SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 July 28, 2000, there were 12,052,379 shares of the Registrant's $0.01 par
value common stock outstanding.
<PAGE>
ENGINEERING ANIMATION, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
As of June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands; unaudited)
<CAPTION>
June 30, December 31,
2000 1999
------------ -------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 19,080 $ 10,939
Accounts receivable:
Billed 19,209 18,649
Unbilled 2,352 2,308
Deferred income taxes 159 7,758
Income taxes receivable - 693
Prepaid expenses and other assets 3,984 3,091
------------ -------------
Total current assets 44,784 43,438
Property and equipment, net 20,962 22,168
Other assets:
Note receivable 1,408 1,408
Software development costs, net 1,961 2,373
Goodwill and developed technology, net 9,276 10,915
Other 99 262
------------ -------------
Total assets $ 78,490 $ 80,564
============ =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,777 $ 4,165
Accrued compensation and other accrued expenses 7,316 8,531
Accrued restructuring and asset-impairment charges 2,536 -
Deferred revenue 4,215 5,204
Bank debt, current portion of long-term debt and lease obligations 700 5,273
Income taxes payable 1,723 -
------------ -------------
Total current liabilities 20,267 23,173
Long-term debt and lease obligations due after one year 551 616
Other long-term liabilities - 184
Deferred income taxes - 104
Net liabilities of discontinued operations 775 1,296
Stockholders' equity 56,897 55,191
------------ -------------
Total liabilities and stockholders' equity $ 78,490 $ 80,564
============ =============
See accompanying notes.
</TABLE>
<PAGE>
<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,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $18,124 $20,120 $35,675 $40,468
Cost of revenues 7,686 7,810 15,598 14,880
----------- ----------- ----------- -----------
Gross profit 10,438 12,310 20,077 25,588
Operating expenses:
Sales and marketing 6,130 7,328 13,076 13,994
General and administrative 3,326 3,626 7,249 6,369
Research and development 5,486 4,731 11,622 9,447
Goodwill and developed technology amortization 789 650 1,578 1,301
Restructuring and asset-impairment charges - - 3,968 -
----------- ----------- ----------- -----------
Total operating expenses 15,731 16,335 37,493 31,111
----------- ----------- ----------- -----------
Operating loss from continuing operations (5,293) (4,025) (17,416) (5,523)
Interest and other income, net 374 282 589 626
----------- ----------- ----------- -----------
Loss from continuing operations before income tax (4,919) (3,743) (16,827) (4,897)
Income tax benefit (15) (1,179) (1) (1,370)
----------- ----------- ----------- -----------
Loss from continuing operations
before extraordinary item (4,904) (2,564) (16,826) (3,527)
Extraordinary item:
Gain from sale of subsidiary, net of transaction
costs and income taxes (see note 3) - - 17,626 -
Discontinued operations:
Loss from discontinued operations, net of
income taxes (see note 2) - (2,390) - (1,927)
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) $(4,904) $(13,884) $ 800 $(14,384)
=========== =========== =========== ===========
Earnings (loss) per share:
Continuing operations (0.41) (0.22) (1.40) (0.30)
Extraordinary item - - 1.47 -
Discontinued operations - (0.95) - (0.92)
----------- ----------- ----------- -----------
Total $ (0.41) $ (1.17) $ 0.07 $ (1.22)
=========== =========== =========== ===========
Weighted average shares outstanding 12,046 11,846 12,030 11,819
=========== =========== =========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
ENGINEERING ANIMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<CAPTION>
Six months ended June 30,
2000 1999
Operating activities ------------ ------------
<S> <C> <C>
Net income (loss) $ 800 $ (14,384)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Goodwill and developed technology amortization expense 1,578 1,301
Depreciation and other amortization expense 2,898 2,299
Deferred income taxes 7,600 (5)
Provision for exiting discontinued operations including operating
losses during phase out period - 13,750
Gain from sale of subsidiary, net of transaction costs (27,312) -
Non-cash compensation expense 390 -
Loss on disposal of assets 94 -
Changes in operating assets and liabilities of continuing operations
Billed accounts receivable (2,135) 5,483
Unbilled accounts receivable (365) (2,587)
Prepaid expenses (119) (758)
Accounts payable (1,028) 2,082
Accrued expenses 3,023 (1,752)
Income taxes 2,476 (2,718)
Deferred revenue (1,025) 651
Cash effect of discontinued operations (1,526) (1,079)
------------ ------------
Net cash provided by (used in) operating activities (14,651) 2,283
------------ ------------
Investing activities
Purchases of property and equipment (826) (6,540)
