<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number: 0-28560
RESEARCH ENGINEERS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-2356861
(State or other jurisdiction of (IRS. Employer Identification
incorporation or organization No.)
22700 SAVI RANCH PARKWAY
YORBA LINDA, CALIFORNIA 92887
(Address of principal executive offices)
(714) 974-2500
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
The number of shares outstanding of the registrant's only class of Common Stock,
$.01 par value, was 5,701,000 on November 13, 1996
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(Unaudited)
(In thousands, except share and per share amounts)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $1,735
Short-term investments 3,034
Accounts receivable (net of allowance
for doubtful accounts of $18) 1,042
Deferred income taxes 164
Notes and related party loans receivable 51
Prepaid and other current assets 342
------
Total current assets 6,368
Property, plant and equipment, net 2,550
Goodwill (net of accumulated amortization of $44) 445
Other assets 253
------
$9,616
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 232
Accrued expenses 355
Current portion of notes payable and loans
to stockholders 16
Income taxes payable 237
Deferred maintenance revenue 634
Current portion of long-term bank debt 83
Other 141
------
Total current liabilities 1,698
Long-term bank debt 160
Notes payable and loans to stockholders 68
Deferred income taxes 22
Other liabilities 72
Stockholders' equity:
Preferred stock, par value $.01. Authorized
5,000,000 shares; issued and outstanding none -
Common stock, par value $.01. Authorized
20,000,000 shares; issued and outstanding
5,701,000 57
Additional paid-in capital 6,785
Retained earnings 757
Foreign currency translation adjustment (3)
------
Total stockholders' equity 7,596
------
$9,616
======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months Six months
ended September 30, ended September 30,
--------------------------- ----------------------------
1996 1995 1996 1995
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net revenues: $ $
Product sales 2,107 1,255 3,841 2,351
Maintenance and support 348 329 679 605
---------- ---------- --------- ----------
Total net revenues 2,455 1,584 4,520 2,956
Cost of revenues 187 121 339 234
---------- ---------- --------- ----------
Gross profit 2,268 1,463 4,181 2,722
Operating expenses:
Selling, general and administrative 1,747 934 3,080 1,761
Research and development 208 336 559 674
In-process research and development 37 37
---------- ---------- --------- ----------
Total operating expenses 1,955 1,307 3,639 2,472
---------- ---------- --------- ----------
Operating income 313 156 542 250
Other (income)/expense:
Interest (income)/expense, net (31) 60 26 126
Other (28) (35) (69) (70)
---------- ---------- --------- ----------
Income before income taxes 372 131 585 194
Income tax expense 84 22 157 28
---------- ---------- --------- ----------
Net Income $ 288 109 $ 428 166
========== ========== ========= ==========
Pro forma net income data (Note 5):
Income before income taxes as reported $ - 131 $ - 194
Pro forma provision for income tax expense - 45 - 66
---------- ---------- --------- ----------
Pro forma net income $ - 86 $ - 128
========== ========== ========= ==========
Net income per share $ 0.06 $ 0.09
========== =========
Weighted average common shares outstanding 5,204,571 4,710,833
========== =========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months
ended September 30,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 428 166
Adjustments to reconcile net income to net cash provided by
operating activities:
In-process research and development 37
Bonus expense for stock issuances 60
Depreciation and amortization 192 100
Deferred income taxes 127
Changes in operating assets and liabilities:
Accounts receivable (97) 38
Notes and related party loans receivable (11) 16
Prepaid expenses and other current assets (179) 39
Other assets (141) 29
Accounts payable, accrued expenses and other current liabilities (278) (74)
Deferred maintenance revenue 29 40
Income taxes payable 22 (22)
Other long-term liabilities (54) 1
-------- --------
Net cash provided by operating activities 38 430
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment, net (93) (95)
Payments to acquire companies, net of cash acquired (26)
Purchase of short-term investments (3,034) --
Proceeds from repayment of related party note receivable 48 --
-------- --------
Net cash used in investing activities (3,079) (121)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 6,469 --
Proceeds from bank debt 71
Repayment of bank debt (1,740) (39)
Repayment of stockholder loans (481) (154)
-------- --------
Net cash provided by (used in) financing activities 4,248 (122)
-------- --------
Increase in cash and cash equivalents 1,207 187
Cash and cash equivalents, beginning of period 528 433
-------- --------
Cash and cash equivalents, end of period $ 1,735 620
======== ========
Supplemental cash flow information:
Amounts paid for:
Interest $ 73 116
======== ========
Income taxes $ -- 6
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Research
Engineers, Inc. (the "Company") and its wholly-owned subsidiaries. These
consolidated financial statements have been prepared by the Company,
without audit, and include all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of operations
for the three months and six months ended September 30, 1996 and 1995, the
financial position at September 30, 1996, and the cash flows for the three
months and six months ended September 30, 1996 and 1995, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Results of operations for the three months and six months ended
September 30, 1996 are not necessarily indicative of the results to be
expected for the full year ended March 31, 1997.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ form those
estimates.
