UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended July 2, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from _____ to _____
Commission File Number 0-8771
__________________________________________________
EVANS & SUTHERLAND COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Utah 87-0278175
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Komas Drive, Salt Lake City, Utah 84108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 588-1000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding Shares at August 6, 1999
- --------------------------------- -----------------------------
Common Stock, $0.20 par value 9,420,440
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
INDEX
FORM 10-Q FOR THE QUARTER ENDED JULY 2, 1999
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 2, 1999 and 3
December 31, 1998
Consolidated Statements of Income for the
three months ended July 2, 1999 and June 26, 1998 4
Consolidated Statements of Income for the six months
ended July 2, 1999 and June 26, 1998 5
Consolidated Statements of Comprehensive Income for
the three and six months ended July 2, 1999 and
June 26, 1998 6
Consolidated Statements of Cash Flows for the six
months ended July 2, 1999 and June 26, 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
July 2, December 31,
1999 1998
------------ ------------
(Unaudited)
Assets:
<S> <C> <C>
Cash and cash equivalents $ 21,439 $ 1,834
Short-term investments 3,706 25,907
Accounts receivable, less allowance for doubtful
receivables of $1,510 in 1999 and $1,616 in 1998 31,307 46,866
Inventories 53,386 53,319
Costs and estimated earnings in excess of billings
on uncompleted contracts 73,290 58,682
Deferred income taxes 9,414 9,450
Prepaid expenses and deposits 8,223 7,278
------------ ------------
Total current assets 200,765 203,336
Property, plant and equipment, net 51,093 53,693
Investment securities 4,603 3,380
Deferred income taxes 2,691 2,487
Goodwill and other intangible assets, net 9,925 11,351
Other assets 536 1,421
----------- ------------
Total assets $ 269,613 $ 275,668
============ ============
Liabilities and stockholders' equity:
Line of credit agreements $ 3,399 $ 4,298
Accounts payable 14,894 24,667
Accrued expenses 28,116 27,147
Customer deposits 4,266 3,339
Income taxes payable 5,059 2,436
Billings in excess of costs and estimated earnings
on uncompleted contracts 10,502 7,092
------------ ------------
Total current liabilities 66,236 68,979
------------ ------------
Long-term debt 18,024 18,062
------------ ------------
Commitments and contingencies
Redeemable convertible preferred stock, class B-1, no par value;
authorized 1,500,000 shares; issued and outstanding 901,408
shares at July 2, 1999 and December 31, 1998 23,658 23,544
------------ ------------
Stockholders' equity:
Preferred stock, no par value; authorized 8,500,000 shares;
no shares issued and outstanding - -
Common stock, $.20 par value; authorized 30,000,000
shares; issued and outstanding 9,627,701 shares at
July 2, 1999 and 9,597,660 shares at December 31, 1998 1,926 1,920
Additional paid-in capital 23,444 23,420
Retained earnings 136,209 139,498
Accumulated other comprehensive income 116 245
----------- ------------
Total stockholders' equity 161,695 165,083
------------ ------------
Total liabilities and stockholders' equity $ 269,613 $ 275,668
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
July 2, June 26,
1999 1998
------------- --------------
<S> <C> <C>
Sales $ 44,023 $ 43,638
Cost of sales 26,420 24,359
------------- --------------
Gross profit
17,603 19,279
------------- --------------
Operating expenses:
Selling, general and administrative 11,943 9,318
Research and development 10,949 6,808
Amortization of goodwill and other intangible assets 713 8
Write-off of acquired in-process technology - 20,780
------------- --------------
23,605 36,914
------------- --------------
Operating loss (6,002) (17,635)
Other income, net 1,022 572
------------- --------------
Loss before income taxes (4,980) (17,063)
Income tax expense (benefit) (1,544) 1,208
------------- --------------
Net loss (3,436) (18,271)
Accretion of preferred stock 57 -
------------- --------------
Net loss applicable to common stock $ (3,493) $ (18,271)
============= ==============
Net loss per common share:
Basic $ (0.36) $ (2.04)
Diluted $ (0.36) $ (2.04)
Weighted average common and common
equivalent shares outstanding:
Basic 9,601 8,939
Diluted 9,601 8,939
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------
July 2, June 26,
1999 1998
------------- -------------
<S> <C> <C>
Sales $ 93,769 $ 86,059
Cost of sales 53,788 49,655
------------- -------------
Gross profit
39,981 36,404
------------- -------------
Operating expenses:
Selling, general and administrative 22,164 17,951
Research and development 22,029 13,485
Amortization of goodwill and other intangible assets 1,426 16
Write-off of acquired in-process technology - 20,780
------------- -------------
45,619 52,232
------------- -------------
Operating loss (5,638) (15,828)
Other income, net 1,037 1,118
------------- -------------
Loss before income taxes (4,601) (14,710)
Income tax expense (benefit) (1,426) 1,972
------------- -------------
Net loss (3,175) (16,682)
Accretion of preferred stock
114 -
------------- -------------
Net loss applicable to common stock $ (3,289) $ (16,682)
============= =============
Net loss per common share:
Basic $ (0.34) $ (1.85)
Diluted $ (0.34) $ (1.85)
Weighted average common and common
equivalent shares outstanding:
Basic 9,602 9,009
Diluted 9,602 9,009
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
July 2, June 26,
1999 1998
------------- --------------
<S> <C> <C>
Net loss $ (3,436) $ (18,271)
Other comprehensive income (loss):
Foreign currency translation adjustments (442) 53
Unrealized gains (losses) on securities 10 (316)
------------- --------------
Other comprehensive loss before income taxes (432) (263)
Income tax benefit related to items of other
comprehensive loss (134) (85)
------------- --------------
Other comprehensive loss, net of income taxes (298) (178)
------------- --------------
Comprehensive loss $ (3,734) $ (18,449)
============= ==============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------
July 2, June 26,
1999 1998
------------- --------------
<S> <C> <C>
Net loss $ (3,175) $ (16,682)
Other comprehensive income (loss):
Foreign currency translation adjustments (197) 135
Unrealized gains (losses) on securities 10 (53)
------------- --------------
Other comprehensive loss before income taxes (187) 82
Income tax benefit related to items of other
comprehensive loss (58) 27
------------- --------------
Other comprehensive loss, net of income taxes (129) 55
------------- --------------
Comprehensive loss $ (3,304) $ (16,627)
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------
July 2, June 26,
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,175) $ (16,682)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 8,019 5,005
Provision for losses on accounts receivable 241 62
Provision for write down of inventories 459 (228)
Provision for warranty expense 389 79
Deferred income taxes (205) (923)
Write-off of acquired in-process technology - 20,780
Other 223 (454)
Changes in assets and liabilities:
Accounts receivable 15,255 467
Inventories (5,242) (3,463)
Costs and estimated earnings in excess of billings on uncompleted
contracts, net (11,193) (9,806)
Prepaid expenses and deposits (952) (789)
Accounts payable (9,729) (1,487)
Accrued expenses 599 (1,124)
Customer deposits 926 (1,352)
Income taxes 2,690 (4,300)
-------------- --------------
Net cash used in operating activities (1,695) (14,215)
-------------- --------------
Cash flows from investing activities:
Purchases of short-term investments (3,450) (3,700)
Proceeds from sale of short-term investments 25,651 38,501
Purchases of investment securities (636) (310)
Proceeds from sale of investment securities - 3,341
Purchases of property, plant and equipment (5,373) (5,947)
Proceeds from sale of certain manufacturing assets 6,010 -
Acquisitions, net of cash acquired - (7,603)
Increase in other assets (37) -
-------------- --------------
Net cash provided by investing activities 22,165 24,282
-------------- --------------
Cash flows from financing activities:
Borrowings under line of credit agreements - 4,166
Payments under line of credit agreements (629) (24)
Proceeds from issuance of common stock 881 1,256
Payments for repurchase of common stock (769) (5,837)
-------------- --------------
Net cash used in financing activities (517) (439)
-------------- --------------
Effect of foreign exchange rate on cash and cash equivalents (348) (155)
-------------- --------------
Net change in cash and cash equivalents 19,605 9,473
Cash and cash equivalents at beginning of year 1,834 8,176
-------------- --------------
Cash and cash equivalents at end of period $ 21,439 $ 17,649
============== ==============
Supplemental Disclosures of Cash Flow Information
Interest $ 664 $ 596
Income taxes, net of refunds (3,635) 5,673
Accretion of preferred stock 114 -
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes necessary for a complete presentation of the
results of operations, the financial position, and cash flows, in conformity
with generally accepted accounting principles. This report on Form 10-Q for the
three months and six months ended July 2, 1999 should be read in conjunction
with the Company's annual report on Form 10-K for the year ended December 31,
1998.
The accompanying unaudited consolidated balance sheets and statements of income,
comprehensive income and cash flows reflect all normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation of
the Company's financial position, results of operations and cash flows. The
results of operations for the interim three and six month periods ended July 2,
1999 are not necessarily indicative of the results to be expected for the full
year.
Certain amounts in the 1998 consolidated financial statements and notes have
been reclassified to conform to the 1999 presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137, is
effective for fiscal years beginning after June 15, 2000. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that all derivative instruments be recognized as either assets or
liabilities in the consolidated balance sheet and measured at fair value. We are
currently assessing the effects of adopting SFAS 133, and the impact of adopting
this statement is not anticipated to be material to the financial statements.
2. PURCHASE COMMITMENTS AND SALE OF MANUFACTURING ASSETS
On June 3, 1999, the Company sold certain manufacturing capital assets and
inventory for $6.0 million as part of the Company's efforts to outsource the
production of certain electronic products and assemblies. In addition, the
Company entered into an Electronic Manufacturing Services Agreement with a
third-party manufacturer. The agreement commits the Company to purchase a
minimum of $22.0 million of electronic products and assemblies from the
third-party manufacturer each year for three years from the date of the
agreement. If the Company fails to meet these minimum purchase levels, subject
to adjustment, the Company may be required to pay 25 percent of the difference
between the $22.0 million and the amount purchased.
3. INVENTORIES
Inventories consist of the following (in thousands):
July 2, December 31,
1999 1998
----------------- ----------------
(Unaudited)
Raw materials $ 24,114 $ 26,084
Work-in-process 25,924 23,511
Finished goods 3,348 3,724
----------------- ----------------
$ 53,386 $ 53,319
================= ================
8
<PAGE>
4. SEGMENT AND RELATED INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which changed the way the Company reports
information about its operating segments.
