<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, 1999
[ ] 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
(State or other jurisdiction of 22-2356861
incorporation) (IRS. Employer Identification No.)
22700 SAVI RANCH PARKWAY
YORBA LINDA, CALIFORNIA 92887
(Address of principal executive offices)
(714) 974-2500
(Registrant'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 5,942,498 on November 12, 1999.
<PAGE>
<TABLE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
(In thousands, except share and per share amounts)
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 2,118
Accounts receivable (net of allowance for doubtful accounts of $415) 3,686
Deferred income taxes 1,258
Notes and related party loans receivable 54
Prepaid expenses and other current assets 840
------------------
Total current assets 7,956
Property, plant and equipment, net 4,295
Goodwill and intangible assets (net of accumulated amortization of $1,112) 7,496
Other assets 747
------------------
$ 20,494
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term bank debt $ 1,308
Current portion of capital lease obligations 101
Accounts payable 855
Accrued expenses 1,149
Income taxes payable 435
Deferred maintenance revenue 842
------------------
Total current liabilities 4,690
Long-term bank debt, net of current portion 5,004
Capital lease obligations, net of current portion 434
Deferred income taxes 308
------------------
Total liabilities 10,436
------------------
Minority Interest 74
------------------
Stockholders' equity:
Preferred stock, par value $.01. Authorized 5,000,000 shares; issued and
outstanding 371,429 shares 4
Common stock, par value $.01. Authorized 20,000,000 shares; issued and
outstanding 5,939,231 shares 59
Additional paid-in capital 10,497
Accumulated deficit (299)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustments (277)
------------------
Total stockholders' equity 9,984
------------------
$ 20,494
==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
Product sales $ 1,593 $ 1,720 $ 3,385 $ 3,463
IT services 1,832 - 3,051 -
Maintenance and support 483 482 931 955
--------------- --------------- --------------- ---------------
Total net revenues 3,908 2,202 7,367 4,418
Cost of revenues:
Product sales, maintenance and support 242 247 456 527
IT Services 1,259 - 2,117 -
--------------- --------------- --------------- ---------------
Total cost of revenues 1,501 247 2,573 527
--------------- --------------- --------------- ---------------
Gross profit 2,407 1,955 4,794 3,891
--------------- --------------- --------------- ---------------
Operating expenses:
Selling, general and administrative 2,064 1,622 3,988 3,109
Research and development 633 607 1,260 1,222
--------------- --------------- --------------- ---------------
Total operating expenses 2,697 2,229 5,248 4,331
--------------- --------------- --------------- ---------------
Operating loss (290) (274) (454) (440)
--------------- --------------- --------------- ---------------
Other expense (income):
Interest, net 120 23 241 39
Other (14) (5) (10) (21)
--------------- --------------- --------------- ---------------
Total other expense 106 18 231 18
--------------- --------------- --------------- ---------------
Loss before income taxes (396) (292) (685) (458)
Income tax benefit (117) (101) (217) (144)
Minority interest in equity of
consolidated subsidiary 7 - 7 -
--------------- --------------- --------------- ---------------
Net loss $ (286) $ (191) $ (475) $ (314)
=============== =============== =============== ===============
Net loss per common share:
Basic $ (0.05) $ (0.03) $ (0.08) $ (0.05)
Diluted $ (0.05) $ (0.03) $ (0.08) $ (0.05)
Common shares used in computing net
loss per common share:
Basic 5,790,210 5,730,710 5,764,576 5,730,210
Diluted 5,790,210 5,730,710 5,764,576 5,730,210
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER SEPTEMBER
30, 1999 30, 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (475) $ (314)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 711 494
Deferred income taxes (200) (241)
Gain on sale of investments - (30)
Minority interest in equity of consolidated subsidiary 7 -
Changes in operating assets and liabilities:
Accounts receivable 238 663
Notes and related party loans receivable (3) 25
Prepaid expenses and other current assets (274) (92)
Other assets (140) (112)
Accounts payable, accrued expenses and other current
liabilities (2) (145)
Deferred maintenance revenue (257) (300)
Income taxes payable 24 (23)
----------------- -----------------
Net cash used in operating activities (371) (75)
----------------- -----------------
Cash flows from investing activities:
Purchase of property, plant and equipment (436) (332)
Purchase of short-term investments - (733)
Sale of short-term investments - 639
Payments to acquire companies, net of cash acquired (2,656) -
----------------- -----------------
Net cash used in investing activities (3,092) (426)
----------------- -----------------
Cash flows from financing activities:
Proceeds from bank debt 890 76
Repayment of bank debt (5) (58)
Repayment of capital lease obligations (36) -
Preferred stock issuance 2,600 -
Common stock issuance from exercise of options 86 8
----------------- -----------------
Net cash provided by financing activities 3,535 26
----------------- -----------------
Effect of exchange rate changes on cash and cash equivalents 35 (23)
----------------- -----------------
Increase (decrease) in cash and cash equivalents 107 (498)
