<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 2-7670
ENGINEERING ANIMATION, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 42-1323712
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2321 North Loop Drive, Ames, Iowa 50010
(Address of principal executive offices and zip code)
(515) 296-9908
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.
-----
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1997 was approximately $52,869,000. The number of
outstanding shares of Registrant's Common Stock as of that date was 4,701,205.
Documents Incorporated by Reference:
Portions of the Proxy Statement for the annual stockholders' meeting to be held
on April 30, 1997 are incorporated by reference into Part III.
________________________________________________________________________________
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PART I
Item 1. Business
EAI specializes in developing and applying 3D visualization technology and
products that address the productivity, communication, education and
entertainment needs of its clients. The Company utilizes its core technical
competencies in high speed real time graphics, CAD/CAE/CAM interfaces,
distributed databases and Internet/intranet communications to provide solutions
in three interrelated product lines: 3D visualization software, interactive
software and custom animation. The Company uses its proprietary 3D visualization
technology and extensive library of computer generated animation assets to
develop products that allow customers to reduce time to market, lower product
development costs and obtain realistic, high quality 3D animation at a
reasonable price within a short time frame.
The Company offers three product lines that benefit from and build upon
each other:
3D visualization software products. EAI develops, produces and sells a
suite of 3D visualization software products, referred to as VisProducts, that
enable users to perform sophisticated product visualization, digital prototyping
and engineering design and analysis tasks. EAI's multi-platform products
interface seamlessly with most popular CAD/CAE/CAM environments, operate on all
major workstation platforms and allow access of visualizations with personal
computers, thereby allowing customers to VisProducts with their existing
hardware. When deployed on an enterprise-wide basis, the Company's VisProducts
enable the creation of a collaborative visual environment that allows functional
groups throughout the organization including manufacturing, purchasing,
marketing, sales and support to more easily visualize products, see the effects
of changes and communicate in real time. This collaborative approach can help
reduce the total time it takes for products to move from initial concept through
final manufacturing, by identifying problems early in the design cycle.
Interactive software products. EAI develops and produces 3D interactive
software products for distribution and marketing partners in both academic and
consumer markets. From its success in products for the medical education market,
EAI has expanded its line of interactive software products to include products
for the broader educational and consumer markets. EAI under contracts with Time
Warner Inc. ("Time Warner"), The Times Mirror Company ("Times Mirror"),
International Business Machines Corporation ("IBM"), BMG Interactive, Elsevier
Science Inc., a subsidiary of Reed Elsevier Inc. ("Elsevier Science"), Hoechst
Marion Roussel North America, Houghton Mifflin Company, Smithsonian Institution
Inc., MacMillan/McGraw-Hill School Publishing Company ("MacMillan/McGraw-Hill"),
Williams & Wilkins Book Publishing, a subsidiary of MacMillian/McGraw-Hill
("Williams & Wilkins") and William C. Brown Publishers.
Custom animation products. The Company develops, produces and sells custom
3D computer-generated animated movies on videotape, videodisc and CD-ROM to the
biomedical, corporate communications, litigation and entertainment markets. The
Company's custom animation products are used to educate students, medical
professionals and trial juries about complex issues. In addition, the Company
has recently created custom animations and special effects for use in
entertainment projects for such producers as The Discovery Channel and the
National Geographic Society ("National Geographic"). In 1996, EAI produced more
than 4,000 minutes of 3D animation in over 150 projects for customers.
Industry Trends
Three-dimensional visualization technology and computer-generated 3D
animation are changing the way information is conveyed, shared and manipulated.
In the fields of engineering, manufacturing, interactive multimedia, education,
industrial design, corporate communications and entertainment, 3D visualization
and animation have become increasingly popular for various reasons:
Natural preference for 3D visualization. Approximately 50% of the human
brain is devoted to the analysis of information conveyed visually. The highly
realistic and dynamic nature of 3D visualization enables powerful communication
by activating the visually intensive cognitive processes of the brain and
simultaneously permits
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versatility through interactive communication. Visualization needs have
traditionally been met with a variety of 2D representations, physical 3D models
and computer-generated 3D wire frame visualizations. Industry and business are
now demanding more detailed and complete 3D animations that can be manipulated
in real time by the viewer.
Proliferation of computing capabilities. The increasing power and improving
performance of microprocessors in both workstations and personal computers have
facilitated the increased use of computers and computer generated 3D animation.
In 1995, an estimated 20.9 million multimedia personal computers were shipped
worldwide, a significant increase from an estimated 10.3 million units in 1994.
Multimedia personal computers are expected to increase approximately 17% per
annum to 47 million units by year 2000. Furthermore, the worldwide installed
base of workstations increased by 18% from 1995 to an estimated 1.5 million
units in 1996. Worldwide mechanical CAD/CAE/CAM software sales were
approximately $2.6 billion in 1995 and the market is expected to increase at a
compound annual growth rate of 15%. Concurrently, this growth has lead to an
increase in demand for more advanced and higher quality software products.
Affordable and high quality animations. Continuing technological advances
in both hardware and software have enabled animation producers to create high
quality animations within a shorter period of time, resulting in much lower
costs than in the past. The markets for 3D animation products are expanding as
high-quality animation is becoming more affordable. For example, companies
engaged in the design and manufacture of products are beginning to demand the
capability to access high quality dynamic digital images of products throughout
all areas of the enterprise, including product development, manufacturing,
support and sales and marketing.
Growth in Internet/Intranet Usage. Use of the Internet and corporate
intranets has increasingly become dominated by a broad range of commercial
organizations and individuals who utilize these platforms to communicate
electronically, to distribute and retrieve information and to conduct commerce.
According to published estimates, the number of Internet/intranet users will be
approximately 200 million by the end of 1999, compared to approximately 56
million by the end of 1995. The rapid commercialization of the Internet and
corporate intranets has resulted in a commensurate rise in the availability and
development of software for these platforms.
3D Visualization Software Products
Manufacturers' need to accelerate time to market. Businesses that develop,
manufacture and market products are competing globally on cost, time to market,
quality, service, innovation and flexibility. Competitive pressures have forced
companies to seek technological solutions to accelerate product development,
from the first stage of conceptual design through manufacturing of the final
product. Meanwhile, mechanical products have become more complex, and the design
of those products has become more difficult. In response to the need to
accelerate time to market, manufacturing companies increasingly rely on
computerization in the design process, including: computer-aided design
(''CAD''), computer-aided engineering (''CAE'') and computer-aided manufacturing
(''CAM''). Design teams, however, continue to make extensive use of expensive
and time-consuming physical prototypes to represent designs interpreted from CAD
schematics. Physical prototypes are beginning to be replaced by 2D and 3D images
generated by 3D visualization and digital prototyping products.
The majority of these products fail to bring design teams together because
the products are slow in translating data into images, and they render images of
insufficient quality. These limitations increase design time and inhibit design
teams from working concurrently to develop and revise product designs.
Therefore, the Company believes that there is strong demand in the design and
engineering market for visualization software that can allow an enterprise-wide
team-based approach in the design process, combining resources from engineering,
manufacturing, sales and support. This requires software that can effectively
interface with existing CAD/CAE/CAM software to quickly generate highly
detailed, accurate 3D images and facilitate real-time collaboration across
multiple departments.
Interactive Software Products and Custom Animation Products
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Growing opportunity for providers of multimedia and 3D software products.
The increase in the installed base of multimedia personal computers has created
an attractive opportunity for software producers. Consumers are increasing their
use of the Internet and other on-line services and of interactive software
products and animated software for reference, educational and entertainment
purposes and to manage personal and business affairs. As a result of this
increase in use, worldwide multimedia software revenues rose to an $6 billion
units in 1995, with CD-ROMs representing approximately 21% of revenues.
Growth in educational software. Educational software is transforming the
way children and adults learn, providing curriculum-based programs used for
skill building as well as products that increase other capabilities, such as
imagination, innovation and creativity. Educational and edutainment software for
multimedia personal computers is expected to be the fastest growing category of
interactive software. In addition, educational publishers are increasingly
enhancing traditional printed textbooks by packaging them with interactive
software as a means of increasing sales.
Increasing Reliance on Content Providers. The highly competitive nature of
the multimedia software publishing industry is forcing publishers to increase
the amount of 3D content in their products. Publishers typically do not possess
the design skills, 3D animation tools or library of computerized animation
assets to produce high quality 3D content. As a result, publishers are
increasingly relying on third party developers to provide this content for their
multimedia software products. While the publishers retain the overall
distribution rights to the multimedia software products, the content provider is
generally hired to produce the content for a fixed fee and then receives a
royalty on sales of the product. This allows the content provider to share in
the success of the product, while limiting the downside risk.
Demand for better animation and increased visualization. Customers are
continually seeking better custom animation and interactive software products to
enhance visualization and expand understanding of subject materials. Customers,
especially in academic and legal fields, are increasingly depending on enhanced
visual media for more detail and interactivity to communicate information. While
other animation and interactive software producers offer visualization, the
Company believes that most 3D animation and interactive software products
offered by competitors require lengthy production schedules and do not contain a
significant amount of high quality 3D animation.
Solutions
EAI develops, produces and sells 3D animation products that address
visualization, animation and graphic needs of its customers in commercial
markets. The Company utilizes its core competencies in high speed real time
graphics, distributed databases and Internet/intranet communication to provide
solutions in the 3D visualization software, interactive software and custom
animation markets. The Company has developed and enhanced its proprietary 3D
visualization software, built an extensive library of 3D animation assets and
strengthened its core team of software development engineers, thereby enabling
it to generate realistic, high quality 3D animations at a reasonable price
within a short time frame.
3D Visualization Software Products
EAI offers a broad range of 3D visualization software products that enable
users to perform sophisticated design and analysis tasks. Using the Company's
digital prototyping and animation products, users can visualize, analyze and
manipulate highly realistic, extremely complex computer-generated models. The
Company's VisProducts suite includes applications supporting digital prototyping
(VisFly and VisMockUp), animation (VisLab) and collaborative communication of
visualizations (NetFly). When integrated to create a collaborative visual
environment, the Company's products enable design teams to identify design
problems early in the product development process, thereby significantly
shortening time to market and reducing manufacturing costs. EAI's
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software relies on unique rendering algorithms that maximize the use of computer
hardware. The Company's software products interface seamlessly with most popular
CAD/CAE/CAM software, operate on all major brands of engineering workstations
and provide the ability to access visualizations with personal computers.
Interactive Software and Custom Animation Products
EAI produces highly realistic 3D animation for use in interactive software
products for academic and consumer markets and animated movies for business. The
Company's interactive software and custom animation products provide ready
access and ease of use while simultaneously increasing the speed, quality,
detail and accuracy of 3D animations. One key attribute of the Company's
solution is EAI's reliance on its proprietary animation software products to
improve the speed and capability of its custom animation and interactive
software products. For example, the Company's VisLab animation software tool is
used in the production of interactive software and custom animation products,
enabling cost effective and fast production and can be enhanced by the Company
to facilitate the design of these complex products. In addition, the Company
currently has over 400 gigabytes of animation assets stored in digital format
and a library of videodiscs containing over 5,400 minutes of EAI-produced
animation, which provides a ready source of content for producing interactive
software products and animated movies for business. Finally, the Company's
databases include the musculoskeletal portion of the EAI Virtual Human project
and data from the National Library of Medicine Visible Human project, as well as
other content created for the Company's custom animation projects. These
attributes permit the Company to offer custom animation products and interactive
software products on a fixed price basis, a key competitive advantage.
Strategy
The Company's objective is to be the leader in 3D visualization and
animation. Key elements of the Company's strategy include the following:
Increase penetration of the market for 3D visualization and digital
prototyping products. EAI plans to continue to enhance its suite of 3D
visualization software products to provide clients with a complete collaborative
visual environment. In addition, the Company continues its efforts to offer 3D
visualization software that is compatible with not only all major CAD/CAE/CAM
software, but that can also operate on all major CAD/CAE/CAM workstations and
access visualizations with personal computers used in areas beyond design and
engineering, such as manufacturing, sales and support. EAI plans to increase its
market penetration as it focuses on establishing site license relationships with
major manufacturers that are already using individual copies of the Company's 3D
visualization software products. The Company is also working to establish site
license relationships with additional major manufacturers and suppliers in the
automotive, aerospace, heavy equipment and other industries that are not current
users of its products.
