<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, 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 jurisdiction of (IRS. Employer 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 12,837,384 on February 8, 2000.
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(Unaudited)
(In thousands, except share and per share amounts)
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 2,463
Accounts receivable (net of allowance for doubtful accounts of $424) 3,671
Income taxes receivable 256
Deferred income taxes 963
Notes and related party loans receivable 377
Prepaid expenses and other current assets 754
---------------
Total current assets 8,484
Property, plant and equipment, net 2,316
Goodwill and intangible assets (net of accumulated amortization of $1,318) 7,760
Other assets 771
---------------
$ 19,331
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term bank debt $ 680
Current portion of capital lease obligations 101
Accounts payable 615
Accrued expenses 1,151
Deferred maintenance revenue 1,159
---------------
Total current liabilities 3,706
Long-term bank debt, net of current portion 3,406
Capital lease obligations, net of current portion 405
Deferred gain on sale-leaseback of real estate 1,058
Deferred income taxes 244
---------------
Total liabilities 8,819
---------------
Stockholders' equity:
Preferred stock, par value $.01. Authorized 5,000,000 shares; issued and
outstanding 371,429 shares 4
Common stock, par value $.01. Authorized 20,000,000 shares; issued and
outstanding 12,222,146 shares 122
Additional paid-in capital 11,367
Accumulated deficit (718)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustments (263)
---------------
Total stockholders' equity 10,512
---------------
$ 19,331
===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
IT services $ 3,359 $ - $ 6,410 $ -
Product sales 1,743 2,545 5,129 6,008
Maintenance and support 491 474 1,422 1,429
--------------- --------------- --------------- ---------------
Total net revenues 5,593 3,019 12,961 7,437
Cost of revenues:
IT services 2,372 - 4,489 -
Product sales, maintenance and
support 247 264 703 791
--------------- --------------- --------------- ---------------
Total cost of revenues 2,619 264 5,192 791
--------------- --------------- --------------- ---------------
Gross profit 2,974 2,755 7,769 6,646
--------------- --------------- --------------- ---------------
Operating expenses:
Selling, general and administrative 2,940 2,167 6,912 5,276
Research and development 594 598 1,871 1,820
--------------- --------------- --------------- ---------------
Total operating expenses 3,534 2,765 8,783 7,096
--------------- --------------- --------------- ---------------
Operating loss (560) (10) (1,014) (450)
--------------- --------------- --------------- ---------------
Other expense (income):
Interest, net 124 14 365 53
Other (16) 11 (25) (10)
--------------- --------------- --------------- ---------------
Total other expense 108 25 340 43
--------------- --------------- --------------- ---------------
Loss before income taxes (668) (35) (1,354) (493)
Income tax (benefit) expense (251) 1 (468) (143)
Minority interest in earnings of
consolidated subsidiary 1 - 8 -
--------------- --------------- --------------- ---------------
Net loss $ (418) $ (36) $ (894) $ (350)
=============== =============== =============== ===============
Cumulative preferred stock dividends $ (26) $ - $ (34) $ -
=============== =============== =============== ===============
Net loss per common share:
Basic $ (0.04) $ (0.00) $ (0.08) $ (0.03)
Diluted $ (0.04) $ (0.00) $ (0.08) $ (0.03)
Common shares used in computing net
loss per common share:
Basic 11,973,156 11,461,420 11,677,692 11,460,754
Diluted 11,973,156 11,461,420 11,677,692 11,460,754
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (894) $ (350)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,134 772
Deferred income taxes 31 (312)
Compensation recognized on issuance of stock options 33 -
Gain on sale of investments - (20)
Changes in operating assets and liabilities:
Accounts receivable 245 12
Notes and related party loans receivable (76) 77
Prepaid expenses and other current assets (209) 5
Other assets (145) (230)
Accounts payable, accrued expenses and other current
liabilities (284) (25)
Deferred maintenance revenue 70 (309)
Income taxes payable (666) (115)
--------------- ---------------
Net cash used in operating activities (761) (495)
--------------- ---------------
Cash flows from investing activities:
Purchase of property, plant and equipment (518) (482)
Proceeds from sale-leaseback of real estate, net 2,709 -
Purchase of short-term investments - (764)
Sale of short-term investments - 2,142
Payments to acquire companies, net of cash acquired (3,194) (366)
--------------- ---------------
Net cash (used in) provided by investing activities (1,003) 530
