<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1998
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ENGINEERING ANIMATION, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 42-1323712
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2321 NORTH LOOP DRIVE, AMES, IOWA 50010 (515) 296-9908
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
JAMIE A. WADE
VICE PRESIDENT OF ADMINISTRATION,
GENERAL COUNSEL AND SECRETARY
2321 NORTH LOOP DRIVE
AMES, IOWA 50010
(515) 296-6942
(Name, address, including zip code, and telephone, including area code, of agent
for service)
with copies to:
GEORGE C. MCKANN STEPHEN A. JANNETTA
GARDNER, CARTON & DOUGLAS MORGAN, LEWIS & BOCKIUS LLP
321 NORTH CLARK STREET, 2000 ONE LOGAN SQUARE
SUITE 3400 PHILADELPHIA, PENNSYLVANIA 19103-6993
CHICAGO, ILLINOIS 60610 (215) 963-5000
(312) 245-8460
---------------------
Approximate date of commencement of proposed sale of the securities to the
public: Upon the Effective Time of the Merger of Transom Technologies, Inc.
("Transom") with and into Engineering Animation, Inc. as set forth in Article I
of the Agreement and Plan of Merger included as Appendix A to the Proxy
Statement/Prospectus forming a part of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<TABLE>
<CAPTION>
==================================================================================================================
PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value..... 205,000 shares $11.48 $2,353,153.00 $695.00
==================================================================================================================
</TABLE>
(1) There is no market for the shares of Transom that are to be received by the
registrant in the Merger. Therefore pursuant to Rule 457(f)(2), the fee is
calculated based on the aggregate book value of such shares, which was
$2,353,153.00 as of June 30, 1998.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
TRANSOM TECHNOLOGIES, INC.
201 SOUTH MAIN STREET, SUITE 300
ANN ARBOR, MICHIGAN 48104
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER , 1998
A Special Meeting of the stockholders of Transom Technologies, Inc., a
Delaware corporation ("Transom"), will be held on September , 1998 at 4:00
p.m., Eastern Time, at , , Pennsylvania to
consider and act upon:
(1) A proposal to approve and adopt an Agreement and Plan of Merger
dated as of July 29, 1998 between Engineering Animation, Inc., a Delaware
corporation ("EAI"), and Transom, pursuant to which Transom will be merge
with and into EAI, as more fully described in the attached Proxy Statement/
Prospectus (the "Merger"); and
(2) Such other business as may properly come before the meeting or any
adjournments thereof.
The Board of Directors has fixed the close of business on August , 1998
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the meeting. Objecting stockholders who perfect and exercise
their dissenters' rights in accordance with the procedural requirements of the
Delaware General Corporation Law, as amended, will be entitled to receive
payment of the "fair value" of their shares in cash if the Merger is
consummated. See "The Merger -- Dissenters' Rights" and Appendix B to the Proxy
Statement/Prospectus, which Appendix is deemed to be a part of this notice.
August , 1998
By order of the Board of Directors
Raynold A. Schmick, Secretary
PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY WHETHER OR NOT YOU EXPECT TO ATTEND
THE SPECIAL MEETING.
<PAGE> 3
TRANSOM TECHNOLOGIES, INC.
PROXY STATEMENT
---------------------
ENGINEERING ANIMATION, INC.
PROSPECTUS
---------------------
This Proxy Statement/Prospectus and the accompanying notice, proxy and
other documents are being sent to stockholders of Transom Technologies, Inc., a
Delaware corporation ("Transom"), on or about August , 1998 in connection with
the solicitation by Transom's Board of Directors of proxies to be used at a
Special Meeting of Stockholders of Transom (the "Meeting"), and at any
adjournment thereof. The Meeting will be held at , at ,
, Pennsylvania on September , 1998 at 4:00 p.m. Eastern Time.
The purpose of the Meeting is for the stockholders of Transom to consider
and vote on the proposed merger (the "Merger") of Transom with and into
Engineering Animation, Inc., a Delaware corporation ("EAI"), pursuant to the
Agreement and Plan of Merger between EAI and Transom dated as of July 29, 1998
(the "Merger Agreement"). See "The Merger." At the Effective Time (as defined
herein) of the Merger, all of the outstanding shares of Transom common stock,
par value $0.001 per share, will be converted into the right to receive a number
of whole shares of EAI common stock, par value $0.01 per share (the "EAI Common
Stock"), plus cash in lieu of fractional shares based upon the Exchange Ratio
(as defined herein). See "The Merger."
Any person who executes and returns the enclosed proxy may revoke it at any
time prior to the vote at the Meeting by notice to the Secretary of Transom
received prior to the Meeting, by execution of a subsequently dated proxy, or by
attending the Meeting and voting in person. The persons named in the enclosed
proxy will vote as directed by the stockholder executing the proxy with respect
to the Merger Agreement or, in the absence of direction, in favor of approval
and adoption of the Merger Agreement. Transom is not aware of any matters to
come before the Meeting other than consideration of the Merger. However, if any
other matters properly come before the Meeting, the persons named on the
enclosed form of proxy will vote the proxy in accordance with their best
judgment on such matters.
THE BOARD OF DIRECTORS OF TRANSOM UNANIMOUSLY HAS APPROVED THE MERGER AND
RECOMMENDS THAT THE STOCKHOLDERS OF TRANSOM VOTE FOR ITS ADOPTION.
---------------------
The information herein with respect to EAI and Transom has been supplied by
each corporation. The information contained herein with respect to the Merger is
qualified by reference to the Merger Agreement, which is attached hereto as
Appendix A and incorporated herein by reference.
The EAI Common Stock is listed and traded on the Nasdaq Stock Market
National Market under the symbol "EAII."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY TRANSOM STOCKHOLDERS IN CONNECTION WITH THE MERGER.
THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES 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 PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Proxy Statement/Prospectus is August , 1998.
<PAGE> 4
AVAILABLE INFORMATION
EAI is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission (Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549) and at the following regional offices: New York
Regional Office, Seven World Trade Center, New York, New York 10048; and Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can 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. The EAI Common Stock
is traded on the Nasdaq Stock Market National Market. Reports, proxy statements
and other information regarding EAI may also be inspected at the offices of the
NASD, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. In addition,
electronically filed documents, including reports, proxy and information
statements and other information regarding EAI, can be obtained from the
Commission's Web site at http://www.sec.gov.
EAI has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), covering the shares
of EAI's Common Stock referred to herein. This Proxy Statement/Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is made to the
Registration Statement.
ii
<PAGE> 5
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by EAI with the Commission (File No. 0-27670)
are incorporated in this Proxy Statement/Prospectus by reference and made a part
hereof:
(i) Annual Report on Form 10-K for the fiscal year ended December 31,
1997;
(ii) Amendment to Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1997;
(iii) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998 and June 30, 1998; and
(iv) Current Reports on Form 8-K, filed March 19, 1998 and July 1,
1998 (as amended July 31, 1998).
All documents subsequently filed by EAI pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the Merger shall be deemed to be incorporated
in this Proxy Statement/Prospectus by reference and to be a part hereof from the
respective dates of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference in this Proxy
Statement/Prospectus shall be deemed to be modified or superseded for purposes
of this Proxy Statement/Prospectus to the extent that a statement contained in
this Proxy Statement/Prospectus or in any other subsequently filed document
which also is or is deemed to be incorporated by reference in this Proxy
Statement/Prospectus modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus. All information
appearing in this Proxy Statement/Prospectus is qualified in its entirety by the
information and financial statements (including the notes thereto) appearing in
the documents incorporated herein by reference.
AS DESCRIBED ABOVE, THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY
REFERENCE THE DOCUMENTS LISTED ABOVE, THE EXHIBITS TO WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE EXHIBITS ARE AVAILABLE WITHOUT CHARGE UPON
REQUEST DIRECTED TO MR. JAMIE A. WADE, VICE PRESIDENT OF ADMINISTRATION, GENERAL
COUNSEL AND SECRETARY, ENGINEERING ANIMATION, INC., 2321 NORTH LOOP DRIVE, AMES,
IOWA 50010; TELEPHONE (515) 296-6942. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE SEPTEMBER , 1998.
iii
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY..................................................... 1
SUMMARY SELECTED FINANCIAL INFORMATION AND PER SHARE DATA... 5
RISK FACTORS................................................ 11
THE SPECIAL MEETING OF THE TRANSOM STOCKHOLDERS............. 16
Date, Time and Place...................................... 16
Purpose of the Meeting.................................... 16
Record Date............................................... 16
Required Vote............................................. 16
Proxies................................................... 16
THE MERGER.................................................. 18
Background of the Merger.................................. 18
Transom's Reasons for the Merger.......................... 18
Transom Board Approval and Recommendation of the Merger... 19
EAI Reasons for the Merger................................ 19
Merger Consideration...................................... 20
Effective Time of the Merger.............................. 20
Conversion of Warrants to Acquire Transom Common Stock.... 20
Conversion of Transom Preferred Stock..................... 21
Conversion of Shares in the Merger........................ 21
Exchange of Certificates.................................. 22
Options to Acquire Transom Common Stock................... 22
Representations and Warranties............................ 23
Conduct of Business Pending Consummation of the Merger.... 23
Conditions to Closing..................................... 24
Termination and Termination Fee........................... 25
No Solicitations.......................................... 26
Interests of Certain Persons in the Merger................ 27
Registration and Listing.................................. 27
Certain Federal Income Tax Consequences................... 27
Accounting Treatment...................................... 30
Regulatory Approvals...................................... 30
Dissenters' Rights........................................ 30
Resale of EAI Common Stock Issued in the Merger;
Affiliates............................................. 31
EAI COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICY........ 32
DIVIDEND POLICY............................................. 32
INFORMATION CONCERNING EAI.................................. 32
INFORMATION CONCERNING TRANSOM.............................. 33
Business.................................................. 33
Market for Shares and Dividends........................... 34
Security Ownership........................................ 34
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 36
Certain Transactions...................................... 38
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 39
RIGHTS OF EAI STOCKHOLDERS AND TRANSOM STOCKHOLDERS......... 45
Description of EAI Stock.................................. 45
Description of Transom Capital Stock...................... 46
Comparison of Rights of EAI Stockholders and Transom
Stockholders........................................... 47
</TABLE>
iv
<PAGE> 7
<TABLE>
<CAPTION>
Page
----
<S> <C>
LEGAL MATTERS............................................... 52
TAX OPINION................................................. 52
EXPERTS..................................................... 52
EAI....................................................... 52
Transom................................................... 52
INDEX TO TRANSOM FINANCIAL STATEMENTS....................... F-1
APPENDIX A -- MERGER AGREEMENT
APPENDIX B -- DELAWARE GENERAL CORPORATION LAW SECTION 262 --
DISSENTERS' RIGHTS
</TABLE>
v
<PAGE> 8
SUMMARY
The following summary is not intended to be complete and is qualified in
its entirety by more detailed information appearing elsewhere in this Proxy
Statement/Prospectus, including the appendices hereto, or in the documents
incorporated herein by reference. Unless otherwise indicated, all references in
this Proxy Statement/Prospectus to EAI include Engineering Animation, Inc. and
its subsidiaries. This Proxy Statement/ Prospectus, including the appendices and
the documents incorporated herein by reference, should be read carefully in its
entirety.
ENGINEERING ANIMATION, INC.
Engineering Animation, Inc., a Delaware corporation ("EAI"), develops,
produces and sells product visualization software and interactive multimedia
products that address the needs of its customers in domestic and international
commercial markets. EAI's principal executive office is located at 2321 North
Loop Drive, Ames, Iowa 50010; its telephone number is (515) 296-9908; its
Internet e-mail address is [email protected]; and its World Wide Web address is
www.eai.com. See "Information Concerning EAI."
TRANSOM TECHNOLOGIES, INC.
Transom Technologies, Inc., a Delaware corporation ("Transom"), is a
provider of human modeling and simulation software. Transom's principal
executive office is located at 201 South Main Street, Suite 300, Ann Arbor,
Michigan, 48104, and its telephone number is (734) 761-6001. See "Information
Concerning Transom."
DATE, TIME AND PLACE OF TRANSOM STOCKHOLDERS' MEETING
A special meeting of Transom's stockholders (the "Meeting") to consider and
vote upon a proposal to authorize the transactions contemplated by an Agreement
and Plan of Merger dated as of July 29, 1998 (the "Merger Agreement") between
EAI and Transom will be held on September , 1998 at located at
, , Pennsylvania, , at 4:00 p.m.,
Eastern Time. See "The Special Meeting of the Transom Stockholders." Pursuant to
the Merger Agreement, Transom will merge with and into EAI (the "Merger").
RECORD DATE
Only holders of record of Transom common stock, par value $0.001 per share
(the "Transom Common Stock"), and Transom Series B Convertible Preferred Stock,
par value $0.001 per share (the "Transom Series B Preferred Stock" and, together
with the Transom Common Stock, the "Transom Voting Stock"), at the close of
business on August , 1998 (the "Record Date") are entitled to vote at the
Meeting. At the close of business on the Record Date, there were 1,650,800
shares of Transom Common Stock and 4,650,000 shares of Transom Series B
Preferred Stock outstanding, each of which is entitled to one vote at the
Meeting. See "The Special Meeting of the Transom Stockholders -- Record Date."
REQUIRED VOTE
The representation in person or by proxy of at least a majority of the
issued and outstanding shares of Transom Voting Stock is necessary to establish
a quorum for the transaction of business at the Meeting. According to the
Delaware General Corporation Law, as amended (the "DGCL"), and Transom's
Certificate of Incorporation, as amended, the affirmative vote of a majority of
the outstanding shares of the Transom Voting Stock is necessary to approve the
Merger Agreement. See "The Special Meeting of the Transom Stockholders
-- Required Vote." Directors and executive officers of Transom and their
affiliates beneficially own 15.08% of the issued and outstanding shares of
Transom Voting Stock. See "Information Concerning Transom -- Security
Ownership."
The consent of the stockholders of EAI is not required to approve the
Merger or the Merger Agreement and will not be sought.
1
<PAGE> 9
PROXIES
All shares of Transom Voting Stock represented by properly executed and
unrevoked proxies that are received prior to or at the Meeting will be voted in
accordance with the instructions indicated in such proxies. Properly executed
proxies that do not contain voting instructions will be voted FOR approval of
the Merger Agreement. See "The Special Meeting of the Transom Stockholders
-- Proxies."
THE MERGER
Under the terms of the Transom Warrants (as hereinafter defined), Transom
has the ability to cause the Transom Warrants to be converted into shares of
Transom Common Stock under certain circumstances, including the Merger. Assuming
the Merger is approved by the Transom stockholders and the other conditions to
the Merger are satisfied (including that the price per share of EAI Common Stock
is greater than $42.00), at or prior to the effective time of the Merger (the
"Effective Time"), each of the issued and outstanding warrants (the "Transom
Warrants") to purchase shares of Transom Series A Preferred Stock (as
hereinafter defined) will be fully converted into shares of Transom Common Stock
pursuant to the terms of the Transom Warrants. All of the Transom Warrants
and/or Transom Series A Preferred Stock will be converted into Transom Common
Stock pursuant to the Merger Agreement and will no longer be outstanding and
will automatically be canceled and cease to exist after such conversion. Each
warrant or certificate previously representing any such Transom Series A
Preferred Stock (or the right to purchase Transom Series A Preferred Stock) will
thereafter represent the right to receive that number of shares of Transom
Common Stock. See "The Merger -- Conversion of Warrants to Acquire Transom
Common Stock."
Under the terms of the Transom Preferred Stock (as hereinafter defined),
Transom has the ability to cause the Transom Preferred Stock to be converted
into shares of Transom Common Stock under certain circumstances, including the
Merger. Assuming the Merger is approved by the Transom stockholders and the
other conditions to the Merger are satisfied (including that the price per share
of EAI Common Stock is greater than $42.00), at or prior to the Effective Time,
each issued and outstanding share of Series A Non-Voting Convertible Preferred
Stock, par value $0.001 per share, of Transom (the "Transom Series A Preferred
Stock") and Transom Series B Preferred Stock (together with the Transom Series A
Preferred Stock, the "Transom Preferred Stock") will be fully converted into one
share of Transom Common Stock pursuant to and in accordance with the terms of
the Transom Preferred Stock. All of the shares of Transom Preferred Stock
converted into Transom Common Stock will no longer be outstanding and will
automatically be canceled and cease to exist after such conversion. See "The
Merger -- Conversion of Transom Preferred Stock."
Upon the terms and subject to the conditions contained in the Merger
Agreement, at the Effective Time, (i) Transom shall merge with and into EAI,
(ii) each outstanding share of Transom Common Stock (other than dissenting
shares and shares to be canceled pursuant to clause (iii) below) will be
converted into the right to receive that number of shares of EAI common stock,
par value $0.01 per share (the "EAI Common Stock"), equal to the Exchange Ratio
(as defined below), and (iii) each share of Transom Common Stock owned by
Transom as treasury shares or owned directly or indirectly by Transom or EAI
will be canceled and will cease to exist, and no stock of EAI or other
consideration will be delivered in exchange therefor. See "The Merger -- Merger
Consideration."
Pursuant to the Merger Agreement, the exchange ratio in the Merger (the
"Exchange Ratio") will be determined as follows: each share of Transom Common
Stock shall be exchanged for that number of shares of EAI Common Stock equal to
the quotient, carried to six decimal places, of (x) 205,000 divided by (y) the
sum of (i) the total number of shares of Transom Common Stock outstanding
immediately prior to the Effective Time (but after the conversion of the Transom
Warrants and Transom Preferred Stock into Transom Common Stock) plus (ii) the
number of shares of Transom Common Stock issuable upon the exercise of all
outstanding options to purchase Transom Common Stock. Based on the number of
shares of Transom Common Stock and Transom Preferred Stock and the number of
Transom options and Transom warrants to purchase Transom Common Stock and
Transom Preferred Stock outstanding on the Record Date,
2
<PAGE> 10
the Exchange Ratio would be 0.024213 shares of EAI Common Stock per share of
Transom Common Stock. See "The Merger -- Merger Consideration."
EAI will issue only whole shares of EAI Common Stock in connection with the
Merger. Each holder of Transom Common Stock who otherwise would be entitled to
receive a fractional share of EAI Common Stock will instead receive an amount of
cash (without interest) determined by multiplying the (i) EAI Stock Value (which
will be the average of the high and low per share sale price of EAI Common
Stock, as reported on the Nasdaq Stock Market National Market (the "NNM"), for
the second trading day prior to the closing of the Merger (the "Closing"), as
reported in the NNM listings published in the Wall Street Journal) by (ii) the
fractional share interest (rounded to six decimal places) to which such holder
would otherwise be entitled. See "The Merger -- Exchange of Certificates."
At the Effective Time, each outstanding option to purchase Transom Common
Stock (a "Transom Option") shall be fully vested in accordance with the terms of
the Transom Options and the Transom 1996 Equity Compensation Plan, as amended
(the "Transom Option Plan"), and shall be assumed by EAI. Each such Transom
Option shall thereafter be deemed to constitute an option to acquire, on the
same terms and conditions as were applicable under such Transom Option, a
certain number of shares of EAI Common Stock, as further described herein under
the caption "The Merger -- Options to Acquire Transom Common Stock."
APPROVAL OF THE MERGER
The Boards of Directors of EAI and Transom have unanimously approved the
consummation of the Merger and the transactions contemplated by the Merger
Agreement. See "The Merger -- Background of the Merger."
EFFECTIVE TIME OF THE MERGER
"Effective Time" shall mean the date and time at which the Merger becomes
effective. The Merger will become effective upon the filing of the Certificate
of Merger with the Secretary of State of Delaware, which is expected to occur
not later than two business days after the satisfaction or waiver of the
conditions precedent to the Merger.
CONDITIONS TO THE MERGER; TERMINATION
The consummation of the Merger is conditioned upon the fulfillment of
certain conditions precedent set forth in the Merger Agreement. The Merger
Agreement may be terminated by mutual consent of the Boards of Directors of
Transom and EAI, by either EAI or Transom if certain conditions have not been
satisfied, and in certain other situations. If Transom terminates the Merger
Agreement under certain circumstances, it will be required to make certain
payments to EAI and may be required to make certain additional payments if it
consummates or agrees to consummate certain types of transactions within the
12-month period following the date of the Merger Agreement. See "The Merger
-- Conditions to Closing," and "-- Termination and Termination Fee."
REGULATORY APPROVALS
EAI and Transom are aware of no governmental or regulatory approvals
required for consummation of the Merger, other than compliance with applicable
securities and "blue sky" laws.
OTHER NEGOTIATIONS
The Merger Agreement places certain restrictions on the extent to which
Transom can negotiate with prospective purchasers other than EAI. See "The
Merger -- No Solicitations."
FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Tax-free treatment of the Merger for EAI and the Transom
3
<PAGE> 11
stockholders will depend in part on circumstances occurring after the Merger.
For a discussion of the possible federal income tax consequences of the Merger,
see "The Merger -- Certain Federal Income Tax Consequences."
RESALE RESTRICTIONS
All shares of EAI Common Stock received by Transom stockholders in
connection with the Merger will be fully transferable, except that shares of EAI
Common Stock received by persons who are deemed to be "affiliates" (as that term
is defined for purposes of Rule 145 under the Securities Act of 1933, as amended
(the "Securities Act")) of Transom at the Effective Time may be resold by such
person only in certain circumstances. See "The Merger -- Resale of EAI Common
Stock Issued in the Merger; Affiliates."
DISSENTERS' RIGHTS
Under the DGCL, Transom stockholders will be entitled to dissent from the
Merger and, if the Merger is consummated, to obtain cash in an amount equal to
the "fair value" of their Transom Common Stock, which may be more or less than
the amount to be received pursuant to the Merger Agreement. Specific procedures
are required to be followed in order to exercise such rights. See "The
Merger -- Dissenters' Rights." The Merger Agreement provides that if holders of
more than ten percent of the outstanding Transom Common Stock (on a
fully-converted basis) shall have validly exercised their dissenters' rights,
EAI may refuse to consummate the Merger and terminate the Merger Agreement.
4
<PAGE> 12
SUMMARY SELECTED FINANCIAL INFORMATION
AND PER SHARE DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial data of EAI for
the years ended December 31, 1997, 1996 and 1995 and as of December 31, 1997 and
1996 have been derived from audited consolidated financial statements and the
notes thereto incorporated herein by reference. The financial data for the years
ended December 31, 1994 and 1993 and as of December 31, 1995, 1994 and 1993 have
been derived from audited consolidated financial statements that are not
included or incorporated herein by reference. The EAI historical financial data
as of and for the six month periods ended June 30, 1998 and 1997 have been
derived from unaudited consolidated financial statements of EAI and have been
prepared on the same basis as the historical information derived from audited
financial statements. In the opinion of the management of EAI, the unaudited
financial statements of EAI from which such data have been derived contain all
adjustments, consisting only of normal recurring accruals necessary for the fair
presentation of the results for, and as of the end of, such periods. The
following selected historical financial data of Transom as of March 31, 1998 and
1997 and for the year ended March 31, 1998 and the period from October 7, 1996
(inception) to March 31, 1997 have been derived from audited financial
statements and the notes thereto included herein. The Transom historical
financial data as of and for the three months ended June 30, 1998 and 1997 have
been derived from unaudited financial statements and have been prepared on the
same basis as the historical financial information derived from audited
financial statements. In the opinion of the management of Transom, the unaudited
financial statements of Transom from which such data have been derived contain
all adjustments, consisting only of normal recurring accruals necessary for the
fair presentation of the results for, and as of the end of, such periods.
EAI SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
--------------------------------------------- -----------------
1997 1996 1995 1994 1993 1998 1997
------- ------- ------- ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................................... $49,717 $27,189 $12,249 $6,324 $3,263 $33,711 $20,794
Income (loss) from operations.................... (398) 3,634 (1,212) 268 206 (6,993) 2,975
Net income (loss)................................ (1,697) 2,567 (1,890) 103 109 (7,099) 2,105
Earnings (loss) per share........................ $ (0.19) $ 0.30 $ (0.39) $ 0.02 $ 0.03 $ (0.71) $ 0.23
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31 AT JUNE 30
--------------------------------------------- -----------------
1997 1996 1995 1994 1993 1998 1997
------- ------- ------- ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets..................................... $80,502 $42,299 $ 8,191 $3,478 $2,585 $84,140 $72,120
Long-term debt and capital lease obligations..... 1,495 1,654 2,352 648 418 1,517 1,705
Stockholders' equity............................. 68,331 34,628 2,942 1,813 1,744 69,876 63,420
</TABLE>
5
<PAGE> 13
TRANSOM SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 7
YEAR ENDED 1996 TO THREE MONTHS ENDED
MARCH 31 MARCH 31 JUNE 30
---------- --------- ------------------
1998 1997 1998 1997
---------- --------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................................ $ 1,362 $ 94 $ 606 $ 178
Income (loss) from operations....................... (1,791) (448) (301) (414)
Net income (loss)................................... (1,757) (441) (301) (405)
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31 AT JUNE 30
---------------------- ----------------
1998 1997 1998 1997
---------- --------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................................ $ 2,819 $2,778 $3,030 $2,392
Long-term debt and capital lease obligations........ 144 -- 141 --
Stockholders' equity................................ 2,102 2,618 2,353 2,213
</TABLE>
6
<PAGE> 14
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following selected unaudited pro forma condensed combined financial
data are derived from the unaudited pro forma condensed combined financial
statements appearing elsewhere herein, which give effect to the Merger as a
pooling of interests, and should be read in conjunction with such unaudited pro
forma financial statements and the notes thereto. The pro forma information for
EAI is based on the historical financial statements contained in EAI's annual,
quarterly and current reports filed with the Commission and incorporated by
reference herein. The pro forma information for Transom is based on the audited
financial statements and notes thereto appearing elsewhere herein. Transom's
fiscal year ends on March 31, therefore, Transom's unaudited results for the six
months ended June 30, 1998, the calendar year ended December 31, 1997 and the
period from October 7, 1996 to December 31, 1996 have been used to conform with
EAI's fiscal year end. For the purpose of the pro forma condensed combined
operating data, EAI's unaudited results of operations for the six months ended
June 30, 1998 and the audited results of operations for the fiscal years ended
December 31, 1997 and 1996 have been combined with Transom's unaudited results
of operations for the six months ended June 30, 1998, the calendar year ended
December 31, 1997 and the period from October 7, 1996 to December 31, 1996. For
the purpose of the pro forma condensed combined balance sheet data, EAI's
unaudited consolidated balance sheet as of June 30, 1998 has been combined with
Transom's unaudited balance sheet as of June 30, 1998, giving effect to the
Merger as if it had occurred on the first day of the earliest period presented.
Pro forma operating data for the six months ended June 30, 1998 and the
year ended December 31, 1997 include the results of Sense8 Corporation
("Sense8"), which EAI acquired on June 17, 1998.
Pro forma operating data for the six months ended June 30, 1998 and the
years ended December 31, 1997 and 1996 and pro forma balance sheet data at June
30, 1998 include the results of Variation Systems Analysis, Inc. ("VSA"). EAI
signed a definitive agreement to acquire VSA on July 29, 1998, which was amended
and restated as of August 5, 1998, with the transaction expected to close during
the third quarter of 1998. VSA's fiscal year ends on June 30, therefore, VSA's
unaudited results for the six months ended June 30, 1998 and the calendar years
ended December 31, 1997 and 1996 and balance sheet data at June 30, 1998 have
been used to conform to EAI's fiscal year.
The summary unaudited pro forma condensed combined financial data are
presented for illustrative purposes only and are not necessarily indicative of
the operating results or financial position that would have been achieved if the
Sense8 and VSA acquisitions or the Merger had been consummated as of the
beginning of the periods presented or as of the dates presented, nor is such
data necessarily indicative of the future consolidated operating results or
financial position of EAI. The summary unaudited pro forma condensed combined
financial data do not give effect to any cost savings which may result from the
integration of the Sense8, VSA and Transom operations. In connection with the
Sense8 acquisition, $9.1 million of purchased in-process research and
development was charged against earnings in the second quarter of 1998 in
accordance with generally accepted accounting principles.
7
<PAGE> 15
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
EAI AND SENSE8
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ----------------- -----------------
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues.................................. $34,322 $ 53,590 $27,189
Income (loss) from operations................. (8,889) (11,142) 3,634
Net income (loss)............................. (9,202) (12,626) 2,567
Earnings (loss) per share..................... (0.90) (1.41) 0.30
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C>
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................................. $84,140
Long-term debt and capital lease obligations.............. 1,517
Stockholders' equity...................................... 69,876
</TABLE>
EAI, SENSE8 AND TRANSOM
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ----------------- -----------------
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues.................................. $35,341 $ 54,392 $27,208
Income (loss) from operations................. (9,574) (12,864) 3,500
Net income (loss)............................. (9,629) (13,665) 2,483
Earnings (loss) per share..................... (0.92) (1.50) 0.28
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C>
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................................. $88,119
Long-term debt and capital lease obligations.............. 1,658
Stockholders' equity...................................... 71,918
</TABLE>
EAI, SENSE8 AND VSA
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ----------------- -----------------
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues.................................. $44,071 $ 70,605 $44,076
Income (loss) from operations................. (8,095) (11,430) 4,317
Net income (loss)............................. (8,813) (12,839) 2,917
Earnings (loss) per share..................... (0.83) (1.37) 0.32
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C>
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................................. $90,133
Long-term debt and capital lease obligations.............. 2,060
Stockholders' equity...................................... 67,552
</TABLE>
8
<PAGE> 16
EAI, SENSE8, TRANSOM AND VSA
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ----------------- -----------------
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues.................................. $45,090 $ 71,407 $44,095
Income (loss) from operations................. (8,780) (13,152) 4,183
Net income (loss)............................. (9,240) (13,878) 2,833
Earnings (loss) per share..................... (0.85) (1.45) 0.31
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C>
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................................. $94,112
Long-term debt and capital lease obligations.............. 2,201
Stockholders' equity...................................... 69,594
</TABLE>
9
<PAGE> 17
COMPARATIVE PER SHARE DATA
The following table sets forth certain unaudited historical per share data
of EAI and Transom and certain unaudited per share data on a pro forma basis
after giving effect to the Sense8 and VSA acquisitions as if Sense8 had been
acquired at the beginning of 1997 and VSA had been acquired at the beginning of
1996 and to the Merger on a pooling-of-interests basis. This data should be read
in conjunction with the selected historical financial data and the unaudited pro
forma condensed combined financial statements included elsewhere herein and the
separate historical financial statements of EAI incorporated by reference herein
and of Transom appearing elsewhere herein. The pro forma combined data are not
necessarily indicative of the operating results or financial position that would
have been achieved if the Sense8 or VSA acquisitions or the Merger had been
consummated as of the beginning of the periods presented or as of the dates
presented, nor are they necessarily indicative of the future consolidated
operating results or financial position of EAI.
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
EAI HISTORICAL
Net income (loss) per share............................ $(0.71) $(0.19) $0.30
Book value per share................................... 6.71
TRANSOM HISTORICAL
Book value per share................................... 0.35
VSA HISTORICAL
Book value per share................................... 12.73
PRO FORMA COMBINED DATA
EAI AND SENSE8
Net income (loss) per share............................ $(0.90) $(1.41) $0.30
Book value per share................................... 6.71
EAI, SENSE8 AND TRANSOM
Net income (loss) per share............................ (0.92) (1.50) 0.28
Book value per share................................... 6.75
EAI, SENSE8 AND VSA
Net income (loss) per share............................ (0.83) (1.37) 0.32
Book value per share................................... 6.21
EAI, SENSE8, TRANSOM AND VSA
Net income (loss) per share............................ (0.85) (1.45) 0.31
Book value per share................................... 6.25
PRO FORMA EQUIVALENT DATA
EAI, SENSE8 AND TRANSOM
Net income (loss) per share............................ $(0.02) $(0.04) $0.01
Book value per share................................... 0.16
EAI, SENSE8 AND VSA
Net income (loss) per share............................ (0.02) (0.03) 0.01
Book value per share................................... 0.15
EAI, SENSE8, TRANSOM AND VSA
Net income (loss) per share............................ (0.02) (0.04) 0.01
Book value per share................................... 0.15
</TABLE>
10
<PAGE> 18
RISK FACTORS
Certain matters discussed in this Proxy Statement/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
EAI's ability to predict or control. Transom stockholders are cautioned not to
put undue reliance on forward-looking statements, which statements have been
made as of the date of this Proxy Statement/Prospectus and Transom stockholders
should not infer that there has been no change in the affairs of EAI since the
date hereof that would warrant any modification of any forward-looking statement
made in this Proxy Statement/Prospectus. EAI 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 Proxy Statement/Prospectus,
the following factors should be considered carefully by Transom stockholders in
evaluating EAI and its business before approving the Merger Agreement.
FIXED EXCHANGE RATIO DESPITE CHANGE IN EAI STOCK PRICE
The consideration to be received in the Merger by holders of Transom Common
Stock (on a fully converted basis) will be based on a fixed number of shares of
EAI Common Stock. See "The Merger -- Merger Consideration." The fixed exchange
ratio will not be adjusted in the event of any increase or decrease in the
market price of EAI Common Stock between the date hereof and the Effective Time.
The price of EAI Common Stock at the Effective Time may be higher or lower than
its price on the date of this Proxy Statement/Prospectus. Such variations may be
the result of changes in the business operations or prospects of EAI, general
market and economic conditions or other factors.
IMPACT OF ACQUISITIONS
In addition to the Merger, EAI is also in the process of consummating
another acquisition. See "Information Concerning EAI." As a consequence of these
acquisitions, EAI will grow in size and will broaden the range of products that
it offers. Any acquisition, however, involves inherent uncertainties, such as
the effect on the acquired business of integration into a larger organization
and the availability of management resources to oversee the operations of the
acquired business. EAI's ability to integrate the operations of acquired
companies is important to its future success. There can be no assurance as to
EAI's ability to integrate new businesses nor as to its success in managing the
larger operations resulting therefrom. Even though an acquired business may have
experienced profitability and growth as an independent company prior to its
acquisition by EAI, there can be no assurance that such profitability and growth
will continue thereafter.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger will have certain federal income tax
consequences to Transom and holders of Transom Common Stock. No ruling has been
(or will be) sought from the Internal Revenue Service as to the anticipated tax
consequences of the Merger. An opinion will be obtained from Ernst & Young LLP
that, subject to the conditions stated in the opinion, the Merger will qualify
as part of a tax free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code("the Code"). However, such opinion will be based upon
certain facts and representations provided by the managements of EAI and Transom
and by certain stockholders of Transom, the inaccuracy of which could affect the
conclusion reached in the opinion. Further, such opinion is not binding on the
Internal Revenue Service. If the Merger does not qualify as part of a tax free
reorganization under Section 368(a) of the Code, the Merger will be taxable to
the Transom stockholders. See "The Merger -- Certain Federal Income Tax
Consequences."
VARIABILITY OF OPERATING RESULTS
EAI has experienced and expects to continue to experience fluctuations in
its quarterly results. EAI's revenues are affected by a number of factors,
including the timing of the introduction of new software and
11
<PAGE> 19
interactive products by EAI and its competitors, seasonality of certain customer
purchasers, product mix, general economic conditions and EAI's ability to obtain
agreements from publishers and distributors to market EAI's products. EAI'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. As a result of the foregoing and
other factors, EAI may experience material fluctuations in future revenues and
operating results on a quarterly or annual basis. Therefore, EAI believes that
period to period comparisons of its revenues and operating results are not
necessarily meaningful and should not be relied upon as indicators of future
performance.
TECHNOLOGICAL CHANGE AND MARKET ACCEPTANCE
EAI'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, develop its 3D
and 2D software products for new platforms and continue to produce high-quality
interactive products in a timely and cost-effective manner. In addition, EAI
must continually anticipate, and adapt its products to, emerging computer
technologies and capabilities, such as enhanced graphics, sound, music, video
and speech generation. The life cycles of EAI's products are difficult to
estimate because the markets that EAI 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 EAI'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, EAI's revenues and operating
results could be materially adversely affected. There is no assurance that EAI
will be able to introduce new products on a timely basis or that such new
products will be accepted in the market.
DEPENDENCE ON EMERGING MARKET FOR SOFTWARE PRODUCTS AND CUSTOMER CONCENTRATION
The market for enterprise-wide 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 EAI's software products will be accepted by
the market. EAI's growth is dependent in large part on significant demand for
its software products. In addition, as EAI markets its product visualization
software as an enterprise-wide solution, there can be no assurance that large
customers will be willing to invest in EAI's products on a company-wide basis or
that users outside the design and engineering areas will adopt EAI's product
visualization software products. In 1997, sales of software products to one
customer accounted for 19% of EAI's revenues. There can be no assurance that EAI
will be able to continue to sell software products to this customer at 1997
levels or, if it fails to do so, that EAI will be able to replace this customer
with new customers.
DEPENDENCE ON EMERGING MARKET FOR INTERACTIVE SOFTWARE PRODUCTS
The market for interactive multimedia software products is emerging and
dependent on a number of variables, including consumer preferences, shipments of
multimedia personal computers, the installed base of multimedia personal
computers and the number of other publishers creating interactive software
products. There can be no assurance that this market will continue to grow. The
market for games and educational multimedia software is characterized by rapid
changes in computer hardware and software technology and is highly competitive
with respect to timely product innovation. EAI's near-term growth is dependent
in part on significant demand for interactive products and the recognition by
publishers of EAI's ability to produce products that are well received by the
market. EAI typically contracts with a publisher to receive a development fee
and royalties on sales; however, EAI does not typically receive royalty revenues
from a product until the publisher achieves a minimum level of sales of the
product, which generally does not occur immediately after delivery of the
product to the publisher, if at all. There can be no assurance that EAI's new
interactive products will be accepted by the market or that EAI will be able to
respond effectively to the evolving requirements of the market.
12
<PAGE> 20
RELIANCE ON THIRD PARTIES TO MARKET AND DISTRIBUTE INTERACTIVE SOFTWARE PRODUCTS
EAI's strategy has relied upon third parties to market and distribute its
interactive products. EAI does not have an exclusive relationship with any of
the current distributors of its interactive products. EAI's relationships with
publishers have generally involved contracts that address a single product or
title for a specific market area and have not constituted a continuing marketing
and distribution agreement. There can be no assurance that EAI's relationships
with publishers will continue or that EAI will be able to find other means to
market and distribute its interactive products. Failure to continue such
relationships, establish new relationships or develop independent means of
marketing and distributing interactive products could have a material adverse
effect on EAI's revenues and operating results.
RELIANCE ON THIRD PARTIES TO MARKET AND DISTRIBUTE CERTAIN SOFTWARE PRODUCTS
In addition to marketing EAI's software products directly to end users, EAI
has contractual relationships with Hewlett-Packard to jointly market and with
Unigraphics Solutions 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
EAI'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 beyond their contract terms.
MANAGEMENT OF GROWTH AND INTERNATIONAL EXPANSION
EAI has experienced and may continue to experience rapid growth, which
could place a significant strain on EAI's employees, operating procedures,
financial resources and information systems. EAI 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 EAI is unable to manage its growth effectively, EAI's revenues,
operating results and financial condition could be materially adversely
affected. In addition, in connection with EAI's plans to increase its sales and
marketing presence in Europe and Asia, EAI will be incurring expenses in advance
of revenues. If EAI is unsuccessful in generating sufficient revenues to recover
these expenses or is unable to hire, train and retain experienced international
sales and marketing personnel, EAI's revenues, operating results and financial
condition could be adversely affected. Increased international activity could
also expose EAI to foreign currency fluctuations, foreign labor laws and other
unforeseen problems.
COMPETITION
EAI expects significant competition in each of its two product lines:
Software Products
Large computer companies or companies competing in the computer-aided
design ("CAD"), computer-aided engineering ("CAE"), computer-aided manufacturing
("CAM") and product data management ("PDM") markets could offer products with
the same or similar functionality as offered by EAI. Such companies, some of
which have substantially greater financial and other resources than EAI, include
Autodesk, Inc., Dassault Systemes S.A., Division plc., International Business
Machines Corporation, Microsoft Corporation, Parametric Technology Corporation,
SDRC and Silicon Graphics, Inc. Although EAI believes it has a technological
advantage over potential competitors in these markets, maintaining its advantage
will require continuing investment by EAI in research and development and sales
and marketing. There can be no assurance that EAI will have sufficient resources
to make such investments or that such investments will be successful.
Interactive Products
The interactive software industry is intensely competitive. EAI's sales to
the educational and consumer markets may be adversely affected by the increasing
number of competitive products. EAI's interactive
13
<PAGE> 21
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., Cendant Corporation International, Digital Domain
Inc., GT Interactive Software Corp. and SoftKey International Inc. Moreover,
large corporations, such as Microsoft Corporation and The Walt Disney Company,
which have substantial bases of intellectual property content and substantial
financial resources, have entered or announced their intention to enter the
market for consumer software.
