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 April 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 May 7, 1999
- ------------------------------- ----------------------------------
Common Stock, $0.20 par value 9,586,979
<PAGE>
FORM 10-Q
Evans & Sutherland Computer Corporation
Quarter Ended April 2, 1999
<TABLE>
Page No.
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of April 2, 1999 and December 31, 1998
3
Consolidated Statements of Operations for the
three months ended April 2, 1999 and March 27, 1998 4
Consolidated Statements of Comprehensive Income for
the three months ended April 2, 1999 and
March 27, 1998 5
Consolidated Statements of Cash Flows for the three
months ended April 2, 1999 and March 27, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
</TABLE>
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>
April 2, December 31,
1999 1998
--------------- ----------------
(Unaudited)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 7,147 $ 1,834
Short-term investments 2,500 25,907
Accounts receivable, less allowance for doubtful
receivables of $1,338 in 1999 and $1,616 in 1998 33,805 46,866
Inventories 58,689 53,319
Costs and estimated earnings in excess of billings
on uncompleted contracts 74,830 58,682
Deferred income taxes 9,143 9,450
Prepaid expenses and deposits 8,906 7,278
--------------- ----------------
Total current assets 195,020 203,336
Property, plant and equipment, net 52,447 53,693
Investment securities 3,786 3,380
Deferred income taxes 2,979 2,487
Goodwill and other intangible assets, net 10,638 11,351
Other assets 989 1,421
--------------- ----------------
Total assets $ 265,859 $ 275,668
=============== ================
Liabilities and stockholders' equity:
Line of credit agreements $ 3,950 $ 4,298
Accounts payable 17,365 24,667
Accrued expenses 24,982 27,147
Customer deposits 3,019 3,339
Income taxes payable 2,795 2,436
Billings in excess of costs and estimated earnings
on uncompleted contracts 7,024 7,092
--------------- ----------------
Total current liabilities 59,135 68,979
--------------- ----------------
Long-term debt 18,040 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 April 2, 1999 and December 31, 1998 23,601 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 9,591,505 shares at
April 2, 1999 and 9,597,660 shares at December 31, 1998 1,918 1,920
Additional paid-in capital 23,049 23,420
Retained earnings 139,702 139,498
Accumulated other comprehensive income 414 245
--------------- ----------------
Total stockholders' equity 165,083 165,083
--------------- ----------------
Total liabilities and stockholders' equity $ 265,859 $ 275,668
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
April 2, March 27,
1999 1998
------------- ------------
<S> <C> <C>
Sales $ 49,746 $ 42,421
Cost of sales 27,368 25,296
------------- ------------
Gross profit 22,378 17,125
------------- ------------
Operating expenses:
Selling, general and administrative 10,221 8,633
Research and development 11,080 6,677
Amortization of goodwill and other intangibles 713 8
------------- ------------
22,014 15,318
------------- ------------
Operating earnings 364 1,807
Other income, net 15 546
------------- ------------
Earnings before income taxes 379 2,353
Income tax expense 118 764
------------- ------------
Net earnings 261 1,589
Accretion of preferred stock 57 -
------------- ------------
Net earnings applicable to common stock $ 204 $ 1,589
============= ============
Earnings per common share:
Basic $ 0.02 $ 0.18
Diluted $ 0.02 $ 0.17
Weighted average common and common equivalent shares outstanding:
Basic 9,603 9,079
Diluted 9,873 9,457
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
April 2, March 27,
1999 1998
-------- --------
<S> <C> <C>
Net earnings $ 261 $ 1,589
Other comprehensive income:
Foreign currency translation adjustments 244 81
Unrealized gains on securities 1 264
-------- --------
Other comprehensive income before income taxes 245 345
Income tax expense related to items of other
comprehensive income 76 112
-------- --------
Other comprehensive income, net of income taxes 169 233
-------- --------
Comprehensive income $ 430 $ 1,822
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
April 2, March 27,
1999 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 261 $ 1,589
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation and amortization 3,980 2,437
Provision for losses on accounts receivable 36 24
Provision for write down of inventories 314 108
Provision for warranty expense 183 108
Deferred income taxes (187) (938)
Other 470 2
Changes in assets and liabilities:
Accounts receivable 12,986 1,438
Inventories (5,697) (1,935)
Costs and estimated earnings in excess of billings on
uncompleted contracts, net (16,213) (7,653)
Prepaid expenses and deposits (1,631) (1,224)
Accounts payable (7,278) (722)
Accrued expenses (2,345) (566)
Customer deposits (320) 2,244
Income taxes 401 (1,226)
---------- ----------
Net cash used in operating activities (15,040) (6,314)
--------- ----------
Cash flows from investing activities:
Proceeds from sale of short-term investments 23,356 17,680
Purchase of investment securities (360) (125)
Purchases of property, plant and equipment (2,048) (1,907)
Increase in other assets (38) -
--------- ----------
Net cash provided by investing activities 20,910 15,648
--------- ----------
Cash flows from financing activities:
Payments under line of credit agreements (179) (942)
Proceeds from issuance of common stock 355 998
Payments for repurchase of common stock (769) (5,837)
--------- ----------
Net cash used in financing activities (593) (5,781)
--------- ----------
Effect of foreign exchange rate on cash and cash equivalents 36 (133)
--------- ----------
Net change in cash and cash equivalents 5,313 3,420
Cash and cash equivalents at beginning of year 1,834 8,176
--------- ----------
Cash and cash equivalents at end of period $ 7,147 $ 11,596
========= ==========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 547 $ 573
Income taxes 64 2,897
Accretion of preferred stock 57 -
</TABLE>
See accompanying notes to consolidated financial statements.
