<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended December 31, 1998
[ ] 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 (IRS. Employer
jurisdiction of Identification No.)
incorporation)
22700 SAVI RANCH PARKWAY
YORBA LINDA, CALIFORNIA 92887
(Address of principal executive offices)
(714) 974-2500
(Registrant's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's only class of Common Stock,
$.01 par value, was 5,680,710 on January 29, 1999.
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,314
Short-term investments 270
Accounts receivable (net of allowance for doubtful 2,226
accounts of $373)
Deferred income taxes 923
Notes and related party loans receivable 77
Prepaid expenses and other current assets 400
------------
Total current assets 5,210
Property, plant and equipment, net 3,266
Goodwill (net of accumulated amortization of $750) 1,204
Other assets 865
------------
$ 10,545
============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term bank debt $ 145
Accounts payable 356
Accrued expenses 463
Income taxes payable 312
Deferred maintenance revenue 716
Other 30
------------
Total current liabilities 2,022
Long-term bank debt 1,753
Deferred income taxes 72
------------
Total liabilities 3,847
------------
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 5,680,710 shares 57
Additional paid-in capital 6,602
Retained earnings 294
Accumulated other comprehensive loss (255)
------------
Total stockholders' equity 6,698
------------
$ 10,545
============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
December December December December
31, 1998 31, 1997 31, 1998 31, 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Product sales $ 2,467 $ 2,787 $ 5,762 $ 7,802
Maintenance and
support 460 493 1,379 1,367
----------- ----------- ---------- ----------
Total net
revenues 2,927 3,280 7,141 9,169
Cost of revenues 238 185 716 607
----------- ----------- ---------- ----------
Gross profit 2,689 3,095 6,425 8,562
----------- ----------- ---------- ----------
Operating expenses:
Selling, general and
administrative 2,082 2,109 5,053 6,541
Research and
development 598 543 1,820 1,497
Acquired in-process
research and
development costs - 450 - 450
----------- ----------- ---------- ----------
Total operating
expenses 2,680 3,102 6,873 8,488
----------- ----------- ---------- ----------
Operating
income/(loss) 9 (7) (448) 74
----------- ----------- ---------- ----------
Other expense/(income):
Interest, net 13 (14) 50 (36)
Other 11 (17) (10) (63)
----------- ----------- ---------- ----------
Total other
expense/(income) 24 (31) 40 (99)
----------- ----------- ---------- ----------
(Loss)/income before
income taxes (15) 24 (488) 173
Income tax
expense/(benefit) 1 150 (143) 170
----------- ----------- ---------- ----------
Net (loss)/income $ (16) $ (126) $ (345) $ 3
=========== =========== ========== ==========
Net (loss)/income per
common share:
Basic $ (0.00) $ (0.02) $ (0.06) $ 0.00
Diluted $ (0.00) $ (0.02) $ (0.06) $ 0.00
Common shares used in
computing net (loss)/
income per common share:
Basic 5,680,710 5,699,618 5,680,377 5,701,373
Diluted 5,680,710 5,699,618 5,680,377 5,778,497
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended
December December
31, 1998 31, 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)/income $ (345) $ 3
Adjustments to reconcile net (loss)/income
to net cash used in operating activities:
In-process research and development - 450
Depreciation and amortization 760 533
Deferred income taxes (312) (80)
Gain on investments (20) (30)
Changes in operating assets and
liabilities:
Accounts receivable (3) (638)
Notes and related party loans receivable 77 (27)
Prepaid expenses and other current assets (2) (29)
Other assets (231) (609)
Accounts payable, accrued expenses and
other current liabilities (27) (168)
Deferred maintenance revenue (309) 97
Income taxes payable (108) 43
Other long-term liabilities - (21)
------------ ------------
Net cash used in operating
activities (520) (476)
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (474) (396)
Purchase of short-term investments (764) (3,958)
Sale of short-term investments 2,142 4,100
Payments to acquire companies, net of cash
acquired (366) (550)
------------ ------------
Net cash provided by (used in)
investing activities 538 (804)
------------ ------------
Cash flows from financing activities:
Proceeds from bank debt 75 -
Repayment of bank debt (89) (107)
Payments to repurchase common stock - (200)
Common stock issuance from exercise of
options 8 9
------------ ------------
Net cash used in financing
activities (6) (298)
------------ ------------
Effect of exchange rate changes on cash and
cash equivalents (38) (174)
------------ ------------
Decrease in cash and cash
equivalents (26) (1,752)
Cash and cash equivalents, beginning of period 1,340 2,579
------------ ------------
Cash and cash equivalents, end of period $ 1,314 $ 827
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended
December December
31, 1998 31, 1997
------------ ------------
<S> <C> <C>
Supplemental cash flow information:
