<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 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)
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(515)296-9908
(Registrant's telephone number, including area code)
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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
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(2) Yes X No
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As of August 9, 1996, there were 4,694,760 shares of the Registrant's $0.01
par value common stock outstanding.
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ENGINEERING ANIMATION, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income
For the three and six months ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
For the six months ended June 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
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Item 1. Financial Statements
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
----------------------------
June 30, December 31,
1996 1995
------------- -------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,467 $ 491
Accounts receivable:
Billed 3,149 1,057
Unbilled 1,983 1,289
Prepaid expenses 338 180
----------- -----------
Total current assets 29,937 3,017
Property and equipment, net 3,471 1,533
Other assets:
Note receivable 1,408 750
Software development costs, net 526 453
Other 217 446
----------- -----------
Total assets $ 35,559 $ 6,199
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 951 $ 631
Accrued expenses 353 112
Accrued payroll and benefits 425 308
Deferred revenue 257 286
Current portion of debt and lease obligations 59 345
----------- -----------
Total current liabilities 2,045 1,682
Debt and lease obligations, long term portion 965 1,880
Deferred income taxes 729 493
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 June 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 1,323 713
----------- -----------
Total stockholders' equity 31,820 2,144
----------- -----------
Total liabilities and stockholders' equity $ 35,559 $ 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
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ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
-------------------------- --------------------------
Three Months ended June 30 Six Months ended June 30
1996 1995 1996 1995
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Custom animation products $ 1,632 $ 1,850 $ 3,100 $ 3,761
Interactive software products 1,605 331 2,437 699
Animation software tools 1,299 380 2,100 568
----------- ---------- ----------- -----------
Total revenues 4,536 2,561 7,637 5,028
Cost of revenues 1,564 650 2,654 1,311
----------- ---------- ----------- -----------
Gross profit 2,972 1,911 4,983 3,717
Operating expenses:
Sales and marketing 1,529 758 2,618 1,413
General and administrative 653 448 1,092 877
Research and development 384 503 638 896
----------- ---------- ----------- -----------
Total operating expenses 2,566 1,709 4,348 3,186
----------- ---------- ----------- -----------
Income from operations 406 202 635 531
Other income (expense):
Interest income 355 3 471 6
Interest expense (27) (31) (76) (56)
----------- ---------- ----------- -----------
Income before income taxes 734 174 1,030 481
Income taxes 300 69 420 202
----------- ---------- ----------- -----------
Net income $ 434 $ 105 $ 610 $ 279
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Net income per share of common stock $ 0.08 $ 0.03 $ 0.13 $ 0.08
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Weighted average number of common and
equivalent shares outstanding 5,389 3,666 4,843 3,666
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
4
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ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
----------------------------
Six Months ended June 30
1996 1995
----------- -----------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (689) $ 299
INVESTING ACTIVITIES
Purchase of note receivable (658) -
Purchases of property and equipment (2,247) (782)
Development of software (150) (64)
Other activities (145) -
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Net cash used by investing activities (3,200) (846)
FINANCING ACTIVITIES
Proceeds from short-term borrowing 600 200
Payments on short-term borrowing (600) (200)
Proceeds from long-term debt - 955
Payments of long-term debt (1,201) (126)
Net proceeds from issuance of common stock 29,066 -
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Net cash provided by financing activities 27,865 829
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Net increase in cash and cash equivalents 23,976 282
Cash and cash equivalents at beginning of period 491 258
Cash and cash equivalents at end of period $ 24,467 $ 540
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</TABLE>
See accompanying notes.
5
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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 six-month periods ended June 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
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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 animation software tools. The
Company recognizes revenues based upon labor and other costs incurred and
progress to completion on contracts. Revenues from sales of animation software
tools are recognized upon delivery of the animation software tools to the
customer and satisfaction of significant related obligations, if any. Revenues
from customer support are included in animation software tools 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 77% to $4.5 million for the three months
ended June 30, 1996 from $2.6 million for the three months ended June 30, 1995,
and increased 52% to $7.6 million for the six months ended June 30, 1996 from
$5.0 million for the six months ended June 30, 1995. Interactive software
product revenues increased 385% to $1.6 million for the three months ended June
30, 1996 from $331,000 for the three months ended June 30, 1995, and increased
249% to $2.4 million for the six months ended June 30, 1996 from $699,000 for
the six months ended June 30, 1995, primarily due to increased projects for
interactive software products. Interactive software products revenue for the
six months ended June 30, 1995 included $369,000 of revenue from a three year
government grant that ended June 1995. Animation software tools revenue
increased 242% to $1.3 million for the three months ended June 30, 1996 from
$380,000 for the three months ended June 30, 1995, and increased 270% to $2.1
million for the six months ended June 30, 1996 from $568,000 for the six months
ended June 30, 1995, as a result of increased product sales and revenue from
several new software development contracts. Custom animation products revenue
decreased 12% to $1.6 million for the three months ended June 30, 1996 from $1.8
million for the three months ended June 30, 1995, and decreased 18% to $3.1
million for the six months ended June 30, 1996 from $3.8 million for the six
months ended June 30, 1995, primarily as a result of the completion in 1995 of
several large projects for a major automotive manufacturer.