6
<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 ended April 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
operations, 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 month period ended April
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, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. The statement requires derivatives to be recorded on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in fair value of the derivatives are recorded
depending upon whether the instruments meet the criteria for hedge accounting.
The impact of adopting this statement is not anticipated to be material to the
financial statements. This statement is effective for fiscal years beginning
after June 15, 1999.
2. BUSINESS ACQUISITIONS
On June 26, 1998, the Company, through its wholly-owned subsidiary, Evans &
Sutherland Graphics Corporation ("ESGC"), acquired all of the outstanding stock
of AccelGraphics, Inc. ("AGI") for approximately $23.7 million in cash and
1,109,303 shares of the Company's common stock valued at $25.7 million. In
addition, the Company converted all outstanding AGI options into options to
purchase approximately 351,000 shares of common stock of the Company with a fair
value of $3.4 million and incurred transaction costs of approximately $1.1
million. AGI is based in Milpitas, California, and is a provider of
high-performance, cost-effective, three-dimensional graphics subsystem products
for the professional Windows NT and Windows 95 markets. The acquisition was
accounted for by the purchase method and, accordingly, the results of operations
of AGI have been included in the Company's consolidated financial statements
from June 26, 1998 forward.
Also on June 26, 1998, the Company acquired the assets and assumed certain
liabilities of Silicon Reality, Inc. ("SRI") for a purchase price of
approximately $1.2 million, including transaction costs of approximately
$250,000. SRI is based in Federal Way, Washington, and designs and produces
three-dimensional graphics hardware and software products for the personal
computer marketplace. This acquisition was accounted for by the purchase method
and, accordingly, the results of operations of SRI have been included in the
Company's consolidated financial statements from June 26, 1998 forward.
7
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial information presents the combined
results of operations of the Company, AGI and SRI for the three months ended
March 27, 1998 as if the acquisitions had occurred as of the beginning of 1998,
after giving effect to certain adjustments, including, but not limited to,
amortization of goodwill, decreased interest income and entries to conform to
the Company's accounting policies (in thousands, except per share amounts).
Sales $ 53,192
Net loss applicable to common stock $ (403)
Loss per common share:
Basic $ (0.04)
Diluted $ (0.04)
There can be no assurance that the Company will be successful in integrating
these separate companies, retaining key employees, or that these acquisitions
will not be viewed as disadvantageous to existing AGI or SRI customers and/or
existing E&S distributors that may consider themselves as competitors of the
combined entity and thus adversely affect the Company's future operating
results.
3. INVENTORIES
Inventories consist of the following (in thousands):
April 2, December 31,
1999 1998
----------------- ----------------
(Unaudited)
Raw materials $ 27,627 $ 26,084
Work-in-process 28,362 23,511
Finished goods 2,700 3,724
----------------- ----------------
$ 58,689 $ 53,319
================= ================
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 and
multimedia industries.
8
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluates segment performance based on earnings (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.
