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 October 1, 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, net of treasury stock, as of the latest practicable date.
Class Outstanding Shares at November 5, 1999
- ---------------------- --------------------------------------
Common Stock, $0.20 par value 9,398,217
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
INDEX
FORM 10-Q FOR THE QUARTER ENDED OCTOBER 1, 1999
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 1,
1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations for
the three months ended October 1, 1999 and
September 25, 1998 4
Condensed Consolidated Statements of Operations for
the nine months ended October 1, 1999 and
September 25, 1998 5
Condensed Consolidated Statements of Comprehensive
Income for the three and nine months ended
October 1, 1999 and September 25, 1998 6
Condensed Consolidated Statements of Cash Flows for
the nine months ended October 1, 1999 and
September 25, 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
October 1, December 31,
1999 1998
--------------- ----------------
Assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 7,519 $ 1,834
Short-term investments 10,523 25,907
Accounts receivable, less allowance for doubtful accounts of $1,579 as of
October 1, 1999 and $1,616 as of December 31, 1998 44,188 46,866
Inventories 39,626 53,319
Costs and estimated earnings in excess of billings on uncompleted contracts 72,912 58,682
Deferred income taxes 10,154 9,450
Other current assets 7,792 7,278
--------------- ----------------
Total current assets 192,714 203,336
Property, plant and equipment, net 52,603 53,693
Investment securities 4,357 3,380
Deferred income taxes 4,960 2,487
Goodwill and other intangible assets, net 597 11,351
Other assets 869 1,421
--------------- ----------------
Total assets $ 256,100 $ 275,668
=============== ================
Liabilities and stockholders' equity:
Line of credit agreements $ 4,062 4,298
Accounts payable 18,075 24,667
Accrued expenses 31,128 27,147
Customer deposits 4,962 3,339
Income taxes payable - 2,436
Billings in excess of costs and estimated earnings on
uncompleted contracts 16,008 7,092
--------------- ----------------
Total current liabilities 74,235 68,979
--------------- ----------------
Long-term debt 18,015 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 as of October 1, 1999
and December 31, 1998 23,714 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 9,654,370
shares as of October 1, 1999 and 9,597,660 shares as of December 31, 1998 1,931 1,920
Additional paid-in capital 23,727 23,420
Retained earnings 118,176 139,498
Accumulated other comprehensive income (86) 245
Treasury stock, at cost, 261,500 shares as of October 1, 1999 (3,612) -
--------------- ----------------
Total stockholders' equity 140,136 165,083
--------------- ----------------
Total liabilities and stockholders' equity $ 256,100 $ 275,668
=============== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
October 1, September 25,
1999 1998
---------------- ---------------
<S> <C> <C>
Sales $ 48,704 $ 47,262
Cost of sales 27,997 26,625
Write-down of inventory 13,230 -
---------------- ---------------
Gross profit 7,477 20,637
---------------- ---------------
Operating expenses:
Selling, general and administrative 10,479 11,128
Research and development 13,600 8,804
Amortization of goodwill and other intangible 45 2,367
Impairment loss 9,693 -
Restructuring charge 1,460 -
---------------- ---------------
35,277 22,299
---------------- ---------------
Operating loss (27,800) (1,662)
Other income (expenses), net (220) 443
---------------- ---------------
Loss before income taxes (28,020) (1,219)
Income tax benefit (10,044) (425)
---------------- ---------------
Net loss (17,976) (794)
Accretion of preferred stock 57 -
---------------- ---------------
Net loss applicable to common stock $ (18,033) $ (794)
================ ===============
Net loss per common share:
Basic and Diluted $ (1.91) $ (0.08)
Weighted average common and common equivalent shares outstanding:
Basic and Diluted 9,436 10,011
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
October 1, September 25,
1999 1998
---------------- ---------------
<S> <C> <C>
Sales $ 142,473 133,321
Cost of sales 81,785 76,280
Write-down of inventory 13,230 -
---------------- ---------------
Gross profit 47,458 57,041
---------------- ---------------
Operating expenses:
Selling, general and administrative 32,643 29,079
Research and development 35,629 22,289
Amortization of goodwill and other intangible 1,471 2,383
Impairment loss 9,693 -
Restructuring charge 1,460 -
Write-off of acquired in-process technology - 20,780
---------------- ---------------
80,896 74,531
---------------- ---------------
Operating loss (33,438) (17,490)