Exploit technological assets. The Company's three product lines benefit
from and build upon each other. The Company's VisProducts are used in the
production of EAI's custom animation and interactive software products and is
sold to companies that need to create 3D animations from CAD models. For
example, VisLab can be enhanced or modified by the Company to accommodate the
design of complex custom animations or interactive software products. Such
enhancements or modifications may be added to the commercial version of VisLab
as new features or improvements. In turn, because VisLab and other EAI products
are used continuously by EAI employees, the Company does not have to rely on
external beta testing for its animation software products and is able to
distribute well-tested products to its customers. EAI intends to exploit these
synergies as the Company develops new products and moves into new markets.
Expand and leverage proprietary assets. EAI intends to continue to build
its proprietary databases of 3D data to deliver high quality animations at a
reasonable price within a short time frame. As the Company's proprietary library
of animation assets continues to grow, EAI intends to increasingly use these
resources in the production of
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new custom animation and interactive software products. By utilizing its
existing databases and reusing its animation assets, the Company can reduce the
time and cost required to complete projects.
Build International Presence. The Company believes that there are
significant opportunities to expand its business in Europe and Asia,
particularly with respect to sales of 3D visualization software. EAI intends to
continue to develop a larger sales and marketing presence in Europe and Asia
through the establishment of additional sales offices and recruitment of
additional distributors. In addition, the Company intends to expand its
international presence by leveraging its existing relationships with the
domestic units of multinational corporations to develop sales to their European
and Asian business units.
Leverage strategic relationships. EAI intends to maintain and expand its
strategic relationships, as well as cultivate new ones, in order to expand the
distribution of the Company's products. The Company has relationships with
Hewlett-Packard Company ("Hewlett-Packard") and Structural Dynamics Research
Corp. ("SDRC"), relating to the development and marketing of EAI's 3D
visualization software products. In addition, EAI has developed products for
Times Mirror, Time Warner, IBM Consumer Division, Elsevier Science and Williams
& Wilkins .These relationships provide the Company with development funding and
marketing and distribution. By leveraging such strategic relationships, the
Company believes that it can enhance its ability to develop new products and
expand its potential markets.
Pursue additional opportunities to market interactive software products.
EAI plans to continue to capitalize on its core 3D visualization, interactive
and Internet technologies and its library of animation assets to provide high
quality 3D interactive software products to the educational and consumer markets
as well as new markets such as games, entertainment and engineering. For
instance, the Company has leveraged its expertise in human anatomy to develop a
number of interactive software products for the medical and academic markets.
The Company intends to continue to pursue new opportunities for interactive
software products by developing content for use in software products published
and distributed by third parties.
Employ a highly educated staff from multiple disciplines. EAI employs
highly educated professionals, including 26 who hold doctoral degrees and an
additional 51 who hold master's degrees. The Company differentiates its products
through scientifically precise and detailed visualization created by artists and
in-house science, engineering and medical professionals.
3D Visualization Software Products
EAI offers a broad range of 3D visualization software products that enable
users to perform sophisticated design and analysis tasks. The Company's
VisProducts suite includes applications supporting digital prototyping (VisFly
and VisMockUp), animation (VisLab) and collaborative communication of
visualizations (NetFly). Using the Company's digital prototyping and animation
products, users can visualize, analyze and manipulate highly realistic,
extremely complex computer-generated models. EAI's visualization products
operate within CAD/CAE/CAM environments and include seamless interfaces to
I-DEAS Master Series, Pro/Engineer, Unigraphics, CATIA and SolidDesigner
software and on a wide variety of hardware platforms such as Hewlett-Packard,
Silicon Graphics, Inc. ("SGI"), Sun Microsystems and IBM. The Company is
continually upgrading and developing newer and more advanced versions of its 3D
visualization software products.
The Company's 3D visualization software products permit the creation of a
collaborative visual environment, which enables design teams to identify design
problems early in the product development process, thereby significantly
shortening time-to-market and reducing manufacturing costs. Ford Motor Company
("Ford") selected EAI's VisProducts suite as a key component of Ford's global
drive to reduce time to market and increase quality. Other customers of EAI's 3D
visualization software products include Ford, 3M, Abbott Laboratories,
AlliedSignal Inc., The Boeing Company, Case Corporation, Caterpillar Inc.,
General Dynamics Corporation, Honda Motor Co., Ltd, ITT Automotive, Inc.,
Johnson & Johnson, Lockheed Martin Corporation, Mascotech, Inc., Motorola, Inc.,
Sandia
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National Labs, Sony Corporation, Toshiba Corporation, Toyota Motor Corporation
and Westinghouse Electric Corporation.
The Company's VisProducts include the following:
VisMockUp is a powerful new digital prototyping software product that
combines 3D visualization technology with a number of tools designed to analyze
an entire assembly, including: interference and collision detection, proximity
and attribute filtering and measurement tools. By enabling users to identify and
eliminate design flaws early in the development cycle, VisMockUp significantly
reduces the costs of product development. VisMockUp includes In addition,
VisMockUp provides users with a range of collaboration tools that take benefit
from corporate intranets.
VisFly is a high performance engineering visualization tool that allows
interactive real time viewing of complex CAD/CAE/CAM designs in real time and
lets them visually "fly though" large models to view assemblies and components
in detail. VisFly was chosen by Industry Week Magazine as one of 25 products to
receive its 1996 Technology and Innovation Award.
NetFly is an intranet connection that takes the advantages of VisFly and
makes the process accessible to entire design teams. NetFly's ability to
interact with corporate intranets, product data management and database systems
can shorten design cycles and reduce costs while also increasing the overall
quality of the final design. Using NetFly, engineers can interact with VisFly
models across a corporate intranet and communicate about specific design issues,
enhancing the concurrent engineering process. NetFly also allows non-VisFly
users to participate directly in the design review process regardless of the
computer platform they use.
VisLab uses proprietary advanced rendering technology to produce 3D
animations from CAD/CAE/CAM models at unprecedented speeds. VisLab integrates
CAD/CAE/CAM, kinematics and analysis data within a single visual environment.
Using unique hardware based rendering, users can transform complex, technical
information into accurate, clear, visually accessible computer animations in a
matter of minutes or hours, saving valuable time. These animations are used in
design reviews, product training and concept presentations.
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The following table describes the Company's 3D visualization software products:
<TABLE>
<CAPTION>
VisProducts Primary Market Product Description
- - ----------- -------------- -------------------
<S> <C> <C>
VisMockUp Engineering design and Enterprise-wide product
analysis visualization and digital
prototyping to enhance
concurrent engineering
VisFly Engineering design and Provides the capability
analysis of real time
visualization or ''fly
through'' of complex
CAD/CAE/CAM designs to
shorten the design cycle
process.
NetFly Engineering design and Enables VisFly to operate
analysis across corporate
intranets and manage
product design data.
VisLab Engineering design, Allows fast and easy
analysis and animation animation of 3D
CAD/CAE/CAM designs.
VisModel Engineering design Permits viewing and
editing of 3D polygonal
models.
Particle Lab Module Engineering animation Allows animation and
simulation of rain, snow,
fire, smoke, explosions,
fluid flow, star galaxies
and other natural
phenomena.
FEA Visualizer Module Engineering design and Visualization of results
analysis from third party analysis
packages.
Seamless I-DEAS Master Engineering design and Provides a fast and easy
Series Interface Module analysis transfer of SDRC I-DEAS
Master Series to VisLab
and VisFly.
Seamless Pro/ENGINEER Engineering design and Provides a fast and easy
Interface Module analysis transfer of Parametric
Technology Corporation's
Pro/ENGINEER to VisLab
and VisFly.
Seamless Unigraphics Engineering design and Provides a fast and easy
Interface analysis transfer of Electronic
Data Systems
Corporation's Unigraphics
to VisLab and VisFly.
Seamless CATIA Interface Engineering design and Provides a fast and easy
analysis transfer of Dassault
Systemes of America
Corp.'s CATIA to VisLab
and VisFly.
RenderMan Interface Engineering animation Provides interface to
Module Pixar's RenderMan product
to create photorealistic
images of CAD/CAE/CAM
models.
</TABLE>
The Company sells upgrades to each of its products as they become available
and provides service support to customers when assistance is required. The
Company has found that its rigorous testing and continual use of its VisProducts
in its own facilities enables it to distribute well-tested products to its
customers.
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From time to time, the Company sells hardware equipment along with its 3D
visualization software products as an accommodation to its customers. To date,
these sales of hardware equipment have not been material.
Interactive Software Products
The Company develops high quality 3D interactive software products that
exploit the visualization capabilities of multimedia personal computers. The
Company delivers its interactive software products on CD-ROMs for use on the PC
or Macintosh (''Mac''), through the Internet and through other media and in
other formats for use on any multimedia system. These interactive software
products combine 3D technology, Internet communication, text, animated color
graphic images, music and digitized speech into educational and information
based programs. Due to high production costs, interactive CD-ROM software
products traditionally have provided only limited 3D animations. By utilizing
the Company's proprietary technology, databases of anatomical and engineering
data and library of animation assets, EAI can reduce the time and cost required
to produce interactive software products containing extensive 3D animations.
In addition, the application of EAI's proprietary visualization software,
including 3D Viewer, allows 3D animations generated on high powered workstations
to be viewed and manipulated on the PC and Mac. Using 3D Viewer, a user can
quickly view dynamic 3D objects from any angle, zoom in and out and cycle
through different layers of an object. This software also allows the user to
view detailed labeling of objects from any perspective, which is crucial for the
development of educational projects.
The following table identifies interactive software products in
distribution and selected products under development:
<TABLE>
<CAPTION>
EAI Product Primary Market Concept Project Status Publisher
- - ----------- -------------- ------- -------------- ---------
<S> <C> <C> <C> <C>
The Magic 3D Coloring Book Children's creativity Crayola crayons used to "color" Distribution IBM Multimedia
market line drawings and create 3D
images
The Dynamic Human Anatomy & physiology Illustration of difficult Distribution William C. Brown
undergraduate concepts in function and Publishers
education motion of human body
The Dissectable Human Higher education Reconstruction of entire human Distribution Mosby-Year Book, Inc.
body and each major system
CardioViewer 3D Higher education Detailed visualization of Distribution Mosby-Year Book, Inc.
the human heart
Pompeii Website Elementary and secondary Interactive field trip through Distribution Harcourt Brace & Company
education ancient city of Pompeii
Animation in the Courtroom Legal Interactive resource material Distribution American Bar Association
for legal education
Encyclopedia of Higher education Anatomy Development Elsevier Science
Neuroscience
The Human Brain Atlas Higher education Detailed visualization of the Development Elsevier Science
human brain
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
The Dynamic Human II Anatomy & physiology Upgrade of The Dynamic Human Development William C. Brown
undergraduate Publishers
education
Electrocardiography Medical education Interactive instruction on use Development Williams & Wilkins
of electrocardiography
Eclipse Multiplayer Internet game Outer space action Development Sirtech Software Inc.
3D Golf Multiplayer Internet game Interactive 3D golf game Development BMG Interactive
and console game
</TABLE>
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Custom Animation Products
EAI develops, produces and sells custom 3D computer generated animations
offering customers high quality 3D graphics and rapid turnaround within fixed
customer budgets. Utilizing the Company's proprietary animation technology, EAI
is able to produce highly detailed, realistic 3D animation that follow the laws
of physics. The Company's proprietary anatomical and engineering databases and
staff of highly skilled professionals with advanced degrees in science, medicine
and the fine arts enable EAI to produce detailed and scientifically accurate
animations. The Company is able to reduce the time and, therefore, the cost
required to create computer generated animations through the use of its
proprietary rendering technology, which is considerably faster than competing
technology, and through the reuse of animation assets from its vast library.
EAI's custom animation products are delivered on videotape, videodisc and CD-ROM
and in digital computer file form, depending on customer requirements. Because
the Company has the ability to deliver these products in a variety of formats,
customers are not limited to any specific platform.
