<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-27493
PROSPECTUS
1,429,000 Shares
LOGO
Common Stock
(par value $.01 per share)
Of the 1,429,000 shares of Common Stock of Engineering Animation, Inc., a
Delaware corporation (the "Company" or "EAI"), offered hereby, 870,000 shares
are being sold by the Company and 559,000 shares are being sold by the Selling
Stockholders identified herein. See "Principal and Selling Stockholders." The
Company will not receive any of the proceeds from the sale of the Common Stock
by the Selling Stockholders.
The Common Stock is quoted on the Nasdaq Stock Market National Market (the
"Nasdaq National Market") under the symbol "EAII." On June 11, 1997, the
reported last sale price of the Common Stock on the Nasdaq National Market was
$29.00 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS (3)
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<S> <C> <C> <C> <C>
Per Share $29.00 $1.74 $27.26 $27.26
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Total (3) $41,441,000 $2,486,460 $23,716,200 $15,238,340
- ----------------------------------------------------------------
</TABLE>
(1)The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2)Before deducting expenses of the Offering payable by the Company estimated
at $400,000.
(3)The Company and certain Selling Stockholders have granted the Underwriters
an option to purchase up to an additional 214,350 shares of Common Stock in the
aggregate, on the same terms as set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discount, Proceeds to the Company and Proceeds to Selling
Stockholders will be $47,657,150, $2,859,429, $27,260,000 and $17,537,721,
respectively. See "Underwriting."
The shares of Common Stock being offered by this Prospectus are being offered
by the Underwriters, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters, and subject to approval of certain legal matters
by Mayer, Brown & Platt, counsel for the Underwriters. It is expected that
delivery of the shares of Common Stock will be made against payment therefor on
or about June 17, 1997 at the offices of J.P. Morgan Securities Inc., 60 Wall
Street, New York, New York.
J.P. MORGAN & CO. COWEN & COMPANY
June 11, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE
"UNDERWRITING."
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange Act of
1934, as amended, and in accordance therewith files periodic reports and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information concerning the Company may
be inspected without charge and copies may be obtained (at prescribed rates) at
the facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of the materials may be obtained from the Public Reference Section
of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and its public reference facilities in New York, New
York, and Chicago, Illinois, at prescribed rates. In addition, electronically
filed documents, including reports, proxy and information statements and other
information regarding the Company, can be obtained from the SEC's Web site at:
http://www.sec.gov.
The Company has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is made to such Registration Statement, including the
exhibits and schedules thereto, a copy of which may be obtained from the
Commission. The statements contained in this Prospectus as to the contents of
any document filed as an exhibit are of necessity brief descriptions thereof
and are not necessarily complete; each such statement is qualified in its
entirety by reference to such document.
<PAGE>
No person has been authorized to give any information or make any
representations not contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company, the Selling Stockholders or any Underwriter. This Prospectus
does not constitute an offer to sell, or a solicitation of an offer to buy, the
Common Stock in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation.
No action has been or will be taken in any jurisdiction by the Company, the
Selling Stockholders or any Underwriter that would permit a public offering of
the Common Stock or possession or distribution of this Prospectus in any
jurisdiction where action for that purpose is required, other than in the
United States. Persons into whose possession this Prospectus comes are required
by the Company, the Selling Stockholders and the Underwriters to inform
themselves about and to observe any restrictions as to the offering of the
Common Stock and the distribution of this Prospectus.
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 7
Use of Proceeds....................... 12
Dividend Policy....................... 12
Price Range of Common Stock........... 12
Capitalization........................ 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 15
Business.............................. 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Management............................................................ 33
Certain Relationships and Related Party Transactions.................. 37
Principal and Selling Stockholders.................................... 38
Description of Capital Stock.......................................... 40
Shares Eligible for Future Sale....................................... 43
Underwriting.......................................................... 44
Legal Matters......................................................... 45
Experts............................................................... 45
Index to Consolidated Financial Statements............................ F-1
</TABLE>
VisLab(R) is a registered trademark of the Company. VisProducts(TM),
VisMockUp(TM), VisFly(TM), NetFly(TM), VisModel(TM), Particle Lab(TM) and FEA
Visualizer(TM) are trademarks of the Company. All other trademarks, brand marks
and trade names used in this Prospectus are trademarks, brand marks, trade
names or registered marks of their respective owners.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements included elsewhere in this Prospectus. Except as set forth in the
consolidated financial statements or otherwise noted, the information contained
in this Prospectus assumes that there will be no exercise of the Underwriters'
over-allotment option.
THE COMPANY
EAI specializes in developing 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 through three
interrelated product lines: 3D visualization software, interactive software and
custom animation. Utilizing its broad base of technology, in conjunction with
its extensive library of computer-generated animation assets, EAI offers
products that allow customers to reduce time to market, decrease product
development costs and obtain realistic, high quality 3D animations at
reasonable prices 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 enables
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 to visualizations with personal
computers, thereby allowing customers to use VisProducts with their existing
hardware and software. 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 engineering,
manufacturing, marketing, sales and support, to more easily visualize products,
see the effects of changes during the development process and communicate in
real time. This collaborative approach can help reduce the total time required
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 creating 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 has contracts
with BMG Interactive, Elsevier Science N.L., Hoechst Marion Roussel North
America, Houghton Mifflin Company, International Business Machines Corporation,
Smithsonian Institution Inc., The Times Mirror Company, William C. Brown
Publishers and Williams & Wilkins, Inc.
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 market products and 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 producers such as The Discovery
Channel and the National Geographic Society. In 1996, EAI produced more than
4,000 minutes of 3D animation in over 150 projects for customers.
The Company was incorporated in 1988 in Iowa and, in December 1995,
reincorporated in Delaware. The Company maintains its executive offices at 2321
North Loop Drive, Ames, Iowa 50010. The Company's telephone number is (515)
296-9908; its Internet e-mail address is [email protected]; and its World Wide Web
address is www.eai.com.
4
<PAGE>
THE OFFERING
The offering of 1,429,000 shares of Common Stock being offered is referred to
in this Prospectus as the "Offering."
<TABLE>
<S> <C>
COMMON STOCK OFFERED(1):
By the Company............ 870,000 shares
By the Selling
Stockholders............. 559,000 shares
Total Offering............ 1,429,000 shares
COMMON STOCK OUTSTANDING
AFTER THE OFFERING(1)(2)... 5,587,184 shares
USE OF PROCEEDS TO THE For expansion of international sales and marketing
COMPANY.................... and for general corporate purposes, including
product development and capital expenditures,
including computer and equipment purchases. See
"Use of Proceeds."
RISK FACTORS................ For a discussion of certain considerations
relevant to an investment in the Common Stock, see
"Risk Factors."
NASDAQ NATIONAL MARKET
SYMBOL..................... "EAII"
</TABLE>
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(1) Assumes the Underwriters' over-allotment option for up to 214,350 shares of
Common Stock is not exercised. See "Underwriting."
(2) Excludes 1,190,000 shares of Common Stock reserved for issuance under the
Company's 1994 Stock Option Plan (the "1994 Option Plan") (including 888,480
shares issuable upon the exercise of outstanding options that have been granted
under the 1994 Option Plan, of which options to purchase 154,675 shares of
Common Stock are currently exercisable), 60,000 shares of Common Stock reserved
for issuance under the Company's Non-Employee Directors Option Plan ("Director
Option Plan") (including 5,000 shares issuable upon the exercise of outstanding
options that have been granted under the Director Option Plan, all of which are
currently exercisable) and 513,996 shares of Common Stock reserved for issuance
under other outstanding options (all of which are currently exercisable). See
"Management--Employee Benefit Plans" and Note 7 of Notes to Consolidated
Financial Statements.
5
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
------------------------------------------------
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1992 1993 1994 1995 1996 1996 1997
---- ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands,
except per share data
STATEMENT OF OPERATIONS
DATA
Net revenues $993 $2,687 $5,456 $10,415 $20,413 $3,101 $7,676
Income from operations 26 204 274 865 2,059 229 1,040
Net income 5 107 114 431 1,851 176 785
Earnings per share -- $ .04 $ .03 $ .12 $ .36 $ .04 $ .14
</TABLE>
<TABLE>
<CAPTION>
-------------------
AT MARCH 31, 1997
AS
ACTUAL ADJUSTED(1)
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<S> <C> <C>
Dollars in thousands
BALANCE SHEET DATA
Cash and short-term investments $17,670 $40,986
Working capital 26,515 49,832
Total assets 38,654 61,971
Long-term debt and obligations under capital leases, less
current maturities 788 788
Stockholders' equity 33,890 57,206
</TABLE>
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(1) Adjusted to reflect the sale of 870,000 shares of Common Stock by the
Company at an offering price of $29.00 per share as if such sale had occurred
on March 31, 1997.
6
<PAGE>
RISK FACTORS
Certain matters discussed in this Prospectus are forward-looking statements
that involve substantial risks and uncertainties that could cause actual
results to differ materially from targets or projected results. Factors that
could cause actual results to differ materially include, among others, those
factors described below. Many of these factors are beyond the Company's ability
to predict or control. Prospective investors are cautioned not to put undue
reliance on forward-looking statements, which statements have been made as of
the date of this Prospectus, and prospective investors should not infer that
there has been no change in the affairs of the Company since the date hereof
that would warrant any modification of any forward-looking statement made in
this Prospectus. The Company disclaims any intent or obligation to update
publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
In addition to the other information in this Prospectus, the following factors
should be considered carefully by prospective investors in evaluating the
Company and its business before purchasing shares of Common Stock being
offered.
VARIABILITY OF OPERATING RESULTS
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 December holiday season or 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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 software products and custom animation 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, operating results and financial condition 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. See "Business--Industry Trends" and "--Strategy."
DEPENDENCE ON EMERGING MARKET FOR 3D VISUALIZATION SOFTWARE PRODUCTS AND
CUSTOMER CONCENTRATION
The market for 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 its 3D visualization software products as an enterprise-
wide solution, there can be no assurance that 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 ("Ford") and
Hewlett-Packard Company ("Hewlett-Packard") 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
7
<PAGE>
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. See "Business--Industry
Trends--3D Visualization Software Products" and "--3D Visualization Software
Products."
DEPENDENCE ON EMERGING MARKET FOR INTERACTIVE SOFTWARE PRODUCTS
The market for interactive 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 developers 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. Although the Company typically receives
development fees for interactive software products, 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 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. See "Business--Industry Trends--Custom Animation Products and
Interactive Software Products" and "--Interactive Software Products."
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 BMG Interactive, Sir-Tech Software Inc. ("Sir-Tech
Software"), The Times Mirror Company ("Times Mirror") and others have involved
contracts that address a single product 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, operating results and financial condition. See
"Business--Marketing and Distribution--Interactive Software Products."
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.
See "Business--Marketing and Distribution--3D Visualization Software Products."
MANAGEMENT OF GROWTH AND INTERNATIONAL EXPANSION
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. Such activities will require
significant managerial expertise. If the Company is unable to manage its growth
effectively, the Company's revenues, operating results and financial condition
could be materially adversely affected. In addition, in connection with the
Company's plans to increase its sales and marketing presence in Europe and
Asia, the Company will be incurring expenses in advance of revenues. If the
Company is unsuccessful in generating sufficient revenues to recover these
expenses or is unable to hire, train and retain experienced international sales
and marketing personnel, the Company's revenues, operating results and
financial condition could be adversely affected. Increased international
activity could also expose the Company to foreign currency fluctuations,
foreign labor laws and other unforeseen problems. See "Business--Industry
Trends" and "--Strategy."
8
<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 computer-aided design
("CAD"), computer-aided engineering ("CAE") and computer-aided manufacturing
("CAM") markets could offer products with the same or similar functionality as
the Company's VisProducts. Such companies, some of which have substantially
greater financial, technical, marketing and other resources than EAI, include
Autodesk, Inc., Dassault Systemes ("Dassault"), Division Plc., International
Business Machines Corporation ("IBM"), Parametric Technology Corporation
("Parametric Technology"), SDRC and Silicon Graphics, Inc. ("SGI"). 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. See
"Business-- Competition--3D Visualization Software Products."
Interactive Software Products
The interactive software 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., CUC International, Digital Domain Inc. ("Digital Domain"), GT Interactive
Software Corp. and The Learning Company. Moreover, large corporations, such as
Microsoft Corporation ("Microsoft") and The Walt Disney Company ("Disney"),
which have substantial bases of intellectual property content and substantial
financial resources, have entered or announced their intention to enter the
consumer software market. See "Business--Competition--Interactive Software
Products."
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. In addition, EAI competes directly against special effects firms for
certain projects in the entertainment market. These special effects firms, some
of which have substantially greater financial, technical, marketing and other
resources than EAI, include Digital Domain, Dreamworks SKG, Industrial Light &
Magic (a division of Lucasfilm Limited) and Pixar. In addition, EAI competes
directly with a number of small companies that provide custom animations to
commercial markets as a complement to their primary business of studio film
production, engineering consulting and communications consulting. See
"Business--Competition--Custom Animation Products."
PROTECTION OF PROPRIETARY RIGHTS
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 3D 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, operating results and financial condition 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. See "Business--Proprietary Rights."
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
9
<PAGE>
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. See "Management."
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 for the educational and medical markets 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, relatively low trading volume in the Common
Stock 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.
See "Underwriting."
CONTROL BY MANAGEMENT STOCKHOLDERS
Upon completion of the Offering, the directors and executive officers of the
Company will beneficially own approximately 32% of the outstanding Common
Stock. As a result, such persons may have the ability to control the Company
and direct its affairs and business. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company. See
"Management" and "Principal and Selling Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering could adversely affect the prevailing market price for the Common
Stock. All of the outstanding shares of Common Stock will be freely tradeable
without restriction under the Securities Act other than the 1,842,166 shares
held by persons who are "affiliates" of the Company as that term is defined in
Rule 144 under the Securities Act. Options to purchase 1,407,476 shares of
Common Stock are currently outstanding, including options to purchase 673,671
shares that are currently exercisable. If a substantial number of shares were
sold in the public market pursuant to Rule 144 or the registration statement
filed in connection with option plans, the trading price of the Common Stock in
the public market could be adversely affected. See "Management--Director
Compensation," "--Employee Benefit Plans," "Shares Eligible for Future Sale"
and "Underwriting."
