<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 17, 1998
ENGINEERING ANIMATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 42-1323712
(State or other jurisdiction of 000-27670 (I.R.S. Employer
incorporation or organization) (Commission File Number) Identification No.)
2321 North Loop Drive
Ames, Iowa 50010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 296-9908
None
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Acquisition of Sense8 Corporation
On June 17, 1998, Engineering Animation, Inc. (the "Company") completed
the acquisition of Sense8 Corporation ("Sense8"), a privately held developer
and distributor of interactive, real-time 3D and virtual reality tools and
applications. The Company acquired Sense8 pursuant to a merger of Sense8 with
and into the Company (the "Merger"). In connection with the acquisition, the
Company issued common stock, $0.01 per share par value ("Common Stock") to
Sense8 shareholders with a value of approximately $7,000,000, based on the stock
price of $42.61725 per share, as provided in the Amended and Restated Agreement
and Plan of Merger ("the "Merger Agreement") among the Company, Sense8 and
EAICA, Inc., a wholly owned subsidiary of the Company. The Company also
assumed approximately $1,300,000 in liabilities of Sense8. The shareholders of
Sense8 received approximately 0.084655 of a share of Common Stock for each
share of Sense8 common stock, 0.244215 of a share of Common Stock for each
share of Sense8 Series A Preferred Stock and 0.499041 of a share of Common
Stock for each share of Sense8 Series B Preferred Stock held at the
consummation of the transaction. Each outstanding option or warrant to acquire
common stock of Sense8 automatically converted into an option or warrant to
acquire the same number of shares of Common Stock as the shares underlying such
Sense8 option or warrant would have been exchangeable for had such Sense8
option or warrant been exercised in full immediately prior to the consummation
of the acquisition. The acquisition of Sense8 by the Company will be treated
as a purchase for accounting and financial reporting purposes.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Index to Financial Statements and Exhibits.
<TABLE>
<S> <C>
(i) Unaudited Pro Forma Consolidated Condensed Combined Financial
Statements
Introduction F-1
Unaudited Pro Forma Combined Balance Sheet at March 31, 1998 F-2
Unaudited Pro Forma Combined Statement of Operations For the
Quarter Ended March 31, 1998 F-3
Unaudited Pro Forma Combined Statement of Operations For the
Year Ended December 31, 1997 F-4
Notes to Unaudited Pro Forma Consolidated Condensed Combined
Financial Statements F-5
(ii) Sense8, Inc. Financial Statements
Report of Independent Accountants F-6
Consolidated Balance Sheet at December 31, 1996 and 1997, and
Unaudited Consolidated Balance Sheet at March 31, 1998 F-7
Consolidated Statement of Operations -- Years ended
December 31, 1996 and 1997, and Unaudited Consolidated
Statement of Operations -- Quarter Ended March 31, 1998 F-8
</TABLE>
1
<PAGE> 3
<TABLE>
<S> <C>
Consolidated Statement of Shareholders' Equity
(Deficit)-- Years ended December 31, 1996 and 1997, and
Unaudited Consolidated Statement of Shareholders' Equity
(Deficit) -- Quarter ended March 31, 1998 F-9
Consolidated Statements of Cash Flows -- Years ended
December 31, 1996 and 1997, and Unaudited Consolidated
Statement of Cash Flows -- Quarter ended March 31, 1998 F-10
Notes to Consolidated Financial Statements F-11
(b) Exhibits.
The exhibits listed in the accompanying Exhibit Index are filed as
part of this Current Report on Form 8-K.
</TABLE>
2
<PAGE> 4
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated condensed combined financial
statements between EAI and Sense8 combined, assume the Merger is accounted for
as a purchase. The unaudited pro forma condensed combined financial statements
are based upon the respective historical consolidated financial statements and
notes thereto of the companies.
F-1
<PAGE> 5
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
---------------------
EAI SENSE8 ADJUSTMENTS COMBINED
------------------------------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,351 $ 75 $ 17,426
Short-term investments 20,877 20,877
Accounts receivable, net:
Billed 13,741 225 13,966
Unbilled 8,337 73 8,410
Deferred income taxes 701 701
Prepaid expenses and other assets 1,612 70 1,682
------------------------------------ -----------
Total current assets 62,619 443 - 63,062
Property and equipment, net 12,934 278 13,212
Other assets:
Restricted Cash 138 138
Note receivable 1,408 1,408
Software development costs, net 1,355 1,355
Deferred income taxes 750 (6) 750
Goodwill, net 1,136 975 (3) 2,111
Other 338 338
------------------------------------ -----------
Total assets $ 79,928 $ 721 $ 1,725 $ 82,374
==================================== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,608 $ 1,173 4,781
Accrued compensation and other accrued expenses 2,888 579 3,467
Accrued estimated transaction costs $ 1,300 (2) 1,300
Deferred revenue 2,433 75 2,508
Current portion long-term debt and lease obligations 155 424 (284)(7) 295
------------------------------------ -----------
Total current liabilities 9,084 2,251 1,016 12,351
Long-term debt and lease obligations due after one year 1,417 133 1,550
Deferred income taxes 455 455
Stockholders' equity 68,972 (1,663) 280 (8) 68,018
(8,786)(4)
1,663 (5)
7,552 (1)
------------------------------------ -----------
Total liabilities and stockholders' equity $ 79,928 $ 721 $ 1,725 $ 82,374
==================================== ===========
</TABLE>
F-2
<PAGE> 6
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
-------------------
EAI SENSE8 ADJUSTMENTS COMBINED
---------------------------------- ---------
<S> <C> <C> <C> <C>
Software Products $ 10,232 $ 614 $ 10,846
Interactive Products 5,564 5,564
---------------------------------- ---------
Net revenues 15,796 614 - 16,410
Cost of revenues 4,333 238 4,571
---------------------------------- ---------
Gross profit 11,463 376 - 11,839
Operating expenses:
Sales and marketing 4,478 245 4,723
General and administrative 1,666 725 49 (3) 2,440
Research and development 2,347 208 2,555
Acquisition costs 4,249 - 8,786 (4) 13,035
---------------------------------- ---------
Total operating expenses 12,740 1,178 8,835 22,753
---------------------------------- ---------
Operating income (loss) (1,277) (802) (8,835) (10,914)
Other income (expense) 555 (144) 411
---------------------------------- ---------
Income (loss) before income taxes (722) (946) (8,835) (10,503)
Income tax expense (274) - (274)
---------------------------------- ---------
Net Income (Loss) $ (448) $ (946) $ (8,835) $(10,229)
================================== =========
Earnings (loss) per share of common stock - basic and diluted $ (0.05) $ (1.02)
========= =========
Weighted average shares outstanding 9,881 10,058
========= =========
</TABLE>
F-3
<PAGE> 7
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
EAI SENSE8 ADJUSTMENTS COMBINED
--------- -------- -------------- ----------
<S> <C> <C> <C> <C>
Software Products.............................. $30,728 $ 3,988 $ (115) (9) $ 34,601
Interactive Products........................... 18,989 18,989
--------- -------- -------------- ----------
Net revenues............................... 49,717 3,988 (115) 53,590
Cost of revenues............................... 13,332 1,095 (3) (9) 14,424
--------- -------- -------------- ----------
Gross profit............................... 36,385 2,893 (112) 39,166
Operating expenses:
Sales and marketing.......................... 15,406 1,911 17,317
General and administrative................... 5,478 1,366 195 (10) 7,039
Research and development..................... 7,068 1,118 (65) (9) 8,121
Acquisition costs............................ 8,831 0 8,786 (4) 17,617
--------- -------- -------------- ----------
Total operating expenses................... 36,783 4,395 8,916 50,094
--------- -------- -------------- ----------
Operating income (loss).................... (398) (1,502) (9,028) (10,928)
Other income (expense)......................... 1,522 (185) 1,337
--------- -------- -------------- ----------
Income (loss) before income taxes.......... 1,124 (1,687) (9,028) (9,591)
Income tax expense............................. 2,772 - 2,772
--------- -------- -------------- ----------
Net income (loss) before minority interest..... (1,648) (1,687) (9,028) (12,363)
Minority Interest.............................. (49) - (49)
--------- -------- -------------- ----------
Net Income (Loss).......................... $(1,697) $(1,687) (9,028) $ (12,412)
========= ======== ============== ==========
Earnings (loss) per share of common stock -
basic and diluted............................. $ (0.19) $ (1.39)
========= ==========
Weighted average shares outstanding............ 8,770 8,947
========= ==========
</TABLE>
F-4
<PAGE> 8
<TABLE>
<CAPTION>
Notes to Unaudited Pro Forma Consolidated Condensed Combined Financial Statements
<S> <C>
(1) Represents the assumed issuance of 177,210 shares of EAI's common stock related
to the Sense8 acqusition. $ 7,552
========
(2) Represents estimated acquistion expenses. 1,300
========
(3) Reflects EAI's estimate of the remaining excess purchase price over the fair value of the net
assets acquired after considering the write off of in-process technology. The $975 of goodwill
is being amortized over a five year period. The quarterly amortization is $49. 975
========
(4) Reflects the preliminary estimate of the in-process technology write off. 8,786
========
(5) Elimination of Sense8's historical equity in accordance with the purchase method
of accounting. 1,663
========
(6) Represents the reversal of the valuation allowance that had been established to offset
the net deferred tax asset of Sense8. 750
========
(7) Represents a $100 write up of the convertible debt to its fair value netted against the
assumed conversion of $384 of the convertible debt. 284
========
(8) Reflects the value of the Sense8 options converted into EAI equivalent options. 280
========
(9) To eliminate revenue recognized in a software license sale from Sense8 to EAI during 1997 of
$115 and the resulting amortization expense of $3 and research and development expense of $65.
(10) Reflects EAI's estimate of the amortization of the remaining excess purchase price over the
fair value of the net assets acquired after considering the write off of in-process technology.
The $975 of goodwill is being amortized over a five year period. The annual amortization is
$195. $ 195
========
</TABLE>
F-5
<PAGE> 9
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Sense8 Corporation and its subsidiary at December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. These consolidated
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has incurred recurring
losses from operations and has a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. As described in Note 1, the Company has entered
into a definitive agreement dated April 11, 1998, to be acquired by Engineering
Animation, Inc. Consummation of the proposed acquisition is subject to certain
conditions of closing.