In 1996, the Company produced more than 4,000 minutes of computer animated
movies in over 150 projects for clients in a wide range of markets, including
biomedical, corporate communications, litigation and entertainment markets.
EAI's animations typically range from $25,000 to $350,000 in price and from
three to 30 minutes in length. Customers of EAI's custom animation products have
included 3M, Abbott Laboratories, Conoco Inc., Deere & Company, Glaxo Wellcome
PLC, Merck & Co., Inc., The Discovery Channel, National Geographic and most of
the major automotive manufacturers, including General Motors Corporation, Ford,
Chrysler Corporation, Toyota Motor Corporation, Mitsubishi Corporation, Nissan
Motor Corporation, Ltd., Isuzu Motors Limited, Subaru of America, Inc.,
Volkswagen AG, Suzuki Motor Corporation and Freightliner Corp.
The Company has recently supplied custom animations for two television
productions. In February 1997, The Discovery Channel's Eco Challenge cable
television special made use of the Company's custom animations to illustrate the
challenges posed to competitors in the Eco Challenge by the environment of the
Pacific Northwest. In March 1997, the National Broadcasting Co., Inc. ("NBC")
aired a National Geographic television special on asteroids, entitled
"Asteroids, Deadly Impact," that used EAI custom animations to depict the
results of an asteroid impact on the Earth.
Marketing and Distribution
EAI's marketing and distribution strategy varies among its three product
lines. The Company currently markets and sells its 3D visualization software
products through a direct sales force in North America and through a distributor
in Europe and Japan. The Company also relies on certain original equipment
manufacturers (''OEMs'') and CAD/CAE/CAM software providers to supplement the
direct sales process. For marketing and distributing interactive software
products, the Company develops relationships with leading publishers who have
established marketing and distribution systems. Custom animation products are
sold through a direct sales force that has specific functional expertise in the
biomedical, corporate communications, litigation and entertainment markets.
3D Visualization Software Products
EAI sells its 3D visualization software products through a variety of
channels including OEMs, distributors and direct sales representatives. For
instance, the Company has a relationship with Hewlett-Packard under which EAI
has developed software programs for Hewlett-Packard computers and participated
in joint marketing programs with Hewlett-Packard. In addition, EAI entered into
an agreement with SDRC in December 1995 pursuant to which SDRC will work with
EAI to market EAI's products and will pay EAI royalties for VisProducts that
SDRC sells.
EAI employs sales and marketing professionals who directly sell its
visualization software products to end users in the United States and Europe and
utilizes distributors in the United States, Europe and Asia. The Company intends
to increase its investment in the expansion of its sales and marketing
operations in Europe and Asia. EAI currently
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maintains a sales office in the Netherlands and intends to open additional sales
offices in Europe and Asia over the next two years. In addition, the Company
intends to increase its presence in Asia by pursuing additional distributors for
its products. While the Company believes that there is considerable opportunity
to sell its 3D visualization software products in Europe and Asia, there can be
no assurance that the additional investment in sale and marketing in Europe and
Asia will lead to increased sales or that any such sales will be profitable to
the Company. See "Risk Factors - Management of Growth."
Customers purchasing the Company's visualization software products have the
option of contracting with EAI for product maintenance and support.
Approximately 90% of the Company's software customers select this service. The
Company's visualization software products are sold pursuant to per workstation
license agreements or site license agreements.
Interactive Software Products
EAI relies on certain publishers with established marketing and
distribution channels to market and distribute its interactive software
products. Typically, the Company utilizes its core competencies in 3D
visualization and its proprietary animation assets to develop proposals for new
interactive software products. These products are then marketed to publishers.
If a publisher agrees to publish a proposed product, the publisher typically
pays the Company a development fee to produce a marketable product. Following
the publication of the product, the Company typically receives a royalty based
on a percentage of the publisher's sales of the product. Examples of this
arrangement have been the Dynamic Human, which was published and distributed by
Times Mirror, and The Magic 3D Coloring Book, which was published and
distributed by the Consumer Division of IBM.
The Company also markets interactive software products to numerous
commercial customers for use in training, development or promotional activities.
Marketing and sales in this market largely parallel the marketing and sales
strategy employed with respect to the Company's custom animation products. For
instance the Company has developed interactive training software for Sikorsky
Aircraft, Abbott Laboratories and Hoechst Marion Roussel North America.
Custom Animation Products
The Company's custom animation product sales and marketing efforts
primarily focus on marketing directly to customers that desire animation as a
communication tool. The Company advertises in selected legal publications and
participates in national and regional trade shows. EAI sales and marketing staff
frequently give lectures to selected trade groups that include medical
professionals, attorneys, insurance executives and insurance claims adjusters.
In response to qualified customer inquiries, EAI prepares, at no cost to
the customer, a written proposal including price, completion date and a detailed
itemization of the features to be included in the animation. The majority of the
Company's custom animation products are sold on a fixed-price basis, although,
when requested, the Company will charge on an hourly basis. The completed
product is typically delivered to the customer on videotape, videodisc or
CD-ROM.
Competition
3D Visualization Software Products
Although the Company has yet to face significant direct competition in
those markets in which the Company offers its 3D visualization software
products, large computer companies or companies competing in the CAD/CAE/CAM
markets could offer products with the same or similar functionality as offered
by VisMockUp and the Company's
11
<PAGE>
other 3D visualization software products. Such companies, some of which have
substantially greater financial and other resources than EAI, include IBM,
Parametric Technology Corporation, SDRC, Dassault Systemes of America Corp.,
Division Inc., SGI and Autodesk, Inc. The Company believes that the main
competitive factors for 3D visualization software products are high speed, real-
time graphics capabilities, multiple CAD/CAE/CAM interfaces and platform
independence, distributed database capability and Internet/intranet
communication. Although the Company believes it has a technological advantage
over potential competitors in these markets, maintaining its advantage will
require continuing investment by the Company in research and development and
sales and marketing.
While the Company believes that many publishers of computer graphics
imaging and animation software target the entertainment market, these firms
could shift their efforts to the commercial markets in which EAI's visualization
software products compete. These entertainment oriented software publishers,
some of which have substantially greater financial, technical, marketing and
other resources than EAI, include Microsoft Corporation ("Microsoft"), SGI and
Pixar. Other large companies expected to introduce visualization software
products include Autodesk, Inc. and Macromedia Inc. In addition, as personal
computer microprocessors become more powerful, software suppliers may also be
able to introduce products for personal computers that could be competitive with
the Company's visualization software products in terms of price and performance.
Interactive Software Products
The interactive software publishing industry is intensely competitive. The
Company's sales to academic and consumer markets may be adversely affected by
the increasing number of competitive products. The Company believes that the
main competitive factors for this product are content and animation quality,
production speed, distribution capabilities and price. EAI's highly educated
staff and its proprietary databases enable the Company to produce interactive
software products with high quality content. The Company's proprietary animation
technology and library of animation assets allow the Company to quickly produce
a product containing 3D animations. By marketing its products through strategic
partners who are leaders in the publishing field, the Company is able to
leverage established distribution networks.
EAI's interactive software products compete directly against educational
software products on anatomy, health and medical topics and, to a lesser extent,
against traditional print textbooks on anatomy and medicine. EAI's competitors
in this area include a large number of companies, some of which have
substantially greater financial, technical, marketing and other resources than
EAI, such as Broderbund Software, Inc., SoftKey International, Digital Domain
Inc., CUC International and Acclaim Entertainment, Inc. Moreover, large
corporations, such as The Walt Disney Company ("Disney") and Microsoft, which
have substantial bases of intellectual property content and substantial
financial resources, have entered or announced their intention to enter the
market for consumer software. EAI's interactive software products in the game
area will also compete with products offered by other producers of computer
games.
Custom Animation Products
EAI sells its custom animation products to a variety of markets, including
biomedical, corporate communications, litigation and entertainment markets. The
Company believes that the main competitive factors in these markets are quality,
time to market, and price. Within the litigation market, the Company competes
not only against small, regional companies that focus on providing animations
for litigation markets, but also against companies that produce these animations
as a complement to their primary businesses of engineering consulting,
communications consulting or studio film production. While the Company has not
faced competition to date in the biomedical market for custom animations, there
can be no assurance that the Company will not face such competition in the
future. The Company believes that it is the only firm that currently can provide
the necessary technology and resources to produce high quality 3D biomedical
animations at a reasonable price. In addition, EAI competes with providers of
more traditional communications media.
12
<PAGE>
EAI believes that special effects firms, which typically target the
entertainment and advertising markets, could refocus their efforts on the
commercial and professional markets in which EAI's custom animation products
compete. These special effects firms, some of which have substantially greater
financial, technical, marketing and other resources than EAI, include Pixar,
Dreamworks SKG, Industrial Light & Magic and Digital Domain Inc. The Company
believes, however, that it has significant cost and speed advantages relative to
these entertainment oriented firms.
Proprietary Rights
Since its inception in 1988, EAI has amassed a significant proprietary base
of 3D visualization technology. The Company's proprietary technology includes
EAI's library of animation assets, its engineering and biomedical databases and
its proprietary hardware rendering algorithms. For example, the Company's
Virtual Human database contains significant, anatomically correct 3D material on
the male and female bodies. As the number of custom animation products and
interactive software products completed by the Company increases, the library of
animation assets and the databases will continue to grow.
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, employee and third party non-disclosure and non-competition
agreements and other methods to protect its proprietary rights. The Company has
not filed any patent applications with respect to its proprietary technology and
instead relies primarily on trade secret protection. However, the Company may
seek patent protection on certain technology in the future, if it deems such
protection appropriate. In addition, the Company has obtained an exclusive
license of certain proprietary, non-patented visualization technology from Iowa
State University Research Foundation (''ISURF'').
EAI has sought registered trademark protection for the Company's
intellectual property, where appropriate. The Company has received registrations
with respect to several of its trademarks and is in the process of registering
several other trademarks. The Company believes that registered and common law
trademarks and common law copyrights are important but are less significant to
the Company's success than factors such as the knowledge, ability and experience
of the Company's personnel, research and development, brand name recognition and
product loyalty.
EAI protects its proprietary technology through security practices.
Generally, employees must sign a confidentiality agreement, a non-competition
agreement and an agreement that grants the Company ownership of all inventions.
As an additional protective measure, only a limited number of development
personnel have access to the source code for the Company's software and this
access is strictly monitored. The Company's 3D visualization software products
are sold pursuant to licensing agreements that permit their use by a customer on
only one machine at a time and contain a built-in protective device that
effectively prevents copying and use on other machines.
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. Data
developed with funds from government grants are owned by the Company, however,
the government retains the right to use such data for its own purposes without
payment of any fees to the Company. As the number of software products in the
industry increases and the functionality of these products further overlaps,
software developers may become increasingly subject to infringement claims.
There can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products, or
that any such assertion will not require the Company to enter into royalty
arrangements or result in costly litigation.
13
<PAGE>
Employees
At March 25, 1997, the Company employed 244 people on a full-time basis, 83
people on a part-time basis and 12 interns and employees in cooperative
educational programs. Of the Company's full-time employees, 193 hold college
degrees, including 26 who hold doctoral degrees and an additional 51 who hold
master's degrees. The Company believes that its relations with its employees are
good. The Company and its employees are not parties to any collective bargaining
agreements.
EAI's headquarters and technical center are located in Ames, Iowa, near
Iowa State University (''ISU''), one of the largest graduate schools of
engineering in the U.S. The Company benefits from access to the large number of
highly skilled ISU graduate students who desire to work part-time. At March 25,
1997, 67 of the Company's employees were ISU students.
14
<PAGE>
Item 2. Properties
The Company occupies approximately 37,000 square feet of space at its
headquarters in Ames, Iowa, under a lease expiring June 2006. The Company
leases office space at various other U.S. locations under leases ranging from
month-to-month to four year terms. The Company believes that its facilities
are adequate for its present level of operations.
Item 3. Legal Proceedings
The Company has in the past been involved in litigation incidental to its
business. The Company is not currently subject to, and none of its properties
is subject to, any material legal proceedings.
Item 4. Submissions of Matters To a Vote of Security Holders
There were no matters which required a vote of security holders during
the three months ended December 31, 1996.