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.
10
<PAGE>
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
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). See "Description of Capital Stock--Preferred Stock," "--
Rights" and "--Certain Limited Liability, Indemnification and Anti-takeover
Provisions."
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. See "Dividend Policy."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $23.3 million ($26.9 million if the Underwriters' over-allotment
option is exercised in full) after deducting the underwriting discount and
estimated offering expenses payable by the Company. The Company will not
receive any of the net proceeds from the sale of shares by Selling
Stockholders.
Of the net proceeds realized by the Company, approximately $5 million will be
used in connection with the expansion of international sales and marketing. The
Company will use the remainder of the net proceeds for general corporate
purposes, including product development and computer and equipment purchases.
Pending application of the net proceeds as described above, the Company intends
to invest the net proceeds in short-term investment grade securities.
DIVIDEND POLICY
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. Any future determination by the Company to
pay cash dividends on its Common Stock will be at the discretion of the Board
of Directors and will be dependent upon the Company's operating results,
financial condition, contractual restrictions and other factors deemed relevant
by the Board of Directors.
PRICE RANGE OF COMMON STOCK
The Common Stock is listed and traded on the Nasdaq National Market under the
symbol "EAII." The table below sets forth the intra-day high and low prices of
the Common Stock on the Nasdaq National Market for the periods indicated since
the Company's initial public offering of Common Stock on February 29, 1996.
<TABLE>
<CAPTION>
-------------
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1996:
First Quarter (from February 29, 1996) $26.25 $19.25
Second Quarter 23.75 18.75
Third Quarter 25.00 16.00
Fourth Quarter 26.75 21.75
Fiscal Year Ending December 31, 1997:
First Quarter $35.75 $22.25
Second Quarter (through June 11, 1997) 34.25 21.50
</TABLE>
On June 11, 1997, the reported last sale price of the Common Stock on the
Nasdaq National Market was $29.00 per share. As of May 15, 1997, the Company
had approximately 2,200 beneficial stockholders.
12
<PAGE>
CAPITALIZATION
The following table sets forth at March 31, 1997 (i) the capitalization of the
Company and (ii) the capitalization as adjusted to reflect the application of
the estimated net proceeds, at a price of $29.00 per share, from the sale by
the Company of 870,000 shares of Common Stock pursuant to the Offering. See
"Use of Proceeds." The information set forth below should be read in
conjunction with the consolidated financial statements and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
-------------------
AT MARCH 31, 1997
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
Dollars in thousands, except per share data
Long-term debt and obligations under capital leases, less
current maturities $ 788 $ 788
Stockholders' equity:
Common Stock, $.01 par value, 20,000,000 shares
authorized, 4,701,205 shares issued and outstanding; and
5,571,205 shares issued and outstanding (as adjusted)(1) 47 56
Preferred Stock, $.01 par value, 20,000,000 shares
authorized, no shares issued and
outstanding -- --
Additional paid-in capital 30,480 53,787
Retained earnings 3,363 3,363
------- -----------
Total stockholders' equity 33,890 57,206
------- -----------
Total capitalization $34,678 $ 57,994
======= ===========
</TABLE>
- -------
(1) Excludes 1,190,000 shares of Common Stock reserved for issuance under the
1994 Option Plan (including 837,750 shares issuable upon the exercise of
outstanding options that have been granted under the 1994 Option Plan, of which
options to purchase 135,505 shares of Common Stock were currently exercisable),
60,000 shares of Common Stock reserved for issuance under the Director Option
Plan (including 5,000 shares issuable upon the exercise of outstanding options
that have been granted under the Director Option Plan, all of which are
currently exercisable) and 513,996 shares of Common Stock reserved for issuance
under other outstanding options (all of which are currently exercisable). See
"Management--Employee Benefit Plans" and Note 7 of Notes to Consolidated
Financial Statements.
13
<PAGE>
SELECTED FINANCIAL DATA
The consolidated statement of income data for the years ended December 31,
1994, 1995 and 1996 and the consolidated balance sheet data at December 31,
1995 and 1996 set forth below are derived from the consolidated financial
statements audited by Ernst & Young LLP included elsewhere in this Prospectus.
The consolidated statement of income data for the years ended December 31, 1992
and 1993 and the balance sheet data at December 31, 1992, 1993 and 1994 set
forth below are derived from audited financial statements that are not included
in this Prospectus. The consolidated statement of income data for the three
months ended March 31, 1996 and 1997 and the consolidated balance sheet data as
of March 31, 1997 are derived from unaudited financial statements of the
Company and include all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of
the financial position and the results of operations for these periods.
Operating results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the entire year. Historical
results are not necessarily indicative of future results. The data set forth
below should be read in conjunction with the consolidated financial statements
and the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
--------------------------------------------------------
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
Dollars in thousands, 1992 1993 1994 1995 1996 1996 1997
except per share data ---- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net revenues $993 $2,687 $5,456 $10,415 $20,413 $3,101 $7,676
Cost of revenues 315 665 1,557 2,759 6,444 1,090 2,425
---- ------ ------ ------- ------- ------- -------
Gross profit 678 2,022 3,899 7,656 13,969 2,011 5,251
Operating expenses:
Sales and marketing 270 733 1,802 3,093 7,428 1,089 2,369
General and
administrative 260 519 954 1,986 2,360 439 925
Research and development 122 566 869 1,712 2,122 254 917
---- ------ ------ ------- ------- ------- -------
Total operating expenses 652 1,818 3,625 6,791 11,910 1,782 4,211
---- ------ ------ ------- ------- ------- -------
Income from operations 26 204 274 865 2,059 229 1,040
Interest income 1 22 6 25 1,134 116 280
Interest expense (20) (32) (74) (162) (106) (49) (15)
---- ------ ------ ------- ------- ------- -------
Income before income
taxes 7 194 206 728 3,087 296 1,305
Income taxes 2 87 92 297 1,236 120 520
---- ------ ------ ------- ------- ------- -------
Net income $ 5 $ 107 $ 114 $ 431 $ 1,851 $ 176 $ 785
==== ====== ====== ======= ======= ======= =======
Earnings per share -- $ .04 $ .03 $ .12 $ .36 $ .04 $ .14
==== ====== ====== ======= ======= ======= =======
<CAPTION>
--------------------------------------------------------
AT DECEMBER 31, AT MARCH 31,
<S> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands 1992 1993 1994 1995 1996 1996 1997
---- ------ ------ ------- ------- ------- -------
BALANCE SHEET DATA
Cash and short-term
investments $ 29 $1,201 $ 258 $ 491 $19,234 $28,214 $17,670
Working capital 90 1,539 1,329 1,335 26,488 30,033 26,515
Total assets 453 2,407 3,143 6,199 37,956 35,033 38,654
Long-term debt and
obligations under
capital leases, less
current maturities 191 416 546 1,880 873 1,003 788
Stockholders' equity 86 1,645 1,714 2,144 33,074 31,443 33,890
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of operations
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included elsewhere in this Prospectus. Certain
matters discussed below are forward-looking statements that involve substantial
risks and uncertainties that could cause actual results to differ materially
from targets or projected results. Factors that could cause actual results to
differ materially include, among others, those factors described in "Risk
Factors." Many of these factors are beyond the Company's ability to predict or
control. Prospective investors are cautioned not to put undue reliance on
forward-looking statements, which statements have been made as of the date of
this Prospectus, and prospective investors should not infer that there has been
no change in the affairs of the Company since the date hereof that would
warrant any modification of any forward-looking statement made in this
Prospectus. The Company disclaims any intent or obligation to update publicly
these forward-looking statements, whether as a result of new information,
future events or otherwise.
OVERVIEW
The Company's revenues are derived from sales of 3D visualization software
products (formerly referred to as animation software tools), interactive
software products and custom animation products. Sales of custom animation
products were EAI's original source of revenues since the Company's founding in
1988. The Company began developing its 3D visualization software products in
1993 and began marketing these products in 1994. In 1996, the Company expanded
its 3D visualization software product line to provide enterprise-wide solutions
for its customers. 3D visualization software products was the Company's fastest
growing product line in 1996. In early 1995, the Company began developing
interactive software products. Since 1995, interactive software product
revenues largely reflect development fees paid to the Company by publishers
that agreed to distribute the Company's interactive software products. In
December 1995, the Company completed its first interactive software title, The
Dynamic Human. The Company expects that near-term interactive software product
revenues will consist primarily of development fees and royalties from sales of
certain of its interactive software products.
Revenues from sales of 3D visualization software products are recognized upon
delivery of the product to the customer and satisfaction of significant related
obligations, if any. Revenues from customer support are included in 3D
visualization software product revenues and represent less than 5.0% of total
revenues. Customer support revenues are deferred and recognized ratably over
the period in which the customer support services are provided. The Company
recognizes revenues from interactive software products and custom animation
products based upon labor and other costs incurred and progress to completion
on contracts.
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 in the
future. For instance, consumer purchases of interactive software products may
experience some effects of seasonality created by the December holiday season.
In addition, EAI's sales of interactive software products in the academic
markets may experience some effects of seasonality created by the timing of the
academic school year. Therefore, if sales of interactive software products
increase, the Company's revenues as a whole may experience some effects of
seasonality.
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,
operating results and financial condition.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain consolidated
financial data as a percentage of revenues:
<TABLE>
<CAPTION>
-----------------------------------
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
1994 1995 1996 1996 1997
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues:
3D visualization software products 10.8% 14.0% 37.4% 25.8% 39.7%
Interactive software products 12.2 23.8 32.5 26.8 28.8
Custom animation products 77.0 62.2 30.1 47.4 31.5
----- ----- ----- ------ ------
Total revenues 100.0 100.0 100.0 100.0 100.0
Cost of revenues 28.5 26.5 31.6 35.1 31.6
----- ----- ----- ------ ------
Gross profit 71.5 73.5 68.4 64.9 68.4
Operating expenses:
Sales and marketing 33.0 29.7 36.4 35.1 30.9
General and administrative 17.5 19.1 11.5 14.2 12.1
Research and development 16.0 16.4 10.4 8.2 11.9
----- ----- ----- ------ ------
Total operating expenses 66.5 65.2 58.3 57.5 54.9
----- ----- ----- ------ ------
Income from operations 5.0 8.3 10.1 7.4 13.5
Interest income (expense), net (1.2) (1.3) 5.0 2.1 3.5
----- ----- ----- ------ ------
Income before income taxes 3.8 7.0 15.1 9.5 17.0
Income taxes 1.7 2.9 6.0 3.8 6.8
----- ----- ----- ------ ------
Net income 2.1% 4.1% 9.1% 5.7% 10.2%
===== ===== ===== ====== ======
</TABLE>
Three Months Ended March 31, 1997 as Compared to Three Months Ended March 31,
1996
Net Revenues The Company's total revenues increased 147.5% to $7.7 million for
the three months ended March 31, 1997 from $3.1 million for the three months
ended March 31, 1996. 3D visualization software products revenue increased
280.6% to $3.0 million for the three months ended March 31, 1997 from $801,000
for the three months ended March 31, 1996, as a result of increased product
sales, particularly to Ford and Hewlett-Packard. Interactive software product
revenues increased 165.6% to $2.2 million for the three months ended March 31,
1997 from $832,000 for the three months ended March 31, 1996, primarily due to
additional projects for interactive software products. Custom animation
products revenue increased 64.6% to $2.4 million for the three months ended
March 31, 1997 from $1.5 million for the three months ended March 31, 1996,
primarily due to additional projects for custom animation products.
Cost of Revenues The Company's cost of revenues includes cost of production,
packaging and distribution costs, royalties and amortization of capitalized
software costs. The Company's cost of revenues increased 122.5% to $2.4 million
for the three months ended March 31, 1997 from $1.1 million for the three
months ended March 31, 1996, primarily due to expenses associated with new
development contracts in 3D visualization software products and increased
development costs for interactive software projects. The Company's cost of
revenues as a percentage of revenues decreased to 31.6% for the three months
ended March 31, 1997 from 35.1% for the three months ended March 31, 1996.
Royalty costs remained unchanged at 1.0% of revenues for the three months ended
March 31, 1997 compared to the three months ended March 31, 1996. 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
Company capitalized software costs of $302,000 for the three months ended March
31, 1997 and $79,000 in the three months ended March 31, 1996, which the
Company amortizes over an estimated economic useful life of three years or
based on the ratio of current revenue to total projected product revenues,
which ever is greater. Amortization expenses for the three months ended March
31, 1997 and 1996 were $48,000 and $37,000, respectively.
Sales and Marketing The Company's sales and marketing expenses include
personnel costs related to sales, marketing and customer service activities, as
well as costs attributable to promotional materials, mail campaigns, trade
shows and advertising. The Company's sales and marketing expenses increased
117.5% to $2.4 million for the three months ended March 31, 1997 from $1.1
million for the three months ended March 31, 1996, primarily due to costs
associated with
16
<PAGE>
the expansion of the sales force and increased marketing costs. Sales and
marketing expenses decreased to 30.9% of total revenues for the three months
ended March 31, 1997 from 35.1% for the three months ended March 31, 1996. The
decrease in sales and marketing expenses as a percentage of revenues was
primarily the result of spreading expenses over higher revenues. The Company
expects sales and marketing expenses to increase as it significantly expands
its international sales and marketing efforts.