PRICE WATERHOUSE LLP
San Jose, California
April 20, 1998
F-6
<PAGE> 10
SENSE8 CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- -----------
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 167,000 $ 57,000 $ 75,000
Accounts receivable, less allowance for doubtful accounts
of $61,000, $125,000 and $136,000...................... 1,096,000 294,000 298,000
Inventories............................................... 31,000 36,000 43,000
Other current assets...................................... 180,000 32,000 27,000
----------- ----------- ----------
Total current assets................................... 1,474,000 419,000 443,000
Property and equipment, net................................. 533,000 312,000 278,000
Other assets................................................ 26,000 - -
----------- ----------- ----------
$ 2,033,000 $ 731,000 $ 721,000
=========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable, current.................................... $ - $ 40,000 $ 40,000
Convertible notes payable to related parties, current..... - - 84,000
Convertible notes payable, current........................ - - 300,000
Accounts payable.......................................... 692,000 727,000 1,173,000
Accrued expenses.......................................... 389,000 421,000 579,000
Deferred revenues......................................... 398,000 98,000 75,000
----------- ----------- ----------
Total current liabilities.............................. 1,479,000 1,286,000 2,251,000
Notes payable, noncurrent................................... - 143,000 133,000
Convertible notes payable to related parties................ - 62,000 -
Convertible notes payable................................... - 222,000 -
----------- ----------- ----------
1,479,000 1,713,000 2,384,000
----------- ----------- ----------
Commitments and Contingencies (Note 7)
Shareholders' Equity (Deficit):
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; designated as follows:
Series A Convertible Preferred Stock, $0.001 par value;
350,585 shares authorized; 88,235, 88,235 and 308,929
shares issued and outstanding, respectively.......... 600,000 600,000 2,049,000
Series B Convertible Preferred Stock, $0.001 par value;
146,326 authorized; 70,782, 70,782, and 0 shares
issued and outstanding, respectively................. 1,199,000 1,199,000 -
Common stock, $0.001 par value; 10,000,000 shares
authorized; 890,000, 957,210 and 964,943 shares issued
and outstanding, respectively.......................... 51,000 97,000 112,000
Warrants outstanding...................................... - 120,000 120,000
Treasury stock, 136,250, 143,583 and 143,583 shares,
respectively, held at cost............................. (100,000) (123,000) (123,000)
Shareholder notes receivable.............................. (8,000) - -
Accumulated deficit....................................... (1,188,000) (2,875,000) (3,821,000)
----------- ----------- ----------
Total shareholders' equity (deficit)................... 554,000 (982,000) (1,663,000)
----------- ----------- ----------
$ 2,033,000 $ 731,000 $ 721,000
=========== =========== ==========
</TABLE>
F-7
<PAGE> 11
SENSE8 CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
-------------------------- ------------------------
1996 1997 1997 1998
----------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues:
Software licenses......................................... $ 4,346,000 $ 2,501,000 $ 754,000 $ 477,000
Consulting and support services........................... 1,293,000 1,229,000 303,000 128,000
Products sales............................................ 1,332,000 258,000 43,000 9,000
----------- ----------- ---------- ----------
6,971,000 3,988,000 1,100,000 614,000
----------- ----------- ---------- ----------
Cost of net revenues:
Software licenses......................................... 109,000 70,000 7,000 14,000
Consulting and support services........................... 924,000 861,000 189,000 217,000
Product sales............................................. 1,014,000 164,000 35,000 7,000
----------- ----------- ---------- ----------
2,047,000 1,095,000 231,000 238,000
----------- ----------- ---------- ----------
Gross profit................................................ 4,924,000 2,893,000 869,000 376,000
----------- ----------- ---------- ----------
Operating expenses:
Sales and marketing....................................... 3,134,000 1,911,000 566,000 245,000
Research and development.................................. 1,531,000 1,118,000 341,000 208,000
General and administrative................................ 1,564,000 1,366,000 335,000 725,000
----------- ----------- ---------- ----------
6,229,000 4,395,000 1,242,000 1,178,000
----------- ----------- ---------- ----------
Loss from operations........................................ (1,305,000) (1,502,000) (373,000) (802,000)
Interest expense............................................ (28,000) (161,000) (17,000) (144,000)
Other income (expense), net................................. (24,000) (24,000) - -
----------- ----------- ---------- ----------
Loss before income taxes.................................... (1,357,000) (1,687,000) (390,000) (946,000)
Income tax benefit.......................................... 64,000 - - -
----------- ----------- ---------- ----------
Net loss.................................................... $(1,293,000) $(1,687,000) $ (390,000) $ (946,000)
=========== =========== ========== ==========
</TABLE>
F-8
<PAGE> 12
SENSE8 CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK TREASURY STOCK
------------------ --------------------- ----------------- WARRANTS -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT OUTSTANDING SHARES AMOUNT
------ -------- ------- ----------- ------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995... 88,235 $ 600,000 -- $ -- 885,000 $41,000 $ -- 136,250 $(100,000)
Exercise of stock options..... -- -- -- -- 5,000 10,000 -- -- --
Payment on shareholder
notes....................... -- -- -- -- -- -- -- -- --
Issuance of Series B Preferred
Stock, net of issuance
costs....................... -- -- 70,782 1,199,000 -- -- -- -- --
Net loss...................... -- -- -- -- -- -- -- -- --
------ ---------- ------ ----------- ------- ------- -------- ------- ---------
BALANCES AT DECEMBER 31, 1996... 88,235 600,000 70,782 1,199,000 890,000 51,000 -- 136,250 (100,000)
Exercise of stock options..... -- -- -- -- 67,210 46,000 -- -- --
Repurchase of shares.......... -- -- -- -- -- -- -- 7,333 (23,000)
Payment on shareholder
notes....................... -- -- -- -- -- -- -- -- --
Warrants issued with
convertible notes payable... -- -- -- -- -- -- 120,000 -- --
Net loss...................... -- -- -- -- -- -- -- -- --
------ ---------- ------ ----------- ------- ------- -------- ------- ---------
BALANCES AT DECEMBER 31, 1997... 88,235 $ 600,000 70,872 $ 1,199,000 957,210 $97,000 $120,000 143,583 $(123,000)
Exercise of stock options..... 7,733 $15,000
Series A Preferred Stock
issued in exchange for
Series B Preferred Stock.... 183,825 $1,199,000 (70,872) $(1,199,000)
Series A Preferred Stock issued
in exchange for conversion of
convertible promissory note. 18,487 $ 125,000
Issuance of Series A Preferred
Stock, net of issuance costs 18,382 $ 125,000
Net loss
------- ---------- ------- ----------- ------- ------- -------- ------- ---------
BALANCES AT MARCH 31, 1998 308,929 2,049,000 - - 964,943 112,000 120,000 143,583 (123,000)
======= ========== ======= =========== ======= ======= ======== ======= =========
(Unaudited)
<CAPTION>
RETAINED TOTAL
SHAREHOLDER EARNINGS SHAREHOLDERS
NOTES (ACCUMULATED EQUITY
RECEIVABLE DEFICIT) (DEFICIT)
----------- ------------ ------------
<S> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995... $(13,000) $ 105,000 $ 633,000
Exercise of stock options..... -- -- 10,000
Payment on shareholder
notes....................... 5,000 -- 5,000
Issuance of Series B Preferred
Stock, net of issuance
costs....................... -- -- 1,199,000
Net loss...................... -- (1,293,000) (1,293,000)
-------- ----------- -----------
BALANCES AT DECEMBER 31, 1996... (8,000) (1,188,000) 554,000
Exercise of stock options..... -- -- 46,000
Repurchase of shares.......... -- -- (23,000)
Payment on shareholder
notes....................... 8,000 -- 8,000
Warrants issued with
convertible notes payable... -- -- 120,000
Net loss...................... -- (1,687,000) (1,687,000)
-------- ----------- -----------
BALANCES AT DECEMBER 31, 1997 $ -- $(2,875,000) $ (982,000)
Exercise of stock options $ 15,000
Series A Preferred Stock issued
in exchange for Series B
Preferred Stock $ --
Series A Preferred Stock issued
in exchange for conversion of
convertible promissory note $ 125,000
Issuance of Series A Preferred
Stock, net of issuance costs $ 125,000
Net loss $ (946,000) $ (946,000)
-------- ----------- ------------
BALANCES AT MARCH 31, 1998 -- (3,821,000) (1,663,000)
======== =========== ============
(Unaudited)
</TABLE>
F-9
<PAGE> 13
SENSE8 CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
-------------------------- ------------------------
1996 1997 1997 1998
----------- ----------- -------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,293,000) $(1,687,000) $(390,000) $(946,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 141,000 252,000 56,000 138,000
Provision for uncollectible accounts receivable...... 7,000 64,000 15,000 11,000
Changes in assets and liabilities:
Accounts receivable............................... (210,000) 738,000 379,000 (15,000)
Inventories....................................... 47,000 (5,000) (2,000) (7,000)
Other current assets.............................. 11,000 148,000 (10,000) 5,000
Other assets...................................... (11,000) 26,000 - -
Accounts payable.................................. 153,000 35,000 (64,000) 446,000
Accrued expenses.................................. 184,000 32,000 (12,000) 158,000
Deferred revenues................................. 228,000 (300,000) (169,000) (23,000)
Customer advances................................. (28,000) - - -
----------- ----------- --------- ----------
Net cash used in operating activities................ (771,000) (697,000) (197,000) (233,000)
----------- ----------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases.......................... (371,000) (63,000) (3,000) (4,000)
Property and equipment sales.............................. - 52,000 - -
----------- ----------- --------- ----------
Net cash used in investing activities................ (371,000) (11,000) (3,000) (4,000)
----------- ----------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes............... - 384,000 - -
Proceeds from notes payable............................... - 200,000 87,000 125,000
Repayment of notes payable................................ - (17,000) - (10,000)
Proceeds from preferred stock issuance, net of issuance
costs.................................................. 1,199,000 - - 125,000
Proceeds from common stock issuance....................... 10,000 46,000 - 15,000
Proceeds from shareholder notes receivable................ 5,000 8,000 - -
Treasury stock purchases.................................. - (23,000) - -
----------- ----------- --------- ----------
Net cash provided by financing activities............ 1,214,000 598,000 87,000 255,000
----------- ----------- --------- ----------
Net increase (decrease) in cash and cash equivalents........ 72,000 (110,000) (113,000) 18,000
Cash and cash equivalents at beginning of year.............. 95,000 167,000 167,000 57,000
----------- ----------- --------- ----------
Cash and cash equivalents at end of year.................... $ 167,000 $ 57,000 $ 54,000 $ 75,000
=========== =========== ========= ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 8,000 $ 8,000 $ 6,000 $ 33,000
=========== =========== ========= ==========
Cash paid for income taxes................................ - $ 7,000 $ - $ -
=========== =========== ========= ==========
NON-CASH FINANCING ACTIVITIES:
Warrants issued with convertible notes payable............ $ - $ 120,000 $ - $ -
=========== =========== ========= ==========
Series A Preferred Stock issued in exchange for conversion
of convertible promissory note $ - $ - $ - $ 125,000
=========== =========== ========= ==========
</TABLE>
F-10
<PAGE> 14
Sense 8 Corporation
Notes to Consolidated Financial Statements
(Unaudited with respect to March 31, 1998 and the
three-month periods ended March 31, 1997 and 1998)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SIGNIFICANT MATTERS:
Sense8 Corporation (the "Company") was incorporated in California in 1990
and designs and markets software development tools for the creation of virtual
reality applications. The Company's products are distributed in the United
States by the Company and internationally through a network of independent
distributors and value-added resellers, primarily located in Europe.
During 1996, the Company formed Sense8 SA (the "Subsidiary") to distribute
the Company's products and to establish a market presence throughout Europe. The
Subsidiary was incorporated in Switzerland and is wholly-owned by the Company.
During 1997, the Company closed Sense8 SA and returned the management of
European distribution to the United States.
The Company has incurred recurring losses from operations and has a net
capital deficiency that raise substantial doubt about its ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. However, on
April 11, 1998, the Company entered into a definitive agreement dated April 11,
1998 to be acquired by Engineering Animation, Inc. (EAI). In connection
therewith, the Company and EAI entered into an interim management agreement
which provides for joint management of the Company through consummation of the
acquisition. EAI has provided working capital to the Company since the date of
the definitive agreement.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Sense8 Corporation and its wholly-owned subsidiary. All intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist principally of bank deposits and money-market accounts that are stated
at cost, which approximates fair value.