--------------- ---------------
Cash flows from financing activities:
Proceeds from bank debt 992 75
Repayment of bank debt (2,335) (91)
Repayment of capital lease obligations (64) -
Preferred stock issuance 2,600 -
Common stock issuance from exercise of options and warrants 986 8
--------------- ---------------
Net cash provided by (used in) financing activities 2,179 (8)
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 37 (38)
--------------- ---------------
Increase (decrease) in cash and cash equivalents 452 (11)
Cash and cash equivalents, beginning of period 2,011 1,390
--------------- ---------------
Cash and cash equivalents, end of period $ 2,463 $ 1,379
=============== ===============
Supplemental cash flow information:
Amounts paid for:
Interest $ 366 $ 123
Income taxes 200 280
Supplemental disclosure of non cash investing and financing activities:
Issuance of common shares for NetGuru acquisition $ 1,194 $ -
Issuance of note payable for NetGuru acquisition 600 -
Note receivable obtained in sale-leaseback of real estate 250 -
Acquisition of equipment under capital lease obligations 4 -
Unrealized gain on investments - 2
Payment of related party note receivable from transfer of short-term
investments - 66
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
Research Engineers, Inc. and its wholly and majority owned subsidiaries
(the "Company"). All significant transactions among the consolidated
entities have been eliminated upon consolidation. Minority interest
represents the minority shareholder's proportionate share of the earnings
of NetGuru Systems, Inc. and NetGuru Consulting, Inc. (collectively,
"NetGuru") up through December 15, 1999 at which time Netguru became a
wholly-owned subsidiary of the Company. The Company's reported results for
the three and nine month periods ended December 31, 1998 have been restated
to include the results of operations of PacSoft Incorporated ("PacSoft") as
a result of the Company's acquisition of PacSoft in March 1999. This
acquisition has been accounted for using the pooling of interests method of
accounting for business combinations.
These unaudited consolidated financial statements have been prepared by the
Company and include all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial position at
December 31, 1999 and the results of operations and the cash flows for the
three month and nine month periods ended December 31, 1999 and 1998,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
consolidated financial statements. Results of operations for the three
month and nine month periods ended December 31, 1999 are not necessarily
indicative of the results to be expected for the full year ended March 31,
2000.
On January 21, 2000, the Company announced that its Board of Directors had
approved a 2 for 1 split of the Company's common shares. This split was
affected in the form of a stock dividend paid on February 7, 2000. All
share and per share data relative to the outstanding common shares included
in these consolidated financial statements and in the Notes to Consolidated
Financial Statements has been restated to reflect the effects of the stock
split as if it had occurred at the beginning of the periods presented.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the unaudited consolidated
financial statements and accompanying notes. Actual results could differ
from those estimates.
3. RECLASSIFICATIONS
Certain prior quarter amounts have been reclassified to conform to the
current quarter presentation.
4. ACQUISITION
Effective September 14, 1999, the Company acquired 80% of the outstanding
capital stock of NetGuru Systems, Inc. and NetGuru Consulting, Inc.
(collectively, "NetGuru"). Pursuant to the terms of the agreement, the
Company purchased the remaining 20% interest on December 15, 1999. NetGuru
is a provider of information technology ("IT") services headquartered in
Waltham, Massachusetts. The aggregate purchase, including acquisition
costs, was approximately $5.2 million which was paid in a combination of
cash, a promissory note and 341,270 shares of the Company's common stock.
The promissory note, amounting to $600,000, is payable one year from the
closing date and bears interest at 8.5%. The cash portion of the purchase
price was obtained through the issuance of 371,429 shares of the Company's
5
<PAGE>
newly created Series B 5% Convertible Preferred Stock to two investors in a
private transaction not involving a public offering. This preferred stock
accrued dividends on a cumulative basis and was convertible to shares of
common stock at the option of the holder. Subsequent to December 31, 1999
all preferred shares were converted into 578,372 shares of common stock.
Preferred dividends accrued through the conversion date were paid in a
combination of 1,532 common shares and approximately $1,800 cash.