3. INITIAL PUBLIC OFFERING
On July 26, 1996, the Company completed its initial public offering of
1,300,000 shares of its common stock at $5.00 per share (1,495,000 shares
after exercise of the underwriters over-allotment option exercised on
September 3, 1996). The net proceeds of the offering (including exercise of
the underwriters over-allotment option), after deducting underwriter's
commissions and offering costs, were approximately $6,469,000. Proceeds to
the Company were used to repay approximately $2,194,000 of indebtedness to
stockholders and banks. The remaining proceeds are anticipated to be used to
further repay indebtedness, to fund research and development activities, to
augment the Company's sales, marketing and customer support activities and
to acquire related businesses, products and technologies.
4. INCOME PER SHARE
Income per share has been determined, in accordance with the treasury stock
method, by dividing net income by the weighted average number of common and
dilutive common equivalent shares outstanding during the period.
5. PRO FORMA INCOME STATEMENT DATA
Prior to October 1995, the Company operated as an S corporation for Federal
tax purposes. Therefore, the tax expense was related to state and foreign
taxes only. In October 1995, the Company converted to a C corporation. The
pro forma net income data for the three months ended September 30, 1995 and
the six months ended September 30, 1996 has been presented to reflect the
Company's provision for income tax expense as if the Company had been a C
corporation at such dates.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Research Engineers, Inc. (the "Company") is a leading provider of technically
sophisticated stand-alone and network-based engineering software products that
provide fully-integrated easy-to-use design automation and analysis solutions
for use by engineering analysis and design professional worldwide. The Company's
comprehensive line of Windows-based engineering software products includes
STAAD-III, the Company's structural analysis and design software, as well as
mechanical, civil and process/piping engineering products. The Company's
software products assist engineers in performing a myriad of mission-critical
engineering tasks, including analysis and design of industrial, commercial,
transportation and utility structures, pipelines, machinery and automative and
aerospace products and survey, contour and digital terrain modeling.
The following discussion and analysis addresses the results of the Company's
operations for the three and six months ended September 30, 1996, as compared to
the Company's results of operations for the three and six months ended September
30, 1995. On July 26, 1996, the Company consummated an initial public offering
(IPO) of 1,300,000 shares of its common stock at $5.00 per share (1,495,000
shares after exercise of the underwriters over-allotment option exercised on
September 3, 1996). The net proceeds of the offering (including exercise of the
underwriters over-allotment option), after deducting underwriter's commissions
and offering costs were approximately $6,469,000.
This quarterly report on Form 10-QSB contains forward-looking statements that
involve risks and uncertainties. The actual future results of The Company could
differ materially from those statements. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in this
report, uncertainties regarding market acceptance of new products and product
enhancements, delays in the introduction of new products, and risks associated
with managing the Company's growth, as well as those factors discussed in the
Company's Registration Statement on Form SB-2 and related Prospectus dated July
25, 1996, and the "Risk Factors" described therein.
RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND SIX
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net Revenues - Net revenues for the quarter ended September 30, 1996 increased
by $871,000 (55%) to $2,455,000, as compared to $1,584,000 for the quarter ended
September 30, 1995. For the six months ended September 30, 1996, revenues
increased by $1,564,000 (53%) to $4,520,000 from $2,956,000 for the six months
ended September 30, 1995. These increases in product sales and maintenance and
support revenues were primarily attributable to (i) increased unit sales of
STAAD III Release 22, released in September 1996 in the United States, (ii) the
Company's continued growth in overseas markets, particularly in the Asia-Pacific
and (iii) continued market acceptance of the 32-bit Windows 95 and Windows NT
versions of the Company's software products.