Other income, net 817 1,561
---------------- ---------------
Loss before income taxes (32,621) (15,929)
Income tax expense (benefit) (11,470) 1,547
---------------- ---------------
Net loss (21,151) (17,476)
Accretion of preferred stock 171 -
---------------- ---------------
Net loss applicable to common stock $ (21,322) $ (17,476)
================ ===============
Net loss per common share:
Basic and Diluted $ (2.23) $ (1.87)
Weighted average common and common equivalent shares outstanding:
Basic and Diluted 9,547 9,343
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
October 1, September 25,
1999 1998
---------------- ----------------
<S> <C> <C>
Net loss $ (17,976) $ (794)
Other comprehensive income (loss):
Foreign currency translation adjustments (47) 101
Unrealized gains (losses) on securities (245) 57
---------------- ----------------
Other comprehensive income (loss) before income taxes
(292) 158
Income tax expense (benefit) related to items of other
comprehensive income (loss) (91) 51
---------------- ----------------
Other comprehensive income (loss), net of income taxes (201) 107
---------------- ----------------
Comprehensive loss $ (18,177) $ (687)
================ ================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
October 1, September 25,
1999 1998
---------------- ----------------
<S> <C> <C>
Net loss $ (21,151) $ (17,476)
Other comprehensive income (loss):
Foreign currency translation adjustments (243) 237
Unrealized gains (losses) on securities (236) 4
---------------- ----------------
Other comprehensive income (loss) before taxes (479) 241
Income tax expense (benefit) related to items of other
comprehensive income (loss) (148) 78
---------------- ----------------
Other comprehensive income (loss), net of income taxes (331) 163
---------------- ----------------
Comprehensive loss $ (21,482) $ (17,313)
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
October 1, September 25,
1999 1998
-------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (21,151) $ (17,476)
Adjustments to reconcile net loss to net cash used in operating activities:
Write-down of inventories 13,230 -
Impairment loss 9,693 -
Write-off of acquired in-process technology - 20,780
Depreciation and amortization 11,913 10,230
Provision for losses on accounts receivable 398 111
Provision for obsolete and excess inventories 1,048 (306)
Provision for warranty expense 650 79
Deferred income taxes (3,134) (3,198)
Other (24) (448)
Changes in assets and liabilities:
Accounts receivable 4,292 (322)
Inventories (5,275) (9,469)
Costs and estimated earnings in excess of billings on uncompleted
contracts, net (5,310) 1,598
Other current assets (519) (598)
Accounts payable (6,561) (4,872)
Accrued expenses 3,339 1,629
Customer deposits 1,623 (2,324)
Income taxes (4,511) (3,476)
-------------- ----------------
Net cash used in operating activities (299) (8,062)
-------------- ----------------
Cash flows from investing activities:
Purchases of short-term investments (14,700) (15,298)
Proceeds from sale of short-term investments 30,084 39,604
Purchases of investment securities (636) (310)
Proceeds from sale of investment securities - 3,341
Purchases of property, plant and equipment (11,131) (8,757)
Proceeds from sale of certain manufacturing assets 6,010 -
Acquisitions, net of cash acquired - (7,603)
Increase in other assets (33) -
-------------- ----------------
Net cash provided by investing activities 9,594 10,977
-------------- ----------------
Cash flows from financing activities:
Borrowings under line of credit agreements 715 2,410
Payments under line of credit agreements (691) (24)
Proceeds from issuance of common stock 1,149 1,809
Payments for repurchase of common stock (4,381) (10,231)
Proceeds from issuance of redeemable convertible preferred stock - 23,149
-------------- ----------------
Net cash (used in) provided by financing activities (3,208) 17,113
-------------- ----------------
Effect of foreign exchange rate on cash and cash equivalents (402) (12)
-------------- ----------------
Net change in cash and cash equivalents 5,685 20,016
Cash and cash equivalents at beginning of year 1,834 8,176
-------------- ----------------
Cash and cash equivalents at end of period $ 7,519 $ 28,192
============== ================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 1,265 $ 1,177
Income taxes, net of refunds (3,749) 7,016
Accretion of preferred stock 171 -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed 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 nine months ended October 1, 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 condensed 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 and nine month periods
ended October 1, 1999 are not necessarily indicative of the results to be
expected for the full year.
