SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A-1
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-27670
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.
Yes ____X___ No ________
As of August 6, 1999, there were 11,951,367 shares of the Registrant's
$0.01 par value common stock outstanding.
1
<PAGE>
ENGINEERING ANIMATION, INC.
FORM 10-Q/A-1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands; unaudited)
<CAPTION>
----------------------
Restated
June 30, December 31,
1999 1998
-------- --------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 25,544 $ 23,623
Short-term investments 6,462 11,873
Accounts receivable:
Billed 21,021 26,684
Unbilled 6,125 3,595
Deferred income taxes 1,233 1,250
Income taxes receivable 4,622 1,882
Prepaid expenses and other assets 2,670 1,997
-------- --------
Total current assets 67,677 70,904
Property and equipment, net 20,510 15,848
Other assets:
Note receivable 1,408 1,408
Software development costs, net 2,224 1,679
Deferred income taxes 777 769
Goodwill and developed technology, net 9,672 10,973
Other 1,266 1,423
Net assets of discontinued operations - 12,586
------- --------
Total assets $103,534 $115,590
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 5,407 $ 3,340
Accrued compensation and other accrued expenses 8,052 10,135
Deferred revenue 4,241 3,590
Bank debt, current portion of long-term debt and lease obligations 4,739 3,327
-------- --------
Total current liabilities 22,439 20,392
Long-term debt and lease obligations due after one year 1,283 1,480
Other long-term liabilities 170 179
Net liabilities of discontinued operations 30 -
Stockholders' equity 79,612 93,539
-------- --------
Total liabilities and stockholders' equity $103,534 $115,590
======== ========
See accompanying notes.
3
<PAGE>
</TABLE>
<TABLE>
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<CAPTION>
------------------------------ -------------------------------
Three months ended June 30, Six months ended June 30,
Restated Restated
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 20,120 $ 20,339 $ 40,468 $ 38,187
Cost of revenues 7,810 6,029 14,880 10,864
-------------- -------------- -------------- ---------------
Gross profit 12,310 14,310 25,588 27,323
Operating expenses:
Sales and marketing 7,328 4,763 13,994 9,217
General and administrative 3,626 2,574 6,369 5,244
Research and development 4,731 3,690 9,447 7,007
Acquisition costs and non-recurring expenses 650 2,181 1,301 6,705
-------------- -------------- -------------- ---------------
Total operating expenses 16,335 13,208 31,111 28,173
-------------- -------------- -------------- ---------------
Income (loss) from operations (4,025) 1,102 (5,523) (850)
Other income, net 282 512 626 1,031
-------------- -------------- -------------- ---------------
Income (loss) from continuing operations before income tax (3,743) 1,614 (4,897) 181
Income tax expense (benefit) (1,179) 1,449 (1,370) 1,025
-------------- -------------- -------------- ---------------
Income (loss) from continuing operations (2,564) 165 (3,527) (844)
Discontinued operations:
Income (loss) from discontinued operations
net of tax (see note 2) (2,390) 412 (1,927) 774
Provision for exiting discontinued operations
including operating losses during phase out
period, net of tax (see note 2) (8,930) - (8,930) -
-------------- -------------- -------------- ---------------
Net income (loss) $ (13,884) $ 577 $ (14,384) $ (70)
============== ============== ============== ===============
Earnings (loss) per share:
Basic
Continuing operations $ (0.22) $ 0.01 $ (0.30) $ (0.07)
Discontinued operations (0.95) 0.04 (0.92) 0.06
-------------- -------------- -------------- ---------------
Total $ (1.17) $ 0.05 $ (1.22) $ (0.01)
============== ============== ============== ===============
Diluted
Continuing operations $ (0.22) $ 0.01 $ (0.30) $ (0.07)
Discontinued operations (0.95) 0.04 (0.92) 0.06
-------------- -------------- -------------- ---------------
Total $ (1.17) $ 0.05 $ (1.22) $ (0.01)
============== ============== ============== ===============
Weighted average shares outstanding 11,846 11,540 11,819 11,356
============== ============== ============== ===============
Weighted average shares outstanding
and assumed conversion 11,846 12,786 11,819 11,356
============== ============== ============== ===============
See accompanying notes.
