UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 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 22-2356861
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
22700 Savi Ranch Parkway, 92887
Yorba Linda, CA (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:
(714) 974-2500
Securities registered pursuant to Section 12 (b) of the
Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this
form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form
10-KSB. [X]
State issuer's revenues for its most recent fiscal year:
$10,745,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 23, 1999 was $20,550,430.
The number of shares outstanding of the registrant's only class of Common Stock,
$.01 par value, was 5,738,210 on June 23, 1999.
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Introduction
Research Engineers, Inc. (the "Company") was incorporated in 1981 and is
currently headquartered in Yorba Linda, California. The Company is a leading
provider of technically advanced engineering software solutions. The Company's
software products 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 structural, mechanical, civil and
process/piping engineering software products is designed to fully integrate the
functions of model generation, analysis, design drafting and data presentation.
All of the Company's products utilize a proprietary Windows-based graphics
engine, allowing the software to be used with or without third-party Computer
Aided Design ("CAD") software. The Company's 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. Suggested list prices for most of the
Company's products range from approximately $995 to $7,000.
Through the acquisition of R-Cube Technologies ("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. In addition, 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.
The Company currently licenses its software products to more than 19,000
customers accounting for over 47,000 software installations and 140,000
concurrent users worldwide. A selected list of the Company's customers include:
Bechtel Corporation, Boston Edison, British Telecom, California Department of
Resources, California Institute of Technology, Jet Propulsion Laboratories,
Exxon Corporation, Fluor Daniel, Inc., General Dynamics, NASA, Rocketdyne,
Siemens AG and Toyo Engineering. The Company's products are sold and supported
domestically and internationally through its network of branch offices,
subsidiaries and representatives in the United States, United Kingdom, Germany,
Japan, France, Scandinavia, Australia, China, Singapore, India, Indonesia,
Korea, Thailand, Malaysia, South Africa, Mexico, Russia, the Middle East and
Latin America. The Company's structural and civil engineering products provide
eight international language options and local design codes required by its
worldwide markets.
Industry Background
The engineering design industry is comprised of a broad range of
organizations including small, medium and large-sized engineering consulting
firms, manufacturing companies, construction/fabrication companies, utilities,
transportation companies and government agencies and is characterized by rapidly
changing market demands as a result of evolving quality/safety regulations,
increasing complexity of engineering projects, increasing demand for
interdisciplinary information integration and increasing competition.
Historically, engineering design organizations relied on internally-developed
programs or "public-domain" software that was developed by universities for
analysis and design tasks. These programs typically ran on expensive mainframes,
minicomputers or workstations in highly centralized environments. As a result of
the increased availability of powerful desktop personal computers ("PCs") which
are capable of accommodating the needs of sophisticated engineering software,
engineering professionals have shifted from these expensive customized
hardware/software solutions to commercial, PC-based solutions. The Company
believes that the shift to powerful PCs has resulted in an increased demand for
technically-sophisticated, easy-to-use engineering software products that
automate, simplify and integrate analysis and design functions in a
cost-effective manner. The following industry dynamics contribute to this
increasing demand:
2
<PAGE>
Increasing regulatory and compliance requirements. In recent years, the
engineering design industry has been subject to significant changes in
regulatory and compliance requirements resulting from, among other things,
natural disasters such as Hurricane Andrew and the Northridge and Loma Prieta,
California earthquakes. For example, in many of the structural engineering
segments of the industry, all newly constructed structures in a seismic or
critical wind load (hurricane/tornado) zone are required to comply with certain
mandatory design requirements irrespective of their size and complexity. In
addition, with the widespread adoption of increased quality assurance standards
such as ISO 9000, even simple consumer products, such as toys, are now subject
to strict quality and safety standards which require computerized stress test
analyses on such products. All of these regulatory requirements have
significantly increased the demand for highly accurate, cost-effective
engineering analysis and design automation software.
Increased use of engineering analysis and design software by small and
medium-sized design/manufacturing firms. Although the engineering design
industry was among the first industries to use sophisticated computer hardware
and software, a significant number of small and medium-sized
design/manufacturing companies could not fully utilize these products due to the
costs involved. For example, prior to the availability of PC-based solutions,
the cost for a typical hardware/software system capable of full-scale solid
modeling functionality would start at approximately $70,000. With the advent of
moderately priced powerful Pentium-based PCs (with large RAM and storage
capabilities), equipped with sophisticated operating systems such as 32-bit
Windows/NT, small and medium-sized design/manufacturing companies can now afford
the systems to run technologically advanced engineering software. This decrease
in the cost of computing power has allowed small and medium-sized
design/manufacturing firms to successfully meet the new regulatory and
compliance requirements described above in a cost-efficient manner thereby
increasing competition in the engineering design industry.
Growth in demand for engineering analysis products with built-in graphics
functionality. Traditionally, the engineering analysis and design market has
been dependent on third-party CAD products to add graphics, visualization and
presentation capabilities to engineering software. However, the high cost of
third-party CAD software, which can range from $6,000 to $24,000, coupled with
its lack of application specific details and potential compatibility problems
has created a demand for engineering products with incorporated proprietary
fully integrated graphics and/or CAD technology. All of the Company's products
incorporate the Company's proprietary Windows-based graphics technology to allow
for visualization, verification and drawing generation capabilities. See
"--Technology."
Growth in international engineering software market. The international
engineering software market is growing rapidly due in large part to the
worldwide surge in infrastructure-related construction activities. The newly
industrialized and emerging growth areas of the world, including Southeast Asia,
China, India and the Latin American countries, have embarked on major
infrastructure development and construction efforts. While the current economic
situation in the region has resulted in a temporary setback, Asia/Pacific
remains a focal area for the worldwide engineering software market. The Company
continues to monitor the economic situation and maintain a presence in the
region with the objective of taking advantage of the opportunities that emerge
as the economy improves.
These dynamics have increased the volume and complexity of information
analysis and exchange between engineering design organizations and organizations
in related disciplines, such as construction, fabrication and production.
Consequently, engineering design firms require more powerful and better
integrated software products for their analysis and design activities. In order
to operate efficiently within this environment, engineering design organizations
must automate and integrate their mission-critical and labor-intensive
functions, including (i) model development, (ii) engineering analysis, (iii)
graphical visualization/verification, (iv) engineering design based on code
requirements and (v) report generation. Modern engineering concepts such as
"concurrent engineering" (i.e., performance of all process functions in a
concurrent manner) are becoming increasingly important in today's competitive
environment. See "--Technology."
3
<PAGE>
Business Strategy
The Company's mission is to become one of the world's leading suppliers of
stand-alone and network-based engineering software products for engineering
analysis and design professionals. The Company seeks to achieve its objectives
through the following strategies:
Leveraging Existing Customer Relationships. The Company considers its
relationships with existing customers to be an important corporate asset.
Currently, the Company has over 19,000 customers, accounting for over 47,000
software installations and 140,000 concurrent users worldwide. The Company
continually introduces new products and upgrades to enhance and extend its
product line. The Company believes that its direct and frequent contact with its
customers provides important market intelligence, which in turn is used to
develop new, demand-driven products.
Maintaining Leadership in Research and Development Activities. The Company
believes that it is an industry leader in designing and developing products for
the technically-sophisticated segment of the engineering analysis and design
industry and in providing products that address the entire spectrum of the
engineering design process in an integrated manner. The Company is committed to
continually advancing the capability of its products, through the incorporation
of advanced technologies. The Company has established research and development
facilities in the United States, United Kingdom and India. All of these
facilities employ highly-skilled technical personnel. The Company's offshore
research and development facility in India is a key competitive advantage, in
that it produces substantially more development effort for equivalent dollars
spent in the U.S. See "--Product Development."
Expanding the Company's Marketing, Sales and Product Support Activities. The
Company believes that its direct sales approach and extensive use of
demonstration materials is the most effective way to market and sell its
software products to engineering professionals. This market typically requires a
full understanding of product capabilities in making a purchase decision. See
"--Sales and Marketing." The Company continues to maintain and enhance its
telesales operation, which is used as a closing mechanism for converting leads
to sales. The Company has recently undertaken a "web marketing" initiative to
generate additional awareness for its products by posting banners on the web
pages of professional engineering societies, newsgroups and similar forums on
the Internet. The Company's Internet strategy includes providing on-line product
demonstrations and on-line use (for a fee) of the Company's products for
discrete projects.
Expanding International Presence. The Company intends to expand its
international presence by opening offices or acquiring businesses in those
foreign countries that provide the greatest potential for sales. In fiscal 1999,
approximately 45% of the Company's revenues were attributable to customers
located outside the United States. While the current economic situation in the
region has resulted in a temporary setback, Asia/Pacific remains a focal area
for the worldwide engineering software market. The Company continues to monitor
the economic situation and maintain a presence in the region with the objective
of taking advantage of the opportunities that emerge as the economy improves.
The Company has extensively "localized" its software products to meet
specific demands of the international market. All of the Company's products
support a complete range of international measurement units. The Company's
structural and civil engineering products allow customers to choose from eight
major international languages and twelve market-specific design codes. The
Company intends to continually evaluate whether to create additional foreign
language versions of any of its products and/or to include specific
international design codes within a particular product based upon, among other
things, the Company's experience in particular foreign markets and the specific
design approval/validation requirements of the particular foreign market.
Expanding Through Acquisitions. In addition to the Company's internal product
development activities, the Company has expanded, and expects to continue to
expand, its product lines, technology and product base through acquisitions
complementary to the Company's current operations. In 1990, the Company acquired
The Technical Group, a software company that developed CIVILSOFT, which is
regarded by many to be the leading engineering and surveying software in the
industry today. In 1995, the Company acquired STARDYNE(R), the first
commercially- available finite element analysis software, now regarded by many
as an industry standard. In March 1996, the Company acquired ADLPipe, Inc., a
software company that provided piping analysis and design solutions since 1975.
In December 1996, the Company acquired QSE (Bristol) Limited, a provider of
structural analysis and design software that expands the Company's product
offerings to the residential and light commercial markets. In March 1997, the
Company acquired from Intrasoft, Inc. the rights to STRUCT.etc, a structural
engineering software product consisting of 88 small stand-alone software modules
that are currently in use by thousands of architects and engineers. In October
1997, the Company acquired the animation technology assets of AXA Corporation, a
private company formerly developing animation technology for the entertainment
industry. The AXA products are currently being distributed as stand-alone
products. The animation technology is also being integrated into the Company's
next generation engineering software. In February 1999, the Company acquired
R-Cube. With this acquisition 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. In March 1999, the Company
acquired PacSoft, a developer of engineering software products and integration
tools that expands the Company's product offerings in the civil engineering
market. The Company believes that additional opportunities exist to expand its
product lines by acquiring businesses, products and technologies that complement
those of the Company.
4
<PAGE>
Products
The Company's engineering analysis and design software product lines include
its core structural engineering line and its emerging civil, mechanical and
process/piping lines. All of the Company's current products use the Company's
proprietary Windows-based graphics engine that provides the most modern graphics
environment for model development, visualization/verification and drawing
generation. These products are also designed for use in conjunction with
third-party CAD drafting systems, including AutoCAD and MicroStation. Suggested
list prices for most of the Company's products range from approximately $995 to
$7,000.
5
<PAGE>
The following table describes the Company's core software products:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Product Product
Category Name Function Applications
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Structural STAAD/Pro A comprehensive Engineering/architectural
Engineering workflow integrated firms, consulting
solution for the engineers, construction
structural engineering companies, building
design office. Includes designers, industrial
STADD Analysis/Design, plant designers,
STARDYNE(R) Advanced offshore/marine
Finite Element Analysis engineering,
and drawing generation. petrochemical industry,
Extensions for power industry,
structural component manufacturing/heavy
design, concurrent industries, transportation,
piping, engineering, facilities,
and detailing. Supports government/municipal
US and all major agencies, etc.
international structural
design codes.
STAAD-III Integrated structural Engineering/architectural
analysis and design for consulting firms,
steel/concrete/timber construction companies,
codes; static/dynamic/ government and municipal
non-linear/seismic agencies, industrial plant
analysis; incorporates design, offshore/marine
U.S., British, German, engineering, equipment
Japanese and other manufacturers,
international codes. transportation engineering,
facilities engineering.
STAAD-III Same as above - Allows Same as above.
Online users to submit jobs for
analysis via modem on
a pay-per-use basis.
QSE-Quick Integrated analysis and For light industrial
Structural design for 2D/3D and residential
Engineering frame structures; applications.
steel/concrete design Engineering/architectural
per US and British codes; consulting firms;
links to detailing construction companies.
software.
FabriCAD Full-scale structural Construction engineering,
Suite fabrication drawing and fabrication shops, steel
detailing; estimating, detailers, mechanical
production control, equipment fabrication.
inventory control and
purchase orders.
STRUCT.etc- A comprehensive array For light industrial and
STRUCTural of structural component residential applications.
Engineering design software tools Engineering/architectural
Tool Case ideal for efficient consulting firms;
design and analysis of construction companies.
steel and concrete
structures.
- --------------------------------------------------------------------------------
Mechanical STARDYNE(R) Finite element analysis Aerospace, nuclear, machine
Engineering of mechanical/structural tools, machinery,
components; machine and manufacturing, automotive,
equipment design; civil/structural,
static/dynamic/ offshore/marine,
non-linear/buckling/ electrical, chemical,
transient/random processing, power/energy,
vibration/thermal/ mining.
fracture/fatigue
analysis.
VISUAL 3D solid modeling in Same as above.
SOLID design automation;
integrated with finite
element analysis
- --------------------------------------------------------------------------------
Process/Piping ADLPIPE Analysis, design and Power, process, industrial
Engineering code checking of piping plant design.
systems; static/dynamic/
seismic/non-linear
analysis; transient/
thermal analysis;
supports U.S., British
and other international
codes.
- --------------------------------------------------------------------------------
Civil CIVILSOFT/ Surveying, contouring, Civil engineering
Engineering CIVIL- roads/highway design, consulting firms;
MASTER(R) site, design, digital, government/municipal
terrain,modeling, agencies; utilities;
earthwork calculations, transportation; facilities;
water network design, construction companies.
sewer/storm drainage
systems, hydraulics.
- --------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Structural Engineering. The Company's structural engineering products may be
used to analyze and design almost any type of structure, including, among
others, buildings (residential and commercial), bridges, industrial structures,
utility structures, transportation structures and transmission towers. Because
of the broad analytic nature of this software, users of the Company's structural
engineering product line include a wide range of organizations from Fortune 500
companies to individual consulting engineers. The Company's structural
engineering product line primarily consists of STAAD, a stand-alone integrated
structural analysis and design software with drafting capabilities. The STAAD
user base currently consists of over 6,000 companies worldwide with more than
20,000 installations. Of the top 500 architectural/engineering companies ranked
in the April 14, 1997 issue of Engineering News-Record (a McGraw-Hill
publication), all of the top ten, 24 of the top 25 and 44 of the top 50 are
STAAD users. In Engineering News-Record's most recent biannual survey of the
structural engineering segment of the architectural engineering and construction
market, STAAD was ranked third in terms of usage and likelihood of purchase. The
first and second ranked software were CAD products offered by AutoCAD and
Intergraph, neither of which offer structural engineering analysis and design.
While most of the users of STAAD are in the structural consulting engineering
business, STAAD is also used by construction companies, architects, mechanical
constructors/fabricators, government agencies, utilities, petroleum producers,
facility development/maintenance groups and the manufacturing industry.
In November 1997, the Company released STAAD/Pro, its "next-generation"
structural engineering software. STAAD/Pro extends the range of STAAD to include
the entire structural design process - modeling, visualization, verification,
analysis, design, detailing and drawing.
The Company also offers STAAD Online, which provides all the functionality of
STAAD but is sold to the customer on a pay-per-use basis. A customer is provided
a package free-of-charge, which includes the STAAD input generator, post
processor software and all the necessary utilities for remote connection. The
customer uses the STAAD input generator to create an input file that is
transferred to the STAAD Online server, via modem, for processing. Upon
completion of analysis, the results are transferred back to the customer's PC.
The customer is billed based on the size of the input file. The Company has
positioned this product for the smaller engineering firm which may only need to
utilize STAAD on a limited basis.
The Company entered into a workflow integration arrangement with Intergraph,
Inc., the industry's leading supplier of drawing and drafting software, whereby
the two companies developed program enhancements that allow STAAD to operate
from within Intergraph products. These enhancements reinforce the two-way link
between the software packages, giving structural engineers seamless access to
structural member data and a smoother workflow for modeling structural members.
The first version of the integrated software was released in September 1997.
During fiscal 1997, the Company expanded its structural engineering product
line with the addition of two new products: Quick Structural Engineering (QSE)
and STRUCTural Engineering Tool Case (STRUCT.etc). QSE consists of a suite of
integrated analysis and design modules for frame structures. Additionally, QSE
provides the engineer with a detailing mode whereby a structural model can be
quickly transferred into a complete two-dimensional or three-dimensional
detailed drawing. STRUCT.etc provides customers a comprehensive array of
structural component design software tools ideal for the efficient design and
analysis of steel, and concrete structures. Both QSE and STRUCT.etc are aimed at
the residential and light commercial market segments.
During fiscal 1998, the Company began distribution of FabriCAD Suite. The
FabriCAD Suite for Windows 95 or NT is a complete suite of products that
automate the fabrication process from Detailing to Production Control. Modules
are included for detailing, estimating, production control, inventory control,
and purchase orders. Sharing resources from a vast pool of engineering and
graphical software from the Company has allowed FabriCAD to become a powerful
alternative to expensive detailing/fabrication software.
During fiscal 1999 the Company continued to enhance its STAAD/Pro product.
With its applicability to a broader range of professionals in the engineering
and design process, the Company has started to explore its corporate licensing
program.
7
<PAGE>
Mechanical Engineering. The Company's mechanical engineering product line was
added in 1995 with the acquisition of STARDYNE(R), a general purpose finite
element analysis software. STARDYNE(R) was the world's first commercial finite
element analysis software and has been serving the mechanical engineering
segment of the industry since 1968. STARDYNE(R) has been enhanced and integrated
with other products of the Company and is currently used by more than 2,000
companies worldwide. For example, STARDYNE(R) has been used by: Rockwell, to
analyze the Apollo spacecraft command module; Rocketdyne, to analyze rocket
engines for the space shuttles; and toy manufacturers, to design and test new
products.
To enhance its mechanical engineering product line, the Company has developed
and introduced VISUAL SOLID, a full-scale three-dimensional solid modeling
software. VISUAL SOLID assists engineering professionals in developing an entire
three-dimensional model on a PC. Based on the 32-bit Windows/NT environments,
VISUAL SOLID includes a graphics-based, intuitive, easy-to-use interface and
full-scale editing facilities. VISUAL SOLID's comprehensive model development
facilities include, among other facilities, Boolean operations, shape change
operators, parametric editing and part assemblies. In addition, VISUAL SOLID is
equipped with its own rendering engine and engineering drawing generation
modules. Fully integrated with STARDYNE(R), VISUAL SOLID allows engineering
professionals to automate the entire process of product design, including model
development, verification/visualization, engineering calculations and design
drawings.
The Company has also acquired distribution rights to a product called FEMKIT
that entered the Company into the finite element modeling market. FEMKIT
provides a Windows native finite element engineering environment with interfaces
available for several popular third-party software products.
Process/Piping Engineering. The Company's process/piping engineering product,
marketed under the name ADLPIPE, is used in the analysis and design of piping
systems to obtain stresses and displacements under pressure, thermal and other
static/dynamic loading conditions. The Company acquired this technology from
ADLPipe, Inc. in March 1996, and adapted the product to Windows, making it the
industry's first Windows native process/piping product. Approximately 2,000
companies currently use ADLPIPE, worldwide. Since its introduction in 1975,
ADLPIPE has been used worldwide by more than 20,000 users.
Civil Engineering. The Company's civil engineering software products,
marketed under the name CIVILSOFT, address all aspects of civil engineering,
including survey, contour and digital terrain modeling, hydraulics, hydrology
and water/sewer network design and analysis within AutoCAD. In April, 1999 as
part of the company's strategy for continued expansion in its core businesses,
acquired Seattle-based PacSoft Incorporated. PacSoft is a well-respected
developer of Windows(TM)-based, 3D civil engineering software products and
integration tools for the engineering industry. The PacSoft acquisition not only
complements the overall growth strategy of our core businesses but, with the
integration of PacSoft's CivilMaster(R) with Visio Corporation's (Nasdaq:VSIO)
IntelliCAD product, has greatly broadened our penetration into the new low cost
IntelliCAD (computer aided design) market. PacSoft, with more than 2,200
installations worldwide, has an 18-year history of developing and marketing
software for civil engineering and surveying applications. The Company believes
that its civil engineering products comprise one of the industry's most
versatile and comprehensive suites of civil engineering software. Over 7,500
companies currently use the Company's civil engineering software products
worldwide, with more than 11,000 installations.
Animation Technology. In fiscal 1998 the Company acquired the animation
technology assets of AXA Corporation, a private company that developed animation
technology for the entertainment industry. The AXA products are currently being
distributed as stand-alone products. The animation technology is also being
integrated into the Company's next generation engineering software.
Customers
Research Engineers currently has over 19,000 customers accounting for over
47,000 software installations and 140,000 concurrent users worldwide. In fiscal
1999, 45% of the Company's revenues were generated from customers outside the
United States.
8
<PAGE>
Sales and Marketing
The Company markets and sells its engineering analysis and design software
products through a direct sales approach consisting of three distinct phases.