While EAI 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 a portion of its interactive
product revenue. These special effects firms, some of which have substantially
greater financial, technical, marketing and other resources than EAI, include
Dreamworks SKG, Industrial Light and Magic (a division of Lucasfilm Limited) and
Pixar. In addition, a large number of small companies provide custom animations
to commercial markets as a complement to their primary business of studio film
production, engineering consulting and communications consulting.
YEAR 2000 COMPLIANCE
EAI has developed and implemented a plan to upgrade its information
technology in order to prepare for the year 2000 and has completed conversion of
all critical data processing systems. Management believes that all of EAI's
systems and applications are year 2000 compliant or will be by January 1, 1999.
EAI has also initiated communications with its significant vendors to determine
the extent to which EAI's systems may be vulnerable to third parties' failure to
remediate their own year 2000 issues. Management currently does not anticipate
such a failure to be an issue; however, operating results could be impacted if
the systems of other companies with whom EAI transacts business are not
compliant in a timely manner.
PROTECTION OF PROPRIETARY RIGHTS
EAI's success and ability to compete are dependent in part upon its
extensive proprietary technology and databases. EAI 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 EAI's competitors from obtaining or using EAI's proprietary technology
and databases. Certain of EAI's products include mechanisms intended to prevent
or inhibit unauthorized copying. In addition, EAI packages its 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 EAI's products were to occur,
EAI's revenues and operating results could be adversely affected. The laws of
certain countries in which EAI's products are or may be distributed do not
protect EAI'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 EAI in the future with respect to current or future products, or that
any such assertion will not require EAI to enter into royalty arrangements or
result in costly litigation.
DEPENDENCE ON KEY PERSONNEL
EAI'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. EAI's key
employees may voluntarily terminate their employment with EAI at any time.
Competition for such employees is intense, and the process of locating key
technical and management personnel with the combination of skills and attributes
required to execute EAI's strategy can be lengthy. Accordingly, the loss of the
services of key personnel could have a material adverse effect on EAI's
revenues, operating results and financial condition. EAI maintains key person
insurance covering certain of its executive officers; however, the amount of
insurance may not be sufficient to offset EAI's loss of the services of any of
its executive officers.
14
<PAGE> 22
RISK OF LIABILITY CLAIMS BY CUSTOMERS
Although EAI has not experienced product liability claims by customers, EAI
could experience such claims in the future. EAI's interactive software products
carry a disclaimer that the products should not be used for diagnostic or
treatment purposes and are only for educational and medical reference purposes.
EAI 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 EAI 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 EAI 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 EAI or its competitors, general conditions in the
software and computer industries and other events or factors. In addition, in
recent years the stock market in general, and the shares of technology companies
in particular, have experienced extreme price fluctuations. This volatility has
had a substantial effect on the market prices of securities issued by many
companies for reasons unrelated to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of the EAI Common Stock.
ANTI-TAKEOVER PROVISIONS
EAI'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 EAI. These
provisions are intended to encourage any person interested in acquiring EAI to
negotiate with and obtain the approval of EAI's Board of Directors in connection
with the transaction. Certain of these provisions may, however, discourage a
future acquisition of EAI not approved by its Board of Directors in which EAI's
stockholders might receive an attractive value for their shares or that a
substantial number or even a majority of EAI's stockholders might believe to be
in their best interest. As a result, EAI 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 EAI Common Stock at a premium, as
well as create a depressive effect on the market price of the shares of EAI
Common Stock. In addition to the EAI Common Stock, EAI's Certificate of
Incorporation authorizes the issuance of up to 20,000,000 shares of preferred
stock. EAI 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 EAI's Board of Directors in its sole discretion, EAI may issue preferred
stock that has rights and preferences superior to the rights of holders of
shares of the EAI Common Stock and thus may adversely affect the rights of
holders of shares of the EAI Common Stock. In addition, EAI's 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 "Rights of EAI Stockholders and Transom
Stockholders -- Description of EAI Stock."
DIVIDENDS
EAI has not paid any cash dividends and does not currently anticipate
paying cash dividends in the future. There can be no assurance that EAI will
ever pay a cash dividend. See "Dividend Policy."
15
<PAGE> 23
THE SPECIAL MEETING OF THE
TRANSOM STOCKHOLDERS
DATE, TIME AND PLACE
The special meeting (the "Meeting") of the stockholders of Transom
Technologies, Inc., a Delaware corporation ("Transom"), will be held on
September , 1998 at located at , ,
Pennsylvania at 4:00 p.m., Eastern Time.
PURPOSE OF THE MEETING
At the Meeting, the stockholders of Transom will be asked to consider and
vote upon a proposal to approve a Plan and Agreement of Merger dated as of July
29, 1998 (the "Merger Agreement") between Engineering Animation, Inc., a
Delaware corporation ("EAI"), and Transom, pursuant to which, among other
things, Transom will merge with and into EAI (the "Merger"). See "The Merger."
RECORD DATE
Only holders of record of Transom Common Stock, par value $0.001 per share
(the "Transom Common Stock"), and Transom Series B Convertible Preferred Stock,
par value $0.001 per share (the "Transom Series B Preferred Stock" and, together
with the Transom Common Stock, the "Transom Voting Stock"), at the close of
business on August , 1998 (the "Record Date") are entitled to vote at the
Meeting. At the close of business on the Record Date, there were 1,650,800
shares of Transom Common Stock and 4,650,000 shares of Transom Series B
Preferred Stock outstanding, each of which is entitled to one vote at the
Meeting.
REQUIRED VOTE
The representation in person or by proxy of at least a majority of the
issued and outstanding shares of Transom Voting Stock is necessary to establish
a quorum for the transaction of business at the Meeting. According to the
Delaware General Corporation Law (the "DGCL") and Transom's Certificate of
Incorporation, the affirmative vote of a majority of the outstanding shares of
the Transom Voting Stock is necessary to approve the Merger Agreement.
On the Record Date, directors and executive officers of Transom and their
affiliates had the right to vote approximately 15.08% of all issued and
outstanding shares of Transom Voting Stock. See "Information Concerning
Transom -- Security Ownership."
The approval of EAI's stockholders is not required for EAI to consummate
the Merger.
PROXIES
All shares of Transom Voting Stock represented by properly executed and
unrevoked proxies that are received prior to or at the Meeting will be voted in
accordance with the instructions indicated in such proxies. Properly executed
proxies that do not contain voting instructions will be voted FOR approval of
the Merger Agreement. Stockholders are urged to mark the box on the proxy to
indicate how their shares are to be voted.
If an executed proxy is returned and the stockholder has abstained from
voting on approval of the Merger Agreement, the shares of Transom Voting Stock
represented by such proxy will be considered present at the Meeting for purposes
of determining a quorum and for purposes of calculating the vote, but will not
be considered to have been voted in favor of the Merger Agreement. Because
approval of the Merger Agreement requires the affirmative vote of at least a
majority of the issued and outstanding shares of Transom Voting Stock,
abstentions will have the same effect as a vote against approval of the Merger
Agreement.
It is not expected that any matter other than those referred to in this
Proxy Statement/Prospectus will be brought before the Meeting. If, however,
other matters are properly presented, the persons named as proxies will vote in
accordance with their judgment with respect to such matters, unless authority to
do so is withheld in the proxy.
16
<PAGE> 24
Any Transom stockholder who executes and returns a proxy may revoke such
proxy at any time before it is voted by (i) providing written notice to the
Secretary of Transom at 201 South Main Street, Suite 300, Ann Arbor, Michigan,
48104, (ii) granting a subsequent proxy or (iii) appearing in person and voting
at the Meeting. Attendance at the Meeting will not in and of itself constitute
revocation of a proxy.
17
<PAGE> 25
THE MERGER
Set forth below is a brief description of various provisions of the Merger
Agreement with references to specific sections. This summary does not purport to
be complete and is qualified in its entirety by reference to the complete Merger
Agreement, which is attached to this Proxy Statement/Prospectus as Appendix A
and is incorporated by reference herein. The stockholders of Transom are urged
to read the Merger Agreement in its entirety.
BACKGROUND OF THE MERGER
In 1997, EAI identified Transom as a producer of human modeling software
that could be used in conjunction with EAI's visualization software. On October
31, 1997, EAI and Transom entered into a Licensing Agreement, pursuant to which
EAI received the right to use certain of Transom's software in return for the
payment of license fees and royalties. Since that time, EAI and Transom have
worked in cooperation on development contracts for certain major industrial
customers. On May 8, 1998, James Price, President and Chief Executive Officer of
Transom, called Martin Vanderploeg, Executive Vice President of EAI, to discuss
a business combination between EAI and Transom. Mr. Price and Dr. Vanderploeg
agreed in their call to further explore a business combination between the
parties. Mr. Price informed the members of the Transom Board of the nature of
his discussion with Dr. Vanderploeg.
On May 13, 1998, Mr. Price and Timothy Mayleben, Transom's Vice President
and Chief Financial Officer, met at EAI's Ames, Iowa headquarters with Dr.
Vanderploeg and Jerome Behar, EAI's Vice President of Finance and Chief
Financial Officer. At the meeting, the parties discussed the possible terms of a
business combination between the two companies, including structure and price.
On June 2, 1998, Frank Slattery, the Chairman of the Transom Board of
Directors, and Messrs. Price and Mayleben met at EAI's Iowa headquarters to
further discuss the terms of a potential merger between the two companies. At
this all-day meeting, the Transom contingent met with several EAI executives,
including Matthew Rizai (Chairman, CEO and President), Michael Barry (Vice
President and Co-General Manager of EAI's Software Business Unit), Jamie Wade
(Vice President of Administration and General Counsel), and Mr. Behar.
On June 16, 1998, Messrs. Barry and Behar visited Ann Arbor, Michigan
accompanied by Michael Jablo, Vice President and Co-General Manager of the
Software Business Unit for EAI, and met for continued business discussions with
Messrs. Price and Mayleben as well as Kurt Skifstad, Transom's Vice President
and Chief Technology Officer. Throughout the discussions in May and June,
Transom management kept the Transom Board informed as to the status of their
discussions with EAI.
On July 9, 1998, the parties executed a non-binding letter of intent that
documented their agreement in principle with respect to a potential merger
between the two companies.
Between July 9, 1998 and July 27, 1998, numerous telephone conversations
occurred to address the terms of the merger. In addition, Messrs. Behar and
Barry visited Transom headquarters in Ann Arbor, Michigan on July 15, 1998 and
met with Messrs. Price and Mayleben and Dr. Skifstad, to further the discussion.
On July 28, 1998, the Transom Board of Directors reviewed the form of the
Merger Agreement and the ancillary agreements, and approved such agreements. On
July 29, 1998, the parties executed the Merger Agreement.
TRANSOM'S REASONS FOR THE MERGER
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 Transom's ability to predict or
control. Transom stockholders are cautioned not to put undue reliance on
forward-looking statements, which statements have been made as of the date of
this Proxy Statement/Prospectus and Transom stockholders should not infer that
there has been no change in
18
<PAGE> 26
the affairs of Transom or EAI since the date hereof that would warrant any
modification of any forward-looking statement made in this Proxy
Statement/Prospectus. Transom and EAI disclaim any intent or obligation to
update publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
Complementary Technologies. Transom will be able to leverage EAI's
investment in graphics, database management, large-model visualization, CAD
translators, multi-platform support, and web integration to provide more robust
solutions to its existing customers.
Economies of Scale. Transom will have access to EAI's worldwide
distribution and support, and to EAI's existing customer base. Based on this
access, Transom anticipates more efficient and accelerated sales. In addition,
access to EAI's existing infrastructure for finance, administration and
marketing is expected to result in more cost-effective operations.
Stockholder Liquidity. The proposed Merger will provide liquidity in the
public market for Transom's stockholders and option holders by replacing the
illiquid Transom Common Stock and Transom Preferred Stock (as hereinafter
defined) and options with publicly-traded EAI Common Stock and options to
purchase EAI Common Stock.
In the course of its deliberations, the Transom Board reviewed and
considered the following additional factors: (i) the additional terms and
conditions of the Merger Agreement, including the amount and form of the
consideration; (ii) information regarding EAI's and Transom's respective
businesses, prospects, financial performance, financial condition, operations
and technology; (iii) the expectation that the Merger will permit Transom
stockholders to exchange their shares of Transom Common Stock and Transom
Preferred Stock for EAI Common Stock on a tax-free basis; (iv) an evaluation by
the Transom management of the historical strategic relationship between Transom
and EAI; (v) Transom's financial condition; and (vi) the economic alternatives
currently available to Transom.
The Transom Board also considered the following potentially negative
factors: (i) the potential disruption of Transom's business that might result
from employee uncertainty and lack of focus following announcement of the Merger
and during the integration of the operations of Transom and EAI; (ii) the
various conditions to the Merger and the possibility that the Merger might not
be consummated; (iii) the risk that the other benefits sought to be achieved in
the Merger will not be achieved; and (iv) the other risks described above under
"Risk Factors."
The foregoing discussion of the information and factors considered and
given weight by the Transom Board is not intended to be exhaustive. In the view
of the variety of factors considered in connection with its evaluation of the
Merger, the Transom Board did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors and information
considered in reaching its determination. In addition, individual members of the
Transom Board may have given different weights to different factors. Moreover,
there can be no assurance that any of the expectations set forth in the
preceding paragraphs will be fulfilled or that any of the expected benefits of
the Merger will be realized.
TRANSOM BOARD APPROVAL AND RECOMMENDATION OF THE MERGER
For the reasons stated above under "-- Transom's Reasons for the Merger",
the Transom Board believes that the Merger Agreement is fair to, and in the best
interests of, Transom and the holders of Transom Common Stock and Transom
Preferred Stock.
THE BOARD OF DIRECTORS OF TRANSOM UNANIMOUSLY HAS APPROVED THE MERGER AND
RECOMMENDS THAT THE STOCKHOLDERS OF TRANSOM VOTE FOR ITS ADOPTION.
EAI'S REASONS FOR THE MERGER
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
19
<PAGE> 27
could cause actual results to differ materially include, among others, those
factors described in "Risk Factors." Many of these factors are beyond EAI's
ability to predict or control. Transom stockholders are cautioned not to put
undue reliance on forward-looking statements, which statements have been made as
of the date of this Proxy Statement/Prospectus and Transom stockholders should
not infer that there has been no change in the affairs of EAI since the date
hereof that would warrant any modification of any forward-looking statement made
in this Proxy Statement/Prospectus. EAI disclaims any intent or obligation to
update publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
This Merger fits with EAI's growth strategy to provide customers with a
portfolio of integrated product data visualization solutions. In particular, by
providing a human factors perspective, Transom's human modeling and simulation
software products will broaden the array of problems EAI's customers can solve.
For example, Transom's Transom Jack product is a 3D graphics software system
that enables users to easily populate digital environments with human models of
any size and to pose them and assign them tasks. Users can then interactively
evaluate how the digital people perform their function, how they fit or interact
with their environment, and how and why they become injured. The benefits of
EAI's enhanced products will be applicable in a variety of environments,
including design, engineering and manufacturing. Embedding Transom's human
modeling technology into EAI's visualization and digital prototyping software
will allow EAI to establish a base upon which it can provide a broader range of
technology-rich solutions for human simulation in human-centered product design,
industrial task simulation and immersive viewing applications. Furthermore, EAI
anticipates that the addition of Transom's current software products will
broaden EAI's product offerings to current customers and attract new customers.
MERGER CONSIDERATION
Upon the terms and subject to the conditions contained in the Merger
Agreement, at the Effective Time, (i) Transom will merge with and into EAI, (ii)
each outstanding share of Transom Common Stock (other than dissenting shares and
shares to be canceled pursuant to clause (iii) below) will be converted into the
right to receive that number of shares of EAI Common Stock equal to the Exchange
Ratio (as defined below), and (iii) each share of Transom Common Stock owned by
Transom as treasury shares or owned directly or indirectly by Transom or EAI
will be canceled and will cease to exist, and no stock of EAI or other
consideration will be delivered in exchange therefor. [Article II]
Pursuant to the Merger Agreement, the exchange ratio in the Merger (the
"Exchange Ratio") will be determined as follows: each share of Transom Common
Stock shall be exchanged for that number of shares of EAI Common Stock equal to
the quotient, carried to six decimal places, of (x) 205,000 divided by (y) the
sum of (i) the total number of shares of Transom Common Stock outstanding
immediately prior to the Effective Time (but after the conversion of the Transom
Warrants (as defined below) and the Transom Preferred Stock (as defined below)
into Transom Common Stock) plus (ii) the number of shares of Transom Common
Stock issuable upon the exercise of all outstanding options to purchase Transom
Common Stock. Based on the number of shares of Transom Common Stock and Transom
Preferred Stock and the number of Transom options and Transom warrants to
purchase Transom Common Stock and Transom Preferred Stock outstanding on the
Record Date, the Exchange Ratio would be 0.024213 shares of EAI Common Stock per
share of Transom Common Stock. [Article II]
EFFECTIVE TIME OF THE MERGER
"Effective Time" shall mean the time and date at which the Merger becomes
effective. The Merger will become effective upon the filing of the Certificate
of Merger with the Delaware Secretary of State, which is expected to occur not
later than two business days after the satisfaction or waiver of the conditions
precedent to the Merger. [Section 1.3] See "-- Conditions to Closing."
CONVERSION OF WARRANTS TO ACQUIRE TRANSOM COMMON STOCK
Under the terms of the Transom Warrants (as hereinafter defined), Transom
has the ability to cause the Transom Warrants to be converted into shares of
Transom Common Stock under certain circumstances,
20
<PAGE> 28
including the Merger. Assuming the Merger is approved by the Transom
stockholders and the other conditions to the Merger are satisfied (including
that the price per share of EAI Common Stock is greater than $42.00), at or
prior to the Effective Time, each of the issued and outstanding warrants (the
"Transom Warrants") to purchase shares of Transom Series A Preferred Stock (as
hereinafter defined) will be fully converted into shares of Transom Common Stock
on a one share of Transom Series A Preferred Stock issuable under such Transom
Warrant for one share of Transom Common Stock basis pursuant to the terms of the
Transom Warrants. All of the Transom Warrants and/or Transom Series A Preferred
Stock will be converted into Transom Common Stock pursuant to the Merger
Agreement and will no longer be outstanding and will automatically be canceled
and cease to exist after such conversion. Each warrant or certificate previously
representing any such Transom Series A Preferred Stock (or the right to purchase
Transom Series A Preferred Stock) will thereafter represent the right to receive
that number of shares of Transom Common Stock. [Section 2.3]
CONVERSION OF TRANSOM PREFERRED STOCK
Under the terms of the Transom Preferred Stock (as hereinafter defined),
Transom has the ability to cause the Transom Preferred Stock to be converted
into shares of Transom Common Stock under certain circumstances, including the
Merger. Assuming the Merger is approved by the Transom stockholders and the
other conditions to the Merger are satisfied (including that the price per share
of EAI Common Stock is greater than $42.00), at or prior to the Effective Time,
each issued and outstanding share of Series A Non-Voting Convertible Preferred
Stock, par value $0.001 per share, of Transom (the "Transom Series A Preferred
Stock"), and Series B Convertible Preferred Stock, par value $0.001 per share,
of Transom (the "Transom Series B Preferred Stock" and, together with the
Transom Series A Preferred Stock, the "Transom Preferred Stock"), will be
converted into one share of Transom Common Stock. All of the shares of Transom
Preferred Stock converted into Transom Common Stock will no longer be
outstanding and will automatically be canceled and cease to exist after such
conversion. Each certificate previously representing any such share of Transom
Preferred Stock will thereafter represent the right to receive that number of
shares of Transom Common Stock. [Section 2.4]
CONVERSION OF SHARES IN THE MERGER
All of the shares of Transom Common Stock converted into EAI Common Stock
pursuant to the Merger will no longer be outstanding and will automatically be
canceled and cease to exist at the Effective Time, and each certificate
previously representing any such Transom Common Stock (a "Transom Certificate")
will thereafter represent the right to receive (i) a certificate representing
the number of whole shares of EAI Common Stock and (ii) cash in lieu of
fractional shares into which the shares of Transom Common Stock represented by
such Transom Certificate have been converted. If, prior to the Effective Time,
the outstanding shares of EAI Common Stock or Transom Common Stock are
increased, decreased, changed into or exchanged for a different number or kind
of shares or securities as a result of a reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, or other
similar change in capitalization, then EAI and Transom have agreed that an
appropriate and proportionate adjustment will be made to the Exchange Ratio.
[Section 2.5(c)]
EAI will issue only whole shares of EAI Common Stock in connection with the
Merger. Each holder of Transom Common Stock who otherwise would be entitled to
receive a fractional share of EAI Common Stock will instead receive an amount of
cash (without interest) determined by multiplying the (i) EAI Stock Value (which
will be the average of the high and low per share sale price of EAI Common
Stock, as reported on the Nasdaq Stock Market National Market (the "NNM"), for
the second trading day prior to the closing of the Merger (the "Closing"), as
reported in the NNM listings published in the Wall Street Journal) by (ii) the
fractional share interest (rounded to six decimal places) to which such holder
would otherwise be entitled. See "The Merger -- Exchange of Certificates."
[Section 2.5(b)]
At the Effective Time, all shares of Transom Common Stock that are owned by
Transom as treasury stock or owned, directly or indirectly, by Transom or EAI
will be canceled and will cease to exist, and no stock
21
<PAGE> 29
of EAI or other consideration will be delivered in exchange therefor. All shares
of EAI Common Stock that are owned by Transom will become treasury stock of EAI.
[Section 2.5(e)]
After the Effective Time, there will be no transfers on Transom's stock
transfer books of shares of Transom Common Stock or Transom Preferred Stock.
[Section 2.5(f)]
EXCHANGE OF CERTIFICATES
At or any time after the Closing, each stockholder of Transom shall have
the right to deliver to EAI a properly completed letter of transmittal in a form
reasonably satisfactory to EAI (the "Transmittal Letter") and Transom
Certificates representing all of the issued and outstanding shares of Transom
Common Stock owned by such stockholder, duly endorsed for transfer or
accompanied by duly executed stock powers, free and clear of all options, liens,
claims, charges, restrictions and other encumbrances of any nature or kind
whatsoever, other than federal and state securities law restrictions. Upon
proper surrender of a Transom Certificate for exchange and cancellation to EAI,
and in accordance with and subject to the other provisions of the Merger
Agreement and the Transmittal Letter, the holder of such Transom Certificate
shall receive in exchange therefor (i) a certificate representing that number of
whole shares of EAI Common Stock to which such holder of Transom Common Stock
shall have become entitled, and (ii) a check representing the amount of any cash
in lieu of fractional shares which such holder has the right to receive. The
Transom Certificate so surrendered shall forthwith be canceled. No interest
shall be paid or accrued on any cash in lieu of fractional shares payable to
holders of Transom Certificates. [Section 2.6(a)]
If any certificate representing shares of EAI Common Stock is to be issued
in a name other than that in which the Transom Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the Transom Certificate shall be properly endorsed (or accompanied by an
appropriate instrument of transfer) and otherwise in proper form for transfer,
and that the person requesting such exchange shall pay to EAI in advance any
transfer or other taxes required by reason thereof, or shall establish to the
satisfaction of EAI that such tax has been paid or is not payable. [Section
2.6(b)]
In the event any Transom Certificate shall have been lost, stolen or
destroyed, the person so claiming shall make an affidavit of that fact and, if
required by EAI, post a bond in such amount as EAI may determine is reasonably
necessary as indemnity against any claim that may be made against it with
respect to such Transom Certificate. Thereafter, EAI shall issue in exchange for
such lost, stolen or destroyed Transom Certificate the shares of EAI Common
Stock and any cash in lieu of a fractional share deliverable in respect thereof
pursuant to the Merger Agreement. [Section 2.6(c)]
OPTIONS TO ACQUIRE TRANSOM COMMON STOCK
At the Effective Time, each outstanding option to purchase Transom Common
Stock (the "Transom Options") shall be fully vested in accordance with the terms
of the Transom Options and the Transom 1996 Equity Compensation Plan, as amended
(the "Transom Option Plan"), and shall be assumed by EAI. Each such Transom
Option shall thereafter be deemed to constitute an option to acquire, on the
same terms and conditions as were applicable under such Transom Option, (i) the
same number of shares of EAI Common Stock as such Transom Option would have been
exchangeable for had such Transom Option been exercised in full immediately
prior to the Merger and (ii) at an exercise price per share (rounded up to the
nearest whole cent) equal to (A) the aggregate exercise price for the shares of
Transom Common Stock otherwise purchasable pursuant to such Transom Option
divided by (B) the number of shares of EAI Common Stock deemed to be purchasable
under such option to acquire EAI Common Stock; provided, however, that the
number of shares of EAI Common Stock that may be purchased upon exercise of such
Transom Option shall not include any fractional share and, upon exercise of such
Transom Option, a cash payment shall be made for any fractional share based upon
the closing price of a share of EAI Common Stock as reported on the NNM on the
trading day immediately preceding the date of exercise. It is the intention of
EAI and Transom that the Transom Options issued pursuant to the Transom Option
Plan, which have been assumed by EAI pursuant to the terms of the Merger
Agreement, to the extent that they pertain to the purchase of EAI Common Stock
thereunder, shall continue to qualify as incentive stock options under Section
422 of the Code to the same
22
<PAGE> 30
extent immediately after the Closing as such Transom Options so qualified
immediately prior to the Closing. As soon as practicable after the Effective
Time, EAI shall deliver to the holders of Transom Options appropriate notices
setting forth such holders' rights and the agreements evidencing the grants of
such Transom Options shall be deemed to be appropriately amended so that such
Transom Options shall represent rights to acquire EAI Common Stock on terms and
conditions as contained in the outstanding Transom Options (subject to certain
adjustments). [Section 2.7(a) and (b)]
Within five business days following the Closing, EAI shall file a
registration statement on Form S-8 with respect to the shares of EAI Common
Stock subject to the Transom Option Plan and shall use its reasonable efforts to
maintain the effectiveness of such registration statement or registration
statements covering the Transom Options (and maintain the current status of the
prospectus or prospectuses referred to therein) for so long as such options
remain outstanding. [Section 2.7(c)]
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by EAI
and by Transom. The representations and warranties of Transom relate to Transom
and, more specifically, to the corporate organization and capital structure of
Transom; Transom's authority to consummate the transactions contemplated by the
Merger Agreement and the lack of conflicts with certain of Transom's other
obligations; regulatory matters; the filing of required governmental reports;
compliance with laws; Transom's financial statements; the absence of certain
changes affecting Transom since March 31, 1998; the absence of legal proceedings
or restrictions affecting Transom; tax matters; employee benefit matters;
Transom's employment and labor relations; contractual matters; the absence of
certain undisclosed liabilities; environmental matters; the tangible assets
owned by Transom; real property matters; intellectual property matters; the
notes and accounts receivable of Transom; the bank accounts, powers of attorney
and guaranties granted by Transom; certain insurance matters; service contracts
and warranties entered into by Transom; the disclosure of certain relationships
between Transom and certain of its affiliates; the information to be included in
the Registration Statement on Form S-4 (the "S-4"); broker's or finder's fees;
certain customer relationships of Transom; and the lack of omissions in any
disclosure to EAI. [Article III]
EAI also makes various representations and warranties in the Merger
Agreement relating to its corporate organization and capital structure; EAI's
authority to consummate the Merger Agreement and the lack of conflicts with
certain of its other obligations; regulatory matters; EAI's reports under the
Exchange Act filed with the Commission; information to be included in this Proxy
Statement/Prospectus; broker's or finder's fees; and the lack of omissions in
any disclosure to Transom. [Article IV]
CONDUCT OF BUSINESS PENDING CONSUMMATION OF THE MERGER
Transom has agreed that, prior to the Effective Time, it will conduct its
business in the ordinary course consistent with past practice, use its
reasonable efforts to maintain and preserve intact its business organization and
advantageous business relationships, retain the services of its key officers and
employees and take no action that would adversely affect or delay the ability of
either of EAI or Transom to obtain the necessary governmental approvals
necessary to consummate the transactions contemplated by the Merger Agreement.
[Section 5.1]
In addition, Transom has agreed that, prior to the Effective Time, it will
not take any of the following actions without the prior written consent of EAI:
incur any indebtedness for borrowed money or otherwise become liable for the
obligations of another, or make any loan or advance; engage in certain actions
regarding its capital structure; sell, transfer or encumber any properties or
release any indebtedness or claims of third parties except in the ordinary
course of business consistent with past practice; make an investment in a third
party; enter into, amend or terminate certain contracts, except in the ordinary
course of business consistent with past practice; take certain actions regarding
compensation and benefits matters; settle any claim, action or proceeding
involving money damages, except in the ordinary course of business consistent
with past practice; take any action that would prevent or impede the Merger from
qualifying for "pooling-of-interests" accounting treatment, or as a tax free
reorganization within the meaning of the Code; amend its certificate of
23
<PAGE> 31
incorporation or bylaws; or take any action that is intended or may reasonably
be expected to result in any of the representations and warranties set forth in
the Merger Agreement being or becoming untrue in any material respect, any of
the conditions to the Merger not being satisfied, or the violation of any
provision of the Merger Agreement, except as may be required by applicable law.
[Section 5.2]
CONDITIONS TO CLOSING
The obligations of EAI and Transom to effect the Merger are subject to the
satisfaction at or prior to the Effective Time of the following conditions: (i)
all regulatory approvals required to consummate the transactions contemplated by
the Merger Agreement must be obtained and must remain in full force and effect
and all statutory waiting periods in respect thereof must have expired; (ii) all
consents necessary to transfer all of Transom's rights, title and interest to
its facilities in Ann Arbor, Michigan and Philadelphia, Pennsylvania must have
been obtained in accordance with the lease, and shall remain in full force and
effect; (iii) the EAI Common Stock to be issued in the Merger must have been
authorized for listing on the NNM, subject to official notice of issuance; (iv)
EAI must have received all state securities or "blue sky" permits and other
authorizations necessary to issue the shares of EAI Common Stock pursuant to the
Merger and the Merger Agreement; (v) no order, injunction or decree issued by
any governmental authority or other legal restraint or prohibition preventing
the consummation of the Merger or any of the other transactions contemplated by
the Merger Agreement shall be in effect, and no law, statute, rule, regulation,
order, injunction or decree shall have been enacted, entered, promulgated or
enforced by any governmental authority which prohibits, materially restricts or
makes illegal the consummation of the Merger or the other transactions
contemplated by the Merger Agreement; (vi) the EAI Stock Value must be greater
than or equal to $42.00 per share; (vii) the Merger Agreement and the
transactions contemplated thereby must have been approved by holders owning a
majority or more of the issued and outstanding shares of Transom Common Stock,
Transom Series B Preferred Stock and, if required by law, Transom Series A
Preferred Stock; (viii) the conversion of the Transom Warrants shall have been
duly and validly effectuated; (ix) the conversion of the Transom Preferred Stock
shall have been duly and validly effectuated; and (x) the S-4 shall have become
effective under the Securities Act and no stop order suspending the
effectiveness of the S-4 shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the Commission. [Section 7.1]
The obligation of EAI to effect the Merger is also subject to the
satisfaction or waiver by EAI at or prior to the Effective Time of the following
conditions: (i) the representations and warranties of Transom must be true and
correct in all material respects (and in certain instances, true and correct in
all respects) as of the Closing (except to the extent that such representations
and warranties speak as of an earlier date), and Transom must have performed in
all material respects all of its obligations pursuant to the Merger Agreement,
and EAI shall have received a certificate signed by Transom's chairman and
president to that effect; (ii) holders of not more than 10% percent of the
outstanding Transom Common Stock (on a fully-converted basis) shall have validly
exercised their "dissenters' rights" pursuant to Section 262 of the DGCL; (iii)
EAI must have received from each affiliate of Transom, an executed letter
agreement substantially in the form attached to the Merger Agreement; (iv)
Transom must have in its personnel files an executed copy of its
confidentiality, noncompetition and nondisclosure agreement from each of its
employees; (v) EAI shall have received a tax opinion from Ernst & Young LLP in
the form attached to the Merger Agreement; (vi) EAI must have received from
Ernst & Young LLP the "pooling-of-interests" letter described in the Merger
Agreement and no governmental authority shall have taken or proposed any action,
and no statute, rule, regulation or order shall have been enacted, promulgated,
issued or proposed by any governmental authority that would prevent EAI from
accounting for the business combination to be effected by the Merger as a
"pooling of interests;" (vii) EAI must have received from Arthur Andersen LLP a
letter as described in the Merger Agreement to the effect that Transom is a
"poolable" entity for purposes of EAI's Consolidated Financial Statements under
generally accepted accounting principles as in effect from time to time in the
United States ("GAAP") and applicable rules and regulations of the Commission,
and such letter shall not have been withdrawn or modified in any material
respect; (viii) EAI must have received a legal opinion from Morgan, Lewis &
Bockius LLP substantially in the form attached to the Merger Agreement and must
have received from Transom such closing documents and certificates as EAI or its
counsel shall reasonably request;
24
<PAGE> 32
(ix) EAI must have received from Transom a Statement of Facts and
Representations regarding tax matters substantially in the forms attached to the
Merger Agreement; (x) there shall not have occurred any change in Transom that
would have a material adverse effect on its business, properties, operations or
financial condition; and (xi) each person who has been an officer of Transom at
any time since June 1, 1998 shall have executed and delivered to EAI a release,
in form satisfactory to EAI, of any rights to receive severance payments arising
out of a resolution adopted by the Executive Committee of the Board of Directors
of Transom on June 2, 1998. [Section 7.2]
The obligation of Transom to effect the Merger is also subject to the
satisfaction or waiver by Transom at or prior to the Effective Time of the
following conditions: (i) the representations and warranties of EAI must be true
and correct in all material respects (and in certain instances, true and correct
in all respects) as of the Closing (except to the extent that such
representations and warranties speak as of an earlier date), and EAI must have
performed in all material respects all of its obligations pursuant to the Merger
Agreement, and Transom must have received a certificate signed by EAI's chief
executive officer or chief financial officer to that effect; (ii) Transom must
have received a legal opinion from Jamie A. Wade, General Counsel of EAI,
substantially in the form attached to the Merger Agreement, together with such
closing documents and certificates as Transom or its counsel shall reasonably
request; (iii) there shall not have occurred any change in EAI or its
subsidiaries that would have a material adverse effect on the business,
properties, operations or financial condition of EAI and its subsidiaries taken
as a whole; (iv) Transom must have received from Arthur Andersen LLP the
poolable entity letter described in the Merger Agreement; and (v) Transom must
have received a tax opinion from Ernst & Young LLP in the form attached to the
Merger Agreement. [Section 7.3]
At any time prior to the Effective Time, the respective Boards of Directors
of EAI and Transom may, to the extent legally allowed, amend the Merger
Agreement, extend the time for the performance of any of the obligations or
other acts of the parties, waive any inaccuracies in the representations and
warranties contained in the Merger Agreement or in any document delivered
pursuant thereto or waive compliance with any of the agreements or conditions
contained therein. However, after the stockholders of Transom have approved the
Merger Agreement and the consummation of the transactions contemplated thereby,
no amendment, extension or waiver of the Merger Agreement which reduces the
amount or changes the form of the consideration to be delivered to the holders
of Transom Common Stock may be effected unless the consent of the Transom
stockholders is obtained. [Section 8.3]
TERMINATION AND TERMINATION FEE
The Merger Agreement may be terminated and the Merger may be abandoned any
time prior to the Effective Time by the written mutual consent of the EAI and
Transom Boards of Directors, if the Board of Directors of each so determines by
the vote of a majority of the members of the Board. The Merger Agreement may be
terminated in certain other circumstances, as follows:
(i) by either the Transom or the EAI Board of Directors, if any
governmental authority required to grant a regulatory approval has denied
approval of the Merger, or any governmental authority of competent
jurisdiction has issued an order permanently enjoining or otherwise
prohibiting the consummation of the transactions contemplated by the Merger
Agreement;
(ii) by either the Transom or the EAI Board of Directors (provided
that the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained in the
Merger Agreement), if (x) there has been a material breach of any of the
representations or warranties or any of the covenants or agreements
contained in the Merger Agreement on the part of the other party, which
breach is not cured within 30 days following written notice to the party
committing such breach, or which breach, by its nature or timing, cannot be
cured prior to October 31, 1998, (y) the Closing shall not have occurred on
or before October 31, 1998, provided that neither Board of Directors shall
be entitled to terminate the Merger Agreement pursuant to the foregoing
clause (y) if the reason the Closing has not occurred by such date is
because any governmental authority that is required to grant a regulatory
approval in connection with the Merger has failed to act, the Meeting shall
not have occurred in accordance with the requirements of the DGCL, or some
similar event beyond the control of both parties
25
<PAGE> 33
shall not have occurred by such date, or (z) the Closing shall not have
occurred on or before December 31, 1998; or
(iii) by the Transom Board of Directors (after consulting with its
legal counsel), if such action is required for the Board of Directors to
comply with its fiduciary duties to Transom and its stockholders; provided,
however, that if such action is taken by Transom, then within two days of
such termination, Transom shall reimburse EAI for its out-of-pocket
expenses (not to exceed $150,000) incurred in connection with the
transactions contemplated by the Merger Agreement; and provided, further,
that if Transom consummates any transaction pursuant to a Takeover Proposal
(as defined below) (x) within 12 months following the date of the Merger
Agreement, or (y) pursuant to a definitive agreement executed by Transom
during such 12-month period, then Transom shall also promptly pay to EAI
$372,000 upon the occurrence of such a transaction; provided, however, if
the Meeting shall have occurred and the Transom stockholders have voted
with respect to approval of the Merger and the vote necessary to approve
the Merger is not received, then the Merger Agreement shall automatically
terminate as of the date of the Meeting and, within 2 days of such
termination, Transom will pay to EAI $75,000 as reimbursement for EAI's
out-of-pocket expenses incurred in connection with the transactions
contemplated in the Merger Agreement. [Section 8.1]
NO SOLICITATIONS
The Merger Agreement places certain restrictions on the extent to which
Transom may negotiate with prospective purchasers other than EAI. The Merger
Agreement specifically provides that Transom shall not, and it shall use its
reasonable efforts to cause its directors, officers and employees, and all
investment bankers, attorneys or other advisors or representatives retained by
Transom not to, (i) solicit or encourage the submission of any Takeover
Proposal, (ii) participate in any discussions or negotiations regarding, or
furnish to any third party any information with respect to, or take any other
action to facilitate any inquiries or the making of any proposal that
constitutes, a Takeover Proposal, (iii) make or authorize any statement or
recommendation in support of any Takeover Proposal or (iv) enter into any
agreement with respect to any Takeover Proposal. [Section 6.8(a)]
Notwithstanding the foregoing paragraph, the directors, executive officers
or stockholders of Transom, or the investment bankers, attorneys, or other
advisors or representatives of Transom may participate in discussions or
negotiations with, or furnish information to, any third party that makes a
Takeover Proposal if all of the following events shall have occurred: (i) EAI
has been notified in writing of such Takeover Proposal within 24 hours of
Transom's receipt thereof, including the identity of the party making the
Takeover Proposal and the material terms thereof; (ii) such third party has made
a written Takeover Proposal to the Transom Board of Directors, which proposal
identifies a price or range of values to be paid and after consultation with
Transom's investment bankers, the Transom Board of Directors has determined that
such Takeover Proposal is financially more favorable to the stockholders of
Transom than the terms of the Merger; (iii) the Transom Board of Directors
reasonably believes after consultation with Transom's investment bankers, that
such third party is financially capable of consummating the transactions
specified in such Takeover Proposal; and (iv) the Transom Board of Directors has
determined, after consultation with its outside legal counsel, that its
fiduciary duties require it to (x) furnish information to and negotiate with
such third party, (y) make or authorize any statement or recommendation in
support of any Takeover Proposal, or (z) enter into any agreement with respect
to any Takeover Proposal. Notwithstanding the foregoing, however, Transom is
prohibited from providing any non-public information to such third party unless
(A) Transom has notified EAI in advance of any such proposed disclosure of
non-public information and has provided EAI with a description of the
information Transom intends to disclose, and (B) Transom provides such
non-public information pursuant to a nondisclosure agreement in a form
substantially similar to that certain Mutual Non-Disclosure Agreement dated
August 27, 1997 between Transom and EAI. In addition to the foregoing
requirements, Transom shall not accept or enter into any agreement concerning a
Takeover Proposal until at least 48 hours after EAI's receipt of a copy of such
Takeover Proposal. [Section 6.8(b)]
26
<PAGE> 34
Upon compliance with the requirements in the preceding paragraph, Transom
is entitled to terminate the Merger Agreement, although Transom may then be
obligated to make certain payments to EAI. See "-- Termination and Termination
Fee." [Section 6.8(c)]
For purposes of the Merger Agreement, "Takeover Proposal" is defined as any
proposal or offer for a merger, consolidation or other business combination
involving Transom or any proposal or offer to acquire a material equity interest
in, or a substantial portion of the assets of, Transom, other than by EAI as
contemplated by the Merger Agreement. [Section 6.8(d)]
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the approval by the Transom Board of the Merger,
stockholders should be aware that certain members of the Transom Board and
senior management of Transom have certain interests in, and will receive
benefits from, the Merger that are in addition to, and differ from, the
interests of, and benefits to, Transom stockholders generally. It is also
expected that certain officers of Transom will receive offers of employment from
EAI on terms similar to other non-executive EAI management employees. In 1997,
EAI entered into an agreement with WAMWare Ltd. ("WAMWare") for WAMWare and its
affiliated companies to provide software related consulting services to EAI.