4
<PAGE>
</TABLE>
<TABLE>
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<CAPTION>
--------------------------------
Six months ended June 30,
Restated
Operating activities 1999 1998
-------------- ---------------
<S> <C> <C>
Net loss $ (14,384) $ (70)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Goodwill and developed technology amortization expense 1,301 538
Depreciation and other amortization expense 3,136 1,921
Deferred income taxes (5) (516)
Write-off of purchased in-process research
and development costs - 1,918
Provision for exiting discontinued operations including operating losses
during phase out period 13,750 -
Changes in operating assets and liabilities
Billed accounts receivable 5,575 (3,368)
Unbilled accounts receivable 1,010 (5,065)
Prepaid expenses (901) (292)
Accounts payable 2,442 958
Accrued expenses (1,495) (1,587)
Income taxes (8,414) 1,428
Deferred revenue 817 (766)
-------------- ---------------
Net cash provided by (used in) operating activities 2,832 (4,901)
-------------- ---------------
Investing activities
Purchases of property and equipment (6,946) (4,646)
Change in other assets (4) (1,181)
Capitalization of software development costs (993) (259)
Maturities of marketable securities 15,000 32,445
Purchases of marketable securities (9,589) (34,318)
Cash purchased in acquisitions - 79
-------------- ---------------
Net cash used in investing activities (2,532) (7,880)
-------------- ---------------
Financing activities
Net change in restricted cash (1) 71
Net change in short-term borrowing 1,500 1,390
Proceeds from long-term debt
and capital lease obligations - 380
Payments on long-term debt and capital lease
obligations (283) (967)
Net proceeds from exercise of options and warrants 781 1,609
Net proceeds from issuance of stock - 1,598
-------------- ---------------
Net cash provided by financing activities 1,997 4,081
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 2,297 (8,700)
-------------- ---------------
Effect of exchange rates (376) (23)
Cash and cash equivalents at beginning of period 23,623 25,881
-------------- ---------------
Cash and cash equivalents at end of period $ 25,544 $ 17,158
============== ===============
See accompanying notes.
5
<PAGE>
</TABLE>
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 subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting 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 1998 Annual Report on Form
10-K as filed with the Securities and Exchange Commission. The results of
operations for the six month period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for any subsequent quarter or for
the fiscal year ending December 31, 1999. The balance sheet as of December 31,
1998 was derived from audited financial statements but has been restated to
reflect net assets of discontinued operations as a separate line item in
accordance with Accounting Principles Board Opinion 30. The balance sheets as of
June 30, 1999 and December 31, 1998 do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The Company has restated the financial statements to give retroactive
effect to the 1998 acquisitions of Variation Systems Analysis, Inc. ("VSA");
Transom Technologies, Inc. ("Transom"); and EAI-DELTA GmbH ("DELTA"), all of
which were accounted for as pooling of interests. The financial statements also
include the operations of Sense8 Corporation ("Sense8") since June 17, 1998, the
date of its acquisition by the Company. The Sense8 transaction was accounted for
as a purchase.
Certain prior year financial information has been reclassified to
conform to the 1999 financial statement presentation.
2. RESTATEMENT
The Company has restated its financial statements for the three and six
months ended June 30, 1999 to reflect the reversal of revenue related to a major
sale originally recorded in the second quarter of 1999. The reversal was due to
the Company's discovery of a violation of Company revenue recognition policy and
generally accepted accounting principles that made it inappropriate for the
Company to recognize this revenue.
The Company undertook a comprehensive review of 1999 revenue and
engaged its independent auditors to perform a study of revenue recognized using
agreed-upon procedures. Based on this review and the agreed-upon procedures
report of its independent auditors, the Company concluded that, with the
exception of the reversal of revenue discussed above, there will be no other
changes to previously reported revenue. This reversal of revenue was partially
offset in the statement of operations by sales and marketing expenses and a tax
benefit associated with the revenue reversal.
6
<PAGE>
The Company's revenue from continuing operations for the second quarter
was restated from $27.2 million to $20.1 million, a reduction of $7.1 million.
Year to date revenue was restated from $47.6 million to $40.5 million. The
Company's sales and marketing expense for the second quarter was restated from
$7.8 million to $7.3 million, a reduction of $0.4 million. Year to date sales
and marketing expense was restated from $14.4 million to $14.0 million. The
Company's income tax from continuing operations for the second quarter was
restated from an expense of $1.4 million to a benefit of $1.2 million, a change
of $2.5 million. The year to date income tax provision was restated from an
expense of $1.2 million to a tax benefit of $1.4 million.
The Company's second quarter net income from continuing operations was
restated from $1.6 million, or $0.12 per share, to a net loss of $2.6 million,
or $0.22 per share. The year to date net income from continuing operations was
restated from $0.6 million, or $0.05 per share, to a net loss of $3.5 million,
or $0.30 per share. The Company's second quarter net loss was restated from $9.8
million, or $0.78 per share, to a net loss of $13.9 million, or $1.17 per share.
The year to date net loss was restated from $10.3 million, or $0.80 per share,
to a net loss of $14.4 million, or $1.22 per share. Billed accounts receivable
and accrued compensation and other accrued expenses at June 30, 1999 were
restated from $28.5 million and $8.5 million to $21.0 million and $8.1 million.
Deferred revenue at June 30, 1999 was restated from $4.6 million to $4.2
million.
7
<PAGE>
2. DISCONTINUED OPERATIONS
EAI announced on July 6, 1999 that it would exit its Interactive Games
and Science and Technology businesses by the end of the first quarter of 2000.
The Company has established a provision for discontinued operations in the
second quarter of 1999 to cover the estimated costs of exiting these businesses
including operating losses during the phase out period.