In determining the purchase price for NetGuru, the Company took into
account the value of companies of similar industry and size to NetGuru,
comparable transactions and the market for such companies. The acquisition
is being accounted for using the purchase method of accounting and as such
all assets acquired and liabilities assumed were recorded at their
estimated fair market values at the date of acquisition. The purchase price
allocation for the acquisition of NetGuru (including acquisition costs of
$422,000) is summarized as follows (in thousands):
Current assets, including cash of $300 $ 1,296
Property and equipment 75
Goodwill 4,908
Current liabilities (1,033)
Capital lease obligations (2)
----------------
$ 5,244
================
As the Company's unaudited consolidated financial statements do not include
the operations of NetGuru for the full nine month periods ended December
31, 1999 and 1998, the following selected unaudited pro forma information
is being provided to present a summary of the combined results of the
Company and NetGuru as if the acquisition had occurred as of April 1, 1998,
giving effect to purchase accounting adjustments.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 1998
--------------- --------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Net revenues $ 4,529 $ 16,826 $ 12,162
Net income (loss) $ 122 $ (840) $ (166)
Basic loss per share $ 0.01 $ (0.08) $ (0.02)
Diluted loss per share $ 0.01 $ (0.08) $ (0.02)
</TABLE>
The unaudited pro forma amounts reflect the results of operations for the
Company including NetGuru and the following purchase accounting adjustments
for the periods presented:
o Amortization of goodwill, straight-line, over a useful life of 15
years;
o The addition of interest expense at 8.5% on debt incurred in the
acquisition;
o Estimated income tax effect on the pro forma adjustments;
o Estimated income tax effect on NetGuru historical financial
results (prior to the acquisition NetGuru was an "S" Corporation
and as such had not reported income tax expense in their
financial statements); and
o The 20% minority interest in the earnings of Net Guru through the
date of the second acquisition closing.
The unaudited pro forma loss per share data is based on the Company's
weighted average number of common shares outstanding during fiscal 2000 and
1999 and the addition of the 341,270 common shares issued as part of the
acquisition. The loss per share calculation was adjusted to include the
effect of cumulative dividends on 371,429 shares of Series B 5% Convertible
Preferred Stock issued as part of financing the acquisition. The unaudited
pro forma data is for informational purposes only and may not necessarily
reflect the results of operations of the Company had NetGuru operated as
part of the Company for the nine month period ended December 31, 1999 and
the three and nine month periods ended December 31, 1998, nor are they
indicative of future operating results.
6
<PAGE>
5. SALE-LEASEBACK OF REAL ESTATE
On December 15, 1999 the Company consummated a sale and leaseback
transaction involving its Yorba Linda, California facility. The gross
selling price of the property was $3.2 million, $1.7 million of which was
paid directly to the bank to pay off the balance of the mortgage on the
property. The Company received approximately $1.0 million in cash proceeds,
net of transaction costs, and a $250,000 short term note receivable for the
sale of the property. The proceeds were used to purchase the remaining 20%
of NetGuru in December and for operating purposes. Concurrent with the
sale, the Company entered into a fifteen year operating lease on the
facility. The net book value of the land and building and the related
mortgage have been removed from the Company's balance sheet and the lease
payments will be charged to expense as incurred. The gain on the sale
transaction has been deferred and will be recognized over the period of the
lease as a reduction in lease expense.
6. SOFTWARE REVENUE RECOGNITION
In 1997, the Accounting Standards Executive Committee ("AcSEC") of the
AICPA issued Statement of Position ("SOP") 97-2, SOFTWARE REVENUE
RECOGNITION, which superceded SOP 91-1. SOP 97-2 distinguishes between
significant and insignificant vendor obligations as a basis for recording
revenue with a requirement that each element of a software licensing
arrangement be separately identified and accounted for based on the
relative fair values of each element. The Company adopted SOP 97-2 in the
first quarter of fiscal 1999, the implementation of which resulted in no
material changes to the Company's results of operations. In 1998, the AICPA
issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION,
WITH RESPECT TO CERTAIN TRANSACTIONS, which modifies SOP 97-2 to allow for
use of the residual method of revenue recognition provided that certain
criteria have been met. The Company adopted SOP 98-9 in the first quarter
of fiscal 2000, the implementation of which resulted in no material changes
to the Company's results of operations.
7. SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
In 1998, the AICPA issued SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, which provides guidance
concerning recognition and measurement of costs associated with developing
or acquiring software for internal use. The Company adopted SOP 98-1 in the
first quarter of fiscal 2000, the implementation of which resulted in no
material impact on the Company's results of operations.
