<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 12, 2000
--------------------------
Unigraphics Solutions Inc.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 001-14155 75-2728894
-------- --------- ----------
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification Number)
Incorporation)
13736 Riverport Drive, Maryland Heights, Missouri 63043
-------------------------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 314-344-5900
----------------------
<PAGE>
EXPLANATORY NOTE
----------------
This Current Report on Form 8-K/A is being filed to include the
financial statements and pro forma financial information previously omitted from
the original filing made on October 27, 2000, as permitted by Item 7 thereof.
Item 2. Acquisition or Disposition of Assets.
On September 5, 2000, Unigraphics Solutions Inc., a Delaware corporation
("Parent"), UGS Acquisition Corporation, a Delaware corporation and a wholly
owned subsidiary of Parent ("Purchaser"), and Engineering Animation, Inc., a
Delaware corporation (the "Company"), entered into an Agreement and Plan of
Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, on September
13, 2000, Parent commenced a cash tender offer for all outstanding shares of the
Company's common stock, par value $.01 per share (the "Common Stock") and the
related rights to purchase shares of the Series A Junior Participating Preferred
Stock of the Company issued pursuant to the Company Rights Plan, dated as of
January 1, 1996 by and between the Company and First Chicago Trust Company of
New York, as Rights Agent, for a price of $13.75 net per share upon the terms
and conditions set forth in the Offer to Purchase dated September 13, 2000 and
the related Letter of Transmittal (which, together with any amendments or
supplements thereto, constituted the "Offer"). Purchaser acquired approximately
10,896,929 shares of Common Stock pursuant to the Offer, which expired on
October 11, 2000. The acquired shares represented more than 90% of the Company's
outstanding Common Stock.
On October 23, 2000, Purchaser merged with and into the Company (the
"Merger") pursuant to the Merger Agreement without a vote of the Company's
shareholders in accordance with Section 253 of the Delaware General Corporation
Law. Following the Merger, the Company continued as the surviving corporation
and became a wholly owned subsidiary of Parent, and the separate corporate
existence of Purchaser ceased. As of the effective time of the Merger, each
share of Common Stock then outstanding (other than shares held by the Company or
any of its subsidiaries, Parent or Purchaser) was canceled and converted
automatically into the right to receive $13.75 per share, net to the seller in
cash, without interest thereon. The Company's Common Stock, previously traded on
the Nasdaq National Market under the symbol "EAII," was deregistered following
the Merger.
The total amount of funds required to purchase all of the outstanding
Common Stock was approximately $166,157,858. Purchaser obtained all funds needed
for the Offer and the Merger through advances made by Parent. Parent obtained
the funds for such advances from borrowings under the Intercompany Credit
Agreement dated as of January 1, 1998, as amended on September 1, 2000, between
Parent and Electronic Data Systems Corporation, a Delaware corporation and
Parent's controlling shareholder ("EDS").
The terms of the Offer and the Merger and the relationships between the
Company and Purchaser, Parent and EDS, and the Company and the respective
directors and executive officers of Purchaser, Parent and EDS, were described in
the Offer to Purchase dated September 13, 2000 filed as an exhibit to the
Schedule TO (File No. 005-48517) filed by Purchaser, Parent and EDS, which is
incorporated herein by reference. The terms of the Offer and the Merger were
established through arm's length negotiations between Purchaser, Parent and the
Company.
The Company is the leader in Internet-enabled visual process management,
collaboration, analysis and communication solutions for extended manufacturing
enterprises. The Company's solutions, which include e-Vis(TM) (www.e-vis.com),
Open Enterprise Visualization(TM) and Virtual Factory, help manufacturing
companies drive down costs while improving business practices, efficiency,
quality and time-to-market. The Company maintains its corporate headquarters and
technology center in Ames, Iowa, and has offices worldwide. Parent
2
<PAGE>
intends to use property, plant and equipment acquired pursuant to the Merger to
continue the Company's business as described above.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired
The financial statements of the business to be acquired,
Engineering Animation, Inc., required by this item are contained
in the financial statements and footnotes thereto listed in the
Index on page F-1 herein.
(b) Pro Forma Financial Information
The pro forma financial information required by this item are
contained in the financial statements and footnotes thereto
listed in the Index on page F-1 herein.