WAMWare is owned by Wayne A. McClelland, a director of Transom. From January 1,
1997 to December 31, 1997, EAI paid $190,635 to WAMWare for such services. From
January 1, 1998, to July 30, 1998, EAI paid WAMWare $161,870 for such services.
No other director or executive officer of Transom had or is expected to have a
business relationship with EAI prior to the Effective Time.
REGISTRATION AND LISTING
EAI has agreed to register under the Securities Act the shares of EAI
Common Stock to be issued in connection with the Merger and to use its
commercially reasonable efforts to obtain all necessary state securities or
"blue sky" qualifications, permits and approvals required to consummate the
transactions contemplated by the Merger Agreement. Transom has agreed to
cooperate with EAI in taking such action. [Section 6.1]
EAI has agreed to cause the shares of EAI Common Stock to be issued in the
Merger to be approved for listing on the NNM, subject to official notice of
issuance, prior to the Effective Time. [Section 6.4]
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary, based upon current law, is a general discussion of
certain federal income tax consequences of the Merger, assuming the Merger is
consummated as contemplated herein. This summary is based upon the Code,
applicable regulations promulgated under the Code by the Treasury Department
("Treasury Regulations"), administrative rulings and judicial authority as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. Any such change could affect the continuing validity of this summary.
This summary applies to holders of Transom Common Stock who hold their
Transom Common Stock as capital assets. This summary does not discuss all
aspects of federal income taxation that may be relevant to a particular holder
of Transom Common Stock in light of the holder's specific circumstances or to
certain types of holders subject to special treatment under the federal income
tax laws (including, for example, foreign persons, dealers in securities,
holders who acquired Transom Common Stock pursuant to the exercise of options or
warrants or otherwise as compensation, banks and other financial institutions,
insurance companies, tax exempt organizations or persons subject to the
alternative minimum tax), and it does not discuss any aspect of state, local,
foreign or other tax laws.
No ruling is being sought from the Internal Revenue Service as to the
anticipated tax consequences of the Merger. Further, this summary is not binding
on the Internal Revenue Service, and the Internal Revenue Service will not be
precluded from asserting contrary positions. CONSEQUENTLY, HOLDERS OF TRANSOM
COMMON STOCK SHOULD CONSULT THEIR TAX ADVISORS AS TO THE TAX
27
<PAGE> 35
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY OF FEDERAL,
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
The Merger. As a condition to consummation of the Merger, Transom and the
stockholders of Transom have received an opinion from Ernst & Young LLP that,
subject to the conditions stated in the opinion, the Merger will constitute, for
federal income tax purposes, a "reorganization" within the meaning of Section
368(a) of the Code. The opinion of Ernst & Young LLP is based upon certain facts
and representations provided by the managements of EAI and Transom and by
certain shareholders of Transom to Ernst & Young LLP. Ernst & Young LLP has not
been engaged to, and will not, update its opinion for changes in facts or law
occurring subsequent to the date of the opinion.
In general, the "continuity of interest" test requires the owners of the
reorganized entity to receive and retain a meaningful equity interest in the
surviving entity. Effective for transactions occurring after January 28, 1998,
the Internal Revenue Service issued final and temporary regulations providing
rules for satisfying the continuity of interest requirement. These regulations
substantially liberalize the historic rules, generally providing that continuity
of interest is satisfied if a substantial part of the value of the proprietary
interest in the target corporation is preserved in the reorganization.
Generally, continuity of interest is not preserved to the extent that the
acquiring corporation acquires target stock for consideration other than
acquiring stock, or if, in connection with the plan of reorganization, the
acquiring stock is redeemed (or purchased by a related party). In addition,
continuity of interest is not preserved to the extent that, prior to and in
connection with the plan of reorganization, the target (or a related party)
acquires the stock with consideration other than stock of the target, or makes
an extraordinary distribution with respect to the stock. Sales by the target
shareholders of stock of the acquirer received in the transaction to unrelated
third parties occurring before or after a reorganization are disregarded.
Among other facts and representations provided by the managements of EAI
and Transom and by certain shareholders of Transom that underlie the opinion
regarding the status of the Merger as a reorganization for federal tax purposes
are facts and representations (a) that neither EAI nor a related person has any
plan or intention, in connection with the plan of reorganization, to acquire a
proprietary interest in Transom for consideration other than stock of EAI, or
redeem stock of EAI issued in exchange for a proprietary interest in Transom;
(b) that neither Transom nor a related person has any plan or intention, prior
to and in connection with the plan of reorganization, to redeem the stock of
Transom, acquire stock of Transom with consideration other than stock of Transom
or EAI, or make an extraordinary distribution with respect to the stock of
Transom; (c) that EAI has no plan or intention to sell or otherwise dispose of
any of Transom's assets following the Merger except for dispositions made in the
ordinary course of business and transfers permitted under Section 368(a)(2)(C)
of the Code; (d) that following the Merger the historic business of Transom will
be continued or a significant portion of Transom's assets will be used in a
trade or business; (e) that there is no intercompany indebtedness existing
between EAI and Transom that was issued, acquired, or will be settled at a
discount.
As a reorganization for United States federal income tax purposes, the
Merger will result in the following general federal income tax consequences:
1. No gain or loss will be recognized by EAI or Transom solely as a
result of the consummation of the Merger.
2. No gain or loss will be recognized by holders of Transom Common
Stock upon the surrender of shares of Transom Common Stock and the receipt
of shares of EAI Common Stock, except with respect to any cash received by
a holder of Transom Common Stock in lieu of fractional shares of EAI Common
Stock.
3. The payment of cash in lieu of fractional share interests of EAI
Common Stock to holders of Transom Common Stock will be treated as if the
fractional shares were distributed as part of the exchange and then were
redeemed by EAI. These cash payments will be treated as distributions in
full payment in exchange for the stock redeemed, subject to the provisions
and limitations of Section 302(a) of the Code.
28
<PAGE> 36
4. Each holder's aggregate tax basis in the EAI Common Stock received
in the Merger will equal such holder's aggregate tax basis in the Transom
Common Stock surrendered, decreased by the amount of any tax basis
allocable to any fractional share interest for which cash is received.
5. The holding period of EAI Common Stock received in the Merger will
include the holding period of the Transom Common Stock surrendered,
provided that the Transom Common Stock is held as a capital asset in the
hands of the holder thereof at the Effective Time of the Merger.
6. EAI will succeed to and take into account those tax attributes of
Transom described in Section 381(c) of the Code.
As noted above, no ruling is being requested from the Internal Revenue
Service in connection with the Merger, and the opinion required to be furnished
by Ernst & Young LLP as a condition to consummation of the Merger and the
discussion herein pertaining to certain anticipated tax consequences associated
with the Merger will neither be binding on the Internal Revenue Service nor
preclude it from asserting contrary positions. Additionally, if any facts or
representations provided by the managements of EAI and Transom and by certain
shareholders of Transom that form the basis for the opinion referred to above,
including the facts and representations regarding the satisfaction of the
continuity of interest requirement do not conform to the facts associated with
the Merger, the validity of the opinion and the discussion contained herein
could be adversely affected. A successful challenge by the Internal Revenue
Service to the status of the Merger as a reorganization under Section 368(a) of
the Code under any circumstances, including by reason of a failure to satisfy
the continuity of interest requirement, would result in holders of Transom
Common Stock recognizing taxable income or loss with respect to the shares of
Transom Common Stock surrendered equal to the differences between the holder's
tax basis in such shares and the fair market value, as of the Effective Time of
the Merger, of the shares of EAI Common Stock and the cash received in the
Merger. In such event, a stockholder's aggregate basis in the shares of EAI
Common Stock received in the Merger would equal its fair market value and the
holding period for such shares would begin the day after the Merger.
Dissenters. The payment of cash to a holder of Transom Common Stock who
exercises dissenters' rights under the DGCL (see "-- Dissenters' Rights") with
respect to such shares will result in a taxable transaction to such holder. Such
payment will be treated as a distribution in redemption of the Transom Common
Stock with respect to which dissenters' rights were exercised and perfected, the
consequences of which will be determined in accordance with Section 302 of the
Code.
Backup Withholding. Certain holders of Transom Common Stock may be subject
to backup withholding at a rate of 31% on cash payments received in lieu of
fractional shares of EAI Common Stock or after exercise of dissenters' rights.
Backup withholding will not apply, however, to a stockholder who furnishes a
correct taxpayer identification number ("TIN") and certifies, under penalties of
perjury, that such stockholder is not subject to backup withholding on a
Substitute Form W-9 or is otherwise exempt from backup withholding. If the
correct TIN and certifications are not received, a $50 penalty may be imposed on
each holder of Transom Common Stock by the Internal Revenue Service. Transom
stockholders may also be required to certify that they are "United States
persons". A Substitute Form W-9 will be provided by EAI to each former holder of
Transom Common Stock after the Effective Time of the Merger. Ernst & Young LLP
has not provided an opinion with respect to the backup withholding requirements
on cash payments received in lieu of fractional shares of EAI Common Stock.
Reporting Requirements. Holders of Transom Common Stock will be required to
attach a statement to their tax returns for the taxable year in which the Merger
is consummated that contains the information set forth in Treasury Regulations
Section 1.368-3(b). The statement must include the holder's tax basis in the
Transom Common Stock surrendered and a description of the EAI Common Stock
received in the Merger. Ernst & Young LLP has not provided an opinion with
respect to these reporting requirements.
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND IS BASED ON EXISTING LAW AS OF THE DATE OF THIS
REGISTRATION STATEMENT. ERNST & YOUNG LLP HAS UNDERTAKEN NO OBLIGATION, AND WILL
NOT, UPDATE ITS OPINION FOR CHANGES IN FACTS OR LAW
29
<PAGE> 37
OCCURRING SUBSEQUENT TO THE DATE OF THE OPINION. HOLDERS OF TRANSOM COMMON STOCK
ARE URGED TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE MERGER (INCLUDING THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS).
ACCOUNTING TREATMENT
The Merger is intended to qualify as a "pooling of interests" for
accounting and financial reporting purposes. Under this method of accounting,
the recorded historical cost basis of the assets and liabilities of EAI and
Transom will be carried forward to the operations of the combined companies at
their recorded amounts, results of operations of the combined companies will
include the results of operations of EAI and Transom for the entire fiscal
period in which the combination occurs and the historical results of operations
of the separate companies for fiscal years prior to the Merger will be combined
and reported as the results of operations of the combined companies.
Consummation of the Merger is conditioned upon receipt, by the parties to
the Merger, of a letter from Ernst & Young LLP regarding that firm's concurrence
with EAI management's and Transom management's conclusions, respectively, that
the Merger qualifies for "pooling-of-interests" treatment for financial
reporting purposes and that such accounting treatment is in accordance with
GAAP. Consummation of the Merger is also conditioned upon receipt, by the
parties to the Merger, of a letter from Arthur Andersen LLP regarding that
firm's concurrence with Transom management's conclusions to the effect that
Transom is a poolable entity for purposes of EAI's consolidated financial
statements. Certain events, including certain transactions with respect to EAI
Common Stock or Transom Common Stock by affiliates of EAI and Transom,
respectively, may prevent the Merger from qualifying as a pooling of interests
for accounting and financial reporting purposes. For information concerning
certain restrictions to be imposed on the transferability of Transom Common
Stock to be received by affiliates in order, among other things, to ensure the
availability of pooling-of-interests accounting treatment, see "-- Resale of EAI
Common Stock issued in the Merger; Affiliates."
REGULATORY APPROVALS
EAI and Transom are aware of no governmental or regulatory approvals
required for consummation of the Merger, other than compliance with applicable
securities and "blue sky" laws.
DISSENTERS' RIGHTS
Section 262 of the DGCL entitles any stockholder of Transom to dissent from
the Merger and obtain payment in cash for the "fair value" of his or her Transom
Common Stock, instead of receiving the shares of EAI Common Stock to which he or
she would otherwise be entitled pursuant to the Merger Agreement. To exercise
such dissenters' rights, stockholders of Transom must comply with the procedural
requirements of Section 262 of the DGCL, a summary of which is provided below.
Any Transom Stockholder who objects to the terms of the Merger may seek
appraisal of his or her Transom Common Stock under and in compliance with the
requirements of Section 262 of the DGCL (the Transom Common Stock as to which
such appraisal rights have been asserted being referred to herein as the
"Dissenting Shares"). Section 262 of the DGCL provides a procedure by which
holders of Transom Common Stock at the Effective Time may seek an appraisal of
part of or all of their Transom Common Stock in lieu of accepting shares of
EAI's Common Stock in exchange therefor. In any such appraisal proceeding, the
Delaware Court of Chancery (the "Chancery Court") would determine the "fair
value" of the Transom Common Stock. Holders of Transom Common Stock should
recognize that such an appraisal could result in a determination of a value
higher or lower than, or equivalent to, the Exchange Ratio. A copy of Section
262 of the DGCL is attached hereto as Appendix B and is incorporated herein by
reference.
FAILURE TO TAKE ANY NECESSARY STEPS FULLY AND PRECISELY TO SATISFY THE
REQUIREMENTS OF SECTION 262 OF THE DGCL WILL RESULT IN A TERMINATION OR
30
<PAGE> 38
WAIVER OF THE APPRAISAL RIGHTS OF THE TRANSOM STOCKHOLDER UNDER SUCH SECTION.
A holder of Transom Common Stock electing to exercise appraisal rights
under Section 262 of the DGCL must (a) deliver to Transom, before the taking of
the vote on the Merger Agreement, a written demand for appraisal that is made by
or on behalf of the person who is the holder of record of the Transom Common
Stock for which appraisal is demanded and (b) not vote in favor of adoption of
the Merger Agreement. A proxy or vote against approval and adoption of the
Merger Agreement does not constitute such a demand. In addition, mere failure,
after the completion of the Merger, to execute and return a Transmittal Letter
to EAI's exchange agent does not constitute a demand. A holder of Transom Common
Stock electing to take such action must do so before the taking of the vote on
the Merger Agreement by a separate written demand that reasonably informs
Transom of the identity of the holder of Transom Common Stock of record and of
his or her intention thereby to demand the appraisal of his or her Transom
Common Stock. Written demands for appraisal should be directed to Transom,
Attention: Corporate Secretary.
Any holder of Transom Common Stock who has duly demanded an appraisal in
compliance with Section 262 of the DGCL will not, after the Effective Time, be
entitled to vote the Transom Common Stock subject to such demand for any purpose
or be entitled to the payment of dividends or other distributions on such
Transom Common Stock (other than those payable or deemed to be payable to
holders of Transom Common Stock of record as of a date prior to the Effective
Time) or on any shares of EAI's Common Stock otherwise issuable, but for such
appraisal demand, in substitution therefor.
THE PRECEDING DISCUSSION IS A SUMMARY OF THE PROVISIONS REGARDING
DISSENTERS' RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY BY THE TEXT
OF SECTION 262 OF THE DGCL, WHICH IS ATTACHED AS APPENDIX B TO THIS PROXY
STATEMENT/PROSPECTUS. TRANSOM STOCKHOLDERS WHO ARE INTERESTED IN ASSERTING
DISSENTERS' RIGHTS PURSUANT TO THE DGCL IN CONNECTION WITH THE MERGER MAY WISH
TO CONSULT WITH THEIR COUNSEL FOR ADVICE AS TO THE PROCEDURES REQUIRED TO BE
FOLLOWED.
RESALE OF EAI COMMON STOCK ISSUED IN THE MERGER; AFFILIATES
The EAI Common Stock to be issued to Transom stockholders in connection
with the Merger will be freely transferable under the Securities Act, except EAI
Common Stock issued to any person deemed to be an affiliate of Transom for
purposes of Rule 145 under the Securities Act ("Rule 145"). Affiliates may not
sell their EAI Common Stock acquired in connection with the Merger except
pursuant to an effective registration statement under the Securities Act
covering such shares, or in compliance with Rule 145 or another applicable
exemption from the registration requirements of the Securities Act.
In addition, each person who is an affiliate of Transom will be required,
as a condition of Closing, to execute a letter pursuant to which they agree not
to dispose of any shares of EAI Common Stock (including shares acquired upon the
exercise of options) until financial statements reflecting thirty days of
combined operations of EAI and Transom are made publicly available by EAI.
31
<PAGE> 39
EAI COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICY
EAI Common Stock is traded on the NNM under the symbol "EAII." The
following table sets forth the high and low closing prices as reported by NNM
for the periods indicated since EAI's initial public offering of EAI Common
Stock on February 29, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998:
First quarter............................................. $45.75 $28.33
Second quarter............................................ $61.00 $42.00
Third quarter (through August 13, 1998)................... $69.75 $54.00
1997:
First quarter............................................. $17.17 $14.83
Second quarter............................................ $24.67 $14.33
Third quarter............................................. $28.17 $21.83
Fourth quarter............................................ $33.33 $23.17
1996:
First quarter (from February 29, 1996).................... $17.50 $12.83
Second quarter............................................ $15.83 $12.50
Third quarter............................................. $16.67 $10.67
Fourth quarter............................................ $17.83 $14.50
</TABLE>
DIVIDEND POLICY
EAI has not declared or paid any cash dividends on the EAI Common Stock
since its formation and does not currently intend to declare or pay any cash
dividends on the EAI Common Stock. EAI intends to retain future earnings for
reinvestment in its business. Any future determination by EAI to pay cash
dividends on the EAI Common Stock will be at the discretion of EAI's Board of
Directors and will be dependent upon the EAI's operating results, financial
condition, contractual restrictions and other factors deemed relevant by EAI's
Board of Directors.
INFORMATION CONCERNING EAI
EAI specializes in developing visualization technology and products that
address the productivity, communication, education and entertainment needs of
its clients. EAI 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 two product lines:
product visualization software and interactive software. 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.
EAI has entered into an Agreement and Plan of Merger with Variation Systems
Analysis, Inc., a Michigan corporation ("VSA"), dated as of July 29, 1998 and
amended and restated as of August 5, 1998, pursuant to which VSA has agreed to
merge with and into EAI (the "VSA Merger"). Pursuant to the VSA Merger, the
shareholders of VSA will receive an aggregate of approximately 422,000 shares of
EAI Common Stock. The VSA Merger is subject to approval by the VSA shareholders
and other normal closing conditions.
VSA is dedicated to dimensional management consulting, software
development, training and support. VSA develops, produces and sells a line of
products for 3D simulation of manufacturing and assembly variation in the
digital manufacturing environment. VSA revenues for the year ended June 30, 1998
were approximately $18.0 million. EAI will account for the VSA Merger as a
pooling of interests. See "Unaudited Pro Forma Condensed Combined Financial
Statements."
32
<PAGE> 40
EAI was incorporated in 1988 in Iowa and, in December 1995, reincorporated
in Delaware. EAI's executive offices are located at 2321 North Loop Drive, Ames,
Iowa 50010 and its telephone number is (515) 296-9908; its Internet e-mail
address is [email protected]; and its World Wide Web address is www.eai.com.
INFORMATION CONCERNING TRANSOM
BUSINESS
Transom specializes in the development and distribution of human modeling
and simulation software. The company's flagship software product, Transom(TM)
Jack(R) ("Transom Jack"), is a real-time, 3D graphical software package that
enables users to create or import graphics or objects; model, scale and pose
human models in the digital environment; and assign those digital humans tasks
and behaviors. The software then automatically simulates how the digital human
interacts with its digital environment, and provides both 3D graphical animation
as well as ergonomics analysis feedback regarding how the person interacts with
his or her surroundings. Transom Jack is used primarily by engineers in
manufacturing industries to perform human-centered design studies and ergonomic
analyses of workplaces such as factories. The Transom Jack software is based in
part on certain technology that was licensed in December, 1996 from the
University of Pennsylvania ("Penn") under an exclusive 50-year license.
Management of Transom believes that, with proper market development and
continuing technical development, the Transom Jack software has significant,
current market potential in the area of computer-aided design, manufacturing and
engineering ("CAD/CAM/CAE"). Management believes that, among engineers and
designers in manufacturing industries (both process and discrete manufacturing),
there exists a recognized need for two human simulation applications: (i)
human-centered product design, or the use of digital humans in a digital mockup
environment to examine and refine the design of vehicles and other products from
a human factors perspective; and (ii) workplace task simulation, or the use of
digital humans for defining and perfecting manual workflow, while performing
ergonomics analysis to design more injury-free workplaces.
Transom's first commercial product, Transom Jack Version 1.1 (v1.1), based
essentially on software developed by Penn, was introduced in February, 1997. A
substantially improved version, Transom Jack v1.2, was introduced in October,
1997. Transom has recognized from the outset that substantial additional
development of the software would be required to bring the product to commercial
standards, and Transom's development efforts have been and continue to be
focused on development of Transom Jack v2.0, which is designed to provide
dramatically improved reliability, ease-of-use, and analytical power.
In addition to licensing of Transom Jack as a free-standing software
program, Transom has developed and marketed a programmer's toolkit version of
its software that third-party licensees can embed in their own 3D software
applications. The toolkit version, marketed as the TJ(TM) Toolkit ("TJ
Toolkit"), allows the customer to use Transom's human modeling and simulation
software as one element of the customer's product. The typical customer for the
TJ Toolkit is a large industrial organization that develops customized, 3D
software products for its own internal use. The initial commercial release, TJ
Toolkit v1.0, was first made available in January, 1998.
Transom markets its products in North America through its own employees,
and internationally through independent distributors. Transom currently has
contractual relationships with distributors in Brazil, Germany, Japan, Sweden,
and the United Kingdom. Transom's experience in marketing its products is that
purchase decisions are made at high levels in the customer's organization, and
that direct involvement by Transom's senior executives is often necessary to
close a sale. Accordingly, each of Transom's senior executives directly
participates from time to time in sales to major accounts.
Transom was incorporated as a Delaware corporation in October, 1996.
Transom's principal offices are located at 201 South Main Street, Suite 300, Ann
Arbor, Michigan 48104. Transom also operates a software
33
<PAGE> 41
development office in Philadelphia, Pennsylvania. Transom currently employs 28
persons on a full-time basis, of whom 22 are located in Ann Arbor and 6 are
located in Philadelphia.
MARKET FOR SHARES AND DIVIDENDS
There is no established public trading market for the Transom Common Stock
or the Transom Preferred Stock. As of the date of this Proxy
Statement/Prospectus there are 59 holders of record of Transom Common Stock and
Transom Preferred Stock. Transom has not declared or paid any cash or other
dividends since its formation.
SECURITY OWNERSHIP
The following table sets forth certain information known to Transom
regarding the ownership of Transom Common Stock, Transom Series A Preferred
Stock and Transom Series B Preferred Stock as of August , 1998 by (i) each
executive officer; (ii) each director; (iii) all current directors and executive
officers of Transom as a group; and (iv) each stockholder known to Transom to be
a beneficial owner of more than five percent (5%) of the Transom Common Stock,
the Transom Series A Preferred Stock or the Transom Series B Preferred Stock.
The address of the directors and executive officers of Transom is 201 South Main
Street, Suite 300, Ann Arbor, Michigan 48104.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (#)(1) CLASS (%)(2)
------------------------------------ ----------------- ------------
<S> <C> <C>
TRANSOM COMMON STOCK
James D. Price.............................................. 930,000(3) 43.7
Frank P. Slattery........................................... 275,000(4) 16.7
Michael J. Young............................................ 180,000(5) 10.3
Kurt D. Skifstad............................................ 270,000(6) 14.1
Timothy M. Mayleben......................................... 270,000(7) 14.1
Wayne McClelland............................................ 80,000(8) 4.6
Allen Alley................................................. 30,000(9) 1.7
James N. Levitt............................................. 130,000(10) 7.3
Norman I. Badler............................................ 500,000 30.3
123 Buck Lane
Haverford, PA 19041
A.P. Jannetta Associates, Inc............................... 225,000 13.6
259 Radnor-Chester Road
Suite 210
Radnor, PA 19087
All directors and officers as a group (8 persons)(11)....... 2,165,000 70.6
TRANSOM SERIES A PREFERRED STOCK
Trustees of the University of Pennsylvania.................. 600,000(12) 95.5
3700 Market Street
Suite 3000
Philadelphia, PA 19104-3147
</TABLE>
34
<PAGE> 42
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (#)(1) CLASS (%)(2)
------------------------------------ ----------------- ------------
<S> <C> <C>
TRANSOM SERIES B PREFERRED STOCK
Hillman Trust............................................... 350,000 7.5
726 Cedar Lane
Villanova, PA 19085
ISI Dentsu, Ltd............................................. 400,000 8.6
4-11-10, Nakano
Nakano-Ku
Tokyo 164-8520, Japan
John Sherrerd............................................... 400,000 8.6
833 Mulrfield Road
Bryn Mawr, PA 19010
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting and investment power with respect
to securities. Except as otherwise indicated, shares of Transom Common
Stock, Transom Series A Preferred Stock or Transom Series B Preferred Stock
subject to Transom Options and Transom Warrants which are currently
convertible or which will become convertible within sixty (60) days after
August , 1998 are deemed outstanding for computing beneficial ownership
of the person holding such Transom Option or Transom Warrant, but are not
outstanding for computing beneficial ownership of any other person or
entity. The persons named in the table above have sole voting and
investment power with respect to all shares shown as beneficially owned by
them.
(2) Applicable percentage ownership is based on 1,650,800 shares of Transom
Common Stock, 478,000 shares of Transom Series A Preferred Stock and
4,650,000 shares of Transom Series B Preferred Stock outstanding as of
August , 1998. The Transom Series A Preferred Stock and the Transom
Series B Preferred Stock are currently convertible into Transom Common
Stock on a one-for-one basis.
(3) Includes 480,000 shares of Transom Common Stock issuable upon exercise of
Transom Options.
(4) Includes 50,000 shares of Transom Common Stock issuable upon conversion of
Series B Preferred Stock.
(5) Includes 105,000 shares of Transom Common Stock issuable upon exercise of
Transom Options.
(6) Includes 270,000 shares of Transom Common Stock issuable upon exercise of
Transom Options.
(7) Includes 270,000 shares of Transom Common Stock issuable upon exercise of
Transom Options.
(8) Includes 30,000 shares of Transom Common Stock issuable upon exercise of
Transom Options and 50,000 shares issuable upon conversion of Series B
Preferred Stock.
(9) Includes 30,000 shares of Transom Common Stock issuable upon exercise of
Transom Options.
(10) Includes 30,000 shares of Transom Common Stock issuable upon exercise of
Transom Options and 100,000 shares issuable upon conversion of Series B
Preferred Stock.
(11) This number reflects the stock ownership of Transom's executive officers
and directors as of August , 1998, which incorporates the shares
referenced in footnotes (3) through (10) above.
(12) Includes 150,000 shares of Series A Preferred Stock issuable pursuant to a
Transom Warrant.
35
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of net revenues.
<TABLE>
<CAPTION>
YEAR OCTOBER 7, THREE MONTHS
ENDED 1996 TO ENDED JUNE 30,
MARCH 31, MARCH 31, ---------------
1998 1997 1998 1997
---------- ---------- ----- -----
<S> <C> <C> <C> <C>
Net revenues................................. 100% 100% 100% 100%
Cost of net revenues......................... 1% 6% 3% 14%
Gross margin................................. 99% 94% 97% 86%
Research, development and engineering........ 98% 98% 66% 106%
General and administrative................... 60% 378% 41% 125%
Sales and marketing.......................... 72% 95% 40% 88%
Operating loss............................... (131)% (478)% (50)% (232)%
Other income (expense)....................... 2% 8% 0% 5%
Loss before income taxes..................... (129)% (470)% (50)% (227)%
Income taxes................................. 0% 0% 0% 0%
Net loss..................................... (129)% (470)% (50)% (227)%
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 as Compared to Three Months Ended June 30,
1997
Net Revenues. Transom's total revenues for the three months ended June 30,
1998 increased 240% to $606,000 from $178,000 for the three months ended June
30, 1997 as a result of increased product sales and software development
contracts.
Cost of Revenues. Transom's cost of revenue includes cost of packaging and
distribution costs. Cost of revenue for the three months ended June 30, 1998
decreased 31% to $17,000 from $24,000 for the three months ended June 30, 1997,
primarily due to revenue mix, which included hardware sales in 1997. Transom's
cost of revenues as a percentage of revenues decreased to 3% in the three months
ended June 30, 1998 from 14% in the three months ended June 30, 1997.
Research, Development and Engineering. Transom's research, development and
engineering focuses on product development and consists primarily of salaries
and benefits, related facility costs, equipment costs and outside consulting
fees. Research, development and engineering expenses for the three months ended
June 30, 1998 increased 113% to $401,000 from $188,000 for the three months
ended June 30, 1997, primarily as a result of increased research, development
and engineering staff and related costs. Research, development, and engineering
expenses were 66% of revenues for the three months ended June 30, 1998 and 106%
of revenues for the three months ended June 30, 1997. The decrease in research,
development and engineering expenses as a percentage of revenues was primarily
the result of spreading expenses over higher revenues.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits, related facility and equipment costs for
administrative and executive personnel, as well as certain consulting expenses,
insurance costs, professional fees and other costs. General and administrative
expenses for the three months ended June 30, 1998 increased 11% to $247,000 from
$222,000 for the three months ended June 30, 1997, primarily as a result of
increased general and administrative staff and related costs. General and
administrative expenses were 41% of revenue for the three months ended June 30,
1998 and 125% of revenue for the three months ended June 30, 1997. The decrease
in general and administrative expenses as a percentage of revenues was primarily
the result of spreading expenses over higher revenues.
Sales and Marketing. Sales and marketing expenses include personnel costs
related to sales and marketing activities, as well as advertising, promotional
materials, mail campaigns, tradeshows and other costs. Sales and marketing
expenses for the three months ended June 30, 1998 increased 54% to $242,000 from
$157,000 for the three months ended June 30, 1997, primarily as a result of
increased sales and marketing staff and related costs. Sales and marketing
expenses were 40% of revenues for the three months
36
<PAGE> 44
ended June 30, 1998 and 88% of revenues for the three months ended June 30,
1997. The decrease in sales and marketing expenses as a percentage of revenues
was primarily the result of spreading expenses over higher revenues.
Income Taxes. Transom was not subject to income taxes during the three
months ended June 30, 1998 or 1997 as a result of recording losses in both
periods. The effective tax rate differs from the Federal statutory rate
primarily due to providing a valuation allowance on future tax benefits.
Year Ended March 31, 1998 as Compared to Period from October 7, 1996 to March
31, 1997
Net Revenues. Transom's total revenues for the year ended March 31, 1998
increased to $1.4 million from $94,000 for the period ended March 31, 1997, as a
result of increased product sales and software development contracts combined
with an abbreviated fiscal year for 1997.
Cost of Revenues. Transom's cost of revenue includes cost of packaging and
distribution costs. Cost of revenue for the year ended March 31, 1998 increased
to $20,000 from $5,000 for the period ended March 31, 1997, primarily due to the
expanded product sales and new software product development contracts. Transom's
cost of revenues as a percentage of revenues decreased to 1% for the year ended
March 31, 1998 from 6% for the period ended March 31, 1997.
Research, Development and Engineering. Transom's research, development and
engineering focuses on product development and consists primarily of salaries
and benefits, related facility costs, equipment costs and outside consulting
fees. Research, development and engineering expenses for the year ended March
31, 1998 increased to $1.3 million from $92,000 for the period ended March 31,
1997, primarily as a result of increased research, development and engineering
staff and related costs and the abbreviated fiscal year in 1997. Research,
development, and engineering expenses remained constant at 98% of revenues for
the year ended March 31, 1998 and the period ended March 31, 1997.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits, related facility costs and equipment costs
for administrative and executive personnel, as well as certain consulting
expenses, insurance costs, professional fees and other costs. General and
administrative expenses for the year ended March 31, 1998 increased to $819,000
from $355,000 for the period ended March 31, 1997, primarily as a result of
increased general and administrative staff and related costs combined with the
abbreviated fiscal year in 1997. General and administrative expenses were 60% of
revenue for the year ended March 31, 1998 and 378% of revenue for the period
ended March 31, 1997. The decrease in general and administrative expenses as a
percentage of revenues was primarily the result of spreading expenses over
higher revenues.
Sales and Marketing. Sales and marketing expenses include personnel costs
related to sales and marketing activities, as well as advertising, promotional
materials, mail campaigns, tradeshows and other costs. Sales and marketing
expenses for the year ended March 31, 1998 increased to $984,000 from $89,000
for the period ended March 31, 1997, primarily as a result of increased sales
and marketing staff and related costs and the abbreviated fiscal year in 1997.
Sales and marketing expenses were 72% of revenues for the year ended March 31,
1998 and 95% of revenues for the period ended March 31, 1997. The decrease in
sales and marketing expenses as a percentage of revenues was primarily the
result of spreading expenses over higher revenues.
Income Taxes. Transom was not subject to income taxes during the year ended
March 31, 1998 or the period ended March 31, 1997 as a result of recording
losses in both periods. The effective tax rate differs from the Federal
statutory rate primarily due to providing a valuation allowance on future tax
benefits.
LIQUIDITY AND CAPITAL RESOURCES
Transom historically has satisfied its cash requirements through
borrowings, capital lease financings and net proceeds of approximately $4.78
million from three private placements of Series B Convertible Preferred Stock in
February 1997, February 1998 and June 1998. As of June 30, 1998, Transom had
$1.6 million in cash and short-term investments.
37
<PAGE> 45
Net cash used in operating activities for the three months ended June 30,
1998 was $472,000, primarily due to the net loss and an increase in accounts
receivable. Net cash used in operating activities for the three months ended
June 30, 1997 was $412,000, primarily due to the net loss and a decrease in
accounts payable.
Net cash used in operating activities for the year ended March 31, 1998 was
$1,763,000, primarily due to the net loss and an increase in accounts receivable
partially offset by depreciation and increases in accounts payable and deferred
revenues. Net cash used in operating activities for the period ended March 31,
1997 was $359,000, primarily due to the net loss and increases in accounts
receivable and prepaid expenses partially offset by increases in accounts
payable and accrued liabilities.
Accounts receivable at June 30, 1998 increased $180,000 to $678,000 from
$498,000 at March 31, 1998. The increase in accounts receivable was primarily
due to increased revenues.
In the three months ended June 30, 1998, Transom used cash of $66,000 in
its investing activities, which was used to purchase property and equipment. In
the three months ended June 30, 1997, Transom provided cash of $319,000 in its
investing activities, of which $500,000 was provided by redeeming short-term
investments and $181,000 was used to purchase property and equipment.
In the year ended March 31, 1998, Transom provided net cash of $308,000 in
its investing activities, of which $500,000 was provided by redeeming short-term
investments and $192,000 was used to purchase property and equipment. In the
period ended March 31, 1997, Transom used cash of $804,000 in its investing
activities, of which $500,000 was used to purchase short-term investments and
$313,000 was used to purchase property and equipment.
Transom has a $500,000 credit agreement with a commercial bank, which
expires on August 31, 1998 and is secured by substantially all of the assets of
Transom. Borrowings under the line of credit portion of the agreement are
limited to a percentage of eligible accounts receivable, as defined in the
credit agreement.
Capital leases payable at June 30, 1998 decreased $20,000 to $224,000 from
$244,000 at March 31, 1998.
CERTAIN TRANSACTIONS
Raynold Schmick, the Secretary of Transom, is a partner in Schmick Law
Offices, P.C., a law firm which serves as outside counsel for Transom.
Transom has entered into a license agreement with Penn with respect to the
Jack(R) software and, in consideration for the license to Transom granted
thereunder, Transom has issued 450,000 shares of Transom Series A Preferred
Stock to Penn and a warrant to purchase 150,000 shares of Transom Series A
Preferred Stock exercisable upon a sale of all or substantially all of the
assets or stock of the Company, certain mergers involving Transom or an initial
public offering of Transom Common Stock.
Stephen A. Jannetta, a minority stockholder in A.P. Jannetta Associates,
Inc., is associated with Morgan, Lewis & Bockius LLP, which is serving as
principal outside counsel to Transom in connection with the Merger. A.P.
Jannetta Associates, Inc. is the beneficial owner of approximately 13.6% of the
outstanding Transom Common Stock. See "-- Security Ownership."
38
<PAGE> 46
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Balance Sheet as of
June 30, 1998, and the related Unaudited Pro Forma Condensed Combined Statements
of Income for the six months ended June 30, 1998 and each of the two years in
the period ended December 31, 1997, give effect to the Merger as if it had
occurred on the first day of the earliest period presented. The Unaudited Pro
Forma Combined Statement of Operations includes the results of the Sense8
acquisition as if it had occurred as of the beginning of 1997 and the results of
the VSA acquisition as if it had occurred at the beginning of 1996. The purchase
of Sense8 was effective June 17, 1998. EAI signed a definitive agreement to
acquire VSA on July 29, 1998, which was amended and restated as of August 5,
1998, with the transaction expected to close during the third quarter of 1998.
The historical EAI results include the results of Sense8 only from June 17,
1998. This pro forma information has been prepared utilizing the historical
consolidated financial statements of EAI and Transom and should be read in
conjunction with the historical financial statements and notes thereto, which
are incorporated by reference herein for EAI and which are appearing elsewhere
herein for Transom. The fiscal year ends on March 31 for Transom and June 30 for
VSA; therefore, unaudited results for the six months ended June 30, 1998, the
calendar year ended December 31, 1997, and the period from October 7, 1996 to
December 31, 1996 for Transom and the six months ended June 30, 1998 and the
calendar years ended December 31, 1997 and 1996 for VSA have been combined with
Sense8's unaudited results for the period January 1, 1998 to June 16, 1998 and
audited results for the year ended December 31, 1997 and EAI's unaudited results
for the six months ended June 30, 1998 and audited results for the years ended
December 31, 1997 and 1996. These Unaudited Pro Forma Condensed Combined
Financial Statements are presented for illustrative purposes only and are not
necessarily indicative of the operating results or financial position that would
have occurred if the Sense8 and VSA acquisitions or the Merger had been
consummated as of the beginning of the periods presented or as of the dates
presented, nor are they necessarily indicative of future operating results or
financial position.
These Unaudited Pro Forma Condensed Combined Financial Statements are based
on the pooling-of-interests method of accounting for the Merger and VSA
acquisition and the purchase method of accounting for the Sense8 acquisition.
The pro forma adjustments are described in the accompanying notes.
39
<PAGE> 47
UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
----------------- PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA
EAI TRANSOM ADJUSTMENTS COMBINED VSA ADJUSTMENTS COMBINED
------- ------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..... $14,393 $1,594 $15,987 $ 147 $16,134
Short-term investments........ 17,280 17,280 17,280
Accounts receivable, net:
Billed...................... 17,051 679 17,730 4,170 21,900
Unbilled.................... 11,504 11,504 691 12,195
Deferred income taxes......... 701 701 701
Prepaid expenses and other
assets...................... 1,917 14 1,931 159 2,090
------- ------ ------- ------- ------ ------- -------
Total current assets.... 62,846 2,287 65,133 5,167 70,300
Property and equipment, net..... 14,571 675 15,246 641 15,887
Other assets:
Note receivable............... 1,408 1,408 1,408
Software development costs,
net......................... 1,384 1,384 1,384
Deferred income taxes......... 652 949(a) 1,601 111 1,712
Goodwill, net................. 1,655 1,655 1,655
Other......................... 1,624 68 1,692 74 1,766
------- ------ ------- ------- ------ ------- -------
Total assets............ $84,140 $3,030 $ 949 $88,119 $5,993 $ $94,112
======= ====== ======= ======= ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............. $ 5,123 $ 81 $ 5,204 $ 131 $ 5,335
Accrued compensation and other
accrued expenses............ 4,450 180 1,500(b) 6,130 1,757 3,500(b) 11,387
Deferred revenue.............. 1,641 192 1,833 1,833
Current portion long-term debt
and lease obligations....... 165 83 248 1,917 2,165
Income taxes payable.......... 1,368 1,368 352 1,720
------- ------ ------- ------- ------ ------- -------
Total current
liabilities........... 12,747 536 1,500 14,783 4,157 3,500 22,440
Long-term debt and lease
obligations due after one
year.......................... 1,517 141 1,658 543 2,201
Other liabilities............... 417 417
Stockholders' equity............ 69,876 2,353 949(a) 71,678 876 (3,500)(b) 69,054
(1,500)(b) (1,143)(d)
(4,853)(c) 1,143(d)
4,853(c)
------- ------ ------- ------- ------ ------- -------
Total liabilities and
stockholders'
equity................ $84,140 $3,030 $ 949 $88,119 $5,993 $ 0 $94,112
======= ====== ======= ======= ====== ======= =======
</TABLE>
40
<PAGE> 48
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
----------------- PRO FORMA PRO FORMA HISTORICAL PRO FORMA
EAI SENSE8 ADJUSTMENTS COMBINED TRANSOM ADJUSTMENTS
------- ------- ----------- --------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues......................... $33,711 $ 821 $(210)(e) $34,322 $1,094 $ (75)(e)
Cost of revenues..................... 9,612 460 (210)(e) 9,862 10 (75)(e)
------- ------- ----- ------- ------ -----
Gross profit................. 24,099 361 0 24,460 1,084 0
Operating expenses:
Sales and marketing................ 9,393 493 9,886 520
General and administrative......... 3,303 1,308 58(f) 4,669 464
Research and development........... 5,067 398 5,465 785
Acquisition and non-recurring
charges.......................... 13,329 13,329
------- ------- ----- ------- ------ -----
Total operating expenses..... 31,092 2,199 58 33,349 1,769
------- ------- ----- ------- ------ -----
Operating income (loss)...... (6,993) (1,838) (58) (8,889) (685) 0
Other income (expense)............... 1,109 (207) 902 (3)
------- ------- ----- ------- ------ -----
Income (loss) before income
taxes...................... (5,884) (2,045) (58) (7,987) (688) 0
Income tax expense (benefit)......... 1,215 1,215 (261)(a)
------- ------- ----- ------- ------ -----
Net income (loss) before minority
interest........................... (7,099) (2,045) (58) (9,202) (688) 261
Minority interest....................