First, the Company uses extensive print advertising, trade show participation
and direct mail campaigns to generate sales leads. Second, in response to
product inquiries generated through these activities, the Company provides
elaborate evaluation/demonstration software packages complete with full user
manuals and working programs. Finally, the Company's telesales professionals are
used to close the sales. The Company's telesales professionals work in
conjunction with the Company's engineers in order to provide complete coverage
of business and technical issues in the sales cycle. The Company believes that
this type of direct sales approach, using extensive demonstration materials
prior to closing a sale, is the best way to market its products to engineering
professionals, who typically require a full understanding of product capability
in making a purchase decision. The Company also utilizes this type of sales
approach in connection with its marketing and sales of product enhancements,
upgrades and new products to current customers. The Company continues to
maintain and enhance its telesales operation, which is used as a closing
mechanism for converting leads to sales. The Company has recently undertaken a
"web marketing" initiative to generate additional awareness for its products by
posting banners on the web pages of professional engineering societies,
newsgroups and similar forums on the Internet. The Company's Internet strategy
includes providing on-line product demonstrations and on-line use (for a fee) of
the Company's products for discrete projects.
The Company conducts sales and training seminars worldwide to provide current
and potential customers with additional information about its products. The
highlight of the Company's fiscal 1999 seminar activities included a 21 city
STAAD/Pro road show in North America to both existing and potential customers.
In addition, in association with its distributors and strategic partners the
Company conducted training seminars in United Kingdom, Japan, France, Germany,
Scandinavia, Singapore, Malaysia, Thailand, Indonesia, India, Philippines,
Middle East, China and Mexico. Since 1987, the Company has also organized Annual
User Conferences for its customers. These events, which are attended by
worldwide users, are intended to serve as a forum for the exchange of ideas and
information. The Company has also been successful in placing its products in
various colleges and universities, including Harvard University, Massachusetts
Institute of Technology and California Institute of Technology, as a means of
introducing its products to future generations of professionals.
The Company sells and supports its products internationally through its
extensive international infrastructure, consisting of branch offices,
subsidiaries and representatives located worldwide. Currently, the Company has
numerous sales representatives and technical support personnel located in the
United Kingdom, Germany, Japan, France, Scandinavia, Australia, China, India,
Singapore, Indonesia, Korea, Thailand, Malaysia, South Africa, Mexico, Russia,
the Middle East and Latin America. Most of the Company's foreign sales
representatives and technical support personnel are local nationals. The
Company's structural and civil engineering products allow customers to choose
from among eight major international languages and twelve local design codes.
Support and Training
The Company believes that providing its customers with direct support
services helps ensure that customers obtain the maximum benefits offered by its
products. The Company believes that its support programs also enhance the
Company's relationships with customers. Purchasers of the Company's software are
typically provided 120 days of product support without charge and a multimedia
training CD-ROM. For support after the 120-day period, customers can elect to
purchase ongoing support either on a one-year contract basis or on an as-used
fee basis. To provide quality technical support worldwide, the Company employs
highly qualified engineers and software specialists and maintains product
support centers in the United States (Orange County, California and Boston,
Massachusetts), United Kingdom, France, Germany, Scandinavia, Singapore, Japan,
China, India, Australia, Indonesia, Korea, Thailand, Malaysia, South Africa,
Mexico, Russia, the Middle East and Latin America. Many of the Company's support
professionals have advanced degrees. In addition, the Company maintains a World
Wide Web site on the Internet and provides e-mail technical support to its
users. Customers also receive a technical newsletter which is distributed
quarterly by the Company and is designed primarily to apprise customers of
technological enhancements and new products offered by the Company.
9
<PAGE>
Product Development
The Company offers a broad range of products that are designed to keep pace
with technological and regulatory developments in the marketplace and address
the increasingly sophisticated needs of its customers. The Company continually
focuses on expanding its existing product line offerings with acquired, upgraded
and new products. The Company specifically seeks opportunities to expand its
product offerings through acquisitions. All of the Company's acquired products
are incorporated into the Company's product lines with the goal of providing
seamless data transfer and functional integration. Product development
activities include, among others, adding new engineering analysis capabilities,
implementing new design codes, enhancing existing engineering databases,
developing new ease-of-use features, enhancing user interfaces, implementing
emerging technologies, exploiting new hardware capabilities and platform
developments, and providing improved interfaces with related third-party
products.
The Company's product development group includes experts in structural
engineering, mechanical engineering, civil engineering, piping/process
engineering, advanced mathematical techniques, numerical methods, computer
graphics and operating system technology. The Company has established research
and development facilities in the United States, United Kingdom and India. The
Company's overseas offices contribute significantly to the development and
maintenance of local engineering design codes that are offered in certain of the
Company's products. The Company's offshore research and development facility in
India is used to develop certain core technologies that require significant
man-hours. Due to the availability of skilled technical personnel at a fraction
of the cost for comparable personnel in the United States, this offshore
research and development facility affords the Company the opportunity to obtain
substantially more development effort for equivalent dollars spent in the United
States. The Company believes that the use of its offshore research and
development facility provides a significant competitive advantage. In addition,
the Company works closely with leading universities in computer-aided
engineering, including the Massachusetts Institute of Technology and the
University of Pennsylvania. The Company has sponsored research projects at and
procured technologies from a number of prominent universities including
Vanderbilt University and Worcester Polytechnic.
The Company releases enhanced versions of its software products on an
on-going basis. The Company works closely with its existing and prospective
customers to determine their requirements and to design enhancements and new
products to meet their needs. The Company believes that a substantial number of
its product enhancements in recent years have been developed as a result of the
ideas and suggestions of its customers.
To ensure that the Company's products meet the requirements of its users and
to ensure that the Company's software development, validation and maintenance
processes meet applicable regulatory guidelines on software development, the
Company has established an extensive quality assurance and quality control
process. Application specialists, who generally have advanced experience with
the Company's products, handle the "alpha" or internal testing of a new product,
while the "beta" testing of a new product is conducted both internally and by
selected customers and consultants. The Company has a separate documentation
group that is dedicated to creating and updating the documentation for each
product, with a particular emphasis on making such documentation more
comprehensive and user-friendly.
During fiscal years 1999 and 1998, the Company spent $2.4 million and $2.1
million, respectively, on product research and development activities. These
amounts represented 22.5% and 16.6%, respectively, of net revenues in each of
those years.
Technology
The Company's software products automate engineering calculations that are
performed by structural, mechanical, civil and process/piping engineers. The key
technology components of the Company's products are: (i) the mathematical models
of the system, (ii) the engineering databases, (iii) the numerical algorithms,
(iv) the software architecture, (v) the graphical user environment and (vi) the
use of preferred operating systems.
10
<PAGE>
Mathematical Models. The mathematical model in an engineering analysis
includes the geometry of the system, physical properties of the components and
external influences such as loads. The model of an engineering system such as an
industrial building, machine component or pipeline may involve hundreds or
thousands of algebraic equations that may be linear or non-linear depending upon
the nature of the problem. The Company's products are comprehensive in their
analysis and modeling capabilities. For example, STARDYNE(R) offers a wide range
of analysis options that include static, dynamic, second order, transient,
harmonic, thermal, buckling, time history, response/shock spectra, fatigue and
fracture analysis. Similarly, STAAD's comprehensive loading facilities include
static, dynamic, seismic, second order, moving loads, wind loads, thermal loads
and loads due to movement of supports. The models are based on the fundamental
laws of physics and mechanics, including static and dynamic equilibrium. In
addition, the user is allowed extensive control on the analysis and design
process through user specifiable parameters.
Engineering Databases. The Company's products are equipped with databases
containing engineering properties of all relevant commonly used materials and
structural sections. For example, STARDYNE(R)'s material library contains data
for 28 different linear and non-linear materials that can be used in a wide
range of industries including aerospace, automotive, power, machinery, energy,
mining, marine and manufacturing. STAAD's steel section databank contains
properties of structural sections from ten different countries throughout the
world. The user can specify the required data from the engineering databases
which saves significant modeling time and ensures accuracy. In applicable
situations, the user is allowed to create and save data for customized use.
Numerical Algorithms. Engineering analysis models require sophisticated
underlying technology to solve large systems of linear/nonlinear algebraic and
differential equations. Solving these equations accurately and in a time and
cost efficient manner is key to the success of any analysis project. The Company
believes that its technology for solving these equations provides it with a
competitive advantage. A major focus of the Company's research and development
activities is the maximization of the computer's memory and storage resources
for numerical solution of equations. All of the Company's products have
benefited from proprietary research and development conducted in the fields of
numerical solutions, data compression/storage and disk caching technologies. The
solution technology in STARDYNE(R) has been developed and perfected over a
period of almost thirty years since the product was first introduced in 1968.
Similarly, the solution techniques used in STAAD, ADLPIPE and CIVILSOFT have
been tested and proven in real life engineering projects for more than ten years
in each case.
Software Architecture. The Company's engineering software products are based
on the principle of "concurrent engineering." Under this methodology, the
engineer can perform all the functions of the process, such as, model
development, analysis, design, visualization, verification and drawing
generation in a "concurrent" manner. An underlying relational database unifies
the process and manages the flow of information within the electronic loop. The
Company believes that this unique blend of modern database technology with
sophisticated engineering algorithms provides for substantial competitive
advantage.
Graphical User Environment. STAAD, QSE, FabriCAD, STRUCT.etc, STARDYNE(R),
CIVILSOFT, ADLPIPE and VISUAL SOLID are equipped with powerful and user-friendly
graphical user environments based on the principles of "concurrent engineering."
With implementation of modern graphics, CAD and database technologies, the
graphical user environment provides visual model generation, verification,
animation and extensive plotting/printing facilities. The Company believes that
the visual approach implemented in its software allows the engineer to be
significantly more productive and efficient.
Operating Systems and Hardware Platforms. The Company supports its products
on a wide range of hardware platforms and operating systems. STAAD, STARDYNE(R)
and ADLPIPE are supported on PCs and UNIX-based workstations including Sun
Microsystems, Hewlett Packard, Digital Equipment Corporation, Silicon Graphics,
IBM, RISC and Intergraph, while QSE, FabriCAD, STRUCT.etc and VISUAL SOLID are
supported on PCs only. All of the Company's products are available in single
user, network-based and client-server modes. The Company believes that engineers
performing computer-aided engineering analysis prefer operating systems similar
to Microsoft Windows. The Company has released new versions of its products for
use on 32-bit Windows/NT, which are 32 bit operating systems designed for
network servers, high-end personal computers and workstations. The Company
believes that the enhanced speed, memory management capabilities and
multitasking operation of the 32-bit Windows/NT operating systems make them the
best choice for the Company's technology-driven software products. The Company's
current research and development efforts are focused on developing enhanced
versions of its current products to take full advantage of the 32-bit Windows/NT
and other emerging 32-bit operating systems.
11
<PAGE>
Competition
The engineering software industry is intensely competitive and rapidly
changing. A number of companies offer products that target the same markets as
the Company. Some of the Company's competitors and potential competitors have
larger technical staffs, more established and larger marketing and sales
organizations and significantly greater financial resources than the Company.
The principal bases for competition in this industry include product
functionality, product reliability, price/performance characteristics, ease of
product use, availability of products on popular computer platforms, ability to
accurately model complex projects, end-user support and documentation, ability
to keep pace with technological advances, corporate reputation and financial
stability. The Company believes that its high caliber development effort,
demonstrated understanding of the needs of the engineering design industry,
ability to attract and retain customers, capability to develop, acquire and
implement emerging technologies, ability to provide technical support and
demonstrated capability to provide attractive price points for its products
represent significant competitive advantages.
The Company's products compete, on occasion, with analysis tools that are
internally developed by a number of engineering firms. Increasingly, companies
in the engineering design industry have come to recognize that it is inefficient
and uneconomical for them to continue to develop and support engineering
analysis software internally. Many of them are currently replacing their
internally developed software with commercial engineering analysis software
tools, such as those provided by the Company.
The Company believes that it competes favorably in the engineering design and
analysis market based upon the combination of technical power and ease-of-use of
its software products, its integrated product line and its ability to provide
local customer support on a direct basis. In order to maintain its market
leadership and competitive position, the Company's intent is to continue (i) to
develop its solution technologies, (ii) to further integrate emerging
technologies (such as 3D solid modeling), (iii) to enhance the scope of product
applications, (iv) to focus on emerging hardware/software platforms (such as
32-bit Windows/NT and other emerging 32-bit operating systems) and (v) to
improve upon the ease-of-use of its software products.
There can be no assurance that competitors will not develop products that are
superior to the Company's products or that achieve greater market acceptance.
The Company's future success will depend significantly upon its ability to
increase its market share and license additional products and product
enhancements to existing customers. There can be no assurance that the Company
will be able to compete successfully or that competition will not have a
material adverse effect on the Company's results of operations.
Intellectual Property and Proprietary Rights
The Company relies primarily on a combination of contract, copyright,
trademark and trade secret laws, license and confidentiality agreements and
software security measures to protect its proprietary technology. The Company
distributes its products under "shrink-wrap" software license agreements, which
grant end-users licenses to (rather than ownership of) the Company's products
and which contain various provisions intended to protect the Company's ownership
and confidentiality of the underlying technology. In addition, the Company's
software is distributed with a third-party "hardware lock" to ensure copyright
protection. The Company also requires all of its employees and other parties
with access to its confidential information to execute agreements prohibiting
the unauthorized use or disclosure of the Company's technology. In addition, the
Company periodically reviews its proprietary technology for patentability,
although the Company does not have any current patents, with the exception of
two patents acquired as part of the AXA asset purchase. Despite these
precautions, the Company believes that existing laws provide limited protection
for the Company's technology and that it may be possible for a third party to
misappropriate the Company's technology or to independently develop similar
technology. In addition, effective copyright and trade secret protection may not
be available in every jurisdiction where the Company distributes products,
particularly in foreign countries where the laws generally offer no protection
or less protection than those of the United States. Moreover, "shrink-wrap"
licenses, which are not signed by the end-user, may be unenforceable in certain
jurisdictions.
12
<PAGE>
The Company believes that, due to the rapid pace of technological innovation
and change within the engineering industry, legal protections afforded the
Company's technology are less significant in affecting the Company's business
and results of operations than factors such as the reputation of the Company,
the knowledge, ability and experience of Company personnel, the frequency of
product enhancements and the timeliness and quality of the Company's customer
service and support.
The Company is not engaged in any material disputes with other parties with
respect to the ownership or use of the Company's proprietary technology.
However, there can be no assurance that other parties will not assert technology
infringement claims against the Company in the future. The litigation of such a
claim may involve significant expense and management time. In addition, if any
such claim were successful, the Company could be required to pay monetary
damages and may also be required to either refrain from distributing the
infringing product or obtain a license from the party asserting the claim (which
license may not be available on commercially reasonable terms). As the number of
software products in the industry increases and the functionality of these
products further overlap, the Company believes that software developers may
become increasingly subject to infringement claims.
STAAD, QSE, FabriCAD, STRUCT.etc, CIVILSOFT, ADLPIPE and VISUAL SOLID are
trademarks of the Company. STARDYNE(R) and CIVILMASTER(R) are registered
trademarks of the Company.
Employees
As of March 31, 1999, the Company had 270 employees, of which 265 were
full-time employees, including 46 in product development and related support
services, 75 in IT consulting, 18 in digital media production, 44 in sales and
marketing and 82 in finance and administration. 90 of the Company's full-time
employees were located in the United States and 175 were located
internationally.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters are located in Yorba Linda,
California, in a company-owned facility consisting of approximately 41,000
square feet of office and warehouse space. In February 1999, the Company
borrowed $2,320,000 under a line of credit with Imperial Bank expiring September
2000. Monthly interest is payable at 3.0% over the bank's prime rate (10.75% at
March 31, 1999) and any remaining outstanding principle borrowings are due at
maturity. In March 1997, the Company borrowed $1,800,000 from Union Bank of
California. The loan is payable in equal monthly installments of principal plus
interest at 2.25% over the LIBOR Base Rate (7.33% at March 31, 1999) with a
balloon payment due at maturity in April 2007. The current principal balance at
March 31, 1999 was $1,723,000. Both loans are secured by the Company's corporate
headquarters in Yorba Linda, California.
The Company owns a recently constructed 22,000 square foot research and
development facility in Calcutta, India. In addition, the Company leases office
space in various other locations domestically and internationally where its
operations are located. The Company believes that its existing facilities are
adequate to meet its current needs and that suitable additional or alternative
space will be available in the future on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
During the quarter ended March 31, 1999, no matters were submitted for vote
to the Company's common stockholders.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock has been traded on the Nasdaq National Market
(ticker symbol RENG) since July 26, 1996 when the Company completed its initial
public offering of 1,495,000 shares of Common Stock. Prior to the initial public
offering, the Company's Common Stock was not publicly traded.
As of June 23, 1999, there were approximately 67 holders of record of the
Company's Common Stock. Within the holders of record of the Company's Common
Stock are brokerage firms which, in turn, hold shares of stock for beneficial
owners.
The Company has reinvested earnings in the business and has never paid any
dividends to holders of the Company's Common Stock. The declaration and payment
of dividends are at the sole discretion of the Board of Directors and will
depend upon the Company's profitability, financial condition, cash requirements,
future prospects and other factors deemed relevant by the Board of Directors.
The high and low closing sales prices of a share of the Company's Common
Stock, as reported by The NASDAQ National Market, for each quarter of fiscal
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal Fiscal
1999 1998
------------- -------------
Low High Low High
------------- -------------
<S> <C> <C> <C> <C>
1st Quarter (April 1 - June 30) $5.00 $7.19 $2.63 $4.13
2nd Quarter (July 1 - September 30) 4.50 6.13 3.00 4.25
3rd Quarter (October 1 - December 31) 3.00 4.94 2.63 4.00
4th Quarter (January 1 - March 31) 3.00 8.75 2.50 6.13
</TABLE>
14
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.
General
Research Engineers, Inc. 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. In
addition, as a result of the acquisition of R-Cube in February 1999, the Company
has expanded into the $90 billion information technology ("IT") services
industry, providing expertise in data-mining and embedded technologies to
Internet/Intranet design and communications. Also, 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.
From inception to 1985, STAAD-III was offered primarily through time-sharing
services. The Company began marketing its products directly to users in 1985 in
connection with the Company's release of the first PC-version of STAAD-III.
During 1986, the Company began its international expansion with the
establishment of a United Kingdom affiliate. An additional affiliate was
established in India during the same year in conjunction with the establishment
of the Company's offshore research and development facility. The Company
acquired both of these commonly-controlled affiliates in fiscal 1996. In
November 1995, the Company acquired its German distributor, EGIS GmbH, and
established its German subsidiary, Research Engineers GmbH. In October 1998 the
Company established its subsidiary in France, Research Engineers, SARL. The
Company currently has branch offices, subsidiaries, distributors and
representatives in the United States, United Kingdom, Germany, Japan, France,
Scandinavia, Australia, China, Singapore, India, Indonesia, Korea, Thailand,
Malaysia, South Africa, Mexico, Russia, and the Middle East and Latin America.
In June 1995, the Company began a program to expand its products and services
offerings by first acquiring the rights to the STARDYNE(R) software product,
which enabled the Company to expand into the mechanical engineering software
market. In March 1996, the Company acquired all of the assets and assumed the
business of ADLPipe, Inc., a Massachusetts-based developer of process/piping
engineering software. In addition, in fiscal 1997 the Company purchased all of
the outstanding stock of QSE (Bristol) Limited, a structural engineering
software manufacturer and marketer, and acquired rights to STRUCT etc. from
Intrasoft, Inc. QSE's structural engineering product and STRUCT etc. further
extended the Company's core product line by addressing the lower-end residential
and light commercial/industrial construction market segment. In October 1997,
the Company acquired the animation technology assets of AXA Corporation, a
private company that developed animation technology for the entertainment
industry. In October 1998 the Company acquired the assets of Techna Consultancy
located in India, and also the assets of Calcutta On Line. These two
acquisitions are providing the expertise for the Company's expansion into the
digital media and e-commerce businesses. In February 1999 the Company acquired
the stock of R-Cube Technologies, Inc., a Silicon Valley based provider of IT
services to the leading technology corporations with a focus on Internet and
Intranet applications. In March 1999, the Company purchased the stock of PacSoft
Incorporated, a Seattle based provider of 3D civil engineering products under
the trade name CivilMaster(R). The PacSoft acquisition has been accounted for as
a pooling of interests and, accordingly the Company's financial position and
results of operations for fiscal 1998 and 1999 have been restated to include
PacSoft for these periods.
The Company derives its revenues principally from sales of its 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. With the expansion into IT
services in late fiscal 1999, it is expected that a significant portion of the
Company's revenues will be derived from that source in the future. Revenues will
be recognized as the services are performed. Inflation has not had a significant
impact on the Company's operating results to date, nor does the Company expect
it to have a significant impact during fiscal 2000. As the Company continues to
expand its international operations, its exposure to gains and losses on foreign
currency transactions continues to increase. The Company plans to consider
limiting such exposure by the purchase of forward exchange contracts and/or
hedging all material foreign currency-denominated receivables by specific hedge
contracts.