Revenues are derived primarily from sales of the Company's engineering software
products and, to a lesser extent, from sales of software maintenance contracts
relating to its products. Software product revenues are recognized upon
shipment. Product maintenance revenues are amortized over the length of the
maintenance contract which is usually twelve months.
International net revenues as a percentage of total revenues for the quarter
ended September 30, 1996 decreased by approximately 1% to 43%, down from 44% for
the quarter ended September 30, 1995. For the six months ended September 30,
1996 international revenues increased by approximately 3% to 45% of total
revenues, up from 42% for the six months ended September 30, 1995. The decline
in international sales for the quarter ended September 30, 1996 is the result of
delays in the localization of
6
<PAGE>
products for certain international markets. The Company's domestic revenues are
denominated in U.S. Dollars. However, revenues and expenses for the Company's
foreign subsidiaries and sales offices, are usually recorded in the applicable
foreign currency and translated with any applicable foreign exchange
adjustments. There were no foreign exchange gains or losses which were material
to the Company's financial results during either of the six months ended
September 30, 1996 and 1995.
Gross profit - Gross profit increased by $805,000 (55%) to $2,268,000 in the
quarter ended September 30, 1996 as compared to $1,463,000 for the quarter ended
September 30, 1995. Gross profit increased by $1,459,000 (54%) to $4,181,000 in
the six months ended September 30, 1996 as compared to $2,722,000 for the six
months ended September 30, 1995. The increases were primarily due to increased
sales volume.
Gross margin remained consistent at 92,4% for both of the quarters ended
September 30, 1996 and 1995. For the six months ended September 30, 1996 gross
margin increased to 92.5% up from 92.1% for the six months ended September 30,
1995. Cost of goods sold are not normally significant as a percentage of net
revenues due to the nature of the Company's products.
Selling, general and administrative expense - Selling, general and
administrative expense increased by $813,000 (87%) to $1,747,000 in the quarter
ended September 30, 1996 as compared to $934,000 for the quarter ended September
30, 1995, and increased as a percentage of net revenues to 71.2% from 59.0%, in
the comparable quarter of the prior year. Selling, general and administrative
expense increased by $1,319,000 (75%) to $3,080,000 in the six months ended
September 30, 1996 as compared to $1,761,000 for the six months ended September
30, 1995, and increased as a percentage of net revenues to 68.1% from 59.6%, in
the comparable six months of the prior year. Selling expenses increased as a
result of the higher commissions being paid associated with higher net revenues,
an increased number of telesales professionals and expanded worldwide sales
operations. General and administrative expenses increased due to the addition of
administrative, customer service and technical support personnel and increased
professional fees.
Research and development expense - Research and development expense decreased by
$128,000 (38%) to $208,000 in the quarter ended September 30, 1996 as compared
to $336,000 for the quarter ended September 30, 1995, and decreased as a
percentage of net revenues to 8.5% from 21.2%, in the comparable quarter of the
prior year. Research and development expense, decreased by $115,000 (17%) to
$559,000 during the six months ended September 30, 1996 as compared to $674,000
for the six months ended September 30, 1995, and decreased as a percentage of
net revenues to 12.4% from 22.8%, in the comparable six months of the prior
year. Research and development expenses consist primarily of software
developers' wages and from time to time the costs of software development
performed by outside parties. Decreases in research and development expense for
the periods presented are due to higher expenditures being incurred for outside
development during the six months ended September 30, 1995 as compared to the
six months ended September 30, 1996.
Other (income)/expense - Net interest (income)/expense decreased by $91,000
(152%) to ($31,000) in the quarter ended September 30, 1996 as compared to
$60,000 for the quarter ended September 30, 1995. Net interest (income)/expense
decreased by $100,000 (79%) to $26,000 during the six months ended September 30,
1996 as compared to $126,000 for the six months ended September 30, 1995. For
both periods the decrease is a result of the repayment of portions of the
Company's debt following the IPO combined with the effect of interest income
from the proceeds of the IPO.
Income taxes - Income tax expense increased by $62,000 to $84,000 in the quarter
ended September 30, 1996 as compared to $22,000 for the quarter ended September
30, 1995. Income tax expense increased by $129,000 to $157,000 in the six months
ended September 30, 1996 as compared to $28,000 for the six months ended
September 30, 1995. Additionally, the effective tax rate for the quarter ended
September 30, 1996 has increased to 22.6% from 16.8% for the quarter ended
September 30, 1995 and for the six months ended September 30, 1996 to 26.8% from
14.4% for the six months ended September 30, 1995. In
7
<PAGE>
1995, the Company operated as an S corporation for Federal tax purposes.