The following table summarizes revenues from discontinued operations
and net income (loss):
<TABLE>
<CAPTION>
------------------------------- --------------------------------
Three months ended June 30, Six months ended June 30,
Restated Restated
(in thousands) 1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues from discontinued operations $ 2,529 $ 5,013 $ 6,981 $ 9,310
=========== ============ ============= ============
Net income (loss) from continuing operations $ (2,564) $ 165 $ (3,527) $ (844)
Discontinued operations:
Income (loss) from discontinued operations before tax (3,855) 664 (3,108) 1,249
Income tax expense (benefit) of income (loss)
from discontinued operations (1,465) 252 (1,181) 475
------------ ------------ ------------- ------------
Net income (loss) from discontinued operations (2,390) 412 (1,927) 774
------------ ------------ ------------- ------------
Provision for exiting discontinued operations
including operating losses during phase out period before tax (13,750) - (13,750) -
Income tax benefit of provision for exiting
discontinued operations including operating
losses during phase out period (4,820) - (4,820) -
------------ ------------ ------------- ------------
Provision for exiting discontinued operations, net of tax (8,930) - (8,930) -
------------ ------------ ------------- ------------
Net income (loss) $ (13,884) $ 577 $ (14,384) $ (70)
============ ============ ============= ============
</TABLE>
During the second quarter of 1999, the Company recorded a provision for
exiting discontinued operations including operating losses during the phase out
period, net of tax, of $8.9 million. The provision includes accruals for
severance payments, asset write downs and estimated operating losses during the
phase out period.
8
<PAGE>
3. EARNINGS PER SHARE
The following table sets forth the computation of earnings per share.
Basic earnings per share are computed using the weighted average number of
common shares outstanding. Diluted earnings per share are computed using the
combination of dilutive common share equivalents and the weighted average number
of common shares outstanding.
<TABLE>
<CAPTION>
------------------------------- -------------------------------
(in thousands, except per share data) Three months ended June 30, Six months ended June 30,
Restated Restated
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) from continuing operations $ (2,564) $ 165 $ (3,527) $ (844)
Income (loss) from discontinued operations (11,320) 412 (10,857) 774
-------------- -------------- -------------- ---------------
Net income (loss) $ (13,884) $ 577 $ (14,384) $ (70)
============== ============== ============== ===============
Denominator
Denominator for basic earnings per share-
weighted average shares 11,846 11,540 11,819 11,356
Stock options and warrants - 1,246 - -
-------------- -------------- -------------- ---------------
Denominator for diluted earnings per share-
adjusted weighted average shares and
assumed conversion 11,846 12,786 11,819 11,356
============== ============== ============== ===============
Basic earnings (loss) per share
Continued operations $ (0.22) $ 0.01 $ (0.30) $ (0.07)
Discontinued operations (0.95) 0.04 (0.92) 0.06
-------------- -------------- -------------- ---------------
Total $ (1.17) $ 0.05 $ (1.22) $ (0.01)
============== ============== ============== ===============
Diluted earnings (loss) per share
Continued operations $ (0.22) $ 0.01 $ (0.30) $ (0.07)
Discontinued operations (0.95) 0.04 (0.92) 0.06
-------------- -------------- -------------- ---------------
Total $ (1.17) $ 0.05 $ (1.22) $ (0.01)
============== ============== ============== ===============
</TABLE>
4. COMPREHENSIVE INCOME
The following table summarizes comprehensive income for the three and
six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
---------------------------------- ---------------------------------
(in thousands) Three months ended June 30, Six months ended June 30,
Restated Restated
1999 1998 1999 1998
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) as reported $ (13,884) $ 577 $ (14,384) $ (70)
Foreign currency translation adjustment (81) (21) (324) (23)
---------------- --------------- --------------- ---------------
Total comprehensive income (loss) $ (13,965) $ 556 $ (14,708) $ (93)
================ =============== =============== ===============
</TABLE>
9
<PAGE>
ENGINEERING ANIMATION, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
We provide Internet-enabled visual process management, collaboration,
analysis and communication solutions for extended manufacturing enterprises. Our
solutions improve communication among engineering, manufacturing, marketing,
purchasing, sales and support teams and their suppliers, allowing them to work
on their processes concurrently. Traditionally, these processes have involved
sequential steps by separate internal teams that use disparate data creation and
storage systems. Our solutions allow users to view, analyze and communicate data
across extended enterprises without extensive training or expensive computer
hardware. In addition, our solutions provide advanced integrated analysis tools
for improving the efficiency of product engineering and manufacturing. Our
solutions improve product quality while reducing errors, cost and time to
market.
We announced on July 6, 1999 that we are exiting our Interactive Games
and Science and Technology businesses by the end of the first quarter of 2000.