------- ------- ----- ------- ------ -----
Net income (loss)............ $(7,099) $(2,045) $ (58) $(9,202) $ (688) $ 261
======= ======= ===== ======= ====== =====
Earnings (loss) per share
Basic.............................. $ (0.71) $ (0.90)
======= =======
Diluted............................ $ (0.71) $ (0.90)
======= =======
Weighted average shares
outstanding........................ 10,066 10,211
======= =======
Weighted average shares outstanding
and assumed conversion............. 10,066 10,211
======= =======
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA PRO FORMA
COMBINED VSA ADJUSTMENTS COMBINED
--------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues......................... $35,341 $9,749 $45,090
Cost of revenues..................... 9,797 5,938 15,735
------- ------ -- -------
Gross profit................. 25,544 3,811 29,355
Operating expenses:
Sales and marketing................ 10,406 430 10,836
General and administrative......... 5,133 841 5,974
Research and development........... 6,250 1,746 7,996
Acquisition and non-recurring
charges.......................... 13,329 13,329
------- ------ -- -------
Total operating expenses..... 35,118 3,017 38,135
------- ------ -- -------
Operating income (loss)...... (9,574) 794 (8,780)
Other income (expense)............... 899 (83) 816
------- ------ -- -------
Income (loss) before income
taxes...................... (8,675) 711 (7,964)
Income tax expense (benefit)......... 954 322 1,276
------- ------ -- -------
Net income (loss) before minority
interest........................... (9,629) 389 (9,240)
Minority interest....................
------- ------ -- -------
Net income (loss)............ $(9,629) $ 389 $ (9,240)
======= ====== == =======
Earnings (loss) per share
Basic.............................. $ (0.92) $ (0.85)
======= =======
Diluted............................ $ (0.92) (0.85)
======= =======
Weighted average shares
outstanding........................ 10,416 10,838
======= =======
Weighted average shares outstanding
and assumed conversion............. 10,416 10,838
======= =======
</TABLE>
41
<PAGE> 49
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO
----------------- PRO FORMA FORMA HISTORICAL PRO FORMA
EAI SENSE8 ADJUSTMENTS COMBINED TRANSOM ADJUSTMENTS
------- ------- ----------- -------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............................ $49,717 $ 3,988 $ (115)(e) $53,590 $ 950 $(148)(e)
Cost of revenues........................ 13,332 1,095 (3)(e) 14,424 20 (148)(e)
------- ------- ------- -------- ------- -----
Gross profit.................... 36,385 2,893 (112) 39,166 930 0
Operating expenses:
Sales and marketing................... 15,406 1,911 17,317 795
General and administrative............ 5,478 1,366 115(f) 6,959 842
Research and development.............. 7,068 1,118 (65)(e) 8,121 1,015
Acquisition and non-recurring
charges............................. 8,831 9,080(g) 17,911
------- ------- ------- -------- ------- -----
Total operating expenses........ 36,783 4,395 9,130 50,308 2,652
------- ------- ------- -------- ------- -----
Operating income (loss)......... (398) (1,502) (9,242) (11,142) (1,722) 0
Other income (expense).................. 1,522 (185) 1,337 46
------- ------- ------- -------- ------- -----
Income (loss) before income
taxes......................... 1,124 (1,687) (9,242) (9,805) (1,676) 0
Income tax expense (benefit)............ 2,772 2,772 (637)(a)
------- ------- ------- -------- ------- -----
Net income (loss) before minority
interest.............................. (1,648) (1,687) (9,242) (12,577) (1,676) 637
Minority interest....................... (49) (49)
------- ------- ------- -------- ------- -----
Net income (loss)............... $(1,697) $(1,687) $(9,242) $(12,626) $(1,676) $ 637
======= ======= ======= ======== ======= =====
Earnings (loss) per share
Basic................................. $ (0.19) $ (1.41)
======= ========
Diluted............................... $ (0.19) $ (1.41)
======= ========
Weighted average shares outstanding..... 8,770 8,928
======= ========
Weighted average shares outstanding and
assumed conversion.................... 8,770 8,928
======= ========
<CAPTION>
PRO PRO
FORMA HISTORICAL PRO FORMA FORMA
COMBINED VSA ADJUSTMENTS COMBINED
-------- ---------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues............................ $54,392 $17,015 $ $ 71,407
Cost of revenues........................ 14,296 11,797 26,093
-------- ------- -- --------
Gross profit.................... 40,096 5,218 45,314
Operating expenses:
Sales and marketing................... 18,112 876 18,988
General and administrative............ 7,801 1,522 9,323
Research and development.............. 9,136 3,108 12,244
Acquisition and non-recurring
charges............................. 17,911 17,911
-------- ------- -- --------
Total operating expenses........ 52,960 5,506 58,466
-------- ------- -- --------
Operating income (loss)......... (12,864) (288) (13,152)
Other income (expense).................. 1,383 (100) 1,283
-------- ------- -- --------
Income (loss) before income
taxes......................... (11,481) (388) (11,869)
Income tax expense (benefit)............ 2,135 (175) 1,960
-------- ------- -- --------
Net income (loss) before minority
interest.............................. (13,616) (213) (13,829)
Minority interest....................... (49) (49)
-------- ------- -- --------
Net income (loss)............... $(13,665) $ (213) $ $(13,878)
======== ======= == ========
Earnings (loss) per share
Basic................................. $ (1.50) $ (1.45)
======== ========
Diluted............................... $ (1.50) $ (1.45)
======== ========
Weighted average shares outstanding..... 9,133 9,555
======== ========
Weighted average shares outstanding and
assumed conversion.................... 9,133 9,555
======== ========
</TABLE>
42
<PAGE> 50
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Historical
----------------------------
For the period
October 7, 1996 to
December 31,
1996 Pro Forma Pro Forma Historical Pro Forma Pro Forma
EAI Transom Adjustments Combined VSA Adjustments Combined
------- ------------------ ----------- --------- ---------- ----------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues................... $27,189 $ 19 $27,208 $16,887 $44,095
Cost of revenues............... 7,277 13 7,290 11,417 18,707
------- ----- ---- ------- ------- -- -------
Gross profit........... 19,912 6 19,918 5,470 25,388
Operating expenses:
Sales and marketing.......... 9,799 38 9,837 850 10,687
General and administrative... 3,041 39 3,080 1,537 4,617
Research and development..... 3,438 63 3,501 2,400 5,901
Acquisition and non-recurring
charges....................
------- ----- ---- ------- ------- -- -------
Total operating
expenses............. 16,278 140 16,418 4,787 21,205
------- ----- ---- ------- ------- -- -------
Operating income
(loss)............... 3,634 (134) 3,500 683 4,183
Other income (expense)......... 987 (1) 986 (102) 884
------- ----- ---- ------- ------- -- -------
Income (loss) before
income taxes......... 4,621 (135) 4,486 581 5,067
Income tax expense (benefit)... 1,744 (51)(a) 1,693 231 1,924
------- ----- ---- ------- ------- -- -------
Net income (loss) before
minority interest............ 2,877 (135) 51 2,793 350 3,143
Minority interest.............. (310) (310) (310)
------- ----- ---- ------- ------- -- -------
Net income (loss)...... $ 2,567 $(135) $ 51 $ 2,483 $ 350 $ 2,833
======= ===== ==== ======= ======= == =======
Earnings (loss) per share
Basic........................ $ 0.35 $ 0.33 $ 0.35
======= ======= =======
Diluted...................... $ 0.30 $ 0.28 $ 0.31
======= ======= =======
Weighted average shares
outstanding.................. 7,432 7,637 8,059
======= ======= =======
Weighted average shares
outstanding and assumed
conversion................... 8,648 8,853 9,275
======= ======= =======
</TABLE>
43
<PAGE> 51
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a) To reflect the income tax benefit that would be recognized if the
transaction had occurred at the beginning of the earliest period presented.
The adjustment is based on the combined tax rate of the companies and the
elimination of the valuation allowance for deferred tax assets of Transom.
(b) To record estimated one-time merger-related charges for the Merger and VSA
Merger. These expenses include outside accounting and legal fees and
various other costs and filing fees. These charges will be recognized at
the time the Transom and VSA mergers are consummated as required under the
pooling-of-interests accounting method.
(c) To record the exchange of Transom Common Stock for EAI Common Stock.
(d) To record the exchange of VSA common stock for EAI Common Stock.
(e) To eliminate intercompany revenue, expense and cost of sales.
(f) To reflect the amortization of goodwill related to the Sense8 transaction.
(g) To reflect the write-off of in-process technology related to the Sense8
transaction.
44
<PAGE> 52
RIGHTS OF EAI STOCKHOLDERS AND TRANSOM STOCKHOLDERS
DESCRIPTION OF EAI STOCK
The authorized capital stock of EAI consists of 60,000,000 shares of EAI
Common Stock and 20,000,000 shares of preferred stock, $0.01 par value (the "EAI
Preferred Stock"). As of July 30, 1998, there were 10,409,395 shares of EAI
Common Stock outstanding and no shares of EAI Preferred Stock outstanding. As of
July 30, 1998, there were 642 holders of record of EAI Common Stock. The EAI
Common Stock is listed and traded on the NNM under the symbol "EAII."
Common Stock
The holders of EAI 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 EAI Common Stock outstanding are able to elect all of the directors. Each
outstanding share of EAI Common Stock is entitled to participate equally in any
distribution of net assets made to the stockholders in liquidation, dissolution
or winding up of EAI 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 EAI Common Stock. All shares of EAI Common Stock have equal rights and
preferences.
EAI Preferred Stock
Pursuant to EAI's Certificate of Incorporation, as amended (the "EAI
Certificate"), EAI is authorized to issue up to 20,000,000 shares of EAI
Preferred Stock, which may be issued from time to time in one or more series
upon authorization by EAI's Board of Directors. EAI's 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 EAI Preferred Stock. The issuance of the EAI
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 EAI 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 EAI, or otherwise adversely affect the market
price of the EAI Common Stock. EAI is not aware of any plans by a third party to
seek control of EAI. EAI has no current plans to issue any EAI Preferred Stock.
Rights
EAI has adopted a Stockholders Rights Plan. Under the Stockholders Rights
Plan, each share of EAI 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-hundred-fiftieth of a share of Series A
Junior Participating Preferred Stock of EAI for a price of $50.00 per one
one-hundred-fiftieth of a share. The Rights are not currently exercisable when
issued and are transferable only with the related shares of EAI 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) (an "Acquiring Person")
has acquired beneficial ownership of 15% or more of the outstanding shares of
EAI Common Stock or (ii) 10 business days (unless delayed by EAI's 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 EAI 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
45
<PAGE> 53
expiration of EAI's right to redeem the Rights. Rights certificates will be
distributed when the Rights become exercisable. An "Exempt Person" will include
EAI 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 EAI 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.
Flip-over. In the event that, on or after the date on which an Acquiring
Person has become such: (i) EAI merges into or consolidates with an Interested
Stockholder or, unless all holders of the outstanding shares of EAI 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 EAI Common Stock are treated the same, any other person (with limited
designated exceptions) merges into EAI or (iii) EAI 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 EAI 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 $0.01 per Right, subject to adjustment, at the direction of
EAI's 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 EAI
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 EAI Common Stock,
EAI's Board of Directors has the right to direct the exchange of shares of EAI
Common Stock for all or any part of the Rights (other than Rights that have
become void) at the exchange rate of one share of EAI Common Stock per Right,
subject to adjustment.
EAI's Rights Agreement may discriminate against a prospective holder of EAI
Common Stock as a result of such holder owning a substantial amount of shares
and may have the effect of delaying, deferring or preventing a change in control
of EAI. See "-- Comparison of Rights of EAI Stockholders and Transom
Stockholders -- Stockholders Rights Plan."
DESCRIPTION OF TRANSOM CAPITAL STOCK
The authorized capital stock of Transom consists of 16,000,000 shares
including 6,000,000 shares of preferred stock, 5,128,000 of which are issued and
outstanding, and 10,000,000 shares of Transom Common Stock, 1,650,800 of which
are issued and outstanding. Of the 6,000,000 shares of preferred stock, Transom
has designated 628,000 shares as Transom Series A Preferred Stock and 5,000,000
shares as Transom Series B Preferred Stock.
Transom Common Stock
The holders of Transom Common Stock are entitled to one vote on all matters
submitted to the stockholders. Subject to preferences that may be applicable to
any outstanding preferred stock, holders of the Transom Common Stock are
entitled to receive ratably such dividends as may be declared by the Transom
Board out of funds legally available therefor. In the event of liquidation,
dissolution, or winding up of Transom, after payment of liabilities and the
liquidation preferences of any outstanding preferred stock, the holders of
Transom Common Stock are entitled to receive all assets remaining available for
distribution to stockholders. The Transom Common Stock has no preemptive or
other subscription of rights, and there are no cumulative voting rights with
respect to such shares.
46
<PAGE> 54
Preferred Stock
Holders of the shares of Transom Series A Preferred Stock do not have any
voting rights except as may be required by law. Each share of Transom Series B
Preferred Stock entitles the holder to one vote for each share of Transom Common
Stock into which it will be convertible, on all matters requiring a stockholder
vote. Except as otherwise required by Delaware law, the Transom Series B
Preferred Stock and the Transom Common Stock will be voted together as one class
on all matters brought before the stockholders. Holders of the Transom Series A
Preferred Stock and Transom Series B Preferred Stock will be entitled to
receive, for each share held and to the same extent as holders of the Transom
Common Stock, such cash dividends as the Transom Board may from time to time
determine. In the event of a liquidation or dissolution of Transom, holders of
Transom Series A Preferred Stock and Transom Series B Preferred Stock shall rank
pari passu and will be entitled to a liquidation preference of $1.00 per share
before any amounts are distributed among the holders of Transom Common Stock.
Other series of preferred stock of Transom may be designated and issued with
dividend and liquidation rights that may rank prior to the Transom Series A
Preferred Stock and the Transom Series B Preferred Stock. Holders of the Transom
Series A Preferred Stock and Transom Series B Preferred Stock will not have any
redemption, preemption, subscription or cumulative voting rights. Each share of
Transom Series A Preferred Stock and Transom Series B Preferred Stock will be
convertible at any time into one share of Transom Common Stock, subject to
adjustments in the event of a stock split, stock dividend, combination, exchange
of shares and other similar events. However, no adjustments will be made in
respect of any issuance of Transom Common Stock upon the exercise of options.
Transom will have the right, at its option, to cause the conversion of the
shares of Transom Series A Preferred Stock and Transom Series B Preferred Stock
then issued and outstanding into fully paid and non-assessable shares of Common
Stock (other than fractional shares) upon the occurrence of a Conversion Event.
A Conversion Event shall be (i) a sale of all or substantially all of the assets
of Transom or a merger at a price that returns to the holders of the Transom
Series A Preferred Stock and Transom Series B Preferred Stock an amount or value
per share greater than the initial conversion price of $1.00 or (ii) the initial
public offering of Transom Common Stock pursuant to a registration under the
Securities Act where (x) the offering is firmly underwritten at a price per
share to the public which is not less than $2.00 and (y) the aggregate gross
proceeds (net of any underwriting discount) received by Transom exceed
$10,000,000. If the EAI Common Stock price is greater than $42.00 per share at
the Effective Time, a Conversion Event will exist.
In addition to the Transom Series A Preferred Stock and the Transom Series
B Preferred Stock, the Transom Board is empowered by Transom's Certificate of
Incorporation to designate and issue from time to time additional classes or
series of preferred stock without any action of the stockholders. The Transom
Board may authorize issuance in one or more classes or series, and may fix and
determine the relative rights, preferences, and limitations of each class or
series so authorized. Such action could adversely affect the voting, dividend,
liquidation and other rights of the holders of Transom's voting securities or
could have the effect of discouraging or making difficult any attempt by a
person or group to obtain control of Transom.
COMPARISON OF RIGHTS OF EAI STOCKHOLDERS AND TRANSOM STOCKHOLDERS
Both EAI and Transom are incorporated under the laws of the State of
Delaware and are governed by the DGCL. The rights of the holders of Transom
Common Stock are currently governed by the DGCL, the Transom Certificate of
Incorporation, as amended (the "Transom Certificate"), and Transom's By-laws, as
amended (the "Transom By-laws," together with the Transom Certificate, the
"Transom Governing Documents"). If the Merger is consummated in accordance with
the terms of the Merger Agreement, Transom stockholders will become holders of
EAI Common Stock and their rights as such will be governed by the DGCL (as is
presently the case), the EAI Certificate and EAI's By-laws, as amended (the "EAI
By-laws," together with the EAI Certificate, the "EAI Governing Documents").
Because of the similarities between the Transom Governing Documents and the EAI
Governing Documents, the rights of former Transom stockholders following the
Merger will remain the same in many respects. In certain other respects,
however, the rights of holders of EAI Common Stock differ from those of holders
of Transom Common Stock. Certain of the material differences between the rights
of holders of Transom Common Stock and the rights of holders of EAI Common Stock
are summarized below.
47
<PAGE> 55
The following summary is not a complete statement of the rights of holders
of EAI Common Stock under applicable Delaware laws or the EAI Governing
Documents, or a comprehensive comparison with the rights of the holders of
Transom Common Stock under the Transom Governing Documents, or a complete
description of the specific provisions referred to herein. The identification of
specific differences is not meant to indicate that other equally or more
significant differences do not exist. This summary is qualified in its entirety
by reference to the DGCL, the EAI Governing Documents and the Transom Governing
Documents, to which holders of Transom Common Stock are referred. For
information as to how such documents may be obtained, see "Available
Information."
Advance Notice Requirements for Stockholder Proposals and Nomination of
Directors. The EAI 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 EAI not less than 120 days or more than 150
days prior to the meeting. The EAI By-laws also specify certain requirements for
a stockholder's notice to be in proper written form. The DGCL is silent as to
advance notice of stockholder proposals and director nominations and, unlike the
EAI By-laws, the Transom Governing Documents do not contain a provision
requiring such advance notice.
Directors; Vacancies; Removal. The DGCL permits the certificate of
incorporation or the by-laws of a corporation to contain provisions governing
the number and qualifications of directors. The EAI By-laws provide that EAI
shall have at least three directors, with the exact number fixed by the Board of
Directors. The Transom By-laws provide that Transom shall have at least one and
not more than twelve directors, with the exact number determined by resolution
of the Board of Directors. The DGCL allows a board of directors to be divided
into classes. EAI's Board of Directors is divided into three classes of
directors serving staggered three-year terms. As a result, approximately
one-third of EAI's Board of Directors is elected each year. Transom's Board of
Directors is not divided into classes. Each of the DGCL, EAI Governing Documents
and Transom Governing Documents provides that 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 EAI Certificate 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. Unless the certificate of
incorporation provides otherwise, the DGCL permits a director or the entire
board of directors to be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of the directors. As
the Transom Certificate is silent with respect to director removal, Transom
directors can be removed according to the provisions of the DGCL.
Vote on Certain Fundamental Transactions. The DGCL and the EAI Governing
Documents require that any merger, consolidation, sale of all or substantially
all of the assets, or dissolution of a corporation be approved by the
affirmative vote of the holders of a majority of all outstanding shares of the
corporation entitled to vote thereon, except in certain circumstances applying
to the surviving corporation in a merger. Although the Transom Governing
Documents are silent as to this issue, the DGCL mandates that a plan of merger,
consolidation, sale of all or substantially all of the assets, or dissolution of
a corporation be approved by the affirmative vote of the holders of a majority
of all outstanding shares of the corporation entitled to vote thereon. Also see
"-- Certain Business Combinations."
Special Meetings of Stockholders; Quorum; Stockholder Action By Written
Consent. Under the DGCL, special stockholder meetings may only be called
pursuant to a resolution adopted by a majority of the Board of Directors. The
DGCL provides that a majority of the shares entitled to vote, represented in
person or by proxy, constitute a quorum at a meeting of stockholders. In
addition, the DGCL generally allows (unless otherwise provided in the
certificate of incorporation) for stockholder actions to be taken without a
meeting, without prior notice and without a vote, if a written consent is signed
by stockholders having not less than the minimum number of votes necessary to
authorize or take such action, provided that a subsequent notice of the taking
of corporate action by less than unanimous written consent is sent to
stockholders who have not consented in writing. The EAI Governing Documents
provide that special meetings of stockholders of EAI may be called only by a
majority of EAI's board of directors, EAI's chairman or its president. The EAI
Governing Documents provide that the stockholders of EAI may only take actions
at a duly called annual or special meeting of stockholders and may not take
action by written consent. The Transom Governing
48
<PAGE> 56
Documents provide that special meetings of the stockholders of Transom may be
called only by the chairman of the board, a majority of the board of directors,
the president, or at the written request of stockholders owning a majority of
the shares entitled to vote. The Transom By-laws provide that the holders of a
majority of the stock issued and outstanding and entitled to vote, present in
person or by proxy, constitute a quorum at a meeting of the stockholders. The
Transom By-laws permit action by written consent if the action taken is set
forth in writing and signed by not less than the minimum number of votes that
would be necessary to take such action at a meeting at which all shares entitled
to vote were present and voted.
Issuance of Shares. The DGCL provides that the directors of a corporation
have the authority to declare issuances of stock.
Amendment of Certificate of Incorporation and By-laws. The DGCL and the EAI
Governing Documents allow EAI to amend its certificate of incorporation if the
EAI board of directors adopts a resolution approving such an amendment and the
stockholders thereafter approve the proposed amendment, either at a special
meeting or at the next annual stockholders meeting. In general, the proposed
amendment must be approved at the meeting by a majority of the outstanding stock
entitled to vote thereon. The EAI By-laws may be amended by a majority
affirmative vote of the shares entitled to vote or a majority affirmative vote
of EAI's board of directors. The Transom Governing Documents permit Transom's
stockholders or board of directors to amend its by-laws at any regular meeting
of the stockholders or board of directors or at any special meeting of the
stockholders or of the board of directors if notice of such amendment is
contained in the notice of the special meeting.
Liability and Indemnification of Directors and Officers. The EAI and
Transom Governing Documents provide that EAI and Transom 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 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 EAI Certificate includes a provision that eliminates, to the fullest
extent permitted, director liability for monetary damages for breaches of
fiduciary duty.
Payment of Dividends. The DGCL allows a corporation, subject to any
restrictions contained in its certificate of incorporation, to pay dividends out
of its surplus or, in case there is no surplus, out of net profits for the
fiscal year in which declared or out of net profits for the preceding fiscal
year. The EAI Certificate permits the payment of dividends in accordance with
the DGCL, but, to date, EAI has not paid any cash dividends on the EAI Common
Stock. The Transom Certificate also permits the payment of dividends in
accordance with the DGCL.
Appraisal or Dissenters' Rights. Section 262 of the DGCL provides that
stockholders of corporations being acquired pursuant to a merger have the right
to exercise certain "appraisal rights" to dissent from such corporate action and
to demand payment of the fair value of their shares. Such dissenters' rights may
be exercised when the stockholders receive any form of consideration for their
shares other than (i) shares of stock of the surviving corporation, (ii) shares
of stock that are listed on a national securities exchange, or designated as a
national market system security on an interdealer quotation system such as the
NNM, or held of record by more than 2,000 stockholders, (iii) cash in lieu of
fractional shares, or (iv) any combination thereof. Corporations are allowed to
enlarge these statutory rights pursuant to their certificate of incorporation,
but neither the EAI Certificate nor the Transom Certificate expands upon such
rights. See "The Merger -- Dissenters' Rights" for a more detailed discussion of
dissenters' rights of the holders of Transom Common Stock.
49
<PAGE> 57
Stockholder Rights Plan. EAI has adopted a Stockholder Rights Plan,
pursuant to which holders of EAI Common Stock receive one Right, a preferred
share purchase right, for each outstanding share of EAI Common Stock, with each
Right entitling its holder to purchase one one-hundred-fiftieth of a share of
Series A Junior Participating Preferred Stock of EAI for a price of $50.00 per
one one-hundred-fiftieth of a share, subject to certain adjustments. The Rights
become exercisable if any person or entity acquires 15% or more of the
outstanding EAI Common Stock, or commences a tender or exchange offer that would
cause the offeror to own 15% or more of the outstanding EAI Common Stock. Under
certain circumstances involving an attempted takeover of EAI, holders of Rights
would be entitled to purchase shares of EAI Common Stock or common stock of the
acquiring person or entity having a value equal to two times the exercise price
of the Right. The Rights are redeemable by EAI at a price of $0.01 per Right.
See "Description of EAI Stock." Transom has not adopted any similar stockholder
rights plan.
Certain Business Combinations. Section 203 of the DGCL contains a "business
combination" section applicable to certain Delaware corporations such as EAI
that have a class of voting stock that is (i) listed on a national securities
exchange, (ii) authorized for quotation on the NNM, or (iii) held of record by
more than 2,000 stockholders. Section 203 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. The DGCL allows Delaware corporations to elect not
to be governed by these provisions. EAI, however, has not so elected, and is
subject to the business combination section of the DGCL.
Because Transom does not have a class of voting stock listed on a national
securities exchange, authorized for quotation on the NNM or held of record by
more than 2,000 stockholders, Transom is not subject to the business combination
provisions of the DGCL.
Interested Director Transactions. The DGCL provides that contracts or
transactions in which one or more of the corporation's directors or officers
have an interest ("Interested Contracts or Transactions") are not void or
voidable solely because of such interest or because such director was present at
the directors' or stockholders' meeting where such contracts or transactions
were approved, provided certain conditions are met. Interested Contracts or
Transactions may be approved by a majority vote of the disinterested directors
or by vote of disinterested stockholders if the material facts of the contracts
or transactions and the director's interest in such contracts or transactions
are fully disclosed and a vote is taken in good faith. Furthermore, Interested
Contracts or Transactions may be approved if such contracts or transactions are
shown to be fair and reasonable to the corporation at the time they are
authorized, approved or ratified by the board of directors or stockholders and
separate disinterested stockholder or disinterested director approval is not
required.
EAI's Quotation on the NNM. EAI Common Stock is quoted on the NNM. In
contrast, Transom Common Stock is not listed on a national securities exchange
or quotation system. As a result, EAI's stockholders enjoy a broader and more
active market for EAI Common Stock than has historically existed for Transom
Common Stock.
Preferred Stock. Pursuant to the EAI Certificate, EAI is authorized to
issue up to 20,000,000 shares of EAI Preferred Stock, which may be issued from
time to time in one or more series upon authorization by EAI's Board of
Directors. Without further approval of the stockholders, the board of directors
is authorized to
50
<PAGE> 58
fix the designation of each series, the stated value of each series, the
dividend rate and other provisions respecting the payment of dividends, the
preferences of the shares in each series, convertibility terms and any other
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions of the shares of each series.
Pursuant to the Transom Certificate, Transom is authorized to issue up to
6,000,000 shares of preferred stock, par value $0.001 per share. Of the
6,000,000 shares of preferred stock authorized to be issued, Transom has
designated two series of preferred stock. There are 628,000 shares designated as
Transom Series A Preferred Stock, of which 478,000 were issued and outstanding
as of the Record Date, and 5,000,000 shares designated as Transom Series B
Preferred Stock, of which 4,650,000 were issued and outstanding as of the Record
Date.
The holders of Transom Series A Preferred Stock do not have voting rights
and are entitled to receive dividends when and as declared by Transom's board of
directors. Dividends are non-cumulative, payable quarterly or as the board of
directors determines, and are payable before any dividend is declared or paid on
shares of Transom Common Stock. If Transom declares a dividend or makes a
distribution on the Common Stock, the holders of Transom Series A Preferred
Stock are entitled to participate with the holders of the Transom Common Stock
in the dividend. In addition, holders of Transom Series A Preferred Stock have
certain rights in the event of a liquidation, including, among other things, a
liquidation preference over the holders of Transom Common Stock equal to $1.00
per share of Transom Series A Preferred Stock, plus an amount equal to all
declared but unpaid dividends thereon, if any, to the date fixed for
distribution. The holders of Transom Series A Preferred Stock also may elect to
convert their shares (the "Optional Conversion Right") into Transom Common
Stock. Under the Optional Conversion Right, each share of Transom Series A
Preferred Stock can be converted into one share of Transom Common Stock, subject
to adjustment in certain circumstances. Alternatively, Transom has the right, at
its option, to cause the conversion of all shares of Transom Series A Preferred
Stock into shares of Transom Common Stock on a one-to-one basis, subject to
adjustment in certain circumstances, immediately prior to the effective date of,
or concurrently with the closing of, certain corporate transactions, including a
merger or sale of substantially all of the assets of Transom.
The holders of Transom Series B Preferred Stock have full voting rights and
powers and are entitled to vote on all matters as to which the holders of
Transom Common Stock are entitled to vote. Holders of Transom Series B Preferred
Stock vote as a single class with holders of Transom Common Stock and are
entitled to cast the number of votes equal to the number of shares of Transom
Common Stock then issuable upon conversion of such holder's shares of Transom
Series B Preferred Stock into Transom Common Stock. Like holders of Transom
Series A Preferred Stock, holders of Transom Series B Preferred Stock are
entitled to receive dividends when and as declared by Transom's board of
directors. Dividends are non-cumulative, payable quarterly or as the board of
directors determines, and are payable before any dividend is declared or paid on
shares of Transom Common Stock. If Transom declares a dividend or makes a
distribution on the Common Stock, the holders of Transom Series B Preferred
Stock are entitled to participate with the holders of the Transom Common Stock
in the dividend. In addition, holders of Transom Series B Preferred Stock have
certain rights in the event of a liquidation, including, among other things, a
liquidation preference over the holders of Transom Common Stock equal to $1.00
per share of Transom Series B Preferred Stock, plus an amount equal to all
declared but unpaid dividends thereon, if any, to the date fixed for
distribution. Upon the occurrence of any liquidation, Transom Series B Preferred
Stock ranks pari passu with Transom Series A Preferred Stock. The holders of
Transom Series B Preferred Stock also have an Optional Conversion Right,
pursuant to which each share of Transom Series B Preferred Stock can be
converted into one share of Transom Common Stock, subject to adjustment in
certain circumstances. Alternatively, Transom has the right, at its option, to
cause the conversion of all shares of Transom Series B Preferred Stock into
shares of Transom Common Stock on a one-to-one basis, subject to adjustment in
certain circumstances, immediately prior to the effective date of, or
concurrently with the closing of, certain corporate transactions, including a
merger or sale of substantially all of the assets of Transom.
Right of First Refusal. The DGCL permits a corporation to impose a
restriction on the transfer of stock by either the certificate of incorporation
or the by-laws or by an agreement among any number of stockholders
51
<PAGE> 59
and the corporation. Although the EAI Governing Documents are silent as to this
issue, the Transom By-laws provide that no stockholder shall sell or otherwise
transfer any of the shares of stock without first giving written notice to the
corporation stating the number of shares to be transferred, the proposed
consideration, and all other terms and conditions of the proposed transfer. For
thirty days following receipt of such notice, the corporation has the option to
purchase all or none of the shares (the "Right of First Refusal"). The Transom
By-laws exempt numerous transactions from this provision, including a
stockholder's transfer of any or all of such stockholder's shares to Transom and
a stockholder's transfer of any and all of its shares pursuant to and in
accordance with the terms of any merger. The Right of First Refusal may be
waived with respect to any transfer either by Transom, upon duly authorized
action of its Board of Directors, or by Transom stockholders, upon the express
written consent of the owners of a majority of the voting power of Transom
(excluding the votes represented by those shares to be transferred by the
transferring stockholder).
LEGAL MATTERS
The validity of the shares of EAI Common Stock to be issued in connection
with the Merger will be passed upon for EAI by Gardner, Carton & Douglas,
Chicago, Illinois.
TAX OPINION
Certain of the tax consequences of the Merger will be passed upon by Ernst
& Young LLP. See "The Merger -- Certain Federal Income Tax Consequences."
EXPERTS
EAI
The consolidated financial statements of EAI at December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, included
in the Annual Report on Form 10-K, for the year ended December 31, 1997, which
is incorporated by reference and made a part of this Proxy Statement/ Prospectus
and Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such consolidated financial statements are incorporated by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
TRANSOM
The financial statements of Transom as of March 31, 1998 and 1997, and for
the year ended March 31, 1998 and for the period from October 7, 1996
(inception) to March 31, 1997, included in this Proxy Statement/Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto and included herein, in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
52
<PAGE> 60
INDEX TO TRANSOM FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets at March 31, 1997 and 1998 and at June 30,
1998 (unaudited).......................................... F-3
Statements of Operations -- Period from inception (October
7, 1996) to March 31, 1997, the year ended March 31, 1998
and the three months ended June 30, 1997 and 1998
(unaudited)............................................... F-4
Statements of Stockholders' Equity -- Period from inception
(October 7, 1996) to March 31, 1997, the year ended March
31, 1998 and the three months ended June 30, 1997 and 1998
(unaudited)............................................... F-5
Statements of Cash Flows -- Period from inception (October
7, 1996) to March 31, 1997, the year ended March 31, 1998
and the three months ended June 30, 1997 and 1998
(unaudited)............................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Transom Technologies, Inc.:
We have audited the accompanying balance sheets of TRANSOM TECHNOLOGIES,
INC. (a Delaware corporation) as of March 31, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the year ended
March 31, 1998, and for the period from inception (October 7, 1996) to March 31,
1997. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March 31,
1998 and 1997, and the results of its operations and its cash flows for the year
ended March 31, 1998, and for the period from inception (October 7, 1996) to
March 31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Ann Arbor, Michigan,
July 9, 1998
F-2
<PAGE> 62
TRANSOM TECHNOLOGIES, INC.
BALANCE SHEETS AS OF MARCH 31, 1997 AND 1998
AND UNAUDITED BALANCE SHEET AS OF JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF MARCH 31, AS OF JUNE 30,
1997 1998 1998
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................... $1,833,475 $ 1,599,340 $ 1,594,459
Certificate of deposit.................................. 500,000 -- --
Accounts receivable, less allowance for doubtful
accounts of $5,000, $5,000 and $25,000 at March 31,
1997, March 31, 1998 and June 30, 1998,
respectively.......................................... 50,380 498,405 678,737
Prepaid expenses and other.............................. 2,844 9,719 13,797
---------- ----------- -----------
Total current assets............................. 2,386,699 2,107,464 2,286,993
PROPERTY AND EQUIPMENT, net............................... 298,472 636,269 674,749
OTHER ASSETS, net......................................... 93,260 75,680 68,298
---------- ----------- -----------
$2,778,431 $ 2,819,413 $ 3,030,040
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligation............. $ -- $ 99,768 $ 83,162
Accounts payable........................................ 99,650 128,357 81,063
Accrued liabilities..................................... 48,171 175,812 179,793
Deferred service revenue................................ 12,739 169,667 191,667
---------- ----------- -----------
Total current liabilities........................ 160,560 573,604 535,685
---------- ----------- -----------
CAPITAL LEASE OBLIGATION, less current portion............ -- 144,269 141,202
---------- ----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock --
Preferred stock, $0.001 par value, 2,000,000,
1,122,000 and 372,000 shares authorized at March 31,
1997, March 31, 1998 and June 30, 1998,
respectively, no shares issued and outstanding...... -- -- --
Series A, nonvoting convertible preferred stock,
$0.001 par value, 1,000,000, 628,000 and 628,000
shares authorized at March 31, 1997, March 31, 1998
and June 30, 1998, respectively, 478,000 shares
issued and outstanding.............................. 478 478 478
Series B, voting convertible preferred stock, $0.001
par value, 3,000,000, 4,250,000 and 5,000,000 shares
authorized, 3,000,000, 4,250,000 and 4,650,000
shares issued and outstanding at March 31, 1997,
March 31, 1998 and June 30, 1998, respectively...... 3,000 4,250 4,650
Common stock, $0.001 par value, 10,000,000 shares
authorized, 1,625,000, 1,650,800 and 1,650,800 shares
issued and outstanding at March 31, 1997, March 31,
1998 and June 30, 1998, respectively.................. 1,625 1,651 1,651
Additional paid-in capital.............................. 3,055,455 4,293,377 4,846,049
Note receivable......................................... (1,500) -- --
Accumulated deficit..................................... (441,187) (2,198,216) (2,499,675)
---------- ----------- -----------
Total stockholders' equity....................... 2,617,871 2,101,540 2,353,153
---------- ----------- -----------
$2,778,431 $ 2,819,413 $ 3,030,040
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 63
TRANSOM TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (OCTOBER 7, 1996) TO MARCH 31, 1997,
THE YEAR ENDED MARCH 31, 1998 AND
THE THREE MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
INCEPTION TO YEAR ENDED ENDED ENDED
MARCH 31, MARCH 31, JUNE 30, JUNE 30,
1997 1998 1997 1998
------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................................... $ 93,900 $ 1,362,107 $ 178,164 $ 606,000
COST OF REVENUES........................... 5,489 20,430 24,196 16,660
--------- ----------- --------- ---------
Gross profit..................... 88,411 1,341,677 153,968 589,340
--------- ----------- --------- ---------
OPERATING EXPENSES:
Research, development and engineering.... 92,244 1,329,187 188,295 400,753
Sales and marketing...................... 89,202 984,249 157,388 242,018
General and administrative............... 355,392 818,940 222,031 247,396
--------- ----------- --------- ---------
Total operating expenses......... 536,838 3,132,376 567,714 890,167
--------- ----------- --------- ---------
Loss from operations............. (448,427) (1,790,699) (413,746) (300,827)
INTEREST INCOME............................ 9,506 38,390 8,959 1,368
INTEREST EXPENSE........................... (2,266) (4,720) -- (2,000)
--------- ----------- --------- ---------
NET LOSS................................... $(441,187) $(1,757,029) $(404,787) $(301,459)
========= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 64
TRANSOM TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (OCTOBER 7, 1996) TO MARCH 31, 1997,
THE YEAR ENDED MARCH 31, 1998 AND
THE THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SERIES A
NON-VOTING SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- ---------------- ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION (OCTOBER 7, 1996)... -- $ -- -- $ -- -- $ -- -- $ --
Issuance of common stock............... -- -- -- -- -- -- 1,025,000 1,025
Issuance of Series A preferred stock in
exchange for services................ -- -- 28,000 28 -- -- -- --
Issuance of Series A preferred stock
and common stock in exchange for
grant of technology license.......... -- -- 450,000 450 -- -- 600,000 600
Issuance of Series B preferred stock... -- -- -- -- 3,000,000 3,000 -- --
Repayment of notes receivable.......... -- -- -- -- -- -- -- --
Net loss for the period from inception
(October 7, 1996) to March 31,
1997................................. -- -- -- -- -- -- -- --
------ ------ ------- ---- --------- ------ --------- ------
BALANCE AT MARCH 31, 1997................ -- -- 478,000 478 3,000,000 3,000 1,625,000 1,625
Issuance of Series B preferred stock... -- -- -- -- 1,250,000 1,250 -- --
Repayment of notes receivable.......... -- -- -- -- -- -- -- --
Issuance of common stock............... -- -- -- -- -- -- 25,800 26
Net loss for the year.................. -- -- -- -- -- -- -- --
------ ------ ------- ---- --------- ------ --------- ------
BALANCE AT MARCH 31, 1998................ -- -- 478,000 478 4,250,000 4,250 1,650,800 1,651
Issuance of Series B preferred stock
(Unaudited).......................... -- -- -- -- 400,000 400 -- --
Net loss for the quarter (Unaudited)... -- -- -- -- -- -- -- --
------ ------ ------- ---- --------- ------ --------- ------
BALANCE AT JUNE 30, 1998 (UNAUDITED)..... -- $ -- 478,000 $478 4,650,000 $4,650 1,650,800 $1,651
====== ====== ======= ==== ========= ====== ========= ======
<CAPTION>
ADDITIONAL TOTAL
PAID-IN NOTES ACCUMULATED STOCKHOLDERS'
CAPITAL RECEIVABLE DEFICIT EQUITY
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE AT INCEPTION (OCTOBER 7, 1996)... $ -- $ -- $ -- $ --
Issuance of common stock............... 19,475 (10,500) -- 10,000
Issuance of Series A preferred stock in
exchange for services................ 1,372 -- -- 1,400
Issuance of Series A preferred stock
and common stock in exchange for
grant of technology license.......... 51,450 -- -- 52,500
Issuance of Series B preferred stock... 2,983,158 -- -- 2,986,158
Repayment of notes receivable.......... -- 9,000 -- 9,000
Net loss for the period from inception
(October 7, 1996) to March 31,
1997................................. -- -- (441,187) (441,187)
---------- -------- ----------- -----------
BALANCE AT MARCH 31, 1997................ 3,055,455 (1,500) (441,187) 2,617,871
Issuance of Series B preferred stock... 1,237,690 -- -- 1,238,940
Repayment of notes receivable.......... -- 1,500 -- 1,500
Issuance of common stock............... 232 -- -- 258
Net loss for the year.................. -- -- (1,757,029) (1,757,029)
---------- -------- ----------- -----------
BALANCE AT MARCH 31, 1998................ 4,293,377 -- (2,198,216) 2,101,540
Issuance of Series B preferred stock
(Unaudited).......................... 552,672 -- -- 553,072
Net loss for the quarter (Unaudited)... -- -- (301,459) (301,459)
---------- -------- ----------- -----------
BALANCE AT JUNE 30, 1998 (UNAUDITED)..... $4,846,049 $ -- $(2,499,675) $ 2,353,153
========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 65
TRANSOM TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 7, 1996) TO MARCH 31, 1997,
THE YEAR ENDED MARCH 31, 1998 AND
THE THREE MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
INCEPTION TO YEAR ENDED ENDED ENDED
MARCH 31, MARCH 31, JUNE 30, JUNE 30,
1997 1998 1997 1998
------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (441,187) $(1,757,029) $ (404,787) $ (301,459)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization...................... 22,836 144,527 24,000 27,500
Provision for uncollectible accounts receivable.... -- -- -- 20,000
Series A preferred stock issued for services....... 1,400 -- -- --
Increase (decrease) in cash resulting from changes
in --
Accounts receivable.............................. (50,380) (448,025) (41,835) (200,332)
Prepaid expenses and other....................... (2,844) (6,875) (1,093) (4,078)
Other assets..................................... (49,484) (9,324) (6,629) 7,382
Accounts payable................................. 99,650 28,707 (66,623) (47,294)
Accrued liabilities.............................. 48,171 127,641 11,097 3,981
Deferred service revenue......................... 12,739 156,928 73,888 22,000
---------- ----------- ---------- ----------
Net cash used in operating activities......... (359,099) (1,763,450) (411,982) (472,300)
---------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (312,584) (193,339) (181,384) (65,980)
Redemption (purchase) of certificate of deposit....... (500,000) 500,000 500,000 --
Repayment of notes receivable for common stock........ 9,000 1,500 -- --
---------- ----------- ---------- ----------
Net cash provided by (used in) investing
activities.................................. (803,584) 308,161 318,616 (65,980)
---------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series B preferred stock.... 2,986,158 1,238,940 -- 553,072
Proceeds from issuance of common stock................ 10,000 258 -- --
Repayments under capital lease obligation............. -- (18,044) -- (19,673)
Proceeds from borrowings from officers................ 170,000 -- -- --
Repayments of borrowings from officers................ (170,000) -- -- --
---------- ----------- ---------- ----------
Net cash provided by financing activities..... 2,996,158 1,221,154 -- 533,399
---------- ----------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,833,475 (234,135) (93,366) (4,881)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ -- 1,833,475 1,833,475 1,599,340
---------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $1,833,475 $ 1,599,340 $1,740,109 $1,594,459
========== =========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --
Cash paid for interest................................ $ 2,266 $ 4,720 $ -- $ 2,500
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 66
TRANSOM TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY
Transom Technologies, Inc. (the "Company") was formed on October 7, 1996,
for the purpose of commercializing leading-edge human modeling and simulation
software technology previously developed at the University of Pennsylvania. The
company develops, markets and supports human modeling and simulation software
and provides consulting, training and maintenance services to customers in both
domestic and international markets.
