<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 March 31, 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)
2625 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 NO X
----- -----
AS OF MARCH 31, 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 Balance Sheet
At March 31, 1996 and December 31, 1995 3
Condensed Statement of Income
For the three months ended March 31, 1996 and 1995 4
Condensed Statement of Cash Flows
For the three months ended March 31, 1996 and 1995 5
Notes to Condensed 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 BALANCE SHEET
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
------------------------------
March 31, December 31,
1996 1995
------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,214 $ 491
Accounts receivable:
Billed 2,129 1,057
Unbilled 1,415 1,289
Prepaid expenses 257 180
---------- ---------
Total current assets 32,015 3,017
Property and equipment, net 1,755 1,533
Other assets:
Note receivable 750 750
Software development costs, net 496 453
Other 17 446
---------- ---------
Total assets $ 35,033 $ 6,199
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,142 $ 631
Accrued expenses 372 420
Deferred revenue 410 286
Current portion of debt and lease obligations 58 345
---------- ---------
Total current liabilities 1,982 1,682
Debt and lease obligations, long term portion 1,003 1,880
Deferred income taxes 605 493
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 March 31, 1996
and December 31, 1995, respectively. 47 29
Preferred stock, $.01 par value, 20,000,000 shares
authorized, no shares issued and outstanding. 0 0
Additional paid-in capital 30,507 1,402
Retained earnings 889 713
---------- ---------
Total stockholders' equity 31,443 2,144
---------- ---------
Total liabilities and stockholders' equity $ 35,033 $ 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 STATEMENT OF INCOME
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
----------------------------
Three Months ended March 31
1996 1995
-------- --------
<S> <C> <C>
Revenues:
Custom animation products $ 1,468 $ 1,911
Interactive software products 832 368
Animation software tools 801 188
-------- --------
Total revenues 3,101 2,467
Cost of revenues 1,090 661
-------- --------
Gross profit 2,011 1,806
Operating expenses:
Sales and marketing 1,089 655
General and administrative 439 429
Research and development 254 393
-------- --------
Total operating expenses 1,782 1,477
-------- --------
Income from operations 229 329
Other income (expense):
Interest income 116 3
Interest expense (49) (25)
-------- --------
Income before deferred income tax expense 296 307
Deferred income tax expense 120 133
-------- --------
Net income $ 176 $ 174
-------- --------
-------- --------
Net income per share of common stock $ 0.04 $ 0.05
-------- --------
-------- --------
Weighted average number of common and equivalent shares
outstanding 4,312 3,601
-------- --------
-------- --------
</TABLE>
See accompanying notes.
4
<PAGE>
ENGINEERING ANIMATION, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
---------------------------------
Three Months ended March 31
1996 1995
------------- ------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 184 $ 316
INVESTING ACTIVITIES
Purchases of property and equipment (341) (444)
Development of software (79) (27)
------------- ------------
Net cash used by investing activities (420) (471)
FINANCING ACTIVITIES
Proceeds from short-term borrowing 600 200
Payments on short-term borrowing (600) (200)
Proceeds from long-term debt - 502
Payments of long-term debt (1,164) (55)
Net proceeds from issuance of common stock 29,123 -
------------- ------------
Net cash provided by financing activities 27,959 447
Net increase in cash and cash equivalents 27,723 292
Cash and cash equivalents at beginning of period 491 258
------------- ------------
Cash and cash equivalents at end of period $ 28,214 $ 550
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
5
<PAGE>
ENGINEERING ANIMATION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited condensed 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 period
ended March 31, 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 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 26% to $3.1 million for the three months
ended March 31, 1996 from $2.5 million for the three months ended March 31,
1995. Interactive software product revenues increased 126% to $832,000 for the
three months ended March 31, 1996 from $368,000 for the three months ended March
31, 1995 primarily due to increased orders for interactive software products.
Interactive software product revenue for the three months ended March 31, 1995
included $203,000 of revenue from a three year government grant that ended June
1995. Animation software tools revenue increased 326% to $801,000 for the three
months ended March 31, 1996 from $188,000 for the three months ended March 31,
1995 as a result of increased product sales and revenue from several new
software development contracts. Custom animation product revenue decreased 23%
to $1.5 million for the three months ended March 31, 1996 from $1.9 million for
the three months ended March 31, 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 65% to $1.1 million for the three months ended March 31, 1996
from $661,000 for the three months ended March 31, 1995 primarily due to
expenses associated with new animation software tools development
7
<PAGE>
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 35% for the three months ended March 31, 1996 from 27% for the three months
ended March 31, 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 66% to $1.1 million for the
three months ended March 31, 1996 from $655,000 for the three months ended
March 31, 1995. Sales and marketing expenses were 35% of total revenues for the
three months ended March 31, 1996 compared to 27% for the three months ended
March 31, 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 2% to $439,000 for the three months ended March 31, 1996 from $429,000
for the three months ended 1995. General and administrative expenses were 14%
of total revenues for the three months ended March 31, 1996 compared to 17% for
the three months ended March 31, 1995. The decrease of general and
administrative expenses as a percentage of revenues for the three months ended
March 31, 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 35% to $254,000 for the three months ended
March 31, 1996 from $393,000 for the three months ended March 31, 1995.
Research and development expenses were 8% of total revenues for the three months
ended March 31, 1996 compared to 16% for the three months ended March 31, 1995.
The decrease in research and development expenses was a result of a $110,000
payment in the quarter ended March 31, 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 three months ended March 31, 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 orders.