We have established a provision for discontinued operations in the second
quarter of 1999 to cover the estimated costs of exiting these businesses
including operating losses during the phase out period. Our prior financial
results have been restated to reflect the Interactive Games and Science and
Technology businesses as discontinued operations. We will also discontinue the
use of the EAI Interactive and Software Division names
On July 19, 1999, we announced a partnership with Hewlett-Packard
Company (HP). They have agreed to support e-Vis.com, our Internet portal for
enterprise and supplier collaboration, integration and E-services, with more
than $150 million in hosting services, Web content, marketing support,
outsourcing, consulting, high-performance server platforms and use of HP's
secure Internet infrastructure.
Restatement
We have restated our financial statements for the three and six months
ended June 30, 1999 to reflect the reversal of revenue related to a major sale
originally recorded in the second quarter of 1999. The reversal was due to our
discovery of a violation of our revenue recognition policy and generally
accepted accounting principles that made it inappropriate for us to recognize
this revenue.
We undertook a comprehensive review of 1999 revenue and engaged our
independent auditors to perform a study of revenue recognized using agreed-upon
procedures. Based on this review and the agreed-upon procedures report of our
independent auditors, we concluded that, with the exception of the reversal of
revenue discussed above, there will be no other changes to previously reported
revenue. This reversal of revenue was partially offset in the statement of
operations by sales and marketing expenses and a tax benefit associated with the
revenue reversal.
Our revenue from continuing operations for the second quarter of 1999
was restated from $27.2 million to $20.1 million, a reduction of $7.1 million.
Year to date revenue was restated from $47.6 million to $40.5 million. Our sales
and marketing expense for the second quarter was restated from $7.8 million to
$7.3 million, a reduction of $0.4 million. Year to date sales and marketing
expense was restated from $14.4 million to $14.0 million. Our income tax from
continuing operations for the second quarter was restated from an expense of
$1.4 million to a benefit of $1.2 million, a change of $2.5 million. The year to
date income tax provision was restated from an expense of $1.2 million to a tax
benefit of $1.4 million.
10
<PAGE>
Our second quarter net income from continuing operations was restated
from $1.6 million, or $0.12 per share, to a net loss of $2.6 million, or $0.22
per share. The year to date net income from continuing operations was restated
from $0.6 million, or $0.05 per share, to a net loss of $3.5 million, or $0.30
per share. Our second quarter net loss was restated from $9.8 million, or $0.78
per share, to a net loss of $13.9 million, or $1.17 per share. The year to date
net loss was restated from $10.3 million, or $0.80 per share, to a net loss of
$14.4 million, or $1.22 per share. Billed accounts receivable and accrued
compensation and other accrued expenses at June 30, 1999 were restated from
$28.5 million and $8.5 million to $21.0 million and $8.1 million. Deferred
revenue at June 30, 1999 was restated from $4.6 million to $4.2 million.
The results of operations below are from our continuing operations
only.
RESULTS OF OPERATIONS
Revenues
Our revenues are derived from software licenses, software development
contracts, professional services, customer support and maintenance. We recognize
software license revenue when an arrangement to deliver software does not
require significant production, modification or customization and all four basic
criteria in the Statement of Position 97-2 ("SOP 97-2"), as modified, issued by
the American Institute of Certified Public Accountants (AICPA) have been met.
The four basic criteria are: persuasive evidence that an arrangement exists,
delivery has occurred, fee is fixed or determinable and collectibility is
probable. We recognize revenues from software development contracts and
professional services based upon labor costs incurred and progress to completion
on contracts. Revenues from customer support and maintenance are deferred and
recognized ratably over the period these services are provided.
<TABLE>
REVENUES
<CAPTION>
Three months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 20,120 (1)% $20,339
- --------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
Revenues $40,468 6% $38,187
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenue decreased 1% to $20.1 million for the three months ended June
30, 1999 from $20.3 million for the three months ended June 30, 1998 and
increased 6% to $40.5 million for the six months ended June 30, 1999 from $38.2
million for the six months ended June 30, 1998. Increases in sales of services
and maintenance were offset by decreases in software license sales.
11
<PAGE>
COST OF REVENUES
<TABLE>
<CAPTION>
Three months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $ 7,810 30% $6,029
- --------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues 39% 30%
Six months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
Expense $14,880 37% $10,864
- --------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues 37% 28%
</TABLE>
Our cost of revenues include direct labor and other costs associated
with funded software development, customer support and professional services,
packaging and distribution costs, royalties and amortization of capitalized
software costs.
Cost of revenues increased 30% to $7.8 million for the three months
ended June 30, 1999 from $6.0 million for the three months ended June 30, 1998,
primarily due to higher compensation and related expenses from the increased
number of employees on our professional services team. The cost of revenues as a
percentage of revenues increased to 39% from 30% for the three months ended June
30, 1999 and 1998 primarily due to revenue being lower than expected in the
second quarter of 1999.