REVENUE RECOGNITION
Revenues from software license fees and product sales are recognized upon
product shipment and fulfillment of acceptance terms, if applicable, provided
that no significant obligations exist and collection of the resulting receivable
is probable. Revenues from software support contracts are recognized ratably
over the course of the support term. Revenues from consulting services are
recognized using the percentage of completion method. Revenues from training
services are recognized as such services are performed.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable, which are generally not collateralized. The Company
limits its exposure to credit loss by placing its cash and cash equivalents with
F-11
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
high credit quality financial institutions. Concentrations of credit risk with
respect to trade accounts receivable are considered to be limited due to the
quality of customers comprising the customer base and their dispersion across
different businesses and geographic markets. The Company performs on-going
credit evaluations of its customers' financial condition to determine the need
for an allowance for doubtful accounts. The aggregate accounts receivable from
one customer represented 19 percent and 10 percent of total accounts receivable
at December 31, 1996 and 1997, respectively.
SALES TO SIGNIFICANT CUSTOMERS
During the year ended December 31, 1996, sales to two customers
represented 21 percent and 15 percent of net revenues, respectively. During
the year ended December 31, 1997, sales to one customer represented 12 percent
of net revenues.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in
first-out (FIFO) basis, or market value and comprise primarily hardware products
purchased for re-sale.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on the straight-line basis over the
estimated useful lives of the assets, which range from two to seven years.
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the remaining lease term or the estimated useful life
of the related asset, typically three years.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
FOREIGN CURRENCY TRANSLATION
The Company had a subsidiary in Switzerland through October 1997. The
functional currency of this entity was the local currency. Accordingly, all
assets and liabilities of these entities are translated at the current exchange
rate in effect at the balance sheet date and revenues and expenses are
translated at the average exchange rates in effect during the reporting period.
During the years ended December 31, 1996 and 1997, foreign currency transaction
and translation gains and losses were immaterial.
RESEARCH AND DEVELOPMENT
Costs incurred in the research and development of new products and
enhancements to existing products are charged to expense as incurred until the
technological feasibility of the product or enhancement has been established.
After establishing technological feasibility, any additional development costs
incurred through the date the product is available for general release would be
capitalized and amortized over the greater of the estimated product life or on a
ratio of current product revenues to total projected product revenues. No costs
have been capitalized to date as the impact on the financial statements for all
periods presented is immaterial.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law;
F-12
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and notes payable, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying interim consolidated financial statements as of March 31,
1998 and for the three months ended March 31, 1997 and 1998 are unaudited. The
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the results of the Company's operations and its cash flows for
the three months ended March 31, 1997 and 1998. The financial data and other
information disclosed in these notes to consolidated financial statements
related to these periods are unaudited. The results for the three months ended
March 31, 1998, are not necessarily indicative of the results expected for the
year ending December 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement will be effective for the Company's year
ending December 31, 1998. The statement establishes presentation and disclosure
requirements for reporting comprehensive income. Comprehensive income includes
charges or credits to equity that are not the result of transactions with
shareholders. The Company expects there will be no material impact on its
consolidated financial position or results of operations as a result of the
adoption of this new accounting standards.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement will be effective for the Company's year ending
December 31, 1998. The statement requires the Company to report certain
financial information about operating segments. It also requires that the
Company report certain information about its services, the geographic areas in
which it operates and its major customers. The method specified in SFAS 131 for
determining what information to report is referred to as the "management
approach." The management approach is based on the way that management organizes
the segments within the enterprise for making operating decisions and assessing
performance. The adoption of SFAS 131 is not expected to have a significant
impact on segment disclosures of the Company.
In October 1997, the AICPA issued SoP 97-2, "Software Revenue Recognition,"
which provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. SoP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
Earlier application is encouraged as of the beginning of fiscal years or interim
periods for which financial statements or information have not been issued.
Retroactive application of the provisions of this SoP is prohibited. The Company
has assessed the provisions of the SoP 97-2 and does not expect that adoption
will have a material impact on its consolidated financial statements.
NOTE 3 -- BALANCE SHEET ITEMS:
Property and equipment, net:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Computer equipment......................................... $ 429,000 $ 439,000
Furniture and fixtures..................................... 155,000 133,000
Purchased internal-use software............................ 133,000 145,000
Leasehold improvements..................................... 105,000 96,000
--------- ---------
822,000 813,000
Less: Accumulated depreciation and amortization............ (289,000) (501,000)
--------- ---------
$ 533,000 $ 312,000
========= =========
</TABLE>
F-13
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Accrued expenses:
Compensation and related benefits........................ $ 293,000 $ 290,000
Interest................................................. -- 27,000
Other.................................................... 96,000 104,000
--------- ---------
$ 389,000 $ 421,000
========= =========
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS:
During the years ended December 31, 1996 and 1997, the Company purchased
hardware inventory at estimated market prices from a shareholder totaling
$59,000 and $7,000, respectively.
See Note 5 for other related party transactions.
NOTE 5 -- NOTES PAYABLE:
In June 1997, the Company issued convertible promissory notes payable to
two customers totaling $300,000 and two shareholders totaling $84,000 which bear
interest at 12% per annum payable quarterly. The notes are convertible at the
option of the holder into shares of Series B Convertible Preferred Stock at an
initial price of $17 per share. Principal and unpaid interest on the notes are
due in June 2000, but shall be immediately due and payable upon either the sale
by the Company of equity securities for gross proceeds totaling $2,000,000 or
more or upon sale of substantially all of the Company's capital stock. See Notes
1 and 10. In connection with the promissory notes, the Company issued warrants
to purchase Series B Convertible Preferred Stock. See Note 8.
In July 1997, the Company borrowed $200,000 from a leasing company. The
loan is secured by certain equipment purchased by the Company. Principal and
interest payments are payable monthly through April 2001. The annual interest
rate is 17.43 percent. At December 31, 1997, the outstanding balance was
$183,000.
Principal payments on notes payable at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998........................................................ $ 40,000
1999........................................................ 48,000
2000........................................................ 441,000
2001........................................................ 38,000
---------
567,000
Less: unamortized discount related to warrants.............. (100,000)
---------
$ 467,000
=========
</TABLE>
NOTE 6 -- INCOME TAXES:
No provision for income taxes was recorded in 1997 as the Company incurred
a net loss. The income tax benefit recorded in 1996 represents the recovery of
previously paid taxes by carrying back the 1996 net loss.
F-14
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Net operating loss carryforwards and credits............... $ 510,000 $ 648,000
Allowance for doubtful accounts............................ 10,000 49,000
Accrued expenses and others................................ 30,000 55,000
--------- ---------
Deferred tax assets........................................ 550,000 752,000
Valuation allowance........................................ (550,000) (752,000)
--------- ---------
$ -- $ --
========= =========
</TABLE>
Management believes that, based on a number of factors, it is more likely
than not that the deferred tax assets will not be recovered, therefore a full
valuation reserve has been recorded.
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $1,400,000 and $925,000 respectively, which are
available to reduce future taxable income. Such carryforwards expire in various
amounts through 2012. The income tax benefit from the utilization of net
operating loss carryforwards may be limited in certain circumstances including,
but not limited to cumulative stock ownership changes of more than 50 percent
over a three-year period. See Note 1 regarding the acquisition.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases office space and equipment under noncancelable operating
leases, which expire through March 2001. The accompanying consolidated financial
statements reflect rent expense on a straight-line basis over the terms of the
respective lease agreements. Total rent expense under noncancelable operating
leases was $405,000 and $379,000 for the years ended December 31, 1996 and 1997,
respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998........................................................ $367,000
1999........................................................ 29,000
2000........................................................ 21,000
2001........................................................ 7,000
--------
$424,000
========
</TABLE>
LEGAL PROCEEDINGS
The Company is subject to various claims and litigation arising in the
normal course of business. It is the opinion of management that losses, if any,
will not have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
NOTE 8 -- SHAREHOLDERS' EQUITY:
The Company's Articles of Incorporation designate and authorize 10,000,000
shares of $0.001 par value Common Stock and 5,000,000 shares of $0.001 par value
Preferred Stock. The authorized preferred stock has been designated as follows:
F-15
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SHARES
---------
<S> <C>
Series A Convertible Preferred Stock ("Series A")........... 96,360
Series B Convertible Preferred Stock ("Series B")........... 146,326
Undesignated................................................ 4,757,314
---------
5,000,000
=========
</TABLE>
The holders of Preferred Stock have certain rights and preferences with
respect to conversion, voting, dividends and liquidation as follows:
CONVERSION
Each share of Preferred Stock is convertible at the option of the holder at
any time into Common Stock at the initial conversion rate of one share of Common
Stock for each share of Preferred Stock. The initial conversion rate of each
series of Preferred Stock is subject to adjustment as provided in the Articles
of Incorporation. Each share of Preferred Stock shall automatically be converted
into shares of Common Stock at the then effective conversion rate upon the
Company's sale of its common stock in an underwritten public offering pursuant
to a registration statement under the Securities Act of 1933.
VOTING
Each holder of Series A and Series B Preferred Stock is entitled to the
number of votes equal to the number of shares of Common Stock into which the
shares of Preferred Stock could be converted.
DIVIDENDS
Holders of Series A and Series B Preferred Stock are entitled to a
dividend, when and if declared by the Board of Directors, at the fixed rate of
$0.68 and $1.77, respectively, per share per annum, prior and in preference to
any distribution on the Common Stock. Such dividends are not cumulative.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series A and Series B Preferred Stock shall be entitled to
receive, prior and in preference to any distribution to the holders of the
Common Stock, the amount of $6.80 and $17.66, respectively, per share, plus an
amount equal to all declared but unpaid dividends on such shares. The remaining
assets, if any, shall be distributed among the holders of Preferred Stock and
Common Stock pro rata based on the number of shares of Common Stock held by
each, determined on an as-converted basis. If the Company's funds are
insufficient to permit the full payment of such preferential amounts, funds
shall be distributed ratably among the holders of Series A and Series B
Preferred Stock in proportion to the respective liquidation preference of each
series.
WARRANTS
In October 1995, the Company issued warrants to purchase 4,000 shares of
Series A Convertible Preferred Stock in connection with a working capital line
of credit agreement. The warrant has an exercise price of $6.80 per share and
expires in October 2000. At the date of grant, the value of the warrants was not
material to the financial statements. At the election of the holder, the Company
shall purchase the warrants for cash upon the closing of any acquisition in an
amount equal to the fair market value of the shares, assuming exercise, less the
exercise price of the warrant.
In May 1996, the Company issued warrants to purchase 4,125 shares of Series
A Convertible Preferred Stock in connection with a working capital line of
credit agreement. The warrant has an exercise price of $6.80 per share and
expires in May 2001. At the date of grant, the value of the warrants was not
material to the financial statements. At the election of the holder, the Company
shall purchase the warrants for cash upon the
F-16
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
closing of any acquisition in an amount equal to the fair market value of the
shares, assuming exercise, less the exercise price of the warrant.
In June 1997, the Company issued warrants to purchase 22,590 shares of
Series B Convertible Preferred Stock in connection with issuance of convertible
notes payable. The warrants have an exercise price of $17.00 per share and
expire in June 2002. At the date of the grant, the warrants had a value of
approximately $120,000 which is being amortized as interest expense over the
term of the related debt.
In July 1997, the Company issued warrants to purchase 5,000 shares of
Common Stock in connection with a Note Payable. The warrant has an exercise
price of $0.01 per share and expires in July 2007. At the date of grant, the
value of the warrants was not material to the financial statements.
NOTE 9 -- EMPLOYEE BENEFITS:
STOCK OPTIONS
The 1997 Stock Option Plan (the "Plan") provides for the grant of incentive
stock options and nonqualified stock options for the purchase of up to an
aggregate of 300,853 shares of the Company's common stock by officers,
employees, consultants and directors of the Company. The Plan amends the 1993
Stock Option Plan (the "1993 Plan") and includes all grants and activity under
the 1993 Plan, as well as other nonqualified stock option grants approved by the
Board of Directors. The Board of Directors is responsible for administration of
the Plan. The Board of Directors determines the term of each option, option
exercise price, number of shares for which each option is granted and the rate
at which each option is exercisable. Options generally vest ratably over four
years. The Company may not grant an employee incentive stock options with a fair
value in excess of $100,000 that is first exercisable during any one calendar
year.
