<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 2-7670
ENGINEERING ANIMATION, INC.
[EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER]
DELAWARE 42-1323712
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2321 NORTH LOOP DRIVE
AMES, IOWA 50010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
______________________
(515)296-9908
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
______________________
INDICATE BY CHECK ( X ) WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
(1) YES X NO
-------- --------
(2) YES X NO
-------- --------
AS OF OCTOBER 30, 1996, THERE WERE 4,694,760 SHARES OF THE REGISTRANT'S
$0.01 PAR VALUE COMMON STOCK OUTSTANDING.
<PAGE>
ENGINEERING ANIMATION, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income
For the three and nine months ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited) (Note)
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $21,770 $ 491
Accounts receivable:
Billed 5,458 1,057
Unbilled 2,606 1,289
Prepaid expenses 501 180
------- ------
Total current assets 30,335 3,017
Property and equipment, net 4,030 1,533
Other assets:
Note receivable 1,408 750
Software development costs, net 495 453
Other 228 446
------- ------
Total assets $36,496 $6,199
------- ------
------- ------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 891 $ 631
Accrued expenses 320 112
Accrued payroll and benefits 837 308
Deferred revenue 347 286
Current portion of debt and lease obligations 61 345
------- ------
Total current liabilities 2,456 1,682
Debt and lease obligations, long term portion 956 1,880
Deferred income taxes 743 493
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, 4,694,760 shares
and 2,869,760 shares issued and outstanding at September 30, 1996
and December 31, 1995, respectively. 47 29
Preferred stock, $.01 par value, 20,000,000 shares authorized, no shares issued
and outstanding. - -
Additional paid-in capital 30,450 1,402
Retained earnings 1,844 713
------- ------
------- ------
Total stockholders' equity 32,341 2,144
------- ------
Total liabilities and stockholders' equity $36,496 $6,199
------- ------
------- ------
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
<PAGE>
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
------------------------------- ------------------------------
Three Months ended September 30 Nine Months ended September 30
1996 1995 1996 1995
-------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Custom animation products $1,349 $1,293 $ 4,449 $5,054
Interactive software products 1,444 802 3,881 1,501
3D software products 2,922 388 5,022 956
------ ------ ------- ------
Total revenues 5,715 2,483 13,352 7,511
Cost of revenues 1,812 611 4,466 1,922
------ ------ ------- ------
Gross profit 3,903 1,872 8,886 5,589
Operating expenses:
Sales and marketing 2,192 819 4,810 2,232
General and administrative 569 514 1,661 1,391
Research and development 623 373 1,261 1,269
------ ------ ------- ------
Total operating expenses 3,384 1,706 7,732 4,892
------ ------ ------- ------
Income from operations 519 166 1,154 697
Other income (expense):
Interest income 353 8 824 14
Interest expense (17) (53) (93) (109)
------ ------ ------- ------
Income before income taxes 855 121 1,885 602
Income taxes 334 47 754 249
------ ------ ------- ------
Net income $ 521 $ 74 $ 1,131 $ 353
------ ------ ------- ------
------ ------ ------- ------
Net income per share of common stock $ 0.10 $ 0.02 $ 0.22 $ 0.10
------ ------ ------- ------
------ ------ ------- ------
Weighted average number of common and
equivalent shares outstanding 5,387 3,699 5,052 3,699
------ ------ ------- ------
------ ------ ------- ------
</TABLE>
See accompanying notes.
4
<PAGE>
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
------------------------------
Nine Months ended September 30
1996 1995
----------- -----------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (2,585) $ 552
INVESTING ACTIVITIES
Purchase of note receivable (658) (428)
Purchases of property and equipment (3,009) (936)
Development of software (182) (181)
Other activities (145) -
----------- -----------
Net cash used by investing activities (3,994) (1,545)
FINANCING ACTIVITIES
Proceeds from short-term borrowing 600 716
Payments on short-term borrowing (600) (350)
Proceeds from long-term debt - 1,305
Payments of long-term debt (1,208) (202)
Net proceeds from issuance of common stock 29,066 -
----------- -----------
Net cash provided by financing activities 27,858 1,469
----------- -----------
Net increase in cash and cash equivalents 21,279 476
Cash and cash equivalents at beginning of period 491 258
----------- -----------
Cash and cash equivalents at end of period $ 21,770 $ 734
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
5
<PAGE>
ENGINEERING ANIMATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Engineering
Animation Europe B.V., its wholly-owned subsidiary established in June 1996.