The Company's business units have been aggregated into three reportable
segments: simulation, workstation products, and applications. These reportable
segments offer different products and services and are managed and evaluated
separately because each segment uses different technologies and requires
different marketing strategies. The simulation segment provides a broad line of
visual systems for flight and ground simulators for training purposes to
government, aerospace and commercial airline customers. The workstation products
segment provides graphics accelerator products, including graphics chips and
subsystems, to the personal PC workstation marketplace. The applications segment
provides digital video applications for entertainment, educational, multimedia
and real estate development industries.
The Company evaluates segment performance based on income (loss) from operations
before income taxes, interest income and expense, other income and expense and
foreign exchange gains and losses. The Company's assets are not identifiable by
segment (in thousands, unaudited).
<TABLE>
<CAPTION>
Simulation Workstation Applications Total
Products
--------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Three months ended July 2, 1999:
Sales $ 35,492 $ 6,751 $ 1,780 $ 44,023
Operating income (loss) 331 (4,724) (1,609) (6,002)
Three months ended June 26, 1998:
Sales $ 40,108 $ 1,677 $ 1,853 $ 43,638
Operating income (loss) 5,559 (21,410) (1,784) (17,635)
Six months ended July 2, 1999:
Sales $ 75,755 $ 14,870 $ 3,144 $ 93,769
Operating income (loss) 3,632 (6,239) (3,031) (5,638)
Six months ended June 26, 1998:
Sales $ 79,850 $ 3,227 $ 2,982 $ 86,059
Operating income (loss) 9,686 (21,728) (3,786) (15,828)
</TABLE>
5. GEOGRAPHIC INFORMATION
The following table presents sales by geographic location based on the location
of the use of the product or services. Sales to individual countries greater
than 10% of consolidated sales are shown separately (in thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 2, June 26, July 2, June 26,
1999 1998 1999 1998
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
United States $ 21,461 $ 20,172 $ 46,952 $ 47,381
United Kingdom 10,465 11,832 25,797 19,052
Europe (excluding United Kingdom) 7,590 4,192 13,869 8,066
Pacific Rim 4,267 6,521 6,726 10,024
Other 240 921 425 1,536
--------------- --------------- -------------- --------------
$ 44,023 $ 43,638 $ 93,769 $ 86,059
=============== =============== ============== ==============
</TABLE>
9
<PAGE>
5 GEOGRAPHIC INFORMATION (Continued)
The following table presents property, plant and equipment by geographic
location based on the location of the assets (in thousands, unaudited):
<TABLE>
<CAPTION>
July 2, December 31,
1999 1998
--------------- ----------------
<S> <C> <C>
United States $ 50,403 $ 52,876
Europe 690 817
--------------- ----------------
Total property, plant and equipment, net $ 51,093 $ 53,693
=============== ================
</TABLE>
6. EARNINGS PER COMMON SHARE
Earnings per common share is computed based on the weighted-average number of
common shares and, if appropriate, dilutive common stock equivalents outstanding
during the period. Stock options are considered to be common stock equivalents.
Basic earnings per common share is the amount of earnings for the period
available to each share of common stock outstanding during the reporting period.
Diluted earnings per share is the amount of earnings for the period available to
each share of common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of common shares
for all dilutive potential common shares outstanding during the period. In
calculating earnings per common share, earnings were the same for both the basic
and diluted calculation.
For the three months ended July 2, 1999, outstanding options to purchase 289,000
shares of common stock, 428,000 shares of common stock issuable upon conversion
of the 6% Convertible Subordinated Debentures, 901,000 shares of common stock
issuable upon conversion of the Company's Class B-1 Preferred Stock and 378,000
shares of common stock upon the exercise and conversion of warrants to purchase
additional Class B-1 Preferred Stock were excluded from the computation of the
diluted earnings per share because to include such shares would have had an
anti-dilutive effect on earnings per common share.
For the six months ended July 2, 1999, outstanding options to purchase 280,000
shares of common stock, 428,000 shares of common stock issuable upon conversion
of the 6% Convertible Subordinated Debentures, 901,000 shares of common stock
issuable upon conversion of the Company's Class B-1 Preferred Stock and 378,000
shares of common stock upon the exercise and conversion of warrants to purchase
additional Class B-1 Preferred Stock were excluded from the computation of the
diluted earnings per share because to include such shares would have had an
anti-dilutive effect on earnings per common share.
For the three months ended June 26, 1998, outstanding options to purchase
446,000 shares of common stock and 428,000 shares of common stock issuable upon
conversion of the 6% Convertible Subordinated Debentures were excluded from the
computation of the diluted earnings per share because to include such shares
would have had an anti-dilutive effect on earnings per common share.
For the six months ended June 26, 1998, outstanding options to purchase 414,000
shares of common stock and 428,000 shares of common stock issuable upon
conversion of the 6% Convertible Subordinated Debentures were excluded from the
computation of the diluted earnings per share because to include such shares
would have had an anti-dilutive effect on earnings per common share.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes included in Item 1 of Part I of this form. Except
for the historical information contained herein, this report on Form 10-Q
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from those indicated by such
forward-looking statements.
OVERVIEW
Evans & Sutherland Computer Corporation ("Evans & Sutherland," "E&S(R)," or the
"Company"), is an established high-technology company with outstanding computer
graphics technology and a worldwide presence in high-performance 3D visual
simulation. In addition, E&S is now applying this core technology into
higher-growth personal computer ("PC") products for both simulation and
workstations. The Company's core computer graphics technology is shared among
the Company's simulation business, workstation products business, and
applications business.
Simulation Group
The Simulation Group provides a broad line of visual systems for flight and
ground training and related services to the United States and international
armed forces, NASA and aerospace companies. E&S remains an industry leader for
visual systems sales to various United States government agencies and more than
20 foreign governments for the primary purpose of training military vehicle
operators. The Simulation Group is also a leading independent supplier of visual
systems for flight simulators for commercial airlines. This group provides over
50 percent of the visual systems installed worldwide in full-flight training
simulators for civil airlines, training centers, simulator manufacturers and
aircraft manufacturers.
The group's visual systems create dynamic, high quality, out-the-window scenes
that simulate the view vehicle operators see when performing tasks under actual
operating conditions. The visual systems are an integral part of full mission
simulators, which incorporate a number of other components, including cockpits
or vehicle cabs and large hydraulic motion systems.
Workstation Products Group
The Workstation Products Group develops and sells graphics chips and graphics
subsystems for the personal workstation marketplace. This group sells to most
personal workstation OEMs and is gaining market share in the professional
graphics market. The group anticipates continued growth in the Windows NT
workstation marketplace with the market's transition from proprietary UNIX
architecture systems to Microsoft and Intel-based open architecture systems. The
Workstation Products Group provides a family of REALimage(TM) chip-based, 3D
graphics subsystems and their associated software to personal workstation OEMs.
These workstation products support a wide range of professional OpenGL(R)
graphics applications, including mechanical computer automated design,
engineering analysis, digital content creation, visualization, simulation,
animation, entertainment and architectural, engineering and construction. To
optimize its position in these markets, E&S maintains close working
relationships with more than 40 independent software vendors that provide
products into these markets. Consequently, E&S is certified and/or tested on
most of the popular PC workstation applications.
Applications Group
The Applications Group is composed of new and synergistic businesses that use
E&S core technology in growth markets. The group's products are applications
that leverage the technology of the Company's Simulation or Workstation Products
Groups and apply them to other growth markets.
11
<PAGE>
The Applications Group's digital theater products include hardware, software,
and content for both the entertainment and educational marketplaces. Digital
theater focuses on immersive all-dome theater applications combining colorful
digitally-produced imagery, full-spectrum audio, and audience-participation
hardware. The group provides turnkey solutions incorporating visual systems and
sub-systems from the Simulation and Workstation Products Groups. E&S integrates
these systems with projection equipment, audio components, and
audience-participation systems from other suppliers. Products include
Digistar(R), a calligraphic projection system designed to compete with analog
star projectors in planetariums, and StarRider(R), a full-color, interactive,
domed theater experience. The group is a leading supplier of digital display
systems in the planetarium marketplace.
The Applications Group's digital video products provide Windows NT, open system,
standard platform based virtual studio systems for digital content production in
the television broadcast, film, video, corporate training and multimedia
industries. The E&S solution offers significant improvement in cost, ease of use
and flexibility compared with the traditional, proprietary UNIX-based systems
common in this developing market. The group's products are all-inclusive system
solutions that incorporate visual system components and subsystems from the
Simulation and Workstation Products Groups. E&S MindSet(TM), Virtual Studio
System(TM) and the FuseBo(TM) control software with real-time, frame-accurate
camera tracking and enable live talent to perform in real time on a virtual set
generated using E&S 3D computer technology. The video output of the set meets
today's digital broadcast video standards. Systems are installed worldwide in
production, postproduction, broadcast and educational applications. The
Applications Group's products are sold directly to end-users by E&S as a prime
contractor or selectively through dealers.
On July 20, 1999, the Applications Group introduced its RAPIDsit(TM) product.
RAPIDsite is a photo-realistic visualization tool designed for use by
real-estate developers, consulting engineers, architects and municipal planners
involved with urban, suburban and environmentally sensitive development
projects. RAPIDsite features fast 3D-model construction, accelerated graphics
rendering performance and interactive exploration of a proposed development on a
Windows NT computer with an Open GL graphics accelerator.