Incentive stock options may be granted to employees at an exercise per
share of not less than the fair value per common share on the date of the grant
(not less than 110% of the fair value in the case of holders of more than 10% of
the Company's voting stock). Nonqualified stock options may be granted to any
officer, employee, director or consultant at an exercise price per share (not
less than 85% of the fair value), as determined by the Company's Board of
Directors.
Options granted under the Plan generally expire 10 years from the date of
the grant (five years for incentive stock options granted to holders of more
than 10% of the Company's voting stock).
During the years ended December 31, 1996 and 1997, respectively, no
compensation costs were recognized in connection with option grants. Had
compensation cost for the Company's Option Plan and separate approval by the
Board of Directors been determined based on the fair value at the grant dates,
as prescribed in SFAS 123, the Company's net income (loss) would have been as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Net income (loss):
As reported........................................... $(1,293,000) $(1,687,000)
Pro forma............................................. $(1,294,000) $(1,722,000)
</TABLE>
F-17
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under SFAS 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Expected lives, in years.................................... 5 5
Dividend yield.............................................. 0.0% 0.0%
Risk-free rate of interest.................................. 6.4% 6.4%
Stock price volatility...................................... 0.0% 0.0%
</TABLE>
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
1996 1997
-------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 170,077 $0.46 210,057 $1.14
Granted.......................... 104,673 2.95 93,200 3.25
Exercised........................ (5,000) 2.00 (67,214) 2.70
Canceled......................... (59,693) 2.00 (98,704) 1.08
------- -------
Outstanding at end of year....... 210,057 1.14 137,339 1.85
======= =======
Options exercisable at year
end............................ 113,214 67,214
======= =======
Weighted-average fair value of
options granted during the
year........................... $0.82 $0.89
===== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
SHARES REMAINING WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.25..................... 60,000 5.2 years $0.25 54,282 $0.25
$2.00-$3.25............... 77,339 9.2 3.10 12,932 2.70
------- -------
137,339 7.5 1.85 67,214 0.72
======= =======
</TABLE>
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects of
reported net income (loss) for future years.
401(K) PLAN
During the year ended December 31, 1996, the Company established a defined
contribution 401(k) Plan for substantially all of its employees. Under the
401(k) Plan, employees may contribute up to 20 percent of their gross wages. The
Company will, at its discretion, match a percentage of the employee
contribution. For the years ended December 31, 1996 and 1997, the Company
elected to not contribute a Company match to the 401(k) Plan.
NOTE 10 -- SUBSEQUENT EVENTS:
PREFERRED STOCK TRANSACTIONS
On March 27, 1998, the Company entered into an agreement to sell 220,694
shares of Series A Preferred Stock at a purchase price of $6.80 per share,
payable as follows: (i) 18,487 shares of Series A Preferred Stock
F-18
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were issued in exchange for conversion of the convertible promissory note in the
principal amount of $125,000, (ii) 18,382 shares of Series A Preferred Stock
were issued in exchange for $125,000 payable in cash, (iii) 183,825 shares of
Series A Preferred Stock were issued in exchange for the previously issued
70,782 shares of Series B Preferred Stock. In connection with this transaction,
the holder agreed to amend the terms of its Series B Note and warrant agreement
dated June 26, 1997 to reduce the conversion price of each of the Series B Note
and Series B warrant from $17.00 to $6.80 per share and change the underlying
securities of each of the Series B Note and Series B warrant from Series B
Preferred Stock to Series A Preferred Stock.
ACQUISITION
On June 17, 1998, Engineering Animation, Inc. completed the acquisition of
the Company.
F-19
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENGINEERING ANIMATION, INC.
Date: July 31, 1998 By: /s/ Jamie A. Wade
--------------------------------
Jamie A. Wade
Vice President of Administration
and General Counsel
S-1
<PAGE> 24
ENGINEERING ANIMATION, INC.
EXHIBIT INDEX TO AMENDMENT NO. 1 TO FORM 8-K REPORT
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger among the Company,
EAICA, Inc. and Sense8 Corporation.*
3.4 Certificate of Merger of Sense8 Corporation into Engineering
Animation, Inc.
23.1 Consent of PricewaterhouseCoopers LLP
</TABLE>
- ------------------
* The schedules and exhibits to these documents are not being filed
herewith. The registrant agrees to furnish supplementally a copy of any
such schedule or exhibit to the Securities and Exchange Commission upon
request.
<PAGE> 1
EX-2.1
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
ENGINEERING ANIMATION, INC.,
EAICA, INC.
AND
SENSE8 CORPORATION
------------------------------------
Dated as of April 30, 1998
------------------------------------
<PAGE> 2
TABLE OF CONTENTS
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
PAGE
----
<S> <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-2
1.6. Directors and Officers................................ A-2
1.7. Tax Consequences...................................... A-2
ARTICLE II. CONVERSION AND EXCHANGE OF SHARES.............. A-2
2.1. Definitions........................................... A-2
2.2. Total Merger Consideration............................ A-3
2.3. Conversion of Sense8 Stock............................ A-3
2.4. Exchange of Shares.................................... A-4
2.5. Warrants to Acquire Sense8 Stock...................... A-5
2.6. Options to Acquire Sense8 Common Stock................ A-5
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF SENSE8...... A-6
3.1. Corporate Organization................................ A-6
3.2. Capitalization........................................ A-6
3.3. Authority; No Violation............................... A-6
3.4. Consents and Approvals................................ A-7
3.5. Reports............................................... A-7
3.6. Compliance with Applicable Law........................ A-7
3.7. Financial Statements.................................. A-7
3.8. Absence of Certain Changes or Events.................. A-7
3.9. Legal Proceedings and Restrictions.................... A-8
3.10. Taxes and Tax Returns................................. A-8
3.11. Employee Benefits..................................... A-9
3.12. Employment and Labor Relations........................ A-11
3.13. Contracts............................................. A-11
3.14. Undisclosed Liabilities............................... A-12
3.15. Environmental Liability............................... A-12
3.16. Tangible Assets....................................... A-13
3.17. Real Property......................................... A-13
3.18. Intellectual Property................................. A-13
3.19. Inventory............................................. A-14
3.20. Notes and Accounts Receivable......................... A-14
3.21. Bank Accounts and Powers of Attorney.................. A-14
3.22. Guaranties............................................ A-14
3.23. Insurance............................................. A-14
3.24. Service Contracts and Warranties...................... A-14
3.25. Certain Relationships................................. A-14
3.26. S-4 Information....................................... A-14
3.27. Broker's Fees......................................... A-14
3.28. Certain Customer Relationships........................ A-15
3.29. Disclosure............................................ A-15
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF EAI.......... A-15
4.1. Corporate Organization................................ A-15
4.2. Capitalization........................................ A-15
4.3. Authority; No Violation............................... A-15
4.4. Consents and Approvals................................ A-16
4.5. SEC Reports........................................... A-16
4.6. S-4 Information....................................... A-16
4.7. Broker's Fee.......................................... A-16
4.8. Disclosure............................................ A-16
ARTICLE V. COVENANTS RELATING TO CONDUCT OF BUSINESS....... A-16
5.1. Conduct of Business Prior to the Effective Time....... A-16
5.2. Sense8 Forbearances................................... A-16
ARTICLE VI. ADDITIONAL AGREEMENTS.......................... A-17
6.1. Regulatory and Other Matters.......................... A-17
6.2. Access to Information................................. A-18
6.3. Shareholders' Approval................................ A-18
6.4. Additional Agreements................................. A-18
6.5. Advice of Changes..................................... A-18
6.6. Takeover Proposals.................................... A-18
6.7. Tax Matters........................................... A-19
ARTICLE VII. CONDITIONS PRECEDENT.......................... A-19
7.1. Conditions to Each Party's Obligation To Effect the
Merger................................................. A-19
7.2. Conditions to Obligations of EAI...................... A-20
7.3. Conditions to Obligations of Sense8................... 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-22
9.1. Expenses.............................................. A-22
9.2. Notices............................................... A-22
9.3. Interpretation........................................ A-23
9.4. Counterparts.......................................... A-23
9.5. Entire Agreement...................................... A-23
9.6. Governing Law......................................... A-23
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. Tax Free Reorganization............................... A-24
EXHIBITS
A -- Brobeck, Phleger & Harrison LLP Legal Opinion
B -- EAI General Counsel Legal Opinion
C -- March 31, 1998 Consolidated Balance Sheet
</TABLE>
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INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Agreement................................................... Recitals
Agreement of Merger......................................... sec.1.1
California Secretary........................................ sec.1.3
Certificate of Merger....................................... sec.1.1
CGCL........................................................ sec.1.1
Closing..................................................... sec.1.2
Closing Date................................................ sec.1.2
Code........................................................ sec.1.8
Consents.................................................... sec.3.4
DGCL........................................................ sec.1.1
Disclosure Schedule......................................... Art. III
Dissenters' Shares.......................................... sec.2.3(g)
EAI......................................................... Recitals
EAI Common Stock............................................ sec.2.1(a)
EAI Stock Value............................................. 2.1(b)
Effective Time.............................................. sec.1.3
Environmental Laws.......................................... sec.3.15(e)
ERISA....................................................... sec.3.11(a)
ERISA Affiliates............................................ sec.3.11(f)
Exchange Act................................................ sec.4.5
Exchange Ratio.............................................. sec.2.3(d)
GAAP........................................................ sec.3.7
Governmental Authority...................................... sec.3.4
Hazardous Material.......................................... sec.3.15(e)
Intellectual Property....................................... sec.3.18
Interim Balance Sheet....................................... sec.3.14
Interim Financial Statements................................ sec.3.7
IRS......................................................... sec.3.11(b)
Liens....................................................... sec.3.3(b)
Material Adverse Effect..................................... sec.3.6
Merger...................................................... Recitals
NNM......................................................... sec.2.1(b)
Per Share Series A Preference Amount........................ sec.2.1(c)
Per Share Series B Preference Amount........................ sec.2.1(d)
Person...................................................... sec.5.2(a)
Primary Customers........................................... sec.3.29
Remaining Total Merger Consideration........................ sec.2.3(d)
Requisite Regulatory Approvals.............................. sec.7.1(a)
Returns..................................................... sec.3.10(c)
S-4......................................................... sec.3.4
SEC......................................................... sec.3.4
Securities Act.............................................. sec.3.26
Sense8...................................................... Recitals
Sense8 Certificate.......................................... sec.2.1(g)
Sense8 Common Stock......................................... sec.2.1(h)
Sense8 Common Warrants...................................... sec.2.1(i)
Sense8 Convertible Notes.................................... sec.2.1(j)
Sense8 Contract............................................. sec.3.13
Sense8 Financial Statements................................. sec.3.7
Sense8 Options.............................................. sec.2.1(k)
</TABLE>
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<TABLE>
<S> <C>
Sense8 Plans................................................ sec.3.11(a)
Sense8 Preferred Stock...................................... sec.2.1(l)
Sense8 Series A Preferred Stock............................. sec.2.1(m)
Sense8 Series A Warrants.................................... sec.2.1(n)
Sense8 Series B Preferred Stock............................. sec.2.1(o)
Sense8 Series B Warrants.................................... sec.2.1(p)
Sense8 Stock................................................ sec.2.1(q)
Sense8 Warrants............................................. sec.2.1(r)
Series A Preference Amount.................................. sec.2.1(e)
Series B Preference Amount.................................. sec.2.1(f)
Shareholders Meeting........................................ sec.1.2
Sub......................................................... Recitals
Surviving Corporation....................................... sec.1.1
Takeover Proposal........................................... sec.6.8(d)
Taxes....................................................... sec.3.10(c)
Total Merger Consideration.................................. sec.2.2
</TABLE>
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AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, DATED AS OF APRIL 30,
1998 (THE "AGREEMENT"), BY AND AMONG ENGINEERING ANIMATION, INC., A DELAWARE
CORPORATION ("EAI"), EAICA, INC., A CALIFORNIA CORPORATION AND A WHOLLY-OWNED
SUBSIDIARY OF EAI ("SUB"), AND SENSE8 CORPORATION, A CALIFORNIA CORPORATION
("SENSE8").