All intercompany accounts and transactions have been eliminated. The unaudited
condensed consolidated financial statements included herein reflect all
adjustments, consisting only of normal recurring accruals which in the opinion
of management are necessary to fairly state the Company's financial position,
results of operations, and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's audited
financial statements as included in the Company's Registration Statement on Form
S-1 as declared effective by the Securities and Exchange Commission on February
28, 1996 (Registration No. 33-80705). The results of operations for the three-
and nine-month periods ended September 30, 1996 are not necessarily indicative
of the results that may be expected for any subsequent quarter or for the fiscal
year ending December 31, 1996. The December 31, 1995 balance sheet was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles.
2. INITIAL PUBLIC OFFERING
In February 1996, the Company completed its initial public offering and
issued 1,825,000 shares of its common stock at a price of $18.00 per share. The
Company received approximately $29.1 million of cash, net of underwriting
discounts and other offering costs.
3. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Common equivalent shares consist of stock options (using the treasury
method). Common equivalent shares are excluded from the computation if their
effect is antidilutive. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin No. 83, common stock equivalents granted at exercise
prices less than the initial public offering price during the twelve months
immediately preceding the initial public offering have been included in the
determination of shares used in the calculation of net income per share (using
the treasury method and the initial public offering price) as if they were
outstanding for all periods presented through the effective date of the initial
public offering.
The Company repaid approximately $1,712,000 of bank debt with the proceeds of
the initial public offering. The impact on earnings per share was not
significant.
6
<PAGE>
ENGINEERING ANIMATION, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The discussion and analysis below contain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed below in
"Risk Factors That May Affect Future Results" as well as those discussed
elsewhere in this section and the risks discussed in the "Risk Factors" section
included in the Company's Registration Statement on Form S-1 as declared
effective by the Securities and Exchange Commission on February 28, 1996
(Registration No. 33-80705).
RESULTS OF OPERATIONS
REVENUES
The Company's total revenues are derived from sales of custom animation
products, interactive software products and three dimensional ("3D") software
products which was formally referred to as animation software tools. The
Company recognizes revenues based upon labor and other costs incurred and
progress to completion on contracts. Revenues from sales of 3D software
products are recognized upon delivery of the 3D software products to the
customer and satisfaction of significant related obligations, if any. Revenues
from customer support are included in 3D software products revenue and represent
less than 5% of total revenues. These revenues are deferred and recognized
ratably over the period the customer support services are provided.
The Company's total revenues increased 130% to $5.7 million for the three months
ended September 30, 1996 from $2.5 million for the three months ended September
30, 1995, and increased 78% to $13.4 million for the nine months ended September
30, 1996 from $7.5 million for the nine months ended September 30, 1995. 3D
software products revenue increased 653% to $2.9 million for the three months
ended September 30, 1996 from $388,000 for the three months ended September 30,
1995, and increased 425% to $5.0 million for the nine months ended September 30,
1996 from $956,000 for the nine months ended September 30, 1995, as a result of
increased product sales and revenue from several new software development
contracts. Interactive software product revenues increased 80% to $1.4 million
for the three months ended September 30, 1996 from $802,000 for the three months
ended September 30, 1995, and increased 159% to $3.9 million for the nine months
ended September 30, 1996 from $1.5 million for the nine months ended September
30, 1995, primarily due to increased projects for interactive software products.