The Company is in the early phases of implementing its operating strategy.
The Company's future success is subject to several technical and business risks
including customer acceptance, availability and retention of key employees,
competition and technological changes.
(2) SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue consists primarily of license fees for the Company's software
products. Revenue is recognized only when a customer contract is fully executed,
the software is delivered and no significant remaining obligations to the
customer exist.
Revenue related to advance payments received under software maintenance
agreements is deferred and amortized over the terms of the respective
agreements. Revenue from other services is recognized upon performance of the
service.
COST OF REVENUE
Cost of revenue consists primarily of costs attributable to software
documentation and distribution.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses include payroll costs and overhead
expenses attributable to research and development activities.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of 90
days or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Additions to property and equipment are recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
respective assets, which generally range from three to seven years.
OTHER ASSETS
Other assets consist primarily of a technology license (see Note 8) and
legal and other expenses related to establishing the Company and its operations
that have been capitalized and are being amortized over five years. As of March
31, 1998 and 1997, accumulated amortization of capitalized legal and other
expenses totaled $17,253 and $8,724, respectively.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plan using the
intrinsic value method prescribed under Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees."
F-7
<PAGE> 67
TRANSOM TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair value of the Company's common stock at the date of the grant
over the amount the employee must pay to acquire the stock. As supplemental
information, the Company has provided pro forma disclosure of the fair value at
the date of grant of stock options granted during 1998 and 1997 in Note 6, in
accordance with the requirements of Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation."
PRODUCT DEVELOPMENT
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," capitalization of software development costs begins upon
the establishment of technological feasibility of the product. The establishment
of technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic product lives and changes in software and
hardware technology. Amounts that would have been capitalized under this
statement after consideration of the above factors were immaterial, and
therefore no software development costs have been capitalized by the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, Statement of Position 97-2, "Software Revenue
Recognition," was issued. This pronouncement provides guidance on recognizing
revenue on software transactions. The Company will be required to adopt this new
standard for transactions entered into beginning April 1, 1998. The Company
believes that the implementation of this statement will not have an impact on
its financial statements or its current revenue recognition policies.
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information". The Company will be required to adopt
these new standards for the year ending March 31, 1999. The Company believes
that the implementation of these statements will not have a material effect on
its financial statements or results of operations for the periods presented.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements
to conform with the 1998 presentation.
F-8
<PAGE> 68
TRANSOM TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT
As of March 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Computer equipment.......................................... $ 669,397 $258,965
Office furniture and equipment.............................. 94,595 49,217
Leasehold improvements...................................... 16,258 4,402
--------- --------
780,250 312,584
Less -- Accumulated depreciation and amortization........... (143,981) (14,112)
--------- --------
$ 636,269 $298,472
========= ========
</TABLE>
As of March 31, 1998, the cost of assets under capital leases included
above totaled $262,081. As of March 31, 1998, accumulated depreciation on these
assets totaled $ 27,013. There were no assets under capital leases in 1997.
(4) LINE OF CREDIT AND CAPITAL LEASE OBLIGATION
The Company has a line-of-credit agreement with a bank whereby the Company
may borrow up to $500,000. Outstanding borrowings bear interest at the bank's
prime rate (8.5% as of March 31, 1998). No borrowings were outstanding as of
March 31, 1998. The agreement expires on August 31, 1998.
In 1998, the Company entered into two capital leases for computer equipment
totaling $262,081. The leases are payable in monthly installments totaling
$8,314, including interest at a weighted average rate of 8.8%, through March
2001. The leases are collateralized by the related equipment. Scheduled future
maturities under these leases as of March 31, 1998, are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 99,768
2000........................................................ 99,768
2001........................................................ 77,004
--------
276,540
Less -- Interest............................................ 32,503
Less -- Current portion..................................... 99,768
--------
$144,269
========
</TABLE>
(5) INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Currently payable........................................... $ -- $ --
Deferred income tax credit.................................. (590,100) (148,900)
Increase in valuation allowance............................. 590,100 148,900
--------- ---------
$ -- $ --
========= =========
</TABLE>
The effective tax rate differs from the Federal statutory rate primarily
due to providing a valuation allowance on future tax benefits.
F-9
<PAGE> 69
TRANSOM TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the deferred income tax benefit as of March 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred income tax benefit --
Net operating loss carryforwards.......................... $ 695,600 $ 142,200
Accrued liabilities....................................... 33,500 10,200
Property and equipment and other assets................... 6,900 (3,500)
Capital lease obligation.................................. 3,000 --
--------- ---------
739,000 148,900
Less -- Valuation allowance............................... (739,000) (148,900)
--------- ---------
$ -- $ --
========= =========
</TABLE>
As of March 31, 1998 the Company has available net operating loss
carryforwards of approximately $2,050,000 which can be utilized to offset future
taxable income and expire in 2012 and 2013. The Company's ability to utilize
these loss carryforwards may be limited under Section 382 of the Internal
Revenue Code. This and other deferred income tax benefits are fully reserved by
a valuation allowance as realizability of these tax benefits is not assured.
(6) STOCKHOLDERS' EQUITY
COMMON STOCK
The Company and its founding stockholders (the Founders) have entered into
agreements generally providing the Company the right of first refusal to
repurchase any shares of common stock offered for sale by the Founders or upon
termination of a Founder's employment with the Company.
The Company has reserved for issuance such number of shares of its
authorized but unissued common stock necessary to effect conversion of all
outstanding shares of Series A convertible preferred stock and Series B
convertible preferred stock and exercise of all outstanding options and
warrants. The holder of each outstanding share of common stock is entitled to
one voting right per share.
In 1998, the Company issued a warrant to purchase 25,800 shares of common
stock at $0.01 per share. The warrant may be exercised upon the issuance of
stock by the Company. This warrant was exercised in 1998.
PREFERRED STOCK
In 1998, the Company decreased the authorized shares of preferred stock by
1,250,000 shares and increased the authorized shares of Series B convertible
preferred stock by 1,250,000 shares. In addition, the Company decreased the
authorized shares of Series A convertible preferred stock by 372,000 shares and
increased the authorized shares of preferred stock by 372,000 shares.
The preferred stock has not yet been designated or issued and, as such, it
has no rights, privileges or preferences associated with it.
The holders of Series A and Series B convertible preferred stock have
certain rights, privileges and preferences which include the following:
Dividends
The holders are entitled to receive dividends before any dividend is
declared or paid on shares of common stock. Such dividends shall be payable only
when declared by the Board of Directors and shall be noncumulative. In the event
the Company declares a distribution of equity securities, indebtedness issued by
F-10
<PAGE> 70
TRANSOM TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the Company, or options or rights to purchase securities, the holders of
convertible preferred stock are entitled to a proportionate share.
Conversion
At the holder's option, each share of convertible preferred stock is
convertible at any time into shares of common stock at the conversion rate, as
defined, which is initially equal to $1 per share. The shares shall
automatically convert into common stock upon the closing of an initial public
offering of the Company's common stock, as defined.
Voting Rights
The holder of each outstanding share of Series A convertible preferred
stock has no voting rights. The holder's consent is not required for the taking
of any corporate action.
The holder of each outstanding share of Series B convertible preferred
stock is entitled to the number of votes equal to the number of shares of common
stock into which each share of preferred stock could be converted and to the
same voting rights and powers as the holders of common stock.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
either voluntarily or involuntarily, the holder of each share of convertible
preferred stock is entitled to receive, prior to and in preference to any
distributions to the holders of common stock, an amount equal to $1 per share,
subject to adjustment, plus any accrued but unpaid dividends on those shares.
Series A Non-Voting Convertible Preferred Stock Warrants
In 1997, the Company issued a warrant to purchase 150,000 shares of Series
A convertible preferred stock at $0.01 per share (see Note 8). The warrant may
be exercised upon the occurrence of any of the following events: (1)
consummation of an initial public offering, (2) sale of substantially all assets
of the Company, (3) merger of the Company whereby the Company is not the
surviving entity, and (4) the effectuation of a transaction or series of related
transactions in which a greater than 50% ownership change occurs within a
three-month period. The warrant has no expiration date. As of March 31, 1998,
this warrant was not exercised.
Stock Option Plan
In November 1996, the Company established a stock option plan (the Plan) to
increase its ability to attract and retain key employees, consultants and
directors. Options granted may be either incentive stock options, which are
granted at the fair market value of the common stock on the date of grant (as
determined under the Plan), or nonqualified stock options, which are generally
granted at the fair market value of the common stock on the date of grant.
Options are granted at the discretion of the Board of Directors. The maximum
number of shares that may be granted under the plan is 1,675,000. Options
granted generally become exercisable over a period of three to five years from
the date of grant except that 135,000 options vest over a one-year period.
Outstanding options expire ten years after the date of grant. As of March 31,
1998 and 1997, the weighted average fair value of options granted was $0.26 and
$0.11, respectively.
F-11
<PAGE> 71
TRANSOM TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE
NUMBER OF PRICE AVERAGE
SHARES PER SHARE PRICE
--------- ---------- --------
<S> <C> <C> <C>
Outstanding -- Inception (October 7, 1996).......... -- -- --
1997 Activity --
Options granted................................... 800,200 $0.02-0.65 $0.15
Options exercised................................. --
Options cancelled................................. --
---------
Outstanding -- March 31, 1997....................... 800,200 $0.02-0.65 $0.15
1998 Activity --
Options granted................................... 538,100 $ 0.65 $0.65
Options exercised................................. --
Options cancelled................................. (86,533) $ 0.65 $0.65
---------
Outstanding -- March 31, 1998....................... 1,251,767 $0.30
=========
Exercisable -- March 31, 1998....................... 236,000
=========
</TABLE>
Using the intrinsic value method under APB 25, no compensation expense has
been recognized in the accompanying statement of operations for options granted
at fair value. Had compensation expense been determined based on the fair value
at the date of grant consistent with SFAS 123, the reported net loss in 1998 and
1997 would have been increased by pro forma compensation expense of $2,135 and
$752, respectively. This pro forma compensation expense may not be
representative of that to be expected in future years.
The fair value of these options was estimated at the date of grant using
the minimum value option valuation method under SFAS 123 with the following
assumptions: Weighted average risk free interest rate of 6.33%; dividend yield
of 0%; and expected life of options of five years.
Option valuation models require the input of highly subjective assumptions.
Because changes in subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing model does not necessarily
provide a reliable single measure of the fair value of the Company's stock
options.
(7) RELATED PARTY TRANSACTIONS
The Secretary of the Board of Directors of the Company is a partner in a
law firm which provides services to the Company. Payments to this law firm for
professional services were approximately $62,000 in 1998. Payments to this firm
were not significant in 1997.
(8) TECHNOLOGY LICENSE
Effective December 3, 1996, the Company entered into a license agreement
with the University of Pennsylvania (Penn) whereby the Company has been granted
the exclusive, worldwide license to use technology developed by Penn to develop,
sell and distribute products based on this technology and to grant sublicenses
to third parties as appropriate. The agreement expires on the later of the
expiration date of the last
F-12
<PAGE> 72
TRANSOM TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to expire of the copyrights for the technology or December 3, 2046. As
consideration for the license, the Company:
(1) Issued 450,000 shares of Series A convertible preferred stock to
Penn.
(2) Issued warrants to Penn for 150,000 additional shares of Series A
convertible preferred stock (see Note 6).
(3) Issued 600,000 shares of common stock directly to the individuals
at Penn responsible for the development of the technology.
The shares of Series A convertible preferred stock and common stock, were
valued at $0.05 per share. The total aggregate value of the preferred and common
shares of $52,500 has been capitalized and is being amortized over five years on
a straight-line basis. As of March 31, 1998 and 1997, accumulated amortization
totaled $21,875 and $3,500, respectively.
(9) COMMITMENTS
The Company entered into noncancelable operating lease agreements for its
office space and office equipment which expire at various dates through February
2001. Rent expense under all agreements totaled approximately $84,000 and
$12,600 in 1998 and 1997, respectively. Minimum future rental commitments under
these agreements are as follows:
<TABLE>
<S> <C>
1999..................................................... $ 81,000
2000..................................................... 26,000
2001..................................................... 23,000
--------
$130,000
========
</TABLE>
(10) BENEFIT PLAN
In August 1997, the Company established a 401(k) plan (the Plan) for the
benefit of its employees. Participants may contribute up to 15% of their
compensation to the Plan. The Company matches 25% of participant contributions
up to a maximum of 6% of the participant's compensation. Total expense under the
Plan in 1998 was $14,000.
(11) SUBSEQUENT EVENTS
In June 1998, the Company decreased the authorized shares of preferred
stock by 750,000 shares and increased the authorized shares of Series B
convertible preferred stock by 750,000 shares. The Company then issued 400,000
shares of Series B convertible preferred stock for net proceeds of $553,072.
On July 9, 1998, the Company received and signed a letter of intent to be
acquired in a transaction to be accounted for as a pooling of interests.
F-13
<PAGE> 73
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
ENGINEERING ANIMATION, INC.
AND
TRANSOM TECHNOLOGIES, INC.
------------------------
DATED AS OF JULY 29, 1998
------------------------
<PAGE> 74
TABLE OF CONTENTS
AGREEMENT AND PLAN OF MERGER
<TABLE>
<S> <C> <C>
ARTICLE I. THE MERGER.................................................. A-1
1.1. The Merger.................................................. A-1
1.2. Closing..................................................... A-1
1.3. Effective Time.............................................. A-1
1.4. Effects of the Merger....................................... A-1
1.5. Certificate of Incorporation and By-Laws.................... A-1
1.6. Directors and Officers...................................... A-1
1.7. Tax and Accounting Consequences............................. A-1
ARTICLE II. CONVERSION AND EXCHANGE OF SHARES........................... A-2
2.1. Definition.................................................. A-2
2.2. Total Merger Consideration.................................. A-2
2.3. Conversion of Transom Series A Warrants..................... A-2
2.4. Conversion of Transom Preferred Stock....................... A-2
2.5. Conversion of Transom Common Stock.......................... A-3
2.6. Exchange of Shares.......................................... A-3
2.7. Options to Acquire Transom Common Stock..................... A-4
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF.......................... A-5
3.1. Corporate Organization...................................... A-5
3.2. Capitalization.............................................. A-5
3.3. Authority; No Violation..................................... A-5
3.4. Consents and Approvals...................................... A-6
3.5. Reports..................................................... A-6
3.6. Compliance with Applicable Law.............................. A-6
3.7. Financial Statements........................................ A-6
3.8. Absence of Certain Changes or Events........................ A-6
3.9. Legal Proceedings and Restrictions.......................... A-7
3.10. Taxes and Tax Returns....................................... A-7
3.11. Employee Benefits........................................... A-8
3.12. Employment and Labor Relations.............................. A-10
3.13. Contracts................................................... A-10
3.14. Undisclosed Liabilities..................................... A-11
3.15. Environmental Liability..................................... A-11
3.16. Tangible Assets............................................. A-11
3.17. Real Property............................................... A-12
3.18. Intellectual Property....................................... A-12
3.19. Notes and Accounts Receivable............................... A-13
3.20. Bank Accounts and Powers of Attorney........................ A-13
3.21. Guaranties.................................................. A-13
3.22. Insurance................................................... A-13
3.23. Service Contracts and Warranties............................ A-13
3.24. Certain Relationships....................................... A-13
3.25. S-4 Information............................................. A-13
3.26. Broker's Fees............................................... A-13
3.27. Certain Customer Relationships.............................. A-13
3.28. Disclosure.................................................. A-14
</TABLE>
i
<PAGE> 75
<TABLE>
<S> <C> <C>
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF EAI...................... A-14
4.1. Corporate Organization...................................... A-14
4.2. Capitalization.............................................. A-14
4.3. Authority; No Violation..................................... A-14
4.4. Consents and Approvals...................................... A-14
4.5. SEC Reports................................................. A-15
4.6. S-4 Information............................................. A-15
4.7. Broker's Fee................................................ A-15
4.8. Disclosure.................................................. A-15
ARTICLE V. COVENANTS RELATING TO CONDUCT OF BUSINESS.................... A-15
5.1. Conduct of Business Prior to the Effective Time............. A-15
5.2. Transom Forbearances........................................ A-15
ARTICLE VI. ADDITIONAL AGREEMENTS....................................... A-16
6.1. Regulatory and Other Matters................................ A-16
6.2. Access to Information....................................... A-16
6.3. Stockholders' Approval...................................... A-17
6.4. NNM Listing................................................. A-17
6.5. Affiliates.................................................. A-17
6.6. Additional Agreements....................................... A-17
6.7. Advice of Changes........................................... A-17
6.8. Takeover Proposals.......................................... A-17
ARTICLE VII. CONDITIONS PRECEDENT....................................... A-18
Conditions to Each Party's Obligation To Effect the
7.1. Merger...................................................... A-18
7.2. Conditions to Obligations of EAI............................ A-19
7.3. Conditions to Obligations of Transom........................ A-20
ARTICLE VIII. TERMINATION AND AMENDMENT................................. A-20
8.1. Termination................................................. A-20
8.2. Effect of Termination....................................... A-21
8.3. Amendment; Extension; Waiver................................ A-21
ARTICLE IX. GENERAL PROVISIONS.......................................... A-21
9.1. Expenses.................................................... A-21
9.2. Notices..................................................... A-21
9.3. Interpretation.............................................. A-22
9.4. Counterparts; Facsimile..................................... A-22
9.5. Entire Agreement............................................ A-22
9.6. Governing Law............................................... A-22
9.7. Severability................................................ A-23
9.8. Publicity................................................... A-23
9.9. Assignment; Third Party Beneficiaries....................... A-23
9.10. Knowledge and Awareness..................................... A-23
9.11. Construction................................................ A-23
9.12. Pooling of Interests Accounting; Tax Free Reorganization.... A-23
EXHIBITS
Exhibit A Form of Affiliate Letters
Exhibit B Form of Tax Opinion
Exhibit C Form of Legal Opinion of Counsel to Transom
Exhibit D Form of Certifications Regarding Tax Matters
Exhibit E Form of Legal Opinion of General Counsel of EAI
</TABLE>
ii
<PAGE> 76
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of July 29, 1998 (the "Agreement"),
by and between ENGINEERING ANIMATION, INC., a Delaware corporation ("EAI"), and
TRANSOM TECHNOLOGIES, INC., a Delaware corporation ("Transom").
WHEREAS, the Boards of Directors of EAI and Transom have determined that it
is in the best interests of their respective companies and stockholders to
consummate the business combination provided for in this Agreement in which
Transom, subject to the terms and conditions set forth herein, shall merge with
and into EAI (the "Merger").
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and to establish certain conditions to
the Merger.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, the parties agree as follows:
ARTICLE I.
THE MERGER
1.1. The Merger. Subject to the terms and conditions of this Agreement, in
accordance with the Delaware General Corporation Law (the "DGCL"), at the
Effective Time (as hereinafter defined), Transom shall merge with and into EAI.
EAI shall be the surviving corporation in the Merger (hereinafter sometimes
referred to as the "Surviving Corporation"), and shall continue its corporate
existence under the laws of the State of Delaware under the name "Engineering
Animation, Inc." Upon consummation of the Merger, the separate corporate
existence of Transom shall terminate.
1.2. Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") will take place at 10:00 a.m., at the
offices of Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois,
as soon as practicable but in any event within two business days after the
satisfaction or waiver of the latest to occur of the conditions set forth in
Article VII, unless extended by mutual agreement of the parties (the "Closing
Date"). The parties anticipate that the Closing shall occur on or before
September 30, 1998.
1.3. Effective Time. Subject to the terms and conditions of this Agreement,
the Merger shall become effective as set forth in the certificate of merger in a
form mutually acceptable to the parties (the "Certificate of Merger"), which
shall be filed with the Secretary of State of the State of Delaware (the
"Delaware Secretary") on or, if both parties agree, before the Closing Date. The
term "Effective Time" shall be the date and time when the Merger becomes
effective, as set forth in the Certificate of Merger.
1.4. Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects set forth in the DGCL.
1.5. Certificate of Incorporation and By-Laws. Subject to the terms and
conditions of this Agreement, at the Effective Time, the Certificate of
Incorporation and By-Laws of EAI shall be the Certificate of Incorporation and
By-Laws of the Surviving Corporation until thereafter amended in accordance with
applicable law.
1.6. Directors and Officers. The directors and officers of EAI immediately
prior to the Effective Time shall continue as the directors and officers of the
Surviving Corporation, unless and until thereafter changed in accordance with
the DGCL and the Surviving Corporation's Certificate of Incorporation and
By-Laws.
1.7. Tax and Accounting Consequences. EAI and Transom intend that the
Merger shall constitute a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), and that this
Agreement shall constitute a "plan of reorganization" for the purposes of
Section 368 of the Code. EAI and Transom also intend that the Merger be
accounted for as a pooling of interests pursuant to Opinion No. 16 of the
Accounting Principles Board.
<PAGE> 77
ARTICLE II.
CONVERSION AND EXCHANGE OF SHARES
2.1. Definitions. The following terms shall have the following respective
meanings for purposes of this Agreement:
(a) "EAI Common Stock" shall mean each share of the Common Stock, $.01 par
value per share, of EAI.
(b) "EAI Stock Value" shall mean the average of the high and low per share
sale price of the EAI Common Stock, as reported on the NASDAQ Stock Market
National Market (the "NNM"), for the second trading day prior to the Closing, as
reported in the NNM listings published in The Wall Street Journal.
(c) "Transom Certificate" shall mean each certificate representing any
shares of Transom Stock outstanding immediately prior to the Effective Time.
(d) "Transom Common Stock" shall mean each share of the common stock, $.001
par value per share, of Transom.
(e) "Transom Options" shall mean all options outstanding immediately prior
to the Effective Time, whether or not then exercisable, to purchase shares of
Transom Common Stock.
(f) "Transom Preferred Stock" shall mean each share of the preferred stock,
$.001 par value per share, of Transom.
(g) "Transom Series A Preferred Stock" shall mean each share of Transom
Preferred Stock designated as "Series A Non-Voting Convertible Preferred Stock".
(h) "Transom Series A Warrants" shall mean all issued and outstanding
warrants to purchase shares of Transom Series A Preferred Stock.
(i) "Transom Series B Preferred Stock" shall mean each share of Transom
Preferred Stock designated as "Series B Convertible Preferred Stock".
(j) "Transom Stock" shall mean all of the Transom Common Stock and the
Transom Preferred Stock.
2.2. Total Merger Consideration. The total consideration payable as
provided herein to holders of Transom Common Stock and Transom Options upon
consummation of the Merger (the "Total Merger Consideration") shall be equal to
205,000 shares of EAI Common Stock.
2.3. Conversion of Transom Series A Warrants. At or prior to the Effective
Time, Transom shall cause all of the issued and outstanding Transom Series A
Warrants to be fully converted into shares of Transom Common Stock on a one
share of Transom Preferred Stock issuable under such Transom Series A Warrants
for one share of Transom Common Stock basis pursuant to the terms of the Transom
Series A Warrants (the "Warrant Conversion"). All of the Transom Series A
Warrants and/or Transom Preferred Stock to be converted into Transom Common
Stock pursuant to this Section 2.3 shall no longer be outstanding and shall
automatically be canceled and cease to exist as of the effective time of the
Warrant Conversion (the "Warrant Conversion Time"), and each warrant or
certificate previously representing any such Transom Preferred Stock (or the
right to purchase Transom Preferred Stock) shall thereafter represent the right
to receive that number of Transom Common Shares as determined by this Section
2.3.
2.4. Conversion of Transom Preferred Stock. At or prior to the Effective
Time, Transom shall cause the conversion of all of the issued and outstanding
shares of Transom Preferred Stock into shares of Transom Common Stock on a one
share of Transom Preferred Stock for one share of Transom Common Stock basis
pursuant to Transom's Certificate of Incorporation (the "Preferred Share
Conversion"). All of the shares of Transom Preferred Stock to be converted into
Transom Common Stock pursuant to this Section 2.4 shall no longer be outstanding
and shall automatically be canceled and cease to exist as of the effective time
of the Preferred Share Conversion (the "Preferred Stock Conversion Time"), and
each certificate previously
A-2
<PAGE> 78
representing any such shares of Transom Preferred Stock shall thereafter
represent the right to receive that number of Transom Common Shares as
determined by this Section 2.4.
2.5. Conversion of Transom Common Stock. At the Effective Time, by virtue
of the Merger and without any action on the part of EAI, Transom or any
stockholder of Transom:
(a) Each share of the Transom Common Stock issued and outstanding
immediately prior to the Effective Time (but after the Warrant Conversion Time
and the Preferred Stock Conversion Time), other than Dissenter's Shares (as
defined below), shall be converted into the right to receive shares of EAI
Common Stock at the Exchange Ratio. The "Exchange Ratio" shall be determined as
follows: each share of Transom Common Stock shall be exchanged for that number
of shares of EAI Common Stock equal to the quotient, carried to six decimal
places, of (x) 205,000 divided by (y) the sum of (i) the total number of shares
of Transom Common Stock outstanding immediately prior to the Effective Time (but
after the Warrant Conversion Time and the Preferred Stock Conversion Time) plus
(ii) the number of shares of Transom Common Stock issuable upon the exercise of
all outstanding Transom Options.
(b) No fractional shares of EAI Common Stock shall be issued, and in lieu
thereof, EAI shall pay to each former stockholder of Transom who otherwise would
be entitled to receive such fractional share an amount in cash determined by
multiplying (i) the EAI Stock Value by (ii) the fraction of a share (rounded to
six decimal places when expressed as an Arabic number) of EAI Common Stock to
which such holder would otherwise be entitled to receive pursuant to this
Section 2.5.
(c) All of the shares of Transom Stock to be converted into EAI Common
Stock pursuant to this Article shall no longer be outstanding and shall
automatically be canceled and cease to exist at the Effective Time, and each
certificate previously representing any such shares of Transom Common Stock (a
"Common Certificate") shall thereafter represent the right to receive (i) a
certificate representing the number of whole shares of EAI Common Stock and (ii)
cash in lieu of fractional shares into which the shares of Transom Common Stock
represented by such Common Certificate have been converted. If, prior to the
Effective Time, the outstanding shares of EAI Common Stock or Transom Common
Stock shall have been increased, decreased, changed into or exchanged for a
different number or kind of shares or securities as a result of a
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split, or other similar change in capitalization, then an
appropriate and proportionate adjustment shall be made to the Exchange Ratio and
the Total Merger Consideration.
(d) Subject to the terms and conditions of this Agreement, shares of
Transom Stock with respect to which dissenters rights have been properly
demanded in accordance with the DGCL ("Dissenters' Shares") shall not be
converted into EAI Common Stock at the Effective Time, but shall be converted
into the right to receive from EAI such consideration as is determined to be due
and payable with respect to such Dissenters' Shares pursuant to the provisions
of the DGCL. Transom shall give EAI (i) prompt notice of any written demands for
appraisals, withdrawals or demands for appraisal and any other instruments in
respect thereof received by Transom and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal. Transom
shall not voluntarily make any payment with respect to any demands for appraisal
and will not, except with the prior written consent of EAI, settle or offer to
settle any such demands.
(e) At the Effective Time, all shares of Transom Stock that are owned by
Transom as treasury stock and all shares of Transom Stock that are owned,
directly or indirectly, by Transom or EAI shall be canceled and shall cease to
exist, and no stock of EAI or other consideration shall be delivered in exchange
therefor. All shares of EAI Common Stock that are owned by Transom shall become
treasury stock of EAI.
(f) After the Effective Time, there shall be no transfers on Transom's
stock transfer books of shares of Transom Stock.
2.6. Exchange of Shares. (a) At or any time after the Closing, each
stockholder of Transom shall have the right to deliver to EAI a properly
completed letter of transmittal in a form reasonably satisfactory to EAI (the
"Transmittal Letter") and Transom Certificates representing all of the issued
and outstanding shares of Transom Stock owned by such stockholder, duly endorsed
for transfer or accompanied by duly executed stock powers, free and clear of all
options, liens, claims, charges, restrictions and other encumbrances of any
nature
A-3
<PAGE> 79
or kind whatsoever, other than federal and state securities law restrictions.
Upon proper surrender of a Transom Certificate for exchange and cancellation to
EAI, and in accordance with and subject to the other provisions of this
Agreement and the Transmittal Letter, the holder of such Transom Certificate
shall receive in exchange therefor (i) a certificate representing that number of
whole shares of EAI Common Stock to which such holder of Transom Stock shall
have become entitled, and (ii) a check representing the amount of any cash in
lieu of fractional shares which such holder has the right to receive. The
Transom Certificate so surrendered shall forthwith be canceled. No interest
shall be paid or accrued on any cash in lieu of fractional shares payable to
holders of Transom Certificates.
(b) If any certificate representing shares of EAI Common Stock is to be
issued in a name other than that in which the Transom Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the Transom Certificate shall be properly endorsed (or accompanied by an
appropriate instrument of transfer) and otherwise in proper form for transfer,
and that the person requesting such exchange shall pay to EAI in advance any
transfer or other taxes required by reason thereof, or shall establish to the
satisfaction of EAI that such tax has been paid or is not payable.
(c) In the event any Transom Certificate shall have been lost, stolen or
destroyed, the person so claiming shall make an affidavit of that fact and, if
required by EAI, post a bond in such amount as EAI may determine is reasonably
necessary as indemnity against any claim that may be made against it with
respect to such Transom Certificate. Thereafter, EAI shall issue in exchange for
such lost, stolen or destroyed Transom Certificate the shares of EAI Common
Stock and any cash in lieu of a fractional share deliverable in respect thereof
pursuant to this Agreement.
2.7. Options to Acquire Transom Common Stock.
(a) At the Effective Time, each outstanding Transom Option shall be fully
vested in accordance with the terms of the Transom Options and the Option Plan
(as defined below), and shall be assumed by EAI. Each such Transom Option so
assumed by EAI under this Agreement shall continue to have and be subject to the
same terms and conditions set forth in the applicable Transom Option immediately
prior to the Effective Time, except that the Transom Option shall be fully
vested as provided in the preceding sentence. Each such Transom Option shall
thereafter be deemed to constitute an option to acquire, on the same terms and
conditions as were applicable under such Transom Option, (i) the same number of
shares of EAI Common Stock as such Transom Option would have been exchangeable
for had such Transom Option been exercised in full immediately prior to the
Merger and (ii) at an exercise price per share (rounded up to the nearest whole
cent) equal to (A) the aggregate exercise price for the shares of Transom Common
Stock otherwise purchasable pursuant to such Transom Option divided by (B) the
number of shares of EAI Common Stock deemed to be purchasable under such option
to acquire EAI Common Stock; provided, however, that the number of shares of EAI
Common Stock that may be purchased upon exercise of such Transom Option shall
not include any fractional share and, upon exercise of such Transom Option, a
cash payment shall be made for any fractional share based upon the closing price
of a share of EAI Common Stock as reported on the NNM on the trading day
immediately preceding the date of exercise. It is the intention of the parties
that the Transom Options issued pursuant to that certain Transom 1996 Equity
Compensation Plan (the "Option Plan") which have been assumed by EAI as provided
herein, to the extent that they pertain to the purchase of EAI Common Stock
thereunder, shall continue to qualify as incentive stock options under Section
422 of the Code to the same extent immediately after the Closing as such Transom
Options so qualified immediately prior to the Closing.
(b) As soon as practicable after the Effective Time, EAI shall deliver to
the holders of Transom Options appropriate notices setting forth such holders'
rights and the agreements evidencing the grants of such Transom Options shall be
deemed to be appropriately amended so that such Transom Options shall represent
rights to acquire EAI Common Stock on terms and conditions as contained in the
outstanding Transom Options (subject to the adjustments required by this Section
2.7 after giving effect to the assumption by EAI as set forth above).
(c) EAI shall file within five (5) business days following the Closing Date
and use its reasonable efforts to maintain the effectiveness of a Form S-8
registration statement covering the Transom Options (and
A-4
<PAGE> 80
maintain the current status of the prospectus or prospectuses referred to
therein) for so long as such Transom Options remain outstanding.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF TRANSOM
Except as disclosed by Transom in the disclosure schedule delivered
pursuant to this Agreement (the "Disclosure Schedule"), Transom represents and
warrants to EAI as follows:
3.1. Corporate Organization. (a) Transom is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Transom has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted,
and is duly licensed or qualified to do business and is in good standing in the
States of Michigan, Pennsylvania and Delaware, which constitutes each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary, except where the failure to be so
licensed, qualified or in good standing would not have a Material Adverse Effect
(as defined in Section 3.8 below) on Transom. Correct and complete copies of the
Certificate of Incorporation and By-Laws of Transom, as in effect on the date of
this Agreement, have been made available to EAI by Transom.
(b) Transom does not own of record or beneficially, directly or indirectly,
(i) any shares of outstanding capital stock or securities convertible into
capital stock of any other corporation or (ii) any participating interest in any
partnership, limited liability company, joint venture or other non-corporate
business.
(c) The minute books of Transom accurately reflect in all material respects
all actions taken by the boards of directors, including committees thereof, and
the stockholders of Transom.
3.2. Capitalization. The authorized capital stock of Transom consists of
(a) 10,000,000 shares of Transom Common Stock, of which 1,650,800 shares are
issued and outstanding and 1,537,667 shares are reserved for issuance upon
exercise of outstanding Transom Options, 628,000 are reserved for issuance upon
conversion of Transom Series A Preferred Stock and 4,650,000 are reserved for
issuance upon conversion of Transom Series B Preferred Stock, (b) 6,000,000
shares of Transom Preferred Stock, of which (x) 628,000 shares have been
designated as Transom Series A Preferred Stock, of which 478,000 shares are
issued and outstanding and 150,000 shares are reserved for issuance upon
conversion of the Transom Series A Warrants, and (y) 5,000,000 shares of Transom
Series B Preferred Stock, of which 4,650,000 shares are issued and outstanding.
Each record holder of Transom Stock and the number of shares owned by each, and
each holder of a Transom Series A Warrant and Transom Option and the number of
shares of Transom Stock which such holder may purchase, is set forth in Section
3.2 of the Disclosure Schedule. No shares of Transom Stock are held in Transom's
treasury and no shares of Transom Stock are reserved for issuance other than
those shares reserved for issuance under the Transom Preferred Stock, Transom
Series A Warrants and Transom Options. All of the issued and outstanding shares
of Transom Stock have been duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. Other than the Transom Preferred Stock,
Transom Series A Warrants and Transom Options, as listed in Section 3.2 of the
Disclosure Schedule, Transom does not have and is not bound by any outstanding
subscriptions, options, convertible securities, warrants, calls, commitments or
agreements of any character calling for the purchase or issuance of any shares
of its capital stock.
3.3. Authority; No Violation. (a) Transom has the corporate power and
authority to execute and deliver this Agreement and (subject to stockholder
consent) to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly approved by the Board of Directors of Transom.
Except for the adoption of this Agreement by the requisite vote of holders of
the issued and outstanding shares of Transom Stock, no other corporate
proceedings on the part of Transom are necessary to approve this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Transom and constitutes a valid and
binding obligation of Transom, enforceable against Transom in
A-5
<PAGE> 81
accordance with its terms, except as such enforceability is limited by
bankruptcy, insolvency, reorganization or similar laws and general principles of
equity.
(b) The execution and delivery of this Agreement by Transom, the
consummation by Transom of the transactions contemplated hereby (subject to
stockholder approval), and the compliance by Transom with the terms or
provisions hereof, shall not (i) violate any provision of the Certificate of
Incorporation or By-Laws of Transom, (ii) violate any law, statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Transom or any of its properties or assets, or (iii) violate,
conflict with, breach any provision of or result in the loss of any benefit or
the increase in the amount of any liability or obligation under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any liens, pledges,
charges, encumbrances or security interests of any nature or kind (collectively,
"Liens") upon any of the properties or assets of Transom under any note, bond,
mortgage, indenture, deed of trust, license, lease, contract, agreement or other
instrument or obligation to which Transom is a party, or by which it or any of
its properties or assets may be bound or affected.
3.4. Consents and Approvals. Except as set forth on Section 3.4 of the
Disclosure Schedule and the (i) the filing of Certificate of Merger with the
Delaware Secretary pursuant to the DGCL, (ii) the approval of this Agreement by
the requisite vote of the holders of Transom Stock, and (iii) the filing with
the Securities and Exchange Commission (the "SEC") and declaration of
effectiveness of a Registration Statement on Form S-4 (the "S-4"), no consent,
approval or authorization of, or withholding of objection on the part of, or
filing, registration or qualification with, or notice to (collectively, the
"Consents") any court, administrative agency, commission or other governmental
authority or instrumentality, whether Federal, state, local or foreign (each a
"Governmental Authority"), or with any third party are necessary in connection
with the execution and delivery by Transom of this Agreement and the
consummation by Transom of the Merger and the other transactions contemplated by
this Agreement.