Cash and cash equivalents, beginning of period 2,011 1,390
----------------- -----------------
Cash and cash equivalents, end of period $ 2,118 $ 892
================= =================
Supplemental cash flow information:
Amounts paid for:
Interest $ 234 $ 37
Income taxes 41 133
Non cash transactions:
Acquisition of equipment under capital lease obligations $ 4 $ -
Issuance of common shares for NetGuru acquisition 1,194 -
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
Research Engineers, Inc. and its wholly and majority owned subsidiaries
(the "Company"). All significant transactions among the consolidated
entities have been eliminated upon consolidation. Minority interest
represents the minority shareholder's proportionate share of the equity in
NetGuru Systems, Inc. and NetGuru Consulting, Inc. (collectively,
"NetGuru"). The Company's reported results for the three and six month
periods ended September 30, 1998 have been restated to include the results
of operations of PacSoft Incorporated ("PacSoft") as a result of the
Company's acquisition of PacSoft in March 1999. This acquisition has been
accounted for using the pooling of interests method of accounting for
business combinations.
These unaudited consolidated financial statements have been prepared by the
Company and include all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial position at
September 30, 1999 and the results of operations and the cash flows for the
three month and six month periods ended September 30, 1999 and 1998,
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 annual
consolidated financial statements. Results of operations for the three
month and six month periods ended September 30, 1999 are not necessarily
indicative of the results to be expected for the full year ended March 31,
2000.
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 unaudited consolidated
financial statements and accompanying notes. Actual results could differ
from those estimates.
3. RECLASSIFICATIONS
Certain prior quarter amounts have been reclassified to conform to the
current quarter presentation.
4. ACQUISITION
Effective September 14, 1999, The Company acquired 80% of the outstanding
capital stock of NetGuru Systems, Inc. and NetGuru Consulting, Inc.
(collectively, "NetGuru"). The terms of the agreement provide for the
acquisition of the remaining 20% interest on December 15, 1999. NetGuru is
a provider of information technology ("IT") services headquartered in
Waltham, Massachusetts. The aggregate purchase, including acquisition
costs, will be approximately $5.4 million. Approximately $4.4 million of
this was paid upon the closing of the initial 80% interest in a combination
of cash, a promissory note and 170,635 shares of the Company's common
stock. The promissory note is payable one year from the closing date and
bears interest at 8.5%. The cash portion of the purchase price was obtained
through the issuance of shares of the Company's newly created Series B 5%
Convertible Preferred Stock to two investors in a private transaction not
involving a public offering. This preferred stock accrues cumulative
dividends and is convertible to shares of common stock at the option of the
holder for a period of two years from issuance. The remainder of the
purchase price will be payable upon closing the remaining 20% interest.
5
<PAGE>
In determining the purchase price for NetGuru, the Company took into
account the value of companies of similar industry and size to NetGuru,
comparable transactions and the market for such companies generally. The
acquisition is being accounted for using the purchase method of accounting
and as such all assets acquired and liabilities assumed were recorded at
their estimated fair market values at the date of acquisition. The purchase
price allocation for the acquisition of 80% of NetGuru (including
acquisition costs of $363,000) is summarized as follows (in thousands):
Current assets, including cash of $300 $ 1,296
Property and equipment 75
Goodwill 4,473
Current liabilities (1,033)
Capital lease obligations (2)
Minority interest (67)
----------------
$ 4,742
================
As the Company's unaudited consolidated financial statements for the
periods ended September 30, 1999 only include about 16 days of operations
of NetGuru, the following selected unaudited pro forma information is being
provided to present a summary of the combined results of the Company and
NetGuru as if the acquisition had occurred as of April 1, 1998, giving
effect to purchase accounting adjustments.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------------- ---------------- --------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 5,578 $ 3,814 $ 11,233 $ 7,633
Net loss $ (326) $ (204) $ (422) $ (294)
Basic loss per share $ (0.06) $ (0.04) $ (0.09) $ (0.07)
Diluted loss per share $ (0.06) $ (0.04) $ (0.09) $ (0.07)
</TABLE>
The unaudited pro forma amounts reflect the results of operations for the
Company including NetGuru and the following purchase accounting adjustments
for the periods presented:
o Amortization of goodwill, straight-line, over a useful life of 15
years;
o The addition of interest expense at 8.5% on debt incurred in the
acquisition;
o Estimated income tax effect on the pro forma adjustments;
o Estimated income tax effect on NetGuru historical financial results
(prior to the acquisition NetGuru was an "S" Corporation and as such
had not reported income tax expense in their financial statements);
and
o The 20% minority interest in the earnings of NetGuru.