12
<PAGE>
RESULTS OF OPERATIONS
The following table presents the percentage of total sales represented by
certain items for the Company for the periods presented (unaudited):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ---------------------------
July 2, June 26, July 2, June 26,
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 60.0 55.8 57.4 57.7
----------- ---------- ----------- -----------
Gross profit 40.0 44.2 42.6 42.3
Operating expenses:
Selling, general and administrative 27.1 21.4 23.6 20.9
Research and development 24.9 15.6 23.5 15.7
Amortization of goodwill and other intangible assets 1.6 - 1.5 -
Write-off of acquired in-process technology - 47.6 - 24.1
----------- ---------- ----------- -----------
Operating expenses 53.6 84.6 48.6 60.7
----------- ---------- ----------- -----------
Operating loss (13.6) (40.4) (6.0) (18.4)
Other income, net 2.3 1.3 1.1 1.3
----------- ---------- ----------- -----------
Loss before income taxes (11.3) (39.1) (4.9) (17.1)
Income tax expense (benefit) (3.5) 2.8 (1.5) 2.3
----------- ---------- ----------- -----------
Net loss (7.8) (41.9) (3.4) (19.4)
Accretion of preferred stock 0.1 - 0.1 -
----------- ---------- ----------- -----------
Net loss applicable to common stock (7.9)% (41.9)% (3.5)% (19.4)%
=========== ========== =========== ===========
</TABLE>
Second Quarter 1999 Compared to Second Quarter 1998
Sales
Sales increased to $44.0 million in the second quarter of 1999 from $43.6
million in the second quarter of 1998. Sales for simulation products decreased
$4.6 million, or 12% ($35.5 million in the second quarter of 1999 compared to
$40.1 million in the second quarter of 1998). The decrease in sales of
simulation products is due to three more systems shipped to commercial customers
in the second quarter of 1998 than in the same period of 1999. In addition,
delays in some government programs in the second quarter of 1999 resulted in
lower simulation products revenues than in the second quarter of 1998. Sales of
workstation products increased $5.1 million, or 303% ($6.8 million in the second
quarter of 1999 compared to $1.7 million in the second quarter of 1998). The
increase in sales of workstation products is due to the acquisition of
AccelGraphics, Inc. ("AGI") at the end of the second quarter of 1998 which
introduced new workstation products and increased the volume of workstation
products sold. Sales of application products decreased $0.1 million, or 4% ($1.8
million in the first quarter of 1999 compared to $1.9 million in the second
quarter of 1998). The decrease in sales of application products is due to fewer
shipments of MindSet virtual studios being shipped in the second quarter of 1999
than the same period in 1998. This decrease was partially offset by a greater
number of Digistar shipments in the second quarter of 1999 compared with the
second quarter of 1998.
13
<PAGE>
Gross Profit
Gross profit decreased $1.7 million, or 9% ($17.6 million in the second quarter
of 1999 compared to $19.3 million in the second quarter of 1998). As a percent
of sales, gross profit decreased to 40.0% in the second quarter of 1999 from
44.2% in the second quarter of 1998. The decrease in gross margin is due to
lower margins in the Simulation Group during the second quarter of 1999
primarily due to lower margins on several contracts to commercial contracts. In
addition, gross margin in the Workstation Products Group decreased in the second
quarter of 1999 as it has changed its business model from one based on royalty
income to one based on sales of graphics subsystems which has product costs
consistent with a manufacturing operation.
Selling, General and Administrative
Selling, general and administrative expenses increased $2.6 million, or 28%
($11.9 million in the second quarter of 1999 compared to $9.3 million in the
second quarter of 1998) and increased as a percent of sales (27.1% in the second
quarter of 1999 compared to 21.4% in the second quarter of 1998). The increase
in these expenses is due to increased selling, general and administrative
expenses related to the operations of Evans & Sutherland Graphics Corporation
("ESGC"), formerly AGI, and increased labor costs due to increased headcount and
related recruiting and relocation expenses.
Research and Development
Research and development expenses increased $4.1 million, or 61% ($10.9 million
in the second quarter of 1999 compared to $6.8 million in the second quarter of
1998) and increased as a percent of sales (24.9% in the second quarter of 1999
compared to 15.6% in the second quarter of 1998). The increase in these expenses
is due to increased research and development expenses related to the operations
of ESGC to support increased research and development activity in the
Workstation Products Group as well as higher costs in the Simulation Group
relating to its Harmony(TM) image generator.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets increased $0.7 million
($0.7 million in the second quarter of 1999 compared to $8,000 in the second
quarter of 1998). The increase in these expenses is due to the amortization of
goodwill and other intangible assets related to the acquisitions of AGI and
Silicon Reality, Inc. ("SRI") during the second quarter of 1998. The goodwill is
being amortized using the straight-line method over an estimated useful life of
seven years. The other intangible assets are being amortized using the
straight-line method over estimated useful lives ranging from six months to
seven years.
Write-off of Acquired In-Process Technology
In the second quarter of 1998, the Company recognized $20.8 million of expense
to write-off acquired in-process technology related to the acquisitions of AGI
and SRI. No such expense was recognized in the second quarter of 1999.
Other Income, Net
Other income, net increased $0.4 million ($1.0 million in the second quarter of
1999 compared to $0.6 million in the second quarter of 1998). Interest income
was $1.3 million and $0.6 million in the second quarter of 1999 and the second
quarter of 1998, respectively. The increase in interest income is due to
interest received in 1999 for delayed income tax refunds.
Income Taxes
The effective tax rate was 31.0% and 32.5% of pre-tax earnings for the second
quarter of 1999 and 1998, respectively. These rates are calculated based on an
estimated annual effective tax rate applied to earnings before income taxes.
14
<PAGE>
Six Months Ended July 2, 1999 Compared to Six Months Ended June 26, 1998
Sales
In the first six months of 1999, sales increased $7.7 million, or 9% ($93.8
million in the first six months of 1999 million compared to $86.1 million in the
first six months of 1998). Sales for simulation products decreased $4.1 million,
or 5% ($75.8 million in the first six months of 1999 compared to $79.9 million
in the first six months of 1998). The decrease in sales of simulation products
is due to increased sales to commercial customers in the first six months of
1998 as compared to the first six months of 1999. The decrease is also due to
delays in some government programs in the first six months of 1999. Sales of
workstation products increased $11.7 million, or 361% ($14.9 million in the
first six months of 1999 compared to $3.2 million in the first six months of
1998). The increase in sales of workstation products is due to the acquisition
of AGI at the end of the second quarter of 1998. Sales of application products
increased $0.1 million, or 5% ($3.1 million in the first six months of 1999
compared to $3.0 million in the first six months of 1998). The increase in sales
of application products is due to increased sales volumes of Digistar
planetarium systems.
Gross Profit
Gross profit increased $3.6 million, or 10% ($40.0 million in the first six
months of 1999 compared to $36.4 million in the first six months of 1998). As a
percent of sales, gross profit increased to 42.6% in the first six months of
1999 from 42.3% in the first six months of 1998. The increase in gross margin is
due to higher margin contracts in the Simulation Group in the first six months
of 1999. During the first quarter of 1998, a significant portion of revenues
from the Simulation Group were derived from a contract in which the Company
served as the prime contractor. These contracts have a lower gross margin than
contracts in which the Company is the subcontractor. This was offset by lower
margins in 1999 in the Workstation Products Group as it has changed its business
model from one based on royalty income to one based on sales of graphics
subsystems which has product costs consistent with a manufacturing operation.
Selling, General and Administrative
Selling, general and administrative expenses increased $4.2 million, or 23%
($22.2 million in the first six months of 1999 compared to $18.0 million in the
first six months of 1998) and increased as a percent of sales (23.6% in the
first six months of 1999 compared to 20.9% in the first six months of 1998). The
increase in these expenses is due to increased selling, general and
administrative expenses related to the operations of ESGC and increased labor
costs due to increased headcount and related recruiting and relocation expenses.
Research and Development
Research and development expenses increased $8.5 million, or 63.4% ($22.0
million in the first six months of 1999 compared to $13.5 million in the first
six months of 1998) and increased as a percent of sales (23.5% in the first six
months of 1999 compared to 15.7% in the first six months of 1998). The increase
in these expenses is due to increased research and development expenses related
to the operations of ESGC to support increased research and development activity
in the Workstation Products Group as well as higher costs in the Simulation
Group relating to its Harmony image generator.
15
<PAGE>
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets increased $1.4 million
($1.4 million in the first six months of 1999 compared to $16,000 in the first
six months of 1998). The increase in these expenses is due to the amortization
of goodwill and other intangible assets related to the acquisitions of AGI and
SRI during the second quarter of 1998. The goodwill is being amortized using the
straight-line method over an estimated useful life of seven years. The other
intangible assets are being amortized using the straight-line method over
estimated useful lives ranging from six months to seven years.
Write-off of Acquired In-Process Technology
In the second quarter of 1998, the Company recognized $20.8 million of expense
to write-off acquired in-process technology related to the acquisitions of AGI
and SRI. No such expense was recognized in the first six months of 1999.
Other Income, Net
Other income, net decreased $0.1 million ($1.0 million in the first six months
of 1999 compared to $1.1 million in the first six months of 1998). Interest
income was $1.5 million and $1.2 million in the first six months of 1999 and the
first six months of 1998, respectively. The increase in interest income is due
to interest received in 1999 for delayed income tax refunds which was offset by
a decrease in the average cash and cash equivalents and short-term investments
balances in the first six months of 1999 as compared to the first six months of
1998.
Income Taxes
The effective tax rate was 31.0% and 32.5% of pre-tax earnings for the first six
months of 1999 and 1998, respectively. These rates are calculated based on an
estimated annual effective tax rate applied to earnings before income taxes.
LIQUIDITY & CAPITAL RESOURCES
At July 2, 1999, the Company had working capital of $134.5 million, including
cash, cash equivalents and short-term investments of $25.1 million, compared to
working capital of $134.4 million at December 31, 1998, including cash, cash
equivalents and short-term investments of $27.7 million. During the six months
ended July 2, 1999, the Company used $1.7 million of cash in its operating
activities, generated $22.2 million of cash from its investing activities and
used $0.5 million of cash in its financing activities.
The primary uses of cash from the Company's operating activities included a net
increase in costs and estimated earnings in excess of billings on uncompleted
contracts of $11.2 million, a decrease in accounts payable of $9.7 million, an
increase in inventory of $5.2 million and an increase in prepaid expenses and
deposits of $1.0 million. These primary uses of cash were partially offset by
$15.3 million net cash flow from the collection of accounts receivable, $8.0
million of depreciation and amortization expense and $0.9 million net cash flow
from customer deposits. The net increase in costs and estimated earnings in
excess of billings on uncompleted contracts was primarily due to the delays in
achieving billing milestones on projects related to the Company's Harmony image
generator. The decline in the Company's accounts payable balance was due to a
change in the timing of materials received which had resulted in a higher
balance at December 31, 1998. The increase in the Company's inventory balance
was due to an increase in raw materials and work-in-process inventory related to
the Company's Harmony image generator. The decline in the Company's accounts
receivable balance was due to an increased effort in collection of receivables
and a reduced volume of new billings due to delays in achieving billing
milestones on projects related to the Company's Harmony image generator.