15
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain statement
of income data expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998
<S> <C> <C>
Net revenues 100.0 % 100.0 %
Cost of revenues 10.7 % 6.7 %
Gross profit 89.3 % 93.3 %
--------- ---------
Selling, general and administrative expenses 71.0 % 72.6 %
Research and development expenses 22.5 % 16.6 %
In-process research and development expenses 0.0 % 3.5 %
Operating income (loss) (4.2)% 0.6 %
Interest, net (1.8)% 0.4 %
Other income 0.5 % 0.4 %
--------- ---------
Income (loss) before income taxes (5.5)% 1.4 %
Provision (benefit) for income taxes (0.7)% 0.6 %
--------- ---------
Net income (loss) (4.8)% 0.8 %
========= =========
</TABLE>
Net Revenues. Net revenues for the fiscal year ended March 31, 1999 decreased
by $1,987,000 (15.6%) to $10,745,000, as compared to $12,731,000 for the fiscal
year ended March 31, 1998. The Company's total revenues consist of software
product sales and software maintenance, support and IT services. As a percentage
of total revenues, software product revenues represented 77.7% for the fiscal
year ended March 31, 1999 down from 85.7% for the fiscal year ended March 31,
1998. The Company's maintenance, support and services revenues increased by
$573,000 (31.4%) to $2,400,000, as compared to $1,826,000 for the fiscal year
ended March 31, 1998, primarily due to $435,000 of IT services revenue relating
to the Company's acquisition of R-Cube in February 1999.
The decrease in net revenue was primarily attributable to: (1) the decline in
economic conditions in Southeast Asia that started during the latter part of
fiscal 1998, which was partially offset by increased revenues in India resulting
from the acquisition of Techna (revenues to Southeast Asia represented 16.7% of
revenue in fiscal 1999 as compared to 25.7% for fiscal 1998), and (2) a decrease
in the sales from Europe primarily the result of the poor performance by the
Company's distributor in Germany. The decreases in Southeast Asia and Europe
were offset slightly by the IT service revenue relating to the R-Cube
acquisition. International net revenues as a percentage of total net revenues
were 45.1% for the fiscal year ended March 31, 1999 as compared to 53.6% for the
fiscal year ended March 31, 1998.
Revenues are derived largely 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. In accordance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 97-2, Software Revenue
Recognition, issued in 1997, which supercedes SOP 91-1, product maintenance
revenues are amortized over the length of the maintenance contract, which is
usually twelve months. The implementation of SOP 97-2 did not result in any
material changes from the Company's previous practice. SOP 97-2 has been amended
by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions, which is effective for fiscal years beginning
March 15, 1999. Application of this accounting standard is not expected to have
a material impact on the Company's results of operations. Additional revenue is
derived from providing IT services. The revenue resulting from providing these
services is recognized as the services are performed.
16
<PAGE>
The Company's domestic revenues and sales to foreign customers originated in
the U.S. 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 the fiscal years ended March 31, 1999
and 1998.
Gross profit. Gross profit decreased as a percentage of net revenues by 4.0 %
to 89.3% for the fiscal year ended March 31, 1999 as compared to 93.3% for the
fiscal year ended March 31, 1998. This decrease was attributable to the decrease
in sales volume combined with an increase in cost of revenues primarily due to
the costs of providing IT services resulting from the R-Cube acquisition. Costs
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 decreased by $1,608,000 (17.4%) to $7,630,000 in the
fiscal year ended March 31, 1999 as compared to $9,238,000 for the fiscal year
ended March 31, 1998, and decreased as a percentage of net revenues from 72.6%
to 71.0%. Selling expenses decreased as a result of the lower commissions
associated with the lower net revenues in the oversees markets. General and
administrative expenses decreased slightly in 1999 even though the Company
incurred non-recurring costs related to terminated acquisitions of $296,000,
increased costs in India related to the Techna operations and the start-up of
the recently announced Digital Media Group and costs resulting from the acquired
R-Cube business. These costs were offset by a decrease in bad debt expense,
$150,000 in fiscal year 1999 compared to $315,000 in fiscal year 1998, and
decreases in a number of other expenses, none of which by themselves were
significant.
Research and development expense. Research and development expense increased
by $299,000 (14.2%) to $2,415,000 for the fiscal year ended March 31, 1999 as
compared to $2,116,000 for the fiscal year ended March 31, 1998, and increased
as a percentage of net revenues to 22.5% from 16.6%. Research and development
expenses consist primarily of software developers' wages. The increase was
primarily attributable to the addition of research and development personnel
beginning in the latter part of fiscal 1998 in the United States and India as a
result of bringing the Company's STAAD/Pro product to market.
In-process research and development. The in-process research and development
expense for the fiscal year ended March 31, 1998 relates to the acquisition of
the animation software assets of AXA Corporation during October 1997. Included
in the assets acquired were costs of $450,000 of in-process research and
development. In the opinion of management, the technological feasibility of the
acquired development had not yet been established and the technology had no
future alternative uses at the time of the acquisition, and accordingly, these
amounts were expensed in the period of acquisition. There were no acquisitions
in the fiscal year ended March 31, 1999 which resulted in a corresponding
expense.
Other income. Net interest expense was $191,000 for the fiscal year ended
March 31, 1999, as compared to net interest income of $45,000 for the fiscal
year ended March 31, 1998. The decrease in interest income is the result of a
decline in the Company's short-term investment balances, combined with an
increase in interest expense due to an increase in capitalized leases for
equipment purchased during the fiscal year and the interest associated with the
line of credit used to acquire R-Cube.
Income taxes. Income tax expense decreased by $143,000 due to an income tax
benefit of $71,000 in the fiscal year ended March 31, 1999 as compared to an
income tax expense of $72,000 for the fiscal year ended March 31, 1998. The
benefit is primarily the result of a pretax loss in the United States. As a
result, the Company increased its deferred tax asset during the fiscal year by
$285,000 and believes that this asset will be realizable against future
earnings.
17
<PAGE>
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 cash equivalents. The Company's principal sources of liquidity at March 31,
1999 consisted of $2,011,000 of cash.
The increase in cash used in operations during the fiscal year ended March
31, 1999 was primarily a result of the net loss for the year. Additional factors
contributing to the decrease in cash and investments were increases in accounts
receivable and other assets, offset by increases in accounts payable, accrued
expenses, bank debt and capital lease obligations.
The increase in the amount of cash used in investing activities was primarily
attributable to the acquisitions of R-Cube, Techna and Calcutta Online.
Additional cash was expended for capital expenditures, largely attributable to
the construction of a new facility in India and the start-up of the Digital
Media Group. These expenditures were offset partially by net proceeds from the
sale of short term investments.
The Company's primary source of financing cash flows has been borrowings
from banks. The Company has a $2,320,000 line of credit with Imperial Bank. The
line of credit bears interest at the prime rate plus 3.0% (10.75% at March 31,
1999) and is collateralized by substantially all of the assets of the Company
and is guaranteed by a major shareholder. The line expires September 2000. As of
March 31, 1999, the entire line of $2,320,000 was used to complete the
acquisition of R-Cube.
In March 1997, the Company borrowed $1,800,000 from Union Bank of California.
These borrowings are secured by the Company's corporate headquarters in Yorba
Linda, California. The loan is payable in equal monthly installments of
principal plus interest at 2.25% over the LIBOR Base Rate (7.33% at March 31,
1999) with a balloon payment due at maturity in April 2007.
The Company believes that its current cash and cash equivalents and cash
generated from operations will provide adequate working capital to fund the
Company's operations at currently anticipated levels through at least March 31,
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.
Outlook
Certain statements contained in this "Outlook" are "forward-looking
statements" that involve risks and uncertainties. The actual future results of
the Company could differ materially from these 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.
The Company's operating results have fluctuated in the past and may fluctuate
significantly in the future. Future results could be impacted by factors such as
customer order delays, a slower growth rate in the market, increased competition
or adverse changes in general economic conditions in any of the countries in
which the Company does business. While no single customer accounted for more
than 10% of revenues, the loss of a major distributor or a reduction in orders
from a major distributor could have a significant impact on the results of
operations in any particular quarter.
A significant portion of the Company's revenue is from international markets,
particularly the Asia-Pacific market. The Company anticipates that sales to
customers outside the U.S. will continue to account for a significant portion of
its total revenues in the foreseeable future. As a result, the Company's
financial results could be impacted by weakened general economic conditions,
such as the recent condition in Southeast Asia as discussed above, differing
technological advances or preferences, volatile foreign exchange rates and
government trade restrictions in any country in which the Company does business.
The Company has been able to bill most of its international customers in U.S.
currency, significantly limiting the foreign exchange risk. However, there can
be no assurance that the Company will be able to continue this practice as sales
to international customers grow.
18
<PAGE>
The Company has increasingly relied on distributors and representatives to
market its products, particularly in the Asia-Pacific market. The Company's
revenue in any particular quarter may be negatively impacted by a lower than
anticipated performance of any significant distributor or representative. The
Company does not offer a right of return to distributors or representatives. The
Company does, however, provide extended payment terms (up to 90 days) and
commissions to these distributors and representatives. Commissions range from
20% to 70% of gross sales. These commissions are recorded at the time of sale
and are reflected in selling expenses in the consolidated statements of
operations. Sales in other regions (North America and Europe) are generally made
without commissions. The Company continues to assess the costs and benefits of
continuing to offer these commissions and to evaluate means whereby the amounts
can be reduced. Means by which commissions may be reduced include, but are not
limited to, opening additional foreign sales offices, establishing new foreign
subsidiaries and renegotiating current commission amounts with foreign
distributors and representatives. The Company may, however, find it necessary in
the future to continue to provide commissions at current levels or possibly
increase them in order to expand international sales, which could negatively
impact operating income.
The Company's success is dependent on its ability to continue to develop,
enhance and market new products to meet its customers' sophisticated needs in a
timely manner and which are consistent with current technological developments.
The Company is committed to new product development and this commitment has
already resulted in new sources of revenue. For example, in April 1999 the
Company announced that it has launched the first of several e-commerce special
interest portals targeting the 90 million expatriate professionals of the Asia
Pacific region now living throughout Europe and North America.
The Company's success also depends in part on its ability to attract and
retain technical and other key employees who are in great demand, to protect the
intellectual property rights of its products and to continue key relationships
with third-party developers. The CAD and Computer Aided Engineering ("CAE")
software industry is highly competitive. The entire industry may experience
pricing and margin pressure which as a result could adversely affect the
Company's operating results and financial position. In addition, certain of the
Company's expenses are based, in part, on its future revenue expectations. The
Company continues to increase its operating expense levels to meet the growing
customer demand for the Company's products and services. If revenue is below
expectations, operating results could be adversely and materially affected. Net
income may be disproportionately affected by an unexpected reduction in revenue
because certain expenses are generally committed in advance.
To expand its markets, the Company's business strategy includes growth
through acquisitions. For instance, through the acquisition of R-Cube in
February 1999, the Company has expanded into the $90 billion IT services
industry. Identifying and pursuing acquisition opportunities and integrating
acquired products and businesses requires a significant amount of management
time and skill. There can be no assurance that the Company will be able to
identify suitable acquisition candidates, consummate any acquisition on
acceptable terms or successfully integrate any acquired business into the
Company's operations. There also can be no assurance that any future acquisition
will not have an adverse effect upon the Company's operating results,
particularly in the fiscal quarters immediately following consummation of the
acquisition while the acquired business is being integrated into the Company's
operations.
The trading price of the Company's stock, like other software and technology
stocks, is subject to significant volatility due to factors impacting the
overall market which are unrelated to the Company's performance. The historical
results of operations and financial position of the Company are not necessarily
indicative of future financial performance. If revenues or earnings fail to meet
securities analysts' expectations, there could be an immediate and significantly
adverse impact on the trading price of the Company's common stock.
The Company has not experienced a material adverse impact of such risks or
uncertainties, with the exception of those discussed above. No assurance can be
given that these risks and uncertainties will not affect the Company's future
results of operations or its financial position.
19
<PAGE>
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.
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 is 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 July 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 1998 the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions, which modifies SOP
97-2, Software Revenue Recognition, to allow for use of the residual method of
revenue recognition provided that certain criteria have been met. SOP 98-9 is
effective for fiscal years beginning March 15, 1999. The Company does not
believe that the adoption of this accounting standard will have a material
impact on the Company's results of operations.
In June 1998, the Financial Accounting Standards Board 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. The Company is required to adopt the statement in the first quarter
of fiscal year 2001. The Company is currently studying the impact of this
pronouncement on its financial statements but has not yet determined the impact
on its results of operations.
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. 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. 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 customer, initiating a new process in an existing facility,
or commencing some new operation. Both pronouncements are effective for
financial statements of years beginning after December 31, 1998, with earlier
application encouraged. The Company does not believe that adoption of these
pronouncements will have a material impact on its financial statements.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
<C> <S> <C>
1. Independent Auditors' Report 22
2. Consolidated Financial Statements
Consolidated Balance Sheet as of March 31, 1999 23
Consolidated Statements of Operations for the years
ended March 31, 1999 and 1998 24
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the years ended
March 31, 1999 and 1998 25
Consolidated Statements of Cash Flows for the years
ended March 31, 1999 and 1998 26
Notes to Consolidated Financial Statements 28
</TABLE>
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Research Engineers, Inc.:
We have audited the consolidated financial statements of Research Engineers,
Inc. and subsidiaries as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Research Engineers,
Inc. and subsidiaries as of March 31, 1999, and the results of their operations
and their cash flows for the years ended March 31, 1999 and 1998, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Orange County, California
May 17, 1999
22
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 1999
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets:
Cash and cash equivalents $ 2,011
Accounts receivable (net of allowance for
doubtful accounts of $356) 2,924
Deferred income taxes 1,041
Notes and related party loans receivable 50
Prepaid expenses and other current assets 588
---------
Total current assets 6,614
Property, plant and equipment, net 4,078
Goodwill and intangible assets (net of
accumulated amortization of $854) 3,279
Other assets 791
---------
$ 14,762
=========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term bank debt $ 66
Current portion of capital lease obligations 102
Accounts payable 432
Accrued expenses 830
Income taxes payable 412
Deferred maintenance revenue 1,090
Other 12
---------
Total current liabilities 2,944
Long-term bank debt, net of current portion 4,474
Capital lease obligations, net of current portion 464
Deferred income taxes 290
---------
Total liabilities 8,172
---------
Commitments (Note 8)
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 5,738,210 shares 57
Additional paid-in capital 6,623
Retained earnings 176
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustments (266)
---------
Total stockholders' equity 6,590
---------
$ 14,762
=========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
Consolidated Statements of Operations
Years ended March 31, 1999 and 1998
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net revenues:
Product sales $ 8,345 $ 10,905
Maintenance, support and services 2,400 1,826
--------- ---------
Total net revenues 10,745 12,731
Cost of revenues 1,150 854
--------- ---------
Gross profit 9,595 11,877
--------- ---------
Operating expenses:
Selling, general and administrative 7,630 9,238
Research and development 2,415 2,116
In-process research and development - 450
--------- ---------
Total operating expenses 10,045 11,804
--------- ---------
Operating (loss) income (450) 73
--------- ---------
Other expense (income):
Interest, net 191 (45)
Other (50) (55)
--------- ---------
Total other expense (income) 141 (100)
--------- ---------
(Loss) income before income taxes (591) 173
Income tax (benefit) expense (71) 72
--------- ---------
Net (loss) income $ (520) $ 101
========= =========
Net (loss) income per common share:
Basic $ (0.09) $ 0.02
========= =========
Diluted $ (0.09) $ 0.02
========= =========
Common shares used in computing net (loss) income per common share:
Basic 5,733,210 5,745,457
========= =========
Diluted 5,733,210 5,834,740
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss)
Years ended March 31, 1999 and 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock other Total
---------------- compre- Total compre-
Number Additional hensive stock- hensive
of Par paid-in Retained income holders' income
shares value capital earnings (loss) equity (loss)
---------- ----- ---------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
March 31,
1997 5,751,000 $ 57 $ 6,786 $ 595 $ 83 $ 7,521
Net income -- -- -- 101 -- 101 $ 101
Foreign currency
translation -- -- -- -- (226) (226) (226)
Unrealized loss
on investments -- -- -- -- (8) (8) (8)
-------- ---- ------ ------ ------- ------- -------
Comprehensive
loss for the
year ended
March 31,
1998 -- -- -- 101 (234) -- $ (133)
=======
Repurchase of (26,290) -- (200) -- -- (200)
common stock
Exercise of
stock options 3,000 -- 8 -- -- 8
-------- ------ ------ ------- ------- -------
Balance,
March 31,
1998 5,727,710 $ 57 $ 6,594 $ 696 $ (151) 7,196
Net loss -- -- -- (520) -- (520) $ (520)
Foreign currency
translation -- -- -- -- (117) (117) (117)
Unrealized gain
on investments -- -- -- -- 2 2 2
-------- ------ ------ ------- ------- ------- -------
Comprehensive
loss for the
year ended
March 31,
1999 -- -- -- (520) (115) -- $ (635)
=======
Exercise of
stock options 10,500 -- 29 -- -- 29
-------- ------ ------ ------- ------- -------
Balance,
March 31,
1999 5,738,210 $ 57 $ 6,623 $ 176 $ (266) $ 6,590
=========== ====== ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
Consolidated Statements of Cash Flows
Years ended March 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (520) $ 101
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
In-process research and development - 450
Depreciation and amortization 1,126 1,088
Deferred income taxes (285) (278)
Gain on investments (20) (44)
Changes in operating assets and
liabilities, (net of acquisitions):
Accounts receivable (166) (93)
Notes and related party loans
receivable 103 (44)
Prepaid expenses and other
current assets (168) 70
Other assets (242) (783)
Accounts payable (7) 27
Deferred maintenance revenue 75 239
Income taxes payable (51) 172
Accrued expenses 94 (99)
Other current liabilities (40) (24)
--------- ---------
Net cash provided by (used
in) operating activities (101) 782
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (805) (924)
Purchase of short-term investments (491) (4,652)
Sale/maturity of short-term investments 2,139 4,763
Payments to acquire companies, net
of cash acquired (2,644) (550)
--------- ---------
Net cash used in investing
activities (1,801) (1,363)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of bank debt 2,875 27
Repayment of bank debt (270) (259)
Payment of capital lease obligations (69) --
Common stock issuance 29 8
Common stock repurchase -- (200)
--------- ---------
Net cash (used in) provided
by financing activities 2,565 (424)
--------- ---------
Effect of exchange rate changes on
cash and cash equivalents (42) (226)
--------- ---------
(Decrease)/increase in cash
and cash equivalents 621 (1,231)
Cash and cash equivalents, beginning of year 1,390 2,621
--------- ---------
Cash and cash equivalents, end of year $ 2,011 $ 1,390
========= =========
</TABLE>
(Continued)
26
<PAGE>
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Supplemental cash flow information:
Amounts paid for:
Interest $ 273 $ 153
Income taxes 276 141
Non-cash transactions:
Acquisition of equipment under
capital lease obligations $ 635 $ --
Unrealized (loss)/gain on investments 2 (8)
Payments to acquire companies, net of cash acquired:
Assets acquired $ 3,108 $ 100
Liabilities assumed (464) --
Purchased research and development -- 450
--------- ---------
$ 2,644 $ 550
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Organization
Research Engineers, Inc. ("REI") was incorporated in New Jersey in 1981 and
is currently headquartered in Yorba Linda, California. Effective April 26,
1996 REI entered into a merger agreement with Research Engineers, Inc., a
Delaware corporation, and a wholly-owned subsidiary of REI ("Surviving
Company"). On the effective date REI common stock issued and outstanding was
converted into shares of common stock of the Surviving Company. REI develops
and markets structural, mechanical, civil and process/piping engineering
software products worldwide. REI and its subsidiaries also provide
information technology ("IT") services, with a focus on internet and
intranet applications.
Principles of Consolidation
The consolidated financial statements include the accounts of Research
Engineers, Inc. and its wholly-owned subsidiaries. All significant
transactions among the consolidated entities have been eliminated upon
consolidation. The consolidated entity is sometimes referred to as "the
Company" in the accompanying consolidated financial statements. The
Company's reported results for both of the fiscal years presented in these
financial statements have been restated to include the balances and results
of operations of PacSoft Incorporated ("PacSoft") as a result of the
Company's acquisition of PacSoft in March 1999 (see Note 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 reported amounts of assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107, Disclosures
About Fair Value of Financial Instruments, requires management to disclose
the estimated fair value of certain assets and liabilities defined by SFAS
No. 107 as financial instruments. Financial instruments are generally
defined by SFAS No. 107 as cash or a contractual obligation that both
conveys to one entity a right to receive cash or other financial instruments
from another entity, and imposes on the other entity the obligation to
deliver cash or other financial instruments to the first entity. At March
31, 1999, management believes that the carrying amounts of cash and cash
equivalents, short-term investments, receivable and payable amounts, and
accrued expenses approximate fair value because of the short maturity of
these financial instruments. The Company believes that the carrying value of
its bank debt and capital lease obligations approximate their fair value as
the interest rates approximate a rate that the Company could obtain under
similar terms at the balance sheet date.
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
subsidiaries are accounted for using the local currency as the functional
currency. Assets and liabilities of the subsidiaries are translated into
U.S. Dollars (the reporting currency) at the exchange rate in effect at each
year-end. Statement of operations accounts are translated at the average
rate of exchange prevailing during the year. Translation adjustments arising
from the use of differing exchange rates from period to period are included
in accumulated other comprehensive income (loss) in stockholders' equity.
Gains and losses resulting from foreign currency transactions are included
in operations and are not material for fiscal 1999 and 1998.
