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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-27670
ENGINEERING ANIMATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 42-1323712
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2321 North Loop Drive, Ames, Iowa 50010
(Address of principal executive offices and zip code)
(515) 296-9908
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $0.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __X__
The aggregate market value of the voting and non-voting Common Stock held by
non-affiliates of the registrant as of February 5, 1999 was $499,646,524. The
number of outstanding shares of registrant's Common Stock as of that date was
11,775,653.
Documents Incorporated by Reference: None
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ENGINEERING ANIMATION, INC.
TABLE OF CONTENTS
TO
1998 ANNUAL REPORT ON FORM 10-K
Item Page
- ---- ----
PART I
1 Business.................................................................3
2 Properties..............................................................13
3 Legal Proceedings.......................................................13
4 Submission of Matters to a Vote of Security Holders.....................13
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters...14
6 Selected Financial Data.................................................15
7 Management's Discussion and Analysis of Financial Condition and
Results of Operation..................................................16
7A Quantitative and Qualitative Disclosures about Market Risk..............31
8 Financial Statements and Supplementary Data.............................32
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................55
PART III
10 Directors and Executive Officers of the Registrant......................56
11 Executive Compensation..................................................62
12 Security Ownership of Certain Beneficial Owners and Management..........65
13 Certain Relationships and Related Transactions..........................67
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.........68
Signatures..............................................................70
ERGODFA(R), ERGOFAB(R), ERGOMan(R), ERGOMAS(R), ERGOPlan(R),
ERGOPro(R), ERGOSim(R), ERGOTEK(R), FactoryCAD(R), FactoryFLOW(R),
FactoryOPT(R), FactoryPLAN(R), Prepare(R), PreVIEW(R), Sense8(R),
VisLab(R), VisMockUp(R), VisProducts(R), VisView(R), VSA(R),
WorldToolKit(R) and World Up(R) are our or our subsidiaries'
registered trademarks. ERGOTime(TM), FactoryBROWSER(TM),
FactoryVIEW(TM), Transom(TM), VisFactory(TM), VisNetwork(TM) and
World2World(TM) are our or our subsidiaries' trademarks. All other
trademarks, brand marks and trade names used in this report are
trademarks, brand marks, trade names or registered marks of their
respective owners.
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PART I
ITEM 1
BUSINESS
We provide enterprise-wide software solutions for process management,
collaboration, communication and analysis. By providing access to product and
process data across large organizations and their suppliers, and by providing
the solutions to analyze, visualize and manipulate that data, our software helps
customers improve product design, lower costs, enhance quality and reduce time
to market. Major manufacturers in the automotive, aerospace, heavy equipment and
electronics industries use our integrated enterprise-wide solutions across
corporate intranets and the Internet. We also offer interactive multimedia
products for the games, consumer, education, business training and litigation
markets.
We were incorporated in 1990. Our corporate headquarters are in Ames,
Iowa, and we have offices worldwide. We organize our business into two segments
- - the Software Division and the Interactive Division.
SOFTWARE DIVISION
Our software solutions improve communication among engineering,
manufacturing, marketing, purchasing, sales and support teams and their
suppliers, allowing them to work on their processes concurrently. Traditionally,
these processes have involved sequential steps by separate internal teams that
use disparate data creation and storage systems. Our solutions allow users to
view, analyze and communicate data across extended enterprises without extensive
training or expensive computer hardware.
Our software solutions allow seamless integration with:
o enterprise resource planning systems;
o computer-aided design ("CAD"), computer-aided engineering
software ("CAE") and computer-aided manufacturing ("CAM") software;
o product data and associated product documents;
o manufacturing software; and
o product data management systems ("PDM").
In addition, our solutions provide advanced integrated analysis tools
for improving the efficiency of product engineering and manufacturing. Our
solutions improve product quality while reducing errors, cost and time to market
by allowing, for example:
o communication, collaboration and analysis through a
common framework;
o management of digital assets across the enterprise;
o digital prototyping in place of expensive physical prototypes;
o visualization of realistic, life-size models for use in concept
design; and
o simulation of human interaction with digital models.
SOFTWARE PRODUCTS
Our software products provide companies with enterprise solutions to
improve their ability to access, view, analyze and manage all types of product
information, including 3D product data, 2D drawings, process information,
documents and product structure. Using our software solutions, users can access
and visualize product data from any database or data vault in a single
integrated environment while communicating in real time. Our software solutions
facilitate collaboration throughout an organization, among users in
manufacturing, sales, marketing, product support and purchasing as well as with
suppliers and others outside
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the organization. Our solutions leverage our customers' existing investments
in CAD and PDM by extending the access to this data to the entire enterprise.
Our major manufacturing customers use our family of software solutions,
which includes the VisProducts and VisFactory software suites. Our VisProducts
software suite of product visualization and digital prototyping solutions
enables early discovery and communication of design and assembly issues. Our
VisFactory software suite of factory layout and design solutions allows for
quick design and analysis of an entire factory to maximize its efficiency. Our
Software Division also includes a professional services group that provides
software consulting and implementation services to customers.
THE VISPRODUCTS SUITE
Our VisProducts software is used by engineering departments for digital
mockup and product simulation, by manufacturing departments for assembly
sequencing and factory simulation, by sales and marketing departments for
presentations, training and product configuration, and by service departments
for interactive maintenance manuals and repair training. Our VisProducts
software suite includes VisView, VisMockUp and VisNetwork software as well as
immersive visualization, dimensional management, human simulation and ergonomic
analysis, and product and process engineering solutions. Our VisProducts
software:
o runs on major hardware platforms, including Windows,
Windows NT and Unix;
o integrates with many of the leading electronic document management
and PDM systems, including ENOVIA from Dassault Systemes S.A.
(Dassault), EDMS from Documentum, Inc., SherpaWORKS from INSO
Corporation, Matrix from MatrixOne, Inc., Metaphase from
Structural Dynamics Research Corporation (SDRC), IMAN from
Unigraphics Solutions Inc. (Unigraphics Solutions) and CMS PDM
from Workgroup Technology Corporation; and
o integrates directly with CAD/CAE/CAM systems from Dassault,
Parametric Technology Corporation (PTC), SDRC and Unigraphics
Solutions.
VISVIEW SOFTWARE SOLUTIONS: Our VisView software solutions allow users
to visualize 3D product data and assemblies, 2D drawings, documents and process
data. They enable users throughout an organization to access, view and analyze
various types of product and process data in a single visual environment. Our
VisView software solutions provide an integrated system for intuitive data
access on major hardware platforms. Users can navigate to specific product
information by clicking on a drawing, 3D model or product structure, or by
entering a part number or query. The component architecture of our VisView
software allows companies to tailor the user interface and product structure to
fit their business needs. This framework offers users the functionality of 2D
and 3D visualization delivered in either the VisView interface or in a standard
Web browser interface, making VisView software accessible to technical and
non-technical users.
Our VisView software solutions include the following components:
Component Function
--------- --------
VisView 2D Access, view, mark up and measure 2D drawings,
images and vector formats
VisView 3D Access, view, mark up, measure and interact
with 3D product visualizations and their related
databases in a single visual environment
VisView Docs View and mark up text-based information
originating from process,
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strategic planning and development documentation
VisView Web Client Access and deliver drawings and 3D models to the
enterprise via a corporate intranet and the
Internet
VisView Configure Create tailored product structures to
meet the needs of individual tasks, such as
presenting and comparing product revisions
VisView Print Print within PDM environments and integrate
third party applications such as word processing
and spreadsheet programs
VisView Convert Consolidate diverse source data formats
into standard archiving formats to save time and
reduce network traffic
VISMOCKUP SOFTWARE SOLUTIONS: Our VisMockUp software solutions extend
the 3D visualization and 2D viewing capabilities of our VisView software
solutions. Customers can create customized VisMockUp software solutions to meet
specific engineering and manufacturing needs by selecting from various component
tools. With our VisMockUp solutions, customers have the advantage of using
digital prototypes, instead of needing to create costly physical prototypes.
This allows customers to analyze large CAD assemblies to avoid design problems
early in a product's design phase, leading to improved product design and
shortened product development time. As a result, customers have an opportunity
to realize cost savings that can generate a competitive advantage.
Customers use our VisMockUp solutions to address a variety of needs.
For example, manufacturing engineers use VisMockUp digital prototyping solutions
to simulate and visually evaluate manufacturing and assembly processes. Using
the VisMockUp assembly motion-sequencing component, manufacturing engineers can
create 3D visual assembly and disassembly paths that are viewable in real time.
Motion sequencing allows customers to predict motion, path movement, collision
and interference and to use that information to improve the product assembly
process. Customers can also use the VisMockUp visual assembly motion-sequencing
and playback features to create accurate, easy to understand instructions for
assembly and manufacturing personnel.
Some of the components that make up our customizable VisMockUp software
solutions include:
Component Function
--------- --------
Measurement Measure distances on 3D CAD models
Interference Check for collisions when
thousands of parts are set into
motion
Configure Manage multiple versions of a
product's design
Assembly Motion-Sequencing Optimize the order in which
products are assembled to minimize
part collision or interference
Working with our Professional Services Group, we help customers meet
other complex needs by developing customized VisMockUp solutions.
VISNETWORK SOFTWARE SOLUTION: Our VisNetwork solution uses an intranet
connection or the Internet to provide a transparent integration between our
VisProducts software suite and PDM systems and product databases. Many companies
use a PDM system to control information assets while providing access to
critical
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data for use in manufacturing and bringing products to market. VisNetwork
software draws data from a variety of sources, including PDM systems and
external product databases, and automatically updates and visualizes this data.
The software allows users to submit and retrieve drawings, documents and 3D
models, register annotations made to VisView or VisMockUp software documents to
the appropriate part structure, update revisions and deliver the latest
information to other VisView and VisMockUp software users.
IMMERSIVE VISUALIZATION SOLUTION: Our immersive visualization solution
enhances the capabilities of our VisProducts software by facilitating
enterprise-wide interaction with life-size product models. This technology
enables geographically dispersed design teams, manufacturing entities and
supplier networks to interact with each other on a human scale. VisProducts
software supports immersive viewing on hardware platforms and PowerWall and CAVE
virtual reality environments.
DIMENSIONAL MANAGEMENT SOLUTION: Our dimensional management solution
enables users to reflect manufacturing variations in a final product assembly,
resulting in higher quality and lower cost products. Users can design,
manufacture and assemble products correctly the first time, significantly
reducing manufacturing costs while improving overall quality.
HUMAN SIMULATION AND ERGONOMIC ANALYSIS SOLUTION: Our human simulation
and ergonomic analysis solution is an optional component of our VisProducts
software that enables users to consider human factors such as reach and
visibility before physical prototypes are constructed. This human modeling and
ergonomics technology allows engineers throughout a corporation to design with
the human in mind, significantly driving down costs and improving product
quality.
PRODUCT AND PROCESS ENGINEERING SOLUTION: Our product and process
engineering solution works directly with our VisProducts and VisFactory software
as well as with enterprise resource planning ("ERP",) PDM and CAD/CAE/CAM
systems to shorten development time and reduce costs throughout the product
production life cycle.
THE VISFACTORY SUITE
Our VisFactory software suite enables engineers throughout an
organization to create, analyze, visualize and simulate factory layouts, thereby
reducing factory layout development time and manufacturing costs. With our
VisFactory software, users can produce new manufacturing layouts that improve
efficiency, productivity and output. The VisFactory software suite uses
object-oriented technology that allows users to design and edit factory layouts
easily without drawing models. Users can quickly place and connect factory
equipment objects and align objects with auto-orientation in a factory layout.
Factory models can then be exported into our VisProducts software, providing
concurrent design of tooling and products in a factory layout.
The VisFactory software suite includes the following components:
Component Function
--------- --------
FactoryCAD Optimize the drawing and modification of
factory layouts through the use of 2D/3D
parametric factory objects, such as cabinets,
containers, conveyors, cranes, fences,
mezzanines, racks and rails
FactoryFLOW Integrate facility drawings and material flow
paths with production and material handling
data to evaluate, compare and recommend
alternative designs
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FactoryPLAN Diagram and score alternative factory designs
using relationships between factors
(supervision, noise and dirt, energy, shared
equipment, personnel movement and material
flow intensity) as the key measure of layout
efficiency
FactoryOPT Create new layouts more quickly using
automatically generated block layouts based
on its FactoryPLAN relationship and/or
FactoryFLOW material flow data
FactoryVIEW Export factory models into VisProducts
software so that the factory design team,
including non-CAD users, can view, pan and
zoom on a rendered 3D factory layout model
FactoryBROWSER Access factory models visually using a Web
browser, allowing design team members
throughout an enterprise to view the same
model
PROFESSIONAL SERVICES
Our Professional Services Group provides comprehensive consulting and
implementation services relating to our products. This group evaluates the
existing product data architecture, locates the data residence and determines
access to develop a customized integrated solution. This group also makes
recommendations for running processes efficiently and implements a training plan
to facilitate a smooth deployment. Our consultants are available to help plan,
install and configure our software. Additionally, we certify installation and
provide the system administrator with the information needed to maintain the
visualization environment. This group may implement our software on a
department, division or enterprise level.
ACQUISITIONS
We have made a number of strategic acquisitions over the past two years
in order to enhance our comprehensive software solutions. These acquisitions
have provided us with real-time 3D and immersive visualization tools, furnished
us with 2D document viewing capabilities, increased our professional services
capabilities and provided us with human modeling and simulation software.
Additionally, these companies have broadened our client base and increased our
geographic presence. The companies we have acquired are:
o DELTA Industrie Informatik GmbH ("DELTA"): In December 1998, we
acquired DELTA, which sells products under the names ERGOPlan,
ERGOPro, ERGODFA, ERGOTEK, ERGOMAS, ERGOTime, ERGOMan, ERGOSim and
ERGOFAB. These products enable manufacturing customers to
efficiently design the production process by analyzing the cost
and time required to complete each phase of the manufacturing
process. These product and process engineering software solutions
work directly with our VisProducts and VisFactory software as well
as ERP, PDM and CAD/CAE/CAM systems to shorten product development
time and reduce costs throughout the product production life
cycle.
o Variation Systems Analysis, Inc. ("VSA"): In September 1998, we
acquired VSA, which performs dimensional management consulting and
software sales. VSA software products include VSA-3D and VSA-GDT
for 3D simulation of manufacturing and assembly variation in the
digital manufacturing environment. VSA's dimensional management
software and consulting services, which we are integrating with
our VisProducts suite, help manufacturers improve quality, reduce
costs and reduce time -to market of complex product assemblies.
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o Transom Technologies, Inc. ("Transom"): In September 1998, we
acquired Transom, whose flagship product was sold under the name
Transom Jack. We are incorporating the Jack technology into our
VisProducts software to provide an integrated enterprise solution
that encompasses human ergonomics in design, manufacturing and
maintenance applications. We have delivered these integrated
solutions to some of our major customers. Using the Jack software,
our customers can consider human factors such as reach and
visibility before constructing physical prototypes.
o Sense8 Corporation ("Sense8"): In June 1998, we acquired Sense8, a
developer and distributor of interactive, real-time 3D and
immersive visualization tools and applications sold under the
names WorldToolKit, World2World and World Up. We are incorporating
Sense8's technology into our VisProducts software to create
immersive visualization solutions, and have delivered completed
solutions to some of our major customers. These solutions will
allow entire project teams to use a common user interface to
visualize and collaborate on production-size models and resolve
product design issues.
o Rosetta Technologies, Inc. ("Rosetta"): In November 1997, we
acquired Rosetta, a developer of interactive product data access
and viewing solutions sold under the names PreVIEW and Prepare. We
have incorporated Rosetta's products and technologies into our
VisProducts software to enhance the VisView product.
o Cimtech, Inc. ("Cimtech"): In November 1997, we acquired Cimtech,
which developed factory layout and design software sold under the
names FactoryCAD, FactoryFLOW, FactoryPLAN and FactoryOPT. We have
integrated the Cimtech software into our software solutions to
create the VisFactory suite.
In addition to acquiring these companies, we licensed visualization
technology in the first quarter of 1998 from General Electric Corporate Research
and Development (GE CRD) and collaboration software technology from
Hewlett-Packard Company (Hewlett Packard). We have formed a joint development
team with GE CRD and are integrating GE CRD's technology into our product
visualization software. We have also agreed to develop future collaboration
technologies with Hewlett Packard.
We also worked with Hewlett Packard to co-develop DirectModel, a
cross-platform application development toolkit that allows programmers to write
custom applications to manipulate large CAD/CAE/CAM models. In addition to being
incorporated in Microsoft's DirectX multimedia framework, DirectModel is
incorporated in our product visualization and digital prototyping software
products.
MARKETING AND DISTRIBUTION
We market and sell our software products through a variety of channels,
including our own sales force and third-party distributors. We also use bundling
and distribution agreements with hardware companies such as Hewlett Packard and
software companies such as SDRC and Unigraphics Solutions. In recent years, we
expanded our direct sales and marketing operations in North America and Europe
and added additional distributors in Asia. Acquisitions also helped us to expand
our presence in North America, the United Kingdom and Germany. We also maintain
sales offices in France, Italy and Malaysia. We intend to increase our global
presence by hiring additional staff, opening additional sales offices and
pursuing additional distributors for our products.
INTERNATIONAL ACTIVITIES
In 1998, 1997 and 1996, we derived approximately 22%, 18% and 17% of
our revenues from sales to end-user customers outside the United States.
"Management's Discussion and Analysis of Financial Condition
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and Results of Operation - Risk Factors - Company Risks - We Face Risks
Associated With Our International Business" and "Notes to Consolidated Financial
Statements - Note 1. Summary of Significant Accounting Policies - International
Operations" contain additional information about our international activities.
COMPETITION
We believe that the main competitive factors for product and process
visualization software are high speed, real-time graphics capabilities, multiple
ERP, PDM as well as CAD/CAE/CAM interfaces, hardware platform independence,
distributed database capabilities and Internet/intranet communication. Although
we believe we have a technological advantage over potential competitors in these
markets, maintaining an advantage will require continuing investments in
research and development, sales and marketing.
We have yet to face significant direct competition in the markets in
which we offer software solutions. Large computer companies and companies
competing in the PDM and CAD/CAE/CAM or virtual reality software markets,
however, are beginning to offer products with similar functionality to some of
our solutions. We believe that we have significant technical and marketing
advantages relative to these products.
"Management's Discussion and Analysis of Financial Condition and
Results of Operation - Risk Factors Company Risks - We May Face Significant
Competition in Both of Our Divisions - Software Products" contains additional
information about competition.
INTERACTIVE DIVISION
We develop, produce and sell a variety of interactive multimedia
products. From our early success in developing these products for litigation
support, we have expanded our client base to include educational book
publishers, leading computer game publishers, toy companies, museums and
pharmaceutical and medical device manufacturers.