8. START-UP ACTIVITIES
In 1998, the AICPA also issued SOP 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES, which provides guidance concerning the costs of start-up
activities including organization costs. For accounting purposes, start-up
activities are defined as one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a
new territory or with a new class of customers, initiating a new process in
an existing facility, or commencing some new operation. The Company adopted
SOP 98-5 in the first quarter of fiscal 2000, the implementation of which
resulted in no material changes to the Company's previous practice and no
material impact on the Company's results of operations.
9. COMPREHENSIVE INCOME (LOSS)
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income
(loss) and its components. The adoption of this statement had no impact on
the Company's reported net (loss)/income or stockholders' equity. SFAS No.
130 requires changes in unrealized gains or losses on the Company's
available-for-sale investments and foreign currency translation
adjustments, which are reported separately in stockholders' equity, to be
included in other comprehensive income (loss). Total comprehensive (loss)
income was ($405,000) and $54,000 for the three months ended December 31,
1999 and 1998, respectively, and was ($891,000) and ($450,000) for the nine
months ended December 31, 1999 and 1998, respectively.
7
<PAGE>
10. STOCK WARRANTS
On December 7, 1999, warrants to purchase 260,000 shares of comon stock, at
an exercise price of $3.00 per share, were exercised. In consideration for
the holder's decision to exercise these warrants for cash rather than via a
cashless exercise, warrants to purchase an additional 260,000 shares of
common stock were issued at an exercise price of $13.44 per share.
11. NET LOSS PER SHARE
In December 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, EARNINGS PER SHARE ("EPS"). SFAS No. 128 replaced the
calculation of primary and fully diluted EPS with basic and diluted EPS.
Unlike primary EPS, basic EPS excludes any dilutive effects of common stock
equivalents, such as options and warrants. Diluted EPS is very similar to
the previously reported fully diluted EPS.
The following table illustrates the computation of basic and diluted net
loss per share (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (418) $ (36) $ (894) $ (350)
Cumulative preferred stock dividends (26) - (34) -
--------------- --------------- --------------- ---------------
Numerator for basic and diluted net
loss per share (444) (36) (928) (350)
Denominator:
Denominator for basic net loss per
share - average number of common
shares outstanding during the period 11,973 11,461 11,678 11,461
Incremental common shares attributable
to exercise of outstanding options - - - -
--------------- --------------- --------------- ---------------
Denominator for diluted net loss per
share 11,973 11,461 11,678 11,461
=============== =============== =============== ===============
Basic net loss per share $ (0.04) $ (0.00) $ (0.08) $ (0.03)
=============== =============== =============== ===============
Diluted net loss per share $ (0.04) $ (0.00) $ (0.08) $ (0.03)
=============== =============== =============== ===============
</TABLE>
Options, warrants, convertible preferred stock and other common stock
equivalents amounting to a weighted average of 2,575,000 and 1,786,000
potential common shares for the three and nine month periods ended December
31, 1999, respectively, and 290,000 and 420,000 potential common shares for
the three and nine month periods ended December 31, 1998, respectively,
were excluded from the computation of diluted EPS because the Company
reported a net loss and, therefore, the effect would be antidilutive. For
the periods ended December 31, 1998 warrants to purchase 260,000 common
shares were also excluded from the computation of diluted EPS as the
exercise price was greater than the average market value of the Company's
stock over those periods.
12. SEGMENT AND GEOGRAPHIC DATA
The Company operates in four significant segments. The Company has
historically derived its revenues principally from sales of its stand-alone
and network-based engineering software products and from sales of software
maintenance contracts relating to these products. With the acquisition of
R-Cube in February 1999, the Company expanded into the $90 billion IT
services industry, providing expertise in data-mining and embedded
technologies to Internet/Intranet design and communications. In April 1999,
the Company launched the first of several e-commerce special interest
portals targeting expatriates of the Asia Pacific region now living
throughout Europe and North America. Finally, the
8
<PAGE>
Company is continuing to develop its presence in providing digital media
services including computer animation. The e-commerce and digital media
services segments have not experienced significant revenues to date and
therefore are not reportable segments for the three and nine month periods
ended December 31, 1999. The following are significant components of
worldwide operations by reportable operating segment:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
NET REVENUE
<S> <C> <C> <C> <C>
IT Services $ 3,359 $ - $ 6,410 $ -
Software sales, maintenance and
technical support 2,215 3,019 6,504 7,437
Other 19 - 47 -
--------------- --------------- --------------- ---------------
Consolidated $ 5,593 $ 3,019 $ 12,961 $ 7,437
=============== =============== =============== ===============
OPERATING (LOSS)/INCOME
IT Services $ 151 $ - $ 593 $ -
Software sales, maintenance and
technical support (416) (10) (807) (450)
Other (295) - (800) -
--------------- --------------- --------------- ---------------
Consolidated $ (560) $ (10) $ (1,014) $ (450)
=============== =============== =============== ===============
</TABLE>
The operating loss reported as "Other" represents costs related to the
development of the e-commerce and digital media services businesses.