28
<PAGE>
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the date of purchase to be cash equivalents.
Short-Term Investments
The Company's short-term investments have historically consisted of United
States government agency securities, classified as held-to-maturity, and
common stock marketable equity securities, certificates of deposit and
mutual funds, classified as available-for-sale. In accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities,
investments classified as available-for-sale have been recorded at fair
value and investments classified as held-to-maturity are reported at
amortized cost. There are no short term investment balances at March 31,
1999. As such, there are no unrealized gains or losses on investments
classified as available-for-sale recorded in accumulated other comprehensive
income (loss) as of March 31, 1999. All realized gains and losses are
computed on the specific identification basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the following useful lives:
Building 39 years
Computer equipment 5 years
Computer software 3 years
Office equipment and furniture 5-7 years
Leasehold improvements are amortized over the lesser of the life of the
asset or the term of the lease but not in excess of 5 years.
Goodwill
The Company amortizes costs in excess of the fair value of net assets of
businesses acquired ("goodwill") using the straight-line method over the
estimated useful lives of the businesses acquired, usually a period of 5-15
years. Goodwill amortization was $362,000 and $307,000 for the years ended
March 31, 1999 and 1998, respectively.
Long-Lived Assets
Long-lived assets to be held and used and goodwill are reviewed for events
or changes in circumstances that indicate that their carrying value may not
be recoverable through cash flows. If the Company determines that the
carrying value of a given asset is deemed not to be recoverable, the asset
will be adjusted to its fair market value.
Software Development Costs and Purchased Technology
The Company capitalizes costs related to the development of certain software
products. Capitalization of costs begins when technological feasibility has
been established and ends when the product is available for general release
to customers. As of March 31, 1999 capitalized costs of approximately
$704,000, net of accumulated amortization, were included in other assets.
Approximately $311,000 of this amount represents the cost of software
developed by third parties on behalf of the Company. The remaining $393,000
represents purchased technology. Additions to capitalized software were
$116,000 and $625,000 during fiscal 1999 and 1998, respectively.
29
<PAGE>
Capitalized software development costs and purchased technology are
amortized using the straight-line method over three to five years, or the
ratio of actual sales to anticipated sales, whichever is greater.
Amortization of software development costs and purchased technology charged
to operations was approximately $329,000 and $213,000 for the years ended
March 31, 1999 and 1998, respectively. Accumulated amortization on
capitalized software was $601,000 and $275,000 as of March 31, 1999 and
1998, respectively.
Revenue Recognition
Revenue from software sales is recognized upon shipment provided that no
significant post-contract support obligations remain outstanding and
collection of the resulting receivable is deemed probable. The Company's
sales do not provide a specific right of return. At the time of sale, the
Company typically provides 120-day initial maintenance and support to the
customer. Costs relating to this initial 120-day support period, which
include primarily telephone support, are not considered material. After the
initial support period, customers can choose to purchase ongoing
maintenance contracts that include telephone, e-mail and other support, and
the right to purchase upgrades at a discounted price. Revenue from these
maintenance contracts is deferred and amortized using the straight-line
method over the life of the contract, usually twelve months. Revenue from
providing IT services is recognized as services are performed.
In October 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 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 previous practice. 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. SOP 98-9 is effective for fiscal years beginning March 15, 1999.
Application of this accounting standard is not expected to have a material
impact on the Company's results of operations.
Research and Development
Research and development costs are charged to operations as incurred.
In-process research and development is charged to operations in the period
acquired.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
30
<PAGE>
Net Income per Share
In December 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share ("EPS"). SFAS No. 128 simplifies the computation of EPS by replacing
primary and fully diluted EPS with basic and diluted EPS. Basic EPS is
calculated by dividing net income (loss) by the weighted-average common
shares outstanding during the period. Diluted EPS reflects the potential
dilution to basic EPS that could occur upon conversion or exercise of
securities, options, or other such items, to common shares using the
treasury stock method based upon the weighted-average fair value of the
Company's common shares during the period. See Note 11 "Earnings (Loss) Per
Share" for computation of EPS.
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, Reporting Comprehensive Income. SFAS
130 established standards for the reporting and display of comprehensive
income. Components of comprehensive income include net income (loss),
foreign currency translation adjustments and unrealized gain (loss) on
investments.
Stock-Based Compensation
The Company has implemented SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company continues to follow
the guidance of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. Consequently, compensation related
to stock options is the difference between the grant price and the fair
market value of the underlying common shares at the grant date. Generally,
the Company issues stock options to employees with a grant price equal to
the market value of common stock on the grant date. Accordingly, the Company
has recognized no compensation expense on its stock option plans. As
required by SFAS No. 123, the Company discloses in Note 5 "Stockholders'
Equity" the pro forma effect on operations, as if compensation costs were
recorded at the estimated fair value of the stock options granted.
Segment Reporting
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 requires segments to be
determined and reported based on how management measures performance and
makes decisions about allocating resources. See Note 10 "Segment and
Geographic Data" for description of and disclosures regarding the Company's
significant reportable segments.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board 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. The Company is required to adopt the statement in the
first quarter of fiscal year 2001. The Company is currently studying the
impact of this pronouncement on its financial statements but has not yet
determined the impact on its results of operations.
31
<PAGE>
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. 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. 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 customer, initiating a new process in
an existing facility, or commencing some new operation. Both pronouncements
are effective for financial statements of years beginning after December 31,
1998, with earlier application encouraged. The Company does not believe that
adoption of these pronouncements will have a material impact on its
financial statements.
Reclassifications
Certain reclassifications have been made to the 1998 financial statements to
conform to the 1999 presentation.
(2) Acquisitions
The Company has consummated a number of acquisitions during the fiscal years
ended March 31, 1999 and 1998. Except for the PacSoft acquisition discussed
below, all acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of operations of the acquired
assets and assumed liabilities have been included with those of the Company
subsequent to effective dates of the respective acquisitions. All assets
acquired and liabilities assumed (except for those of PacSoft) were recorded
at their estimated fair market values at the date of acquisition in the
consolidated balance sheet.
PacSoft Incorporated
On March 31, 1999, the Company acquired all of the outstanding stock of
PacSoft Incorporated, a developer of engineering software products and
integration tools for the engineering industry, in exchange for 50,000
shares of the Company's common stock. This acquisition has been accounted
for using the pooling of interests method of accounting for business
combinations. Accordingly, the Company's financial statements for the years
ended March 31, 1999 and 1998 have been restated herein to include the
historical results of operations of PacSoft for those respective periods.
The total assets and liabilities of PacSoft included in the consolidated
balance sheet of the Company as of March 31, 1999 were $51,000 and $5,000,
respectively. Prior to the merger, PacSoft had a fiscal year-end of December
31. PacSoft results have been restated to conform to the Company's fiscal
year. Net revenues and net loss for the nine-month period ended
December 31, 1998 (unaudited) were $296,000 and $4,000, respectively. The
results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements are as follows (in
thousands):
<TABLE>
<CAPTION>
For the year ended
March 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Net revenues:
Company, excluding PacSoft $ 10,380 $ 12,346
PacSoft 365 385
---------- ----------
Consolidated $ 10,745 $ 12,731
========== ==========
Net (loss) income:
Company, excluding PacSoft $ (508) $ 88
PacSoft (12) 13
---------- ----------
Consolidated $ (520) $ 101
========== ==========
</TABLE>
32
<PAGE>
R-Cube Technologies, Inc.
On February 26, 1999, the Company acquired all of the outstanding common
stock of R-Cube Technologies, Inc. (R-Cube), an established provider of
Information Technology (IT) services, for $2,320,000 in cash. The funds used
for the acquisition were provided by a new bank credit agreement (see Note
4). The Company incurred approximately $283,000 in related acquisition
costs.
The purchase price allocation for the acquisition of R-Cube is summarized as
follows (in thousands):
<TABLE>
<S> <C>
Current assets, including cash of $263 $ 809
Property and equipment 21
Other non-current assets 2
Goodwill 2,235
Current liabilities (464)
=========
$ 2,603
=========
</TABLE>
As the Company's fiscal 1999 financial statements only include one month of
operations of R-Cube, the following selected unaudited pro forma information
is being provided to present a summary of the combined results of the
Company and R-Cube as if the acquisition had occurred as of April 1, 1997,
giving effect to purchase accounting adjustments.
<TABLE>
<CAPTION>
For the pro forma year
ended March 31,
-------------------------
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Net revenues $ 14,742 $ 14,286
Net loss $ (878) $ (99)
Basic loss per share $ (0.15) $ (0.02)
Diluted loss per share $ (0.15) $ (0.02)
</TABLE>
The pro forma amounts reflect the results of operations for the Company
including R-Cube and the following purchase accounting adjustments for the
periods presented:
1. Amortization of goodwill, straight-line, over a useful life of 15
years;
2. The addition of interest expense on debt incurred to finance
the acquisition; and
3. Estimated income tax effect on the pro forma adjustments.
The pro forma loss per share data is based on the Company's weighted average
number of common shares during fiscal 1999 and 1998. The unaudited pro forma
data is for informational purposes only and may not necessarily reflect the
results of operations of the Company had R-Cube operated as part of the
Company for the fiscal years ended March 31, 1999 and 1998.
33
<PAGE>
Techna Consultancy Private Limited
On October 1, 1998, the Company, through its subsidiary in India, acquired
Techna Consultancy Private Limited ("Techna"), a software developer and
consultant. The purchase price of $254,000 in cash primarily related to an
agreement not to compete and the assumption of employee base. The purchase
price was allocated to intangible assets which will be amortized
straight-line over 5 years.
Calcutta On-line
In October, 1998 the Company acquired Calcutta Online, a website developer.
The purchase price of $50,000 in cash primarily related to an agreement not
to compete and the assumption of employee base. The purchase price was
allocated to intangible assets which will be amortized straight-line over
5 years.
AXA Corporation
On October 3, 1997, the Company purchased certain assets of AXA Corporation
("AXA"), a software developer and marketer. The purchase price of the
acquired assets was a cash payment of $550,000. On the date of acquisition,
the Company determined that no alternative future use existed for the
research and development in progress acquired and charged $450,000 to
operations. The portion of the purchase price allocated to goodwill will be
amortized straight-line over 5 years.
The purchase price allocation for the acquisition of certain assets of AXA
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
AXA
---------
<S> <C>
Property and equipment $ 3
Goodwill 97
In-process research and development 450
=========
$ 550
=========
</TABLE>
Pro forma disclosures have not been provided for the Techna, Calcutta Online
and AXA acquisitions as they would not be significantly different from
reported results for fiscal years ended March 31, 1999 and 1998.
(3) Property, Plant and Equipment
Property, plant and equipment, at cost, as of March 31, 1999 consists of the
following (in thousands):
<TABLE>
<S> <C>
Land $ 550
Building 1,983
Office and computer equipment,
software and furniture 2,286
Assets under capital lease 635
---------
5,454
Accumulated depreciation (1,376)
---------
Net property, plant and equipment $ 4,078
=========
</TABLE>
34
<PAGE>
(4) Line of Credit and Bank Debt
Long-term bank debt consists of the following at March 31, 1999 (in
thousands):
<TABLE>
<S> <C>
Revolving line of credit payable to bank, bearing
interest at 3.0% over the bank's prime rate
(10.75% at March 31, 1999) through maturity
of September 2000, secured by substantially all
of the assets of the Company and guaranteed by a
major shareholder $ 2,320
Mortgage payable to bank, monthly payments
of principal plus interest at 2.25% over the
LIBOR Base Rate (7.33% at March 31, 1999)
through maturity of April 2007, secured by
certain real estate owned by the Company 1,723
Capital lease obligations maturing at dates
ranging from October, 2001 to November, 2003,
secured by the leased assets 566
Other 497
----------
Total 5,106
Less current portion 168
----------
$ 4,938
==========
</TABLE>
The revolving line of credit contains certain restrictive covenants, all of
which have either been complied with or for which a waiver has been
received at March 31, 1999. There are no available borrowings under this
credit facility at March 31, 1999.
The long-term bank debt matures in each of the following years ending March
31 (in thousands):
<TABLE>
<S> <C>
2000 $ 168
2001 2,589
2002 275
2003 275
2004 252
Thereafter 1,547
----------
$ 5,106
==========
</TABLE>
(5) Stockholders' Equity
Stock Repurchase
On December 16, 1997, in accordance with Amendment No. 1 to the Agreement
and Plan of Reorganization dated March 8, 1996 between the Company and
ADLPipe, Inc., the Company repurchased 26,290 shares of common stock for
$200,000.
35
<PAGE>
Warrants
Warrants issued to the underwriters as part of the Company's initial public
offering to purchase 130,000 shares of common stock at $6.00 per share were
outstanding and exercisable during fiscal 1999 and 1998. These warrants
expire July 26, 2001.
Stock Option Plans
The Company has three adopted employee stock option plans:
<TABLE>
<CAPTION>
Shares
Adopted Terminates Authorized
--------- ---------- ----------
<S> <C> <C> <C>
Research Engineers, Inc.
1998 Stock Option Plan
(the "1998 Plan") December 1998 November 2008 500,000
Research Engineers, Inc.
1997 Stock Option Plan
(the "1997 Plan") February 1997 February 2007 300,000
Research Engineers, Inc.
1996 Stock Option Plan
(the "1996 Plan") April 1996 April 2006 294,000
</TABLE>
Each of the plans provides for the granting of shares as either Incentive
Stock Options (ISOs) or Non-Qualified Stock Options (NQOs). Options under
all plans generally vest over 3 years, though the vesting periods may vary
from person to person, and are exercisable subject to continued employment
and other conditions. As of March 31, 1999, there were 257,400 options
available for grant and no options exercisable under the 1998 Plan, no
options available for grant and 85,833 options exercisable under the 1997
Plan, and 1,550 options available for grant and 148,867 options exercisable
under the 1996 Plan.
During fiscal 1998, the Company granted 20,000 stock options outside of the
above described plans. These options vest at the rate of 2,500 options per
quarter with an exercise price of $2.81.
The following is a summary of activity related to all outstanding stock
options (number of shares in thousands):
<TABLE>
<CAPTION>
Weighted
Number average
of exercise
shares price
------ --------
<S> <C> <C>
Outstanding at April 1, 1997 326 $ 2.75
Granted 221 2.95
Exercised (3) 2.75
Forfeited (56) 2.83
------
Outstanding at March 31, 1998 488 2.81
Granted 379 3.07
Exercised (10) 2.80
Forfeited (15) 2.84
------
Outstanding at March 31, 1999 842 $ 2.86
======
</TABLE>
36
<PAGE>
As discussed in Note 1, the Company accounts for its stock options based on
the intrinsic value of a grant as of the date of the grant in accordance
with APB No. 25. Accordingly, no compensation expense has been recognized in
1999 or 1998 for options granted. Had compensation cost been recognized in
accordance with the fair value provisions of SFAS No. 123, pro-forma and
assumption information would have been as follows for the fiscal years ended
March 31 (dollars in thousands, except amounts per share):
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Net (loss) income - as reported $ (520) $ 101
Net loss - pro forma (852) (130)
========== ==========
Basic net (loss) income per share -
as reported $ (0.09) $ 0.02
pro forma (0.15) (0.02)
Diluted net (loss) income per share -
as reported (0.09) 0.02
pro forma (0.15) (0.02)
========== ==========
Weighted average fair value of
options granted $ 3.01 $ 2.91
========== ==========
Black-Scholes option pricing model assumptions:
Dividend yield -- --
Expected volatility 63% 48%
Risk-free interest rate 4.53% 5.57%
Expected option lives (in years) 5 5
</TABLE>
At March 31, 1999, the range of exercise prices and the weighted average
remaining contractual life of outstanding options were $2.63 - $3.30 and
8.59 years, respectively.
(6) Related Party Transactions
In October 1996, the Company loaned $37,500 to a stockholder, with principal
and accrued interest originally due in October 1997. The note's maturity
date was extended to March 2000. Interest accrues at the rate of 8% per
annum. The stockholder has pledged his common stock in the Company as
collateral for this note. The note is included in notes and related party
loans receivable on the consolidated balance sheet.
(7) Retirement Plan
The Company has adopted a qualified cash or deferred 401(k) retirement
savings plan. The plan covers all employees who have attained age 21. The
Company makes matching contributions to this plan based on 100% of the
employees' elective contributions up to a maximum of 6% of compensation. For
the years ended March 31, 1999 and 1998, Company contributions in the amount
of $105,000 and $81,000, respectively, were paid to the plan. Certain of the
Company's subsidiaries have similar plans, however, the Company does not
match contributions to these plans.
37
<PAGE>
(8) Commitments
The Company leases certain facilities and equipment under noncancelable
operating leases. The facility leases include options to extend the lease
terms and provisions for payment of property taxes, insurance and
maintenance expenses.
At March 31, 1999, future minimum annual rental commitments under these
lease obligations were as follows (in thousands):
<TABLE>
<CAPTION>
Year ending
March 31:
<S> <C>
2000 $ 237
2001 156
2002 90
2003 79
2004 8
Thereafter --
----------
$ 570
==========
</TABLE>
Rent expense was $325,000 and $375,000 for the years ended March 31, 1999
and 1998, respectively.
The Company leases space to third parties in a Company-owned building under
operating leases. Certain leases contain renewal options and provide for
reimbursement of certain operating expenses. The tenant that represented the
significant portion of rental income did not renew its lease which expired
in October 1997. Rental income for the years ended March 31, 1999 and 1998,
included in other income in the accompanying consolidated statements of
operations, was $8,000 and $71,000, respectively.
(9) Income Taxes
The components of income (loss) before income taxes are as follows for the
year ended March 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
United States $ (863) $ (1,390)
Foreign 272 1,563
----------- -----------
Total (591) 173
=========== ===========
</TABLE>
38
<PAGE>
The (benefit) provision for income taxes is comprised of the following for
the year ended March 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Current:
Federal $ -- $ --
State 2 73
Foreign 212 288
------ ------
214 361
Deferred:
Federal (295) (216)
State 14 (71)
Foreign (4) (2)
------ ------
(285) (289)
------ ------
Total $ (71) $ 72
====== ======
</TABLE>
The reported (benefit) provision for income taxes differs from the amount
computed by applying the statutory federal income tax rate of 34% to income
(loss) before income taxes as follows for the year ended March 31, (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Income tax (benefit) at statutory rate $ (201) $ 59
State taxes, net of federal benefits 7 --
Foreign income tax rate differential 90 36
Return to provision adjustment (15) (16)
Change in valuation allowance 60 --
Research and development credits (17) --
Other 5 (7)
--------- ---------
Total $ (71) $ 72
========= =========
</TABLE>
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting and income tax
purposes. The tax effects of temporary differences at March 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Cash to accrual adjustment $ 130
Accrued vacation 66
Allowance for doubtful accounts 104
Amortization ofintangibles 256
Net operating loss carryforward 437
Foreign tax credit carryforward 90
Research and development credit 17
carryforward
Other 1
---------
Total deferred tax assets 1,101
Less: valuation allowance (60)
---------
Net deferred tax assets 1,041
---------
Deferred tax liabilities:
Depreciation (83)
Cash to accrual adjustment (201)
Other (6)
---------
Total deferred tax liabilities (290)
---------
Net deferred tax asset $ 751
=========
</TABLE>
39
<PAGE>
During fiscal 1999 the Company added approximately $73,000 of deferred tax
liabilities as part of the acquisition of R-Cube (see Note 2).
At March 31, 1999 the Company had tax net operating loss carryforwards
of $1,137,000 for federal and $565,000 for state income tax purposes which
expire at varying dates beginning in 2019 and 2004, respectively. In
addition, the Company has for federal income tax purposes $17,000 of
research and development credit carryforwards and $90,000 of foreign tax
credit carryforwards which expire at varying dates beginning in 2013 and
2003, respectively.
In assessing the realizability of the net deferred tax assets, management
considers whether it is more likely than not that some or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon either the generation of future
taxable income during the periods in which those temporary differences
become deductible or the carryback of losses to recover income taxes
previously paid during the carryback period. As of March 31, 1999, the
Company had provided a valuation allowance of $60,000 to reduce the net
deferred tax assets due to the potential expiration of certain foreign tax
credit carryforwards prior to their utilization.
Undistributed earnings of certain of the Company's foreign subsidiaries are
considered to be indefinitely reinvested and, accordingly, no provision for
United States federal and state income taxes has been provided thereon. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both federal income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries.
40
<PAGE>
(10) Segment and Geographic Data
The Company is a provider of 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. Software sales and related maintenance and
technical support is considered to be the Company's only reportable segment
for fiscal 1999. With the acquisition of R-Cube in February 1999, the
Company has expanded into the $90 billion information technology ("IT")
services industry, providing expertise in data-mining and embedded
technologies to Internet/Intranet design and communications. Fiscal 1999
includes only one month of operations for R-Cube and as such IT services is
considered individually insignificant for separate detailed disclosure at
March 31, 1999. IT services will be a significant reportable segment for
fiscal 2000.
The Company's operations are based worldwide through foreign subsidiaries
and branch offices in Germany, India, the United Kingdom, and Asia-Pacific.
