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 June 30, 2000
or
[ ] 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 ____
The number of shares of the registrant's common stock, par value $0.20 per
share, outstanding at August 4, 2000 was 9,380,696.
<PAGE>
FORM 10-Q
Evans & Sutherland Computer Corporation
Quarter Ended June 30, 2000
<TABLE>
<CAPTION>
Page No.
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three months
ended June 30, 2000 and July 2, 1999 4
Consolidated Statements of Operations for the six months
ended June 30, 2000 and July 2, 1999 5
Consolidated Statements of Comprehensive Loss for the three
and six months ended June 30, 2000 and July 2, 1999 6
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and July 2, 1999 7
Notes to 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 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</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>
June 30, December 31,
2000 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 19,355 $ 22,110
Short-term investments - 748
Accounts receivable, less allowance for doubtful receivables of
$4,583 at June 30, 2000 and $1,338 at December 31, 1999 31,043 28,743
Inventories 39,713 40,588
Costs and estimated earnings in excess of billings on uncompleted contracts 67,490 80,457
Deferred income taxes - 15,923
Prepaid expenses and deposits 7,023 7,844
---------------- ----------------
Total current assets 164,624 196,413
Property, plant and equipment, net 50,256 52,184
Investment securities 6,198 4,467
Deferred income taxes - 4,418
Goodwill and other intangible assets, net 463 552
Other assets 941 430
---------------- ----------------
Total assets $ 222,482 $ 258,464
================ ================
Liabilities and stockholders' equity:
Notes payable $ 4,920 $ 2,657
Accounts payable 21,625 19,575
Accrued expenses 41,057 39,057
Customer deposits 1,681 4,720
Income taxes payable - 1,062
Billings in excess of costs and estimated earnings on uncompleted contracts 29,641 12,412
---------------- ----------------
Total current liabilities 98,924 79,483
---------------- ----------------
Long-term debt 18,015 18,015
---------------- ----------------
Commitments and contingencies
Redeemable convertible preferred stock, class B-1, no par value;
authorized 1,500,000 shares; issued and outstanding 901,408 shares 23,886 23,772
---------------- ----------------
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 9,725,711 shares at June 30, 2000 and
9,678,938 shares at December 31, 1999 1,945 1,936
Additional paid-in capital 24,473 24,086
Common stock in treasury, at cost; 352,500 shares (4,709) (4,709)
Retained earnings 60,335 115,816
Accumulated other comprehensive income (387) 65
---------------- ----------------
Total stockholders' equity 81,657 137,194
---------------- ----------------
Total liabilities and stockholders' equity $ 222,482 $ 258,464
================ ================
</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
--------------------------------------
June 30, July 2,
2000 1999
------------ --------------
<S> <C> <C>
Sales $ 25,589 $ 44,023
Cost of sales 37,892 26,420
------------ --------------
Gross profit (loss) (12,303) 17,603
------------ --------------
Operating expenses:
Selling, general and administrative 8,703 11,943
Research and development 10,984 10,949
Amortization of goodwill and other intangibles 44 713
------------ --------------
Operating expenses 19,731 23,605
------------ --------------
(32,034) (6,002)
Gain on sale of business unit 816 -
------------ --------------
Operating loss (31,218) (6,002)
Other income (expense), net (380) 1,022
------------ --------------
Loss before income taxes (31,598) (4,980)
Income tax expense (benefit) 20,598 (1,544)
------------ --------------
Net loss (52,196) (3,436)
Accretion of preferred stock 57 57
------------ --------------
Net loss applicable to common stock $ (52,253) $ (3,493)
============ ==============
Net loss per common share:
Basic and Diluted $ (5.58) $ (0.36)
Weighted average common and common
equivalent shares outstanding:
Basic and Diluted 9,360 9,601
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------
June 30, July 2,
2000 1999
------------ ------------
<S> <C> <C>
Sales $ 71,544 $ 93,769
Cost of sales 67,734 53,788
------------ ------------
Gross profit 3,810 39,981
------------ ------------
Operating expenses:
Selling, general and administrative 18,992 22,164
Research and development 22,516 22,029
Amortization of goodwill and other intangibles 89 1,426
------------ ------------
Operating expenses 41,597 45,619
------------ ------------
(37,787) (5,638)
Gain on sale of business unit 1,918 -
------------ ------------
Operating loss (35,869) (5,638)
Other income (expense), net (556) 1,037
------------ ------------
Loss before income taxes (36,425) (4,601)
Income tax expense (benefit) 18,943 (1,426)
------------ ------------
Net loss (55,368) (3,175)
Accretion of preferred stock 114 114
------------ ------------
Net loss applicable to common stock $ (55,482) $ (3,289)
============ ============
Net loss per common share:
Basic and Diluted $ (5.93) $ (0.34)
Weighted average common and common
equivalent shares outstanding:
Basic and Diluted 9,349 9,602
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
June 30, July 2,
2000 1999
------------ ------------
<S> <C> <C>
Net loss $ (52,196) $ (3,436)