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of September 5,
2000, by and among Parent, Purchaser and the Company,
incorporated herein by reference to Exhibit (d)(1) to the
Schedule TO (File No. 005-48517) filed by Parent and
Purchaser on September 13, 2000.*
23.1 Consent of KPMG LLP
23.2 Consent of Ernst & Young LLP
99.1 Offer to Purchase dated September 13, 2000, filed as
Exhibit (a)(1)(A) to the Schedule TO (File No. 005-48517)
filed by Purchaser, Parent and EDS, which is incorporated
herein by reference
* The registrant hereby undertakes to furnish supplementally a copy of
any omitted schedule to this Agreement to the Securities and Exchange
Commission upon request.
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Unigraphics Solutions Inc.
(Registrant)
Date: December 26, 2000 By: /s/ Douglas E. Barnett
-------------------------------
Name: Douglas E. Barnett
Title: Vice President, Chief
Financial Officer
4
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements Page Numbers
-------------------- ------------
<S> <C>
Engineering Animation, Inc. and subsidiaries - for the fiscal years ended December 31, 1997, 1998, and 1999:
Consolidated Statements of Operations F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Stockholders' Equity and Other Comprehensive Income
(Loss) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Accountants F-25
Engineering Animation, Inc. and Subsidiaries - for the three and nine month periods ended
September 30, 2000 and 1999:
Unaudited Condensed Consolidated Statements of Operations F-27
Unaudited Condensed Consolidated Balance Sheets F-28
Unaudited Condensed Consolidated Statements of Cash Flows F-29
Notes to Unaudited Condensed Consolidated Financial Statements F-30
Unigraphics Solutions Inc. - for the nine month period ended September 30, 2000 and
for the fiscal years ended December 31, 1999:
Unaudited Pro Forma Condensed Combined Financial Statements F-33
Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2000 F-34
Unaudited Pro Forma Condensed Combined Statement of Operations for the fiscal
year ended December 31, 1999 F-35
Unaudited Pro Forma Condensed Combined Statement of Operations for the nine
months ended September 30, 2000 F-36
Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-37
</TABLE>
F-1
<PAGE>
Engineering Animation, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
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
</TABLE>
See accompanying notes.
F-2
<PAGE>
Engineering Animation, Inc.
Consolidated Balance Sheets
(thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
Assets 1999 1998
---------------------------
<S> <C> <C>
Current assets:
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
===========================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Engineering Animation, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Retained Total
Common Stock Paid-In Comprehensive Earnings Stockholders'
---------------------
Shares Amount Capital Income (Loss) (Deficit) Equity
--------------------- ---------- ------------- --------- -------------
<S> <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 adjustments - - - (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.
F-4
<PAGE>
Engineering Animation, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
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 - -
</TABLE>
See accompanying notes.
F-5
<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.
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
F-6
<PAGE>
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.
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.
F-7
<PAGE>
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:
<TABLE>
<S> <C>
Building................................30 years
Equipment...............................3 - 7 years
Leasehold improvements..................Lesser of term of lease or life of asset
</TABLE>
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.
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
F-8
<PAGE>
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.
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.
F-9
<PAGE>
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>
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.
F-10
<PAGE>
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.
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.
Summary of Results of Operations by Entity Acquired
(in thousands)
Years ended December 31,
1998 1997
------------------------
Revenues
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
========================
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.
F-11
<PAGE>
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)
Years ended December 31,
1998 1997
-------- --------
Revenues $90,522 $61,503
Loss from continuing operations (2,812) (4,964)
Loss per share from continuing operations (0.24) (0.49)
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:
(in thousands)
<TABLE>
<CAPTION>
<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:
(in thousands)
<TABLE>
<CAPTION>
<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>
F-12
<PAGE>
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.
The following table shows the components of acquisition costs and non-
recurring expenses.