Certain amounts in the 1998 condensed 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.
Impairment Loss
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 from the underlying assets to assess
recoverability. The assets are considered to be impaired when the expected
future cash flows from these assets do not exceed the carrying balances of the
related assets. The impairment loss of $9.7 million, as determined in accordance
with Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," relates to the write-down to fair value of goodwill, intangibles and other
long-lived assets acquired in the acquisition of AccelGraphics, Inc. ("AGI") and
Silicon Reality, Inc. ("SRI"). The impairment loss consisted of the write-off of
$4.9 million of goodwill, $4.4 million of intangible assets and $0.4 million of
property, plant and equipment.
The impairment loss was the result of several circumstances: (i) delay in
production introductions for the AccelGALAXY(TM), E&S Lightning 1200(TM) and the
multiple-controller graphics subsystems product line; (ii) the developer of the
chip used on the AccelGMX(TM) acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX; and (iii)
introduction of lower-end products by competitors which can perform many of the
functions of the higher-end 3D graphics cards.
8
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restructuring Charge
In the third quarter of 1999, the Company initiated a restructuring plan focused
on reducing the operating cost structure of its Workstation Products Group. As
part of the plan, the Company recorded a charge of $1.5 million relating to 28
employee terminations, including 17 employees in San Jose and 11 employees in
Salt Lake City. As of October 1, 1999, the Company had paid $38,000 in
termination benefits. The remaining benefits will be paid out over the next two
years. The charge was recorded in accordance with Emerging Issues Task Force
Issue 94-03 "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit (Including Certain Costs Incurred in a Restructuring)."
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):
October 1, December 31,
1999 1998
----------------- ----------------
(Unaudited)
Raw materials $ 25,025 $ 26,084
Work-in-process 11,474 23,511
Finished goods 3,127 3,724
----------------- ----------------
$ 39,626 $ 53,319
================= ================
The Company periodically reviews inventories for obsolescence and provides a
reserve that it considers sufficient to cover any impaired inventories. During
the third quarter of 1999, the Company finished its design and testing of
software relating to its Harmony(TM) image generator product which had been
delayed. As part of its testing, the Company determined that certain of the
inventories previously purchased for the Harmony image generator had become
technologically obsolete and did not properly function with the updated
software. In connection with this assessment, the Company recorded a charge of
$12.1 million to write-down obsolete, excess and overvalued inventories. In
addition, during the third quarter of 1999, the Company wrote-down $1.1 million
of Workstation Products Group inventories related to end-of-life or abandoned
product lines.
