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, 1999
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 March 31, 2000 was $140,023,583. The
number of outstanding shares of registrant's Common Stock as of that date was
12,037,671.
Documents Incorporated by Reference: None
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ENGINEERING ANIMATION, INC.
TABLE OF CONTENTS
TO
1999 ANNUAL REPORT ON FORM 10-K
Item Page
PART I
1 Business................................................................3
2 Properties.............................................................14
3 Legal Proceedings......................................................14
4 Submission of Matters to a Vote of Security Holders....................14
PART II
5 Market for Registrant's Common Equity and Related Stockholder
Matters...............................................................15
6 Selected Financial Data...............................................16
7 Management's Discussion and Analysis of Financial Condition and
Results of Operation..................................................17
7A Quantitative and Qualitative Disclosures about Market Risk............32
8 Financial Statements and Supplementary Data...........................33
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................60
PART III
10 Directors and Executive Officers of the Registrant....................61
11 Executive Compensation................................................63
12 Security Ownership of Certain Beneficial Owners and Management........66
13 Certain Relationships and Related Transactions........................67
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.......68
Signatures.................................................................72
Our registered trademarks, and those of our subsidiaries, include:FactoryCAD(R),
FactoryFLOW(R), FactoryPLAN(R), Jack(R), Sense8(R), VisFactory(R), VisMockUp(R),
VisView(R) and VSA(R). Our trademarks, and those of our subsidiaries, include:
e-Vis(TM), K-Log(TM), OEV(TM), Open Enterprise Visualization(TM), Open Virtual
Factory(TM), OVF(TM), VisConcept(TM) and VisPublish3D(TM).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. Our domain names
include e-Vis.com and eai.com.
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PART I
ITEM 1
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This report, and statements that we or our representatives make, may
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 in this report. We may 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.
You should carefully consider the risks, uncertainties and other
information described in this report. These are not the only risks and
uncertainties that we face. Additional risks and uncertainties that we do not
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 position, operating results or liquidity could be materially
harmed.
BUSINESS
Engineering Animation, Inc. develops and produces Internet-enabled
visual process management, collaboration, communication and analysis solutions
and accompanying services for extended manufacturing enterprises. These software
solutions, now being marketed as e-vis.com, provide manufacturers and their
suppliers and partners with shared, worldwide access to product and process
data. Together they can analyze, visualize and manipulate the shared data in
real time. Our solutions enable the manufacturing network to realize the
competitive advantages of lowered costs and faster time-to-market through
improved product designs, enhanced product quality and shorter production
cycles.
Major manufacturers in the automotive, aerospace, industrial/heavy
equipment, electronics, telecommunications and government/defense industries use
our integrated enterprise-wide solutions across corporate intranets and the
Internet. Our software solutions customers represent over 1,000 manufacturers,
including Alcatel U.S.A, The Boeing Company, DaimlerChrysler A.G., Deere &
Company, Ford Motor Company, Freightliner Corporation, General Electric Company,
General Motors Corporation, Lockheed Martin Corporation, Motorola, Inc.,
Navistar International Corporation, Sauer-Sundstrand Company and Xerox
Corporation.
In 1999, we decided to discontinue our Interactive Games and Science
and Technology businesses. You can find additional information about these
discontinued operations later in this section of the report under the heading
"Discontinued Operations." Following this event, we marketed our software
products as:
o the e-Vis.com solutions for providing secure, Internet-enabled
collaboration;
o the Open Enterprise Visualization (OEV) solutions for viewing,
distributing and analyzing product design data; and
o the Open Virtual Factory (OVF)solutions for enhancing the efficiency
and quality of manufacturing operations and processes, now called
our virtual factory solutions.
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Additional business activities in 1999 included:
o development of our e-Vis.com Internet portal for manufacturers;
o the Professional Services Group continuing to provide customized systems
integration and deployment services in support of our software products
and E-services; and
o the Litigation Services Group continuing to create software animation
products for the legal community.
In July 1999, we acquired Kx Verksamhetsutveckling AB, a Swedish
software company. Additional information about this acquisition can be found
later in this section, in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (MD&A), and in Note 3 to the enclosed
financial statements.
In March 2000, we sold our wholly-owned German subsidiary EAI-DELTA
GmbH to Dassault Systemes S.A. for $31 million in cash. Additional information
about this disposition of assets can be found in Note 18 to the enclosed
financial statements.
We incorporated in 1988 and became publicly traded in 1996. Our
corporate headquarters and technology center is located in Ames, Iowa. You can
contact us by addressing written correspondence to 2321 North Loop Drive, Ames,
IA 50010, or by phoning us at (515) 296-9908. Our Internet e-mail address is
[email protected]; our World Wide Web home site is www.eai.com. We have offices
worldwide.
OUR E-VIS.COM SOLUTIONS
Our e-Vis.com solutions provide extended manufacturing enterprises with
secure, Internet-enabled collaboration solutions. These extended enterprises
gain project-based access to mission-critical information at the speed and
convenience of the Web. Introduced in 1999, our e-Vis.com portal is designed to
increase manufacturers' internal and external communication and collaboration
capabilities. With these capabilities, manufacturers can:
o achieve stronger business relationships and supply-chain integration;
o manage heterogeneous teams and computing systems;
o decrease time-to-market;
o improve product quality; and
o reduce overall costs.
The subscription and pay-per-use features of the e-Vis.com solutions
mean users can acquire these capabilities without high adoption, deployment and
maintenance costs.
Through a partnership announced in July 1999 with Hewlett-Packard
Company (HP), our e-Vis.com solutions are powered and secured by HP's servers
and its Praesidium VirtualVault software, providing a security infrastructure
and secure socket layer encryption technology. For those wishing to do so,
however, users may combine their own security-related technology with the
functionality offered by e-Vis.com.
Using the collaboration features of e-Vis.com, major manufacturers can
communicate and interact with their suppliers and partners in real time around
the world. Participants spanning the manufacturing enterprise spectrum can
create or be invited to join project teams that meet and communicate within the
Internet. Within our e-Vis.com solutions, project teams conveniently share
documents, applications, information and decisions at on-line speed.
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The e-Vis.com solutions enable project teams to:
o view and search stored and organized project-related 2D and 3D documents,
drawings, models and other PC created documents that have been gathered
from multiple sources;
o participate in on-line design reviews and conferences, with the ability to
mark up data and documents and share the changes in real time on the
computer screen, even if the program in which the data or document was
created is not installed on the user's computer;
o participate in threaded discussion forums for on-line conversations,
tracking project decisions and rationale; and
o receive notification via e-mail of up-to-the-minute information related to
the project, including notices of data or documents being changed or added
to a project folder.
We have developed three deployment options for our e-Vis.com solutions:
o e-Vis.com Portal - users collaborate through the Internet by logging on to
our subscription-based on-line service;
o e-Vis Enterprise - users collaborate within the corporate intranet,
selectively opening the firewalls to connect with suppliers and partners
that use the e-Vis.com Portal solution. Typical users would be larger
companies interested in maintaining their own systems and internal control
of sensitive data; and
o "Powered by" e-Vis.com - developers of business-to-business E-commerce
applications and services license a co-branded version of the e-Vis.com
solution in order to power collaboration for their solutions. Users would
include companies developing trade exchanges and business portals.
THE CONCEPT OF "OPEN" SOFTWARE SOLUTIONS
Our "open" visualization software solutions improve communication among
manufacturers' design, engineering, manufacturing, marketing, purchasing, sales
and support teams and their partners and suppliers, enabling them to work on
their processes concurrently. Traditionally, these processes involved sequential
steps by separate teams that used disparate data creation and storage systems.
Our solutions allow users to view, analyze, manipulate and communicate data
across extended enterprises, and to do so without extensive training or
expensive computer hardware.
Manufacturing enterprises using our software solutions can access,
view, analyze and manage 3D product data, 2D drawings, process information,
product documents and structure information. Our software solutions enable users
to access and visualize product data from any database or data vault in a single
integrated environment while communicating in real time. Our solutions leverage
our customers' existing investments in CAD and PDM by extending data access to
an entire enterprise. Our software solutions allow seamless integration with:
o enterprise resource planning (ERP) systems;
o computer-aided design (CAD), computer-aided engineering (CAE) and
computer-aided manufacturing (CAM) software; and
o product data management systems (PDM).
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Our solutions provide advanced integrated analysis tools for improving the
efficiency of product engineering and manufacturing. They enable manufacturers
to improve product quality while reducing errors, costs and timetomarket by
allowing, for example:
o communication, collaboration and analysis through a common framework;
o management of digital assets across an enterprise;
o digital prototyping inplace of expensive physical prototyping;
o visualization of realistic, life-size models for use in concept design;
and
o simulation of human interaction with digital models.
Major manufacturing customers use our family of Open Enterprise
Visualization solutions, which accounted for approximately 34%, 55% and 45% of
our total revenues in 1999, 1998, and 1997.
OPEN ENTERPRISE VISUALIZATION SOLUTIONS
Our Open Enterprise Visualization (OEV) software solutions provide
customers with large-model visualization, real time collaboration, digital
prototyping and analysis capabilities. The OEV solutions are used by:
o engineering departments for digital mockup and product simulation;
o manufacturing departments for assembly sequencing and factory simulation;
o sales and marketing departments for presentations, training and product
configuration; and
o service departments for interactive maintenance manuals and repair
training.
Our OEV solutions run on major hardware platforms, including Windows,
Windows NT and Unix. They integrate with many of the leading electronic document
management and PDM systems, including:
o ENOVIA from Dassault Systemes S.A. (Dassault);
o EDMS from Documentum, Inc.;
o CADIM-DMS from EIGNER + PARTNER A.G.;
o Matrix from MatrixOne, Inc.;
o R3 from SAP A.G.;
o the Metaphase product line and SherpaWORKS from Structural Dynamics
Research Corporation (SDRC);
o IMAN from Unigraphics Solutions Inc. (Unigraphics Solutions); and
o CMS PDM from Workgroup Technology Corporation.
They also integrate with CAD/CAE/CAM systems from Dassault, Parametric
Technology Corporation (PTC), SDRC and Unigraphics Solutions.
OEV products include VisView and VisMockUp software and their related
technology components, as well as the VisConcept and VisPublish3D solutions. All
of these solutions are networked by a common integration framework that enables
seamless movement from one component to another.
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VisView - Our Enterprise-Wide, Product Data Visualization Solution: Our
VisView software solution allows users to visualize 3D product data and
assemblies, 2D drawings, documents and process data. It enables users across an
enterprise to access, view, measure, markup, analyze and interact with various
types of product and process data in a single visual environment. Our VisView
software solution provides 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 enterprise
participants 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.
VisView software components enable users to:
o access, view, mark up and measure 2D drawings, images and vector formats;
o access, view, mark up, measure and interact with 3D product visualizations
and their related databases in a single visual environment;
o view and mark up text-based information originating from process, strategic
planning and development documentation;
o access and deliver drawings and 3D models to the enterprise via a corporate
intranet and the Internet;
o create tailored product structures to meet the needs of individual tasks,
such as presenting and comparing product revisions;
o print within PDM environments and integrate third party applications such
as word processing and spreadsheet programs; and
o consolidate diverse source data formats into standard archiving formats to
save time and reduce network traffic.
VisMockUp - Our Real Time, Digital Prototyping Solution: Our VisMockUp
software solution extends the 3D visualization and 2D viewing capabilities of
our VisView software solution. With our VisMockUp solution, users gain the
advantages of digital prototyping, avoiding having to create costly physical
prototypes. Users can analyze large CAD assemblies early in the product design
phase, avoiding delayed discovery of design problems. The results are improved
product design and shortened product development time. Users have an opportunity
to realize cost savings, improving their potential for a competitive advantage.
With our VisMockUp software, users can create customized solutions to
meet specific engineering and manufacturing needs by selecting from various
component tools. For example, manufacturing engineers use VisMockUp digital
prototyping to simulate and visually evaluate manufacturing and assembly
processes. They can create 3D visual assembly and disassembly paths, viewable in
real time, by using the VisMockUp assembly motion-sequencing component. Motion
sequencing allows users to predict motion, path movement, collision and
interference. The result is improved product assembly processes. Additionally,
with the VisMockUp visual assembly motion-sequencing and playback features,
users can create accurate, easy to understand instructions for assembly and
manufacturing personnel.
Functions provided by some of the customizable VisMockUp software
solution components include:
o measuring distances on 3D CAD models;
o checking for collisions when thousands of parts are set into motion;
o managing multiple versions of product design;
o optimizing the order in which products are assembled; and
o sequencing to minimize part collision or interference.
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VisConcept - Our 1:1 Scale, Immersive Visualization Solution For
Virtual Prototyping: Our VisConcept software solution is designed to enable
users to cost effectively experience product designs by creating 1:1 scale
virtual prototypes. Engineers, designers and stylists gain the ablity to explore
design variations and alternatives in a human-scale, immersive environment that
composites 2D and 3D data in real time. The effects of design changes are
viewable sooner than if an expensive, time-consuming physical prototype were
built.
VisConcept software components include VisConcept Layout, which
provides a 2D/graphical user interface-based tool for creating presentations on
a typical workstation. It also includes VisConcept Presenter, which supports
human-scale display and human interaction with virtual prototypes.
VisPublish3D - Our 3D Digital Publishing Solution: Released in April
2000, our VisPublish3D software solution is designed to enable users to
eliminate their need to create expensive technical illustration. By leveraging
the 2D and 3D visualization functions of our VisMockUp solution, users are able
to create documents such as work and assembly instructions, and installation and
operation manuals.
VIRTUAL FACTORY SOLUTIONS
Our virtual factory software solutions enable manufacturers to design,
analyze, visualize and simulate factory layouts, thereby reducing factory layout
development time and manufacturing costs. With this software, users can produce
new manufacturing layouts that improve their efficiency, productivity, output
and safety.
The virtual factory software 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 solutions and accessed visually using a Web browser, providing
concurrent design of tooling and products in a factory layout. We referred to a
previous version of these solutions as our VisFactory suite of software
solutions.
The virtual factory solutions are composed of three main design
processes that function together to assist users in developing a complete
manufacturing design solution. The three processes include:
o Process Flow Chart, for developing the manufacturing process plan;
o VisFactory, for evaluating factory layout alternatives based upon material
flow using -
o FactoryCAD, for modeling the production layout using "drag-and-drop"
Smart Objects;
o FactoryPLAN, for evaluating and comparing factory layout concepts;
o FactoryFLOW, for viewing product and material flow;and
o FactoryBROWSER, for managing changes and collaborating on-line using
e-Vis; and
o Jack, for modeling human interaction with the factory layout.
Our virtual factory solutions accounted for approximately 22%, 16% and
18% of our total revenues in 1999, 1998 and 1997.
PROFESSIONAL SERVICES GROUP
Our Professional Services Group is comprised of employees who provide
comprehensive consulting and implementation services relating to our product
offerings. We evaluate customers' existing product data architectures, locate
data residences, determine access and develop customized integrated solutions.
We also makes recommendations on running processes efficiently and implement
training plans to facilitate smooth deployments. Additionally, we help plan,
install and configure our software solutions, certify installations and provide
system administrators with the information needed to maintain visualization
environments on a departmental, divisional or enterprise level. These services
accounted for 37%, 22% and 30% of total our revenues in 1999, 1998 and 1997.
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LITIGATION SERVICES
Our Litigation Services Group develops 3D computer animations for
litigation, alternative dispute resolution, public hearings, presentations,
demonstrations and educational programs. Combining the knowledge of engineers,
scientists and lawyers with the skills and talents of graphic artists, we create
computer visualizations that make complex issues easier to understand. Using
proprietary technology and extensive visual databases, we produce 3D animations
that accurately re-create past events or events that take place beyond the
bounds of normal observation.
ACQUISITIONS, DISPOSITIONS AND ALLIANCES
In July 1999, we acquired Kx Verksamhetsutveckling AB (Kx), a Swedish
company that provides a proprietary database software solution called K-Log,
audio-visual presentation rooms called K-Room, and training and support
services. Additional information about this acquisition and others made in 1998
and 1997 can be found in the MD&A and Note 3 to the enclosed financial
statements.
In March 2000, we sold EAI-DELTA GmbH for $31 million in cash to
Dassault Systemes S.A. We had acquired DELTA in December 1998 for approximately
$24 million of our common stock. Additional information about this transaction
can be found in the MD&A and Note 18 to the enclosed financial statements.
In July 1999, we announced a relationship with HP in which HP agreed to
provide hosting services, Web content, marketing funds and support, consulting,
high-performance server platforms and use of HP's secure Internet infrastructure
for e-Vis.com. We have estimated the value for this support to have the
potential to exceed $150 million over the life of the agreement.
MARKETING, DISTRIBUTION AND INTERNATIONAL ACTIVITIES
We market our software products and services 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 HP and
software companies such as EIGNER + PARTNER, MatrixOne, SAP, 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, Germany and Sweden. We also maintain additional sales offices in
Canada, France, Italy and Malaysia. We intend to increase our global presence by
hiring additional staff and pursuing additional distributors for our products
and services. In addition, we intend to expand our sales activities via the
"Powered by" e-Vis.com program, whereby developers of business-to-business
E-commerce applications and services license a co-branded version of the
e-Vis.com solution.
In 1999, 1998 and 1997, we derived 32%, 27% and 22% of our revenues
from sales to customers outside the United States. The Risk Factors in the MD&A
and Note 1 to the enclosed financial statements contain additional information
about our international activities.
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RESEARCH AND DEVELOPMENT
The rapid-paced advances in the Internet-enabled visualization and
collaboration markets require companies like us to devote substantial resources
to research and development efforts. These efforts are aimed at enabling us to
establish a presence, then maintain and enhance our competitive position in
these markets.
Our current efforts focus on the development of e-Vis.com and further
enhancement and development of our core product areas - OEV and virtual factory
solutions.
We spent $21.4 million, $15.9 million and $10.4 million on research and
development in 1999, 1998 and 1997. We anticipate maintaining or increasing this
level of commitment to our research and development efforts.
COMPETITION
We believe that the main competitive factors for product and process
visualization software include:
o high speed, real time graphics capabilities;
o multiple ERP, PDM as well as CAD/CAE/CAM interfaces;
o hardware platform independence;
o distributed database capabilities; and
o Internet/intranet communication.
We believe that the main competitive factors for our collaborative
Internet solutions for the extended enterprise are, in addition to those listed
above:
o secure Internet visual collaboration;
o project-based access to mission-critical information;
o E-services for the extended enterprise; and
o value-added content for the manufacturing community.
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.
The Risk Factors in the MD&A contain additional information about our
competition.
DISCONTINUED OPERATIONS
Through our former Interactive Division, we developed, produced and
sold a variety of interactive multimedia products to educational book
publishers, computer game publishers, toy companies, museums and pharmaceutical
and medical device manufacturers. In July 1999, we announced our decision to
withdraw from the Interactive Games and Science and Technology portions of this
business by the end of the first quarter of 2000. Our decision to exit these
businesses resulted from our analysis of the resources required to remain
competitive in the Interactive business and our desire to focus our resources on
our core businesses. We continue to do business in the Litigation Services
portion of this business as described above.
In 1999, we recorded a $13.8 million after-tax provision for exiting
these operations, including accruals for severance payments, asset write downs
and estimated operating losses during the phase out period. We believe that our
financial statements contain an adequate provision for the ultimate loss on
discontinuation of these operations. Note 2 to the enclosed financial statements
contains additional information about our discontinued operations.
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ADDITIONAL INFORMATION
You can find information about the following topics as indicated below.
------------------------------------------ ------------------------------------
Geographic financial information Notes 1 and 16 to the enclosed
financial statements
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Key customers Risk Factors in the MD&A and Note
15 to the enclosed financial
statements
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PROPRIETARY RIGHTS
We have a significant proprietary base of visualization, collaboration
and data management technology. This includes computer software that we have
created as well as other computer software obtained through acquisitions.
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 authorize our customers to use our visualization, collaboration and
data management technology through various licensing arrangements and
subscription agreements. 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. Some of
our software also contains built-in protection that effectively prevents copying
and use on other machines.