<TABLE>
<CAPTION>
(in thousands)
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) December 31,
1999 1998
-------- --------
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
======== =======
F-13
<PAGE>
6. Debt
Long-term debt at December 31, 1999 and 1998 consists of the following:
(in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------
<S> <C> <C>
Interest bearing revolving line of credit for $3.5 million with a bank,
commencing in September 1998 and due May 2000; floating interest
at the bank's base rate less 1% (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:
(in thousands)
2001 $ 109
2002 146
2003 90
2004 94
Thereafter 177
-----
Total $ 616
=====
F-14
<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)
2000 $ 3,796
2001 3,705
2002 3,314
2003 2,258
2004 1,757
Thereafter 5,293
------------
Total $ 20,123
============
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:
(in thousands) Years ended December 31,
1999 1998 1997
-----------------------------------
Domestic $ (29,397) $ 4,167 $ 1,674
Foreign 554 1,358 247
-----------------------------------
Total $ (28,843) $ 5,525 $ 1,921
===================================
F-15
<PAGE>
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
(in thousands) Years ended December 31,
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Current
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>
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
---------------------
<S> <C> <C>
Deferred tax liabilities:
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>
F-16
<PAGE>
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.
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.
F-17
<PAGE>
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.
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>
F-18
<PAGE>
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 $ 1.68 511,157
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.
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:
(in thousands, except per share data) Years ended December 31,
1999 1998 1997
----------------------------------
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)
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.
F-19
<PAGE>
11. Earnings (LOSS) Per Share
The following table sets forth the computation of earnings (loss) per
share.
<TABLE>
<CAPTION>
(in thousands, except per share data) Years ended December 31,
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Numerator:
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>
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.
F-20
<PAGE>
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.
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)
(Audited) (Unaudited)
Year ended Three Months ended
-----------------------------------------
Dec. 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1999 1999 1999 1999
---------- -------- --------- -------- ---------
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)
(Audited) (Unaudited)
Year ended Three Months ended
-----------------------------------------
Dec. 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998 1998
---------- -------- --------- -------- ---------
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)
F-21
<PAGE>
The following table sets forth selected quarterly financial information
from discontinued operations for 1999 and 1998.
(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
--------- -------- --------- -------- ---------
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
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.
(Audited) (Unaudited)
Year ended Three Months ended
-----------------------------------------
Dec. 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998 1998
---------- -------- --------- -------- ---------
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
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.
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.
F-22
<PAGE>
Geographic Segments
(in thousands) Years ended December 31,
1999 1998 1997
-------- -------- --------
Revenues by Geographic Region:
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
======== ======== ========
At December 31,
Identifiable Long-Lived Assets: 1999 1998 1997
-------- -------- --------
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
======== ======== ========
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.
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.
F-23
<PAGE>
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.
F-24
<PAGE>
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
F-25
<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
F-26
<PAGE>
ENGINEERING ANIMATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 13,592 $ 13,799 $ 49,267 $ 54,267
Cost of revenues 7,959 8,754 23,557 23,634
----------- --------------- --------------- --------------
Gross profit 5,633 5,045 25,710 30,633
----------- --------------- --------------- --------------
Operating expenses
Sales and marketing 6,269 7,521 19,345 21,515
General and administrative 3,349 4,701 10,598 11,070
Research and development 5,787 5,490 17,409 14,937
Goodwill and developed technology amortization 786 755 2,364 2,056
Non-recurring expenses -- -- 3,968 --
----------- --------------- --------------- --------------
Total operating expenses 16,191 18,467 53,684 49,578
----------- --------------- --------------- --------------
Loss from operations (10,558) (13,422) (27,974) (18,945)
Other income, net 272 89 861 715
----------- --------------- --------------- --------------
Loss from continuing operations before income tax (10,286) (13,333) (27,113) (18,230)
Income tax expense (benefit) 2 (3,719) (1) (5,089)