INTERACTIVE PRODUCTS
We develop high quality interactive products that exploit the
visualization capabilities of multimedia personal computers. We deliver our
interactive products on CD-ROMs, through the Internet and through other media.
These interactive software products combine 3D technology, Internet
communication, text, animated color graphic images, music and digitized speech
into entertainment, educational and information based programs. Due to high
production costs, interactive CD-ROM software products traditionally have
provided only 2D and limited 3D interaction. Utilizing our proprietary
technology, databases of anatomical and engineering data and our library of
animation assets, we can reduce the time and cost required to produce
interactive software products containing extensive 3D animations and
interaction.
We produce highly realistic 3D animations for use in interactive
software products for academic and consumer markets as well as 3D animations for
business. Our interactive products provide ready access and ease of use while
simultaneously increasing the speed, quality, detail and accuracy of 3D
animations. One key attribute of our solutions is our reliance on our
proprietary 3D visualization software products to improve the speed and
capability of our custom animation and interactive software products. For
example, the Company's VisLab animation software is used in the production of
interactive software and custom animation products, enabling cost-effective and
fast production. The use of our proprietary game engines increases the quality
of our end products, while reducing production time.
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We also produce 3D animations and multimedia presentations for use in
litigation. Expert witnesses use the visual presentations we produce to analyze,
prepare and explain their findings and opinions to judges and juries. We
produced a number of interactive games for release under various labels in 1998,
including:
Disney Interactive A Bug's Life Active Play
Hasbro Interactive Clue: Murder at Boddy Mansion
Outburst
Small Soldiers: Globotech Design Lab
IBM/Crayola 20,000 Leagues Under Sea
Gulliver's Travels
Trojan Horse
Cool Critters
Amazing Animals
K'NEX The Lost Mines: The Adventure Begins
Sierra On-Line Trophy Buck
SouthPeak Interactive Back to the Drawing Board
(based on Steven Spielberg
Presents Pinky and the Brain)
Home Tweet Home
(based on Warner Bros. Looney
Tunes characters)
On Location
(based on Steven Spielberg
Presents Animaniacs)
Duckbumps
(based on Warner Bros. Looney
Tunes characters)
In 1998, we also produced a number of interactive educational products
published under various labels, including the following:
Elsevier Science Encyclopedia of Neuroscience
McGraw Hill Higher Biology I (Mader)
Education Biology II (Lewis)
Biology for Majors
History
Journey Through Geology
Mechanical Engineering
Psychology I (Smith)
Psychology II (Lahey)
Psychology III (Sodorow)
McGraw Hill Medical Genetics
Professional
Williams & Wilkins USMLE I and II
(review aids for the U.S.
Medical Licensing Exam)
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In addition to CD-ROM produced for publishers, we created products for
customers who distributed these products in other ways. For example, we produced
ConocoLand, an interactive CD-ROM that Conoco used as a corporate communications
tool during its initial public offering. As another example, in 1998 we produced
3D computer-generated illustrations for David Kirk's new children's book, Nova's
Ark, to be released in the spring of 1999.
MARKETING AND DISTRIBUTION
We develop interactive multimedia software products for the product
publishers in exchange for a development fee. Our direct sales force markets our
interactive products to publishers. We rely upon our publisher customers for the
marketing and sale of interactive products to the ultimate purchaser. Following
the distribution of the product by the publisher, we may be entitled to receive
a royalty based on the publisher's sales of the product.
We also market interactive software products to numerous commercial
customers for use in training, development or promotional activities. Our direct
sales force markets and sells interactive products for commercial use. We also
create interactive products on a custom basis, which we distribute directly to
commercial customers, such as law firms and pharmaceutical companies that use 3D
graphics and animation as a communication tool.
COMPETITION
The interactive software markets are intensely competitive. The main
competitive factors in the consumer and educational markets include product
content and animation quality, production speed, distribution capabilities and
price. The main competitive factors in the biomedical, corporate communications,
litigation and entertainment markets include product quality, accuracy, time to
market and price.
Our highly educated staff and our proprietary databases of animations
and models enable us to quickly produce interactive software products with high
quality content. We team with strategic partners who are leaders in the
publishing field, enabling us to leverage established distribution networks.
"Management's Discussion and Analysis of Financial Condition and
Results of Operation - Risk Factors Company Risks - We May Face Significant
Competition in Both of Our Divisions - Interactive Products" contains additional
information about competition.
ADDITIONAL INFORMATION
INDUSTRY SEGMENTS Notes to Consolidated Financial
Statements - Note 1. Summary of Significant
Accounting Policies - Segment Information
Notes to Consolidated Financial Statements -
Note 15. Segment Information
ACQUISITIONS Management's Discussion and Analysis of
Financial Condition and Results of Operation
- Overview
Management's Discussion and Analysis of
Financial Condition and Results of Operation
- Acquisition Costs and Non-Recurring
Expenses
Management's Discussion and Analysis of
Financial Condition
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and Results of Operation - Risk Factors -
Company Risks - Failure to Integrate Acquired
Businesses Could Harm Our Business
Notes to Consolidated Financial Statements -
Note 2. Acquisitions
RESEARCH AND DEVELOPMENT Management's Discussion and
Analysis of Financial Condition and Results
of Operation - Research and Development
KEY CUSTOMERS Management's Discussion and Analysis of
Financial Condition and Results of Operation
- Risk Factors - Company Risks - Decreased
Sales to a Key Customer or Industry Could
Harm Our Business
Notes to Consolidated Financial Statements -
Note 13. Major Customers
PROPRIETARY RIGHTS
We have a significant proprietary base of visualization technology.
This proprietary technology includes a library of animation assets, engineering
and biomedical databases and proprietary hardware rendering algorithms. Our
library continues to grow as we acquire companies and complete projects. We own
the data developed with funds from government grants, but the government retains
the right to use this data for its own purposes without payment of any fee.
We rely on a combination of copyright, trademark and trade secret laws,
employee and third party non-disclosure and non-competition agreements and other
methods to protect our proprietary rights. We consider our proprietary
technology a trade secret and sometimes file for patents. We often obtain
registered trademark protection. We also use confidentiality, non-compete and
invention disclaimer contractual clauses. As an additional protective measure,
we limit the number of development personnel who have access to our source code.
We sell our visualization software products through site licensing
agreements and licensing agreements that permit their use by a customer on only
one machine at a time. Some of our software also contains built-in protection
that effectively prevents copying and use on other machines.
We believe that our products, trademarks and other proprietary rights
do not infringe on other's proprietary rights. As the number of software
products in the industry increases and the functionality of these products
further overlaps, software developers may become increasingly subject to
infringement claims. We can make no assurance that others will not assert
infringement claims against us, or that these claims will not require us to
enter into royalty arrangements or result in costly litigation.
EMPLOYEES
At December 31, 1998, we employed 932 people on a full-time basis and
93 people on a part-time basis. We believe that relations with our employees are
good. We do not have any collective bargaining agreements with our employees.
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ITEM 2
PROPERTIES
Our headquarters in Ames, Iowa, consists of approximately 84,400 square
feet, of which we own approximately 51,000 square feet and lease approximately
33,400 square feet under a lease that expires on July 1, 2006, with options to
extend through July 1, 2016. We lease office space throughout the United States
and Germany, and in Paris, France; Coventry and Enderby, England; Turin, Italy;
and Penang, Malaysia.
ITEM 3
LEGAL PROCEEDINGS
We have learned that complaints purporting to be class action
lawsuits on behalf of shareholders who purchased EAI common stock between
February 19, 1998 and February 17, 1999 were filed in the United States District
Court for the Southern District of Iowa against us and certain of our executive
officers. The complaints allege various violations of federal securities laws
and seek unspecified damages. Based upon the information set forth in the
complaints, the outcome of these matters are currently not determinable. We
believe that the allegations are totally without merit and intend to oppose the
actions vigorously.
We are involved from time to time in other litigation incidental to our
business. We believe that current pending litigation will not have a material
adverse effect on our business.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
PUBLIC MARKET FOR COMMON STOCK
Our common stock is traded on the Nasdaq Stock Market National Market
under the symbol "EAII." We completed our initial public offering on February
28, 1996. The following table sets forth, for the periods indicated, the high
and low closing prices for the common stock as reported by the Nasdaq Stock
Market National Market. The prices have been adjusted to reflect our
three-for-two stock split, paid to shareholders of record as of February 12,
1998.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year ended December 31, 1997
First Quarter..........................$17.17....................$15.00
Second Quarter..........................24.33.....................14.42
Third Quarter...........................28.17.....................21.92
Fourth Quarter..........................32.67.....................23.50
</TABLE>
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year ended December 31, 1998
First Quarter..........................$45.75....................$28.33
Second Quarter..........................61.00.....................42.00
Third Quarter...........................69.75.....................36.88
Fourth Quarter..........................55.50.....................32.13
</TABLE>
On February 5, 1999, we had 817 holders of record of common stock. We
have not declared or paid any cash dividends on the common stock since our
formation. We do not currently intend to declare or pay any cash dividends on
it. We intend to retain future earnings for reinvestment in our business.
RECENT UNREGISTERED ISSUANCES OF COMMON STOCK
On December 22, 1998, we issued approximately 557,000 shares of common
stock to acquire DELTA Industrie Informatik GmbH ("DELTA"), a privately held
German software company, in a transaction valued at approximately $24 million.
Our acquisition of DELTA has been treated as a pooling of interests. We issued
common stock to the DELTA stockholders using the registration exemption under
Rule 903 of Regulation S of the Securities Act of 1933, as amended. See "Item 1.
Business - Software Division - Acquisitions."
-14-
<PAGE> 15
ITEM 6
SELECTED FINANCIAL DATA
We have restated the financial data to give retroactive effect to the
acquisitions of: Technology Company Ventures, LLC (the "Rosetta acquisition");
Cimtech, Inc.; Variation Systems Analysis, Inc.; Transom Technologies, Inc.; and
DELTA Industrie Informatik GmbH, all of which were accounted for as pooling of
interests. In addition, the financial statements for 1998 include the operations
of Sense8 since June 17, 1998, the date of acquisition which was accounted for
as a purchase. For further information, see the "Notes to Consolidated Financial
Statements."
<TABLE>
<CAPTION>
(in thousands, except per share data) YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Software revenues $ 85,512 $ 53,825 $ 35,812 $ 19,834 $ 14,575
Interactive revenues 21,464 18,989 12,767 8,957 4,865
-------------------------------------------------------
Net revenues 106,976 72,814 48,579 28,791 19,440
Cost of revenues 33,231 25,837 19,822 12,840 9,633
-------------------------------------------------------
Gross profit 73,745 46,977 28,757 15,951 9,807
Operating expenses
Sales and marketing 24,381 17,804 11,546 5,185 3,321
General and administrative 12,361 9,665 5,768 4,425 2,919
Research and development 18,463 12,691 7,113 5,030 3,289
Acquisition costs and non-recurring expenses 14,075 5,057 62 2,520 --
-------------------------------------------------------
Total operating expenses 69,280 45,217 24,489 17,160 9,529
-------------------------------------------------------
Income (loss) from operations 4,465 1,760 4,268 (1,209) 278
Interest and other income (expense), net 1,660 1,465 847 (208) (61)
-------------------------------------------------------
Income (loss) before income tax
and minority interest 6,125 3,225 5,115 (1,417) 217
Income taxes 5,745 2,080 2,023 375 117
-------------------------------------------------------
Income (loss) before minority interest 380 1,145 3,092 (1,792) 100
Minority interest -- (49) (310) (128) --
-------------------------------------------------------
Net income (loss) $ 380 $ 1,096 $ 2,782 $ (1,920) $ 100
=======================================================
Basic earnings (loss) per share $ 0.03 $ 0.11 $ 0.32 $ (0.33) $ 0.02
Diluted earnings (loss) per share 0.03 0.09 0.28 (0.33) 0.01
<CAPTION>
(in thousands) DECEMBER 31,
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments $ 35,496 $ 41,287 $ 21,048 $ 1,430 $ 1,180
Working capital 58,743 55,172 30,593 3,522 2,433
Total assets 116,780 91,843 48,017 12,730 7,210
Long-term debt 1,480 1,569 1,473 2,001 648
Stockholders' equity 93,539 75,083 35,838 3,786 2,701
</TABLE>
We have adjusted all historical earnings per share amounts to reflect
our three-for-two stock split, paid to shareholders of record as of February 12,
1998.
-15-
<PAGE> 16
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
OVERVIEW
We provide enterprise-wide software solutions for process management,
collaboration, communication and analysis (Software Division). We also offer
interactive multimedia products for the games, consumer, education, business
training and litigation markets (Interactive Division).
Our software solutions improve communication among engineering,
manufacturing, marketing, purchasing, sales and support teams and their
suppliers, allowing them to work on their processes concurrently. Traditionally,
these processes have involved sequential steps by separate internal teams that
use disparate data creation and storage systems. Our solutions allow users to
view, analyze and communicate data across extended enterprises without extensive
training or expensive computer hardware. In addition, our solutions provide
advanced integrated analysis tools for improving the efficiency of product
engineering and manufacturing. Our solutions improve product quality while
reducing errors, cost and time to market.
We develop, produce and sell a variety of interactive multimedia
products for educational book publishers, toy companies, museums, computer game
publishers and medical device manufacturers. We also develop custom computer
animations for trial attorneys, pharmaceutical companies, manufacturers and
producers of entertainment and educational programming. We deliver our
interactive products on CD-ROMs, through the Internet and through other media.
Utilizing our proprietary technology, databases of anatomical and engineering
data and library of animation assets, we can reduce the time and cost required
to produce interactive software products containing extensive 3D animations.
RESTATEMENT OF FINANCIAL STATEMENTS
On June 17, 1998, we acquired Sense8 in a transaction accounted for
using the purchase method. On November 25, 1997, we acquired Rosetta in two
separate transactions. First, we acquired a controlling interest in Rosetta
through a merger with Technology Company Ventures, LLC ("TCV"). We accounted for
this merger as a pooling of interests. We then acquired the remaining minority
interest in Rosetta and accounted for this transaction using the purchase
method.
In accordance with Accounting Principles Board Opinion No. 16,
"Accounting for Business Combinations," we allocated the costs of the Sense8
acquisition and the Rosetta minority interest acquisition to the assets acquired
and the liabilities assumed, including in-process research and development
("IPR&D"), based on their estimated fair values using valuation methods believed
to be appropriate at the time. We expensed the IPR&D related to each transaction
in the period in which we consummated the acquisition, in accordance with FASB
Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method." For Sense8, we expensed the
estimated IPR&D fair value of $9.1 million in the second quarter of 1998. For
Rosetta, we expensed the estimated IPR&D fair value of $5.6 million in the
fourth quarter of 1997.
Subsequent to the Securities and Exchange Commission's ("SEC")
September 9, 1998 letter to the American Institute of Certified Public
Accountants ("AICPA") regarding its views on IPR&D, we have re-evaluated our
IPR&D charges on the Sense8 acquisition and the Rosetta minority interest
acquisition. Consequently, we have revised the purchase price allocations and
restated our financial statements.
-16-
<PAGE> 17
We have decreased the amount previously expensed as IPR&D and increased the
amount capitalized as developed technology and goodwill by $7.2 million for
Sense8 and $3.9 million for Rosetta.
In conjunction with this restatement, we have reclassified amortization
of goodwill and developed technology from general and administrative to
acquisition and non-recurring expense for all periods presented. The effect of
these adjustments on the reported consolidated financial statements as of and
for the years ended December 31, 1998 and 1997 are as disclosed in "Notes to
Consolidated Financial Statements - Note 2. Acquisitions."
ACQUISITIONS
On December 22, 1998, we completed the acquisition of DELTA Industrie
Informatik GmbH ("DELTA"), a privately held German software company that
develops solutions for integrated product and process engineering. We acquired
DELTA by purchasing all of the outstanding shares of DELTA's capital stock from
six stockholders. In connection with the acquisition, we issued approximately
557,000 shares of common stock to DELTA stockholders with a value of
approximately $24.0 million. Our acquisition of DELTA was accounted for as a
pooling of interests.
On September 22, 1998, we completed the acquisition of Variation
Systems Analysis, Inc. ("VSA"), a privately held company based in St. Clair
Shores, Michigan. We issued approximately 542,000 shares of common stock in
exchange for all of the outstanding common stock of VSA in a transaction valued
at approximately $26.0 million. This acquisition was accounted for as a pooling
of interests.
On September 22, 1998, we completed the acquisition of Transom
Technologies, Inc. ("Transom"), a privately held company based in Ann Arbor,
Michigan. We issued approximately 192,000 shares of common stock in exchange for
all of the outstanding preferred and common stock of Transom in a transaction
valued at approximately $13.0 million. This acquisition was accounted for as a
pooling of interests.
We issued approximately 158,000 shares of our common stock for all
outstanding shares of Sense8 Corporation ("Sense8") a privately held company in
Mill Valley, California. Based upon the value of our common stock exchanged, the
transaction, including transaction costs and net liabilities assumed, was valued
at approximately $9.7 million.
REVENUE RECOGNITION
We derive revenues from sales of software products and interactive
products. We recognize revenues from software products when an arrangement to
deliver software does not require significant production, modification or
customization and all four basic criteria in the Statement of Position 97-2
("SOP 97-2") as issued by the AICPA have been met. The four basic criteria are:
persuasive evidence of an arrangement exists, delivery has occurred, fee is
fixed or determinable and collectibility is probable. Software revenues include
revenues from software development contracts, professional services, customer
support and maintenance. Revenues from customer support and maintenance are
deferred and recognized ratably over the period these services are provided. We
recognize revenues from software development contracts, professional services
and interactive products based upon labor costs incurred and progress to
completion on contracts.
NET REVENUES
<TABLE>
<CAPTION>
(in thousands) 1998 CHANGE 1997 CHANGE 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software products $ 85,512 59% $ 53,825 50% $ 35,812
Interactive products 21,464 13% 18,989 49% 12,767
- -------------------------------------------------------------------------------
Total $106,976 47% $ 72,814 50% $ 48,579
===============================================================================
</TABLE>
-17-
<PAGE> 18
Revenues for 1998 increased 47% to $107.0 million from $72.8 million
for 1997. Software product revenues for 1998 increased 59% to $85.5 million from
$53.8 million for 1997, as a result of increased sales of software products,
software development contracts and services. Interactive product revenues for
1998 increased 13% to $21.5 million from $19.0 million for 1997, primarily due
to an increased number of projects.
Revenues for 1997 increased 50% to $72.8 million from $48.6 million for
1996. The increase in revenues was primarily attributable to increased software
product sales and services, software development contracts and further expansion
into the interactive product market.