The following are significant components of worldwide operations by
geographic location:
<TABLE>
<CAPTION>
For the year ended
March 31
----------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Net revenue
United States $ 4,805 $ 4,543
The Americas (other than U.S.) 994 1,218
Europe 3,161 3,704
Asia-Pacific 1,785 3,266
----------- -----------
Consolidated $ 10,745 $ 12,731
=========== ===========
Export sales
United States $ 2,085 $ 3,489
=========== ===========
Long-lived Assets
United States $ 6,106 $ 3,312
Europe 662 884
Asia-Pacific 1,380 942
----------- -----------
Consolidated $ 8,148 $ 5,138
=========== ===========
</TABLE>
41
<PAGE>
(11) Earnings Per Share
The following table illustrates the computation of basic and diluted net
income (loss) per share for the years ended March 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Numerator:
Numerator for basic and diluted net income
(loss) per share - net income (loss) $ (520) $ 101
======== ========
Denominator:
Denominator for basic net income (loss)
per share - average number of common
shares outstanding during the year 5,733 5,745
Incremental common shares attributable
to exercise of outstanding options - 90
-------- --------
Denominator for diluted net income (loss)
per share 5,733 5,835
======== ========
Basic net income (loss) per share $ (0.09) $ 0.02
======== ========
Diluted net income (loss) per share $ (0.09) $ 0.02
======== ========
</TABLE>
All options, warrants and other common stock equivalents amounting to
259,705 potential common shares were excluded from the computation of
diluted EPS for fiscal 1999 because the Company reported a net loss and,
therefore, the effect would be antidilutive. Warrants to purchase 130,000
shares of common stock were not included in the computation of diluted EPS
for 1998 because their exercise price was greater than the average market
price of the common shares and therefore would be antidilutive.
42
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT.
Directors, Executive Officers and Key Employees
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Amrit K. Das...... 54 Chairman of the Board, Chief Executive
Officer and Director
Jyoti Chatterjee.. 43 President, Chief Operating Officer and Director
Wayne L. Blair.... 59 Chief Financial Officer, Treasurer and Secretary
Clara Young....... 44 Vice President Administration
Dan W. Heil....... 66 Director
Bruce E. Cummings. 50 Director
Santanu Das....... 26 Manager of New Technology and Director
Steve Owen........ 40 Director of European Operations
John Putnam....... 41 Manager of Sales and Marketing
</TABLE>
Amrit K. Das is the founder of the Company and has served as its Chief
Executive Officer and as a Director since its inception in 1981. Mr. Das also
served as President of the Company since its inception until March 15, 1999. Mr.
Das holds a B.S. in Civil/Structural Engineering from Calcutta University, India
and an M.S. in Structural Engineering from the University of South Carolina.
Jyoti Chatterjee has served as the Company's President, Chief Operating
Officer since March 15, 1999 and prior to that he served as its Executive Vice
President, Chief Operating Officer and as a Director since April 1990. Prior to
that Mr. Chatterjee served as Chief Consulting Engineer for the Company from
1985 to 1990. Mr. Chatterjee holds a B.S. in Structural Engineering from the
Indian Institute of Technology and an M.S. in Structural Engineering from the
University of Pennsylvania.
Wayne L. Blair has served as the Company's Chief Financial Officer,
Treasurer and Secretary since September 1997. Prior to that Mr. Blair was the
Chief Financial Officer for National Electronics Corporation from 1994 to 1997.
From 1992 to 1994, Mr. Blair was the Chief Financial Officer for Satellite
Technology (currently STM Wireless, Inc.). Mr. Blair holds a B.S. in Accounting
from California State University, Long Beach.
Clara Young has served as Vice President Administration of the Company
since December 1987. Prior to that Ms. Young served as program analyst with The
Technical Group, Inc. from December 1982 to December 1987. Ms. Young holds a
B.S. in Computer Science from California State University, Fullerton.
Dan W. Heil has served as a Director of the Company since 1990. Mr. Heil
has been the President and Chief Executive Officer of Willdan Associates, an
engineering and planning company, since its founding in 1965. Mr. Heil holds a
B.S. in Civil Engineering from Stanford University.
Bruce E. Cummings has served as a Director of the Company since 1996. Mr.
Cummings is the Principal of Bruce Cummings Associates, management and marketing
consultants. Prior to that, Mr. Cummings was the President and Chief Executive
Officer of Portrait Display Labs, Inc., a manufacturer of special purpose
computer monitors, which he co-founded, from 1992 to June 1997. From January
1991 to July 1992, Mr. Cummings was Vice President of Corporate Marketing for
Macromedia. Mr. Cummings is currently a member of the Advisory Board for Europe
Direct, the European Direct Marketing Conference. Mr. Cummings holds a B.S. in
Marketing from California State University at Long Beach.
Santanu Das has served as Manager of New Technology of the Company since
May 1997 and as a Director since September 1996. Prior to that, Mr. Das served
as a Senior Engineering Analyst for the Company from 1991 to April 1997. Mr. Das
holds a B.S. in Structural Engineering from the University of Southern
California and an M.S. in Structural Engineering from the Massachusetts
Institute of Technology. Santanu Das is the son of Amrit Das, the Company's
Chief Executive Officer.
Stephen Owen has served as the Company's Director of European Operations
since 1987. Mr. Owen holds a B.S. in Civil Engineering from the University
College Swansea, United Kingdom.
John Putnam has served as the Company's Manager of Sales and Marketing
since 1991. For the six year period prior to that, Mr. Putnam held various
marketing and advertising positions with The Technical Group, Inc., including
marketing and advertising manager for CIVILSOFT (a division of The Technical
Group, Inc.). Mr. Putnam holds a B.A. in political science/public administration
from California State Polytechnic University, Pomona, and an M.B.A. from the
University of Redlands.
All directors hold office until the next annual stockholders' meeting or
until their respective successors are elected or until their earlier death,
resignation or removal. Officers are appointed by, and serve at the discretion
of, the Board of Directors.
Compliance with Beneficial Ownership Reporting Rules
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), requires the Company's executive officers and directors, and persons who
beneficially own more than 10% of a registered class of the Company's Common
Stock to file initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission ("Commission"). Such officers,
directors and stockholders are required by Commission regulations to furnish the
Company with copies of all such reports that they file.
Based solely upon a review of copies of such reports furnished to the Company
during its fiscal year ended March 31, 1999 and thereafter, or any written
representations received by the Company from directors, officers and beneficial
owners of more than 10% of the Company's Common Stock ("reporting persons") that
no other reports were required, the Company believes that, during the Company's
1999 fiscal year, all Section 16(a) filing requirements applicable to the
Company's reporting persons were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
Executive Compensation
There is shown below information concerning the annual and long-term
compensation for services in all capacities to the Company of the Company's
Chief Executive Officer and the other executive officers of the Company whose
aggregate cash compensation exceeded $100,000 (collectively, the "Named
Executives") during the fiscal years ended March 31, 1999, 1998 and 1997.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------------------------ ----------
Securities
Name and Other Annual Underlying All Other
Principal Salary Bonus Compensation(1) Options Compensation
Position Year ($) ($) ($) (#) ($)
- ----------------- ------ ------ ----- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Amrit K. Das 1999 260,000 -- -- 60,000 16,506(2)
Chief Executive 1998 260,000 -- 66,071 -- 15,824(2)
Officer 1997 249,200 -- 78,379 25,000 15,824(2)
Jyoti Chatterjee 1999 156,000 -- -- 50,000 9,360(3)
President and 1998 156,000 -- -- 15,000 9,360(3)
Chief Operating 1997 136,560 -- -- 48,000 8,194(3)
Officer
Wayne L. Blair 1999 125,000 -- -- 30,000 2,019(3)
Chief Financial 1998 60,096 -- -- 40,000 --
Officer
Clara Young 1999 104,000 -- -- 12,500 6,040(3)
Vice President of 1998 104,000 -- -- 7,500 6,240(3)
Administration 1997 93,920 -- -- 18,500 5,808(3)
</TABLE>
(1)The costs of certain benefits are not included because they did not exceed,
in the case of each Named Executive, the lesser of $50,000 or 10% of the
total annual salary and bonus as reported above.
(2)Represents 401(k) contributions made by the Company as well as premiums paid
by the Company pursuant to a split-dollar life insurance policy established
by the Company for the benefit of Mr. Das in the amount of $7,006 in 1999 and
$6,324 for each of 1998 and 1997.
(3)Represents 401(k) contributions made by the Company on behalf of the Named
Executive.
Stock Option Grants in 1999
The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1997 Stock Option Plan and 1998
Stock Option Plan during fiscal 1999 to each of the Named Executives. The
Company has never granted any stock appreciation
rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------
Number of Percent of
Securities Total
Underlying Options Exercise
Options Granted to or Base
Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Sh) Date
- --------------------- ---------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
Amrit K. Das . . . . . 60,000 15.8% $3.30 12/06/08
Jyoti Chatterjee . . 50,000 13.2% $3.00 12/06/08
Wayne L. Blair . . . 30,000 7.9% $3.00 12/06/08
Clara Young . . . . . 12,500 3.3% $3.00 12/06/08
</TABLE>
<PAGE>
Option Exercises and Fiscal Year-End Values
Shown below is information with respect to the number of shares of the
Company's Common Stock acquired upon exercise of options, the value realized
therefor, the number of unexercised options at March 31, 1999 and the value of
unexercised in-the-money options at March 31, 1999 for the Named Executives in
the Summary Compensation Table above. The Named Executives did not hold any
stock appreciation rights during fiscal 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Fiscal Options at Fiscal
Shares Year-End(#) Year-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable
- -------------- ------------- ----------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Amrit K. Das -- -- 16,667 / 68,333 93,750 / 351,375
Jyoti Chatterjee -- -- 37,000 / 76,000 206,875 / 412,500
Wayne L. Blair -- -- 13,333 / 56,667 76,667 / 314,583
Clara Young -- -- 14,833 / 23,667 82,813 / 128,750
</TABLE>
Directors' Compensation
The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board of
Directors and committee meetings.
Employment Agreements
As of May 1, 1996, the Company entered into five-year employment agreements
with each of Amrit Das, Jyoti Chatterjee and Clara Young. Those agreements,
which became effective upon the closing of the Company's initial public offering
of its Common Stock, provide that Mr. Das, Mr. Chatterjee and Ms. Young will
receive minimum base annual salaries of $260,000, $156,000 and $104,000,
respectively. Each employment agreement also provides for the grant of an annual
bonus with such bonuses, if any, to be determined by the Compensation Committee
of the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth as of June 23, 1999, certain information with
respect to (i) each director of the Company, (ii) the Named Executives and (iii)
all directors and executive officers of the Company as a group, and (iv) each
person known to the Company to be the beneficial owner of more than 5% of the
Company's Common Stock. The information with respect to each person specified is
as supplied or confirmed by such person or based upon statements filed with the
Commission.
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Beneficial Percent of Class
of Beneficial Owner Ownership of Common Stock (1) of Common Stock
- ---------------------- ---------------------------------- --------------------
<S> <C> <C>
Amrit K. Das (2)(3)(4) 1,298,092 22.5%
Jyoti Chatterjee (2)(3)(5) 186,312 3.2%
Wayne L. Blair (2)(6) 13,333 *
Clara Young (2)(7) 39,519 *
Dan W. Heil (3)(8) 102,621 1.8%
Bruce E. Cummings (3)(9) 8,333 *
Santanu Das (3)(10) 1,324,117 22.9%
Sormistha Das 931,462 16.2%
1043 Taylor Court
Anaheim Hills, CA 92808
All Directors and Executive 2,972,327 50.3%
Officers of the Company as
a Group (7 persons) (11)
</TABLE>
- ---------------
* Less than 1%
(1)Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Shares of Common Stock subject to options currently exercisable, or
exercisable within 60 days after June 23, 1999, are deemed to be outstanding
in calculating the percentage ownership of a person or group but are not
deemed to be outstanding as to any other person or group.
(2) Named executive officer of the Company. The address of each executive
officer is c/o Research Engineers, Inc., 22700 Savi Ranch Parkway, Yorba
Linda, CA.
(3) Director of the Company. The address of each director is c/o Research
Engineers, 22700 Savi Ranch Parkway, Yorba Linda, CA.
(4) Includes 1,279,759 shares of Common Stock held by the A. and P. Das Living
Trust and 18,333 shares of Common Stock underlying options which are
exercisable as of June 23, 1999 or within 60 days after such date. Does not
include 931,462 shares of Common Stock held by Mr. Das' daughter, Sormistha
Das, or 1,324,117 shares of Common Stock beneficially held by Mr. Das' son,
Santanu Das. Mr. Das disclaims beneficial ownership of the shares of Common
Stock held by Sormistha Das and Santanu Das.
(5) Includes 53,667 shares of Common Stock underlying options which are
exercisable as of June 23, 1999 or within 60 days after such date.
(6) Represents 13,333 shares of Common Stock underlying options which are
exercisable as of June 23, 1999 or within 60 days after such date.
(7) Includes 21,833 shares of Common Stock underlying options which are
exercisable as of June 23, 1999 or within 60 days after such date.
(8) Includes 8,333 shares of Common Stock underlying options which are
exercisable as of June 23, 1999 or within 60 days after such date.
(9) Represents 8,333 shares of Common Stock underlying options which are
exercisable as of June 23, 1999 or within 60 days after such date.
(10)Includes 46,667 shares of Common Stock underlying options which are
exercisable as of June 23, 1999 or within 60 days after such date. Mr. Das
is the son of Amrit Das, the Company's Chief Executive Officer.
(11)Includes 170,499 shares of Common Stock underlying options which are
exercisable as of June 23, 1999 or within 60 days after such date.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Research Engineers, Inc. 1996 Stock Option Plan*
10.2 Employment Agreement dated May 1, 1996, by and
between the Company and Amrit K. Das*
10.3 Employment Agreement dated May 1, 1996, by and
between the Company and Jyoti Chatterjee*
10.4 Employment Agreement dated May 1, 1996, by and
between the Company and Clara Y. M. Young*
10.5 Research Engineers, Inc. 1997 Stock Option Plan**
10.6 Business Loan agreement dated October 15, 1996
between the Company and Union Bank of California N.A.**
10.7 Promissory Note dated March 20, 1997 in the principal
amount of $1,800,000 made payable to Union Bank of
California N.A.**
10.8 Agreement Not To Compete dated October 1, 1998
between the Company and Techna Consultancy Private
Limited***
10.9 Research Engineers, Inc. 1998 Stock Option Plan +
10.10 Credit Agreement dated February 26, 1999 by and
between the Company and Imperial Bank****
10.11 General Security Agreement dated February 26, 1999 by
and between the Company and Imperial Bank ****
10.12 General Security Agreement dated February 26, 1999 by
and between the Company and Imperial Bank ****
10.13 Note Secured by Deed of Trust in the principal
amount of $2,320,000 dated February 26, 1999 made
by the Company in favor of Imperial Bank****
10.14 Agreement and Plan of Reorganization among the Company,
PacSoft, Incorporated and Karen Hunter, William Schmidt
and Mae Webb dated March 31, 1999++
23 Consent of Independent Auditors
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
(b) Reports on Form 8-K
On March 5, 1999, the Company filed a Current Report on Form 8-K,
reporting the acquisition of R-Cube Technologies, Inc.
- -----------------------
* Filed as an exhibit to the Company's Registration Statement on Form SB-2
dated May 21, 1996 or amendment thereto dated June 14, 1996 (Registration
No. 333-4844-LA) and incorporated herein by reference.
** Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
March 31, 1997 and filed with Securities and Exchange Commission on June
30, 1997, or amendment thereto filed on August 19, 1997 and incorporated
herein by reference.
*** Filed as an exhibit to the Company's Form 10-QSB for the quarterly period
ended December 31, 1998 and filed with the Securities and Exchange
Commission on February 11, 1999 and incorporated herein by reference.
**** Filed as an exhibit to the Company's Form 8-K dated February 26, 1999 and
filed with the Securities and Exchange Commission on March 5, 1999 and
incorporated
herein by reference.
+ Filed as an exhibit to the Company's Proxy Statement filed pursuant to
Section 14(a) of the Securities Act on November 12, 1998 and incorporated
herein by reference.
++ Filed herewith.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RESEARCH ENGINEERS, INC
Dated: June 30, 1999 By: /s/ AMRIT K. DAS
--------------------------
Amrit K. Das, Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ----------------------- -------------------- -------------
<S> <C> <C>
/s/ AMRIT K. DAS Chairman of the Board, June 30, 1999
- -------------------- Chief Executive Officer
Amrit K. Das and Director (principal
executive officer)
/s/ JYOTI CHATTERJEE President, Chief Operating June 30, 1999
- -------------------- and Director
Jyoti Chatterjee
/s/ WAYNE BLAIR Secretary and Chief June 30, 1999
- ------------------- Financial Officer (principal
Wayne Blair financial and accounting
officer)
/s/ SANTANU DAS Director June 30, 1999
- -------------------
Santanu Das
/s/ DAN W. HEIL Director June 30, 1999
- -------------------
Dan W. Heil
/s/ BRUCE CUMMINGS Director June 30, 1999
- -------------------
Bruce Cummings
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------------------------------------------------------------
10.1 Research Engineers, Inc. 1996 Stock Option Plan*
10.2 Employment Agreement dated May 1, 1996, by and between
the Company and Amrit K. Das*
10.3 Employment Agreement dated May 1, 1996, by and between
the Company and Jyoti Chatterjee*
10.4 Employment Agreement dated May 1, 1996, by and between
the Company and Clara Y. M. Young*
10.5 Research Engineers, Inc. 1997 Stock Option Plan**
10.6 Business Loan agreement dated October 15, 1996 between the
Company and Union Bank of California N.A.**
10.7 Promissory Note dated March 20, 1997 in the principal amount
of $1,800,000 made payable to Union Bank of California N.A.**
10.8 Agreement Not To Compete dated October 1, 1998 between the
Company and Techna Consultancy Private Limited***
10.9 Research Engineers, Inc. 1998 Stock Option Plan +
10.10 Credit Agreement dated February 26, 1999 by and between
the Company and Imperial Bank****
10.11 GeneralSecurity Agreement dated February 26, 1999 by and
between the Company and Imperial Bank ****
10.12 GeneralSecurity Agreement dated February 26, 1999 by and
between the Company and Imperial Bank ****
10.13 Note Secured by Deed of Trust in the principal amount of
$2,320,000 dated February 26, 1999 made by the Company in favor
of Imperial Bank****
10.14 Agreement and Plan of Reorganization among the Company,
PacSoft, Incorporated and Karen Hunter, William Schmidt and
Mae Webb dated March 31, 1999++
23 Consent of Independent Auditors
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
- -----------------------
* Filed as an exhibit to the Company's Registration Statement on Form SB-2
dated May 21, 1996 or amendment thereto dated June 14, 1996 (Registration
No. 333-4844-LA) and incorporated herein by reference.
** Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
March 31, 1997 and filed with Securities and Exchange Commission on June
30, 1997, or amendment thereto filed on August 19, 1997 and incorporated
herein by reference.
*** Filed as an exhibit to the Company's Form 10-QSB for the quarterly period
ended December 31, 1998 and filed with the Securities and Exchange
Commission on February 11, 1999 and incorporated herein by reference.
**** Filed as an exhibit to the Company's Form 8-K dated February 26, 1999 and
filed with the Securities and Exchange Commission on March 5, 1999 and
incorporated herein by reference.
+ Filed as an exhibit to the Company's Proxy Statement filed pursuant to
section 14(a) of the Securities Act on November 12, 1998 and incorporated
herein by reference.
++ Filed herewith.
<PAGE>
EXHIBIT 10.14
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
RESEARCH ENGINEERS, INC.
PACSOFT INCORPORATED
AND
KAREN HUNTER
WILLIAM SCHMIDT
AND
MAE WEBB
MARCH 31, 1999
<PAGE>
TABLE OF CONTENTS
DESCRIPTION PAGE NO.
