies and startups. There are currently no established manufacturing and design engineering portals or ASPs, and PlanetCAD is moving quickly to establish itself as the premier player in the space. While PlanetCAD expects significant competition to emerge, the company has several unique assets that position it to compete successfully. These competitive advantages include: - Access to Spatial's large, existing installed base of 210 ACIS enabled software applications and over 550 licensees - First mover advantage - Exclusive access to proprietary technologies - Freedom from legacy engineering software infrastructure and economics - Ability to deliver power clients for non-server side web applications - Strong relationships with mechanical engineering software 3rd parties - Neutrality in the marketspace 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 -- We Are Dependent on Third Party Developers" and "-- We May Be Exposed To Risks of Intellectual Property and Proprietary Rights Infringement." 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 -- We May Be Exposed To Risks of Intellectual Property and Proprietary Rights Infringement." EMPLOYEES As of December 31, 1999, the Company had 130 full-time employees, including 78 in product development, quality assurance and technical support, 48 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. 11 14 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 $29,000. The lease for this facility expires in September 2000. The Company leases approximately 5,120 square feet of additional office space in Boulder. Monthly lease payments for this space are approximately $5,000. The Company also leases approximately 3,700 square feet of office space in Westchester, Illinois and 2,400 square feet in San Francisco, California, at a monthly rate of approximately $3,000 and $6,000, respectively. In addition, the Company leases international sales offices in Monchengladbach, Germany and Tokyo, Japan. 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. 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.
1998 1999 ------------- ------------- HIGH LOW HIGH LOW ----- ----- ----- ----- First Quarter....................................... $2.69 $1.25 $4.31 $2.69 Second Quarter...................................... $2.75 $1.75 $4.88 $2.56 Third Quarter....................................... $2.63 $1.88 $4.94 $3.25 Fourth Quarter...................................... $3.56 $1.44 $5.88 $2.88
As of March 1, 2000 there were approximately 103 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 February 22, 2000, the Company issued an aggregate of 1,900,000 shares of Common Stock (the "Shares") to certain investors pursuant to the Stock Purchase Agreement, by and among the Company and the Investors named therein, dated February 22, 2000. The sale and issuance of such shares was deemed to be exempt from registration under the Securities Act of 1933 by virtue of Rule 506 of Regulation D thereof. The recipients were all accredited and represented their intention to acquire the securities for investment only. 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. 12 15 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 December 31, 1998 and 1999 and for each of the years in the three-year period ended December 31, 1999 have been derived from the Company's consolidated financial statements which have been audited by KPMG 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):
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1995 1996 1997 1998 1999 -------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Revenue: License fees............................... $ 5,318 $ 5,308 $ 4,854 $ 6,253 $ 5,412 Royalties.................................. 1,341 2,243 2,866 3,922 4,875 Services................................... 2,687 3,079 3,164 4,175 4,613 -------- ------- ------- ------- ------- Total revenue...................... 9,346 10,630 10,884 14,350 14,900 Gross profit................................. 8,397 9,612 10,059 13,586 13,768 Operating expenses: Sales and marketing........................ 3,168 3,840 4,477 5,213 5,918 Research and development................... 3,248 4,167 4,619 5,678 7,742 General and administrative................. 1,284 1,457 2,393 2,097 2,362 Acquired in-process research and development............................. -- -- 621 -- -- Merger costs............................... -- -- -- 319 500 -------- ------- ------- ------- ------- Total operating expenses........... 7,700 9,464 12,110 13,307 16,522 Earnings (loss) from operations.............. 697 148 (2,051) 279 (2,754) -------- ------- ------- ------- ------- Net earnings (loss)................ $ 414 $ 11 $(1,820) $ 201 $(2,861) ======== ======= ======= ======= ======= Earnings (loss) per common share(1): Basic Earnings (loss) per common share........ $ 0.09 $ 0.00 $ (0.21) $ 0.02 $ (0.31) Diluted Earnings (loss) per common share........ $ 0.05 $ 0.00 $ (0.21) $ 0.02 $ (0.31) Weighted average number of common shares outstanding(1) Basic...................................... 4,419 3,411 8,849 9,199 9,345 Diluted.................................... 8,595 6,781 8,849 9,307 9,345
DECEMBER 31, ------------------------------------------------ 1995 1996 1997 1998 1999 -------- ------- ------- ------- ------- BALANCE SHEET DATA: Cash and cash equivalents.................... $ 225 $ 8,441 $ 5,795 $ 4,534 $ 1,324 Working capital (deficit).................... (1,187) 7,545 5,703 5,349 1,977 Total assets................................. 3,083 11,468 10,751 11,589 10,072 Long-term debt and capital lease obligation................................. -- 451 249 79 -- Redeemable preferred stock(2)................ 14,155 -- -- -- -- Total stockholders' equity (deficit)......... (14,714) 7,890 7,269 7,802 5,878
- --------------- (1) Diluted earnings per share and weighted average common shares outstanding for 1995 and 1996 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 ("IPO") in October 1996. As a result of the IPO in 1996, conversion of preferred stock is not applicable for 1997, 1998 and 1999. (2) Converted to common stock in 1996. 13 16 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". Historically, the Company's core business focus has been to provide 3D modeling software, and while the Company remains committed to providing its customers with industry-leading open, component 3D modeling technology, the Company believes there is growing demand from the engineering sector for web-based business-to-business interoperability solutions and services. This includes the Company's PlanetCAD suite of internet application services for the engineering software industry. In order to pursue this opportunity, the Company expanded its focus in 1999 to encompass its Web-based business-to-business interoperability solution, 3DShare.com. This expanded focus going forward allows the Company to increase the business impact its customers derive from its Web-based interoperability solutions and allowing Customers to leverage these services to reduce time to market, interact more easily with a broader supplier base and ensure the best prices. The Company's Component Technologies business has three sources of revenue: license fees, royalties, and services, which include maintenance, training and consulting. 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. Most licensees also pay royalties based on a percentage of net revenue received from applications incorporating the ACIS 3D software. Royalty revenue is generally recognized upon receipt of payment. 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 is recognized upon completion of a training class or performance of services, respectively. In addition, the Company expects its PlanetCAD business model will soon become an important part of the Company's overall revenue model. For the year ended December 31, 1999, the Company incurred a net loss of $2.9 million (or $0.31 per share) on total revenue of $14.9 million, as compared to a profit of $201,000 (or $0.02 per share) on total revenue of $14.4 million reported for 1998. The net loss for 1999 includes acquired in-process research and development charges of $500,000 in connection with the acquisition of certain assets and liabilities of Sven Technologies, Inc. in June 1999. Additionally, results for 1998 include charges associated with the acquisition of Inter Data Access, Inc. of approximately $319,000, primarily for legal, accounting and other costs associated with the integration of the two companies. Excluding acquired in-process research and development charges in 1999 and acquisition costs in 1998, the Company incurred a net loss of $2.4 million (or $0.25 per share) in 1999 as compared to a $520,000 profit in 1998. The net loss for 1999 reflects slightly increased revenue as compared to 1998, offset by significantly increased operating expenses including research and development, in connection with the Company's roll out of its first application service, 3DShare.com, higher cost of sales and lower interest income. In addition, a significant factor in the Company's performance in 1999 was lower than expected license revenue resulting from competition and a trend in the high-end software market towards lower up front license fees in favor of future services and royalty obligations. Although the Company had been anticipating this trend, it occurred sooner than expected, and the Company expects this trend to continue in the engineering software market segment in which it operates. 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 in the Component Technologies business 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 -- Our Operating Results Fluctuate Substantially." 14 17 As of December 31, 1999, the Company had net operating loss carryforwards totaling $16.6 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. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain statement of operations data expressed as a percentage of total revenue:
YEAR ENDED DECEMBER 31, ------------------------- 1997 1998 1999 ----- ----- ----- Revenue: License fees.............................................. 45% 44% 36% Royalties................................................. 26 27 33 Services.................................................. 29 29 31 --- --- --- Total revenue..................................... 100 100 100 Gross profit................................................ 92 95 92 Operating expenses: Sales and marketing....................................... 41 36 39 Research and development.................................. 42 40 52 General and administrative................................ 22 15 16 Acquired in-process research and development.............. 6 -- -- Merger costs.............................................. -- 2 3 --- --- --- Total operating expenses.......................... 111 93 110 Earnings (loss) from operations............................. (19)% 2% (18)% Net earnings (loss)............................... (17)% 1% (19)%
FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998 Revenue. For the year ended December 31, 1999, total revenue increased 4% to $14.9 million from $14.4 million reported for 1998, reflecting increased royalties and services, partially offset by a decline in license fees. License fees decreased 13% to $5.4 million in 1999 as compared to $6.3 million for 1998 due to a decrease in the average license fees received by the Company per contract in 1999 as compared to 1998, partially offset by license fees for new product introductions in 1999. New product introductions in 1999 represented 27% of license fees versus 39% in 1998. Decreased average license fees resulted from competition and a trend in the high-end software market towards lower up front license fees. Royalties advanced 24% to $4.9 million from $3.9 million reported in 1998, reflecting an increase in the number of the Company's customers shipping ACIS-based software applications and increased non-refundable prepaid royalties. Nonrefundable prepaid royalties increased to $1.5 million in 1999 from $330,000 reported in 1998. As a result of the trend in the high-end software market noted above, the Company expects to continue to include up front prepaid royalties with its license agreements. Service revenue, derived from the sale of maintenance contracts and the performance of training and consulting services, increased 10% to $4.6 million for 1999 as compared to $4.2 million reported in 1998. The increase in service revenue resulted from growth in the Company's installed customer base and increased consulting services performed for these customers. Geographically, revenue increased in Japan and the United States, partially offset by decreased revenue in Europe, Canada and Asia during 1999. Domestic revenue represented 53% of total revenue in 1999, an increase from 51% reported for 1998, reflecting an 8% increase to $7.9 million in 1999, from $7.3 million reported in 1998. International revenue remained flat at $7.0 million for 1999 and 1998. Revenue reported for Europe in 1999 decreased 14% to $3.7 million from $4.4 million reported in 1998. Revenue reported for Japan advanced 52% in 1999 to $3.1 million as compared to $2.0 million reported in the prior year period. Revenue for other geographic regions, including other parts of Asia and Canada, decreased 73% to $175,000 for 1999 from $641,000 reported for 1998. 15 18 Cost of Sales. Total cost of sales increased 48% to $1.1 million for 1999, as compared to $764,000 reported in 1998. 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 increased primarily due to increased staffing in customer support. Customer support expense increased $202,000 (or 103%) in 1999 as compared to the prior year as a result of increased staffing in support of an increase in the Company's installed customer base and engineering consulting services performed. Purchased computer software amortization costs increased $71,000 (or 35%) in 1999 as compared to 1998 as a result of software purchased in connection with the acquisition of Sven Technologies, Inc., as well as technology purchased in 1998. As a percent of total revenue, cost of sales increased to 8% in 1999 from 5% in 1998. Sales and Marketing Expense. For the year ended December 31, 1999, sales and marketing expense increased 14% to $5.9 million from $5.2 million reported in 1998. Increased sales and marketing expense for 1999 as compared to 1998 was due to higher commissions paid in Japan in support of Japan's revenue growth and an across the board increase in travel related costs. Also contributing to increased Sales and Marketing expense was the Company's increased investment in the roll out and marketing of its Internet based business, PlanetCAD. The Company expects this trend to continue in 2000 as it rapidly moves to gain market share in the ASP market space. As a percent of revenue, sales and marketing expense increased from 36% in 1998 to 40% in 1999. Research and Development Expense. Research and development expense increased 37% to $7.8 million for 1999 as compared to $5.7 million reported in 1998. Research and development expense was higher in 1999 as compared to 1998 due to increased staffing in support of growing development efforts to enhance the existing ACIS product line in addition to the development of a new generation of web based business to business interoperability products. Increased development efforts on existing products during 1999 produced two major product releases with significant improvements in performance and functionality. Additionally, the Company invested $1.7 million in the development of its web based interoperability product line, producing 3Dshare.com and the supporting ACIS(R) Pro-E, Catia and Step translators. The Company expects its investment in research and development to increase in 2000 with the continued expansion of software offered from its internet based business to business ASP model. As a percent of revenue, research and development expense increased from 40% in 1998 to 52% in 1999. The Company accounts for software development costs 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 13% to $2.4 million in 1999 from $2.1 million reported in 1998. Increased general and administrative expense for 1999 versus 1998 was primarily due to increased bad debt expense. Bad debt expense in 1999 was $569,000 as compared to $85,000 in 1998, as the Company recognized the expense related to a few large balance accounts. The Company believes future charges will not be at the level incurred in 1999. As a percent of revenue, general and administrative expense increased from 15% in 1998 to 16% in 1999. Acquired In-process Research and Development and Merger Costs. Acquired in-process research and development expense of $500,000 for 1999 relates to the acquisition of certain assets and