COST OF REVENUES
<TABLE>
<CAPTION>
(in thousands) 1998 CHANGE 1997 CHANGE 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $33,231 29% $25,837 30% $19,822
===============================================================================
As a percentage
of net revenues 31% 35% 41%
</TABLE>
Our cost of revenues includes cost of production, direct labor and
other costs associated with funded development and professional services,
packaging and distribution costs, royalties and amortization of capitalized
software costs. Cost of revenues for 1998 increased 29% to $33.2 million from
$25.8 million for 1997. This was primarily due to expanded software product
sales, software product development and professional service contracts and
development costs for interactive products. The cost of revenues as a percentage
of revenues decreased to 31% for 1998 from 35% for 1997, primarily due to a
larger share of overall revenues being derived from sales of software licenses.
Cost of revenues for 1997 increased 30% to $25.8 million from $19.8
million for 1996. Cost of revenues was 35% of revenues for 1997 and 41% for
1996. Cost of revenues as a percentage of revenues for 1997 decreased primarily
due to increased proportion of software licenses relative to total sales.
We capitalize certain software development costs in accordance with the
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." For 1998, 1997 and
1996, we capitalized software costs of $1,390,000, $1,013,000 and $343,000,
respectively. We amortize these costs over an estimated economic useful life of
three years, or on the ratio of current revenues to total projected product
revenues, whichever is greater. Amortization expenses reported as cost of
revenues for 1998, 1997 and 1996 were $521,000, $219,000 and $194,000,
respectively.
SALES AND MARKETING
<TABLE>
<CAPTION>
(in thousands) 1998 CHANGE 1997 CHANGE 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $24,381 37% $17,804 54% $11,546
===============================================================================
As a percentage
of net revenues 23% 24% 24%
</TABLE>
Sales and marketing expenses include personnel costs related to sales,
marketing and customer service activities, as well as facility costs,
advertising, promotional materials, mail campaigns, trade shows, depreciation
and other costs. Our sales and marketing expenses increased 37% to $24.4 million
from $17.8 million for 1997 due to costs associated with expansion of the sales
force in both divisions, personnel increases in the marketing group, additional
sales commission expenses associated with higher revenues and increased
marketing and
-18-
<PAGE> 19
advertising costs. The decrease in sales and marketing expenses as a percentage
of revenues was primarily the result of spreading expenses over higher revenues
in 1998.
Sales and marketing expenses for 1997 increased 54% to $17.8 million
from $11.5 million for 1996. The increase in sales and marketing expenses was
primarily due to costs associated with expansion of the sales force in both
divisions, personnel increases in the marketing group, additional sales
commission expenses associated with higher revenues and increased marketing and
advertising costs.
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
(in thousands) 1998 CHANGE 1997 CHANGE 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $12,361 28% $ 9,665 68% $ 5,768
===============================================================================
As a percentage
of net revenues 12% 13% 12%
</TABLE>
General and administrative expenses consist primarily of salaries and
facility costs for administrative, systems, legal, executive and accounting
personnel, as well as certain consulting expenses, insurance costs, professional
fees, depreciation expense, and other costs. General and administrative expenses
for 1998 increased 28% to $12.4 million from $9.7 million for 1997, primarily as
a result of increased staff and related costs as the Company builds its
infrastructure to support its increased operations. The decrease in general and
administrative expenses as a percentage of revenue was primarily the result of
spreading expenses over higher revenues in 1998.
General and administrative expenses for 1997 increased 68% to $9.7
million from $5.8 million for 1996. General and administrative expenses were 13%
of revenues for 1997 and 12% of revenues for 1996.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
(in thousands) 1998 CHANGE 1997 CHANGE 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $18,463 45% $12,691 78% $ 7,113
===============================================================================
As a percentage
of net revenues 17% 17% 15%
</TABLE>
Our research and development focuses on product development and
consists primarily of personnel costs, related facility costs, equipment costs,
depreciation and amortization expense and outside consulting fees. Research and
development expenses for 1998 increased 45% to $18.5 million from $12.7 million
for 1997 due to increased staffing and related costs. Research and development
expenses were 17% of revenues for both 1998 and 1997.
Research and development expenses for 1997 increased 78% to $12.7
million from $7.1 million for 1996. Research and development expenses were 17%
of revenues for 1997 and 15% for 1996. The increase in research and development
expenses was primarily due to increased staffing and related costs.
ACQUISITION COSTS AND NON-RECURRING EXPENSES
<TABLE>
<CAPTION>
(in thousands) 1998 CHANGE 1997 CHANGE 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $14,075 178% $ 5,057 N/M $ 62
===============================================================================
As a percentage
of net revenues 13% 7% N/M
</TABLE>
-19-
<PAGE> 20
In 1998, we incurred acquisition and non-recurring expenses of $6.1
million in conjunction with the acquisitions of VSA, Transom and DELTA, all of
which were accounted for as pooling of interests.
A charge of $1.9 million was incurred for in-process research and
development in the second quarter of 1998 related to the acquisition of Sense8,
which was accounted for as a purchase.
A charge of $4.2 million was incurred in the first quarter of 1998
attributable to technology licensed from Hewlett Packard and General Electric
Corporate Research and Development.
Goodwill and developed technology amortization in 1998 was $1.8 million
and related to the acquisitions of Rosetta and Sense8.
In 1997, we incurred acquisition and non-recurring expenses of $3.2
million in conjunction with the acquisition of TCV and Cimtech, both of which
were accounted for as a pooling of interests. A charge of $1.7 million was
incurred in the fourth quarter of 1997 for IPR&D related to the acquisition of
the minority interest in Rosetta. Goodwill and developed technology amortization
of $140,000 in 1997 related to the Rosetta acquisition.
We incurred acquisition and non-recurring expenses of $62,000 for 1996,
which related to goodwill amortization for the Rosetta acquisition.
We recorded non-recurring charges for IPR&D in conjunction with the
acquisitions of Rosetta and Sense8. A summary of the purchased IPR&D and the
valuation analysis for each of these transactions follows:
ROSETTA
In connection with the November 25, 1997 acquisition of Rosetta, we
recorded a non-recurring charge in 1997 of $1.7 million related to IPR&D which
was not deductible for income tax purposes.
ROSETTA - TECHNOLOGY DISCUSSION
The nature of the efforts required to develop the purchased in-process
research and development into commercially viable products principally relates
to the completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet their design
requirements, including functions, features and technical performance
requirements.
As of the acquisition date, Rosetta had spent considerable research and
development effort on data access and viewing efforts covering the areas of
Internet/intranet-based document management, product data management ("PDM")
integrations, document handling, internationalization and 3D annotations. These
data access and viewing technologies, which were in mid-term to late stages of
development, were expected to result in new Rosetta products and product
enhancements. They were also relevant to our current and planned product lines.
The Internet/intranet-based document management technology was a new
product development effort for Rosetta, designed to provide new ways of
accessing drawings and documents through the Web. Development of PDM
integrations for leading PDM systems was in-process at the time of the
acquisition. This was an essential element of Rosetta's as well as our product
strategy - we had developed integrations for all of the major CAD systems but
had no PDM integrations at the time of the acquisition. Rosetta's document
handling development effort was creating new capabilities for the fast
conversion and manipulation of office
-20-
<PAGE> 21
documents like Microsoft Word or Excel. The research and development efforts in
internationalization dealt with development of a drawing markup system so that
global corporations could create multi-lingual annotations and share them.
Rosetta's development efforts for 3D annotations were based on virtual real
machine language ("VRML") viewing technology.
With respect to the acquired IPR&D, the calculations of value reflect
the value creation efforts of Rosetta prior to the close of the acquisition. The
data access and viewing IPR&D was estimated to be 70% complete at the time of
the acquisition, with a technology life of 5 years and product introduction
dates planned in 1998. Each of these development efforts was brought to the
point of technological feasibility and resulted in the introduction of new
products or components in 1998.
VALUATION ANALYSIS
REVENUE
Future revenue estimates were generated for the data access and viewing
IPR&D projects mentioned above. Aggregate revenue for Rosetta products was
estimated to be approximately $13.8 million for the year ended December 31,
1998. Revenues, including revenues associated with yet-to-be-developed products
utilizing the purchased technologies, as well as most of the in-process projects
identified in the valuation analysis, were estimated to increase on an
annualized basis at rates ranging from 15% to 48% annually through the year
ended December 31, 2002. Revenue estimates were based on management projections,
aggregate revenue growth rates for the business as a whole, individual product
revenues and anticipated product development and introduction schedules.
EXPENSES
Expenses used in the valuation analysis of Rosetta included cost of
goods sold, sales and marketing expenses, research and development expenses and
general and administrative expenses. Expense estimates were based on management
projections through 1999 and were forecast as a percent of revenue based on the
implied trend for 2000 through 2002.
Cost of revenues, expressed as a percentage of revenue for the
developed technology and the IPR&D identified in the valuation analysis was 19%
for the years 1998 through 2002.
Operating expenses include sales and marketing expenses, research and
development expenses and general and administrative expenses. Research and
development was divided into the cost to complete the IPR&D and the costs for
developed technologies which have already been introduced to the market and are
generating revenue ("maintenance R&D"). Maintenance R&D was estimated based on
management expectations. The cost to complete IPR&D projects was based on an
estimate of the effort required to complete the projects. Operating expenses
were estimated to be 63% to 65% of revenue for the years ended December 31, 1998
and 1999 and 45% for all other years through 2002.
EFFECTIVE INCOME TAX RATE
The effective income tax rate utilized in the analysis of IPR&D was 40%
for all years, which reflects our estimated combined federal and state statutory
income tax rate, exclusive of non-recurring charges at the time of the
acquisition and estimated for future years.
-21-
<PAGE> 22
DISCOUNT RATE
The discount rates selected for developed and in-process technology
were 15% and 30%. The discount rates were estimated by using the Capital Asset
Pricing Model and by examining independent studies that analyze market return
required by venture capitalists for various development-stage companies. The
spread between the discount rates reflects the inherently greater risk of the
IPR&D over the developed technology.
COMPARISON TO ACTUAL RESULTS
The assumptions used in the projections of revenues from IPR&D projects
and the estimated costs and completion dates for those projects were reasonable
based on factors known at the acquisition date. These assumptions appear
reasonable compared to the actual revenues, expenses and completion dates of the
IPR&D projects since the acquisition date.
SENSE8
In connection with the June 17, 1998 acquisition of Sense8, we recorded
a charge for IPR&D of $1.9 million, all of which was recorded as a non-recurring
charge in the quarter ended June 30, 1998. The purchased IPR&D recorded in
connection with the Sense8 transaction was not deductible for income tax
purposes.
SENSE8 - TECHNOLOGY DISCUSSION
The nature of the efforts required to develop the purchased in-process
research and development into commercially viable products principally relates
to the completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet their design
requirements, including functions, features and technical performance
requirements.
As of the acquisition date, Sense8 had spent considerable research and
development effort related to immersive environments. Several research and
development projects pertaining to immersive environments were in progress at
the time of the acquisition, had been started as early as two and a half years
prior to the acquisition, and were relevant to our current and planned product
lines. Sense8's principal development project was the "T2000 framework," which
was its component framework aimed at creating an environment where virtual
reality capabilities could be "plugged" into an existing application. The
following peripheral projects were also under development:
o Paralyze shadow calculations to enable realistic images in real
time on a life-size screen;
o MPEG streaming technology to create MPEG video at real-time rates
using buffering to generate video without slowing the interaction
in a real-time environment;
o Device server technology revolved around separating the third
party devices (gloves, wands, sensors of all types) from the
applications by creating a server that "listens" to the third
party devices and then sends simple commands to the applications;
and
o Navigation schemes aimed at simulating users in various
configurations (walk, fly, bicycle, etc.) to be easily
exchangeable into any scene or any application.
With respect to the acquired IPR&D, the calculations of value reflect
the value creation efforts of Sense8 prior to the close of the acquisition. The
immersive in-process research and development was estimated to be 40% complete
at the time of the acquisition, with a technology life of 5 years and product
introduction dates in 1998 and 1999. All of these development efforts were
brought to the point of technological feasibility in 1998 with some technology
introduced into products which were completed in 1998.
-22-
<PAGE> 23
VALUATION ANALYSIS
REVENUE
Future revenue estimates were generated for the T2000 and related IPR&D
products. Aggregate revenue for Sense8 products was estimated to be
approximately $2.3 million for the twelve months ended March 31, 1999. Revenues,
including revenues associated with yet-to-be-developed products utilizing the
purchased technologies as well as most of the in-process projects identified in
the valuation analysis, were estimated to increase on an annualized basis by
approximately 190% in the year ended March 31, 2000. Thereafter, revenue was
estimated to increase at rates ranging from 0% to 85% annually for the years
ended March 31, 2001 through 2004. Revenue estimates were based on management
projections, aggregate revenue growth rates for the business as a whole,
individual product revenues and anticipated product development and introduction
schedules.
EXPENSES
Expenses used in the valuation analysis of Sense8 included cost of
goods sold, sales and marketing expenses, research and development expenses and
general and administrative expenses. Expense estimates were based on management
projections through 2002, the implied trend thereof, and an analysis of the
product visualization industry's cost structure.
Cost of revenues, expressed as a percentage of revenue for the
developed technology and the IPR&D identified in the valuation analysis was 25%
for all periods.
Operating expenses include sales and marketing expenses, research and
development expenses and general and administrative expenses. Research and
development was divided into the cost to complete the IPR&D and maintenance R&D.
Maintenance R&D was estimated based on management expectations. The cost to
complete IPR&D projects was based on an estimate of the effort required to
complete the projects. Operating expenses expressed as a percentage of revenue
were 119% and 59% for the years ended March 31, 1999 and 2000. For the years
ended March 31, 2001 and beyond, operating expenses were estimated to be 34% of
revenue.
EFFECTIVE INCOME TAX RATE
The effective income tax rate utilized in the analysis of IPR&D was 40%
for all years, which reflects our estimated combined federal and state statutory
income tax rate, exclusive of non-recurring charges at the time of the
acquisition and estimated for future years.
DISCOUNT RATE
The discount rates selected for developed and in-process technology
were 15% and 30%. The discount rates were estimated by examining independent
studies which analyze market return required by venture capitalists for various
development-stage companies. The spread between the discount rates reflects the
inherently greater risk of the IPR&D over the developed technology.
COMPARISON TO ACTUAL RESULTS
The assumptions used in the projections of revenues from IPR&D projects
and the estimated costs and completion dates for those projects were reasonable
based on factors known at the acquisition date. These assumptions appear
reasonable compared to the actual revenues, expenses and completion dates of the
IPR&D projects since the acquisition date.
-23-
<PAGE> 24
INCOME TAXES
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense $5,745 $2,080 $2,023
===============================================================================
Effective tax rate 94% 64% 40%
</TABLE>
The effective tax rate for the years ended December 31, 1998 and 1997,
differs substantially from the statutory tax rate due primarily due to
nondeductible acquisition related costs. Our pre-tax income for 1998 and 1997
includes expenses for acquired IPR&D and acquisition charges for $14.1 million
and $5.1 million respectively, most of which are not deductible for income tax
purposes. In January 1997, we also recorded an income tax benefit of
approximately $1.0 million due to the reversal of valuation allowances that had
been previously established to offset a portion of our deferred tax assets.
QUARTERLY RESULTS OF OPERATIONS
See "Notes to the Consolidated Financial Statements - Note 14.
Quarterly Results of Operations."
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied cash requirements through borrowings,
operations, capital lease financing, aggregate net proceeds of approximately
$55.6 million from the initial public offering of common stock in February 1996
and a follow-on offering of common stock in June 1997. We also received net
proceeds of approximately $600,000, $1,200,000 and $3,000,000 in June 1998,
February 1998 and February 1997 from private placements of common stock issued
by the companies we acquired.
As of December 31, 1998, we had $35.5 million in cash and short-term
investments. We consider all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value. Restricted cash consists of
cash committed as collateral for the notes payable to the State of Iowa.
Net cash provided by operating activities for the year ended December
31, 1998, was $1.8 million. Approximately $9.2 million of cash used in operating
activities during 1998 was attributed to acquisition-related and non-recurring
expenses. Net cash provided by operating activities in 1998 excluding the
acquisition and non-recurring expenses was $11.1 million. Net cash used in
operating activities was $77,000 for the year ended December 31, 1997. Net cash
used in operating activities was $2.5 million for the year ended December 31,
1996.
Accounts receivable, net of allowances for doubtful accounts, at
December 31, 1998, increased $13.0 million to $39.5 million from $26.5 million
at December 31, 1997. The increase in accounts receivable was primarily due to
increased revenues. Our allowance for doubtful accounts was $517,000 at December
31, 1998 compared to $855,000 at December 31, 1997. Our accounts receivable
balance will vary from period to period, depending on revenues, contract terms
and timing of collections.
In 1998, we used cash of $9.6 million in investing activities. We used
$10.5 million to purchase property and equipment and $2.7 million for
development of software and purchases of other assets. Our short-term
investments were reduced by $3.6 million to fund part of our cash requirements
and purchases of other assets. In 1997, we used cash of $15.6 million in
investing activities. We increased our short-term investment portfolio by $5.5
million and used $8.7 million to purchase property and equipment and $1.0
million for development of software. In 1996, we used cash of $16.2 million in
investing activities. We purchased $22.3
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<PAGE> 25
million in short term investments and $12.5 million matured. We used $5.0
million to purchase property and equipment, $343,000 for the development of
software and $658,000 as an advance to the developer of our office building in
Ames, Iowa.
Net cash provided by financing activities was $5.4 million for the year
ended December 31, 1998. The main financing sources were proceeds from stock
option exercises, issuances of common stock and net increases in short-term
borrowings. A $3.5 million line of credit was established during September 1998,
replacing an existing $2.5 million line of credit held by VSA of which $1.9
million was utilized at the time of the acquisition.
In 1997, we had a $1.0 million line of credit agreement with a
commercial bank, which expired on May 1, 1997. It was secured by substantially
all of our assets. Borrowings under this credit agreement were limited to a
percentage of eligible accounts receivable, as defined in the credit agreement.
We did not renew the credit agreement upon its expiration on May 1, 1997.
We had a $500,000 operating line of credit with a commercial bank that
expired on November 30, 1997. All advances were collateralized by accounts
receivable and equipment. This line of credit is no longer in place.
We believe our cash and short-term investment balances will be
sufficient to meet anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. There can be no assurance that
additional capital beyond the amounts currently forecasted by us will not be
required nor that any such required additional capital will be available on
reasonable terms, if at all, at such time as we may require it.
DIVIDENDS
We have not paid any cash dividends and do not currently anticipate
paying cash dividends in the future. There can be no assurance that we will ever
pay a cash dividend. Prior to our acquisition of DELTA in December 1998, DELTA
had declared and paid dividends to its shareholders.
YEAR 2000 READINESS
We are evaluating the effect of Year 2000 issues on our current
products and mission critical facilities and databases, hardware and software
systems. We have implemented a plan that coordinates our Year 2000 efforts
company-wide. Under the direction of the Vice President of Administration, a
task force oversees the evaluation of our products, facilities and operations.