9
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 October 1, 1999:
Sales $ 43,001 $ 4,231 $ 1,472 $ 48,704
Operating loss (9,293) (16,911) (1,596) (27,800)
Three months ended September 25, 1998:
Sales 39,896 6,791 575 47,262
Operating income (loss) 5,219 (4,375) (2,506) (1,662)
Nine months ended October 1, 1999:
Sales 118,756 19,101 4,616 142,473
Operating loss (5,661) (23,150) (4,627) (33,438)
Nine months ended September 25, 1998:
Sales 119,746 10,018 3,557 133,321
Operating income (loss) 14,905 (26,103) (6,292) (17,490)
</TABLE>
10
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Nine Months Ended
----------------------------------- ----------------------------------
October 1, September 25, October 1, September 25,
1999 1998 1999 1998
------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
United States $ 27,260 $ 23,275 $ 74,212 $ 70,656
United Kingdom 14,754 14,094 40,552 33,146
Europe (excluding United Kingdom) 4,089 5,217 17,958 13,283
Pacific Rim 2,547 4,673 9,273 14,694
Other 54 3 478 1,542
------------- ----------------- ------------- -----------------
$ 48,704 $ 47,262 $ 142,473 $ 133,321
============= ================= ============= =================
</TABLE>
The following table presents property, plant and equipment by geographic
location based on the location of the assets (in thousands, unaudited):
October 1, December 31,
1999 1998
--------------- ----------------
United States $ 52,038 $ 52,876
Europe 565 817
--------------- ----------------
Total property, plant and
equipment, net $ 52,603 $ 53,693
=============== ================
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, warrants, Class B-1 Preferred Stock and
Convertible Subordinated Debentures 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 October 1, 1999, outstanding options to purchase
29,000 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 issuable 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.
11
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended October 1, 1999, outstanding options to purchase
196,000 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 issuable 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 September 25, 1998, outstanding options to purchase
235,000 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 issuable 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 nine months ended September 25, 1998, outstanding options to purchase
354,000 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 issuable 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.
12
<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 condensed
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. The group anticipates
growth in the Windows NT workstation marketplace with the market's eventual
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 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.
13
<PAGE>
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.
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 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.
On July 20, 1999, the Applications Group introduced its RAPIDsite(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.
14
<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 Nine Months Ended
----------------------------- -------------------------------
October 1, September 25, October 1, September 25,
1999 1998 1999 1998
----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 57.5 56.3 57.4 57.2
Write-down of inventories 27.2 - 9.3 -
----------- -------------- ------------ ---------------
Gross profit 15.3 43.7 33.3 42.8
Operating expenses:
Selling, general and administrative 21.5 23.6 22.9 21.8
Research and development 27.9 18.6 25.0 16.7
Amortization of goodwill and other 0.1 5.0 1.1 1.8
intangible assets
Impairment loss 19.9 - 6.8 -
Restructuring charge 3.0 - 1.0 -
Write-off of acquired in-process technology - - - 15.6
----------- -------------- ------------ ---------------
Operating expenses 72.4 47.2 56.8 55.9
----------- -------------- ------------ ---------------
Operating loss (57.1) (3.5) (23.5) (13.1)
Other income (expenses), net (0.4) 0.9 0.6 1.2
----------- -------------- ------------ ---------------
Loss before income taxes (57.5) (2.6) (22.9) (11.9)
Income tax expense (benefit) (20.6) (0.9) (8.0) 1.2
----------- -------------- ------------ ---------------
Net loss (36.9) (1.7) (14.9) (13.1)
Accretion of preferred stock 0.1 - 0.1 -
----------- -------------- ------------ ---------------
Net loss applicable to common stock (37.0)% (1.7)% (15.0)% (13.1)%
=========== ============== ============ ===============
</TABLE>
Third Quarter 1999 Compared to Third Quarter 1998
Sales
Sales increased $1.4 million, or 3% ($48.7 million in the third quarter of 1999
compared to $47.3 million in the third quarter of 1998). Sales for simulation
products increased $3.1 million, or 8% ($43.0 million in the third quarter of
1999 compared to $39.9 million in the third quarter of 1998). The increase in
sales of simulation products is due to stronger sales and shipments to
government customers which offset lower sales to commercial customers. Sales of
workstation products decreased $2.6 million, or 38% ($4.2 million in the third
quarter of 1999 compared to $6.8 million in the third quarter of 1998). The
decrease in sales of workstation products is due to lower royalty income as well
as lower volumes and prices on sales of boards and chips. The lower royalty
income was due to the trailing off of royalty payments from 1998 designs not
being replaced by newer designs in 1999. The lower volumes and prices was due to
a decrease in the number of units sold and decreased selling prices of existing
products and the delay in introduction of new products. Sales of application
products increased $0.9 million, or 156% ($1.5 million in the third quarter of
1999 compared to $0.6 million in the third quarter of 1998). The increase in
sales of application products is due to the greater number of shipments of
Digistars, increased sales related to the StarRider product and sales of
content-related projects in the third quarter of 1999 compared to 1998.