We license third party software from others for use in our software
products under a variety of different licensing arrangements. Some of these
arrangements require us to pay license fees or royalties for use of the
software. Open source code licensing arrangements require us to make the source
code for the third party software and its derivative works available to
end-users.
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, 1999, we had 919 full-time and 38 part-time employees.
We believe that relations with our employees are good. We do not have any
collective bargaining agreements with our employees. As stated in Note 18 to the
enclosed financial statements, due to events subsequent to year-end, we have
approximately 769 full-time and 32 part-time employees as of March 31, 2000.
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EXECUTIVE OFFICERS OF EAI
The Board of Directors generally appoints the executive officers at the
first meeting of the Board held after the annual meeting of stockholders. The
executive officers hold office until a successor is elected and qualified or
until death, resignation or removal in accordance with our by-laws. Our current
executive officers are:
Matthew M. Rizai
Age: 43
Title: Chairman, Chief Executive Officer and Treasurer
Experience: Dr. Rizai has been our Chairman, Chief Executive Officer and a
Director since joining EAI in June 1990. He has been Treasurer since November
1995. He was President from June 1990 until November 1999. 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.
Robert M. Nierman
Age: 55
Title: President and Chief Operating Officer
Experience: Mr. Nierman has served as President since November 1999 and Chief
Operating Officer since joining EAI in May 1999. He was Executive Vice President
from May until November 1999. Mr. Nierman's prior experience includes serving as
Executive Vice President and Chief Operating Officer of Structural Dynamics
Research Corporation (SDRC) from January 1997 until May 1999, and President and
Chief Executive Officer of Metaphase Technologies, Inc. from October 1992 until
December 1996. Mr. Nierman attended Cornell University.
Martin J. Vanderploeg
Age: 43
Title: Executive Vice President
Experience: Dr. Vanderploeg co-founded EAI in 1988. He has served as Executive
Vice President since October 1993. Dr. Vanderploeg has been a Director since
1988. He was Secretary from June 1990 until November 1995 and a Co-General
Manager of the Software Division from October 1997 until August 1999. 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.
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Jamie A. Wade
Age: 51
Title: Vice President of Administration, General Counsel and
Secretary
Experience: Mr. Wade has served as our Vice President of Administration and
General Counsel since June 1994 and Secretary since November 1995. He has been a
Director since 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.
Robert L. Cyr
Age: 40
Title: Vice President of Worldwide Sales and Marketing
Experience: Mr. Cyr has served as our Vice President of Worldwide Sales and
Marketing since January 2000. Prior to that, Mr. Cyr was Vice President of the
Americas and Asia Pacific for SDRC in 1998. Mr. Cyr worked for
Honeywell-Measurex Corporation (and formerly Measurex Corporation) from 1995
through 1997, serving in several national and international sales and service
vice presidential positions. He earned a B.S. in Chemical Engineering from the
University of Maine's Bowdoin College.
Michael K. O'Gara
Age: 53
Title: Vice President of Finance and Chief Financial Officer
Experience: Mr. O'Gara joined EAI in October 1999, serving as our Vice President
of Business Operations until March 2000, when he became Vice President of
Finance and Chief Financial Officer. Prior to joining EAI, he served as an
executive of business operations for SDRC from January 1997 until August 1999,
and Chief Financial Officer for Metaphase Technologies, Inc. from October 1992
until December 1996. Mr. O'Gara earned a B.S. in Accounting from Minnesota State
University - Mankato.
Jeff D. Trom
Age: 40
Title: Vice President and Chief Technology Officer
Experience: Dr. Trom, a co-founder of EAI, has held the position of Vice
President since June 1990, and Chief Technology Officer since November 1999. He
served as Treasurer from June 1990 until November 1995. Dr. Trom earned a Ph.D.
in Mechanical Engineering from Iowa State University.
13
<PAGE>
ITEM 2
PROPERTIES
Our headquarters in Ames, Iowa, consists of approximately 95,100 square
feet, of which we own approximately 61,700 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 in various locations in the
United States, United Kingdom and Germany, and also lease an office in each of
the following countries: Canada, France, Italy, Malaysia and Sweden.
ITEM 3
LEGAL PROCEEDINGS
In February 1999, actions were filed against us and certain of our
current and former executive officers in the United States District Court for
the Southern District of Iowa. These actions allege that we violated Sections
10(b) and 20(a) of, and Rule 10b-5 under, the Securities Exchange Act of 1934.
They allege that we made false or misleading statements of material fact about
our accounting for in-process research and development in connection with the
Rosetta Technologies, Inc. (Rosetta) and Sense8 Corporation (Sense8)
acquisitions and our 1999 business prospects. They seek unspecified damages.
These claims are now consolidated into one class action purporting to include
individuals who purchased our common stock between February 19, 1998 and April
6, 1999. The court has appointed lead plaintiffs and co-lead counsel in the
action. The court has granted in part and dismissed in part the motion we filed
to dismiss the plaintiffs' amended complaint. We intend to oppose the action
vigorously.
In October 1999, actions were filed against us and certain of our
current and former executive officers in the United States District Court for
the Southern District of Iowa. These actions allege that we violated Sections
10(b) and 20(a) of, and Rule 10b-5 under, the Securities Exchange Act of 1934.
They allege that we made false or misleading statements of material fact about
our financial results for the second quarter of 1999. These claims are now
consolidated into one class action purporting to include individuals who
purchased our common stock between July 29, 1999 and October 1, 1999. The court
has appointed lead plaintiffs and lead counsel in the action. We intend to
oppose the action 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
14
<PAGE>
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
Year ended December 31, 1998
<S> <C> <C>
First Quarter........................$45.75....................$28.33
Second Quarter........................61.00.....................42.00
Third Quarter.........................69.75.....................36.88
Fourth Quarter........................55.50.....................32.13
High Low
Year ended December 31, 1999
First Quarter................... ....$61.88....................$40.31
Second Quarter................... ....42.13.....................14.88
Third Quarter.........................25.31.....................15.81
Fourth Quarter........................11.00......................7.25
</TABLE>
On March 31, 2000, we had 1,105 holders of record of common stock. We
have not declared or paid any cash dividends on the common stock since our
formation and we do not currently intend to do so. We intend to retain future
earnings for reinvestment in our business.
Recent Unregistered Issuances of Common Stock
On July 27, 1999, we acquired Kx Verksamhetsutveckling AB (Kx), a
privately held company in Gothenburg, Sweden. The acquisition, including
transaction costs and assumed net liabilities, was valued at approximately $3.1
million. We paid cash of $1.8 million and issued 56,000 shares of our common
stock to the Kx stockholders, who are persons outside the United States, in
compliance with the registration exemption under Rule 903 of Regulation S of the
Securities Act of 1933, as amended, in exchange for all the outstanding common
stock of Kx. We accounted for the transaction as a purchase. See Item 1.
Business-Acquisitions.
15
<PAGE>
ITEM 6
SELECTED FINANCIAL DATA
We have presented the financial data to give retroactive effect for
discontinued operations related to our exit from the Interactive Games and
Science and Technology businesses. The revenues and expenses related to these
businesses are included in income (loss) from discontinued operations, net of
tax, below. In addition, the financial statements for 1999 include the
operations of Kx Verksamhetsutveckling AB (Kx) since July 27, 1999, the date of
the 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,
1999 1998 1997 1996 1995
---------------------------------------------------------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues $ 70,736 $ 89,911 $ 57,630 $ 39,870 $23,376
Cost of revenues 32,713 23,120 18,004 15,161 10,766
---------------------------------------------------------------
Gross profit 38,023 66,791 39,626 24,709 12,610
Operating expenses
Sales and marketing 28,556 21,576 14,665 9,696 4,543
General and administrative 15,950 11,326 9,065 5,707 4,425
Research and development 21,409 15,949 10,383 6,158 3,973
Goodwill and developed technology
amortization expense 2,835 1,838 140 62 -
Acquisition costs and non-recurring expenses (925) 12,237 4,917 - 2,520
---------------------------------------------------------------
Total operating expenses 67,825 62,926 39,170 21,623 15,461
---------------------------------------------------------------
Operating income (loss) from continuing operations (29,802) 3,865 456 3,086 (2,851)
Interest and other income (expense), net 959 1,660 1,465 847 (208)
---------------------------------------------------------------
Income (loss) from continuing operations
before income tax and minority interest (28,843) 5,525 1,921 3,933 (3,059)
Income tax expense (benefit) (5,260) 5,517 1,584 1,574 (249)
---------------------------------------------------------------
Income (loss) from continuing operations
before minority interest (23,583) 8 337 2,359 (2,810)
Minority interest - - (49) (310) (128)
---------------------------------------------------------------
Income (loss) from continuing operations (23,583) 8 288 2,049 (2,938)
Income (loss) from discontinued operations,
net of tax (16,888) 372 808 733 1,018
---------------------------------------------------------------
Net income (loss) $ (40,471) $ 380 $ 1,096 $ 2,782 $ (1,920)
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Earnings (loss) per share:
Basic:
<S> <C> <C> <C> <C> <C>
Continuing operations $ (1.98) $ 0.00 $ 0.03 $ 0.24 $ (0.50)
Discontinued operations (1.42) 0.03 0.08 0.08 0.17
---------------------------------------------------------------
Total $ (3.40) $ 0.03 $ 0.11 $ 0.32 $ (0.33)
===============================================================
Diluted:
Continuing operations $ (1.98) $ 0.00 $ 0.02 $ 0.21 $ (0.50)
Discontinued operations (1.42) 0.03 0.07 0.07 0.17
---------------------------------------------------------------
Total $ (3.40) $ 0.03 $ 0.09 $ 0.28 $ (0.33)
===============================================================
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
(in thousands) December 31,
1999 1998 1997 1996 1995
-------------------------------------------------------------
Balance Sheet Data:
Cash, cash equivalents and
<S> <C> <C> <C> <C> <C>
short-term investments $10,939 $35,496 $41,287 $21,048 $ 1,430
Working capital 20,265 50,512 49,899 25,978 2,309
Total assets excluding net assets
from discontinued operations 80,564 103,004 81,271 39,458 10,235
Total assets 80,564 115,590 90,493 47,195 12,365
Long-term debt 616 1,480 1,569 3,136 3,374
Stockholders' equity 55,191 93,539 75,083 35,838 3,786
</TABLE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
PLEASE SEE THE SECTION ENTITLED "SAFE HARBOR FOR FORWARD-LOOKING
STATEMENTS" SET FORTH AT THE BEGINNING OF THIS REPORT.
Overview
Engineering Animation, Inc. develops and produces Internet-enabled
visual process management, collaboration, communication and analysis solutions
and accompanying services for extended manufacturing enterprises. Major
manufacturers in the automotive, aerospace, industrial/heavy equipment,
electronics, telecommunications and government/defense industries use our
integrated enterprise-wide solutions across corporate intranets and the
Internet.
Our software solutions provide manufacturers and their suppliers and
partners with shared, worldwide access to product and process data. Together
they can analyze, visualize and manipulate the shared data in real time. Our
solutions enable the manufacturing network to realize the competitive advantages
of lowered costs and faster time-to-market through improved product designs,
enhanced product quality and shorter production cycles.
Our software products include: the Open Enterprise Visualization (OEV)
solutions for viewing, distributing and analyzing product design data; and the
virtual factory solutions for enhancing the efficiency and quality of
manufacturing operations and processes. In 1999, we announced the development of
e-Vis.com, our Internet portal for providing enterprise and supplier
collaboration, integration and E-services to manufacturers.
In addition, our Professional Services Group provides customized
systems integration and deployment services in support of our software products
and E-services. Our Litigation Services Group creates software animation
products for the legal community.
In February 1999, we restated earnings for the years ended 1998 and
1997 to reflect the Securities and Exchange Commission's new guidance on
accounting for in-process research and development charges associated with
acquisitions. In October 1999, we restated earnings for the second quarter of
1999 to reflect the reversal of an order that had been recorded in contravention
of our revenue recognition policy.
17
<PAGE>
We announced, on July 6, 1999, that we would exit our Interactive Games
and Science and Technology businesses by the end of the first quarter of 2000.
We established a provision for discontinued operations in the second quarter of
1999 to cover the estimated costs of exiting these businesses including
operating losses during the phase out period. We believe that this provision
will be sufficient to cover any further costs. Our prior financial results have
been presented to reflect the Interactive Games and Science and Technology
businesses as discontinued operations. We discontinued the use of the EAI
Interactive and Software Division names.
On July 19, 1999, we announced a relationship with Hewlett-Packard
Company (HP). HP agreed to support e-Vis.com and is providing hosting services,
Web content, marketing funds and support, consulting, high-performance server
platforms and use of HP's secure Internet infrastructure. In exchange, HP will
receive royalties from us based on total portal revenue.
We announced, on March 1, 2000, the signing of a definitive agreement
with Dassault Systemes S.A. for the sale of EAI-DELTA GmbH (DELTA) for $31
million in cash. The resulting pre-tax gain, net of transaction costs, will be
recognized in the first quarter of 2000 as an extraordinary gain on sale of
subsidiary. The transaction closed on March 24, 2000.
We also announced we will record a restructuring charge of
approximately $6.0 million in the first quarter of 2000 related to actions
associated with redefining the Company's infrastructure. The charge may include
severance costs, asset write-downs, office closings and other expenses.
Acquisitions
On July 27, 1999, we acquired Kx Verksamhetsutveckling AB (Kx), a
privately held company in Gothenburg, Sweden. The acquisition, including
transaction costs and assumed net liabilities, was valued at approximately $3.1
million. We paid cash of $1.8 million and issued 56,000 shares of common stock
in exchange for all the outstanding common stock of Kx. Kx provides integrated
software solutions, training and support for manufacturing customers in
Scandinavia. We have accounted for the acquisition of Kx as a purchase and all
intangibles associated with the purchase are being amortized over five years
using the straight-line method.
On December 22, 1998, we completed the acquisition of DELTA. In
connection with the acquisition, we issued approximately 557,000 shares of
common stock in exchange for all the outstanding common stock of DELTA in a
transaction valued at 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). 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). 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.
On June 17, 1998, we completed the acquisition of Sense8. We issued
approximately 158,000 shares of our common stock for all of the outstanding
shares of Sense8. The transaction, including transaction costs and net
liabilities assumed, was valued at approximately $9.7 million. This acquisition
was accounted for as a purchase.
18
<PAGE>
On November 26, 1997, we acquired Cimtech, Inc. (Cimtech) by issuing
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, we acquired Rosetta in two separate transactions
valued at approximately $25.5 million. We acquired a controlling interest in
Rosetta through a merger with Technology Company Ventures, LLC (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. We
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 as a purchase.
RESULTS OF OPERATIONS
For all periods presented below, the results of operations include the
operating results of Kx beginning July 27, 1999 and do not include our
discontinued Interactive Games and Science and Technology businesses.
Revenues
Our revenues are derived from software licenses, software development
contracts, professional services, customer support and maintenance. We recognize
revenue allocated to software licenses when an arrangement to deliver software
does not require significant additional production, modification or
customization and all four basic criteria in the Statement of Position (SOP)
97-2, as amended, issued by the American Institute of Certified Public
Accountants (AICPA) have been met. The four basic criteria are: persuasive
evidence that an arrangement exists, delivery has occurred, fee is fixed or
determinable and collection of the resulting receivable is probable. For
contracts with multiple obligations, such as deliverable and undeliverable
software licenses, maintenance or other services, we allocate revenue to each
component of the contract based on vendor-specific objective evidence. We
recognize revenues from software development contracts and professional services
based upon labor costs incurred and progress to completion on contracts.
Revenues from customer support and maintenance are deferred and recognized
ratably over the period these services are provided.
<TABLE>
<CAPTION>
REVENUES
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $70,736 (21)% $89,911 56% $57,630
==================================================================================================================
</TABLE>
Revenues decreased 21% to $70.7 million for 1999 from $89.9 million for
1998. Growth in services and maintenance revenues was offset by a decrease in
revenues from software licenses. We attribute this decrease in 1999 revenues to
a number of factors, including the following.
o As we continue to expand our partner program, the ratio of our partners'
sales to our direct sales has increased. Revenues from partner sales are
typically lower because they are royalty-based.
o A number of our major customers placed fewer large orders as they deployed
across their enterprises prior year purchases of our products.
o Our customers are changing the fundamental way in which they purchase and
deploy software within their organizations. As the Internet becomes the
primary distribution medium, the subscription model or monthly usage fee is
replacing the large, one-time licensing fee we have experienced in the
past.
Revenues increased 56% to $89.9 million for 1998 from $57.6 million for
1997. The increase was attributed to growth in sales of software licenses,
services and maintenance.
19
<PAGE>
<TABLE>
<CAPTION>
COST OF REVENUES
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $32,713 41% $23,120 28% $18,004
==================================================================================================================
As a percentage
of revenues 46% 26% 31%
</TABLE>
Our cost of revenues includes direct labor and other costs associated
with funded software development, customer support and professional services,
packaging and distribution costs, royalty fees paid to third parties under
licensing agreements and amortization of capitalized software costs.
Cost of revenues increased 41% to $32.7 million for 1999 from $23.1
million for 1998 primarily due to higher compensation and related expenses from
the increased number of employees in our professional services group and higher
royalty fees. The increase in the number of employees was in anticipation of
higher volume from our software business. Our cost of revenues as a percentage
of revenues increased to 46% from 26% for 1999 and 1998 primarily due to
software license revenues being lower than expected in 1999.
Cost of revenues increased 28% to $23.1 million for 1998 from $18.0
million for 1997 primarily due to expanded software product sales, software
product development and professional service contracts. Our cost of revenues as
a percentage of revenues decreased to 26% from 31% for 1998 and 1997 primarily
due to a larger share of overall revenues being derived from sales of software
licenses.
For 1999, 1998 and 1997, we capitalized software costs of $1.4 million,
$0.8 million and $1.0 million, 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 amortization expense
amount is greater. Amortization expenses reported as cost of revenues for 1999,
1998 and 1997 were $733,000, $521,000 and $219,000, respectively. We compare
unamortized computer software costs with net realizable value on a
product-by-product basis. These estimates are based upon all available
information, including life cycles and revenues from similar products, our past
history, the market for the products, our existing customer base, and other
factors unique to the products. Recoverability is subject to changes in our
business model and the demand for the product either because of general market
conditions or the introduction of new products by competitors.
<TABLE>
<CAPTION>
SALES AND MARKETING
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $28,556 32% $21,576 47% $14,665
==================================================================================================================
As a percentage
of revenues 40% 24% 25%
</TABLE>
Sales and marketing expenses include personnel and facility costs
related to sales, marketing and customer service activities, as well as
advertising, promotional materials, trade shows, travel, depreciation and other
costs.
Our sales and marketing expenses increased 32% to $28.6 million for
1999 from $21.6 million for 1998 primarily due to personnel increases in the
sales and marketing groups and related expenses and increased marketing
expenditures. This increase was partially offset by lower sales commission
expense associated with lower revenues. Sales and marketing expenses increased
to 40% of total revenues for 1999 from 24% for 1998 primarily due to the
personnel increases and software license revenues being lower than expected in
1999.
20
<PAGE>
Our sales and marketing expenses increased 47% to $21.6 million for
1998 from $14.7 million for 1997 primarily due to personnel increases in the
sales and marketing groups and related expenses, additional sales commission
expenses associated with higher revenues and increased marketing expenditures.
Sales and marketing expenses decreased to 24% of total revenues for 1998 from
25% for 1997.
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $15,950 41% $11,326 25% $9,065
==================================================================================================================
As a percentage
of revenues 23% 13% 16%
</TABLE>
General and administrative expenses consist primarily of personnel and
facility costs for administrative, information systems, legal, executive and
accounting staff, as well as certain consulting expenses, insurance costs,
professional fees, depreciation expense, bad debt expense and other costs.