Change in other assets (3) (4)
Capitalization of software development costs (97) (850)
Maturities of marketable securities - 15,000
Purchases of marketable securities - (9,589)
Proceeds from sale of subsidiary, net of transaction costs paid and
cash sold 27,970 -
------------ ------------
Net cash provided by (used in) investing activities 27,044 (1,983)
------------ ------------
Financing activities
Net change in restricted cash - (1)
Net change in short-term borrowing (4,608) 1,500
Payments on long-term debt and capital lease obligations (138) (283)
Net proceeds from exercise of options and warrants 466 781
------------ ------------
Net cash provided by (used in) financing activities (4,280) 1,997
------------ ------------
Net increase in cash and cash equivalents 8,113 2,297
Effect of exchange rates 28 (376)
Cash and cash equivalents at beginning of period 10,939 23,623
------------ ------------
Cash and cash equivalents at end of period $ 19,080 $ 25,544
============ ============
See accompanying notes.
</TABLE>
<PAGE>
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 1999 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, 2000, are not necessarily indicative of the
results that may be expected for any subsequent quarter or for the fiscal year
ending December 31, 2000. The balance sheet as of December 31, 1999 was derived
from audited financial statements. The balance sheets as of June 30, 2000, and
December 31, 1999, do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The financial statements include the operations of EAI-DELTA GmbH (DELTA)
up to March 24, 2000, the date of its sale by the Company (see Note 3 for
further discussion of the sale).
2. DISCONTINUED OPERATIONS
The Company announced on July 6, 1999 that it would exit its Interactive
Games and Science and Technology businesses. The following table summarizes
revenues and income (loss) from discontinued operations for the three and six
months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in thousands) 2000 1999 2000 1999
------- ------- ------ -------
<S> <C> <C> <C> <C>
Revenues from discontinued operations $ - $ 2,529 $ 393 $ 6,981
======= ======== ======= ========
Discontinued operations:
Loss from discontinued operations - (3,855) - (3,108)
Income tax benefit of loss
from discontinued operations - (1,465) - (1,181)
------- -------- ----- ---------
Net loss from discontinued operations - (2,390) - (1,927)
------- -------- ----- ---------
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 - (8,930) - (8,930)
tax
------- -------- ----- ---------
Loss from discontinued operations, net of income taxes $ - $(11,320) $ - $(10,857)
======= ======== ===== =========
</TABLE>
<PAGE>
3. SALE OF SUBSIDIARY
On March 24, 2000, the Company sold DELTA to Dassault Systemes S.A. for
$31.0 million in cash. The resulting gain, net of transaction costs, of $27.3
million was recognized in the first quarter of 2000 as an extraordinary gain on
sale of subsidiary. The Company recorded $9.7 million in U.S. and foreign income
tax expense on the transaction. The Company had acquired DELTA on December 22,
1998, and accounted for it as a pooling of interests.
4. RESTRUCTURING AND ASSET-IMPAIRMENT CHARGES
The Company recorded a restructuring charge of $2.7 million and an
asset-impairment charge of $1.3 million in the first quarter of 2000, related to
actions associated with redefining the Company's infrastructure. These charges
and the related accrual included severance costs, fixed asset write-downs,
office closings and other related expenses as detailed below:
<TABLE>
<CAPTION>
Total Cash payments/
restructuring/ non-cash charges Balance
(in thousands) asset-impairment against accrual of accrual at
charge accrued in 2000 June 30, 2000
-------------------------------------------------------
<S> <C> <C> <C>
Severance and other people costs $ 954 $ 937 $ 17
Office closings and sublease costs 1,751 271 1,480
Asset-impairment charge 1,263 224 1,039
-------------------------------------------------------
Total $ 3,968 $ 1,432 $ 2,536
=======================================================
</TABLE>
The severance payments and people costs were primarily attributed to
personnel in the general and administrative support areas involuntarily
terminated on March 24, 2000. Office closings and sublease costs were related to
either offices that are no longer being used by the Company or offices that will
be subleased out to entities not affiliated with the Company. The
asset-impairment charge relates to fixed assets of offices to be closed or
subleased. The Company has paid $1.2 million as of June 30, 2000 for severance
and other people costs, office closings and sublease costs. Except for long-term
lease payments, the Company expects most cash payments to be made by December
31, 2000.