----------- --------------- --------------- --------------
Loss from continuing operations (10,288) (9,614) (27,112) (13,141)
----------- --------------- --------------- --------------
Discontinued operations:
Loss from discontinued operations, net of tax (2,750) -- (2,750) (1,927)
Provision for exiting discontinued operations
including operating losses during phase
out period, net of tax -- -- -- (8,930)
Extraordinary gain, net of transaction costs and
income taxes -- -- 17,626 --
----------- --------------- --------------- --------------
Net loss $ (13,038) $ (9,614) $ (12,236) $ (23,998)
=========== =============== =============== ==============
Earnings (loss) per share:
Basic and Diluted
Continuing operations $ (0.85) $ (0.81) $ (2.25) $ (1.11)
Discontinued operations and extraordinary gain (0.23) -- 1.23 (0.91)
----------- --------------- --------------- --------------
Total $ (1.08) $ (0.81) $ (1.02) $ (2.02)
=========== =============== =============== ==============
Weighted average number of common stock outstanding:
Basic 12,066 11,937 12,042 11,859
=========== =============== =============== ==============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-27
<PAGE>
ENGINEERING ANIMATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 15,411 $ 10,939
Accounts receivable, net of allowance for doubtful accounts
Billed 16,572 18,649
Unbilled 2,421 2,308
Deferred income taxes -- 7,758
Income taxes receivable -- 693
Prepaid expenses and other current assets 1,854 3,091
------------- ------------
Total current assets 36,258 43,438
------------- ------------
Property and equipment, net 19,971 22,168
------------- ------------
Operating and other assets
Restricted cash -- 30
Notes receivable 1,408 1,408
Goodwill, software and other intangibles, net 10,215 13,288
Other -- 232
------------- ------------
Total operating and other assets 11,623 14,958
------------- ------------
Total assets $ 67,852 $ 80,564
============= ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 12,093 $ 4,165
Accrued compensation and other accrued expenses 1,610 8,531
Deferred revenue 4,197 5,204
Income taxes payable 1,584 --
Lines of credit -- 4,500
Current portion of long-term debt and lease obligations -- 773
Other current liabilities 620 --
------------- ------------
Total current liabilities 20,104 23,173
------------- ------------
Long term notes payable 477 616
Other long term liabilities -- 184
Deferred income taxes -- 104
Net liabilities of discontinued operations 3,105 1,296
Stockholders' equity
Common stock 121 120
Additional paid-in capital 96,317 94,959
Retained earnings (deficit) (51,620) (39,382)
Accumulated other comprehensive loss (652) (506)
------------- ------------
Total stockholders' equity 44,166 55,191
------------- ------------
Total liabilities and stockholders' equity $ 67,852 $ 80,564
============= ============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-28
<PAGE>
ENGINEERING ANIMATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Net cash used in operating activities $ (18,475) $ (5,559)
------------- ------------
Cash flows from investing activities
Purchase of property and equipment (978) (9,228)
Changes in other assets 28 (19)
Capitalization of software development costs (97) (1,404)
Maturities of marketable securities -- 20,500
Purchases of marketable securities -- (9,622)
Cash purchased in acquisition -- 481
Cash consideration for acquisition of Kx -- (1,800)
Net proceeds from sale of subsidiary, net of transaction costs 28,496 --
Other (526) --
------------- ------------
Net cash provided by (used in) investing activities 26,923 (1,092)
------------- ------------
Cash flows from financing activities
Net change in restricted cash 30 (2)
Net change in short-term borrowing (4,553) 1,426
Payments on long-term debt and capital lease obligations (292) (365)
Net proceeds from exercise of options and warrants 969 960
------------- ------------
Net cash provided by (used in) financing activities (3,846) 2,019
------------- ------------
Effect of exchange rate changes on cash and cash equivalents (130) (159)
------------- ------------
Net increase (decrease) in cash and cash equivalents 4,472 (4,791)
Cash and cash equivalents at beginning of period 10,939 23,623
------------- ------------
Cash and cash equivalents at end of period $ 15,411 $ 18,832
============= ============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-29
<PAGE>
Notes To Unaudited Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Engineering Animation, Inc. and the Company's subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The unaudited condensed consolidated financial statements
included herein reflect all adjustments, consisting of normal recurring
accruals, which in the opinion of management are necessary to fairly state
the Company's financial position, results of operations and cash flows for
the periods presented. These financial statements should be read in
conjunction with the Company's audited financial statements as included in
the Company's 1999 Annual Report on Form 10-K as filed with the Securities
and Exchange Commission. The results of operations for the nine-month period
ended September 30, 2000 are not necessarily indicative of the results that
may be expected for any subsequent quarter or for the fiscal year ending
December 31, 2000. The balance sheet as of December 31, 1999 was derived
from audited financial statements. The balance sheets as of September 30,
2000 and December 31, 1999 do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The financial statements include the operations of EAI-DELTA GmbH
("DELTA") up to March 24, 2000, the date of its sale by the Company (see
Note 3 for further discussion of the sale).