Other comprehensive income (loss):
Foreign currency translation adjustments 15 (442)
Unrealized gains (losses) on securities (637) 10
------------ ------------
Other comprehensive loss before income taxes (622) (432)
Income tax benefit related to items of other
comprehensive loss (223) (134)
------------ ------------
Other comprehensive loss, net of income taxes (399) (298)
------------ ------------
Comprehensive loss $ (52,595) $ (3,734)
============ ============
Six Months Ended
--------------------------------------
June 30, July 2,
2000 1999
------------ ------------
Net loss $ (55,368) $ (3,175)
Other comprehensive income (loss):
Foreign currency translation adjustments 50 (197)
Unrealized gains (losses) on securities (772) 10
------------ ------------
Other comprehensive loss before income taxes (722) (187)
Income tax benefit related to items of other
comprehensive loss (270) (58)
------------ ------------
Other comprehensive loss, net of income taxes (452) (129)
------------ ------------
Comprehensive loss $ (55,820) $ (3,304)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, July 2,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (55,368) $ (3,175)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 6,473 8,019
Gain on sale of business unit (1,918) -
Provision for losses on accounts receivable 3,457 241
Provision for write down of inventories 2,288 459
Provision for warranty expense 513 389
Deferred income taxes 20,598 (205)
Other (32) 223
Changes in assets and liabilities:
Accounts receivable (5,418) 15,255
Inventories (1,994) (5,242)
Costs and estimated earnings in excess of billings on uncompleted
contracts, net 30,199 (11,193)
Prepaid expenses and deposits 707 (952)
Accounts payable 2,066 (9,729)
Accrued expenses 843 599
Customer deposits (3,039) 926
Income taxes (1,677) 2,690
------------ ------------
Net cash used in operating activities (2,302) (1,695)
------------ ------------
Cash flows from investing activities:
Purchases of short-term investments - (3,450)
Proceeds from sale of short-term investments 752 25,651
Purchase of investment securities - (636)
Proceeds from sale of business unit 1,250 -
Purchases of property, plant and equipment (4,641) (5,373)
Proceeds from sale of property, plant and equipment 52 6,010
Increase in other assets (528) (37)
------------ ------------
Net cash provided by (used in) investing activities (3,115) 22,165
------------ ------------
Cash flows from financing activities:
Borrowings from notes payable 11,193 -
Payments of notes payable (8,786) (629)
Proceeds from issuance of common stock 343 881
Payments for repurchase of common stock - (769)
------------ ------------
Net cash provided by (used in) financing activities 2,750 (517)
------------ ------------
Effect of foreign exchange rates on cash and cash equivalents (88) (348)
------------ ------------
Net change in cash and cash equivalents (2,755) 19,605
Cash and cash equivalents at beginning of year 22,110 1,834
------------ ------------
Cash and cash equivalents at end of period $ 19,355 $ 21,439
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 641 $ 664
Income taxes (15) (3,635)
Accretion of preferred stock 114 114
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes necessary for a complete presentation of the
results of operations, the financial position, and cash flows, in conformity
with generally accepted accounting principles. This report on Form 10-Q for the
three months and six months ended June 30, 2000 should be read in conjunction
with the Company's annual report on Form 10-K for the year ended December 31,
1999.
The accompanying unaudited consolidated balance sheets and statements of
operations, comprehensive loss and cash flows reflect all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows. The results of operations for the interim three and six month periods
ended June 30, 2000 are not necessarily indicative of the results to be expected
for the full year.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, is effective for all fiscal years beginning after June 15,
2000. SFAS 133 establishes new accounting and reporting standards for companies
to report information about derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company intends to adopt SFAS 133 by
January 1, 2001. The impact of adopting SFAS 133 is not anticipated to be
material to the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 provides guidance on the recognition, presentation and disclosure of revenue
in financial statements. In June 2000, the Securities and Exchange Commission
issued SAB 101B which extends the implementation date of SAB 101 to the
Company's fourth quarter of 2000. The Company is currently evaluating the
impact, if any, that SAB 101 will have on its financial statements.
2. BUSINESS DIVESTITURE
On March 28, 2000, the Company sold certain assets of its Applications Group
relating to digital video products to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in
cash, common stock of RT-SET Real Time Synthesized Entertainment Technology Ltd.
valued at approximately $1.0 million, and the assumption of certain liabilities.
On June 15, 2000, the Company received additional common stock of RT-SET Real
Time Synthesized Entertainment Technology Ltd. valued at $1.5 million related to
the successful development of a product included in the purchased assets.