Cost of revenues increased 37% to $14.9 million for the six months
ended June 30, 1999 from $10.9 million for the six months ended June 30, 1998,
primarily due to higher compensation and related expenses from the increased
number of employees on our professional services team. The cost of revenues as a
percentage of revenues increased to 37% from 28% for the six months ended June
30, 1999 and 1998, primarily due to revenue being lower than expected in 1999.
We capitalize certain software development costs in accordance with
the Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." For the
quarters ended June 30, 1999 and 1998, we capitalized software costs of $487,000
and $131,000. Amortization expenses for the quarters ended June 30, 1999 and
1998 were $158,000 and $134,000. For the six months ended June 30, 1999 and
1998, we capitalized software costs of $843,000 and $226,000. Amortization
expenses for the six months ended June 30, 1999 and 1998 were $305,000 and
$271,000.
12
<PAGE>
Operating Expenses
<TABLE>
<CAPTION>
SALES AND MARKETING
Three months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $7,328 54% $4,763
- --------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues 36% 23%
Six months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
Expense $13,994 52% $9,217
- --------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues 35% 24%
</TABLE>
Sales and marketing expenses include personnel and facility costs
related to sales, marketing and customer service activities, as well as
advertising, promotional materials, trade shows, depreciation and other costs.
Our sales and marketing expenses increased 54% to $7.3 million for the
three months ended June 30, 1999 from $4.8 million for the three months ended
June 30, 1998, primarily due to staffing increases in the sales and marketing
group and related compensation expense. Sales and marketing expenses increased
to 36% of total revenues for the three months ended June 30, 1999 from 23% for
the three months ended June 30, 1998, primarily due to the staffing increases
and to revenue being lower than expected in the second quarter of 1999.
Our sales and marketing expenses increased 52% to $14.0 million for the
six months ended June 30, 1999 from $9.2 million for the six months ended June
30, 1998 primarily due to staffing increases in the sales and marketing group
and related compensation expense. Sales and marketing expenses increased to 35%
of total revenues for the six months ended June 30, 1999 from 24% for the six
months ended June 30, 1998 primarily due to the staffing increases and revenue
being lower than expected in 1999.
13
<PAGE>
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Three months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $3,626 41% $2,574
- --------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues 18% 13%
Six months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
Expense $6,369 21% $5,244
- --------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues 16% 14%
</TABLE>
General and administrative expenses consist primarily of personnel
and facility costs for administrative,systems, legal, executive and accounting
staff, as well as certain consulting expenses, insurance costs, professional
fees, depreciation expense, bad debt expense and other costs.
General and administrative expenses increased 41% to $3.6 million for
the three months ended June 30, 1999 from $2.6 million for the three months
ended June 30, 1998. The increase was primarily due to staffing increases and
related compensation expense and increased legal and bad debt expense. General
and administrative expenses increased to 18% from 13% of total revenues for the
three months ended June 30, 1999 and 1998 primarily due to revenue being lower
than expected in the second quarter of 1999.
General and administrative expenses increased 21% to $6.4 million for
the six months ended June 30, 1999 from $5.2 million for the six months ended
June 30, 1998. The increase was primarily due to staffing increases and related
compensation expense, and increased legal and bad debt expense partially offset
by decreases in other types of expenses. General and administrative expenses
increased to 16% of total revenues for the six months ended June 30, 1999 from
14% for the six months ended June 30, 1998 primarily due to revenue being lower
than expected in 1999.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Three months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $4,731 28% $3,690
- --------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues 24% 18%
Six months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
Expense $9,447 35% $7,007
- --------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues 23% 18%
</TABLE>
14
<PAGE>
Research and development expenses focus on software product development
and consist primarily of personnel costs, related facility costs, equipment
costs, depreciation and amortization expenses and outside consulting fees.
Research and development expenses increased 28% to $4.7 million for the
three months ended June 30, 1999 from $3.7 million for the three months ended
June 30, 1998, primarily due to increased staffing and related costs and outside
consulting expenses. Research and development expenses increased to 24% of total
revenues for the three months ended June 30, 1999 from 18% for the three months
ended June 30, 1998 primarily due to revenue being lower than expected in the
second quarter of 1999.
Research and development expenses increased 35% to $9.4 million for the
six months ended June 30, 1999 from $7.0 million for the six months ended June
30, 1998, primarily due to increased staffing and related costs and outside
consulting expenses. Research and development expenses increased to 23% of total
revenues for the six months ended June 30, 1999 from 18% for the six months
ended June 30, 1998 primarily due to revenue being lower than expected in 1999.
ACQUISITION COSTS AND NON-RECURRING EXPENSES
<TABLE>
<CAPTION>
Three months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $650 (70)% $2,181
- --------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues 3% 11%
Six months ended June 30,
(in thousands) 1999 Change 1998
- -------------------------------------------------------------------------------------------------------------------------
Expense $1,301 (81)% $6,705
- --------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues 3% 18%
</TABLE>
Goodwill and developed technology amortization was $650,000 and
$263,000 for the three months ended June 30, 1999 and 1998 and was $1.3 million
and $538,000 for the six months ended June 30, 1999 and 1998.