2. DISCONTINUED OPERATIONS
The Company announced on July 6, 1999 that it would exit its Interactive
Games and Science and Technology businesses. During 2000, the Company
increased the provision for exiting discontinued operations including
operating losses during the phase out period by $2.8 million. The provision
includes accruals for severance payments, asset write-downs and estimated
operating losses during the phase out period. The following table summarizes
revenues and loss from discontinued operations for the three and nine months
ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2000 1999 2000 1999
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from discontinued operations $ - $ 659 $ 393 $ 7,640
========= ======== ========= =========
Discontinued operations:
Loss from discontinued operations - - - (3,108)
Income tax benefit of loss
from discontinued operations - - - 1,181
-------- ------- -------- -------
Net loss from discontinued operations - - - (1,927)
-------- ------- -------- -------
Provision for exiting discontinued operations
including operating losses during phase out period
before tax (2,750) - (2,750) (13,750)
Income tax benefit of provision for exiting
discontinued operations including operating
losses during phase out period - - - 4,820
--------- -------- -------- -------
Provision for exiting discontinued operations, net of tax (2,750) - (2,750) (8,930)
--------- -------- -------- -------
Loss from discontinued operations, net of income taxes $ (2,750) $ - $(2,750) $(10,857)
========= ========= ======== ========
</TABLE>
F-30
<PAGE>
3. SALE OF SUBSIDIARY
On March 24, 2000, the Company sold DELTA to Dassault Systemes S.A. for
$31.0 million in cash. The resulting gain, net of transaction costs, of
$27.3 million was recognized in the first quarter of 2000 as an
extraordinary gain on sale of subsidiary. The Company recorded $9.7 million
in U.S. and foreign income tax expense on the transaction. The Company had
acquired DELTA on December 22, 1998, and accounted for it as a pooling of
interests.
4. RESTRUCTURING AND ASSET-IMPAIRMENT CHARGES
The Company recorded a restructuring charge of $2.7 million and an
asset-impairment charge of $1.3 million in the first quarter of 2000,
related to actions associated with redefining the Company's infrastructure.
These charges and the related accrual included severance costs, fixed asset
write-downs, office closings and other related expenses as detailed below:
<TABLE>
<CAPTION>
Total Cash payments/
restructuring/ non-cash changes Balance
asset-impairment against accrual of actual
change accured in 2000 September 30,2000
---------------------------------------------------------
<S> <C> <C> <C>
Serverance and other people costs $ 954 $ 855 $ 99
Office closing and sublease cost 1,751 590 1,161
Asset-impairment charge 1,263 977 286
---------------------------------------------------------
Total $ 3,968 $ 2,442 $ 1,546
---------------------------------------------------------
</TABLE>
The severance payments and people costs were primarily attributed to
personnel in the general and administrative support areas involuntarily
terminated on March 24, 2000. Office closings and sublease costs were
related to either offices that are no longer being used by the Company or
offices that will be subleased out to entities not affiliated with the
Company. The asset-impairment charge relates to fixed assets of offices to
be closed or subleased. The Company has paid $1.4 million as of September
30, 2000 for severance and other people costs, office closings and sublease
costs. Except for long-term lease payments, the Company expects most cash
payments to be made by December 31, 2000.
5. COMPREHENSIVE INCOME (LOSS)
The following table summarizes comprehensive loss for the three and nine
months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
(in thousands) September 30, September 30,
2000 1999 2000 1999
----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Net loss as reported $ (13,038) $ (9,614) $ (12,236) $ (23,998)
Foreign currency translation (196) 150 (146) (172)
adjustment ----------------- ---------- ----------------- ----------
Total comprehensive loss $ (13,234) $ (9,464) $ (12,382) $ (24,170)
================= ========== ================= ==========
</TABLE>
F-31
<PAGE>
6. INCOME TAXES
The Company has net operating losses and tax credits carried forward as of
September 30, 2000, which result in a potential deferred tax asset. 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 estimated future taxable income. Based on
this assessment, the Company has provided a full valuation allowance of its
deferred tax assets and will continue to assess the need for this allowance.