The Company's investing activities during the six months ended July 2, 1999
included capital expenditures of $5.4 million for building improvements and
equipment. The Company has a capital commitment, as of August 6, 1999, of $0.8
million to construct a building in Salt Lake City, Utah to house its machine
shop. Proceeds from the sale of short-term investments, net of purchases,
provided $22.2 million of cash during the six months ended July 2, 1999.
16
<PAGE>
On June 3, 1999, the Company sold certain manufacturing capital assets and
inventory for $6.0 million as part of the Company's efforts to outsource the
production of certain electronic products and assemblies. In addition, the
Company entered into an Electronic Manufacturing Services Agreement with a
third-party manufacturer. The agreement commits the Company to purchase a
minimum of $22.0 million of electronic products and assemblies from the
third-party manufacturer each year for three years from the date of the
agreement. If the Company fails to meet these minimum purchase levels, subject
to adjustment, the Company may be required to pay 25 percent of the difference
between the $22.0 million and the amount purchased.
The Company's financing activities during the six months ended July 2, 1999
included the use of $0.8 million for the repurchase of common stock and $0.6
million for repayments under line of credit agreements. Proceeds from the
issuance of common stock relating to the exercise of stock options provided $0.9
million of cash during the six months ended July 2, 1999.
On February 18, 1998, the Company's Board of Directors authorized the repurchase
of up to 600,000 shares of the Company's common stock, including the 327,000
shares still available from the repurchase authorization approved by the Board
of Directors on November 11, 1996. On September 8, 1998, the Company's Board of
Directors authorized the repurchase of an additional 1,000,000 shares of the
Company's common stock. Subsequent to February 18, 1998, the Company has
repurchased 1,008,000 shares of its common stock; thus, 592,000 shares currently
remain available for repurchase as of August 6, 1999. Stock may be acquired in
the open market or through negotiated transactions. Under the program,
repurchases may be made from time to time, depending on market conditions, share
price, and other factors. These repurchases are to be used primarily to meet
current and near-term requirements for the Company's stock-based benefit plans.
In November 1998, the Company entered into a revolving line of credit agreement
with U.S. Bank National Association. The revolving line of credit provides for
borrowings by the Company of up to $20.0 million. Borrowings bear interest at
the prevailing prime rate minus 1.0% or the LIBOR rate plus 1.0%. The revolving
line of credit expires on November 10, 1999. The revolving line of credit, among
other things, (i) requires the Company to maintain certain financial ratios;
(ii) restricts the Company's ability to incur debt or liens; sell, assign,
pledge or lease assets; merge with another company; and (iii) restricts the
payment of dividends and repurchase of any of the Company's outstanding shares
without prior consent of the lender if there are borrowings outstanding under
the agreement. The revolving line of credit is unsecured. There were no
borrowings under this agreement outstanding as of August 6, 1999. In addition,
the Company has a $7.5 million unsecured line for letters of credit with U.S.
Bank National Association for which there were approximately $6.0 million
outstanding as of July 2, 1999.
As of July 2, 1999, the Company had revolving line of credit agreements with
foreign banks totaling approximately $6.3 million, of which approximately $3.0
million was unused and available. The Company has a letter of credit with
another bank in the United States for $5.0 million as a guarantee for one of the
Company's foreign line of credit agreements.
In July 1998, the Company obtained approximately $24.0 million, less transaction
costs of approximately $0.5 million, of financing through the sale of 901,408
shares of the Company's Class B-1 Preferred Stock, no par value, and issued
warrants to purchase 378,462 additional shares of the Company's Class B-1
Preferred Stock at an exercise price of $33.28125 per share to Intel Corporation
("Intel"). The Class B-1 Preferred Stock has no dividend rights. Intel has
certain contractual rights, including registration rights, a right of first
refusal, and a right to require the Company to repurchase the 901,408 shares of
Class B-1 Preferred Stock, 378,462 shares underlying the warrant, and shares of
common stock of the Company issuable upon conversion of the Class B-1 Preferred
Stock (the "Intel Shares") in the event of any transaction qualifying as a
Corporate Event, as defined below. If Intel fails to exercise its right of first
refusal as to a Corporate Event, Intel shall, upon the Company's entering into
an agreement to consummate a Corporate Event, have the right to sell to the
Company any or all of the Intel Shares. The potential mandatory redemption
amount is the greater of (i) the original price per share purchase price paid by
Intel or (ii) either the highest price per share of capital stock (or
equivalent) paid in connection with a Corporate Event or, if the transaction
involves the sale of a significant subsidiary or assets or the licensing of
intellectual property, Intel's pro rata share of the consideration received,
directly or indirectly, by the Company in such transaction based on its then
fully-diluted ownership of the Company's capital stock. A Corporate Event shall
mean any of the following, whether accomplished through one or a series of
related transactions: (i) certain transactions that result in a greater than 33%
change in the total outstanding number of voting securities of the Company
immediately after such issuance; (ii)
17
<PAGE>
an acquisition of the Company or any of its significant subsidiaries by
consolidation, merger, share purchase or exchange or other reorganization or
transaction in which the holders of the Company's or such significant
subsidiary's outstanding voting securities immediately prior to such transaction
own, immediately after such transaction, securities representing less than 50%
of the voting power of the Company, any such significant subsidiary or the
person issuing such securities or surviving such transaction, as the case may
be; (iii) the acquisition of all or substantially all the assets of the Company
or any significant subsidiary; (iv) the grant by the Company or any of its
significant subsidiaries of an exclusive license for any material portion of the
Company's or such significant subsidiary's intellectual property to a person
other than Intel or any of its subsidiaries; or (v) any transaction or series of
related transactions that result in the failure of the majority of the members
of the Company's Board of Directors immediately prior to the closing of such
transaction or series of related transactions failing to constitute a majority
of the Board of Directors (or its successor) immediately following such
transaction or series of related transactions.
As of July 2, 1999, the Company had approximately $18.0 million of 6%
Convertible Subordinated Debentures due in 2012 (the "6% Debentures"). The 6%
Debentures are unsecured and are convertible at each bondholder's option into
shares of the Company's common stock at a conversion price of $42.10 or 428,000
shares of the Company's common stock subject to adjustment. The 6% Debentures
are redeemable at the Company's option, in whole or in part, at par.
Management believes that existing cash, cash equivalents and short-term
investment balances, borrowings available under its line of credit agreements
and cash from future operations will be sufficient to meet the Company's
anticipated working capital needs, research and development, routine capital
expenditures and current debt service obligations for the next twelve months.
The Company's cash, cash equivalents and short-term investments are available
for working capital needs, research and development, capital expenditures,
strategic investments, mergers and acquisitions, stock repurchases and other
potential cash needs as they may arise. On a longer-term basis, if future cash
from operations and existing line of credit agreements are not sufficient to
meet the Company's cash requirements, the Company may be required to renegotiate
its existing line of credit agreements or seek additional financing from the
issuance of debt or equity securities. There can be no assurances that the
Company would be successful in renegotiating its existing line of credit
agreements or obtaining additional debt or equity financing.
ACQUIRED IN-PROCESS TECHNOLOGY
In connection with the acquisitions of AGI and SRI, the Company made allocations
of the purchase price to various acquired in-process technology projects. These
amounts were expensed as non-recurring charges in the quarter ended June 26,
1998 because the acquired in-process technology had not yet reached
technological feasibility and had no future alternative uses.
Failure to complete the development of these projects in their entirety, or in a
timely manner, could have a material adverse impact on the Company's operating
results, financial condition and results of operations. No assurance can be
given that actual revenues and operating profit attributable to acquired
in-process technology will not deviate from the projections used to value such
technology in connection with each of the respective acquisitions. On-going
operations and financial results for the acquired technology and the Company as
a whole are subject to a variety of factors which may not have been known or
estimable at the date of such acquisition, and the estimates discussed below
should not be considered the Company's current projections for operating results
for the acquired businesses or the Company as a whole. A description of the
acquired in-process technology and the estimates made by the Company for each of
the technologies is discussed below.
Mid-range Professional Graphics Subsystem (2100). This technology is a
graphics subsystem with built in VGA core and integral DMA engines. This
technology provides superior graphics performance over previous
technologies, and includes features such as stereo and dual monitor support
and various texture memory configurations. The technology is used in the
AccelGALAXY(TM) product, which was completed and began shipping to
customers in late third quarter of 1998. The cost to complete this project
subsequent to the acquisition of AGI was $0.3 million, $0.1 million over
the budgeted amount and was funded by working capital. The project was also
completed a month later than scheduled. The assigned value to this
technology is $6.1 million.
18
<PAGE>
CAD-focused Professional Graphics Subsystem (1200). This technology is a
graphic subsystem with lower costs compared to the mid-range technology,
resulting in a more cost-effective graphics solution for the end-user. It
provides the cost sensitive user with adequate graphics performance, with
few features, and a single texture configuration option. The technology is
used in the E&S Lightning 120(TM) product, which was completed in March
1999 and began shipping to customers in April 1999. The cost to complete
this project subsequent to the acquisition of AGI was $0.5 million, $0.2
million over the budgeted amount and was funded by working capital. The
assigned value for this technology is $6.2 million.
Multiple-Controller Graphics Subsystems (2200). This technology is a
high-end graphics subsystem involving the parallel use of two or four
controllers. This technology is aimed at super users in the graphics area
who need significant increases in performance and features to accomplish
their tasks and are willing to pay the increased price necessary to support
those requirements. This technology is in development with its introduction
date under review. As of July 2, 1999, the cost to complete this project
subsequent to the acquisition of AGI was $0.9 million. Management estimates
that additional costs to complete this project will be $0.5 million and it
will be completed by the end of the third quarter of 1999. This project
will be funded by working capital. The assigned value for this technology
is $2.7 million.
On-board Geometry Engine Graphics Subsystem (AccelGM(TM)). This technology
is a mid-range graphics subsystem with a geometry engine on board. This
technology is aimed at the performance intensive graphics end-user. It has
fewer features than the mid-range professional technology, but faster
geometry performance compared to the mid-range professional technology on
Pentium II processors. This technology was completed in the third quarter
of 1998 and the AccelGMX product that uses this technology began shipping
to customers at that time. The cost to complete this project subsequent to
the acquisition of AGI was $0.1 million and was funded by working capital.
The assigned value of this technology was $5.3 million.
The AccelGALAXY has performed below revenue estimates due to the delay in
product introduction by the Company and a delayed design win at one major OEM.
Management is unable to predict the long-term effect of this one-month delay.