<TABLE>
<CAPTION>
Workstation
(in thousands, unaudited) Simulation Products Applications Total
--------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Three months ended April 2, 1999
Sales $ 40,263 $ 8,119 $ 1,364 $ 49,746
Operating earnings (loss) 3,301 (1,515) (1,422) 364
Three months ended March 27, 1998
Sales 39,742 1,550 1,129 42,421
Operating earnings (loss) 4,127 (318) (2,002) 1,807
</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):
Three Months Ended
April 2, March 27,
1999 1998
-------------- ---------------
(Unaudited)
United States $ 25,491 $ 27,208
United Kingdom 15,332 7,220
Europe (excluding United Kingdom) 6,279 3,874
Pacific Rim 2,459 3,500
Other 185 619
-------------- ---------------
$ 49,746 $ 42,421
============== ===============
The following table presents property, plant and equipment by geographic
location based on the location of the assets (in thousands):
April 2, December 31,
1999 1998
---------------- ----------------
(Unaudited)
United States $ 51,666 $ 52,876
Europe 781 817
---------------- ----------------
Total property, plant and equipment, net $ 52,447 $ 53,693
================ ================
6. EARNINGS PER COMMON SHARE
Earnings per common share is computed based on the weighted-average number of
common shares and, as 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.
9
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a reconciliation between the basic and diluted weighted-average
number of common shares for all periods presented (in thousands):
Three Months Ended
April 2, March 27,
1999 1998
-------------- ---------------
(Unaudited)
Basic weighted-average number of common shares
outstanding during the period 9,603 9,079
Weighted-average number of dilutive common
stock options outstanding during the period 270 378
-------------- ---------------
Diluted weighted-average number of common
shares outstanding during the period 9,873 9,457
============== ===============
In calculating earnings per common share, earnings were the same for both the
basic and diluted calculation.
For the three months ended April 2, 1999, outstanding options to purchase
213,000 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 the exercise or conversion
prices were greater than the average market price of the common stock during the
quarter.
For the three months ended March 27, 1998, outstanding options to purchase
62,000 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 the exercise or conversion
prices were greater than the average market price of the common stock during the
quarter.
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. All
data in the tables are in thousands except for percentages. 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 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 Application 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 FuseBox(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.
RESULTS OF OPERATIONS
The following table presents the percentage of total sales represented by
certain items for the Company for the periods presented:
<TABLE>
<CAPTION>
First Quarter
-----------------------------------------
1999 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 55.0 59.6
------------------ ------------------
Gross profit 45.0 40.4
Expenses:
Selling, general and administrative 20.6 20.4
Research and development 22.3 15.7
Amortization of goodwill and other intangible assets 1.4 -
------------------ -----------------
Total operating expenses 44.3 36.1
------------------ -----------------
Operating earnings 0.7 4.3
Other income, net - 1.2
------------------ -----------------
Earnings before income taxes 0.7 5.5
Income tax expense 0.2 1.8
------------------ -----------------
Net earnings 0.5 3.7
Accretion of preferred stock 0.1 -
------------------ -----------------
Net earnings applicable to common stock 0.4% 3.7%
================== =================
</TABLE>
12
<PAGE>
Sales
In the first quarter of 1999, sales increased $7.3 million, or 17% ($49.7
million compared to $42.4 million in 1998). Sales for simulation products
increased $0.5 million, or 1% ($40.3 million in the first quarter of 1999
compared to $39.7 million in the first quarter of 1998). The increase in sales
of simulation products is due to increased sales volumes due to strong demand by
U.S. and European government customers and commercial airline customers. Sales
of workstation products increased $6.6 million, or 424% ($8.1 million in the
first quarter of 1999 compared to $1.6 million in the first quarter of 1998).
The increase in sales of workstation products is due to the acquisition of
AccelGraphics, Inc. at the end of the second quarter of 1998. Sales of
application products increased $0.2 million, or 21% ($1.4 million in the first
quarter of 1999 compared to $1.1 million in the first quarter of 1998). The
increase in sales of application products is due to increased sales volumes of
Virtual Studio Systems.
Gross Profit
Gross profit increased $5.3 million, or 31% ($22.4 million in the first quarter
of 1999 compared to $17.1 million in the first quarter of 1998). As a percent of
sales, gross profit increased to 45.0% in the first quarter of 1999 from 40.4%
in the first quarter of 1998. The increase in gross margin is due to lower
margin contracts in the Simulation Group in which the Company served as the
primary contractor and low-margin location-based entertainment sales in the
Applications Group in 1998. 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 $1.6 million, or 18%
($10.2 million in the first quarter of 1999 compared to $8.6 million in the
first quarter of 1998) but remained consistent as a percent of sales (20.6% in
the first quarter of 1999 compared to 20.4% in the first quarter of 1998). The
increase in these expenses is due to increased selling, general and
administrative expenses related to the operations of ESGC (formerly
AccelGraphics, Inc.) and increased labor costs due to increased headcount.