WHEREAS, the Boards of Directors of EAI and Sense8 have determined that it
is in the best interests of their respective companies and the stockholders of
EAI and the shareholders of Sense8 to consummate the business combination
provided for in this Agreement;
WHEREAS, on April 11, 1998, EAI, Sub and Sense8 entered into an Agreement
and Plan of Merger (the "Original Agreement") pursuant to which Sub, subject to
the terms and conditions set forth therein, was to merge with and into Sense8
and as a result Sense8 shall become a wholly-owned subsidiary of EAI;
WHEREAS, EAI, Sub and Sense8 have subsequently determined that it is
preferable that the business combination of EAI and Sense8 be accomplished by a
merger of Sense8 with and directly into EAI (the "Merger") and thus have amended
and restated the Original Agreement by entering into this Agreement;
WHEREAS, EAI and Sense8 entered into an Interim Management Agreement
concurrent with the Original Agreement;
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 and
an agreement of merger (the "Agreement of Merger") to be filed in accordance
with the California General Corporation Law (the "CGCL") and a certificate of
merger (the "Certificate of Merger") to be filed in accordance with the Delaware
General Corporation Law (the "DGCL"), at the Effective Time (as hereinafter
defined), Sense8 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. Upon consummation of the Merger, the separate corporate
existence of Sense8 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 the offices of
Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois, as soon as
possible following the meeting of the shareholders of Sense8 at which the Merger
is approved (the "Shareholder Meeting"), but in any event not later than 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").
1.3. Effective Time. Subject to the provisions of this Agreement, the
Agreement of Merger and the Certificate of Merger, the parties hereto shall
cause the Merger to be consummated by filing a properly executed Agreement of
Merger with the California Secretary of State in accordance with the CGCL and a
properly executed Certificate of Merger with the Delaware Secretary of State in
accordance with the DGCL (the time of such filings being the "Effective Time")
on the Closing Date.
1.4. Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects set forth in the CGCL and the DGCL.
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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 Consequences. EAI and Sense8 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.
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 $42.61725, which is the average of
the last reported per share sale price of the EAI Common Stock, as reported
on the Nasdaq Stock Market National Market (the "NNM"), for each of the
four trading days immediately preceding April 11, 1998, as reported in the
NNM listings published in The Wall Street Journal.
(c) "Per Share Series A Preference Amount" shall mean the quotient of
(x) $6.80, divided by (y) the EAI Stock Value, carried six decimal places.
(d) "Per Share Series B Preference Amount" shall mean the quotient of
(x) $17.66, divided by (y) the EAI Stock Value, carried six decimal places.
(e) "Series A Preference Amount" shall mean $6.80 times the total of
the number of shares of Sense8 Series A Preferred Stock outstanding
immediately prior to the Effective Time plus the number of shares of Sense8
Series A Preferred Stock issuable upon the exercise of all Sense8 Series A
Warrants outstanding immediately prior to the Effective Time.
(f) "Series B Preference Amount" shall mean $17.66 times the total of
the number of shares of Sense8 Series B Preferred Stock outstanding
immediately prior to the Effective Time plus the number of shares of Sense8
Series B Preferred Stock issuable upon the exercise of all Sense8 Series B
Warrants outstanding immediately prior to the Effective Time.
(g) "Sense8 Certificate" shall mean each certificate representing any
shares of Sense8 Stock outstanding immediately prior to the Effective Time.
(h) "Sense8 Common Stock" shall mean each share of the common stock,
$.001 par value per share, of Sense8.
(i) "Sense8 Common Warrants" shall mean all issued and outstanding
warrants to purchase shares of Sense8 Common Stock.
(j) "Sense8 Convertible Notes" shall mean all convertible promissory
notes issued by Sense8 pursuant to that certain Note and Warrant Purchase
Agreement, dated as of June 26, 1997, by and among Sense8 and the investors
listed therein.
(k) "Sense8 Options" shall mean all options outstanding immediately
prior to the Effective Time, whether or not then exercisable, to purchase
shares of Sense8 Common Stock.
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(l) "Sense8 Preferred Stock" shall mean each share of the preferred
stock, $.001 par value per share, of Sense8.
(m) "Sense8 Series A Preferred Stock" shall mean each share of Sense8
Preferred Stock designated as "Series A Preferred Stock".
(n) "Sense8 Series A Warrants" shall mean all issued and outstanding
warrants to purchase shares of Sense8 Series A Preferred Stock.
(o) "Sense8 Series B Preferred Stock" shall mean each share of Sense8
Preferred Stock designated as "Series B Preferred Stock".
(p) "Sense8 Series B Warrants" shall mean all issued and outstanding
warrants to purchase shares of Sense8 Series B Preferred Stock.
(q) "Sense8 Stock" shall mean all of the Sense8 Common Stock and the
Sense8 Preferred Stock.
(r) "Sense8 Warrants" shall mean the Sense8 Common Warrants, the
Sense8 Series A Warrants and the Sense8 Series B Warrants.
2.2. Total Merger Consideration. The total consideration payable to
holders of Sense8 Stock and Sense8 Warrants upon consummation of the Merger (the
"Total Merger Consideration") shall equal (i) $6,793,089 minus (ii) any legal
fees, 1996 audit costs or brokers' costs of Sense8 as of the Closing Date which
relate to the Merger and which are not reflected on the March 31, 1998
consolidated balance sheet of Sense8, attached hereto as Exhibit C, plus (iii)
the principal amount and converted interest of any Sense8 Convertible Notes
which are converted prior to the Effective Time.
2.3. Conversion of Sense8 Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of EAI, Sense8 or any shareholder of
Sense8:
(a) Each share of Sense8 Series A Preferred Stock issued and
outstanding immediately prior to the Effective Time, other than Dissenters'
Shares (as defined below), shall be converted into the right to receive
shares of EAI Common Stock in the amount equal to the sum of (i) the Per
Share Series A Preference Amount and (ii) the Exchange Ratio (as defined
below).
(b) Each share of Sense8 Series B Preferred Stock issued and
outstanding immediately prior to the Effective Time, other than Dissenters'
Shares, shall be converted into the right to receive shares of EAI Common
Stock in the amount equal to the sum of (i) the Per Share Series B
Preference Amount and (ii) the Exchange Ratio (as defined below).
(c) Each share of Sense8 Common Stock issued and outstanding
immediately prior to the Effective Time, other than Dissenters' Shares,
shall be converted into the right to receive shares of EAI Common Stock in
an amount equal to the Exchange Ratio (as defined below).
(d) The "Exchange Ratio" shall be determined as follows: each share of
Sense8 Stock shall be exchanged for that number of shares of EAI Common
Stock equal to the quotient, carried to six decimal places, of (x) the
number obtained by dividing the Remaining Total Merger Consideration (as
defined below) by the total of the number of shares of Sense8 Stock
outstanding immediately prior to the Effective Time (omitting any shares of
Sense8 Stock issued after April 11, 1998 as a result of exercise of a
Sense8 Option) plus the number of shares of Sense8 Stock issuable upon the
exercise of all Sense8 Warrants outstanding immediately prior to the
Effective Time, divided by (y) the EAI Stock Value. The "Remaining Total
Merger Consideration" is the difference of (i) the Total Merger
Consideration less (ii) the sum of the Series A Preference Amount and the
Series B Preference Amount.
(e) No fractional shares of EAI Common Stock shall be issued, and in
lieu thereof, EAI shall pay to each former shareholder of Sense8 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 the nearest thousandth when expressed as an Arabic
number) of EAI Common Stock to which such holder would otherwise be
entitled to receive pursuant to this Section 2.3.
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(f) All of the shares of Sense8 Stock 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 Sense8 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
Sense8 Stock represented by such Sense8 Certificate have been converted.
If, prior to the Effective Time, the outstanding shares of EAI Common Stock
or Sense8 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 this Article.
(g) Shares of Sense8 Stock with respect to which dissenters rights
have been properly demanded in accordance with the CGCL ("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 with respect to such Dissenters'
Shares pursuant to the provisions of the CGCL. Sense8 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
Sense8 and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal. Sense8 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.
(h) At the Effective Time, all shares of Sense8 Stock that are owned
by Sense8 as treasury stock and all shares of Sense8 Stock that are owned,
directly or indirectly, by Sense8, EAI or any wholly-owned subsidiary of
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 Sense8 shall become treasury stock of
EAI.
(i) After the Effective Time, there shall be no transfers on Sense8's
stock transfer books of shares of Sense8 Stock.
2.4. Exchange of Shares. (a) At the Closing, each shareholder of Sense8
shall have the right to deliver to EAI a properly completed letter of
transmittal and Sense8 Certificates representing all of the issued and
outstanding shares of Sense8 Stock owned by such shareholder, 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 whatsoever, other than federal and state securities law restrictions.
Upon proper surrender of a Sense8 Certificate for exchange and cancellation to
EAI, and in accordance with and subject to the other provisions of this
Agreement and the letter of transmittal, the holder of such Sense8 Certificate
shall receive in exchange therefor (i) a certificate representing that number of
whole shares of EAI Common Stock to which such holder of Sense8 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 Sense8
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
Sense8 Certificates.
(b) If any certificate representing shares of EAI Common Stock is to be
issued in a name other than that in which the Sense8 Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the Sense8 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 Sense8 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 Sense8 Certificate. Thereafter, EAI shall issue in exchange for
such lost, stolen or destroyed Sense8 Certificate the shares of EAI Common Stock
and any cash in lieu of a fractional share deliverable in respect thereof
pursuant to this Agreement.
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2.5. Warrants to Acquire Sense8 Stock.
(a) At the Effective Time, pursuant to its terms, each outstanding Sense8
Warrant shall automatically be deemed to constitute a warrant to acquire, on the
same terms and conditions as were applicable under such Sense8 Warrant, (i) the
same number of shares of EAI Common Stock as such Sense8 Warrant would have been
exchangeable for had such Sense8 Warrant been exercised in full immediately
prior to the Effective Time 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 Sense8 Stock otherwise purchasable pursuant to such Sense8 Warrant
divided by (B) the number of shares of EAI Common Stock deemed to be purchasable
under such warrant to acquire EAI Common Stock; provided, however, that the
number of shares of EAI Common Stock that may be purchased upon exercise of such
Sense8 Warrant shall not include any fractional share and, upon exercise of such
Sense8 Warrant, 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.
(b) As soon as practicable after the Effective Time, EAI shall deliver to
the holders of Sense8 Warrants appropriate notices setting forth such holders'
rights and the agreements evidencing such Sense8 Warrants shall be deemed to be
appropriately amended so that such Sense8 Warrants shall represent rights to
acquire EAI Common Stock on terms and conditions as contained in the outstanding
Sense8 Warrants (subject to the adjustments required by this Section 2.5 after
giving effect to the conversion as set forth above).