3.5. Reports. Transom has timely filed all reports, registrations and
statements required to be filed since October 6, 1996 with any Governmental
Authority, and has paid all fees and assessments due and payable in connection
therewith, except where the failure to make such filings and payments would not
have a Material Adverse Effect on Transom. No Governmental Authority has
initiated any proceeding or, to the best knowledge of Transom, investigation
into the business or operations of Transom.
3.6. Compliance with Applicable Law. Transom holds all licenses,
franchises, permits and authorizations necessary for the lawful conduct of its
business and has complied with and is not in default under any law, statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
of any Governmental Authority applicable to Transom, except where the failure to
comply would not have a Material Adverse Effect on Transom.
3.7. Financial Statements. Transom has previously provided EAI with correct
and complete copies of the following (collectively, the "Transom Financial
Statements"): (a) the audited balance sheets of Transom as of March 31, 1997 and
1998, and the related audited statements of operations and stockholders' equity
and cash flows for the fiscal years ended March 31, 1997 and 1998, and (b) the
unaudited balance sheet of Transom as of June 30, 1998, and the related
unaudited consolidated statement of operations for the period then ended (the
"Interim Financial Statements"). The Transom Financial Statements fairly present
in all material respects the financial position of Transom as of the dates
thereof, and the results of operations and cash flows of Transom for the
respective fiscal periods or as of the respective dates thereof.
Each of the Transom Financial Statements, including the notes thereto, has been,
or shall be, prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied during the periods involved subject, in
the case of the Interim Financial Statements to normal year-end adjustments and
lack of footnotes. The books and records of Transom have been, and are being,
maintained in accordance with GAAP.
3.8. Absence of Certain Changes or Events. (a) Since March 31, 1998, (i)
Transom has not incurred any material liability that is not disclosed in the
Interim Financial Statements, (ii) no event has occurred which, individually or
in the aggregate, could reasonably be expected to have a material adverse effect
on the
A-6
<PAGE> 82
business, properties, operations or financial condition (a "Material Adverse
Effect") of Transom, and (iii) Transom has carried on its business in the
ordinary and usual course.
(b) Except as set out in Section 3.8 of the Disclosure Schedule, since
March 31, 1998, Transom has not (i) increased the salaries, wages, or other
compensation, or pensions, fringe benefits or other perquisites payable to any
director, executive officer or employee, or (ii) granted any severance or
termination pay, or (iii) paid or accrued any bonuses or commissions, or (iv)
suffered any strike, work stoppage, slowdown, or other labor disturbance which
could, either individually or in the aggregate, result in a Material Adverse
Effect on Transom.
3.9. Legal Proceedings and Restrictions. (a) Except as set forth on Section
3.9 of the Disclosure Schedule, there are no actions, suits, proceedings, claims
or investigations pending, or to the knowledge of Transom, threatened against or
affecting Transom at law or in equity or before any Governmental Authority.
(b) There is no judgment, order, writ, decree, injunction or regulatory
restriction imposed upon Transom or its assets which has had, or could
reasonably be expected to have, a Material Adverse Effect on Transom.
3.10. Taxes and Tax Returns.
(a) (i) Transom (which term for purposes of this Section 3.10 shall
include any former subsidiaries or predecessors of Transom for periods
during which they were owned) has timely filed (when due or prior to the
expiration of any extension of the time to file) correct and complete
Returns in respect of Taxes required to be filed; all Taxes shown on such
Returns or otherwise known by Transom to be due or payable have been timely
paid; no adjustment relating to any such Return has been proposed in
writing by any Governmental Authority, except proposed adjustments that
have been resolved prior to the date hereof; and there are no outstanding
summons, subpoenas or written requests for information with respect to any
such Returns or the Taxes reflected thereon. To the knowledge of Transom,
there is no basis for imposing any additional Taxes on it other than the
Taxes shown on such Returns. There are no outstanding waivers or agreements
extending the statute of limitations for any period with respect to any Tax
to which Transom may be subject and Transom is not under audit by any
Governmental Authority for any Tax. There are no Tax liens on any assets of
Transom other than liens for Taxes not yet due or payable;
(ii) Transom has paid, on the basis of Transom's good faith estimate
of the required installments, all estimated Taxes required to be paid under
Section 6655 of the Code or any comparable provision of state, local or
foreign law; and all Taxes which shall be due and payable for any period or
portion thereof ending on or prior to the Closing Date shall have been paid
or shall be reflected on Transom's books as an accrued Tax liability,
either current or deferred. The amount of such Tax liabilities as of March
31, 1998 shall be set forth in Section 3.10 of the Disclosure Schedule. All
Taxes required to be withheld, collected or deposited by Transom during any
taxable period for which the applicable statute of limitations on
assessment remains open have been timely withheld, collected or deposited
and, to the extent required, have been paid to the relevant Governmental
Authority;
(iii) For each taxable period for which the statute of limitations on
assessment remains open, Transom has not (A) been either a common parent
corporation or a member corporation of an affiliated group of corporations
filing a consolidated Federal income tax return, or (B) acquired any
corporation that filed a consolidated Federal income tax return with any
other corporation that was not also acquired by Transom; and no other
entity that was included in the filing of a Return with Transom on a
consolidated, combined, or unitary basis has left Transom's consolidated,
combined or unitary group in a taxable year for which the statute of
limitations on assessment remains open. Transom has not been at any time a
member of any partnership, limited liability company or joint venture or
the holder of a beneficial interest in any trust for any period for which
the statute of limitations for any Tax potentially applicable as a result
of such membership or holding has not expired;
(iv) No consent under Section 341(f) of the Code has been filed with
respect to Transom; and
A-7
<PAGE> 83
(b) Transom:
(i) Does not have any Tax sharing or allocation agreement or
arrangement, does not owe any amount pursuant to any Tax sharing or
allocation agreement or arrangement, and will not have any liability in
respect to any Tax sharing or allocation agreement or arrangement with
respect to any entity that has been sold or disposed of;
(ii) Was not acquired in a qualified stock purchase under Section
338(d)(3) of the Code and no elections under Section 338(g) of the Code,
protective carryover basis elections, offset prohibition elections or other
deemed or actual elections under Section 338 are applicable to Transom;
(iii) Is not and has not been subject to the provisions of Section
1503(d) of the Code related to "dual consolidated loss" rules;
(iv) Is not a party to any agreement, contract or arrangement that
would result, individually or in the aggregate, in the payment of any
"excess parachute payments" within the meaning of Section 280G of the Code
by reason of the Merger;
(v) Does not have any income reportable for a period ending after the
Closing Date but attributable to an installment sale occurring in or a
change in accounting method made for a period ending on or prior to the
Closing Date which resulted in a deferred reporting of income from such
transaction or from such change in accounting method (other than a deferred
intercompany transaction), or deferred gain or loss arising out of any
deferred intercompany transaction;
(vi) Does not have any unused net operating loss, unused net capital
loss, unused tax credit, or excess charitable contribution for Federal
income tax purposes;
(vii) Is not a United States real property holding corporation
("USRPHC") as defined in Section 897 of the Code and as of the Closing has
not been a USRPHC for the five year period immediately preceding the
Closing Date; and
(viii) No withholding of Taxes by EAI will be required in this
transaction under Sections 3406 or 1445 of the Code or any other provision
of the Code or state, local or foreign law and Transom will provide any
required certificates to avoid any such withholding.
(ix) Is not a Small Business Corporation ("S" Corporation) as defined
in Section 1361(a) of the Code.
(c) For purposes of this Agreement:
(i) "Returns" means any and all returns, reports, information returns
and information statements with respect to Taxes required to be filed with
any Governmental Authority, including consolidated, combined and unitary
tax returns.
(ii) "Tax" or "Taxes" means any and all taxes, charges, fees, levies,
and other governmental assessments and impositions of any kind, payable to
any Governmental Authority, including income, franchise, net worth,
profits, gross receipts, minimum alternative, estimated, ad valorem, value
added, sales, use, service, real or personal property, capital stock,
license, payroll, withholding, disability, employment, social security,
Medicare, workers' compensation, unemployment compensation, excise, stamp,
occupation, premiums, windfall profits, transfer and gains taxes, customs
duties, imposts, charges, levies or other similar assessments of any kind,
and interest, penalties and additions to tax imposed with respect thereto.
3.11. Employee Benefits.
(a) Except as set forth on Section 3.11 of the Disclosure Schedule, Transom
(which for purposes of this Section 3.11 shall include any ERISA Affiliate (as
hereinafter defined)) has not at any time within the past three years,
maintained, administered or contributed to any pension, profit-sharing, thrift
or 401(k), disability, medical, dental, health, life (including any individual
life insurance policy), death benefit, group insurance or any other welfare
plan, bonus, incentive, deferred compensation, stock purchase, stock option,
severance plan,
A-8
<PAGE> 84
salary continuation, vacation, holiday, sick leave, fringe benefit, personnel
policy, or similar plan, trust, program, policy, commitment or arrangement
whether or not covered by Employee Retirement and Income Security Act of 1974,
as amended ("ERISA") and whether or not funded or insured and whether written or
oral (hereinafter referred to as the "Transom Plans"), which could result in EAI
or Transom having any liabilities, whether direct or indirect.
(b) Transom has made available to EAI correct and complete copies of (i)
each Transom Plan document, amendments thereto and board resolutions adopting
such plans and amendments, (ii) each current summary plan description, (iii) any
and all agreements, insurance policies and other documents related to any
Transom Plan, including written descriptions of any unwritten Transom Plans,
(iv) the most recent determination letter from the Internal Revenue Service (the
"IRS") for each Transom Plan (as applicable), and (v) the three most recent
Annual Reports -- Form 5500 (including accompanying schedules) and summary
annual reports for each Transom Plan.
(c) (i) Each Transom Plan (and any related agreements and documents) and
Transom have at all times complied in all material respects with the applicable
requirements of ERISA, the Code and any other applicable law (including
regulations and rulings thereunder), and the Transom Plans have at all times
been properly administered in all material respects in accordance with all such
laws and with the terms of each applicable plan document, (ii) Transom has
received a favorable determination letter from the IRS with respect to each
Transom Plan that is intended to be "qualified" within the meaning of Code
Section 401(a) and no facts exist that could reasonably be expected to affect
adversely such "qualified" status, (iii) no Transom Plan provides benefits,
including, without limitation, death or medical benefits (whether or not
insured), for current or former employees following their retirement or other
termination of service, other than coverage mandated by applicable statutes or
death benefits or retirement benefits under any "employee pension plan" (as such
term is defined in ERISA Section 3(2)), (iv) there has not occurred nor, to the
knowledge of Transom, is any person contractually bound to enter into any
non-exempt "prohibited transaction" within the meaning of Code Section 4975 or
ERISA Section 406 with respect to a Transom Plan, (v) Transom has not engaged in
a transaction which could subject it to either a civil penalty under ERISA
Section 409 or a tax under Code Section 4976, (vi) Transom has made or caused to
be made on a timely basis any and all contributions, premiums and other amounts
due and owing under the terms of any Transom Plan or as otherwise required by
applicable law with respect to a Transom Plan, (vii) Transom has in all material
respects complied with Code Section 4980B and other applicable laws concerning
the continuation of employer-provided health benefits following a termination of
employment or any other event that would otherwise terminate such coverage,
(viii) Transom has not at any time maintained, administered or contributed to
any plan subject to ERISA Title IV, and (ix) Transom has not at any time
participated in, made contributions to or had any other liability with respect
to a "multiemployer plan" under ERISA Section 4001, a "multiple employer plan"
under Code Section 413(c), or a "multiple employer welfare arrangement' under
ERISA Section 3(40).
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including, without limitation, severance, unemployment compensation,
golden parachute or otherwise) becoming due to any director, officer or employee
of Transom, (ii) increase any benefits otherwise payable under any Transom Plan,
(iii) result in any acceleration of the time of payment or vesting of any such
benefits other than the acceleration of vesting of the Transom Options, or (iv)
impair the rights of Transom under any Transom Plan.
(e) Except as set forth in Section 3.11 of the Disclosure Schedule, there
are no actions, claims, investigations or audits pending or, to Transom's
knowledge, threatened with respect to any Transom Plan (other than claims for
benefits in the ordinary course) that will create any liability or obligation
for the Surviving Corporation with respect to any Transom Plan participant,
beneficiary, alternate payee or other claimant, or with respect to any
Governmental Authority, including, but not limited to, the IRS, the Department
of Labor and the Pension Benefit Guaranty Corporation.
(f) For purposes of this Agreement, "ERISA Affiliate" means Transom and (i)
any corporation that is a member of a controlled group of corporations within
the meaning of Section 414(b) of the Code of which
A-9
<PAGE> 85
Transom is a member, (ii) any trade or business (whether or not incorporated)
which is a member of a group of trades or businesses under common control within
the meaning of Section 414(c) of the Code of which Transom is a member; and
(iii) any member of an affiliated service group within the meaning of Section
414(m) or (o) of the Code of which Transom, any corporation described in clause
(i) above or any trade or business described in clause (ii) above is a member.
3.12. Employment and Labor Relations. To the knowledge of Transom, no
executive, key employee or group of employees has any plans to terminate its or
their employment with Transom. There are no charges, complaints, investigations
or litigation currently pending, or to the knowledge of Transom threatened (and
to the knowledge of Transom there is no basis therefor), against Transom,
relating to alleged employment discrimination, unfair labor practices, equal pay
discrimination, affirmative action noncompliance, occupational safety and
health, breach of employment contract, employee benefit matters, wrongful
discharge or other employment-related matters. There are no outstanding orders
or charges against Transom under any applicable occupational safety and health
laws in any jurisdiction in which Transom conducts business. All levies,
assessments and penalties made against Transom pursuant to any applicable
workers' compensation legislation in any jurisdiction in which Transom conducts
business have been paid by Transom. Transom is not a party to any contracts with
any labor union or employee association nor has Transom made commitments to or
conducted negotiations with any labor union or employee association with respect
to any future contracts. Transom is not aware of any current attempts to
organize or establish any labor union or employee association with respect to
any employees of Transom, and there is no existing or pending certification of
any such union with regard to a bargaining unit.
3.13. Contracts. Section 3.13 of the Disclosure Schedule lists or describes
the following contracts, agreements, licenses, permits, arrangements,
commitments or understandings (whether written or oral) which are currently in
effect or which will, without any further action on the part of Transom become
effective in the future, to which Transom is a party (collectively, the "Transom
Contracts"):
(a) any agreement for the lease of personal property or real property to or
from any person or entity that individually involves an expenditure by the
lessee of in excess of $10,000 in any one year;
(b) any agreement for the purchase, sale or distribution of products,
materials, commodities, supplies or other personal property, or for the
furnishing or receipt of services, the performance of which will extend over a
period of more than one year or involve consideration payable by any party in
excess of $10,000 in any one year;
(c) any agreement creating, governing or providing for an investment or
participation in a partnership, limited liability company or joint venture;
(d) any agreement under which Transom has created, incurred, assumed or
guaranteed any indebtedness for borrowed money, or any capitalized lease
obligation, or under which Transom has imposed a Lien on any of its assets;
(e) any agreement concerning confidentiality or noncompetition;
(f) any agreement with any director, officer, employee or stockholder of
Transom or any of their affiliates;
(g) any pension, profit sharing, thrift or 401(k), bonus, incentive,
deferred compensation, stock purchase, stock option, severance, salary
continuation or other plan or arrangement for the benefit of current or former
directors, officers or employees;
(h) any agreement for the employment of any individual on a full-time,
part-time, consulting or other basis;
(i) any agreement relating to any Intellectual Property (as that term is
defined in Section 3.18) used by Transom in the conduct of its business, or that
is licensed by Transom for use by others;
(j) any agreement under which the consequences of a default, termination,
non-renewal or acceleration could have a Material Adverse Effect on Transom; or
A-10
<PAGE> 86
(k) any other agreement the performance of which involves consideration
payable by any party in excess of $10,000 in any one year.
Transom has made available to EAI a correct and complete copy of each
Transom Contract. Except as set forth in Section 3.13 of the Disclosure
Schedule, (i) each Transom Contract is legal, valid, binding, enforceable in
accordance with its terms and in full force and effect, except as such
enforceability is limited by bankruptcy, insolvency, reorganization or similar
laws and general principles of equity, (ii) the consummation of the Merger will
not cause a breach or termination of any Transom Contract nor effect a change in
any of the terms of any Transom Contract, (iii) Transom is not, and, to
Transom's knowledge, no other party is, in breach or default of any Transom
Contract and no event has occurred which with notice or lapse of time, or both,
would constitute a breach or default that would result in or permit termination,
modification or acceleration under any Transom Contract, and (iv) Transom has
not, and, to Transom's knowledge, no other party has, repudiated any provision
of any Transom Contract.
3.14. Undisclosed Liabilities. Except for liabilities (i) that are fully
reflected or reserved against on the audited March 31, 1998 balance sheet of
Transom (the "1998 Balance Sheet") or (ii) that were incurred in the ordinary
course of business consistent with past practice since March 31, 1998, or (iii)
that are fully reflected or reserved against in the Interim Financial
Statements, Transom has not incurred any liability of any nature whatsoever
(whether absolute, accrued, contingent or otherwise and whether due or to become
due).
3.15. Environmental Liability.
(a) Transom has not received any notice, and does not otherwise have
knowledge, of any claim, and no proceeding has been instituted raising any
claim, against Transom or any of the real properties now or formerly owned,
leased or operated by Transom or other assets of Transom, alleging any damage to
the environment or violation of any Environmental Laws;
(b) Transom does not have knowledge of any facts which would give rise to
any claim, public or private, of violation of Environmental Laws or damage to
the environment emanating from, occurring on or in any way related to real
properties now or formerly owned, leased or operated by Transom or to other
assets of Transom or their use;
(c) Transom has not stored or released any Hazardous Materials on real
properties now or formerly owned, leased or operated by it or disposed of any
Hazardous Materials, in each case in a manner contrary to any Environmental
Laws, except where the failure to comply could not reasonably be expected to
result in a Material Adverse Effect on Transom; and
(d) All buildings on all real properties now owned, leased or operated by
Transom are in compliance with applicable Environmental Laws, except where the
failure to comply could not reasonably be expected to result in a Material
Adverse Effect on Transom.
(e) For purposes of this Agreement,
(i) "Environmental Laws" means any and all Federal, state, county,
local and foreign laws, statutes, codes, ordinances, rules, regulations,
judgments, orders, decrees, permits, concessions, grants, franchises,
licenses, agreements or governmental restrictions relating to pollution and
the protection of the environment or the release of any materials into the
environment, including but not limited to those related to hazardous
substances or wastes, air emissions and discharges to waste or public
systems; and
(ii) "Hazardous Material" means any and all pollutants, toxic or
hazardous wastes or any other substances that might pose a hazard to health
or safety, the removal of which may be required or the generation,
manufacture, refining, production, processing, treatment, storage,
handling, transportation, transfer, use, disposal, release, discharge,
spillage, seepage, or filtration of which is or shall be restricted,
prohibited or penalized by any applicable law (including asbestos, urea
formaldehyde foam insulation and polychlorinated biphenyls).
3.16. Tangible Assets. Transom has good and marketable title to, or a valid
leasehold interest in, the properties and assets used by it, located on its
premises, shown on the 1998 Balance Sheet or acquired after
A-11
<PAGE> 87
the date thereof, except for properties and assets disposed of in the ordinary
course of business, free and clear of all Liens. Transom owns or leases pursuant
to a Transom Contract all buildings, machinery, equipment and other tangible
assets material to the conduct of its business as presently conducted. Each such
tangible asset is free from defects (patent and latent) other than defects that
do not individually or in the aggregate materially impair its value or intended
use, has been maintained in accordance with normal industry practice, is in good
operating condition and repair (subject to normal wear and tear) and is suitable
for the purposes for which it presently is used. Section 3.16 of the Disclosure
Schedule contains a schedule of such tangible assets owned or leased by Transom
that have a value in excess of $10,000.
3.17. Real Property. Transom does not own any real property. Section 3.17
of the Disclosure Schedule lists and describes briefly all real property leased
or subleased to Transom. Transom has made available to EAI correct and complete
copies of each such lease and sublease. Except as set forth in Section 3.17 of
the Disclosure Schedule:
(a) each such lease or sublease is legal, valid, binding, enforceable and
in full force and effect;
(b) the consummation of the transactions contemplated hereby will neither
cause the termination of each such lease or sublease nor effect a change in any
of its terms;
(c) Transom is not, and, to the knowledge of Transom, no other party to
such lease or sublease is, in breach or default, and no event has occurred
which, with notice or lapse of time, or both, would constitute a breach or
default that would permit termination, modification or acceleration thereunder;
(d) neither Transom nor, to the knowledge of Transom, any other party to
each such lease or sublease has repudiated or disputed any provision thereof;
(e) there are no oral agreements in effect as to each such lease or
sublease;
(f) to the knowledge of Transom, the representations and warranties set
forth in clauses (a) through (e) above are true and correct with respect to the
lease underlying each such sublease; and
(g) Transom has not assigned, transferred, conveyed, mortgaged, deeded in
trust or encumbered any interest in any leasehold or subleasehold.
3.18. Intellectual Property. (a) Section 3.18 of the Disclosure Schedule
identifies each patent, trademark, service mark, trade name, assumed name,
copyright, trade secret, license to or from third parties with respect to any of
the foregoing, applications to register or registrations of any of the foregoing
or other intellectual property rights which are owned or used by or have been
issued to Transom (collectively the "Intellectual Property"). Transom has made
available correct and complete copies of all patents, trademarks, copyrights,
registrations, licenses, permits, agreements and applications related to the
Intellectual Property to EAI and correct and complete copies of all other
written documentation evidencing ownership of or the right to use each such
item. Except as set forth in Section 3.18 of the Disclosure Schedule:
(i) Transom possesses all right, title and interest in and to the
Intellectual Property, free and clear of any Lien or other restriction;
(ii) the legality, validity, enforceability, ownership or use of the
Intellectual Property is not currently being challenged, nor to the
knowledge of Transom is it subject to any such challenge;
(iii) Transom has taken all necessary action to maintain and protect
the Intellectual Property and will continue to maintain those rights prior
to the Closing so as not to affect materially the validity or enforcement
of the rights set forth in Section 3.18 of the Disclosure Schedule; and
(iv) the Intellectual Property will be owned or available for use by
the Surviving Corporation on identical terms and conditions immediately
subsequent to the Closing and the transactions contemplated by this
Agreement will have no Material Adverse Effect on Transom's rights, title
and interest in and to any of the rights set forth in Section 3.18 of the
Disclosure Schedule.
(b) To the knowledge of Transom, (i) Transom has not interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
intellectual property rights of third parties, nor is Transom currently
A-12
<PAGE> 88
interfering with, infringing upon, misappropriating or otherwise coming into
conflict with any intellectual property rights of third parties, and (ii) no
third party has, in the past three years, interfered with, infringed upon,
misappropriated or otherwise come into conflict with any Intellectual Property
rights of Transom that could result in a Material Adverse Effect on Transom, nor
is any third party currently interfering with, infringing upon, misappropriating
or otherwise coming into conflict with any Intellectual Property rights of
Transom.
3.19. Notes and Accounts Receivable. All notes and accounts receivable of
Transom are reflected properly on Transom's books and records, are not, to the
knowledge of Transom, subject to any setoff or counterclaim, are current and
collectible, subject only to the reserve for bad debts, if any, established in
accordance with the past practice of Transom.
3.20. Bank Accounts and Powers of Attorney. Section 3.20 of the Disclosure
Schedule sets forth a list of all accounts, borrowing resolutions and deposit
boxes maintained by Transom at any bank or other financial institution and the
names of the persons authorized to effect transactions in such accounts and
pursuant to such resolutions and with access to such boxes. There are no
outstanding powers of attorney executed on behalf of Transom.
3.21. Guaranties. Transom is not a guarantor or otherwise is liable for any
indebtedness, liability or other obligation of any other person or entity.
3.22. Insurance. Section 3.22 of the Disclosure Schedule lists each
insurance policy and self-insurance arrangement to which Transom is a party, a
named insured or otherwise the beneficiary of, specifying the insurer, type of
insurance, policy number and pending claims thereunder with respect to Transom.
The coverage provided by each of such policies is in an amount, and of a type
consistent with industry practice. Transom is in substantial compliance with all
conditions contained in such policies.
3.23. Service Contracts and Warranties. Except as set out in Section 3.23
of the Disclosure Schedule, Transom is not a party to any service contract
pursuant to which services are provided by Transom to a third party. Section
3.23 of the Disclosure Schedule includes copies of the standard terms and
conditions of all product warranties and service or maintenance contracts
granted or entered into by Transom.
3.24. Certain Relationships. No stockholder, director, officer or, to
Transom's knowledge, employee of Transom (i) is, or controls, or is an employee
of any competitor, supplier, customer or lessor or lessee of Transom, or (ii) is
indebted to Transom in an amount in excess of $1,000 in any individual case, or
(iii) owns any asset, tangible or intangible, which is used in the business of
Transom, other than assets that are immaterial in value; and Transom has not
entered into any transaction (including the furnishing of goods or services)
with any stockholder, director, officer, employer or other affiliate, except on
terms and conditions no less favorable to Transom than would be obtained in a
comparable arm's-length transaction with a third party.
3.25. S-4 Information. None of the written information to be supplied by
Transom for inclusion in the S-4 will, at the time the S-4 is filed with the
SEC, at any time it is amended or supplemented, at the time it becomes effective
under the Securities Act of 1933, as amended (the "Securities Act"), or at the
Closing Date, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading.
3.26. Broker's Fees. Neither Transom nor any of its directors, officers or
employees has employed any person or entity as a broker, finder or agent or
incurred any liability for any broker's fees, finder's fees or other commission
in connection with the Merger or the related transactions contemplated by this
Agreement.
3.27. Certain Customer Relationships. Section 3.27 of the Disclosure
Schedule contains an accurate list of Transom's ten largest customers on a
cumulative basis (the "Primary Customers"), together with the total dollar
amount of all products purchased by such Primary Customers from Transom since
Transom's inception. Transom believes it has good relationships with each of the
Primary Customers and Transom has not received any notice or otherwise has
knowledge that any Primary Customer intends to reduce the volume or dollar
amount of the products it purchases from Transom.
A-13
<PAGE> 89
3.28. Disclosure. No representation or warranty by Transom contained in
this Agreement (including the Disclosure Schedule and the Exhibits referred to
herein), or in any certificate furnished or to be furnished by Transom to EAI in
connection with the transactions contemplated hereby contains or will contain
any untrue statement of a material fact, or omits or will omit to state any
material fact required to make the statements herein or therein not misleading.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF EAI
EAI represents and warrants to Transom as follows:
4.1. Corporate Organization. EAI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. EAI has
the corporate power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted, and is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary, except where the failure to be so
licensed or qualified could not have a Material Adverse Effect on EAI and its
subsidiaries, taken as a whole. Correct and complete copies of the Certificate
of Incorporation and By-Laws of EAI, as in effect as of the date of this
Agreement, have been made available to Transom by EAI.
4.2. Capitalization. The authorized capital stock of EAI consists of
60,000,000 shares of EAI Common Stock, of which as of May 11, 1998, 10,213,195
shares were issued and outstanding, and 20,000,000 shares of preferred stock,
$.01 par value per share, none of which is issued and outstanding. All of the
issued and outstanding shares of EAI Common Stock have been duly authorized and
validly issued and are fully paid, nonassessable and free of preemptive rights,
with no personal liability attaching to the ownership thereof. The shares of EAI
Common Stock to be issued pursuant to the Merger will be duly authorized and
validly issued and, at the Effective Time, all such shares will be fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof.
4.3. Authority; No Violation. (a) EAI has the corporate power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
approved by the Board of Directors of EAI. No other corporate proceedings on the
part of EAI are necessary to approve this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by EAI and constitutes a valid and binding obligation of
EAI, enforceable against EAI in accordance with its terms.
(b) The execution and delivery of this Agreement by EAI, the consummation
by EAI of the transactions contemplated hereby, and the compliance by EAI with
the terms or provisions hereof, will not (i) violate any provision of the
Certificate of Incorporation or By-Laws of EAI, (ii) violate any law, statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to EAI or any of its properties or assets, or (iii) violate, conflict
with, breach any provision of or result in the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any Lien upon any of the
properties or assets of EAI under any note, bond, mortgage, indenture, deed of
trust, license, lease, contract, agreement or other instrument or obligation to
which EAI is a party, or by which it or any of its properties or assets may be
bound or affected.
4.4. Consents and Approvals. Except for (i) the filing of Certificate of
Merger with the Delaware Secretary pursuant to the DGCL, (ii) the filing with
the SEC and declaration of effectiveness of the S-4, (iii) such filings and
approvals as are required to be made or obtained under the securities or "Blue
Sky" laws of various states in connection with the issuance of the shares of EAI
Common Stock pursuant to this Agreement, and (iv) the filings and authorizations
necessary to list the shares of EAI Common Stock issued pursuant to this
Agreement on the NNM, no Consents from any Governmental Authority or any third
party
A-14
<PAGE> 90
are necessary in connection with the execution and delivery by EAI of this
Agreement and the consummation by EAI of the Merger and the other transactions
contemplated by this Agreement.
4.5. SEC Reports. The annual report on Form 10-K of EAI for the fiscal year
ended December 31, 1997, as filed under the Securities Exchange Act of 1934
("Exchange Act"), and all other reports and proxy statements filed or required
to be filed by EAI subsequent to such report, have been duly and timely filed by
EAI, complied as to form with all requirements under the Exchange Act, were true
and correct in all material respects as of the dates at which the information
was furnished, and contained no untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading.
4.6. S-4 Information. None of the information that EAI will include or
incorporate by reference in the S-4 will, at the time the S-4 is filed with the
SEC, at any time it is amended or supplemented, at the time it becomes effective
under the Securities Act or at the Closing Date, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. Notwithstanding the
foregoing, EAI makes no representation or warranty with respect to statements
made in the S-4 based on written information supplied by Transom specifically
for inclusion therein.
4.7. Broker's Fees. Neither EAI nor any of its directors, officers or
employees has employed any person or entity as a broker, finder or agent or
incurred any liability for any broker's fees, finder's fees or other commission
in connection with the Merger or the related transactions contemplated by this
Agreement.
4.8. Disclosure. No representation or warranty by EAI contained in this
Agreement, or in any financial statement, certificate or other document
furnished or to be furnished by EAI to Transom or its representatives in
connection herewith contains or will contain any untrue statement of a material
fact, or omits or will omit to state any material fact required to make the
statements herein or therein not misleading.
ARTICLE V.
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1. Conduct of Business Prior to the Effective Time. During the period
from the date of this Agreement to the Effective Time, except as expressly
contemplated or permitted by this Agreement, Transom shall (i) conduct its
business in the usual, regular and ordinary course consistent with past
practice, (ii) use its reasonable efforts to maintain and preserve intact its
business organization and advantageous business relationships and retain the
services of its key officers and employees and (iii) take no action which would
adversely affect or delay the ability of Transom or EAI to obtain any necessary
approvals of any Governmental Authority required for the transactions
contemplated hereby or to perform its covenants and agreements under this
Agreement.
5.2. Transom Forbearances. During the period from the date of this
Agreement to the Effective Time, except as expressly contemplated or permitted
by this Agreement, Transom shall not, without the prior written consent of EAI:
(a) incur any indebtedness for borrowed money (except pursuant to existing
funded debt agreements described in Section 3.13 of the Disclosure Schedule),
assume, guarantee, endorse or otherwise as an accommodation, become responsible
for the obligations of any other individual, partnership, limited liability
company, corporation or other entity (collectively, "Person"), or make any loan
or advance;
(b) (i) adjust, split, combine or reclassify any capital stock; (ii) make,
declare or pay any dividend, or make any other distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock, (iii) grant any Person any right to acquire any
shares of its capital stock, or (iv) issue any additional shares of capital
stock, except in accordance with the Warrant Conversion and Preferred Share
Conversion;
A-15
<PAGE> 91
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of its
properties or assets to any Person, or cancel or release any indebtedness or
claims owed to or held by Transom or by any Person, except in the ordinary
course of business consistent with past practice;
(d) make any investment in any Person by purchase of securities,
contributions to capital, property transfers, or purchase of any property or
assets of any other Person;
(e) except for transactions in the ordinary course of business consistent
with past practice, enter into or terminate any Transom Contract, or change any
terms in any Transom Contract, other than renewals or changes in immaterial
terms thereof;
(f) increase in any manner the compensation or fringe benefits of any of
its directors, officers or employees other than in the ordinary course of
business consistent with past practice, pay any pension or retirement allowance
not required by any existing plan or agreement to any of the foregoing, or
become a party to, amend or commit itself to, any pension, retirement,
profit-sharing or welfare benefit plan or agreement or employment agreement with
or for the benefit of any of the foregoing;
(g) settle any claim, action or proceeding involving money damages, except
in the ordinary course of business consistent with past practice;
(h) take any action that would prevent or impede the Merger from qualifying
(i) for "pooling of interests" accounting treatment, or (ii) as a reorganization
within the meaning of Section 368 of the Code;
(i) amend its Certificate of Incorporation or By-Laws; or
(j) take any action that is intended or may reasonably be expected to
result in (i) any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect, or (ii) any of the
conditions to the Merger set forth in Article VII not being satisfied or (iii)
any violation of any provision of this Agreement, except, in each case, as may
be required by applicable law.
ARTICLE VI.
ADDITIONAL AGREEMENTS
6.1. Regulatory and Other Matters. (a) The parties shall promptly jointly
prepare and file the S-4 with the SEC and use their commercially reasonable
efforts to have the S-4 declared effective under the Securities Act as promptly
as practicable after such filing. Transom shall, upon request, furnish EAI with
all information or documents concerning Transom and its directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the S-4. EAI shall also use its commercially reasonable
efforts to obtain all necessary state securities law or "Blue Sky"
qualifications, permits and approvals required to carry out the transactions
contemplated by this Agreement, and Transom shall furnish all information
concerning Transom and the holders of Transom Common Stock as may be reasonably
requested by EAI in connection with such qualifications, permits and approvals.
(b) The parties shall cooperate with each other and use their best efforts
to prepare and file promptly all necessary documentation to effect all
applications, notices, petitions and filings and to obtain as promptly as
practicable all Consents of Governmental Authorities and third parties which are
necessary or advisable to consummate the Merger and the other transactions
contemplated by this Agreement, and the parties shall keep each other apprised
of the status of matters relating to completion of the transactions contemplated
herein.
6.2. Access to Information. Upon reasonable notice, Transom shall afford to
the officers, employees, accountants, counsel and other representatives of EAI
access during normal business hours during the period prior to the Effective
Time to all of Transom's books and records, properties and contracts, and,
during such period, Transom shall make available to EAI all information
concerning its business, assets and personnel as EAI may reasonably request.
A-16
<PAGE> 92
6.3. Stockholders' Approval. Transom shall call a meeting of its
stockholders for the purpose of voting upon the adoption of this Agreement and
the approval of the Merger, which meeting shall be held as soon as reasonably
practicable after the S-4 is declared effective by the SEC.
6.4. NNM Listing. EAI shall cause the shares of EAI Common Stock to be
issued in the Merger to be approved for listing on the NNM, subject to official
notice of issuance, prior to the Effective Time.
6.5. Affiliates. Prior to the Effective Time, Transom shall obtain from
each of the stockholders and each of the optionholders listed in Section 6.5 of
the Disclosure Schedule as being "affiliates" of Transom a written agreement
substantially in the form attached as Exhibit A (the "Affiliate Letters").
6.6. Additional Agreements. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, the proper officers and directors of each party to this
Agreement shall take all such necessary or advisable action.
6.7. Advice of Changes. Transom shall promptly advise EAI of any change or
event which is likely to have a Material Adverse Effect on Transom or which
Transom believes would or would be reasonably likely to cause or constitute a
material breach of any of its representations, warranties or covenants contained
herein.
6.8. Takeover Proposals. (a) Transom agrees that from and after its
execution of this Agreement through the Effective Time, it shall not and it
shall use its reasonable efforts to cause its directors, officers and employees,
and all investment bankers, attorneys or other advisors or representatives
retained by Transom not to, (i) solicit or encourage the submission of any
Takeover Proposal (as hereinafter defined), (ii) participate in any discussions
or negotiations regarding, or furnish to any third party any information with
respect to, or take any other action to facilitate any inquiries or the making
of any proposal that constitutes, a Takeover Proposal, (iii) make or authorize
any statement or recommendation in support of any Takeover Proposal, or (iv)
enter into any agreement with respect to any Takeover Proposal.
(b) Notwithstanding the foregoing paragraph (a), nothing contained in this
Section 6.8 shall prohibit the Board of Directors, executive officers or
stockholders of Transom, or the investment bankers, attorneys, or other advisors
or representatives retained by Transom from (x) participating in any discussions
or negotiations with, or furnishing any information to, any third party that
makes a Takeover Proposal (y) making or authorizing any statement or
recommendation in support of any Takeover Proposal, or (z) entering into any
agreement with respect to any Takeover Proposal if all of the following events
shall have occurred: (i) EAI has been notified in writing of such Takeover
Proposal within 24 hours of Transom's receipt thereof, including the identity of
the party making the Takeover Proposal and the material terms thereof; (ii) such
third party has made a written Takeover Proposal to the Board of Directors of
Transom, which Takeover Proposal identifies a price or range of values to be
paid and after consultation with Transom's investment bankers, the Board of
Directors of Transom has determined that such Takeover Proposal is financially
more favorable to the stockholders of Transom than the terms of the Merger;
(iii) Transom's Board of Directors reasonably believes after consultation with
Transom's investment bankers, that such third party is financially capable of
consummating the transactions specified in the Takeover Proposal; and (iv) the
Board of Directors of Transom has determined, after consultation with its
outside legal counsel, that its fiduciary duties require it to (x) furnish
information to and negotiate with such third party, (y) make or authorize any
statement or recommendation in support of any Takeover Proposal, or (z) enter
into any agreement with respect to any Takeover Proposal. Notwithstanding the
foregoing, Transom shall not provide any non-public information to such third
party unless (A) Transom has notified EAI in advance of any such proposed
disclosure of non-public information and has provided EAI with a description of
the information Transom intends to disclose; and (B) Transom provides such
non-public information pursuant to a nondisclosure agreement in a form
substantially similar to that certain Mutual Non-Disclosure Agreement dated
August 27, 1997 (the "Non-Disclosure Agreement") between Transom and EAI.
(c) In addition to the foregoing requirements, Transom shall not accept or
enter into any agreement concerning a Takeover Proposal until at least 48 hours
after EAI's receipt of a copy of such Takeover
A-17
<PAGE> 93
Proposal. Upon compliance with the requirements in the foregoing paragraph (b)
and this paragraph (c), Transom shall be entitled to terminate this Agreement in
accordance with the provisions of Section 8.1(d).
(d) For purposes of this Agreement, "Takeover Proposal" means any proposal
or offer for a merger, consolidation or other business combination involving
Transom or any proposal or offer to acquire a material equity interest in, or a
substantial portion of the assets of, Transom other than by EAI as contemplated
by this Agreement.
(e) Transom shall be entitled to furnish a copy of this Section 6.8 to any
third party who expresses an interest in making a Takeover Proposal after the
execution of this Agreement.
ARTICLE VII.
CONDITIONS PRECEDENT
7.1. Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) Approvals and Consents. All regulatory approvals required to consummate
the transactions contemplated hereby shall have been obtained and shall remain
in full force and effect and all statutory waiting periods in respect thereof
shall have expired (all such approvals and the expiration of all such waiting
periods being referred to herein as the "Requisite Regulatory Approvals"), all
of the Consents necessary to consummate the transactions contemplated by this
Agreement shall have been obtained, and all consents necessary to transfer all
of Transom's right, title and interest to its facilities located at 201 South
Main, Suite 300, Ann Arbor, Michigan, 48104 and 2133 Arch Street, 2nd Floor,
Philadelphia, PA 19103 shall have been obtained in accordance with the lease
thereof, and shall remain in full force and effect.
(b) NNM Listing. The shares of EAI Common Stock which shall be issued to
the stockholders of Transom upon consummation of the Merger shall have been
authorized for listing on the NNM, subject to official notice of issuance.
(c) Blue Sky. EAI shall have received all state securities or "Blue Sky"
permits and other authorizations necessary to issue the shares of EAI Common
Stock pursuant to this Agreement and the Merger.