The task force is comprised of high level managers. In general, the plan calls
for creating an inventory of products and mission critical facilities and
systems; analyzing our state of knowledge regarding their Year 2000 readiness;
gathering additional information through contacts or testing, where needed;
assessing whether a risk exists and what to do about it; and developing and
implementing remedies, where needed. We have developed an Internet web site for
communicating our Year 2000 readiness disclosure information.
PRODUCTS: We have inventoried our current products, which are defined
as products currently being sold and products no longer being sold but which we
continue to support under software maintenance agreements. We have identified
the inventoried products we believe to be Year 2000 ready. We consider a product
Year 2000 ready if it is capable of correctly processing, providing and
receiving date data within and between the 20th and 21st centuries, during 1999,
2000 and leap year calculations. This assumes that our product is used in
accordance with its associated documentation and all other hardware and software
products used with our software properly exchange accurate date data with it. As
we test our software, we coincidentally test third party software included in
our products. We have evaluated and tested most of our products for Year
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<PAGE> 26
2000 readiness and anticipate completing our product evaluation and testing by
April 1999. We estimate the total cost of testing our products at less than
$10,000. Additionally, some of our customers have tested our products.
Collectively, we have identified only a few Year 2000 issues associated with our
products and have offered our customers a patch or an upgrade.
FACILITIES: We lease offices in over 23 locations throughout the world.
We have identified our mission critical facilities and are preparing an
inventory of each of their mission critical information technology ("IT") and
non-IT systems. We consider an office to be mission critical if it supports
approximately 15 or more employees or if it supports a critical function or
contract. Generally, we consider a location's telecommunications, utilities,
HVAC and security systems as mission critical. We have begun gathering Year 2000
information on these systems from suppliers. For some of these suppliers, we
depend upon their web site disclosures; for others, we have written to them or
spoken with them directly. We anticipate completing the gathering of this
information in April 1999 and will be assessing on an on-going basis whether
contingency planning is needed. The costs associated with these activities to
date are nominal.
SYSTEMS: Our business utilizes Unix, database and personal computer
(PC) software/hardware systems. Management of these systems is centralized in
our corporate headquarters. We have evaluated, or are in the process of
evaluating each of these systems. Most will require software upgrades (patches)
to address Year 2000 issues. Generally, systems manufacturers have made patches
available for free over the Internet. We have obtained and installed these
patches for some of our mission critical systems and are in the process of doing
so for our remaining mission critical systems. Where patches are not available,
we are evaluating alternative actions such as internal testing, phase-out or
replacement.
Of our Unix systems, approximately 70% have been patched. The remaining
systems will either be phased out due to their obsolescence or patched, with the
patching due to be completed by April 1999. We estimate the total cost to
install these patches at less than $10,000.
Our centralized databases include the accounting, human resources and
payroll systems. Although we have done some database testing, we are primarily
relying on the assurances of the suppliers of these systems for Year 2000
readiness. We plan to conduct additional testing of some of these systems
through the first half of 1999.
We use approximately 1,000 PCs company-wide, with nearly every employee
dependent upon a PC for the performance of his or her daily work. Most, if not
all of these PCs will need to be patched. We expect to complete our evaluation
of the hardware, operating systems and applications by April 1999. We project
completing the installation of these patches by July 1999. We estimate the total
cost for the PC upgrading at less than $25,000.
CONTINGENCY PLANS: Our products are based on software that is
relatively new. This, plus the relatively few Year 2000 issues that have been
identified to date through internal and external testing of our products, leads
us to believe that the most reasonably likely worst case scenario for us does
not involve our products. Instead, a worst case scenario is more likely to arise
from the failure of externally supplied services, such as utilities or
telecommunications, over which we have no control. We will continue to evaluate
the need to develop contingency plans for these types of Year 2000 issues. We
can not ensure that we will identify and assess all Year 2000 issues that may
affect us. We also can not ensure that we will adequately address the Year 2000
issues that we do identify. Any of these failures or oversights could materially
adversely affect our business operations or financial statements.
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<PAGE> 27
RISK FACTORS
You should carefully consider the risks and uncertainties described
below and other information in this report. These are not the only risks and
uncertainties that we face. Additional risks and uncertainties that we do not
currently know about or that we currently believe are immaterial may also harm
our business operations. If any of these risks or uncertainties actually occur,
our business, financial condition or operating results could be materially
harmed.
INDUSTRY RISKS
FAILURE TO ADAPT TO TECHNOLOGICAL CHANGES OR A LACK OF MARKET ACCEPTANCE FOR
OUR PRODUCTS COULD HARM OUR BUSINESS
Our revenues and operating results may decline if:
o our products and services become outdated;
o we are unable to introduce new products or upgrades of existing
products when the market demands them; or
o the market does not accept our products or upgrades.
Therefore, our success depends on our ability to:
o develop and sell our products and services;
o adapt our software products for new platforms;
o develop site licensing agreements with major manufacturers in the
automotive, aerospace, heavy equipment and other manufacturing
industries;
o attract other companies to make their software products
compatible with ours; and
o cost-effectively produce high-quality interactive products to
meet our customers' requirements.
Since we provide products and services in a rapidly-changing industry,
we try to anticipate emerging computer technologies and capabilities. We must
adapt our products and services in response to industry developments such as
enhanced graphics, sound, music, video and speech generation. We cannot assure
you that we will be able to introduce new products on a timely basis or that new
products will be accepted in the market. Because we target developing markets in
which we are uncertain of effects of future product enhancements, future
technological developments and future competition, we cannot accurately predict
the life cycles of our products and services.
THE MARKET FOR OUR SOFTWARE PRODUCTS IS EMERGING AND MAY NOT CONTINUE TO GROW
Sales of software products constitute a majority of our revenues, so
our growth depends on whether there is significant market demand for our
software products. The market for enterprise-wide visualization and
collaboration software products in the automotive, aerospace, heavy equipment
and other manufacturing industries is still emerging and dependent on a number
of variables, including customer preferences and the rate at which customers
adopt new technologies. We cannot assure you that the software products market
will continue to grow or that the market will continue to demand or accept our
software products. Also, we market our software products as an enterprise-wide
solution and we cannot be certain that large customers will invest in our
products on a company-wide basis or that users outside the design, engineering
and manufacturing areas will adopt our visualization and collaboration products.
THE MARKET FOR OUR INTERACTIVE PRODUCTS MAY NOT CONTINUE TO GROW
The near-term growth of our Interactive Division depends in part on
whether customers continue to demand interactive multimedia products and whether
publishers recognize our ability to produce products that
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<PAGE> 28
the market will receive well. We cannot be certain that the interactive
multimedia products market will continue to grow. In addition, we cannot assure
you that the market will accept our new interactive products or that we will be
able to respond effectively to the evolving requirements of the market.
YEAR 2000 ISSUES MAY ADVERSELY AFFECT US
Year 2000 issues may adversely affect our business if our readiness
efforts are inadequate. We are in the process of evaluating our current products
and mission critical facilities, databases and software and hardware systems for
Year 2000 readiness. Based on our evaluation and remediation efforts to date, we
do not believe that our current products or mission critical databases and
software and hardware systems will be substantially affected by Year 2000
issues.
If in completing our Year 2000 readiness evaluation we fail to identify
or solve a mission critical Year 2000 readiness issue, our normal business
operations could be interrupted or fail. If the systems supplied to us by third
parties and upon which we rely are not made compliant on a timely basis, our
business operations could also be interrupted or fail. These interruptions or
failures could have a material adverse effect on us. We are still in the process
of evaluating what the most reasonably likely worst case Year 2000 scenario is
for us.
COMPANY RISKS
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE; OUR FUTURE REVENUE AND
PROFITABILITY ARE UNCERTAIN
We historically have experienced fluctuations in our quarterly revenues
and operating results and we expect to experience fluctuations in the future.
Since our quarterly and annual revenues and operating results vary, we believe
that period-to-period comparisons of results are not necessarily meaningful. You
should not rely on period-to-period comparisons as indicators of our future
performance.
In addition to general economic conditions, the following factors
affect our revenues:
o difficulties in forecasting the volume and timing of customer
orders;
o the timing of our introduction of new products relative to our
competitors' introduction of similar products;
o our arrangements with publishers and distributors to market our
products;
o customer budgets; and
o our ability to competitively price our products.
OUR SHARE PRICE IS VOLATILE
The market price of our common stock has been and is likely to continue
to be volatile and significantly affected by factors such as:
o general market conditions and market conditions affecting
technology stocks generally;
o actual or anticipated fluctuations in our quarterly or annual
operating results;
o announcements relating to customer contracts, acquisitions or
investments or corporate actions such as stock splits; and
o industry conditions or trends.
The stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices of the stocks of
technology companies. These broad market or technology sector fluctuations may
adversely affect the market price of our common stock.
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<PAGE> 29
The market price of our common stock has also been and is likely to
continue to be affected by expectations of analysts and investors. Reports and
statements of analysts do not necessarily reflect our views. The fact that we
have in the past met or exceeded analyst or investor expectations does not
necessarily mean that we will do so in the future. See in Item 5 "Public Market
for Common Stock."
FAILURE TO INTEGRATE ACQUIRED BUSINESSES COULD HARM OUR BUSINESS
We will need to successfully integrate the businesses that we have
recently acquired and any businesses that we may acquire in the future. In
December 1998, we acquired DELTA; in September 1998, we acquired Transom and
VSA; and, in June 1998, we acquired Sense8 Corporation. We intend to consider
acquiring additional businesses. We may not be able to successfully integrate
the businesses acquired in the past or businesses we may acquire in the future.
Our ability to integrate the acquired businesses primarily depends on the effect
on the acquired businesses of integration into our organization, our ability to
effectively manage the operations of the acquired businesses and the
profitability and growth of the acquired businesses. See "Item 1.
Business-Software Division-Acquisitions."
DECREASED SALES TO A KEY CUSTOMER OR INDUSTRY COULD HARM OUR BUSINESS
In 1998, 13% of our revenues came from sales of software products and
services to Ford Motor Company. We cannot assure you, however, that we will be
able to continue to sell software products to Ford at 1998 levels or, if we fail
to do so, that we will be able to replace Ford with new customers. In addition,
a large portion of our other software customers are in the automotive industry.
Decreased demand for our software products by automotive companies would harm
our business.
WE MAY FACE SIGNIFICANT COMPETITION IN BOTH OF OUR DIVISIONS
SOFTWARE PRODUCTS: Large software companies or companies competing in
the computer-aided design (CAD), computer-aided engineering (CAE),
computer-aided manufacturing (CAM) and product data management (PDM) markets
could offer solutions with a range of functionality similar to ours. These
companies include Agile Software Inc., Dassault Systemes S.A., INSO Corp.,
MatrixOne Inc., Microsoft Corporation, Parametric Technology Corporation,
Silicon Graphics, Inc., Structural Dynamics Research Corporation (SDRC),
Tecnomatix Technologies Ltd., Unigraphics Solutions Inc. and Visio Corp. In
addition, companies in the enterprise resource planning (ERP) software market
could offer products with functionality similar to ours. These companies include
Baan Company N.V., Computer Associates International, Inc., Oracle Corporation,
PLATINUM technology International, inc. and SAP A.G. Some of these companies
have substantially greater financial and other resources than we have. Although
we believe that we have a technical advantage over competitors in these markets,
maintaining our advantage will require our continued investment in research and
development and sales and marketing. We cannot assure you that we will have
sufficient resources to make continued investments in these areas or that our
efforts will be successful.
INTERACTIVE PRODUCTS: Competition in the interactive software industry
is intense. The increasing number of competitive products may negatively impact
our sales to the consumer and educational markets. Our interactive software
products compete directly against other educational and consumer software
products, including multi-player Internet games. A large number of companies
compete in these markets, and some of them have substantially greater financial,
technical and other resources than we do. Our competitors in the educational and
consumer markets include Computer Associates International Inc., Digital Domain
Inc., Electronic Arts Inc., GT Interactive Software Corp. and Vivendi S.A. The
number of competitors in these markets continues to grow even as the market has
consolidated. Large companies that have substantial intellectual property and
financial resources, such as Hasbro, Inc., Mattel, Inc., Microsoft Corporation
and The Walt Disney Company, are major competitors in the market for consumer
software.
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<PAGE> 30
WE RELY ON THIRD PARTIES TO MARKET AND DISTRIBUTE SOFTWARE PRODUCTS
Our success depends in part on agreements with third parties to market
and distribute our software products. We market our software products to end
users both directly and indirectly. Currently, we have contractual relationships
with Hewlett-Packard Company, Unigraphics Solutions Inc., Itochu Corporation and
SDRC to jointly market and distribute our software products. These contracts
represent significant marketing and distribution opportunities for our software
products. However, we cannot assure you that these relationships will continue
beyond their contract terms. In addition, we do not control the sales forces of
these third parties. See "Item 1. Business-Software Division-Marketing and
Distribution."
WE MUST EFFECTIVELY MANAGE OUR GROWTH
We expect that if we are unable to effectively manage our growth, our
operating results and financial condition will suffer. We have grown rapidly,
and continued rapid growth could strain our employees, operating procedures,
financial resources and information systems. We plan to expand our sales and
marketing initiatives, introduce a significant number of new products, increase
our development expenditures and hire additional employees. These activities
will require significant management time and expertise.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL BUSINESS
Our international operations and revenues have been increasing and may
continue to increase in the future. In 1998, sales to international end-user
customers represented 22% of our net revenues. As a result, we are subject to
the risks of conducting business outside the United States, including changes in
regulatory requirements, the burdens of complying with a variety of foreign
laws, fluctuations in currency exchange rates and tariffs, other trade barriers
and restrictions and slower collection periods. We do not know what effect such
regulatory, geopolitical and other factors will have on our business in the
future or if we will have to modify our business. In addition, the laws of
certain foreign countries may not protect our proprietary rights to the same
extent as do the laws of the United States.
WE FACE RISKS RELATED TO OUR INTELLECTUAL PROPERTY RIGHTS
Our extensive proprietary technology and databases are crucial to our
success and ability to compete. We protect our proprietary rights through a
combination of copyright, trademark and trade secret laws, and employee and
third party non-disclosure and non-competition agreements. However, these
measures may not prevent our competitors from obtaining or using our proprietary
technology and databases.
We have incorporated mechanisms into certain of our products that we
hope will prevent or inhibit unauthorized copying. Also, we package our software
products with license agreements that prohibit unauthorized copying of the
software. Nevertheless, certain users do copy software without authorization
and, if a significant amount of unauthorized copying of our products occurs, it
would negatively impact our revenues and operating results. Also, we believe
that as the number of software products in the industry increases and the
functionality of these products further overlaps, assertions of infringement
claims will become more common. If third parties assert infringement claims
against us, it is possible that we will have to enter into royalty arrangements
or engage in costly litigation, which could negatively affect our profitability.
OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL
Our success depends in large part on our ability to continue to
attract, motivate and retain key technical, marketing, sales and management
personnel. If one of our key employees decides to leave EAI, we will have to
find a replacement with the combination of skills and attributes necessary to
execute our strategy. Because competition for skilled employees is intense and
the process of finding qualified individuals can be
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<PAGE> 31
lengthy and expensive, we believe that the loss of the services of key
personnel could negatively affect our revenues, operating results and financial
condition. We maintain key person life insurance covering our executive
officers. Nevertheless, the amount of insurance may be insufficient to offset
the loss of their services. See "Item 10. Directors and Executive Officers of
the Registrant."
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This report and statements we make or our representatives make contain
forward-looking statements that involve risks and uncertainties. We develop
forward-looking statements by combining currently available information with our
beliefs and assumptions. These statements often contain words like believe,
expect, anticipate, intend, contemplate, seek, plan, estimate or similar
expressions. Forward-looking statements do not guarantee future performance.
Recognize these statements for what they are and do not rely upon them as facts.
Forward-looking statements involve risks, uncertainties and
assumptions, including, but not limited to, those discussed above and elsewhere
in this report. We will not update the forward-looking statements, even if they
become incorrect or misleading. We make these statements under the protection
afforded them by Section 21E of the Securities Exchange Act of 1934, as amended.
Because we cannot predict all of the risks and uncertainties that may affect us,
or control the ones we do predict, these risks and uncertainties can cause our
results to differ materially from the results we express in our forward-looking
statements.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rates. Our revenue originating outside the
U.S. in 1998, 1997 and 1996 was 22%, 18% and 17% of total revenues,
respectively. International sales are made mostly from our foreign sales
subsidiaries in the local countries. Certain international sales are denominated
in U.S. dollars. Our subsidiaries incur most of their expenses in the local
currency.
Our international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
our future results could be materially adversely impacted by changes in these or
other factors.
Interest Rates. We invest our cash in a variety of financial
instruments, including bank time deposits and fixed rate obligations of
governmental entities and agencies. These investments are denominated in U.S.
dollars. Cash balances in foreign currencies overseas are operating balances and
are invested in short-term time deposits of the local operating bank.
Investments in fixed rate interest earning instruments carry a degree
of interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Due in part to these
factors, our future investment income may fall short of expectations due to
changes in interest rates or we may suffer losses in principal if forced to sell
securities which have seen a decline in market value due to changes in interest
rates. Our investment securities are held for purposes other than trading.
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<PAGE> 32
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Board of Directors
Engineering Animation, Inc.
We have audited the accompanying consolidated balance sheets of
Engineering Animation, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Technology Company
Ventures, LLC, which statements reflect total revenues constituting 11% in 1996
of the related consolidated total. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Technology Company Ventures, LLC, is based solely
on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Engineering Animation, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 15, 1999
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<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Managers and Members of
Technology Company Ventures, LLC:
We have audited the accompanying consolidated balance sheet of
Technology Company Ventures, LLC (an Oregon limited liability company) as of
December 31, 1996, and the related consolidated statements of operations,
member's equity and cash flows for the year then ended, not presented separately
herein. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
and not presented separately herein, present fairly, in all material respects,
the financial position of Technology Company Ventures, LLC as of December 31,
1996, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
October 14, 1997
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<PAGE> 34
Engineering Animation, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1998 1997
------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,623 $25,881
Short-term investments 11,873 15,406
Accounts receivable, net:
Billed, less allowance for doubtful accounts of $517 in 1998
and $855 in 1997 30,539 19,471
Unbilled 8,969 7,037
Deferred income taxes 1,250 733
Prepaid expenses and other assets 4,071 1,694
------------------------
Total current assets 80,325 70,222
Property and equipment, net 19,781 12,771
Other assets:
Restricted cash 60 210
Note receivable 1,408 1,524
Software development costs, net of accumulated
amortization of $774 in 1998 and $595 in 1997 2,265 1,396
Deferred income taxes 503 41
Goodwill and developed technology, net of
accumulated amortization of $2,040 in 1998 and $202 in 1997 10,973 5,063
Other 1,465 616
------------------------
Total assets $ 116,780 $91,843
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,788 $3,399
Accrued compensation and other accrued expenses 10,871 6,621
Line of credit 3,000 527
Deferred revenue 3,596 2,965
Current portion of long-term debt and lease obligations 327 1,246
Income taxes payable - 292
------------------------
Total current liabilities 21,582 15,050
Long-term debt and lease obligations due after one year 1,480 1,569
Other long term liabilities 179 141
Stockholders' equity
Preferred stock, $0.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - None - -
Common stock, $0.01 par value:
Authorized shares - 60,000,000
Issued and outstanding shares - 11,772,969 in 1998
and 11,029,726 in 1997 118 111
Additional paid in capital 92,308 74,151
Accumulated other comprehensive income 24 (70)
Retained earnings 1,089 891
------------------------
Total stockholders' equity 93,539 75,083
------------------------
Total liabilities and stockholders' equity $ 116,780 $91,843
========================
</TABLE>
See accompanying notes.