1. EXCHANGE OF SHARES...............................1
1.1 Exchange of Shares. ....................1
1.2 Consideration and Exchange Ratio. ......1
1.3 Tax Status of the Exchange..............1
2. REPRESENTATIONS AND WARRANTIES OF PACSOFT AND
SELLERS..........................................1
2.1 Organization; Good Standing;
Qualification and Power...............2
2.2 Capital Structure.......................2
2.2.1 Stock........................2
2.2.2 No Other Commitments ........2
2.3 Authority...............................2
2.3.1 Corporate Action.............2
2.3.2 Sellers' Authority...........3
2.3.3 No Conflict..................3
2.3.4 Governmental Consents........3
2.4 Financial Statements. ..................3
2.5 Compliance with Applicable Laws. .......3
2.6 Insurance. .............................3
2.7 Litigation. ............................4
2.8 Employee Benefits. .....................4
2.9 Absence of Undisclosed Liabilities. ....5
2.10 Absence of Certain Changes or Events. .5
2.11 No Defaults. ..........................6
2.12 Certain Agreements. ...................6
2.13 Taxes..................................7
2.14 Intellectual Property..................9
2.15 Fees and Expenses......................9
2.16 Environmental Matters..................10
2.17 Disclosure. ...........................10
2.18 Restrictions on Business Activities. ..10
2.19 Accounts Receivable....................10
2.20 Personal Property. ....................10
2.21 Real Property. ........................10
2.22 Warranties. ...........................11
2.23 Contracts. ............................11
2.24 Products and Distribution. ............11
2.25 Development Tools. ....................12
2.26 Investment Representation. ............12
2.27 Year 2000 Compliance. .................12
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF REI...........13
3.1 Organization; Good Standing;
Qualification and Power..............13
3.2 Capital Structure......................13
3.2.1 Stock, Options and Warrants.13
3.2.2 No Other Commitments........13
3.3 Authority..............................13
3.3.1 Corporate Action............13
3.3.2 No Conflict.................14
3.3.3 Governmental Consents.......14
3.4 Litigation. ...........................14
3.5 Fees and Expenses......................14
4. PACSOFT AND SELLERS COVENANTS...................14
4.1 Regulatory Approvals. .................14
4.2 Necessary Consents. ...................15
4.3 Cooperation in Audit. .................15
5. REI COVENANTS...................................15
5.1 Regulatory Approvals. .................15
5.2 Necessary Consents. ...................15
6. ADDITIONAL AGREEMENTS...........................15
6.1 Employee Matters. .....................15
6.2 Employment Agreement...................15
6.3 PacSoft Office Location. ..............15
6.4 Registration Rights. ..................16
6.4.1 Definitions.................16
6.4.2 Piggyback Registration......16
6.4.3 Obligations of REI..........16
6.4.4 Condition Precedent.........17
6.4.5 Underwriting Requirements...17
6.4.6 Indemnification.............17
6.4.7 Reports Under 1934 Act......19
6.4.8 Lock-up Agreement...........19
6.4.9 Delay of Registration.......19
7. INDEMNIFICATION OF THE PARTIES..................20
7.1 Indemnification by Sellers.............20
7.2 Indemnification by REI.................20
7.3 Adjustments to Indemnification Payments20
7.4 Indemnification Procedures.............20
7.5 Manner of Indemnification. ............21
<PAGE>
8. CLOSING......................................... 21
8.1 Closing Date. ......................... 22
8.2 Deliveries by PacSoft and Sellers
at the Closing....................... 22
8.3 Deliveries by REI at the Closing. ..... 22
9. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS....................................... 22
10. MISCELLANEOUS................................... 22
10.1 Governing Law. ........................22
10.2 Assignment; Binding Upon Successors
and Assigns......................... 23
10.3 Severability. .........................23
10.4 Counterparts. .........................23
10.5 Other Remedies. .......................23
10.6 Amendment and Waivers. ................23
10.7 Expenses. .............................23
10.8 Attorneys' Fees. ......................23
10.9 Notices. ..............................23
10.10 Construction of Agreement.............24
10.11 No Joint Venture......................25
10.12 Further Assurances....................25
10.13 Absence of Third Party Rights.........25
10.14 Entire Agreement......................25
10.15 Press Releases........................25
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is entered into as
of this 31st day of March, 1999, by and among Research Engineers, Inc., a
Delaware corporation ("REI"), PacSoft Incorporated, a Washington corporation
("PacSoft"), and Karen Hunter, an individual, William Schmidt, an individual,
and Mae Webb, an individual (collectively, "Sellers").
RECITALS
A. Sellers own, in the aggregate, all of the issued and outstanding shares
("Shares") of capital stock of PacSoft.
B. REI desires to acquire from Sellers the Shares, and Sellers desire to
acquire from REI the Stock (as defined in Section 1.2 below), on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, the parties to this Agreement agree as follows:
EXCHANGE OF SHARES.
Exchange of Shares. Subject to the terms and conditions set forth herein, at the
Closing (as defined in Section 8 below), Sellers shall transfer, convey,
assign and deliver the Shares to REI, and REI shall issue and deliver the
Stock to Sellers.
Consideration and Exchange Ratio. The aggregate consideration to be given in
exchange for the Shares shall consist of 50,000 shares of common stock,
$.01 par value per share, of REI ("Stock"), which results in an exchange
ratio of 83.3333 shares of Stock to be issued in exchange for each Share.
Tax Status of the Exchange. The exchange of the Shares for the Stock is intended
to be a reorganization as described in Section 368(a) of the Internal Revenue
Code of 1986 (the "Internal Revenue Code"), and this Agreement is intended to
be a "plan of reorganization" within the meaning of the regulations
promulgated under Section 368(a) of the Internal Revenue Code.
REPRESENTATIONS AND WARRANTIES OF PACSOFT AND SELLERS.
<PAGE>
8
Except as set forth in a schedule dated the date of this Agreement and
delivered by PacSoft to REI concurrently herewith ("Disclosure Schedule")
specifically identifying the Sections of this Agreement requiring the delivery
of such disclosure, PacSoft and Sellers jointly and severally represent and
warrant to REI as set forth below. In this Agreement, any reference to any
event, change or effect being "material" with respect to any entity or group of
entities means any material event, change or effect related to the condition
(financial or otherwise), properties, assets, liabilities, businesses,
operations, results of operations or prospects of such entity or group of
entities taken as a whole. In this Agreement, the term "Material Adverse Effect"
used in connection with a party or any of that party's subsidiaries means any
event, change or effect that is materially adverse to the condition (financial
or otherwise), properties, assets, liabilities, businesses, operations, results
of operations or prospects of that party and its subsidiaries, taken as a whole;
provided, however, that a Material Adverse Effect shall not include any adverse
effect resulting from general economic conditions or conditions affecting the
engineering software market.
Organization; Good Standing; Qualification adn Power. PacSoft is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
business as now being conducted, and is duly qualified and in good standing
to do business in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes qualification necessary,
other than in jurisdictions where the failure to qualify would not have a
Material Adverse Effect. PacSoft does not have any subsidiaries. PacSoft
has made available to REI or its counsel complete and correct copies of the
certificate or articles of incorporation and bylaws of PacSoft as amended
to the date of this Agreement, and copies of all minutes of meetings and
actions by written consent of shareholders, directors and board committees.
Capital Structure.
Stock. The authorized capital stock of PacSoft consists of 50,000 shares of
Common Stock, $1.00 par value per share ("PacSoft Common Stock"). At the
date of this Agreement, 600 shares of PacSoft Common Stock are issued and
outstanding. All outstanding shares of PacSoft Common Stock are validly
issued, fully paid and nonassessable and not subject to preemptive rights
and are held of record and beneficially by Sellers, free and clear of all
claims, liens and encumbrances. None of the shares of PacSoft Common Stock
was issued in violation of any federal or state securities laws or other
legal requirements.
No Other Commitments. There are no options, warrants, calls, rights,
commitments, conversion rights or agreements of any character to which
PacSoft is a party or by which PacSoft is bound obligating PacSoft to
issue, deliver or sell, or cause to be issued, delivered or sold, any
shares of capital stock of PacSoft or securities convertible into or
exchangeable for shares of capital stock of PacSoft, or obligating PacSoft
to grant, extend or enter into any option, warrant, call, right,
commitment, conversion right or agreement. There are no voting trusts or
other agreements or understandings to which PacSoft or any Sellers is a
party with respect to the voting of the capital stock of PacSoft.
Authority.
Corporate Action. PacSoft has all requisite corporate power and authority to
enter into this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement by PacSoft and the consummation by PacSoft
of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of PacSoft. This Agreement has been
duly executed and delivered by PacSoft and this Agreement is the valid and
binding obligation of PacSoft, enforceable in accordance with its terms,
except that such enforceability may be subject to (i) bankruptcy,
insolvency, reorganization or other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) general equitable
principles.
<PAGE>
Sellers' Authority. Sellers have full power and capacity to enter into this
Agreement. This Agreement has been duly executed and delivered by Sellers
and this Agreement is the valid and binding obligation of Sellers,
enforceable in accordance with its terms, except that enforceability may be
subject to (i) bankruptcy, insolvency, reorganization or other similar laws
affecting or relating to enforcement of creditors' rights generally and
(ii) general equitable principles.
No Conflict. Neither the execution, delivery and performance of this
Agreement, nor the consummation of the transactions contemplated hereby nor
compliance with the provisions hereof will conflict with, or result in any
violations of, or cause a default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, amendment,
cancellation or acceleration of any obligation contained in, or the loss of
any material benefit under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the material properties or
assets of PacSoft under any term, condition or provision of (x) the
certificate or articles of incorporation or bylaws of PacSoft or (y) any
loan or credit agreement, note, bond, mortgage, indenture, lease or other
material agreement, judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to PacSoft or its respective properties or assets,
other than any such conflicts, violations, defaults, losses, liens,
security interests, charges, or encumbrances which, individually or in the
aggregate, would not have a Material Adverse Effect.
Governmental Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency
or commission or other governmental authority or instrumentality, domestic
or foreign (each a "Governmental Entity"), is required to be obtained by
PacSoft in connection with the execution and delivery of this Agreement or
the consummation of the transactions contemplated hereby.
Financial Statements. PacSoft has furnished to REI copies of: (a) the unaudited
balance sheets of PacSoft at December 31, 1998 and February 28, 1999, and
the related statements of income for the periods then ended. All financial
statements referred to in this Section 2.4 ("PacSoft Financial Statements")
are complete and correct, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
respective periods, and fairly present the financial condition of PacSoft
at the respective dates thereof and the results of operation of PacSoft for
the respective periods covered by the statements of income contained in
therein. PacSoft does not have any material obligations or liabilities,
contingent or otherwise, not fully disclosed by the PacSoft Financial
Statements.
Compliance with Applicable Laws. The business of PacSoft is not being conducted
in violation of any law, ordinance, regulation, rule or order of any
Governmental Entity where the violation would have a Material Adverse
Effect. PacSoft has not been notified by any Governmental Entity that any
investigation or review with respect to PacSoft is pending or threatened,
nor has any Governmental Entity notified PacSoft of its intention to
conduct an investigation or review. PacSoft has all permits, licenses and
franchises from Governmental Entities required to conduct its business as
now being conducted, except for those whose absence would not have a
Material Adverse Effect.
<PAGE>
Insurance. PacSoft maintains and at all times since March 31,1996 has maintained
fire and casualty and general liability insurance that PacSoft believes to
be reasonably prudent for its business. PacSoft has delivered or made
available to REI complete and correct copies of all such policies, together
with all riders and amendments thereto. These policies are in full force
and effect, and all premiums due thereon have been paid. PacSoft has
complied in all material respects with the terms and provisions of the
policies. The Disclosure Schedule sets out all claims made by PacSoft under
any policy of insurance since March 31, 1996 and, in the opinion of PacSoft
reasonably formed and held, there is no basis on which a claim should or
could be made under any such policy.
Litigation. There is no suit, action, arbitration, demand, claim or proceeding
pending or, to the best knowledge of PacSoft and Sellers, threatened
against PacSoft, nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against PacSoft
that, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect.
Employee Benefits.
2. PacSoft has made available to REI a list of all employees of
PacSoft and their salaries as of the date of this Agreement. PacSoft has made
available to REI copies or descriptions of all written or formal plans or
agreements involving direct or indirect compensation or benefits (including
any employment agreements entered into between PacSoft and any employee of
PacSoft, but excluding workers' compensation, unemployment compensation and
other government-mandated programs) currently or previously maintained,
contributed to or entered into by PacSoft under which PacSoft has any present
or future obligation or liability (collectively, "PacSoft Employee Plans").
Copies of all PacSoft Employee Plans (and, if applicable, related trust
agreements) and all amendments thereto and written interpretations thereof
(including summary plan descriptions) have been made available to REI or its
counsel. No contributions are due or past due from PacSoft with respect to
any of the PacSoft Employee Plans. To PacSoft's and Sellers' knowledge, each
of the PacSoft Employee Plans has been maintained in compliance with its
terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations that are applicable to the PacSoft Employee Plans
except for noncompliance which would not have a Material Adverse Effect.
3. PacSoft has made available to REI a list of each employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement providing for insurance coverage (including any self-insured
arrangements), workers' benefits, vacation benefits, severance benefits,
disability benefits, death benefits, hospitalization benefits, retirement
benefits, deferred compensation, profit-sharing, bonuses, stock options,
stock purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits for
employees, consultants or directors which (i) is not one of the PacSoft
Employee Plans, (ii) is entered into, maintained or contributed to, as the
case may be, by PacSoft and (iii) covers any employee or former employee of
PacSoft. The contracts, plans and arrangements described in this paragraph
2.8(d) are referred to collectively as the "PacSoft Benefit Arrangements." To
PacSoft's and Sellers' knowledge, each of the PacSoft Benefit Arrangements
has been maintained in substantial compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to PacSoft Benefit Arrangements. PacSoft has
made available to REI or its counsel a complete and correct copy or
description of each of the PacSoft Benefit Arrangements.
<PAGE>
4. There has been no amendment to, written interpretation or
announcement by PacSoft relating to, or change in employee participation or
coverage under, any of the PacSoft Employee Plans or PacSoft Benefit
Arrangements that would increase materially the expense of maintaining the
PacSoft Employee Plans or PacSoft Benefit Arrangements above the level of the
expense incurred in respect thereof for the fiscal year ended December 31,
1998.
5. To PacSoft's and Sellers' knowledge, PacSoft is in compliance
in all material respects with all applicable laws, agreements and contracts
relating to employment, employment practices, wages, hours, and terms and
conditions of employment.
Absence of Undisclosed Liabilities. Except as disclosed on the Disclosure
Schedule, at February 28, 1999 ("PacSoft Balance Sheet Date"), (i) PacSoft
has not had any liabilities or obligations of any nature (matured or
unmatured, fixed or contingent) which were material to PacSoft and were not
provided for in the balance sheet of PacSoft at the PacSoft Balance Sheet
Date, a copy of which has been delivered to REI ("PacSoft Balance Sheet");
and (ii) all reserves established by PacSoft and set forth in the PacSoft
Balance Sheet were reasonably adequate.
Absence of Certain Changes or Events. Since the PacSoft Balance Sheet Date,
there has not occurred:
6. any change in the condition (financial or otherwise),
properties, assets, liabilities, businesses, operations, results of
operations or prospects of PacSoft that could reasonably constitute a
Material Adverse Effect;
7. any amendments or changes in the certificate or articles
of incorporation or bylaws of PacSoft;
8. any damage, destruction or loss, whether covered by
insurance or not, that could reasonably constitute a Material Adverse Effect;
9. any redemption, repurchase or other acquisition of shares of
PacSoft Common Stock by PacSoft, or any declaration, setting aside or payment
of any dividend or other distribution (whether in cash, stock or property)
with respect to PacSoft Common Stock;
10. any material increase in or modification of the compensation
or benefits payable or to become payable by PacSoft to any of its directors
or employees, except in the ordinary course of business consistent with past
practice;
11. any material increase in or modification of any bonus,
pension, insurance or any of the PacSoft Employee Plans or PacSoft Benefit
Arrangements (including, but not limited to, the granting of stock options,
restricted stock awards or stock appreciation rights) made to, for or with
any of its employees, other than in the ordinary course of business
consistent with past practice;
<PAGE>
12. any acquisition or sale of a
material amount of property or assets of PacSoft, other
than in the ordinary course of business consistent with
past practices;
13. any alteration in any term of any
outstanding security of PacSoft;
14. any (A) incurrence, assumption or guarantee by PacSoft of
any debt for borrowed money; (B) issuance or sale of any securities
convertible into or exchangeable for debt securities of PacSoft; or (C)
issuance or sale of options or other rights to acquire from PacSoft, directly
or indirectly, debt securities of PacSoft or any securities convertible into
or exchangeable for any such debt securities;
15. any creation or assumption by
PacSoft of any mortgage, pledge, security interest or
lien or other encumbrance on any asset;
16. any making of any loan, advance or capital contribution to
or investment in any person other than (i) travel loans or advances made in
the ordinary course of business of PacSoft, (ii) other loans and advances in
an aggregate amount which does not exceed $10,000 outstanding at any time and
(iii) purchases on the open market of liquid, publicly traded securities;
17. any entering into, amendment of, relinquishment, termination
or non-renewal by PacSoft of any contract, lease transaction, commitment or
other right or obligation other than in the ordinary course of business;
18. any transfer or grant of a right under the PacSoft IP Rights
(as defined in Section 2.14), other than those transferred or granted in the
ordinary course of business;
19. any labor dispute or charge of unfair labor practice (other
than routine individual grievances), any activity or proceeding by a labor
union or representative thereof to organize any employees of PacSoft or any
campaign being conducted to solicit authorization from employees to be
represented by the labor union; or
20. any agreement or arrangement made by PacSoft to take any
action which, if taken prior to the date hereof, would have made any
representation or warranty set forth in this Agreement untrue or incorrect
unless otherwise disclosed.
No Defaults. PacSoft has not been in default under, and there exists no event,
condition or occurrence which, after notice or lapse of time, or both,
would constitute a default by PacSoft under any contract or agreement to
which PacSoft is a party and which would, if terminated or modified, have a
Material Adverse Effect.
<PAGE>
Certain Agreements. Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including, without limitation, severance, unemployment
compensation, golden parachute, bonus or otherwise) becoming due to any
director or employee of PacSoft from PacSoft, under any of the PacSoft
Employee Plans, PacSoft Benefit Arrangements or otherwise, (ii) materially
increase any benefits otherwise payable under any of the PacSoft Employee
Plans, the PacSoft Benefit Arrangements or otherwise or (iii) result in the
acceleration of the time of payment or vesting of any benefits.
Taxes.
21. For purposes of this Agreement, "Tax" or collectively
"Taxes" means any and all federal, state, local, and foreign taxes,
assessments, and other governmental charges, duties, impositions, and
liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, estimated,
excise and property taxes, together with all interest, penalties, and
additions imposed with respect to those amounts and any obligations under any
agreements or arrangements with any other person with respect to those
amounts and including any liability for taxes of a predecessor entity.
22. Except as set forth in the
Disclosure Schedule:
(i) PacSoft has prepared and filed all required federal,
state, local, and foreign returns, estimates, information statements, and
reports relating to any and all Taxes ("Returns") concerning or attributable to
PacSoft that are required to be filed by or with respect to PacSoft on or prior
to the date of this Agreement, and each of the Returns shall be true, correct,
and complete in all material respects and shall have been completed in
accordance with applicable law;
(ii) PacSoft: (A) has paid or accrued in accordance with
generally accepted accounting principles all Taxes concerning or attributable to
PacSoft relating to periods ending on or before the date of this Agreement
regardless of whether reflected on Returns and (B) has withheld with respect to
its employees all federal and state income taxes, FICA, FUTA, and other Taxes
required to be withheld;
(iii)....PacSoft has not been delinquent in the payment of any
Tax nor is there any Tax deficiency outstanding, proposed or assessed against
PacSoft, nor has PacSoft executed any waiver of the statute of limitations on or
extending the period for the assessment or collection of any Taxes;
(iv) No audit or other examination of any Return of PacSoft is
presently in progress, nor has PacSoft been notified of any request for an audit
or examination;
(v) PacSoft does not have any liabilities for unpaid federal,
state, local and foreign Taxes which have not been accrued or reserved in
accordance with generally accepted accounting principles on the PacSoft Balance
Sheet, and PacSoft does not have knowledge of any reasonable basis for the
assertion of any liability attributable to PacSoft or any of its assets and
operations;
(vi) PacSoft has made available to REI and its counsel copies
of all federal and state income and all state sales and use Tax Returns for all
periods since December 31, 1995;
<PAGE>
(vii)....There are no liens, pledges, charges, claims,
security interests, or other encumbrances of any sort ("Liens") on the assets of
PacSoft relating or attributable to Taxes other than liens for sales and payroll
taxes not yet due and payable;
(viii)...Neither PacSoft nor Sellers has knowledge of any
reasonable basis for the assertion of any claim relating or attributable to
Taxes which, if adversely determined, would result in any Lien on the assets of
PacSoft;
(ix) None of the assets of PacSoft is property that is
required to be treated as owned by any other person pursuant to the "safe harbor
lease" provisions of former Code Section 168(f)(8), and none of the assets is
treated as "tax-exempt use property" within the meaning of Code Section 168(h);
(x) PacSoft has not been included in any "consolidated,"
"unitary," or "combined" Return provided for under the law of the United States
or any state or locality with respect to Taxes for any taxable period;
(xi) PacSoft is not a party to a tax sharing, allocation,
indemnification or similar agreement or arrangement, nor does PacSoft owe any
amount under any agreement or arrangement;
(xii)....No Return of PacSoft contains a disclosure statement
under Code Section 6662 (or predecessor provision) or any similar provision of
state, local, or foreign law;
(xiii)...PacSoft is not nor has it at any time been a "United
States real property holding corporation" within the meaning of Code Section
897(c)(2);
(xiv)....No indebtedness of PacSoft
consists of "corporate acquisition indebtedness" within
the meaning of Code Section 279;
(xv) PacSoft has not taken any action not in accordance with
past practice that would have the effect of deferring any Tax liability of
PacSoft from any period ending on or before the Closing Date to any taxable
period ending after the Closing Date;
(xvi)....PacSoft was not acquired in a "qualified stock
purchase" under Code Section 338(d)(3), and no elections under Code Section
338(g), protective carryover basis elections, or offset prohibition elections
are applicable to PacSoft or any predecessor corporations; and
(xvii)...The tax bases of the assets of PacSoft for purposes
of determining future amortization, depreciation, and other federal income tax
deductions are accurately reflected on the tax books and records of PacSoft.
<PAGE>
24
Intellectual Property.