General and Administrative The Company's general and administrative expenses
consist of salaries and facility costs for administrative, executive and
accounting personnel, as well as consulting expenses, insurance costs,
professional fees and other costs. The Company's general and administrative
expenses increased 110.7% to $925,000 for the three months ended March 31, 1997
from $439,000 for the three months ended March 31, 1996, primarily a result of
increased administrative staff and related costs. General and administrative
expenses decreased to 12.1% of total revenues for the three months ended March
31, 1997 from 14.2% for the three months ended March 31, 1996. The decrease of
general and administrative expenses as a percentage of revenues was primarily a
result of spreading expenses over higher revenues.
Research and Development The Company's research and development expenses
consist of salaries, related facility costs, equipment costs and outside
consulting fees. The Company's research and development expenses increased
261.0% to $917,000 for the three months ended March 31, 1997 from $254,000 for
the three months ended March 31, 1996. Research and development expenses
increased to 11.9% of total revenues for the three months ended March 31, 1997
from 8.2% for the three months ended March 31, 1996. The increase in research
and development expenses for the three months ended March 31, 1997 was
primarily due to additional personnel and related costs required to meet the
increased demand for 3D visualization software and interactive software
products.
Income Taxes The Company's effective income tax rate for the three months
ended March 31, 1997 decreased to 39.9% from 40.6% for the three months ended
March 31, 1996.
Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995
Net Revenues The Company's total revenues for the year ended December 31, 1996
increased 96.0% to $20.4 million from $10.4 million for the year ended December
31, 1995. 3D visualization 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, particularly to Ford and Hewlett-Packard. 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 in 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.
Cost of Revenues The Company's cost of revenues increased 133.6% to $6.4
million for the year ended December 31, 1996 from $2.8 million for the year
ended December 31, 1995. The increase was primarily due to expenses associated
with new 3D visualization 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. Royalty costs
remained unchanged from 1996 to 1995 at 1.0% of revenues. The Company
capitalized software costs of $343,000 in 1996 and $263,000 in 1995, which the
Company amortizes over an estimated economic useful life of three years or
based on the ratio of current revenue to total projected product revenues,
whichever is greater. Amortization expenses for 1996 and 1995 were $194,000 and
$121,000, respectively.
Sales and Marketing The Company's sales and marketing expenses for the year
ended December 31, 1996 increased 140.2% to $7.4 million from $3.1 million in
the year ended December 31, 1995. Sales and marketing expenses as a percentage
of revenues also increased to 36.4% in 1996 from 29.7% in 1995. The increase in
sales and marketing expenses is primarily due to costs associated with
expansion of the sales force, personnel increases in the marketing group,
additional sales commission expenses associated with higher revenues and
increased advertising costs.
General and Administrative The Company's general and administrative expenses
for the year ended December 31, 1996 increased 18.8% to $2.4 million from $2.0
million in the year ended December 31, 1995, primarily as a result of increased
administrative staff and related costs. General and administrative expenses as
a percentage of revenues decreased to 11.6% in 1996 from 19.1% in 1995. This
decrease is primarily the result of higher sales volume and refinement of the
allocation of common costs among departments rather than absorbing these
expenses as general and administrative.
17
<PAGE>
Research and Development The Company's research and development expenses for
the year ended December 31, 1996 increased 23.9% to $2.1 million from $1.7
million in the year ended December 31, 1995 due to the additional personnel and
related costs required to meet the increased demand for 3D visualization
software products and interactive software products. This increase in expenses
was partially offset by the increased allocation of staffing to funded project
development activities recorded as cost of revenues in 1996. Research and
development expenses as a percentage of revenues decreased to 10.4% in 1996
from 16.4% in 1995 due to the allocation of certain research and development
staffing to cost of revenues in 1996 and to the spreading of expenses over
higher sales volume during 1996.
Income Taxes The Company's effective income tax rate for the year ended
December 31, 1996 decreased to 40.0% from 40.8% for the year ended December 31,
1995. 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 of $1.2 million resulted from temporary differences in recognition of
revenues and expenses for income tax and financial statement purposes.
Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994
Net Revenues The Company's total revenues for the year ended December 31, 1995
increased 90.9% to $10.4 million from $5.5 million for the year ended December
31, 1994. The increase in revenues was attributable to further expansion into
the interactive software market, enhancements to the Company's 3D visualization
software products and increased custom animation product orders. Revenues from
the Company's interactive software products for 1995 and 1994 included a three
year federal government grant that ended in June 1995. Revenues from this grant
for 1995 and 1994 were $369,000 and $564,000, respectively.
Cost of Revenues The Company's cost of revenues increased 77.1% to $2.8 million
in the year ended December 31, 1995 from $1.6 million in the year ended
December 31, 1994. The increase was primarily due to expenses associated with
increased sales volume. However, the Company's cost of revenues as a percentage
of revenues decreased to 26.5% in 1995 from 28.5% in 1994 due to sales of
higher-margin 3D visualization software products and several higher-margin
custom animation products in early 1995. Royalty costs remained unchanged from
1995 to 1994 at 1.0% of revenues. The Company capitalized software costs of
$263,000 in 1995 and $260,000 in 1994, which the Company amortizes over an
estimated economic useful life of three years or based on the ratio of current
revenue to total projected product revenues, whichever is greater. Amortization
expenses for 1995 and 1994 were $121,000 and $60,000, respectively.
Sales and Marketing The Company's sales and marketing expenses for the year
ended December 31, 1995 increased 71.7% to $3.1 million from $1.8 million in
the year ended December 31, 1994. However, sales and marketing expenses as a
percentage of revenues decreased to 29.7% in 1995 from 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 The Company's general and administrative expenses
for the year ended December 31, 1995 increased 108.0% to $2.0 million from $1.0
million in the year ended December 31, 1994. General and administrative
expenses as a percentage of revenues increased to 19.1% in 1995 from 17.5% in
1994, primarily as a result of increased administrative staff and related costs
in 1995.
Research and Development The Company's research and development expenses for
the year ended December 31, 1995 increased 97.2% to $1.7 million from $869,000
in the year ended December 31, 1994. Research and development expenses as a
percentage of revenues increased to 16.4% in 1995 from 16.0% in 1994. This
increase in expenses is primarily the result of increased research and
development staffing.
Income Taxes The Company's effective income tax rate for the year ended
December 31, 1995 decreased to 40.8% from 44.6% for the year ended December 31,
1994.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth quarterly unaudited consolidated financial
information of the Company for the nine quarters ended March 31, 1997 and as a
percentage of the Company's revenues represented by each item. This information
has been prepared on the same basis as the annual information presented
elsewhere in this Prospectus and, in management's opinion, reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair
18
<PAGE>
presentation of the information for the quarters presented when read in
conjunction with the Company's consolidated financial statements and the notes
thereto included elsewhere in this Prospectus. The operating results for any
quarter are not necessarily indicative of the results for any subsequent period
or for the entire fiscal year. Except as otherwise indicated, any comparison
discussed below reflects a change from the prior quarter.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
QUARTERS ENDED
1995 1996 1997
------------------------------------ ------------------------------------ --------
Dollars in thousands MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
-------- ------- -------- ------- -------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
3D visualization
software products $ 188 $ 380 $ 388 $ 502 $ 801 $1,299 $2,922 $2,624 $3,049
Interactive software
products 368 331 802 978 832 1,605 1,444 2,751 2,210
Custom animation
products 1,911 1,850 1,293 1,424 1,468 1,632 1,349 1,686 2,417
-------- ------- -------- ------- -------- ------- -------- ------- --------
Total revenues 2,467 2,561 2,483 2,904 3,101 4,536 5,715 7,061 7,676
Cost of revenues 661 650 611 837 1,090 1,564 1,812 1,978 2,425
-------- ------- -------- ------- -------- ------- -------- ------- --------
Gross profit 1,806 1,911 1,872 2,067 2,011 2,972 3,903 5,083 5,251
Operating expenses:
Sales and marketing 655 758 819 861 1,089 1,529 2,192 2,618 2,369
General and
administrative 429 448 514 595 439 653 569 699 925
Research and development 393 503 373 443 254 384 623 861 917
-------- ------- -------- ------- -------- ------- -------- ------- --------
Total operating expenses 1,477 1,709 1,706 1,899 1,782 2,566 3,384 4,178 4,211
-------- ------- -------- ------- -------- ------- -------- ------- --------
Income from operations 329 202 166 168 229 406 519 905 1,040
Interest income
(expense), net (22) (28) (45) (42) 67 328 336 297 265
-------- ------- -------- ------- -------- ------- -------- ------- --------
Income before income
taxes 307 174 121 126 296 734 855 1,202 1,305
Income taxes 133 69 47 48 120 300 334 482 520
-------- ------- -------- ------- -------- ------- -------- ------- --------
Net income $ 174 $ 105 $ 74 $ 78 $ 176 $ 434 $ 521 $ 720 $ 785
======== ======= ======== ======= ======== ======= ======== ======= ========
<CAPTION>
------------------------------------------------------------------------------------
QUARTERS ENDED
1995 1996 1997
------------------------------------ ------------------------------------ --------
As a percentage of MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
revenues -------- ------- -------- ------- -------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
3D visualization
software products 7.6% 14.8% 15.6% 17.3% 25.8% 28.6% 51.1% 37.1% 39.7%
Interactive software
products 14.9 12.9 32.3 33.7 26.8 35.4 25.3 39.0 28.8
Custom animation
products 77.5 72.3 52.1 49.0 47.4 36.0 23.6 23.9 31.5
-------- ------- -------- ------- -------- ------- -------- ------- --------
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues 26.8 25.4 24.6 28.8 35.1 34.5 31.7 28.0 31.6
-------- ------- -------- ------- -------- ------- -------- ------- --------
Gross profit 73.2 74.6 75.4 71.2 64.9 65.5 68.3 72.0 68.4
Operating expenses:
Sales and marketing 26.6 29.6 32.9 29.7 35.1 33.7 38.3 37.1 30.9
General and
administrative 17.4 17.5 20.7 20.5 14.2 14.4 10.0 9.9 12.1
Research and development 15.9 19.6 15.1 15.2 8.2 8.4 10.9 12.2 11.9
-------- ------- -------- ------- -------- ------- -------- ------- --------
Total operating expenses 59.9 66.7 68.7 65.4 57.5 56.5 59.2 59.2 54.9
-------- ------- -------- ------- -------- ------- -------- ------- --------
Income from operations 13.3 7.9 6.7 5.8 7.4 9.0 9.1 12.8 13.5
Interest income
(expense), net (0.9) (1.1) (1.8) (1.4) 2.1 7.2 5.9 4.2 3.5
-------- ------- -------- ------- -------- ------- -------- ------- --------
Income before income
taxes 12.4 6.8 4.9 4.4 9.5 16.2 15.0 17.0 17.0
Income taxes 5.3 2.7 1.9 1.7 3.8 6.6 5.9 6.8 6.8
-------- ------- -------- ------- -------- ------- -------- ------- --------
Net income 7.1% 4.1% 3.0% 2.7% 5.7% 9.6% 9.1% 10.2% 10.2%
======== ======= ======== ======= ======== ======= ======== ======= ========
</TABLE>
Total revenues increased every quarter during 1997 and 1996, primarily due to
increased sales of 3D visualization software and interactive software products.
3D visualization software was the Company's fastest growing product line during
the first quarter of 1997 and in 1996, with growth during the first quarter of
1997 and the third and fourth quarter of 1996 benefitting from new
relationships with Ford and Hewlett-Packard. Interactive software product
revenues were substantially higher in the fourth quarter of 1996 compared to
the prior quarters of 1996 and the first quarter of 1997,
19
<PAGE>
due to the substantial completion of several interactive software development
contracts in the fourth quarter of 1996. Custom animation product revenues
increased in the first quarter of 1997, primarily due to revenues associated
with entertainment and medical animation contracts.
The cost of revenues increased steadily in 1997 and 1996 primarily due to
expenses associated with additional development contracts for 3D visualization
software products and interactive software products. However, cost of revenues
decreased as a percentage of revenues in 1996 due to the increasing proportion
of 3D visualization software product revenues, which generate a higher gross
margin. The cost of revenues as a percentage revenues was lower in the fourth
quarter of 1996 than in the third quarter of 1996 and the first quarter of 1997
due to substantial completion of several higher margin development contracts in
the fourth quarter of 1996. Sales and marketing expenses decreased in the first
quarter of 1997 from the fourth quarter of 1996, primarily due to decreased
sales commissions in 1997. The decrease in sales and marketing expenses as a
percentage of revenues in the first quarter of 1997 was a result of spreading
decreased expenses over higher revenues. Sales and marketing expenses increased
steadily throughout 1996 due to the expansion of the sales force and additional
sales commission expense, primarily associated with commissions related to the
sale of 3D visualization software products. General and administrative expenses
increased in the first quarter of 1997, primarily due to additional
administrative staff and related costs. As a result, general and administrative
costs as a percentage of revenues increased in the first quarter of 1997.
During 1996, general and administrative expenses experienced moderate growth in
absolute dollars, but decreased as a percentage of revenues as a result of
higher sales. Beginning with the first quarter of 1996, the Company began
allocating common costs among departments rather than absorbing these expenses
as general and administrative expenses.
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 December holiday season or 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.
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
Common Stock in February 1996. As of March 31, 1997, the Company had $10.2
million in cash and cash equivalents and $7.5 million in short-term
investments.
Net cash used by operating activities was $308,000 for the three months ended
March 31, 1997, primarily due to an increase in accounts receivables, offset by
net income, and an increase in income taxes payable. Net cash provided by
operating activities was $185,000 for the three months ended March 31, 1996,
primarily due to net income, an increase in prepaid expense, and a decrease in
accounts payable, offset by an increase in accounts receivables.
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.
Accounts receivable at March 31, 1997 increased $810,000 to $7.5 million from
$6.7 million at December 31, 1996. The increase in accounts receivable was due
to increased revenues and the increased size of the Company's contracts, which
historically have taken a longer period to collect than smaller contracts. The
Company's accounts receivable balance will vary from quarter to quarter,
depending on the number and size of client projects and on the timing of
completion of the projects and tend to be higher at the end of each quarter.