5. COMPREHENSIVE INCOME (LOSS)
The following table summarizes comprehensive income (loss) for the three
and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Six months ended
(in thousands) June 30, June 30,
2000 1999 2000 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) as reported $ (4,904) $ (13,884) $ 800 $ (14,384)
Foreign currency translation adjustment 15 (77) 50 (322)
----------- ------------ ------------ ------------
Total comprehensive income (loss) $ (4,889) $ (13,961) $ 850 $ (14,706)
=========== ============ ============ ============
</TABLE>
<PAGE>
6. INCOME TAXES
The Company has net operating losses and tax credits carried forward as of
June 30, 2000, which result in a potential deferred tax asset. A valuation
allowance is required to reduce a potential deferred tax asset when it is likely
that all or some portion of the potential deferred tax asset will not be
realized due to the lack of sufficient taxable income. The Company has reviewed
its taxable earnings history and prospective future taxable income. Based on
this assessment, the Company has provided a full valuation allowance of its
deferred tax assets and will continue to assess the need for this allowance.
<PAGE>
ENGINEERING ANIMATION, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Engineering Animation, Inc. develops and produces Internet-enabled visual
process management, collaboration, communication and analysis solutions and
accompanying services for extended manufacturing enterprises. Major
manufacturers in the automotive, aerospace, industrial/heavy equipment,
electronics, telecommunications and government/defense industries use our
integrated enterprise-wide solutions across corporate Intranets and the
Internet.
Our software solutions provide manufacturers and their suppliers and
partners with shared, worldwide access to product and process data. Together
they can analyze, visualize and manipulate the shared data in real time. Our
solutions enable the manufacturing network to realize the competitive advantages
of lowered costs and faster time-to-market through improved product designs,
enhanced product quality and shorter production cycles.
Our software products include: the Open Enterprise Visualization(TM) (OEV)
solutions for viewing, distributing and analyzing product design data; the
virtual factory solutions for enhancing the efficiency and quality of
manufacturing operations and processes; and e-Vis(TM), our secure, Internet-
enabled collaborative solution that provides integration and communication
services to distributed project teams throughout the extended enterprise.
In addition, our Professional Services Group provides customized systems
integration and deployment services in support of our software products and
E-services. Our Litigation Services Group provides animated evidence to the
legal community.
On March 24, 2000, we sold DELTA to Dassault Systemes S.A. for $31.0
million in cash. The resulting gain, net of transaction costs, of $27.3 million
was recognized in the first quarter of 2000 as an extraordinary gain on sale of
subsidiary. We recorded $9.7 million in U.S. and foreign income tax expense on
the transaction.
We also recorded restructuring and asset-impairment charges of $4.0 million
in the first quarter of 2000 related to actions associated with redefining our
infrastructure. The charges include severance costs, fixed asset write-downs,
office closings and other related expenses.
RESULTS OF OPERATIONS
Revenue Recognition
Our revenues are derived from software licenses, software development
contracts, professional services, customer support and maintenance and
subscription services. We recognize revenue allocated to software licenses when
an arrangement to deliver software does not require significant production,
modification or customization and all four basic criteria in the Statement of
Position (SOP) 97-2, as amended, 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 collection of the resulting receivable is probable.
<PAGE>
For contracts with multiple obligations such as deliverable and undeliverable
software licenses, maintenance or other services, we allocate revenue to each
component of the contract based on vendor-specific objective evidence. 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. In 1998, the AICPA issued
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect
to Certain Transactions," to readdress vendor-specific objective evidence. We
adopted SOP 98-9 on January 1, 2000. The adoption has not had a material effect
on our financial position, operating results or liquidity. Our subscription
revenue is generated from monthly fees for customers subscribing to e-Vis, and
is recognized over the period that the services are provided. Deferred revenue
from our subscriptions consists of fees billed in advance.