7. TENDER OFFER
On September 5, 2000, the Company and Unigraphics Solutions Inc. (NYSE: UGS), a
leading provider of collaborative product development software and services,
announced that a definitive agreement was reached allowing UGS to acquire the
Company in a cash tender offer. The total purchase price for the outstanding
shares was approximately $166.2 million and the aggregate purchase price-
including acquisition related costs-was approximately $205 million. The
agreement called for shareholders of the Company to receive $13.75 cash for each
share of Company common stock owned. The agreement was approved by both
companies' boards of directors and the transaction was effected on October 12,
2000.
F-32
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
have been derived from the application of pro forma adjustments to the
historical financial statements of Unigraphics Solutions Inc. ("Company") and
Engineering Animation, Inc. ("EAI"). The unaudited pro forma condensed combined
balance sheet as of September 30, 2000 gives effect to the acquisition as if it
occurred on September 30, 2000. The unaudited pro forma condensed combined
statements of operations for the year ended December 31, 1999 and the nine
months ended September 30, 2000, give effect to the merger as if it had occurred
on January 1, 1999. The unaudited pro forma condensed combined financial
statements should be read in conjunction with the Fiscal Year 1999 Annual Report
on Form 10-K and the Financial Information on Form 10-Q for the nine months
ended September 30, 2000 for the Company and, for EAI, the following reports
which are enclosed: certain financial data from the Fiscal Year 1999 Annual
Report on Form 10-K and financial statements and accompanying notes to the
financial statements for the nine months ended September 30, 2000.
The pro forma adjustments are described in the notes to the unaudited pro
forma condensed combined financial statements and are based on available
information and assumptions that management believes are reasonable. The
unaudited proforma condensed combined financial statements do not purport to
present the financial position or results of operations of the Company had the
merger occurred on the date specified, nor are they necessarily indicative of
the results of operations that may be achieved in the future. The unaudited pro
forma condensed combined financial statements do not reflect any adjustments for
the benefits that management expects to realize in connection with the
acquisition. No assurances can be made as to the amount or timing of the
benefits, if any, that may be realized.
The acquisition will be accounted for using the purchase method of
accounting. Under this method, tangible and identifiable intangible assets
acquired and liabilities assumed are recorded at their estimated fair values.
The excess of the purchase price, including estimated fees and expenses related
to the acquisition, over the fair value of the assets acquired is classified as
goodwill on the accompanying unaudited pro forma condensed combined balance
sheet. The allocation of the purchase price, estimated fair values and useful
lives of assets acquired and liabilities assumed may be subject to final
valuation adjustments. Management of the Company does not believe the purchase
price allocation and the related amortization will be materially different from
the allocation presented herein.
F-33
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Historical Historical
Unigraphics Engineering Pro forma Pro forma
Solutions Animation Adjustments Combined
-------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 16,216 $ 15,411 $ (155) (4e) $ 31,472
Accounts receivable, net:
Billed, less allowance for doubtful accounts 112,970 16,572 (843) (4a) 127,384
(1,315) (4c)
Unbilled -- 2,421 -- 2,421
Prepaid expenses 10,048 890 ( 113) (4a) 10,825
Businesses held for sale -- -- 2,540(2)(4e) 2,540
Other current assets 5,146 964 (13) (4e) 6,097
-------------- --------------- ----------- ------------
Total current assets 144,380 36,258 101 180,739
-------------- --------------- ----------- ------------
Property and equipment, net 29,374 19,971 (1,966) (2) 46,876
(503) (4e)
Operating and other assets
Notes receivable -- 1,408 (128) (2) 1,280
Goodwill, software and other intangibles, net 64,562 10,215 123,900 (2) 188,516
(8,441) (4b)
(1,720) (4d)
Deferred income taxes 19,619 -- 18,000 (2) 37,619
-------------- --------------- ----------- ------------
Total operating and other assets 84,181 11,623 131,611 227,415
-------------- --------------- ----------- ------------
Total assets $ 257,935 $ 67,852 129,243 $ 455,030
============== =============== =========== ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 53,416 $ 13,703 $ 414 (2) $ 66,348