Amounts paid for:
Interest $ 118 $ 114
Income taxes 280 136
Non-cash transactions:
Unrealized gain/(loss) on investments 2 (48)
Payment of related party note receivable
from transfer of short-term investments 66 -
Payments to acquire companies, net of cash
acquired:
Assets acquired 407 100
Purchased research and development - 450
------------ ------------
$ 407 $ 550
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Research
Engineers, Inc. (the "Company") and its wholly-owned subsidiaries. These
consolidated financial statements have been prepared by the Company, without
audit, and include all adjustments which are, in the opinion of management,
necessary for a fair presentation of the results of operations for the three
months and nine months ended December 31, 1998 and 1997, the financial
position at December 31, 1998, and the cash flows for the nine months ended
December 31, 1998 and 1997, pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. Results of operations for the
three months and nine months ended December 31, 1998 are not necessarily
indicative of the results to be expected for the full year ended March 31,
1999.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
3. RECLASSIFICATIONS
Certain prior quarter amounts have been reclassified to conform to the
current quarter presentation.
4. SOFTWARE REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which supercedes 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. 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 consolidated financial position, results of
operations or liquidity.
5. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no impact on
the Company's reported net (loss)/income or stockholders' equity. SFAS No.
130 requires changes in unrealized gains or losses on the Company's
available-for-sale investments and foreign currency translation adjustments,
which are reported separately in stockholders' equity, to be included in
other comprehensive income. The prior year Consolidated Statement of
Stockholders' Equity will be reclassified at year-end fiscal 1999 to conform
to the requirements of SFAS No. 130. For the three months ended December 31,
1998 and 1997, total comprehensive income/(loss) was $54,000 and ($368,000),
respectively, and was ($449,000) and ($219,000) for the nine months ended
December 31, 1998 and 1997, respectively.
6
<PAGE>
6. NET (LOSS)/INCOME PER SHARE
In December 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings per Share ("EPS"). SFAS No. 128 replaced the
calculation of primary and fully diluted EPS with basic and diluted EPS.
Unlike primary EPS, basic EPS excludes any dilutive effects of common stock
equivalents, such as options and warrants. Diluted EPS is very similar to the
previously reported fully diluted EPS. All EPS amounts for all periods have
been restated to conform to the SFAS No. 128 requirements.
The following table illustrates the computation of basic and diluted net
income/(loss) per share (dollars in thousands):
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
December December December December
31, 1998 31, 1997 31, 1998 31,1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and
diluted net
(loss)/income per
share - net
(loss)/income $ (16) $ (126) $ (345) $ 3
=========== =========== ========== ==========
Denominator:
Denominator for basic
net (loss)/income per
share - weighted
average number of
common shares
outstanding during the
period 5,681 5,700 5,680 5,701
Incremental common
shares attributable to
exercise of
outstanding options - - - 77
----------- ----------- ---------- ----------
Denominator for diluted
net (loss)/income per
share 5,681 5,700 5,680 5,778
=========== =========== ========== ==========
Basic net (loss)/income
per share $ (0.00) $ (0.02) $ (0.06) $ 0.00
=========== =========== ========== ==========
Diluted net (loss)/
income per share $ (0.00) $ (0.02) $ (0.06) $ 0.00
=========== =========== ========== ==========
</TABLE>
The computation of diluted loss per share for the three months ended December
31, 1998 and 1997 and the nine months ended December 31, 1998 excluded the
effect of 145,000, 70,000 and 210,000, respectively, of incremental common
shares attributable to the exercise of outstanding common stock options
because their effect was antidilutive.
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 during the three months and nine months ended December 31, 1998
and 1997 but were not included in the computation of diluted EPS because the
warrants' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
7
<PAGE>
7. ACQUISITIONS
On October 1, 1998, the Company purchased the assets of Techna Consultancy
Private Limited ("Techna"), a software developer and consultant, through its
India subsidiary. The purchase price of $357,000 in cash included an
agreement not to compete and was allocated as follows:
<TABLE>
<S> <C>
Goodwill $287,000
Property and equipment 70,000
--------
$357,000
========
</TABLE>
The goodwill associated with the Techna acquisition will be amortized over
five years on a straight-line basis.