liabilities of Sven. Specifically included in this expense were amounts allocated to three separate projects which had not reached technological feasibility and had no probable alternative future uses. At the acquisition date each of these three projects was evaluated and it was determined that they were between 20% and 30% complete. The projects identified include development of two software components that would be sold as add-on extensions ("Husks") to the Company's ACIS 3D Toolkit and viewing product line, which are referred to as the Level of Detail Husk and Large Model Viewing Husk, respectively. The third project involves integration of the purchased technology, as well as the software components noted above, with products and Internet based services the Company released in the fourth quarter of 1999. Taking into consideration the percentage of completion, the fair values of the Level of Detail Husk, Large Model Viewing Husk, and integration project were determined to be $130,000, $210,000 and $160,000, respectively. The method used to determine the fair values was a discounted cash flow model, that assumed a 3-5 year period of cash inflow and a 22.5% risk adjusted discount rate. The expensing of the fair 16 19 values of the identified projects at the date of acquisition was based on the Company's evaluation of the nature, timing and status of these projects. The Company, having substantial experience with the design, development and marketing of technical software products, concluded that the identified projects are complex, and the related technology is unique with respect to the computer engineering market segment in which it operates. Accordingly, the Company believes there were significant risks associated with completing development of the identified projects, and that failure to deliver the related products and services, and to do so according to an established schedule, may have had an adverse effect on the Company's ability to execute current business strategies. Merger costs of $319,000 in 1998 related to the acquisition of IDA and represent legal, accounting and other costs associated with the integration of the two companies. (See Note 1 and 2 of Notes to Consolidated Financial Statements.) Other Income (Expense), Net. Other income reported in 1999 was $139,000 as compared to $238,000 in 1998, reflecting lower interest income, as a result of lower cash balances in 1999 as compared to 1998. Income Tax Expense. The Company's income tax expense decreased to $246,000 for 1999 from $316,000 for 1998 due to income tax expense incurred in 1998 of approximately $99,000 related to earnings by IDA, whereas no such expense was incurred in 1999. The Company's net operating loss carry forwards are not available to offset IDA's taxable income. The remaining amount expensed in 1999 and 1998 includes only withholding taxes on foreign sales. (See Note 6 of Notes to Consolidated Financial Statements.) FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997 Revenue. For the year ended December 31, 1998, total revenue increased 32% to $14.4 million from $10.9 million reported for 1997, reflecting increases in all revenue categories. License fees increased 29% to $6.3 million in 1998 as compared to $4.9 million for 1997, as the Company's component and interoperability product lines both contributed to increased license fees. Increased license fees were primarily due to an increase in the number of contracts executed in 1998 as compared to 1997. Additionally, new product introductions were a driving factor in increased license fees for the component business during 1998, accounting for more than 40% of new license revenue. Royalties increased 37% to $3.9 million from $2.9 million reported in 1997, reflecting an increase in the number of the Company's customers shipping ACIS-based software applications. Maintenance and other revenue increased 32% to $4.2 million for 1998 as compared to $3.2 million reported in 1997. Maintenance and other revenue includes maintenance, training and consulting fees, all of which increased in 1998 as compared to 1997. Revenue from the Company's OEM product line increased 28% to $12.4 million as compared to $9.7 million reported in 1997. Revenue derived from interoperability products and services increased 68% to $2.0 million from $1.2 million in 1997. Geographically, revenue increased in the United States and Europe during 1998, while Japan was substantially unchanged from the prior year. Domestic revenue represented 51% of total revenue in 1998, a decrease from the 54% reported for 1997. However, domestic revenue increased 24% to $7.3 million in 1998 as compared to $5.9 million reported in 1997. International revenue increased 41%, growing to $7.0 million in 1998 from $5.0 reported in the prior year due to increased revenue in Europe. Revenue reported for Europe in 1998 increased 61% to $4.4 million from $2.7 million reported in 1997. Revenue reported for Japan was unchanged at $2.0 million for 1998 and 1997. Revenue for other geographic regions, including other parts of Asia and Canada, increased 92% to $641,000 for 1998 from $333,000 reported for 1997 due to increased revenue in Canada. Cost of Sales. Total cost of sales decreased 7% to $764,000 for 1998, as compared to $825,000 reported in 1997. 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 $92,000 in 1998 as compared to the prior year due to the acquisition of certain intellectual property rights from Three-Space Limited ("TSL") in December 1997. As part of this transaction, the Company's royalty obligation to TSL was eliminated. (See Note 2 of Notes to Consolidated Financial Statements). Manufacturing costs decreased $61,000 (or 44%) in 1998 as compared to 1997, reflecting cost savings derived from the Company's transition to the use of on-line documentation and use of the internet to 17 20 deliver certain product releases to its customers. As a percent of total revenue, cost of sales decreased to 5% in 1998 from 8% in 1997. Sales and Marketing Expense. For the year ended December 31, 1998, sales and marketing expense increased 16% to $5.2 million from $4.5 million reported in 1997. Increased sales and marketing expense for 1998 as compared to 1997 was due to higher commission and travel related costs associated with increased revenue. As a percent of revenue, sales and marketing expense decreased from 41% in 1997 to 36% in 1998. Research and Development Expense. Research and development expense increased 23% to $5.7 million for 1998 as compared to $4.6 million reported in 1997. Research and development expense was higher in 1998 as compared to 1997 due to increased staffing in support of increased development efforts for existing products, as well as for new product offerings, including the ACIS(R) 3D Open Viewer, the ACIS(R) Healing Husk and the ACIS(R) IGES Translator Husk. Increased development efforts, on existing products during 1998 produced significantly enhanced functionality and performance, including new bending functionality, and enhanced blending capabilities. As a percent of revenue, software development costs decreased from 42% in 1997 to 40% in 1998. The Company accounts for software development costs 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 decreased 12% to $2.1 million in 1998 from $2.4 million reported in 1997. Decreased general and administrative expense for 1998 as compared to 1997 reflected lower payroll related expenses as a result of a decrease in staffing levels in 1998 as compared to 1997. As a percent of revenue, general and administrative expense decreased from 22% in 1997 to 15% in 1998. Acquisition Related Costs. Charges associated with the December 1998 acquisition of IDA were approximately $319,000 and represent legal, accounting and other costs associated with the integration of the two companies. All of these costs were charged to operations in December 1998. Acquired in-process research and development expense of $621,000 in 1997 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 1 and 2 of Notes to Consolidated Financial Statements.) Other Income (Expense), Net. Other income reported in 1998 was $238,000 as compared to $341,000 in 1997, reflecting lower interest income, as a result of lower cash balances in 1998 as compared to 1997. Income Tax Expense. The Company's income tax expense increased to $316,000 for 1998 from $110,000 for 1997. Income tax expense for 1998 includes approximately $100,000 related to earnings by IDA prior to the December 1998 acquisition. The Company's net operating loss carry forwards are not available to offset IDA's taxable income. The remaining amount expensed in 1998, as well as the 1997 expense includes only withholding taxes on foreign sales. (See Note 6 of Notes to Consolidated Financial Statements.) 18 21 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.
THREE MONTHS ENDED ----------------------------------------------------------------------------- MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31 1998 1998 1998 1998 1999 1999 1999 1999 ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) Revenue: License fees................................ $ 936 $1,759 $1,760 $1,798 $1,670 $1,286 $1,552 $ 904 Royalties................................... 1,002 932 919 1,069 1,277 1,082 1,046 1,470 Services.................................... 954 972 933 1,316 1,104 1,235 1,177 1,097 ------ ------ ------ ------ ------ ------ ------ ------- Total revenue......................... 2,892 3,663 3,612 4,183 4,051 3,603 3,775 3,471 Gross profit.................................. 2,736 3,512 3,446 3,892 3,827 3,292 3,470 3,179 Operating expenses: Sales and marketing......................... 1,241 1,242 1,351 1,379 1,433 1,242 1,494 1,749 Research and development.................... 1,210 1,376 1,464 1,628 1,766 1,664 2,043 2,269 General and administrative.................. 434 594 561 508 475 491 444 952 Acquired in-process research and development............................... -- -- -- -- -- 500 -- -- Merger costs................................ -- -- -- 319 -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------- Total operating expenses.............. 2,885 3,212 3,376 3,834 3,674 3,897 3,981 4,970 Earnings (loss) from operations............... (149) 300 70 58 153 (605) (511) (1,791) Net earnings (loss)................... $ (192) $ 244 $ 90 $ 59 $ 60 $ (605) $ (510) $(1,806)
Until the second quarter in 1999 the Company experienced four quarters of profitability. The net loss for three consecutive quarters beginning the quarter ended June 30, 1999 through the quarter ended December 31, 1999 is attributable to a shortfall in revenue, primarily from license fees as well as slower growth from royalty and service revenue. Also contributing to the net losses were higher operating expenses due to increased staffing and marketing activities in connection with the Company's execution of its Internet based business to business ASP model. During the quarter ended December 31, 1999, the Company recognized bad debt expense totaling $383,000. For the quarter ended June 30, 1999, the Company incurred acquired in-process research and development charges of $500,000 in connection with the acquisition of certain assets and liabilities of Sven Technology, Inc. During the quarter ended December 31, 1998, the Company charged approximately $319,000 associated with the acquisition of IDA, primarily for legal, accounting and other costs associated with the integration of the two companies. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1999, the Company had $1.3 million in cash and cash equivalents, reflecting a decrease of $3.2 million from 1998. The decrease in cash and cash equivalents during 1999 was primarily due to the Company's net loss and cash used in investing activities. Net cash used by operating activities in 1999 was $1.6 million, reflecting a net loss of $2.9 million, offset by non-cash and other adjusting items in operating activities including depreciation, amortization, accounts receivable write-off and the write-off of acquired in-process research and development. Net cash used by operating activities was $150,000 in 1998, reflecting net income of $201,000 and cash provided by increased deferred revenue and accounts payable offset by increased accounts receivable and decreased accrued expenses. Net cash used by operating activities in 1997 was $1.2 million. Cash used by investing activities was $1.7 million, $1.1 million, and $1.8 million for the years ended December 31, 1999, 1998 and 1997, respectively. Net cash used by investing activities in 1999 includes $1.0 million used for capital equipment purchases, including personal computers and networking equipment to upgrade the Company's infrastructure in support of the execution of its Internet based business model. In addition, the Company used $219,000 to purchase certain technologies that are included in purchased computer 19 22 software, and $500,000 in connection with the Sven acquisition. Net cash used by investing activities in 1998 includes $629,000 used for capital equipment purchases, primarily personal computers and networking equipment and $446,000 for additions to purchased computer software. Net cash used by investing activities in 1997 reflects $910,000 for equipment purchases and $851,000 in connection with the acquisition of TSL. (See Note 2 of Notes to Consolidated Financial Statements.) Net cash provided by financing activities was $51,000 during 1999 as compared to cash used by financing activities of $7,000 in 1998 and $391,000 provided in 1997. Net cash provided by financing activities in 1999 includes proceeds from the exercise of common stock options and the issuance of common stock pursuant to the Company's employee stock purchase plan. Net cash used by financing activities in 1998 includes principal payments on debt, partially offset by proceeds from common stock issued pursuant to the Company's employee stock purchase plan. Net cash provided by financing activities in 1997 reflects $525,000 from the issuance of common stock for cash and $319,000 in proceeds from exercise of common stock options and common stock issued under the employee stock purchase plan. Financing cash proceeds during 1997 were partially offset by cash used for principal payments on debt of $268,000 and dividend payments of $185,000. As of December 31, 1999, the Company had accounts receivable of approximately $4.2 million for license fees and maintenance and other fees. Typically, the Company's terms for payment on its accounts receivable are net 45 days from invoicing and shipment, and the Company typically experiences collection cycles of 45 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 more than 30 days. As of December 31, 1999, the Company's principal source of liquidity was cash and cash equivalents totaling $1.3 million. As indicated in Management's Discussion and Analysis, the Company has allocated significant research and development resources to its Internet based business strategy. To capitalize on this market strategy the Company will continue to invest in its infrastructure, research and development and marketing. As a result, the Company has been actively pursuing financing alternatives to meet the capital requirements needed for the execution of this business strategy. In February 2000, the Company completed a transaction in which it sold 1.9 million shares of common stock at a price of $3.60 per share and warrants to purchase 1.2 million shares of common stock at $0.05 per warrant for $6.9 million. The warrants are exercisable at $6.50 per share. Management believes that the completion of additional funding, together with existing cash 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 Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS No. 133) was issued by the FASB in June 1998. The Company will be required to adopt SFAS No. 133 for the fiscal year ending December 31, 2001. However, because the Company does not utilize derivative financial instruments, it does not believe the impact of SFAS No. 133 will be material to our consolidated financial position or results of operations. In December 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 requires use of the "residual method" for recognition of revenue when vendor-specific objective evidence exists for undelivered elements but does not exist for delivered elements of a software arrangement. The Company has adopted SOP 98-9 effective for 1999 and had no material adverse effect on the Company's consolidated financial statements. 