(843) (4a)
(342) (4e)
Deferred revenue 19,148 4,197 (113) (4a) 23,192
(40) (4e)
Income taxes payable 22,856 1,584 (51) (4e) 24,389
Other current liabilities -- 620 -- 620
-------------- --------------- ----------- ------------
Total current liabilities 95,420 20,104 (975) 114,549
-------------- --------------- ----------- ------------
Long-term notes payable -- 477 -- 477
Intercompany note 9,480 -- 166,086 (2) 208,018
32,452 (4f)
Net liabilities of discontinued operations -- 3,105 -- 3,105
Stockholders' equity
Common stock 50 121 (121) (4f) 50
Class B common stock 313 -- -- 313
Additional paid-in capital 148,913 96,317 (96,317) (4f) 148,913
Retained earnings (deficit) 8,080 (51,620) (24,154) (2) (16,074)
(8,441) (4b)
(1,720) (4d)
(1,612) (4e)
63,393 (4f)
Accumulated other comprehensive loss (4,321) (652) 59 (4e) (4,321)
593 (4f)
-------------- --------------- ----------- ------------
Total stockholders' equity 153,035 44,166 (68,320) 128,881
-------------- --------------- ----------- ------------
Total liabilities and stockholders' equity $ 257,935 $ 67,852 $ 129,243 $ 455,030
============== =============== =========== ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
F-34
<PAGE>
UNIGRAPHICS SOLUTIONS AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Historical
Unigraphics Engineering Pro forma Pro forma
Solutions Animation Adjustments Combined
---------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Software $ 198,936 $ 30,988 $ (563) (4a) $ 229,132
$ (229) (4e)
Services 234,205 39,748 (4,502) (4e) 269,451
Hardware 34,809 -- -- 34,809
---------------- ------------- ---------------- ------------------
Total revenue 467,950 70,736 (5,294) 533,392
---------------- ------------- ---------------- ------------------
Cost of revenue:
Software:
Amortization 22,358 2,835 (2,835) (4b) 42,116
19,758 (4c)
Royalties, distribution and other 20,635 3,193 (563) (4a) 23,265
Services 96,067 29,520 (2,089) (4e) 123,498
Hardware 28,191 -- -- 28,191
---------------- ------------- ---------------- ------------------
Total cost of revenue 167,251 35,548 14,272 217,070
---------------- ------------- ---------------- ------------------
Gross profit 300,699 35,188 (19,565) 316,322
---------------- ------------- ---------------- ------------------
Operating expenses:
Selling, general and administrative 167,389 44,506 (1,588) (4e) 210,307
Research and development 70,963 21,409 (289) (4e) 92,083
In-process research and development 2,386 -- 24,154 (2) 26,540
Acquisition costs and non-recurring charges -- (925) -- (925)
---------------- ------------- ---------------- ------------------
Total operating expenses 240,738 64,990 22,277 328,005
---------------- ------------- ---------------- ------------------
Operating income (loss) from continuing operations 59,961 (29,802) (41,842) (11,683)
Other income, net 5,272 959 (12) (4e) 6,219
---------------- ------------- ---------------- ------------------
Income (loss) from continuing operations
before income taxes 65,233 (28,843) (41,854) (5,464)
Provision for income taxes 23,484 (5,260) (2) (4e) 18,222
---------------- ------------- ---------------- ------------------
Income (loss) from continuing operations $ 41,749 $ (23,583) $ (41,852) $ (23,686)
================ ============= ================ ==================
Income (loss) from continuing operations per share:
Basic $ 1.15 $ (1.98) $ (0.65)
================ ============= ==================
Diluted $ 1.14 $ (1.98) $ (0.65)
================ ============= ==================
Weighted average number of common shares outstanding:
Basic 36,277 11,887 36,277
================ ============= ==================
Diluted 36,490 11,887 36,277
================ ============= ==================
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
F-35
<PAGE>
UNIGRAPHICS SOLUTIONS AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Historical
Unigraphics Engineering Pro forma Pro forma
Solutions Animation Adjustments Combined
---------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Software $ 158,753 $ 16,307 $ (5,233) (4a) $ 169,497
(330) (4e)
Services 201,732 32,960 (3,293) (4e) 231,399
Hardware 10,522 -- -- 10,522
---------------- ------------- ---------------- ------------------
Total revenue 371,007 49,267 (8,856) 411,418
---------------- ------------- ---------------- ------------------
Cost of revenue:
Software
Amortization 7,853 2,364 (2,364) (4b) 22,672
14,819 (4c)
Royalties, distribution and other 23,439 2,011 (5,233) (4a) 20,217
Services 86,347 21,546 (2,451) (4e) 105,442
Hardware 9,274 -- -- 9,274
---------------- ------------- ---------------- ------------------
Total cost of revenue 126,913 25,921 4,771 157,605