15
<PAGE>
Write-down of Inventories
The Company periodically reviews inventories for obsolescence and provides a
reserve that it considers sufficient to cover any impaired inventories. During
the third quarter of 1999, the Company finished its design and testing of
software relating to the Harmony image generator product which had been delayed.
As part of its testing, the Company determined that certain of the inventories
previously purchased for the Harmony image generator had become technologically
obsolete and did not properly function with the updated software. In connection
with this assessment, the Company recorded a charge of $12.1 million to
write-down obsolete, excess and overvalued inventories. In addition, during the
third quarter of 1999, the Company wrote-down $1.1 million of Workstation
Products Group inventories related to end-of-life or abandoned product lines.
Gross Profit
Gross profit decreased $13.2 million, or 64% ($7.5 million in the third quarter
of 1999 compared to $20.6 million in the third quarter of 1998). As a percent of
sales, gross profit decreased to 15.3% in the third quarter of 1999 from 43.7%
in the third quarter of 1998. The decrease in gross margin resulted primarily
from the write-down of $13.2 million of obsolete, excess and overvalued
inventories. The decrease in gross margin is also due to slightly lower margins
in the Simulation Group during the third quarter of 1999 primarily due to lower
margins on several contracts to government customers which include the Harmony
image generator. In addition, gross margin in the Workstation Products Group
decreased in the third quarter of 1999 as it has changed its business model in
1999 from one based on royalty income to one based on sales of graphics
subsystems which has product costs consistent with a manufacturing operation.
The decrease in gross margin is also due to lower margins in the Workstation
Products Group as a result of a decrease in the number of units sold and
decreased selling prices of existing products and the delay in introduction of
new products.
Selling, General and Administrative
Selling, general and administrative expenses decreased $0.6 million, or 6%
($10.5 million in the third quarter of 1999 compared to $11.1 million in the
third quarter of 1998) and decreased as a percent of sales (21.5% in the third
quarter of 1999 compared to 23.6% in the third quarter of 1998). The decrease in
these expenses is due to lower labor-related expenses as well as a reduction in
corporate advertising costs.
Research and Development
Research and development expenses increased $4.8 million, or 54% ($13.6 million
in the third quarter of 1999 compared to $8.8 million in the third quarter of
1998) and increased as a percent of sales (27.9% in the third quarter of 1999
compared to 18.6% in the third quarter of 1998). The increase in these expenses
is due to higher costs in the Simulation Group relating to its Harmony image
generator and in the Workstation Products Group to support increased research
and development activity on new products.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets decreased $2.3 million
($45,000 in the third quarter of 1999 compared to $2.4 million in the third
quarter of 1998). The decrease in these expenses is due to the write-off of $9.3
million of goodwill and other intangible assets during the third quarter of
1999.
16
<PAGE>
Impairment Loss
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 from the underlying assets to assess
recoverability. The assets are considered to be impaired when the expected
future cash flows from these assets do not exceed the carrying balances of the
related assets. The impairment loss of $9.7 million, as determined in accordance
with Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", relates to the write-down to fair value of goodwill, intangibles and other
long-lived assets acquired in the acquisition of AGI and SRI. The impairment
loss consisted of the write-off of $4.9 million of goodwill, $4.4 million of
intangible assets and $0.4 million of property, plant and equipment.
The impairment loss was the result of several circumstances: (i) delay in
production introductions for the AccelGALAXY, E&S Lightning 1200 and the
multiple-controller graphics subsystems product line; (ii) the developer of the
chip used on the AccelGMX acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX; and (iii)
introduction of lower-end products by competitors which can perform many of the
functions of the higher-end 3D graphics cards.