Therefore, the tax expense was related to state and foreign taxes only. In
October 1995, the Company converted to a C corporation. Therefore, tax expense
for the three and six months ended September 30, 1996 includes Federal tax
expense on operations subsequent to conversion. The pro forma net income data
for the three and six months ended September 30, 1995 has been presented to
reflect the Company's provision for income tax expense as if the Company had
been a C corporation at such date. Additionally, the effective tax rates for the
three and six months ended September 30, 1996 were lower than they would have
been otherwise by approximately 16% and 10%, respectively, due to the finalizing
of the Company's March 31, 1996 fiscal year end tax return and a reduction in
the amounts previously accrued for such return.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently finances its operations (including capital expenditures)
primarily through cash flows from operations as well as its cash and short-term
investment balances.
The Company's principal sources of liquidity at September 30, 1996, consisted of
$1,735,000 of cash, $3,034,000 of short-term investments and $150,000 available
under a line of credit with Wells Fargo Bank, N.A.. The Company's short-term
investments consist of $2,694,000 of United States government agency securities,
classified as held-to-maturity and $340,000 of preferred stock marketable equity
securities, classified as available-for-sale.
Cash provided by operations for the six months ended September 30, 1996 was
$38,000, and was generated primarily by current earnings, depreciation and
amortization expense, changes in deferred income taxes, offset by increases in
accounts receivable and in prepaid expenses and other assets, and decreases in
accounts payable and accrued expenses. Cash used in investing activities, which
consists primarily of purchases of both short-term investments and property,
plant and equipment, was $3,079,000. Cash provided by financing activities was
$4,248,000 and consisted of the net proceeds of the IPO offset by the repayment
of debt.
The Company has a $150,000 line of credit with Wells Fargo Bank, N.A. bearing
interest at prime plus 2% per annum. The line of credit is collateralized by
substantially all of the assets of the Company and expires on March 10, 1997. As
of September 30, 1996 there were no amounts of principal or accrued interest
outstanding relating to this line of credit. The Company is currently
negotiating an increase in the amount of this line of credit, however there can
be no assurances that such negotiations will be successful.
The Company consummated its IPO on July 26, 1996. The net proceeds to the
Company of $6,469,000 (which includes the amount received by the Company as a
result of the exercise of the underwriters over-allotment option on September 3,
1996) were used to repay approximately $2,194,000 of indebtedness. The remaining
proceeds are anticipated to be used to further repay indebtedness to fund
research and development activities, to augment the Company's sales, marketing
and customer support activities and to acquire related businesses, products and
technologies.
The Company believes that its current cash and short-term investment balances
and cash generated from operations and borrowings available under the Company's
line of credit will provide adequate working capital to fund the Company's
operations at currently anticipated levels through September 30, 1997. To the
extent that such amounts are insufficient to finance the Company's working
capital requirements, the Company will be required to raise additional funds
through public or private equity or debt financings. There can be no assurance
that such additional financings will be available, if needed, or, if available,
will be on terms satisfactory to the Company.
8
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
9
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 14, 1996
RESEARCH ENGINEERS, INC.
By: /s/ AMRIT K. DAS
----------------------------------
Amrit K. Das
Chairman of the Board, President,
Chief Executive Officer and
Director (principal executive officer)
By: /s/ BRIAN PAUL
-----------------------------------
Brian Paul
Chief Financial Officer, Secretary
and Treasurer (principal financial
and accounting officer)
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,735
<SECURITIES> 3,034
<RECEIVABLES> 1,042
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,368
<PP&E> 2,550
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,616
<CURRENT-LIABILITIES> 1,698
<BONDS> 0
0
0
<COMMON> 57
<OTHER-SE> 7,539
<TOTAL-LIABILITY-AND-EQUITY> 9,616
<SALES> 4,520
<TOTAL-REVENUES> 4,520
<CGS> 339
<TOTAL-COSTS> 3,639
<OTHER-EXPENSES> (69)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 585
<INCOME-TAX> 157
<INCOME-CONTINUING> 428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 428
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