23. PacSoft owns or has acquired all material Intellectual
Property Rights (as defined below), including rights to make, use and sell
goods and services, as necessary or required for the conduct of its business
as presently conducted (the Intellectual Property Rights being referred to as
the "PacSoft IP Rights"), and these rights are reasonably sufficient for the
conduct of its business;
24. the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will not
constitute a material breach of any instrument or agreement governing any
PacSoft IP Rights ("PacSoft IP Rights Agreements"), will not cause the
forfeiture or termination or give rise to a right of forfeiture or
termination of any PacSoft IP Right or materially impair the right of PacSoft
or REI to use, sell or license any PacSoft IP Right or portion thereof
(except where the breach, forfeiture or termination would not have a Material
Adverse Effect);
25. neither the manufacture, marketing, license, sale or
intended use of any product currently licensed or sold by PacSoft or
currently under development by PacSoft violates any license or agreement
between PacSoft and any third party or infringes any Intellectual Property
Right of any other party; and there is no pending or threatened claim or
litigation contesting the validity, ownership or right to use, sell, license
or dispose of any PacSoft IP Right nor is there any basis for any claim, nor
has PacSoft received any written notice asserting that any PacSoft IP Right
or the proposed use, sale, license or disposition thereof conflicts or will
conflict with the rights of any other party, nor is there any basis for any
assertion; and
26. PacSoft has taken reasonable and practicable steps designed
to safeguard and maintain its proprietary rights in all material PacSoft IP
Rights. All officers, employees and consultants of PacSoft have executed and
delivered to PacSoft an agreement regarding the protection of proprietary
information and the assignment to PacSoft of all Intellectual Property Rights
arising from the services performed for PacSoft by those persons. No current
or prior officer, employee or consultant of PacSoft claims an ownership
interest in any PacSoft IP Rights as a result of having been involved in the
development of that property while employed by or consulting to PacSoft, or
otherwise.
The term "Intellectual Property Rights" shall mean all worldwide
industrial and intellectual property rights, including, without limitation,
patents, patent applications, patent rights, trademarks, trademark
registrations, trademark registration applications, trade names, service marks,
service mark registrations, service mark registration applications, copyrights,
copyright registrations, copyright registration applications, franchises,
licenses, inventories, know-how, trade secrets, customer lists, proprietary
processes and formulae, all source and object codes, algorithms, architecture,
structure, display screens, layouts, inventions, development tools and all
documentation and media constituting, describing or relating to the above,
including, without limitation, manuals, memoranda and records.
Fees and Expenses. PacSoft has not paid or become obligated to pay any fee or
commission to any broker, finder or intermediary in connection with the
transactions contemplated by this Agreement.
<PAGE>
Environmental Matters.
27. None of the properties or facilities of PacSoft is in
violation of any federal, state or local law, ordinance, regulation or order
relating to industrial hygiene or to the environmental conditions on, under
or about the properties or facilities, including, but not limited to, soil
and ground water condition, except where the violations individually or in
the aggregate would not constitute a Material Adverse Effect. During the time
that PacSoft has owned or leased its respective properties and facilities,
neither PacSoft nor, to PacSoft's and Sellers' knowledge, any third party,
has released, used, generated, manufactured or stored on, under or about the
properties or facilities or transported to or from the properties or
facilities any hazardous materials.
28. There has been no litigation brought or threatened against
PacSoft by, or any settlement reached by PacSoft with, any party or parties
alleging the presence, disposal, release or threatened release of any
hazardous materials on, from or under any of the properties or facilities
owned or leased by PacSoft.
Disclosure. No representation or warranty made by PacSoft in this Agreement, nor
any document, written information, written statement, financial statement,
certificate or exhibit prepared and furnished or to be prepared and
furnished by PacSoft or its representatives pursuant hereto or in
connection with the transactions contemplated hereby, when taken together,
contains any untrue statement of a material fact, or omits to state a
material fact necessary to make the statements or facts contained herein or
therein not misleading in light of the circumstances under which they were
furnished.
Restrictions on Business Activities. There is no material agreement, judgment,
injunction, order or decree binding upon PacSoft that has or could
reasonably be expected to have the effect of prohibiting or materially
impairing any business practice of PacSoft, any acquisition of property by
PacSoft or the conduct of business by PacSoft as currently conducted.
Accounts Receivalbe. The accounts receivable shown on the PacSoft Balance Sheet
as of the PacSoft Balance Sheet Date, or thereafter acquired prior to the
date hereof, have been and are (as the case may be) collectible within 90
days from the Closing Date in amounts not less than the aggregate amounts
thereof carried on the books of PacSoft reduced by the reserves for
discounts and bad debts, if any, taken on the PacSoft Balance Sheet.
Personal Property. PacSoft has good title, free and clear of all title defects,
objections and liens, including without limitation, leases, chattel
mortgages, conditional sales contracts, collateral security arrangements
and other title or interest-retaining arrangements, to all of its
machinery, equipment, furniture, inventory and other personal property. All
personal property used in the business of PacSoft is in good operating
condition. All of the leases to personal property utilized in the business
of PacSoft are valid and enforceable against PacSoft and are not in default
by PacSoft or any of the other parties thereto.
<PAGE>
Real Property. PacSoft does not own any real property. The Disclosure Schedule
contains a list of all leases for real property to which PacSoft is a
party, the square footage leased with respect to each lease and the
expiration date of each lease. These leases are valid and enforceable and
are not in default. To the best knowledge of PacSoft and Sellers, the real
property leased or occupied by PacSoft, the improvements located thereon,
and the furniture, fixtures and equipment relating thereto (including
plumbing, heating, air conditioning and electrical systems), conform to any
and all applicable health, fire, safety, zoning, land use and building
laws, ordinances and regulations. There are no outstanding contracts made
by PacSoft for any improvements made to the real property leased or
occupied by PacSoft that have not been paid for.
Warranties. PacSoft has made no warranties or guarantees relating to its
products other than as implied or required by law. The Disclosure Schedule
contains a list of all warranty and indemnification obligations of PacSoft
relating to patents and other proprietary rights.
Contracts. TheDisclosure Schedule lists all oral or written agreements, notes,
instruments, or contracts to which PacSoft is a party or by which its
assets or properties may be bound which involve the payment or receipt of
more than $25,000 (on an annual basis), or which have a term of more than
one year, or which involve intellectual property, or which are employment
or consulting agreements ("PacSoft Contracts"). PacSoft is not in default
in performance of its obligations under any material provisions of the
PacSoft Contracts. Neither PacSoft nor Sellers have any knowledge of any
violation of any PacSoft Contract by any other party thereto and have no
knowledge of any intent by any other party to a PacSoft Contract not to
perform its obligations under any PacSoft Contract.
Products and Distribution. The Disclosure Schedule contains a complete list of
the top five software products (by title, determined by aggregate net sales
by PacSoft during the last fiscal year from the title) developed, sold,
published and/or distributed by PacSoft ("PacSoft Developed Products") and
the expected top five products (by title, determined by the projected net
sales for the title in its first year after introduction) under development
or consideration by PacSoft with a scheduled ship date on or prior to
December 31, 1999 ("PacSoft Products Under Development," and collectively
with the PacSoft Developed Products, the "PacSoft Products").
29. The Disclosure Schedule sets forth, for each PacSoft
Product, the following: (i) a list of all material contracts and agreements
(including without limitation all material development, trademark license,
technology license, distribution or other agreements) relating to the PacSoft
Product; (ii) whether the PacSoft Product has been developed internally
(i.e., substantially entirely by employees of PacSoft) or externally (i.e.,
including substantive contributions by one or more independent contractors to
PacSoft) and, if externally, the Disclosure Schedule sets forth the identity
of the significant independent contractors and a list of the material
agreements with those independent contractors; (iii) the material advances
paid or payable, and the material royalties payable, to any third parties
with respect to that PacSoft Product; and (iv) a list of the third parties
with significant distribution or publication rights to that PacSoft Product
together with a description of: (A) the territory in which the third party
has distribution rights; and (B) whether the distribution rights are
exclusive or nonexclusive.
<PAGE>
30. The Disclosure Schedule sets forth, for each PacSoft Product
Under Development, the following (as of the date of this Agreement): (i) the
currently scheduled public availability date (which dates PacSoft believes to
be reasonable); (ii) a schedule of development milestone events and any
material related payments, including both milestones already achieved in the
past six months and those scheduled for the future; and (iii) whether any
significant development milestone for the PacSoft Product has been missed in
the past six months by more than 30 days.
Development Tools. The Disclosure Schedule contains a complete list of all
material software development tools used or currently intended to be used
by PacSoft in the development of any of the PacSoft Developed Products,
except for any tools that are generally available and are used in their
generally available form (such as standard compilers) ("PacSoft Development
Tools"). The Disclosure Schedule also sets forth, for each PacSoft
Development Tool: (a) for any PacSoft Development Tool not entirely
developed internally by the employees of PacSoft, the identity of the
independent contractors and consultants involved in a material way in such
development and a list of the material agreements with such independent
contractors and consultants with respect to the PacSoft Development Tools;
(b) a list of any third parties with any rights to receive material
royalties or other payments with respect to such PacSoft Development Tools,
and a schedule of all such royalties payable; (c) a list of any material
restrictions on PacSoft's unrestricted right to use and distribute the
PacSoft Development Tools; and (d) a list of all agreements with third
parties for the use by the third party of the PacSoft Development Tools.
Investment Representation. Each Seller acknowledges that, upon issuance, the
Stock will not have been "registered" and will therefore be "restricted
securities" as these terms are used under the Securities Act and the rules
and regulations thereunder. By their execution of this Agreement, each
Seller agrees, represents and warrants that (i) his or her acquisition of
the Stock is for investment only, for his or her own account and not with a
view to "distribution" as that term is used under the Securities Act, (ii)
he or she is an "accredited investor" as that term is used in Regulation D
under the Securities Act, and (iii) he or she has received copies of REI's
Form 10-KSB for the fiscal year ended March 31, 1998, and Form 10-QSB for
the quarters ended June 30 and September 30, 1998 and December 31, 1999.
Each Seller agrees that he or she shall not at any time make any sale,
pledge, hypothecation, gift or other transfer of Stock except pursuant to
an effective registration statement under the Securities Act or pursuant to
the provisions of Rule 144 under the Securities Act or another exemption
from the registration requirements of the Securities Act, and in accordance
with any applicable state "blue sky" or other securities laws, and that
prior to making any sale or other disposition of Stock pursuant to any such
exemption, he or she shall, if requested by REI, obtain an opinion of
counsel, satisfactory to REI's counsel, that such sale complies with
applicable federal and state securities laws. Each Seller agrees that he or
she has been informed that the Stock must be held indefinitely unless the
Stock is subsequently registered under the Securities Act or an exemption
from such registration is available and he or she understands that any sale
of the Stock made in reliance upon Rule 144, or any other like rule, can be
made only in limited amounts in accordance with the terms and conditions of
those rules and, if those rules are not applicable, any resale may require
compliance with another available exemption under the Securities Act or, in
the alternative, may require registration of the Stock. Sellers acknowledge
that, except as expressly set forth in Section 6.4, REI makes no
representation or covenant that it shall conduct its affairs so as to
permit sales under Rule 144 and REI is under no obligation to register or
repurchase the Stock. Sellers acknowledge that REI shall cause a legend to
be placed on the certificates representing the Stock to reflect the
foregoing.
<PAGE>
Year 2000 Compliance. Allcomputer hardware or software owned, used, or provided
by PacSoft, including, but not limited to, microcode, firmware, system and
application programs, files, databases, and computer services, the failure
or disfunctionality of which would either individually or in the aggregate
constitute a Material Adverse Event, is Year 2000 Compliant. The term "Year
2000 Compliant" means that the hardware or software will:
31. process date data from at least
the years 1900 through 2101 without error or
interruption;
32. maintain functionality with
respect to the introduction, processing or output of
records containing dates falling on or after January 1,
2000; and
33. be interoperable with other software or hardware that may
deliver records to, receive records from, or interact with, the hardware or
software in the course of processing data.
REPRESENTATIONS AND WARRANTIES OF REI.
REI hereby represents and warrants to PacSoft and Sellers that:
Organization; Good Standing; Qualification adn Power. REIis a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation.
Capital Structure.
Stock, Options adn Warrants. Theauthorized capital stock of REI consists of
20,000,000 shares of Common Stock, $.01 par value ("REI Common Stock"), and
5,000,000 shares of Preferred Stock, $.01 par value ("REI Preferred
Stock"). At the close of business on March 31, 1999, 5,688,209 shares of
REI Common Stock were issued and outstanding, and 971,550 shares of REI
Common Stock were reserved for issuance upon the exercise of outstanding
options ("REI Options") and warrants ("REI Warrants") to purchase REI
Common Stock. No shares of REI Preferred Stock are issued or outstanding.
All outstanding shares of REI Common Stock are validly issued, fully paid
and nonassessable and not subject to preemptive rights.
No Other Commitments. Except for the REI Options and REI Warrants disclosed in
or pursuant to Section 3.2.1, there are no options, warrants, calls,
rights, commitments, conversion rights or agreements of any character to
which REI is a party or by which REI is bound obligating REI to issue,
deliver or sell, or cause to be issued, delivered or sold, any shares of
capital stock of REI or securities convertible into or exchangeable for
shares of capital stock of REI, or obligating REI to grant, extend or enter
into any such option, warrant, call, right, commitment, conversion right or
agreement.
Authority.
<PAGE>
Corporate Action. REI has all requisite corporate power and authority to enter
into this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement by REI and the consummation by REI of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of REI. This Agreement has been duly executed
and delivered by REI and this Agreement is the valid and binding obligation
of REI, enforceable in accordance with its terms, except that
enforceability may be subject to (i) bankruptcy, insolvency, reorganization
or other similar laws affecting or relating to enforcement of creditors'
rights generally and (ii) general equitable principles.
No Conflict. Neither the execution, delivery and performance of this
Agreement, nor the consummation of the transactions contemplated hereby nor
compliance with the provisions hereof will conflict with, or result in any
violations of, or cause a default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, amendment,
cancellation or acceleration of any obligation contained in, or the loss of
any material benefit under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the material properties or
assets of REI or any of the REI Subsidiaries under, any term, condition or
provision of (x) the certificate or articles of incorporation or bylaws of
REI or any of the REI Subsidiaries or (y) any loan or credit agreement,
note, bond, mortgage, indenture, lease or other material agreement,
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to REI or any of the REI Subsidiaries or their respective
properties or assets, other than any such conflicts, violations, defaults,
losses, liens, security interests, charges or encumbrances which,
individually or in the aggregate, would not have a Material Adverse Effect.
Governmental Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required to be obtained by REI or any of the REI Subsidiaries in connection
with the execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby, except for securities law filings to
be made in connection with the issuance of the Stock.
Litigation. There is no suit, action, arbitration, demand, claim or proceeding
pending or, to the best knowledge of REI, threatened against REI or any of
the REI Subsidiaries in connection with or relating to the transactions
contemplated by this Agreement or of any action taken or to be taken in
connection herewith or the consummation of the transactions contemplated
hereby.
Fees and Expenses. REI has not paid or become obligated to pay any fee or
commission to any broker, finder or intermediary in connection with the
transactions contemplated by this Agreement.
PACSOFT AND SELLERS COVENANTS.
Regulatory Approvals. PacSoft will promptly execute and file, or join in the
execution and filing of, any application or other document that may be
necessary in order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign, which may be required,
or which REI may reasonably request, in connection with the consummation of
the transactions contemplated by this Agreement. PacSoft will use its best
efforts to promptly obtain all such authorizations, approvals and consents.
<PAGE>
Necessary Consents. PacSoft will use its best efforts to obtain such written
consents and take such other actions as may be necessary or appropriate in
addition to those set forth in Section 4.1 to allow the consummation of the
transactions contemplated hereby.
Cooperation in Audit. PacSoft and Sellers shall cooperate fully with REI and its
auditors in having the financial statements of PacSoft audited to the
extent required by SEC and Nasdaq rules and regulations applicable to REI,
including providing access to the information referred to in Section 4.3
and any other information necessary in order to complete the audit. The
audit will be performed by REI's auditors at REI's expense.
REI COVENANTS
Regulatory Approvals. REI will promptly execute and file, or join in the
execution and filing of, any application or other document that may be
necessary in order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign which may be required,
or which PacSoft may reasonably request, in connection with the
consummation of the transactions contemplated by this Agreement. REI will
use its best efforts to promptly obtain all such authorizations, approvals
and consents.
Necessary Consents. REI will use its best efforts to obtain such written
consents and take such other actions as may be necessary or appropriate in
addition to those set forth in Section 5.1 to allow the consummation of the
transactions contemplated hereby.
ADDITIONAL AGREEMENTS.
Employee Matters. PacSoft and Sellers represent and warrant that on or prior to
the date of this Agreement, PacSoft has paid to each of its employees
one-half of the value (at the employee's current rate of pay) of any
vacation hours accrued prior to the Closing in excess of 160 hours, and any
additional accrued vacation hours have been forfeited by the employee.
Following the Closing, all employees of PacSoft will be offered employment
by REI. Those employees will be provided employment benefits that are
similar to those they currently receive from PacSoft. Notwithstanding the
foregoing, REI makes no representation, warranty or promise as to the
length of time that any such employee will remain in the employ of REI
following the Closing (except with respect to those employees who become
parties to employment agreements pursuant to Section 6.2).
Employee Agreement. At the Closing, REI and Karen Hunter shall enter into an
employment agreement satisfactory in form and substance to REI and Ms.
Hunter. The employment agreement with Ms. Hunter shall contain
non-competition provisions satisfactory in form and substance to REI and
Ms. Hunter.
PacSoft Office Location. Following the Closing, the principal office of PacSoft
will be maintained in the general area where it is presently located;
provided, however, that REI makes no representation, warranty or promise as
to the specific length of time that such office will be maintained in such
general area.
<PAGE>
Registration Rights.
Definitions. For purposes of Section 6.4:
34. The terms "register,"
"registered," and "registration" refer to a registration effected by
preparing and filing a registration statement in compliance with the Act and
the declaration or ordering of effectiveness of such registration statement;
35. The term "Registrable
Securities" refers to the Stock and any Common Stock of REI issued as a
dividend or other distribution with respect to, or in exchange or in
replacement of, the Stock or such Common Stock, except that the Stock (or any
particular shares of the Stock) shall cease to be Registrable Securities when
and to the extent (i) a registration statement with respect to the sale of
such shares of the Stock has become effective under the Act and the Stock has
been disposed of in accordance with such registration statement; (ii) the
shares of Stock held by any Holder shall have been or may be sold to the
public by that Holder in their entirety in any three month period pursuant to
Rule 144 or any successor provision under the Securities Act; (iii) such
shares of the Stock shall have been otherwise transferred, new certificates
for the Stock not bearing a legend restricting further transfer shall have
been delivered by the Company and subsequent disposition of the Stock does
not require registration or qualification under the Act or any similar state
law then in force in the opinion of legal counsel for REI; or (iv) the Stock
has ceased to be outstanding; and
36. The term "Holder" means
any Seller holding Registrable Securities.
Piggyback Registration. Subject to Section 6.4.5, if at any time REI proposes to
register any of REI Common Stock under the Securities Act on a form that
would also permit the registration of the Registrable Securities, REI
shall, each such time, promptly give each Holder written notice of such
determination. Upon the written request of any Holder delivered to REI
within ten days after mailing of any such notice by REI, REI shall use its
best efforts to cause to be registered under the Securities Act all of the
Registrable Securities that each such Holder has requested be registered.
Obligations of REI. Whenever required under Section 6.4.2 to use its best
efforts to effect the registration of any Registrable Securities, REI
shall, as expeditiously as reasonably possible:
37. Prepare and file with the
SEC a registration statement with respect to such Registrable Securities and
use its best efforts to cause such registration statement to become and
remain effective; provided, however, that in connection with any proposed
registration intended to permit an offering of any securities from time to
time (i.e., a so-called "shelf registration"), the Company shall in no event
be obligated to cause any such registration to remain effective for more than
90 days.
<PAGE>
38. Prepare and file with the
SEC such amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement.
39. Furnish to the Holders
such numbers of copies of a prospectus, including a preliminary prospectus,
and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
40. Use its best efforts to
register and qualify the securities covered by such registration statement
under such other securities or Blue Sky laws of such jurisdictions as shall
be reasonably appropriate for the distribution of the securities covered by
the registration statement, provided that REI shall not be required in
connection therewith or as a condition thereto to qualify to do business or
to file a general consent to service of process in any such states or
jurisdictions, and further provided that (notwithstanding anything in this
Agreement to the contrary with respect to the bearing of expenses) if any
jurisdiction in which the securities shall be qualified shall require that
expenses incurred in connection with the qualification of such securities in
that jurisdiction be borne by selling shareholders, then such expenses shall
be payable by selling shareholders pro rata, to the extent required by such
jurisdiction.
Condition Precendent. It shall be a condition precedent to the obligations of
REI to take any action pursuant to this Section 6.4 that the Holders shall
furnish to REI such information regarding them, the Registrable Securities
held by them, and the intended method of disposition of such securities as
REI shall reasonably request and as shall be required in connection with
the action to be taken by REI.
Underwriting Requirements. In connection with any offering involving an
underwriting of shares being issued by REI, REI shall not be required under
Section 6.4.2 to include any of the Holders' Registrable Securities in such
underwriting unless the Holders accept the terms of the underwriting as
agreed upon between REI and the underwriters selected by it or them, and
then only in such quantity as will not, in the written opinion of the
underwriters, jeopardize the success of the offering by REI. If the total
amount of securities that all Holders request to be included in such
offering exceeds the amount of securities that the underwriters reasonably
believe compatible with the success of the offering, REI shall only be
required to include in the offering so many of the securities of the
selling Holders as the underwriters believe will not jeopardize the success
of the offering (the securities so included to be apportioned pro rata
among the selling Holders according to the total amount of securities owned
by said selling Holders, or in such other proportions as shall mutually be
agreed to by such selling Holders), provided that no such reduction shall
be made with respect to any securities offered by REI for its own account.