The Company's operations are based worldwide through foreign and domestic
subsidiaries and branch offices in the United States, Germany, India, the
United Kingdom, and Asia-Pacific. The following are significant components
of worldwide operations by geographic location:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
NET REVENUE
<S> <C> <C> <C> <C>
United States $ 4,181 $ 1,144 $ 9,073 $ 3,283
The Americas (other than U.S.) 217 334 554 743
Europe 918 932 2,271 2,269
Asia-Pacific 277 609 1,063 1,142
--------------- --------------- --------------- ---------------
Consolidated $ 5,593 $ 3,019 $ 12,961 $ 7,437
=============== =============== =============== ===============
EXPORT SALES
United States $ 447 $ 706 $ 1,129 $ 1,268
=============== =============== =============== ===============
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1999 1998
--------------- ---------------
LONG-LIVED ASSETS
United States $ 8,771 $ 3,395
Europe 569 719
Asia-Pacific 1,507 1,232
--------------- ---------------
Consolidated $ 10,847 $ 5,346
=============== ===============
</TABLE>
9
<PAGE>
13. SUBSEQUENT EVENTS
On January 31, 2000 the Company consummated its acquisition of
e-Destinations, Inc. in a stock for stock purchase. Based in Artesia,
California, e-Destinations is a full service, on-line travel agency with
special emphasis on Asia/Pacific countries. The purchase price for this
acquisition included 60,000 shares of the Company's common stock and
options to purchase an additional 100,000 shares. The services provided by
e-Destinations will be used in connection with the e-commerce segment of
the Company's business and is expected to be integrated under the Company's
city-on-net.com subsidiary. This acquisition was accounted for as a
purchase business combination.
On February 2, 2000 the Company signed a letter of intent to acquire the
internet service provider (ISP) business unit of India-based Interra Global
Limited. The purchase price for this acquisition will be approximately $1.4
million, which will be paid in shares of the Company's common stock. The
acquisition will be consummated in two phases. The first phase is expected
to close by March 31, 2000 and will give the Company a 49% ownership and
management control of the ISP. The second phase is expected to close by May
31, 2000, pending approval of the acquisition by the Indian government, and
will result in the Company purchasing the remaining 51% ownership. The
agreement commits the Company to invest an estimated additional $10 million
for necessary equipment and development of the ISP. It is expected that
$5.4 million of this will be spent during phase one of the acquisition and
the remaining $4.6 million will be spent during phase two. The ISP will be
used in connection with the Company's city-on-net.com subsidiary and the
e-commerce segment of the Company's business and is expected to be
integrated under the Company's city-on-net.com subsidiary.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 as amended and
Section 21E of the Securities Exchange Act of 1934 as amended (the "Exchange
Act"), and the Company intends that such forward-looking statements be subject
to the safe harbors created thereby. The Company may experience significant
fluctuations in future operating results due to a number of factors, including,
among other things, the impact of adverse developments in overseas economies,
the size and timing of customer orders, new or increased competition, delays in
product upgrades and new product introductions, the ability to attract and
retain key technical and management personnel, the ability to penetrate the IT
services and other new markets the Company enters, Year 2000 issues, changes in
market demand, market acceptance of new products, product returns, integration
of acquisitions, the ability to identify and consummate acquisitions and
integrate them successfully, and the ability to meet future capital
requirements. Any of these factors could cause operating results to vary
significantly from prior periods and period-to-period. As a result, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as any indication of future
performance. Fluctuations in the Company's operating results could cause the
price of the Company's common stock to fluctuate substantially.