20 23 RISK FACTORS OUR OPERATING RESULTS FLUCTUATE SUBSTANTIALLY Our operating results have fluctuated significantly in the past and we expect them to continue to fluctuate due to factors that affect two of Spatial's principal sources of revenue: license fees and royalties and due to the launch of our Internet business. Quarterly revenues from royalties may fluctuate significantly. Revenues from royalties are based on sales by our customers of products incorporating the ACIS 3D modeling software and, therefore, our customers' sales fluctuations are reflected in our royalty revenue stream. Quarterly revenues from license fees may be affected by a number of factors, including: - the volume of orders received within a quarter; - demand for our products and the product mix purchased by our customers; - competing capital budget considerations of our customers; - introduction and enhancement of products by us and our competitors; - market acceptance of new products; - reviews in the industry press concerning our products or those of our competitors; - seasonal factors, such as the timing of new product release, year-end purchasing and trade shows; - delays in the introduction or availability of hardware and software products from third parties; - changes or anticipated changes in our pricing or that of our competitors; and - general economic conditions. - Acquisitions In addition, the timing of our license fees fluctuates quarterly because we generally ship products as we receive orders and, therefore, we have little or no backlog. Additionally, we have generally shipped products and recognized most of our license fee revenues near the end of each quarter, thus recognizing the majority of license fee revenue in the last few days of the quarter. Our operating expenses are to a large extent fixed and are based in part on anticipated revenues. As a result, it is difficult for us to reduce expenses in time to compensate for any unexpected revenue shortfall. Accordingly, any significant unanticipated shortfall in sales could materially adversely affect operating results. Many of these factors are described in more detail in this "Risk Factors" section. RISKS ASSOCIATED WITH THE INTERNET As PlanetCAD is in the early stage of development, we take risks and there are uncertainties relating to our ability to successfully implement a new business plan. The business and prospects must be considered in light of the risks, expenses and difficulties encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as Internet services. The risks and uncertainties include, among other things, the following: - we may not be able to develop awareness and brand loyalty for our products and services - we may not be able to anticipate and adapt to the changing market for Internet services and e-commerce - we may not be able to expand our sales and marketing efforts - we may not be able to continue to upgrade and enhance our technologies to accommodate expanded service offerings 21 24 - we may not successfully respond to competitive developments - we may not be able to develop and renew strategic relationships. We may not be successful in accomplishing any or all of these objectives, which could materially harm our business. In this case, the value of your investment may decline. WE HAVE A HISTORY OF LOSSES, AND WE EXPECT CONTINUING LOSSES AND WE MAY NEVER ACHIEVE PROFITABILITY. - We have not generated enough revenue to cover the substantial amounts we have invested to create, launch and enhance our Internet business. If our revenue does not increase substantially, we may never become profitable. Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future. This may, in turn, cause our stock price to decline. In addition, if we do not achieve or sustain profitability in the future, we may be unable to continue our operations. WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN NEEDED. - We believe that our existing capital resources will enable us to maintain our current and planned operations at least through the end of 2000. However, if our capital requirements or revenue vary materially from our current plans or if unforeseen circumstances occur, we may require additional financing sooner than we anticipate. This financing may not be available on a timely basis, in sufficient amounts or on terms acceptable to us. The financing may also dilute existing stockholders. WE OFFER AN UNDIVERSIFIED PRODUCT LINE TO A CONCENTRATED CUSTOMER BASE We generate substantially all of our revenues from license fees, royalties and maintenance and training contracts relating to the ACIS 3D modeling software. Any decline in demand for the ACIS 3D modeling software could materially adversely affect our business, operating results and financial condition. Any of the following factors could cause such a decline in demand: - failure to achieve market acceptance of any new version of ACIS 3D; - increased competition; - technological superiority of a competitor; or - our failure to release new versions of ACIS 3D modeling software on a timely basis. Historically, most of our revenues have come from sales to a few large CAD software developers such as Autodesk, Baystate Technologies, Inc. and Visionary Design Systems, Inc. Our growth strategy is to target smaller 3D applications software developers. This new market segment may have lower profit margins and higher credit risks than we have experienced previously. Revenues from our current customers may decline, or we may be unable to expand our customer base profitably. WE DEPEND ON SWIFT AND TIMELY INTRODUCTIONS OF NEW PRODUCTS We compete in an industry faced with evolving standards and rapid technological developments. New products are introduced frequently and customer requirements change with technology developments. Our success will depend upon our ability to anticipate evolving standards, technological developments and customer requirements and enhance existing products accordingly. Software development is inherently uncertain. We cannot predict the exact timing of a new product shipment or version release on any particular platform; we have experienced delays in the development of certain new products and product versions. Additionally, we utilize third party development partners to facilitate the development of product enhancements and new component extensions. Factors beyond our control may affect our partners' ability to timely deliver product enhancements and new component extensions. Delays in product 22 25 development may adversely affect our business, financial condition and operating results. Negative reviews of new products or product versions could also materially adversely affect market acceptance. OUR PRODUCTS MAY CONTAIN UNDETECTED ERRORS Our software products may contain undetected errors when first introduced or as new versions are released. In the past, we have discovered software errors in some new products and enhancements after their introduction. We may find errors in current or future new products or releases after commencement of commercial shipments. Any errors, whether we discover them before or after shipment, may result in delay, which could materially adversely affect our business, operating results and financial condition. Although we have not experienced product liability claims by customers in the past as a result of product errors, such claims might be brought against Spatial in the future. COMPETITION IN OUR INDUSTRY IS INTENSE The markets for our products are highly competitive, rapidly changing and subject to constant technological innovation. Participants in these markets face constant pressure to accelerate the release of new products, enhance existing products, introduce new product features and reduce prices. Many of our competitors or potential competitors have significantly greater financial, managerial, technical and marketing resources than us. Actions by our competitors which could materially adversely affect our business, financial condition and results of operations include: - a reduction in product prices; - increased promotion; - accelerated introduction of, or the announcement of, new or enhanced products or features; - acquisitions of software applications or technologies from third parties; or - product giveaways or product bundling. In addition, our present and future competitors may be able to develop comparable or superior products or respond more quickly to new technologies or evolving standards. Accordingly, we may be unable to consistently compete effectively in our markets, competition might intensify or future competition may develop, all of which could materially adversely affect our business, financial condition or results of operations. WE ARE DEPENDENT UPON KEY PERSONNEL AND THE ABILITY TO HIRE ADDITIONAL PERSONNEL Our executive officers and key employees are vital assets. We do not have employment agreements with any of our executive officers, except for the president and chief executive officer. We also depend on our ability to attract, retain and motivate high quality personnel, especially management, skilled development personnel and sales personnel. Competition for skilled development personnel with specialized experience and training relevant to 3D modeling and web-based software is intense. There are a limited number of skilled people in the United States with the skills and training we require. As our sales force has grown, we have suffered turnover among our United States sales force that has, in some cases, delayed sales. The loss of any of our executive officers or other key employees could materially adversely affect our business, financial condition or operating results. A failure to recruit executive officers or key sales, management or development personnel would similarly harm our growth and competitiveness. WE ARE DEPENDENT UPON THIRD PARTY DEVELOPERS We rely on a number of development partners and third party licensors for the development and enhancement of portions of the ACIS 3D modeling software. Our plans for the future development of the ACIS 3D modeling technology continue to rely on these development partners and third party licensors for further product enhancements and extensions. We share ownership of, or rights to, the technology developed with 23 26 certain development partners. In certain limited circumstances, these partners may use this technology to compete with us. All of our development partners and third party licensors may terminate these agreements under certain circumstances. We may not be able to continue to use the services of our development partners to augment our development capabilities or the technologies of third party licensors in our products, and we may not be able to replace those services or technologies in a timely manner, if necessary. The loss of any third party licensees could also result in delays or cancellations in product shipments until equivalent software can be identified, licensed or developed and integrated with our products. WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH The anticipated growth in our Web-based business may place substantial demands on our managerial, operational and financial resources. Our future success will depend upon our ability to: - continue to enhance our PlanetCAD suite of products - respond to competitive developments; - expand our sales and marketing efforts, and - attract, train, motivate and retain qualified management and engineering personnel. Although we believe that our systems and controls are adequate for the current level of our operations, we anticipate that we may need to add additional personnel and expand and upgrade our systems and controls to manage possible future growth. The failure to do so could have a material adverse effect upon our business, financial condition and results of operations. In the future, we may acquire additional complementary companies, products or technologies. Managing acquired businesses entails numerous operational and financial risks. These risks include the difficulty in assimilating acquired operations, diversion of management's attention and the potential loss of key employees or customers of acquired operations. We may not be able to achieve or effectively manage growth, and failure to do so could materially adversely affect our operating results. WE MAY BE EXPOSED TO RISKS OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS INFRINGEMENT Our proprietary technologies are crucial to our success and ability to compete. We rely on trade secret and copyright laws to protect our proprietary technologies, including our source code, but our efforts may be inadequate to protect our proprietary rights or to prevent others from claiming violations of their proprietary rights. We have no patents with respect to the ACIS 3D modeling technology. Further, effective trade secret and copyright protection may not be available in all foreign countries. We generally enter into confidentiality or license agreements with employees, consultants and customers. Additionally, we generally control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary information is difficult. The unauthorized misappropriation of our technology could have a material adverse effect on our business, financial condition and results of operations. If we resort to legal proceedings to enforce our proprietary rights, the proceedings could be burdensome and expensive and could involve a high degree of risk. We may also be subject to claims alleging infringement by us of third party proprietary rights. Litigating such claims, whether meritorious or not, could be costly. These claims might require us to enter into royalty or license agreements, the terms of which may be unfavorable to us. If we were found to have infringed upon the proprietary rights of third parties, we 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 our business, financial condition or results of operations. 24 27 A SUBSTANTIAL PORTION OF OUR SALES ARE SUBJECT TO RISKS OF THE INTERNATIONAL MARKET International sales represented a substantial portion of our total revenues in 1999. We believe that international sales will continue to represent a significant portion of our total revenues. Inherent risks of conducting business internationally include: - 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. This reliance on international sales makes our business results particularly vulnerable to changes in overseas markets. These changes are difficult to anticipate and react to and, therefore, may affect us disproportionately. Sales of our products currently are denominated principally in U.S. dollars. Accordingly, any increase in the value of the U.S. dollar as compared to currencies in our principal overseas markets would increase the foreign currency-denominated cost of our products, which may decrease our sales in those markets. We have not engaged in any currency exchange hedging practices. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE Additionally, the Company intends to file a Registration Statement on Form S-3 in order to register an aggregate of 3,100,000 shares of our common stock no later than November 2000. After such registration statement becomes effective, the shares registered thereunder will be eligible for resale in the market without restriction. Sales of any substantial number of shares of our common stock in the public market may have an adverse effect on the market price of our common stock. The average daily trading volume of our common stock has been very low. Any sustained sales of shares by our existing or future stockholders or any increase in the average volume of shares traded in the public market may adversely affect the market price of our common stock. OUR STOCK PRICE IS HIGHLY VOLATILE The market price of our common stock has been highly volatile and is likely to continue to be volatile. Factors affecting our stock price may include: fluctuations in our operating results, announcements of technological innovations or new software standards by us or competitors, published reports of securities analysts, developments in patent or other proprietary rights, changes in our relationships with development partners and general market conditions, especially regarding the general performance of comparable technology stocks. Many of these factors are beyond our control. These factors may materially adversely affect the market price of our common stock, regardless of our operating performance. 25 28 ITEM 7. FINANCIAL STATEMENTS SPATIAL TECHNOLOGY INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ Financial Statements: Consolidated Balance Sheets, as of December 31, 1998 and 1999................................................... Consolidated Statements of Operations, years ended December 31, 1997, 1998 and 1999....................... Consolidated Statements of Stockholders' Equity, years ended December 31, 1997, 1998 and 1999................. Consolidated Statements of Cash Flows, years ended December 31, 1997, 1998 and 1999....................... Notes to Consolidated Financial Statements................