8
<PAGE>
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 March 31, 1996, the Company had $28.2 million in cash and cash
equivalents. Net cash provided by operating activities was $184,000 for the
three months ended March 31, 1996. Accounts receivable at March 31, 1996
increased approximately $1,072,000 to $2,129,000 from $1,057,000 at December
31, 1995. The increase in accounts receivable was due to increased order
activity and several large projects remaining with open receivables. 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. The accounts payable balance at March 31, 1996
increased to $1,142,000 from $631,000 at December 31, 1995. The increase in
accounts payable was due to unpaid expenses relating to the initial public
offering.
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 March 31, 1996, the Company had no outstanding borrowings
against this line of credit.
At March 31, 1996, the Company had $1.1 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 expects to spend approximately $3.2 million for capital equipment in
1996, principally consisting of computer and office equipment, most of which
will be paid from the proceeds of the Offering.
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 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,
9
<PAGE>
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 March
31, 1996.
11
<PAGE>
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: May 13, 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
- - - ------- ----------- ------------
3.1** Certificate of Incorporation
3.2** Bylaws
4.1** Specimen Common Stock Certificate
4.2** Rights Agreement between the Company and First Chicago
Trust Company of New York, dated as of January 1, 1996
10.1** Amended and Restated 1994 Stock Option Plan
10.2** Non-Employee Directors Stock Option Plan
10.3** Employment and Severance Agreements by and between the
Company and Matthew M. Rizai, dated as of
January 1, 1996
10.4** Employment and Severance Agreements by and between the
Company and Martin J. Vanderploeg, dated as of
January 1, 1996
10.5** Employment and Severance Agreements by and between the
Company and Jamie A. Wade, dated as of January 1, 1996
10.6** Employment and Severance Agreements by and between the
Company and Jay E. Shannan, dated as of January 1, 1996
10.7** Employment and Severance Agreements by and between the
Company and Jeff D. Trom, dated as of January 1, 1996
10.8** Employment and Severance Agreements by and between the
Company and Michael J. Jablo, dated as of
September 18, 1995
10.9** Employment and Severance Agreements by and between the
Company and Michael K. Jewell, dated as of
January 26, 1996
10.10** Option Agreement by and between the Company and
Matthew M. Rizai, dated June 9, 1994
10.11** Option Agreement by and between the Company and
Martin J. Vanderploeg, dated June 9, 1994
13
<PAGE>
10.12** Option Agreement by and between the Company and
Matthew M. Rizai, dated as of February 11, 1995
10.13** Option Agreement by and between the Company and
Martin J. Vanderploeg, dated as of February 11, 1995
10.14** Option Agreement by and between the Company and
Jay E. Shannan, dated as of February 11, 1995
10.15** Option Agreement by and between the Company and
Jeff D. Trom, dated as of February 11, 1995
10.16** Option Agreement by and between the Company and
Jamie A. Wade, dated as of February 11, 1995
10.17** Lease Agreements between Iowa State University
Research Park Corporation and the Company, dated
March 1, 1993, January 1, 1995 and June 15, 1995;
Lease Agreement between Iowa State University
Research Park Corporation and Bennet, Williams &
Blattert, Inc., dated August 3, 1990; and Sublease
Agreements between R.E. Blattert & Associates,
Inc. and the Company dated July 1, 1993 and May 11,
1994; all as amended by Letter Agreement between
Iowa State University Research Park Corporation
and the Company, dated November 1, 1995
10.18** Ground Lease Agreement between Iowa State
University Research Park Corporation and the
Company, dated June 1, 1995
10.19** Mortgage between CRE, Inc. and the Company, dated
June 29, 1995
10.20** Lease Assignment and Agreement between CRE, Inc.,
and the Company, dated June 14, 1995
10.21** Lease Agreement Between CRE, Inc. and the Company,
dated June 14, 1995
10.22** Work for Hire Contracts between Wm. C. Brown
Publishers, a division of Wm. C. Brown
Communication, Inc. and the Company, dated
November 14, 1994, as amended by Addendum dated
December 21, 1995
10.23** Publishing Agreement between Mosby-Year Book,
Inc. and the Company, dated November 1, 1995
10.24** Design and Development Agreement between Warner
Books, Inc. and the Company, dated July 17, 1995
14
<PAGE>
10.25** Agreement between HarperCollins College Publishers
and the Company, dated December 15, 1995
10.26** Development Agreement between The Jack Morton
Company and the Company, dated January 5, 1996
10.27** Distribution Agreement between SDRC Operations,
Inc. and the Company, dated December 29, 1995
10.28** Porting Agreement between Hewlett-Packard Company
and the Company, dated April 26, 1995
10.29** Porting Agreement between Hewlett-Packard Company
and the Company, dated December 6, 1995
10.30** License Agreement between the Company and Iowa
State University Research Foundation, dated
July 30, 1990, as amended on November 15, 1993
27. Financial Data Schedule
** Previously filed with the Company's Registration Statement on
Form S-1, Registration No. 33-80705, and incorporated herein by
reference.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 28,214
<SECURITIES> 0
<RECEIVABLES> 3,544<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,015
<PP&E> 2,468
<DEPRECIATION> 713
<TOTAL-ASSETS> 35,033
<CURRENT-LIABILITIES> 1,982
<BONDS> 1,003
0
0
<COMMON> 47
<OTHER-SE> 31,396
<TOTAL-LIABILITY-AND-EQUITY> 35,033
<SALES> 3,101
<TOTAL-REVENUES> 3,101
<CGS> 1,090
<TOTAL-COSTS> 1,090
<OTHER-EXPENSES> 1,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> 296
<INCOME-TAX> 120
<INCOME-CONTINUING> 176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 176
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<FN>
<F1>Receivables include $1,415,000 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 and several large
projects remaining with open receivables.
</FN>
</TABLE>