<TABLE>
<CAPTION>
NET REVENUES
Three months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $18,124 (10)% $20,120
=====================================================================================================================
Six months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
Revenues $35,675 (12)% $40,468
=====================================================================================================================
</TABLE>
Revenues decreased 10% to $18.1 million for the three months ended June 30,
2000, from $20.1 million for the three months ended June 30, 1999, and decreased
12% to $35.7 million for the six months ended June 30, 2000, from $40.5 million
for the six months ended June 30, 1999. Both of these decreases in revenues were
primarily due to lower revenues from software licenses, customer- funded
development and the sale of DELTA. There was no revenue attributable to DELTA
recognized in the second quarter of 2000. During the second quarter of 2000,
there were no license contracts with recognizable revenue greater than 3% of
total revenue.
During the first quarter of 2000, our royalty revenue included $3.5 million
related to a sale by one of our partners.
<TABLE>
<CAPTION>
COST OF REVENUES
Three months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $7,686 (2)% $7,810
======================================================================================================================
As a percentage
of revenues 42% 39%
Six months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
Expense $15,598 5% $14,880
=====================================================================================================================
As a percentage
of revenues 44% 37%
</TABLE>
<PAGE>
Our cost of revenues are related primarily to direct labor and related
costs associated with our professional services group. Cost of revenues also
include packaging and distribution costs, royalty fees paid to third parties
under licensing agreements and amortization of capitalized software costs.
Cost of revenues decreased 2% to $7.7 million for the three months ended
June 30, 2000, compared to $7.8 million for the three months ended June 30,
1999. Expenses associated with funded development revenue projects decreased
significantly in the second quarter 2000 compared to the second quarter 1999.
This was offset by increases in compensation and related expenses attributable
to our professional services group and the inclusion of expenses from Kx
Verksamhetsutveckling AB (Kx) in the second quarter of 2000. Kx was acquired on
July 27, 1999. Our cost of revenues as a percentage of revenues increased to 42%
from 39% for the three months ended June 30, 2000 and 1999.
Cost of revenues increased 5% to $15.6 million for the six months ended
June 30, 2000, from $14.9 million for the six months ended June 30, 1999,
primarily due to higher compensation and related expenses attributable to our
professional services group and the inclusion of expenses from Kx in 2000,
offset by decreased expenses associated with funded development in 2000. The
cost of revenues as a percentage of revenues increased to 44% from 37% for the
six months ended June 30, 2000 and 1999. There were no cost of revenues
associated with the royalty revenue of $3.5 million recognized in the first
quarter of 2000, as described above in "Revenues."
For the three months ended June 30, 2000, we did not capitalize any
software development costs. For the three months ended June 30, 1999, we
capitalized software development costs of $487,000. We amortize these costs over
an estimated economic useful life of three years, or on the ratio of current
revenues to total projected product revenues, whichever amortization expense
amount is greater. Amortization expenses reported as cost of revenues for the
three months ended June 30, 2000 and 1999, were $279,000 and $166,000. For the
six months ended June 30, 2000 and 1999, we capitalized software costs of
$97,000 and $850,000. Amortization expenses for the six months ended June 30,
2000 and 1999 were $509,000 and $305,000. We compare unamortized computer
software costs with net realizable value on a product-by-product basis. These
estimates are based upon available information, including life cycles and
revenues from similar products, our past history, the market for the products,
our existing customer base, and other factors unique to the products.
Recoverability is subject to changes in our business model and the demand for
the product either because of general market conditions or the introduction of
new products by competitors. Capitalized software development costs, net of
accumulated amortization as of June 30, 2000, were $2.0 million.
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses
SALES AND MARKETING
Three months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $6,130 (16)% $7,328
=====================================================================================================================
As a percentage
of revenues 34% 36%
Six months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
Expense $13,076 (7)% $13,994
=====================================================================================================================
As a percentage
of revenues 37% 35%
</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, travel, depreciation expense and other
costs.
