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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27670
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 MAY 8, 1998, THERE WERE 10,213,125 SHARES OF THE REGISTRANT'S
$0.01 PAR VALUE COMMON STOCK OUTSTANDING.
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ENGINEERING ANIMATION, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
For the three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 1998 and 1997 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 2. Changes in Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
----------------------------
March 31, December 31,
1998 1997
--------- -----------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,351 $ 24,892
Short-term investments 20,877 15,406
Accounts receivable:
Billed 13,741 15,617
Unbilled 8,337 6,321
Deferred income taxes 701 701
Prepaid expenses 1,612 1,554
--------- ---------
Total current assets 62,619 64,491
Property and equipment, net 12,934 11,394
Other assets:
Note receivable 1,408 1,408
Software development costs, net 1,355 1,396
Goodwill, net 1,136 1,212
Other 476 601
--------- ---------
Total assets $ 79,928 $ 80,502
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,608 $ 2,885
Accrued compensation and other accrued expenses 2,888 4,416
Deferred revenue 2,433 2,546
Current portion of long-term debt and lease obligations 155 176
--------- ---------
Total current liabilities 9,084 10,023
Long-term debt and lease obligations due after one year 1,417 1,495
Deferred income taxes 455 653
Stockholders' equity 68,972 68,331
--------- ---------
Total liabilities and stockholders' equity $ 79,928 $ 80,502
========= =========
</TABLE>
Note: The balance sheet at December 31, 1997 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 OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
----------------------------
Three Months ended March 31,
1998 1997
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<S> <C> <C>
Net revenues:
Software products $ 10,232 $ 5,072
Interactive products 5,564 4,627
-------- --------
Total revenues 15,796 9,699
Cost of revenues 4,333 2,608
-------- --------
Gross profit 11,463 7,091
Operating expenses:
Sales and marketing 4,478 3,193
General and administrative 1,666 1,142
Research and development 2,347 1,401
Purchased technology 4,249 --
-------- --------
Total operating expenses 12,740 5,736
-------- --------
Income (loss) from operations (1,277) 1,355
Other income, net 555 225
-------- --------
Income (loss) before income taxes
and minority interest (722) 1,580
Income tax expense (benefit) (274) 616
-------- --------
Net income (loss) before minority interest (448) 964
Minority Interest -- (58)
-------- --------
Net income (loss) $ (448) $ 906
======== ========
Earnings (loss) per share:
Basic $ (0.05) $ 0.12
======== ========
Diluted $ (0.05) $ 0.10
======== ========
Weighted average shares outstanding 9,881 7,864
======== ========
Weighted average shares outstanding
and assumed conversion 9,881 9,159
======== ========
</TABLE>
See accompanying notes.
4
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ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
---------------------------
Three Months ended March 31,
1998 1997
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (916) $ 376
INVESTING ACTIVITIES
Purchases of property and equipment (2,120) (1,088)
Development of software (96) (250)
Maturities of marketable securities 11,525 2,417
Purchases of marketable securities (16,996) --
-------- --------
Net cash provided by (used in) investing activities (7,687) 1,079
FINANCING ACTIVITIES
Decrease in restricted cash 72 71
Payments on long-term debt (99) (85)
Net proceeds from issuance of common stock 1,089 18
-------- --------
Net cash provided by financing activities 1,062 4
-------- --------
Net increase (decrease) in cash and cash equivalents (7,541) 1,459
Cash and cash equivalents at beginning of period 24,892 10,786
-------- --------
Cash and cash equivalents at end of period $ 17,351 $ 12,245
======== ========
</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, Inc. and the Company's wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. 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 1997
Form 10-K as filed with the Securities and Exchange Commission. The results of
operations for the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for any subsequent quarter or for
the fiscal year ending December 31, 1998. The December 31, 1997 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
The consolidated financial statements are presented giving retroactive
effect to the Company's November, 1997 acquisitions of Technology Company
Ventures, L.L.C. ("TCV") and Cimtech, Inc. ("Cimtech") which have been accounted
for under the pooling of interests method.
Certain prior year financial information has been reclassified to
conform to the 1998 financial statement presentation.
2. Public Offerings
In June 1997, the Company completed a follow-on offering of 1,000,000
shares of its common stock. The Company received approximately $26.6 million of
cash, net of underwriting discounts and other offering costs. In March 1998,
certain stockholders of the Company sold 966,000 shares of common stock to or
through agents or dealers. The Company did not receive any of the proceeds from
the sale of the common stock.
3. Stock Split
The Board of Directors approved a three-for-two stock split effected in
the form of a dividend, paid to the shareholders of record as of February 28,
1998. Accordingly, all share, per share, weighted average share and stock option
information has been restated to reflect the split.