On October 23, 1998, the Company signed a definitive agreement (the "COADE
Agreement") to acquire Engineering Physics Software, Inc., dba COADE. Certain
terms and conditions of the COADE Agreement were not met by specified dates,
and therefore, the COADE Agreement was terminated in January 1999.
8. SUBSEQUENT EVENT
On January 19, 1999, the Company signed a definitive agreement (the "R-Cube
Agreement") to acquire R-Cube Technologies, Inc. Under the terms and
conditions of the R-Cube Agreement, the Company has agreed to acquire all of
the outstanding stock of R-Cube Technologies for $2.3 million in cash.
8
<PAGE>
ITEM 2. MANAGMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Research Engineers, Inc. (the "Company") is a leading provider of technically
sophisticated stand-alone and network-based engineering software products that
provide fully-integrated easy-to-use design automation and analysis solutions
for use by engineering analysis and design professionals worldwide. The
Company's comprehensive line of Windows-based engineering software products
includes STAAD-III, the Company's flagship structural analysis and design
software; STAAD/Pro, the first comprehensive structural design office solution;
as well as mechanical, civil and process/piping engineering products. The
Company's software products assist engineers in performing a myriad of
mission-critical engineering tasks, including analysis and design of industrial,
commercial, transportation and utility structures, pipelines, machinery,
automotive and aerospace products, and survey, contour and digital terrain
modeling.
The following discussion and analysis addresses the results of the Company's
operations for the three months and nine months ended December 31, 1998, as
compared to the Company's results of operations for the three months and nine
months ended December 31, 1997.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 AND
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net revenues - Net revenues for the quarter ended December 31, 1998 decreased by
$353,000 (11%) to $2,927,000, as compared to $3,280,000 for the quarter ended
December 31, 1997. For the nine months ended December 31, 1998, revenues
decreased by $2,028,000 (22%) to $7,141,000 from $9,169,000 for the nine months
ended December 31, 1997. These decreases in net revenues were primarily
attributable to: (1) the decreased performance of the Company's distributor in
Germany, which was partially offset by the addition of the Company's new
subsidiary in France, and (2) the decline in economic conditions in Southeast
Asia that started during the latter part of fiscal 1998, which was offset
somewhat in the third quarter by the revenues derived from the acquisition of
Techna. Revenues to Southeast Asia for the three months and nine months ended
December 31, 1997 represented 28% and 30%, respectively, compared to only 21%
and 16% for the three months and nine months ended December 31, 1998,
respectively.
Revenues are derived primarily from sales of the Company's engineering software
products and, to a lesser extent, from sales of software maintenance contracts
relating to its products. Software product revenues are recognized upon
shipment. 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 consolidated financial position, results of
operations or liquidity.
International net revenues as a percentage of total revenues for the quarter
ended December 31, 1998 decreased to 53%, from 57% for the quarter ended
December 31, 1997. For the nine months ended December 31, 1998, international
revenues decreased to 48%, from 59% for the nine months ended December 31, 1997.
The decrease in international revenues for the periods was primarily the result
of the decline in economic conditions in Southeast Asia that started during the
latter part of fiscal 1998. The Company expects these conditions to continue for
at least the next several quarters, and therefore, remains cautious about its
short-term Southeast Asia prospects. The previous sentence is a forward-looking
statement. The state of the Asian economy at any particular point in the future
depends on a large number of factors which are beyond the control of the
Company, and is impossible for the Company to predict accurately. The Company's
domestic revenues are denominated in U.S. Dollars, while revenues and expenses
for the Company's foreign subsidiaries and sales offices are usually recorded in
the applicable foreign currency and translated into U.S. Dollars. There were no
foreign exchange gains or losses that
9
<PAGE>
were material to the Company's financial results during the three months and
nine months ended December 31, 1998 and 1997.
Cost of revenues - Cost of revenues increased by $53,000 (29%) to $238,000 in
the quarter ended December 31, 1998 as compared to $185,000 for the quarter
ended December 31, 1997. Cost of revenues increased by $109,000 (18%) to
$716,000 for the nine months ended December 31, 1998 as compared to $607,000 for
the nine months ended December 31, 1997. These increases were primarily due to
increased amortization of capitalized software as a result of additions to the
capitalized software balance during fiscal years 1998 and 1999.