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "EAII." The following table sets forth, for the periods indicated,
the range of high and low sale prices for the Common Stock as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Year Ended December 31, 1996
First Quarter (from February 28, 1996).. $26.25 $19.25
Second Quarter.......................... 23.75 18.75
Third Quarter........................... 25.00 16.00
Fourth Quarter.......................... 26.75 21.75
</TABLE>
15
<PAGE>
As of March 20, 1997, the Company had 122 holders of record of its Common
Stock.
The Company has not declared or paid any cash dividends on its Common
Stock since its formation and does not currently intend to declare or pay any
cash dividends on its Common Stock. The Company intends to retain future
earnings for reinvestment in its business.
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Income Statement Data: Years Ended December 31,
1992 1993 1994 1995 1996
Dollars in thousands, except per share data
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 993 $2,687 $5,546 $10,415 $20,413
Cost of revenues 315 665 1,557 2,759 6,444
-----------------------------------------------
Gross profit 678 2,022 3,899 7,656 13,969
Operating expenses:
Sales and marketing 270 733 1,802 3,093 7,428
General and administrative 260 519 954 1,986 2,360
Research and development 122 566 869 1,712 2,122
-----------------------------------------------
Total operating expenses 652 1,818 3,625 6,791 11,910
-----------------------------------------------
Income from operations 26 204 274 865 2,059
Interest income 1 22 6 25 1,134
Interest expense (20) (32) (74) (162) (106)
-----------------------------------------------
Income before income taxes 7 194 206 728 3,087
Income taxes 2 87 92 297 1,236
-----------------------------------------------
Net income $ 5 $ 107 $ 114 $ 431 $ 1,851
===============================================
Earnings per share - $.04 $.03 $.12 $.36
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: At December 31,
1992 1993 1994 1995 1996
Dollars in thousands
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 29 $1,201 $ 258 $ 491 $19,234
Working capital 90 1,539 1,329 1,335 26,488
Total assets 453 2,407 3,143 6,199 37,956
Long-term debt due after one year 191 416 546 1,880 872
Stockholders' equity 86 1,645 1,714 2,144 33,074
</TABLE>
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
EAI specializes in developing and applying three-dimensional ("3D")
visualization technology to meet the productivity, communication, education
and entertainment needs of its clients through three interrelated product
lines: 3D visualization software, interactive multimedia and custom animation.
EAI's 3D visualization software products enable clients in the
automotive, aerospace, heavy equipment and other manufacturing industries to
collaborate in real time using digital prototypes. EAI's multi-platform
products integrate seamlessly with most popular CAD/CAE environments.
EAI's interactive multimedia products apply advanced 3D technology to
programs developed for clients targeting the consumer and educational markets.
In addition to titles published on CD-ROM, EAI also produces customized
interactive programs for specific educational and training situations,
including museums, libraries, hospitals and universities.
The Company's custom animation products combine proprietary animation
technology with 3D-rich content to address the communication needs of clients
in the biomedical, multimedia, entertainment, litigation and corporate
communications markets. The Company uses an extensive library of models and
textures in addition to a proprietary engineering database to create detailed
and scientifically accurate animations that conform to the laws of physics.
Sales of custom animation products were EAI's original source of
revenues. Revenues from interactive software products initially consisted of
government grants, which the Company sought in order to assist it in
developing its proprietary animation resources. Beginning in 1995, interactive
software product revenues largely reflect development fees paid to the Company
by publishers that have agreed to distribute the Company's interactive
software products. In December 1995, the Company completed its first
interactive software title, The Dynamic Human. In 1996, revenues from
interactive software products continued to increase as the Company introduced
additional consumer titles. The Company expects that near-term interactive
software product revenues will consist primarily of development fees, as well
as royalties from sales of certain of its interactive software titles.
In March 1994, the Company introduced a line of 3D software products
based on technology used in the production of the Company's custom animation
products. These products integrate both CAD and CAE analysis to provide
complete visualization and communication solutions to the engineering design
and analysis market.
While the business of the Company as a whole has not historically
experienced significant effects of seasonality, the Company anticipates that
sales of certain interactive software products may be affected by
seasonality. Consumer purchases of interactive software products may
experience some effects of seasonality created by the Christmas holiday. In
addition, EAI's sales of interactive software products in the academic markets
may experience some effect of seasonality created by the academic school year.
Therefore, as sales of interactive software products increase, the Company's
revenues as a whole may experience some effect of seasonality.
17
<PAGE>
The Company has scheduled several product introductions in 1997. Due to
the inherent uncertainties of software development, the Company cannot
accurately predict the exact timing of new product shipments, nor can the
Company be assured that any significant revenues will be derived from these
product offerings. Any delays in the scheduled release of these products, or
any failure to achieve market acceptance of such products among new or
existing customers, could have a material adverse effect on the Company's
revenues and operating results.
Net Revenues
<TABLE>
<CAPTION>
($000s) 1996 Change 1995 Change 1994
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3D software products $ 7,646 424.4% $ 1,458 146.7% $ 591
Interactive software products 6,632 167.5% 2,479 271.6% 667
Custom animation products (1) 6,135 (5.3)% 6,478 54.3% 4,198
---------------------------------------------------------------------------
Total $20,413 96.0% $10,415 90.9% $5,456
===========================================================================
</TABLE>
(1) Custom animation product revenues in 1995 included several large projects
for a major automotive manufacturer.
The Company's total revenues are derived from sales of custom animation
products, interactive software products and 3D software products, which were
formerly referred to as animation software tools. The Company recognizes
revenues based upon labor and other costs incurred and progress to completion
on contracts. Revenues from sales of 3D software products are recognized upon
delivery of the 3D software product to the customer and satisfaction of
significant related obligations, if any. Revenues from customer support are
included in 3D software products revenues and represent less than 5.0% of
total revenues. These revenues are deferred and recognized ratably over the
period the customer support services are provided.
The Company's total revenues for 1996 increased 96.0% to $20.4 million
from $10.4 million for 1995. 3D software product revenues for 1996 increased
424.4% to $7.7 million from $1.5 million for 1995, as a result of increased
product sales and several new software development contracts. Interactive
software product revenues for 1996 increased 167.5% to $6.6 million from $2.5
million for 1995, primarily due to additional projects for interactive
software products. Interactive software product revenues for 1995 included
$369,000 of revenues from a three year government grant that ended June 1995.
Custom animation product revenues for 1996 decreased 5.3% to $6.1 million from
$6.5 million for 1995, primarily as a result of the completion in 1995 of
several large projects for a major automotive manufacturer.
Revenues for 1995 increased 90.9% to $10.4 million from $5.5 million for
1994. The increase in revenues was attributable to further expansion into the
interactive software market, enhancements to the Company's 3D software
products and increased orders for the Company's custom animation products.
Revenues from its interactive software products for 1994 and 1995 included a
three year federal government grant that ended in June 1995. Revenues from
this grant for 1994 and 1995 were $564,000 and $369,000, respectively.
18
<PAGE>
Cost of Revenues
<TABLE>
<CAPTION>
($000s) 1996 Change 1995 Change 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost of sales $6,099 140.3% $2,538 75.9% $1,443
Royalties 151 51.0% 100 85.2% 54
Amortization of capitalized
software costs 194 60.3% 121 101.7% 60
-----------------------------------------------------------------------------
Total $6,444 133.6% $2,759 77.1% $1,557
=============================================================================
As a percentage of net revenues 31.6% 26.5% 28.5%
=============================================================================
</TABLE>
The cost of revenues includes cost of sales (consisting of cost of
materials sold, certain personnel costs and related facility costs, including
equipment costs), royalties and amortization of capitalized software costs.
Cost of revenues for 1996 increased 133.6% to $6.4 million from $2.8 million
for 1995, primarily due to expenses associated with new 3D software product
development contracts, increased costs of certain animations and increased
development costs for interactive software projects. As a result, the
Company's cost of revenues as a percentage of revenues increased to 31.6% in
1996 from 26.5% in 1995.
Cost of revenues for 1995 increased 77.1% to $2.8 million from $1.6
million for 1994. Cost of revenues was 26.5% of revenues in 1995 and 28.5% in
1994. Cost of revenues as a percentage of revenues in 1995 decreased as
revenues increased from the sale of higher margin 3D software products and the
sale of several higher margin custom animation products in early 1995.
Royalty costs remained constant at 1.0% of revenues for 1994, 1995 and
1996.
The Company capitalizes certain software development costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." In
1994, 1995 and 1996, the Company capitalized software costs of $260,000,
$263,000 and $343,000, respectively. The Company is amortizing these costs
over an estimated economic useful life of three years or on the ratio of
current revenues to total projected product revenues, whichever is greater.
Amortization expenses reported as cost of revenues for 1994, 1995 and 1996
were $60,000, $121,000 and $194,000, respectively.
Sales and Marketing
<TABLE>
<CAPTION>
($000s) 1996 Change 1995 Change 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $7,428 140.2% $3,093 71.7% $1,802
=============================================================================
As a percentage of net revenues 36.4% 29.7% 33.0%
=============================================================================
</TABLE>
Sales and marketing expenses include personnel costs related to sales,
marketing and customer service activities, as well as advertising, promotional
materials, mail campaigns, trade show costs and other costs. Sales and
marketing expenses for 1996 increased 140.2% to $7.4 million from $3.1 million
for 1995. Sales and marketing expenses were 36.4% of revenues in
19
<PAGE>
1996 and 29.7% in 1995. The increase in sales and marketing expenses is
primarily due to costs associated with expansion of the sales force in all
three product lines, personnel increases in the marketing group, additional
sales commission expenses associated with higher revenues and increased
advertising costs.
Sales and marketing expenses for 1995 increased 71.7% to $3.1 million
from $1.8 million for 1994. Sales and marketing expenses were 29.7% of
revenues in 1995 and 33.0% in 1994. The decrease in sales and marketing
expenses as a percentage of revenues is primarily the result of the Company
spreading increased expenses over a higher sales volume during 1995.
General and Administrative
<TABLE>
<CAPTION>
($000s) 1996 Change 1995 Change 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $2,360 18.8% $1,986 108.0% $ 954
============================================================================
As a percentage of net revenues 11.5% 19.1% 17.5%
============================================================================
</TABLE>
General and administrative expenses consist primarily of salaries and
facility costs for administrative, executive and accounting personnel, as well
as certain consulting expenses, insurance costs, professional fees and other
costs. General and administrative expenses for 1996 increased 18.8% to $2.4
million from $2.0 million for 1995, primarily a result of increased
administrative staff and related costs. General and administrative expenses
were 11.5% of revenues in 1996 and 19.1% of revenues in 1995. The decrease in
general and administrative expenses as a percentage of revenues in 1996 was
primarily a result of spreading expenses over higher sales volume and refining
the allocation of common costs among departments rather than absorbing these
expenses as general and administrative.
General and administrative expenses for 1995 increased 108.0% to $2.0
million from $1.0 million for 1994. General and administrative expenses were
19.1% of revenues in 1995 and 17.5% in 1994. The increase in general and
administrative expenses as a percentage of revenues during 1995 is primarily
the result of increased administrative staff and related costs.
Research and Development
<TABLE>
<CAPTION>
($000s) 1996 Change 1995 Change 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $2,122 23.9% $1,712 97.2% $ 869
============================================================================
As a percentage of net revenues 10.4% 16.4% 16.0%
============================================================================
</TABLE>
The Company's research and development focuses on product development and
consists primarily of salaries, related facility costs, equipment costs and
outside consulting fees. Research and development expenses for 1996 increased
by 23.9% to $2.1 million from $1.7 million for 1995. Research and development
expenses were 10.4% of revenues in 1996 and 16.4% of revenues in 1995 due to
the allocation of certain research and development staffing to costs of
revenues in 1996 and spreading research and development costs over higher
sales volume in
20
<PAGE>
1996. The increase in research and development expenses for 1996 was primarily
due to additional personnel and related costs required to meet the demand in
3D software products and interactive software products. This increase in
expenses is partially offset by the increased allocation of staffing to funded
project development activities recorded as costs of revenues in 1996.