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<PAGE> 35
Engineering Animation, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Software revenues $85,512 $53,825 $35,812
Interactive revenues 21,464 18,989 12,767
-------------------------------------
Net revenues 106,976 72,814 48,579
Cost of revenues 33,231 25,837 19,822
-------------------------------------
Gross profit 73,745 46,977 28,757
Operating expenses
Sales and marketing 24,381 17,804 11,546
General and administrative 12,361 9,665 5,768
Research and development 18,463 12,691 7,113
Acquisition costs and non-recurring expenses 14,075 5,057 62
-------------------------------------
Total operating expenses 69,280 45,217 24,489
-------------------------------------
Income from operations 4,465 1,760 4,268
Interest and other income, net 1,660 1,465 847
-------------------------------------
Income before income tax and minority interest 6,125 3,225 5,115
Income taxes 5,745 2,080 2,023
-------------------------------------
Income before minority interest 380 1,145 3,092
Minority interest - (49) (310)
-------------------------------------
Net income $ 380 $ 1,096 $ 2,782
=====================================
Basic earnings per share $ 0.03 $ 0.11 $ 0.32
Diluted earnings per share $ 0.03 $ 0.09 $ 0.28
Weighted average shares outstanding 11,549 10,061 8,579
Weighted average shares outstanding and
assumed conversion 12,772 11,647 9,802
</TABLE>
See accompanying notes.
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<PAGE> 36
Engineering Animation, Inc.
Consolidated Statement of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER RETAINED TOTAL
------------------------- PAID-IN COMPREHENSIVE EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME (DEFICIT) EQUITY
------------- -------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 6,173 $ 62 $ 5,942 $ 19 $ 2,237 $ 3,786
Comprehensive income
Net income - - - - 2,782 2,782
Foreign currency translation
of adjustment - - - (60) - (60)
-----------
Total Comprehensive income 2,722
-----------
Issue of common stock in connection
with the Company's initial public,
net of offering expense 2,738 27 29,040 - - 29,067
Issue of common stock, net of offering
expense 58 1 63 - - 64
Common stock issued for options
exercised 23 - 648 - - 648
Shares redeemed (16) - (126) 322 (448)
Conversion of accrued salaries into
common stock 10 - 40 - - 40
Dividends paid - - - - (41) (41)
----------- --------- ------------- ------------- ------------- -----------
Balance at December 31, 1996 8,986 90 35,607 (41) 182 35,838
Comprehensive income
Net income - - - - 1,096 1,096
Foreign currency translation of
adjustment - - - (29) - (29)
-----------
Total Comprehensive income 1,067
-----------
Issue of common stock, net of offering
expense 1,583 16 29,604 - - 29,620
Common stock issued for options
and warrants exercised 165 2 1,098 - - 1,100
Shares redeemed (12) - (303) - (363) (666)
Conversion of notes payable into
common stock 18 - 351 - - 351
Purchase of minority interest in
Rosetta Technologies, Inc. 290 3 7,130 - - 7,133
Income tax benefit related to
stock option plans - - 664 - - 664
Dividends paid - - - - (24) (24)
----------- --------- ------------- ------------- ------------- -----------
Balance at December 31, 1997 11,030 111 74,151 (70) 891 75,083
Comprehensive income
Net income - - - - 380 380
Foreign currency translation
adjustment - - - 94 - 94
-----------
Total Comprehensive income 474
-----------
Issue of common stock, net of offering
expense 47 - 1,788 - - 1,788
Common stock issued for options
and warrants 519 5 2,371 - - 2,376
Shares redeemed (7) - 41 - (149) (190)
Purchase of Sense8 corporation 158 2 7,037 - - 7,039
Income tax benefit related to
stock option plans - - 5,754 - - 5,754
Shares issued as non-cash
compensation 26 - 1,248 - - 1,248
Dividends paid - - - - (33) (33)
----------- --------- ------------- ------------- ------------- -----------
Balance at December 31, 1998 11,773 $ 118 $ 92,308 $ 24 $ 1,089 $ 93,539
=========== ========= ============= ============= =========== ===========
</TABLE>
See accompanying notes.
36
<PAGE> 37
Engineering Animation, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 380 $1,096 $ 2,782
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 6,401 2,762 1,400
Deferred income taxes 122 (1,527) 336
Write-off of purchased research and development
and acquisition costs 1,918 1,684 -
Minority interest in income - 49 310
Non-cash compensation expense 1,248 - -
Changes in operating assets and liabilities
Billed accounts receivable (11,091) (6,596) (7,925)
Unbilled accounts receivable (1,839) (3,377) (2,131)
Prepaid expenses (381) (1,116) (356)
Accounts payable (754) 1,605 786
Accrued expenses 1,723 3,407 1,119
Income taxes 3,499 322 337
Deferred revenue 580 1,614 814
-------------------------------------------
Net cash provided by (used in) operating activities 1,806 (77) (2,528)
-------------------------------------------
INVESTING ACTIVITIES
Issuance of notes receivable - - (658)
Purchases of property and equipment (10,519) (8,746) (5,027)
Purchases of other assets (1,285) (330) (279)
Capitalization of software development costs (1,390) (1,013) (343)
Maturities of marketable securities 51,951 37,068 12,500
Purchase of marketable securities (48,417) (42,590) (22,347)
Sense8 Corporation cash purchased 79 - -
-------------------------------------------
Net cash used in investing activities (9,581) (15,611) (16,154)
-------------------------------------------
FINANCING ACTIVITIES
Decrease (increase) in restricted cash 150 285 (495)
Net change in short-term borrowing 2,473 232 215
Proceeds from note receivable 116 30 -
Proceeds from long-term debt 432 1,598 1,490
Payments on long-term debt
and capital lease obligations (1,689) (1,731) (2,024)
Dividend distribution (33) (24) (41)
Net proceeds from exercise of options and warrants 2,376 1,100 648
Net proceeds from issuance of common stock 1,598 28,954 28,683
-------------------------------------------
Net cash provided by financing activities 5,423 30,444 28,476
-------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,352) 14,756 9,794
-------------------------------------------
Effect of exchange rates 94 (39) (60)
Cash and cash equivalents at beginning of year 25,881 11,164 1,430
===========================================
Cash and cash equivalents at end of year $23,623 $25,881 $11,164
===========================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 262 $ 305 $ 266
Income taxes paid 715 3,363 1,168
Property and equipment purchased through capital lease
obligations and notes payable 142 121 -
Common stock issued to purchase minority interest
in Rosetta Technologies, Inc. - 7,133 -
Promissory note converted into common stock - 351 -
Common stock issued to purchase Sense8 Corporation 7,039 - -
Net liabilities assumed in Sense8 Corporation purchase 2,628 - -
</TABLE>
See accompanying notes.
- 37 -
<PAGE> 38
Engineering Animation, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Engineering Animation, Inc. (the "Company") develops, produces and
sells enterprise-wide software solutions and interactive software products that
address communication, animation and graphics needs of its customers in domestic
and international commercial markets.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The consolidated financial statements are presented giving retroactive
effect to the Company's acquisitions of Technology Company Ventures, LLC
("TCV"), Cimtech, Inc. ("Cimtech"), Variation Systems Analysis, Inc. ("VSA"),
Transom Technologies, Inc. ("Transom"), and DELTA Industrie Informatik GmbH
("DELTA"), which have been accounted for as a pooling of interests.
Sense8 which was acquired on June 17, 1998, has been accounted for as a
purchase. The consolidated financial statements include the results of Sense8
since the date of acquisition.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
RESTRICTED CASH
Restricted cash consists of cash committed as collateral for the notes
payable to the State of Iowa.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of U.S. Government or
governmental agencies debt securities and high-grade commercial paper.
Short-term investments are stated at cost plus accrued interest, which
approximates market value. The Company classifies its short-term investments as
"available-for-sale."
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board Opinion No. 25 (APB 25)
and related interpretations in accounting for its stock plans. Under APB 25,
when the exercise price of an employee stock option equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
REVENUE RECOGNITION
Revenue from software products is recognized when an arrangement to
deliver software does not require significant production, modification or
customization and all four basic criteria in the Statement of
- 38 -
<PAGE> 39
Position 97-2 ("SOP 97-2"), as issued by the American Institute of Certified
Public Accountants, have been met. The four basic criteria are:
persuasive evidence of an arrangement exists, delivery has occurred, fee
is fixed or determinable and collectibility is probable.
Revenue from service and customer support contracts is deferred and
recognized ratably over the period the services are provided.
Revenue is recognized in our software and interactive divisions based
upon labor and other costs incurred and progress to completion on development
contracts. Unbilled accounts receivable represent revenue earned but not yet
billable based on terms of the contract. Billings are made based on milestones
or as otherwise provided for in the contracts.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of trade accounts
receivable. This risk is partially mitigated due to the large number, diversity
and financial strength of entities comprising the Company's customer base.
INTERNATIONAL OPERATIONS
The Company's international operations represent an increasingly
substantial portion of its overall operating results. Sales offices are located
in France, Italy, England and Malaysia. Sales and operating offices are located
in Germany.
During 1998, foreign revenues were $23.9 million or 22% of total
revenues compared with $12.8 million or 18% of total revenues in 1997 and $8.3
million or 17% of total revenues in 1996.
The Company's international operations are subject to a number of risks
including currency exchange rate fluctuations, changes in foreign governments
and their laws and policies, and expropriation or requirements of local or
shared ownership. The Company believes that the geographic dispersion of its
sales and assets and liabilities partially mitigates these risks. Certain
international sales are denominated in U.S. dollars.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The functional currencies of the Company's foreign subsidiaries are
considered to be the respective subsidiary's local currency.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation of property and
equipment and amortization of capital lease assets are computed principally by
the straight-line method over the following estimated useful lives:
Building............................30 years
Equipment...........................3 - 7 years
Leasehold improvements..............Lesser of term of lease or life of asset
- 39 -
<PAGE> 40
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." The capitalization
of these costs begins when a product's technological feasibility has been
established and ends when the product is available for general release to
customers. The Company amortizes these costs over an estimated economic useful
life of three years or on the ratio of current revenue to total projected
product revenues, whichever is greater. Amortization expense was $521,000,
$219,000 and $194,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under
this method, deferred income taxes are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred taxes
are recorded based on enacted tax laws and tax rates. Changes in enacted tax
rates will be reflected in the tax provision as they occur.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number
of common shares outstanding. Diluted earnings per share is computed using the
combination of dilutive common share equivalents and the weighted average number
of common shares outstanding.
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Statement 131 superseded Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise." Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of Statement 131 did not affect the Company's results of operations
or financial position, but did affect its disclosure of segment information.
COMPREHENSIVE INCOME
As of January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Statement 130
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires the foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATION
Certain prior year financial information has been reclassified to
conform to the 1998 financial statements presentation.
- 40 -
<PAGE> 41
2. ACQUISITIONS
On December 22, 1998, the Company completed the acquisition of DELTA.
The Company acquired DELTA by purchasing all of the outstanding shares of
DELTA's capital stock of six stockholders. In connection with the acquisition,
the Company issued approximately 557,000 shares of common stock with a value of
approximately $24.0 million. The acquisition of DELTA by the Company was
accounted for as a pooling of interests.
On September 22, 1998, the Company completed the acquisition of VSA.
The Company issued approximately 542,000 shares of common stock in exchange for
all of the outstanding common stock of VSA in a transaction valued at
approximately $26.0 million. This acquisition was accounted for as a pooling of
interests.
On September 22, 1998, the Company completed the acquisition of
Transom. The Company issued approximately 192,000 shares of common stock in
exchange for all of the outstanding preferred and common stock of Transom in a
transaction valued at approximately $13.0 million. This acquisition was
accounted for as a pooling of interests.
On November 26, 1997, the Company acquired Cimtech. The Company issued
approximately 185,000 shares of common stock in exchange for all of the
outstanding common stock of Cimtech in a transaction valued at approximately
$6.0 million. This acquisition was accounted for as a pooling of interests.
On November 25, 1997, the Company acquired Rosetta, in two separate
transactions valued at approximately $25.5 million. The Company acquired a
controlling interest in Rosetta through a merger with TCV by exchanging
approximately 630,000 shares of common stock for the outstanding member equity
of TCV. This phase was accounted for as a pooling of interests. It subsequently
acquired the remaining minority interest in Rosetta by issuing approximately
309,000 shares of common stock. The minority interest in the acquisition was
accounted for using the purchase method.
The following table shows the separate results of operations for the
companies acquired in 1998 and 1997 as a pooling of interest for the periods
prior to the acquisitions. The operations of acquired companies are included as
the Company's operations starting in the quarter of acquisition.
- 41 -
<PAGE> 42
SUMMARY OF RESULTS OF OPERATIONS FOR PERIODS PRIOR TO ACQUISITIONS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
REVENUES
EAI $91,533 $42,928 $20,413
DELTA 4,675 5,279 4,484
Transom 1,019 802 19
VSA 9,749 17,016 16,887
TCV - 4,622 5,292
Cimtech - 2,167 1,484
--------------------------------
Combined $ 106,976 $72,814 $48,579
================================
NET INCOME (LOSS)
EAI $ 123 $1,674 $1,851
DELTA 332 153 20
Transom (473) (1,040) (135)
VSA 398 (171) 330
TCV - 260 674
Cimtech - 220 42
--------------------------------
Combined $ 380 $1,096 $2,782
================================
</TABLE>
On June 17, 1998, the Company exchanged approximately 158,000 shares of
its common stock for all of the outstanding stock of Sense8, a privately held
developer and distributor of interactive, real-time 3D and virtual reality tools
and applications. Based on the value of EAI stock and options exchanged, the
transaction, including transaction costs and net liabilities assumed, was valued
at approximately $9.7 million.
The following table shows the pro forma consolidated results of
operations as if Sense8 had been acquired as of the beginning of the periods
presented.
(in thousands, except per share data)
PRO FORMA CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
-----------------------------
<S> <C> <C>
Revenues $ 107,587 $ 76,687
Net loss $ (2,440) $ (4,156)
Net loss per share $ (0.21) $ (0.41)
</TABLE>
The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might have been achieved from
combined operations.
- 42-
<PAGE> 43
The Sense8 purchase consideration was allocated to the intangible
assets based on fair values as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
In-process research and development charged to operations
in the quarter ended June 30, 1998 $1,918
Developed technology 3,642
Goodwill and other intangible assets 4,107
-------
Total purchase consideration $9,667
=======
</TABLE>
Management estimated that $1.9 million of the purchase price
represented purchased in-process research and development ("IPR&D") that had not
yet reached technological feasibility and had no alternative future use.
Accordingly, this amount was expensed following consummation of the acquisition.
The value assigned to IPR&D was determined by identifying research projects in
areas for which technological feasibility had not been achieved. The value was
determined by estimating the costs to develop the IPR&D into commercially viable
products, estimating the resulting net cash flows from such projects, and
discounting the net cash flows back to their present value. The discount rate
included a factor that took into account the uncertainty surrounding the
successful development of the IPR&D projects.
To determine the value of the developed technology ($3.6 million), the
expected future cash flows of the existing developed technologies were
discounted taking into account the characteristics and applications of the
product, the size of existing markets, growth rates of existing and future
markets as well as an evaluation
In connection with the acquisition of the minority interest in Rosetta,
the purchase consideration was allocated as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Net assets acquired $ 965
In-process research and development
charged to operations in the quarter
ended December 31, 1997 1,684
Developed technology 2,224
Goodwill and other intangible assets 2,729
-------------
Total purchase consideration $ 7,602
=============
</TABLE>
Management estimated that $1.7 million of the purchase price
represented purchased IPR&D that had not yet reached technological feasibility
and had no alternative future use. Accordingly, this amount was expensed in 1997
following consummation of the acquisition. The value assigned to IPR&D was
determined by identifying research projects in areas for which technological
feasibility had not been achieved. The value was determined by estimating the
costs to develop the IPR&D into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present value. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the IPR&D
projects.
To determine the value of the developed technology ($2.2 million), the
expected future cash flows of the existing developed technologies were
discounted taking into account the characteristics and applications of the
products, the size of existing markets, growth rates of existing and future
markets as well as an evaluation
- 43 -
<PAGE> 44
of past and anticipated product-life cycles. Developed technologies and
goodwill and other intangible assets acquired from Rosetta are being
amortized on a straight-line basis over the respective useful lives of
the assets of five years.
The purchase price allocations for both the Sense8 and Rosetta purchase
transactions differ from what was originally reported by the Company. The
Company allocated the costs to the assets acquired and the liabilities assumed,
including IPR&D, based on their estimated fair values using valuation methods
believed to be appropriate at the time. The Company expensed the IPR&D in the
period in which it consummated the acquisition, in accordance with FASB
Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method." The Company expensed IPR&D
of $9.1 million in the second quarter of 1998 related to Sense8 and $5.6 million
in the fourth quarter of 1997 related to Rosetta.
Subsequent to the Securities and Exchange Commission's letter to the
AICPA dated September 9, 1998, regarding its views on IPR&D, the Company has
re-evaluated its IPR&D charges on the Sense8 and Rosetta acquisitions.
Consequently, the Company has revised the purchase price allocations and
restated the 1997 annual financial statements and the financial statements for
the first three quarters of 1998. The Company has decreased the amount
previously expensed as IPR&D and increased the amount capitalized as developed
technology and goodwill by $7.2 million related to Sense8 and $3.9 million
related to Rosetta. Accordingly, net income for 1997 increased by $3.9 million
or $.36 per share on a diluted basis.
The Company has recorded acquisition costs and non-recurring expenses
of $14.1 million, $5.1 million and $62,000 in 1998, 1997 and 1996, respectively.
The following table shows the components of these expenses.