Subsequent to the Company's acquisition of AGI, the developer of the chip used
on the AccelGMX also acquired a board company, Dynamic Pictures, and entered the
graphics accelerator market in direct competition with the AccelGMX. As a
result, the AccelGMX has performed below revenue estimates. The E&S Lightning
1200 has performed below revenue estimates due to the delay in product
introduction by the Company. Management is unable to predict the long-term
effect of this delay.
The Company periodically reviews the value assigned to the separate components
of goodwill, intangibles and other long-lived assets through comparison to
anticipated, undiscounted cash flows of the underlying business to assess
recoverability. In light of the events described above, during the third quarter
of 1999 the Company is conducting a detailed evaluation of the assets acquired
in connection with the acquisitions of AGI and SRI. If from such evaluation the
Company determines that a portion of the acquired assets are impaired, an
appropriate adjustment of the carrying value may be necessary to reflect the
estimated fair value.
YEAR 2000 ISSUE
The Year 2000 issue is the result of potential problems with computer systems or
any equipment with computer chips that store the year portion of the date as
just two digits (for example, 98 for 1998). Systems using this two-digit
approach will not be able to determine whether "00" represents the year 2000 or
1900. The problem, if not corrected, will make those systems fail altogether or,
even worse, allow them to generate incorrect calculations causing a disruption
of normal operations.
The Company has created a company-wide Year 2000 team to identify and resolve
Year 2000 issues associated either with the Company's internal systems or the
products and services sold by the Company. As part of this effort, the Company
is communicating with its main suppliers of technology products and services
regarding the Year 2000 status of such products or services. The Company has
identified and tested its main internal systems. The Company expects to complete
implementation of needed Year 2000-related modifications to its information
systems by the end of the third quarter of 1999. The Company has also assessed
its internal non-information technology systems, and expects to complete testing
and any needed modifications to these systems by the end of the third quarter of
1999.
19
<PAGE>
The Company's total cost relating to these activities has not been and is not
expected to be material to the Company's financial position, results of
operations, or cash flows. The Company believes that necessary modifications
will be made on a timely basis. However, there can be no assurance that there
will not be a delay in, or increased costs associated with, the implementation
of such modifications, or that the Company's suppliers will adequately prepare
for the Year 2000 issue. It is possible that any such delays, increased costs,
or supplier failures could have a material adverse impact on the Company's
operations and financial results, by, for example, impacting the Company's
ability to deliver products or services to its customers. The Company expects to
finalize its assessment of and contingency planning for potential operational or
performance problems related to Year 2000 issues with its information systems by
the end of the third quarter of 1999.
The Company's Year 2000 effort has included testing products currently or
recently on the Company's price list for Year 2000 issues. Generally, for
products that were identified as needing updates to address Year 2000 issues,
the Company has prepared or is preparing updates, or has removed or is removing
the product from its price list. Some of the Company's customers are using
product versions that the Company will not support for Year 2000 issues; the
Company is encouraging these customers to migrate to current product versions
that are Year 2000 ready.
For third party products which the Company distributes with its products, the
Company has sought information from the product manufacturers regarding the
products' Year 2000 readiness status. Customers who use the third-party products
are directed to the product manufacturer for detailed Year 2000 status
information. On its Year 2000 web site at www.es.com/investor/y2k_corp.html, the
Company provides information regarding which of its products are Year 2000 ready
and other general information related to the Company's Year 2000 efforts. The
Company's total costs relating to these activities has not been and is not
expected to be material to the Company's financial position or results of
operations. Additionally, there can be no guarantee that one or more of the
Company's current products do not contain Year 2000 date issues that may result
in material costs to the Company.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q, includes certain "forward-looking
statements" within the meaning of that term in Section 27A of the Securities Act
of 1933, and Section 21E of the Exchange Act, including, among others, those
statements preceded by, followed by or including the words "believes,"
"expects," "anticipates" or similar expressions.
These forward-looking statements are based largely on our current expectations
and are subject to a number of risks and uncertainties. Our actual results could
differ materially from these forward-looking statements. Important factors to
consider in evaluating such forward-looking statements include risk of product
demand, market acceptance, economic conditions, competitive products and
pricing, difficulties in product development, commercialization and technology
and other risks detailed in this filing and in the Company's most recent Form
10-K. Although the Company believes it has the product offerings and resources
for continuing success, future revenue and margin trends cannot be reliably
predicted. Factors external to the Company can result in volatility of the
Company's common stock price. Because of the foregoing factors, recent trends
are not necessarily reliable indicators of future stock prices or financial
performance and there can be no assurance that the events contemplated by the
forward-looking statements contained in this quarterly report will, in fact,
occur.
TRADEMARKS USED IN THIS FORM 10-Q
AccelGALAXY, AccelGMX, Digistar, E&S, E&S Lightning 1200, FuseBox, Harmony,
MindSet, REALimage, RAPIDsite, StarRider, and Virtual Studio System are
trademarks or registered trademarks of Evans & Sutherland Computer Corporation.
All other product, service, or trade names or marks are the properties of their
respective owners.
20
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which the Company is exposed are changes in
foreign currency exchange rates and changes in interest rates. The Company's
international sales, which accounted for 49% of the Company's total sales in the
six months ended July 2, 1999 are concentrated in the United Kingdom,
continental Europe and Asia. The Company manages its exposure to changes in
foreign currency exchange rates by entering into most of its sales and purchase
contracts for products and materials in U.S. dollars. Occasionally, the Company
enters into sales and purchase contracts for products and materials denominated
in currencies other than U.S. dollars and in those cases the Company enters into
foreign exchange forward sales or purchase contracts to offset those exposures.
Foreign currency purchase and sale contracts are entered into for periods
consistent with related underlying exposures and do not constitute positions
independent of those exposures. The Company does not enter into contracts for
trading purposes and does not use leveraged contracts. As of July 2, 1999, the
Company had no material sales or purchase contracts in currencies other than
U.S. dollars and had no foreign currency sales or purchase contracts.
The Company reduces its exposure to changes in interest rates by maintaining a
high proportion of its debt in fixed-rate instruments. As of July 2, 1999, 84%
of the Company's total debt was in fixed-rate instruments; however, the Company
has a revolving line of credit that provides for borrowings by the Company of up
to $20.0 million. The borrowings bear interest at a variable rate at the
prevailing prime rate minus 1.0% or the LIBOR rate plus 1.0%. If the Company
were to borrow all of the $20.0 million of the revolving line of credit and the
$6.6 million of foreign lines of credit, 41% of the Company's total debt would
be in fixed-rate instruments.
21
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 20, 1999. Proxies for
the meeting were solicited pursuant to Regulation 14A.
The Company's Board of Directors is divided into three classes whose terms
expire at successive annual meetings. Accordingly, not all Directors are elected
at each Annual Meeting of Stockholders. Mr. Stewart Carrell was re-elected as a
Director and other continuing Directors are: Peter O. Crisp, Ivan E. Sutherland,
Gerald S. Casilli and James R. Oyler.
The matters described below were voted on at the meeting and the results are as
follows:
1. Election of Stewart Carrell to serve until the 2002 Annual Meeting of
Stockholders
For Against
8,103,359 195,368
2. Amendment to the Evans & Sutherland 1998 Stock Option Plan to increase the
aggregate number of shares of the Company's common stock available for grant
under the Plan from 400,000 shares to 850,000 shares
For Against Abstain Non-Vote
4,926,311 3,202,962 169,448 6
3. The ratification of KPMG LLP as independent auditors of the Company for the
fiscal year ending December 31, 1999
For Against Abstain Non-Vote
8,290,299 5,647 2,781 -
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
10.1 Master Agreement for Electronic Manufacturing
Services, dated as of June 3, 1999, between
Evans & Sutherland Computer Corporation and
Sanmina Corporation
27.1 Financial Data Schedule
(filed as part of electronic filing only)
(b) Reports on Form 8-K
None.
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVANS & SUTHERLAND COMPUTER CORPORATION
Date August 16, 1999 By: /s/ Mark C. McBride
------------------------------------
Mark C. McBride, Vice President,
Corporate Controller and
Corporate Secretary
(Principal Financial Officer)
23
SANMINA CORPORATION,
EVANS & SUTHERLAND COMPUTER CORPORATION
MASTER AGREEMENT FOR
ELECTRONIC MANUFACTURING SERVICES
This Master Agreement for Electronic Manufacturing Services (the "Agreement") is
made and entered into effective as of June 3, 1999, by and between Sanmina
Corporation, a Delaware corporation ("Sanmina") and Evans & Sutherland Computer
Corporation, a Utah Corporation ("Customer" or "E&S").
RECITALS
Sanmina and E&S have entered into an Asset Purchase Agreement dated concurrently
with the date of this Agreement (the "Purchase Agreement"), pursuant to which
Sanmina is acquiring certain assets associated with E&S' Salt Lake City, Utah
prototype, printed circuit board and other electronic assemblies manufacturing
operation (the "Electronics Manufacturing Operation"). In connection with the
execution and performance of the Purchase Agreement, and as a condition and
inducement to the parties' undertakings therein, this Agreement is being
executed to provide for a continuing relationship between Sanmina and E&S,
pursuant to which Sanmina will perform manufacturing services for E&S, upon the
terms and conditions set forth herein.
AGREEMENT
I. Manufacturing Services to be Performed
A. Products. The products covered by this Agreement (collectively the
"Products") are those electronic products and assemblies, including
printed circuit boards, prototypes and Legacy Products (as defined
below) which Customer may desire to have Sanmina manufacture for
Customer during the term of this Agreement. "Legacy Products" means
those electronics products, boards and assemblies having no
identifiable, forecastable demand (i.e., driven solely by discreet
orders) which were previously produced at the Electronics
Manufacturing Operation, for which Customer may need replacements or
additional inventory.
B. Manufacturing Services. During the term of this Agreement, and in
accordance with the provisions hereof, Sanmina will manufacture and
sell Products to Customer.
C. Scope of Agreement. All manufacturing and sales of Products by
Sanmina, its subsidiaries and affiliates (collectively referred
hereinafter as "Sanmina") for and to Customer during the term of this
Agreement shall be governed by and subject to the terms and conditions
of this Agreement.