Interactive software products revenue for the nine months ended September 30,
1995 included $369,000 of revenue from a three year government grant that ended
June 1995. Custom animation products revenue increased 4% to $1,349,000 for the
three months ended September 30, 1996 from $1,293,000 for the three months ended
September 30, 1995, and decreased 12% to $4.4 million for the nine months ended
September 30, 1996 from $5.1 million
7
<PAGE>
for the nine months ended September 30, 1995, primarily as a result of the
completion in 1995 of several large projects for a major automotive
manufacturer.
COST OF REVENUES
The cost of revenues includes cost of materials sold, royalties paid, certain
personnel costs and related facility costs, including equipment costs. Cost of
revenues increased 197% to $1.8 million for the three months ended September 30,
1996 from $611,000 for the three months ended September 30, 1995, and increased
132% to $4.5 million for the nine months ended September 30, 1996 from $1.9
million for the nine months ended September 30, 1995, primarily due to expenses
associated with new 3D software products development contracts and increased
development costs for interactive software projects. As a result, the Company's
cost of revenues as a percentage of revenues increased to 32% for the three
months ended September 30, 1996 from 25% for the three months ended September
30, 1995, and increased to 33% for the nine months ended September 30, 1996 from
26% for the nine months ended September 30, 1995.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses include personnel costs
related to sales, marketing and customer service activities as well as
advertising, promotional materials, mail campaigns, trade show costs and other
costs. Sales and marketing expenses increased 168% to $2.2 million for the
three months ended September 30, 1996 from $819,000 for the three months ended
September 30, 1995, and increased 116% to $4.8 million for the nine months ended
September 30, 1996 from $2.2 million for the nine months ended September 30,
1995. Sales and marketing expenses were 38% of total revenues for the three
months ended September 30, 1996 compared to 33% for the three months ended
September 30, 1995, and were 36% of total revenues for the nine months ended
September 30, 1996 compared to 30% for the nine months ended September 30, 1995.
The increase in sales and marketing expenses was primarily due to costs
associated with expansion of the sales force in all three product lines,
personnel increases in the marketing group, additional sales commission
expenses associated with higher revenue and increased advertising costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and facility costs for administrative, executive and
accounting personnel, as well as certain consulting expenses, insurance costs,
professional fees and other costs. General and administrative expenses
increased 11% to $569,000 for the three months ended September 30, 1996 from
$514,000 for the three months ended September 30, 1995, and increased 19% to
$1.7 million for the nine months ended September 30, 1996 from $1.4 million for
the nine months ended September 30, 1995, primarily a result of increased
administrative staff and related costs. General and administrative expenses
were 10% of total revenues for the three months ended September 30, 1996
compared to 21% for the three months ended September 30, 1995, and were 12% of
total revenues for the nine months ended September 30, 1996 compared to 19% for
the nine months ended September 30, 1995. The decrease of general and
administrative expenses as a percentage of revenues for the three and nine
months ended September 30, 1996 was primarily a result of spreading expenses
over higher revenues and refining the allocation of common costs among the
departments rather than absorbing these expenses as general and administrative.
8
<PAGE>
RESEARCH AND DEVELOPMENT. The Company's research and development focuses on
product development and consists primarily of salaries and support personnel,
related facility costs, equipment costs and outside consulting fees. Research
and development expenses increased 67% to $623,000 for the three months ended
September 30, 1996 from $373,000 for the three months ended September 30, 1995,
and decreased 1% to $1,261,000 for the nine months ended September 30, 1996 from
$1,269,000 for the nine months ended September 30, 1995. Research and
development expenses were 11% of total revenues for the three months ended
September 30, 1996 compared to 15% for the three months ended September 30,
1995, and were 9% of total revenues for the nine months ended September 30, 1996
compared to 17% for the nine months ended September 30, 1995. The increase in
research and development expenses for the three months ended September 30, 1996
was primarily due to additional personnel and related costs required to meet the
increased demand in 3D software products and interactive software products
lines. The decrease in research and development expenses for the nine months
ended September 30, 1996 was a net result of a $223,000 payment in the nine
months ended September 30, 1995 to an outside research consultant in connection
with a three year government grant which ended in June 1995 and increased
allocation of staffing to funded project development activities recorded as
costs of revenues in the nine months ended September 30, 1996. These decreases
in expenses were partially offset by increased research and development staffing
in the nine months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had $21.8 million in cash and cash