---------------- ------------- ---------------- ------------------
Gross profit 244,094 23,346 (13,627) 253,813
---------------- ------------- ---------------- ------------------
Operating expenses:
Selling, general and administrative 134,991 29,943 (1,194) (4e) 163,740
Research and development 56,890 17,409 (148) (4e) 74,151
Non-recurring expenses -- 3,968 -- 3,968
---------------- ------------- ---------------- ------------------
Total operating expenses 191,881 51,320 (1,342) 241,859
---------------- ------------- ---------------- ------------------
Operating income (loss) 52,213 (27,974) (12,285) 11,954
Other income (expense), net (505) 861 -- 356
---------------- ------------- ---------------- ------------------
Income (loss) from continuing operations before income
taxes 51,708 (27,113) (12,285) 12,310
Provision for income taxes 18,615 (1) -- 18,614
---------------- ------------- ---------------- ------------------
Income (loss) from continuing operations $ 33,093 $ (27,112) $ (12,285) $ (6,304)
================ ============= ================ ==================
Income (loss) from continuing operations per share:
Basic $ 0.91 $ (2.25) $ (0.17)
================ ============= ==================
Diluted $ 0.90 $ (2.25) $ (0.17)
================ ============= ==================
Weighted average number of common shares outstanding:
Basic 36,312 12,042 36,312
================ ============= ==================
Diluted 36,639 12,042 36,312
================ ============= ==================
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
F-36
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combined balance sheet as
of September 30, 2000 gives effect to the acquisition as if it had occurred on
September 30, 2000. The unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1999 and for the nine months ended
September 30, 2000 give effect to the acquisition as if it had occurred on
January 1, 1999. These statements are prepared on the basis of accounting for
the acquisition as a purchase business combination.
NOTE 2: PURCHASE PRICE AND PURCHASE PRICE ALLOCATION
Purchase Price
The Company will account for the transaction as a purchase of EAI. The
purchase price, which was funded through advances under the Company's
Intercompany Credit Agreement, was determined as follows (in thousands):
EAI common stock at $13.75 per share $ 166,158
Payout on EAI options in-the-money 12,185
Acquisition costs 20,195
--------------
Purchase price $ 198,538
==============
Purchase Price Allocation
The purchase price was allocated to the fair value of the net assets
acquired and to goodwill as follows (in thousands):
Cash and cash equivalents $ 15,256
Accounts receivable 16,835
Property and equipment 17,502
Deferred income taxes 18,000
In-process research and development 24,154
Businesses held for sale 2,540
Other assets 3,062
Current liabilities (19,129)
Other liabilities (3,582)
Goodwill and other intangibles 123,900
--------------
Purchase price $ 198,538
==============
NOTE 3: EARNINGS PER COMMON SHARE
Pro forma earnings per common share has been computed based upon results
as if the acquisition occurred on January 1, 1999. The transaction had no effect
on the Company's weighted average number of common shares outstanding nor the
incremental increase in common shares outstanding assuming the exercise of all
employee stock options that would have had a dilutive effect on earnings per
share.
F-37
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 4: OTHER PRO FORMA ADJUSTMENTS
a) All balances and transactions between the Company and EAI are eliminated.
b) Historical goodwill carried on the balance sheet and associated amortization
recorded on the statements of operations of EAI are eliminated.
c) The effect of allocating a portion of the purchase price to goodwill results
in additional amortization expense of $19.8 million and $14.8 million for
the year ended December 31, 1999 and the nine months ended September 30,
2000, respectively.
d) Software development costs carried on the balance sheet by EAI in compliance
with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, are eliminated as such intangible assets are
effected in the purchase price allocation.
e) The Company is actively pursuing divestiture of the litigation line of
business. The Sweden subsidiary was divested on December 5, 2000. All
transactions and balances arising from these business operations are
eliminated. The balance sheet reflects the expected proceeds from these
divestitures, net of related transaction costs.
f) The pro forma adjustments reflect the elimination of the EAI historical
common stock, additional paid-in capital, retained deficit and accumulated
other comprehensive loss as of September 30, 2000.
F-38
