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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 March 31, 1997
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 MAY 1, 1997, THERE WERE 4,701,960 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
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income
For the three months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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March 31, December 31,
1997 1996
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ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 10,203 $ 9,350
Short-term investments 7,467 9,884
Accounts receivable:
Billed 7,476 6,666
Unbilled 3,684 3,334
Deferred income taxes 54 48
Prepaid expenses 688 390
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Total current assets 29,572 29,672
Property and equipment, net 5,904 5,192
Other assets:
Note receivable 1,408 1,408
Software development costs, net 856 602
Other 914 1,082
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Total assets $ 38,654 $ 37,956
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 809 $ 1,058
Accrued expenses 414 278
Accrued compensation 795 1,135
Deferred revenue 318 400
Deferred income taxes 119 119
Current portion of debt and lease obligations 64 62
Income taxes payable 538 132
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Total current liabilities 3,057 3,184
Debt and lease obligations, long term portion 788 872
Deferred income taxes 919 826
Stockholders' equity 33,890 33,074
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Total liabilities and stockholders' equity $ 38,654 $ 37,956
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Note: The balance sheet at December 31, 1996 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.
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ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data; unaudited)
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Three Months ended March 31
1997 1996
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Net revenues:
3D visualization software products $ 3,049 $ 801
Interactive software products 2,210 832
Custom animation products 2,417 1,468
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Total revenues 7,676 3,101
Cost of revenues 2,425 1,090
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Gross profit 5,251 2,011
Operating expenses:
Sales and marketing 2,369 1,089
General and administrative 925 439
Research and development 917 254
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Total operating expenses 4,211 1,782
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Income from operations 1,040 229
Interest income, net 265 67
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Income before income taxes 1,305 296
Income taxes 520 120
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Net income $ 785 $ 176
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Earnings per share of common stock $ 0.14 $ 0.04
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Weighted average number of common and
equivalent shares outstanding 5,498 4,312
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See accompanying notes.
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ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
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Three Months ended March 31,
1997 1996
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NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES $ (295) $ 229
INVESTING ACTIVITIES
Purchases of property and equipment (1,026) (341)
Development of software (250) (79)
Maturities of marketable securities 2,417 -
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Net cash used by investing activities 1,141 (420)
FINANCING ACTIVITIES
Proceeds from short-term borrowing 600
Payments on short-term borrowing - (600)
Decrease in restricted cash 71 -
Payments on long-term debt (82) (1,164)
Net proceeds from issuance of common stock 18 29,078
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Net cash provided by financing activities 7 27,914
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Net increase in cash and cash equivalents 853 27,723
Cash and cash equivalents at beginning of period 9,350 491
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Cash and cash equivalents at end of period $ 10,203 $ 28,214
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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 Form 10-K as filed with the
Securities and Exchange Commission on March 31, 1997. The results of operations
for the three month period ended March 31, 1997 are not necessarily indicative
of the results that may be expected for any subsequent quarter or for the fiscal
year ending December 31, 1997. The December 31, 1996 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. The Company received approximately
$29.0 million of cash, net of underwriting discounts and other offering costs.
3. EARNINGS PER SHARE
Per share earnings are based on the weighted average number of shares of
common stock and common stock equivalents outstanding. The dilutive effect of
outstanding stock options was determined based upon the treasury stock method.
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 earnings per share as if they were outstanding for all periods.
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.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per
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share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share for the first
quarter ended March 31, 1997 and March 31, 1996 of $0.02 and $0.01 per share,
respectively. The impact of Statement 128 on the calculation of fully diluted
earnings per share for these quarters is not expected to be material.
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ENGINEERING ANIMATION, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
NET REVENUES
The Company's total revenues are derived from sales of three dimensional ("3D")
visualization software products, interactive software products and custom
animation products. 3D visualization software products were formerly 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 visualization software products are recognized upon
delivery of the 3D visualization software products to the customer and
satisfaction of significant related obligations, if any. Revenues from customer
support are included in 3D visualization 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 148% to $7.7 million for the three months
ended March 31, 1997 from $3.1 million for the three months ended March 31,
1996. 3D visualization software products revenue increased 281% to $3.0 million
for the three months ended March 31, 1997 from $801,000 for the three months
ended March 31, 1996, as a result of increased product sales. Interactive
software product revenues increased 166% to $2.2 million for the three months
ended March 31, 1997 from $832,000 for the three months ended March 31, 1996,
primarily due to additional projects for interactive software products. Custom
animation products revenue increased 65% to $2.4 million for the three months
ended March 31, 1997 from $1.5 million for the three months ended March 31,
1996, primarily due to additional projects in custom animation products.
COST OF REVENUES
The cost of revenues includes cost of production, packaging and distribution
costs, royalties and amortization of capitalized software costs. Cost of
revenues increased 122% to $2.4 million for the three months ended March 31,
1997 from $1.1 million for the three months ended March 31, 1996, primarily due
to expenses associated with new development contracts in 3D visualization
software products and increased development costs for interactive software
projects. The Company's cost of revenues as a percentage of revenues was 32% for
the three months ended March 31, 1997 compared to 35% for the three months ended
March 31, 1996.