Research and development expenses for 1995 increased by 97.2% to $1.7
million from $869,000 for 1994. Research and development expenses were 16.4%
of revenues in 1995 and 16.0% in 1994. The increase in research and
development expenses as a percentage of revenues during 1995 is primarily the
result of increased research and development staffing.
Income Taxes
<TABLE>
<CAPTION>
($000s) 1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C>
Expense $1,236 $ 297 $ 92
===========================================================
Effective tax rate 40.0% 40.8% 44.7%
===========================================================
</TABLE>
In 1996, the Company began filing its income taxes on the accrual basis
rather than on the cash basis used in prior years. The Company in 1996 used
its net operating loss carryforward of $779,000, which was a result of using
accelerated depreciation, expensing software development costs for tax
purposes and filing the Company's income tax return on a cash basis. Deferred
tax expense results from temporary differences in recognition of revenues and
expenses for income tax and financial statement purposes.
Liquidity and Capital Resources
The Company historically has satisfied its cash requirements through
borrowings, customer advances, capital lease financings and net proceeds of
approximately $29.0 million from the Company's initial public offering of
equity securities in February 1996. As of December 31, 1996, the Company had
$9.3 million in cash and cash equivalents and $9.9 million in short-term
investments.
Net cash used by operating activities for the year ended December 31,
1996 was $3.0 million, primarily due to increased receivables, offset by net
income, depreciation and increases in accrued expenses. Net cash provided by
operating activities was $1.4 million for the year ended December 31, 1995.
Net cash used by operating activities was $0.5 million for the year ended
December 31, 1994.
In 1996, the Company used cash of $15.4 million in its investing
activities, of which $9.9 million was used to purchase short-term investments,
$4.4 million was used to purchase property and equipment, $343,000 was used
for development of software and $658,000 was paid as an advance to the
developer of the Company's new office building. In 1995, the Company used cash
of $2.4 million in its investing activities, of which $1.0 million was used to
purchase property and equipment, $263,000 was used for the development of
software and $750,000 was paid as an advance to the developer of the Company's
new office building. In 1994, net cash of $385,000 was provided by investing
activities through the sale of marketable securities, which generated
21
<PAGE>
cash of $1.1 million, offset principally by purchases of property and
equipment of $500,000 and software development costs of $260,000.
Accounts receivable at December 31, 1996 increased $5.6 million to $6.7
million from $1.1 million at December 31, 1995. The increase in accounts
receivable was due to increased revenues and the increased size of the
Company's contracts which take a longer period to collect. The Company's
accounts receivable balance will vary from year to year, depending on the
number and size of client projects and on the timing of completion of the
projects.
The Company has a $1.0 million line of credit agreement with a commercial
bank, which expires on May 1, 1997 and is secured by substantially all of the
assets of the Company. Borrowings under the credit agreement are limited to a
percentage of eligible accounts receivable, as defined in the credit
agreement. At December 31, 1996, the Company had no outstanding borrowings
against this agreement. The Company does not intend to renew the credit
agreement upon its expiration on May 1, 1997.
At December 31, 1996, the Company had $935,000 of notes payable and
capital lease principal payable. The Company used a portion of the net
proceeds of its initial public offering to repay $1,112,000 of the long-term
bank debt and $600,000 of short-term bank borrowings.
The Company believes its cash and short-term investment balances will be
sufficient to meet anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. There can be no assurance that
additional capital beyond the amounts currently forecasted by the Company will
not be required nor that any such required additional capital will be
available on reasonable terms, if at all, at such time as required by the
Company.
Additional Item. Safe Harbor For Forward-Looking Statements
The Company or its representatives from time to time may make or may have
made certain forward-looking statements, orally or in writing, including
without limitations any such statements made or to be made in the Management's
Discussions and Analysis contained in its various S.E.C. filings. The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to ensure to the fullest extent possible the protections of
the safe harbor established in the Private Securities Litigation Reform Act of
1995. Accordingly, such statements are qualified in their entirety by
reference to and are accompanied by the following discussion of certain
important factors that could cause actual results to differ materially from
those projected in such forward-looking statements.
The Company cautions the reader that this list of factors may not be
exhaustive. The Company operates in a continually changing business
environment, and new risk factors emerge from time to time. Management cannot
predict such risk factors, nor can it assess the impact, if any, of such risk
factors on the Company's business or the extent to which any factors, or
combination of factors, may cause actual results to differ materially from
those projected in any forward-looking statements. Accordingly, forward-
looking statements should not be relied upon as a prediction of actual
results.
Variability of Operating Results
22
<PAGE>
The Company has experienced and expects to continue to experience
fluctuations in its quarterly results. The Company's revenues are affected by
a number of factors, including the timing of the introduction of new 3D
visualization software and interactive software products by the Company and
its competitors, seasonality of certain customer purchases of interactive
software products, product mix, general economic conditions and the Company's
ability to obtain agreements from publishers and distributors to market the
Company's interactive software products. The Company's operating results also
will vary significantly depending on changes in pricing, changes in customer
budgets and the volume and timing of orders received during the quarter, which
are difficult to forecast. EAI's interactive software products may experience
some effect of seasonality created by the academic school year. As a result of
the foregoing and other factors, the Company may experience material
fluctuations in future revenues and operating results on a quarterly or annual
basis. Therefore, the Company believes that period to period comparisons of
its revenues and operating results are not necessarily meaningful and should
not be relied upon as indicators of future performance.
Technological Change and Market Acceptance
The Company's success depends on its ability to develop and sell new
products, develop site licensing agreements with major manufacturers in the
automotive, aerospace, heavy equipment and other manufacturing industries,
port its 3D visualization software products to new platforms and continue to
produce high-quality interactive products in a timely and cost effective
manner. In addition, the Company must continually anticipate, and adapt its
products to, emerging computer technologies and capabilities, such as enhanced
sound, music, video and speech generation. The life cycles of the Company's
products are difficult to estimate because the markets that the Company
targets are in the early stages of development and because of uncertainties
arising from the effect of future product enhancements, future developments in
hardware and software technology and future competition. If the Company's
products become outdated and lose market share or if new products or existing
product upgrades are not introduced when demanded by the market or are not
accepted by the market, the Company's revenues and operating results could be
materially adversely affected. There is no assurance that the Company will be
able to introduce new products on a timely basis or that such new products
will be accepted in the market.
Dependence on Emerging Market for 3D Visualization Software Products
The market for enterprise-wide 3D visualization software products in the
automotive, aerospace, heavy equipment and other manufacturing industries is
emerging and dependent on a number of variables, including customer
preferences and the rate of adoption of new technology. There can be no
assurance that this market will continue to grow or that the Company's 3D
visualization software products will be accepted by the market. The Company's
growth is dependent in part on significant demand for its 3D visualization
software products. In addition, as the Company increasingly markets it 3D
visualization software as an enterprise-wide solution, there can be no
assurance that large customers will be willing to invest in EAI's products on
a company-wide basis or that users outside the design and engineering areas
will accept the Company's products. In 1996, sales of 3D visualization
software products to Ford Motor Company and Hewlett-Packard Company
23
<PAGE>
accounted for 14.9% and 18.0% of the Company's revenues, respectively. There
can be no assurance that EAI will be able to continue to sell 3D visualization
software products to these customers at 1996 levels or, if it fails to do so,
that the Company will be able to replace these customers with new customers.
Dependence on Emerging Market for Interactive Software Products
The market for interactive multimedia software products is emerging and
dependent on a number of variables, including consumer preferences, shipments
of multimedia personal computers, the installed base of multimedia personal
computers and the number of other publishers creating interactive software
products. There can be no assurance that this market will continue to grow.
The market for games and educational multimedia software is characterized by
rapid changes in computer hardware and software technology and is highly
competitive with respect to timely product innovation. The Company's near-term
growth is dependent in part on significant demand for its recently released
interactive software products and for its products under development. However,
the Company does not receive royalty revenues from a product until the
publisher commences retail sales of the product, which may not occur
immediately after delivery of the product to the publisher, if at all. There
can be no assurance that the Company's new interactive software products will
be accepted by the market or that the Company will be able to respond
effectively to the evolving requirements of the market.
Reliance on Third Parties to Market and Distribute Interactive Software
Products
EAI's strategy has been to rely upon third parties to market and
distribute its interactive software products. EAI does not have an exclusive
relationship with any of the current distributors of its interactive software
products. EAI's relationships with Sirtech Software Inc., BMG Interactive,
Times Mirror, Time Warner, Elsevier Science and others have involved contracts
that address a single product or title for a specific market area and do not
constitute a continuing marketing and distribution agreement. There can be no
assurance that EAI's relationships with such publishers will continue or that
the Company will be able to find other means to market and distribute its
interactive software products. Failure to continue such relationships,
establish new relationships or develop independent means of marketing and
distributing interactive software products could have a material adverse
effect on the Company's revenues and operating results.
Reliance on Third Parties to Market and Distribute Certain 3D Visualization
Software Products
In addition to marketing the Company's 3D visualization software products
directly to end users, EAI has contractual relationships with Hewlett-Packard
to jointly market and Structural Dynamics Research Corp. ("SDRC") to jointly
market and distribute certain of EAI's software products. Although these
contracts represent a significant marketing and distribution opportunity for
the Company's software products, there can be no assurance that these
contractual relationships will be successful in creating significant sales or
that these relationships will be continued at the end of their one year terms.
24
<PAGE>
Competition
EAI expects significant competition in each of its three product lines:
3D Visualization Software Products
Large computer companies or companies competing in the CAD/CAE/CAM
markets could offer products with the same or similar functionality as offered
by VisMockUp(TM) and the Company's other visualization software products. Such
companies, some of which have substantially greater financial and other
resources than EAI, include IBM, Parametric Technology Corp., SDRC, Silicon
Graphics, Inc., Dassault Systemes of America Corp., Division Inc. and Autodesk
Inc. Although the Company believes it has a technological advantage over
potential competitors in these markets, maintaining its advantage will require
continuing investment by the Company in research and development and sales and
marketing. There can be no assurance that the Company will have sufficient
resources to make such investments or that such investments will be
successful.
Interactive Software Products
The interactive software publishing industry is intensely competitive.
The Company's sales to the educational and consumer markets may be adversely
affected by the increasing number of competitive products. EAI's interactive
software products will compete directly against other educational and consumer
software products including multi-player Internet games. EAI's competitors in
this area include a large number of companies, some of which have
substantially greater financial, technical, marketing and other resources than
EAI, such as Broderbund Software Inc., GT Interactive Software Corp., SoftKey
International Inc., Digital Domain Inc. and CUC International. Moreover, large
corporations, such as The Walt Disney Company and Microsoft Corporation, which
have substantial bases of intellectual property content and substantial
financial resources, have entered or announced their intention to enter the
market for consumer software.
Custom Animation Products
While the Company believes that most special effects firms target the
feature film and advertising markets, these firms could refocus their efforts
in the commercial markets, an area in which EAI derives most of its custom
animation revenue. These special effects firms, some of which have
substantially greater financial, technical, marketing and other resources than
EAI, include Dreamworks SKG, Pixar, Industrial Light and Magic (a division of
Lucasfilm Limited) and Digital Domain. In addition, a large number of small
companies provide custom animations to commercial markets as a complement to
their primary business of studio film production, engineering consulting and
communications consulting.
Protection of Proprietary Rights
25
<PAGE>
The Company's success and ability to compete is dependent in part upon
its extensive proprietary technology and databases. The Company relies
primarily on a combination of copyright, trademark and trade secret laws,
employee and third party non-disclosure and non-competition agreements and
other methods to protect its proprietary rights. There can be no assurance
that these measures will prevent the Company's competitors from obtaining or
using the Company's proprietary technology and databases. Certain of the
Company's products include mechanisms intended to prevent or inhibit
unauthorized copying. In addition, the Company packages its visualization
software products with license agreements, which prohibit unauthorized copying
of such products. Unauthorized copying does, however, occur in the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's revenues and operating results could be
adversely affected. The laws of certain countries in which the Company's
products are or may be distributed do not protect the Company's products and
proprietary rights to the same extent as do the laws of the United States.
Furthermore, as the number of software products in the industry increases and
the functionality of these products further overlaps, software developers may
increasingly become subject to infringement claims. There can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to current or future products, or that any such
assertion will not require the Company to enter into royalty arrangements or
result in costly litigation.