II. Orders and Acceptances for Products
A. Purchase Orders and Acceptances. Customer will purchase Products by
issuing purchase orders ("Order" or "Orders") to Sanmina. Orders will
contain such things as quantity, prices, specified delivery dates,
specifications, and Product number or designation, consistent with the
terms of this Agreement. Repeat Orders for Products may initially be
placed by electronic transmission, provided that Customer will make
commercially reasonable efforts to send a confirmational written Order
to Sanmina (except as otherwise agreed) within one week after the
electronic order. Blanket Orders may be placed, with subsequent
electronic or written instructions to authorize shipment and delivery
of Products, up to the maximum quantities covered by the blanket
Orders. Sanmina will sign and return written confirmation of each
Order within five business days after receipt. All Orders and
acceptances relating to Products will be governed by the terms of this
Agreement, and nothing contained in any Order or acceptance will in
any way modify the terms or conditions of this Agreement, unless
expressly agreed to in writing by Sanmina and Customer. Sanmina and
Customer hereby give notice of their objection to any additional or
different terms.
B. Placement of Orders; Delivery of Forecasts. Upon execution of this
Agreement, Customer will submit an Order for Products deliverable over
the first three months of the term of this Agreement. Thereafter,
Customer will provide Orders to Sanmina on a monthly basis, including
orders for Products to be delivered in the third month following the
date of the Order, resulting in a rolling three month period covered
by Orders. Upon execution of this Agreement, and on a monthly basis
thereafter, concurrently with the submission of the monthly Orders
referenced above, Customer will provide a rolling nine month forecast
of Customer's anticipated Product purchases, for the nine month period
immediately following the three month period covered by submitted
Orders. Obligations to purchase Products, and any liability of the
parties with respect to anticipated Product requirements, will arise
only as actual Orders are submitted to Sanmina, with the sole
exception that with respect to any long lead-time parts for which a
forecast would cause procurement activity as provided herein, Customer
shall have those obligations set forth in Section III below. Actual
Orders may be different from forecasted numbers. Orders may be
submitted other than at the monthly intervals provided above,
consistent with the terms of this Agreement. Where appropriate,
Customer will level load requirements for certain Products in order to
provide a steady flow of Product to Customer and a steady production
schedule for Sanmina. Sanmina will review forecasts provided by
Customer and advise Customer if Sanmina anticipates that it will be
unable to achieve the Product volumes reflected in such forecasts.
C. Acceptance of Orders. Sanmina will accept all orders for Products
submitted by Customer in accordance with the terms and conditions of
this Agreement up to the greater of (i) 125% of the amount specified
in the forecast delivered in the preceding month with respect to the
period covered by such Orders, or (ii) the amount of Products for
which Sanmina has purchased Materials, as provided herein. Sanmina
will use its reasonable best efforts to accept Orders submitted by
Customer for Products in excess of the committed volume levels. Orders
submitted in excess of the committed quantity levels that Sanmina is
unable to accept must be rejected within five business days after
receipt by Sanmina.
III. Materials Planning, Procurement Process and Liabilities
A. Master Production Schedule. Based on the Orders and forecasts received
from Customer as provided above, Sanmina will on a monthly basis
generate a Master Production Schedule ("MPS") for a rolling twelve
month period. This MPS will define the master plan on which Sanmina
will base its procurement, internal capacity projections and
commitments. The MPS created as described above will not impose any
liability on either Sanmina or Customer, except that with respect to
any long lead-time parts and that portion of the MPS related to firm
orders as described in Section II paragraph B of this document, for
which the MPS would cause procurement activity as provided herein,
Customer shall have those obligations set forth in this Section III.
B. Material Procurement Schedule. Sanmina will process the MPS through
industry-standard MRP software that will convert the MPS reflecting
Customer's Orders and forecasts into requirements for components
utilized to make the applicable Products. In doing so, Sanmina will
off-set the requirements for receipt of components or materials by
allowing for the time required to build the Products per the following
times:
1. In-Circuit Test/Functional Test - 5 Working Days
2. Assembly - 7 Working Days
3. Kitting - 2 Working Days
4. Material Handling - 2 Working Days
Per this Agreement, Sanmina will plan and schedule material to be at
Sanmina eleven working days before the Products are due to ship to
Customer where no test is required, and sixteen working days before
the Products are due to ship to Customer where testing is required.
C. Sanmina Orders for Materials. Sanmina will release (launch) orders to
suppliers of materials required in connection with the production of
Products a reasonable period of time prior to the anticipated date
that the material is needed (as set forth in the preceding paragraph).
When these orders are launched will depend on the vendor lead time
determined by Sanmina from time to time and maintained as a parameter
of Sanmina's manufacturing or materials planning systems. Sanmina,
through its MRP system, will also issue an instruction ("MRP signal")
to its procurement group to buy a part approximately seven days before
the order is due to be placed in accordance with this paragraph.
Unless otherwise directed by Customer, Sanmina will purchase
components for Products in accordance with a vendor list approved by
Sanmina and Customer ("AVL"). In the event Sanmina for any reason
cannot purchase any components from an approved vendor named on the
AVL, Sanmina may purchase such components from an alternate vendor
with the prior written consent of Customer. In no event will Sanmina,
without the prior written consent of Customer, be authorized to
purchase (or to impose obligations on Customer with respect to,
pursuant to Section III of this Agreement), materials, parts and
components beyond those necessary to support Orders actually delivered
by Customer, with the exception of minimum quantity requirements
imposed by vendors for parts being procured by Sanmina for Customer,
and any anticipated Orders for the next 30 day period, as reflected in
any forecasts delivered by Customer to Sanmina. Proto-type and
Quick-turn Orders will not appear on the MPS, but will be managed on a
manual basis due to the critical time factor and lot size of these
orders. Customer agrees that it will be liable for all materials ,
including minimum purchase requirements, purchased for any Quick-turn
or Proto-Type Order that Customer places with Sanmina.
D. Materials Classifications and Periods of Supply. When Sanmina places
an order with its suppliers in accordance with the preceding
paragraph, Sanmina will order parts in various quantities (defined in
periods-worth-of-supply) that are defined by the part's ABC
classification. This classification, as well as the expected
distribution or characteristics of various classes of parts, and the
periods-worth-of-supply ("Periods-of-Supply") that will be bought for
each class of part, are shown on the following table:
<TABLE>
<CAPTION>
ABC Classifications, Descriptions and Periods-of-Supply
- --------------------------- -------------------------- -------------------------- --------------------------
Part Class Expected Expected Periods Worth of
Percentage of Total Percentage of Total Supply to be Bought
Parts Value (of Gross With Each Order
Requirements)
<S> <C> <C> <C>
A 3% 80% 4 Weeks
- --------------------------- -------------------------- -------------------------- --------------------------
B 17% 17% 3 Months
- --------------------------- -------------------------- -------------------------- --------------------------
C 80% 3% 12 Months
- --------------------------- -------------------------- -------------------------- --------------------------
</TABLE>
E. Materials Quantities Criteria. In addition to ordering parts for
various Periods-of-Supply as referenced above, Sanmina will order
parts according to appropriate minimum-buy quantities, tape and reel
quantities, and multiples of packaging quantities.
F. Customer Liability for Materials. In the event that Sanmina procures
(other than pursuant to the terms of the Purchase Agreement)
components, parts or materials unique to, and specifically for use in,
Products ordered or forecasted by Customer (collectively "Materials"),
consistent with the procurement procedures set forth above, and any
such Materials become obsolete or surplus to Customer, so as to be
unusable in current Orders for Products from Customer, then Sanmina
will provide to Customer prompt notice of such obsolescence/surplus,
and the potential cost to Customer hereunder as a result of such
obsolescence or surplus. Sanmina shall use its reasonable best efforts
(for a period of at least four weeks) to cancel any outstanding orders
for any such Materials, use excess/uncancelable Materials for the
manufacture of products for other customers, and return such Materials
back to the original supplier or sell such Materials to the original
supplier or a third party at the original purchase price, or on such
other terms as Supplier and Customer may agree upon. After the
exhaustion of such remedies, Sanmina will be entitled to: (a) sell to
Customer any remaining obsolescent/surplus Materials, at an amount
equal to 116% of Sanmina's out-of-pocket costs therefor (the
"Materials Transfer Price"); and (b) invoice Customer for (i) the
amount by which the Materials Transfer Price for any such Materials
which Sanmina was able to sell to third parties as provided above
exceeded the price obtained from such third parties with respect
thereto, and (ii) the amount of any re-stocking or other fees charged
to Sanmina with respect to any order cancellations and returns of
obsolete/surplus Materials. Customer's obligations with respect to
obsolete/surplus Materials as set forth herein shall not extend to any
materials acquired by Sanmina pursuant to the terms of the Purchase
Agreement. Customer's only obligations with respect to such Materials
shall be as set forth in the Purchase Agreement.
G. Acquisition of Tooling. If necessary and with the Customer's written
consent, Sanmina will acquire any necessary tools and tooling to
fulfill any Orders. All such tooling required by Sanmina shall remain
the Customer's property, and Sanmina shall return such tooling (normal
wear and tear excepted) to Customer upon request, following the
completion of the relevant Order or the termination of this Agreement.
Responsibility for the cost of tooling acquired pursuant to the terms
of the Purchase Agreement shall be as set forth in the Purchase
Agreement. Except as otherwise provided herein or agreed by the
parties hereto, Customer will be responsible for the cost of all other
tools and tooling required to be acquired by Sanmina hereunder. When
requested by Customer, and agreed to in writing by Sanmina and
Customer, the cost of such tooling will be amortized over the
estimated volume of Products to be produced with such tooling.
H. Limitations on Sanmina's Rights to Build Ahead. Although Orders cover
up to 90 days and forecasts cover longer periods, Sanmina is not
authorized to make unilateral decisions on the amount of Products to
be built more than 30 days prior to scheduled delivery date, with the
exception of agreed upon Kanban levels. Lot sizes and build-ahead
quantities will be the result of a mutual agreement between Sanmina
and Customer.
IV. Reschedules
A. Rescheduling Matrix. Customer may reschedule delivery dates for
Products subject to the following matrix:
Notice Prior to Percent of Original
Original Quantity that can be
Delivery Date Rescheduled
0 to 30 days 0%
31 to 60 days 25%
61 to 90 days 50%
Beyond 90 days 100%
As an example, if Customer notifies Sanmina in writing between 31 and
60 days prior to the scheduled deliver date of certain Products,
Customer may reschedule the delivery of a maximum of 25% of the total
amount of such Products.
