CAPSTONE CASE 2: SPATIAL TECHNOLOGY, INC.
End-of-Case Assignments: Suggested Discussions and Analyses
A. Describe Spatial Technology’s “business model” in terms of revenues, profits,
and cash flows.
Spatial is the originator of a 3D modeling file format (SAT) and object
B. What intellectual property, if any, does Spatial Technology possess?
Spatial’s file format (SAT) and modeling approach are its primary intellectual
C. Describe the experience and expertise characteristics of the management team.
The management team has a founder that is well known in the field with previous
D. Describe Spatial Technology’s pricing and marketing strategy.
Spatial has adopted a strategy of forward-funding itself by taking large amounts
of prepaid royalties. Historically, its two primary revenue areas were royalties
E. Discuss the competition faced by Spatial Technology in conjunction with 3D
modeling technology in general and specifically with it ACIS product.
Spatial competes with others firms trying to win the adoption race for formats and
Capstone Case 2: Spatial Technology, Inc.
F. Describe the four successful rounds of venture financing (A through D) achieved
by Spatial Technology in terms of sources and amounts. What additional
financing sources have been used?
Round A for $1,000,000 was raised from Nazem & Co. shortly after organization.
G. Conduct a ratio analysis of Spatial Technology’s past income statements and
balance sheets. Note any performance strengths and weaknesses and discuss any
ratio trends.
As the project at hand will involve valuing Spatial, we have chosen to concentrate
our ratio analysis on “percent of sales.” The following is the historical
presentation of the income statement and balance sheet percent-of-sales ratios.
Income Statement 1993 1994 1995 1996 1996 1996
(half year) (Projected) Ratios
Revenue
License fees 3687 50.0% 3087 47.1% 4850 56.2% 2348 4773 51.04%
Royalties 562 7.6% 876 13.4% 1207 14.0% 1228 1831.5 19.59%
Earnings growth rate
Noninterest part of “other” -67 -0.9% 16 0.2% -53 –0.6% 1 -25.5 -0.27%
Interest Income 40 0.5% 24 0.4% 21 0.2% 12 22.5 0.24%
Interest Expense -34 -0.5% -82 -1.3% -83 -1.0% -64 -105.5 -1.13%
ProForma rate on interest inc.
ProForma rate on interest exp.
Balance Sheet 1993 1994 30.5% 1995 23.1% 1996 1996 1996
(mid-year) (Projected) Ratios
Current assets
Required Cash 288 4.4% 153 1.8% 390 390 4.2%
Excess Cash 0
Accounts receivable 1742 26.6% 1893 21.9% 2293 2293 24.5%
Prepaid expenses, etc. 185 2.8% 179 2.1% 171 171 1.8%
Total current assets 2215 33.8% 2225 25.8% 2854 2854 30.5%
Capstone Case 2: Spatial Technology, Inc.
H. Use cash flow statements for Spatial Technology, Inc. to determine whether the
venture has been building or burning cash, as well as possible trends in building
or burning cash.
It is pretty clear that the venture has been burning large amounts of cash in the
I. Discuss possible reasons why the plan by Spatial Technology for an initial public
offering (IPO) of common stock at the end of 1992 was withdrawn.
The primary issues resulting in pulling the 1992 IPO were an insufficiently broad
J. Describe the IPO market conditions in 1996 and discuss possible reasons why the
proposed IPO at a price of about $10 per share planned for October 1996 and
involving Dain Bosworth as lead underwriter failed.
The official reason for the failure was insignificant demand for the shares.
However, there were several contributors to the underwriter’s failure including
K. Evaluate the compound return on investments made at startup, Round A, Round
B, Round C, and Round D if the acquired shares eventually sell at $10 and $5.
Evaluate the compound return on all investments of each existing investor.
Analyze the incentives of each investor and founder for taking the Cruttenden
Roth offer to execute a $5 IPO.
This exercise can be done in a number of ways depending on how in depth the
Capstone Case 2: Spatial Technology, Inc.
L. Using the provided financial statements as a starting point:
1. Prepare and present a DCF valuation and pro forma financials with five
years of explicit forecasts using license fees and royalties growth rates
consistent with recent history (e.g., two to three years) at Spatial.