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4. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which the Company adopted on December 31, 1997.
Statement 128 replaces the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 requirements.
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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 software products and
interactive products. Revenues from sales of software products are recognized
upon delivery of the software product to the customer and satisfaction of
significant related obligations, if any. Revenues from customer support are
included in software product revenues 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 recognizes revenues from
software development contracts and interactive products based upon labor and
other costs incurred and progress to completion on contracts.
The Company's total revenues increased 63% to $15.8 million for the three months
ended March 31, 1998 from $9.7 million for the three months ended March 31,
1997. Software products revenue increased 102% to $10.2 million for the three
months ended March 31, 1998 from $5.1 million for the three months ended March
31, 1997, as a result of increased product sales. Interactive product revenues
increased 20% to $5.6 million for the three months ended March 31, 1998 from
$4.6 million for the three months ended March 31, 1997, primarily due to
additional projects for interactive products.
COST OF REVENUES
The Company's cost of revenues includes cost of production, packaging and
distribution costs, royalties and amortization of capitalized software costs.
The Company's cost of revenues increased 66% to $4.3 million for the three
months ended March 31, 1998 from $2.6 million for the three months ended March
31, 1997, primarily due to expanded software product sales, software product
development contracts, and development costs for interactive products. The
Company's cost of revenues as a percentage of revenues remained constant at 27%
for the three months ended March 31, 1998 and 1997.
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 shows and other costs.
Sales and marketing expenses increased 40% to $4.5 million for the three months
ended March 31, 1998 from $3.2 million for the three months ended March 31,
1997, primarily due to costs associated with expansion of the sales force and
increased marketing costs. Sales and marketing expenses decreased to 28% of
total revenues for the three months ended March 31, 1998 from 33% for the three
months ended March 31, 1997. The
8
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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
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 $1.7 million for the three months ended March 31, 1998 from $1.1 million
for the three months ended March 31, 1997, primarily a result of increased
administrative staff and related costs. General and administrative expenses
decreased to 11% of total revenues for the three months ended March 31, 1998
from 12% for the three months ended March 31, 1997. The decrease of general and
administrative expenses as a percentage of revenues was primarily a result of
spreading expenses over higher revenues.
Research and development. The Company's research and development focuses on
product development and consists primarily of salaries and benefits, related
facility costs, equipment costs and outside consulting fees. The Company's
research and development expenses increased 68% to $2.3 million for the three
months ended March 31, 1998 from $1.4 million for the three months ended March
31, 1997. Research and development expenses increased to 15% of total revenues
for the three months ended March 31, 1998 from 14% for the three months ended
March 31, 1997. The increase in research and development expenses was primarily
due to additional personnel and related costs.
Purchased technology. In the first quarter of 1998, EAI formed strategic
partnerships with General Electric Corporate Research and Development and
Hewlett-Packard Company to license technology to incorporate into EAI's
VisProducts. Both agreements are accounted for as non-recurring charges to
purchased technology expense in the first quarter of 1998 in the aggregate
amount of $4.2 million.
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 and approximately $26.6 million from the Company's follow-on
offering of Common Stock in June 1997. As of March 31, 1998, the Company had
approximately $38.2 million in cash, cash equivalents and short-term
investments.
Net cash used by operating activities was $916,000 for the three months ended
March 31, 1998. Net cash provided by operating activities was $376,000 for the
three months ended March 31, 1997.
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.
9
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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company or its representatives may, from time to time, 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 Management's Discussions
and Analysis of Financial Condition and Results of Operations 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.
VARIABILITY OF OPERATING 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 software products and
interactive products by the Company and its competitors, seasonality of certain
customer purchases, product mix, general economic conditions and the Company's
ability to obtain agreements from publishers and distributors to market the
Company's products. The Company's operating results also will vary significantly
depending on changes in pricing, changes in customer budgets and changes in the
volume and timing of orders received, which are difficult to forecast. 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
revenues and operating results are not necessarily meaningful and should not be
relied upon as indicators of future performance.
YEAR 2000 COMPUTER CONVERSION
The Company has developed and implemented a plan to upgrade its information
technology in order to prepare for the year 2000 and has completed conversion of
all critical data processing systems. All of the Company's systems and
applications are 2000 compliant. The Company has also initiated communications
with its significant vendors to determine the extent to which the Company's
systems may be vulnerable to third parties' failure to remediate their own 2000
issues. Management currently does not anticipate such a failure to be an issue.
However,
10
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operating results could be impacted if the systems of other companies with whom
the Company transacts business are not compliant in a timely manner.
For a more complete discussion of other risk factors affecting the Company, see
the Company's 1997 Form 10-K.