26 29 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Spatial Technology Inc.: We have audited the accompanying consolidated balance sheets of Spatial Technology Inc. and subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. 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, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP Boulder, Colorado January 27, 2000 27 30 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARES) ASSETS
DECEMBER 31, ------------------- 1998 1999 -------- -------- Current Assets: Cash and cash equivalents................................. $ 4,534 $ 1,324 Accounts receivable, net of allowance of $100 and $199 in 1998 and 1999, respectively............................ 3,981 4,156 Prepaid expenses and other................................ 542 691 -------- -------- Total current assets.............................. 9,057 6,171 Equipment, net (note 3)..................................... 1,392 1,891 Purchased computer software, net (note 2)................... 1,140 2,010 -------- -------- Total Assets...................................... $ 11,589 $ 10,072 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 626 $ 1,028 Other accrued expenses.................................... 1,203 1,245 Deferred revenue.......................................... 1,869 1,921 Current maturities of long-term debt (note 4)............. 10 -- -------- -------- Total current liabilities......................... 3,708 4,194 -------- -------- Long-term debt, less current maturities (note 4)............ 79 -- -------- -------- Stockholders' Equity (note 5): Common stock, $.01 par value; 22,500,000 shares authorized: 9,239,791 and 9,508,179, shares outstanding in 1998 and 1999, respectively......................... 92 95 Additional paid-in capital................................ 24,929 25,828 Accumulated deficit....................................... (17,075) (19,936) Accumulated other comprehensive loss...................... (144) (109) -------- -------- Total stockholders' equity........................ 7,802 5,878 -------- -------- Commitments and contingencies (note 7) Total Liabilities and Stockholders' Equity........ $ 11,589 $ 10,072 ======== ========
See accompanying notes to consolidated financial statements. 28 31 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, --------------------------- 1997 1998 1999 ------- ------- ------- Revenue: License fees.............................................. $ 4,854 $ 6,253 $ 5,412 Royalties................................................. 2,866 3,922 4,875 Services.................................................. 3,164 4,175 4,613 ------- ------- ------- Total revenue..................................... 10,884 14,350 14,900 ------- ------- ------- Cost of sales: License fees.............................................. 319 461 539 Royalties................................................. 163 39 9 Services.................................................. 343 264 584 ------- ------- ------- Total cost of sales............................... 825 764 1,132 ------- ------- ------- Gross profit...................................... 10,059 13,586 13,768 ------- ------- ------- Operating expenses: Sales and marketing....................................... 4,477 5,213 5,918 Research and development.................................. 4,619 5,678 7,742 General and administrative................................ 2,393 2,097 2,362 Acquired in-process research and development (note 2)..... 621 -- 500 Merger costs (note 1)..................................... -- 319 -- ------- ------- ------- Total operating expenses.......................... 12,110 13,307 16,522 ------- ------- ------- Earnings (loss) from operations................... (2,051) 279 (2,754) Other income (expense): Interest income........................................... 382 255 146 Interest expense.......................................... (32) (27) (5) Other, net................................................ (9) 10 (2) ------- ------- ------- Total other income................................ 341 238 139 ------- ------- ------- Earnings (loss) before income taxes............... (1,710) 517 (2,615) Income tax expense (note 6)................................. 110 316 246 ------- ------- ------- Net earnings (loss)............................... $(1,820) $ 201 $(2,861) ======= ======= ======= Other comprehensive income (loss): Foreign currency translation adjustment................... (35) (29) 35 ------- ------- ------- Comprehensive income (loss)............................... $(1,855) $ 172 $(2,826) ======= ======= ======= Earnings (loss) per common share: Basic..................................................... $ (0.21) $ 0.02 $ (0.31) Diluted................................................... $ (0.21) $ 0.02 $ (0.31) Weighted average number of common shares outstanding: Basic..................................................... 8,849 9,199 9,345 Diluted................................................... 8,849 9,307 9,345
See accompanying notes to consolidated financial statements. 29 32 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARES)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TOTAL ------------------ PAID-IN- ACCUMULATED COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT LOSS EQUITY --------- ------ ---------- ----------- ------------- ------------- Balances at January 1, 1997....... 8,385,484 $84 $23,342 $(15,456) $ (80) $ 7,890 Exercise of common stock options for cash........................ 64,496 1 168 -- -- 169 Common stock issued under employee stock purchase plan............. 56,964 1 149 -- -- 150 Common stock issued for purchased computer software (note 2)...... 250,000 2 388 -- -- 390 Common stock issued for cash by pooled company.................. 435,183 4 521 -- -- 525 Purchase and retirement of treasury stock by pooled company......................... (50,779) (1) 1 -- -- -- Net loss.......................... -- -- -- (1,820) -- (1,820) Foreign currency translation adjustment...................... -- -- -- -- (35) (35) --------- --- ------- -------- ----- ------- Balances at December 31, 1997..... 9,141,348 $91 $24,569 $(17,276) $(115) $ 7,269 Exercise of common stock options for cash........................ 1,625 -- 3 -- -- 3 Common stock issued under employee stock purchase plan............. 96,818 1 179 -- -- 180 Common stock options issued for purchased computer software and services........................ -- -- 178 -- -- 178 Net earnings...................... -- -- -- 201 -- 201 Foreign currency translation adjustment...................... -- -- -- -- (29) (29) --------- --- ------- -------- ----- ------- Balances at December 31, 1998..... 9,239,791 $92 $24,929 $(17,075) $(144) $ 7,802 Exercise of common stock options and warrant for cash............ 53,321 1 97 -- -- 98 Common stock issued under employee stock purchase plan............. 21,206 -- 43 -- -- 43 Common stock and warrant issued in connection with Sven acquisition..................... 193,861 2 759 -- -- 761 Net earnings...................... -- -- -- (2,861) -- (2,861) Foreign currency translation adjustment...................... -- -- -- -- 35 35 --------- --- ------- -------- ----- ------- Balances at December 31, 1999..... 9,508,179 $95 $25,828 $(19,936) $(109) $ 5,878 ========= === ======= ======== ===== =======
See accompanying notes to consolidated financial statements. 30 33 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------- 1997 1998 1999 ------- ------- ------- Cash flows from operating activities: Net earnings (loss)....................................... $(1,820) $ 201 $(2,861) Adjustments to reconcile net earnings (loss) to net cash used by operating activities: Depreciation and amortization.......................... 312 598 791 Acquired in-process research and development........... 621 -- 500 Write-down of purchased computer software.............. 200 -- -- Provision for, and write-off of, uncollectible accounts receivable........................................... -- -- 383 Changes in operating assets and liabilities: Accounts receivable.................................. (858) (1,249) (558) Prepaid expenses and other........................... (52) (133) (205) Accounts payable..................................... (155) 320 402 Accrued expenses..................................... 367 (286) (72) Deferred revenue..................................... 145 399 52 ------- ------- ------- Net cash used by operating activities............. (1,240) (150) (1,568) ------- ------- ------- Cash flows from investing activities: Additions to equipment.................................... (911) (629) (1,009) Additions to purchased computer software.................. (851) (446) (219) Cash paid for software in business combination............ -- -- (500) ------- ------- ------- Net cash used by investing activities............. (1,762) (1,075) (1,728) ------- ------- ------- Cash flows from financing activities: Principal payments on debt................................ (268) (190) (89) Dividends paid............................................ (185) -- -- Proceeds from issuance of common stock, net............... 525 -- -- Proceeds from exercise of common stock options and warrants and purchase of common stock for cash......... 319 183 141 ------- ------- ------- Net cash provided (used) by financing activities...................................... 391 (7) 51 ------- ------- ------- Foreign currency translation adjustment affecting cash...... (35) (29) 35 ------- ------- ------- Net decrease in cash and cash equivalents......... (2,646) (1,261) (3,210) Cash and cash equivalents at beginning of period............ 8,441 5,795 4,534 ------- ------- ------- Cash and cash equivalents at end of period.................. $ 5,795 $ 4,534 $ 1,324 ======= ======= ======= Supplemental cash flow information: Cash paid for interest.................................... $ 27 $ 29 $ 5 ======= ======= ======= Cash paid for income taxes................................ $ 145 $ 229 $ 211 ======= ======= ======= Supplemental disclosure of non-cash investing activities: Common stock and warrants issued in business combination............................................ $ -- $ -- $ 932 ======= ======= =======
See accompanying notes to consolidated financial statements. 31 34 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 that assist in the sales and licensing of the Company's products, including Spatial Technology Ltd., Spatial Technology GmbH, and Spatial Technology K.K. located in England, Germany, and Japan, respectively. In addition, the Company operates InterData Access, Inc. (IDA), a wholly owned subsidiary from its Boulder, Colorado headquarters. The Company and the subsidiaries currently operate in one business segment although the Company may establish additional business segments in the future. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and 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 (Loss) Per Share Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of potential common stock, consisting only of common stock warrants and options. For the years ended December 31, 1997 and December 31, 1999, diluted loss per share is the same as basic loss per share, as the effect of potential common stock is 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) Other Comprehensive Income or Loss 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 as other comprehensive income or loss. 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, 1997, 1998 and 1999. (e) Revenue Recognition The Company recognizes revenue in accordance with the provisions of Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2") which requires that revenue for licensing, selling, leasing, or otherwise marketing computer software be recognized when evidence of an arrangement exists, delivery of the product has occurred, collectibility of the related receivable is assured and the vendor's fee is fixed or determinable. In addition, revenue is recognized for the multiple elements of software arrangements based upon the vendor specific objective evidence of fair value for each element. Accordingly, revenue from products or services is recognized based upon shipment of products or performance of services. In December 1998, the American Institute of Certified Public Accountants ("AICPA") issued SOP No. 98-9, "Modification of SOP 32 35 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP No. 98-9 clarifies certain provisions of SOP No. 97-2, and effectively defers the required adoption of those provisions until the Company's fiscal year beginning January 1, 2000. Effective January 1, 1999, the Company adopted the provision of SOP No. 98-9, and the impact on the Company's results of operations, financial position or cash flows was not material. License fee revenue is recognized upon completion of a signed contract and shipment of the software. Revenue from royalties is generally recognized upon receipt of payment. Revenue from maintenance contracts is deferred and recognized ratably over the period of the agreement. Training and consulting revenue is recognized upon completion of the training or performance of services, respectively. (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 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 required 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 are 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 1997, 1998 and 1999. (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. 33 36 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (k) Reclassifications Certain 1997 and 1998 amounts items have been reclassified to conform to the 1999 presentation. (2) ACQUISITIONS AND IN-PROCESS RESEARCH AND DEVELOPMENT In June 1999 the Company acquired certain assets and liabilities of Sven Technologies, Inc. ("Sven") for total consideration of $1.4 million, including $500,000 cash and 193,861 shares of common stock and a warrant to purchase 250,000 shares of common stock at $12.50 per share. The acquisition was accounted for using the purchase method, and the purchase price was allocated to the assets acquired based on their estimated fair values, including $932,000 of purchased computer software and $500,000 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. The unaudited pro forma combined results of the companies, as if Sven had been acquired as of January 1, 1998 are as follows (in thousands) :
YEAR ENDED DECEMBER 31, ----------------- 1998 1999 ------- ------- Revenue..................................................... $14,497 $15,014 Net loss.................................................... $ (834) $(3,022) Loss per share -- basic and diluted......................... $ (0.09) $ (0.32)
In December 1998, the Company acquired all of the outstanding common stock of IDA in exchange for 1,400,000 shares of the Company's common stock. Established in 1983, IDA develops and markets software for the sharing, access and exchange of electronic product data throughout the manufacturing process. The merger was accounted for as a pooling of interests and, accordingly, the financial statements for all periods presented were restated to include the assets, liabilities and operations of IDA. Total charges associated with the merger were approximately $319,000 and represent legal, accounting and other costs associated with the integration of the two companies. These costs were charged to operations in December 1998. 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 TSL. The purchase price was allocated to the technology acquired based on its 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. 34 37 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) EQUIPMENT Equipment consists of the following (in thousands):
DECEMBER 31, ----------------- 1998 1999 ------- ------- Computer equipment.......................................... $ 1,693 $ 2,003 Furniture and office equipment.............................. 669 739 Leasehold improvements...................................... 135 171 ------- ------- 2,497 2,913 Less accumulated depreciation............................... (1,105) (1,022) ------- ------- $ 1,392 $ 1,891 ======= =======