Research and Development
Research and development expenses increased $4.4 million, or 66% ($11.1 million
in the first quarter of 1999 compared to $6.7 million in the first quarter of
1998) and increased as a percent of sales (22.3% in the first quarter of 1999
compared to 15.7% in the first 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 the launch of 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 first quarter of 1999 compared to $8,000 in the first
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 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.
Other Income, Net
Other income, net decreased $0.5 million ($15,000 in the first quarter of 1999
compared to $0.5 million in the first quarter of 1998). Interest income was $0.2
million and $0.6 million in the first quarter of 1999 and the first quarter of
1998, respectively. The decrease in interest income is due to the decrease in
the average cash and cash equivalents and short-term investments balances in the
first quarter of 1999 as compared to the first quarter of 1998.
13
<PAGE>
Income Taxes
The effective tax rate was 31.1% and 32.5% of pre-tax earnings for the first
quarter 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 April 2, 1999, the Company had working capital of $135.9 million, including
cash, cash equivalents and short-term investments of $9.6 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 first
quarter of 1999, the Company used $15.0 million of cash in its operating
activities, generated $20.9 of cash from its investing activities, and used $0.6
million of cash in its financing activities.
The primary uses of cash from its operating activities included an increase in
costs and estimated earnings in excess of billings on uncompleted contracts, net
of $16.2 million, a decrease in accounts payable of $7.3 million, an increase in
inventories of $5.7 million and a decrease in accrued expenses of $2.3 million.
These primary uses of cash were partially offset by $13.0 million net cash flow
from the collection of accounts receivable and $4.0 million of depreciation and
amortization expense. The increase in costs and estimated earnings in excess of
billings on uncompleted contracts was due to the Company's overall revenue
growth in addition to the timing of revenue and billing milestones. The increase
in inventories is attributed to the Company's transition to new products that
required the need to carry inventories of old and new products simultaneously
and the Company's initial transition efforts to outsource certain aspects of its
manufacturing assemblies which resulted in temporary duplications of certain
inventories.
The Company's investing activities during the first quarter of 1999 included
capital expenditures of $2.0 million for building improvements and equipment.
Proceeds from the sale of short-term investments provided $23.4 million of cash
during the first quarter of 1999.
The Company's financing activities during the first quarter of 1999 included the
use of $0.8 million for the repurchase of common stock and $0.2 million for
repayments under line of credit agreements. Proceeds from the issuance of common
stock relating to the exercise of stock options provided $0.4 million of cash
during the first quarter of 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 784,000 shares of its common stock; thus, 816,000 shares currently
remain available for repurchase as of May 14, 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. The revolving line of credit is unsecured.
There were no borrowings under this agreement outstanding as of April 2, 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 $6.1
million outstanding as of April 2, 1999.
As of April 2, 1999, the Company had revolving line of credit agreements with
foreign banks totaling approximately $6.6 million, of which approximately $2.7
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"). 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
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<PAGE>
the Class B-1 Preferred Stock (the "Intel Shares") for 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. A Corporate Event
shall mean any of the following, whether accomplished through one or a series of
related transactions: (a) 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; (b) 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; (c) the acquisition of all or substantially all
the assets of the Company or any significant subsidiary; (d) 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 (e) 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 April 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
15
<PAGE>
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.
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
1200(TM) product, which was completed in March 1999 and began shipping
product 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
project was also completed three months later than scheduled. 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 April 2,
1999, the cost to complete this project subsequent to the acquisition
of AGI was $0.4 million. Management estimates that additional costs to
complete this project will be $0.3 million and it will be completed by
the end of the second 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 (AccelGMX(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 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.
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 mid-1999. The Company has also assessed its internal non-information
16
<PAGE>
technology systems, and expects to complete testing and any needed modifications
to these systems in mid-1999.
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 in
mid-1999 to finalize its assessment of and contingency planning for potential
operational or performance problems related to Year 2000 issues with its
information systems.
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 Ligtning 1200, FuseBox, Harmony,
MindSet, REALimage, 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.
17
<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
three months ended April 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 April 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 April 2, 1999, 82%
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, 40% of the Company's total debt would
be in fixed-rate instruments. In addition, the Company maintains an average
maturity of its short-term investment portfolio under twelve months to avoid
large changes in its market value. As of April 2, 1999, the average maturity of
the Company's short-term investments was approximately nine months.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Regulation S-K
Exhibit No. Description
27.1 Financial Data Schedule (filed as part of electronic
filing only)
(b) Reports on Form 8-K
None.
18
<PAGE>
SIGNATURES
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 May 17, 1999 By: /S/ John T. Lemley
----------------------
John T. Lemley, Vice President
and Chief Financial Officer
(Principal Financial Officer)
19
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