7
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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 141% to $1.6 million for the three months ended June 30, 1996
from $650,000 for the three months ended June 30, 1995, and increased 102% to
$2.7 million for the six months ended June 30, 1996 from $1.3 million for the
six months ended June 30, 1995, primarily due to expenses associated with new
animation software tools 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 34% for the three months ended June 30,
1996 from 25% for the three months ended June 30, 1995, and increased to 35% for
the six months ended June 30, 1996 from 26% for the six months ended June 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 102% to $1.5 million for the
three months ended June 30, 1996 from $758,000 for the three months ended June
30, 1995, and increased 85% to $2.6 million for the six months ended June 30,
1996 from $1.4 million for the six months ended June 30, 1995. Sales and
marketing expenses were 34% of total revenues for the three months ended June
30, 1996 compared to 30% for the three months ended June 30, 1995, and were 34%
of total revenues for the six months ended June 30, 1996 compared to 28% for the
six months ended June 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 46% to $653,000 for the three months ended June 30, 1996 from $448,000
for the three months ended June 30, 1995, and increased 25% to $1.1 million for
the six months ended June 30, 1996 from $877,000 for the six months ended June
30, 1995, primarily a result of increased administrative staff and related
costs. General and administrative expenses were 14% of total revenues for the
three months ended June 30, 1996 compared to 17% for the three months ended June
30, 1995, and were 14% of total revenues for the six months ended June 30, 1996
compared to 17% for the six months ended June 30, 1995. The decrease of general
and administrative expenses as a percentage of revenues for the three and six
months ended June 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.
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 decreased
8
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24% to $384,000 for the three months ended June 30, 1996 from $503,000 for the
three months ended June 30, 1995, and decreased 29% to $638,000 for the six
months ended June 30, 1996 from $896,000 for the six months ended June 30, 1995.
Research and development expenses were 8% of total revenues for the three months
ended June 30, 1996 compared to 20% for the three months ended June 30, 1995,
and were 8% of total revenues for the six months ended June 30, 1996 compared to
18% for the six months ended June 30, 1995. The decrease in research and
development expenses was a result of a $223,000 payment in the six months ended
June 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
six months ended June 30, 1996. These decreases in expenses were partially
offset by increased research and development staffing required to meet the
increased activity in animation software tools and interactive software products
lines.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company completed its initial public offering and its
common stock began trading in the Nasdaq National Market under the symbol EAII.
Through the offering, the Company sold 1,825,000 shares of its common stock
which generated approximately $29.1 million of cash, net of underwriting
discounts and other offering costs.
As of June 30, 1996, the Company had $24.5 million in cash and cash equivalents.
Net cash used by operating activities was $689,000 for the six months ended June
30, 1996, primarily due to increases in receivables, offset by net income,
depreciation, and increases in accounts payable and other accrued expenses.
Accounts receivable at June 30, 1996 increased approximately $2,092,000 to
$3,149,000 from $1,057,000 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 June 30, 1996 increased approximately $1.9 million,
primarily due to $2.2 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 June 30, 1996, the Company had no outstanding borrowings
against this line of credit.
At June 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.
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
9
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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 animation software tools 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
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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 June
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: 8/9/96 ENGINEERING ANIMATION, INC.
---------------------- (Registrant)
By: /s/ Michael K. Jewell
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Michael K. Jewell
Vice President of Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
12
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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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 24,467
<SECURITIES> 0
<RECEIVABLES> 5,132<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,937
<PP&E> 4,298
<DEPRECIATION> 827
<TOTAL-ASSETS> 35,559
<CURRENT-LIABILITIES> 2,045
<BONDS> 965
0
0
<COMMON> 47
<OTHER-SE> 31,773
<TOTAL-LIABILITY-AND-EQUITY> 35,559
<SALES> 7,637
<TOTAL-REVENUES> 7,637
<CGS> 2,654
<TOTAL-COSTS> 2,654
<OTHER-EXPENSES> 4,348
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> 1,030
<INCOME-TAX> 420
<INCOME-CONTINUING> 610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 610
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
<FN>
<F1>RECEIVABLES INCLUDE $1,983,000 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>