The unaudited pro forma loss per share data is based on the Company's
weighted average number of common shares outstanding during fiscal 1999 and
1998 and the addition of the 170,635 shares issued as part of the
acquisition. The loss per share calculation was adjusted to include the
effect of cumulative dividends on 371,429 shares of Series B 5% Convertible
Preferred Stock issued as part of the financing of the acquisition. The
unaudited pro forma data is for informational purposes only and may not
necessarily reflect the results of operations of the Company had NetGuru
operated as part of the Company for the three and six month periods ended
September 30, 1999 and 1998, nor are they indicative of future operating
results.
5. SOFTWARE REVENUE RECOGNITION
In 1997, the Accounting Standards Executive Committee ("AcSEC") of the
AICPA issued Statement of Position ("SOP") 97-2, SOFTWARE REVENUE
RECOGNITION, which superceded SOP 91-1. SOP 97-2 distinguishes between
significant and insignificant vendor obligations as a basis for recording
revenue with a requirement that each element of a software licensing
arrangement be separately identified and accounted for based on the
relative fair values of each element. The Company adopted SOP 97-2 in the
first quarter of fiscal 1999, the implementation of which resulted in no
material changes to the Company's results of operations. In 1998, the AICPA
issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION,
WITH RESPECT TO CERTAIN TRANSACTIONS, which modifies SOP 97-2 to allow for
use of the residual method of revenue recognition provided that certain
criteria have been met. The Company adopted SOP 98-9 in the first quarter
of fiscal 2000, the implementation of which resulted in no material changes
to the Company's results of operations.
6
<PAGE>
6. SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
In 1998, the AICPA issued SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, which provides guidance
concerning recognition and measurement of costs associated with developing
or acquiring software for internal use. The Company adopted SOP 98-1 in the
first quarter of fiscal 2000, the implementation of which resulted in no
material impact on the Company's results of operations.
7. START-UP ACTIVITIES
In 1998, the AICPA also issued SOP 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES, which provides guidance concerning the costs of start-up
activities including organization costs. For accounting purposes, start-up
activities are defined as one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a
new territory or with a new class of customers, initiating a new process in
an existing facility, or commencing some new operation. The Company adopted
SOP 98-5 in the first quarter of fiscal 2000, the implementation of which
resulted in no material changes to the Company's previous practice and no
material impact on the Company's results of operations.
8. COMPREHENSIVE INCOME (LOSS)
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income
(loss) and its components. The adoption of this statement had no impact on
the Company's reported net (loss)/income or stockholders' equity. SFAS No.
130 requires changes in unrealized gains or losses on the Company's
available-for-sale investments and foreign currency translation
adjustments, which are reported separately in stockholders' equity, to be
included in other comprehensive income (loss). Total comprehensive loss was
$260,000 and $207,000 for the three months ended September 30, 1999 and
1998, respectively, and was $486,000 and $294,000 for the six months ended
September 30, 1999 and 1998, respectively.
9. NET LOSS PER SHARE
In December 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, EARNINGS PER SHARE ("EPS"). SFAS No. 128 replaced the
calculation of primary and fully diluted EPS with basic and diluted EPS.
Unlike primary EPS, basic EPS excludes any dilutive effects of common stock
equivalents, such as options and warrants. Diluted EPS is very similar to
the previously reported fully diluted EPS.