2.6. Options to Acquire Sense8 Common Stock.
(a) At the Effective Time, each outstanding Sense8 Option, whether vested
or unvested, shall be assumed by EAI. Each such Sense8 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 Sense8 Stock Option immediately prior to
the Effective Time. Each such Sense8 Option shall thereafter be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Sense8 Option, (i) the same number of shares of EAI Common
Stock as such Sense8 Option would have been exchangeable for had such Sense8
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 Sense8 Common Stock otherwise
purchasable pursuant to such Sense8 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 Sense8 Option shall not include any
fractional share and, upon exercise of such Sense8 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 Sense8 Options
assumed by EAI, 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
Sense8 Options so qualified immediately prior to the Closing. As a condition to
EAI's obligations to consummate the Merger, each holder of a Sense8 Option,
which by its terms does not automatically convert in the Merger into an option
to purchase EAI Common Stock, shall have consented to the above described
assumption pursuant to a written agreement or instrument signed by such holder.
(b) As soon as practicable after the Effective Time, EAI shall deliver to
the holders of Sense8 Options appropriate notices setting forth such holders'
rights and the agreements evidencing the grants of such Sense8 Options shall be
deemed to be appropriately amended so that such Sense8 Options shall represent
rights to acquire EAI Common Stock on terms and conditions as contained in the
outstanding Sense8 Options (subject to the adjustments required by this Section
2.6 after giving effect to the assumption by EAI as set forth above).
(c) EAI shall file within three (3) business days following the Closing
Date and use its reasonable efforts to file and maintain the effectiveness of a
Form S-8 registration statement covering the Sense8 Options (and maintain the
current status of the prospectus or prospectuses referred to therein) for so
long as such Sense8 Options remain outstanding.
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF SENSE8
Except as disclosed by Sense8 in the disclosure schedule delivered pursuant
to this Agreement (the "Disclosure Schedule"), Sense8 represents and warrants to
EAI as follows:
3.1. Corporate Organization. (a) Sense8 is a corporation duly organized,
validly existing and in good standing under the laws of the State of California.
Sense8 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. Correct and complete copies of the
Articles of Incorporation and By-Laws of Sense8, as in effect on April 11, 1998,
have been made available to EAI by Sense8.
(b) Sense8 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 noncorporate
business.
(c) The minute books of Sense8 accurately reflect in all material respects
all actions taken by the boards of directors, including committees thereof, and
the shareholders of Sense8.
3.2. Capitalization. As of March 31, 1998, the authorized capital stock of
Sense8 consists of (i) 10,000,000 shares of Sense8 Common Stock, of which
828,693 shares are issued and outstanding, 5,000 shares are reserved for
issuance upon exercise of the Sense8 Common Warrants, 137,339 shares are
reserved for issuance upon exercise of outstanding Sense8 Options, 349,845
shares are reserved for issuance upon conversion of Sense8 Series A Preferred
Stock and 31,222 shares are reserved for issuance upon conversion of Series B
Preferred Stock, and (ii) 5,000,000 shares of Sense8 Preferred Stock, of which
(X) 350,585 shares have been designated as Sense8 Series A Preferred Stock, of
which 308,929 shares are issued and outstanding, 23,967 shares are reserved for
issuance upon conversion of the Sense8 Convertible Notes and 16,949 shares are
reserved for issuance upon exercise of Sense8 Series A Warrants, and (Y) 146,326
shares have been designated as Sense8 Series B Preferred Stock, none of which
are issued and outstanding, 14,956 shares are reserved for issuance upon
conversion of the Sense8 Convertible Notes and 16,266 shares are reserved for
issuance upon exercise of Sense8 Series B Warrants. Each record holder of Sense8
Stock and the number of shares owned by each, each holder of a Sense8 Option or
a Sense8 Warrant and the number and class of shares of Sense8 Stock which such
holder may purchase, and each holder of a Sense8 Convertible Note and the number
and class of shares of Sense8 Stock issuable upon conversion of such Sense8
Convertible Note, is set forth in Section 3.2 of the Disclosure Schedule. No
shares of Sense8 Stock are held in Sense8's treasury and except as described in
the first sentence of this Section 3.2, no shares of Sense8 Stock are reserved
for issuance. All of the issued and outstanding shares of Sense8 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 Sense8 Options, the Sense8 Warrants and the Sense8
Convertible Notes, as listed in Section 3.2 of the Disclosure Schedule, Sense8
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) Sense8 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 Sense8. Except for the adoption of
this Agreement by the requisite vote of holders of the issued and outstanding
shares of Sense8 Stock, no other corporate proceedings on the part of Sense8 are
necessary to approve this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Sense8 and constitutes a valid and binding obligation of Sense8,
enforceable against Sense8 in accordance with its terms.
(b) The execution and delivery of this Agreement by Sense8, the
consummation by Sense8 of the transactions contemplated hereby, and the
compliance by Sense8 with the terms or provisions hereof, shall not
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(i) violate any provision of the Articles of Incorporation or By-Laws of Sense8,
(ii) violate any law, statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to Sense8 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 kind
(collectively, "Liens") upon any of the properties or assets of Sense8 under any
note, bond, mortgage, indenture, deed of trust, license, lease, contract,
agreement or other instrument or obligation to which Sense8 is a party, or by
which it or any of its properties or assets may be bound or affected, other than
violations in clause (ii) or clause (iii) which individually or in the aggregate
could not have a Material Adverse Effect on Sense8.
3.4. Consents and Approvals. Except for (i) the filing of Agreement of
Merger with the California Secretary pursuant to the CGCL, (ii) the approval of
this Agreement by the requisite vote of the holders of Sense8 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 Sense8 of this
Agreement and the consummation by Sense8 of the Merger and the other
transactions contemplated by this Agreement.
3.5. Reports. Sense8 has timely filed all reports, registrations and
statements required to be filed since January 1, 1996 with any Governmental
Authority, and has paid all fees and assessments due and payable in connection
therewith. No Governmental Authority has initiated any proceeding or, to the
best knowledge of Sense8, investigation into the business or operations of
Sense8.
3.6. Compliance with Applicable Law. Sense8 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 Sense8, other than licenses,
franchises, permits or authorizations or failures to comply or defaults which,
individually or in the aggregate, could not have a material adverse effect on
the business, properties, operations or financial condition (a "Material Adverse
Effect") of Sense8.
3.7. Financial Statements. Sense8 has previously provided EAI with correct
and complete copies of the following (collectively, the "Sense8 Financial
Statements"): (a) the unaudited consolidated balance sheet of Sense8 as of
December 31, 1997 and the unaudited consolidated balance sheet of Sense8 as of
December 31, 1996, and the related unaudited consolidated statements of income
and retained earnings and cash flows for the fiscal year ended December 31,
1997, and unaudited consolidated statements of income and retained earnings and
cash flows for the fiscal years ended December 31, 1996 and 1995, and (b) the
unaudited consolidated balance sheet of Sense8 as of March 31, 1998 and the
related unaudited consolidated statements of income for the periods then ended
(the "Interim Financial Statements"), which are attached as part of the
Disclosure Schedule. The Sense8 Financial Statements fairly present the
consolidated financial position of Sense8 and its subsidiaries as of the dates
thereof, and the results of operations and cash flows of Sense8 for the
respective fiscal periods or as of the respective dates thereof. Each of the
Sense8 Financial Statements, including the notes thereto, has been prepared in
accordance with generally accepted accounting principles ("GAAP") consistently
applied during the periods involved. The books and records of Sense8 have been,
and are being, maintained in accordance with all applicable legal and accounting
requirements.
3.8. Absence of Certain Changes or Events. (a) Since March 31, 1998, (i)
Sense8 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 have a Material Adverse Effect on Sense8, and (iii)
Sense8 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
December 31, 1997, Sense8 has not (i) increased the salaries, wages, or other
compensation, or pensions, fringe benefits or other perquisites
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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 Sense8.
3.9. Legal Proceedings and Restrictions. (a) There are no actions, suits,
proceedings, claims or investigations pending, or to the knowledge of Sense8,
threatened against or affecting Sense8 at law or in equity or before any
Governmental Authority.
(b) There is no judgment, order, writ, decree, injunction or regulatory
restriction imposed upon Sense8 or its assets which has had, or could reasonably
be expected to have, a Material Adverse Effect on Sense8.
3.10. Taxes and Tax Returns.
(a) (i) Sense8 (which term for purposes of this Section 3.10 shall include
former subsidiaries of Sense8 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 Sense8 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 April 11, 1998; and
there are no outstanding summons, subpoenas or written requests for
information with respect to any such Returns or the Taxes reflected
thereon. To Sense8's knowledge 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 Sense8 may be
subject and Sense8 is not under audit by any Governmental Authority for any
Tax. There are no Tax liens on any assets of Sense8 other than liens for
Taxes not yet due or payable;
(ii) Sense8 has paid, on the basis of Sense8'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 Sense8'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 Sense8 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, Sense8 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 Sense8; and no other entity
that was included in the filing of a Return with Sense8 on a consolidated,
combined, or unitary basis has left Sense8's consolidated, combined or
unitary group in a taxable year for which the statute of limitations on
assessment remains open. Sense8 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 Sense8; and
(v) There is no significant difference on the books of Sense8 between
the amounts of the book basis and the tax basis of assets (net of
liabilities) that is not accounted for by an accrual on the books for
Federal income tax purposes.
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(b) Sense8:
(i) Does not have any property that is or will be required to be
treated as being owned by another person under the provisions of Section
168(f)(8) of the Code (as in effect prior to amendment by the Tax Reform
Act of 1986) or is "tax-exempt use property" within the meaning of Section
168 of the Code;
(ii) Does not have any Tax sharing or allocation agreement or
arrangement (written or oral), 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;
(iii) 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 Sense8;
(iv) Is not and has not been subject to the provisions of Section
1503(d) of the Code related to "dual consolidated loss" rules;
(v) 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;
(vi) 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;
(vii) Does not have any unused net operating loss, unused net capital
loss, unused tax credit, or excess charitable contribution for Federal
income tax purposes;
(viii) Is not a United States real property holding corporation as
defined in Section 897 of the Code; and
(ix) 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 Sense8 will provide any
required certificates to avoid any such withholding.
(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, utility,
severance, production, 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) Sense8 (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
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compensation, stock purchase, stock option, severance plan, 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 "Sense8 Plans"), which could result in EAI or Sense8 having
any material liabilities, whether direct or indirect.
(b) Sense8 has made available to EAI correct and complete copies of (i)
each Sense8 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 Sense8
Plan, including written descriptions of any unwritten Sense8 Plans, (iv) the
most recent determination letter from the Internal Revenue Service (the "IRS")
for each Sense8 Plan (as applicable), and (v) the three most recent Annual
Reports -- Form 5500 (including accompanying schedules) and summary annual
reports for each Sense8 Plan, as applicable.
(c) (i) Each Sense8 Plan (and any related agreements and documents) and
Sense8 have at all times complied in all material respects with the applicable
requirements of ERISA, the Code and any other applicable law (including valid
regulations and valid rulings thereunder), and the Sense8 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) each of the
Sense8 Plans intended to be "qualified" within the meaning of Code Section
401(a) has received a favorable IRS determination and no facts exist that could
reasonably be expected to affect adversely such determination, (iii) no Sense8
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 Sense8, is any person contractually bound
to enter into any material non-exempt "prohibited transaction" within the
meaning of Code Section 4975 or ERISA Section 406, (v) Sense8 has not engaged in
a transaction which could subject it to either a material civil penalty under
ERISA Section 409 or a material tax under Code Section 4976, (vi) Sense8 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 Sense8 Plan or as
otherwise required by applicable law, (vii) Sense8 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) Sense8 has not at any time maintained, administered or contributed to any
plan subject to ERISA Title IV, and (ix) Sense8 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 Sense8, (ii) increase any benefits otherwise payable under any Sense8 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 Sense8 Options, or (iv)
impair the rights of Sense8 under any Sense8 Plan.