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OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses include personnel costs
related to sales, marketing and customer service activities, as well as costs
attributable to promotional materials, mail campaigns, trade shows and
advertising. Sales and marketing expenses increased 118% to $2.4 million for
the three months ended March 31, 1997 from $1.1 million for the three months
ended March 31, 1996, primarily due to costs associated with expansion of sales
force and increased marketing costs. Sales and marketing expenses were 31% of
total revenues for the three months ended March 31, 1997 compared to 35% for the
three months ended March 31, 1996. The decrease in sales and marketing expenses
as a percentage of revenues was primarily the result of spreading expenses over
higher revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
salaries and facility costs for administrative, executive and accounting
personnel, as well as consulting expenses, insurance costs, professional fees
and other costs. General and administrative expenses increased 111% to $925,000
for the three months ended March 31, 1997 from $439,000 for the three months
ended March 31, 1996, primarily a result of increased administrative staff and
related costs. General and administrative expenses were 12% of total revenues
for the three months ended March 31, 1997 compared to 14% for the three months
ended March 31, 1996. The decrease of general and administrative expenses as a
percentage of revenues for the three months ended March 31, 1997 was primarily a
result of spreading expenses over higher revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses consists of
salaries, related facility costs, equipment costs and outside consulting fees.
Research and development expenses increased 261% to $917,000 for the three
months ended March 31, 1997 from $254,000 for the three months ended March 31,
1996. Research and development expenses were 12% of total revenues for the
three months ended March 31, 1997 compared to 8% for the three months ended
March 31, 1996. The increase in research and development expenses for the three
months ended March 31, 1997 was primarily due to additional personnel and
related costs required to meet the increased demand for 3D visualization
software and interactive software products.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has satisfied its cash requirements through borrowings,
customer advances, capital lease financing and net proceeds of approximately
$29.0 million from the Company's initial public offering of Common Stock in
February 1996. As of March 31, 1997, the Company had $10.2 million in cash and
cash equivalents and $7.5 million in short-term investments.
Net cash used by operating activities was $295,000 for the three months ended
March 31, 1997, primarily due to an increase in accounts receivables, offset by
net income, depreciation, and an increase in income taxes payable. Accounts
receivable at March 31, 1997 increased approximately $810,000 to $7.5 million
from $6.7 million at December 31, 1996. The increase in accounts receivable was
due to increased revenues and increased size of the Company's contracts, which
historically have taken a longer period to collect than smaller contracts. The
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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 Company had a $1.0 million line of credit agreement with a commercial bank,
which expired on May 1, 1997 and was secured by substantially all of the assets
of the Company. As of March 31, 1997, the Company had no outstanding borrowings
against this line of credit. The Company did not renew the credit agreement
upon its expiration.
The Company believes its current cash and short-term investment balances 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.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company or its representatives from time to time may make or may have made
certain forward-looking statements, orally or in writing, including without
limitations any such statements made or to be made in the Management's
Discussion and Analysis contained in its various SEC filings. The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to ensure to the fullest extent possible the protections of
the safe harbor established in the Private Securities Litigation Reform Act of
1995. Accordingly, such statements are qualified in their entirety by reference
to and are accompanied by the following discussion of certain important factors
that could cause actual results to differ materially from those projected in
such forward-looking statements.
The Company cautions the reader that this list of factors may not be exhaustive.
The Company operates in a continually changing business environment, and new
risk factors emerge from time to time. Management cannot predict such risk
factors, nor can it assess the impact, if any, of such risk factors on the
Company's business or the extent to which any factors, or combination of
factors, may cause actual results to differ materially from those projected in
any forward-looking statements. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company may experience material fluctuations in future revenues and
operating results on a quarterly or annual basis resulting from a number of
factors, including: the time of the introduction of new visualization software
and interactive software products by the Company and by 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 products are sold in markets which change
rapidly and the Company must continually anticipate and adapt its products to
emerging computer technologies and capabilities.
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The market for the Company's three-dimensional visualization software products
is emerging and dependent upon a number of a variables, including consumer
preferences and the rate of adoption of new technology. There is a risk that
these markets will not continue to grow and that the Company's three-dimensional
visualization software products will not be accepted by the markets. The market
for the Company's interactive software products is emerging and dependent upon a
number of variables, including consumer preferences, shipments of, and the
installed base of, multimedia personal computers, and the number of developers
creating interactive software products. There is risk that the Company's
interactive software products will not be accepted by the market or that the
Company will be unable to respond to evolving requirements of the market.
For a more complete discussion of these risk factors, see the Company's Form
10-K, filed March 31, 1997.
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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 March
31, 1997.
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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: May 1, 1997 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)
13
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INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit Description Page
- - ------- ----------- -------------
27. Financial Data Schedule
14
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,203
<SECURITIES> 7,467
<RECEIVABLES> 11,160
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,572
<PP&E> 7,510
<DEPRECIATION> 1,606
<TOTAL-ASSETS> 38,654
<CURRENT-LIABILITIES> 3,057
<BONDS> 788
0
0
<COMMON> 47
<OTHER-SE> 33,843
<TOTAL-LIABILITY-AND-EQUITY> 38,654
<SALES> 7,676
<TOTAL-REVENUES> 7,676
<CGS> 2,425
<TOTAL-COSTS> 2,425
<OTHER-EXPENSES> 4,211
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 1,305
<INCOME-TAX> 520
<INCOME-CONTINUING> 785
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 785
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
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