(4) NOTES PAYABLE IDA issued subordinated promissory notes to two stockholders. Each promissory note bore interest at 10% per annum, and requires monthly payments of $760 through 2005. Both promissory notes were paid in full during 1999. (5) STOCKHOLDERS' EQUITY Preferred 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, 1999, no shares of preferred stock were outstanding. Stock Options In July 1998, the Board of Directors of the Company approved the 1998 Non-officer Stock Option Plan (1998 Plan). Up to 505,000 shares of Common Stock may be issued pursuant to the 1998 Plan. Under the 1998 Plan, the Company may issue nonqualified stock options, which are granted at an exercise price equal to the fair market value of the stock on the date of grant. Vesting and option term, which may not exceed ten (10) years from the date of grant, are determined by the Board of Directors at the time of grant. As of December 31, 1999 options to purchase 312,200 shares of common stock under the 1998 Plan were outstanding at a weighted average exercise price of $3.55. In June 1996, the Board of Directors of the Company approved the 1996 Equity Incentive Plan (1996 Plan). Up to 1,350,000 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 earlier upon the attainment of specific performance objectives, and are exercisable over a maximum ten-year period or upon attainment of such objectives. As of December 31, 1999 options to purchase 1,268,794 shares of common stock under the 1996 Plan were outstanding at a weighted average exercise price of $3.05. 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 and are immediately exercisable over a ten-year period from date of grant. As of December 31, 1999, 35 38 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) options to purchase 141,000 shares of common stock under the Directors' Plan were outstanding at a weighted average exercise price of $3.42. 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 the attainment of specific performance objectives, and are exercisable over a five-year period or upon attainment of such objectives. As a result of such termination, no additional options may be issued under the 1987 Plan. The options to purchase 51,931 shares of Common Stock at a weighted average exercise price of $4.05 outstanding as of December 31, 1999 will remain exercisable until they expire or terminate pursuant to their terms. A summary of the status of the Company's fixed option plans as of December 31, 1997, 1998 and 1999 and changes during the years then ended is presented below:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1997 1998 1999 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICES SHARES PRICES SHARES PRICES ---------- -------- ---------- -------- ---------- -------- Outstanding at beginning of year...................... 889,809 $4.29 1,170,649 $3.18 1,207,930 $2.78 Granted..................... 606,825 1.97 416,800 2.12 658,811 3.93 Exercised................... (64,496) 2.55 (1,625) 1.88 (37,673) 2.59 Forfeited................... (261,489) 4.32 (377,894) 3.28 (55,143) 3.38 ---------- ---------- ---------- Outstanding at end of year...................... 1,170,649 3.18 1,207,930 2.78 1,773,925 3.20 ========== ========== ========== Weighted-average fair value of options granted during the year at exercise prices equal to market price at grant date....... $ 1.18 $ 1.33 $ 2.71 ========== ========== ==========
The following table summarizes information about fixed stock options outstanding as of December 31, 1999:
OPTIONS OUTSTANDING ---------------------------------------- OPTIONS EXERCISABLE WEIGHTED- -------------------------- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE - -------- -------------- ----------- --------- -------------- --------- $1.63-2.00......................... 591,566 7.8 $1.84 287,312 $1.82 $2.31-3.84......................... 590,783 8.6 3.04 174,159 2.83 $4.13-5.00......................... 591,576 7.1 4.71 372,593 4.82 --------- ------- 1,773,925 7.8 3.20 834,064 3.37 ========= =======
36 39 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of options granted during 1997, 1998 and 1999 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997, 1998 and 1999:
1997 1998 1999 ------- ------- ------- Risk free interest rate................................... 5.75% 5.19% 6.60% Expected life............................................. 4 years 4 years 4 years Volatility................................................ 55% 68% 73%
Pro forma financial information assuming the use of SFAS 123 in accounting for stock based compensation is as follows:
YEARS ENDED DECEMBER 31, -------------------------- 1997 1998 1999 ------- ------ ------- Net earnings (loss): As reported............................................. $(1,820) $ 201 $(2,861) Adjusted pro forma...................................... (2,419) (219) (4,080) Basic and diluted earnings (loss) per share: As reported............................................. $ (0.21) $ 0.02 $ (0.31) Adjusted pro forma...................................... (0.27) (0.02) (0.44)
Employee Stock Purchase Plan In June 1996, the Board of Directors approved the Employee Stock Purchase Plan. Up to 175,000 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 at the beginning or end of each purchase period. During 1997, 1998 and 1999 the Company has issued an aggregate of 174,988 shares at an average price of $1.85. Warrants A summary of outstanding common stock purchase warrants as of December 31, 1999 is as follows:
EXERCISE EXPIRATION SHARES PRICE DATE - ------ -------- ---------- 6,666....................................................... $ 8.22 2000 166,665..................................................... 8.22 2001 210,000..................................................... 6.50 2001 22,500...................................................... 8.22 2003 250,000(a).................................................. 12.50 2004
- --------------- (a) These warrants were issued in connection with the Sven acquisition, as described in note 2, and were valued using the Black-Scholes option pricing model with the following assumptions; no dividends, volatility of 68%, risk free interest of 6.60% and an expected life of two years. 37 40 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) TAXES Tax expense for 1997 and 1999 is comprised solely of taxes on foreign sales. Tax expense for 1998 consists of foreign taxes for Spatial and federal and state income tax expense for IDA. Income tax expense differs from the amount computed by applying the statutory federal income tax rate to earnings (loss) before income taxes as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------- 1997 1998 1999 ------ ------ ------- Expected income tax expense (benefit)....................... $(581) $ 176 $ (889) Non deductible expenses, net................................ 11 94 9 Change in deferred tax valuation allowance.................. 750 89 1,838 Taxes on foreign sales...................................... 110 95 246 State taxes, net of federal benefit......................... -- 38 (98) Research and development tax credit......................... (174) (206) (200) Adjustment of previously provided taxes..................... -- -- (660) Other, net.................................................. (6) 30 -- ----- ----- ------ Actual income tax expense................................... $ 110 $ 316 $ 246 ===== ===== ======
The tax effects of significant temporary differences that result in deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31, ----------------- 1998 1999 ------- ------- Accounts receivable, primarily due to differences in accounting for bad debts................................................. $ 37 $ 79 Property and equipment, primarily due to differences in Depreciation.............................................. (51) (20) Deferred revenue, due to differences in revenue recognition for financial statement and income tax purposes........... 22 1 Accrued expenses, primarily due to difference in the period of recognition for financial statement and income tax purposes.................................................. 122 182 Purchased software, primarily due to differences in carrying values for financial statement and income tax purposes.... (94) (254) Acquired in-process research and development, amortized for income tax purposes....................................... -- 172 Research and development and other tax credit carryforwards............................................. 1,307 1,896 Net operating loss carryforwards............................ 5,495 6,620 ------- ------- Total deferred tax assets......................... 6,838 8,676 Less valuation allowance.................................... (6,838) (8,676) ------- ------- Net deferred tax assets........................... $ -- $ -- ======= =======
At December 31, 1999, the Company had net operating loss carryforwards for regular income tax purposes of approximately $16,176,000, which if not utilized, expire in the years 2003 through 2019. The net operating loss carryforwards at December 31, 1999 are subject to limitation under Section 382 of the Internal Revenue Code. The Company has provided a valuation allowance for the entire deferred tax balance due to uncertainty of the realization of the asset. 38 41 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company also has research and development credit carryforwards for income tax purposes available totaling approximately $1,495,000, which if not utilized, expire in the years 2003 through 2019. Approximately $284,000 of the total credit carryforwards is also subject to limitation under Section 382 of the Internal Revenue Code. (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): 2000........................................................ $452 2001........................................................ 152 2002........................................................ 105 2003........................................................ 98 Thereafter.................................................. 72 ---- $879 ====
Rent expense was approximately $487,000, $528,000 and $555,000 in 1997, 1998 and 1999, 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 and the software consulting agreement were approximately $327,000, $400,000 and $398,000 in 1997, 1998 and 1999, respectively. The Company has entered into various 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 $383,000, $291,000 and $349,000 in 1997, 1998 and 1999, respectively. (8) REVENUE, SIGNIFICANT CUSTOMERS AND CONCENTRATION OR CREDIT RISK Revenue by geographic area is summarized as follows (in thousands):
YEARS ENDED DECEMBER 31, --------------------------- 1997 1998 1999 ------- ------- ------- United States........................................... $ 5,893 $ 7,331 $ 7,926 Europe.................................................. 2,699 4,355 3,734 Japan................................................... 1,959 2,023 3,065 Other................................................... 333 641 175 ------- ------- ------- Total......................................... $10,884 $14,350 $14,900 ======= ======= =======
39 42 SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Earnings (loss) from operations by geographic area is summarized as follows (in thousands):
YEARS ENDED DECEMBER 31, ---------------------------- 1997 1998 1999 ------- ------- -------- United States........................................... $ 4,209 $ 5,369 $ 5,385 Europe.................................................. 1,457 2,771 2,145 Japan................................................... 894 960 1,586 Other................................................... 255 533 123 ------- ------- -------- 6,815 9,633 9,239 Unallocated corporate expenses.......................... (8,866) (9,354) (11,993) ------- ------- -------- Total......................................... $(2,051) $ 279 $ (2,754) ======= ======= ========
Substantially all of the company's identifiable assets relate to domestic operations. During 1997, 1998 and 1999 one customer accounted for 11%, 11% and 10% of the Company's revenue in each year, respectively. 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. (9) SUBSEQUENT EVENT In February 2000 the Company issued 1.9 million shares of common stock and warrants to purchase 1.2 million shares of common stock at an exercise price of $6.50 per share for total consideration of $6.9 million. The warrants are exercisable beginning August 2000 through their expiration in February 2005. 40 43 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. ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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.
41 44
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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. 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.
42 45
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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 Registrant and TSL, dated as of December 31, 1997. 10.30a**** -- Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank, dated as of August 15, 1995, as amended. 10.31*** -- Registration Rights Agreement, by and between the Registrant and TSL, dated as of December 31, 1997. 10.32*** -- Software Consulting Agreement, by and between the Registrant and TSL, dated December 31, 1997. 10.33***** -- Stock Purchase Agreement, by and among the Registrant, InterData Access, Inc., and Shareholders of InterData Access, Inc., dated December 23, 1998. 10.34***** -- Escrow Agreement, by and among the Registrant, InterData Access, Inc., and Shareholders of InterData Access, Inc., dated December 23, 1998. 10.35****** -- Asset purchase agreement, by and between the Company and Sven Technologies, Inc., dated as of June 29, 1999. 10.36 -- Securities Purchase Agreement, by and between the Company and Purchasers , dated as of February 22, 2000. 21.1* -- List of Subsidiaries of the Registrant. 23.1 -- Consent of KPMG LLP. 27 -- Financial Data Schedule
- --------------- * 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. **** Incorporated by reference to the Issuer's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998. ***** Incorporated by reference to the Issuer's Report on Form 8-K dated December 23, 1998. ****** Incorporated by reference to the issuers report on Form 8-K dated July 14, 1999 as amended. (b) Reports on Form 8-K None 43 46 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/ R. BRUCE MORGAN ---------------------------------- R. Bruce Morgan President, Chief Executive Officer and Director (Principal Executive and Financial Officer) By: /s/ TODD S. LONDA ---------------------------------- Todd S. Londa Vice President, Administration and Corporate Controller (Principal Accounting Officer) March 28, 2000 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD M. SOWAR Chairman, Director and Chief March 28, 2000 - ----------------------------------------------------- Technology Officer Richard M. Sowar /s/ R. BRUCE MORGAN President, Chief Executive March 28, 2000 - ----------------------------------------------------- Officer and Director R. Bruce Morgan (Principal Executive and Financial Officer) /s/ PHILIP E. BARAK Director March 28, 2000 - ----------------------------------------------------- Philip E. Barak /s/ GENE FISCHER Director March 28, 2000 - ----------------------------------------------------- Gene Fischer /s/ H. ROBERT GILL Director March 28, 2000 - ----------------------------------------------------- H. Robert Gill /s/ M. THOMAS HULL Director March 28, 2000 - ----------------------------------------------------- M. Thomas Hull /s/ FRED F. NAZEM Director March 28, 2000 - ----------------------------------------------------- Fred F. Nazem
44 47 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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. 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.