20
<PAGE>
In the three months ended March 31, 1997, net cash of $1.1 million was provided
by investing activities through the maturities of marketable securities, which
generated cash of $2.4 million, offset principally by purchases of property and
equipment of $1.0 million and software development costs of $302,000. In the
three months ended March 31, 1996, the Company used cash of $421,000 in
investing activities, of which $342,000 was used to purchase property and
equipment and $79,000 was used for development of software.
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 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 office building. In
1994, net cash of $385,000 was provided by investing activities through the
sale of marketable securities, which generated cash of $1.1 million, offset
principally by purchases of property and equipment of $500,000 and software
development costs of $260,000.
The Company had a $1.0 million line of credit agreement with a commercial bank,
which expired on May 1, 1997 and was secured by substantially all of the assets
of the Company. Borrowings under the credit agreement were limited to a
percentage of eligible accounts receivable, as defined in the credit agreement.
At March 31, 1997, the Company had no outstanding borrowings against this
agreement. The Company did not renew the credit agreement upon its expiration.
At March 31, 1997, the Company had an aggregate of $852,000 of notes payable
and capital lease principal payable. The Company used a portion of the net
proceeds of its initial public offering to repay $1.1 million of long-term bank
debt and $600,000 of short-term bank borrowings.
The Company believes proceeds from the Offering together with 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 or that any such
required additional capital will be available on reasonable terms, if at all,
at such time as required by the Company.
21
<PAGE>
BUSINESS
Certain matters discussed below are forward-looking statements that involve
substantial risks and uncertainties that could cause actual results to differ
materially from targets or projected results. Factors that could cause actual
results to differ materially include, among others, those factors described in
"Risk Factors." Many of these factors are beyond the Company's ability to
predict or control. Prospective investors are cautioned not to put undue
reliance on forward-looking statements, which statements have been made as of
the date of this Prospectus, and prospective investors should not infer that
there has been no change in the affairs of the Company since the date hereof
that would warrant any modification of any forward-looking statement made in
this Prospectus. The Company disclaims any intent or obligation to update
publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
EAI specializes in developing 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 through three
interrelated product lines: 3D visualization software, interactive software and
custom animation. Utilizing its broad base of technology, in conjunction with
its extensive library of computer generated animation assets, EAI offers
products that allow customers to reduce time to market, decrease product
development costs and obtain realistic, high quality 3D animations at
reasonable prices 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 enables
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 to visualizations with personal
computers, thereby allowing customers to use VisProducts with their existing
hardware and software. 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 engineering,
manufacturing, marketing, sales and support, to more easily visualize products,
see the effects of changes during the development process and communicate in
real time. This collaborative approach can help reduce the total time required
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 creating 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 has contracts
with BMG Interactive, Elsevier Science N.L., a subsidiary of Reed Elsevier Inc.
("Elsevier Science"), Hoechst Marion Roussel North America, Houghton Mifflin
Company, IBM, Smithsonian Institution Inc., Times Mirror, William C. Brown
Publishers and Williams & Wilkins, Inc. ("Williams & Wilkins").
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 market products and 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 producers such 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, industrial design, interactive
multimedia, education, corporate communications and entertainment, 3D
visualization and animation have become increasingly popular for various
reasons:
22
<PAGE>
General
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 versatility through interactive communication.
Visualization needs of industries and businesses have traditionally been met
with a variety of 2D representations, physical 3D models and computer-generated
3D wire frame visualizations. Industries and businesses 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 computer shipments are expected to increase at a compound
annual growth rate of 17% from 1995 to 2000. Furthermore, approximately 1.5
million workstations were shipped during 1996 resulting in a worldwide
installed base of 5.0 million units. Worldwide workstation shipments are
expected to increase at a compound annual growth rate of 33% from 1996 to 2000.
Worldwide mechanical CAD/CAE/CAM software sales were approximately $2.1 billion
in 1995, up 20% from $1.7 billion in 1994, and the market is expected to
increase at a compound annual growth rate of 15% from 1996 to 2000. This growth
in computer capability has led 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 engineering, manufacturing, marketing,
sales and support.
Growth in Internet/intranet usage For a broad range of commercial organizations
and individuals, the Internet and corporate intranets are increasingly becoming
the preferred method for communicating electronically, distributing and
retrieving information and conducting commerce. The number of Internet/intranet
users is expected to be approximately 200 million by the end of 1999, compared
to approximately 56 million at the end of 1995. The rapid commercialization of
the Internet and the growth of corporate intranets have resulted in a
commensurate rise in demand for software for these platforms by corporations
and individuals.
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 and to compete more effectively, manufacturing
companies increasingly rely on computerization in the design process, including
computer-aided design, engineering and manufacturing. Design teams, however,
continue to make extensive use of expensive and time-consuming physical
prototypes to represent designs interpreted from CAD schematics.
In addition to requiring physical prototypes, many CAD/CAE/CAM 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 enables an enterprise-wide, team-based approach in the design
process, combining resources from engineering, manufacturing, marketing, sales
and support. This requires software that can effectively interface with
existing CAD/CAE/CAM software to quickly generate highly detailed, accurate 3D
images to replace physical prototypes and 2D images and to facilitate real time
collaboration across multiple departments.
Interactive Software Products and Custom Animation Products
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
23
<PAGE>
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 were $6 billion
in 1995, with CD-ROMs representing approximately 21% of worldwide multimedia
software 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. The market for educational software for
multimedia personal computers is expected to continue to grow. In addition,
educational publishers are increasingly enhancing traditional print 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 in order to attract consumers.
Publishers typically do not possess the design skills, 3D animation tools or
library of computerized animation assets required to produce high quality 3D
content in a cost-effective manner. 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 based 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 technical competencies in high speed,
real time graphics, CAD/CAE/CAM interfaces, distributed databases and
Internet/intranet communications 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 the Company 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 includes applications supporting digital prototyping
(VisFly and VisMockUp), animation (VisLab) and collaborative communication of
visualizations (NetFly). 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. 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 engineering, manufacturing, marketing, sales and
support, to more easily visualize products, see the effects of changes during
the development process and communicate in real time. EAI's software relies on
proprietary 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 engineering workstations and provide
the ability to access visualizations with personal computers.
Interactive Software and Custom Animation Products
EAI produces highly realistic 3D animations 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
24
<PAGE>
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 3D visualization software
products to improve the speed and capability of its custom animation and
interactive software products. For example, the Company's VisLab product is
used in the production of interactive software and custom animation products,
enabling cost-effective and fast production. 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 provide a ready source of content for producing interactive software
products and custom animation products. 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, which is a 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 will continue 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, marketing, 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 as well as major
manufacturers and suppliers in the automotive, aerospace, heavy equipment and
other manufacturing 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. In
addition to selling its VisProducts to companies that want to create high
quality 3D animations from CAD models, the Company also utilizes these products
internally in the production of EAI's custom animation and interactive software
products. By utilizing its proprietary 3D visualization software products
internally, EAI not only improves its ability to deliver high quality animation
in a timely manner, but also continuously modifies and enhances such software.
Such enhancements or modifications may be added to the commercial versions of
the Company's VisProducts as new features or improvements. In turn, because
VisLab and other VisProducts are used continuously by EAI employees, the
Company does not have to rely on external beta testing for its 3D visualization
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.
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 products. EAI intends 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.
Expand and Leverage Proprietary Assets
EAI intends to continue to build its proprietary databases of 3D animation 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 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.
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 and SDRC, relating
to
25
<PAGE>
the development and marketing of EAI's 3D visualization software products. EAI
has also worked with Hewlett-Packard to co-develop DirectModel, an application
development toolkit that allows programmers to write custom applications to
manipulate large CAD/CAE/CAM models. In addition to being marketed by Hewlett-
Packard and incorporated into Microsoft's DirectX multimedia framework,
DirectModel will be incorporated in the Company's VisMockUp and VisFly
products. EAI has also developed interactive software products for the Consumer
Division of IBM, Elsevier Science, Times Mirror and Williams & Wilkins, which
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 22 who hold doctoral
degrees and an additional 59 who hold master's degrees. These science,
engineering and medical professionals, as well as in-house artists, enable the
Company to differentiate its products by providing a high level of scientific
precision and visual detail.
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 by providing seamless interfaces to I-
DEAS Master Series, Pro/Engineer, Unigraphics and CATIA software and operate on
a wide variety of hardware platforms such as Hewlett-Packard, SGI, Sun
Microsystems and IBM. The Company is continually upgrading and developing 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. For example, Ford
selected EAI's VisProducts 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 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., Mazda Motor Corporation,
Motorola, Inc., Sandia National Labs, Sony Corporation, Toshiba Corporation,
Toyota Motor Corporation and Westinghouse Electric Corporation.
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. In addition, VisMockUp provides
users with a range of tools that enable collaboration across a corporate
intranet.
VisFly is a high performance engineering visualization product that permits
viewing of complex models, accepting and analyzing CAD/CAE/CAM data imported
from most software programs. VisFly enables interactive real time viewing of
complex CAD/CAE/CAM designs and lets users visually "fly through" 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 makes the advantages of VisFly accessible
to entire design teams. 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 being used. NetFly's ability to utilize corporate intranets
and interface with product data management and database systems when used with
other VisProducts can shorten design cycles and reduce costs while also
increasing the overall quality of the final design.
26
<PAGE>
VisLab uses proprietary advanced hardware-based rendering technology to produce
3D animations from CAD/CAE/CAM models faster than competing products. VisLab
integrates CAD/CAE/CAM, kinematics and analysis data within a single visual
environment. 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.
The following table describes the Company's 3D visualization software products
for the engineering market:
<TABLE>
<CAPTION>
VISPRODUCTS FUNCTION PRODUCT DESCRIPTION
----------- -------- -------------------
<C> <C> <S>
VisMockUp Design and analysis Enhances concurrent
engineering by providing
enterprise-wide product
visualization and digital
prototyping.
VisFly Design and analysis Provides the capability of
real time visualization or
"fly through" of complex
CAD/CAE/CAM designs to
shorten the design cycle
process.
NetFly Design and analysis Enables VisFly to operate
across corporate intranets
and manage product design
data.
VisLab Design, analysis and Allows fast and easy
animation animation of 3D
CAD/CAE/CAM designs.
VisModel Design Permits viewing and
editing of 3D polygonal
models.
Particle Lab Module Animation Allows animation and
simulation of rain, snow,
fire, smoke, explosions,
fluid flow, star galaxies
and other natural
phenomena.
FEA Visualizer Module Design and analysis Allows visualization of
results from third party
finite element analysis
("FEA") packages.
Seamless I-DEAS Master Design and analysis Provides a fast and easy
Series Interface Module transfer of SDRC I-DEAS
Master Series to VisLab,
VisFly and VisMockUp.
Seamless Pro/ENGINEER Design and analysis Provides a fast and easy
Interface Module transfer of Parametric
Technology's Pro/ENGINEER
to VisLab, VisFly and
VisMockUp.
Seamless Unigraphics Interface Design and analysis Provides a fast and easy
transfer of Electronic
Data Systems Corporation's
Unigraphics to VisLab,
VisFly and VisMockUp.
Seamless CATIA Interface Design and analysis Provides a fast and easy
transfer of Dassault's
CATIA to VisLab and
VisFly.
RenderMan Interface Animation Provides interface to
Module Pixar's RenderMan product
to create photorealistic
images of CAD/CAE/CAM
models.
</TABLE>
The Company continually works to add new features and other improvements to 3D
visualization software products. For example, the Company intends to
incorporate DirectModel, an application development toolkit co-developed with
Hewlett-Packard, into EAI's VisMockUp and VisFly products.
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
internally enable it to distribute well-tested products to its customers.
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. These interactive software products combine 3D technology, Internet
communication, text, animated color graphic images, music and digitized
27
<PAGE>
speech into educational and information based programs. Due to high production
costs, interactive CD-ROM software products traditionally have provided only 2D
and 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
educational projects.
The following table identifies selected interactive software products in
distribution:
<TABLE>
<CAPTION>
EAI PRODUCT PRIMARY MARKET CONCEPT PUBLISHER
- ----------- -------------- ------- ---------
<S> <C> <C> <C>
The Magic 3D Coloring Children's creativity Crayola crayons used to color IBM
Book market line drawings and create 3D images
The Dynamic Human Anatomy & physiology Illustration of difficult William C. Brown
undergraduate concepts in function and Publishers
education motion of human body
The Dissectable Human Higher education Reconstruction of entire human Mosby-Year Book, Inc.
body and each major system
CardioViewer 3D Higher education Detailed visualization of Mosby-Year Book, Inc.
the human heart
Pompeii Website Elementary and Interactive field trip through Harcourt Brace & Company
secondary education the ancient city of Pompeii
Animation in the Legal Interactive resource material for American Bar Association
Courtroom legal education
The following table identifies selected interactive software products under
development:
<CAPTION>
EAI PRODUCT PRIMARY MARKET CONCEPT PUBLISHER
- ----------- -------------- ------- ---------
<S> <C> <C> <C>
Encyclopedia of Higher education Detailed visualization of neuroanatomy Elsevier Science
Neuroscience
The Dynamic Human II Anatomy & physiology Upgrade of The Dynamic William C. Brown
undergraduate Human Publishers
education
Electrocardiography Medical education Interactive instruction on use of Williams & Wilkins
electrocardiography
The Human Brain Atlas Higher education Detailed visualization of the Elsevier Science
human brain
Interactive Kiosk Museum Educational kiosk on geology and gems Smithsonian Institution Inc.
