AGUSTINUS AXCEL GIRINDRA P. 2101707485 (LA26) FINANCIAL MANAGEMENT
SUMMARY ABOUT SPATIAL TECHNOLOGY INC.
After receiving a BS in mathematics from Marietta College and an MS in operations
research, Sowar worked at the Air Force Graduate School in Ohio for several years. He
then began doctoral studies in computer science at the University of Colorado while
working as a research associate at Bell Laboratories and later joined a startup company.
With a mission to design, develope, and market 3D modeling software with targeted
applications in the machine tool industry, Sowar, Lehman, and Lynch incorporated Spatial
later that month in the state of Delaware. Although Spatial was principally located in
Boulder, Colorado, the founding president, Lynch, lived in Dallas and commuted to
Boulder once or twice a month to take care of the administrative work. Spatial had no
difficulties attracting additional talented developers. “We lured five really good
technologists away from Graftek. The company closed financing in September 1986 with
an initial capitalization of $1 million from Nazem & Company with capital, seven talented
developers, strategic development partners at Three Space Ltd. in England, and a plan
providing a two-year development process, the startup was set to go. Unfortunately, during
the first two development years, the machine tool industry for which Spatial had targeted
application software underwent a major crisis. “During 1988 it became clear that our
original strategy wasn’t going to work because the machine tool industry was in a decline
and wasn’t investing in anything. They were just trying to keep their companies alive,”
Sowar said.
Abandoning the original target end-user market, Spatial decided to focus on
licensing the 3D modeling technology as its core business. The modeling kernel emerging
from two years of internal and partnered development was unrivaled in its technological
standards; it held the promise of becoming an industry standard. The change in direction
was reflected in the new business model developed by John Rowley, who had joined
Spatial as CEO in the summer of 1988. Spatial would license its 3D modeling engine,
known as ACIS, to other CAD/CAM software developers who would fold it into end-user
applications software, thereby generating revenues By mid-1989, the first version of the
ACIS product was brought to
and gained immediate recognition with initial customers like Hewlett-Packard. Enthusiasm
for the company was high and Spatial easily obtained additional funding to bring its
product to market and begin building an infrastructure. With its open design, ACIS had the
potential to provide core 3D modeling capability for numerous commercial CAD software
applications on a variety of platforms. Although ACIS was quickly embraced by
universities and the research community, convincing its potential key customers to rely
fully on ACIS was more difficult. Companies like Shape Data (a subsidiary of Electronic
Data Systems), Ricoh, and, in many
With a mission to design, develop, and market 3D modeling software with targeted
applications in the machine tool industry, Sowar, Lehman, and Lynch incorporated Spatial
later that month in the state of Delaware. Although Spatial was principally located in
Boulder, Colorado, the founding president, Lynch, lived in Dallas and commuted to
Boulder once or twice a month to take care of the administrative work. Spatial had no
difficulties attracting additional talented developers. “We lured five really good
technologists away from Graftek. We hadn’t approached them before, but I knew that they
would be in love with our idea,” Sowar said. The company closed financing in September
1986 with an initial capitalization of $1 million from Nazem & Company. With capital,
seven talented developers, strategic development partners at Three Space Ltd. in England,
and a plan providing a two-year development process, the startup was set to go. cases, the
customers’ own in-house modeling platforms competed with the adoption of ACIS. In
order to convince important customers (including Bentley Systems, CDC, Intergraph, and
Hitachi-Zosen) to commit to ACIS, and to improve the quarterly cash flows, Spatial offered
a somewhat unusual licensing agreement. With Graftek’s culture change, Sowar started to
think about how he could pursue his own, somewhat different vision for 3D technology: I
was interested in the applied use of solid modeling, and I had very good contacts with the
people at Shape Data Co., among them Dr. Ian Braid, the “father” of solid modeling. The
idea when we started Spatial was to make use of Shape Data’s modeling technology as a
foundation for building a system for machine tool manufacturers:
CAM machining software that could automatically drive a machine to cut parts. I
wrote up a little eleven-page white paper to explain the concept. It was far from being a
business plan. It basically said: “Hey, this is how we’re going to put the technology together
and we should make a lot of money off this thing.” I think I was fairly convincing in some
of the things I talked about in this paper. So I took this little white paper to Cy (who had
already left Graftek) in 1985 and asked him, “How do I get money By mid-1989, the first
version of the ACIS product was brought to market and gained immediate recognition with
initial customers like Hewlett-Packard. Enthusiasm for the company was high and Spatial
easily obtained additional funding to bring its product to market and begin building an
infrastructure. Nazem & Company, some of the limited partners of the Nazem Funds
(Benefit Capital, New York Life, Allied Signal), and Hewlett-Packard invested in the next
round (series B) of venture financing. With its open design, ACIS had the potential to
provide core 3D modeling capability for numerous commercial CAD software applications
on a variety of platforms. Although ACIS was quickly embraced by universities and the
research community, convincing its potential key customers to rely fully on ACIS was
more difficult. Companies like Shape Data (a subsidiary of Electronic Data Systems),
Ricoh, and, in many cases, the customers’ own in-house modeling platforms competed
with the adoption of ACIS. In order to convince important customers including Bentley
Systems, CDC, Intergraph, and Hitachi-Zosen to commit to ACIS, and to improve the
quarterly cash flows, Spatial offered a somewhat unusual licensing agreement. The
company began to sell an ACIS license to targeted customers for a one-time lump sum that
included a specific level of prepaid but heavily discounted royalty fees. These prepaid
royalty deals were a key element in the company’s revenue streams from 1990 to 1993.
The IPO, A subsequent attempt by the company to arrange a private placement with the
help of Donaldson, Lufkin & Jenrette failed because of the high valuation Spatial was
seeking. Despite the critical situation, Spatial’s management was able to convince its
existing investors to put up another round of capital. In the beginning of 1993, John Rowley
(CEO) and Kevin Walsh, who was Spatial’s CFO at the time, negotiated a fourth round of
venture financing. The preferred stock series D was priced at $8.22 per share, indicating a
$45 million valuation of the company. As a consequence of the feedback from the
investment bankers, the board of Spatial Technology began looking for industry people to
fill out Spatial’s management team. In 1994, the development efforts started to pay off, as
ACIS became stable enough for Spatial’s customers to ship their ACIS-enabled
applications. Financially, however, times were rough. Dropping the Personal ACIS product
had resulted in significant overstaffing in sales. Management decided to lay off 25 percent
of the entire work force in September 1993.
In addition, by the end of 1993, Chuck Bay and Mark Vellequette (then corporate
controller) had written down accounts receivables by $1 million to eliminate the inflated
(recognized) revenue related to marginal deals that never materialized. The overall result
of the restructuring was a loss of $3 million
When I got here in July 1993 we had an outstanding legal bill over $200,000 for the failed
1992 IPO, the private placement efforts by DLJ, and the series D arrangement. Our
company had effectively only collected $1.2 million from the series D and they hadn’t even
paid the lawyers. So then we had to deal with them and stretched their payment out into It
was just a nightmare. In addition, we had an employment lawsuit with a former Spatial
vice president who had left in August 1993. He had sued us for everything under the sun,
which seems to be the American way and we lost. As a result, the company got slapped
with a $419,000 judgment in the beginning of 1995. That means we had huge legal bills
we were paying throughout 1994 and in 1995. But the management pretty much turned it
around in a year and got things stabilized. Operationally, we were doing OK. We started
turning a profit in Q3 1994, but we still had to pay off all that old crap and we wanted to