48
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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 Registrant and TSL, dated as of December 31, 1997. 10.30a**** -- Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank, dated as of August 15, 1995, as amended. 10.31*** -- Registration Rights Agreement, by and between the Registrant and TSL, dated as of December 31, 1997. 10.32*** -- Software Consulting Agreement, by and between the Registrant and TSL, dated December 31, 1997. 10.33***** -- Stock Purchase Agreement, by and among the Registrant, InterData Access, Inc., and Shareholders of InterData Access, Inc., dated December 23, 1998. 10.34***** -- Escrow Agreement, by and among the Registrant, InterData Access, Inc., and Shareholders of InterData Access, Inc., dated December 23, 1998. 10.35****** -- Asset purchase agreement, by and between the Company and Sven Technologies, Inc., dated as of June 29, 1999. 10.36 -- Securities Purchase Agreement, by and between the Company and Purchasers , dated as of February 22, 2000. 21.1* -- List of Subsidiaries of the Registrant. 23.1 -- Consent of KPMG LLP. 27 -- Financial Data Schedule
- --------------- * 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. 49 *** Incorporated by reference to the Issuer's Report on Form 8-K dated December 31, 1997. **** Incorporated by reference to the Issuer's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998. ***** Incorporated by reference to the Issuer's Report on Form 8-K dated December 23, 1998. ****** Incorporated by reference to the issuers report on Form 8-K dated July 14, 1999 as amended. EX-10.36 2 SECURITIES PURCHASE AGREEMENT 1 EXHIBIT 10.36 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of February 18, 2000, by and among Spatial Technology Inc., a corporation organized under the laws of the State of Delaware (the "COMPANY"), and the purchasers (the "PURCHASERS") set forth on Schedule 1 attached hereto. WHEREAS: A. The Company and each Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the provisions of Regulation D ("REGULATION D"), as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT"). B. Each Purchaser desires to purchase, severally and not jointly, subject to the terms and conditions stated in this Agreement, (i) the number of shares of the Company's common stock, par value $.01 per share (the "COMMON STOCK") set forth opposite such purchaser's name on Schedule 1 at a purchase price of $3.60 per share, and (ii) warrants in the form attached hereto as Exhibit A (including any warrants issued in replacement thereof, the "WARRANTS"), to acquire shares of Common Stock in a ratio of one Warrant per 1.5833 shares of Common Stock acquired hereby (rounded up to the next whole Warrant) at a purchase price of $.05 per Warrant. The shares of Common Stock issuable upon exercise of or otherwise pursuant to the Warrants are referred to herein as the "WARRANT SHARES." C. Contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement in the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS AGREEMENT"), pursuant to which the Company has agreed to provide certain registration rights under the Securities Act and the rules and regulations promulgated thereunder, and applicable state securities laws. NOW, THEREFORE, the Company and the Purchasers hereby agree as follows: 2 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings ascribed to them as provided below: "BUSINESS DAY" shall mean any day on which the American Stock Exchange ("AMEX") or, if the Common Stock is not then traded on the AMEX, other principal United States securities exchange or trading market on which the Common Stock is listed or traded is open for trading. "INVESTMENT AMOUNT" shall mean the dollar amount to be invested in the Company at the Closing for the Shares and the Warrants pursuant to this Agreement by any Purchaser, as set forth opposite such Purchaser's name on Schedule 1. "MATERIAL ADVERSE EFFECT" shall mean any material adverse effect on (i) the Securities, (ii) the ability of the Company to perform its obligations hereunder (including the issuance of the Shares and the Warrants), under the Warrants (including the issuance of the Warrant Shares) or under the Registration Rights Agreement or (iii) the business, operations, properties or financial condition of the Company and its subsidiaries, taken as a whole. "PRO RATA AMOUNT" shall mean, with respect to any Purchaser, a percentage computed by dividing (x) the number of shares of Common Stock of the Company then owned by such Purchaser, together with the number of shares of Common Stock of the Company which such Purchaser is then entitled to acquire through the exercise or conversion of outstanding securities of the Company by (y) the total number of then outstanding shares of Common Stock of the Company. "SECURITIES" shall mean the Shares, the Warrants and the Warrant Shares. "SHARES" means the shares of Common Stock to be issued and sold by the Company and purchased by the Purchasers at the Closing. "TRADING DAY" shall mean a Business Day on which at least 10,000 shares of Common Stock are traded on the principal United States securities exchange or trading market on which such security is listed or traded. 2. PURCHASE AND SALE OF SHARES AND WARRANTS. a. Generally. Except as otherwise provided in this Section 2 and subject to the satisfaction (or waiver) of the conditions set forth in Section 6 and Section 7 below, each Purchaser shall purchase the number of Shares and Warrants determined as provided in 2 3 this Section 2, and the Company shall issue and sell such number of Shares and Warrants to each Purchaser for such Purchaser's Investment Amount as provided below. b. Number of Closing Shares and Warrants; Form of Payment; Closing Date. i. On the Closing Date (as defined below), the Company shall sell and each Purchaser shall buy (A) the number of Shares set forth opposite such Purchaser's name on Schedule 1 at a purchase price of $3.60 per share and (B) a number of Warrants in a ratio of one Warrant per 1.5833 Shares to be purchased by such Purchaser (rounded up to the next whole Warrant) at a purchase price of $.05 per Warrant. On the Closing Date, each Purchaser shall pay the Company an amount equal to such Purchaser's Investment Amount. ii. On the Closing Date, each Purchaser shall pay its Investment Amount by wire transfer to the Company, in accordance with the Company's written wiring instructions against delivery of certificates representing the Shares and duly executed Warrants being purchased by such Purchaser, and the Company shall deliver such Shares and Warrants against delivery of the such Purchaser's Investment Amount. iii. Subject to the satisfaction (or waiver) of the conditions thereto set forth in Section 6 and Section 7 below, the date and time of the sale of the Shares and the Warrants pursuant to this Agreement (the "CLOSING") shall be 12:00 p.m. New York City Time on February 18, 2000 or such other date or time as the parties may mutually agree ("CLOSING DATE"). The Closing shall occur at the offices of Heller Ehrman White & McAuliffe, 711 Fifth Avenue, 5th Floor, New York, New York 10022, or at such other place as the parties may otherwise agree. 3. THE PURCHASER'S REPRESENTATIONS AND WARRANTIES. Each Purchaser severally and not jointly represents and warrants to the Company as follows: a. Purchase for Own Account. The Purchaser is purchasing the Securities for the Purchaser's own account and not with a present view towards the distribution thereof. The Purchaser understands that the Purchaser must bear the economic risk of this investment indefinitely, unless the Securities are registered pursuant to the Securities Act and any applicable state securities or blue sky laws or an exemption from such registration is available, and that the Company has no present intention of registering any such Securities other than as contemplated by the Registration Rights Agreement. Notwithstanding anything in this Section 3(a) to the contrary, by making the foregoing representation, the Purchaser does not agree to hold the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in 3 4 accordance with or pursuant to a registration statement or an exemption from registration under the Securities Act and any applicable state securities laws. b. Information. The Purchaser has been furnished all materials relating to the business, finances and operations of the Company and its subsidiaries and materials relating to the offer and sale of the Securities which have been requested by the Purchaser. The Purchaser has been afforded the opportunity to ask questions of the Company and has received satisfactory answers to any such inquiries. Neither such inquiries nor any other due diligence investigation conducted by the Purchaser or its counsel or any of its representatives shall modify, amend or affect the Purchaser's right to rely on the Company's representations and warranties contained in Section 4 below. c. Governmental Review. The Purchaser understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities. d. Authorization; Enforcement. The Purchaser has the requisite power and authority to enter into and perform its obligations under this Agreement and to purchase the Shares and the Warrants in accordance with the terms hereof. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Purchaser and is a valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other laws affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). e. Transfer or Resale. The Purchaser understands that (i) except as provided in the Registration Rights Agreement, the Securities have not been and are not being registered under the Securities Act or any state securities laws, and may not be transferred unless (a) subsequently registered thereunder, (b) the Purchaser shall have delivered to the Company an opinion of counsel reasonably acceptable to the Company (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the Securities to be sold or transferred may be sold or transferred under an exemption from such registration, or (c) sold under Rule 144 promulgated under the Securities Act (or a successor rule); and (ii) neither the Company nor any other person is under any obligation to register such Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder, in each case, other than pursuant to the Registration Rights Agreement. Notwithstanding the foregoing, no such registration statement or opinion of counsel shall be necessary for a transfer by a Purchaser which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its stockholders in accordance with their interest in the corporation, (C) a limited liability 4 5 company to its members or former members in accordance with their interest in the limited liability company, or (D) to the Purchaser's family member or trust for the benefit of an individual Purchaser. f. Legends. The Purchaser understands that the Shares and the Warrants and, until such time as the Shares and Warrant Shares have been registered under the Securities Act as contemplated by the Registration Rights Agreement or otherwise may be sold by the Purchaser under Rule 144, the certificates for the Shares and Warrant Shares may bear a restrictive legend in substantially the following form: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state of the United States. The securities represented hereby may not be offered or sold in the absence of an effective registration statement for the securities under applicable securities laws unless offered, sold or transferred under an available exemption from the registration requirements of those laws. The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if, (a) the sale of such Security is registered under the Securities Act, (b) such holder provides the Company with an opinion of counsel, in form and substance customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Security may be made without registration under the Securities Act or (c) such holder provides the Company with reasonable assurances that such Security can be sold under Rule 144(k). The Purchaser agrees to sell all Securities, including those represented by a certificate(s) from which the legend has been removed, pursuant to an effective registration statement or under an exemption from the registration requirements of the Securities Act. The legend shall be removed when such Security may be sold pursuant to an effective registration statement or sold under Rule 144(k). g. Accredited Investor Status. The Purchaser is an "ACCREDITED INVESTOR" as that term is defined in Rule 501(a) of Regulation D. The Purchaser is not registered as a broker or dealer under Section 15(a) of the Securities Exchange Act of 1934, as amended, or a member of the National Association of Securities Dealers. h. Company Reliance. The Purchaser understands that the Shares are being offered and sold and the Warrants are being issued to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Purchaser's compliance with, the representations, warranties, agreements, acknowledgments, and 5 6 understandings of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Shares and the Warrants. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Purchaser as follows: a. Organization and Qualification. The Company is a corporation, and each of its subsidiaries is an entity, duly organized and existing under the laws of the jurisdiction in which it is organized, and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company and each of its subsidiaries is duly qualified as a foreign entity to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect. The SEC Documents set forth the name of each of the Company's subsidiaries and its jurisdiction of organization. Each of the Company's subsidiaries are wholly-owned. b. Authorization; Enforcement. (i) The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement, the Warrants and the Registration Rights Agreement, to issue and sell the Shares and the Warrants in accordance with the terms hereof and to issue the Warrant Shares upon exercise of the Warrants in accordance with the terms of the Warrants; (ii) the execution, delivery and performance of this Agreement, the Warrants and the Registration Rights Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby (including, without limitation, the reservation for issuance and issuance of the Shares and the issuance of the Warrants, and the reservation for issuance and issuance of the Warrant Shares) have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors or its stockholders is required; (iii) this Agreement has been duly executed and delivered by the Company; and (iv) this Agreement constitutes, and, upon execution and delivery by the Company of the Registration Rights Agreement and the Warrants, such agreements will constitute, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other laws affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). c. Capitalization. As of the date hereof, the authorized capital stock of the Company consists of 25,000,000 shares, consisting of two classes: 22,500,000 shares of Common Stock and 2,500,000 shares of Preferred Stock. According to a certificate from the Company's transfer agent dated February 18, 2000, an aggregate of 9,543,823 shares 6 7 of the Company's Common stock were issued and outstanding as of the date of such transfer agent certificate. No shares of the Company's Preferred Stock are outstanding as of the date hereof. As of the date hereof, there is an aggregate of 2,882,411 shares of the Company's Common Stock reserved for issuance under the Company's option plans and employee stock purchase plan. All of such outstanding shares of the Company's capital stock have been, or upon issuance will be, validly issued, fully paid and nonassessable. Except as set forth in this Section 4(c) or on Schedule 4(c), no shares of capital stock of the Company (including the Shares or the Warrant Shares) or any of the subsidiaries are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances. Except for the Securities and as disclosed in this Section 4(c) or Schedule 4(c), as of the date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its subsidiaries, or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or such subsidiaries, and (ii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the Securities Act (except the Registration Rights Agreement). Except as set forth on Schedule 4(c), there are no securities or instruments containing price-based antidilution or similar provisions that may be triggered by the issuance of the Securities in accordance with the terms of this Agreement, the Warrants or the Registration Rights Agreement and the holders of the securities and instruments listed on such Schedule 4(c) have waived any rights they may have under such antidilution or similar provisions in connection with the issuance of the Securities in accordance with the terms of this Agreement, the Warrants or the Registration Rights Agreement. The Company has made available to each Purchaser and counsel for the Purchasers true and correct copies of the Company's Certificate of Incorporation as in effect on the date hereof ("CERTIFICATE OF INCORPORATION"), the Company's By-laws as in effect on the date hereof (the "BY-LAWS") and all other instruments and agreements governing securities convertible into or exercisable or exchangeable for capital stock of the Company, except for stock options granted under any employee benefit plan or director stock option plan of the Company. d. Issuance of Shares. The Shares are duly authorized and when issued and paid for in accordance with the terms hereof, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances, and will not be subject to preemptive rights or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof. The Warrant Shares are duly authorized and reserved for issuance, and, upon exercise of the Warrants in accordance with the terms thereof, will be validly issued, fully paid and non-assessable and free from all taxes and liens, claims and encumbrances and will not be subject to preemptive rights 7 8 or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof. e. No Conflicts. The execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Warrants by the Company, and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the reservation for issuance and issuance of the Shares, the Warrant Shares and the issuance of the Warrants) will not (i) conflict with or result in a violation of the Certificate of Incorporation or By-laws or (ii) conflict with, or constitute a default (or an event which, with notice or lapse of time or both, would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including United States federal and state securities laws and regulations and AMEX regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected (except, with respect to clause (ii), for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation, By-laws and other organizational documents and neither the Company nor any of its subsidiaries is in default (and no event has occurred which, with notice or lapse of time or both, would put the Company or any of its subsidiaries in default) under, nor has there occurred any event giving others (with notice or lapse of time or both) any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, except for actual or possible violations, defaults or rights as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its subsidiaries are not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for actual or possible violations, if any, the sanctions for which either singly or in the aggregate would not have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, approval, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self regulatory agency in order for it to execute, deliver or perform any of its obligations under this Agreement (including, without limitation, the issuance and sale of the Shares and Warrants as provided hereby), or the Warrants (including the issuance of the Warrant Shares), in each case in accordance with the terms hereof or thereof. The Company is not in violation of the listing requirements of the AMEX and does not reasonably anticipate that the Common Stock will be delisted by AMEX in the foreseeable future based on its rules (and interpretations thereof) as currently in effect. 