Eclipse Multiplayer Internet Outer space action game Sir-Tech Software
game
</TABLE>
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 animations 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
28
<PAGE>
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, The
Discovery Channel, Glaxo Wellcome PLC, Merck & Co., Inc., National Geographic
and most of the major automotive manufacturers, including Chrysler Corporation,
Freightliner Corp., Ford, General Motors Corporation, Isuzu Motors Limited,
Mitsubishi Corporation, Nissan Motor Corporation, Ltd., Subaru of America,
Inc., Suzuki Motor Corporation, Toyota Motor Corporation and Volkswagen AG.
The Company recently supplied custom animations for two television productions.
In February 1997, The Discovery Channel's Eco Challenge cable television
special used 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 Europe and through
distributors in Europe and Asia. 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 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 works with EAI to market and distribute
EAI's products and pays EAI royalties for VisProducts that SDRC sells.
EAI employs sales and marketing professionals who directly sell its 3D
visualization software products to end users in the United States and Europe.
The Company also 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 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 Europe and 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 sales 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 3D visualization software products have the
option of contracting with EAI for product maintenance and support.
Approximately 90% of the Company's 3D visualization software product customers
select this service. The Company's 3D 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 proposed 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 is being
distributed by Times Mirror, and The Magic 3D Coloring Book, which was
published and is being distributed by the Consumer Division of IBM.
29
<PAGE>
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 Abbott
Laboratories, Hoechst Marion Roussel North America and Sikorsky Aircraft.
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 the Company's
VisProducts. Such companies, some of which have substantially greater
financial, technical, marketing and other resources than EAI, include Autodesk,
Inc., Dassault, Division Plc., IBM, Parametric Technology, SDRC and SGI. 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, Pixar and SGI. 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 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 quickly produce interactive
software products with high quality content. 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 Acclaim Entertainment, Inc., Broderbund Software, Inc., CUC
International, Digital Domain and The Learning Company. Moreover, large
corporations, such as Disney and Microsoft, which have substantial bases of
intellectual property content and substantial financial resources, have entered
or announced their intention to enter the consumer software market. EAI's
interactive software products in the game area will also compete with products
offered by other producers of computer games.
30
<PAGE>
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.
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. In addition, EAI competes directly against special effects firms for
certain projects in the entertainment market. These special effects firms, some
of which have substantially greater financial, technical, marketing and other
resources than EAI, include Digital Domain, Dreamworks SKG, Industrial Light &
Magic and Pixar. 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.
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.
31
<PAGE>
FACILITIES
EAI leases its headquarters in Ames, Iowa, consisting of approximately 37,000
square feet, pursuant to a lease that expires on July 1, 2006, with options to
extend through July 1, 2016. The Company leases office space at various other
locations in the United States and in the Netherlands under leases ranging from
month-to-month to five year terms. The Company plans to add approximately
26,000 square feet of space to its headquarters in Ames, Iowa in order to
accommodate additional employees to support continued growth.
EMPLOYEES
At June 10, 1997, the Company employed 268 people on a full-time basis, 70
people on a part-time basis and 18 interns and employees in cooperative
educational programs. Of the Company's full-time employees, 207 hold college
degrees, including 22 who hold doctoral degrees and an additional 56 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 United States. The Company benefits from access to the large number of
highly skilled ISU graduate students who desire to work part-time. At June 10,
1997, 60 of the Company's employees were ISU students.
LEGAL PROCEEDINGS
The Company has in the past been involved in litigation incidental to its
business. There is currently no material litigation pending.
32
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company's directors and officers and their ages as of April 30, 1997 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<C> <C> <S>
Chairman, Chief Executive Officer, President,
Matthew M. Rizai, Ph.D.(1) 41 Treasurer and Director
Martin J. Vanderploeg, Ph.D. 40 Executive Vice President and Director
Vice President of Administration, General
Jamie A. Wade 48 Counsel, Secretary and Director
Vice President of Finance and Chief Financial
Michael K. Jewell 39 Officer
Jay E. Shannan, Ph.D. 35 Vice President of Operations
Jeff D. Trom, Ph.D. 36 Vice President of Software Development
Vice President of Software Sales and
Michael J. Jablo 45 Marketing
Adrian Sannier, Ph.D. 35 Vice President of Interactive Production
Michael Crow, Ph.D.(1) (2) 41 Director
Laurence J. Kirshbaum(1) (2) 52 Director
</TABLE>
- -------
(1)Member of the Audit Committee.
(2)Member of the Compensation Committee.
MATTHEW M. RIZAI has been Chairman, Chief Executive Officer, President and a
director of the Company since joining the Company in June 1990 and has been
Treasurer since November 1995. Dr. Rizai's prior experience includes serving
as: associate with ARCH Development Corporation, a venture capital firm; senior
research engineer with General Motors Corporation; and development engineer
with Ford. Dr. Rizai earned a Ph.D. in Mechanical Engineering from Michigan
State University and an M.B.A. from the University of Chicago.
MARTIN J. VANDERPLOEG has served as a director since co-founding the Company in
1988, as Executive Vice President since October 1993 and as the Company's
Secretary from June 1990 until November 1995. Dr. Vanderploeg's prior
experience includes serving as a faculty member in mechanical engineering at
Iowa State University and performing contract research for a number of large
corporations. Dr. Vanderploeg earned a Ph.D. in Mechanical Engineering from
Michigan State University and is a licensed Professional Engineer.
JAMIE A. WADE has served as Vice President of Administration and General
Counsel to the Company since June 1994 and Secretary since November 1995. From
1983 to 1994, Mr. Wade was a partner with Davis, Hockenberg, Wine, Brown, Koehn
& Shors, P.C., a Des Moines law firm. Mr. Wade earned a J.D. from Drake
University Law School and a B.A. from Drake University College of Business.
MICHAEL K. JEWELL has served as Vice President of Finance and Chief Financial
Officer since January 1996. Mr. Jewell has been a consultant specializing in
finance and accounting issues for emerging technology companies since 1991 and
has served as a finance and accounting consultant to the Company since 1992.
Mr. Jewell earned an M.B.A. from the University of Southern California and a
B.A. in business from San Jose State University.
JAY E. SHANNAN is a co-founder of the Company and has served as Vice President
of Operations since 1990. Dr. Shannan earned a Ph.D. in Mechanical Engineering
from Iowa State University.
JEFF D. TROM is a co-founder of the Company and has served as Vice President of
Software Development since June 1990. Dr. Trom served as the Company's
Treasurer from June 1990 to November 1995. Dr. Trom earned a Ph.D. in
Mechanical Engineering from Iowa State University.
MICHAEL J. JABLO has served as Vice President of Software Sales and Marketing
since joining the Company in October 1995. From January 1990 to October 1995
Mr. Jablo was employed by Mentor Graphics Corporation where he ultimately
served as North Central area sales manager. Mr. Jablo earned an M.B.A. from the
University of Detroit as well as a B.S. in Mechanical Engineering and a B.S. in
Business Management from Bradley University.
ADRIAN SANNIER has served as Vice President of Interactive Production since
February 1997 and prior to that served as the Company's Vice President of New
Product Development since joining the Company in January 1996. From 1990 until
joining the Company, Dr. Sannier was employed in a variety of positions with
CIMLINC Incorporated, a provider of business process execution software to the
aerospace industry and heavy equipment manufacturers, most recently as
33
<PAGE>
Vice President, Product Development. Dr. Sannier earned a Ph.D. and a B.S. in
Electrical Engineering and Systems Science from Michigan State University.
MICHAEL CROW has served as a director of the Company since November 1991. Dr.
Crow has been Vice Provost at Columbia University since August 1991. Dr. Crow
served as the Director of the Institute for Physical Research and Technology
and the Office of Science Policy and Research at Iowa State University from
July 1985 to June 1991. Dr. Crow earned a Ph.D. in Public Administration
(Science and Technology Policy) from Syracuse University.
LAURENCE J. KIRSHBAUM has served as a director of the Company since August
1995. Mr. Kirshbaum has been Chairman of Time Warner Trade Publishing since
1996 and was previously President and CEO of Warner Books Inc., a subsidiary of
Time Warner, Inc. ("Time Warner"), since 1984. Mr. Kirshbaum earned a B.A. from
the University of Michigan.
The Company's Board of Directors is divided into three classes. Dr. Vanderploeg
and Mr. Kirshbaum serve in the class whose term expires on the date of the
annual meeting to be held in 1998. Dr. Rizai and Dr. Crow serve in the class
whose term expires on the date of the annual meeting to be held in 1999. Mr.
Wade serves in the class whose term expires on the date of the annual meeting
to be held in 2000. Upon the expiration of the term of each class of directors,
directors comprising such class will be elected for a three-year term at the
annual meeting of stockholders in the year in which such term expires. All
officers serve at the pleasure of the Board of Directors.
The Board of Directors has established two standing committees: the Audit
Committee and the Compensation Committee. The Audit Committee recommends the
appointment of auditors and oversees the accounting and audit functions of the
Company. The Compensation Committee determines executive officers' salaries,
bonuses and other compensation and administers the 1994 Option Plan.
DIRECTOR COMPENSATION
Directors who are not officers or employees of the Company are entitled to a
yearly retainer fee of $12,000 plus $750 and reimbursement of expenses for
attending each meeting of the Board of Directors and each meeting of any
committee. The Company has adopted a stock option plan for non-employee
directors. See "Management--Employee Benefit Plans--Director Option Plan."
EXECUTIVE COMPENSATION
The following table shows information concerning compensation for the Company's
Chief Executive Officer and the four next most highly compensated executive
officers (collectively, the "Named Executive Officers") for the years ended
December 31, 1996 and 1995.
Summary Compensation
<TABLE>
<CAPTION>
--------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- ------------
NUMBER OF
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL YEAR SALARY ($) BONUS ($) OPTIONS ($)
POSITION ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Matthew M. Rizai 1996 180,000 --(1) 40,000 5,805(2)
Chief Executive 1995 150,000 75,000 70,000 14,623(2)
Officer, President
and Treasurer
Martin J. Vanderploeg 1996 180,000 --(1) 40,000 5,683(3)
Executive Vice 1995 150,000 75,000
President 70,000 3,000(3)
Michael J. Jablo 1996 170,776(4) 25,000(1) 12,000 2,308(5)
Vice President of 1995 35,873(4) -- 37,500 --
Software Sales
and Marketing
Jamie A. Wade 1996 120,000 6,000(1) 11,000 1,740(6)
Vice President of 1995 90,000 25,000 13,000 450(6)
Administration,
General Counsel and
Secretary
Michael K. Jewell 1996 111,739 --(1) 46,500 165(7)
Vice President of 1995 -- -- -- --
Finance and
Chief Financial Officer
</TABLE>
34
<PAGE>
- -------
(1) The Named Executive Officers also received the following bonuses on
February 28, 1997: Dr. Rizai $28,000, Dr. Vanderploeg $28,000, Mr. Wade $6,000
and Mr. Jewell $12,000. Mr. Jablo has not received a bonus payment in 1997.
(2) Consists of $2,205 of premiums on a life insurance policy paid in 1996,
$11,395 paid in lieu of vacation in 1995 and $3,600 and $3,228 of matching
contributions by the Company to the Engineering Animation, Inc. Retirement Plan
made in 1996 and 1995, respectively.
(3) Consists of $2,083 of premiums on a life insurance policy paid in 1996 and
$3,600 and $3,000 of matching contributions by the Company to the Engineering
Animation, Inc. Retirement Plan made in 1996 and 1995, respectively.
(4) Includes $64,776 and $15,000 in sales commissions in 1996 and 1995,
respectively.
(5) Consists of $309 of premiums on a life insurance policy paid in 1996 and
$1,999 of matching contributions by the Company to the Engineering Animation,
Inc. Retirement Plan made in 1996.
(6) Consists of $480 of premiums on a life insurance policy paid in 1996 and
$1,260 and $450 of matching contributions by the Company to the Engineering
Animation, Inc. Retirement Plan made in 1996 and 1995, respectively.
(7) Consists of $165 of premiums on a life insurance policy paid in 1996.
Option Grants in the Last Fiscal Year
The following table shows information with respect to grants of options to the
Named Executive Officers for the fiscal year ended December 31, 1996. The
options were granted under the 1994 Option Plan.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
GRANTED FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
NAME ---------- ------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Matthew M. Rizai 24,000(2) 4.60 22.25 12/30/06 335,830 851,058
16,000(3) 3.07 22.25 12/30/06 223,886 567,372
Martin J. Vanderploeg 24,000(2) 4.60 22.25 12/30/06 335,830 851,058
16,000(3) 3.07 22.25 12/30/06 223,886 567,372
Michael J. Jablo 10,400(2) 1.99 22.25 12/30/06 145,526 368,792
1,600(3) 0.31 22.25 12/30/06 22,389 56,737
Jamie A. Wade 2,400(2) 0.46 22.25 12/30/06 33,583 85,106
1,600(3) 0.31 22.25 12/30/06 22,389 56,737
7,000(4) 1.34 7.50 1/20/06 33,017 83,671
Michael K. Jewell 2,400(2) 0.46 22.25 12/30/06 33,583 85,106
1,600(3) 0.31 22.25 12/30/06 22,389 56,737
42,500(5) 8.15 7.50 1/26/06 200,460 508,005
</TABLE>
- -------
(1) Amounts reflect certain assumed rates of appreciation set forth in the
Commission's executive compensation disclosure rules. Actual gains, if any, on
stock options exercised, will depend on future performance of the Common Stock.
No assurance can be made that the amounts reflected in these columns will be
achieved.
(2) Options were granted December 30, 1996 and vest in four equal annual
installments beginning December 30, 1997, but only if certain Company
performance goals are met in 1997.
(3) Options were granted December 30, 1996 and vest in four equal annual
installments beginning December 30, 1997.
(4) Options were granted January 20, 1996 and vested in five equal annual
installments beginning January 20, 1996.
(5) Options were granted January 26, 1996 and vested in two annual installments
of 10,000 shares beginning January 26, 1996 and three annual installments of
7,500 shares beginning January 26, 1998.