Restructuring Charge
In the third quarter of 1999, the Company initiated a restructuring plan focused
on reducing the operating cost structure of its Workstation Products Group. As
part of the plan, the Company recorded a charge of $1.5 million relating to 28
employee terminations, including 17 employees in San Jose and 11 employees in
Salt Lake City.
Other Income (Expenses), Net
Other income (expenses), net decreased $0.7 million ($0.2 million of other
expense, net in the third quarter of 1999 compared to $0.4 million of other
income, net in the third quarter of 1998). Interest income was $0.2 million and
$0.8 million in the third quarter of 1999 and the third quarter of 1998,
respectively. The decrease in interest income is due to a lower average balance
of cash and cash equivalents and short-term investments balances during the
third quarter of 1999 as compared to 1998.
Income Taxes
The effective tax rate was 35.2% and 34.9% of pre-tax earnings for the third
quarter of 1999 and 1998, respectively. These rates are calculated based on an
estimated annual effective tax rate applied to earnings before income taxes.
Nine Months Ended October 1, 1999 Compared to Nine Months Ended September 25,
1998
Sales
In the first nine months of 1999, sales increased $9.2 million, or 7% ($142.5
million in the first nine months of 1999 million compared to $133.3 million in
the first nine months of 1998). Sales for simulation products decreased $1.0
million, or 1% ($118.8 million in the first nine months of 1999 compared to
$119.8 million in the first nine months of 1998). The decrease in sales of
simulation products is due to unusually strong sales to commercial customers in
the first nine months of 1998, the pace of which was not repeated in the first
nine months of 1999. Sales of workstation products increased $9.1 million, or
91% ($19.1 million in the first nine months of 1999 compared to $10.0 million in
the first nine 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 which
added $14.9 million of the increase in sales during the nine months ended
October 1, 1999. This increase was offset by a decrease in royalty income, a
decrease in the number of units sold and decreased selling prices of existing
products and the delay in introduction of new products. Sales of application
products increased $1.0 million, or 28% ($4.6 million in the first nine months
of 1999 compared to $3.6 million in the first nine months of 1998). The increase
in sales of application products is due to an increased number of shipments of
Digistars, increased sales related to the StarRider product and sales of
content-related projects in the first nine months of 1999 compared to the first
nine months of 1998. These increases offset fewer shipments and lower selling
prices of MindSet virtual studio products.
17
<PAGE>
Write-down of Inventories
The Company periodically reviews inventories for obsolescence and provides a
reserve that it considers sufficient to cover any impaired inventories. During
the third quarter of 1999, the Company finished its design and testing of
software relating to the Harmony image generator product which had been delayed.
As part of its testing, the Company determined that certain of the inventories
previously purchased for the Harmony image generator had become technologically
obsolete and did not properly function with the updated software. In connection
with this assessment, the Company recorded a charge of $12.1 million to
write-down obsolete, excess and overvalued inventories. In addition, during the
third quarter of 1999, the Company wrote-down $1.1 million of Workstation
Products Group inventories related to end-of-life or abandoned product lines.
Gross Profit
Gross profit decreased $9.6 million, or 17% ($47.5 million in the first nine
months of 1999 compared to $57.0 million in the first nine months of 1998). As a
percent of sales, gross profit decreased to 33.3% in the first nine months of
1999 from 42.8% in the first nine months of 1998. The decrease in gross margin
resulted primarily from the write-down of $13.2 million of obsolete, excess and
overvalued inventories. The decrease in gross margin is also due to lower
margins in the Workstation Products Group as a result of a decrease in royalty
income, a decrease in the number of units sold and decreased selling prices of
existing products and the delay in introduction of new products.
Selling, General and Administrative
Selling, general and administrative expenses increased $3.5 million, or 12%
($32.6 million in the first nine months of 1999 compared to $29.1 million in the
first nine months of 1998) and increased as a percent of sales (22.9% in the
first nine months of 1999 compared to 21.8% in the first nine months of 1998).