General and administrative expenses increased 41% to $16.0 million for
1999 from $11.3 million for 1998. The increase was primarily due to personnel
increases and related expenses, increased outside professional services and bad
debt expense. General and administrative expenses increased to 23% of total
revenues for 1999 from 13% for 1998 primarily due to the personnel increases and
software license revenues being lower than expected in 1999.
General and administrative expenses increased 25% to $11.3 million for
1998 from $9.1 million for 1997. The increase was primarily due to personnel
increases and related expenses as we built our infrastructure to support
increased operations. General and administrative expenses decreased to 13% of
total revenues for 1998 from 16% in 1997.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $21,409 34% $15,949 54% $10,383
===================================================================================================================
As a percentage
of revenues 30% 18% 18%
</TABLE>
Research and development expenses focus on software product development
and consist primarily of personnel costs, related facility costs, equipment
costs, depreciation and amortization expenses and outside consulting fees.
Research and development expenses increased 34% to $21.4 million for
1999 from $15.9 million for1998 primarily due to personnel increases and related
expenses and increased outside consulting expenses. Included in research and
development expenses in 1999 is a write-off of $840,000 of intangible assets for
unused technology. Research and development expenses increased to 30% of total
revenues for 1999 from 18% for 1998, primarily due to the personnel increases
and software license revenues being lower than expected in 1999. Although
software license revenues have decreased, we expect to at least maintain the
previous levels of investments made in research and development.
21
<PAGE>
Research and development expenses increased 54% to $15.9 million for
1998 from $10.4 million for 1997 primarily due to personnel increases and
related expenses and increased outside consulting expenses. Research and
development expenses remained at 18% of total revenues for 1998 and 1997.
GOODWILL AND DEVELOPED TECHNOLOGY AMORTIZATION EXPENSE
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expense $2,835 54% $1,838 N/M $140
==================================================================================================================
As a percentage 4% 2% N/M
of revenues
</TABLE>
Goodwill and developed technology amortization expense relates to the
acquisitions made in 1999, 1998 and 1997 as stated in the section titled
"Acquisitions" above.
<TABLE>
<CAPTION>
ACQUISITION COSTS AND NON-RECURRING EXPENSES
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expense $(925) N/M $12,237 149% $4,917
===================================================================================================================
As a percentage
of revenues (1)% 14% 9%
</TABLE>
In December 1999, we reversed $0.9 million of transaction costs accrued
in connection with acquisitions made in 1998. The excess accrual was due to
lower than expected costs and expenses associated with the acquisitions.
In 1998, we incurred acquisition and non-recurring expenses of $6.1
million in conjunction with the acquisitions of DELTA, VSA and Transom. These
acquisitions were accounted for as poolings.
We incurred a non-recurring charge of $1.9 million 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.
We incurred a non-recurring charge of $4.2 million in the first quarter
of 1998, attributable to technology licensed from HP and General Electric
Corporate Research and Development.
In 1997, we incurred acquisition and non-recurring expenses of $3.2
million in conjunction with the acquisitions of Cimtech and TCV. We also
incurred a non-recurring charge of $1.7 million in the fourth quarter of 1997
for in-process research and development related to the acquisition of the
minority interest in Rosetta.
22
<PAGE>
INCOME TAX EXPENSE (BENEFIT)
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expense (benefit) $(5,260) $5,517 $1,584
==================================================================================================================
Effective tax rate 18% 100% 82%
</TABLE>
The effective tax rate for 1999 differs substantially from the
statutory tax rate primarily due to goodwill and developed technology
amortization of $1.8 million, which is not deductible for income tax purposes
and the creation of a valuation allowance. In the fourth quarter of 1999, we
recorded a valuation allowance of $11.6 million to offset a portion of our
deferred tax assets, of which $6.0 million of the valuation allowance is
attributable to discontinued operations. The carrying value of the net deferred
tax asset net of the valuation allowance is $7.7 million.
The effective tax rates for 1998 and 1997 differ substantially from
the statutory tax rate primarily due to acquisition related costs. Our pre-tax
income for 1998 and 1997 includes goodwill and developed technology amortization
expense and acquired in-process research and development expenses and
acquisition charges of $14.1 million and $5.1 million, respectively. Most of
these are not deductible for income tax purposes. In January 1997, we also
recorded an income tax benefit of $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
The following discussion of liquidity and capital resources includes
our continuing and discontinued operations.
We have historically satisfied cash requirements through borrowings,
operations, capital lease financing and aggregate net proceeds from public
offerings of common stock.
As of December 31, 1999, we had $10.9 million in cash and cash
equivalents. 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.
In 1999, net cash used in operating activities was $12.2 million. We
experienced lower revenues and cash collections on those revenues during the
year. We also incurred cash outflows associated with discontinuing our
Interactive Games and Science and Technology businesses that will continue
through the end of the first quarter of 2000. During the second quarter of 1999,
$3.1 million of accounts receivable attributed to software license and deferred
maintenance revenue were sold to a third party finance company on a non-recourse
basis. Net cash provided by operations was $1.8 million in 1998, and net cash
used in operating activities was $77,000 in 1997.
In 1999, net cash used in investing activities was $2.0 million. An
increase of $10.9 million in property and equipment was due to the cost of
expanding our facilities by $4.7 million and purchases of computers, furniture
and equipment of $6.2 million. This was offset by net maturities in our
short-term investments of $11.9 million. We paid $1.8 million in cash for the
purchase of Kx and $1.6 million was spent on software development costs that
were capitalized.
In 1998, we used cash of $9.6 million in investing activities. This was
primarily due to our property and equipment increasing $10.5 million because of
the expansion of our facilities by $4.3 million and our purchases of computers,
furniture and equipment of $6.2 million. This was partially offset by net
maturities in our short-term investments of $3.5 million. 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.
23
<PAGE>
In 1999, net cash provided by financing activities was $2.0 million.
The main financing sources were proceeds from stock option exercises and net
increases in our lines of credit.
In 1998, net cash provided by financing activities was $5.4 million.
The main financing sources were proceeds from stock option exercises, issuances
of common stock and the increase in a line of credit. At December 31, 1998, $3.0
million from this line of credit was utilized. In 1997, net cash provided by
financing activities was $30.4 million primarily due to a public issuance of
common stock.
In March 2000, our sale of DELTA generated cash proceeds of $31.0
million, which will be used in current operations. We had two lines of credit
with commercial banks. One of the lines of credit, totaling $1.0 million, was
secured and has been paid off. The other line of credit, totaling $3.5 million,
is unsecured and expires on May 31, 2000. We plan to repay the $3.5 million
outstanding balance on or before May 31, 2000.
We believe that our current cash and cash equivalent balances will be
sufficient to meet anticipated cash needs for working capital and capital
expenditures through the next twelve months. However, there can be no assurance
that additional capital beyond the amounts currently forecasted by us will not
be required or that any such required additional capital will be available on
reasonable terms, if at all, at such times as we may require it.
New Accounting Pronouncements
In 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions." This statement
requires recognition of revenue using the "residual method." This applies when
we have vendor-specific objective evidence (VSOE) of the fair values of all
undelivered elements in a multiple-element arrangement that is not accounted for
using long-term contract accounting. This also applies when VSOE of fair value
does not exist for one or more of the delivered elements in the arrangement. All
revenue-recognition criteria in SOP 97-2, other than the requirement for VSOE of
the fair value of each delivered element of the arrangement, must be satisfied.
This statement amends SOP 98-4, "Deferral of the Effective Date of the Provision
of SOP 97-2," by extending the deferral of the application of several passages
of SOP 97-2 through fiscal years ending on or before March 15, 1999. All other
provisions of SOP 97-2 are effective for transactions entered into by us in
fiscal years ending after March 15, 1999.
Under the residual method, the arrangement is recognized when the total
value of the undelivered elements, as indicated by VSOE, is deferred and
subsequently recognized in accordance with the relevant sections of SOP 97-2,
and the difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized by us as revenue related to the delivered
elements.
We adopted SOP 98-9 on January 1, 2000. It is expected that the
adoption will not have a significant effect on our financial position, operating
results or liquidity.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities," establishing new standards for recognizing
all derivatives as either assets or liabilities, and measuring those instruments
at fair value. Currently, we do not anticipate that SFAS No. 133 will have a
material impact on our financial position, results of operation or liquidity.
SFAS No. 133 is effective on January 1, 2001.
24
<PAGE>
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 DISCLOSURE
Through 1999, we continued evaluating the effect of Year 2000 issues on
our core software products, mission critical facilities, databases, and hardware
and software systems. Under a plan formulated in 1998 to coordinate our Y2K
efforts company-wide, the Vice President of Administration directed a task force
comprised of high level managers that oversaw the evaluation of our products,
facilities and operations. In general, the plan called for:
o creating an inventory of current products, mission critical facilities,
databases and systems;
o analyzing our state of knowledge regarding their Y2K readiness;
o gathering additional information through contacts or testing, where needed;
o assessing whether a risk existed and what to do about it; and
o developing and implementing remedies, where needed.
We addressed the Y2K-related issues we identified through these efforts
and, where appropriate, communicated our result to our customers. We developed
pages within our corporate Web site to communicate with the public about our Y2K
readiness.
We believe our efforts were successful. We have not experienced any
disruption of our business as a result of Y2K-related issues. We will continue
to be watchful for late-developing Y2K issues. We cannot assure you, however,
that all Y2K issues have surfaced or, if they were to, that they would not
materially adversely affect our business operations or financial statements.
25
<PAGE>
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
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 position, operating results or liquidity could be materially
harmed. Please refer to the section titled "Safe Harbor For Forward-Looking
Statements" set forth at the beginning of this report.
INDUSTRY RISKS
Failure to Adapt to Technological Changes or a Lack of Market Acceptance for Our
Products or Services Could Harm Our Business
Our revenues, operating results and liquidity may decline if:
o our products and services become outdated;
o we are unable to introduce new products or services, or upgrade existing
products or services, when the market demands them; or
o the market does not accept our products or services or their upgrades.
Therefore, our success depends on our ability to:
o anticipate our customers' evolving visualization, collaboration and
communication requirements;
o adapt our software products for new platforms;
o cost-effectively develop, produce, market and sell high-quality products
and services that timely address our customers' requirements;
o capture and retain major manufacturers as our customers; and
o attract other companies to make their software products compatible with
ours.
Since we provide products and services in a rapidly changing industry,
we try to anticipate emerging computer technologies and capabilities. We cannot
assure you that we will be able to introduce new products and services on a
timely basis or that our new products and services 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 Markets for Our Software Products and Services are Emerging and May Not
Continue to Grow
Software licensing of our OEV and virtual factory solutions and the
sales of related services currently constitute the majority of our revenues. The
market for these enterprise-wide visualization and collaboration software
products and services 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
and deploy new technologies. Our growth depends on whether there is significant
market demand for these solutions and services, particularly on an
enterprise-wide basis. 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 and support services.
Additionally, we have invested significant resources in our e-Vis.com
solutions. The on-line market is a new industry that is currently experiencing
rapid growth. Its future growth and direction, however, are unknowns. Our growth
in this business will depend on how well we anticipate the manufacturing
market's on-line collaboration and communication requirements, and our success
in communicating and delivering our on-line capabilities to the market. We do
not have any prior experience in this market and cannot assure you that we will
be successful.
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<PAGE>
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.
If revenues fall below our expectations in a particular quarter, our
business could be harmed. General economic conditions affect our revenue
expectations, as well as the following factors:
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 to market our products;
o customer budgets and willingness to pay for delivered products and
services; and
o our ability to competitively price our products and services.
The revenue flow from our OEV and virtual factory solutions sales and
licensing is uneven within a fiscal quarter. Sales typically occur in the third
month of a quarter, and often in the last week or days of a quarter. Factors
contributing to this pattern include:
o long lead times on customer budgetary approvals, which tend to be given
late in a quarter;
o the tendency of customers to wait until late in a quarter to commit to
purchase in the hope of obtaining more favorable pricing from one or more
competitors seeking their business;
o at times, seasonal influences; and
o the fourth quarter influence of customers spending their remaining capital
budget authorization prior to new budget constraints in the first quarter
of the following year.
Shortfalls from anticipated revenue or revenue recognition delays
result in significant variations in our operating results from quarter to
quarter. On the other hand, our expenses are relatively fixed in the near term,
or they may increase as our research and development efforts increase in
anticipation of new market opportunities or in response to competitive pressure.
We do not anticipate this pattern changing.
Additionally, we find it difficult to forecast quarterly licensing
revenue. Our sales cycle, from initial evaluation to delivery of software, is
lengthy and varies substantially from customer to customer, particularly in the
cases of customized business solutions. Even though we intend to decrease our
involvement with customized business solutions, we do not anticipate that this
change will improve our ability to forecast quarterly revenue.
We anticipate our e-Vis.com sales will be primarily subscription-based.
We will recognize revenue from these sales ratably over the life of the
subscription. The degree to which these sales will have any leveling effect on
our revenue flow depends particularly upon how quickly we grow this area of our
business. However, we have no prior experience with a subscription-based
business. We cannot assure you that these sales will have any effect on our
results.
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<PAGE>
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
in particular;
o actual or anticipated fluctuations in our quarterly or annual operating
results;
o announcements relating to customer contracts, investments, acquisitions,
divestitures;
o discontinued operations, layoffs 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.
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.
Failure to Integrate Acquired Businesses Could Harm Our Business
We need to successfully integrate the businesses that we have acquired
and any businesses that we may acquire in the future. Each acquisition has
required us to pay significant attention to the integration of products,
processes, personnel and culture, including the following specific items:
o the acquired businesses' response to integration into our organization;
o our ability to effectively manage the operations of the acquired
businesses; and
o the profitability and growth of the acquired businesses.
We may not be able successfully to integrate businesses we acquired in
the past or businesses we may acquire in the future.
Decreased Sales to a Key Customer or Industry Could Harm Our Business
In 1999, 11% and 10% of our revenues came from sales and licensing of
software products and services to DaimlerChrysler and SDRC, respectively. We
cannot assure you that we will be able to continue to sell or license software
products and services to these customers at 1999 levels or, if we fail to do so,
that we will be able to replace them with new customers. In addition, the
automotive industry accounts for a large portion of our other software customers
and a target market for our on-line services. Decreased demand for our software
products and services by automotive companies or the lack of demand for our
on-line services in this industry would harm our business.
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<PAGE>
We May Face Significant Competition
There are large software companies and companies in the CAD, CAE, CAM
and PDM markets offering solutions with visualization functionality similar to
that available through our software products. These companies include Dassault
Systemes S.A. and Parametric Technology Corporation. We have also formed
partnerships with other companies in these markets by licensing portions of our
technology to them, which enables them to offer visualization solutions. These
companies include Unigraphics Solutions Inc., Structural Dynamics Research
Corporation and SAP A.G.
Companies like NexPrise, Inc. and Framework Technologies Corporation
offer solutions with collaboration functionality similar to that of our
products. Companies offering Internet visual collaboration functions similar to
ours include Alibre, Inc. and CoCreate Software, Inc.
Although we believe that we have technical advantages over competitors
in these markets, maintaining these advantages 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. Moreover, we cannot assure
you that technical advantages will mean success in the market.
The markets for manufacturing-oriented portal and exchange solutions
are new and experiencing rapid growth and evolution. Internet providers in these
markets, like VerticalNet, Inc., Ariba, Inc., Commerce One Inc. and i2
Technologies, Inc., offer manufacturers vertical and horizontal solutions that
compete with certain of the functions offered by our solutions. At the same
time, major manufacturers, including those in the automotive,
telecommunications, and aerospace and defense industries, have announced that
they are forming their own industry exchanges and portals focused on their own
needs. Competition to be the Internet-enabled solution provider to these and
other consolidated customer bases will be significant. We cannot assure you that
we will be successful in this business.
We Rely on Third Parties to Market and Distribute Our Products and Services, in
Addition to Our Own Sales Force
We market our products and services to end users both directly and
indirectly. Our success depends in part on agreements with third parties to
market and distribute our products and services. These agreements represent
significant marketing and distribution opportunities for our software products
and services. However, we cannot assure you that these relationships will
continue beyond their contract terms or that they will be performed to our level
of expectation.
In addition, our success depends on our own sales force. Our sales
force must be able to adapt to changes in our marketing strategy. In the past,
we focused our efforts on selling discrete software products to our customers.
With the advances in our technology and the changes in the market, we are
transitioning our marketing strategy to selling business solutions that
incorporate many of our products. We cannot assure you that our sales force will
deliver this message to our customers in a manner that will ensure our success.
Moreover, our success depends on our own sales force achieving its
sales objectives. We assign our sales personnel sales quota, to which a
percentage of their compensation is tied. While the quota and variable
compensation are intended as incentives to enhance performance, the success of
these factors depends on how well we estimate and link the two, given current
market conditions. We cannot assure you that we will achieve the proper balance.
Additionally, the on-line services market is emerging. Our sales force must
contend with an emerging market and introduce our new products and services to
this market. We cannot assure you that their efforts will be successful.
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<PAGE>
We Must Effectively Manage Our Resources in Anticipation of and Response to Our
Business Direction
Over the past two and one-half years, we have experienced significant,
yet opposite growth trends in responding to the needs of the market. First,
through acquisitions, we rapidly increased our product offerings, staff,
facilities and revenues. Then, with revenues declining, we refocused our
business direction and, in the process, discontinued businesses, divested assets
and reduced staff. These expanding and contracting trends exert significant
strain on our employees, operating procedures, financial resources and
information systems.
We cannot assure you that these pressures will lessen as we continually
reassess and adjust our business model in response to the market. Our success
will depend in part on our ability to effectively transition our activities and
resources to meet these changes. We expect that our operating results, liquidity
and financial position would suffer if we were unable to manage our resources in
response to our evolving business direction.
We Face Risks Associated with Our International Business
Our international operations and revenues have increased in the past.
In March 2000, we sold DELTA, which had contributed significantly to our
international revenues. We cannot assure you that our future revenues from
international business will continue to increase.
In 1999, sales to international customers represented 32% of our net
revenues. As a result, we are subject to the risks of conducting business
outside the United States, including:
o changes in regulatory requirements;
o the burdens of complying with a variety of foreign laws;
o fluctuations in currency exchange rates and tariffs;
o other trade barriers and restrictions; and
o 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:
o copyright, trademark and trade secret laws;
o employee and third party non-disclosure and non-competition agreements; and
o negotiated contract terms and conditions.
However, these measures may not prevent our competitors from obtaining or using
our proprietary technology and databases.
We have incorporated into or employed mechanisms with certain of our
products and services designed to prevent or inhibit unauthorized copying or
use. Also, we package our software products and services with agreements that
prohibit their unauthorized copying and use. Nevertheless, certain users do copy
or use software without authorization, despite our efforts. If a significant
amount of unauthorized copying or use of our products or services were to occur,
it would negatively impact our revenues and operating results.
30
<PAGE>
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.
Internet-Associated Problems Encountered by Our Customers May Adversely Affect
Us
We have partnered with HP for it to provide the hosting and security
functions for our e-Vis.com business solution. If HP were unable or unwilling to
provide these functions in a timely, uninterrupted or secure manner, our
business could be negatively affected by customers' decisions to reduce or
discontinue the use of our Internet solutions.
Additionally, factors like natural disasters, electrical or
telecommunication failures, sabotage, vandalism or human error may interrupt our
services and cause our customers to reduce or terminate their use of our
solutions. Any of these events could negatively affect our revenues, operating
results, liquidity or financial position.
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 lengthy and expensive, we
believe that the loss of the services of key personnel could negatively affect
our revenues, operating results, liquidity and financial position.
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.
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<PAGE>
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rates
Our revenues originating outside the U.S. for 1999, 1998 and 1997 were
32%, 27% and 22% of total revenues. International sales are made mostly from our
foreign subsidiaries in local currency. Certain international sales are
denominated in U.S. dollars. Our subsidiaries incur most of their expenses in
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 currency volatility. Our future results
could be adversely impacted by changes in these or other factors.