In the second quarter of 1998, a charge of $1.9 million was incurred
for in-process research and development related to the acquisition of Sense8,
which was accounted for as a purchase.
In the first quarter of 1998, we formed strategic partnerships with
General Electric Corporate Research and Development and Hewlett-Packard Company
to license technology to incorporate into VisProducts(R) software. Both
agreements are accounted for as non-recurring charges in the first quarter of
1998 in the aggregate amount of $4.2 million.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources is for our
combined continuing and discontinued operations.
As of June 30, 1999, we had $32 million in cash, cash equivalents and
short-term investments. We consider all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents are carried at cost, which approximates market value.
Net cash provided by operating activities was $2.8 million for the six
months ended June 30, 1999. Net cash used in operating activities was $4.9
million for the six months ended June 30, 1998. The increase in net cash
provided by operating activities was primarily due to lower growth during the
first six months of 1999 in overall accounts receivable balances compared to the
first six months of 1998. During the second quarter of 1999, $3.1 million of
accounts receivable attributed to software license and deferred maintenance
revenue was sold to a third party finance company on a non-recourse basis. The
effect of increased income taxes receivable on net cash provided by operating
activities was offset by an increase in accounts payable. Excluding cash flows
related to acquisition costs and non-recurring expenses, net cash provided by
operating activities during the first six months of 1999 and 1998 were $4.5
million and $0.9 million.
Net cash used in investing activities was $2.5 million for the six
months ended June 30, 1999. This was primarily due to a $6.9 million increase of
property and equipment because of the expansion of our facilities and purchases
of computer equipment. This was offset by net maturities in our short-term
investments of $5.4 million. For the six months ended June 30, 1998, we used
cash of $7.9 million in investing activities. This was primarily due to
increasing our short-term investment portfolio by $1.9 million and to increasing
our property and equipment by $4.6 million relating to the expansion of our
facilities and purchases of computer equipment.
Net cash provided by financing activities was $2.0 million and $4.1
million for the six months ended June 30, 1999 and 1998. For the first six
months of 1999, the main financing source was proceeds from stock option
exercises and net increases in short-term borrowings. For the first six months
of 1998, the main financing sources were proceeds from stock option exercises,
issuance of stock and net increases in short-term borrowings. We have two lines
of credit totaling $4.5 million, all of which was utilized as of June 30, 1999.
We plan to invest in sales, marketing and research and development
infrastructure. This will include investments in existing and advanced areas of
technology that could include using cash to acquire technology and to fund
ventures and other strategic opportunities. We intend to continue additions to
property and equipment, including new or expanding facilities and computer
systems for research and development, sales and marketing, support and
administrative staff.
We have not paid any cash dividends and do not currently anticipate
paying cash dividends in the future. There can be no assurance that we will ever
pay a cash dividend.
We believe our 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 us will not be
required or that any such required additional capital will be available on
reasonable terms, if at all, at such time as we may require it.
16
<PAGE>
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This report and statements we or our representatives make contain
forward-looking statements that involve risks and uncertainties. We develop
forward-looking statements by combining currently available information with our
beliefs and assumptions. These statements often contain words like believe,
expect, anticipate, intend, contemplate, seek, plan, estimate or similar
expressions. Forward-looking statements do not guarantee future performance.
Recognize these statements for what they are and do not rely upon them as facts.
Forward-looking statements involve risks, uncertainties and
assumptions, including, but not limited to, those discussed in this report. We
will not update the forward-looking statements, even if they become incorrect or
misleading. We make these statements under the protection afforded them by
Section 21E of the Securities Exchange Act of 1934, as amended. Because we
cannot predict all of the risks and uncertainties that may affect us, or control
the ones we do predict, these risks and uncertainties can cause our results to
differ materially from the results we express in our forward-looking statements.
Variability of Operating Results
We historically have experienced fluctuations in our quarterly revenues
and operating results and we expect to experience fluctuations in the future.
Since our quarterly and annual revenues and operating results vary, we believe
that period-to-period comparisons of results are not necessarily meaningful. You
should not rely on period-to-period comparisons as indicators of our future
performance.
In addition to general economic conditions, the following factors
affect our revenues:
* difficulties in forecasting the volume and timing of customer
orders;
* the timing of our introduction of new products relative to our
competitors' introduction of similar products;
* our arrangements with distributors to market our products;
* customer budgets; and
* our ability to competitively price our products and
services.
Year 2000 Readiness
During the second quarter of 1999, we continued evaluating the effect
of Year 2000 issues on our core software products, mission critical facilities,
databases, and hardware and software systems. Under a plan formulated in 1998 to
coordinate our Year 2000 efforts company-wide, the Vice President of
Administration continues to direct a task force comprised of high level managers
that oversees the evaluation of our products, facilities and operations. In
general, the plan called for creating an inventory of current products, mission
critical facilities, databases and systems; analyzing our state of knowledge
regarding their Year 2000 readiness; gathering additional information through
contacts or testing, where needed; assessing whether a risk existed and what to
do about it; and developing and implementing remedies, where needed.