equivalents. Net cash used by operating activities was $2.6 million for the
nine months ended September 30, 1996, primarily due increases in receivables,
offset by net income, depreciation, and increases in accounts payable and other
accrued expenses. Accounts receivable at September 30, 1996 increased
approximately $4.4 million to $5.5 million from $1.1 million at December 31,
1995. The increase in accounts receivable was due to increased order activity.
The Company's accounts receivable balance will vary from quarter to quarter,
depending on the number and size of client projects and on the timing of
completion of the projects. Property and equipment at September 30, 1996
increased approximately $2.5 million, primarily due to $3.0 million of computer
and office equipment purchased from the proceeds of the offering, net of
depreciation expense.
The Company has a $1.0 million line of credit agreement with a commercial bank,
which expires on May 1, 1997 and is secured by substantially all of the assets
of the Company. As of September 30, 1996, the Company had no outstanding
borrowings against this line of credit.
At September 30, 1996, the Company had $1.0 million of notes payable and capital
lease principal payable. The Company used a portion of the net proceeds of the
offering to repay approximately $1,112,000 of long-term bank debt and $600,000
of short-term bank borrowings.
9
<PAGE>
The Company believes its current cash balances, its available credit under the
existing bank line and the cash flow generated from operations, if any, will be
sufficient to meet anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. There can be no assurance
that additional capital beyond the amounts currently forecasted by the Company
will not be required nor that any such required additional capital will be
available on reasonable terms, if at all, at such time as required by the
Company.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company has experienced and expects to continue to experience fluctuations
in its quarterly results. The Company's revenues are affected by a number of
factors, including the timing of the introduction of new interactive software
products and 3D software products by the Company and its competitors,
seasonality of certain customer purchases of interactive software products,
product mix, general economic conditions and the Company's ability to obtain
agreements from publishers and distributors to market the Company's interactive
software products. The Company's operating results also will vary significantly
depending on changes in pricing, changes in customer budgets and the volume and
timing of orders received during the quarter, which are difficult to forecast.
Interactive software products may experience some effect of seasonality created
by the academic school year. As a result of the foregoing and other factors,
the Company may experience material fluctuations in future revenues and
operating results on a quarterly or annual basis. Therefore, the Company
believes that period to period comparisons of its revenue and operating results
are not necessarily meaningful and should not be relied upon as indicators of
future performance.
10
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Index to Exhibits
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the quarter ended
September 30, 1996.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 8, 1996 ENGINEERING ANIMATION, INC.
------------------------ (Registrant)
By: /s/ Michael K. Jewell
-----------------------------------
Michael K. Jewell
Vice President of Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
12
<PAGE>
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit Description Page
- - ------- ----------- ------------
27. Financial Data Schedule
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 21,770
<SECURITIES> 0
<RECEIVABLES> 8,064<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,335
<PP&E> 5,060
<DEPRECIATION> 1,030
<TOTAL-ASSETS> 36,496
<CURRENT-LIABILITIES> 2,456
<BONDS> 956
0
0
<COMMON> 47
<OTHER-SE> 32,294
<TOTAL-LIABILITY-AND-EQUITY> 36,496
<SALES> 13,352
<TOTAL-REVENUES> 13,352
<CGS> 4,466
<TOTAL-COSTS> 4,466
<OTHER-EXPENSES> 7,732
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> 1,885
<INCOME-TAX> 754
<INCOME-CONTINUING> 1,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,131
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
<FN>
<F1>Receivables include $2,606,000 of unbilled accounts receivables which
represent revenue earned but not yet billable based on the terms of the
contract. The increase in receivables was due to increased order
activity.
</FN>
</TABLE>