Our sales and marketing expenses decreased 16% to $6.1 million for the
three months ended June 30, 2000, from $7.3 million for the three months ended
June 30, 1999. The decrease was due to lower headcount in the sales and
marketing groups and related expenses, as well as lower sales commission expense
associated with lower revenues. Sales and marketing expenses decreased to 34% of
total revenues for the three months ended June 30, 2000, from 36% for the three
months ended June 30, 1999.
Our sales and marketing expenses decreased 7% to $13.1 million for the six
months ended June 30, 2000, from $14.0 million for the six months ended June 30,
1999. The decrease was primarily due to lower headcount in the sales and
marketing groups and related expenses, as well as lower sales commission expense
associated with lower revenues. Sales and marketing expenses increased to 37% of
total revenues for the six months ended June 30, 2000, from 35% for the six
months ended June 30, 1999.
During the second half of 2000, we are initiating an advertising campaign
associated with e-Vis in several national publications. We also anticipate
expanding our sales force and, as a result, we expect sales and marketing
expenses to increase during the second half of 2000.
<TABLE>
<CAPTION>
GENERAL AND ADMINISTRATIVE
Three months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $3,326 (8)% $3,626
=====================================================================================================================
As a percentage
of revenues 18% 18%
Six months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
Expense $7,249 14% $6,369
=====================================================================================================================
As a percentage
of revenues 20% 16%
</TABLE>
<PAGE>
General and administrative expenses consist primarily of personnel and
facility costs for administrative, information 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 decreased 8% to $3.3 million for the
three months ended June 30, 2000, from $3.6 million for the three months ended
June 30, 1999. The decrease was primarily due to lower headcount and related
personnel costs in our Administrative areas, as well as the benefits which are
beginning to be derived from the actions taken associated with redefining our
infrastructure. General and administrative expenses remained at 18% of total
revenues for the three months ended June 30, 2000, and June 30, 1999.
General and administrative expenses increased 14% to $7.2 million for the
six months ended June 30, 2000, from $6.4 million for the six months ended June
30, 1999. The increase as compared to the first six months of 1999 was primarily
due to higher professional fees, franchise taxes and bad debt expense. General
and administrative expenses increased to 20% of total revenues for the six
months ended June 30, 2000, from 16% for the six months ended June 30, 1999,
both due to the higher expenses and lower revenues.
<TABLE>
<CAPTION>
RESEARCH AND DEVELOPMENT
Three months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $5,486 16% $4,731
=====================================================================================================================
As a percentage
of revenues 30% 24%
Six months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
Expense $11,622 23% $9,447
=====================================================================================================================
As a percentage
of revenues 33% 23%
</TABLE>
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 16% to $5.5 million for the
three months ended June 30, 2000, from $4.7 million for the three months ended
June 30, 1999. The increase was primarily due to personnel increases and related
expenses that included further development enhancements to e-Vis. Research and
development expenses increased to 30% of total revenues for the three months
ended June 30, 2000, from 24% for the three months ended June 30, 1999, due to
both the expense increases and lower revenues.
Research and development expenses increased 23% to $11.6 million for the
six months ended June 30, 2000, from $9.4 million for the six months ended June
30, 1999. The increase was primarily due to personnel increases and related
expenses that included further development enhancements to e-Vis. Research and
development expenses increased to 33% of total revenues for the six months ended
June 30, 2000, from 23% for the six months ended June 30, 1999, due to both the
expense increases and lower revenues.
We expect to at least maintain the previous levels of investments we have
made in research and development.
<PAGE>
<TABLE>
<CAPTION>
GOODWILL AND DEVELOPED TECHNOLOGY AMORTIZATION EXPENSE
Three months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $789 21% $650
=====================================================================================================================
As a percentage
of revenues 4% 3%
Six months ended June 30,
(in thousands) 2000 Change 1999
---------------------------------------------------------------------------------------------------------------------
Expense $1,578 21% $ 1,301
=====================================================================================================================
As a percentage
of revenues 4% 3%
</TABLE>
Goodwill and developed technology amortization expense relates to
acquisitions we made in 1999, 1998 and 1997. The increase for the three and six
months ended June 30, 2000, compared to the three and six months ended June 30,
1999, is due to amortization of goodwill created upon the acquisition of Kx
Verksamhetsutveckling AB in July 1999.