17
<PAGE>
Our business has continued to change since the implementation of the
plan. We have taken that into consideration as we have applied the plan. To keep
the public informed of our progress, we have developed a location within our
Internet Web site for communicating our Year 2000 readiness disclosure
information.
Products: We consider a product Year 2000 ready if it is capable of
correctly processing, providing and receiving date data within and between the
20th and 21st centuries, and during 1999, 2000 and leap year calculations. This
assumes that our product is used in accordance with its associated documentation
and all other hardware and software products used with our software properly
exchange accurate date data with it. As we test our software, we coincidentally
test third party software included in our products.
Although we have completed the initial inventory, testing and
evaluation of our core software products, some testing efforts will continue
throughout the remainder of the year. Additionally, some of our customers have
tested and will continue to test our products. Collectively, we have identified
only a few Year 2000 issues associated with some of our products and have
offered our customers a patch or an upgrade for these products. We have posted
to our Web site the Year 2000 readiness status of these products. We estimate
the total cost of our having evaluated and tested our current products at less
than $20,000.
Facilities: We lease offices in about 30 locations throughout the
world. Of these offices, we have identified our mission critical facilities. We
consider an office to be mission critical if it supports approximately 15 or
more employees or if it supports a critical function or contract.
We have prepared an inventory of the mission critical information
technology ("IT") and non-IT systems for the mission critical facilities.
Generally, we consider a location's telecommunications, utilities, HVAC and
security systems as mission critical systems. We have continued our efforts to
gather Year 2000 information on these systems from landlords and suppliers. For
some of the suppliers, we are depending upon their Web site disclosures for
their Year 2000 assurances; for others, we have written to them or spoken with
them directly. We will continue to gather and review the information through
1999 as it is updated by the landlords and suppliers to assess whether
contingency planning is needed. The costs associated with these activities to
date have been nominal.
Systems: Our business utilizes Unix, database and personal computer
(PC) software/hardware systems. Management of these systems is centralized in
our corporate headquarters. We evaluated these systems and determined that most
required software upgrades (patches) to address Year 2000 issues. Generally,
systems manufacturers have made patches available for free over the Internet. We
install these patches as they are made available by the manufacturers. Where
patches are not available, we have implemented alternative actions such as
internal testing, or phase-out or replacement of equipment.
Due to obsolescence, we have either patched or will phase out by the
end of 1999 our Unix Systems. We estimate the total cost to install the Unix
system patches at less than $10,000.
18
<PAGE>
Our centralized databases include the accounting, human resources and
payroll systems. Although we have done some database testing, we are primarily
relying on the statements of the suppliers of these systems regarding their Year
2000 readiness.
Nearly every employee is dependent upon a PC for the performance of his
or her daily work. Most, if not all of these PCs, needed to be patched. With
over 60% of these PCs already patched, we have scheduled this project to
continue into September 1999. We estimate the total cost for the PC upgrading at
less than $25,000.
Contingency Plan: Our products are based on software that is relatively
new. This, plus the relatively few Year 2000 issues that have been identified to
date through internal and external testing of our products, leads us to believe
that the most reasonably likely worst case scenario for us does not involve our
products. Instead, a worst case scenario is more likely to arise from the
failure of externally supplied services, such as utilities or
telecommunications, over which we have no control.
We have developed a model contingency plan for these types of Year 2000
issues. Our facilities will be implementing facility-specific versions of this
plan during the third and fourth quarters of 1999.
We can not ensure that we have identified and assessed all Year 2000
issues that may affect us. We also can not ensure that we have adequately
addressed the Year 2000 issues that we have identified. Any of these failures or
oversights could materially adversely affect our business operations or
financial statements.
For a more complete discussion of other risk factors affecting the
Company, see the Company's 1998 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Rates
Our revenue originating outside the U.S. for the first six months of
1999 and 1998 was 31% and 28% of total revenue. International sales are made
mostly from our foreign subsidiaries in local currency. Certain international
sales are denominated in U.S. dollars. Our subsidiaries incur most of their
expenses in local currency.
Our international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions and foreign currency volatility. Our largest
foreign currency exposure is from the German Deutsche Mark.Our future results
could be adversely impacted by changes in these or other factors.
19
<PAGE>
Interest Rates
We invest our cash in a variety of financial instruments, including
bank time deposits and fixed rate obligations of governmental entities and
agencies. These investments are denominated in U.S. dollars. Cash balances in
foreign currencies overseas are operating balances and are invested in
short-term time deposits of the local operating bank.