35
<PAGE>
Fiscal Year-End Option Values
The following table provides information regarding stock options held by the
Named Executive Officers as of December 31, 1996. None of those individuals
exercised any stock options during the 1996 fiscal year.
<TABLE>
<CAPTION>
---------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Matthew M. Rizai 253,344 49,000 5,196,904 280,250
Martin J. Vanderploeg 253,344 49,000 5,196,904 280,250
Michael J. Jablo 15,000 34,500 305,250 481,875
Jamie A. Wade 14,525 24,475 291,681 417,569
Michael K. Jewell 20,400 27,100 343,140 397,085
</TABLE>
- -------
(1) Value is calculated by subtracting the exercise price per share from the
last reported market price at December 31, 1996 and multiplying the result by
the number of shares subject to the option.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company entered into employment agreements with Dr. Rizai, Dr. Vanderploeg
and Mr. Wade as of January 1, 1996, and with Mr. Jewell as of January 26, 1996,
each of which expires on December 31, 1999. Dr. Rizai's agreement provides that
he will be employed as the Company's Chairman, Chief Executive Officer and
President at an annual salary of $180,000. Dr. Vanderploeg's agreement provides
that he will be employed as the Company's Executive Vice President at an annual
salary of $180,000. Mr. Wade's agreement provides that he will be employed as
the Company's Vice President of Administration, General Counsel and Secretary
at an annual salary of $120,000. Mr. Jewell's agreement provides that he will
be employed as the Company's Vice President of Finance and Chief Financial
Officer at an annual salary of $120,000. Each of the agreements provides that
the base salary will be reviewed annually and that the executive will receive
an annual performance bonus as determined by the Board of Directors and, for
Dr. Rizai and Dr. Vanderploeg, a car allowance. The employment agreements also
include certain non-competition and confidentiality provisions. The Company has
also entered into severance agreements with each of Dr. Rizai, Dr. Vanderploeg,
Mr. Wade and Mr. Jewell, each dated as of the effective date of the respective
officer's employment agreement. The severance agreements provide for payment of
a lump sum equal to two times the sum of the employee's base salary and the
bonus paid to the employee in the prior year for Dr. Rizai and Dr. Vanderploeg
(one times that sum for Mr. Wade and Mr. Jewell) and continuation of benefits
for two years (one year in the case of Mr. Wade and Mr. Jewell) upon (i)
termination of employment by the Company without cause, (ii) termination of
employment by the employee for good reason (including change in control of the
Company), (iii) death or (iv) permanent disability. The Company may terminate
the employment of the executive at any time for cause without the payment of
severance. The agreements with Dr. Rizai and Dr. Vanderploeg also provide that,
upon termination by the Company without cause or by the executive for good
reason, the Company upon demand by the executive would be required to file a
registration statement for all shares of Common Stock that the executive then
owned or had the right to acquire upon exercise of options then held and would
be required to include any such shares in any other registration statement
filed by the Company.
The Company entered into an employment agreement with Mr. Jablo as of September
18, 1995 that terminates (i) by mutual agreement of the Company and Mr. Jablo,
(ii) upon Mr. Jablo's death or disability, (iii) at the option of the Company
for cause or (iv) upon the dissolution or bankruptcy of the Company. This
agreement provides that Mr. Jablo will be employed as the Company's Vice
President of Sales and Marketing at an annual salary of $106,000 per year with
a $25,000 signing bonus and a car allowance. In addition to base salary, the
agreement provides for the payment of commissions through 1996 to Mr. Jablo of
3.25% of the first $3.0 million of sales of VisLab and related 3D animation
software and all consulting services related to such software and 3.5% of such
sales in excess of $3.0 million. Commissions paid after 1996 are to be
established by the Company's President. The agreement also contains certain
non-competition and confidentiality provisions. Mr. Jablo's employment
agreement contains severance provisions that require the payment by the Company
to Mr. Jablo of (i) an amount equal to the total compensation paid to Mr. Jablo
during the first year of the contract if the contract is terminated following a
merger, sale or change of control of the Company and (ii) an amount equal to
one-half of the total compensation paid to Mr. Jablo during the first year of
the contract if the contract is terminated for cause (as defined in the
agreement) by the Company after the first anniversary of the agreement.
36
<PAGE>
EMPLOYEE BENEFIT PLANS
1994 Option Plan
The 1994 Option Plan was adopted by the Company's Board of Directors and
approved by the Company's stockholders on February 11, 1995. The 1994 Option
Plan was amended and restated in January 1996 and was further amended and
restated effective May 1, 1997. The Company has reserved 1,190,000 shares of
Common Stock for issuance under the 1994 Option Plan. Unless terminated sooner
by the Board of Directors, the 1994 Option Plan will terminate in December
2005.
The 1994 Option Plan is administered by the Compensation Committee of the Board
of Directors. The Committee has the authority and discretion, subject to the
provisions of the 1994 Option Plan, to select persons to whom options will be
granted, to designate the number of shares to be covered by options, to specify
the type of consideration to be paid to the Company, and to establish all other
terms and conditions of each stock option.
The 1994 Option Plan provides for the grant of stock options to officers and
employees of the Company or its subsidiaries and to directors who are not
members of the Compensation Committee. Options granted under the 1994 Option
Plan may be qualified or non-qualified stock options. The exercise price for a
stock option may not be less than the fair market value of the Company's Common
Stock on the date of grant. Stock options granted under the 1994 Option Plan
may not be transferred other than by will or by the laws of descent and
distribution.
Director Option Plan
In January 1996, the Company adopted a Non-Employee Directors Option Plan
("Director Option Plan"). The Director Option Plan was amended and restated
effective May 1, 1997. Pursuant to the Director Option Plan, non-employee
directors of the Company receive options to purchase 5,000 shares of Common
Stock in the year that they join the board and options to purchase an
additional 2,500 shares of Common Stock for each subsequent year of service.
The exercise price of such options shall be at the fair market value of the
Company's Common Stock on the date of grant. Stock options granted under the
Director Option Plan may not be transferred other than by will or by the laws
of descent and distribution. The Company has reserved 60,000 shares of Common
Stock for issuance under the Director Option Plan. The Director Option Plan may
be terminated by the Board of Directors at any time.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company has entered into an agreement with Warner Books Inc., a subsidiary
of Time Warner, pursuant to which the Company has received $117,722 in funding
for the development of an interactive multimedia CD-ROM, which Warner Books
Inc. will market and distribute. The Company will receive a royalty from Warner
Books Inc. on sales of the CD-ROM. Laurence J. Kirshbaum, a member of the
Company's Board of Directors, is the Chairman of Time Warner Trade Publishing.
37
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth ownership of the Company's Common Stock,
immediately prior to and immediately following completion of the Offering, by
(i) each person who is known to the Company to own beneficially more than 5% of
the outstanding Common Stock, (ii) each director, (iii) the Named Executive
Officers and (iv) all officers and directors as a group.
<TABLE>
<CAPTION>
------------------------------------------------
SHARES
BENEFICIALLY SHARES TO BE
OWNED BENEFICIALLY
PRIOR TO THE OWNED AFTER
OFFERING(1) OFFERING(1)
----------------- NUMBER OF -----------------
NUMBER OF SHARES BEING NUMBER OF
SHARES PERCENT OFFERED SHARES PERCENT
NAME --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Matthew M. Rizai (2) 756,344 15.21 146,066 610,278 10.44
Martin J. Vanderploeg (3) 764,212 15.37 153,934 610,278 10.44
Jeff D. Trom (4) 500,184 10.58 66,000 434,184 7.76
Jay E. Shannan (5) 216,816 4.59 24,000 192,816 3.44
Michael Crow (6) 58,832 1.25 11,000 47,832 *
Jamie A. Wade (7) 104,129 2.20 80,000 24,129 *
Michael K. Jewell (8) 20,600 * 0 20,600 *
Michael J. Jablo (9) 17,000 * 0 17,000 *
Laurence J. Kirshbaum (10) 4,000 * 0 4,000 *
All directors and officers as
a group (10 persons) 2,445,617 45.96 481,000 1,964,617 31.74
James Bernard (11) 154,434 3.27 78,000 76,434 1.37
A I M Management Group Inc.
(12) 436,900 9.26 0 436,900 7.82
RCM Capital Management,
L.L.C. (13) 339,000 7.19 0 339,000 6.07
Investment Advisors, Inc.
(14) 265,800 5.63 0 265,800 4.76
</TABLE>
- -------
*Less than one percent.
(1) Assumes 4,717,184 shares outstanding prior to the Offering and 5,587,184
shares outstanding after the Offering. Except as indicated in the footnotes to
this table and subject to applicable community property laws, the persons named
in this table have sole voting and investment power with respect to all shares
beneficially owned by them. All information assumes no exercise of the
Underwriters' over-allotment option. See "Underwriting." The number of shares
shown as owned by, and the voting power of, individual stockholders includes
shares that are not currently outstanding but that such stockholders are
entitled to acquire or will be entitled to acquire within 60 days. Such shares
are deemed to be outstanding for the purpose of computing the percentage of
outstanding Common Stock owned by the particular stockholder, but are not
deemed to be outstanding for the purpose of computing the percentage ownership
of any other person.
(2) Consists of 500,000 shares held by the Matthew Rizai Family Limited
Partnership and 256,344 shares issuable upon exercise of vested options and
options that will vest within 60 days. Assuming the exercise of the
Underwriters' over-allotment option, the aggregate number of shares offered by
Dr. Rizai will be 188,241 and Dr. Rizai's beneficial ownership after the
Offering will be 568,103 shares, or 9.53%. Dr. Rizai's address is c/o
Engineering Animation, Inc., 2321 North Loop Drive, Ames, Iowa 50010.
(3) Includes 18,934 shares held by the Matthew and Tonja Rizai Charitable
Remainder Trust of which Dr. Vanderploeg is Special Trustee, all of which
shares are being offered hereby, and 256,344 shares issuable upon exercise of
vested options and options that will vest within 60 days. Assuming the exercise
of the Underwriters' over-allotment option, the aggregate number of shares
offered by Dr. Vanderploeg will be 196,109 and Dr. Vanderploeg's beneficial
ownership after the Offering will be 568,103 shares, or 9.53%. Dr.
Vanderploeg's address is c/o Engineering Animation, Inc., 2321 North Loop
Drive, Ames, Iowa 50010.
(4) Includes 11,250 shares issuable upon exercise of vested options and options
that will vest within 60 days. Dr. Trom's address is c/o Engineering Animation,
Inc., 2321 North Loop Drive, Ames, Iowa 50010.
(5) Includes 11,250 shares issuable upon exercise of vested options and options
that will vest within 60 days. Dr. Shannan's address is c/o Engineering
Animation, Inc., 2321 North Loop Drive, Ames, Iowa 50010.
(6) Includes 5,200 shares issuable upon exercise of vested options and options
that will vest within 60 days. Dr. Crow's address is 34 Sunnyside Place,
Irvington, New York 10533.
38
<PAGE>
(7) Consists of (i) 30,000 shares held by the Martin Vanderploeg Charitable
Remainder Trust of which Mr. Wade is Special Trustee, all of which shares are
being offered hereby, (ii) 30,000 shares held by the Jeffrey D. Trom Charitable
Remainder Trust of which Mr. Wade is Special Trustee, all of which shares are
being offered hereby, (iii) 20,000 shares held by the Jay and Jill Shannan
Charitable Remainder Trust of which Mr. Wade is Special Trustee, all of which
shares are being offered hereby, (iv) 4,166 shares owned by Davis, Brown, Koehn
401(k) Plan f/b/o Jamie A. Wade and (v) 19,963 shares issuable upon exercise of
vested options and options that will vest within 60 days. Mr. Wade's address is
c/o Engineering Animation, Inc., 2321 North Loop Drive, Ames, Iowa 50010.
(8) Consists of shares issuable upon exercise of vested options and options
that will vest within 60 days. Mr. Jewell's address is c/o Engineering
Animation, Inc., 2321 North Loop Drive, Ames, Iowa 50010.
(9) Includes 15,000 shares issuable upon exercise of vested options and options
that will vest within 60 days. Mr. Jablo's address is c/o Engineering
Animation, Inc., 2321 North Loop Drive, Ames, Iowa 50010.
(10) Consists of shares issuable upon exercise of vested options and options
that will vest within 60 days. Mr. Kirshbaum's address is c/o Time Warner Trade
Publishing, Time and Life Building, 1271 Avenue of the Americas, New York, New
York 10020.
(11) Includes 3,000 shares issuable upon exercise of vested options. Dr.
Bernard's address is 2201 Timberland, Ames, Iowa 50014.
(12) Information provided in a Schedule 13G filed on February 12, 1997. The
investor has shared voting and dispositive power with respect to 436,900
shares. The Schedule 13G indicates that the shares are held by A I M Advisors,
Inc. and A I M Capital Management, Inc., subsidiaries of the investor. The
investor's address is: A I M Management Group Inc., 11 Greenway Plaza, Suite
1919, Houston, Texas 77046.
(13) Information provided in a Schedule 13G filed on February 6, 1997 by RCM
Capital Management, L.L.C. ("RCM Capital") and a Schedule 13G filed on February
13, 1997 by Dresdner Bank AG ("Dresdner"). RCM has sole voting power with
respect to 339,000 shares and sole dispositive power with respect to 395,000
shares. RCM Limited L.P. ("RCM Limited") is the Managing Agent of RCM Capital.
RCM General Corporation is the General Partner of RCM Limited. RCM Capital is a
wholly-owned subsidiary of Dresdner. RCM Capital's address is 4 Embarcadero
Center, Suite 3000, San Francisco, California 94111.
(14) Information provided in a Schedule 13G filed on February 7, 1997. The
investor has sole voting and dispositive power with respect to 200,200 shares
and shared voting and dispositive power with respect to 65,600 shares. The
investor's address is 3700 First Bank Place, P.O. Box 357, Minneapolis,
Minnesota 55440.