B. Revised Delivery Dates. Deliveries rescheduled as provided above shall
be deferred to such date or dates, within 60 days following the
original delivery date, as Customer may reasonably determine. A change
in the delivery date of any Product for a period exceeding 60 days in
the aggregate shall be deemed a cancellation by Customer with respect
to such Product.
V. Revisions
In the event Customer requests an engineering change to a Product,
Sanmina will notify Customer of any impact on the cost and/or
scheduled delivery of such Product within five business days of the
receipt of Customer's request. Unless Customer consents to the amended
notification from Sanmina, the requested engineering change will be
deemed canceled. Any changes (whether up or down) in the cost of
Products resulting from an engineering change order ("ECO") will be
applied to the applicable purchase price for such Products. Sanmina
will charge a $250.00 administrative fee per ECO to partially cover
Sanmina's processing costs involved in processing the ECO.
VI. Cancellations
Customer may cancel any Order, with the exception of Quick-turn and
/or Proto-type Orders, by notifying Sanmina in writing at least 30
days prior to the delivery date of such Order. Within 10 days of such
cancellation, Sanmina will provide Customer with the amount of
Customer's obligations with respect to Materials and labor costs
associated with the canceled order, as provided in Section III above.
Customer will pay such cancellation amount to Sanmina on a net 30 day
basis. After receipt of such cancellation amount, Sanmina shall
deliver to Customer, at Customer's expense, any Materials purchased
but unused as a result of such cancellation or scrap such Materials,
at the discretion of Customer.
VII. Product Pricing
A. Initial Prices; Adjustments. The initial prices for Products listed in
Exhibit A attached hereto will be as set forth in Exhibit A. For
Products not listed in Exhibit A, or with no prices established
therefor, the prices shall be established through the Sanmina-Customer
quote process. Sanmina will respond to Customer's requests for quotes
and proposals within 14 days after receipt of all necessary data. The
initial prices for Products shown in Exhibit A will be evaluated on a
quarterly basis for potential changes, in accordance with prior
agreements with Customer. Customer expects improvements in
efficiencies, material cost reductions and innovative processes to
contribute to these reductions. Prices otherwise established as
provided herein are subject to adjustment as provided herein to
reflect ECOs and variations in the market prices of Materials and
other components. Any cost reductions realized by Sanmina due to a
reduction in material or labor costs or yield improvements will be
shared equally with Customer at the time such reductions are realized.
Any price decreases will apply immediately to all new Orders Price
increases will apply to new Orders issued (i) after agreement by the
parties of the price increase, or (ii) more than thirty (30) days
following Customer's receipt of written notice of the increase.
B. Computation of Prices; Taxes. All prices of Products are F.O.B.
Sanmina's facility. All prices will be quoted and paid in U.S.
dollars. All prices applicable to Products purchased pursuant to the
terms of this Agreement will include all charges for packaging,
packing, crating, storage and shipping and transportation costs to
Customer's facility or other designated ship-to location, except as
otherwise provided herein. Prices do not include any federal, state or
local sales, use, excise VAT and similar taxes, that may be applicable
to the Products. When Sanmina has the obligation to collect taxes, the
appropriate amount may be added to Customer's invoice and will be paid
by Customer unless Customer provides Sanmina with a valid tax
exemption certificate authorized by the appropriate taxing authority
and quantities.
C. Most Favored Customer Pricing. In no event are the prices applicable
to Products ordered by Customer hereunder to be higher than the lowest
prices then offered by Sanmina to its most favored customers, for
substantially similar products and quantities.
VIII. Shipping and Delivery
A. Delivery Terms. Customer's Orders will state delivery dates for
Products in accordance with the terms of this Agreement, and time will
be of the essence in meeting Customer's delivery requirements. Unless
otherwise agreed in writing by the parties, delivery of all Products
under this Agreement shall be F.O.B. Sanmina's plant, at which time
risk of loss and title shall pass to Customer.
B. Shipping. Sanmina will transport Products by the method specified by
Customer, to Customer's address or to an address specified in writing
by Customer. All freight, insurance and other shipping expenses from
the delivery point shall be borne by Customer. All Products delivered
pursuant to the terms of this Agreement will be suitably packed for
shipment in a commercially reasonable manner in Sanmina's standard
shipping cartons, unless otherwise designated by Customer. When
special packaging is requested or, in the opinion of Sanmina, is
required under the circumstances, the additional expenses related to
such special packaging will be borne by Customer. Each shipping
container will be marked to show Customer's Order number, Product
description and identifying numbers, and quantity contained therein.
If Products are delivered more than five days in advance of the
specified delivery date, Customer may either return such Products at
Sanmina's risk and expense for subsequent delivery on the specified
delivery date or retain such Products and make payment when it would
have been due based on the specified delivery date. If Products are
returned to Sanmina then reshipped to Customer, Sanmina will bear the
cost and risk of loss associated with such return and reshipment. In
the event Products will be delivered more than five business days
late, Customer may request such Products to be shipped and delivered
via an expedited method of delivery. In such event, Sanmina agrees to
pay or reimburse Customer for all transportation charges in excess of
the normal charges.
IX. Payment and Invoicing
Payment terms will be net 30 days from invoice date, which will be no
earlier than the date of delivery to Customer of the Products covered
thereby. Sanmina will provide Customer with a credit limit]. In the
event that Customer exceeds this credit limit or has outstanding
invoices for more than 60 days, Sanmina may stop shipments of Products
to Customer until Customer makes sufficient payment to bring its
account consistent with terms outlined above. In the event of a
material default by Customer of its payment obligations hereunder,
Sanmina may reduce the credit limit, upon written notice to Customer.
X. Quality Standards and Warranty
Sanmina warrants that the Products will be manufactured in a good and
workmanlike manner, consistent with industry standards, and will
conform to and perform in accordance with applicable specifications,
and that the Products (excluding components purchased from third-party
vendors ("Vendor Components")) will be free from any defects in
workmanship for a period of one year from the date of delivery to
Customer. Warranty on Vendor Components is limited to the warranty
provided by the component manufacturer. Sanmina will pass on any
unexpired warranty for such Vendor Components provided by third-party
vendors or passed on by such third-party vendors from the original
manufacturers until the expiration of such warranties. As Customer's
sole remedy under the warranty, Sanmina will, at no charge, rework,
repair and retest, or replace, any Products returned to Sanmina and
found not to be manufactured in accordance with the applicable
specifications or that are otherwise defective. Warranty coverage does
not include failures due to Customer's design, the supply or selection
of improper or defective parts or materials designated by Customer,
Customer requested changes, damages caused by Customer's misuses,
unauthorized repair or negligence. Sanmina does not assume any
liability for expendable items such as lamps and fuses. The
performance of any repair or replacement by Sanmina does not extend
the warranty period for any Products beyond the period applicable to
the Products originally delivered.
EXCEPT FOR THE ABOVE EXPRESS WARRANTIES, SANMINA MAKES AND THE
CUSTOMER RECEIVES NO WARRANTIES ON THE PRODUCTS, EXPRESS, IMPLIED,
STATUTORY, OR OTHERWISE, AND SANMINA SPECIFICALLY DISCLAIMS ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
XI. Service of Legacy Products
During the term of this Agreement, Sanmina will continue to
manufacture and repair all Legacy Products as Customer may request, in
accordance with such pricing schedule as may be mutually agreed upon
by the parties from time to time, consistent with the Sanmina-Customer
quote process referenced in Section VII above.
XII. Design Services
During the term of this Agreement, Sanmina will provide design
services to Customer, in connection with the design and development of
prototype and production electronic circuit boards, assemblies and
Products, at such prices and on such terms as may be mutually agreed
upon by the parties from time to time, consistent with the
Sanmina-Customer quote process referenced in Section VII above.
XIII. Minimum Work Commitment - "Take or Pay" Provision
A. Minimum Order Requirement. During each of the three one year periods
commencing from the effective date of this Agreement, Customer will
undertake to submit to Sanmina Orders for Products and design services
having an aggregate purchase price of at least $22,000,000 (subject to
adjustment as provided below). If in any of such one year periods
Customer should fail to submit Orders to Sanmina in such minimum
aggregate amount, then Customer will make payments to Sanmina as
provided below (and such payment obligations will be Customer's sole
liability and Sanmina's sole remedy with respect to any such failure).
B. Consequence of Missing First or Second Year Targets by More Than 20%.
If, during the first or second one year period commencing from the
effective date of this Agreement, Orders are submitted to Sanmina in
an aggregate amount of less than 80% of the targeted minimum amount
(or $17,600,000 in the first year), then within 60 days following the
end of such one year period, Customer will pay to Sanmina a sum equal
to the amount of such shortfall, multiplied by 25% (representing
Sanmina's assumed profit margin with respect to the Orders represented
by the shortfall). For example, if during the first year Customer
submitted Orders to Sanmina aggregating $15,000,000, Customer would
pay to Sanmina the sum of $7,000,000 x .25 = $1,750,000.
C. Consequence of Missing First or Second Year Targets by Less Than 20%.
If, during the first or second one year periods commencing from the
effective date of this Agreement, Orders are submitted to Sanmina in
an aggregate amount of at least 80% of the targeted minimum amount,
then the amount of the shortfall will be added to the minimum
commitment applicable to the following year, and any amount to be paid
by Customer to Sanmina would be determined after completion of the
following year. For example, if during the first year Customer
submitted Orders to Sanmina aggregating $20,000,000, then the minimum
order requirement applicable to the second year would be $24,000,000.
D. Consequence of Missing Third Year Target. If, during the third one
year period commencing from the effective date of this Agreement,
Orders are submitted to Sanmina in an aggregate amount of less than
the targeted minimum amount, then within 60 days following the end of
such one year period, Customer will pay to Sanmina a sum equal to the
amount of such shortfall, multiplied by 25% (representing Sanmina's
assumed profit margin with respect to the Orders represented by the
shortfall). For example, if during the third year Customer submitted
Orders to Sanmina aggregating $20,000,000, and, as a result of a
carry-over of $2,000,000 from the second year the minimum target
applicable to the third year were $24,000,000, then Customer would pay
to Sanmina the sum of $4,000,000 x .25 = $1,000,000.
E. Carry-Over of Orders in Excess of Minimum. If, during the first or
second one year periods commencing from the effective date of this
Agreement, Orders are submitted to Sanmina in an aggregate amount in
excess of that required to satisfy the minimum obligation set forth
above (i.e., having an aggregate purchase price of $22,000,000 or such
lesser amount which, when added to the excess Orders submitted during
the prior year, would satisfy the minimum annual $22,000,000
requirement), then the amount by which the aggregate purchase price of
such Orders exceed such targeted minimum amount (the "Surplus Amount")
will be counted toward satisfaction of Customer's minimum Order
requirement for the next one year period.