The following table illustrates the computation of basic and diluted net
loss per share (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (286) $ (191) $ (475) $ (314)
Cumulative preferred stock dividends (8) - (8) -
--------------- --------------- ---------------- ---------------
Numerator for basic and diluted net
loss per share (294) (191) (483) (314)
Denominator:
Denominator for basic net
loss per share - average
number of common shares
outstanding during the period 5,790 5,731 5,765 5,730
Incremental common shares
attributable to exercise of
outstanding options - - - -
--------------- --------------- ---------------- ---------------
Denominator for diluted net
(loss)/income per share 5,790 5,731 5,765 5,730
=============== =============== ================ ===============
Basic net (loss)/income per share $ (0.05) $ (0.03) $ (0.08) $ (0.05)
=============== =============== ================ ===============
Diluted net (loss)/income per share $ (0.05) $ (0.03) $ (0.08) $ (0.05)
=============== =============== ================ ===============
</TABLE>
7
<PAGE>
All options, warrants, convertible preferred stock and other common stock
equivalents amounting to 614,000 and 645,000 potential common shares for
the three and six month periods ended September 30, 1999, respectively, and
219,038 and 234,089 potential common shares for the three and six month
periods ended September 30, 1998, respectively, were excluded from the
computation of diluted EPS because the Company reported a net loss and,
therefore, the effect would be antidilutive.
10. SEGMENT AND GEOGRAPHIC DATA
The Company operates in four significant segments. The Company has
historically derived its revenues principally from sales of its stand-alone
and network-based engineering software products and from sales of software
maintenance contracts relating to these products. With the acquisition of
R-Cube in February 1999, the Company expanded into the $90 billion
information technology ("IT") services industry, providing expertise in
data-mining and embedded technologies to Internet/Intranet design and
communications. In April 1999, the Company launched the first of several
e-commerce special interest portals targeting expatriates of the Asia
Pacific region now living throughout Europe and North America. Finally, in
June 1999 the Company announced that it has signed an agreement to provide
digital media services for animation projects including feature films and a
television series. The e-commerce and digital media services segments have
not experienced significant revenues or other activity to date and
therefore are not reportable segments for the three and six month periods
ended September 30, 1999. The following are significant components of
worldwide operations by reportable operating segment:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
NET REVENUE
Software sales, maintenance and
technical support $ 2,032 $ 2,202 $ 4,299 $ 4,418
IT Services 1,832 - 3,051 -
Other 44 - 17 -
--------------- --------------- ---------------- ---------------
Consolidated $ 3,908 $ 2,202 $ 7,367 $ 4,418
=============== =============== ================ ===============
OPERATING (LOSS)/INCOME
Software sales, maintenance and
technical support $ (479) $ (274) $ (611) $ (440)
IT Services 306 - 443 -
Other (117) - (286) -
--------------- --------------- ---------------- ---------------
Consolidated $ (290) $ (274) $ (454) $ (440)
=============== =============== ================ ===============
</TABLE>
The operating loss reported as "Other" represents costs related to the
development of the e-commerce and digital media services businesses.
8
<PAGE>
The Company's operations are based worldwide through foreign and domestic
subsidiaries and branch offices in the United States, Germany, India, the
United Kingdom, and Asia-Pacific. The following are significant components
of worldwide operations by geographic location:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
NET REVENUE
United States $ 2,691 $ 1,020 $ 4,892 $ 2,185
The Americas (other than U.S.) 128 191 336 363
Europe 666 655 1,353 1,337
Asia-Pacific 423 336 786 533
--------------- --------------- ---------------- ---------------
Consolidated $ 3,908 $ 2,202 $ 7,367 $ 4,418
=============== =============== ================ ===============
EXPORT SALES
United States $ 396 $ 279 $ 792 $ 279
=============== =============== ================ ===============
AS OF AS OF
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
--------------- ---------------
LONG-LIVED ASSETS
United States $ 10,386 $ 3,198
Europe 640 763
Asia-Pacific 1,512 1,051
--------------- ---------------
Consolidated $ 12,538 $ 5,012
=============== ===============
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 as amended and
Section 21E of the Securities Exchange Act of 1934 as amended (the "Exchange
Act"), and the Company intends that such forward-looking statements be subject
to the safe harbors created thereby. The Company may experience significant
fluctuations in future operating results due to a number of factors, including,
among other things, the impact of adverse developments in overseas economies,
the size and timing of customer orders, new or increased competition, delays in
product upgrades and new product introductions, the ability to attract and
retain key technical and management personnel, the ability to penetrate the IT
services and other new markets the Company enters, Year 2000 compliance, changes
in market demand, market acceptance of new products, product returns,
integration of acquisitions, the ability to identify and consummate acquisitions
and integrate them successfully, and the ability to meet future capital
requirements. Any of these factors could cause operating results to vary
significantly from prior periods and period-to-period. As a result, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as any indication of future
performance. Fluctuations in the Company's operating results could cause the
price of the Company's Common Stock to fluctuate substantially.