Gross profit - Gross profit decreased by $406,000 (13%) to $2,689,000 in the
quarter ended December 31, 1998 as compared to $3,095,000 for the quarter ended
December 31, 1997. Gross profit decreased by $2,137,000 (25%) to $6,425,000 for
the nine months ended December 31, 1998 as compared to $8,562,000 for the nine
months ended December 31, 1997. These decreases were primarily due to decreased
sales volume.
Selling, general and administrative expense - Selling, general and
administrative expense decreased by $27,000 (1%) to $2,082,000 for the quarter
ended December 31, 1998 as compared to $2,109,000 for the quarter ended December
31, 1997, and increased as a percentage of net revenues to 71% from 64% in the
comparable quarter of the prior year. Selling, general and administrative
expense decreased by $1,488,000 (23%) to $5,053,000 in the nine months ended
December 31, 1998 as compared to $6,541,000 for the nine months ended December
31, 1997, and remained 71% of net revenues for both periods. The most
significant contributor to the decline for both the three-month and nine-month
periods in fiscal 1999 was a decrease in sales commissions, due primarily to the
decline in revenue from Southeast Asia. Included in selling, general and
administrative expense, however, were non-recurring costs related to terminated
acquisitions of $205,000 and $318,000 for the three months and nine months ended
December 31, 1998, respectively. Excluding these non-recurring costs, selling,
general and administrative expense, other than sales commissions, also
experienced a decrease in comparison to the same periods in fiscal 1998.
Research and development expense - Research and development expense increased by
$55,000 (10%) to $598,000 in the quarter ended December 31, 1998 as compared to
$543,000 for the quarter ended December 31, 1997, and increased as a percentage
of net revenues to 20% from 17% in the comparable quarter of the prior year.
Research and development expense increased by $323,000 (22%) to $1,820,000 in
the nine months ended December 31, 1998 as compared to $1,497,000 for the nine
months ended December 31, 1997, and increased as a percentage of net revenues to
25% from 16% in the comparable nine months of the prior year. The increases in
research and development expense are primarily due to the addition of research
and development personnel during the latter part of fiscal 1998, as well as
additional costs paid to outside consultants for research and development
projects.
Other (income) expense - Net interest (income) expense decreased by $27,000 to
$13,000 in the quarter ended December 31, 1998 as compared to ($14,000) for the
quarter ended December 31, 1997. Net interest (income) expense decreased by
$86,000 to $50,000 in the nine months ended December 31, 1998 as compared to
($36,000) for the nine months ended December 31, 1997. The decreases result from
a decline in the Company's short-term investment balances since the first part
of fiscal 1998 and the resulting decrease in interest income. Other (income)
expense decreased by $28,000 to $11,000 in the quarter ended December 31, 1998
as compared to ($17,000) for the quarter ended December 31, 1997. Other (income)
expense decreased by $53,000 to ($10,000) in the nine months ended December 31,
1998 as compared to ($63,000) for the nine months ended December 31, 1997.
During October 1997, one of the Company's tenants who was renting space in the
Corporate building terminated its lease, resulting in a decrease in rental
income.
Income taxes - The Company had income tax expense (benefit) of $1,000 and
($143,000) for the three months and nine months ended December 31, 1998,
respectively, as compared to income tax expense of $150,000 and $170,000 for the
three months and nine months ended December 31, 1997, respectively. These
fluctuations are primarily due to a pretax loss in the United States for the
three months and nine months ended December 31, 1998 and the related tax benefit
for the net operating loss that was recorded.
10
<PAGE>
The Company increased its deferred tax asset during the current quarter by
$71,000 and $312,000 for the nine months ended December 31, 1998 and believes
that this asset will be realizable against future earnings and could potentially
be realized against prior earnings.
LIQUIDITY AND CAPITAL RESOURCES
Certain statements contained in this "Liquidity and Capital Resources" section
are "forward-looking statements" that involve risks and uncertainties. The
actual future results of the Company could differ materially from those
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in this report, uncertainties regarding
market acceptance of new products and product enhancements, delays in the
introduction of new products, and risks associated with managing the Company's
growth, as well as those factors discussed in the Company's Form 10-KSB for the
fiscal year ended March 31, 1998 which was filed with the Securities and
Exchange Commission on June 29, 1998 and the risks described in the "Outlook"
section therein.