The information contained in this report is not a complete description of the
Company's business or the risks associated with an investment in the Company's
common stock. Before deciding to buy or maintain a position in the Company's
common stock, you should carefully review and consider the various disclosures
made by the Company in this report and in its other materials filed with the
SEC, including its Annual Report on Form 10-KSB for the fiscal year ended March
31, 1999 (and, in particular, in the "Outlook" section therein) that discusses
the Company's business in greater detail and that also discloses various risks,
uncertainties and other factors that may affect the Company's business, results
of operations or financial condition.
Assumptions relating to the forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions, all of which are difficult or impossible to predict accurately, and
many of which are beyond the control of the Company. In addition, the business
and operations of the Company are subject to significant risks which increase
the uncertainty inherent in the forward-looking statements. In light of this,
the inclusion of forward-looking information should not be regarded as a
representation or guarantee by the Company or any other person that the
objectives or plans of the Company will be achieved.
GENERAL
The Company is a leading provider of technically-sophisticated stand-alone and
network-based engineering software products that provide fully-integrated
easy-to-use design automation and analysis solutions for use by engineering
analysis and design professionals worldwide. The Company's comprehensive line of
Windows-based engineering software products includes STAAD, the Company's
structural analysis and design software, as well as mechanical, civil and
process/piping engineering products. The Company's software products assist
engineers in performing a myriad of mission-critical engineering tasks,
including the analysis and design of industrial, commercial, transportation and
utility structures, pipelines, machinery, automotive and aerospace products, and
survey, contour and digital terrain modeling.
As a result of the acquisitions of NetGuru in September 1999 and R-Cube in
February 1999, the Company has expanded into the $90 billion IT services
industry, providing expertise in data-mining and embedded technologies to
Internet/Intranet design and communications.
11
<PAGE>
The Company is expanding into two additional markets. In April 1999, the Company
announced that it had 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 is also exploring its
potential in providing digital media services including computer animation.
The following discussion and analysis addresses the results of the Company's
operations for the three and nine month periods ended December 31, 1999, as
compared to the Company's results of operations for the three and nine month
periods ended December 31, 1998.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31,
1999 AND 1998
NET REVENUES - Net revenues for the quarter ended December 31, 1999 increased by
$2,574,000 (85.3%) to $5,593,000, as compared to $3,019,000 for the quarter
ended December 31, 1998. For the nine months ended December 31, 1999, revenues
increased by $5,524,000 (74.3%) to $12,961,000 from $7,437,000 for the nine
months ended December 31, 1998. These increases in net revenues were primarily
attributable to the acquisitions of R-Cube and NetGuru. Combined revenue from
these acquisitions were $3,359,000 and $6,410,000 for the three and nine month
periods respectively. This was offset by a decrease in software product sales.
International net revenues as a percentage of total revenues for the quarter
ended December 31, 1999 decreased to 21.4%, from 51.0% for the quarter ended
December 31, 1998. For the nine months ended December 31, 1999, international
revenues decreased to 25.7%, from 45.9% for the nine months ended December 31,
1998. The decrease in international net revenues as a percentage of total net
revenues was primarily due to the expansion into the IT services industry.
Currently, all of the Company's IT services revenue is generated within the
United States, thus this segment's revenues increase the percentage of
consolidated net revenues generated domestically. The Company's domestic
revenues are denominated in U.S. Dollars, while revenues and expenses for the
Company's foreign subsidiaries and sales offices are usually recorded in the
applicable foreign currency and translated into U.S. Dollars. There were no
foreign exchange gains or losses that were material to the Company's financial
results during the three months and nine months ended December 31, 1999 and
1998.
GROSS PROFIT - Gross profit increased by $219,000 (7.9%) to $2,974,000 in the
quarter ended December 31, 1999 as compared to $2,755,000 for the quarter ended
December 31, 1998. Gross profit increased by $1,123,000 (16.9%) to $7,769,000
for the nine months ended December 31, 1999 as compared to $6,646,000 for the
nine months ended December 31, 1998. These increases were primarily due to the
expansion into the IT services industry but were partially offset by losses
incurred due to lower software product sales as discussed above Gross profit for
IT services was $987,000 for the quarter ended December 31, 1999 and $1,921,000
for the nine month period. Gross margin decreased to 53.2% of total net revenues
in the quarter ended December 31, 1999 as compared to 91.3% for the quarter
ended December 31, 1998, and decreased to 59.9% for the nine months ended
December 31, 1999 as compared to 89.4% of the corresponding period last year.