RESTRUCTURING AND ASSET-IMPAIRMENT CHARGES
We recorded a restructuring charge of $2.7 million and an asset-impairment
charge of $1.3 million in the first quarter of 2000, related to actions
associated with redefining our infrastructure. These charges included severance
and other people costs, fixed asset write-downs, office closings and other
related expenses.
The severance and other people costs were primarily attributed to personnel
in the general and administrative support areas involuntarily terminated on
March 24, 2000. Office closings were related to either offices that are no
longer being used by us, or offices that will be subleased to entities not
affiliated with us. The asset write-downs related to fixed assets attributed to
these offices. We have paid $1.2 million as of June 30, 2000 for severance and
other people costs, office closings and sublease costs. Except for long-term
lease payments, we expect most cash payments to be made by December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied cash requirements through borrowings,
operations, capital and operating lease financing and aggregate net proceeds
from public offerings of common stock.
As of June 30, 2000, we had $19.1 million in cash and cash equivalents. 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.
For the six months ended June 30, 2000, net cash used in operating
activities was $14.7 million. We experienced lower revenues and total cash
collections during the six-month period compared to the same period last year.
We incurred cash outflows associated with restructuring charges of $1.2 million
as mentioned in Note 4 in Notes to Condensed Consolidated Financial Statements.
Cash outflows associated with discontinued operations were $1.5 million. Net
cash provided by operating activities was $2.3 million for the six months ended
June 30, 1999.
<PAGE>
For the six months ended June 30, 2000, net cash provided by investing
activities was $27.0 million. In March 2000, our sale of DELTA generated cash
proceeds, net of transaction costs and cash sold, of $28.0 million, which is
being used in current operations. We invested $0.8 million in property and
equipment, which was primarily due to the purchase of computers and other
equipment. For the six months ended June 30, 1999, we used cash of $2.0 million
in investing activities. We invested $6.5 million in the expansion of our
facilities and our purchases of computers, furniture and equipment. This was
offset by net maturities in our short-term investments of $5.4 million.
For the six months ended June 30, 2000, net cash used in financing
activities was $4.3 million, primarily due to paying off two lines of credit
totaling $4.5 million in April and May of 2000, partially offset by proceeds
from stock option exercises. Net cash provided by financing activities was $2.0
million for the six months ended June 30, 1999. The main financing sources were
net increases in short-term borrowing and proceeds from stock option exercises.
We believe that our current cash and cash equivalent balances will be
sufficient to meet anticipated cash needs for working capital and capital
expenditures for the next twelve months. However, 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 times as we may require it.
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.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This report, and statements that our representatives or we make, may
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 may 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.
You should carefully consider the risks, uncertainties and other
information described in this report. These are not the only risks and
uncertainties that we face. Additional risks and uncertainties that we do not
know about, or that we currently believe are immaterial, may also harm our
business operations. If any of these risks or uncertainties actually occur, our
business, financial position, operating results or liquidity could be materially
harmed.
<PAGE>
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.
If revenues fall below our expectations in a particular quarter, our
business could be harmed. General economic conditions affect our revenue
expectations, as well as the following factors:
o difficulties in forecasting the volume and timing of customer orders;
o the timing of our introduction of new products relative to our competitors'
introduction of similar products; o our arrangements to market our products;
o customer budgets and willingness to pay for delivered products and services;
and
o our ability to competitively price our products and services.
The revenue flow from our OEV and virtual factory solutions sales and
licensing is uneven within a fiscal quarter. Sales typically occur in the third
month of a quarter, and often in the last week or days of a quarter. Factors
contributing to this pattern include:
o long lead times on customer budgetary approvals, which tend to be given late
in a quarter;
o the tendency of customers to wait until late in a quarter to commit to
purchase in the hope of obtaining more favorable pricing from one or more
competitors seeking their business;
o at times, seasonal influences; and
o the fourth quarter influence of customers spending their remaining capital
budget authorization prior to new budget constraints in the first quarter
of the following year.