The Company currently finances its operations (including capital expenditures)
primarily through cash flows from operations as well as its cash and short-term
investment balances.
The Company's principal sources of liquidity at December 31, 1998 consisted of
$1,314,000 of cash, $270,000 of short-term investments and $500,000 available
under a line of credit with Union Bank of California.
The decrease in total cash and investments during the nine months ended December
31, 1998 was primarily attributable to the net loss, the acquisition of Techna,
acquisition costs related to discontinued acquisitions during the first nine
months of fiscal 1999, the purchase of fixed assets, primarily related to the
acquisition of Techna, the payment of income taxes in the UK, combined with an
increase in accounts receivable and a decrease in deferred maintenance revenue,
offset by a decrease in prepaid and other current assets and increases in
accounts payable and accrued expenses.
The Company has a $500,000 line of credit with Union Bank of California. The
line of credit bears interest at the prime rate. This credit line is
collateralized by substantially all of the assets of the Company. The line of
credit expires on March 1, 1999, at which time the Company plans to renew the
agreement. As of December 31, 1998, there were no amounts outstanding under the
line of credit.
During fiscal 1998 and the first three quarters of fiscal 1999, the Company
experienced a decrease in Southeast Asia revenues as a result of a downturn in
economic conditions in key Asian markets. Payment from the Company's customers
in these markets has been hampered by difficulty in obtaining favorable foreign
exchange resulting in approximately $744,000 in past-due receivables from Asian
customers at December 31, 1998, which represents a slight decrease from prior
quarter. The Company expects to collect the past-due receivables from Asian
customers over the next few quarters net of the allowance for doubtful accounts.
The Company believes that its current cash and short-term investment balances
and cash generated from operations and borrowings available under the Company's
line of credit will provide adequate working capital to fund the Company's
operations at currently anticipated levels through December 31, 1999. 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. In addition, the Company is
currently working with its investment banker to raise all or a significant
portion of the cash component of the R-Cube purchase price through a combination
of long-term secured and unsecured borrowings.
11
<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 anticipates that its systems, equipment and processes will be
substantially Year 2000 ready by the end of March 1999. The Company is currently
assessing the cost to remediate its Year 2000 issues. Although the actual cost
to remediate these issues is not yet fully known, based upon information to
date, the Company estimates the costs should not exceed $250,000, most of which
represents lease payments for software that will be paid ratably through 2002.
It is expected that the remediation will not have a material impact on the
Company's financial condition or operating results. The Company is currently
working on its contingency plan for Year 2000 issues, which is expected to be in
place by the end of fiscal 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
As of April 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's reported net (loss)/income or stockholders'
equity. SFAS No. 130 requires changes in unrealized gains or losses on the
Company's available-for-sale investments and foreign currency translation
adjustments, which are reported separately in stockholders' equity, to be
included in other comprehensive income. The prior year Consolidated Statement of
Stockholders' Equity will be reclassified at year-end fiscal 1999 to conform to
the requirements of SFAS No. 130. During the third quarter of fiscal 1999 and
1998, total comprehensive income/(loss) was $54,000 and ($368,000),
respectively, and was ($449,000) and ($219,000) for the nine months ended
December 31, 1998 and 1997, respectively.
In December 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which requires the Company to disclose
certain information about reportable operating segments in complete sets of
financial statements of the Company and in condensed financial statements of
interim periods. Application of this accounting standard is not expected to have
a material impact on the Company's consolidated financial position, results of
operations or liquidity.
12
<PAGE>
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments embedded in other contracts and for hedging
activities. SFAS 133 is effective for all fiscal quarters or fiscal years
beginning after June 15, 1999. Application of this accounting standard is not
expected to have a material impact on the Company's consolidated financial
position, results of operations or liquidity.
13
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on
December 15, 1998.
(b) Omitted pursuant to Instruction 3 to Item 4 of Form 10-QSB.