Dependence on Key Personnel
The Company's future success depends in large part on the continued
service of its key technical, marketing, sales and management personnel and on
its ability to continue to attract, motivate and retain highly qualified
employees. The Company's key employees may voluntarily terminate their
employment with the Company at any time. Competition for such employees is
intense and the process of locating key technical and management personnel
with the combination of skills and attributes required to execute the
Company's strategy can be lengthy. Accordingly, the loss of the services of
key personnel could have a material adverse effect on the Company's revenues,
operating results and financial condition. The Company maintains key person
insurance covering certain of its executive officers. However, the amount of
insurance may not be sufficient to offset the Company's loss of the services
of any of its executive officers.
Management of Growth
The Company has experienced and may continue to experience rapid growth
which could place a significant strain on the Company's employees, operating
procedures, financial resources and information systems. The Company plans to
introduce a significant number of new products, increase its production
capacity and development expenditures, expand its sales and marketing
initiatives and hire additional employees. The Company's plans to increase its
sales and marketing presence in Europe and Asia could expose the Company to
foreign currency fluctuations, foreign labor laws and other unforeseen
problems. Such activities will require
26
<PAGE>
significant managerial expertise. If the Company is unable to manage its
growth effectively, the Company's operating results and financial condition
could be materially adversely affected.
Risk of Liability Claims by Customers
Although the Company has not experienced product liability claims by
customers, the Company could experience such claims in the future. The
Company's interactive software products carry a disclaimer that the products
should not be used for diagnostic or treatment purposes and are only for
educational and medical reference purposes. The Company has general liability
insurance and insurance for errors and omissions in the content of its
products. If a liability claim were to be made, there can be no assurance
that the Company would be successful in defending against the claim or, if
unsuccessful, that the amount of insurance coverage, if any, would be
sufficient to pay the claim.
Share Price Volatility
The trading price of the Common Stock could be subject to wide
fluctuations in response to quarter to quarter variations in operating
results, changes in earnings estimates by analysts, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the software and computer industries and other events or
factors. In addition, in recent years the stock market in general, and the
shares of technology companies in particular, have experienced extreme price
fluctuations. This volatility has had a substantial effect on the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.
Anti-takeover Provisions
The Company's Certificate of Incorporation and By-laws and Delaware law
contain provisions that may have the effect of delaying, deferring or
preventing a non-negotiated merger or other business combination involving the
Company. These provisions are intended to encourage any person interested in
acquiring the Company to negotiate with and obtain the approval of the Board
of Directors in connection with the transaction. Certain of these provisions
may, however, discourage a future acquisition of the Company not approved by
the Board of Directors in which stockholders might receive an attractive value
for their shares or that a substantial number or even a majority of the
Company's stockholders might believe to be in their best interest. As a
result, stockholders who desire to participate in such a transaction may not
have the opportunity to do so. Such provisions could also discourage bids for
the shares of Common Stock at a premium, as well as create a depressive effect
on the market price of the shares of Common Stock. Such provisions include,
among other things, a classified Board of Directors serving staggered three-
year terms, the elimination of stockholder voting by consent, a provision
providing that only a majority of the Board of Directors, the Chairman or the
President can call a special meeting of stockholders, and a provision
permitting removal of directors only for cause and only by the holders of at
least 80% of the outstanding shares of stock entitled to vote
27
<PAGE>
generally in the election of directors, voting together as a single class. In
addition to the Common Stock, the Company's Certificate of Incorporation
authorizes the issuance of up to 20,000,000 shares of preferred stock. The
Company has no current plans to issue any shares of preferred stock. However,
because the rights and preferences for any series of preferred stock may be
set by the Board of Directors in its sole discretion, the Company may issue
preferred stock that has rights and preferences superior to the rights of
holders of shares of the Common Stock and thus may adversely affect the rights
of holders of shares of the Common Stock. In addition, the Board of Directors
has adopted a Stockholders Rights Plan that may have an anti-takeover effect
and may discourage or prevent takeover attempts not first approved by the
Board of Directors (including takeovers that certain stockholders may deem to
be in their best interests).
Dividends
The Company has not paid any dividends and does not currently anticipate
paying cash dividends in the future. There can be no assurance that the
Company will ever pay a cash dividend.
28
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Board of Directors
Engineering Animation, Inc.
We have audited the accompanying consolidated balance sheets of
Engineering Animation, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Engineering Animation, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Des Moines, Iowa
January 17, 1997
29
<PAGE>
Engineering Animation, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1995 1996
-------------------------
<S> <C> <C>
Assets (Note 3)
CURRENT ASSETS:
Cash and cash equivalents $ 490,524 $ 9,349,660
Short-term investments - 9,884,250
Accounts receivable:
Billed, less allowance of $12,157
and $121,000 in 1995 and 1996,
respectively 1,057,143 6,666,006
Unbilled 1,288,930 3,333,595
Deferred income taxes, net (Note 6) - 48,000
Prepaid expense and other assets 180,284 390,193
-------------------------
Total current assets 3,016,881 29,671,704
PROPERTY AND EQUIPMENT:
Computer equipment and software 1,899,150 4,544,996
Office equipment and furniture 236,177 1,708,752
Leasehold improvements 39,465 229,965
-------------------------
2,174,792 6,483,713
Less accumulated depreciation and
amortization 641,594 1,291,195
-------------------------
Total property and equipment 1,533,198 5,192,518
OTHER ASSETS:
Restricted cash - 495,000
Note receivable (Note 2) 750,286 1,408,286
Software development costs - net of
accumulated amortization of $181,687
and $375,779 in 1995 and 1996,
respectively 453,019 602,076
Other 445,887 586,656
-------------------------
Total assets $6,199,271 $37,956,240
=========================
Liabilities and stockholders' equity
CURRENT LIABILITIES:
Accounts payable $ 631,335 $ 1,057,600
Accrued compensation and other 420,056 1,413,285
Deferred revenue 286,102 400,050
Deferred income taxes, net (Note 6) - 119,000
Long-term debt and lease obligations
due within one year (Notes 3 and 4) 344,795 62,128
Income taxes payable - 131,882
-------------------------
Total current liabilities 1,682,288 3,183,945
Long-term debt due after one year (Note 3) 1,806,900 831,766
Obligations under capital leases due
after one year (Note 4) 72,934 40,806
Deferred income taxes (Note 6) 492,800 826,000
Commitments (Notes 4 and 5)
STOCKHOLDERS EQUITY (Note 7)
Common stock, $.01 par value, 20,000,000
shares authorized; issued and outstanding
shares 2,869,760 in 1995, 4,697,320 in
1996 28,697 46,973
Preferred stock, $.01 par value,
20,000,000 shares authorized; no shares
issued or outstanding - -
Additional paid-in capital 1,401,957 30,462,053
Retained earnings 713,695 2,564,697
-------------------------
Total stockholders' equity 2,144,349 33,073,723
Total liabilities and stockholders' equity $6,199,271 $37,956,240
=========================
</TABLE>
See accompanying notes.
30
<PAGE>
Engineering Animation, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
1994 1995 1996
----------------------------------------
<S> <C> <C> <C>
Net revenues (Note 8) $5,456,343 $10,414,637 $20,412,757
Cost of revenues 1,557,470 2,758,591 6,443,329
----------------------------------------
Gross profit 3,898,873 7,656,046 13,969,428
Operating expenses:
Sales and marketing 1,801,634 3,092,623 7,428,063
General and administrative (Note 9) 954,980 1,986,228 2,360,026
Research and development 868,645 1,712,568 2,122,435
----------------------------------------
Total operating expenses 3,625,259 6,791,419 11,910,524
----------------------------------------
Income from operations 273,614 864,627 2,058,904
Other income (expense):
Interest income 6,580 24,888 1,134,488
Interest expense (74,661) (161,850) (106,390)
----------------------------------------
(68,081) (136,962) 1,028,098
----------------------------------------
Income before income taxes 205,533 727,665 3,087,002
Income taxes (Note 6) 91,600 297,000 1,236,000
----------------------------------------
Net income $ 113,933 $ 430,665 $ 1,851,002
----------------------------------------
Earnings per share of common stock $.03 $.12 $.36
Weighted average number of common and
equivalent shares outstanding (Note 1) 3,695 3,702 5,157
</TABLE>
See accompanying notes.
31
<PAGE>
Engineering Animation, Inc.
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Additional Gain (Loss) on Total
Common Stock Paid-in Marketable Retained Stockholders'
Shares Amount Capital Securities Earnings Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 3,224,448 $32,244 $ 1,453,410 $(10,132) $ 169,097 $ 1,644,619
Repurchase of common shares (354,688) (3,547) (51,453) - - (55,000)
Unrealized gain on marketable
securities - - - 10,132 - 10,132
Net income - - - - 113,933 113,933
----------------------------------------------------------------------------------------
Balance at December 31, 1994 2,869,760 28,697 1,401,957 - 283,030 1,713,684
Net income - - - - 430,665 430,665
----------------------------------------------------------------------------------------
Balance at December 31, 1995 2,869,760 28,697 1,401,957 - 713,695 2,144,349
Issue of common stock in
connection with the Company's
initial public offering, net of
offering expenses (Note 7) 1,825,000 18,250 29,048,250 - - 29,066,500
Common stock issued for
options exercised 2,560 26 11,846 - - 11,872
Net income - - - - 1,851,002 1,851,002
----------------------------------------------------------------------------------------
Balance at December 31, 1996 4,697,320 $46,973 $30,462,053 $- $2,564,697 $33,073,723
</TABLE>
See accompanying notes.
32
<PAGE>
Engineering Animation, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1994 1995 1996
------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 113,933 $ 430,665 $ 1,851,002
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 220,106 471,707 976,696
Deferred income taxes 90,800 295,000 404,200
Loss on disposal of equipment 1,305 - 16,200
(Increase) decrease in billed accounts receivable (1,126,248) 266,840 (5,608,863)
(Increase) decrease in unbilled accounts receivable 12,050 (1,004,965) (2,044,665)
Increase in prepaid expenses (49,902) (10,211) (247,613)
Increase in accounts payable 49,809 486,567 426,265
Increase in accrued expenses 65,844 292,180 1,125,111
Increase in deferred revenue 82,913 203,189 113,948
------------------------------------------
Net cash (used) provided by operating activities (539,390) 1,430,972 (2,987,719)
Investing activities
Increase in note receivable - (750,286) (658,000)
Purchases of property and equipment (503,643) (976,506) (4,435,347)
Sales of property and equipment - - 30,000
(Purchases) sales of other assets 25,633 (441,057) (193,546)
Development of software (259,313) (263,149) (343,149)
(Purchases) sales of marketable securities 1,121,943 - (9,846,546)
------------------------------------------
Net cash (used) provided by investing activities 384,620 (2,430,998) (15,446,588)
Financing activities
Increase in restricted cash - - (495,000)
Proceeds from short-term borrowing 200,000 600,000 -
Payments on short-term borrowing - (800,000) -
Proceeds from long-term debt 306,000 1,713,140 -
Payments of long-term debt (122,795) (263,343) (1,263,723)
Principal payments under capital lease obligations (5,991) (17,150) (26,206)
Net proceeds from issuance of common stock - - 29,078,372
Repurchase of common stock (55,000) - -
------------------------------------------
Net cash provided by financing activities 322,214 1,232,647 27,293,443
------------------------------------------
Net increase in cash and cash equivalents 167,444 232,621 8,859,136
Cash and cash equivalents at beginning of period 90,459 257,903 490,524
------------------------------------------
Cash and cash equivalents at end of period $ 257,903 $ 490,524 $ 9,349,660
==========================================
Supplemental disclosures
Interest paid $ 59,222 $ 146,735 $ 46,805
Income taxes paid 800 2,000 699,918
Noncash investing and financing activity - property
and equipment purchased through capital lease
obligations and notes payable - 116,290 -
Noncash investing activity -- property and equipment
gifted to the Company - - 420,590
</TABLE>
See accompanying notes.
33
<PAGE>
Engineering Animation, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Business and Organization
Engineering Animation, Inc. (the "Company") develops, produces and sells
three-dimensional ("3D") products that address visualization, animation and
graphics needs of its customers in domestic and international commercial
markets.