Shortfalls from anticipated revenue or revenue recognition delays could
result in significant variations in our operating results from quarter to
quarter. Our expenses are relatively fixed in the near term, or they may
increase as our research and development efforts increase in anticipation of new
market opportunities or in response to competitive pressure. We do not
anticipate this pattern for expenses changing.
Additionally, we find it difficult to forecast quarterly licensing revenue.
Our sales cycle, from initial evaluation to delivery of software, is lengthy and
varies substantially from customer to customer, particularly in the cases of
customized business solutions. Even though we intend to decrease our involvement
with customized business solutions, we do not anticipate that this change will
improve our ability to forecast quarterly revenue.
We anticipate our e-Vis sales will consist of a combination of both
subscription and enterprise software license revenue. We will recognize revenue
from the subscription sales ratably over the life of the subscription. The
revenue flow from our enterprise sales is likely to be uneven within a fiscal
quarter with sales typically occurring in the third month of a quarter and often
in the last week or days of a quarter. The degree to which e-Vis sales will have
any effect on our revenue flow depends on how quickly we grow this area of our
business.
<PAGE>
For a more complete discussion of other risk factors affecting the Company,
see the Company's 1999 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Rates
Our revenues originating outside the U.S. for the first six months of 2000
and 1999 were 24% and 31% of total revenues. The decrease can be attributed to
the sale of DELTA, a German based subsidiary in the first quarter of 2000.
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 future results could be
adversely impacted by changes in these or other factors.
Interest Rates
Our long-term debt at June 30, 2000 had variable rates of interest ranging
from 0% to 9%.
PART II. OTHER INFORMATION
Item 1. Legal proceedings
In February 1999, actions were filed against us and certain of our current
and former executive officers in the United States District Court for the
Southern District of Iowa. These actions allege that we violated Sections 10(b)
and 20(a) of, and Rule 10b-5 under, the Securities Exchange Act of 1934. They
allege that we made false or misleading statements of material fact about our
accounting for in-process research and development in connection with the
Rosetta Technologies, Inc. and Sense8 Corporation acquisitions and our 1999
business prospects. They seek unspecified damages. These claims are now
consolidated into one class action purporting to include individuals who
purchased our common stock between February 19, 1998 and April 6, 1999. The
court has appointed lead plaintiffs and co-lead counsel in the action. The court
has granted in part and dismissed in part the motion we filed to dismiss the
plaintiffs' amended complaint. We intend to oppose the action vigorously.
In October 1999, actions were filed against us and certain of our current
and former executive officers in the United States District Court for the
Southern District of Iowa. These actions allege that we violated Sections 10(b)
and 20(a) of, and Rule 10b-5 under, the Securities Exchange Act of 1934. They
allege that we made false or misleading statements of material fact about our
financial results for the second quarter of 1999. These claims are now
consolidated into one class action purporting to include individuals who
purchased our common stock between July 29, 1999, and October 1, 1999. The court
has appointed lead plaintiffs and lead counsel in the action. We intend to
oppose the action vigorously.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on June 29, 2000,
the stockholders of the Company (1) elected Jamie A. Wade as director of the
Company to hold office until the 2003 annual meeting of stockholders (subject to
the election and qualification of his successor or his earlier death,
resignation or removal); and (2) ratified the appointment of KPMG LLP as
auditors.
The votes were as follows:
Withheld/
Votes for Votes against Abstain
--------- ------------- ---------
(1) Election of director:
Jamie A. Wade 9,448,494 - 317,214
(2) Ratification of the appointment
of KPMG LLP as auditors 9,638,733 43,812 83,163
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See index to exhibits.
(b) Reports on Form 8-K
Current report on Form 8-K filed April 7, 2000, relating to the sale of
EAI-DELTA GmbH by EAI Holding GmbH, the Company's wholly owned
subsidiary, to Dassault Systemes S.A., for a negotiated purchase price
of $31.0 million in cash.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 9, 2000 ENGINEERING ANIMATION, INC.
------------------ (Registrant)
By: /s/ Michael K. O'Gara
------------------------
Michael K. O'Gara
Vice President of Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
------- ------------
27.1 Financial Data Schedule