This change is due to the growth of the IT services segment, for which the cost
of generating revenues is significantly higher than for sales of software
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Selling, general and
administrative ("SG&A") expense increased by $773,000 (35.7%) to $2,940,000 for
the quarter ended December 31, 1999 as compared to $2,167,000 for the quarter
ended December 31, 1998, and decreased as a percentage of total net revenues to
52.6% from 71.8% in the comparable quarter of the prior year. Selling, general
and administrative expense increased by $1,636,000 (31.0%) to $6,912,000 in the
nine months ended December 31, 1999 as compared to $5,276,000 for the nine
months ended December 31, 1998, and decreased as a percentage of total net
revenues to 53.3% from 70.9% in the comparable period of the prior year. The
majority of the increase in expenses is due to the expansion into IT services
upon the acquisition of R-Cube and NetGuru. SG&A expenses for the IT services
segment totaled $837,000 for the current quarter and $1,328,000 for the nine
months ended December 31, 1999, which includes increases due to goodwill
amortization resultant from the recent acquisitions. The remaining increase for
both periods was largely experienced in India and was related to the development
of the e-commerce and digital media services businesses.
12
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSE - Research and development expense decreased by
$4,000 to $594,000 in the quarter ended December 31, 1999 as compared to
$598,000 for the quarter ended December 31, 1998, and decreased as a percentage
of total net revenues to 10.6% from 19.8% in the comparable quarter of the prior
year. Research and development expense increased by $51,000 to $1,871,000 in the
nine months ended December 31, 1999 as compared to $1,820,000 for the nine
months ended December 31, 1998, but decreased as a percentage of net revenues to
14.4% from 24.5% in the comparable nine months of the prior year. The decrease
in research and development expense as a percentage of total net revenues is
primarily due to the addition of the IT services segment. The results for both
the three and nine month periods ended December 31, 1999 include added net
revenues for IT services with relatively little change in research and
development expense.
OTHER (INCOME) EXPENSE - Net interest expense increased by $110,000 to $124,000
in the quarter ended December 31, 1999 as compared to $14,000 for the quarter
ended December 31, 1998. Net interest expense increased by $312,000 to $365,000
in the nine months ended December 31, 1999 as compared to $53,000 for the nine
months ended December 31, 1998. The increase in both periods is primarily due to
the increase in long-term debt used to finance the acquisition of R-Cube.
INCOME TAXES - The Company had income tax benefits of $251,000 and $468,000 for
the three months and nine months ended December 31, 1999, respectively, as
compared to income tax provision of $1,000 and income tax benefit of $143,000
for the three months and nine months ended December 31, 1998, respectively. This
increase in income tax benefit is primarily due to an increase in pretax loss in
the United States and Singapore for the three months and nine months ended
December 31, 1999 for which the related tax benefits were recognized. Management
believes that it is more likely than not that the net operating loss can be
utilized.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently finances its operations (including capital expenditures)
primarily through its existing cash and cash equivalent balances.
The Company's principal sources of liquidity at December 31, 1999 consisted of
$2,463,000 of cash and cash equivalents. Cash and cash equivalents increased by
$452,000 during the nine months ended December 31, 1999. The increase was
largely due to an increase in cash provided by financing activities offset by
increases in cash used in operations and investing.
This increase in cash provided by financing activities was the result of many
factors. A large portion of the increase was $2.6 million obtained through the
issuance of 371,429 shares of 5% convertible preferred stock. These proceeds
were used to fund a portion of the purchase price of NetGuru. Another $986,000
was received through issuance of shares of the Company's common stock as stock
options and stock warrants were exercised by holders during the period.
Additional increases resulted from increased borrowings in India as additional
funds were needed for the continued development of the e-commerce and digital
media services businesses. These increases were partially offset by repayment of
outstanding debt and capital lease obligations.
The increase in cash used in operations is primarily the result of the increased
net loss for the period as compared to the prior year. Additional decreases
resulted from general decreases in current liabilities and an increase in
prepaid and other assets.
The increase in cash used in financing activities is largely attributable to the
acquisition of NetGuru. Payments to acquire companies, net of cash acquired,
accounted for approximately $3.2 million of the change. Another $518,000 was
spent on the purchase of property, plant and equipment. These changes were
partially offset by cash proceeds of $2.7 million, net of transaction costs,
resulting from the sale leaseback transaction involving the Company's Yorba
Linda facility in December 1999.