Basis of Consolidation
The consolidated financial statements include the accounts of Engineering
Animation Europe B.V., its wholly-owned subsidiary established in June 1996.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Cash Equivalents
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents. Cash equivalents are carried at
cost, which approximates market.
Restricted Cash
Restricted cash consists of cash committed as collateral for the notes
payable to the State of Iowa. As requirements of the note are met, the cash
will be released in increments of $75,000 on a quarterly basis.
Short-Term Investments
Short-term investments consist of debt securities of U.S. Government or
governmental agencies and high-grade commercial paper. Short-term investments
are stated at cost plus accrued interest, which approximates market. The
Company classifies its short-term investments as "available-for-sale".
Revenue Recognition
Revenue is recognized based upon labor and other costs incurred and
progress to completion on contracts. Unbilled accounts receivable represent
revenue earned but not yet billable based on terms of the contract. The
Company generally requires a deposit on each contract and billings are made
based on milestones or as otherwise provided for in the contracts.
Revenue from sales of 3D software products is recognized upon delivery of
the 3D software product to the customer and satisfaction of significant
related obligations, if any. Revenue from customer support is deferred and
recognized ratably over the period the customer support services are provided.
34
<PAGE>
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts
receivable. This risk is limited due to the large number and diversity of
entities comprising the Company's customer base and the Company's practice of
obtaining deposits on contracts.
Property and Equipment
Property and equipment is carried at cost. Depreciation and amortization
of property and equipment is provided over the estimated useful lives of the
assets, which range from five to seven years, on the straight-line method.
Software Development Costs
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." The
capitalization of these costs begins when a product's technological
feasibility has been established and ends when the product is available for
general release to customers. The Company amortizes these costs over an
estimated economic useful life of three years or on the ratio of current
revenue to total projected product revenues, whichever is greater.
Amortization expense was $60,000, $121,000 and $194,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
Income Taxes
The Company accounts for income taxes using the liability method.
Deferred income taxes are provided for temporary differences between the
financial reporting and tax basis of assets and liabilities.
Earnings Per Share
Per share earnings are based on the weighted average number of shares of
common stock and common stock equivalents outstanding. The dilutive effect of
outstanding stock options was determined based upon the treasury stock method.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83 ("SAB No. 83"), common stock equivalents granted at exercise prices
less than the initial public offering price during the 12 months immediately
preceding the initial public offering, have been included in the determination
of shares used in the calculation of net income per share as if they were
outstanding for all periods.
The Company used a portion of the proceeds of its initial public offering
in February 1996 to repay $1,712,000 of outstanding bank indebtedness.
Earnings per share for the year ended December 31, 1996 would not have changed
if the repayment had taken place January 1, 1996.
Impact of Recently Issued Accounting Standards
The Company is not aware of any accounting standards which have been
issued and which will require the Company to change its current accounting
policies or adopt new policies, the effect of which would be material to the
Company's financial statements.
35
<PAGE>
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 financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Note Receivable
During 1995, the Company entered into a loan agreement whereby the
Company agreed to loan $750,286 to the developer of the building the Company
leases. During 1996, the Company loaned an additional $658,000 to the
developer. The Company began leasing the building July 1, 1996. Interest at a
rate of 2.25% above the U. S. Treasury three-year constant rate began accruing
and is payable monthly upon commencement of the lease. The principal is due
June 2016, unless the developer sells the building to an unaffiliated third
party, at which time the principal and interest accrued to date becomes
immediately due. The note receivable is collateralized by a second mortgage on
the building.
3. Debt
The Company has a $1,000,000 line of credit agreement with a commercial
bank, expiring May 1, 1997, which generally provides for advances at 70% of
eligible accounts receivable. The line of credit bears interest at .5% above
the New York prime rate (8.75% at December 31, 1996) and is collateralized by
substantially all the assets of the Company. No amounts were borrowed on the
line as of December 31, 1995 or 1996.
Long-term debt at December 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
1995 1996
---------- --------
<S> <C> <C>
Note payable to bank, repaid with proceeds from the Company's initial public offering. $ 203,847 $ -
Note payable to bank, repaid with proceeds from the Company's initial public offering. 187,666 -
Note payable to bank, repaid with proceeds from the Company's initial public offering. 146,692 -
Note payable to the City of Ames, requiring 36 monthly interest-only payments of $243, and
subsequently due in 24 monthly principal installments of $2,782, plus interest at 4.375%, through
September 2000. This note is personally guaranteed by the President of the Company. 66,871 66,766
Note payable to bank, repaid with proceeds from the Company's initial public offering. 620,412 -
Note payable to the Ames Economic Development Commission, due in monthly
installments of $2,381, commencing July 1998 through June 2005, collateralized
by all equipment of the Company. This note is non-interest bearing unless certain job
attainment goals are not met by January 1998, at which time 9% interest will be payable
on the outstanding balance. The Company is also subject to a penalty if it fails to
maintain its principal place of business in Ames, Iowa. 200,000 200,000
Note payable to the Ames Seed Capital fund, $44,000 principal payment and interest accrued
at 4.5% due June 2000. Thereafter, equal monthly installments including interest at the New
York prime rate are due through June 2005. A 9% interest rate will be effected if certain job
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C>
attainment goals are not met by January 1998. The Company is also subject to a penalty if it
fails to maintain its principal place of business in Ames, Iowa. 100,000 100,000
Note payable to the State of Iowa, due in annual installments of $30,000 through June 2000,
collateralized by restricted cash. This note is non-interest bearing unless certain job
attainment goals are not met by January 1998, at which time 6% interest will be payable on
all or a portion of the outstanding balance from the inception of the note. 150,000 120,000
Note payable to the State of Iowa collateralized by restricted cash. This note is being forgiven
at the rate of $75,000 each calendar quarter as long as certain job attainment goals are met. If
these goals are not met, the note is payable over three years including 6% interest 450,000 375,000
---------- --------
2,125,488 861,766
Less amounts due within one year 318,588 30,000
---------- --------
Long-term debt due after one year $1,806,900 $831,766
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 $427,632
1999 91,955
2000 129,764
2001 34,933
Thereafter 147,482
-----------
$831,766
</TABLE>
4. Leases
During 1995, the Company began leasing certain office equipment and
furniture under capital leases expiring in 1998 and 1999. The cost of the
assets at December 31, 1995 and 1996 was $116,290. The accumulated
depreciation of the assets at December 31, 1995 and 1996 was $9,691 and
$32,949, respectively.
The following is a schedule of future minimum lease payments under
capital leases, together with the present value of those payments as of
December 31, 1996:
<TABLE>
<S> <C>
1997 $43,945
1998 35,233
1999 11,051
---------
Total minimum lease payments 90,229
Less amount representing interest 17,295
---------
Present value of net minimum lease payments 72,934
Amounts due within one year 32,128
---------
Obligations under capital leases due after one year $40,806
</TABLE>
37
<PAGE>
In June 1996, the Company entered into a new operating lease for office
facilities upon completion of construction of the underlying building. The
rent is $410,820 annually for 10 years. The Company also has operating leases
for additional office space and equipment with various lease terms expiring
through 2006. Rent expense for the years ended December 31, 1994, 1995 and
1996 was $158,000, $300,000, and $564,000, respectively. The future minimum
lease payments at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 871,623
1998 879,647
1999 868,583
2000 850,274
2001 764,611
Thereafter 1,874,295
----------
$6,109,033
</TABLE>
5. Royalty Agreements
In July 1990, the Company entered into a 15 year license agreement with
Iowa State University Research Foundation (ISURF). Under the terms of the
agreement, the Company was granted an exclusive license to make and reproduce
certain software products and to furnish certain related services in
consideration for payment of an initial $2,000 license fee, a 2% royalty on
certain software product revenue and a 2% royalty on two-thirds of all
consulting revenue for the next five years. Effective November 1993, the
royalty agreement was amended to require Engineering Animation, Inc. to pay a
3% royalty on certain software products and services through July 2005. In
addition, the amended royalty agreement requires a .3% royalty on sales of
VisLab core computer software. This amended agreement does not include any
additional software modules or other software products of VisLab. The
agreement, among other things, requires minimum royalty payments over the term
of the license ($20,000 in total during the first three years and $10,000
annually thereafter). In addition to the royalties described above, the
Company, upon sublicensing the software products to third parties, is required
to pay to ISURF 50% of the gross income received from sublicensing. Such
revenue is in addition to the minimum royalty payments required under the
license between ISURF and the Company. ISURF royalty expense was approximately
$45,000, $78,000 and $79,000 for the years ended December 31, 1994, 1995 and
1996, respectively.
In March 1994, the Company entered into a royalty agreement with Pixar, a
California corporation, to obtain the rights to use and distribute Pixar
software products in conjunction with the Company's software products. Pixar
royalty expense was approximately $8,000, $20,000 and $18,000 during the years
ended December 31, 1994, 1995 and 1996, respectively.
In May, 1995, the Company entered into a royalty agreement with Visual
Kinematics, Inc. (VKI), a California corporation, to obtain the rights to use
the licensed software in conjunction with the Company's software products to
develop a derived software. The Company pays a royalty to VKI for each copy
of the derived software distributed to end users and distributors.
38
<PAGE>
VKI royalty expense was approximately $0 and $50,000 during the years 1995 and
1996, respectively.
6. Income Taxes
Income tax expense is comprised of the following components:
<TABLE>
<CAPTION>
Year Ended
1994 1995 1996
<S> <C> <C> <C>
Current tax expense:
Federal $ 0 $ 0 $ 758,000
State 0 0 73,800
0 0 831,800
Deferred tax expense 91,600 297,000 404,200
------- -------- ----------
Total income
tax provision $91,600 $297,000 $1,236,000
</TABLE>
Significant components of the Company's deferred tax liabilities and
assets at December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
Current Noncurrent Current Noncurrent
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Depreciation -- $(100,000) -- $(326,000)
Software development costs -- (154,800) -- (262,000)
Cash basis accounting for tax purposes $(126,000) (377,000) $(119,000) (238,000)
--------- --------- --------- ---------
Total deferred tax liabilities (126,000) (631,800) (119,000) (826,000)
Deferred tax assets:
NOL carryforwards expiring through 2009 126,000 139,000 -- --
Allowance for doubtful accounts -- 48,000 --
--------- --------- --------- ---------
Total deferred tax assets 126,000 139,000 48,000 --
--------- --------- --------- ---------
Net deferred tax liabilities $ -- $(492,800) $ (71,000) $(826,000)
========= ========= ========= =========
</TABLE>
Total reported tax expense applicable to the Company's operations varies
from the tax that would have resulted by applying the statutory U.S. federal
income tax rates to income before income taxes for the following reasons:
39
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
---------------------------
<S> <C> <C> <C>
Income taxes at the
statutory rates 34.0% 34.0% 34.0%
State and local income taxes,
net of federal tax benefits 6.0 6.0 6.0
Other 4.6 .8 -
----- ----- -----
Effective tax rate 44.6% 40.8% 40.0%
</TABLE>
In 1996, the Company began filing its income taxes on the accrual basis
rather than on the cash basis used in prior years. The Company in 1996 used
the net operating loss carryforward of $779,000, which was a result of using
accelerated depreciation, expensing software development costs for tax
purposes and filing the Company's income tax on a cash basis.
7. Capital Stock and Stock Options
Capital Stock
The Board of Directors is authorized to issue up to an aggregate
20,000,000 shares of preferred stock, $.01 par value per share, in one or more
series.
The Company adopted a stockholders rights plan effective at the time of
the initial public offering. Under the plan, each share of common stock has
associated with it one preferred share purchase right ("Right"). The terms of
the Rights are set forth in a Rights agreement.
Stock Options
The Company has stock option arrangements with various officers,
directors, other members of management and employees. The options are
generally granted at fair market value. The options generally vest over
periods of five years and must be exercised no later than 10 years from the
date of grant.
On June 9, 1994, the Company issued non-qualified options to purchase
354,688 shares of common stock for $2.00 per share to two officer/
stockholders. These options, which are not part of the 1994 stock option plan
described below, are fully vested and remain exercisable through June 9, 2009.