The information contained in this report is not a complete description of the
Company's business or the risks associated with an investment in the Company's
Common Stock. Before deciding to buy or maintain a position in the Company's
Common Stock, you should carefully review and consider the various disclosures
made by the Company in this report and in its other materials filed with the
SEC, including its Annual Report on Form 10-KSB for the fiscal year ended March
31, 1999 (and, in particular, in the "Outlook" section therein) that discuss the
Company's business in greater detail and that also disclose various risks,
uncertainties and other factors that may affect the Company's business, results
of operations or financial condition.
Assumptions relating to the forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions, all of which are difficult or impossible to predict accurately, and
many of which are beyond the control of the Company. In addition, the business
and operations of the Company are subject to significant risks which increase
the uncertainty inherent in the forward-looking statements. In light of this,
the inclusion of forward-looking information should not be regarded as a
representation or guarantee by the Company or any other person that the
objectives or plans of the Company will be achieved.
GENERAL
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 professionals worldwide. The Company's comprehensive line of
Windows-based engineering software products includes STAAD, 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 the analysis and design of industrial, commercial, transportation and
utility structures, pipelines, machinery, automotive and aerospace products, and
survey, contour and digital terrain modeling.
As a result of the acquisitions of NetGuru in September 1999 and R-Cube in
February 1999, the Company has expanded into the $90 billion IT services
industry, providing expertise in data-mining and embedded technologies to
Internet/Intranet design and communications.
10
<PAGE>
The Company has expanded into two additional markets. In April 1999, the Company
announced that it has launched the first of several e-commerce special interest
portals targeting the 90 million expatriates of the Asia Pacific region now
living throughout Europe and North America. In June 1999, the Company announced
that it has signed an agreement to provide digital media services for animation
projects, including a television series and feature films.
The following discussion and analysis addresses the results of the Company's
operations for the three and six month periods ended September 30, 1999, as
compared to the Company's results of operations for the three and six month
periods ended September 30, 1998.
RESULTS OF OPERATIONS FOR THE Three AND SIX month PERIODS ended SEPTEMBER 30,
1999 and 1998
NET REVENUES - Net revenues for the quarter ended September 30, 1999 increased
by $1,706,000 (77%) to $3,908,000, as compared to $2,202,000 for the quarter
ended September 30, 1998. For the six months ended September 30, 1999, revenues
increased by $2,949,000 (67%) to $7,367,000 from $4,418,000 for the six months
ended September 30, 1998. These increases in net revenues were primarily
attributable to the acquisitions of R-Cube and NetGuru. Combined revenue from
these acquisitions were $1,832,000 and $3,051,000 for the three and six month
periods respectively.
International net revenues as a percentage of total revenues for the quarter
ended September 30, 1999 decreased to 27%, from 45% for the quarter ended
September 30, 1998. For the six months ended September 30, 1999, international
revenues decreased to 29%, from 42% for the six months ended September 30, 1998.
The decrease in international net revenues as a percentage of total net revenues
was primarily due to the expansion into the IT services industry. Currently, all
of the Company's IT services revenue is generated within the United States, thus
this segment's revenues increase the percentage of consolidated net revenues
generated domestically. The Company's domestic revenues are denominated in U.S.
Dollars, while revenues and expenses for the Company's foreign subsidiaries and
sales offices are usually recorded in the applicable foreign currency and
translated into U.S. Dollars. There were no foreign exchange gains or losses
that were material to the Company's financial results during the three months
and six months ended September 30, 1999 and 1998.