F. Sale of Operations; Counting of Orders. If, at any time during the
three year period that the requirements of this Section XIII are in
effect, Customer sells any divisions or operations which have
previously submitted Orders to Sanmina hereunder, then any Orders
subsequently submitted to Sanmina by the purchaser with respect to
products Sanmina is building for any such division or operation will
be counted toward the satisfaction of the targeted minimum Order
requirement hereunder, as if such Orders had been submitted hereunder
by Customer to Sanmina.
XIV. Right of First Refusal
As Customer develops new products that require manufacturing of
printed circuit boards or other electronics assemblies or components,
or puts out to bid the manufacturing rights to the printed circuit
boards or other electronics components of existing products, then to
the extent such manufacturing rights are not contractually committed
to any other party, and Sanmina demonstrates to the satisfaction of
Customer that it can satisfactorily perform such manufacturing
operations in terms of price competitiveness, quality, timeliness and
production capacity, Customer will extend to Sanmina the right to
perform such manufacturing services, on such terms as Customer may in
its discretion determine to be appropriate.
XV. Testing
During the term of this Agreement, and in accordance with the
following requirements, Sanmina will continue to maintain and support
all in-circuit tests developed for the S790 test platform, and E&S
will support, sustain and develop all functional test platforms,
diagnostics and post production test hardware:
1. System Requirements. Sanmina will maintain the S770 and S790
systems. Sanmina has the option of converting to the S790 system,
and Sanmina will convert all S770 fixtures and programs to the
S790 as required by Order, thereby eliminating the requirement to
maintain the S770 system once all S770 fixtures and programs have
been converted. The conversion will be at E&S expense.
2. Fixture Requirements.
a. Sanmina will preserve and maintain all S770 and S790 test
fixtures in good working order.
b. In the event that Customer requires changes to current test
fixtures, Sanmina will provide services necessary to
implement and maintain changes. In the event that the
changes will require a new test fixture, Sanmina has the
option to move the test to a different platform or system.
Any of the above actions pursuant to this paragraph 2(b)
will be at the expense of E&S.
3. Test Program Requirements. Sanmina will preserve and maintain all
S790 test programs in good working order. In the event that
Customer requires changes to current test programs, Sanmina will
provide services necessary to implement and maintain changes, at
E&S' expense. Prudent test program archival and back-up processes
will be secured to prevent the loss of any test programs.
4. Status of Tools and Tooling. All tools and tooling relating to
test fixtures and programs provided to and maintained by Sanmina
will remain the property of Customer.
XVI. Indemnification
A. By Customer. Customer will indemnify and hold harmless Sanmina
from and against any and all losses, damages, costs, liabilities
or expenses (including court costs and the reasonable fees of
attorneys and other professionals) to the extent that such
losses, costs, liabilities or expenses arise out of, or in
connection with, in whole or in part, (a) infringements of any
patent, trademark, copyright or other intellectual property of
Customer or (b) any negligence or willful misconduct by Customer,
its employees or agents and subcontractors, including but not
limited to any such act or omission that contributes to: (i) any
bodily injury, sickness, disease, or death; (ii) any injury or
destruction to tangible or intangible property of the injured
party or any loss of use resulting therefrom; or (iii) any
violation of any statute, ordinance or regulation.
B. By Sanmina. Sanmina will indemnify and hold harmless Customer
from and against any and all losses, damages, costs, liabilities
and expenses (including court costs and the reasonable fees of
attorneys and other professionals) to the extent that such
losses, costs, liabilities or expenses arise out of, or in
connection with, in whole or in part, (a) Sanmina having utilized
in the manufacture of any Products any intellectual property
rights of others, where such use has not been required by the
specifications or instructions provided to Sanmina by Customer or
(b) any negligence or willful misconduct by Sanmina, its
employees or agents and subcontractors, including but not limited
to any such act or omission that contributes to: (i) any bodily
injury, sickness, disease, or death; (ii) any injury or
destruction to tangible or intangible property of the injured
party or any loss of use resulting therefrom; or (iii) any
violation of any statute, ordinance or regulation. . XVII.
Quality, Inspection and Reporting
A. Inspection of Work. Customer will have the right at all
reasonable times, upon reasonable advance notice, to visit
Sanmina's plant to inspect the work performed on Products.
Inspection of the work shall not relieve Sanmina of any of its
obligations under this Agreement or any Orders. Sanmina will
provide Customer with all mutually agreed upon quality reports at
agreed upon intervals. Sanmina reserves the right to restrict
Customer's access to the plant or any area within it as necessary
to protect confidential information of Sanmina or its other
customers.
B. Inspection as Condition of Acceptance. If Customer demands
inspection of any Products prior to the delivery of such Products
as a condition of acceptance of such Products, Customer must
inspect the Products within 48 hours of a transmission of written
notice by facsimile or other electronic or telephonic delivery
system from Sanmina informing Customer that the Products are
ready to be shipped.
C. Quality Improvement Program. Customer and Sanmina will implement
a joint quality improvement program that will develop and
implement continuous Product quality improvements.
XVIII. Term and Termination
A. Initial Term; Extension. This Agreement shall be in effect for a
period of 36 months commencing from the effective date hereof as
set forth above, unless earlier terminated or extended as
provided herein. The parties may, by mutual agreement, extend
this Agreement at any time prior to its expiration or
termination. Except as otherwise specifically provided herein, in
the event of the expiration or earlier termination of this
Agreement, the Agreement shall remain in full force and effect
with respect to, and shall be applicable to, any Orders issued by
Customer and accepted by Sanmina prior to such expiration or
termination.
B. Termination. Either party may, without penalty, terminate this
Agreement upon 60 days prior written notice to the other party in
either one of the following events:
1. the other party materially breaches this Agreement and such
breach remains uncured for thirty (30) days following
written notice of breach from the non breaching party; or
2. the other party becomes involved in any voluntary or
involuntary bankruptcy or other insolvency petition or
proceeding for the benefit of its creditors, and such
petition, assignment or proceeding is not dismissed within
sixty (60) days after it was filed.
C. Effect of Termination. Upon the expiration or earlier termination
of this Agreement, Sanmina will provide Customer with an invoice
of amounts owed to Sanmina hereunder. In addition, Customer will
be liable for all work-in-progress at its value at the time of
cancellation and any outstanding charges. Any work-in-progress
and/or finished goods built beyond the mutually agreed-upon
schedule will not be the responsibility of Customer. Upon
termination, Customer will pay all invoiced charges in net thirty
(30) days.
XIX. Limitation of Liability
IN NO EVENT WILL SANMINA OR CUSTOMER BE LIABLE FOR ANY SPECIAL,
INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON
ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THIS AGREEMENT.
THIS LIMITATION WILL APPLY EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED HEREIN.
XX. Miscellaneous
A. Governing Law. This Agreement will be governed by and interpreted
under the laws of the State of Utah, without reference to
conflict of laws principles.
B. Jurisdiction. For any dispute arising out of this Agreement, the
parties consent to personal and exclusive jurisdiction of and
venue in the state and federal courts within Salt Lake County,
Utah.
C. Entire Agreement; Amendment and Waiver; Enforcement of Rights.
This Agreement sets forth the entire agreement and understanding
of the parties relating to the subject matter herein and merge
all prior discussions between them. No modification of or
amendment to this Agreement, nor any waiver of any rights under
this Agreement, will be effective unless in writing signed by the
party to be charged. The failure by either party to enforce any
rights thereunder will not be construed as a waiver of any rights
of such party.
D. Assignment; Successors and Assigns. Neither party will have any
right to assign its rights or obligations under this Agreement
without the prior written consent of the other party. Subject to
the foregoing, this Agreement, and the rights and obligations of
the parties hereunder, will be binding upon, and inure to the
benefit of, their successors and permitted assigns.
E. Notices. Any required notices hereunder will be given in writing
at the address of each party set forth on the signature pages
hereof, or to such other address as either party may substitute
by written notice to the other in the manner contemplated herein,
and will be deemed served when delivered by facsimile or mail or
when tendered in person.
F. Force Majeure. Neither party will be liable to the other for any
default hereunder if such default is caused by an event beyond
such party's control, including without limitation acts or
failures to act of the other party, strikes or labor disputes,
component shortages, unavailability of transportation, floods,
fires, governmental requirements and acts of God (a "Force
Majeure Event"). In the event of threatened or actual
non-performance as a result of any of the above causes, the
non-performing party will exercise commercially reasonable
efforts to avoid and cure such non-performance. Should a Force
Majeure Event prevent a party's performance hereunder for a
period in excess of ninety (90) days, then the other party may
elect to terminate this Agreement by written notice thereof.
G. Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of
which together will constitute one and the same instrument.
SANMINA: CUSTOMER:
Sanmina Corporation Evans & Sutherland Computer Corporation
By: /s/ Bertnard.J. Whitney By: /s/ William C. Gibbs
Bernard J. Whitney, Executive William C. Gibbs, Vice President of
Vice President and Chief Financial Corporate Development
Officer
Address: 355 East Trimble Road Address: 600 Komas Drive
San Jose, California 95131 Salt Lake City, Utah 84108
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION FROM THE EVANS & SUTHERLAND
COMPUTER CORPORATION JULY 2, 1999 FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000276283
<NAME> EVANS & SUTHERLAND COMPUTER CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUL-02-1999
<CASH> 21,439
<SECURITIES> 3,706
<RECEIVABLES> 32,817
<ALLOWANCES> 1,510
<INVENTORY> 53,386
<CURRENT-ASSETS> 200,765
<PP&E> 51,093
<DEPRECIATION> 0
<TOTAL-ASSETS> 269,613
<CURRENT-LIABILITIES> 66,236
<BONDS> 18,024
23,658
0
<COMMON> 1,926
<OTHER-SE> 159,769
<TOTAL-LIABILITY-AND-EQUITY> 269,613
<SALES> 93,769
<TOTAL-REVENUES> 93,769
<CGS> 53,788
<TOTAL-COSTS> 53,788
<OTHER-EXPENSES> 45,619
<LOSS-PROVISION> 241
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,601)
<INCOME-TAX> (1,426)
<INCOME-CONTINUING> (3,175)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,289)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