<TABLE>
<CAPTION>
(in thousands) YEARS ENDED DECEMBER 31,
1998 1997 1996
------- -------- ------
<S> <C> <C> <C>
Acquisition transaction costs $ 6,070 $ 3,232 $ -
Purchased in-process research
and development 1,918 1,685 -
Amortization of goodwill and
other intangibles 1,838 140 62
Licensed technology 4,249 - -
--------- -------- ------
$ 14,075 $ 5,057 $ 62
========= ======== ======
</TABLE>
3. NOTE RECEIVABLE
During 1995, the Company entered into a loan agreement whereby the
Company agreed to loan approximately $750,000 to the developer of a building the
Company leases. During 1996, the Company loaned an additional $658,000 to the
developer. The Company began leasing the building in July 1996. Interest, at a
rate of 2.25% above the U.S. Treasury three-year constant rate, began accruing
and is payable monthly upon commencement of the lease. The principal is due June
2016, unless the developer sells the building to an unaffiliated third party, at
which time the principal and interest accrued to date become immediately due.
The note receivable is collateralized by a second mortgage on the building.
- 44 -
<PAGE> 45
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
(in thousands)
1998 1997
------------- ------------
<S> <C> <C>
Computer equipment and software $ 15,833 $ 11,072
Equipment and furniture 4,695 3,242
Buildings and leasehold improvements 4,318 318
Construction in progress 3,393 3,081
------------- ------------
Total 28,239 17,713
Less accumulated depreciation (8,458) (4,942)
------------- ------------
Net property and equipment $ 19,781 $ 12,771
============= ============
</TABLE>
5. DEBT
Long-term debt at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
(in thousands)
DECEMBER 31,
1998 1997
---------------
<S> <C> <C>
An interest bearing revolving line of credit for $3.5 million with a bank,
commencing in September 1998 and due May 2000; floating interest
at the bank's base rate less 1% $3,000 $ -
An interest bearing revolving line of credit with a bank with a maximum limit of
of $2.5 million, bearing an interest rate of prime less 0.25%; replaced
September 1998 - 527
Demand note to officer of VSA; bearing a 10% interest rate;
paid off at date of merger. - 938
Non-interest bearing note payable, due in monthly installments commencing July
1998 through June 2005; collateralized by all equipment of the
Company 186 200
Forgivable note with interestaccruing at 6% commencing November 1997 due
October 2000; job attainment goals must be met for principal and
interest to be forgiven 500 500
Non-interest bearing note payable commencing November 1997 due December 2007;
attainment of goals must be met to remain
non-interest bearing 450 500
Capital lease obligations 194 153
Other notes payable with interest ranging from 0% to 6%, and payments due from
1998 through 2007 477 524
--------- -------
Total debt 4,807 3,342
Less amounts due within one year 3,327 1,773
--------- -------
Long-term debt $ 1,480 $ 1,569
========= =======
</TABLE>
-45-
<PAGE> 46
Future maturities of long-term debt and capital lease obligations at
December 31, 1998 are as follows:
(in thousands)
2000 $ 830
2001 143
2002 146
2003 90
Thereafter 271
----------
$ 1,480
==========
6. OPERATING LEASES
The Company has operating leases for office space and equipment with
various lease terms expiring through 2006. Rent expense for the years ended
December 31, 1998, 1997 and 1996 was $2.8 million, $2.0 million and $1.2
million, respectively.
The future minimum lease payments at December 31, 1998 are as follows:
(in thousands)
1999 $ 2,498
2000 2,405
2001 2,131
2002 1,698
2003 1,198
Thereafter 1,397
------------
$ 11,327
============
7. ROYALTY AGREEMENTS
The Company has entered into royalty agreements with various entities
to use and distribute products in conjunction with the Company's software
products. Royalty expense for the years ended December 31, 1998, 1997 and 1996
was $285,000, $469,000 and $832,000, respectively.
8. INCOME TAXES
The components of earnings before income taxes and minority interest
are as follows:
<TABLE>
<CAPTION>
(in thousands) YEARS ENDED DECEMBER 31,
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Domestic $4,767 $2,978 $4,704
Foreign 1,358 247 411
-----------------------------------
$6,125 $3,225 $5,115
===================================
</TABLE>
-46-
<PAGE> 47
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
(in thousands) YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Current
Federal $ 3,989 $ 3,296 $ 1,329
State 502 209 166
Foreign 1,132 102 192
--------------------------------
5,623 3,607 1,687
Deferred 122 (510) 285
Change in valuation reserve - (1,017) 51
--------------------------------
Total $ 5,745 $ 2,080 $ 2,023
================================
</TABLE>
A reconciliation of income tax computed at the U.S. statutory rate to
the effective income tax rate is as follows:
<TABLE>
<CAPTION>
(in thousands)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Tax at US statutory rate $2,144 $1,096 $ 1,740
State income taxes, net of Federal tax benefit 399 107 275
Non-deductible acquisition costs 1,772 1,748 -
Goodwill amortization 643 - -
Effect of foreign income taxes 394 97 10
Change in valuation allowance - (1,017) 51
Other, net 393 49 (53)
--------------------------------
Total $ 5,745 $ 2,080 $ 2,023
================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred income tax liabilities and assets as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31,
1998 1997
---------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $(1,068) $ (500)
Capitalized software development costs (861) (530)
Other, net (214) (263)
---------------------
Total deferred tax liabilities (2,143) (1,293)
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts 190 224
Accruals 480 229
Net operating loss carryforwards 2,794 1,494
Other, net 432 120
---------------------
Total deferred tax assets 3,896 2,067
---------------------
Net deferred tax asset $ 1,753 $ 774
=====================
</TABLE>
-47-
<PAGE> 48
At December 31, 1998, the Company has net operating loss carryforwards
of $7.4 million for federal income tax purposes that expire in the years 2003
through 2017. Section 382 of the Internal Revenue Code restricts the annual
utilization of the NOL carryforwards incurred prior to a change in ownership.
Such a change in ownership occurred in connection with TCV's acquisition of the
majority interest of Rosetta in 1995 and will limit the Company's ability to
utilize the NOL carryforwards existing when Rosetta was acquired by TCV. Changes
in ownership also occurred in connection with the Company's 1997 acquisitions of
TCV and Cimtech and its 1998 acquisitions of Sense8 and Transom. The Company
does not believe that its utilization of the carryforwards for the companies
acquired in 1997 and 1998 will be significantly limited under Section 382.
Unremitted earnings of overseas subsidiaries amounted to approximately
$1.2 million at December 31, 1998. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. or state income
taxes have been provided thereon. Upon distribution of those earnings in the
form of dividends or otherwise, the Company will be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable to the various foreign countries. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practicable because of
the complexities associated with the hypothetical calculation; however, income
tax credits will substantially offset any resulting tax liability.
9. CAPITAL STOCK, STOCK SPLIT AND STOCK OPTIONS
CAPITAL STOCK
The Company adopted a stockholders rights plan effective at the time of
the initial public offering. Under the plan, each share of common stock has
associated with it one preferred share purchase right. The terms of these rights
are set forth in the Rights Agreement between the Company and First Chicago
Trust Company of New York.
STOCK SPLIT
The Company completed a three-for-two stock split in the form of a
stock dividend, paid to stockholders of record as of February 12, 1998.
Accordingly, all share, per share, weighted average share and stock option
information for periods prior to the split, has been restated to reflect the
split.
STOCK OPTIONS
The Company has stock option arrangements with various directors and
officers and other employees. The options are generally granted at fair market
value. The options generally vest over four or five years and must be exercised
no later than 10 years from the date of grant.
In 1994, the Company issued non-qualified options to purchase 532,032
shares of common stock for $1.33 per share to two officer/stockholders. These
options are not part of the 1994 Stock Option Plan described below. In 1998,
268,840 of these options were exercised. The remaining options are fully vested
and remain exercisable through June 2009.
During 1994, the Company adopted the Engineering Animation, Inc. 1994
Stock Option Plan providing for issuance of either incentive or non-qualified
options to employees based upon management discretion. The Company has reserved
1,785,000 shares of common stock for issuance under this Plan.
In February 1995, the Company issued non-plan/non-qualified options to
purchase 221,250 shares of common stock at prices ranging from $2.67 to $8.00
per share to five executives. Of these options, 3,375 were exercised in 1998 and
the rest are fully vested and remain exercisable through February 2010.
-48-
<PAGE> 49
In January 1996, the Company adopted a Non-Employee Directors Option
Plan. Each non-employee director receives an annual grant of 7,500 non-qualified
options under this Plan. The Company has reserved 90,000 shares of common stock
for issuance under this Plan.
During 1997, the Company adopted the Engineering Animation, Inc. 1997
Non-Qualified Stock Option Plan providing for issuance of non-qualified options
to employees based upon management discretion. During 1998, the Company amended
the Plan to increase the number of shares reserved for issuance by 600,000. The
Company has reserved 1,200,000 shares of common stock for issuance under this
Plan.
In June 1998, the Company acquired Sense8, which had a stock option
plan ("1997 Stock Option/Stock Issuance Plan") and two individual stock option
agreements. The Company has assumed Sense8's outstanding obligations under the
Plan and the agreements. Incentive and non-qualified options had been issued
under the Plan. The Company has reserved 6,226 shares of common stock for
issuance under the Plan. Non-qualified options had been issued under the two
individual stock option agreements. The Company has reserved 5,078 shares of
common stock for issuance under these agreements.
In September 1998, the Company acquired Transom, which had a stock
option plan ("Transom, Inc. 1996 Equity Compensation Plan"). The Company has
assumed Transom's outstanding obligations under this Plan. All options became
immediately exercisable as a result of the acquisition. Incentive and
non-qualified options had been issued under the Plan. The Company has reserved
42,681 shares of common stock for issuance under this Plan.
A summary of common stock option activity and related information for
the years ended December 31, follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- --------------------
OPTIONS WEIGHTED OPTIONS WEIGHTED OPTIONS WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,200,271 $ 8.57 1,992,297 $ 6.30 1,202,047 $ 2.32
Granted 882,784 38.84 484,182 17.20 815,585 12.07
Exercised (507,825) 4.29 (147,328) 4.26 (3,840) 3.09
Forfeited (163,250) 22.50 (128,880) 10.80 (21,495) 3.33
--------- --------- ---------
Outstanding at end of year 2,411,980 $ 19.60 2,200,271 $ 8.57 1,992,297 $ 6.30
========= ========== =========
Exercisable at end of year 988,002 $ 7.25 1,180,318 $ 4.19 970,342 $ 2.62
========= ========== =========
Weighted-average fair value of options
granted during the year $ 23.22 $ 14.64 $ 4.91
</TABLE>
-49-
<PAGE> 50
Exercise prices for options outstanding at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF RANGE OF AVERAGE
OPTIONS EXERCISE PRICES EXERCISE PRICE
-------- ---------------- --------------
<S> <C> <C> <C>
422,377 $0.003 - $1.801 $ 1.31
416,232 2.573 - 9.007 4.57
566,288 10.670 - 19.920 14.09
477,576 22.090 - 29.750 27.87
65,428 30.250 - 39.390 34.31
402,355 40.282 - 49.560 43.56
61,725 54.440 - 67.000 61.32
----------
2,411,980 $0.003 - $67.000 $19.60
==========
</TABLE>
The weighted-average remaining contractual life of these options is 8.8
years.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of
5.0%, 5.7% and 5.7%; a dividend yield of 0.0%; volatility factors of the
expected market price of the Company's common stock of 0.63, 0.34 and 0.36; and
a weighted-average expected life of the option of 5.4, 4.0 and 4.0 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair market value
of the options is amortized to expense net of related pro forma tax benefits
over the options' vesting period. The Company's pro forma information follows:
<TABLE>
<CAPTION>
(in thousands, except per share data) YEARS ENDED DECEMBER 31,
-- -----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss) $(3,796) $ (381) $ 2,435
Pro forma earnings (loss) per share:
Basic $ (0.33) $(0.04) $ 0.28
Diluted $ (0.33) $(0.04) $ 0.25
</TABLE>
Because Statement 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect is not representative of future pro
forma amounts.
-50-
<PAGE> 51
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share, adjusted for the three-for-two stock split on February 12,
1998.
<TABLE>
<CAPTION>
(in thousands, except per share data) YEARS ENDED DECEMBER 31,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $ 380 $ 1,096 $ 2,782
============= ============= =============
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,549 10,061 8,579
Stock options 1,223 1,586 1,223
------------- ------------- -------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 12,772 11,647 9,802
============= ============= =============
Basic earnings per share $ 0.03 $ 0.11 $ 0.32
============= ============= =============
Diluted earnings per share $ 0.03 $ 0.09 $ 0.28
============= ============= =============
</TABLE>
11. EMPLOYEE RETIREMENT PLANS
The Company has a 401(k) plan that covers the majority of U.S. based
employees who meet the minimum age requirement. The Company matches one-half of
the employee's contribution up to a maximum Company contribution of the first 4%
of the employee's compensation. The Company's matched expense for 1998, 1997 and
1996 was approximately $469,000, $220,000 and $130,000, respectively.
12. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Notes Receivable--the carrying amount reported in the balance sheet for
the note receivable approximates its fair value since it has a floating rate of
interest.
Long-Term Debt--the carrying amounts reported in the balance sheet for
the Company's bank notes payable approximate their fair values as they bear
variable rates of interest. The Company believes that the municipal notes,
issued to the Company to encourage and facilitate expansion and increased
employment, approximate their fair values as they were negotiated and issued in
the latter half of 1997. The prime lending rate in 1998 approximated the rate in
1997 and, accordingly, the fair value change would be immaterial.
13. MAJOR CUSTOMERS
The Company's revenue is generated from a significant customer base in
diversified industries across different geographic areas. A major customer is
defined as one that individually represents more than 10% of
-51-
<PAGE> 52
revenues in any year. Revenue from one customer represented 13% in 1998, 10% in
1997 and 14% in 1996. Another customer represented 13% in 1997, a third customer
represented 10% in 1997 and 12% in 1996 and a fourth customer represented 10% in
1996. Management believes the allowances for doubtful accounts is adequate to
cover any potential credit risks.
14. QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected quarterly financial information
for 1998 and 1997. Operating expenses include acquisition costs and
non-recurring expenses of $4.5 million, $2.2 million, $5.7 million and $1.7
million for the quarters ended March 31, June 30, September 30, and December 31,
1998. Acquisition costs and non-recurring expenses for the year ended December
31, 1998 total $14.1 million. Operating expenses include acquisition costs and
non-recurring expenses of $14,000 in the quarters ended March 31, June 30, and
September 30, 1997 and $5.0 million for the quarter ended December 31, 1997.
Acquisition costs and non-recurring expenses for the year ended December 31,
1997 total $5.1 million. The Company believes that all necessary adjustments
have been included to present fairly the selected quarterly information.
(in thousands except per share data)
<TABLE>
<CAPTION>
(AUDITED)
YEAR ENDED THREE MONTHS ENDED (UNAUDITED)
----------------------------------------------------------------
DEC. 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1998 1998 1998 1998 1998
-------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 106,976 $ 31,734 $ 27,745 $ 25,352 $ 22,145
Gross profit 73,745 22,756 18,910 16,987 15,092
Operating expenses 69,280 17,929 19,671 15,221 16,459
Operating income (loss) 4,465 4,827 (761) 1,766 (1,367)
Net income (loss) 380 2,483 (2,033) 577 (647)
Earnings (loss) per share:
Basic 0.03 0.21 (0.17) 0.05 (0.06)
Diluted 0.03 0.19 (0.17) 0.05 (0.06)
</TABLE>
<TABLE>
<CAPTION>
(AUDITED)
YEAR ENDED THREE MONTHS ENDED (UNAUDITED)
----------------------------------------------------------------
DEC. 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1997 1997 1997 1997 1997
-------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 72,814 $ 21,550 $ 18,898 $ 17,026 $ 15,340
Gross profit 46,977 14,127 12,767 10,647 9,436
Operating expenses 45,217 16,556 10,931 9,350 8,380
Operating income (loss) 1,760 (2,429) 1,836 1,297 1,056
Net income (loss) 1,096 (2,105) 1,469 996 736
Earnings (loss) per share:
Basic 0.11 (0.19) 0.14 0.11 0.08
Diluted 0.09 (0.19) 0.12 0.09 0.07
</TABLE>
Note: The fourth quarter of 1997 and the first three quarters of 1998
have been restated to reflect the adjustment to the purchase price allocation
associated with the Rosetta acquisition in 1997 and the Sense8 acquisition in
1998.
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<PAGE> 53
15. SEGMENT INFORMATION
The Company has two segments: the Software Division and the
Interactive Division.
The Software Division develops, produces and sells a variety of
enterprise-wide process management, collaboration, communication and analysis
software solutions for major manufacturing corporations. Our solutions enable
users to perform sophisticated product visualizations, digital prototyping and
engineering design and analysis tasks across extended enterprises. The solutions
are platform independent and interface seamlessly with most popular CAD/CAE/CAM
and PDM systems. Customers use the solutions with their existing hardware and
software to improve their product quality while reducing errors, cost and time
to market.
The Interactive Division produces interactive multimedia products for
use in the games, consumer, education, business training and litigation markets.
Its 3D products include animations for trial attorneys, pharmaceutical
companies, manufacturers, and producers of entertainment and educational
programming. The customers include toy companies, museums, computer game
publishers and medical device manufacturers.
The accounting policies of the divisions are the same as those described
in the summary of significant accounting policies. Interest income or expense is
allocated entirely to corporate. The related debt is not allocated to the
division and remains on corporate books. The Company evaluates performance based
on profit or loss before income taxes, not including acquisition costs and
non-recurring expenses.