(e) There are no actions, claims, investigations or audits pending or, to
Sense8's knowledge, threatened or anticipated by, on behalf of, against or with
respect to Sense8, any Sense8 Plan or any trust related thereto (other than
claims for benefits in the ordinary course) that will create any liability or
obligation for the Surviving Corporation with respect to any Sense8 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 Sense8 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 Sense8 is a member, (ii) any
trade or business (whether or not incorporated) which is a member of a group of
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trades or businesses under common control within the meaning of Section 414(c)
of the Code of which Sense8 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
Sense8, 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. No executive, key employee or group
of employees has given notice of termination of his/her or their employment with
Sense8. There are no charges, complaints or litigation, or to the knowledge of
Sense8 investigations, currently pending, or to the knowledge of Sense8
threatened (and to the knowledge of Sense8 there is no reasonable basis
therefor), against Sense8, 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 Sense8 under any applicable occupational
safety and health laws in any jurisdiction in which Sense8 conducts business.
All levies, assessments and penalties made against Sense8 pursuant to any
applicable workers' compensation legislation in any jurisdiction in which Sense8
conducts business have been paid by Sense8. Sense8 is not a party to any
contracts with any labor union or employee association nor has Sense8 made
commitments to or conducted negotiations with any labor union or employee
association with respect to any future contracts. Sense8 is not aware of any
current attempts to organize or establish any labor union or employee
association with respect to any employees of Sense8, and there is no existing or
pending certification of any such union with regard to a bargaining unit. Each
employee and independent contractor employed by Sense8 has executed a
proprietary rights agreement in the form attached to the Disclosure Schedule and
Sense8 knows of no breach of any such agreement by a current or former employee
or independent contractor.
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, to the knowledge of Sense8,
oral) which are currently in effect or which will, without any further action on
the part of Sense8 become effective in the future, to which Sense8 is a party
(collectively, the "Sense8 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 require the payment of consideration
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 Sense8 has created, incurred, assumed or
guaranteed any indebtedness for borrowed money, or any capitalized lease
obligation, or under which Sense8 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 shareholder
of Sense8 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 Sense8 in the conduct of its business,
or that is licensed by Sense8 for use by others;
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(j) any agreement under which the consequences of a default,
termination, non-renewal or acceleration could have a Material Adverse
Effect on Sense8; or
(k) any other agreement the performance of which requires the payment
of consideration by any party in excess of $10,000 in any one year.
Sense8 has made available to EAI a correct and complete copy of each Sense8
Contract. Except as set forth in Section 3.13 of the Disclosure Schedule and, to
the knowledge of Sense8, (i) each Sense8 Contract is legal, valid, binding,
enforceable and in full force and effect, (ii) the consummation of the Merger
will not cause a breach or termination of any Sense8 Contract nor effect a
change in any of the terms of any Sense8 Contract nor require the consent of any
other party to the Sense8 Contract, (iii) Sense8 is not, and, to Sense8's
knowledge, no other party is, in breach or default of any Sense8 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 Sense8 Contract, and (iv) Sense8 has not, and, to
Sense8's knowledge, no other party has, repudiated any provision of any Sense8
Contract.
3.14. Undisclosed Liabilities. Except for liabilities (i) that are fully
reflected or reserved against on the March 31, 1998 consolidated balance sheet
of Sense8 (the "Interim Balance Sheet") or (ii) that were incurred in the
ordinary course of business consistent with past practice since March 31, 1998,
Sense8 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) Sense8 has not received any notice, and does not otherwise have
knowledge, of any claim, and no proceeding has been instituted raising any
claim, against Sense8 or any of the real properties now or formerly owned,
leased or operated by Sense8 or other assets of Sense8, alleging any damage to
the environment or violation of any Environmental Laws, except where the claim
could not reasonably be expected to result in a Material Adverse Effect on
Sense8.;
(b) Sense8 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 Sense8 or to other
assets of Sense8 or their use, except where the claim could not reasonably be
expected to result in a Material Adverse Effect on Sense8.;
(c) Sense8 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 storage or release could not reasonably be expected to
result in a Material Adverse Effect on Sense8; and
(d) All buildings on all real properties now owned, leased or operated by
Sense8 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 Sense8.
(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,
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prohibited or penalized by any applicable law (including asbestos, urea
formaldehyde foam insulation and polychlorinated biphenyls).
3.16. Tangible Assets. Sense8 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 Interim Balance Sheet or acquired after the date thereof,
except for properties and assets disposed of in the ordinary course of business,
free and clear of all Liens other than Liens reflected in the Sense8 Financial
Statements and Liens for taxes not yet due and payable. Sense8 owns or leases
pursuant to a Sense8 Contract all buildings, machinery, equipment and other
tangible assets material to the conduct of its business as presently conducted.
Section 3.16 of the Disclosure Schedule contains a schedule of such tangible
assets owned or leased by Sense8 that have a value in excess of $10,000.
3.17. Real Property. Sense8 does not own any real property. Section 3.17
of the Disclosure Schedule lists and describes briefly all real property leased
or subleased to Sense8. Sense8 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) Sense8 is not, and, to the knowledge of Sense8, 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 Sense8 nor, to the knowledge of Sense8, 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 Sense8, 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) Sense8 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, dba, registered
copyright, 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 in connection with
Sense8's business or have been issued to Sense8 (collectively the "Intellectual
Property"). Sense8 has made available correct and complete copies of all
patents, registered trademarks, registered 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
Sense8's ownership of or the right to use each such item. Except as set forth in
Section 3.18 of the Disclosure Schedule:
(i) to the knowledge of Sense8, Sense8 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 by
Sense8 of the Intellectual Property is not currently being challenged, nor
to the knowledge of Sense8 is it subject to any such challenge;
(iii) Sense8 has taken all reasonably necessary action to maintain and
protect rights in the Intellectual Property and will continue to maintain
those rights prior to the Closing so as not to affect materially the
validity or enforceability of the rights set forth in Section 3.18 of the
Disclosure Schedule; and
(iv) to the knowledge of Sense8, the Intellectual Property will be
owned or available for use by Sense8 on identical terms and conditions
immediately subsequent to the Closing and the transactions
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contemplated by this Agreement will have no Material Adverse Effect on
Sense8'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 Sense8, (i) Sense8 has not interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
intellectual property rights of third parties, nor is Sense8 currently
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 Sense8 that could result in a Material Adverse Effect on Sense8, nor
is any third party currently interfering with, infringing upon, misappropriating
or otherwise coming into conflict with any Intellectual Property rights of
Sense8.
3.19. Inventory. No material portion of the inventory of Sense8 is unfit
for the purpose for which it was procured, or is obsolete, expired, damaged or
defective.
3.20. Notes and Accounts Receivable. All notes and accounts receivable of
Sense8 are reflected properly on Sense8's books and records, are not subject to
any setoff or counterclaim, are current, subject only to the reserve for bad
debts, if any, established in accordance with the past practice of Sense8.
3.21. Bank Accounts and Powers of Attorney. Section 3.21 of the Disclosure
Schedule sets forth a list of all accounts, borrowing resolutions and deposit
boxes maintained by Sense8 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 Sense8.
3.22. Guaranties. Sense8 is not a guarantor or otherwise is liable for any
indebtedness, liability or other obligation of any other person or entity.
3.23. Insurance. Section 3.23 of the Disclosure Schedule lists each
insurance policy and self-insurance arrangement to which Sense8 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 Sense8.
Sense8 believes that the coverage provided by each of such policies is in an
amount, and of a type sufficient for the business presently conducted and
proposed to be conducted by Sense8. Sense8 is in substantial compliance with all
conditions contained in such policies.
3.24. Service Contracts and Warranties. Except as set out in Section 3.24
of the Disclosure Schedule, Sense8 is not a party to any service contract
pursuant to which services are provided by Sense8 to a third party. Section 3.24
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 Sense8.
3.25. Certain Relationships. No shareholder, director, officer or, to
Sense8's knowledge, employee of Sense8 (i) is, or controls, or is an employee of
any competitor, supplier, customer or lessor or lessee of Sense8, or (ii) is
indebted to Sense8 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
Sense8, other than assets that are immaterial in value; and Sense8 has not
entered into any transaction (including the furnishing of goods or services)
with any shareholder, director, officer, employer or other affiliate, except on
terms and conditions no less favorable to Sense8 than would be obtained in a
comparable arm's-length transaction with a third party.
3.26. S-4 Information. None of the written information to be supplied by
Sense8 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.
3.27. Broker's Fees. Neither Sense8 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.
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3.28. Certain Customer Relationships. Section 3.28 of the Disclosure
Schedule contains an accurate list of Sense8's ten largest customers or
distributors in 1997 (the "Primary Customers"), together with the total dollar
amount of all products purchased by such Primary Customers from Sense8 in 1997.
Sense8 believes that it has good relationships with each of the Primary
Customers and Sense8 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 Sense8.
3.29. Disclosure. No representation or warranty by Sense8 contained in
this Agreement (including the Disclosure Schedule and the Exhibits referred to
herein), or in any certificate furnished or to be furnished by Sense8 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 Sense8 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 April 11, 1998, have
been made available to Sense8 by EAI.
4.2. Capitalization. The authorized capital stock of EAI consists of
20,000,000 shares of EAI Common Stock, of which, as of March 23, 1998,
10,188,949 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 or
upon exercise of any Sense8 Options or Sense8 Warrants will be duly authorized
and validly issued and, when issued, 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.
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4.4. Consents and Approvals. Except for (i) the filing of Agreement of
Merger with the California Secretary pursuant to the CGCL, (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 are necessary in connection with the execution and delivery by EAI or Sub
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
Sense8 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 Sense8 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 the Original Agreement to the Effective Time, unless EAI shall
otherwise agree in writing, or as otherwise expressly contemplated or permitted
by this Agreement (including the Disclosure Schedule hereto), or resulting from
joint management of Sense8 and EAI pursuant to the Interim Management Agreement,
Sense8 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 Sense8
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. Sense8 Forbearances. During the period from the date of the Original
Agreement to the Effective Time, unless EAI shall otherwise agree in writing, or
as otherwise expressly contemplated or permitted by this Agreement, or resulting
from joint management of Sense8 and EAI pursuant to the Interim Management
Agreement, Sense8 shall not:
(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
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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;
(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 Sense8 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 Sense8 Contract,
or change any terms in any Sense8 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 as a reorganization within the meaning of Section 368 of the
Code;
(i) amend its Articles 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) EAI, with the cooperation of
Sense8, shall promptly prepare and file the S-4 with the SEC and shall use
reasonable best efforts to have the S-4 declared effective under the Securities
Act as promptly as practicable after such filing. Sense8 shall, upon request,
furnish EAI with all information or documents concerning Sense8 and its
directors, officers and shareholders and such other matters as may be reasonably
necessary or advisable in connection with the S-4. EAI shall also use its
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 Sense8 shall furnish all information
concerning Sense8 and the holders of Sense8 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.
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6.2. Access to Information. Upon reasonable notice, Sense8 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 Sense8's books and records, properties and contracts, and, during
such period, Sense8 shall make available to EAI all information concerning its
business, assets and personnel as EAI may reasonably request.
6.3. Shareholders' Approval. Sense8 shall call a meeting of its
shareholders for the purpose of voting upon this Agreement and the Merger, which
meeting shall be held as soon as reasonably practicable after the S-4 is
declared effective by the SEC.