(d) No Injunctions or Restraints; Illegality. No order, injunction or
decree issued by any Governmental Authority or other legal restraint or
prohibition preventing the consummation of the Merger or any of the other
transactions contemplated by this Agreement shall be in effect. No law, statute,
rule, regulation, order, injunction or decree shall have been enacted, entered,
promulgated or enforced by any Governmental Authority which prohibits,
materially restricts or makes illegal the consummation of the Merger or the
other transactions contemplated by this Agreement.
(e) EAI Stock Value. The EAI Stock Value shall be greater than or equal to
$42.00 per share (subject to appropriate and proportionate adjustment in the
event of a reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split, or other similar change in capitalization of
EAI Common Stock).
(f) Transom Stockholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved by the requisite holders of the
issued and outstanding shares of Transom Common Stock, Transom Series B
Preferred Stock and, if required by law, Transom Series A Preferred Stock.
(g) Warrant Conversion. The Warrant Conversion shall have been duly and
validly effectuated.
(h) S-4. The S-4 shall have become effective under the Securities Act, and
no stop order suspending the effectiveness of the S-4 shall have been issued and
no proceeding for that purpose shall have been initiated or threatened by the
SEC.
(i) Preferred Share Conversion. The Preferred Share Conversion shall have
been duly and validly effectuated.
A-18
<PAGE> 94
7.2. Conditions to Obligations of EAI. The obligation of EAI to effect the
Merger is also subject to the satisfaction or waiver by EAI at or prior to the
Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties of
Transom set forth in this Agreement that are qualified with reference to a
Material Adverse Effect or materiality shall be true and correct, and the
representations and warranties of Transom that are not so qualified shall be
true and correct in all material respects, in each case as of the date of this
Agreement and (except to the extent such representations and warranties speak as
of an earlier date) as of the Closing Date as though made on and as of the
Closing Date. EAI shall have received a certificate signed on behalf of Transom
by the Chief Executive Officer and President, to the foregoing effect.
(b) Performance of Obligations of Transom. Transom shall have performed in
all material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and EAI shall have received a
certificate signed on behalf of Transom by the Chief Executive Officer and
President to such effect.
(c) Dissenters Rights. Holders of not more than ten percent (10%) of the
outstanding Transom Stock (on a fully-converted basis) shall have validly
exercised their "dissenters rights" pursuant to the DGCL.
(d) Affiliates Agreements. EAI shall have received executed Affiliate
Letters from each stockholder and each optionholder of Transom listed in Section
6.5 of the Disclosure Schedule as an "affiliate" of Transom.
(e) Proprietary Information Agreements. Transom shall have in its personnel
files an executed copy of Transom's confidentiality, noncompetition and
nondisclosure from the employees of Transom previously disclosed in writing to
EAI.
(f) Tax Opinion. EAI shall have received a tax opinion from Ernst & Young,
LLP in the form attached as Exhibit B (the "Tax Opinion").
(g) Pooling of Interests Letter. EAI shall have received from Ernst &
Young, LLP a letter dated on or about the date that is two business days prior
to the date the Proxy Statement Prospectus that forms a part of the S-4 is first
mailed to stockholders of Transom, in form and substance acceptable to EAI, to
the effect that the business combination to be effected by the Merger will
qualify for accounting as a "pooling of interests" by EAI for purposes of its
consolidated financial statements under GAAP and applicable rules and
regulations of the SEC, (the "Pooling of Interests Letter") and such letter
shall not have been withdrawn or modified in any material respect on the Closing
Date. EAI shall have received from Arthur Anderson a letter dated on or about
the date that is two business days prior to the date the Proxy
Statement/Prospectus that forms a part of the S-4 is first mailed to the
stockholders of Transom, in form and substance acceptable to EAI, to the effect
that Transom is a "poolable" entity for purposes of EAI's Consolidated Financial
Statements under GAAP and applicable rules and regulations of the SEC ("Poolable
Entity Letter"), and such letter shall not have been withdrawn or modified in
any material respect on the Closing Date. No action shall have been taken or
proposed by any Governmental Authority, and no statute, rule, regulation or
order shall have been enacted, promulgated, issued or proposed by any
Governmental Authority that would prevent EAI from accounting for the business
combination to be effected by the Merger as a pooling of interests.
(h) Legal Opinion; Closing Certificates. EAI shall have received from
Morgan, Lewis & Bockius LLP, counsel to Transom, an opinion substantially in the
form attached as Exhibit C. In addition, Transom shall provide EAI with such
customary closing documents and certificates as EAI or its counsel shall
reasonably request.
(i) Certifications Regarding Tax Matters. EAI shall have received a
certificate from Transom regarding tax matters substantially in the form
attached as Exhibit D.
(j) Material Adverse Change. There shall not have occurred any change which
would constitute a Material Adverse Effect on Transom.
(k) Severance Releases. Each person who has been an officer of Transom at
any time since June 1, 1998 shall have executed and delivered to EAI a release,
in a form reasonably satisfactory to EAI, of any rights to
A-19
<PAGE> 95
receive severance payments arising out of a resolution adopted by the Executive
Committee of the Board of Directors of Transom on June 2, 1998.
7.3. Conditions to Obligations of Transom. The obligation of Transom to
effect the Merger is also subject to the satisfaction or waiver by Transom at or
prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties of
EAI set forth in this Agreement that are qualified with a reference to
materiality shall be true and correct, and the representations and warranties of
EAI that are not so qualified shall be true and correct in all material
respects, in each case, as of the date of this Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as of
the Closing Date as though made on and as of the Closing Date. Transom shall
have received a certificate signed on behalf of EAI by the Chief Executive
Officer or the Chief Financial Officer of EAI to the foregoing effect.
(b) Performance of Obligations of EAI. EAI shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and Transom shall have received a
certificate signed on behalf of EAI by the Chief Executive Officer or the Chief
Financial Officer of EAI to such effect.
(c) Legal Opinion; Closing Certificates. Transom shall have received from
Jamie A. Wade, General Counsel of EAI, an opinion substantially in the form
attached as Exhibit E together with such customary closing documents and
certificates as Transom or its counsel shall reasonably request.
(d) Material Adverse Change. There shall not have occurred any change which
would constitute a Material Adverse Effect on EAI and its subsidiaries, taken as
a whole.
(e) Tax Opinion. Transom shall have received the Tax Opinion.
(f) Pooling of Interests Letter/Poolable Entity Letter. Transom shall have
received the Pooling of Interests Letter from Ernst & Young LLP and the Poolable
Entity Letter from Arthur Andersen LLP.
ARTICLE VIII.
TERMINATION AND AMENDMENT
8.1. Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the Merger by the
stockholders of Transom:
(a) by mutual consent of Transom and EAI in a written instrument, if the
Board of Directors of each so determines by a vote of a majority of the members
of its entire Board;
(b) by either the Board of Directors of Transom or the Board of Directors
of EAI if any Governmental Authority which must grant a Requisite Regulatory
Approval has denied approval of the Merger, or any Governmental Authority of
competent jurisdiction shall have issued an order permanently enjoining or
otherwise prohibiting the consummation of the transactions contemplated by this
Agreement;
(c) by either the Board of Directors of Transom or the Board of Directors
of EAI (provided that the terminating party is not then in material breach of
any representation, warranty, covenant or other agreement contained herein) if
(x) there shall have been a material breach of any of the representations or
warranties or any of the covenants or agreements set forth in this Agreement on
the part of the other party, which breach is not cured within 30 days following
written notice to the party committing such breach, or which breach, by its
nature or timing, cannot be cured prior to October 31, 1998, (y) the Closing
shall not have occurred on or before October 31, 1998; provided, however, that
neither Board of Directors shall be entitled to terminate the Agreement pursuant
to this clause (y) if the reason the Closing has not occurred by such date is
because any Governmental Authority which must grant a Requisite Regulatory
Approval has failed to act, the Transom stockholder meeting shall not have
occurred in accordance with the requirements of the DGCL or some similar event
beyond the control of both parties shall not have occurred by such date, or (z)
the Closing shall not have occurred on or before December 31, 1998; or
A-20
<PAGE> 96
(d) by the Board of Directors of Transom (after consulting with its legal
counsel), if , after compliance with the requirements of Section 6.8 hereof,
such action is required for the Board of Directors to comply with its fiduciary
duties to Transom and its stockholders as contemplated in Section 6.8 hereof;
provided, however, if such action is taken by Transom, then (i) within 2 days of
such termination Transom shall reimburse EAI for its out-of-pocket expenses (not
to exceed $150,000) incurred in connection with the transactions contemplated by
this Agreement; and (ii) if Transom shall consummate any transaction pursuant to
a Takeover Proposal (x) within 12 months following the date of this Agreement,
or (y) pursuant to a definitive agreement executed by Transom during such
12-month period, Transom shall also promptly pay to EAI $372,000 upon the
occurrence of such transaction;
provided, however, if the Transom stockholder meeting shall have occurred and
the Transom stockholders shall have voted with respect to approval of the Merger
and the requisite vote necessary to approve the Merger shall not have been
received, then this Agreement shall automatically be terminated as of the date
of such Transom stockholder meeting without further action of any of the parties
hereto and within 2 days of such termination Transom pay to EAI $75,000 as
reimbursement for EAI's out-of-pocket expenses incurred in connection with the
transactions contemplated by this Agreement (for which EAI shall not be required
to account).
8.2. Effect of Termination. In the event of termination of this Agreement
by either Transom or EAI as provided in Section 8.1, this Agreement shall
forthwith become void and have no effect, and none of Transom or EAI or any of
their directors or officers shall have any liability of any nature whatsoever
hereunder, or in connection with the transactions contemplated hereby, except
that (i) Sections 8.1(d) and 9.1, the final proviso clause of Section 8.1 and
this Section 8.2 shall survive any termination of this Agreement, and (ii)
notwithstanding anything to the contrary contained in this Agreement, neither
Transom nor EAI shall be relieved or released from any liabilities or damages
arising out of its willful breach of any provision of this Agreement.
8.3. Amendment; Extension; Waiver. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (i) amend any term or provision
of this Agreement, (ii) extend the time for the performance of any of the
obligations or other acts of the parties hereto, (iii) waive any inaccuracies in
the representations and warranties contained herein or in any document delivered
pursuant hereto and (iv) waive compliance with any of the agreements or
conditions contained herein; provided, however, that after any approval of the
transactions contemplated by this Agreement by the stockholders of Transom,
there may not be, without further approval of such stockholders, any amendment,
extension or waiver of this Agreement which reduces the amount or changes the
form of the consideration to be delivered to the holders of Transom Common Stock
hereunder other than as contemplated by this Agreement. Any agreement on the
part of a party hereto to any such amendment, extension or waiver shall be valid
only if set forth in a written instrument signed on behalf of such party, but
such amendment, extension or waiver or failure to insist on strict compliance
with any obligation, covenant, agreement or condition in this Agreement shall
not operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
ARTICLE IX.
GENERAL PROVISIONS
9.1. Expenses. Except as set forth in Section 8.1(d) or the final proviso
clause of Section 8.1, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expense.
9.2. Notices. All notices and other required communications hereunder shall
be in writing and shall be deemed given: if delivered personally, when so
delivered; if telecopied, on the date telecopied (provided there is written
confirmation of receipt and a confirming notice or communication is delivered in
the manner set forth herein) provided it is telecopied before 12:00 noon local
time or otherwise the next business day; if mailed by registered or certified
mail (postage prepaid and return receipt requested), on the date five days
A-21
<PAGE> 97
after deposit in the mail; or if delivered by overnight courier (with written
confirmation of delivery to such courier), on the next business after such
delivery, in each case to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to EAI, to:
Engineering Animation, Inc.
2321 North Loop Drive
Ames, Iowa 50010
Attention: Jamie A. Wade
Vice President of Administration, General Counsel and Secretary
Fax: (515) 296-6941
with a copy to:
Gardner, Carton & Douglas
321 North Clark Street, Suite 3400
Chicago, Illinois 60610
Attention: Nancy M. Borders
Fax: (312) 644-3381
and
(b) if to Transom, to:
Transom Technologies, Inc.
201 South Main
Suite 300
Ann Arbor, MI 48104
Attention: James D. Price, President and Chief Executive Officer
Fax: (734) 761-7003
with a copy to:
Morgan, Lewis & Bockius LLP
200 One Logan Square
Philadelphia, PA 19103
Attention: Stephen Jannetta
Fax: (215) 963-5299
9.3. Interpretation. When a reference is made in this Agreement to
Sections, Schedules or Exhibits, such reference shall be to a Section of or
Schedule or Exhibit to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." No provision of this Agreement shall be construed to require EAI,
Transom or any of their respective affiliates to take any action which would
violate any applicable law, rule or regulation.
9.4. Counterparts; Facsimile. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement. The
Agreement may be executed and delivered by facsimile transmission, and a
facsimile of this Agreement or of a signature of a party shall be as effective
as an original.
9.5. Entire Agreement. This Agreement (including the Disclosure Schedule,
Exhibits, documents and instruments referred to herein) and the Non-Disclosure
Agreement constitute the entire agreement of the parties and supersedes all
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter hereof.
9.6. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without regard to any
applicable conflicts of law which would result in the application of any other
law.
A-22
<PAGE> 98
9.7. Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
9.8. Publicity. Except as otherwise required by applicable law or the rules
of the NNM, neither Transom nor EAI shall, or shall permit any of their
respective affiliates to, issue or cause the publication of any press release or
other public announcement with respect to, or otherwise make any public
statement concerning, the transactions contemplated by this Agreement without
the prior consent of the other party, which consent shall not be unreasonably
withheld.
9.9. Assignment; Third Party Beneficiaries. Neither this Agreement nor any
of the rights, interests or obligations set forth herein shall be assigned by
either of the parties (whether by operation of law or otherwise) without the
prior written consent of the other party. Subject to the preceding sentence,
this Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns. This
Agreement (including the Disclosure Schedule, Exhibits, documents and
instruments referred to herein) is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder.
9.10. Knowledge and Awareness. As used in this Agreement, "knowledge" or
"awareness" of any entity means the actual knowledge or awareness of such
entity's officers and other persons exercising supervisory authority, and such
knowledge or awareness as such entity's officers and other persons exercising
supervisory authority should have had after reasonable investigation. Whenever
the term "knowledge" or "awareness" is used to refer to the "knowledge" or
"awareness" of Transom, such term shall include the "knowledge" or "awareness"
of the directors, officers and other persons exercising supervisory authority
over Transom and the stockholders of Transom who are active in the business of
Transom.
9.11. Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumptions or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of any
of the provisions of this Agreement. Any reference to any Federal, state,
county, local or foreign law or statute shall be deemed also to refer to all
rules and regulations promulgated thereunder, unless the context requires
otherwise.
9.12. Pooling of Interests Accounting; Tax Free Reorganization. In the
event that either EAI or Transom becomes aware of any provisions of this
Agreement which would prevent the Merger from being accounted for as a pooling
of interests or qualifying as a reorganization within the meaning of Section 368
of the Code, such parties shall negotiate in good faith with a view toward
amending this Agreement in a manner which would permit the Merger to be
accounted for as a pooling of interests or qualified as such a reorganization,
as applicable.
A-23
<PAGE> 99
IN WITNESS WHEREOF, EAI, and Transom have caused this AGREEMENT AND PLAN OF
MERGER to be executed by their respective officers thereunto duly authorized as
of the date first above written.
ENGINEERING ANIMATION, INC.
By: /s/ JAMIE A. WADE
----------------------------------
Name: Jamie A. Wade
-------------------------------
Title: Vice President
---------------------------------
TRANSOM TECHNOLOGIES, INC.
By: /s/ JAMES D. PRICE
----------------------------------
James D. Price
President and Chief Executive
Officer
A-24
<PAGE> 100
EXHIBIT A
FORM OF AFFILIATE LETTER
, 1998
Engineering Animation, Inc.
2321 North Loop Drive
Ames, Iowa 50010
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to
be an "affiliate" of Transom Technologies, Inc., a Delaware corporation
("Transom"), as the term "affiliate" is defined within the meaning of Rule 145
of the rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, (the "Act"). Pursuant to the terms of the Agreement and Plan of Merger
dated as of July 29, 1998, (as may be amended from time to time, the
"Agreement"), between Engineering Animation, Inc., a Delaware corporation
("EAI"), and Transom, Transom shall merge with and into EAI (the "Merger") and
as a result of the Merger, EAI shall be the surviving corporation.
In connection with the Merger, I may be entitled to receive shares of
common stock, par value $0.01 per share, of EAI (the "EAI Common Stock") in
exchange for shares of Transom common stock, par value $.001 per share, and/or
Transom preferred stock, par value $.001 per share (collectively, the "Transom
Stock").
I represent and warrant to, and covenant with, EAI that in the event I
receive any EAI Common Stock as a result of the Merger:
(a) I shall not make any sale, transfer or other disposition of the
EAI Common Stock in violation of the Act or the Rules and Regulations.
(b) I have carefully read this letter and the Agreement and, to the
extent I felt necessary, I have discussed the requirements of such
documents and other applicable limitations upon my ability to sell,
transfer or otherwise dispose of EAI Common Stock with my counsel or
counsel for Transom.
(c) I further represent to, and covenant with, EAI that I will not,
during the 30 days prior to the Effective Time (as defined in the
Agreement), sell, transfer or otherwise dispose of Transom Stock or shares
of the capital stock of EAI that I may hold and, furthermore, that I will
not sell, transfer or otherwise dispose of EAI Common Stock received by me
in the Merger or any other shares of the capital stock of EAI until after
such time as results covering at least 30 days of the combined operations
of Transom and EAI have been published by EAI, in the form of a quarterly
earnings report, an effective registration statement filed with the
Commission, a report filed with the Commission on Form 10-K, 10-Q, or 8-K,
or any other public filing or announcement which includes such combined
results of operations, and I understand that EAI may place on the
certificates of EAI Common Stock issued to me a legend to the foregoing
effect.
A-25
<PAGE> 101
Execution of this letter is not an admission on my part that I am an
"affiliate" of Transom as described in the first paragraph of this letter, or as
a waiver of any rights I may have to object to any claim that I am such an
affiliate on or after the date of this letter.
Sincerely yours,
--------------------------------------
Name:
--------------------------------------
By:
--------------------------------------
Its:
--------------------------------------
Accepted this day of
, 1998
ENGINEERING ANIMATION, INC.
By:
- --------------------------------------
Name:
----------------------------------
Title:
----------------------------------
A-26
<PAGE> 102
EXHIBIT B
FORM OF ERNST & YOUNG TAX OPINION
, 1998
<TABLE>
<S> <C>
Transom Technologies, Inc. Engineering Animation, Inc.
201 South Main 2321 North Loop Drive
Suite 300 Ames, IA 50010
Ann Arbor, MI 48104
</TABLE>
Re: Merger of Transom Technologies, Inc. With and Into Engineering Animation,
Inc.
Ladies and Gentlemen:
This letter is in reply to your request for our opinion concerning certain
Federal income tax consequences of the proposed merger (the "Merger") of Transom
Technologies, Inc. ("Transom") with and into Engineering Animation, Inc. ("EAI")
pursuant to an Agreement and Plan of Merger dated , 1998 (the
"Agreement'). Capitalized terms not otherwise defined herein shall have the
meaning set forth in the Agreement.
In rendering this opinion, we have relied upon the facts as presented to us
in originals or copies of pertinent documents (sometimes hereinafter referred to
collectively as "Documents"), including:
1. The Statements of Facts and Representations received from James D.
Price, Norman I. Badler, and Penn .
2. The Statements of Facts and Representations received from Transom and
EAI.
3. The Agreement and Plan of Merger, dated , 1998, by and
among Transom and EAI.
4. The Form S-4 filed with the Securities and Exchange Commission on
, 1998.
5. The Irrevocable Proxy Agreement, dated as of , 1998,
between EAI, Transom and certain holders of Common Stock of Transom set
forth in such agreement.
We have made no independent determination regarding the facts and
circumstances surrounding the Merger, but instead have relied upon the
Documents, without independent verification, for purposes of this letter.
This opinion is being rendered solely to EAI, Transom and Transom's
shareholders and is solely for their benefit. This opinion may not be relied
upon by any other person or persons, or be used for any other purposes,
including, but not necessarily limited to, filings with Governmental agencies
without our prior written consent. However, we understand that this opinion may
be included as an exhibit to the Form S-4 to be filed with the Securities and
Exchange Commission. We consent to the inclusion of our opinion with such
filing.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Based upon our examination of the Agreement, the Documents, the
representations of EAI, Transom, Transom's shareholders and our review of
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations and rulings thereunder, it is our opinion for
Federal income tax purposes that:
(1) The Merger will constitute a tax-free reorganization within the
meaning of Sections 368(a)(1)(A) of the Code and Transom and EAI will each
be a party to the reorganization;
A-27
<PAGE> 103
(2) No gain or loss will be recognized by the shareholders of Transom
who exchange their Transom Common Stock for EAI Common Stock pursuant to
the Merger (except with respect to cash received in lieu of a fractional
share interest in EAI Common Stock);
(3) The tax basis of the EAI Common Stock received by shareholders who
exchange all of their Transom Common Stock for EAI Common Stock in the
Merger will be the same as the tax basis of the Transom Common Stock
surrendered in exchange therefor (reduced by any amount allocable to a
fractional share interest for which cash is received);
(4) The holding period of EAI Common Stock received by shareholders of
Transom in the Merger will include the period during which the shares of
Transom Common Stock surrendered in exchange therefor were held; provided,
such Transom Common Stock was held as a capital asset by the holder of such
Transom Common Stock at the Effective Time; and
(5) No gain or loss will be recognized by Transom or EAI as a result
of the Merger.
SCOPE OF OPINION
The scope of this opinion is expressly limited solely to the federal income
tax issues specifically addressed in (1) through (5) in the section entitled
"CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES", above. Specifically,
our opinion has not been requested, and we have made no determination nor
expressed any opinion on any other issues, including, but not limited to,
valuation issues, any state and local, foreign, consolidated return, employee
benefit, and Section 382 issues, or alternative minimum tax consequences to the
parties to this transaction. Additionally, our opinion has not been requested
and none is expressed with respect to the exercise of options or similar rights
to purchase stock, or the exchange, assumption or substitution of options or
similar rights to purchase Transom Stock for rights to purchase EAI Stock.
Further, no opinion is expressed as to the qualification of the Merger as a
statutory merger under state law.
Our opinion, as stated above, is based upon our analysis of the Internal
Revenue Code of 1986, as amended, the Treasury Regulations, current case law,
and published Internal Revenue Service ("IRS") authorities in effect as of the
date of this letter. The foregoing are subject to change, and such change may be
retroactively effective. No assurance can be provided as to the effect of any
such change upon our opinion. In addition, our opinion is based on the
information contained in the Documents. Any change in the Documents may affect
our opinion, perhaps in an adverse manner. We have undertaken no obligation to
update this opinion for changes in facts or law occurring subsequent to the date
hereof.
This letter represents our views as to the interpretation of existing law
and is not binding on the IRS or the courts.
Very truly yours,
A-28
<PAGE> 104
EXHIBIT C
FORM OF LEGAL OPINION TO BE DELIVERED
BY COUNSEL TO TRANSOM TECHNOLOGIES, INC.
The legal opinion of counsel to Transom Technologies, Inc. (the "Company")
shall be to the effect that:
1. The Company has been duly incorporated and is validly existing and in
good standing under the laws of the State of Delaware. The Company has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted. The Company is duly
qualified to do business and is in good standing as a foreign corporation under
the laws of the State of Michigan and the Commonwealth of Pennsylvania.
2. The authorized capital stock of the Company consists of (a) 10,000,000
shares of common stock, $.001 par value per share ("Common Stock"), of which
1,650,800 shares are issued and outstanding, and 1,537,667 shares are reserved
for issuance upon exercise of outstanding Transom Options, 628,000 shares are
reserved for issuance upon conversion of the Transom Series A Preferred Stock,
4,650,000 shares are reserved for the issuance upon conversion of the Transom
Series B Preferred Stock and 150,000 shares are reserved for the issuance upon
exercise or conversion of the Transom Series A Warrants; and (b) 6,000,000
shares of preferred stock, $.001 par value per share ("Preferred Stock"), of
which (i) 628,000 shares are designated "Series A Non-Voting Convertible
Preferred Stock", of which 478,000 shares are issued and outstanding, and (ii)
5,000,000 shares are designated "Series B Convertible Preferred Stock", of which
4,650,000 shares are issued and outstanding. All of the issued and outstanding
shares of Common Stock and Preferred Stock have been duly authorized and validly
issued and are fully paid, nonassessable, free of statutory preemptive rights,
and, to our knowledge, free of any other preemptive rights, other than those
rights in respect of the Transom Series A Preferred Stock and Transom Series B
Preferred Stock as set forth in the Certificate of Incorporation. To our
knowledge, other than the Transom Options, the Transom Series A Warrants and the
matters described in Section 3.2 of the Disclosure Schedule, the Company does
not have and is not bound by any outstanding subscriptions, options, convertible
securities, warrants, calls, commitments or agreements of any character calling
for the purchase or issuance of any shares of its capital stock.
3. Effective at or prior to the Effective Time, all of the issued and
outstanding shares of Transom Preferred Stock have been converted into shares of
Common Stock and all of the issued and outstanding Transom Series A Warrants
have been converted into shares of Common Stock.
4. Each of the Transom Options may, under their terms, be assumed by EAI
upon the consummation of the Merger and, accordingly, represent the right to
acquire EAI Common Stock as provided in Section 2.7 of the Agreement.
5. The Company has the corporate power and authority to execute and deliver
the Agreement and to consummate the transactions contemplated thereby. The
execution and delivery of the Agreement and the consummation of the transactions
contemplated thereby have been duly authorized by the Board of Directors. The
Agreement has been duly approved by the stockholders of the Company. Except for
the conversions described in paragraph 3 above, no other corporate proceedings
on the part of the Company are necessary to approve the Agreement or to
consummate the transactions contemplated thereby. The Agreement has been duly
and validly executed and delivered by the Company and (assuming the due
authorization, execution, and delivery by EAI) constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to the qualifications that enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other similar
laws affecting creditors' rights and remedies generally and subject to general
principles of equity, including principles of commercial reasonableness, good
faith and fair dealing (regardless of whether enforcement is sought in equity or
in law).
6. The execution and delivery of the Agreement by the Company do not, and
the performance by the Company of its obligations thereunder will not (a)
violate any provision of the Certificate of Incorporation or By-laws of Transom,
(b) constitute a violation of any Applicable Contract, (c) cause the creation of
any
A-29
<PAGE> 105
security interest or lien upon any of the property of the Company pursuant to
any Applicable Contract, (d) contravene any provision of any Applicable Law, or
(e) contravene any Applicable Order of any Governmental Authority binding upon
the Company.
Reference to (i) "Applicable Laws" shall mean the Delaware General
Corporation Law and those laws, rules and regulations of the United States of
America which, in our experience, are normally applicable to transactions of the
type contemplated by the Agreement; (ii) "Governmental Authorities" shall mean
any Delaware or federal executive, legislative, judicial, administrative or
regulatory body, or any regulatory body acting pursuant to the Delaware General
Corporation Law; (iii) "Applicable Orders" shall mean those orders or decrees of
Governmental Authorities that are known to us to be binding on the Company; and
(iv) "Applicable Contracts" shall mean those agreements or instruments set forth
on Annex A attached hereto and made a part hereof.
7. Except for (a) the filing of Certificate of Merger with the Secretary of
State of Delaware pursuant to and in accordance with the Delaware General
Corporation Law, (b) the approval of the Agreement by the requisite vote of the
holders of Transom Common Stock, Transom Series A Preferred Stock and Transom
Series B Preferred Stock, which has been obtained, (c) the filings set forth in
the Disclosure Schedule that are required to be made after the Closing, (d) any
other filings required as a result of the identity or legal status of EAI, (e)
filings and approvals that are required to be made or obtained by EAI under the
securities or "blue sky" laws of various states in connection with the issuance
of EAI Common Stock under the Agreement, (f) filings and authorizations
necessary to list the shares of EAI Common Stock issued pursuant to the
Agreement on the NNM, and (g) the filing with the Securities and Exchange
Commission and declaration of effectiveness of the Registration Statement on
Form S-4, no Consent of any Governmental Authority is necessary in connection
with the execution and delivery by the Company of the Agreement and the
consummation by the Company of the Merger and the other transactions
contemplated thereby.
At your request, we are also advising you that, to our knowledge, except as
set forth in the Disclosure Schedule, there are no actions, suits, proceedings,
claims or investigations pending or threatened against or affecting the Company
at law or in equity or before any Governmental Authority or challenging the
validity or propriety of the transactions contemplated by the Agreement.
Very truly yours,
A-30
<PAGE> 106
EXHIBIT D.1
STATEMENT OF FACTS AND REPRESENTATIONS
JAMES D. PRICE, SHAREHOLDER OF TRANSOM TECHNOLOGIES, INC.
, 1998
Ernst & Young LLP
1400 Pillsbury Center
Minneapolis, MN 55402
This STATEMENT OF FACTS AND REPRESENTATIONS made by James D. Price
("Price") to Ernst & Young LLP, is intended to provide certain representations
that may be relied upon in the issuance of an opinion as to the Federal income
tax consequences arising from the consummation of the proposed merger (the
"Merger") of Transom Technologies, Inc. ("Transom"), with and into Engineering
Animation, Inc. ("EAI"), as set forth in the Agreement and Plan of Merger
(including attachments, the "Agreement"), dated as of , 1998, made
and entered into by EAI and Transom. This Statement of Facts and Representations
is made to the best knowledge and belief of the undersigned party solely for the
purpose of the issuance of the tax opinion referenced above and may not be
relied upon by any person other than Ernst & Young LLP.
(a) Price has no plan or intention prior to or in connection with the plan
of reorganization, to sell or otherwise dispose of any stock of Transom to
Transom or a related person (as defined in Treas. Reg. section 1.368-1(e)(3)
determined without regard to Treas. Reg. section 1.368-1(e)(3)(i)(A)).
Additionally, Price has no plan or intention subsequent to or in connection with
the plan of reorganization, to sell or otherwise dispose of any stock of EAI
received in the plan of reorganization to EAI or a related person (as defined in
Treas. Reg. section 1.368-1(e)(3) determined without regard to Treas. Reg.
section 1.368-1(e)(3)(i)(A)).
(b) None of the compensation received by any shareholder employees of
Transom will be separate consideration for, or allocable to, any of their shares
of Transom stock; none of the shares of EAI stock received by any
shareholder-employees in connection with the Merger will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
(c) Price will not knowingly take any action, that would jeopardize the
treatment of the Merger as a tax-free reorganization under Section 368(a) of the
Code.
(d) The representations made herein are current as of the date hereof and
are expected to be true and complete through the closing of the Merger. If any
event should occur which may alter one or more of the representations made
herein, Ernst & Young will be promptly notified in order that a determination
may be made as to the impact, if any, that such event shall have on their tax
opinion.
This letter is being furnished to you in connection with your rendering
your opinion that the Merger qualifies as a "reorganization" under Section
368(a) of the Code. The undersigned expressly acknowledges that your opinion
will be based upon the certifications and representations set forth herein and
in other letters to be delivered to you by EAI, Transom and the Transom
shareholders and on the representations, warranties, covenants, assumptions and
statements contained in the Agreement, any documents related thereto and your
opinion and that your opinion will be subject to certain exceptions limitations
and qualifications and that it may not be relied upon if any such
representations, warranties, covenants, assumptions or statements are not
accurate in all material respects. Moreover, I expressly acknowledge that to the
extent any representations are made to my knowledge or belief you will be
relying upon the accuracy of the underlying statements as if represented without
such qualification.
Very truly yours,
James D. Price
A-31
<PAGE> 107
EXHIBIT D.2
STATEMENT OF FACTS AND REPRESENTATIONS
NORMAN I. BADLER, SHAREHOLDER OF TRANSOM TECHNOLOGIES, INC.
, 1998
Ernst & Young LLP
1400 Pillsbury Center
Minneapolis, MN 55402
This STATEMENT OF FACTS AND REPRESENTATIONS made by Norman I. Badler
("Badler") to Ernst & Young LLP, is intended to provide certain representations
that may be relied upon in the issuance of an opinion as to the Federal income
tax consequences arising from the consummation of the proposed merger (the
"Merger") of Transom Technologies, Inc. ("Transom"), with and into Engineering
Animation, Inc. ("EAI"), as set forth in the Agreement and Plan of Merger
(including attachments, the "Agreement"), dated as of , 1998, made
and entered into by EAI and Transom. This Statement of Facts and Representations
is made to the best knowledge and belief of the undersigned party solely for the
purpose of the issuance of the tax opinion referenced above and may not be
relied upon by any person other than Ernst & Young LLP.
(a) Badler has no plan or intention prior to, or in connection with the
plan of reorganization, to sell or otherwise dispose of any stock of Transom to
Transom or a related person (as defined in Treas. Reg. section 1.368-1(e)(3)
determined without regard to Treas. Reg. section 1.368-1(e)(3)(i)(A)).
Additionally, Badler has no plan or intention subsequent to, or in connection
with the plan of reorganization, to sell or otherwise dispose of any stock of
EAI received in the plan of reorganization to EAI or a related person (as
defined in Treas. Reg. section 1.368-1(e)(3) determined without regard to Treas.
Reg. section 1.368-1(e)(3)(i)(A)).
(b) None of the compensation received by any shareholder employees of
Transom will be separate consideration for, or allocable to, any of their shares
of Transom stock; none of the shares of EAI stock received by any
shareholder-employees in connection with the Merger will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
(c) Badler will not knowingly take any action, that would jeopardize the
treatment of the Merger as a tax-free reorganization under Section 368(a) of the
Code.
(d) The representations made herein are current as of the date hereof and
are expected to be true and complete through the closing of the Merger. If any
event should occur which may alter one or more of the representations made
herein, Ernst & Young will be promptly notified in order that a determination
may be made as to the impact, if any, that such event shall have on their tax
opinion.
This letter is being furnished to you in connection with your rendering
your opinion that the Merger qualifies as a "reorganization" under Section
368(a) of the Code. The undersigned expressly acknowledges that your opinion
will be based upon the certifications and representations set forth herein and
in other letters to be delivered to you by EAI, Transom and the Transom
shareholders and on the representations, warranties, covenants, assumptions and
statements contained in the Agreement, any documents related thereto and your
opinion and that your opinion will be subject to certain exceptions limitations
and qualifications and that it may not be relied upon if any such
representations, warranties, covenants, assumptions or statements are not
accurate in all material respects. Moreover, I expressly acknowledge that to the
extent any representations are made to my knowledge or belief you will be
relying upon the accuracy of the underlying statements as if represented without
such qualification.
Very truly yours,
Norman I. Badler
A-32
<PAGE> 108
EXHIBIT D.3
STATEMENT OF FACTS AND REPRESENTATIONS
PENN, SHAREHOLDER OF TRANSOM TECHNOLOGIES, INC.
, 1998
Ernst & Young LLP
1400 Pillsbury Center
Minneapolis, MN 55402
This STATEMENT OF FACTS AND REPRESENTATIONS made by Penn to Ernst & Young
LLP, is intended to provide certain representations that may be relied upon in
the issuance of an opinion as to the Federal income tax consequences arising
from the consummation of the proposed merger (the "Merger") of Transom
Technologies, Inc. ("Transom"), with and into Engineering Animation, Inc.
("EAI"), as set forth in the Agreement and Plan of Merger (including
attachments, the "Agreement"), dated as of , 1998, made and entered
into by EAI and Transom. This Statement of Facts and Representations is made to
the best knowledge and belief of the undersigned party solely for the purpose of
the issuance of the tax opinion referenced above and may not be relied upon by
any person other than Ernst & Young LLP.
(a) Penn has no plan or intention prior to, or in connection with the plan
of reorganization, to sell or otherwise dispose of any stock of Transom to
Transom or a related person (as defined in Treas. Reg. section 1.368-1(e)(3)
determined without regard to Treas. Reg. section 1.368-1(e)(3)(i)(A)).
Additionally, Penn has no plan or intention subsequent to, or in connection with
the plan of reorganization, to sell or otherwise dispose of any stock of EAI
received in the plan of reorganization to EAI or a related person (as defined in
Treas. Reg. section 1.368-1(e)(3) determined without regard to Treas. Reg.
section 1.368-1(e)(3)(i)(A)).
(b) None of the compensation received by any shareholder employees of
Transom will be separate consideration for, or allocable to, any of their shares
of Transom stock; none of the shares of EAI stock received by any
shareholder-employees in connection with the Merger will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
(c) Penn will not knowingly take any action, that would jeopardize the
treatment of the Merger as a tax-free reorganization under Section 368(a) of the
Code.
(d) The representations made herein are current as of the date hereof and
are expected to be true and complete through the closing of the Merger. If any
event should occur which may alter one or more of the representations made
herein, Ernst & Young will be promptly notified in order that a determination
may be made as to the impact, if any, that such event shall have on their tax
opinion.
This letter is being furnished to you in connection with your rendering
your opinion that the Merger qualifies as a "reorganization" under Section
368(a) of the Code. The undersigned expressly acknowledges that your opinion
will be based upon the certifications and representations set forth herein and
in other letters to be delivered to you by EAI, Transom and the Transom
shareholders and on the representations, warranties, covenants, assumptions and
statements contained in the Agreement, any documents related thereto and your
opinion and that your opinion will be subject to certain exceptions limitations
and qualifications and that it may not be relied upon if any such
representations, warranties, covenants, assumptions or statements are not
accurate in all material respects. Moreover, I expressly acknowledge that to the
extent any representations are made to my knowledge or belief you will be
relying upon the accuracy of the underlying statements as if represented without
such qualification.
Very truly yours,
A-33
<PAGE> 109
EXHIBIT E
FORM OF LEGAL OPINION TO BE DELIVERED
BY GENERAL COUNSEL OF ENGINEERING ANIMATION, INC.
The legal opinion of Jamie A. Wade, General Counsel of Engineering
Animation, Inc. ("EAI"), shall be to the effect that:
1. EAI is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. EAI has the corporate power
and authority to own or lease all of its properties and assets and to carry on
its business as it is now being conducted.
2. The authorized capital stock of EAI consists of 60,000,000 shares of EAI
Common Stock and 20,000,000 shares of preferred stock, $.01 par value per share.
All of the issued and outstanding shares of EAI Common Stock have been duly
authorized and validly issued and are fully paid, nonassessable and free of
statutory preemptive rights. The shares of EAI Common Stock to be issued
pursuant to the Merger have been duly authorized and, at the Effective Time upon
issuance pursuant to the Merger Agreement, all such shares will be validly
issued, fully paid, nonassessable and free of statutory preemptive rights.
3. EAI has the corporate power and authority to execute and deliver the
Merger Agreement and to consummate the transactions contemplated thereby. The
execution and delivery of the Merger Agreement and the consummation of the
transactions contemplated thereby have been duly and validly approved by the
Board of Directors of EAI. No other corporate proceedings on the part of EAI are
necessary to approve the Merger Agreement or to consummate the transactions
contemplated thereby. The Merger Agreement has been duly and validly executed
and delivered by EAI and constitutes a valid and binding obligation of EAI,
enforceable against EAI in accordance with its terms, except to the extent that
enforcement may be limited by applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or similar laws of general application
relating to or affecting the enforcement of the rights of creditors or by
equitable principles regardless of whether enforcement is sought in a proceeding
in equity or at law. No opinion is expressed as to the validity or
enforceability of any provision regarding choice of Delaware law to govern the
Merger Agreement.
4. The execution and delivery of the Merger Agreement by EAI, the
consummation by EAI of the transactions contemplated thereby, and the compliance
by EAI with the terms or provisions thereof, will not (i) violate any provision
of the Certificate of Incorporation or By-Laws of EAI, (ii) violate the Delaware
General Corporation Law, or any federal law, rule or regulation that to the
knowledge of such counsel is applicable to transactions of the type contemplated
by the Merger Agreement, (iii) contravene any order or decree of any federal,
governmental authority known by such counsel to be applicable to EAI, or (iv)
constitute a violation of, or cause the creation of any lien pursuant to, any
material license, lease, contract, agreement or other instrument or obligation
to which EAI or any of its subsidiaries is a party and which is filed as an
exhibit to any filings or reports with the SEC. Notwithstanding the preceding
sentence, no opinion is expressed as to whether the execution and delivery of
the Merger Agreement by EAI, the consummation by EAI of the transactions
contemplated thereby or the compliance by EAI with the terms and provisions
thereof will constitute a breach of, or constitute a default under, any covenant
or provision with respect to financial ratios or tests or any aspect of the
financial condition or results of operations of EAI contained in any agreement
to which EAI is a party.