11
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PART II. OTHER INFORMATION
Item 2. Changes in Securities
At the Annual Meeting of Stockholders of the Company on May 1, 1998, the
stockholders approved an amendment to the Company's Certificate of Incorporation
to increase the number of shares of Common Stock authorized for issuance from
20,000,000 shares to 60,000,000. This amendment is filed herewith as Exhibit
3.3.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on May 1, 1998, the
stockholders of the Company (1) elected Martin J. Vanderploeg and Laurence J.
Kirshbaum as directors of the Company to hold office until the 2001 annual
meeting of stockholders (subject to the election and qualification of their
successors and to their earlier death, resignation or removal); (2) approved the
amendment of the Company's Certificate of Incorporation, increasing the number
of shares authorized for issuance by 40,000,000 to 60,000,000; and (3) ratified
the appointment of Ernst & Young LLP as auditors. The votes were as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
<S> <C> <C> <C>
(1) Election of director:
Martin J. Vanderploeg 7,404,093 -- 84,974
Laurence J. Kirshbaum 7,403,707 -- 85,360
(2) Approval of Amendment of the
Company's Certificate of
Incorporation 6,155,394 1,322,084 11,589
(3) Ratification of the appointment
of Ernst & Young LLP as auditors 7,469,507 12,827 6,733
</TABLE>
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, 1998.
12
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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: ENGINEERING ANIMATION, INC.
----------------------------- (Registrant)
By: /s/ Jerome M. Behar
-----------------------------
Jerome M. Behar
Vice President of Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
13
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INDEX TO EXHIBITS
Exhibit Description
- - ------- -----------
2.4 Amended and Restated Agreement and Plan of Merger between the
Company, EAICA, Inc., and Sense8 Corporation, dated as of April
30, 1998 (incorporated herein by reference from the Company's
Registration Statement on Form S-4, SEC File No. 333-52003)
3.3 Certificate of Amendment to Certificate of Incorporation
27. Financial Data Schedule
14
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EXHIBIT 3.3
STATE OF DELAWARE
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ENGINEERING ANIMATION, INC.
FIRST: That by unanimous written consent, dated February 11, 1998, in accordance
with Section 141(f) of the General Corporation Law of the State of Delaware, the
Board of Directors of Engineering Animation, Inc. (the "Corporation") duly
adopted resolutions setting forth a proposed amendment of the Certificate of
Incorporation of said Corporation, declaring said amendment to be advisable and
submitting such amendment to the stockholders of said Corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that the Certificate of Incorporation of this Corporation be amended
by changing Section 1 of Article Fourth thereof so that, as amended, said
Section shall be and read as follows:
"1. AUTHORIZED SHARES. The total number of shares of stock of
all classes which the Corporation shall have authority to issue is
eighty million (80,000,000), of which twenty million (20,000,000) shall
be shares of Preferred Stock of the par value of $0.01 per share, and
sixty million (60,000,000) shall be shares of Common Stock of the par
value of $0.01 per share."
SECOND: That thereafter, pursuant to resolution of its Board of Directors, a
majority of the holders of Common Stock of said Corporation, by action of such
stockholders at the annual meeting of the stockholders of the corporation, on
May 1, 1998 in accordance with Section 242 of the General Corporation Law of the
State of Delaware, voted as follows: of the 9,890,949 shares of outstanding
Common Stock entitled to vote thereon, (1) the holders of 6,155,394 shares of
the outstanding stock voted in favor of the approval of said amendment; (2) the
holders of 1,322,084 shares of the outstanding stock entitled to vote thereon
voted against the approval of said amendment and (3) the holders of 11,589
shares of the outstanding stock did not vote on said amendment. There were no
shares of outstanding Preferred Stock entitled to vote thereon.
THIRD: That said amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
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IN WITNESS WHEREOF, said Board of Directors has caused this certificate to be
signed by Jamie A. Wade, its Vice President, this eleventh day of May, 1998.
By: /s/ Jamie A. Wade
-----------------------------
Vice President
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 17,351
<SECURITIES> 20,877
<RECEIVABLES> 22,078
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 62,619
<PP&E> 12,934
<DEPRECIATION> 0
<TOTAL-ASSETS> 79,928
<CURRENT-LIABILITIES> 9,084
<BONDS> 1,417
0
0
<COMMON> 0
<OTHER-SE> 68,972
<TOTAL-LIABILITY-AND-EQUITY> 79,928
<SALES> 15,796
<TOTAL-REVENUES> 15,796
<CGS> 4,333
<TOTAL-COSTS> 4,333
<OTHER-EXPENSES> 12,740
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (555)
<INCOME-PRETAX> (722)
<INCOME-TAX> (274)
<INCOME-CONTINUING> (448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (448)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