During 1994, the Company adopted the Engineering Animation, Inc. 1994
Stock Option Plan providing for issuance of incentive or non-qualified options
to employees based upon management's discretion. The Company has reserved
1,000,000 shares of common stock for issuance under this plan. Non-qualified
options to purchase 15,250 and 26,300 shares were exercisable at December 31,
1995 and 1996, respectively. Statutory options to purchase 33,808 and 92,025
shares were exercisable at December 31, 1995 and 1996, respectively.
On February 11, 1995, the Company issued non-plan/non-qualified options
to purchase 147,500 shares of common stock at prices ranging from $4.00 to
$12.00 per share to five executives. The options are fully vested and remain
exercisable through February 2005.
In January 1996, the Company adopted a Non-Employee Directors Option
Plan. The Company has reserved 250,000 shares of Common Stock for issuance
under this plan.
The Company has elected to follow Accounting Principles Board Opinion
No.25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting
40
<PAGE>
for its employee stock options because, as discussed below, the alternative
fair value accounting provided for under FASB Statement No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions for 1995 and 1996, respectively: risk-free interest rates
ranging from 5.9% to 6.2%; a dividend yield of 0.0%; volatility factors of the
expected market price of the Company's common stock of .01 and .40, and a
weighted-average expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense net of related pro forma tax benefits over the
options' vesting period. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1995 1996
---------------------------------------------------
<S> <C> <C>
Pro forma net income $401,686 $1,672,994
Pro forma earnings per share $.11 $.32
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect is not representative of future pro
forma amounts.
A summary of common stock option activity, and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
1994 1995 1996
Weighted-Average Weighted-Average Weighted-Average
Options Exercised Price Options Exercised Price Options Exercised Price
------- ---------------- ------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year 11,808 $.005 550,096 $1.96 798,646 $ 3.46
Granted 538,288 2.00 284,800 6.19 526,350 18.34
Exercised -- -- (2,560) 4.64
Forfeited -- (36,250) 2.00 (12,370) 3.68
Outstanding at end of year 550,096 1.96 798,646 3.46 1,310,066 9.44
------- ----- ------- ----- --------- ------
Exercisable at end of year 376,016 $1.94 562,064 $3.65 632,321 $ 3.81
------- ----- ------- ----- --------- ------
Weighted-average fair value of options
granted during the year $0.51 $ 6.85
</TABLE>
41
<PAGE>
Exercise prices for options outstanding as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Number of Options Range of Exercise Prices
----------------------------------------------------------------------
<S> <C>
11,808 $.005
799,058 $2.00 - $9.00
175,650 $12.00 - $19.25
323,550 $20.125 - $24.00
----------------------------------------------------------------------
1,310,066 $.005 - $24.00
</TABLE>
The weighted-average remaining contractual life of these options is 9.77
years.
8. Government Grant
During 1992, the Company entered into a three-year Advanced Technology
Program federal government grant for $1,947,000 from the United States
Department of Commerce to create a three dimensional fully detailed
engineering database of the musculoskeletal system of the human body using
computer visualization and computational dynamics. The Company and the Federal
government, through a cost-sharing agreement, developed this intellectual
property. Revenues from this grant for the years ended December 31, 1994 and
1995 were $564,000, and $369,000, respectively.
9. Employee Retirement Plan
The Company has a 401(k) plan which covers substantially all employees
who meet the minimum age requirement. The Company is required to match one-
half of the employee's contribution up to a maximum Company contribution of
the first 4% of the employee's compensation. Plan expense for 1994, 1995 and
1996 was approximately $29,000, $58,000 and $92,000, respectively.
10. Fair Market Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Notes receivable: The carrying amount reported in the balance sheet for
the note receivable approximates its fair value as it carries a floating rate
of interest.
Long-term debt: The carrying amounts reported in the balance sheet for
the Company's bank notes payable approximate their fair values as they bear
variable rates of interest. The Company believes that the municipal notes,
issued to the Company to encourage and facilitate expansion and increased
employment, approximate their fair values as they were negotiated and issued
in the latter half of 1995. The prime lending rate in 1996 approximated the
rate in 1995, therefore, the fair value change would be immaterial.
42
<PAGE>
11. Major Customers
Two major customers accounted for 3.9%, 5.6% and 32.9% of revenues for
1994, 1995, and 1996, respectively.
12. Quarterly Results of Operations (Unaudited)
The following table sets forth selected unaudited quarterly financial
information for 1996. The Company believes that all necessary adjustments have
been included in the amounts stated below to present fairly the selected
quarterly information.
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------------------- Year ended
Dollars in thousands, March 31, 1996 June 30, 1996 September 30, December 31, 1996 December 31, 1996
except per share data 1996
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $3,101 $4,536 $5,715 $7,061 $20,413
Gross profit 2,011 2,972 3,903 5,083 13,969
Operating expenses 1,782 2,566 3,384 4,178 11,910
Operating income 229 406 519 905 2,059
Net income 176 434 521 720 1,851
Earnings per share 0.04 0.08 0.10 0.13 0.36
</TABLE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
During 1996, there were no disagreements with the Company's independent
public accountants on accounting procedures or accounting and financial
disclosures.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning the directors and executive officers of the
Registrant is incorporated herein by reference from the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders under the captions
"Election of Directors," "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance."
43
<PAGE>
Item 11. Executive Compensation
Information concerning management compensation is incorporated herein by
reference from the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders under the captions "Executive Compensation," "Director
Compensation," "Report of the Compensation Committee of the Board of
Directors" and "Company Performance."
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated by reference from the Company's Proxy Statement
for the 1997 Annual Meeting of Stockholders under the caption "Security
Ownership."
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders under the caption "Certain Transactions."
44
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a)(1) Financial Statements
The following consolidated financial statements of Engineering
Animation, Inc. and its subsidiaries are included in Part II of this
report:
Page
----
Report of Independent Auditors.................................... 29
Consolidated Balance Sheets - December 31, 1996 and 1995.......... 30
Consolidated Statements of Income - years ended
December 31, 1996, 1995 and 1994.................................. 31
Consolidated Statement of Stockholders' Equity - years
ended December 31, 1996, 1995 and 1994............................ 32
Consolidated Statements of Cash Flows - years ended
December 31, 1996, 1995 and 1994.................................. 33
Notes to Consolidated Financial Statements........................ 34
(a)(2) Financial Statement Schedule
None
(a)(3) List of Exhibits:
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation*
3.2 By-laws*
4.1 Specimen Common Stock Certificate*
45
<PAGE>
4.2 Rights Agreement between the Company and First Chicago
Trust Company of New York, dated as of January 1, 1996*
10.1 Amended and Restated 1994 Stock Option Plan+*
10.2 Non-Employee Directors Stock Option Plan+*
10.3 Employment and Severance Agreements by and between the
Company and Matthew M. Rizai, dated as of January 1, 1996+*
10.4 Employment and Severance Agreements by and between the
Company and Martin J. Vanderploeg, dated as of January 1,
1996+*
10.5 Employment and Severance Agreements by and between the
Company and Jamie A. Wade, dated as of January 1, 1996+*
10.6 Employment and Severance Agreements by and between the
Company and Jay E. Shannan, dated as of January 1, 1996+*
10.7 Employment and Severance Agreements by and between the
Company and Jeff D. Trom, dated as of January 1, 1996+*
10.8 Employment Agreement by and between the Company and Michael
J. Jablo, dated as of September 18, 1995+*
10.9 Employment and Severance Agreements by and between the
Company and Michael K. Jewell, dated as of January 26,
1996+*
10.10 Option Agreement by and between the Company and Matthew M.
Rizai, dated June 9, 1994+*
10.11 Option Agreement by and between the Company and Martin J.
Vanderploeg, dated June 9, 1994+*
10.12 Option Agreement by and between the Company and Matthew M.
Rizai, dated as of February 11, 1995+*
10.13 Option Agreement by and between the Company and Martin J.
Vanderploeg, dated February 11, 1995+*
10.14 Option Agreement by and between the Company and Jay E.
Shannan, dated February 11, 1995+*
10.15 Option Agreement by and between the Company and Jeff D.
Trom, dated February 11, 1995+*
46
<PAGE>
10.16 Option Agreement by and between the Company and Jamie A.
Wade, dated February 11, 1995+*
10.17 Ground Lease Agreement between Iowa State University
Research Park Corporation and the Company, dated June 1,
1995*
10.18 Mortgage between CRE, Inc. and the Company, dated June 29,
1995*
10.19 Lease Assignment and Agreement between CRE, Inc. and the
Company, dated June 14, 1995*
10.20 Lease Agreement between CRE, Inc. and the Company, dated
June 14, 1995*
10.21 Work for hire Contracts between Wm. C. Brown Publishers, a
division of Wm. C. Brown Communication, Inc. and the
Company, dated November 14, 1994, as amended by Addendum
dated December 21, 1995*
10.22 Publishing Agreement between Mosby-Year Book, Inc. and the
Company, dated November 1, 1995*
10.23 Design and Development Agreement between Warner Books,
Inc. and the Company, dated July 17, 1995*
10.24 Distribution Agreement between SDRC Operations, Inc. and
the Company, dated December 29, 1995*
10.25 License Agreement between the Company and Iowa State
University Research Foundation, dated July 30, 1990, as
amended on November 15, 1993*
11.1 Statement re: Computation of Per Share Earnings
47
<PAGE>
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
_____________
+ Denotes compensatory plan.
* Incorporated herein by reference from the Company's Registration
Statement on Form S-1, SEC file no. 33-80705.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended December 31,
1996.
48
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
11.1 Computation of Per Share Earnings
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 11.1
------------
Engineering Animation, Inc.
Computation of Per Share Earnings
<TABLE>
<CAPTION>
------------------------------------
Years Ended December 31,
------------------------------------
1994 1995 1996
(in thousands, except per share data)
<S> <C> <C> <C>
Primary:
Weighted average number of shares outstanding 3,017,547 2,869,760 4,390,807
Net effect of dilutive stock options--based on treasury
stock method using the IPO price of $18.00 per share for
1994 and 1995 and average market price of $21.49 for 1996 490,283 645,001 734,661
SAB 83 adjustment due to cheap stock 186,941 186,941 31,157
------------------------------------
Total 3,694,771 3,701,702 5,156,625
------------------------------------
Net income $113,933 $430,665 $1,851,002
------------------------------------
Income per share of common stock $.03 $.12 $.36
------------------------------------
Fully Diluted:
Weighted average number of shares outstanding 3,017,547 2,869,760 4,390,807
Net effect of dilutive stock options--based on treasury
stock method using the year-end market price, if higher
than average market price 490,283 645,001 800,456
SAB 83 adjustment due to cheap stock 186,941 186,941 31,157
------------------------------------
Total 3,694,771 3,701,702 5,222,420
------------------------------------
Net income $113,933 $430,665 $1,851,002
------------------------------------
Income per share of common stock $.03 $.12 $.35
------------------------------------
</TABLE>
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF ERNST & YOUNG LLP
----------------------------
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No.33-17393) pertaining to the Amended and Restated 1994 Stock
Option Plan, the 1995 Executive Bonus and Stock Option Plan, the Non-Employee
Directors Option Plan and the Original Directors Option Plan of Engineering
Animation, Inc. of our report dated January 17, 1997, with respect to the
consolidated financial statements of Engineering Animation, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Des Moines, Iowa
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,350
<SECURITIES> 9,884
<RECEIVABLES> 10,000
<ALLOWANCES> 121
<INVENTORY> 0
<CURRENT-ASSETS> 29,672
<PP&E> 6,484
<DEPRECIATION> 1,291
<TOTAL-ASSETS> 37,956
<CURRENT-LIABILITIES> 3,184
<BONDS> 872
0
0
<COMMON> 47
<OTHER-SE> 33,027
<TOTAL-LIABILITY-AND-EQUITY> 37,956
<SALES> 20,413
<TOTAL-REVENUES> 20,413
<CGS> 6,444
<TOTAL-COSTS> 6,444
<OTHER-EXPENSES> 11,910
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> 3,087
<INCOME-TAX> 1,236
<INCOME-CONTINUING> 1,851
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,851
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
</TABLE>