8 9 f. SEC Documents; Financial Statements. Since October 1996, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and has filed all registration statements and other documents required to be filed by it with the SEC pursuant to the Securities Act (all of the foregoing filed prior to the date hereof, and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, being hereinafter referred to herein as the "SEC DOCUMENTS"). The Company has made available to each Purchaser and to counsel for the Purchasers true and complete copies of the SEC Documents not filed on EDGAR and requested by Purchasers, except for the exhibits and schedules thereto and the documents incorporated therein. The SEC Documents available to the Purchasers through the EDGAR archives of the SEC are true and complete copies of all SEC Documents filed by the Company through EDGAR. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act or the Securities Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Any statements made in any such SEC Documents that are or were required to be updated or amended under applicable law have been so updated or amended. As of their respective dates, the financial statements of the Company included in the SEC Documents complied in all material respects with applicable accounting requirements and the published rules and regulations of the SEC applicable with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its subsidiaries as of the dates thereof and the results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal and recurring year-end audit adjustments). Except as set forth in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to the date of such SEC Documents and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such SEC Documents, which liabilities and obligations referred to in clauses (i) and (ii), individually or in the aggregate, are not material and would not have a Material Adverse Effect. 9 10 g. Absence of Certain Changes. Except as disclosed in the SEC Documents, since September 30, 1999, there has been no change or development which individually or in the aggregate has had or could have a Material Adverse Effect. h. Absence of Litigation. Except as disclosed in the SEC Documents and set forth on Schedule 4(h), there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, or to the knowledge of the Company, threatened against or affecting the Company, or any of its subsidiaries, or any of their directors or officers in their capacities as such except as would not have a Material Adverse Effect. i. Intellectual Property. The Company and each of its subsidiaries owns or is licensed to use all patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, permits, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge (collectively, "INTANGIBLES") necessary for the conduct of its business as now being conducted and as proposed to be conducted. Neither the Company nor any of its subsidiaries is infringing or in conflict with any other person with respect to any Intangibles. Neither the Company nor any of its subsidiaries has received written notice that it is infringing upon third party Intangibles. Neither the Company nor any of its subsidiaries has entered into any consent, indemnification, forbearance to sue or settlement agreements with respect to the validity of the Company's or such subsidiary's ownership or right to use its Intangibles and, to the knowledge of the Company, there is no basis for any such claim to be successful. The Intangibles are valid and enforceable, and no registration relating thereto has lapsed, expired or been abandoned or canceled or is the subject of cancellation or other adversarial proceedings, and all applications therefor are pending and in good standing. The Company has complied, in all material respects, with its contractual obligations relating to the protection of the Intangibles used pursuant to licenses. To the Company's knowledge, no person is infringing on or violating the Intangibles owned or used by the Company. j. Agreements. Except as filed as Exhibits to the SEC Documents or as set forth in Schedule 4(j), there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company or any of its subsidiaries is a party or by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $250,000 (other than licenses pursuant to license agreements entered into in the ordinary course of the Company's business) or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses pursuant to license agreements entered into in the ordinary course of the Company's business), or (iii) provisions restricting or affecting the development, manufacture or distribution of the 10 11 Company's or its subsidiaries' products or services, or (iv) indemnification by the Company or any subsidiary with respect to infringements of proprietary rights (other than indemnification obligations arising from purchase or sale agreements entered into in the ordinary course of business) or (v) transactions between the Company and any of the Company's or its subsidiaries' officers, directors, affiliates, or any affiliates thereof (other than pursuant to employment agreements or stock or benefit plans), or (vi) employment of the Company's officers or (vii) incurrence of any indebtedness for money borrowed or any other liabilities (other than with respect to dividend obligations, distributions, indebtedness and other obligations incurred in the ordinary course of business or as disclosed in the SEC Documents) individually in excess of $250,000 or, in the case of indebtedness and/or liabilities individually less than $250,000, in excess of $500,000 in the aggregate, or (viii) the making of any loans or advances to any person, other than ordinary advances for travel expenses, or (ix) the sale, exchange or other disposition of any of its assets or rights, other than licenses in the ordinary course of business. k. Foreign Corrupt Practices. Neither the Company, or any of its subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any of its subsidiaries has, in the course of such person's actions for, or on behalf of, the Company, or any of its subsidiaries, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the United States Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. l. Environment. Except as disclosed in the SEC Documents (i) there is no environmental liability, nor, to the knowledge of the Company, factors likely to give rise to any environmental liability, affecting any of the properties of the Company or any of its subsidiaries that, individually or in the aggregate, would have a Material Adverse Effect and (ii) neither the Company nor any of the subsidiaries has violated any environmental law applicable to it now or previously in effect, other than such violations or infringements that, individually or in the aggregate, have not had and will not have a Material Adverse Effect. m. Title. The Company does not own any real property. Any real property and facilities held under lease by the Company or any of its subsidiaries are held by the Company or such subsidiary under valid, subsisting and enforceable leases with such exceptions which have not had and will not have a Material Adverse Effect. n. Insurance. The Company and its subsidiaries maintain such insurance relating to their business, operations, assets, key-employees and officers and directors as 11 12 is appropriate to their business, assets and operations, in such amounts and against such risks as are customarily carried and insured against by owners of comparable businesses, assets and operations, and such insurance coverages will be continued in full force and effect to and including the Closing Date other than those insurance coverages in respect of which the failure to continue in full force and effect could not reasonably be expected to have a Material Adverse Effect. o. Disclosure. All information relating to or concerning the Company and its subsidiaries set forth in this Agreement or provided to the Purchaser in writing in connection with the transactions contemplated hereby is true and correct in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any information contained within any of the foregoing related to future events, or the projected future financial performance of the Company, including any financial projections, or descriptions of potential strategic or business relationships between the Company and third parties. p. No Brokers. The Company has not engaged any person to which or to whom brokerage commissions, finder's fees, financial advisory fees or similar payments are or will become due in connection with this Agreement or the transactions contemplated. q. Tax Status. The Company and each of its subsidiaries has made or filed all federal, state and local income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and has paid all taxes and other governmental assessments and charges, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith, and has set aside on its books provisions adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes claimed to be due by the taxing authority of any jurisdiction. The Company has not executed a waiver with respect to any statute of limitations relating to the assessment or collection of any federal, state or local tax. Except as set forth in Schedule 4(q), none of the Company's tax returns has been or is being audited by any taxing authority. r. No General Solicitation. Neither the Company nor any person participating on the Company's behalf in the transactions contemplated hereby has conducted any "general solicitation" or "general advertising" as such terms are used in Regulation D, with respect to any of the Securities being offered hereby. s. No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has, directly or indirectly, made any offers or 12 13 sales of any security or solicited any offers to buy any security under circumstances that would require registration of the Securities being offered hereby under the Securities Act or cause this offering of Securities to be integrated with any prior offering of securities of the Company for purposes of the Securities Act or any applicable stockholder approval provisions, including, without limitation, the applicable AMEX regulations. t. Form S-3 Eligibility. The Company is currently eligible to register the resale of its Common Stock on a registration statement on Form S-3 under the Securities Act. Except as set forth on Schedule 4(t), to the knowledge of the Company, there exist no facts or circumstances (including without limitation any required approvals or waivers of any circumstances that may delay or prevent the obtaining of accountant's consents) that would prohibit or delay the preparation and filing of a registration statement on Form S-3 with respect to the Registrable Securities (as defined in the Registration Rights Agreement). u. Qualified Small Business. The Company represents and warrants to the Purchasers that, to the best of its knowledge, the Securities should qualify as "Qualified Small Business Stock" as defined in Section 1202(c) of the Internal Revenue Code of 1986, as amended (the "CODE") as of the date hereof. The Company will use reasonable efforts to comply with the reporting and record keeping requirements of Section 1202 of the Code, any regulations promulgated thereunder and any similar state laws and regulations, and agrees not to repurchase any stock of the Company if such repurchase would cause such Shares not to so qualify as "Qualified Small Business Stock." v. Real Property Holding Corporation. Neither the Company nor any subsidiary of the Company is a real property holding corporation within the meaning of Section 897(c)(2) of the Code and any regulations promulgated thereunder. w. ERISA. The Company has complied in all material respects with the applicable rules and regulations of the Employee Retirement Income Security Act of 1974, as amended, with respect to any employee benefit plans subject thereto. x. Small Business Concern. The Company together with its "affiliates" (as that term is defined in Section 121.103 of Title 13 of the Code of Federal Regulations (the "FEDERAL REGULATIONS")), is a "small business concern" or within the meaning of the Small Business Investment Act of 1958, as amended (the "SMALL BUSINESS ACT"), and the regulations promulgated thereunder, including Section 121.301 of Title 13 of the Federal Regulations (a "SMALL BUSINESS CONCERN"). The information delivered to each Purchaser that is a licensed Small Business Investment Company (an "SBIC PURCHASER") on SBA Forms 480, 652 and 1031 delivered in connection herewith is true and correct. The Company is not ineligible for financing by any SBIC Purchaser pursuant to Section 13 14 107.720 of Title 13 of the Federal Regulations. The Company acknowledges that each SBIC Purchaser is a Federal licensee under the Small Business Act. 5. COVENANTS. a. Best Efforts. The parties shall use their best efforts timely to satisfy each of the conditions set forth in Section 6 and Section 7 of this Agreement. b. Form D; Blue Sky Laws. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to each Purchaser and to counsel for the Purchasers as soon as practicable after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to the Purchasers pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States or obtain exemption therefrom, and shall provide evidence of any such action so taken to each Purchaser and counsel for the Purchasers as soon as practicable after such filing. c. Reporting Status. So long as a Purchaser beneficially owns any Securities or has the right to acquire any Securities pursuant to this Agreement, the Company shall timely file all reports required to be filed with the SEC pursuant to the Exchange Act, and shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. d. Use of Proceeds. The Company shall use the net proceeds from the sale of the Shares and the Warrants in order to fund the Company's sales and marketing activities, to launch its PlanetCAD initiative, for working capital and for other general corporate purposes, including potential strategic acquisitions, but in no event shall the Company use such net proceeds to repurchase any outstanding securities of the Company or for any other distribution with respect to outstanding securities of the Company. e. Expenses. At the Closing, the Company shall pay the reasonable fees and expenses of one counsel to the Purchasers, not to exceed $25,000, and shall reimburse the Purchasers at Closing for the cost of consulting by Russ Henke, not to exceed $5,000 (the "EXPENSES"). f. Reservation of Shares. The Company has and shall at all times have authorized and reserved for the purpose of issuance a sufficient number of shares of Common Stock to provide for the issuance of the Shares as provided in Section 2 hereof, and the full exercise of the Warrants and the issuance of the Warrant Shares in connection therewith and as otherwise required hereby and by the Warrants. The Company shall not reduce the number of shares of Common Stock reserved for issuance under this 14 15 Agreement (except as a result of the issuance of the Shares hereunder), the Warrants (except as a result of the issuance of the Warrant Shares upon the exercise of the Warrants) or the Registration Rights Agreement, without the consent of the Purchasers. g. Listing. Promptly after the Closing Date, the Company shall secure the listing of the Shares and Warrant Shares, in each case, upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed or quoted (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Shares from time to time issuable hereunder and all Warrant Shares from time to time issuable upon exercise of the Warrants. The Company will use its best efforts to continue the listing and trading of its Common Stock on the AMEX, (or, if listing is moved, the New York Stock Exchange ("NYSE") or the Nasdaq National Market ("NASDAQ")) and will comply in all material respects with the Company's reporting, filing and other obligations under the bylaws or rules of the AMEX. h. Corporate Existence. So long as any Purchaser beneficially owns any Securities or has the right to acquire any Securities pursuant to this Agreement, the Warrants or the Registration Rights Agreement, the Company shall maintain its corporate existence, except in the event of a merger, consolidation or sale of all or substantially all of the Company's assets, as long as the surviving or successor entity in such transaction assumes the Company's obligations hereunder and under the Warrants and under the agreements and instruments entered into in connection herewith. i. No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, shall, directly or indirectly, make any offers or sales of any security or solicit any offers to buy any security under circumstances that would require registration of the Securities being offered hereby under the Securities Act or cause this offering of Securities to be integrated with any prior or future offering of securities of the Company for purposes of the Securities Act or any applicable stockholder approval provisions, including, without limitation, the applicable AMEX regulations. j. Designation of Director. For so long as the Purchasers collectively own 10% of the Company's outstanding Common Stock, Capstone Ventures SBIC, L.P. ("CV") shall have the right to designate (the "Designation Rights") a representative to the Company's Board of Directors. The Company shall take all necessary corporate action to cause such nomination to be made at the next annual stockholder meeting for which the annual proxy has not yet been mailed. The CV Director shall be compensated in accordance with the Company's compensation and benefit plans for its outside directors. Subject to applicable fiduciary duties, the Company shall nominate such designees or 15 16 designee on management's slate of directors at succeeding annual meetings of stockholders. k. Restrictions on Purchase. Each Purchaser agrees not to purchase any shares of the Company's Common Stock in the open market or in privately negotiated transactions from non-affiliates for a period of one year from the Closing Date, without the prior approval of the Board of Directors of the Company. l. President of Planet CAD Division. The Company will use its best efforts to recruit and retain a senior executive with Internet experience to serve as President of the PlanetCAD division of the Company as soon as practicable after the Closing Date. m. Indemnification by the Company. The Company shall indemnify, defend and hold each Purchaser, and each of their respective affiliates, officers, directors, stockholders, employees and agents, harmless with respect to any and all demands, claims, actions, suits, proceedings, assessments, judgments, costs, losses, damages, liabilities and expenses (including, without limitation, reasonable attorneys' fees) ("LOSSES") asserted against, resulting from, imposed upon or incurred by any such indemnified party directly relating to or arising out of: (a) the inaccuracy of any representation or warranty of the Company contained herein or in any instrument or certificate delivered pursuant to this Agreement, and (b) the breach of any covenant or agreement by the Company. n. Indemnification by the Purchasers. Each Purchaser, severally but not jointly, shall indemnify, defend and hold the Company, and its affiliates, officers, directors, stockholders, employees and agents, harmless with respect to any and all Losses asserted against, resulting from, imposed upon or incurred by any such indemnified party directly relating to or arising out of: (a) the inaccuracy of any representation or warranty of such Purchaser contained herein or in any instrument or certificate delivered pursuant to this Agreement, and (b) the breach of any covenant or agreement by such Purchaser. o. Certain Covenants Relating to SBA Matters. i. Use of Proceeds. The proceeds from the issuance and sale of the Securities pursuant to this Agreement (the "PROCEEDS") shall be used by the Company for its growth, modernization or expansion. Specifically, the proceeds shall be used as set forth in Section 5(d). The Company shall provide each SBIC Purchaser and the SBA reasonable access to the Company's books and records for the purpose of confirming the use of Proceeds. 16 17 ii. Business Activity. For a period of one year following the Closing, the Company shall not change the nature of its business activity if such change would render the Company ineligible as provided in 13 C.F.R. Section 107.720. iii. Compliance. So long as any SBIC Purchaser holds any securities of the Company, the Company will at all times comply with the non-discrimination requirements of 13 C.F.R. Parts 112, 113 and 117. iv. Information for SBIC Investor. Within forty-five (45) days after the end of each fiscal year and at such other times as an SBIC Investor may reasonably request, the Company shall deliver to such SBIC Purchaser a written assessment, in form and substance satisfactory to such SBIC Purchaser, of the economic impact of such SBIC Purchaser's financing specifying the full-time equivalent jobs created or retained in connection with such investment, and the impact of the financing on the Company's business in terms of profits and on taxes paid by the Company and its employees. Upon request, the Company agrees to promptly provide each SBIC Purchaser with sufficient information to permit such Purchaser to comply with their obligations under the Small Business Act, and the regulations promulgated thereunder and related thereto; provided, however, each SBIC Purchaser agrees that it will protect any information which the Company labels as confidential to the extent permitted by law. Any submission of any financial information under this Section shall include a certificate of the company's president, chief executive officer, treasurer or chief financial officer. v. Books and Records. The Company agrees to provide each SBIC Purchaser and/or the SBA's examiners access to its books and records for the purposes of verifying the certifications made under Section 107.610 of Title 13 of the Federal Regulations. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the Company hereunder to issue and sell Shares and Warrants to a Purchaser at the Closing hereunder is subject to the satisfaction, at or before the Closing Date, of each of the following conditions thereto; provided, however, that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion. a. The applicable Purchaser shall have executed the signature page to this Agreement and the Registration Rights Agreement, and delivered the same to the Company. b. The applicable Purchaser shall have delivered such Purchaser's Investment Amount in accordance with Section 2(b) above. 17 18 c. The representations and warranties of the applicable Purchaser shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date), and the applicable Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the applicable Purchaser at or prior to the Closing Date. d. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement. 7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE SHARES AND WARRANTS. The obligation of each Purchaser hereunder to purchase Shares and Warrants to be purchased by it hereunder is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for such Purchaser's sole benefit and may be waived by such Purchaser at any time in such Purchaser's sole discretion: a. The Company shall have executed the signature pages to this Agreement and the Registration Rights Agreement, and delivered the same to the Purchaser. b. The Company shall have instructed its transfer agent to issue to the Purchaser duly executed certificates representing the number of Shares and shall have delivered to the Purchaser duly executed Warrants as provided in Section 2(b) above. c. Trading in the Common Stock (or on AMEX generally) shall not have been suspended or be under threat of suspension by the SEC or AMEX. d. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Purchaser shall have received a certificate, executed on behalf of the Company by its Vice President, Administration and Corporate Controller, dated as of the Closing Date, to the 18 19 foregoing effect and attaching true and correct copies of the resolutions adopted by the Company's Board of Directors authorizing the execution, delivery and performance by the Company of its obligations under this Agreement, the Warrants and the Registration Rights Agreement. e. No statute, rule, regulation, executive order, decree, ruling, injunction, action, proceeding or interpretation shall have been enacted, entered, promulgated, endorsed or adopted by any court or governmental authority of competent jurisdiction or any self-regulatory organization, or the staff of any thereof, having authority over the matters contemplated hereby which questions the validity of, or challenges or prohibits the consummation of, any of the transactions contemplated by this Agreement. f. The Purchaser shall have received an opinion of the Company's counsel, dated as of the Closing Date, in form and substance acceptable to counsel for the Purchasers. g. From the date of this Agreement through the Closing Date, there shall not have occurred any Material Adverse Effect. h. The Company shall have provided advance notice to AMEX of the issuance of the Shares and provided the Purchaser with oral or written evidence of the Company's compliance with all applicable rules of AMEX. i. Each of the other Purchasers shall have delivered to the Company its Investment Amount and, with respect to the Closing, the aggregate amount to be invested in the Company by all of the Purchasers shall equal approximately $6.9 million. 8. GOVERNING LAW; MISCELLANEOUS. a. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. b. Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other parties hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. In the event any signature is delivered by facsimile transmission, the party using such means of delivery shall cause the manually executed Execution Page(s) hereof to be physically delivered to the other party within five (5) days of the execution hereof. 19 20 c. Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. d. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. e. Entire Agreement; Amendments; Waiver. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchasers make any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the Company and by the Purchasers representing at least two-thirds of the aggregate Investment Amounts. Any waiver by the Purchasers, on the one hand, or the Company, on the other hand, of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision of or any breach of any other provision of this Agreement. The failure of the Purchasers, on the one hand, or the Company, on the other hand to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. f. Notices. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier or by confirmed telecopy, and shall be effective five days after being placed in the mail, if mailed, or upon receipt or refusal of receipt, if delivered personally or by courier or confirmed telecopy, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Spatial Technology Inc. 2425 55th Street, Ste. 100 Boulder, CO 80301 Telephone No.: 303-544-2900 Facsimile No.: 303-544-3005 Attention: Chief Executive Officer 20 21 With a copy to: Cooley Godward LLP 2595 Canyon Blvd., Ste 250 Boulder, CO 80302 Telephone No.: 303-546-4000 Facsimile No.: 303-546-4099 Attention: Michael L. Platt, Esq. If to the Purchaser, to the address set forth under the Purchaser's name on the Execution Page hereto executed by such Purchaser, with a copy to: Heller Ehrman White & McAuliffe 711 Fifth Avenue, 5th Floor New York, NY 10022 Telephone No.: 212-832-8300 Facsimile No.: 212-832-3353 Attention: Stephen M. Davis, Esq. Each party shall provide notice to the other parties of any change in address. g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchasers. h. Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by any other person. i. Survival. The representations and warranties of the Company and the agreements and covenants set forth in Sections 4, 5 and 8 shall survive the Closing notwithstanding any due diligence investigation conducted by or on behalf of the Purchasers. Moreover, none of the representations and warranties made by the Company herein shall act as a waiver of any rights or remedies a Purchaser may have under applicable federal or state securities laws. The Company agrees to indemnify and hold harmless each Purchaser and each of such Purchaser's officers, directors, employees, partners, members, agents and affiliates for loss or damage relating to the Securities purchased hereunder arising as a result of or related to any breach by the Company of any of its representations or covenants set forth herein, including advancement of expenses as they are incurred. 21 22 j. Publicity. The Company and CV on behalf of the Purchasers shall have the right to review and comment upon the issuance of any press releases, or the filing of any SEC or AMEX filings, or any other public statements with respect to the transactions contemplated hereby. CV shall be provided documents to review at least 48 hours prior to the filing or other issuance thereof except that draft press releases shall be provided to CV at least 24 hours prior to issuance. Within the time period required by the SEC, the Company shall file a Current Report on Form 8-K or other appropriate form with the SEC disclosing the transactions contemplated hereby, if required in the judgment of counsel to the Company. k. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. l. Termination. In the event that the Closing Date shall not have occurred on or before February 28, 2000, unless the parties agree otherwise, this Agreement shall terminate at the close of business on such date. Notwithstanding any termination of this Agreement, any party not in breach of this Agreement shall preserve all rights and remedies it may have against another party hereto for a breach of this Agreement prior to or relating to the termination hereof. m. Equitable Relief. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to a Purchaser by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations hereunder will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement, that a Purchaser shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. n. Determinations. Except as otherwise expressly provided herein, all consents, approvals and other determinations (other than amendments to the terms and provisions of this Agreement) to be made by the Purchasers pursuant to this Agreement and all waivers to or of any provisions in this Agreement prior to the Closing Date shall be made by Purchasers that have agreed to invest a majority of the aggregate Investment Amounts to be invested by all Purchasers and except as otherwise expressly provided herein, all consents, approvals and other determinations (other than amendments to the terms and provisions of this Agreement) to be made by the Purchasers pursuant to this Agreement and all waivers to or of any provisions in this Agreement after the Closing 22 23 Date shall be made by Purchasers that have invested a majority of the aggregate Investment Amounts invested by all Purchasers. Amendments to the terms and provisions of this Agreement shall be made by the Company and by the Purchasers representing at least two-thirds of the aggregate Investment Amounts as provided in Section 8(e) hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 23 24 IN WITNESS WHEREOF, the undersigned Purchasers and the Company have caused this Securities Purchase Agreement to be duly executed as of the date first above written. SPATIAL TECHNOLOGY INC. By: ------------------------------------ Name: R. Bruce Morgan Title: President and Chief Executive Officer THE PURCHASERS: By: ------------------------------------ 25 SCHEDULE I
- ---------------------------------------------------------------------------------------- INVESTMENT AMOUNT ($) NUMBER OF SHARES NUMBER OF WARRANTS - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- TOTAL 6,900,000 1,900,000 1,200,000 - ----------------------------------------------------------------------------------------
EX-23.1 3 CONSENT OF KPMG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Spatial Technology Inc.: We consent to incorporation by reference in the registration statements (No. 333-72757) on Form S-3 and (No. 333-85939) on Form S-8, of Spatial Technology Inc. of our report dated January 27, 2000, relating to the consolidated balance sheets of Spatial Technology Inc. and subsidiaries as of December 31, 1998, and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999, annual report on Form 10-KSB of Spatial Technology Inc. KPMG LLP Boulder, Colorado March 27, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,324 0 4,355 (199) 0 6,171 2,913 (1,022) 10,072 4,194 0 0 0 95 5,783 10,072 0 14,900 0 1,132 15,953 569 139 (2,615) 246 (2,861) 0 0 0 (2,861) (0.31) (0.31)
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