Interest Rates
Our long-term debt in 1999 included two lines of credit with commercial
banks. Both lines of credit, one totaling $3.5 million and the other totaling
$1.0 million, had floating rates of interest. All other long-term debt had fixed
rates of interest ranging from 0% to 6%.
32
<PAGE>
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors and Shareholders
Engineering Animation, Inc.
We have audited the accompanying consolidated balance sheet of
Engineering Animation, Inc. and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Engineering
Animation, Inc. and subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Minneapolis, Minnesota
March 24, 2000
33
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Engineering Animation, Inc.
We have audited the accompanying consolidated balance sheet of
Engineering Animation, Inc. as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Engineering Animation, Inc. at December 31, 1998, and the consolidated results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 15, 1999
34
<PAGE>
<TABLE>
<CAPTION>
Engineering Animation, Inc.
Consolidated Balance Sheets
(thousands, except share and per share data)
December 31,
Assets 1999 1998
--------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 10,939 $ 23,623
Short-term investments - 11,873
Accounts receivable, net:
Billed, less allowance for doubtful accounts of $714 in 1999
and $300 in 1998 18,649 26,684
Unbilled 2,308 3,595
Deferred income taxes 7,758 1,250
Income taxes receivable 693 1,882
Prepaid expenses and other assets 3,091 1,997
--------------------------------
Total current assets 43,438 70,904
Property and equipment, net 22,168 15,848
Other assets:
Restricted cash 30 60
Note receivable 1,408 1,408
Software development costs, net of accumulated
amortization of $967 in 1999 and $774 in 1998 2,373 1,679
Deferred income taxes - 769
Goodwill and developed technology, net of
accumulated amortization of $4,875 in 1999 and $2,040 in 1998 10,915 10,973
Other 232 1,363
Net assets of discontinued operations - 12,586
--------------------------------
Total assets $ 80,564 $ 115,590
================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,165 $ 3,340
Accrued compensation and other accrued expenses 8,531 10,135
Lines of credit 4,500 3,000
Deferred revenue 5,204 3,590
Current portion of long-term debt and lease obligations 773 327
--------------------------------
Total current liabilities 23,173 20,392
Long-term debt and lease obligations due after one year 616 1,480
Other long term liabilities 184 179
Deferred income taxes 104 -
Net liabilities of discontinued operations 1,296 -
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 - 11,973,221 in 1999
and 11,772,969 in 1998 120 118
Additional paid in capital 94,959 92,308
Accumulated other comprehensive income (loss)
-foreign currency translation adjustment (506) 24
Retained earnings (deficit) (39,382) 1,089
--------------------------------
Total stockholders' equity 55,191 93,539
--------------------------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 80,564 $ 115,590
================================
See accompanying notes.
35
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Engineering Animation, Inc.
Consolidated Statements of Operations (in thousands, except per share data)
Years ended December 31,
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Revenues $ 70,736 $ 89,911 $ 57,630
Cost of revenues 32,713 23,120 18,004
--------------------------------------------------
Gross profit 38,023 66,791 39,626
Operating expenses:
Sales and marketing 28,556 21,576 14,665
General and administrative 15,950 11,326 9,065
Research and development 21,409 15,949 10,383
Goodwill and developed technology amortization 2,835 1,838 140
Acquisition costs and non-recurring expenses (925) 12,237 4,917
--------------------------------------------------
Total operating expenses 67,825 62,926 39,170
--------------------------------------------------
Operating income (loss) from continuing operations (29,802) 3,865 456
Interest and other income, net 959 1,660 1,465
--------------------------------------------------
Income (loss) from continuing operations
before income tax and minority interest (28,843) 5,525 1,921
Income tax expense (benefit) (5,260) 5,517 1,584
--------------------------------------------------
Income (loss) from continuing operations
before minority interest (23,583) 8 337
Minority interest - - (49)
--------------------------------------------------
Income (loss) from continuing operations (23,583) 8 288
Discontinued operations:
Income (loss) from discontinued operations,
net of tax (see note 2) (3,138) 372 808
Provision for exiting discontinued operations
including operating losses during phase-out
period, net of tax (see note 2) (13,750) - -
--------------------------------------------------
Net income (loss) $ (40,471) $ 380 $ 1,096
==================================================
Earnings (loss) per share:
Basic:
Continuing operations $ (1.98) $ 0.00 $ 0.03
Discontinued operations (1.42) 0.03 0.08
--------------------------------------------------
Total $ (3.40) $ 0.03 $ 0.11
==================================================
Diluted:
Continuing operations $ (1.98) $ 0.00 $ 0.02
Discontinued operations (1.42) 0.03 0.07
--------------------------------------------------
Total $ (3.40) $ 0.03 $ 0.09
==================================================
Weighted average shares outstanding 11,887 11,549 10,061
Weighted average shares outstanding and
assumed conversion 11,887 12,772 11,647
See accompanying notes.
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</TABLE>
Engineering Animation, Inc.
Consolidated Statement of Stockholders' Equity and Comprehensive Income (Loss)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Retained Total
------------------- Paid-In Comprehensive Earnings Stockholders'
Shares Amount Capital Income (Loss) (Deficit) Equity
------------------- ---------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 8,986 $ 90 $ 35,607 $ (41) $ 182 $ 35,838
Comprehensive income
Net income -- -- -- -- 1,096 1,096
Foreign currency translation adjustment -- -- -- (29) -- (29)
--------
Total comprehensive income 1,067
--------
Issue of common stock, net of offering
expenses 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 by subsidiary -- -- -- -- (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 expenses 47 -- 1,788 -- -- 1,788
Common stock issued for options
and warrants exercised 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 by subsidiary -- -- -- -- (33) (33)
-------------------- -------- -------- -------- --------
Balance at December 31, 1998 11,773 118 92,308 24 1,089 93,539
Comprehensive loss
Net loss -- -- -- -- (40,471) (40,471)
Foreign currency translation adjustment -- -- -- (530) -- (530)
--------
Total comprehensive loss (41,001)
--------
Common stock issued for options and
warrants exercised 144 1 969 -- -- 970
Income tax benefit related to
stock option plans -- -- 483 -- -- 483
Purchase of Kx 56 1 1,199 -- -- 1,200
-------------------- -------- -------- -------- --------
Balance at December 31, 1999 11,973 $ 120 $ 94,959 $ (506) $(39,382) $ 55,191
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
37
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<TABLE>
<CAPTION>
Engineering Animation, Inc.
Consolidated Statements of Cash Flows (in thousands)
Years ended December 31,
Operating activities 1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (40,471) $ 380 $ 1,096
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Goodwill and developed technology amortization expense 2,835 1,838 140
Depreciation and amortization 5,937 4,563 2,622
Deferred income taxes (5,939) 122 (1,527)
Write-off of purchased in-process research and development costs - 1,918 1,684
Provision for exiting discontinued operations
including operating losses during phase out period 13,750 - -
Loss on disposal or impairment of assets 1,032 - -
Minority interest in income - - 49
Non-cash compensation expense - 1,248 -
Changes in operating assets and liabilities
Billed accounts receivable 8,088 (11,091) (6,596)
Unbilled accounts receivable 4,816 (1,839) (3,377)
Prepaid expenses (1,000) (381) (1,116)
Accounts payable 1,122 (754) 1,605
Accrued expenses (5,802) 1,723 3,407
Income taxes 1,695 3,499 322
Deferred revenue 1,781 580 1,614
---------------------------------------------------
Net cash provided by (used in) operating activities (12,156) 1,806 (77)
---------------------------------------------------
Investing activities
Purchases of property and equipment (10,948) (10,519) (8,746)
Change in other assets (34) (1,285) (330)
Capitalization of software development costs (1,581) (1,390) (1,013)
Maturities of marketable securities 21,500 51,951 37,068
Purchase of marketable securities (9,627) (48,417) (42,590)
Cash purchased in acquisitions 481 79 -
Cash consideration for purchase of Kx (1,800) - -
---------------------------------------------------
Net cash used in investing activities (2,009) (9,581) (15,611)
---------------------------------------------------
Financing activities
Decrease in restricted cash 30 150 285
Net change in short-term borrowing 1,404 2,473 232
Proceeds from note receivable - 116 30
Proceeds from long-term debt - 432 1,598
Payments on long-term debt and capital lease obligations (416) (1,689) (1,731)
Dividend distribution by subsidiary - (33) (24)
Net proceeds from exercise of options and warrants 970 2,376 1,100
Net proceeds from issuance of common stock - 1,598 28,954
---------------------------------------------------
Net cash provided by financing activities 1,988 5,423 30,444
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents (12,177) (2,352) 14,756
---------------------------------------------------
Effect of exchange rates (507) 94 (39)
Cash and cash equivalents at beginning of year 23,623 25,881 11,164
---------------------------------------------------
Cash and cash equivalents at end of year $ 10,939 $ 23,623 $ 25,881
===================================================
Supplemental disclosures
Interest paid $ 146 $ 262 $ 305
Income taxes (received) paid (1,206) 715 3,363
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 -
Common stock issued to purchase Kx 1,200 - -
See accompanying notes.
</TABLE>
38
<PAGE>
Engineering Animation, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Engineering Animation, Inc. (the Company) develops and produces
Internet-enabled visual process management, collaboration, communication and
analysis solutions and accompanying services for extended manufacturing
enterprises. Major manufacturers in the automotive, aerospace, industrial/heavy
equipment, electronics, telecommunications and government/defense industries use
its integrated enterprise-wide solutions across corporate intranets and the
Internet.
The Company's software solutions provide manufacturers and their
suppliers and partners with shared, worldwide access to product and process
data. Together they can analyze, visualize and manipulate the shared data in
real time. Its solutions enable the manufacturing network to realize the
competitive advantages of lowered costs and faster time-to-market through
improved product designs, enhanced product quality and shorter production
cycles.
Its software products include: the Open Enterprise Visualization (OEV)
solutions for viewing, distributing and analyzing product design data; and the
virtual factory solutions for enhancing the efficiency and quality of
manufacturing operations and processes. In 1999, the Company announced the
development of e-Vis.com, its Internet portal for providing enterprise and
supplier collaboration, integration and E-services to manufacturers.
In addition, the Professional Services Group provides customized
systems integration and deployment services in support of the Company's software
products and services. The Litigation Services Group creates software animation
products for the legal community.
The Company introduced on May 27, 1999, e-Vis.com, its Internet portal
for enterprise and supplier collaboration, integration and E-services. This
secure, Web-based solution allows manufacturing companies to integrate with
their suppliers and create virtual project teams. e-Vis.com provides companies
the ability to collaborate in real time across organization and geographic
boundaries, capture knowledge about projects and ensure that project teams are
working with current information.
The Company announced on July 6, 1999 that it would exit its
Interactive Games and Science and Technology businesses by the end of the first
quarter of 2000 and has classified both of these as discontinued operations.
On July 19, 1999, the Company announced a relationship with
Hewlett-Packard Company (HP). HP agreed to support e-Vis.com by providing
hosting services, Web content, marketing funds and support, consulting,
high-performance server platforms and use of HP's secure Internet
infrastructure.
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. The accounts of the Interactive Games and Science
and Technology businesses, classified as discontinued operations during 1999,
are reflected as a single line item in the Company's consolidated financial
statements. All significant intercompany accounts and transactions have been
eliminated in consolidation.
39
<PAGE>
Business Combinations
Business combinations accounted for under the pooling-of-interests
method of accounting include assets, liabilities and stockholders' equity of the
acquired entities in combination with the Company's respective accounts at
recorded values. The results of operations of the acquired entities for these
mergers are included in all periods presented. Business combinations accounted
for under the purchase method of accounting include the results of operations of
the acquired business from the date of acquisition. Net assets or liabilities of
the companies acquired using the purchase method of accounting are recorded at
their fair value at the date of acquisition. Amounts allocated to acquired
in-process research and development are expensed in the period of acquisition
(for further detail see Note 3).
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 (SFAS) 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
Revenues are derived from software licenses, software development
contracts, professional services, customer support and maintenance. The Company
recognizes revenue allocated to software licenses when an arrangement to deliver
software does not require significant production, modification or customization
and all four basic criteria in the Statement of Position (SOP) 97-2 as amended
issued by the American Institute of Certified Public Accountants (AICPA) have
been met. The four basic criteria are: persuasive evidence that an arrangement
exists, delivery has occurred, fee is fixed or determinable and collection of
the resulting receivable is probable. For contracts with multiple obligations
such as deliverable and undeliverable software licenses, maintenance or other
services, the Company allocates revenue to each component of the contract based
on vendor-specific objective evidence. The Company recognizes revenues from
software development contracts and professional services based upon labor costs
incurred and progress to completion on contracts. Revenues from customer support
and maintenance are deferred and recognized ratably over the period these
services are provided. In 1998, the AICPA issued SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to
readdress vendor-specific objective evidence. The Company adopted SOP 98-9 on
January 1, 2000. It is expected that the adoption will not have a material
effect on the Company's financial position, operating results or liquidity.
40
<PAGE>
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of trade accounts
receivable. This risk is partially mitigated due to the large number, diversity
and financial strength of entities comprising the Company's customer base.
International Operations
The Company has international sales offices located in Canada, France,
Italy and Malaysia. Sales and operating offices are located in the United
Kingdom, Germany, and Sweden.
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. The financial
statements of foreign subsidiaries have been translated into U.S. dollars in
accordance with SFAS No. 52, "Foreign Currency Translation." All balance sheet
accounts have been translated using the exchange rates in effect at the balance
sheet date. Income statement amounts have been translated using the average
exchange rate for the year. The gains and losses resulting from the changes in
exchange rates from year to year have been reported in other comprehensive
income. The effect on the statements of operations of transaction gains and
losses is insignificant for all years presented.
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
Software Development Costs
Software development costs are capitalized 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 amortization expense
amount is greater. Amortization expenses were $733,000, $521,000 and $219,000
for the years ended December 31, 1999, 1998 and 1997, respectively. The Company
compares unamortized computer software costs with net realizable value on a
product-by-product basis. These estimates are based upon all available
information, including life cycles and revenues from similar products, the
Company's past history, the market for the products, the Company's existing
customer base, and other factors unique to the products. Recoverability is
subject to changes in our business model and the demand for the product because
of general market conditions or introduction of new products by competitors.
41
<PAGE>
Goodwill
Goodwill represents the excess of purchase price over the fair value of
net assets acquired and is amortized using the straight-line method over a
period of five years. The Company assesses the potential impairment of its
goodwill based on anticipated cash flows from operations.
Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. As a result of its review for
impairment of long-lived assets the Company wrote off $840,000 of intangible
assets during 1999 which was included in research and development expense.
Income Taxes
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.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of the Company's net income (loss)
and foreign currency translation adjustment and is presented in the consolidated
statement of stockholders' equity and comprehensive income (loss).
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed using the combination of dilutive assumed conversion shares and the
weighted average number of common shares outstanding.
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 1999 financial statement presentation.
42
<PAGE>
2. DISCONTINUED OPERATIONS
The Company announced on July 6, 1999 that it would exit its
Interactive Games and Science and Technology businesses by the end of the first
quarter of 2000. The Company recorded a provision for exiting discontinued
operations including operating losses during the phase out period of $13.8
million. The provision includes accruals for severance payments, asset
write-downs and estimated operating losses during the phase-out period. During
the fourth quarter of 1999, the Company recorded a valuation allowance of $6.0
million on the deferred tax asset associated with discontinued operations.
The following table summarizes revenues from discontinued operations and
net income (loss) for the last three years.
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands) 1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Revenues from discontinued operations $ 8,156 $ 17,065 $ 15,184
======== ======== ========
Income (loss) from continuing operations $(23,583) $ 8 $ 288
-------- -------- --------
Discontinued operations:
Income (loss) from discontinued operations (3,108) 600 1,304
Income tax expense (benefit) of income (loss)
from discontinued operations before valuation allowance (1,181) 228 496
Deferred tax asset valuation allowance 1,211 -- --
-------- -------- --------
Net tax expense 30 228 496
-------- -------- --------
Net income (loss) from discontinued operations, net of tax (3,138) 372 808
Provision for exiting discontinued operations
including operating losses during phase out period (13,750) -- --
Income tax benefit of exiting discontinued operations including
operating losses during phase-out period before valuation allowance (4,820) -- --
Deferred tax asset valuation allowance 4,820 -- --
-------- -------- --------
Net tax expense -- -- --
-------- -------- --------
Provision for exiting discontinued operations
including operating losses during phase out period, net of tax (13,750) -- --
-------- -------- --------
Net income (loss) $(40,471) $ 380 $ 1,096
======== ======== ========
</TABLE>
43
<PAGE>
3. ACQUISITIONS
On July 27, 1999, the Company acquired Kx Verksamhetsutveckling AB,
(Kx), a privately-held company in Gothenburg, Sweden. The acquisition, including
transaction costs and assumed net liabilities, was valued at approximately $3.1
million. The Company paid cash of $1.8 million and issued 56,000 shares of
common stock in exchange for all of the outstanding common stock of Kx. Kx
provides integrated software solutions, training and support for manufacturing
customers in Scandinavia. The Company has accounted for the acquisition of Kx as
a purchase and all intangibles associated with this acquisition are being
amortized over five years using the straight-line method. Pro forma results of
the purchase are not presented, as the amounts are not material to the
consolidated financial statements.
On December 22, 1998, the Company completed the acquisition of
EAI-DELTA GmbH (DELTA). The Company acquired DELTA by purchasing all of the
outstanding shares of DELTA's capital stock from its 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. In March 2000,
DELTA was sold to Dassault Systemes S.A. for $31 million in cash. See Note 18
for further detail.
On September 22, 1998, the Company completed the acquisition of
Variation Systems Analysis, Inc. (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
Technologies, Inc. (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, Inc. (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 Technologies, Inc.
(Rosetta) in two separate transactions valued at approximately $25.5 million.
The Company acquired a controlling interest in Rosetta through a merger with
Technology Company Ventures, LLC (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.
44
<PAGE>
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.
<TABLE>
<CAPTION>
Summary of Results of Operations by Entity Acquired
(in thousands)
Years ended December 31,
1998 1997
------------------------------------
Revenues
<S> <C> <C>
EAI $ 74,468 $ 27,744
DELTA 4,675 5,279
Transom 1,019 802
VSA 9,749 17,016
TCV - 4,622
Cimtech - 2,167
------------------------------------
Combined $ 89,911 $ 57,630
====================================
Income (loss) from
continuing operations
EAI $ (249) $ 866
DELTA 332 153
Transom (473) (1,040)
VSA 398 (171)
TCV - 260
Cimtech - 220
------------------------------------
Combined $ 8 $ 288
====================================
</TABLE>
On June 17, 1998, the Company exchanged approximately 158,000 shares of
its common stock for all of the outstanding stock of Sense8 Corporation
(Sense8). 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.
Pro Forma Consolidated Results
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
---------- -----------
<S> <C> <C>
Revenues $ 90,522 $ 61,503
Loss from continuing operations (2,812) (4,964)
Loss per share from continuing operations (0.24) (0.49)
</TABLE>
45
<PAGE>
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.
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 in 1998 following consummation of the
acquisition.
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 of past and anticipated product life cycles.
Developed technologies and goodwill and other intangible assets acquired from
Sense8 are being amortized on a straight-line basis over the useful lives of the
assets of five years.
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.
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 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 five years, the useful
lives of the assets.
46
<PAGE>
The following table shows the components of acquisition costs and
non-recurring expenses.