The increase in these expenses is due to the inclusion of nine months of AGI
expenses in 1999 compared to three months in 1998. In addition, higher labor
costs in the first nine months of 1999 compared to the first nine months of 1998
contributed to the increase.
Research and Development
Research and development expenses increased $13.3 million, or 60% ($35.6 million
in the first nine months of 1999 compared to $22.3 million in the first nine
months of 1998) and increased as a percent of sales (25.0% in the first nine
months of 1999 compared to 16.7% in the first nine months of 1998). The increase
in these expenses is due to increased research and development expenses related
to higher costs in the Simulation Group relating to its Harmony image generator.
In addition, the first nine months of 1999 included nine months of AGI expenses
while the first nine months of 1998 only included three months of AGI expenses.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets decreased $0.9 million
($1.5 million in the first nine months of 1999 compared to $2.4 in the first
nine months of 1998). The decrease in these expenses is due to the write-off of
$9.3 million of goodwill and other intangible assets during the third quarter of
1999.
18
<PAGE>
Impairment Loss
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 from the underlying assets to assess
recoverability. The assets are considered to be impaired when the expected
future cash flows from these assets do not exceed the carrying balances of the
related assets. The impairment loss of $9.7 million, as determined in accordance
with SFAS 121, relates to the write-down to fair value of goodwill, intangibles
and other long-lived assets acquired in the acquisition of AGI and SRI. The
impairment loss consisted of the write-off of $4.9 million of goodwill, $4.4
million of intangible assets and $0.4 million of property, plant and equipment.
The impairment loss was the result of several circumstances: (i) delay in
production introductions for the AccelGALAXY, E&S Lightning 1200 and the
multiple-controller graphics subsystems product line; (ii) the developer of the
chip used on the AccelGMX acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX; and (iii)
introduction of lower-end products by competitors which can perform many of the
functions of the higher-end 3D graphics cards.
Restructuring Charge
In the third quarter of 1999, the Company initiated a restructuring plan focused
on reducing the operating cost structure of its Workstation Products Group. As
part of the plan, the Company recorded a charge of $1.5 million relating to 28
employee terminations, including 17 employees in San Jose and 11 employees in
Salt Lake City.
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 nine months of 1999.
Other Income, Net
Other income, net decreased $0.7 million ($0.8 million in the first nine months
of 1999 compared to $1.6 million in the first nine months of 1998). Interest
income was $1.7 million and $2.0 million in the first nine months of 1999 and
the first nine months of 1998, respectively. The decrease in interest income is
due a decrease in the average cash and cash equivalents and short-term
investments balances offset by interest received in 1999 for delayed income tax
refunds in the first nine months of 1999 as compared to the first nine months of
1998.
Income Taxes
Excluding the write-off of acquired in-process technology in 1998, the effective
tax rate was 35.2% and 31.9% of pre-tax earnings for the first nine 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 October 1, 1999, the Company had working capital of $118.5 million, including
cash, cash equivalents and short-term investments of $18.0 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 nine months
ended October 1, 1999, the Company used $0.3 million of cash in its operating
activities, generated $9.6 million of cash from its investing activities and
used $3.2 million of cash in its financing activities.
19
<PAGE>
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 $5.3 million, a decrease in accounts payable of $6.6 million, an
increase in inventories of $5.3 million and a decrease in income taxes payable
of $4.5 million. These primary uses of cash were partially offset by $4.3
million net cash flow from the collection of accounts receivable, and $1.6
million net cash flow from customer deposits and a $3.3 million increase in
accrued expenses. 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 inventories balance was due to an
increase in raw materials and work-in-process inventories 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 nine months ended October 1, 1999
included capital expenditures of $11.1 million for building improvements and
equipment. The Company has a capital commitment, as of October 1, 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 $15.4 million of cash during the nine months ended October 1, 1999.