5. Except for (i) the filing of Certificate of Merger with the Delaware
Secretary pursuant to the Delaware General Corporation Law, (ii) the filing with
the Securities and Exchange Commission and declaration of effectiveness of the
S-4, (iii) such filings and approvals as are required to be made or obtained
under the securities or "Blue Sky" laws of various states in connection with the
issuance of the shares of EAI Common Stock pursuant to this Agreement, and (iv)
the filings and authorizations necessary to list the shares of EAI Common Stock
issued pursuant to the Merger Agreement on the NNM, all of which filings,
expirations, approvals and declarations have been made, occurred or obtained, no
Consents from any federal or Delaware governmental authority are necessary in
connection with the execution and delivery by EAI of the Merger Agreement and
the consummation by EAI of the Merger and the other transactions contemplated by
the Merger Agreement.
A-34
<PAGE> 110
APPENDIX B
SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW -- APPRAISAL RIGHTS
Appraisal Rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of an nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
B-1
<PAGE> 111
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares a proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all of the shares of such class or series of stock
of such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not
B-2
<PAGE> 112
more than 10 days prior to the date the notice is given, provided, that if
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger of consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of share not voted
in favor of the merger or consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or consolidation and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such discretion, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
B-3
<PAGE> 113
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertified stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving in or resulting corporation a written withdrawal of his demand
for an appraisal and an acceptance of the merger or consolidation, either within
60 days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
B-4
<PAGE> 114
TRANSOM TECHNOLOGIES, INC.
PROXY CARD
Proxy for the Special Meeting of Stockholders to be Held on September ___, 1998.
This Proxy is Solicited on Behalf of the Board of Directors.
The undersigned hereby constitutes and appoints James D. Price as true and
lawful agent and proxy of the undersigned, with full power of substitution, to
represent the undersigned and to vote all shares of Common Stock which the
undersigned is entitled to vote at the Special Meeting of Stockholders of
Transom Technologies, Inc. (the "Company") to be held on September ___, 1998,
and at any and all adjournments and postponements thereof, on all matters before
such meeting.
THIS PROXY WILL BE VOTED AS SPECIFIED BELOW. HOWEVER, IF NO VOTE IS SPECIFIED,
THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT
AND PLAN OF MERGER WITH ENGINEERING ANIMATION, INC., WHICH MATTER IS MORE FULLY
DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS OF WHICH THE UNDERSIGNED STOCKHOLDER
ACKNOWLEDGES RECEIPT.
THIS PROXY GRANTS DISCRETIONARY AUTHORITY TO VOTE IN ACCORDANCE WITH THE BEST
JUDGMENT OF THE NAMED PROXIES ON OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL
MEETING.
- --------------------------------------------------------------------------------
PLEASE VOTE, SIGN AND DATE THIS PROXY ON THE OTHER SIDE AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE
- --------------------------------------------------------------------------------
[X] Please mark
votes as in this
example
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE APPROVAL.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR the approval
- --------------------------------------------------------------------------------
1. Approval and Adoption of Agreement FOR AGAINST ABSTAIN
and Plan of Merger with Engineering [ ] [ ] [ ]
Animation, Inc., dated as of July 29, 1998.
2. In the discretion of the proxy named herein, the proxy is authorized
to vote upon other matters as are properly brought before the meeting.
YES NO
I PLAN TO ATTEND [ ] [ ]
THE MEETING
- --------------------------------------------------------------------------------
The signer hereby revokes all proxies heretofore given by
the signer to vote at said meeting or any adjournments
thereof.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON.
Joint owners should each sign. When signing as attorney,
executor, administrator, trustee or guardian,
please give full title as such.
-----------------------------------------
-----------------------------------------
Signature(s) Date
<PAGE> 115
TRANSOM TECHNOLOGIES, INC.
PROXY CARD
Proxy for the Special Meeting of Stockholders to be Held on September ___, 1998.
This Proxy is Solicited on Behalf of the Board of Directors.
The undersigned hereby constitutes and appoints James D. Price as true and
lawful agent and proxy of the undersigned, with full power of substitution, to
represent the undersigned and to vote all shares of Series B Preferred Stock
which the undersigned is entitled to vote at the Special Meeting of Stockholders
of Transom Technologies, Inc. (the "Company") to be held on September ___, 1998,
and at any and all adjournments and postponements thereof, on all matters before
such meeting.
THIS PROXY WILL BE VOTED AS SPECIFIED BELOW. HOWEVER, IF NO VOTE IS SPECIFIED,
THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT
AND PLAN OF MERGER WITH ENGINEERING ANIMATION, INC., WHICH MATTER IS MORE FULLY
DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS OF WHICH THE UNDERSIGNED STOCKHOLDER
ACKNOWLEDGES RECEIPT.
THIS PROXY GRANTS DISCRETIONARY AUTHORITY TO VOTE IN ACCORDANCE WITH THE BEST
JUDGMENT OF THE NAMED PROXIES ON OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL
MEETING.
- --------------------------------------------------------------------------------
PLEASE VOTE, SIGN AND DATE THIS PROXY ON THE OTHER SIDE AND RETURN PROMPTLY IN
THE ENCLOSED ENVELOPE
- --------------------------------------------------------------------------------
[X] Please mark
votes as in this
example
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE APPROVAL.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR the approval
- --------------------------------------------------------------------------------
1. Approval and Adoption of Agreement FOR AGAINST ABSTAIN
and Plan of Merger with Engineering [ ] [ ] [ ]
Animation, Inc., dated as of July 29, 1998.
2. In the discretion of the proxy named herein, the proxy is authorized to vote
upon other matters as are properly brought before the meeting.
YES NO
I PLAN TO ATTEND [ ] [ ]
THE MEETING
- --------------------------------------------------------------------------------
The signer hereby revokes all proxies heretofore given by
the signer to vote at said meeting or any adjournments
thereof.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON.
Joint owners should each sign. When signing as attorney,
executor, administrator, trustee or guardian, please give
full title as such.
----------------------------------------------------
----------------------------------------------------
Signature(s) Date
<PAGE> 116
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
EAI's Certificate of Incorporation and By-laws provide that EAI 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 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. The enabling
statute 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. EAI's Certificate of
Incorporation includes a provision that eliminates, to the fullest extent
permitted, director liability for monetary damages for breaches of fiduciary
duty.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The Exhibits to this registration statement are listed in the Index to
Exhibits.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of
II-1
<PAGE> 117
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in the documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Ames and
State of Iowa on the 14th day of August, 1998.
ENGINEERING ANIMATION, INC.
(Registrant)
/s/ MATTHEW M. RIZAI
------------------------------------
Matthew M. Rizai,
Chairman, Chief Executive Officer,
President, Treasurer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each of the undersigned hereby
constitutes and appoints, jointly and severally, Matthew M. Rizai and Jamie A.
Wade, or either of them (with full power to each of them to act alone), as his
true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and on his behalf to sign, execute and
file this Registration Statement, any or all amendments (including, without
limitation, post-effective amendments) to this Registration Statement, and any
and all additional registration statements filed pursuant to Rule 462(b) related
to this Registration Statement, and to file the same, with all exhibits thereto
and all documents required to be filed with respect therewith, with the
Securities and Exchange Commission or any regulatory authority, granting unto
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith and about the premises in order to effectuate the same
as fully to all intents and purposes as he might or could do if personally
present, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the 14th day of August, 1998.
<TABLE>
<S> <C>
/s/ MATTHEW M. RIZAI Chairman, Chief Executive Officer,
- ----------------------------------------------------- President, Treasurer and Director
Matthew M. Rizai (Principal Executive Officer)
/s/ MARTIN J. VANDERPLOEG Executive Vice President and Director
- -----------------------------------------------------
Martin J. Vanderploeg
/s/ JEROME M. BEHAR Vice President of Finance and Chief
- ----------------------------------------------------- Financial Officer (Principal Financial
Jerome M. Behar and Accounting Officer)
/s/ JAMIE A. WADE Vice President of Administration, General
- ----------------------------------------------------- Counsel, Secretary and Director
Jamie A. Wade
/s/ MICHAEL CROW Director
- -----------------------------------------------------
Michael Crow
/s/ LAURENCE J. KIRSHBAUM Director
- -----------------------------------------------------
Laurence J. Kirshbaum
</TABLE>
S-1
<PAGE> 119
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2 Agreement and Plan of Merger between the Registrant and
Transom Technologies, Inc., dated as of July 29, 1998.
Included as Appendix A to the Proxy Statement/ Prospectus.
4.2 Rights Agreement between the Registrant and First Chicago
Trust Company of New York, dated as of January 1, 1996.
Filed as Exhibit 4.2 to the Registrant's Statement on Form
S-1 (file 33-80705) and incorporated herein by reference.
5 Opinion of Gardner, Carton & Douglas
8 Tax Opinion of Ernst & Young LLP
23(a) Consent of Ernst & Young LLP
23(b) Consent of Arthur Andersen LLP
23(c) Consent of Arthur Andersen LLP
23(d) Consent of PricewaterhouseCoopers LLP
23(e) Consent of Gardner, Carton & Douglas (included in Exhibit 5)
</TABLE>
<PAGE> 1
EXHIBIT 5
[GC&D LETTERHEAD]
August 14, 1998
Securities and Exchange Commission
400 Fifth Street, N.W.
Washington, D.C. 20549
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as special securities counsel to Engineering Animation,
Inc., a Delaware corporation (the "Company"), in connection with the legal
proceedings and matters relating to the Company's common stock, par value $0.01
per share (the "Shares"), being registered pursuant to the Registration
Statement on Form S-4 to which this opinion is an Exhibit.
In our opinion, the Shares have been duly authorized and when issued
pursuant to the Agreement and Plan of Merger between the Company, and Transom
Technologies, Inc., dated as of July 29, 1998, will be validly issued, fully
paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters"
in the Registration Statement and to the filing of this opinion as an exhibit
to the Registration Statement.
Very truly yours,
/s/ Gardner, Carton & Douglas
<PAGE> 1
EXHIBIT 8
[Ernst & Young LLP Letterhead]
August 10, 1998
The Board of Directors and Transom The Board of Directors
Shareholders Engineering Animation, Inc.
Transom Technologies, Inc. 2321 North Loop Drive
201 South Main Ames, IA 50010
Suite 300
Ann Arbor, MI 48104
Re: Merger of Transom Technologies, Inc. With and Into Engineering Animation,
Inc.
Dear Ladies and Gentlemen:
This letter is in reply to your request for our opinion concerning certain
federal income tax consequences of the proposed merger (the "Merger") of
Transom Technologies, Inc. ("Transom") with and into Engineering Animation,
Inc. ("EAI") pursuant to an Agreement and Plan of Merger dated July 29, 1998
(the "Agreement"). Capitalized terms not otherwise defined herein shall have
the meaning set forth in the Agreement.
In rendering this opinion, we have relied upon the facts as represented to us
in originals or copies of pertinent documents (sometimes hereinafter referred
to collectively as "Documents"), including:
1. The Statements of Facts and Representations received from
James D. Price and Norman I. Badler.
2. The Statements of Facts and Representations received from
Transom and EAI.
3. The Agreement and Plan of Merger, dated July 29, 1998, by and
among Transom and EAI.
4. The August 6, 1998 draft Registration Statement, Form S-4, to
be filed with the Securities and Exchange Commission and
containing the draft Proxy Statement/Prospectus of EAI and
Transom.
You have represented to us that the statement of facts contained in the
Documents provide an accurate and complete description of the facts and
circumstances concerning the Merger. We have not been engaged to make and have
not made any independent determination regarding such facts and circumstances
and, therefore, have relied upon the facts and representations in the Documents
with regards thereto for purposes of this letter. Any changes to the facts or
Documents may affect the conclusions stated herein.
<PAGE> 2
Engineering Animation, Inc. Page 2
Transom Technologies, Inc. August 10, 1998
This opinion is being rendered solely to EAI, Transom and Transom's
shareholders and is solely for their benefit. This opinion may not be relied
upon by any other person or persons, or be used for any other purposes,
including, but not necessarily limited to, filings with Governmental agencies
without our prior written consent. However, we understand that a reference to
Ernst & Young LLP, and a summarization of this opinion may be included as an
exhibit to the Registration Statement, Form S-4, to be filed with the
Securities and Exchange Commission relating to the Merger. We consent to such
reference and summarization in the Registration Statement of our opinion
therein.
STATEMENT OF FACTS
You have represented the following to us:
Transom is a corporation organized and existing under the laws of the State of
Delaware. Transom is a provider of human modeling and simulation software. As
of July 29, 1998 the authorized capital stock of Transom consisted of (a)
10,000,000 shares, $.01 par value per share, Transom Common Stock, of which
1,650,800 shares were issued and outstanding and 1,537,667 shares were reserved
for issuance upon exercise of outstanding Transom Options, as defined in
Section 2.1(e) of the Agreement, 628,000 were reserved for issuance upon
conversion of Transom Series A preferred stock and 4,650,000 were reserved for
issuance upon conversion of Transom Series B preferred stock, (b) 6,000,000
shares of Transom preferred stock, $.001 par value per share, of which (x)
628,000 shares have been designated as Transom Series A preferred stock, of
which 478,000 shares were issued and outstanding and 150,000 shares were
reserved for issuance upon conversion of the Transom Series A Warrants, and (y)
5,000,000 shares, $.001 par value per share, of Transom Series B preferred
stock, of which 4,650,000 shares were issued and outstanding. No shares of
Transom stock were held in Transom's treasury and no shares of Transom stock
were reserved for issuance other than those shares reserved for issuance under
the Transom preferred stock, Transom Series A Warrants and Transom Options.
Other than the Transom preferred stock, Transom Series A Warrants and Transom
Options, there were no options, warrants, subordinated rights, or other rights
to purchase Transom Common Stock outstanding as of July 29, 1998. The shares
of Transom Common Stock were held by approximately 58 shareholders. As
represented by the management of Transom, no material changes in such
capitalization have occurred between July 29, 1998 and the date of this
opinion.
EAI is a corporation organized and existing under the laws of the State of
Delaware. EAI develops, produces and sells product visualization software and
interactive multimedia products that address the needs of its customers in
domestic and international commercial markets. The presently authorized
capital stock of EAI is 60,000,000 shares of common stock, $.01 par value per
share, of which, 10,409,395 shares were issued and outstanding as of July 30,
1998, and
<PAGE> 3
Engineering Animation, Inc. Page 3
Transom Technologies, Inc. August 10, 1998
20,000,000 shares of preferred stock, $.01 par value per share, none of which
were issued or outstanding. No shares of EAI stock were held in treasury and
no shares of EAI stock were reserved for issuance. The holders of EAI Common
Stock are entitled to one vote for each share held of record on all matters
voted upon by stockholders. As of July 30, 1998, there were 642 holders of
record of EAI Common Stock. EAI is publicly traded and listed on the National
Association of Securities Dealers Automated Quotations (the "NASDAQ") Stock
Exchange. As represented by the management of EAI, no material changes in such
capitalization have occurred between July 30, 1998 and the date of this
opinion.
BUSINESS PURPOSE
As represented in the August 6, 1998 draft Registration Statement, Form S-4,
EAI is attempting to consummate the Merger in order to acquire proprietary
technology owned by Transom to improve its presence in the technology market
which will broaden the array of problems EAI's customers can solve. Transom
believes it will be able to leverage EAI's investments in graphics, database
management, large-model visualization, CAD translators, multi-platform support,
and web integration to provide more robust solutions to existing customers. In
addition, various other substantial reasons are enumerated in the Proxy
Statement/Prospectus under the caption, "The Merger--Reasons for the Merger."
PROPOSED TRANSACTIONS
You have represented that in accordance with the above-stated business purpose
the following transactions have been proposed:
1. After all necessary regulatory and shareholder approvals have
been granted, Transom will merge with and into EAI in
accordance with the Delaware Corporation General Law (the
"DGCL"), with EAI continuing as the surviving corporation.
2. The corporate existence of EAI, with all of its purposes,
powers and objects, shall continue unaffected and unimpaired
by the merger and, as the surviving corporation it shall be
governed by the laws of the State of Delaware and succeed to
all rights, assets, liabilities and obligations of Transom in
accordance with Delaware General Corporation Law ("DGCL").
3. The Merger shall become effective as set forth in the
certificate of merger in a form mutually acceptable to both
parties which shall be filed with the secretary of the State
of Delaware on or before the closing date. The term
"Effective Time" shall be the date and time when the Merger
becomes effective. Each share of the Transom Common Stock
issued and outstanding immediately prior to the Effective Time
(but after the Warrant Conversion Time and the Preferred Stock
Conversion Time), other than Dissenter's Shares (as defined
below), shall be converted into the right to receive shares of
EAI Common Stock at the Exchange
<PAGE> 4
Engineering Animation, Inc. Page 4
Transom Technologies, Inc. August 10, 1998
Ratio. The "Exchange Ratio" shall be determined as follows:
each share of Transom Common Stock shall be exchanged for that
number of shares of EAI Common Stock equal to the quotient,
carried to six decimal places, of (x) 205,000 divided by (y)
the sum of (i) the total number of shares of Transom Common
Stock outstanding immediately prior to the Effective Time (but
after the Warrant Conversion Time and the Preferred Stock
Conversion Time) plus (ii) the number of shares of Transom
Common Stock issuable upon the exercise of all outstanding
Transom Options.
4. At the Effective Time, each outstanding Transom Option shall
be fully vested in accordance with the terms of the Transom
Options and the Option Plan, and shall be assumed by EAI. In
accordance with certain conversion ratios, the options will
then represent options to acquire EAI common stock on the same
terms and conditions as were applicable under the Transom
stock option plan therein assumed.
5. No fractional shares of EAI Common Stock shall be issued.
Each holder of Transom Common Stock who would otherwise have
been entitled to receive a fraction of a share of EAI Common
Stock shall receive, in lieu thereof, cash in the amount equal
to such fractional part of a share multiplied by the average
market price of EAI Common Stock.
6. Shares of Transom Stock with respect to which dissenters
rights have been properly demanded in accordance with the DGCL
("Dissenters' Shares") shall not be converted into EAI Common
Stock at the Effective Time, but shall be converted into the
right to receive from EAI such consideration as is determined
to be due and payable with respect to such Dissenters' Shares
pursuant to the provisions of the DGCL.
7. At or prior to the Effective Time, Transom shall cause all of
the issued and outstanding Transom Series A Warrants to be
fully converted into shares of Transom Common Stock. All of
the Transom Series A Warrants (the "Warrants") to be converted
into Transom Common Stock shall no longer be outstanding and
shall automatically be canceled and cease to exist as of the
effective time of the Warrant Conversion (the "Warrant
Conversion Time"), and each warrant or certificate previously
representing any such Transom Preferred Stock (or the right to
purchase Transom Preferred Stock) shall thereafter represent
the right to receive Transom Common Shares.
8. At or prior to the Effective Time, Transom shall cause the
conversion of all of the issued and outstanding shares of
Transom Preferred Stock into shares of Transom Common Stock,
(the "Preferred Share Conversion"). All of the shares of
Transom Preferred Stock to be converted into Transom Common
Stock shall no longer be outstanding and shall automatically
be canceled and cease to exist as of the effective time of the
Preferred Share Conversion (the "Preferred Stock Conversion
Time"), and each certificate previously representing any such
shares of Transom Preferred Stock shall thereafter represent
the right to receive that number of Transom Common Shares.
<PAGE> 5
Engineering Animation, Inc. Page 5
Transom Technologies, Inc. August 10, 1998
REPRESENTATIONS
The following summarizes the representations which have been provided to Ernst
& Young LLP by the respective managements of EAI and Transom and by Norman I.
Badler and James D. Price, who represent that they now and will continue
through the Effective Time to own five percent or more of the Transom Common
Stock.
The following representations have been made by EAI and Transom:
1. The fair market value of the EAI shares and other
consideration received by each Transom shareholder in the
Merger will be approximately equal to the fair market value of
the Transom shares surrendered in exchange therefor.
2. All of the stock of Transom outstanding immediately prior to
the Merger will be exchanged solely for stock (except for cash
issued in exchange for fractional shares and dissenters, if
any) of EAI. EAI intends that no consideration be paid or
received (directly or indirectly, actually or constructively)
for Transom stock other than EAI common stock. Neither EAI
nor a related person (as defined in Section 1.368-1(e)(3) of
the Income Tax Treasury Regulations (the "Regulations")) has
any plan or intention, in connection with the plan of
reorganization, to (i) acquire a proprietary interest in
Transom for consideration other than stock of EAI, or (ii)
redeem stock of EAI issued in exchange for a proprietary
interest in Transom.
3. Neither Transom nor a related person (as defined in Section
1.368-1(e)(3) of the Regulations determined without regard to
Section 1.368-1(e)(3)(i)(A) of the Regulations) has any plan
or intention, prior to and in connection with the plan of
reorganization, to (i) redeem the stock of Transom, (ii)
acquire stock of Transom with consideration other than stock
of Transom or EAI, or (iii) make an extraordinary distribution
with respect to the stock of Transom.
4. The liabilities of Transom assumed by EAI and the liabilities
to which the transferred assets of Transom are subject were
incurred by Transom in the ordinary course of its business.
5. EAI has no plan or intention to sell or otherwise dispose of
any of Transom's assets following the Merger, except for
dispositions made in the ordinary course of business and
transfers permitted under Section 368(a)(2)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and Section
1.368- 1(d) of the Regulations.
6. Following the Merger, EAI will continue the historic business
of Transom or use a significant portion of Transom's historic
business assets in a business.
<PAGE> 6
Engineering Animation, Inc. Page 6
Transom Technologies, Inc. August 10, 1998
7. EAI, Transom, & Transom's shareholders will each pay their
respective expenses, if any, incurred in connection with the
Merger.
8. There is no intercorporate indebtedness existing between EAI
and Transom that was issued or acquired at a discount, or that
will be settled at a discount.
9. Transom is not insolvent, within the meaning of Section
368(a)(3)(A) of the Code, nor has it filed for protection from
creditors under the U.S. bankruptcy laws or otherwise made a
general assignment of its assets for the benefit of creditors.
10. No two parties to the transaction are investment companies
within the meaning of Section 368(a)(2)(F)(iii) and (iv) of
the Code. In general, a corporation is an "investment
company" under that provision of the Code if 50% or more of
its assets (by value excluding cash, cash equivalents and
government securities from the calculation) consist of stock
or securities and 80% or more of its assets (by value) are
held for investment. For purposes of these 50% and 80% tests,
however, stock of a subsidiary corporation is ignored and the
parent corporation is deemed to own a ratable portion of its
subsidiary's assets directly. (A corporation is a subsidiary
for this purpose if the parent owns 50% or more of its stock
by vote or value.)
11. EAI and Transom are entering into the Merger for business
reasons and not for the principal purpose of avoiding U.S.
federal income tax.
12. No compensation paid or payable to any shareholder of Transom
by EAI will be separate consideration or allocable to the
tender of any such shareholders of Transom shares and any such
compensation will be for services actually rendered and will
be commensurate with amounts paid to third parties bargaining
at arm's length for similar services. To the extent
consideration is payable to any Transom shareholder under any
employment agreement or other agreement, no such consideration
is intended by EAI to constitute separate or additional
consideration for the shares of Transom stock tendered by the
Transom shareholders in the Merger. No part of the
consideration transferred to the Transom shareholders in the
Merger is intended by EAI to constitute separate or additional
compensation or consideration attributable to any employment
agreement or other agreement.
13. The payment of cash in lieu of fractional shares of EAI shares
is solely for the purpose of avoiding the expense and
inconvenience of issuing fractional shares and does not
represent separately bargained for consideration. The total
cash consideration that will be issued in the Merger to the
Transom shareholders will not exceed 1 percent of the total
consideration that will be issued to the Transom shareholders
in the Merger.
<PAGE> 7
Engineering Animation, Inc. Page 7
Transom Technologies, Inc. August 10, 1998
14. As of the Effective Time of the Merger, the fair market value
of the assets of Transom will exceed the sum of Transom's
liabilities plus the amount of liabilities, if any, to which
Transom's assets are subject.
Norman I. Badler and James D. Price, shareholders of Transom who own five
percent or more of the Transom Common Stock, have represented that:
1. They have no plan or intention prior to and in connection with
the plan of reorganization, to sell or otherwise dispose of
any stock of Transom to Transom or a related person (as
defined in Section 1.368- 1(e)(3) of the Regulations
determined without regard to Section 1.368-1(e)(3)(i)(A) of
the Regulations). Additionally, they have no plan or
intention subsequent to, or in connection with the plan of
reorganization, to sell or otherwise dispose of any stock of
EAI received in the plan of reorganization to EAI or a related
person (as defined in Section 1.368-1(e)(3) of the Regulations
determined without regard to Section 1.368-1(e)(3)(i)(A) of
the Regulations.
TECHNICAL DISCUSSION
Statutory Requirements
Section 368(a)(1)(A) of the Code provides that a reorganization (a "Type A"
reorganization) includes a statutory merger or consolidation. Such a
reorganization can only be achieved by strict compliance with applicable
corporation laws. A statutory merger occurs wherein one party (the surviving
corporation) to the transaction absorbs the other party whose corporate
existence ceases. It has been represented by the managements of EAI and
Transom that the merger of Transom with and into EAI, with EAI surviving the
Merger, wherein EAI Common Stock is to be exchanged for Transom Common Stock,
is to occur as a statutory merger under Delaware state law.
Other Requirements
Sections 1.368-1(b) and 1.368-2(g) of the Income Tax Regulations (the
"Regulations") provide that the following additional requirements must be met
for a transaction to qualify as a reorganization within the meaning of Section
368 of the Code:
(i) "continuity of interest" must be present,
(ii) "continuity of business enterprise" must exist, and
(iii) the transaction must be undertaken for reasons pertaining to
the continuance of the business of a corporation which is a
party to the transaction.
<PAGE> 8
Engineering Animation, Inc. Page 8
Transom Technologies, Inc. August 10, 1998
Continuity of Interest. In general, the continuity of interest test requires
the owners of the reorganized entity to receive and retain a meaningful equity
interest in the surviving entity. See e.g., Pinellas Ice & Cold Storage Co. v.
Comm'r, 287 U.S. 462 (1933); Cortland Specialty Company v. Comm'r, 60 F.2d 937
(2d Cir. 1932), cert. denied, 288 U.S. 599 (1932); Helvering v. Minnesota Tea
Co., 296 U.S. 378 (1935).
The Internal Revenue Service (the "Service") has issued final and temporary
regulations (T.D. 8760 and T.D. 8761) providing rules for satisfying the
continuity of interest requirement. These regulations substantially liberalize
the historic rules, generally providing that continuity of interest is
satisfied if a substantial part of the value of the proprietary interest in the
target corporation is preserved in the reorganization. Generally, continuity
of interest is not preserved to the extent that the acquiring corporation
acquires target stock for consideration other than acquiring stock, or if, in
connection with the plan of reorganization, the acquiring stock is redeemed (or
purchased by a related party). Section 1.368-1(e)(1) of the Regulations. In
addition, continuity of interest is not preserved to the extent that, prior to
and in connection with the plan of reorganization, the target (or a related
party) acquires the stock with consideration other than stock of the target, or
makes an extraordinary distribution with respect to the stock. Section
1.368-1T(e)(1)(ii)(A) of the Regulations. Generally, a related party includes
any member of the same affiliated group (without regard to the exceptions in
Section 1504(b) of the Code) as the acquiring corporation, or any other
corporation where the purchase of the acquiring stock by such corporation would
result in the purchase being a redemption under Section 304(a)(2) of the Code.
Section 1.368-1(e)(3) of the Regulations. Sales by the target shareholders of
stock of the acquirer received in the transaction to unrelated third parties
occurring before or after a reorganization are disregarded.
Based upon the facts presented in the August 6, 1998 draft Registration
Statement, the Agreement, and the Statements of Facts and Representations
provided by the managements of EAI and Transom and by certain Transom
shareholders, the Merger will satisfy the continuity of interest requirement.
The managements of EAI and Transom have represented that all of the stock of
Transom outstanding immediately prior to the Merger will be exchanged solely
for stock of EAI, except for cash paid for fractional shares and dissenters, if
any. EAI has represented further that neither EAI nor a related person (as
defined in Section 1.368-1(e)(3) of the Regulations) has any plan or intention,
in connection with the plan of reorganization, to (i) acquire a proprietary
interest in Transom for consideration other than stock of EAI, or (ii) redeem
any of the stock issued in the transaction. In addition, the management of
Transom represented that neither Transom nor a related person (as defined in
Section 1.368-1(e)(3) of the Regulations determined without regard to Section
1.368-1(e)(3)(i)(A) of the Regulations) has any plan or intention, prior to and
in connection with the plan of reorganization, to redeem, acquire, or make an
extraordinary distribution with respect to the stock of either entity.
Continuity of Business Enterprise. Section 1.368-1(b) of the Regulations also
provides that a continuity of business enterprise (as described in Section
1.368-1(d) of the Regulations) is a requisite to a reorganization. Section
1.368- 1(d) of the Regulations (and as modified by T.D.
<PAGE> 9
Engineering Animation, Inc. Page 9
Transom Technologies, Inc. August 10, 1998
8760) provides that continuity of business enterprise requires that the
acquiring corporation either continue the acquired corporation's historic
business or use a significant portion of the acquired corporation's historic
assets in a business. The Merger will meet the continuity of business
enterprise test of Section 1.368-1(d) of the Regulations because, based upon
the representation of the management of EAI, EAI will continue the historic
business of Transom or will use a significant portion of Transom's historic
assets in a business.
Business Purpose. Section 1.368-2(g) of the Regulations provides that a
reorganization must be undertaken for reasons germane to the continuance of the
business of a corporation which is a party to the reorganization. As
heretofore indicated in the "Business Purpose" Section set forth above, the
managements of EAI and Transom have represented that there are substantial
business reasons for the Merger. Based upon those representations, the Merger
satisfies the business purpose requirement as set forth in the Regulations.
Recapitalization of Transom
Section 368(a)(1)(E) of the Code provides that a "recapitalization" is a
reorganization. A recapitalization has been defined as a "reshuffling of a
capital structure within the framework of an existing corporation." Helvering
v. Southwest Consolidated Corp., 315 U.S. 194 (1942), Ct. D. 1544, 1942-1 C.B.
218. Section 1.368-2(e)(2) of the Regulations provides that a recapitalization
includes the surrender "to a corporation for cancellation 25 percent of its
preferred stock in exchange for no par value common stock." Under Section
1.368-2(e)(2) of the Regulations, a recapitalization also includes an exchange
made of a corporation's outstanding preferred stock, having certain priorities
with reference to the amount and time of payment of dividends and the
distribution of the corporate assets upon liquidation, for a new issue of such
corporation's common stock having no such rights.
Section 354(a)(1) of the Code provides that shareholders and security holders
do not recognize gain or loss when they exchange stock or securities of a
corporation that is a party to a reorganization solely for stock or securities
of that corporation, or of another corporation that is a party to the
reorganization. Section 1.354-1(e) of the Regulations provides that the term
"securities" includes warrants issued by a party to a reorganization.
Section 354(a)(2)(A) of the Code provides that the general nonrecognition rule
of Section 354(a)(1) does not apply if: (1) the principal amount of securities
received exceeds the principal amount of securities surrendered, or (2)
securities are received, and no securities are surrendered.
Under the terms of the Merger, Transom will convert its outstanding preferred
stock into Transom Common Stock immediately prior to the Merger in accordance
with the Preferred Stock Conversion. The conversion of the Transom Preferred
Stock into Transom Common Stock is an example of a recapitalization provided in
Section 1.368-2(e) of the Regulations. Consequently, the conversion of the
Transom Preferred Stock into Transom Common Stock will constitute a tax-free
recapitalization under Section 368(a)(1)(E) of the Code.
<PAGE> 10
Engineering Animation, Inc. Page 10
Transom Technologies, Inc. August 10, 1998
Under the terms of the Merger, Transom will also convert its outstanding
warrants into common stock immediately prior to the Merger. The conversion of
the warrants will constitute a tax-free recapitalization under Section
368(a)(1)(E) of the Code. Because the term "securities" includes warrants, the
warrantholders' exchange of their warrants for Transom Common Stock will be
tax-free to the warrantholders under Section 354(a)(1) of the Code. Section
354(a)(2)(A) of the Code will not apply to the exchange because the
warrantholders will not receive securities with a principal amount greater than
the principal amount of securities surrendered.
Transom's recapitalization immediately prior to the Merger will not affect the
Merger qualifying as a reorganization under Section 368(a)(1)(A) of the Code.
Revenue Ruling ("Rev. Rul.") 69-407, 1969-2 C.B. 50; Rev. Rul. 78-330, 1978-2
C.B. 147.
Additional Statutory and Regulatory Provisions
Section 368(b) of the Code defines the term "a party to a reorganization" to
include a corporation resulting from a reorganization, and both corporations,
in the case of a reorganization resulting from the acquisition by one
corporation of stock or properties of another.
Section 361(a) of the Code provides that no gain or loss shall be recognized to
a transferor corporation which is a party to a reorganization on any exchange
pursuant to the plan of reorganization solely for stock or securities in
another corporation which is a party to the reorganization.
Section 1032(a) of the Code provides that no gain or loss shall be recognized
to a corporation on the receipt of money or other property in exchange for
stock of such corporation
Cash received by shareholders of Transom Common Stock who dissent, will be
treated as received in exchange for his or her stock subject to the provisions
and limitations of Section 302 of the Code. See Section 1.354-1(d), Example
(3) of the Regulations. If, as a result of such distribution, a shareholder
owns no Transom Common Stock either directly or indirectly through the
application of Section 318 of the Code, the redemption will be treated as a
complete termination of interest under Section 302(b)(3) of the Code and such
cash will be treated as a distribution in exchange for stock under Section
302(a) of the Code resulting in gain or loss recognition to the shareholder.
Section 362(b) of the Code generally provides that if property is acquired by a
corporation in connection with the reorganization, then the basis of the
property shall be the same as it would be in the hands of the transferor,
increased by the amount of gain recognized to the transferor on such transfer.
<PAGE> 11
Engineering Animation, Inc. Page 11
Transom Technologies, Inc. August 10, 1998
Section 358(a)(1) of the Code generally provides that in the case of an
exchange to which Sections 351 and 354 apply, the basis of the property
permitted to be received without the recognition of gain or loss shall be the
same as that of the property exchanged.
Section 1223(1) of the Code states that in determining the period for which a
taxpayer has held property received in an exchange, the period for which the
taxpayer held the property exchanged shall be included if the property has, for
the purpose of determining gain or loss from a sale or exchange, the same basis
in whole or in part in the taxpayer's hands as the property exchanged, and the
property exchanged constitutes a capital asset at the time of the exchange.
Section 1223(2) of the Code provides that in determining a taxpayer's holding
period for property, there shall be included the period for which such property
was held by another person, if such property has, for the purpose of
determining gain or loss from a sale or exchange, the same basis in whole or in
part in such taxpayer's hands as it would have had in the hands of such other
person.
Section 381 of the Code applies to certain transactions, including those
transactions to which Section 361 of the Code applies, where there is a
transfer in connection with a reorganization described in Section 368(a)(1)(A)
of the Code.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Based upon the facts and representations set forth in the Documents, applicable
provisions of the Code, the Regulations, and rulings thereunder, it is our
opinion for Federal income tax purposes that the following will result:
(1) Provided the Merger of Transom with and into EAI qualifies as a
statutory merger under Delaware state law, the Merger will be a
reorganization within the meaning of Section 368(a)(1)(A) of the Code.
Transom and EAI will each be a party to a reorganization within the
meaning of Section 368(b) of the Code.
(2) No gain or loss will be recognized by Transom upon the transfer of its
assets to EAI in exchange solely for EAI Common Stock and the
assumption by EAI of the liabilities of Transom (Sections 361(a) and
357(a) of the Code).
(3) No gain or loss will be recognized by EAI on receipt of the Transom
assets in exchange for EAI Common Stock and the assumption by EAI of
the liabilities of Transom (Section 1032(a) of the Code).
(4) The basis of the assets of Transom in the hands of EAI will, in each
case, be the same as the basis of those assets in the hands of Transom
immediately prior to the transaction (Section 362(b) of the Code).
<PAGE> 12
Engineering Animation, Inc. Page 12
Transom Technologies, Inc. August 10, 1998
(5) The holding period of the assets of Transom in the hands of EAI will,
in each case, include the period for which such assets were held by
Transom (Section 1223(2) of the Code).
(6) No gain or loss will be recognized, with respect to the receipt of EAI
Common Stock, by the shareholders of Transom who receive solely EAI
Common Stock and cash for fractional shares (Section 354(a)(1) of the
Code). With respect to the cash received in lieu of fractional
shares, see Item 11 below.
(7) The cash received by a dissenting shareholder of Transom in exchange
for his or her Transom Common Stock will be treated as having been
received by such shareholder as a distribution in redemption of his or
her stock subject to the provisions and limitations of Section 302 of
the Code. If, as a result of such distribution, a shareholder owns no
Transom Common Stock either directly or indirectly through the
application of Section 318 of the Code, the redemption will be treated
as a complete termination of interest under Section 302(b)(3) of the
Code and such cash will be treated as a distribution in full payment
in exchange for the stock under Section 302(a) of the Code.
(8) The basis of EAI Common Stock to be received by the shareholders of
Transom Common Stock will be, in each instance, the same as the basis
of their stock surrendered in exchange therefor, decreased by the
amount of any tax basis allocable to any fractional share interest for
which cash is received (Section 358(a)(1) of the Code).
(9) The holding period of the EAI Common Stock to be received by the
shareholders of Transom Common Stock in the transaction will include
in each instance, the period during which the Transom Common Stock
surrendered in exchange therefor is held as a capital asset on the
date of the surrender (Section 1223(l) of the Code).
(10) EAI will succeed to and take into account those tax attributes of
Transom described in Section 381(c) of the Code. (Section 381(a) of
the Code; Section 1.381(a)-1 of the Regulations). These items will be
taken into account by EAI subject to the conditions and limitations
specified in Sections 381, 382, 383, and 384 of the Code and the
Regulations thereunder.
(11) The payment of cash in lieu of fractional share interests of EAI
Common Stock will be treated as if the fractional shares were
distributed as part of the exchange and then were redeemed by EAI.
These cash payments will be treated as distributions in full payment
in exchange for the stock redeemed, subject to the provisions and
limitations of Section 302(a) of the Code (Rev. Rul. 66-365, 1966-2
C.B. 116 and Revenue Procedure 77-41, 1977-2 C.B. 574).
<PAGE> 13
Engineering Animation, Inc. Page 13
Transom Technologies, Inc. August 10, 1998
SCOPE OF OPINION
The scope of this opinion is expressly limited to the federal income tax issues
specifically addressed in (1) through (11) in the section entitled "CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES", above. Specifically, our
opinion has not been requested, and we have made no determination nor expressed
any opinion on any other issues, including, but not limited to, valuation
issues, any state and local, foreign, consolidated return, employee benefit,
and Section 382 issues, or alternative minimum tax consequences to the parties
to this transaction. Additionally, our opinion has not been requested and none
is expressed with respect to the exercise of options or similar rights to
purchase stock, or the exchange, assumption or substitution of options or
similar rights to purchase Transom Stock for rights to purchase EAI Stock.
Further, no opinion is expressed as to the qualification of the Merger as a
statutory merger under state law.
Our opinion, as stated above, is based upon our analysis of the Internal
Revenue Code of 1986, as amended, the Treasury Regulations, current case law,
and published Internal Revenue Service authorities in effect as of the date of
this letter. The foregoing are subject to change, and such change may be
retroactively effective. No assurance can be provided as to the effect of any
such change upon our opinion. In addition, our opinion is based on the facts
and representations contained in the Documents. Any change in the Documents
may affect our opinion, perhaps in an adverse manner. We have undertaken no
obligation to, and will not, update this opinion for changes in facts or law
occurring subsequent to the date hereof.
This letter represents our views as to the interpretation of existing law and
is not binding on the Internal Revenue Service or the courts.
Very truly yours,
/s/ Ernst & Young LLP
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Engineering
Animation, Inc. and to the incorporation by reference therein of our report
dated January 30, 1998, with respect to the consolidated financial statements
of Engineering Animation, Inc. included in its Annual Report (Form 10-K) for
the year ended December 31, 1997, filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
August 12, 1998
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the use of our report
dated July 9, 1998, and to all references to our Firm, included in or made a
part of this Registration Statement on form S-4 of Engineering Animation, Inc.
/s/ ARTHUR ANDERSEN LLP
Ann Arbor, Michigan
August 12, 1998
<PAGE> 1
EXHIBIT 23(c)
CONSENT OF IDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the incorporation by
reference in this Form S-4 Registration Statement and related Prospectus
pertaining to Engineering Animation, Inc., of our report on Technology Company
Ventures, L.L.C. dated October 14, 1997 included in the Engineering Animation,
Inc. Annual Report on Form 10-K for the year ended December 31, 1997 and to all
references to our firm included in this Registration Statement and related
Prospectus.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon
August 12, 1998
<PAGE> 1
EXHIBIT 23(d)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Engineering
Animation, Inc., (the "Company") of our report dated April 20, 1998 relating to
the consolidated financial statements of Sense8 Corporation, which appears in
the Current Report on Form 8-K/A of the Company dated July 17, 1998.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
August 12, 1998