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Acquisition costs (reversal) $ (925) $ 6,070 $ 3,232
Purchased in-process research and development - 1,918 1,685
Licensed technology - 4,249 -
-------------------------------------
Total acquisition and non-recurring expenses $ (925) $ 12,237 $ 4,917
=====================================
</TABLE>
4. 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
fixed rate of 8.5% began accruing upon commencement of the lease and is payable
monthly. 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.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consist of the
following:
(in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
------------- ------------
<S> <C> <C>
Computer equipment and software $ 13,056 $ 10,531
Equipment and furniture 5,725 3,436
Buildings and leasehold improvements 8,044 4,197
Construction in progress 4,214 3,393
----------- ----------
Total 31,039 21,557
Less accumulated depreciation (8,871) (5,709)
------------ ----------
Net property and equipment $ 22,168 $ 15,848
============ ==========
</TABLE>
47
<PAGE>
6. DEBT
Long-term debt at December 31, 1999 and 1998 consists of the following:
(in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
---------------------
Interest bearing revolving line of credit for $3.5 million with a bank,
commencing in September 1998 and due May 2000; floating interest
<S> <C> <C>
at the bank's base rate less 1% (7.75% at December 31, 1999) $ 3,500 $ 3,000
Interest bearing revolving line of credit for $1.0 million with a bank,
commencing in January 1999 and due March 2000; floating interest
at the bank's base rate (8.75% at December 31, 1999) 1,000 -
Non-interest bearing note payable, due in monthly installments
commencing July 1998 through June 2005; collateralized by all equipment
of the Company 157 186
Forgivable note with interest accruing 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 400 450
Capital lease obligations 97 194
Other notes payable with interest ranging from 0% to 4.5%, and payments due
from 1999 through 2007 235 477
--------- ---------
Total debt 5,889 4,807
Less amounts due within one year 5,273 3,327
--------- ---------
Long-term debt $ 616 $ 1,480
========= =========
</TABLE>
Future maturities of long-term debt and capital lease obligations at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
2001 $ 109
2002 146
2003 90
2004 94
Thereafter 177
-----------
Total $ 616
===========
</TABLE>
48
<PAGE>
7. OPERATING LEASES
The Company has operating leases for office space and equipment with
various lease terms expiring through 2008. Rent expense for the years ended
December 31, 1999, 1998 and 1997 was $3.6 million, $2.2 million and $1.4
million, respectively.
The future minimum lease payments at December 31, 1999 are as follows:
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
2000 $ 3,796
2001 3,705
2002 3,314
2003 2,258
2004 1,757
Thereafter 5,293
-------------
Total $ 20,123
=============
</TABLE>
8. 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, 1999, 1998 and 1997
was $782,000, $230,000 and $339,000, respectively.
9. INCOME TAXES
The components of income (loss) from continuing operations before
income taxes and minority interest are as follows:
<TABLE>
<CAPTION>
(in thousands) Years ended December 31,
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Domestic $ (29,397) $ 4,167 $ 1,674
Foreign 554 1,358 247
-----------------------------------------
Total $ (28,843) $ 5,525 $ 1,921
=========================================
</TABLE>
49
<PAGE>
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
(in thousands) Years ended December 31,
1999 1998 1997
----------------------------------
Current
<S> <C> <C> <C>
Federal $ 1,805 $ 4,073 $ 2,776
State (1,382) 513 176
Foreign 304 1,132 102
------------------------------------
727 5,718 3,054
Deferred (11,581) (201) (453)
Change in valuation allowance 5,594 -- (1,017)
------------------------------------
Total $ (5,260) $ 5,517 $ 1,584
====================================
</TABLE>
A reconciliation of income tax expense (benefit) computed at the U.S.
statutory rate to the effective income tax rate is as follows:
<TABLE>
<CAPTION>
(in thousands) Years ended December 31,
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Tax at US statutory rate $ (10,095) $ 1,934 $ 653
State income taxes, net of Federal tax benefit (750) 383 54
Non-deductible acquisition costs - 1,772 1,748
Goodwill amortization 998 643 -
Effect of foreign income taxes (383) 394 97
Change in valuation allowance 5,594 - (1,017)
Other, net (624) 391 49
-----------------------------------
Total $ (5,260) $ 5,517 $ 1,584
===================================
</TABLE>
50
<PAGE>
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(in thousands) December 31,
1999 1998
------------------------
Deferred tax liabilities:
<S> <C> <C>
Tax over book depreciation $(1,329) $ (854)
Capitalized software development costs (855) (525)
Other, net (133) (193)
------------------------
Total deferred tax liabilities (2,317) (1,572)
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts 390 25
Accruals 1,052 384
Net operating loss carryforwards 13,205 2,794
Other, net 918 388
------------------------
Total deferred tax assets 15,565 3,591
------------------------
Valuation allowance (5,594) -
------------------------
Net deferred tax assets $ 7,654 $ 2,019
========================
</TABLE>
The total deferred tax assets indicated above do not include a $6.0
million deferred tax asset attributable to discontinued operations.
Additionally, the valuation allowance indicated above does not include $6.0
million attributable to discontinued operations used to completely offset the
deferred tax asset attributable to discontinued operations.
A valuation allowance is required to reduce a potential deferred tax
asset when it is likely that all or some portion of the potential deferred tax
asset will not be realized due to the lack of sufficient taxable income. The
Company has reviewed its taxable earnings history and prospective future taxable
income. Based on this assessment, the Company has provided a valuation allowance
for a portion of the deferred tax assets and will continue to assess the need
for this allowance. In addition the Company may be required to provide further
valuation allowances if the Company does not generate sufficient future taxable
income.
At December 31, 1999, the Company had net operating loss (NOL)
carryforwards of $40.0 million for federal income tax purposes that expire in
years 2003 through 2019. Additionally, the Company had $2.6 million of U.S. tax
credits that expire in years 2001 through 2019. 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
$1.7 million at December 31, 1999. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. or state income
taxes has been provided thereon. When those earnings are distributed in the form
of dividends, the Company will be subject to U.S. and state income tax liability
and for taxes withheld at the source of payment in the respective foreign
jurisdictions. 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 may substantially offset
any resulting tax liability.
51
<PAGE>
10. CAPITAL STOCK 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, a division of EquiServe.
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 to 15 years after the date of grant.
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. At the 1999 Annual
Meeting, our stockholders approved the amendment and restatement of this Plan,
increasing the number of shares reserved for issuance under the Plan by 550,000.
A total of 2,335,000 shares of common stock are reserved for issuance under this
Plan.
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 1999, the Company amended
the Plan to increase the number of shares reserved for issuance by 435,000. The
Company has reserved 1,635,000 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.
In April and December 1999, the Company issued non-plan/non-qualified
options to purchase 225,000 and 80,000 shares of common stock at $15.907 and
$8.282 per share to two newly hired executives. These options will vest over
four years and will remain exercisable through April and December 2009,
respectively.
52
<PAGE>
A summary of common stock option activity and related information for
the indicated years ended December 31, follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------ ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------ ------------ ------------ --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,411,980 $ 19.60 2,200,271 $ 8.57 2,055,461 $ 6.30
Granted 1,788,950 20.49 882,784 38.84 421,018 17.20
Exercised (143,952) 6.74 (507,825) 4.29 (147,328) 4.26
Forfeited (670,330) 23.81 (163,250) 22.50 (128,880) 10.80
--------- --------- ----------
Outstanding at end of year 3,386,648 $ 19.80 2,411,980 $ 19.60 2,200,271 $ 8.57
========== ========= ==========
Exercisable at end of year 1,264,037 $ 12.11 988,002 $ 7.25 1,180,318 $ 4.19
========== ========= ==========
Weighted-average fair value of options
granted during the year $ 13.18 $ 23.22 $ 14.64
</TABLE>
The remaining contractual life and exercise prices for options
outstanding and the number of options exercisable at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------------
Weighted
Average
Remaining
Contractual Weighted
Number of Range of Life Average Options
Options Exercise Prices (in years) Exercise Price Exercisable
-------- ------------------ --------- -------------- -----------
<S> <C> <C> <C> <C> <C>
525,759 $ 1.073 - $3.540 7.77 $ 1.680 511,157
639,537 5.000 - 8.438 9.70 7.777 173,258
502,727 8.500 - 15.420 7.51 13.190 296,298
489,475 15.500 - 19.917 9.30 16.020 29,810
486,518 19.920 - 31.500 8.15 27.462 151,560
544,862 36.000 - 44.250 8.89 42.847 52,361
197,770 44.500 - 67.000 9.11 50.723 49,595
------------ ------- ----------
3,386,648 $ 1.073 - $67.000 8.63 19.803 1,264,037
============ ======= ==========
</TABLE>
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 1999, 1998 and 1997, respectively: risk-free interest rates of
5.6%, 5.0% and 5.7%; a dividend yield of 0.0%; volatility factors of the
expected market price of the Company's common stock of 0.74, 0.63 and 0.34; and
a weighted-average expected life of the option of 4.9, 5.4 and 4.0 years.
53
<PAGE>
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 operations information
follows:
<TABLE>
<CAPTION>
(in thousands, except per share data) Years ended December 31,
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Pro forma net loss $ (48,305) $ (3,796) $ (381)
Pro forma loss per share:
Basic $ (4.06) $ (0.33) $ (0.04)
Diluted $ (4.06) $ (0.33) $ (0.04)
</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.
54
<PAGE>
11. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of earnings (loss) per share.
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
----------------------------------------------
(in thousands, except per share data)
Numerator:
<S> <C> <C> <C>
Income (loss) from continuing operations $ (23,583) $ 8 $ 288
Income (loss) from discontinued operations (16,888) 372 808
-------------- ------------- -------------
Net income (loss) $ (40,471) $ 380 $ 1,096
============== ============= =============
Denominator:
Denominator for basic earnings (loss) per
share - weighted average shares 11,887 11,549 10,061
Stock options and warrants - 1,223 1,586
-------------- ------------- -------------
Denominator for diluted earnings (loss) per
share - weighted average
shares and assumed conversions 11,887 12,772 11,647
============== ============= =============
Basic earnings (loss) per share
Continuing operations $ (1.98) $ 0.00 $ 0.03
Discontinued operations (1.42) 0.03 0.08
-------------- ------------- -------------
Total $ (3.40) $ 0.03 $ 0.11
============== ============= =============
Diluted earnings (loss) per share
Continuing operations $ (1.98) $ 0.00 $ 0.02
Discontinued operations (1.42) 0.03 0.07
-------------- ------------- -------------
$ (3.40) $ 0.03 $ 0.09
============== ============= =============
</TABLE>
55
<PAGE>
12. 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 incurred for 1999,
1998 and 1997 was approximately $703,000, $360,000 and $116,000, respectively.
13. 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:
Note Receivable--the carrying amount reported in the balance sheet for
the note receivable totaling $1.4 million at December 31, 1999 approximated its
fair value since the prime lending rate at December 31, 1999 was equal to the
interest rate on the note receivable. At December 31, 1998, the carrying value
for the note receivable was $1.4 million and the fair value was $1.5 million.
Long-Term Debt--the carrying amounts reported in the balance sheet for
the Company's lines of credit totaling $4.5 million for 1999 and $3.0 million
for 1998 approximated their fair values as they bear variable rates of interest.
At December 31, 1999, the remaining notes and capital lease obligations had a
carrying amount of $1.4 million compared to a fair value of $1.3 million. At
December 31, 1998, the carrying amounts for the remaining notes and capital
lease obligations approximated 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.
56
<PAGE>
14. QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected quarterly financial information
from continuing operations for 1999 and 1998. Operating expenses include
acquisition costs and non-recurring expenses (recoveries) of $0.7 million, $0.7
million, $0.8 million and $(0.1) million for the quarters ended March 31, June
30, September 30, and December 31, 1999. Acquisition costs and non-recurring
expenses for the year ended December 31, 1999 total $1.9 million. 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.
The Company believes that all necessary adjustments have been included to
present fairly the selected quarterly information.
Continuing Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
(Audited) (Unaudited)
Year ended Three Months ended
----------------------------------------------------------------
Dec. 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1999 1999 1999 1999
-------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $70,736 $16,469 $13,799 $20,120 $20,348
Gross profit 38,023 7,390 5,045 12,310 13,278
Operating expenses 67,825 18,247 18,467 16,335 14,776
Operating loss (29,802) (10,857) (13,422) (4,025) (1,498)
Loss (23,583) (10,442) (9,614) (2,564) (963)
Loss per share:
Basic (1.98) (0.87) (0.81) (0.22) (0.08)
Diluted (1.98) (0.87) (0.81) (0.22) (0.08)
</TABLE>
<TABLE>
<CAPTION>
(Audited) (Unaudited)
Year ended Three Months ended
----------------------------------------------------------------
Dec. 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998 1998
-------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $89,911 $28,675 $23,049 $20,339 $17,848
Gross profit 66,791 22,391 17,077 14,310 13,013
Operating expenses 62,926 16,611 18,142 13,208 14,965
Operating income (loss) 3,865 5,780 (1,065) 1,102 (1,952)
Income (loss) 8 3,074 (2,222) 165 (1,009)
Earnings (loss) per share:
Basic 0.00 0.26 (0.19) 0.01 (0.09)
Diluted 0.00 0.24 (0.19) 0.01 (0.09)
</TABLE>
57
<PAGE>
The following table sets forth selected quarterly financial information
from discontinued operations for 1999 and 1998.
<TABLE>
<CAPTION>
Discontinued Operations
(in thousands, except per share data)
(Audited) (Unaudited)
Year ended Three Months ended
----------------------------------------------------------------
Dec. 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1999 1999 1999 1999
-------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) $(16,888) $(6,031) - $(11,320) $463
Earnings (loss) per share:
Basic (1.42) (0.50) - (0.96) 0.04
Diluted (1.42) (0.50) - (0.96) 0.04
<FN>
Note: For the second quarter ended June 30, 1999, the Company recorded a provision for exiting discontinued
operations including operating losses during the phase out period, net of tax, of $8.9 million. For the fourth quarter
ended Decmber 31, 1999, the Company recorded a valuation allowance of $6.0 million to offset the deferred tax
attributable to discontinued operations. See Note 2 of Notes to Consolidated Financial Statements for more
information.
</FN>
</TABLE>
<TABLE>
<CAPTION>
(Audited) (Unaudited)
Year ended Three Months ended
----------------------------------------------------------------
Dec. 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998 1998
-------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) $372 $(591) $189 $412 $362
Earnings (loss) per share:
Basic 0.03 (0.05) 0.02 0.04 0.03
Diluted 0.03 (0.05) 0.02 0.03 0.03
</TABLE>
15. MAJOR CUSTOMERS
The Company's revenue from continuing operations 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 revenues in any year. Revenue from one customer represented 11% in 1999
and 12% in 1997. Another customer represented 15% of revenues in 1998 and 13% of
revenues in 1997, and a third customer represented 10% of revenues in 1999 and
17% of revenues in 1997.
58
<PAGE>
16. SEGMENT INFORMATION
During 1999 the Company operated in one business: software products and
related services for users.
Information regarding the Company's operations in different geographic
areas is set forth below. Revenues are reported based on the location of the
Company's customers.
<TABLE>
<CAPTION>
Geographic Segments
(in thousands) Years ended December 31,
1999 1998 1997
--------------- --------------- --------------
Revenues by Geographic Region:
<S> <C> <C> <C>
United States $ 47,833 $ 66,036 $ 44,846
Germany 13,812 10,351 5,933
United Kingdom 2,472 2,449 1,332
Japan 2,171 8,189 2,983
Other 4,448 2,886 2,536
--------------- --------------- --------------
Total revenues $ 70,736 $ 89,911 $ 57,630
=============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
At December 31,
Identifiable Long-Lived Assets: 1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
United States $ 35,958 $ 30,508 $ 16,930
Germany 706 682 492
United Kingdom 130 17 9
Japan - - -
Other 302 64 31
--------------- --------------- --------------
Total long-lived assets $ 37,096 $ 31,271 $ 17,462
=============== =============== ==============
</TABLE>
17. LEGAL MATTERS
In February 1999, actions were filed against the Company and certain
current and former executive officers in the United States District Court for
the Southern District of Iowa. These actions allege that the Company violated
Sections 10(b) and 20(a) of, and Rule 10b-5 under, the Securities Exchange Act
of 1934. They allege that the Company made false or misleading statements of
material fact about accounting for in-process research and development in
connection with the Rosetta and Sense8 acquisitions and 1999 business prospects.
They seek unspecified damages. These claims are now consolidated into one class
action purporting to include individuals who purchased common stock between
February 19, 1998 and April 6, 1999. The court has appointed lead plaintiffs and
co-lead counsel in the action. The court has granted in part and dismissed in
part the motion the Company filed to dismiss the plaintiffs' amended complaint.
The Company intends to oppose the action vigorously.
In October 1999, actions were filed against the Company and certain
current and former executive officers in the United States District Court for
the Southern District of Iowa. These actions allege that the Company violated
Sections 10(b) and 20(a) of, and Rule 10b-5 under, the Securities Exchange Act
of 1934. They allege that the Company made false or misleading statements of
material fact about financial results for the second quarter of 1999. These
claims are now consolidated into one class action purporting to include
individuals who purchased the Company's common stock between July 29, 1999 and
October 1, 1999. The court has appointed lead plaintiffs and lead counsel in the
action. The Company intends to oppose the action vigorously.
59
<PAGE>
The Company is involved from time to time in other litigation
incidental to its business. The Company believes that current pending litigation
will not have a material adverse effect on its business.
18. SUBSEQUENT EVENTS
The Company announced on March 1, 2000 the signing of a definitive
agreement with Dassault Systemes S.A. for the sale of DELTA for $31 million in
cash. A resulting pre-tax gain, net of transaction costs, will be recognized in
the first quarter of 2000 as an extraordinary gain on sale of subsidiary. The
transaction closed on March 24, 2000.
The Company also announced it will record a restructuring charge of
approximately $6.0 million in the first quarter of 2000 related to actions
associated with redefining the Company's infrastructure. The charge may include
severance costs, asset write-downs, office closings and other expenses.
19. NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which
establishes new standards for recognizing all derivatives as either assets or
liabilities, and measures those instruments at fair value. Currently, the
Company does not anticipate that SFAS No. 133 will have a material impact on its
financial position, results of operation or liquidity. SFAS No. 133 is effective
on January 1, 2001.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Ernst & Young LLP (E&Y) resigned as our independent auditor on February
29, 2000. After discussions with the Securities and Exchange Commission, E&Y
determined that it could not meet the strict, SEC enforced technical
requirements for auditor independence due to certain bookkeeping work E&Y had
performed at three of our European subsidiaries. On March 1, 2000, we appointed
KPMG LLP as our independent auditor. You can find additional information about
this change in the Current Report on Form 8-K that we filed with the SEC on
March 3, 2000.
60
<PAGE>
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 one director to serve for a term of three years or until a qualified
successor director has been elected. The nominee for election at the Annual
Meeting (Jamie Wade) is currently on the Board. The remaining four directors
(Matthew Rizai, Michael Crow, Martin Vanderploeg and Laurence Kirshbaum) will
continue to serve on the Board as described below.
The nominee and continuing directors have provided the following
information about themselves.
Nominee
- -------
Jamie A. Wade
Age: 51
Director Since: 1995
Experience: Mr. Wade has served as our Vice President of Administration and
General Counsel 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
- ----------------------------------------------
Laurence J. Kirshbaum
Age: 55
Director Since: 1995
Experience: Mr. Kirshbaum has been Chairman of Time Warner Trade Publishing
since 1997. From 1984 to 1997, he was President and CEO of Warner Books Inc., a
subsidiary of Time Warner Inc. Mr. Kirshbaum is a director of Hoover's, Inc., an
Internet provider of company and industry information. Mr. Kirshbaum earned a
B.A. from the University of Michigan.
61
<PAGE>
Martin J. Vanderploeg, Ph.D.
Age: 43
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 from October 1997
until August 1999. 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.
Directors Continuing Until 2002 Annual Meeting
- ----------------------------------------------
Michael M. Crow, Ph.D.
Age: 44
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.
Matthew M. Rizai, Ph.D.
Age: 43
Director Since: 1990
Experience: Dr. Rizai has been our Chairman and Chief Executive Officer since
joining EAI in June 1990. He has been Treasurer since November 1995 and was the
President from June 1990 until November 1999. 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.
Information regarding our executive officers is contained in Part 1 of
this report under the title "Executive Officers of EAI."
62
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that our
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 1999, we believe that all filing requirements were met.
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.