GROSS PROFIT - Gross profit increased by $452,000 (23%) to $2,407,000 in the
quarter ended September 30, 1999 as compared to $1,955,000 for the quarter ended
September 30, 1998. Gross profit increased by $903,000 (23%) to $4,794,000 for
the six months ended September 30, 1999 as compared to $3,891,000 for the six
months ended September 30, 1998. These increases were primarily due to the
expansion into the IT services industry. Gross profit for IT services was
$573,000 for the quarter ended September 30, 1999 and $934,000 for the six month
period. Gross margin decreased to 62% of total net revenues in the quarter ended
September 30, 1999 as compared to 89% for the quarter ended September 30, 1998,
and decreased to 65% for the six months ended September 30, 1999 as compared to
88% of the corresponding period last year. This change is due to the growth of
the IT services segment, for which the cost of generating revenues is
significantly higher than for sales of software products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Selling, general and
administrative ("SG&A") expense increased by $442,000 (27%) to $2,064,000 for
the quarter ended September 30, 1999 as compared to $1,622,000 for the quarter
ended September 30, 1998, and decreased as a percentage of total net revenues to
53% from 74% in the comparable quarter of the prior year. Selling, general and
administrative expense increased by $879,000 (28%) to $3,988,000 in the six
months ended September 30, 1999 as compared to $3,109,000 for the six months
ended September 30, 1998, and decreased as a percentage of total net revenues to
54% from 70% in the comparable period of the prior year. The majority of the
increase in expenses is due to the expansion into IT services upon the
acquisition of R-Cube and NetGuru. SG&A expenses for the IT services segment
totaled $266,000 for the current quarter and $491,000 for the six months ended
September 30, 1999. Additional increases resulted from goodwill amortization due
to the recent acquisitions. The remaining increase for both periods was largely
experienced in India and was related to the development of the e-commerce and
digital media services businesses.
11
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSE - Research and development expense increased by
$26,000 to $633,000 in the quarter ended September 30, 1999 as compared to
$607,000 for the quarter ended September 30, 1998, but decreased as a percentage
of total net revenues to 16% from 28% in the comparable quarter of the prior
year. Research and development expense increased by $38,000 to $1,260,000 in the
six months ended September 30, 1999 as compared to $1,222,000 for the six months
ended September 30, 1998, but decreased as a percentage of net revenues to 17%
from 28% in the comparable six months of the prior year. The decrease in
research and development expense as a percentage of total net revenues is
primarily due to the addition of the IT services segment. The results for both
the three and six month periods ended September 30, 1999 include added net
revenues for IT services with no addition to research and development expense.
OTHER (INCOME) EXPENSE - Net interest expense increased by $97,000 to $120,000
in the quarter ended September 30, 1999 as compared to $23,000 for the quarter
ended September 30, 1998. Net interest expense increased by $202,000 to $241,000
in the six months ended September 30, 1999 as compared to $39,000 for the six
months ended September 30, 1998. The increase in both periods is primarily due
to the increase in long-term debt used to finance the acquisition of R-Cube.
INCOME TAXES - The Company had income tax benefit of $117,000 and $217,000 for
the three months and six months ended September 30, 1999, respectively, as
compared to income tax benefit of $101,000 and $144,000 for the three months and
six months ended September 30, 1998, respectively. This increase in income tax
benefit is primarily due to an increase in pretax loss in the United States and
Singapore for the three months and six months ended September 30, 1999 for which
the related tax benefits were recognized.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently finances its operations (including capital expenditures)
primarily through its existing cash and cash equivalent balances.
The Company's principal sources of liquidity at September 30, 1999 consisted of
$2,118,000 of cash and cash equivalents.
Cash and cash equivalents increased slightly during the six months ended
September 30, 1999. The increase was largely due to increased borrowings in
India as additional funds were needed for the continued development of the
e-commerce and digital media services businesses. Another $2.6 million was
obtained through the issuance of 371,429 shares of 5% convertible preferred
stock. These proceeds were used to fund a portion of the purchase price of
NetGuru. These increases were largely offset by increases in cash used in
operating and investing activities. The increase in cash used by operations is
primarily attributable to the net loss experienced for the year to date. The
increase in investing activities is largely due to the acquisition of NetGuru
and the purchase of capital assets for the e-commerce and digital media services
businesses.
The Company anticipates that it will finalize a sale and leaseback transaction
involving its Yorba Linda, California facility during the third quarter. This
transaction is expected to give the Company cash proceeds of $1.3 million, net
of transaction costs. These proceeds will provide the necessary funds for the
purchase of the remaining 20% of NetGuru in December as well as provide funds
for operating purposes. Management believes that these proceeds and its current
cash and cash equivalents balances will provide adequate working capital to fund
the Company's operations at currently anticipated levels through September 30,
2000. 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.