Investments in fixed rate interest earning instruments carry a degree
of interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Due in part to these
factors, our future investment income may fall short of expectations due to
changes in interest rates or we may suffer losses in principal if forced to sell
securities that have seen a decline in market value due to changes in interest
rates. Interest rate risk is mitigated by the short-term nature of our
investments. Our investment securities are held for purposes other than trading.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Beginning in February, 1999, actions were filed in the United States
District Court for the Southern District of Iowa which named the Company and
certain of its executive officers as defendants. The actions have been
consolidated and are a purported class action of all persons who purchased our
common stock between February 19, 1998 and April 6, 1999. The complaints allege
various violations of federal securities laws and seek unspecified damages. We
believe that the allegations are totally without merit and we intend to oppose
the actions vigorously.
On October 15, 1999, and October 29, 1999, actions were filed in the
United States District Court for the Southern District of Iowa which named the
Company and certain of its executive officers as defendants. The actions are
purported class actions of all persons who purchased our common stock between
July 29, 1999 and October 1, 1999. The complaints allege various violations of
federal securities laws and seek unspecified damages. We believe that the
allegations are not supportable and we will defend vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on May 11,
1999, the stockholders of the Company (1) elected Matthew M. Rizai and Michael
M. Crow as directors of the Company to hold office until the 2002 annual meeting
of stockholders (subject to the election and qualification of their successors
or their earlier death, resignation or removal); (2) approved the amendment and
restatement of the Stock Option Plan to increase the number of shares that may
be issued under the Plan from 1,785,000 to 2,335,000 and to make a technical
amendment to the Plan; and (3) ratified the appointment of Ernst & Young LLP as
auditors. The votes were as follows:
<TABLE>
<CAPTION>
Withheld/
Votes for Votes against Abstain
--------- ------------- -------
(1) Election of director:
<S> <C> <C>
Matthew M. Rizai 9,919,072 - 112,467
Michael M. Crow 9,917,183 - 114,356
(2) Approval of amendment and restatement
of the Stock Option Plan to increase
number of shares
that may be issued 7,184,834 2,660,055 186,650
(3) Ratification of the appointment
of Ernst & Young LLP as auditors 9,698,469 53,471 279,599
</TABLE>
21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See index to exhibits.
(b) Reports on Form 8-K
Form 8-K filed July 9, 1999, relating to the Company's
announcement July 6, 1999 of its exit from the Interactive
Games and Science and Technology businesses.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1999 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)
22
<PAGE>
INDEX TO EXHIBITS
10.1 Employment Letter to Robert Nierman, dated April 16, 1999.+
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
--------------------
+ Denotes compensatory agreement.
23
VIA UPS OVERNIGHT DELIVERY
April 16, 1999
Mr. Robert Nierman
XXXXXXXXXXXX
XXXXXXXXXXXX
Dear Bob:
I am very pleased to offer to you the position of Chief Operating Officer and
Executive Vice President of Engineering Animation, Inc. With your experience,
reputation, and knowledge of the industry, I am confident that you will be an
invaluable member of my management team. In this position, you will report
directly to me and you will be responsible for all operations of EAI.
The compensation package for this position includes an annual salary of $300,000
and an annual bonus of an equal amount. The bonus amount will be prorated from
the date of employment and will paid quarterly, commencing with the third
quarter. In addition, you will be granted a stock option which will permit you
to purchase 225,000 shares of EAI common stock. The total life of the option
will be ten years and will vest over a period of four years from the date of
grant. Additional compensation items will include an auto allowance of $750 per
month and a life insurance policy with a face amount of $500,000 payable to your
chosen beneficiary.
As agreed, we will also provide a severance benefit to you which will provide
that in the event of your termination following a change of control in the first
eighteen months of your employment, you will be paid a severance amount equal to
three times the total of your current salary and bonus. In the event of a
termination following a change of control after eighteen months, you will
receive a severance benefit equal to two times your current salary and bonus. As
part of our agreement, you also agree that you will sign an EAI standard
non-competition agreement.
Naturally, you will also receive EAI's standard benefits package of health and
dental insurance, 401(k) matching contributions, paid time off, and similar
benefits.
Bob, I have asked Jamie Wade, our General Counsel, to add a draft of an
employment agreement to this letter along with other employment information
materials. If the terms as stated in this letter are as we discussed, please
execute the copy of this letter at the bottom and return it to my office by fax
at 515-XXX-XXXX. Please contact Jamie prior to sending the fax so that we can
maintain confidentiality. If the employment agreement does not address the terms
as you understand them, or if you have any questions, please feel free to
contact Jamie Wade at 515-XXX-XXXX or at 515-XXX-XXXX (cell) or 515-XXX-XXXX
(home). If you would like to speak to me, please leave me a voicemail at
515-XXX-XXXX letting me know the best time to contact you from Japan.
Bob, we have gathered some of the best people in the country to accomplish EAI's
goals, and your addition to the team will help us capture the lead in this
industry.
Sincerely,
/s/ Matthew Rizai
- -----------------
Matthew Rizai
President and CEO
I accept the terms of employment as stated in this letter.
/s/ Robert Nierman
- ------------------
Robert Nierman
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