<TABLE>
<CAPTION>
Summary Compensation
Long-Term
Compensation
------------
Number of
Annual Compensation Securities
------------------------------ Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options Compensation ($)
- ---------------------------- ------ ------------------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Matthew M. Rizai 1999 395,000 - 320,000 (1) 10,153 (2)
Chief Executive Officer 1998 295,000 200,000 60,000 8,569 (2)
and Treasurer 1997 235,000 205,000 - 8,062 (2)
Robert M. Nierman 1999 184,524 109,615 265,000 2,086 (4)
Chief Operating Officer and
President (3)
Martin J. Vanderploeg 1999 395,000 - 320,000 (1) 10,153 (5)
Executive Vice President 1998 295,000 200,000 60,000 8,483 (5)
1997 235,000 205,000 - 8,062 (5)
Jamie A. Wade 1999 200,000 - 28,000 (6) 3,958 (7)
Vice President of Administration, 1998 155,000 40,000 6,000 2,746 (7)
General Counsel and Secretary 1997 140,000 30,000 - 2,069 (7)
Jerome M. Behar 1999 200,000 - 8,000 (6) 3,889 (8)
Vice President of Finance 1998 150,000 50,000 13,500 3,658 (8)
and Chief Financial Officer 1997 78,750 20,000 54,750 3,115 (8)
</TABLE>
[FN]
(1) Includes 200,000 options cancelled in 1999.
(2) Consists of $6,953, $3,463 and $3,128 of premiums on a life insurance
policy paid in 1999, 1998 and 1997, and $3,200, $5,106 and $4,934 of
matching contributions by EAI to the Engineering Animation, Inc.
Retirement Plan made in 1999, 1998 and 1997.
(3) Mr. Nierman began working at EAI in May 1999.
63
<PAGE>
(4) Consists of premiums on a life insurance policy paid in 1999.
(5) Consists of $6,953, $3,463 and $3,128 of premiums on a life insurance
policy paid in 1999, 1998 and 1997, and $3,200, $5,020 and $4,934 of
matching contributions by EAI to the Engineering Animation, Inc. Retirement
Plan made in 1999, 1998 and 1997.
(6) Includes 8,000 shares of performance based grants that fully lapsed on
February 9, 2000, due to Company performance criteria not being met.
(7) Consists of $1,648, $686 and $609 of premiums on a life insurance policy
paid in 1999, 1998 and 1997, and $2,310, $2,060 and $1,460 of matching
contributions by EAI to the Engineering Animation, Inc. Retirement Plan
made in 1999, 1998 and 1997.
(8) Consists of $689, $333 and $112 of premiums on a life insurance policy paid
in 1999, 1998 and 1997, and $3,200, $3,325 and $750 of matching
contributions by EAI to the Engineering Animation, Inc. Retirement Plan
made in 1999, 1998 and 1997, and $2,253 paid in 1997 for taxable relocation
expenses. Mr. Behar was employed from June 1, 1997 until February 29, 2000.
</FN>
OPTION GRANTS IN 1999
This table provides information relating to the 1999 stock option
grants to the executive officers listed in the Summary Compensation Table.
<TABLE>
<CAPTION>
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 Expiration ---------------------------
Name Granted (#) Year $/Share Date 5% ($) 10% ($)
- ------------------- ---------------------- ------------- -------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Matthew M. Rizai 120,000 6.71 44.25 2/09/09 5,575,500 5,841,000
200,000 (1) 11.18 19.69 6/28/09 4,134,480 4,331,360
------------- ----- ----------- -----------
Total 320,000 17.89 9,709,980 10,172,360
============= ===== =========== ===========
Robert M. Nierman 225,000 12.58 15.91 4/30/09 3,758,029 3,936,983
40,000 2.24 8.44 11/4/09 354,396 371,272
------------- ----- ----------- ----------
Total 265,000 14.82 4,112,425 4,308,255
============= ===== =========== ==========
Martin J. Vanderploeg 120,000 6.71 44.25 2/09/09 5,575,500 5,841,000
200,000 (1) 11.18 19.69 6/28/09 4,134,480 4,331,360
------------- ----- ----------- -----------
Total 320,000 17.89 9,709,980 10,172,360
============= ===== =========== ==========
Jamie A. Wade 8,000 (2) 0.45 44.25 2/09/09 371,700 389,400
20,000 1.12 8.44 11/04/09 177,198 185,636
------------- ----- ----------- -----------
Total 28,000 1.57 548,898 575,036
============= ===== =========== ==========
Jerome M. Behar 8,000 (2) 0.45 29.75 2/09/09 249,900 261,800
============= ===== =========== ==========
</TABLE>
[FN]
(1) Grant that was cancelled in 1999.
(2) Performance based grant that fully lapsed on February 9, 2000, due to
Company performance criteria not being met.
</FN>
64
<PAGE>
AGGREGATED OPTION EXERCISES
IN 1999 AND FISCAL
YEAR-END OPTION VALUES
This table provides information regarding the exercise of stock options
during 1999 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 our 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 $8.75 (the last reported market
price of our common stock on December 31, 1999) multiplied by the number of
shares underlying the option. An option is in-the-money if the market value of
the common stock subject to the option is greater than the exercise price.
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1999
and Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at FY-End (#) at FY-End ($)
Acquired on Value ----------------------------- ---------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ------------ ------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Matthew M. Rizai -- -- 274,289 180,000 1,149,349 --
Robert M. Nierman -- -- -- 265,000 -- 12,480
Martin J. Vanderploeg -- -- 363,903 180,000 1,814,016 --
Jamie A. Wade 25,300 449,984 13,500 41,200 (1) 31,825 40,440
Jerome M. Behar -- -- 28,571 45,499 (1) -- --
</TABLE>
[FN]
(1) Includes 8,000 shares of performance based grants that fully lapsed on
February 9, 2000, due to Company performance criteria not being met.
</FN>
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Our employment agreements with the named executive officers generally
state the executives' compensation for their first year of employment, after
which their base salaries are reviewed annually, with the executives receiving
annual performance bonuses as determined by the Board of Directors. Mr.
Nierman's agreement states that his term of employment expires in May 2001.
We also have severance arrangements with the named executive officers.
Executive officers would receive a lump sum payment equal to the sum of their
base salary and bonus paid in the prior year. Drs. Rizai and Vanderploeg's
agreements provide for two-times this amount. Mr. Nierman would receive
three-times his then current annual salary and bonus, or two-times this amount
if a change in control occurred after the first 18 months of his employment.
Each of the agreements also provides for additional employee benefits and earned
bonuses. The vesting of stock options held by Drs. Rizai and Vanderploeg and Mr.
Nierman's would accelerate, with registration rights.
Severance is triggered if we terminate an executive's employment
without cause or if an executive terminates employment for good reason, which
includes a change in control. In some instances, severance is payable upon an
executive's death or permanent disability. Mr. Nierman's severance would trigger
if he were to terminate his employment for good reason or there were a change in
control.
65
<PAGE>
DIRECTOR COMPENSATION
Directors who are 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.
Our two 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 our 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 our 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 our common stock the directors, the
named executive officers and all executive officers and directors as a group
beneficially owned as of March 31, 2000. The named executive officers include
the Chief Executive Officer and the four other most highly compensated executive
officers based on compensation earned during 1999. To our knowledge, no other
person is a beneficial owner of more than 5% of our 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 currently exercisable 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.
66
<PAGE>
<TABLE>
<CAPTION>
Stock Options
Shares of Exercisable
Common Stock Within Sixty Days Percent
Named Executive Officers and Directors Owned After 3/31/00 of Class
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jerome M. Behar (1) 150 66,250 *
Michael M. Crow 63,948 25,200 *
Laurence J. Kirshbaum - 23,250 *
Robert M. Nierman - 56,250 *
Matthew M. Rizai (2), (3) 467,639 319,289 6.4%
Martin J.Vanderploeg (2) 378,026 408,903 6.3%
Jamie A. Wade (4) 44,049 17,100 *
All directors and executive officers as a group
(10 persons) 1,419,769 950,367 19.3%
</TABLE>
[FN]
* Less than one percent
(1) Mr. Behar's employment at EAI ended February 29, 2000.
(2) Address: c/o Engineering Animation, Inc., 2321 North Loop Drive, Ames,
Iowa 50010.
(3) Held by the Matthew Rizai Family Limited Partnership.
(4) Includes 6,249 shares held in Mr. Wade's Individual Retirement Account.
</FN>
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
67
<PAGE>
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:
Page
Report of KPMG LLP.................................................33
Report of Ernst & Young LLP........................................34
Consolidated Balance Sheets - December 31, 1999 and 1998...........35
Consolidated Statements of Operations - years ended December 31,
1999, 1998 and 1997 ...............................................36
Consolidated Statements of Stockholders' Equity and Other
Comprehensive Income (Loss)-years ended December 31, 1999, 199
and 1997...........................................................37
Consolidated Statements of Cash Flows - years ended December 31,
1999, 1998 and 1997................................................38
Notes to Consolidated Financial Statements.........................39
(a)(2) Financial Statement Schedule
Schedule II
(a)(3) List of Exhibits
Exhibit
Number Description
------ ------------------
2 Purchase and Sale Agreement with Dassault Systemes S.A.,
dated as of February 29, 2000 1
3.1 Certificate of Incorporation, as amended 2
3.2 By-laws, as amended 3
4 Rights Agreement with First Chicago Trust Company of
New York, dated as of January 1, 1996 4
10.1 Amended and Restated 1994 Stock Option Plan 5
10.2 Non-Employee Directors Stock Option Plan 4, 5
10.3 Matthew M. Rizai Employment and Severance Agreements,
dated as of January 1, 1996, and Option Agreements, dated
June 9, 1994 and February 11, 1995 4,5
10.4 Martin J. Vanderploeg Employment and Severance Agreements,
dated as of January 1, 1996, and Option Agreements, dated
June 9, 1994 and February 11, 1995 4,5
10.5 Jamie A. Wade Employment and Severance Agreements, dated
as of January 1, 1996, and Option Agreement, dated
February 11, 1995 4,5
68
<PAGE>
10.6 Robert M. Nierman Employment Agreement 6, dated April 21,
1999, and Option Agreement, dated April 30, 1999 5
10.7 Jeff D. Trom Employment and Severance Agreements, dated as
of January 1, 1996 4, 5
10.8 Jerome M. Behar Employment Agreement 7, dated as of May 2,
1997, and Addendum to Employment Agreement 6, dated
August 2, 1999 5
10.9 Robert L. Cyr Option Agreement, dated December 27, 1999 5
10.10 Ground Lease Agreement with Iowa State University Research
Park Corporation, dated June 1, 1995 4
10.11 Mortgage with CRE, Inc., dated June 29, 1995 4
10.12 Lease Assignment and Agreement with CRE, Inc., dated
June 14, 1995 4
10.13 Lease Agreement with CRE, Inc., dated June 14, 1995 4
21 Subsidiaries
23.1 Consent of KPMG LLP
23.2 Consent of Ernst & Young LLP
27 Financial Data Schedules
- -----------------------------
[FN]
1 Incorporated herein by reference from our Current Report
on Form 8-K dated March 24, 2000.
2 Incorporated herein by reference from our Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
3 Incorporated herein by reference from our Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999.
4 Incorporated herein by reference from our Registration
Statement on Form S-1, SEC file no. 33-80705.
5 Denotes compensatory plan.
6 Incorporated herein by reference from our Quarterly
Report on Form 10-Q for the fiscal quarter ended
September 30, 1999.
7 Incorporated herein by reference from our Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
</FN>
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the last quarter of
1999.
69
<PAGE>
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors and Shareholders
Engineering Animation, Inc.:
Under the date of March 24, 2000, we reported on the consolidated balance sheets
of Engineering Animation, Inc. and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for the year then ended, as contained
in the 1999 annual report to shareholders. These consolidated financial
statements and our report thereon are incorporated by reference in the annual
report on Form 10-K for the year 1999. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audit.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Minneapolis, Minnesota
March 24, 2000
70
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
ENGINEERING ANIMATION,INC.
December 31, 1999
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
Balance at Charged to Charged to Balance at
Beginning of Costs Other End of
Description Period and Expenses Accounts Deductions Period
----------------- -------------- -------------- ----------- ---------
Year Ended December 31, 1999
Deducted from assets accounts:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 300 $ 1,739 $ - $ 1,325 (1) $ 714
--------------------------------------------------------------------- ------------
Total $ 300 $ 1,739 $ - $ 1,325 $ 714
===================================================================== ============
Year Ended December 31, 1998
Deducted from assets accounts:
Allowance for doubtful accounts $ 158 $ 138 $ 181 $ 177 (1) $ 300
--------------------------------------------------------------------- ------------
Total $ 158 $ 138 $ 181 $ 177 $ 300
===================================================================== ============
Year Ended December 31, 1997
Deducted from assets accounts:
Allowance for doubtful accounts $ 57 $ 146 $ - $ 45 (1) $ 158
--------------------------------------------------------------------- ------------
Total $ 57 $ 146 $ - $ 45 $ 158
===================================================================== ============
<FN>
(1) Uncollectible accounts written off, net of recoveries
</FN>
</TABLE>
71
<PAGE>
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 April 14, 2000.
ENGINEERING ANIMATION, INC.
By: /s/ Michael K. O'Gara
Michael K. O'Gara
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 April 14, 2000 by the following persons on
behalf of the Registrant in the capacities indicated.
Signature Title
/s/ Matthew M. Rizai Chairman, Chief Executive Officer
- --------------------------------------------- and Director (Principal Executive
Officer)
Matthew M. Rizai
/s/ Martin J. Vanderploeg Director
- --------------------------------------------
Martin J. Vanderploeg
/s/ Michael K. O'Gara Vice President of Finance and
- -------------------------------------------- Chief Financial Officer
Michael K. O'Gara (Principal Financial and
Accounting Officer)
/s/ Jamie A. Wade Director
- -------------------------------------------
Jamie A. Wade
/s/ Michael M. Crow Director
- -------------------------------------------
Michael M. Crow
/s/ Lawrence J. Kirshbaum Director
- ------------------------------------------
Lawrence J. Kirshbaum
72
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------
10.2 Amended and Restated 1994 Stock Option Plan
10.6 Robert M. Nierman Option Agreement, dated April 30, 1999
10.9 Robert L. Cyr Option Agreement, dated December 27, 1999
21 Subsidiaries
23.1 Consent of KPMG LLP
23.2 Consent of Ernst & Young LLP
27 Financial Data Schedules
73
EXHIBIT 10.2
ENGINEERING ANIMATION, INC.
STOCK OPTION PLAN
(As Amended and Restated Effective February 10, 1999)
1. Purpose. The purpose of Engineering Animation, Inc. Stock Option
Plan (the "Plan"), as hereinafter set forth, is to enable Engineering Animation,
Inc., a Delaware corporation (the "Company"), to attract, retain and reward
corporate officers and managerial and other significant employees, and
non-employees (other than non-employee directors) who have an ongoing consultant
or independent contractor relationship with the Company, by offering them an
opportunity to have a greater proprietary interest in and closer identity with
the Company and with its financial success.
Options granted under this Plan may be incentive or non-qualified
(collectively referred to as "Options"). Proceeds of cash or Company Stock
received by the Company from the sale of Common Stock of the Company pursuant to
Options granted under the Plan will be used for general corporate purposes.
2. Administration. The Plan shall be administered by a Committee
consisting of two or more members of the Board of Directors of the Company who
are appointed from time to time by said Board of Directors (the "Committee").
Subject to the express provisions of the Plan, the Committee shall have the
power to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions of
Participants' individual option agreements (which need not be identical) and to
make such other determinations as it deems necessary or advisable in carrying
out the administration of the Plan. All decisions of the Committee on matters
within its jurisdiction shall be conclusive and binding. To the extent required
to comply with the relevant provisions of Rule 16b-3 under the Securities
Exchange Act of 1934, each member of the Committee shall qualify as a
"non-employee director," as defined in Rule 16b-3 or in any successor definition
adopted by the Securities and Exchange Commission. No member of the Board of
Directors or the Committee shall be liable for any action taken or determination
made in good faith.
3. Definitions. Whenever used in this Agreement, the
following terms shall have the meanings set forth below:
(a) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934.
(b) "Change in Control" of the Company shall be deemed to have
occurred if the conditions set forth in any one or more of the
following paragraphs shall have been satisfied:
(i) Any Person other than a trustee or other
fiduciary holding securities under an employee benefit plan of
the Company, or a corporation owned directly or indirectly by
the stockholders of the Company in substantially the same
proportions as their ownership of Shares of the Company, or
other than a Person whose stock ownership is approved by a
vote of two-thirds (2/3) of the Directors who are not
affiliated with such Person), becomes the Beneficial Owner,
directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the
Company's then outstanding securities; or
(ii) During any period of two consecutive fiscal
years, individuals who at the beginning of such period
constitute the Board of Directors (and any new Director, whose
election the Board of Directors was approved by a vote of at
least two-thirds (2/3) of the Directors then still in office
who either were Directors at the beginning of the period or
whose election was previously so approved), cease for any
reason to constitute a majority thereof; or
(iii) The stockholders of the Company approve (a) a
plan of complete liquidation of the Company; or (b) an
agreement for the sale or disposition of all or substantially
all the Company's assets; or (c) a merger or consolidation of
the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity), at
least 50% of the combined voting securities of the Company (or
such surviving entity) outstanding immediately after such
merger or consolidation;
(iv) The Board of Directors agrees by a two-thirds
(2/3) vote, that a Change in Control of the Company has
occurred.
However, in no event shall a Change in Control be deemed to have
occurred, with respect to a Participant, if that Participant is part of
a purchasing group which consummates the Change in Control transaction.
A Participant shall be deemed "part of a purchasing group" for purposes
of the preceding sentence if the Participant is an equity participant
or has agreed to become an equity participant in the purchasing company
or group (except for (i) passive ownership of less than 3% of the
shares of the purchasing company; or (ii) ownership or equity
participation in the purchasing company or group which is otherwise not
deemed to be significant, as determined prior to the Change in Control
by a majority of the disinterested Directors of the Company).
(c) "Common Stock" shall mean the Company's $0.01 par
value common stock.
(d) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Securities Exchange Act of 1934 and used in
Sections 13(d) and 14(d) thereof, including a group defined in Section
13(d).
4. Eligibility. Options may be granted under this Plan to any employee
of the Company or its subsidiaries whose participation the Committee determines
is in the best interest of the Company, including employees who are officers
and/or members of the Board of Directors, and to any nonemployee who is a
consultant or independent contractor to the Company whose participation the
Committee determines is in the best interests of the Company ("Participants");
provided, however, that no incentive options shall be granted to anyone who is
not an employee of the Company and no non-employee member of the Board of
Directors shall be eligible to receive any new Option grant hereunder. The
Committee shall have absolute discretion to determine, within the limits of the
express provisions of the Plan, those Participants to whom and the time or times
at which Options shall be granted. The Committee shall also determine the number
of shares to be subject to each Option, the duration of each Option, the
exercise price (Option price) under each Option, the time or times within which
(during the term of the Option) all or portions of each Option may be exercised,
and whether cash or Common Stock may be accepted in full or partial payment upon
exercise of an Option. In making such determination, the Committee may take into
account the nature of the services rendered by the Participant, his or her
present and potential contributions to the Company's success and such other
factors as the Committee in its discretion shall deem relevant; provided,
however, that no Option granted under this Plan may become exercisable prior to
six (6) months following the date it is granted.
5. Common Stock. The number of shares of Common Stock with respect to
which Options may be granted under the Plan shall not exceed, in the aggregate,
2,335,000 shares, subject to adjustment in accordance with the provisions of
Section 12 of the Plan; provided, however, the maximum number of shares of
Common Stock with respect to which Options may be granted to any one individual
in any calendar year may not exceed 500,000 shares.