None of the outstanding shares of Common Stock are currently subject to
registration rights, however, the severance agreements of Dr. Rizai and Dr.
Vanderploeg give each of them the right to require the Company to register all
shares held by him in the event of his termination "without cause" or "for good
reason," as defined in such agreements. See "Management--Employment and
Severance Agreements."
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.01 par value (the "Common Stock"), and 20,000,000 shares of
Preferred Stock, $.01 par value (the "Preferred Stock"). As of the date of this
Prospectus, there were 4,717,184 shares of Common Stock outstanding and no
shares of Preferred Stock outstanding. As of the date of this Prospectus, there
were 150 holders of record of Common Stock. All shares of Common Stock are, and
the Common Stock offered hereby will be, when issued, fully paid and non-
assessable.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters voted upon by stockholders and may not use cumulative
voting for the election of directors. Thus, the owners of a majority of the
Common Stock outstanding are able to elect all of the directors. Each
outstanding share of Common Stock is entitled to participate equally in any
distribution of net assets made to the stockholders in liquidation, dissolution
or winding up of the Company and is entitled to participate equally in
dividends and other distributions, if, as and when declared by the Board of
Directors. There are no redemption, sinking fund, conversion or preemptive
rights with respect to the Common Stock. All shares of Common Stock have equal
rights and preferences.
PREFERRED STOCK
Pursuant to the Certificate of Incorporation, the Company is authorized to
issue up to 20,000,000 shares of Preferred Stock, which may be issued from time
to time in one or more series upon authorization by the Company's Board of
Directors. The Board of Directors, without further approval of the
stockholders, is authorized to fix the number of shares constituting any
series, dividend rights and terms, conversion rights and terms, voting rights
and terms, redemption rights and terms, liquidation preferences and any other
rights, preferences, privileges and restrictions applicable to each series of
the Preferred Stock. The issuance of the Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, adversely affect the voting power of the
holders of the Common Stock and, under certain circumstances, have the effect
of making it more difficult for a third party to acquire, or discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company, or otherwise adversely affect the market price of the Common Stock.
The Company is not aware of any plans by a third party to seek control of the
Company. The Company has no current plans to issue any Preferred Stock.
RIGHTS
The Company has adopted a Stockholders Rights Plan. Under the Stockholders
Rights Plan, each share of Common Stock has associated with it one preferred
share purchase right (a "Right"). The terms of the Rights are set forth in a
Rights Agreement. Under certain circumstances described below, each Right would
entitle the holders thereof to purchase one one-hundredth of a share of Series
A Junior Participating Preferred Stock for a price of $50.00 per one one-
hundredth of a share. The Rights are not currently exercisable when issued and
are transferable only with the related shares of Common Stock.
The Rights would become exercisable at the specified exercise price upon the
earlier to occur of (i) 10 business days after the first public announcement
that any person or group (other than an Exempt Person) has acquired (an
"Acquiring Person") beneficial ownership of 15% or more of the outstanding
shares of Common Stock and (ii) 10 business days (unless delayed by the Board
of Directors) after any person or group (other than an Exempt Person) has
commenced, or announced the intention to commence, a tender or exchange offer
that would, upon its consummation, result in such person or group being the
beneficial owner of 15% or more of the outstanding shares of Common Stock (each
a "Triggering Event"). Rights will not be exercisable following the occurrence
of an event described below under the caption "Flip-in" prior to the expiration
of the Company's right to redeem the Rights. Rights certificates will be
distributed when the Rights become exercisable. An "Exempt Person" will include
the Company and certain related entities.
Flip-in After the Rights become exercisable (unless the Triggering Event is
the commencement or the announcement of a tender or exchange offer as described
in (ii) in the immediately preceding paragraph), the holders of the Rights
(other than an Acquiring Person and certain transferees thereof) would be
entitled to exercise the Rights to purchase that number of shares of Common
Stock which at the time of such acquisition would have a market value of two
times the exercise price of the Rights. After the occurrence of a Flip-in
event, the Rights of an Acquiring Person and such transferees will become void.
40
<PAGE>
Flip-over In the event that, on or after the date on which an Acquiring Person
has become such: (i) the Company merges into or consolidates with an Interested
Stockholder or, unless all holders of the outstanding shares of Common Stock
are treated the same, any other person (with limited designated exceptions),
(ii) an Interested Stockholder or, unless all holders of the outstanding shares
of Common Stock are treated the same, any other person (with limited designated
exceptions) merges into the Company or (iii) the Company sells or transfers 50%
or more of its consolidated assets or earning power to an Interested
Stockholder or, unless all holders of the outstanding shares of Common Stock
are treated the same, any other person (with limited designated exceptions),
the holders of the Rights (other than Rights which have become void) would be
entitled to purchase common shares of the acquirer (or a person affiliated
therewith) at a 50% discount. In general, an "Interested Stockholder" will be
an Acquiring Person and certain persons affiliated, associated or acting on
behalf of or in concert therewith.
Redemption of Rights The Rights are redeemable, as a whole, at a redemption
price of $.01 per Right, subject to adjustment, at the direction of the Board
of Directors, at any time prior to the acquisition by a person or group of
beneficial ownership of 15% or more of the outstanding shares of Common Stock.
Exchange of shares for Rights At any time after any person or group shall have
become an Acquiring Person and before any person (other than an Exempt Person),
together with its affiliates and associates, shall have become the beneficial
owner of 50% or more of the outstanding shares of Common Stock, the Board of
Directors has the right to direct the exchange of shares of Common Stock (or
Preferred Shares) for all or any part of the Rights (other than Rights that
have become void) at the exchange rate of one share of Common Stock (or one
one-hundredth of a share of Preferred Stock) per Right, subject to adjustment.
CERTAIN LIMITED LIABILITY, INDEMNIFICATION AND ANTI-TAKEOVER PROVISIONS
Indemnification and Limitation of Liability
The Company's Certificate of Incorporation and By-laws provide that the Company
shall, subject to certain limitations, indemnify its directors and officers
against expenses (including attorneys' fees, judgments, fines and certain
settlements) actually and reasonably incurred by them in connection with any
suit or proceeding to which they are a party so long as they acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct to
have been unlawful.
Section 102 of the Delaware General Corporation Law ("DGCL") permits a Delaware
corporation to include in its certificate of incorporation a provision
eliminating or limiting a director's liability to a corporation or its
stockholders for monetary damages for breaches of fiduciary duty. DGCL Section
102 provides, however, that liability for breaches of the duty of loyalty, acts
or omissions not in good faith or involving intentional misconduct, or knowing
violation of the law, and the unlawful purchase or redemption of stock or
payment of unlawful dividends or the receipt of improper personal benefits
cannot be eliminated or limited in this manner. The Company's Certificate of
Incorporation includes a provision that eliminates, to the fullest extent
permitted, director liability for monetary damages for breaches of fiduciary
duty.
Section 203 of Delaware General Corporation Law
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder," which is defined as a person who,
together with any affiliates or associates of such person, beneficially owns,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other
dispositions of such assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation, and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period
of three years after the date the interested stockholder becomes an interested
stockholder, unless (i) the business combination is approved by the
corporation's board of directors prior to the date the interested stockholder
becomes an interested stockholder, (ii) the interested stockholder acquired at
least 85% of the voting stock of the corporation (other than stock held by
directors who are also officers or by certain employee stock plans) in the
transaction in which it becomes an interested stockholder or (iii) the business
combination is approved by a majority of the board of directors and by the
affirmative vote of 66 2/3% of the outstanding voting stock that is not owned
by the interested stockholder.
41
<PAGE>
Special Meetings of Stockholders; No Stockholder Action By Written Consent
The Certificate of Incorporation provides that special meetings of stockholders
of the Company may be called only by a majority of the Board of Directors, the
Chairman or the President. In addition, the Certificate of Incorporation
provides that the stockholders of the Company may only take actions at a duly
called annual or special meeting of stockholders and may not take action by
written consent.
Advance Notice Requirements for Stockholder Proposals and Nomination of
Directors
The By-laws provide that stockholders seeking to bring business before or
nominate directors at any annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be given
in writing to the Secretary of the Company not less than 120 days or more than
150 days prior to the meeting. The By-laws also specify certain requirements
for a stockholder's notice to be in proper written form.
Classified Board of Directors
The Certificate of Incorporation and By-laws of the Company provide that the
Board of Directors is divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Company's Board
of Directors is elected each year. See "Management--Directors and Executive
Officers of the Company."
Number of Directors; Removal; Vacancies
The By-laws provide that there shall be at least three directors, with the
exact number fixed by the Board of Directors. Vacancies on the Board of
Directors may be filled only by the affirmative vote of a majority of the
remaining Directors then in office. The Certificate of Incorporation provides
that directors may be removed only for cause and only by the holders of at
least 80% of the outstanding shares of stock entitled to vote generally in the
election of Directors, voting together as a single class.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Chicago Trust
Company of New York.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
5,587,184 shares of Common Stock. All of these shares will be freely tradeable
without restriction under the Securities Act by persons other than "affiliates"
of the Company as that term is defined in Rule 144 under the Securities Act.
Certain executive officers of the Company have agreed with the Company at the
request of the Underwriters not to sell or otherwise dispose of an aggregate of
1,312,368 shares of Common Stock in the public market for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Representatives of the Underwriters (as defined below). Upon expiration of the
180-day lock-up period, these shares will be eligible for sale subject to
compliance with the volume and other limitations of Rule 144 described below.
In general, under Rule 144 as currently in effect, any person who may be deemed
an "affiliate" of the Company and who owns Common Stock, is entitled, subject
to certain conditions, to sell within any three-month period a number of those
shares that does not exceed the greater of (i) 1% of the Company's then
outstanding Common Stock (55,871 shares immediately after the Offering) or (ii)
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
manner-of-sale and notice requirements and requirements concerning the
availability of public information about the Company. If such person is deemed
not to have been an "affiliate" of the Company for at least three months
preceding a sale, such person would be entitled to sell shares in the public
market under Rule 144(k) without regard to the requirements mentioned above.
Shares issued or issuable upon exercise of options granted by the Company prior
to the date of this Prospectus also may be eligible for sale in the public
market pursuant to a Registration Statement on Form S-8 filed by the Company
under the Securities Act. Options to purchase 1,407,476 shares of Common Stock
are currently outstanding, including options to purchase 673,671 shares that
are currently exercisable.
43
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom J.P. Morgan
Securities Inc. and Cowen & Company are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the underwriting agreement among the Company, the Selling
Stockholders and the Representatives (the "Underwriting Agreement"), to
purchase from the Company and the Selling Stockholders, and the Company and the
Selling Stockholders have agreed to sell to the Underwriters, the respective
number of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS ----------------
<S> <C>
J.P. Morgan Securities Inc..................................... 600,600
Cowen & Company................................................ 400,400
Piper Jaffray Inc. ............................................ 107,000
Principal Financial Securities, Inc. .......................... 107,000
Charles Schwab & Co., Inc. .................................... 107,000
Wessels, Arnold & Henderson, L.L.C. ........................... 107,000
---------
Total...................................................... 1,429,000
=========
</TABLE>
The nature of the Underwriters' obligations under the Underwriting Agreement is
such that all of the Common Stock being offered, excluding shares covered by
the over-allotment option granted to the Underwriters, must be purchased if any
are purchased.
The Representatives have advised the Company and the Selling Stockholders that
the several Underwriters propose to offer the Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus and may offer the Common Stock to selected dealers at such price
less a concession not to exceed $1.04 per share. The Underwriters may allow,
and such dealers may reallow, a concession to other dealers not in excess of
$.10 per share. After the public offering of the Common Stock, the public
offering price and other selling terms may be changed by the Representatives.
The Company and certain Selling Stockholders have granted the Underwriters an
option, exercisable within 30 days after the date of this Prospectus, to
purchase up to an aggregate of 214,350 additional shares of Common Stock,
consisting of 130,000 shares from the Company and 42,175 shares from each of
Dr. Rizai and Dr. Vanderploeg, at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any such additional shares pursuant to the option, each of the Underwriters
will be committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may exercise the
option only to cover over-allotments, if any, made in connection with the
distribution of Common Stock offered hereby.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot the offering, creating a syndicate
short position. In addition, the Underwriters may bid for, and purchase, shares
of Common Stock in the open market to cover syndicate short positions or to
stabilize the price of the Common Stock. Finally, the underwriting syndicate
may reclaim selling concessions allowed for distributing the Common Stock in
the offering, if the syndicate repurchases previously distributed Common Stock
in syndicate covering transactions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
Common stock above independent market levels. The Underwriters are not required
to engage in these activities and may end any of these activities at any time.
The Underwriters and dealers may engage in passive market making transactions
in the Common Stock in accordance with Rule 103 of Regulation M promulgated by
the Commission. In general, a passive market maker may not bid for, or
purchase, the Common Stock at a price that exceeds the highest independent bid.
In addition, the net daily purchases made by any passive market maker generally
may not exceed 30% of its average daily trading volume in the Common Stock
during a specified two month prior period, or 200 shares, whichever is greater.
A passive market maker must identify passive market making bids as such on the
Nasdaq National Market electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the Common Stock above
independent market levels. Underwriters and dealers are not required to engage
in passive market making and may end passive market making activities at any
time.
44
<PAGE>
The Company and certain executive officers have agreed not to offer, sell or
otherwise dispose of, any Common Stock or any securities convertible into
Common Stock or register for sale under the Securities Act any Common Stock,
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Representatives. See "Shares Eligible for Future Sale."
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required
to make in respect thereof.
J.P. Morgan Securities Inc. has provided financial advisory services to the
Company in the past, for which it has received customary fees.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Gardner, Carton & Douglas, Chicago,
Illinois. Mayer, Brown & Platt, Chicago, Illinois, has acted as counsel to the
Underwriters in connection with certain legal matters relating to the Common
Stock offered hereby.