13
<PAGE>
Management believes that its current cash and cash equivalents balances will
provide adequate working capital to fund the Company's operations at currently
anticipated levels through December 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.
IMPACT OF YEAR 2000
The Company has not experienced any significant problems as a result of the
arrival of the Year 2000. Although no significant problems have materialized to
date, the Company will continue to monitor its systems (both IT and non-IT)
throughout the Year 2000, including the proper recognition of the leap year. The
actual cost of remediation was approximately $250,000, most of which represents
lease payments for software that will be paid ratably through 2002.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The
provisions of the statement require the recognition of all derivatives as either
assets or liabilities in the consolidated balance sheet and the measurement of
those instruments at fair value. The accounting for the changes in fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. In June, 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133 - AN AMENDMENT OF FASB STATEMENT NO. 133. This
statement delays the required implementation of SFAS No. 133 by one year to
fiscal years beginning after June 15, 2000. The Company is required to adopt the
statement in the first quarter of fiscal year 2002. The Company is currently
studying the impact of this pronouncement on its consolidated financial
statements but has not yet determined the impact on its results of operations.
14
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On January 21, 2000, the Company announced that its Board of
Directors had approved a 2 for 1 split of the Company's common
shares. This split was affected in the form of a stock dividend
paid on February 7, 2000. All share and per share data relative to
the outstanding common shares included in this report has been
restated to reflect the effects of the stock split as if it had
occurred at the beginning of the periods presented.
On September 14, 1999, the Company issued an aggregate of 371,429
shares of its Series B 5% Convertible Preferred Stock and warrants
to purchase an additional 100,000 shares of Common Stock to two
institutional investors for a total of $2,600,000. The proceeds,
net of commissions and fees of $60,000, were used to pay the cash
portion of the purchase of 80% of the outstanding capital stock of
NetGuru Systems, Inc. and NetGuru Consulting, Inc. (collectively,
"NetGuru"). The transaction was exempt under Section 4(2) of the
Securities Act of 1933.
The Series B 5% Convertible Preferred Stock was convertible into,
and the warrants are exercisable for, the Company's common stock at
a price determined by a formula tied to the current market price of
the Company's common stock, and depends on the date of conversion
or exercise. The warrants contain a "cashless exercise" feature
whereby the warrant holder may use the spread between the exercise
price and the current market price to pay the exercise price. The
terms of the conversion formula are more particularly described in
the Company's Form S-3 registration statement filed on October 13,
1999. Subsequent to December 31, 1999 all outstanding shares of the
Series B Preferred stock were converted into 578,372 shares of
common stock. Preferred dividends accrued through the conversion
date were paid in a combination of 1,532 additional common shares
and approximately $1,800 cash.
Also on September 14, 1999, the Company issued 341,270 shares of
common stock to Bharat Manglani as the non-cash portion of the
purchase of 80% of NetGuru. The transaction was exempt under
Section 4(2) of the Securities Act of 1933, and was more
particularly described in the Company's report on Form 8-K filed on
September 29, 1999, and amended on October 15, 1999, and November
15, 1999.
On December 7, 1999, warrants to purchase 260,000 shares of common
stock at an exercise price of $3.00 per share were exercised. In
consideration for the holder's decision to exercise these warrants
for cash rather than via a cashless exercise, warrants to purchase
an additional 260,000 shares of common stock were issued at an
exercise price of $13.44 per share.
15
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on September 29, 1999,
reporting on Item 2 with respect to the acquisition of
NetGuru. On October 15, 1999, the Company filed a Form
8-K/A No. 1 to provide an additional exhibit, and on
November 15, 1999, the Company filed a Form 8-K/A No. 2 to
provide financial statements for NetGuru.
16
<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 14, 2000
RESEARCH ENGINEERS, INC.
By: /S/ WAYNE BLAIR
----------------------------------
Wayne Blair
Senior Vice President of Finance,
Chief Financial Officer, Secretary
and Treasurer (principal financial
and accounting officer)
17
<PAGE>
Exhibit Index
-------------
Exhibit 27.1 Financial Data Schedule
Exhibit 27.2 Restated Financial Data Schedule
18
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