6.4. 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.
6.5. Advice of Changes. Sense8 shall promptly advise EAI of any change or
event which is likely to have a Material Adverse Effect on Sense8 or which
Sense8 believes would or would be reasonably likely to cause or constitute a
material breach of any of its representations, warranties or covenants contained
herein.
6.6. Takeover Proposals. (a) Sense8 agrees that from and after its
execution of the Original Agreement through the Effective Time, it shall not and
it shall use its best efforts to cause the directors, officers, employees and
shareholders, and all investment bankers, attorneys or other advisors or
representatives retained by Sense8 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
shareholders of Sense8, or the investment bankers, attorneys, or other advisors
or representatives retained by Sense8 from participating in any discussions or
negotiations with, or furnishing any 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
Sense8's receipt thereof, including the identity of the party making the
Takeover Proposal and the specific terms and conditions thereof, and has been
given copies of such Takeover Proposal; (ii) such third party has made a written
Takeover Proposal to the Board of Directors of Sense8, which Takeover Proposal
identifies a price or range of values to be paid and based on the advice of
Sense8's investment bankers, the Board of Directors of Sense8 has determined
that such Takeover Proposal is financially more favorable to the shareholders of
Sense8 than the terms of the Merger; (iii) Sense8's Board of Directors has
determined, based on the advice of Sense8'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 Sense8 has determined,
after consultation with its outside legal counsel, that its fiduciary duties
require it to furnish information to and negotiate with such third party.
Notwithstanding the foregoing, Sense8 shall not provide any non-public
information to such third party unless (x) prior to the date thereof Sense8 has
provided such information to EAI; (y) Sense8 has notified EAI in advance of any
such proposed disclosure of non-public information and has provided EAI with a
description of the information Sense8 intends to disclose; and (z) Sense8
provides such non-public information pursuant to a nondisclosure agreement in a
form satisfactory to EAI.
(c) In addition to the foregoing requirements, Sense8 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. Upon compliance with
the requirements in the foregoing paragraph (b) and this paragraph (c), Sense8
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
Sense8 or any proposal or offer to acquire a material
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equity interest in, or a substantial portion of the assets of, Sense8 other than
by EAI as contemplated by this Agreement.
(e) Sense8 shall be entitled to furnish a copy of this Section 6.6 to any
third party who expresses an interest in making a Takeover Proposal after the
execution of this Agreement.
6.7. Tax Matters. Sense8 and EAI agree as follows:
(a) Sense8 and EAI will not file any tax return or make any disclosure
that is inconsistent with the Merger qualifying as a reorganization under
Section 368(a) of the Code. Sense8 and EAI will, and Sense8 will use its
best efforts to cause its shareholders to, file all Returns and statements
as required by the regulations under Section 368 of the Code as they apply
to the Merger.
(b) Sense8 will use its best efforts to provide EAI with information
as to the adjusted tax basis of its shareholders in their Sense8 Stock.
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 consents necessary to transfer all
of Sense8's rights, title and interest to its facilities located on
Shoreline Highway, Mill Valley, California shall have been obtained in
accordance with the lease thereof, and shall remain in full force and
effect.
(b) 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.
(c) Sense8 Shareholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved by the requisite holders of
the issued and outstanding shares of Sense8 Stock.
(d) Federal Tax Opinion. Sense8 and the shareholders of Sense8 shall
have received an opinion of Brobeck, Phleger & Harrison LLP, in form and
substance reasonably satisfactory to them prior to the mailing of the S-4,
which opinion shall not have been amended, modified or withdrawn as of the
Closing, substantially to the effect that:
(i) The Merger will constitute a tax free reorganization under
Section 368(a)(1)(A) of the Code and Sense8 and EAI will each be a party
to the reorganization; and
(ii) The discussion in the S-4 under the caption "The
Merger -- Certain Federal Income Tax Consequences" insofar as it relates
to matters of federal income tax law is a fair and accurate summary of
such matters.
In rendering such opinion, counsel may require and rely upon assumptions and
representations contained in certificates of officers of Sense8, EAI and others.
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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 Sense8 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 Sense8 that are not so
qualified shall be true and correct except to the extent such failure does
not, individually or in the aggregate, constitute a Material Adverse
Effect, in each case as of the date of the Original Agreement (except to
the extent such representations and warranties speak as of an earlier
date). EAI shall have received a certificate signed on behalf of Sense8 by
the President, to the foregoing effect.
(b) Performance of Obligations of Sense8. Sense8 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 other than obligations
which, individually or in the aggregate, if not performed, would not have a
Material Adverse Effect, and EAI shall have received a certificate signed
on behalf of Sense8 by the Chairman of the Board and the President to such
effect.
(c) Dissenters Rights. Holders of not more than twenty percent (20%)
of the outstanding Sense8 Stock shall have validly exercised their
"dissenters rights" pursuant to the CGCL.
(d) Sense8 Options. Each holder of a Sense8 Option which does not
automatically convert in the Merger into an option to acquire EAI Common
Stock shall have consented to the assumption by EAI of such Sense8 Option
as contemplated by Section 2.6 pursuant to a written agreement or
instrument signed by such holder.
(e) Legal Opinion; Closing Certificates. EAI shall have received from
Brobeck, Phleger & Harrison LLP, counsel to Sense8, an opinion
substantially in the form attached as Exhibit A, together with such
customary closing documents and certificates as EAI or its counsel shall
reasonably request.
7.3. Conditions to Obligations of Sense8. The obligation of Sense8 to
effect the Merger is also subject to the satisfaction or waiver by Sense8 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 the Original
Agreement (except to the extent such representations and warranties speak
as of an earlier date). Sense8 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 Sense8 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. Sense8 shall have received
from Jamie A. Wade, General Counsel of EAI, an opinion substantially in the
form attached as Exhibit B together with such customary closing documents
and certificates as Sense8 or its counsel shall reasonably request.
(d) Registration Statement. The Registration Statement shall have
been declared effective under the Securities Act and shall not be the
subject of any stop order or proceeding by the SEC seeking a stop order.
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
shareholders of Sense8:
(a) by mutual consent of Sense8 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;
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(b) by either the Board of Directors of Sense8 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 Sense8 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 June 30, 1998, (y) the Closing shall not have
occurred on or before June 30, 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 S-4 shall have been filed but shall not yet
have been declared effective, the Sense8 shareholder meeting shall not have
occurred in accordance with the requirements of the CGCL and 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 August 31, 1998; or
(d) by the Board of Directors of Sense8 (after consulting with its
legal counsel), if such action is required for the Board of Directors to
comply with its fiduciary duties to Sense8 and its shareholders as
contemplated in Section 6.6 hereof; provided, however, if such action is
taken by Sense8, then (i) within 2 days of such termination Sense8 shall
reimburse EAI for its out-of-pocket expenses incurred in connection with
the transactions contemplated by this Agreement; and (ii) if Sense8 shall
consummate any transaction pursuant to a Takeover Proposal (x) within 12
months following April 11, 1998, or (y) pursuant to a definitive agreement
executed by Sense8 during such 12-month period, Sense8 shall also promptly
pay to EAI $300,000 upon the closing of such transaction;
provided, however, if the Sense8 shareholder meeting shall have occurred and the
Sense8 shareholders 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
Sense8 shareholder meeting without further action of any of the parties hereto
and within 2 days of such termination Sense8 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 Sense8 or EAI as provided in Section 8.1, this Agreement shall
forthwith become void and have no effect, and none of Sense8, EAI, Sub 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
Sense8 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 shareholders
of Sense8, there may not be, without further approval of such shareholders, 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 Sense8
Stock hereunder other than as contemplated by this Agreement. Any agreement on
the part of a party hereto to any such
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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 and any costs or expenses incurred with respect to the
December 31, 1997 audit by Price Waterhouse of Sense8's books and records (which
costs and expenses will be paid by EAI), all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expense; provided, however, if the Merger is
consummated, EAI, as the Surviving Corporation, shall pay Sense8's costs and
expenses.
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); if mailed by registered or certified mail (postage
prepaid and return receipt requested), on the date five days 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 Sense8, to:
Sense8 Corporation
100 Shoreline Highway
Suite 282
Mill Valley, CA 94941
Attention: Thomas Coull
Fax: 415-331-9148
with a copy to:
Brobeck, Phleger & Harrison LLP
38 Technology Drive
Irvine, California 92618-2301
Attention: Frederic A. Randall, Jr.
Fax: 949-790-6301
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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,
Sub, Sense8 or any of their respective affiliates to take any action which would
violate any applicable law, rule or regulation.
9.4. Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement.
9.5. Entire Agreement. This Agreement (including the Disclosure Schedule,
the Exhibits, and the Confidential Disclosure Agreement dated as of February 20,
1998) constitutes 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 California, without regard to any
applicable conflicts of law which would result in the application of any other
law.
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 Sense8 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 Sense8, such term shall include the "knowledge" or "awareness" of
the directors, officers and other persons exercising supervisory authority over
Sense8 and the shareholders of Sense8 who are active in the business of Sense8.
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.
A-23
<PAGE> 29
9.12. Tax Free Reorganization. In the event that either EAI or Sense8
becomes aware of any provisions of this Agreement which would prevent the Merger
from 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 qualify as such a
reorganization, as applicable.
IN WITNESS WHEREOF, EAI, Sub and Sense8 have caused this AMENDED AND
RESTATED 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 of
Administration,
General Counsel and Secretary
EAICA, INC.
By: /s/ JAMIE A. WADE
----------------------------------
Name: Jamie A. Wade
Title: Vice President of
Administration,
General Counsel and Secretary
SENSE8 CORPORATION
By: /s/ THOMAS B. COULL
----------------------------------
Name: Thomas B. Coull
Title: President
A-24
<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF MERGER
OF
SENSE8 CORPORATION
INTO
ENGINEERING ANIMATION, INC.
The undersigned corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the name and state of incorporation of each of the
constituent corporations of the merger is as follows:
NAME STATE OF INCORPORATION
---- ----------------------
Sense8 Corporation California
Engineering Animation, Inc. Delaware
SECOND: That an agreement and plan of merger between the parties to the
merger has been approved, adopted, certified, executed and acknowledged by each
of the constituent corporations in accordance with the requirements of Section
252 of the General Corporation Law of the State of Delaware.
THIRD: That the name of the surviving corporation of the merger is
Engineering Animation, Inc.
FOURTH: That the certificate of incorporation of Engineering Animation,
Inc., a Delaware corporation, the surviving corporation, shall be its
certificate of incorporation.
FIFTH: That the authorized stock for the non-surviving corporation is Ten
Million (10,000,000) shares of common stock with no par value.
SIXTH: That the executed agreement and plan of merger is on file at the
principal place of business of the surviving corporation. The address of the
principal place of business of the surviving corporation is 2321 North Loop
Drive, Ames, Iowa 50010.
SEVENTH: That a copy of the agreement and plan of merger will be
furnished by the surviving corporation, on request and without cost to any
stockholder of any constituent corporation.
ENGINEERING ANIMATION, INC.
DATED: June 8, 1998 BY: /s/ Jamie Wade
----------------------------------
Jamie Wade
ITS: Vice President and General Counsel
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-17393, 333-40823, 333-40825 and 333-57231) and
the Registration Statement on Form S-3 (No. 333-47809) of Engineering
Animation, Inc. of our report dated April 20, 1998 relating to the consolidated
financial statements of Sense8 Corporation, included in this Current Report
(Form 8-K/A).
PricewaterhouseCoopers LLP
San Jose, California
July 27, 1998