EXPERTS
The consolidated financial statements of the Company at December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996,
included in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report appearing
elsewhere in this Prospectus and in the Registration Statement, and such
consolidated financial statements are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
45
<PAGE>
ENGINEERING ANIMATION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 and at March 31,
1997 (unaudited).......................................................... F-3
Consolidated Statements of Income--Years ended December 31, 1994, 1995 and
1996 and Three Months ended March 31, 1996 and 1997 (unaudited)........... F-4
Consolidated Statement of Stockholders' Equity--Years ended December 31,
1994, 1995 and 1996 and Three Months ended March 31, 1997 (unaudited)..... F-5
Consolidated Statements of Cash Flows--Years ended December 31, 1994, 1995
and 1996 and Three Months ended March 31, 1996 and 1997 (unaudited)....... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Engineering Animation, Inc.
We have audited the accompanying consolidated balance sheets of Engineering
Animation, Inc. as of December 31, 1995 and 1996, 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Engineering
Animation, Inc. at December 31, 1995 and 1996, and the 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
F-2
<PAGE>
ENGINEERING ANIMATION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
----------------------------------
AT DECEMBER 31, AT MARCH 31,
1995 1996 1997
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (note 3)
Current assets:
Cash and cash equivalents $ 490,524 $ 9,349,660 $10,203,195
Short-term investments -- 9,884,250 7,466,657
Accounts receivable:
Billed, less allowance of $12,157,
$121,000 and $135,263 at December 31,
1995 and 1996 and March 31, 1997,
respectively 1,057,143 6,666,006 7,476,526
Unbilled 1,288,930 3,333,595 3,684,197
Deferred income taxes -- 48,000 54,000
Prepaid expense and other assets 180,284 390,193 687,766
---------- ----------- -----------
Total current assets 3,016,881 29,671,704 29,572,341
Property and equipment:
Computer equipment and software 1,899,150 4,544,996 5,441,984
Office equipment and furniture 236,177 1,708,752 1,794,009
Leasehold improvements 39,465 229,965 274,176
---------- ----------- -----------
2,174,792 6,483,713 7,510,169
Less accumulated depreciation and
amortization 641,594 1,291,195 1,606,664
---------- ----------- -----------
Total property and equipment 1,533,198 5,192,518 5,903,505
Other assets:
Restricted cash -- 495,000 424,126
Note receivable (note 2) 750,286 1,408,286 1,408,286
Software development costs--net of
accumulated amortization of $181,687,
$375,779 and $424,259 at December 31,
1995 and 1996 and March 31, 1997,
respectively 453,019 602,076 856,081
Other 445,887 586,656 490,148
---------- ----------- -----------
Total assets $6,199,271 $37,956,240 $38,654,487
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 631,335 $ 1,057,600 $ 809,237
Accrued compensation and other 420,056 1,413,285 1,208,906
Deferred revenue 286,102 400,050 318,226
Deferred income taxes -- 119,000 119,000
Long-term debt and lease obligations due
within one year (notes 3 and 4) 344,795 62,128 63,808
Income taxes payable -- 131,882 537,496
---------- ----------- -----------
Total current liabilities 1,682,288 3,183,945 3,056,673
Long-term debt due after one year (note 3) 1,806,900 831,766 756,548
Obligations under capital leases due after
one year (note 4) 72,934 40,806 31,697
Deferred income taxes (note 6) 492,800 826,000 919,000
Commitments (notes 4 and 5)
Stockholders' equity (note 7)
Preferred stock, $.01 par value,
20,000,000 shares authorized; no shares
issued or outstanding -- -- --
Common stock, $.01 par value, 20,000,000
shares authorized; issued and
outstanding shares 2,869,760 at
December 31, 1995, 4,697,320 at
December 31, 1996 and 4,701,205 at
March 31, 1997 28,697 46,973 47,012
Additional paid-in capital 1,401,957 30,462,053 30,480,231
Retained earnings 713,695 2,564,697 3,363,326
---------- ----------- -----------
Total stockholders' equity 2,144,349 33,073,723 33,890,569
---------- ----------- -----------
Total liabilities and stockholders'
equity $6,199,271 $37,956,240 $38,654,487
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ENGINEERING ANIMATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
------------------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1994 1995 1996 1996 1997
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues (note 8) $5,456,343 $10,414,637 $20,412,757 $3,101,059 $7,675,826
Cost of revenues 1,557,470 2,758,591 6,443,329 1,090,218 2,424,474
---------- ----------- ----------- ---------- ----------
Gross profit 3,898,873 7,656,046 13,969,428 2,010,841 5,251,352
Operating expenses:
Sales and marketing 1,801,634 3,092,623 7,428,063 1,088,774 2,369,032
General and
administrative
(note 9) 954,980 1,986,228 2,360,026 439,446 925,270
Research and
development 868,645 1,712,568 2,122,435 253,787 917,064
---------- ----------- ----------- ---------- ----------
Total operating
expenses 3,625,259 6,791,419 11,910,524 1,782,007 4,211,366
---------- ----------- ----------- ---------- ----------
Income from
operations 273,614 864,627 2,058,904 228,834 1,039,986
Other income
(expense):
Interest income 6,580 24,888 1,134,488 115,726 280,407
Interest expense (74,661) (161,850) (106,390) (48,889) (15,501)
---------- ----------- ----------- ---------- ----------
(68,081) (136,962) 1,028,098 66,837 264,906
---------- ----------- ----------- ---------- ----------
Income before income
taxes 205,533 727,665 3,087,002 295,671 1,304,892
Income taxes (note 6) 91,600 297,000 1,236,000 120,000 520,000
---------- ----------- ----------- ---------- ----------
Net income $ 113,933 $ 430,665 $ 1,851,002 $ 175,671 $ 784,892
========== =========== =========== ========== ==========
Earnings per share of
common stock $ .03 $ .12 $ .36 $ .04 $ .14
========== =========== =========== ========== ==========
Weighted average
number of common and
equivalent shares
outstanding
(in thousands) (note
1) 3,695 3,702 5,157 4,312 5,498
========== =========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
ENGINEERING ANIMATION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
-----------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN (LOSS) ON TOTAL
------------------ 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
stock (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
Issuance 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
Common stock issued
for options exercised 3,885 39 18,178 -- -- 18,217
Foreign currency
translation
adjustment -- -- -- -- 13,737 13,737
Net income -- -- -- -- 784,892 784,892
--------- ------- ----------- ----------- ---------- -----------
Balance at March 31,
1997 (unaudited) 4,701,205 $47,012 $30,480,231 -- $3,363,326 $33,890,569
========= ======= =========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
ENGINEERING ANIMATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1994 1995 1996 1996 1997
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES (UNAUDITED)
Net income $ 113,933 $ 430,665 $ 1,851,002 $ 175,671 $ 784,892
Adjustments to reconcile
net income to net cash
provided (used) by
operating activities:
Depreciation and
amortization 220,106 471,707 976,696 148,751 408,106
Deferred income taxes 90,800 295,000 404,200 112,352 87,000
Loss on disposal of
equipment 1,305 -- 16,200 8,172 --
(Increase) decrease in
billed accounts
receivable (1,126,248) 266,840 (5,608,863) (1,072,266) (810,520)
(Increase) decrease in
unbilled accounts
receivable 12,050 (1,004,965) (2,044,665) (125,949) (350,602)
Increase in prepaid
expenses (49,902) (10,211) (247,613) 351,240 (297,573)
(Decrease) increase in
accounts payable 49,809 486,567 426,265 510,589 (248,363)
Increase (decrease) in
accrued expenses 65,844 292,180 1,125,111 (47,651) 201,235
(Decrease) increase in
deferred revenue 82,913 203,189 113,948 124,399 (81,824)
---------- ---------- ----------- ----------- -----------
Net cash (used)
provided by
operating
activities (539,390) 1,430,972 (2,987,719) 185,308 (307,649)
INVESTING ACTIVITIES
Increase in note
receivable -- (750,286) (658,000) -- --
Purchases of property
and equipment (503,643) (976,506) (4,435,347) (341,367) (1,026,456)
Sales of property and
equipment -- -- 30,000 -- --
Sales (purchases) of
other assets 25,633 (441,057) (193,546) -- 52,351
Development of software (259,313) (263,149) (343,149) (79,299) (302,485)
(Purchases) maturities
of marketable
securities 1,121,943 -- (9,846,546) -- 2,417,593
---------- ---------- ----------- ----------- -----------
Net cash (used)
provided by
investing
activities 384,620 (2,430,998) (15,446,588) (420,666) 1,141,003
FINANCING ACTIVITIES
Decrease (increase) in
restricted cash -- -- (495,000) -- 70,874
Proceeds from short-term
borrowing 200,000 600,000 -- 600,000 --
Payments on short-term
borrowing -- (800,000) -- (600,000) --
Proceeds from long-term
debt 306,000 1,713,140 -- -- --
Payments of long-term
debt (122,795) (263,343) (1,263,723) (1,158,722) (75,218)
Principal payments under
capital lease
obligations (5,991) (17,150) (26,206) (6,060) (7,429)
Net proceeds from
issuance of common
stock and from exercise
of stock options -- -- 29,078,372 29,123,501 18,217
Repurchase of common
stock (55,000) -- -- -- --
---------- ---------- ----------- ----------- -----------
Net cash provided by
financing
activities 322,214 1,232,647 27,293,443 27,958,719 6,444
---------- ---------- ----------- ----------- -----------
Effect of exchange
rate changes on
cash -- -- -- -- 13,737
---------- ---------- ----------- ----------- -----------
Net increase in cash
and cash
equivalents 167,444 232,621 8,859,136 27,723,361 853,535
Cash and cash
equivalents at
beginning of period 90,459 257,903 490,524 490,524 9,349,660
---------- ---------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period $ 257,903 $ 490,524 $ 9,349,660 $28,213,885 $10,203,195
========== ========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 59,222 $ 146,735 $ 46,805 $ 31,802 $ 4,068
Income taxes paid 800 2,000 699,918 7,648 27,386
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 -- -- 420,590 116,002 --
</TABLE>
See accompanying notes.
F-6
<PAGE>
ENGINEERING ANIMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
Engineering Animation, Inc. (the "Company") develops, produces and sells 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., the Company's 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 notes 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 visualization 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.
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
F-7
<PAGE>
ENGINEERING ANIMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997)
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 at January 1, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the first quarter ended March 31, 1997 and
March 31, 1996 of $0.02 and $0.01 per share, respectively. The impact of
Statement 128 on the calculation of fully diluted earnings per share for these
quarters is not expected to be material.
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.
Interim Financial Information
The accompanying consolidated financial statements as of March 31, 1997 and for
the three-month periods ended March 31, 1996 and 1997 are unaudited. In the
opinion of the management of the Company, these consolidated financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments necessary for a fair presentation of the consolidated financial
statements. The results of operations for the three-month period ended March
31, 1997 are not necessarily indicative of the results that may be expected for
the full year ending December 31, 1997.
(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
F-8
<PAGE>
ENGINEERING ANIMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997)
June 2016, unless the developer sells the building to an unaffiliated third
party, at which time the principal and interest accrued to date become
immediately due. The note receivable is collateralized by a second mortgage on
the building.
(3) DEBT
The Company had a $1,000,000 line of credit agreement with a commercial bank,
which expired May 1, 1997. No amounts were borrowed on the line as of December
31, 1995 or 1996 and March 31, 1997. The Company did not renew this credit
agreement upon its expiration.
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
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 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>
F-9
<PAGE>
ENGINEERING ANIMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997)
(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>
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 the Company 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(R) core
computer software. This amended agreement does not include any additional
software modules or other software products of VisLab(R). 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
F-10
<PAGE>
ENGINEERING ANIMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997)
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. VKI royalty
expense was approximately $50,000 for the year ended December 31, 1996.
(6) INCOME TAXES
Income tax expense is comprised of the following components:
<TABLE>
<CAPTION>
---------------------------
YEARS ENDED DECEMBER 31,
1994 1995 1996
------- -------- ----------
<S> <C> <C> <C>
Current tax expense:
Federal -- -- $ 758,000
State -- -- 73,800
------- -------- ----------
-- -- 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 asset:
NOL carryforwards expiring
through 2009 126,000 139,000 -- --
Accounts receivable principally
due to 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:
<TABLE>
<CAPTION>
------------------
YEARS 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 income tax rate 44.6% 40.8% 40.0%
==== ==== ====
</TABLE>
F-11
<PAGE>
ENGINEERING ANIMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997)
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 return 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 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 four years.
F-12
<PAGE>
ENGINEERING ANIMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997)
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 the 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>
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996
----------------- ------------------ --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISED OPTIONS EXERCISED OPTIONS EXERCISED
------- PRICE ------- PRICE --------- PRICE
--------- --------- ---------
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 $ .51 $ 6.85
</TABLE>
Exercise prices for options outstanding at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C>
11,808 $.005
799,058 $2.00-$9.00
175,650 $12.00-$9.25
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
F-13
<PAGE>
ENGINEERING ANIMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND THE
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997)
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 the years ended December 31,
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, fair value change would be immaterial.
(11) MAJOR CUSTOMERS
Two major customers were responsible for 3.9%, 5.6% and 32.9% of revenues for
the years ended December 31, 1994, 1995, and 1996, respectively.
(12) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth selected unaudited quarterly financial
information for 1996 and for the first quarter of 1997. 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
THREE MONTHS ENDED YEAR ENDED ENDED
Dollars in thousands, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31,
except per share data 1996 1996 1996 1996 1996 1997
--------- -------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $3,101 $4,536 $5,715 $7,061 $20,413 $7,676
Gross profit 2,011 2,972 3,903 5,083 13,969 5,251
Operating expenses 1,782 2,566 3,384 4,178 11,910 4,211
Operating income 229 406 519 905 2,059 1,040
Net income 176 434 521 720 1,851 785
Earnings per share .04 .08 .10 .13 .36 .14
</TABLE>
F-14