(c)(i)PROPOSAL ONE:Election of five Directors by the holders of issued
and outstanding shares of Common Stock:
<TABLE>
<CAPTION>
For Abstain Against
--------- --------- ---------
<S> <C> <C> <C>
Amrit K. Das 5,370,621 0 13,000
Jyoti Chatterjee 5,370,621 0 13,000
Dan W. Heil 5,370,621 0 13,000
Bruce E. Cummings 5,370,621 0 13,000
Santanu Das 5,370,621 0 13,000
</TABLE>
(c)(ii)PROPOSAL TWO:Ratification of the approval of the Company's 1998
Stock Option Plan:
<TABLE>
<S> <C>
For: 4,643,827
Against: 38,050
Abstain: 56,888
Broker Non-Voting 644,856
</TABLE>
(c)(iii)PROPOSAL THREE:Ratification of the appointment of KPMG Peat
Marwick LLP as the Company's independent accountants for the
fiscal year beginning April 1, 1998:
<TABLE>
<S> <C>
For: 5,374,128
Against: 8,400
Abstain: 1,093
Broker Non-Voting -
</TABLE>
(d) Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.35 Purchase Agreement dated August 13, 1998 between Research
Engineers Private Limited and Techna Consultancy Private
Limited
10.36 Agreement Not To Compete dated October 1, 1998 between
Research Engineers, Inc. and Techna Consultancy Private
Limited
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 11, 1999
RESEARCH ENGINEERS, INC.
By: /S/ WAYNE BLAIR
----------------------------------
Wayne Blair
Chief Financial Officer, Secretary
and Treasurer (principal financial
and accounting officer)
15
<PAGE>
EXHIBIT INDEX
-------------
Exhibit 10.35 Purchase Agreement dated August 13, 1998 between Research
Engineers Private Limited and Techna Consultancy Private Limited
Exhibit 10.36 Agreement Not To Compete dated October 1, 1998 between Research
Engineers, Inc. and Techna Consultancy Private Limited
Exhibit 27.1 Financial Data Schedule
16
<PAGE>
Exhibit 10.35
PURCHASE AGREEMENT
This agreement is made as Phase I of two phase agreement between Research
Engineers Private Limited (Indian Registered Company and a wholly owned
subsidiary of Research Engineers, Inc. - a publicly-traded U.S. Company) and
Techna Consultancy Private Limited (a company registered under the Indian
Companies Act, 1956).
a) Research Engineers Private Limited (hereinafter referred to as REPL) will
purchase all the assets of Techna Consultancy Priviate Limited (hereinafter
referred to as TCPL) mainly owned by Dr. Alo Ghosh (hereinafter referred to
as AG).
b) Assets to include facilities in Calcutta, Delhi and Ranchi.
c) Assets also include Apple Multimedia systems in Ranchi, 30 new P-II (266MHz)
computers in Calcutta, Telco Bus in Calcutta, Furniture and Computers in
Delhi.
d) Total Purchase price agreed at Rs 44,00,000/- will be paid in Indian Rupees
for the fixed assets in India.
e) Both REPL and TCPL will make best effort to complete the Phase II by 15th
September 1998.
f) This Agreement will act as the binding on both REPL and TCPL for a period
upto 31st December 1998.
IN WITNESS WHEREOF, the parties have executed this agreement:
Research Engineers Private Limited Techna Consultancy Private Limited
/S/ AMRIT K. DAS /S/ DR. ALO GHOSH
- ---------------- -----------------
Signature Signature
Name: Amrit K. Das Name: Alo Ghosh
Title: Managing Director Title: Director
Date: August 13, 1998 Date: August 13, 1998
17
<PAGE>
Exhibit 10.36
AGREEMENT NOT TO COMPETE
This Agreement not to compete by and between Dr. Alo Ghosh, 100% shareholder of
Techna Consultancy Private Limited, a company registered under the Indian
Companies Act (to be henceforth referred to as Shareholder) and Research
Engineers, Inc., a Delaware Corporation (to be henceforth referred to as The
Company) is made and entered into as of this First day of October 1998.
Recitals
A. Shareholder will receive a sum of two hundred and fifty three thousand and
nine hundred and eighty six thousand dollars ($253,986) October 1, 1998, in
exchange for a written, signed and duly executed Agreement for not competing
with The Company.
B. Techna Consultancy, Private, Limited and The Company have an Agreement
whereby Techna Consultancy, Private, Limited is selling its assets to
Research Engineers (India) Private Limited, a wholly owned subsidiary, of
Research Engineers, Inc. Pursuant to and as a succeeding part to a
Sale-of-Assets Agreement, The Company is also acquiring an assurance from the
100% Shareholder of Techna Consultancy, Private, Limited, that the
Shareholder will not compete with The Company and thereby impair the goodwill
of the assets being purchased by The Company through its Indian subsidiary.