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 nine months ended October 1, 1999
included the use of $4.4 million for the repurchase of common stock. Proceeds
from the issuance of common stock relating to the exercise of stock options
provided $1.1 million of cash during the nine months ended October 1, 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 1,045,500 shares of its common stock; thus, 554,500 shares currently
remain available for repurchase as of November 5, 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 January 10, 2000. 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 November 5, 1999. In addition,
the Company has a $12.5 million unsecured line for letters of credit with U.S.
Bank National Association for which there was approximately $12.0 million
outstanding as of October 1, 1999.
20
<PAGE>
As of October 1, 1999, the Company had revolving line of credit agreements with
foreign banks totaling approximately $6.5 million, of which approximately $2.4
million was unused and available. The Company has a letter of credit with
another bank in the United States for $4.9 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) 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 October 1, 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.
21
<PAGE>
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, has had a material adverse impact on the Company's results of
operations. During the third quarter of 1999, the Company recorded on impairment
loss of $9.7 million (discussed below). Actual revenues and operating profits
attributable to acquired in-process technology have deviated significantly from
the original 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 for this acquired in-process technology
was $6.1 million.
CAD-focused Professional Graphics Subsystem (1200). This technology is
a graphics 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
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. This project was
completed five months later than originally projected. The assigned
value for this acquired in-process technology was $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. As of October 1, 1999, the cost to complete this project
subsequent to the acquisition of AGI was $1.5 million. During the
third quarter, the Company determined the technology and graphics
subsystem as originally designed would not be a viable product in the
marketplace. The new graphics subsystem will be based on the
technology behind the 2200 and the AccelGMX products. Management
estimates that additional costs to complete this project will be $1.3
million and the project is expected to be completed by the end of the
second quarter of 2000, approximately 15 months later than planned.
This project will be funded by working capital. The assigned value for
this acquired in-process technology was $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 for
this acquired in-process technology was $5.3 million.
22
<PAGE>
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.
These delays, in addition to increased competition, caused an erosion of
approximately 50% of the projected average selling price for the AccelGALAXY and
a loss of projected unit sales. Subsequent to the Company's acquisition of AGI,
the developer of the chip used on the AccelGMX also acquired a board company and
entered the graphics accelerator market in direct competition with the AccelGMX.
Due to the advantage of producing the chip, the competitor can produce a
comparable product at a lower cost; thus, the AccelGMX has performed below
revenue estimates and the Company no longer expects to generate significant
revenues from this product. The E&S Lightning 1200 has performed below revenue
estimates due to the delay in product introduction by the Company. As a result
of the delay in product introduction, most OEMs selected a competing product.
The expected sales volume and average selling price of the E&S Lightning 1200
have been significantly reduced.
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 from the underlying assets to assess
recoverability. The assets are considered to be impaired when the expected
future cash flows from these assets do not exceed the carrying balances of the
related assets. Based on the events described above and in accordance with
Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", during the third quarter of 1999 the Company recorded an impairment loss of
$9.7 million related to the acquisition of AGI and SRI. The impairment loss
consisted of the write-off of $4.9 million of goodwill, $4.4 million of
intangible assets and $0.4 million of property, plant and equipment.
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 November 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 November 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 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 November 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.
23
<PAGE>
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.
24
<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 48% of the Company's total sales in the
nine months ended October 1, 1999 are concentrated in the United Kingdom,
continental Europe and the Pacific Rim. 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
October 1, 1999, the Company had no material sales or purchase contracts in
currencies other than U.S. dollars and had no material 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 October 1, 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 $6.5 million of foreign lines of credit, 40% of the Company's total debt
would be in fixed-rate instruments.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
27.1 Financial Data Schedule (filed as part of electronic
filing only)
(b) Reports on Form 8-K
None.
25
<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 November 15, 1999 By: /s/ Mark C. McBride
Mark C. McBride, Vice President,
Acting Chief Financial Officer,
Corporate Controller and
Corporate Secretary
(Principal Financial Officer)
26
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THIS SCHEDULE CONTAINS SUMMARY INFORMATION FROM THE EVANS & SUTHERLAND COMPUTER
CORPORATION OCTOBER 1, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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