2. Modify your analysis to consider a more successful scenario where
Spatial’s main revenue sources (combined) grow at 50 percent for five
Once a student (or instructor) has constructed an initial working set of financial
statements and valuation, it is relatively easy to mutate the spreadsheet into the
three other alternative scenarios. We present one scenario below and have made
the electronic spreadsheet available on the web page for manipulation in
producing three alternatives of the instructor’s own choosing.
Income Statement 1996 1996 1996 1997 1998 1999 2000 2001 SS SS+1 Growth
(half year) (Projected) Ratios
Revenue
License fees 2348 4773 51.04%
Royalties 1228 1831.5 19.59%
Prepaid royalties 0 0 0.00%
Maintenance and training 1461 2747 29.37%
Total Revenue 5037 9351.5 100.00% 10,249 11,233 12,312 13,493 14,789 15,676 16,617 6.00%
Cost of Sales -403 -741.5 -7.93% -820 -899 -985 –1,079 -1,183 -1,254 -1,329 6.00%
Gross Profit 4634 8610 92.07% 9,429 10,335 11,327 12,414 13,606 14,422 15,287 6.00%
Capstone Case 2: Spatial Technology, Inc.
M. Discuss the $5 and $10 IPO prices for Spatial within the context of comparable
firms and their multiples. (There are some glimpses of multiples in the case
materials, but you may wish to use some outside reference materials. Please state
your sources.)
Typically, students find a $5 valuation possible but only under optimistic
scenarios and improved ratios. The $10 valuation is typically seen as impossibly
Balance Sheet 1996 1996 1996 1997 1998 1999 2000 2001 SS SS+1 Growth
(mid-year) (Projected) Ratios
Current assets
Required Cash 390 390 4.2% 430 472 517 567 621 658 698 6.00%
Excess Cash 0 131 234 307 342 0 0 0
Accounts receivable 2293 2293 24.5% 2,511 2,752 3,016 3,306 3,623 3,841 4,071 6.00%
Prepaid expenses, etc. 171 171 1.8% 184 202 222 243 266 282 299 6.00%
Total current assets 2854 2854 30.5% 3,257 3,660 4,062 4,457 4,511 4,781 5,068 6.00%
Equipment, net 373 373 4.0% 410 449 492 540 592 627 665 6.00%
Purchased software, net 410 410 4.4% 451 494 542 594 651 690 731 6.00%
Total assets 3637 3637 38.9% 4,118 4,604 5,097 5,591 5,753 6,098 6,464 6.00%
Current liabilities
Deficit/Retained earnings -14688 -14688 -14,171 -13,599 -12,969 -12,276 -13,411 -13,345 -13,275
Treasury stock 0 0 0 0 0 0 0 0 0
Foreign currency trans. -78 -78 N/A –78 -78 -78 -78 -78 -78 -78
Total Equity Balance -181 -181 336 908 1,538 2,231 1,096 1,162 1,232 6.00%
Total Liabilities & Equity 3637 3637 4,118 4,604 5,097 5,591 5,753 6,098 6,464 6.00%
+Notes proceeds 0 0 0 0 1,418 85 90 6.00%
-Currency transl. losses 0 0 0 0 0 0 0
-Cash dump (dividend) 0 0 0 0 -1,894 -566 –600 6.00%
Change in cash 172 144 118 84 -288 37 40 6.00%
Beginning cash 390 562 706 824 909 621 658 6.00%
Ending cash 561.814 706.053 824.391 908.708 621.133 658.400 697.902 6.00%
Check 561.814 706.053 824.391 908.708 621.131 658.399 697.903
Valuation Cash Flows
(marginal tax rate used) 25% 25% 25% 25% 25% 25% 25%
Net Income 517 572 630 693 759 632 670
+D&A 243 267 293 321 351 385 408
Capstone Case 2: Spatial Technology, Inc.
N. Prepare an executive summary discussing the events and decisions (technological
and financial) leading to its current situation, the options it currently has, and
your recommendations for Spatial’s near future. Would (could) you have done
anything differently?
Typically, the students’ executive summaries discuss the implausibility of the $10
O. Take a position on whether you would recommend the $5 IPO. Take a position on
whether, as an investor, you would have purchased shares in the $5 IPO.
Answers will vary, but some students will recommend investing at the $5 price.
P. Discuss what you believe will be the strategic (product lines, licensing,
competitors, etc.) outlook for Spatial and what you believe will be the financial
market’s view of a publicly traded Spatial Technology.
In many cases, students will research the post-IPO Spatial, which was publicly
traded for several years before being acquired. The market that Spatial tried to