Because of the distinction in the products, each division is managed
separately, has its own strategic and marketing plan and serves different
customers. The following amounts reflect these policies:
-53-
<PAGE> 54
BUSINESS SEGMENTS
(in thousands)
<TABLE>
<CAPTION>
SOFTWARE INTERACTIVE
YEAR ENDED DECEMBER 31, 1998 DIVISION DIVISION CORPORATE TOTAL
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 85,512 $ 21,464 $ - $106,976
Interest and other income - - 1,660 1,660
Depreciation 2,173 1,520 1,205 4,898
Acquisition costs and non-recurring
expenses - - 14,075 14,075
Segment operating income 25,918 3,354 (24,807) 4,465
Segment assets 38,329 16,911 61,540 116,780
Expenditures for long-lived assets 5,716 1,716 5,762 13,194
</TABLE>
<TABLE>
<CAPTION>
SOFTWARE INTERACTIVE
YEAR ENDED DECEMBER 31, 1997 DIVISION DIVISION CORPORATE TOTAL
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 53,825 $ 18,989 $ - $ 72,814
Interest and other income - - 1,465 1,465
Depreciation 1,141 476 1,005 2,622
Acquisition costs and non-recurring
expenses - - 5,057 5,057
Segment operating income 10,593 2,707 (11,540) 1,760
Segment assets 21,922 11,027 58,894 91,843
Expenditures for long-lived assets 3,546 837 5,706 10,089
</TABLE>
<TABLE>
<CAPTION>
SOFTWARE INTERACTIVE
YEAR ENDED DECEMBER 31, 1996 DIVISION DIVISION CORPORATE TOTAL
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 35,812 $ 12,767 $ - $ 48,579
Interest and other income - - 847 847
Depreciation 760 175 403 1,338
Acquisition costs and non-recurring
expenses - - 62 62
Segment operating income 4,714 3,566 (4,012) 4,268
Segment assets 11,812 8,738 27,467 48,017
Expenditures for long-lived assets 1,494 1,320 2,835 5,649
</TABLE>
-54-
<PAGE> 55
<TABLE>
<CAPTION>
GEOGRAPHIC SEGMENTS
(in thousands) YEARS ENDED DECEMBER 31,
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
NET REVENUES BY GEOGRAPHIC REGION:
United States $ 83,101 $ 60,030 $ 40,256
Europe 14,884 9,801 7,752
Asia 8,991 2,983 571
--------------- -------------- ----------------
Net revenues $106,976 $ 72,814 $ 48,579
=============== ============== ================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
IDENTIFIABLE LONG LIVED ASSETS: 1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
United States $ 35,129 $ 20,838 $ 9,007
Europe 739 507 255
Asia 24 25 -
--------------- -------------- ----------------
$ 35,892 $ 21,370 $ 9,262
=============== ============== ================
</TABLE>
16. REPORTING THE COSTS OF START-UP ACTIVITIES
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), "Reporting the Costs of Start-Up
Activities." Which requires that costs related to start-up activities be
expensed as incurred. Prior to 1998, the Company capitalized its organization
costs associated with setting up or acquiring new subsidiaries. The Company
adopted the provisions of SOP 98-5 early in 1998. The effect of adoption of SOP
98-5 was to decrease 1998 income before income taxes by $107,000.
17. LEGAL MATTERS
The Company has learned that complaints purporting to be class action
lawsuits on behalf of shareholders who purchased EAI common stock between
February 19, 1998 and February 17, 1999 were filed in the United States District
Court for the Southern District of Iowa against it and certain of its executive
officers. The complaints allege various violations of federal securities laws
and seek unspecified damages. Based upon the information set forth in the
complaints, the outcome of these matters are currently not determinable. The
Company believes that the allegations are totally without merit and intends to
oppose the actions vigorously.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During 1998, there were no disagreements with our independent public
accountants on accounting procedures or accounting and financial disclosures.
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<PAGE> 56
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Five directors serve on our Board of Directors. The directors are
divided into three classes. At the Annual Meeting this year, shareholders will
elect two directors to serve for a term of three years or until a qualified
successor director has been elected. The nominees for election at the Annual
Meeting (Matthew Rizai and Michael Crow) are currently on the Board. The
remaining three directors (Martin Vanderploeg, Jamie Wade and Laurence
Kirshbaum) will continue to serve on the Board as described below.
The nominees and continuing directors have provided the following
information about themselves.
NOMINEES
- -------------------------------------------------------------------------------
MATTHEW M. RIZAI, PH.D.
AGE: 42
DIRECTOR SINCE: 1990
EXPERIENCE: Dr. Rizai has been Chairman, Chief Executive Officer, President
and a Director of EAI since joining in June 1990. He has been
Treasurer since November 1995. Dr. Rizai's prior experience
includes serving as an associate with a venture capital firm, a
senior research engineer with General Motors Corporation and a
development engineer with Ford Motor Company. Dr. Rizai earned
a Ph.D. in Mechanical Engineering from Michigan State University
and an M.B.A. from the University of Chicago.
MICHAEL M. CROW, PH.D.
AGE: 43
DIRECTOR SINCE: 1991
EXPERIENCE: Dr. Crow has been Executive Vice Provost at Columbia University
since August 1991. Dr. Crow served as the Director of the
Institute for Physical Research and Technology and the Office of
Science Policy and Research at Iowa State University from July
1985 to June 1991. Dr. Crow earned a Ph.D. in Public
Administration (Science and Technology Policy) from Syracuse
University.
- --------------------------------------------------------------------------------
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<PAGE> 57
DIRECTOR CONTINUING UNTIL 2000 ANNUAL MEETING
- --------------------------------------------------------------------------------
JAMIE A. WADE
AGE: 50
DIRECTOR SINCE: 1995
EXPERIENCE: Mr. Wade has served as Vice President of Administration and
General Counsel to EAI since June 1994 and Secretary since
November 1995. From 1983 to 1994, Mr. Wade was a partner with
Davis, Hockenberg, Wine, Brown, Koehn & Shors, P.C., a Des
Moines law firm. Mr. Wade earned a J.D. from Drake University
Law School and a B.A. from Drake University College of Business.
- --------------------------------------------------------------------------------
DIRECTORS CONTINUING UNTIL 2001 ANNUAL MEETING
- --------------------------------------------------------------------------------
MARTIN J. VANDERPLOEG, PH.D.
AGE: 42
DIRECTOR SINCE: 1988
EXPERIENCE: Dr. Vanderploeg co-founded EAI in 1988. He has served as
Executive Vice President since October 1993, as Secretary from
June 1990 until November 1995 and as a Co-General Manager of the
Software Division since October 1997. His prior experience
includes serving as a faculty member in mechanical engineering
at Iowa State University and performing contract research for a
number of large corporations. Dr. Vanderploeg earned a Ph.D. in
Mechanical Engineering from Michigan State University and is a
licensed Professional Engineer.
LAURENCE J. KIRSHBAUM
AGE: 54
DIRECTOR SINCE: 1995
EXPERIENCE: Mr. Kirshbaum has been Chairman of Time Warner Trade Publishing
since 1997. Previously, since 1984, he was President and CEO of
Warner Books Inc., a subsidiary of Time Warner Inc. Mr.
Kirshbaum earned a B.A. from the University of Michigan.
- -------------------------------------------------------------------------------
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<PAGE> 58
EXECUTIVE OFFICERS
The following individuals are executive officers in addition to Messrs. Rizai,
Vanderploeg and Wade. They have provided the following information about
themselves.
JEROME M. BEHAR
AGE: 41
TITLE: Vice President of Finance and Chief Financial Officer
EXPERIENCE: Mr. Behar has served as Vice President of Finance and Chief
Financial Officer since August 1997, after serving as the
Executive Director of Finance since joining EAI in May 1997. Prior
to that, Mr. Behar had served since April 1996 as director of
finance at MagiNet Corporation. Mr. Behar's prior experience
includes serving as vice president of finance and administration
at Western Lodging Corporation from September 1994 to April 1996
and as controller of Matrix Pharmaceutical, Inc. from March 1992
to September 1994. He also held executive and management
positions at International Risk Control, Inc. and the Cooper
Companies, Inc. Mr. Behar is a Certified Public Accountant. He
earned an M.B.A. from Stanford University and a B.A. in business
administration from Michigan State University.
MICHAEL J. JABLO
AGE: 46
TITLE: Vice President and Co-General Manager of the Software Division
EXPERIENCE: Mr. Jablo has served in his current capacity as Vice President and
Co-General Manager of the Software Division since October 1997.
Prior to that he had been the Vice President of Software Sales and
Marketing since joining EAI in October 1995. From January 1990 to
October 1995 Mr. Jablo was employed by Mentor Graphics Corporation
where he ultimately served as the North Central area sales
manager. Mr. Jablo earned an M.B.A. from the University of
Detroit as well as a B.S. in Mechanical Engineering and a B.S. in
Business Management from Bradley University.
PATRICIA F. JOHNSON
AGE: 47
TITLE: Vice President of Human Resources
EXPERIENCE: Ms. Johnson has served as Vice President of Human Resources since
December 1997, after serving as the Executive Director of Human
Resources since joining EAI in January 1997. Prior to that, Ms.
Johnson worked at Disney Feature Animation, where she was Director
of Human Resources for three years. Ms. Johnson has also served
as Director of Human Resources for NBC Entertainment and worked
twelve years for Digital Equipment Corporation in various human
resources management roles. She earned a B.A. from the University
of Northern Colorado, Greeley.
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<PAGE> 59
KEY EMPLOYEES
WILLIAM L. ANDERSON
AGE: 46
TITLE: Vice President of North American Sales - Software Division
EXPERIENCE: Mr. Anderson has served as the Vice President of North American
Sales for the Software Division since November 1998. Prior to that
he served as EAI's Executive Director of National Accounts since
joining EAI in March 1996. From 1995 until joining EAI, Mr.
Anderson was employed by Mentor Graphics as the Account Manager.
From 1986 until 1995, he was the Worldwide Account Manager for
Digital Equipment Corporation. Mr. Anderson earned a B.A. in
Business Administration and an M.B.A. from the University of
Michigan.
MARK E. CRAIG
AGE: 42
TITLE: Vice President of Professional Services - Software Division
EXPERIENCE: Mr. Craig has served as Vice President of Professional Services for
the Software Division since November 1998. Prior to that Mr. Craig
served as the President and Chief Executive Officer of Variation
Systems Analysis, Inc. ("VSA"), the company he founded in 1982.
EAI acquired VSA in September 1998. Mr. Craig earned a mechanical
engineering degree from Michigan State University.
RAIMUND MENGES, PH.D.
AGE: 38
TITLES: Vice President of Process Engineering Products - Software Division
and Managing Director of DELTA Industrie Informatik GmbH
EXPERIENCE: Dr. Menges has served as Vice President of Process Engineering
Products - Software Division and Managing Director of DELTA since
February 1999. Since 1989 when he co-founded DELTA, he had served
as its Managing Director. EAI acquired DELTA in December 1998.
Dr. Menges earned an undergraduate degree in aeronautical
engineering and a doctorate in engineering from the University of
Stuttgart.
GUIDO T. PERSCH, PH.D.
AGE: 44
TITLE: Vice President of Engineering - Software Division
EXPERIENCE: Dr. Persch has served as Vice President of Engineering Software
since EAI's acquisition of Rosetta in November 1997. Dr. Persch
had been Vice President of Engineering and led the Rosetta product
development organizations since January 1994. Dr. Persch has also
held senior development management positions at Cadre Technologies
from January 1993 to December 1993 and prior to that at Software
AG and Siemens/Intel. Dr. Persch earned a Ph.D. in Computer
Science from the University of Karlsruhe, Germany.
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<PAGE> 60
JAMES L. RYAN
AGE: 43
TITLE:
Vice President of Marketing and Business Development -
Software Division
EXPERIENCE: Mr. Ryan has served as Vice President of Marketing and Business
Development for the Software Division since November 1998. He had
been the Vice President of Marketing and Professional Services
since joining EAI in November 1997 upon EAI's acquisition of
Rosetta. Mr. Ryan had served as the Vice President of Business
Development of Rosetta since July 1997. Mr. Ryan also served as
director of IBM's Worldwide Product Data Management Solutions from
January 1993 to July 1997.
ADRIAN V. SANNIER, PH.D.
AGE: 37
TITLE: Vice President and General Manager - Interactive Division
EXPERIENCE: Dr. Sannier has served as Vice President and General Manager of the
Interactive Division since February 1997 and prior to that served
as EAI's Vice President of New Product Development since February
1996. From 1990 until joining EAI, Dr. Sannier was employed in a
variety of positions by CIMLINC Incorporated, a provider of
business process execution software to the aerospace industry and
heavy equipment manufacturers, most recently as Vice President,
Product Development. Dr. Sannier earned a Ph.D. and a B.S. in
Electrical Engineering and Systems Science from Michigan State
University.
JAY E. SHANNAN, PH.D.
AGE: 36
TITLE: Vice President of Operations
EXPERIENCE: Dr. Shannan is a co-founder of EAI and has served as Vice President
of Operations since June 1990. Dr. Shannan earned a Ph.D. in
Mechanical Engineering from Iowa State University.
DAVID P. SLY
AGE: 35
TITLE: Vice President of Factory Products - Software Division
EXPERIENCE: Mr. Sly has served as the Vice President of Factory Products for
the Software Division since November 1998. Prior to that he was
the Executive Director of Factory Products since November 1997,
when EAI acquired Cimtech, Inc., the company he founded and served
as president. Mr. Sly earned B.S. and M.S. degrees in industrial
engineering, and an M.B.A. from Iowa State University.
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<PAGE> 61
JEFFREY D. TROM, PH.D.
AGE: 38
TITLE: Vice President of Product Development - Software Division
EXPERIENCE: Dr. Trom is a co-founder of EAI and has served as Vice President of
Product Development for the Software Division since June 1990. Dr.
Trom served as EAI's Treasurer from June 1990 to November 1995.
Dr. Trom earned a Ph.D. in Mechanical Engineering from Iowa State
University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that
EAI's executive officers, directors and 10% stockholders file reports of
ownership and changes of ownership of EAI common stock with the SEC and the
Nasdaq Stock Market National Market. Based on a review of copies of these
reports provided to us for 1998, we believe that all filing requirements were
met.
-61-
<PAGE> 62
ITEM 11
EXECUTIVE COMPENSATION
This table summarizes the before-tax compensation for the Chief
Executive Officer and the other four most highly compensated executive officers.
SUMMARY COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
ANNUAL NUMBER OF
COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS COMPENSATION ($)
- --------------------------- ------ ----------------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Matthew M. Rizai 1998 295,000 200,000 60,000 8,569(1)
Chief Executive Officer, 1997 235,000 205,000 -- 8,062(1)
President and Treasurer 1996 180,000 28,000 60,000 7,245(1)
Martin J. Vanderploeg 1998 295,000 200,000 60,000 8,483(2)
Executive Vice President, 1997 235,000 205,000 -- 8,062(2)
Co-General Manager of Software 1996 180,000 28,000 60,000 7,245(2)
Division
Michael J. Jablo 1998 180,000 25,000 10,500 2,707(4)
Vice President and Co-General 1997 265,767(3) 75,000 -- 2,718(4)
Manager of Software Division 1996 270,530(3) 25,000 18,000 2,486(4)
Jamie A. Wade 1998 155,000 40,000 6,000 2,746(5)
Vice President of Administration, 1997 140,000 30,000 -- 2,069(5)
General Counsel and Secretary 1996 123,332 6,000 16,500 1,933(5)
Jerome M. Behar 1998 150,000 50,000 13,500 3,658(6)
Vice President of Finance 1997 78,750 20,000 54,750 3,115(6)
and Chief Financial Officer
</TABLE>
(1) Consists of $3,463, $3,128 and $3,645 of premiums on a life insurance
policy paid in 1998, 1997 and 1996, and $5,106, $4,934 and $3,600 of
matching contributions by EAI to the Engineering Animation, Inc. Retirement
Plan made in 1998, 1997 and 1996.
(2) Consists of $3,463, $3,128 and $3,645 of premiums on a life insurance
policy paid in 1998, 1997 and 1996, and $5,020, $4,934 and $3,600 of
matching contributions by EAI to the Engineering Animation, Inc. Retirement
Plan made in 1998, 1997 and 1996.
(3) Includes $129,570 and $164,530 in sales commissions in 1997 and 1996.
(4) Consists of $538, $480 and $487 of premiums on a life insurance policy paid
in 1998, 1997 and 1996, and $2,169, $2,238 and $1,999 of matching
contributions by EAI to the Engineering Animation, Inc. Retirement Plan
made in 1998, 1997 and 1996.
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<PAGE> 63
(5) Consists of $686, $609 and $673 of premiums on a life insurance policy paid
in 1998, 1997 and 1996, and $2,060, $1,460 and $1,260 of matching
contributions by EAI to the Engineering Animation, Inc. Retirement Plan
made in 1998, 1997 and 1996.
(6) Consists of $333 and $112 of premiums on a life insurance policy paid in
1998 and 1997, and $3,325 and $750 of matching contributions by EAI to the
Engineering Animation, Inc. Retirement Plan made in 1998 and 1997, and
$2,253 paid in 1997 for taxable relocation expenses.
OPTION GRANTS IN 1998
This table gives information relating to 1998 option grants to the
executive officers listed in the Summary Compensation Table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
POTENTIAL
% OF REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE --------------------------
NAME GRANTED (#) YEAR $/SH EXPIRATION DATE 5% ($) 10% ($)
- ----------------------- ------------ ---------- --------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Matthew M. Rizai 60,000 6.80 29.75 January 15, 2008 1,122,577 2,844,830
Martin J. Vanderploeg 60,000 6.80 29.75 January 15, 2008 1,122,577 2,844,830
Michael J. Jablo 10,500 1.19 29.75 January 15, 2008 196,451 497,845
Jamie A. Wade 6,000 0.68 29.75 January 15, 2008 112,258 284,483
Jerome M. Behar 13,500 1.53 29.75 January 15, 2008 252,580 640,087
</TABLE>
OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
This table provides information regarding the exercise of options
during 1998 by the CEO and the other four most highly compensated executives.
The "value realized" is calculated using the difference between the option
exercise price and the price of EAI common stock on the date of exercise
multiplied by the number of shares subject to the option. The "value of
unexercised in-the-money options at fiscal year end" is calculated using the
difference between the option exercise price and $54.00 (the last reported
market price of EAI common stock on December 31, 1998) multiplied by the number
of shares underlying the option. An option is in-the-money if the market value
of the common stock subject to the option is greater than the exercise price.
AGGREGATED OPTION EXERCISES IN 1998
AND FY-END OPTION/VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END (#) AT FY-END ($)
ACQUIRED ON VALUE ------------------------------- ------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Matthew M. Rizai 179,227 7,262,636 239,789 94,500 11,783,935 2,867,012
Martin J. Vanderploeg 89,613 3,631,298 330,978 95,550 16,571,360 2,912,162
Michael J. Jablo 4,500 121,599 49,500 30,750 2,489,252 1,185,378
Jamie A. Wade 12,500 523,963 26,200 25,800 1,292,570 1,117,103
Jerome M. Behar 2,000 53,044 11,688 54,562 451,940 1,915,119
</TABLE>
-63-
<PAGE> 64
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
We entered into employment agreements with Dr. Rizai, Dr. Vanderploeg
and Mr. Wade as of January 1, 1996. These agreements expire on December 31,
1999. Dr. Rizai's agreement provides that he will be employed as EAI's Chairman,
Chief Executive Officer and President at an annual salary of $180,000. Dr.
Vanderploeg's agreement provides that he will be employed as EAI's Executive
Vice President at an annual salary of $180,000. Mr. Wade's agreement provides
that he will be employed as EAI's Vice President of Administration, General
Counsel and Secretary at an annual salary of $120,000. Each of the agreements
provides that the base salary will be reviewed annually and that the executive
will receive an annual performance bonus as determined by the Board of Directors
and, for Dr. Rizai and Dr. Vanderploeg, a car allowance. The employment
agreements also include certain non-competition and confidentiality provisions.