In the event that any Option granted under the Plan expires
unexercised, is surrendered by a Participant for cancellation or is terminated
or ceases to be exercisable for any other reason without having been fully
exercised prior to the end of the period during which Options may be granted
under the Plan, the shares subject to such Option, or to the unexercised portion
thereof, shall again become available for new Options to be granted under the
Plan to any eligible Participant (including the holder of such former Option) at
an Option price determined in accordance with Section 6(a) or Section 7(a)
hereof, as appropriate, which price may then be greater or less than the Option
price of such former Option. Any shares of Common Stock that are surrendered or
withheld in payment of the exercise price of an Option or that are surrendered
or withheld in satisfaction of any tax liabilities resulting from the exercise
of an Option will be added to the aggregate number of shares of Common Stock
available for new Option grants hereunder.
6. Required Terms and Conditions of Incentive Options. The incentive
options granted under this Plan are intended to be "incentive stock options"
within the meaning of that term in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and the provisions of each incentive option
granted shall be interpreted in a manner consistent with Section 422 and with
all valid regulations issued thereunder. Such incentive options shall be granted
in such form and upon such terms and conditions, including provisions as to the
treatment of outstanding incentive options upon the occurrence of a Change in
Control, as the Committee shall from time to time determine, subject to the
general provisions of the Plan, and the following specific rules:
(a) Option Price. The purchase price per share of Common Stock
subject to an incentive option shall be fixed by the Committee, but
shall not be less than 100% of the Fair Market Value per share of
Common Stock at the time the incentive option is granted. However, if
an eligible Participant on the date that an option is granted owns,
directly or indirectly, within the meaning of Section 424(d) of the
Code, stock representing more than 10% of the voting power of all
classes of stock of the Company, then the purchase price per share
shall in no instance be less than 110% of the Fair Market Value per
share of Common Stock at the time the incentive option is granted;
provided further, however, that the incentive option price shall in no
event be less than the par value of the Common Stock subject to such
incentive option. See Section 8 below for determination of "Fair Market
Value."
(b) Maximum Term. Notwithstanding anything herein to the
contrary, no incentive option shall be exercisable after the expiration
of ten years from the date it is granted and no incentive option shall
be exercisable after the expiration of five years in the case a
Participant who at the time of grant owns (directly or indirectly,
including the shares purchasable under such incentive option) stock of
the Company possessing more than 10% of the total combined voting power
of all classes of stock of the Company.
(c) Time of Exercise. The Committee shall determine the
duration of each incentive option and the time or times within which
(during the term of the incentive option) all or portions of each
incentive option may be exercised, except to the extent that other
terms of exercise are specifically provided by other provisions of the
Plan.
(d) Value of Shares. The aggregate Fair Market Value
(determined at the date of grant) of the incentive options exercisable
for the first time by a Participant during any calendar year shall not
exceed $100,000 or any other limit imposed by the Code.
(e) Limitations on Dispositions. To retain incentive option
tax treatment, stock received upon exercise of an incentive option may
not be disposed of prior to the later of two years from the date the
incentive option was granted or one year from the date the shares are
transferred to the Participant upon exercise of the incentive option.
7. Required Terms and Conditions of Nonqualified Options. The
nonqualified options granted under the Plan shall be in such form and upon such
terms and conditions, including provisions as to the treatment of outstanding
nonqualified options upon the occurrence of a Change in Control, as the
Committee shall from time to time determine, subject to the general provisions
of the Plan, and the following specific rules:
(a) Option Price. The option price of each option to
purchase Common Stock shall be 100% of the
Fair Market Value per share of Common Stock at the date the option is
granted.
(b) Maximum Term. No option shall be exercisable after
the expiration of fifteen (15) years from the date it is granted,
except as provided in Section 10(b), (c), (d) or (e).
(c) Time of Exercise. The Committee shall determine the
duration of each Option and the time or times within which (during the
term of Option) all or portions of each Option may be exercised, except
to the extent that other terms of exercise are specifically provided by
other provisions of the Plan; provided, however, that no Option granted
under this Plan may become exercisable prior to six (6) months
following the date it is granted.
8. Fair Market Value. "Fair Market Value" shall be the amount
determined by the Committee from time to time, using such good faith valuation
methods as it deems appropriate, except that as long as the Common Stock is
traded on NASDAQ or a recognized stock exchange, it shall mean the average of
the highest and lowest quoted selling prices for the Shares on the relevant
date, or (if there were no sales on such date) the weighted average of the means
between the highest and the lowest quoted selling prices on the nearest day
before and the nearest day after the relevant date, as prescribed by Treasury
Regulation 20.2031-2(b)(2), as reported in the Wall Street Journal or a similar
publication selected by the Committee.
9. Conversion and Modification. The Company retains the right to
convert incentive options to nonqualified options. The Company may modify grants
of options to Participants who are foreign nationals or employed outside the
United States to fulfill Plan purposes and recognize differences in local law,
tax policy and custom.
10. Expiration of Option.
(a) General Rule. Except with respect to Options expiring
pursuant to Section 10(b), (c), (d) or (e), each Option shall expire on
the first to occur of: (i) the tenth anniversary in the case of
incentive Options, or the fifteenth anniversary in the case of
nonqualified Options, of the date of grant thereof, or (ii) the
expiration date or dates set forth in the applicable Option agreement.
(b) Expiration Upon Termination of Employment. Except with
respect to Options expiring pursuant to Section 10(c), (d) or (e), an
Option shall expire on the first to occur of the applicable date or
dates determined pursuant to Section 10(a) or the date that the
employment or relationship of the Participant with the Company
terminates. Notwithstanding the preceding provisions of this Section
10(b), the Committee, in its sole discretion, may permit such a
Participant to exercise an Option during a period following his or her
termination of employment, which period shall not exceed three months.
In no event, however, may the Committee permit such Participant to
exercise an Option under this Section 10(b) after the expiration date
computed under Section 10(a).
(c) Expiration Upon Disability or Death. If the employment or
relationship of a Participant with the Company terminates by reason of
disability (as determined in the discretion of the Committee) or by
reason of death, his or her Options, if any, shall expire after the
first to occur of the expiration date computed under Section 10(a) or
the one-year anniversary of termination of employment or relationship
by reason of disability or death.
(d) Expiration Upon Retirement. If the employment of a
Participant with the Company terminates due to "retirement," as defined
below, with the consent of the Committee, his or her Options, if any,
shall expire on the first to occur of the applicable date or dates
determined pursuant to Section 10(b). If a Participant who has so
retired dies prior to exercising in full an Option which has not
expired pursuant to the preceding sentence, then, notwithstanding the
preceding sentence, his or her Options shall expire after the first to
occur of the expiration date computed under Section 10(a) or the
one-year anniversary of the date of the Participant's death.
"Retirement" for purposes of this Plan shall mean the termination of
employment of a Participant with the Company on or after the date a
Participant attains age 65.
(e) Expiration Upon Termination for Cause. If the employment
or relationship of a Participant is terminated by the Company for
substantial cause, the Participant's right to exercise his or her
Options shall terminate at the time notice of termination of
employment, or cancellation of relationship, is given by the Company to
such Participant. For purposes of this provision, substantial cause
shall include:
(i) The commission of an action against or in
derogation of the interests of the Company which, if proven in
a court of law, would constitute a violation of a criminal
code or similar law;
(ii) Divulging the Company's confidential
information; or
(iii) The performance of any similar action that the
Committee, in its sole discretion, may deem to be sufficiently
injurious to the interest of the Company to constitute
substantial cause for termination.
11. Method of Exercise. Options may be exercised by giving written
notice to the Corporate Secretary of the Company, stating the number of shares
of Common Stock with respect to which the Option is being exercised and
tendering payment therefor. The exercise price of an Option shall be paid in
full at the time that the Option, or any part thereof, is exercised. Subject to
the approval of the Committee, payment may be made (i) in cash, (ii) through the
surrender of previously acquired shares of Common Stock having a Fair Market
Value equal to the exercise price of the Option or the withholding of shares of
Common Stock having a Fair Market Value equal to the exercise price of the
Option, or (iii) a combination of (i) and (ii).
12. Adjustments.
(a) The aggregate number of shares of Common Stock with
respect to which Options may be granted hereunder, the number of shares
of Common Stock subject to each outstanding Option and the Option price
per share for each such Option may all be appropriately adjusted, as
the Committee may determine, for any increase or decrease in the number
of shares of issued Common Stock of the Company resulting from a
subdivision or consolidation of shares whether through reorganization,
payment of a share dividend or other increase or decrease in the number
of such shares outstanding effected without receipt of consideration by
the Company, distribution of assets to stockholders, or the assumption
and conversion of outstanding options in an acquisition of the Company;
provided, however, that no adjustment in the number of shares with
respect to which Options may be granted under the Plan or in the number
of shares subject to outstanding Options shall be made except in the
event that such adjustment, together with all respective prior
adjustments which were not made as a result of this provision, involve
a net change of more than 10%.
(b) Subject to any required action by the stockholders, if the
Company shall be a party to a transaction involving a sale of
substantially all its assets, a merger or a consolidation, any Option
granted hereunder shall pertain to and apply to the securities to which
a holder of the number of shares of Common Stock subject to the Option
would have been entitled if the Participant actually owned the stock
subject to the Option immediately prior to the time any such
transaction became effective; provided, however, that all unexercised
Options under the Plan may be canceled by the Company as of the
effective date of any such transaction by giving notice to the holders
thereof of its intention to do so and by permitting the exercise,
during the 30-day period preceding the effective date of such
transaction, of all partly or wholly unexercised Options in full
(without regard to installment exercise limitations). This provision
shall apply provided that the Participant is not terminated for cause.
(c) In the case of dissolution of the Company, every Option
outstanding hereunder shall terminate; provided, however, that each
Participant shall have 30 days' prior written notice of such event,
during which time the holder shall have a right to exercise the partly
or wholly unexercised Option (without regard to installment exercise
limitations).
(d) On the basis of information known to the Company, the
Committee shall make all determinations under this Section 12,
including whether a transaction involves a sale of substantially all
the Company's assets, and all such determinations shall be conclusive
and binding.
13. Option Agreements. Each Participant shall agree to such terms and
conditions in connection with the exercise of an Option, including restrictions
on the disposition of the Common Stock acquired upon the exercise thereof, as
the Committee may deem appropriate. Option agreements need not be identical. The
certificates evidencing the shares of Common Stock acquired upon exercise of an
Option may bear a legend referring to the terms and conditions contained in the
respective Option agreement and the Plan, and the Company may place a stop
transfer order with its transfer agent against the transfer of such shares. If
requested to do so by the Committee at the time of exercise of an Option, each
Participant shall execute a certificate indicating that he or she is purchasing
the Common Stock under such Option for investment and not with any present
intention to sell the same.
14. Withholding of Taxes. Upon the exercise of an Option, the Company
may deduct any Federal, state or local taxes required by law to be withheld with
respect to such exercise. Any holder of an Option may elect to surrender shares
of Common Stock previously acquired by the holder or to have the Company
withhold shares that would have otherwise been issued to the holder pursuant to
the exercise of an Option, the number of such withheld or surrendered shares to
be sufficient to satisfy all or a portion of the income tax liability that
arises upon such exercise.
15. Legal and Other Requirements. The obligation of the Company to sell
and deliver Common Stock under Options granted under the Plan shall be subject
to all applicable federal and state laws, regulations, rules and approvals. A
Participant shall have no rights as a stockholder with respect to any shares
covered by an Option granted to or exercised by him or her until the date of
delivery of a stock certificate to him or her for such shares. No adjustment
other than pursuant to Section 12 hereof shall be made for dividends or other
rights for which the record date is prior to the date such stock certificate is
delivered.
16. Nontransferability. During the lifetime of a Participant, any
Option granted to him or her shall be exercisable only by him or her or by his
or her guardian or legal representative. No Option shall be assignable or
transferable, except by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Internal
Revenue Code or the Employee Retirement Income Security Act. The granting of an
Option shall impose no obligation upon the Participant to exercise such Option.
17. Indemnification of Committee. In addition to such other rights of
indemnification as they may have as members of the Board of Directors or as
members of the Committee, the members of the Committee shall be indemnified by
the Company against the reasonable expenses, including attorneys' fees actually
and necessarily incurred in connection with the defense of any action, suit or
proceeding (or in connection with any appeal therein), to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding that such
Committee member is liable for gross negligence or misconduct in the performance
of his or her duties; provided, that within 60 days after institution of any
such action, suit or proceeding, Committee members shall in writing offer the
Company the opportunity, at its own expense, to handle and defend the same.
18. No Contract of Employment. Neither the adoption of this Plan nor
the grant of any Option shall be deemed to obligate the Company to continue the
employment or relationship of any Participant for any particular period, nor
shall the granting of an Option constitute a request or consent to postpone the
retirement date of any Participant.
19. Termination and Amendment of Plan. No Incentive Options shall be
granted under the Plan more than ten years after the date the Plan was adopted
by the Board of Directors. The Board of Directors, acting by a majority of its
members, without further action on the part of the stockholders, may from time
to time alter, amend or suspend the Plan or any Option granted hereunder or may
at any time terminate the Plan; provided, however, the Board of Directors may
not materially increase the number of shares of Common Stock subject to the Plan
(except as provided in Section 12 hereof), and provided further that no such
action shall materially and adversely affect any outstanding Options without the
consent of the respective Participants.
20. Effective Date of Plan. The Plan as adopted by the Board of
Directors and approved by stockholders was originally effective as of June 9,
1994 and was amended and restated as of January 1, 1996 and May 1, 1997. This
amendment and restatement of the Plan is effective February 10, 1999, subject to
the approval of the Company's stockholders.
ENGINEERING ANIMATION, INC.
EXHIBIT 10.6
1999 NONQUALIFIED STOCK OPTION AGREEMENT
(NON-PLAN OPTION)
THIS AGREEMENT is made as of the 30th day of April, 1999 (the "Grant
Date") between ENGINEERING ANIMATION, INC., a Delaware corporation (the
"Company"), and Robert Nierman (the "Optionee").
WITNESSETH:
WHEREAS, the Board of Directors of the Company recognizes the value of
granting stock options to employees of the Company a means of attracting,
retaining and rewarding persons of ability as key employees and motivating these
employees to exert their best efforts on behalf of the Company; and
WHEREAS, the Board of Directors of the Company (the "Board") has
decided to grant to the Optionee an option to purchase shares of the Company's
common stock, $0.01 par value per share ("Common Stock").
NOW THEREFORE, the parties hereby agree as follows:
1. Grant. The Company grants to the Optionee an option (the
"Option") to purchase 225,000 shares of the Company's Common Stock at a per-
share price of $15.907 (the "Option Price"), on the terms and subject to the
conditions set forth in this Agreement.
2. Timing and Duration of Exercise. Subject to the provisions of
Section 3 of this Agreement, the duration of the Option shall be for the period
beginning on the Grant Date and continuing through the close of business on the
10-year anniversary of the Grant Date (the "Option Period"). Except to the
extent otherwise provided in this Agreement, the Optionee shall become vested in
the Option as follows:
o Fifty-six thousand two hundred fifty (56,250) shares shall vest as of each
of the one-year, two-year, three-year, and four-year anniversaries of the
Grant Date.
The Option shall be exercisable by the Optionee at any time during the
Option Period to the extent it is vested.
<PAGE>
3. Exercise in the Event of Death or Other Termination.
---------------------------------------------------
(a) If the Optionee dies while an employee of the Company or
terminates the employment relationship with the Company because of
"permanent disability," as defined in Code Section 22(e)(3), the Option
may be exercised, to the extent that the Optionee could have done so at
the date of the Optionee's termination of employment because of death
or permanent disability (i.e., to the extent the Option is vested at
that time), by the person or persons to whom the Optionee's rights
under the Option pass by will or applicable law, or if no such person
has such right, by his/her executors or administrators, at any time, or
from time to time, within one year after the date of such termination
of employment or consulting or advisor relationship, but not later than
the expiration date specified in Section 5(c) of this Agreement.
(b) If the Optionee's employment shall terminate due to
"retirement" as defined below, the Optionee may exercise the Option, to
the extent that the Optionee could have done so at the date of the
Optionee's termination of employment due to retirement (i.e., to the
extent the Option is vested at that time), at any time, or from time to
time, within three months of such retirement but not later than the
expiration date specified in Section 5(c) of this Agreement. If the
Optionee dies following his/her retirement and prior to exercising the
portion of the Option that has not expired as of the date of his/her
death, then, notwithstanding the preceding sentence, that portion of
the Option shall remain exercisable until the first to occur of the
expiration date specified in Section 5(c) of this Agreement or one year
after the date of the Optionee's death. "Retirement" for purposes of
this Agreement shall mean the termination of the Optionee's employment
on or after the date he/she attains age 65.
(c) Notwithstanding anything in this Section to the contrary,
if the Optionee's employment relationship is terminated for cause,
his/her ability to exercise any portion of the Option shall terminate
on the date of his/her termination of employment. For this purpose,
termination for "cause" means
(i) the commission of an action against or in derogation of
the interests of the Company which, if proven in a court of
law, would constitute a violation of a criminal code or
similar law;
(ii) divulging the Company's confidential information; or
(iii) the performance of any similar action that the
Committee, in its sole discretion, may deem to be sufficiently
injurious to the interest of the Company to constitute cause
for termination.
(d) If the Optionee's employment is terminated for any reason other than
those described in subsections (a), (b) or (c) of this Section, he/she
may exercise the Option, to the extent that the Optionee could have
done so at the date of the Optionee's termination of employment (i.e.,
to the extent the Option is vested at that time), at any time, or from
time to time, within three months of the date of his/her termination of
employment, consulting or advisor relationship, but not later than the
end of the Option Period.
4. Method of Exercise. The Option, or any part of it, shall be
exercised by written notice directed to the Corporate Secretary of the Company
at the Company's principal office in Ames, Iowa. Such notice must satisfy the
following requirements:
(a) The notice must state the Grant Date, the number of shares
of Common Stock subject to the grant, the number of shares of Common
Stock with respect to which the Option is being exercised, the person
in whose name the stock certificate or certificates for such shares of
Common Stock is to be registered and the person's address and Social
Security number (or if more than one person, the names, addresses and
Social Security numbers of such persons).
(b) The notice shall be accompanied by check, bank draft,
money order or other cash payment or by delivery of a certificate or
certificates, properly endorsed, for shares of Common Stock equivalent
in Fair Market Value on the date of exercise to the Option Price, or by
a combination of cash and shares, in full payment of the Option Price
for the number of shares specified in the notice.
(c) The notice shall contain such representations and
agreements as to the holder's investment intent with respect to such
shares of Common Stock as may be satisfactory to the Board.
(d) The notice must be signed by the person or persons
entitled to exercise the Option and, if the Option is being exercised
by any person or persons other than the Optionee, be accompanied by
proof, satisfactory to the Board, of the right of such person or
persons to exercise the Option.
The exercise may be with respect to any one or more shares of Common
Stock covered by the Option, reserving the remainder for a subsequent timely
exercise. The Company shall make prompt delivery of such shares; provided that
if any law or regulation requires the Company to take any action with respect to
such shares before the issuance thereof, then the date of delivery of such
shares shall be extended for the period necessary to take such action; and
provided further that the Company shall have no obligation to deliver any such
certificate unless and until appropriate provision has been made for any
withholding taxes in respect of such exercise. The Optionee may elect to
surrender shares of Common Stock previously acquired by the Optionee or to have
the Company withhold shares that would have otherwise been issued pursuant to
the exercise of the Option in order to satisfy all or a portion of any such tax
withholding obligation.
5. Termination of Option; Bar to Exercise.
--------------------------------------
(a) The Board may at any time terminate the Option if it
shall, in the reasonable exercise of its judgment, find that the
Optionee has disclosed, without the written consent of an authorized
officer of the Company, to any person not employed by or engaged to
render services to the Company, any confidential information of the
Company or has engaged in competition with the Company or in any
activities otherwise contrary to the best interests of the Company. The
right to exercise this Option has been granted, and the compensation to
be realized in the event of exercise has been provided, upon the
express understanding that the Optionee shall refrain from engaging in
any activities contrary to the best interests of the Company.
(b) The Option may not be exercised if such exercise could
constitute a violation of any applicable federal, state or other law or
regulation.
(c) The Option may not be exercised after the last day of the
Option Period, as defined in Section 2 of this Agreement, subject to
the limitation in Section 3 of this Agreement, if applicable.