As part of the sale covenants, The Company wishes to restrict the 100%
Shareholder of Techna Consultancy, Private, Limited from certain competitive
activities.
Agreement
Now therefore, for and in consideration of the foregoing recitals and the
respective covenants, agreements and representations contained herein, the
parties hereto agree as follows.
1. Shareholder agrees not to operate any business in India, Pakistan,
Bangladesh, Sri Lanka, Nepal, Bhutan, Afghanistan, Iran and all Middle Eastern
Countries similar to the business conducted by Techna Consultancy, Private,
Limited as of the effective date of this Agreement.
2. Shareholder will not directly or indirectly solicit or otherwise deal with
any existing client of Techna Consultancy, Private, Limited in India, in a
manner designed to (or that could) take business away from the buyer of its
assets, The Company. Shareholder, on behalf of Techna Consultancy, Private,
Limited will notify its current clients accordingly, through a letter that will
be prepared in consultation with The Company, within 45 days of this agreement
being effective.
3. For a period of two years, after the closure of this Non-Compete Agreement,
Shareholder will not solicit or otherwise induce any employee of The Company to
18
<PAGE>
terminate his/her employment interest with The Company. In addition, Shareholder
shall not solicit those employees of Techna Consultancy, Private, Limited
offered employment by The Company, prior to closure of this Non-Compete
Agreement. For a period of two years, after the closure of this Non- Compete
Agreement, The Company shall not solicit or induce any employee of Techna
Digital, Techna International, and Techna Institute and/or their subsidiaries
and affiliates to terminate his/her employment interest with these entities. The
covenant for non-solicitation of each party's employees, for a period of two
years, shall be applicable on a worldwide basis
4.The duration of this Non-Compete Agreement with The Company is for a period of
ten years commencing from October 1, 1998. However, insofar as the employees of
either party are concerned, the mutual non-solicitation-of-employees covenant
shall be valid and enforceable for a period of two years only. Furthermore, the
geographic area covered by this Agreement is restricted to the countries listed
above.
5. Notwithstanding the foregoing, nothing in this Agreement shall prevent
Shareholder to engage in competition with businesses, subsidiaries, or
affiliates of The Company other than the business Techna Consultancy, Private,
Limited is currently engaged in. Similarly, nothing in his Agreement shall
prevent The Company to engage in competition with any business, affiliate, or
subsidiary of Shareholder.
6. At the time of signing of this Agreement, The Company will pay Shareholder
the sum of $253,986 by direct wire transfer to an account which has been
designated by Shareholder. This amount will be transmitted within one business
day of signing of this Agreement, failing which this entire Agreement will be
null and void.
7.This Agreement, and all documents executed and delivered hereunder, shall be
deemed to be contracts under the laws of the US courts and for all purposes
shall be construed and governed under such laws. Any suit or other action to
enforce any provision of this Agreement or to obtain any remedy with respect
hereto shall be brought in any US Court with competent jurisdiction sitting in
the State of California.
8.Although this Agreement is signed on October 15th, 1998, the Agreement shall
be effective from October 1, 1998.
Signed, agreed and accepted this 15th day of October 1998.
/S/ DR. ALO GHOSH /S/ DR. JYOTI CHATTERJEE
- ----------------- ------------------------
Dr. Alo Ghosh Dr. Jyoti Chatterjee
Shareholder Executive Vice President
Techna Consultancy, Pvt. Ltd. Research Engineers, Inc.
19
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,314
<SECURITIES> 270
<RECEIVABLES> 2,599
<ALLOWANCES> 373
<INVENTORY> 0
<CURRENT-ASSETS> 5,210
<PP&E> 4,406
<DEPRECIATION> 1,140
<TOTAL-ASSETS> 10,545
<CURRENT-LIABILITIES> 2,022
<BONDS> 0
0
0
<COMMON> 57
<OTHER-SE> 6,641
<TOTAL-LIABILITY-AND-EQUITY> 10,545
<SALES> 7,141
<TOTAL-REVENUES> 7,141
<CGS> 716
<TOTAL-COSTS> 716
<OTHER-EXPENSES> (10)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> (488)
<INCOME-TAX> (143)
<INCOME-CONTINUING> (345)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (345)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
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