Indemnification. If any Registrable Securities are included in a registration
statement under this Section 6.4:
<PAGE>
41. To the extent permitted
by law, REI will indemnify each Holder requesting or joining in a
registration, any underwriter (as defined in the Securities Act) for it, and
each person, if any, who controls such Holder or underwriter within the
meaning of the Securities Act, against any losses, claims, damages, or
liabilities joint or several, to which they may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based on any
untrue or alleged untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make
the statements therein not misleading, except to the extent the untrue
statement or omission resulted from information that the Holder furnished in
writing to REI expressly for use therein or by the Holder's failure to
deliver a copy of the registration statement or prospectus or any amendments
or supplements thereto to any purchaser after REI has furnished the Holder
with copies of the relevant documents.
42. To the extent permitted
by law, each Holder requesting or joining in a registration will indemnify
REI, each of its directors, each of its officers who have signed the
registration statement, each person, if any, who controls REI within the
meaning of the Securities Act, and each agent and any underwriter for REI
(within the meaning of the Securities Act) against any losses, claims,
damages, or liabilities to which REI or any such director, officer,
controlling person, agent, or underwriter may become subject, under the
Securities Act or otherwise, insofar as such losses, claims damages, or
liabilities (or actions in respect thereto) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in such
registration statement, preliminary or final prospectus, or amendments or
supplements thereto, in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with
such registration; and each such Holder will reimburse any legal or other
expenses reasonably incurred by REI or any such director, officer,
controlling person, agent, or underwriter in connection with investigating or
defending any such loss, claim, damage, liability, or action. This indemnity
will be in addition to any liability which each Holder may otherwise have.
43. If the indemnification
provided for in paragraphs (a) and (b) above is unavailable to any
indemnified party in respect of any loss, claim, damage, liability or action
referred to herein, then each such indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such loss, claim, damage,
liability or action in such proportion as is appropriate to reflect the
relative fault of the indemnified parties and the indemnifying parties in
connection with the actions or omissions which resulted in such loss, claim,
damage, liability or action, as well as any other relevant equitable
considerations. No person guilty of fraudulent misrepresentations (within the
meaning of Section 11(f) of the Exchange Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
<PAGE>
44. Any person entitled to
indemnification hereunder will: (i) give prompt notice to the indemnifying
party of any claim with respect to which it seeks indemnification; and (ii)
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with respect to
such claim, permit such indemnifying party to assume the defense of such
claim with counsel reasonably satisfactory to the indemnified party. The
indemnifying party will not be subject to any liability for any settlement
made without its consent (but such consent will not be unreasonably
withheld). An indemnifying party who is not entitled or elects not to assume
the defense of a claim will not be obligated to pay the fees and expenses of
more than one counsel for all parties indemnified by such indemnifying party
with respect to such claim, unless in the reasonable judgment of any
indemnified party a conflict of interest may exist between such indemnified
party and any other such indemnified parties with respect to such claim.
45. Notwithstanding anything
to the contrary contained in this Agreement, the obligations of REI and
Holders under this Section 6.4 shall survive the completion of any offering
of Registrable Securities.
Reports Under 1934 Act. With a view to making available to the Holders the
benefits of Rule 144 promulgated under the Securities Act and any other
rule or regulation of the SEC that may at any time permit a Holder to sell
securities of REI to the public without registration, REI agrees to use its
best efforts to:
46. Make and keep public
information available as those terms are understood and
defined in Rule 144;
47. File with the SEC in a
timely manner all reports and other documents required
of REI under the Securities Act and the 1934 Act; and
48. Furnish to any Holder so
long as such Holder owns any of the Stock or Registrable Securities forthwith
upon request (i) a written statement by REI that it has complied with the
reporting requirements of Rule 144 and of the Securities Act and the 1934
Act, (ii) a copy of the most recent annual or quarterly report of REI, and
(iii) such other reports and documents so filed by REI as may be reasonably
requested in availing any Holder of any rule or regulation of the SEC
permitting the selling of any such securities without registration.
Lock-up Agreement. Inconsideration for REI agreeing to its obligations under
this Section 6.4, each Holder agrees in connection with any registration of
REI's securities that, upon the request of REI or the underwriters managing
any underwritten offering of REI's securities, not to sell, make any short
sale of, loan, grant any option for the purchase of, or otherwise dispose
of any Registrable Securities (other than those included in the
registration) without the prior written consent of REI or such
underwriters, as the case may be, for such period of time (not to exceed
180 days) from the effective date of such registration as REI or the
underwriters may specify.
Delay of Registration. No Holder shall have any right to take any action to
restrain, enjoin, or otherwise delay any registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Section 6.4.
<PAGE>
INDEMNIFICATION OF THE PARTIES.
Indemnification by Sellers. Sellers shall, jointly and severally, indemnify,
defend, protect and hold harmless REI, each of subsidiary of REI, and each
of their respective successors and assigns and each of their respective
directors, officers, employees, agents and affiliates (each an "REI
Indemnified Party"), at all times from and after the date of this Agreement
against all losses, claims, damages, actions, suits, proceedings, demands,
assessments, adjustments, costs and expenses ("Losses") (including
specifically, but without limitation, reasonable attorneys' fees and
expenses of investigation ("Legal Expenses")) based upon, resulting from or
arising out of (i) any inaccuracy or breach of any representation or
warranty of PacSoft or Sellers contained in or made in connection with this
Agreement, and (ii) the breach by PacSoft or Sellers of, or the failure by
PacSoft or Sellers to observe, any of their respective covenants or other
agreements contained in or made in connection with this Agreement.
Indemnification by REI. REI shall indemnify, defend, protect and hold harmless
Sellers (each a "Seller Indemnified Party"), at all times from and after
the date of this Agreement against all Losses based upon, resulting from or
arising out of (i) any inaccuracy or breach of any representation or
warranty of REI contained in or made in connection with this Agreement, and
(ii) the breach by REI of, or the failure by REI to observe, any of its
covenants or other agreements contained in or made in connection with this
Agreement.
Adjustments to Indemnification Payments. Any payment made to any REI Indemnified
Party or any Seller Indemnified Party (each, an "indemnified party")
pursuant to this Section 7 in respect of any claim will be net of any
insurance proceeds realized by and paid to the indemnified party in respect
of any such claim. The indemnified party will use its reasonable efforts to
make insurance claims relating to any claim for which it is seeking
indemnification pursuant to this Section 7; provided, however, that the
indemnified party will not be obligated to make such an insurance claim if
the indemnified party in its reasonable judgment believes the cost of
pursuing such an insurance claim, together with any corresponding increase
in insurance premiums or other chargebacks to the indemnified party, would
exceed the value of the claim for which the indemnified party is seeking
indemnification.
Indemnification Procedures.
49. Promptly after receipt by an indemnified party of notice of
the commencement of any action, suit or proceeding by a person not a party to
this Agreement in respect of which the indemnified party will seek
indemnification hereunder (a "Third Party Action"), the indemnified party
shall notify the party required to provide indemnification (the "indemnifying
party") in writing, but any failure to so notify the indemnifying party shall
not relieve it from any liability that it may have to the indemnified party
under Section 7.1 or 7.2, except to the extent that the indemnifying party is
prejudiced by the failure to give such notice. The indemnifying party shall
be entitled to participate in the defense of such Third Party Action and to
assume control of such defense (including settlement of such Third Party
Action) with counsel reasonably satisfactory to such indemnified party;
provided, however, that:
<PAGE>
50. the indemnified party shall be entitled to participate in
the defense of such Third Party Action and to employ counsel at its own
expense (which shall not constitute Legal Expenses for purposes of this
Agreement) to assist in the handling of such Third Party Action;
51. the indemnifying party shall obtain the prior written
approval of the indemnified party before entering into any settlement of such
Third Party Action or ceasing to defend against such Third Party Action, if
pursuant to or as a result of such settlement or cessation, injunctive or
other equitable relief would be imposed against the indemnified party or the
indemnified party would be adversely affected thereby;
52. no indemnifying party shall consent to the entry of any
judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by each claimant or plaintiff to each
indemnified party of a release from all liability in respect of such Third
Party Action; and
53. the indemnifying party shall not be entitled to control the
defense of any Third Party Action unless the indemnifying party confirms in
writing its assumption of such defense and continues to pursue the defense
reasonably and in good faith. After written notice by the indemnifying party
to the indemnified party of its election to assume control of the defense of
any such Third Party Action in accordance with the foregoing, (i) the
indemnifying party shall not be liable to such indemnified party hereunder
for any Legal Expenses subsequently incurred by such indemnified party
attributable to defending against such Third Party Action, and (ii) as long
as the indemnifying party is reasonably contesting such Third Party Action in
good faith, the indemnified party shall not admit any liability with respect
to, or settle, compromise or discharge the claim underlying, such Third Party
Action without the indemnifying party's prior written consent. If the
indemnifying party does not assume control of the defense of such Third Party
Action in accordance with this Section 7.4, the indemnified party shall have
the right to defend and/or settle such Third Party Action in such manner as
it may deem appropriate at the cost and expense of the indemnifying party,
and the indemnifying party will promptly reimburse the indemnified party
therefor in accordance with this Section 7.4. The reimbursement of fees,
costs and expenses required by this Section 7.4 shall be made by periodic
payments during the course of the investigation or defense, as and when bills
are received or expenses incurred.
54. If an indemnified party has actual knowledge of any facts or
circumstances other than the commencement of a Third Party Action which cause
in good faith it to believe that it is entitled to indemnification under this
Section 7, then such indemnified party shall promptly give the indemnifying
party notice thereof in writing, but any failure to so notify the
indemnifying party shall not relieve it from any liability that it may have
to the indemnified party under Section 7.1 or 7.2, except to the extent that
the indemnifying party is prejudiced by the failure to give such notice.
Manner of Indemnification. All indemnification under this Section 7 shall be
effected by the payment of cash or delivery of a bank cashier's check, or
by a combination of the foregoing.
<PAGE>
CLOSING.
Closing Date. The closing of the transactions contemplated by this Agreement
("Closing") will take place concurrently with the execution of this
Agreement at the offices of Rutan & Tucker LLP, 611 Anton Boulevard, Suite
1400, Costa Mesa, California 92626, unless another place, time and date is
selected by PacSoft and REI ("Closing Date").
Deliveries by PacSoft and Sellers at the Closing. At the Closing, PacSoft and
Sellers shall deliver to REI:
55. Certificates representing all of the Shares, free of liens
and encumbrances, accompanied by duly executed stock powers made by each
Seller in favor of REI with all necessary transfer stamps affixed thereto or
other evidence of payment of applicable stock transfer taxes, if any;
56. All other documents, instruments, consents and other
deliveries required to be delivered by PacSoft and Sellers pursuant to this
Agreement.
Deliveries by REI at the Closing. At the Closing, REI shall deliver to Sellers:
57. Certificates representing the
Stock, with facsimile signatures of appropriate REI
officers and endorsement by REI's transfer agent; and
58. All other documents, instruments, consents and other
deliveries required to be delivered by REI pursuant to this Agreement.
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
All representations, warranties and covenants contained in this
Agreement and any other documents or instruments delivered in connection with
this Agreement will remain operative and in full force and effect, regardless of
any investigation made by or on behalf of the parties to this Agreement, until
three years after the Closing Date, except for covenants that by their terms
survive for a longer period and except (i) with respect to Sellers' obligations
for damages arising with respect to taxes for any period or part thereof prior
to the Closing or any breach of the representations, warranties and covenants
with respect to employee benefits, taxes and environmental laws, which
obligations shall continue until the applicable statute of limitations has
expired and (ii) with respect to Sellers' obligations for damages arising out of
any breach of the representations and warranties contained in Section 2.2 and
elsewhere herein relating to the Shares, which obligations shall continue
forever.
MISCELLANEOUS.
<PAGE>
Governing Law. The internal laws of the State of California (irrespective of its
choice of law principles) will govern the validity of this Agreement, the
construction of its terms and the interpretation and enforcement of the
rights and duties of the parties hereto. The parties hereby consent in any
dispute, action, litigation or other proceeding concerning this Agreement
to the jurisdiction of the courts of California, with the County of Orange
being the sole venue for bringing of the action or proceeding.
Assignment; Binding Upon Successors adn Assigns. No party hereto may assign any
of its rights or obligations hereunder without the prior written consent of
the other parties hereto. This Agreement will be binding upon and inure to
the benefit of the parties hereto and their respective successors and
permitted assigns.
Severability. If any provision of this Agreement, or the application thereof,
will for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
interest of the parties hereto. The parties further agree to replace such
void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the greatest extent possible,
the economic, business and other purpose of the void unenforceable
provision.
Counterparts. This Agreement may be executed in any number of counterparts, each
of which will be deemed an original as regards any party whose signature
appears thereon and all of which together will constitute one and the same
instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, will bear the
signatures of all the parties reflected hereon as signatories.
OtherRemedies. Except as otherwise provided herein, any and all remedies herein
expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby or by law on such party, and
the exercise of any one remedy will not preclude the exercise of any other.
Amendments and Waivers. Anyterm or provision of this Agreement may be amended,
and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby.
The waiver by a party of any breach hereof or default in the performance
hereof will not be deemed to constitute a waiver of any other default or
any succeeding breach or default.
Expenses. REI, on the one hand, and Sellers, on the other, will each bear their
own expenses and legal fees incurred with respect to this Agreement and the
transactions contemplated hereby. Sellers shall be responsible for all
expenses and legal fees incurred by PacSoft with respect to the negotiation
and entry into this Agreement and the transactions contemplated hereby.
Attorneys' Fees. Should suit be brought to enforce or interpret any part of this
Agreement, the prevailing party will be entitled to recover, as an element
of the costs of suit and not as damages, reasonable attorneys' fees to be
fixed by the court (including, without limitation, costs, expenses and fees
on any appeal).
<PAGE>
32
Notices. Allnotices and other communications pursuant to this Agreement shall be
in writing and deemed to be sufficient if contained in a written instrument
and shall be deemed given if delivered personally, telecopied, sent by
nationally-recognized overnight courier or mailed by registered or
certified mail (return receipt requested), postage prepaid, to the parties
at the following address (at such other address for a party as shall be
specified by like notice):
If to PacSoft to: PacSoft Incorporated
14024 NE 181st Street, Suite 201
Woodinville, Washington 98041
Attention: Chief Executive Officer
Telecopier: (425) 489-1535
If to REI to: Research Engineers, Inc.
22700 Savi Ranch Parkway
Yorba Linda, California 92887
Attention: President
Telecopier: (714) 974-4771
With a copy to:... Rutan & Tucker, LLP
611 Anton, Suite 1400
Costa Mesa, California 92626
Attention: Gregg Amber, Esq.
Telecopier: (714) 546-9035
If to Sellers to: Karen Hunter
22609 102nd Avenue, SE
Woodinville, Washington 98072
William Schmidt
9614 180th Street, SE
Snohomish, Washington 98296
Mae Webb
106 NW 112th Street
Seattle, Washington 98177
All notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of delivery, (b) in
the case of a telecopy, when the party receiving the copy shall have confirmed
receipt of the communication, (c) in the case of delivery by
nationally-recognized overnight courier, on the business day following dispatch,
and (d) in the case of mailing, on the third business day following such
mailing.
<PAGE>
Construction of Agreement. Thelanguage in all parts of this Agreement shall be
in all cases construed simply according to its fair meaning and not
strictly for or against any party. Whenever the context requires, all words
used in the singular will be construed to have been used in the plural, and
vice versa, and each gender will include any other gender. The captions of
the Sections and Subsections of this Agreement are for convenience only and
shall not affect the construction or interpretation of any of the
provisions of this Agreement. This Agreement has been negotiated between
unrelated parties who are sophisticated and knowledgeable in the matters
contained in this Agreement and who have acted in their own self interest.
In addition, each party affirms that it has been afforded the opportunity
to receive independent advice from its respective legal counsel as to the
advisability of entering into this Agreement and to consult and discuss the
provisions of this Agreement with its respective legal counsel and fully
understands the legal effect of each provision. Accordingly, any rule of
law, including Section 1654 of the California Civil Code, as well as any
other statute, law, ordinance or common law principles or other authority
of any jurisdiction of similar effect, or legal decision that would require
interpretation of any ambiguities in this Agreement against the party who
has drafted it is not applicable and is hereby waived. The provisions of
this Agreement shall be interpreted in a reasonable manner to effect the
purpose of the parties, and this Agreement shall not be interpreted or
construed against any party to this Agreement because that party or any
attorney or representative for that party drafted this Agreement or
participated in the drafting of this Agreement.
No Joint Venture. Nothing contained in this Agreement will be deemed or
construed as creating a joint venture or partnership between any of the
parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party will
have the power to control the activities and operations of any other. The
status of the parties hereto is, and at all times will continue to be, that
of independent contractors with respect to each other. No party will have
any power or authority to bind or commit any other. No party will hold
itself out as having any authority or relationship in contravention of this
Section.
Further Assurances. Each party agrees to cooperate fully with the other parties
and to execute such further instruments, documents and agreements and to
give such further written assurances as may be reasonably requested by any
other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of
this Agreement.
Absence of Third Party Rights. No provisions of this Agreement are intended, nor
will be interpreted, to provide or create any third party beneficiary
rights or any other rights of any kind in any client, customer, affiliate,
shareholder or partner of any party hereto or any other person or entity
unless specifically provided otherwise herein, and, except as so provided,
all provisions hereof will be personal solely between the parties to this
Agreement.
Entire Agreement. This Agreement and the schedules and exhibits hereto
constitute the entire understanding and agreement of the parties hereto
with respect to the subject matter hereof and supersede all prior and
contemporaneous agreements or understandings, inducements or conditions,
express or implied, written or oral, between the parties with respect
thereto. The express terms hereof control and supersede any course of
performance or usage of trade inconsistent with any of the terms hereof.
Press Releases. No party will issue or authorize to be issued any press release
or similar announcement concerning this Agreement or any of the transactions
contemplated hereby without the prior written approval of the other parties,
which approval shall be given in order to allow compliance with the
disclosure requirements of applicable securities laws.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed by their duly authorized respective officers as of the
date first above written.
RESEARCH ENGINEERS, INC.,
a Delaware corporation
By: ____________________________
Jyoti Chatterjee, President
PACSOFT INCORPORATED,
a Washington corporation
By: ____________________________
Karen Hunter, President
By: ____________________________
William Schmidt, Secretary
___________________________________
KAREN HUNTER, an individual
___________________________________
WILLIAM SCHMIDT, an individual
___________________________________
MAE WEBB, an individual
<PAGE>
THE UNDERSIGNED SPOUSES HAVE EXECUTED THIS AGREEMENT FOR THE PURPOSE OF
CONFIRMING THEIR CONSENT TO THE CONVEYANCE OF THEIR COMMUNITY PROPERTY INTEREST,
IF ANY, IN SHARES OF CAPITAL STOCK OF PACSOFT PURSUANT TO THIS AGREEMENT.
_____________________________________________________
_________________, spouse of Karen Hunter
_____________________________________________________
_________________, spouse of William Schmidt
_____________________________________________________
_________________, spouse of Mae Webb
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Research Engineers, Inc.:
We consent to incorporation by reference in the Registration Statement (Nos.
333-29747) on Form S-8 of Research Engineers, Inc. of our report dated May 17,
1999, relating to the consolidated balance sheet of Research Engineers, Inc. and
subsidiaries as of March 31, 1999, and the related consolidated statements of
operations, stockholders' equity and comprehensive income (loss) and cash flows
for each of the years in the two-year period ended March 31, 1999, which report
appears in the March 31, 1999 annual report on Form 10-KSB of Research
Engineers, Inc.
/s/ KPMG LLP
Orange County, California
June 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,011
<SECURITIES> 0
<RECEIVABLES> 2,924
<ALLOWANCES> 356
<INVENTORY> 0
<CURRENT-ASSETS> 6,614
<PP&E> 4,078
<DEPRECIATION> 1,376
<TOTAL-ASSETS> 14,762
<CURRENT-LIABILITIES> 2,944
<BONDS> 0
0
0
<COMMON> 57
<OTHER-SE> 6,533
<TOTAL-LIABILITY-AND-EQUITY> 14,762
<SALES> 10,745
<TOTAL-REVENUES> 10,745
<CGS> 1,150
<TOTAL-COSTS> 1,150
<OTHER-EXPENSES> (50)
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 191
<INCOME-PRETAX> (591)
<INCOME-TAX> (71)
<INCOME-CONTINUING> (520)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (520)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,390
<SECURITIES> 1,626
<RECEIVABLES> 2,266
<ALLOWANCES> 354
<INVENTORY> 0
<CURRENT-ASSETS> 6,411
<PP&E> 3,990
<DEPRECIATION> 1,056
<TOTAL-ASSETS> 11,561
<CURRENT-LIABILITIES> 2,485
<BONDS> 0
0
0
<COMMON> 57
<OTHER-SE> 7,137
<TOTAL-LIABILITY-AND-EQUITY> 11,561
<SALES> 12,731
<TOTAL-REVENUES> 12,731
<CGS> 854
<TOTAL-COSTS> 854
<OTHER-EXPENSES> (55)
<LOSS-PROVISION> 322
<INTEREST-EXPENSE> (45)
<INCOME-PRETAX> 173
<INCOME-TAX> 72
<INCOME-CONTINUING> 101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