6. Change in Control. As of the effective date of any "Change in
Control," as defined below, the Option shall become fully vested and shall be
exercisable with respect to any portion of the shares of Common Stock subject
thereto at any time prior to the expiration date specified in Section 5(c) of
this Agreement (subject to Section 3 of this Agreement). For this purpose, a
"Change in Control" of shall be deemed to have occurred if the conditions set
forth in any one or more of the following paragraphs shall have been satisfied:
(a) Any Person other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or a
corporation owned directly or indirectly by the stockholders of the
Company in substantially the same proportions as their ownership of
Shares of the Company, or other than a Person whose stock ownership is
approved by a vote of two-thirds (2/3) of the Directors who are not
affiliated with such Person), becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding securities;
or
(b) During any period of two consecutive fiscal years,
individuals who at the beginning of such period constitute the Board of
Directors (and any new Director, whose election the Board of Directors
was approved by a vote of at least two-thirds (2/3) of the Directors
then still in office who either were Directors at the beginning of the
period or whose election was previously so approved), cease for any
reason to constitute a majority thereof; or
(c) The stockholders of the Company approve (a) a plan of
complete liquidation of the Company; or (b) an agreement for the sale
or disposition of all or substantially all the Company's assets; or (c)
a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity), at least 50%
of the combined voting securities of the Company (or such surviving
entity) outstanding immediately after such merger or consolidation; or
(d) The Board of Directors agrees by a two-thirds (2/3)
vote, that a Change in Control of the Company has occurred.
However, in no event shall a Change in Control be deemed to have
occurred, with respect to an Optionee, if that Optionee is part of a
purchasing group which consummates the Change in Control transaction.
An Optionee shall be deemed "part of a purchasing group" for purposes
of the preceding sentence if the Optionee is an equity participant or
has agreed to become an equity participant in the purchasing company or
group (except for (i) passive ownership of less than 3% of the shares
of the purchasing company; or (ii) ownership or equity participation in
the purchasing company or group which is otherwise not deemed to be
significant, as determined prior to the Change in Control by a majority
of the disinterested Directors of the Company).
7. Rights Not Conferred. The Option shall not be affected by any
change in the nature of the Optionee's employment with the Company so long as
the Optionee continues to be employed by the Company. Nothing contained in this
Agreement shall confer upon the Optionee any right with respect to continuance
of employment or other relationship with the Company or interfere in any way
with the right of the Company to terminate the employment of the Optionee at any
time.
8. Nontransferability. The Option shall not be transferable
other than by will or by the laws of descent and distribution. During the
lifetime of the Optionee, the Option shall be exercisable only by the Optionee
or by the Optionee's guardian or legal representative.
9. No Rights as a Stockholder. The Optionee shall not have any
rights as a stockholder with respect to any shares of Common Stock subject to
the Option prior to the date of issuance to the Optionee of a certificate or
certificates for such shares.
10. Option Subject to this Agreement. The granting of the Option is
being made pursuant to this Agreement and the Option shall be exercisable only
in accordance with the applicable terms of this Agreement. The Agreement
contains certain definitions, restrictions, limitations and other terms and
conditions all of which shall be applicable to the Option.
11. Adjustments in Event of Change in Common Stock. In the event of any
increase or decrease in the number of shares of issued Common Stock of the
Company resulting from a subdivision or consolidation of shares whether through
reorganization, payment of a share dividend or other increase or decrease in the
number of such shares outstanding effected without receipt of consideration by
the Company, distribution of assets to stockholders or the assumption and
conversion of outstanding options in an acquisition of the Company, the number
and kind of shares subject to the Option, and the Option Price may be
appropriately adjusted consistent with such change in such manner as the Board
may deem equitable to prevent substantial dilution or enlargement of the rights
granted to or available for the Optionee; provided, however, that no adjustment
in the number of shares subject to the Option shall be made, except in the event
that such adjustment, together with all respective prior adjustments that were
not made as a result of this provision, involve a net change of more than 10%.
12. Withholding of Taxes. Upon the exercise of an Option, the Company
may deduct any Federal, state or local taxes required by law to be withheld with
respect to such exercise. Any holder of an Option may elect to surrender shares
of Common Stock previously acquired by the holder or to have the Company
withhold shares that would have otherwise been issued to the holder pursuant to
the exercise of an Option, the number of such withheld or surrendered shares to
be sufficient to satisfy all or a portion of the income tax liability that
arises upon such exercise.
13. Severability. If any provision or portion of this Agreement shall
be determined to be invalid or unenforceable for any reason, the remaining
provisions of this Agreement shall be unaffected and shall remain in full force
and effect in such jurisdiction, and any such invalid or unenforceable provision
shall not be considered invalid or unenforceable in any other jurisdiction.
14. Binding Effect. This Agreement shall be binding upon the
heirs, executors, administrators and successors of the parties.
15. Administration. The Agreement shall be administered by a Committee
consisting of two or more members of the Board of Directors of the Company who
are appointed from time to time by said Board of Directors (the "Committee").
Subject to the express provisions of the Agreement, the Committee shall have the
power to interpret the Agreement, to prescribe, amend and rescind rules and
regulations relating to the Agreement, to determine the terms and provisions of
Optionee's individual option agreements (which need not be identical) and to
make such other determinations as it deems necessary or advisable in carrying
out the administration of the Agreement. All decisions of the Committee on
matters within its jurisdiction shall be conclusive and binding. To the extent
required to comply with the relevant provisions of Rule 16b-3 under the
Securities Exchange Act of 1934, each member of the Committee shall qualify as a
"non-employee director," as defined in Rule 16b-3 or in any successor definition
adopted by the Securities and Exchange Commission. No member of the Board of
Directors or the Committee shall be liable for any action taken or determination
made in good faith.
16. Other Definitions.
-----------------
(a) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934.
(b) "Common Stock" shall mean the Company's $0.01 par
value common stock.
(c) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Securities Exchange Act of 1934 and used in
Sections 13(d) and 14(d) thereof, including a group defined in Section
13(d).
EXHIBIT 10.9
ENGINEERING ANIMATION, INC.
1999 OFFICER PLAN NONQUALIFIED STOCK OPTION AGREEMENT
(NON-PLAN OPTION)
THIS AGREEMENT is made as of the 27th day of December, 1999 (the "Grant
Date") between ENGINEERING ANIMATION, INC., a Delaware corporation (the
"Company"), and Robert L. Cyr (the "Optionee").
WITNESSETH:
WHEREAS, the Board of Directors of the Company recognizes the value of
granting stock options to employees of the Company as a means of attracting,
retaining and rewarding persons of ability as key employees and motivating these
employees to exert their best efforts on behalf of the Company; and
WHEREAS, the Board of Directors of the Company (the "Board") has
decided to grant to the Optionee an option to purchase shares of the Company's
common stock, $0.01 par value per share ("Common Stock").
NOW THEREFORE, the parties hereby agree as follows:
1. Grant. The Company grants to the Optionee an option (the
"Option") to purchase 80,000 shares of the Company's Common Stock at a per-share
price of $8.282 (the "Option Price"), on the terms and subject to the conditions
set forth in this Agreement.
2. Timing and Duration of Exercise. Subject to the provisions of
Section 3 of this Agreement, the duration of the Option shall be for the period
beginning on the Grant Date and continuing through the close of business on the
10-year anniversary of the Grant Date (the "Option Period"). Except to the
extent otherwise provided in this Agreement, the Optionee shall become vested in
the Option as follows:
o Twenty thousand (20,000) shares shall vest as of each of the one-year,
two-year, three-year, and four-year anniversaries of the Grant Date.
The Option shall be exercisable by the Optionee at any time during the
Option Period to the extent it is vested.
<PAGE>
3. Exercise in the Event of Death or Other Termination.
---------------------------------------------------
(a) If the Optionee dies while an employee of the Company or
terminates the employment relationship with the Company because of
"permanent disability," as defined in Code Section 22(e)(3), the Option
may be exercised, to the extent that the Optionee could have done so at
the date of the Optionee's termination of employment because of death
or permanent disability (i.e., to the extent the Option is vested at
that time), by the person or persons to whom the Optionee's rights
under the Option pass by will or applicable law, or if no such person
has such right, by his/her executors or administrators, at any time, or
from time to time, within one year after the date of such termination
of employment or consulting or advisor relationship, but not later than
the expiration date specified in Section 5(c) of this Agreement.
(b) If the Optionee's employment shall terminate due to
"retirement" as defined below, the Optionee may exercise the Option, to
the extent that the Optionee could have done so at the date of the
Optionee's termination of employment due to retirement (i.e., to the
extent the Option is vested at that time), at any time, or from time to
time, within three months of such retirement but not later than the
expiration date specified in Section 5(c) of this Agreement. If the
Optionee dies following his/her retirement and prior to exercising the
portion of the Option that has not expired as of the date of his/her
death, then, notwithstanding the preceding sentence, that portion of
the Option shall remain exercisable until the first to occur of the
expiration date specified in Section 5(c) of this Agreement or one year
after the date of the Optionee's death. "Retirement" for purposes of
this Agreement shall mean the termination of the Optionee's employment
on or after the date he/she attains age 65.
(c) Notwithstanding anything in this Section to the contrary,
if the Optionee's employment relationship is terminated for cause,
his/her ability to exercise any portion of the Option shall terminate
on the date of his/her termination of employment. For this purpose,
termination for "cause" means
(i) the commission of an action against or in derogation of
the interests of the Company which, if proven in a court of
law, would constitute a violation of a criminal code or
similar law;
(ii) divulging the Company's confidential information; or
(iii) the performance of any similar action that the
Committee, in its sole discretion, may deem to be sufficiently
injurious to the interest of the Company to constitute cause
for termination.
(d) If the Optionee's employment is terminated for any reason other than
those described in subsections (a), (b) or (c) of this Section, he/she
may exercise the Option, to the extent that the Optionee could have
done so at the date of the Optionee's termination of employment (i.e.,
to the extent the Option is vested at that time), at any time, or from
time to time, within three months of the date of his/her termination of
employment, consulting or advisor relationship, but not later than the
end of the Option Period.
4. Method of Exercise. The Option, or any part of it, shall be
exercised by written notice directed to the Corporate Secretary of the
Company at the Company's principal office in Ames, Iowa. Such notice
must satisfy the following requirements:
(a) The notice must state the Grant Date, the number of shares
of Common Stock subject to the grant, the number of shares of Common
Stock with respect to which the Option is being exercised, the person
in whose name the stock certificate or certificates for such shares of
Common Stock is to be registered and the person's address and Social
Security number (or if more than one person, the names, addresses and
Social Security numbers of such persons).
(b) The notice shall be accompanied by check, bank draft,
money order or other cash payment or by delivery of a certificate or
certificates, properly endorsed, for shares of Common Stock equivalent
in Fair Market Value on the date of exercise to the Option Price, or by
a combination of cash and shares, in full payment of the Option Price
for the number of shares specified in the notice.
(c) The notice shall contain such representations and
agreements as to the holder's investment intent with respect to such
shares of Common Stock as may be satisfactory to the Board.
(d) The notice must be signed by the person or persons
entitled to exercise the Option and, if the Option is being exercised
by any person or persons other than the Optionee, be accompanied by
proof, satisfactory to the Board, of the right of such person or
persons to exercise the Option.
The exercise may be with respect to any one or more shares of Common
Stock covered by the Option, reserving the remainder for a subsequent timely
exercise. The Company shall make prompt delivery of such shares; provided that
if any law or regulation requires the Company to take any action with respect to
such shares before the issuance thereof, then the date of delivery of such
shares shall be extended for the period necessary to take such action; and
provided further that the Company shall have no obligation to deliver any such
certificate unless and until appropriate provision has been made for any
withholding taxes in respect of such exercise. The Optionee may elect to
surrender shares of Common Stock previously acquired by the Optionee or to have
the Company withhold shares that would have otherwise been issued pursuant to
the exercise of the Option in order to satisfy all or a portion of any such tax
withholding obligation.
5. Termination of Option; Bar to Exercise.
--------------------------------------
(a) The Board may at any time terminate the Option if it
shall, in the reasonable exercise of its judgment, find that the
Optionee has disclosed, without the written consent of an authorized
officer of the Company, to any person not employed by or engaged to
render services to the Company, any confidential information of the
Company or has engaged in competition with the Company or in any
activities otherwise contrary to the best interests of the Company. The
right to exercise this Option has been granted, and the compensation to
be realized in the event of exercise has been provided, upon the
express understanding that the Optionee shall refrain from engaging in
any activities contrary to the best interests of the Company.
(b) The Option may not be exercised if such exercise could
constitute a violation of any applicable federal, state or other law or
regulation.
(c) The Option may not be exercised after the last day of the
Option Period, as defined in Section 2 of this Agreement, subject to
the limitation in Section 3 of this Agreement, if applicable.
6. Change in Control. As of the effective date of any "Change in
Control," as defined below, the Option shall become fully vested and shall be
exercisable (subject to Section 3 of this Agreement) as follows: If a Change of
Control occurs prior to January 30, 2000, then 20,000 shares shall vest; if a
Change of Control occurs after January 30, 2000 and prior to March 30, 2000,
then 40,000 shares shall vest; if a Change of Control occurs after March 30,
2000 and prior to June 30, 2000, then 80,000 shares shall vest; if a Change of
Control occurs after June 30, 2000, then all 80,000 shares shall vest.
For this purpose, a "Change in Control" of shall be deemed to have
occurred if the conditions set forth in any one or more of the following
paragraphs shall have been satisfied:
(a) Any Person other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or a
corporation owned directly or indirectly by the stockholders of the
Company in substantially the same proportions as their ownership of
Shares of the Company, or other than a Person whose stock ownership is
approved by a vote of two-thirds (2/3) of the Directors who are not
affiliated with such Person), becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding securities;
or
(b) During any period of two consecutive fiscal years,
individuals who at the beginning of such period constitute the Board of
Directors (and any new Director, whose election the Board of Directors
was approved by a vote of at least two-thirds (2/3) of the Directors
then still in office who either were Directors at the beginning of the
period or whose election was previously so approved), cease for any
reason to constitute a majority thereof; or
(c) The stockholders of the Company approve (a) a plan of
complete liquidation of the Company; or (b) an agreement for the sale
or disposition of all or substantially all the Company's assets; or (c)
a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity), at least 50%
of the combined voting securities of the Company (or such surviving
entity) outstanding immediately after such merger or consolidation; or
(d) The Board of Directors agrees by a two-thirds (2/3)
vote, that a Change in Control of the Company has occurred.
However, in no event shall a Change in Control be deemed to have
occurred, with respect to an Optionee, if that Optionee is part of a
purchasing group which consummates the Change in Control transaction.
An Optionee shall be deemed "part of a purchasing group" for purposes
of the preceding sentence if the Optionee is an equity participant or
has agreed to become an equity participant in the purchasing company or
group (except for (i) passive ownership of less than 3% of the shares
of the purchasing company; or (ii) ownership or equity participation in
the purchasing company or group which is otherwise not deemed to be
significant, as determined prior to the Change in Control by a majority
of the disinterested Directors of the Company).
7. Rights Not Conferred. The Option shall not be affected by any
change in the nature of the Optionee's employment with the Company so long as
the Optionee continues to be employed by the Company. Nothing contained in this
Agreement shall confer upon the Optionee any right with respect to continuance
of employment or other relationship with the Company or interfere in any way
with the right of the Company to terminate the employment of the Optionee at any
time.
8. Nontransferability. The Option shall not be transferable
other than by will or by the laws of descent and distribution. During the
lifetime of the Optionee, the Option shall be exercisable only by the Optionee
or by the Optionee's guardian or legal representative.
9. No Rights as a Stockholder. The Optionee shall not have any
rights as a stockholder with respect to any shares of Common Stock subject to
the Option prior to the date of issuance to the Optionee of a certificate or
certificates for such shares.
10. Option Subject to this Agreement. The granting of the Option is
being made pursuant to this Agreement and the Option shall be exercisable only
in accordance with the applicable terms of this Agreement. The Agreement
contains certain definitions, restrictions, limitations and other terms and
conditions all of which shall be applicable to the Option.
11. Adjustments in Event of Change in Common Stock. In the event of any
increase or decrease in the number of shares of issued Common Stock of the
Company resulting from a subdivision or consolidation of shares whether through
reorganization, payment of a share dividend or other increase or decrease in the
number of such shares outstanding effected without receipt of consideration by
the Company, distribution of assets to stockholders or the assumption and
conversion of outstanding options in an acquisition of the Company, the number
and kind of shares subject to the Option, and the Option Price may be
appropriately adjusted consistent with such change in such manner as the Board
may deem equitable to prevent substantial dilution or enlargement of the rights
granted to or available for the Optionee; provided, however, that no adjustment
in the number of shares subject to the Option shall be made, except in the event
that such adjustment, together with all respective prior adjustments that were
not made as a result of this provision, involve a net change of more than 10%.
12. Withholding of Taxes. Upon the exercise of an Option, the Company
may deduct any Federal, state or local taxes required by law to be withheld with
respect to such exercise. Any holder of an Option may elect to surrender shares
of Common Stock previously acquired by the holder or to have the Company
withhold shares that would have otherwise been issued to the holder pursuant to
the exercise of an Option, the number of such withheld or surrendered shares to
be sufficient to satisfy all or a portion of the income tax liability that
arises upon such exercise.
13. Severability. If any provision or portion of this Agreement shall
be determined to be invalid or unenforceable for any reason, the remaining
provisions of this Agreement shall be unaffected and shall remain in full force
and effect in such jurisdiction, and any such invalid or unenforceable provision
shall not be considered invalid or unenforceable in any other jurisdiction.
14. Binding Effect. This Agreement shall be binding upon the
heirs, executors, administrators and successors of the parties.
15. Administration. The Agreement shall be administered by a Committee
consisting of two or more members of the Board of Directors of the Company who
are appointed from time to time by said Board of Directors (the "Committee").
Subject to the express provisions of the Agreement, the Committee shall have the
power to interpret the Agreement, to prescribe, amend and rescind rules and
regulations relating to the Agreement, to determine the terms and provisions of
Optionee's individual option agreements (which need not be identical) and to
make such other determinations as it deems necessary or advisable in carrying
out the administration of the Agreement. All decisions of the Committee on
matters within its jurisdiction shall be conclusive and binding. To the extent
required to comply with the relevant provisions of Rule 16b-3 under the
Securities Exchange Act of 1934, each member of the Committee shall qualify as a
"non-employee director," as defined in Rule 16b-3 or in any successor definition
adopted by the Securities and Exchange Commission. No member of the Board of
Directors or the Committee shall be liable for any action taken or determination
made in good faith.
16. Other Definitions.
-----------------
(a) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934.
(b) "Common Stock" shall mean the Company's $0.01 par
value common stock.
(c) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Securities Exchange Act of 1934 and used in
Sections 13(d) and 14(d) thereof, including a group defined in Section
13(d).
EXHIBIT 21
ENGINEERING ANIMATION, INC.
SUBSIDIARIES
At December 31, 1999
Jurisdiction or
Subsidiary State of Organization
- ----------- ----------------------
EAI-DELTA GmbH Germany
EAI UK Limited United Kingdom
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, 333-68159, and 333-87761) of our reports dated March 24, 2000 with
respect to the consolidated balance sheet of Engineering Animation, Inc. and
subsidiaries as of December 31, 1999 and the related consolidated statements of
operations, stockholders' equity and comprehensive income (loss) and cash flows
for the year then ended and the related financial statement schedule which
reports appear in the December 31, 1999 annual report on Form 10-K of
Engineering Animation, Inc.
/s/ KPMG LLP
Minneapolis, Minnesota
April 13, 2000
EXHIBIT 23.2
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, 333-68159 and 333-87761) of our report dated February 15, 1999 with
respect to the consolidated financial statements and schedule of Engineering
Animation, Inc. included in its Annual Report (Form 10-K) for the year ended
December 31, 1999, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 11, 2000
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