IMPACT OF YEAR 2000
Many existing software programs use only two digits to identify the year in the
date field. If such programs are not corrected, date data concerning the Year
2000 could cause many computer applications to fail, lock-up or generate
erroneous results.
12
<PAGE>
The Company has identified its mission-critical systems related to the Year 2000
and has committed the resources necessary to resolve any potential Year 2000
issues. This identification and assessment also involved identification of
vendors that may have a significant impact on the Company's operations and their
expected completion of any conversions. Although the Company is addressing such
issues in what it considers to be sufficient time prior to the century rollover,
there can be no assurance that there will be no interruption of operations or
other limitations of system functionality, or that the Company will not incur
substantial costs to avoid such occurrences. The Company has determined that it
will not need to modify or replace significant portions of its software sold to
customers, as it does not contain any date-specific material, and does not
believe its significant vendors will require significant modification of their
internal systems.
The Company's systems (both IT and non-IT), equipment and processes were
substantially Year 2000 ready by the end of March 1999. The actual cost of
remediation was approximately $250,000, most of which represents lease payments
for software that will be paid ratably through 2002. The Company is currently
working on its contingency plan for Year 2000 issues, which is expected to be in
place by the end of November 1999.
In addition, the Company has initiated communications with its significant
suppliers and large customers to determine the extent to which the Company's
internal applications and other interface systems are vulnerable to those third
parties' failure to remedy their own Year 2000 issues. There can be no assurance
that other companies' systems on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems. The
most reasonably likely worst case scenario would be that the Company's
significant customers' inability to remedy their own Year 2000 issues would
prevent them from purchasing the Company's products.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The
provisions of the statement require the recognition of all derivatives as either
assets or liabilities in the consolidated balance sheet and the measurement of
those instruments at fair value. The accounting for the changes in fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. In June, 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133 - AN AMENDMENT OF FASB STATEMENT NO. 133. This
statement delays the required implementation of SFAS No. 133 by one year, fiscal
years beginning after June 15, 2000. The Company is required to adopt the
statement in the first quarter of fiscal year 2002. The Company is currently
studying the impact of this pronouncement on its consolidated financial
statements but has not yet determined the impact on its results of operations.
13
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On September 14, 1999, the Company issued an aggregate of 371,429
shares of its Series B 5% Convertible Preferred Stock and warrants
to purchase an additional 50,000 shares of Common Stock to two
institutional investors for a total of $2,600,000. The proceeds,
net of commissions and fees of $60,000, were used to pay the cash
portion of the purchase of 80% of the outstanding capital stock of
NetGuru Systems, Inc. and NetGuru Consulting, Inc. (collectively,
"NetGuru"). The transaction was exempt under Section 4(2) of the
Securities Act of 1933.
The Series B 5% Convertible Preferred Stock is convertible into,
and the warrants are exercisable for, the Company's Common Stock at
a price determined by a formula tied to the current market price of
the Comany's Common Stock, and depends on the date of conversion or
exercise. The warrants contain a "cashless exercise" feature
whereby the warrant holder may use the spread between the exercise
price and the current market price to pay the exercise price. The
terms of the conversion formula are more particularly described in
the Company's Form S-3 registration statement filed on October 13,
1999.
Also, on September 14, 1999, the Company issued 170,635 shares of
Common Stock to Bharat Manglani as the non-cash portion of the
purchase of 80% of NetGuru. The transaction was exempt under
Section 4(2) of the Securities Act of 1933, and was more
particularly described in the Company's report on Form 8-K filed on
September 29, 1999, and amended on October 15, 1999, and November
15, 1999.
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
27.2 Restated Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on September 29, 1999,
reporting on Item 2 with respect to the acquisition of
NetGuru. On October 15, 1999, the Company filed a Form
8-K/A No. 1 to provide an additional exhibit, and on
November 15, 1999, the Company filed a Form 8-K/A No. 2 to
provide financial statements for NetGuru.
14
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 15, 1999
RESEARCH ENGINEERS, INC.
By: /S/ WAYNE BLAIR
-----------------------------------
Wayne Blair
Senior Vice President of Finance,
Chief Financial Officer, Secretary
and Treasurer (principal financial
and accounting officer)
15
<PAGE>
Exhibit Index
-------------
Exhibit 27.1 Financial Data Schedule
Exhibit 27.2 Restated Financial Data Schedule
16
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