We also have entered into severance agreements with each of Dr. Rizai,
Dr. Vanderploeg and Mr. Wade. These agreements are dated as of the effective
date of the respective officer's employment agreement. The severance agreements
provide for payment of a lump sum equal to two times the sum of the employee's
base salary and the bonus paid to the employee in the prior year for Dr. Rizai
and Dr. Vanderploeg (one times that sum for Mr. Wade) and continuation of
benefits for two years (one year in the case of Mr. Wade) upon (i) termination
of employment by us without cause, (ii) termination of employment by the
employee for good reason (including change in control of EAI), (iii) death or
(iv) permanent disability. We may terminate the executive's employment at any
time for cause without the payment of severance. The agreements with Dr. Rizai
and Dr. Vanderploeg also provide that, upon termination by us without cause or
by the executive for good reason, the executive may require us to file a
registration statement for all shares of EAI common stock that he then owns or
has the right to acquire upon exercise of options then held and, further, may
require that we include any such shares in any other registration statement
filed by us.
We entered into an employment agreement with Mr. Jablo as of September
18, 1995 that terminates (i) by mutual agreement of us and Mr. Jablo, (ii) upon
Mr. Jablo's death or disability, (iii) at our option for cause or (iv) upon our
dissolution or bankruptcy. This agreement provides that Mr. Jablo will be
employed as EAI's Vice President of Sales and Marketing at an initial annual
salary of $106,000 and a car allowance. In addition to base salary, the
agreement provides for the payment of commissions on sales of our 3D
visualization software products to Mr. Jablo at rates established by EAI's
President. The agreement also contains certain non-competition and
confidentiality provisions. Mr. Jablo's employment agreement contains severance
provisions that require us to pay him (i) an amount equal to the total
compensation paid to him during the first year of the agreement if the agreement
is terminated following a merger, sale or change in control of EAI and (ii) an
amount equal to one-half of the total compensation paid to him during the first
year of the agreement if the agreement is terminated for cause (as defined in
the agreement) by us after September 18, 1996.
We entered into an employment agreement with Mr. Behar as of May 2,
1997 for a one-year term that may be extended by mutual agreement. The agreement
can be terminated for cause. Mr. Behar's duties are assigned to him by the Chief
Executive Officer. The agreement calls for a salary of $135,000 through its
first anniversary, a minimum bonus of $10,000 in 1997 and eligibility for annual
performance bonuses thereafter at our discretion. The agreement also contains
certain non-competition and confidentiality provisions. The agreement provided
that Mr. Behar be granted up to 54,750 stock options within 30 days after its
effective date, vesting in quarterly increments over four years. The severance
provisions of the agreement require us to pay Mr. Behar up to the first year's
base salary if his employment were terminated within the first year for any
reason other than conviction of a criminal act. In the year following the first
anniversary of the agreement, Mr. Behar would receive, following a merger, sale,
change in control, or termination of employment for cause, the amount of total
compensation paid to him during the first year of his employment.
-64-
<PAGE> 65
DIRECTOR COMPENSATION
Directors who are EAI employees receive no fees for their services as
directors. Non-employee "outside" directors receive an annual retainer of
$20,000 as well as a fee of $1,000 and reimbursement of expenses for each Board
meeting and each committee meeting they attend.
Outside directors participate in the Non-Employee Directors Stock
Option Plan. The Chairman of the Board, Matthew Rizai, administers this Plan.
Each non-employee director receives an initial option to purchase 7,500 shares
of EAI common stock in the year he or she joins the Board and an option to
purchase an additional 7,500 shares for each subsequent year he or she serves.
The options have a ten year term and an exercise price equal to the fair market
value of EAI common stock on the date the option is granted. The initial options
granted under the Plan become exercisable in four equal annual installments.
Subsequent options are exercisable when they are granted. Directors may not
transfer the options other than by will or by the laws of descent and
distribution.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table shows how much EAI common stock the directors, the
named executive officers and all executive officers and directors as a group
beneficially owned as of February 17, 1999. The named executive officers include
the Chief Executive Officer and the four other most highly compensated executive
officers based on compensation earned during 1998. The table also shows all
persons we know to be beneficial owners of more than 5% of EAI common stock.
Beneficial ownership is a technical term broadly defined by the SEC to
mean more than ownership in the usual sense. In general, beneficial ownership
includes any shares a director or executive officer can vote or transfer and
stock options that are exercisable currently or become exercisable within 60
days. These shares are considered to be outstanding for the purpose of
calculating the percentage of outstanding EAI common stock owned by a particular
stockholder, but are not considered to be outstanding for the purpose of
calculating the percentage ownership of any other person. Except as otherwise
noted, the stockholders named in this table have sole voting and investment
power for all shares shown as beneficially owned by them.
-65-
<PAGE> 66
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENT
NAMED EXECUTIVE OFFICERS AND DIRECTORS OWNED OF CLASS
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Matthew M. Rizai (1) 722,427 6.00%
Martin J.Vanderploeg (2) 724,003 5.97%
Michael M. Crow (3) 80,298 *
Michael J. Jablo (4) 52,125 *
Jamie A. Wade (5) 48,549 *
Laurence J. Kirshbaum (6) 15,750 *
Jerome M. Behar (7) 15,213 *
All directors and executive officers as a group 1,665,490 13.82%
(8 persons) (8)
OTHER 5% STOCKHOLDERS
Pilgrim Baxter & Associates, Ltd. (9) 1,112,350 9.44%
AMVESCAP plc (10) 1,043,700 8.85%
Janus Capital Corp. (11) 604,700 5.13%
</TABLE>
* Less than one percent
(1) Consists of 467,638 shares held by the Matthew Rizai Family Limited
Partnership and 254,789 shares issuable upon the exercise of vested
options and options that will vest within 60 days. Dr. Rizai's address is
c/o Engineering Animation, Inc., 2321 North Loop Drive, Ames, Iowa 50010.
(2) Includes 345,978 shares issuable upon the exercise of vested options and
options that will vest within 60 days, including 1,575 shares issuable
upon exercise of vested options by his spouse. Dr. Vanderploeg's address
is c/o Engineering Animation, Inc., 2321 North Loop Drive, Ames, Iowa
50010.
(3) Includes 16,350 shares issuable upon the exercise of vested options and
options that will vest within 60 days.
(4) Consists of shares issuable upon exercise of vested options and options
that will vest within 60 days.
(5) Includes 6,249 shares held in Mr. Wade's Individual Retirement Account and
29,800 shares issuable upon the exercise of vested options and options
that will vest within 60 days.
(6) Consists of shares issuable upon the exercise of vested options and
options that will vest within 60 days.
(7) Includes 15,063 shares issuable upon the exercise of vested options and
options that will vest within 60 days.
(8) Includes 736,980 shares issuable upon the exercise of vested options and
options that will vest within 60 days.
(9) This information was provided in a Schedule 13G filed with the SEC on
January 19, 1999. If you wish, you may obtain a copy of this report from
the SEC. Pilgrim has sole voting power with respect to 1,072,350 shares,
shared voting power with respect to 40,000 shares and sole dispositive
power with respect to 1,112,350 shares. This Schedule 13G indicates that
PBHG Growth Fund beneficially owns 833,400 shares of the reported amount,
of which PBHG Growth Fund has sole voting and dispositive power with
respect to 833,400 shares. Pilgrim's address is 825 Duportail Road,
Wayne, PA 19087.
(10) This information was provided in a Schedule 13G filed with the SEC on
February 10, 1999. If you wish, you may obtain a copy of this report from
the SEC. AMVESCAP has shared voting and dispositive power with respect to
1,043,700 shares. The Schedule 13G indicates that the shares are held by
AVZ, Inc.; AIM Management Group Inc.; AMVESCAP Group Services, Inc.;
INVESCO, Inc. and INVESCO North
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<PAGE> 67
American Holdings, Inc., subsidiaries of AMVESCAP. AMVESCAP's address is
11 Devonshire Square, London EC2M 4YR, England.
(11) This information was provided in a Schedule 13G filed with the SEC on
February 12, 1999. If you wish, you may obtain a copy of this report from
the SEC. Janus and Thomas H. Bailey, an owner of Janus, have shared voting
and dispositive power with respect to 604,700 shares, all of which they
disclaim beneficial ownership. Janus Venture Fund, a Janus managed
portfolio, owns 575,000 of these shares. Janus's address is 100 Fillmore
Street, Denver, CO 80206-4923.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
-67-
<PAGE> 68
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of Engineering
Animation, Inc. and its subsidiaries are included in Part II of this
report:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Ernst & Young LLP.............................................................................32
Report of Arthur Andersen LLP...........................................................................33
Consolidated Balance Sheets - December 31, 1998 and 1997................................................34
Consolidated Statements of Operations - years ended December 31, 1998, 1997 and 1996....................35
Consolidated Statements of Stockholders' Equity - years
ended December 31, 1998, 1997 and 1996.........................................................36
Consolidated Statements of Cash Flows - years ended December 31, 1998, 1997 and 1996....................37
Notes to Consolidated Financial Statements..............................................................38
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULE
None.
(a)(3) LIST OF EXHIBITS
Exhibit
Number Description
2.1 Stock Purchase Agreement with DELTA and the DELTA
stockholders*
3.1 Certificate of Incorporation, as amended**
3.2 By-laws***
4.1 Specimen Common Stock Certificate***
4.2 Rights Agreement with First Chicago Trust Company of New
York, dated as of January 1, 1996***
10.1 Amended and Restated 1994 Stock Option Plan+***
10.2 Non-Employee Directors Stock Option Plan+***
10.3 Employment and Severance Agreements with Matthew M. Rizai,
dated as of January 1, 1996+***
10.4 Employment and Severance Agreements with Martin J.
Vanderploeg, dated as of January 1, 1996+***
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<PAGE> 69
10.5 Employment and Severance Agreements with Jamie A. Wade,
dated as of January 1, 1996+***
10.6 Employment Agreement with Michael J. Jablo, dated as of
September 18, 1995+***
10.7 Employment Agreement with Jerome M. Behar, dated as of May
2, 1997+****
10.8 Employment Agreement with Patricia F. Johnson, dated as of
December 26, 1996 +****
10.9 Option Agreement with Matthew M. Rizai, dated June 9,
1994+***
10.10 Option Agreement with Martin J. Vanderploeg, dated June 9,
1994+***
10.11 Option Agreement with Matthew M. Rizai, dated as of
February 11, 1995+***
10.12 Option Agreement with Martin J. Vanderploeg, dated
February 11, 1995+***
10.13 Option Agreement with Jamie A. Wade, dated
February 11, 1995+***
10.14 Ground Lease Agreement with Iowa State University
Research Park Corporation, dated June 1, 1995***
10.15 Mortgage with CRE, Inc., dated June 29, 1995***
10.16 Lease Assignment and Agreement with CRE, Inc., dated June
14, 1995***
10.17 Lease Agreement with CRE, Inc., dated June 14, 1995***
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedules
- ------------------------
+ Denotes compensatory plan.
* Incorporated herein by reference from our Current Report
on Form 8-K filed January 6, 1999.
** Incorporated herein by reference from our Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
*** Incorporated herein by reference from our Registration
Statement on Form S-1, SEC file no. 33-80705.
**** Incorporated herein by reference from our Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
(b) REPORTS ON FORM 8-K
Form 8-K filed January 6, 1999, as amended by Form 8-K/A filed February
17, 1999, relating to our acquisition of DELTA. Included Item 2, Item 7
and Item 9. Financial statements filed included: (i) Unaudited Pro
Forma Consolidated Condensed Combined Financial Statement of the
Company and DELTA; and (ii) DELTA Financial Statements.
Form 8-K filed November 16, 1998, relating to our acquisitions of VSA
and Transom. Included "Other Events."
-69-
<PAGE> 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 3, 1999.
ENGINEERING ANIMATION, INC.
By: /s/ Jerome M. Behar
--------------------
Jerome M. Behar
Vice President of Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 3, 1999 by the following persons on
behalf of the Registrant in the capacities indicated.
Signature Title
--------- -----
/s/ Matthew M. Rizai Chairman, Chief Executive Officer, President
- ------------------------------ and Director (Principal Executive Officer)
Matthew M. Rizai
/s/ Martin J. Vanderploeg Director
- ------------------------------
Martin J. Vanderploeg
/s/ Jerome M. Behar Vice President of Finance and Chief
Financial Officer
- ------------------------------ (Principal Financial and Accounting Officer)
Jerome M. Behar
/s/ Jamie A. Wade Director
- ------------------------------
Jamie A. Wade
/s/ Michael M. Crow Director
- ------------------------------
Michael M. Crow
/s/ Lawrence J. Kirshbaum Director
- ------------------------------
Lawrence J. Kirshbaum
-70-
<PAGE> 71
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedules
-71-
<PAGE> 1
EXHIBIT 21.1
ENGINEERING ANIMATION, INC.
SUBSIDIARIES
JURISDICTION OR
SUBSIDIARY STATE OF ORGANIZATION
---------- ---------------------
Variation Systems Analysis, Inc. Michigan
Cimtech, Inc. dba Cimtechnologies Corporation Iowa
DELTA Industrie Informatik GmbH Germany
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-17393, 333-40823 and 333-40825, 333-57231,
333-64429 and 333-68159) pertaining to the Amended and Restated 1994 Stock
Option Plan, the 1995 Executive Bonus and Stock Option Plan, the Non-Employee
Directors Option Plan, the Original Directors Option Plan, the 1997
Non-Qualified Stock Option Plan, the Engineering Animation, Inc./Sense8 1997
Stock Option Plan, the Engineering Animation, Inc./Sense8 1993 Animation,
Inc./Transom 1996 Equity Compensation Plan of Engineering Animation, Inc. of our
report dated February 15, 1999 with respect to the consolidated financial
statements of Engineering Animation, Inc. included in its annual Report (Form
10-K) for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
February 26, 1999
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<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report on Technology Company Ventures, L.L.C. dated October
14, 1997 included in the Annual Report on Form 10-K for the year ended December
31, 1998 into Engineering Animation, Inc.'s previously filed Registration
Statement File Nos. 333-17393, 333-40823, 333-40825, 333-57231, 333-64429 and
333-68159 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon,
February 26, 1999
-74-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 23,623
<SECURITIES> 11,873
<RECEIVABLES> 40,025
<ALLOWANCES> 517
<INVENTORY> 0
<CURRENT-ASSETS> 80,325
<PP&E> 28,239
<DEPRECIATION> 8,458
<TOTAL-ASSETS> 116,780
<CURRENT-LIABILITIES> 21,582
<BONDS> 0
<COMMON> 118
0
0
<OTHER-SE> 93,421
<TOTAL-LIABILITY-AND-EQUITY> 116,780
<SALES> 106,976
<TOTAL-REVENUES> 106,976
<CGS> 33,231
<TOTAL-COSTS> 33,231
<OTHER-EXPENSES> 69,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,660)
<INCOME-PRETAX> 6,125
<INCOME-TAX> 5,745
<INCOME-CONTINUING> 380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.2
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 APR-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 JUN-30-1998 MAR-31-1998
<CASH> 18,521 17,158 19,917
<SECURITIES> 11,889 17,280 20,877
<RECEIVABLES> 39,925 35,011 27,255
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 73,289 72,168 70,458
<PP&E> 18,331 16,062 14,409
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 110,149 106,951 93,631
<CURRENT-LIABILITIES> 23,367 20,083 15,232
<BONDS> 0 0 0
<COMMON> 0 0 0
0 0 0
0 0 0
<OTHER-SE> 85,061 85,236 76,726
<TOTAL-LIABILITY-AND-EQUITY> 110,149 106,951 93,631
<SALES> 27,745 25,352 22,145
<TOTAL-REVENUES> 27,745 25,352 22,145
<CGS> 8,835 8,365 7,053
<TOTAL-COSTS> 8,835 8,365 7,053
<OTHER-EXPENSES> 19,671 15,221 16,459
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (369) (512) (519)
<INCOME-PRETAX> (392) 2,278 (848)
<INCOME-TAX> 1,641 1,701 201
<INCOME-CONTINUING> (2,033) 577 (647)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (2,033) 577 (647)
<EPS-PRIMARY> (0.17) 0.05 (0.06)
<EPS-DILUTED> (0.17) 0.05 (0.06)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.3
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 25,881
<SECURITIES> 15,406
<RECEIVABLES> 27,363
<ALLOWANCES> 855
<INVENTORY> 0
<CURRENT-ASSETS> 70,222
<PP&E> 17,713
<DEPRECIATION> 4,942
<TOTAL-ASSETS> 91,843
<CURRENT-LIABILITIES> 15,050
<BONDS> 0
<COMMON> 111
0
0
<OTHER-SE> 74,972
<TOTAL-LIABILITY-AND-EQUITY> 91,843
<SALES> 72,814
<TOTAL-REVENUES> 72,814
<CGS> 25,837
<TOTAL-COSTS> 25,837
<OTHER-EXPENSES> 45,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,465)
<INCOME-PRETAX> 3,225
<INCOME-TAX> 2,080
<INCOME-CONTINUING> 1,096
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,096
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.4
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 APR-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 8,843 26,645 15,388
<SECURITIES> 34,088 21,484 7,467
<RECEIVABLES> 23,605 17,955 16,952
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 68,301 67,492 40,677
<PP&E> 11,659 9,114 7,140
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 84,042 80,482 51,518
<CURRENT-LIABILITIES> 10,881 9,248 8,186
<BONDS> 0 0 0
<COMMON> 0 0 0
0 0 0
0 0 0
<OTHER-SE> 69,297 67,036 39,337
<TOTAL-LIABILITY-AND-EQUITY> 84,042 80,482 51,518
<SALES> 18,898 17,026 15,340
<TOTAL-REVENUES> 18,898 17,026 15,340
<CGS> 6,131 6,379 5,904
<TOTAL-COSTS> 6,131 6,379 5,904
<OTHER-EXPENSES> 10,931 9,350 8,380
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (576) (287) (215)
<INCOME-PRETAX> 2,412 1,584 1,271
<INCOME-TAX> 892 578 477
<INCOME-CONTINUING> 1,469 996 736
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,469 996 736
<EPS-PRIMARY> 0.14 0.11 0.08
<EPS-DILUTED> 0.12 0.09 0.07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.5
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,164
<SECURITIES> 9,884
<RECEIVABLES> 16,777
<ALLOWANCES> 160
<INVENTORY> 0
<CURRENT-ASSETS> 38,260
<PP&E> 9,141
<DEPRECIATION> 3,017
<TOTAL-ASSETS> 48,017
<CURRENT-LIABILITIES> 7,667
<BONDS> 0
<COMMON> 90
0
0
<OTHER-SE> 35,838
<TOTAL-LIABILITY-AND-EQUITY> 48,017
<SALES> 48,579
<TOTAL-REVENUES> 48,579
<CGS> 19,822
<TOTAL-COSTS> 19,822
<OTHER-EXPENSES> 24,489
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (847)
<INCOME-PRETAX> 5,115
<INCOME-TAX> 2,023
<INCOME-CONTINUING> 2,782
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,782
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.28
</TABLE>