8
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
Inventories consist of the following (in thousands):
June 30, December 31,
2000 1999
----------------- -----------------
(Unaudited)
Raw materials $ 26,593 $ 26,803
Work-in-process 11,142 11,479
Finished goods 1,978 2,306
----------------- -----------------
$ 39,713 $ 40,588
================= =================
4. INCOME TAXES
During the second quarter of 2000, the Company increased its deferred tax asset
valuation allowance by $20.6 million. As a result of the net operating loss in
the second quarter of 2000, the cumulative net operating losses for 2000, 1999
and 1998, and the cancellation of a significant contract and the related civil
complaint filed by Lockheed Martin Corporation as discussed in Note 9 to the
consolidated financial statements, the Company fully reserved its net deferred
tax assets which previously existed at the end of the first quarter of 2000 and
those deferred tax assets recognized during the second quarter of 2000. These
net deferred tax assets relate to temporary differences, tax credit carry
forwards and net operating loss carry forwards. The valuation allowance was
recorded in accordance with SFAS 109, which requires that a valuation allowance
be established when there is significant uncertainty as to the realizability of
the deferred tax assets. The Company evaluates the realizability of its deferred
tax assets on a quarterly basis. If the deferred tax assets are realized in the
future, or if a portion or all of the valuation allowance is no longer deemed to
be necessary, the related tax benefits will reduce future income tax provisions.
5. NOTES PAYABLE
On March 31, 2000, the Company entered into a financing facility (the
"Facility") with Zions First National Bank. The Facility provides for borrowings
of up to $15.0 million, which included a $7.0 million sublimit for the issuance
of letters of credit. Effective as of June 30, 2000, the Facility was amended to
allow the entire Facility amount to be used for the issuance of letters of
credit, modify certain covenants, increase the interest rate and allow for the
cash collateralization of up to $6.0 million of additional letter of credit
capacity beyond the $15.0 million Facility amount pursuant to the terms and
conditions of a supplemental letter of credit and reimbursement agreement and a
managed agency account assignment agreement. Borrowings under the Facility bear
interest at an indexed prime rate plus 4% per annum. The issuance of letters of
credit under the Facility and cash collateralized letters of credit outside the
Facility bear an annual issuance fee of 4% and 2%, respectively. The Facility
expires on March 30, 2001. Except for certain permitted exceptions as identified
in the Facility, among other things, the Facility prevents the Company from (a)
declaring or paying any dividends except as are mandatorily required on the
Company's preferred stock, (b) making any distribution of assets to the
Company's shareholders, investors, or equity holders, whether in cash, assets,
or in obligations of the Company, (c) allocating or otherwise setting apart any
sum for the payment of any dividend or distribution on, or for the purchase,
redemption, or retirement of any shares of its capital stock or equity interests
in excess of $2.0 million for any year, (d) making any other distribution by
reduction of capital or otherwise in respect of any shares of its capital stock
or equity interests in excess of $250,000, or (e) creating, incurring, assuming,
or suffering to exist any debt or any encumbrance, mortgage or lien upon certain
real and personal property of the Company. The Company's obligations under the
Facility are secured by substantially all of the Company's assets, subject to
certain liens permitted under the Facility. As of June 30, 2000, borrowings of
$4.9 million were outstanding under the Facility and an additional $7.4 million
was reserved under the Facility, due to outstanding letters of credit. Such
amounts shall continue to be reserved and shall not otherwise be available to be
advanced to the Company, until the expiration or termination of such letters of
credit.
9
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a $5.0 million unsecured letter of credit facility with First
Security Bank, N.A., of which approximately $2.6 million was unused and
available as of June 30, 2000. First Security Bank has notified the Company that
it must deposit cash collateral in the amount of $2.4 million with First
Security Bank to secure the Company's reimbursement obligation for all
outstanding letters of credit. Any additional issuance of letters of credit by
First Security Bank would also require cash collateral equal to the face amount
of the letter of credit issued. The First Security Bank letter of credit
facility matures on September 30, 2000, after which no further letters of credit
may be issued, and requires the Company to pay letter of credit fees. In
addition, the Company has unsecured letters of credit totaling approximately
$3.3 million outstanding with U.S. Bank, N.A. and Lloyds TSB Bank plc ("Lloyds")
that expire between September 2000 and June 2001.
On June 19, 2000, Evans & Sutherland Computer Limited, a wholly owned subsidiary
of Evans & Sutherland Computer Corporation, executed a $5.0 million overdraft
facility (the "Overdraft Facility") with Lloyds. Borrowings under the Overdraft
Facility bear interest at the bank's short-term offered rate plus 1.75% per
annum. The Overdraft Facility is subject to reduction or demand repayment for
any reason at any time at Lloyds' discretion and expires on November 30, 2000.
Evans & Sutherland Computer Corporation provided a parent guarantee to Lloyds to
cover the principal and interest and other costs under the Overdraft Facility
and agreed to maintain a one million Pound Sterling letter of credit in support
of the Overdraft Facility. Evans & Sutherland Computer Limited executed a letter
of negative pledge in favor of Lloyds against its assets. Covenants in the
agreement restrict dividend payments from Evans & Sutherland Computer Limited
and require maintenance of certain financial covenants.
6. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) 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, warrants, Class B-1 Preferred
Stock and Convertible Subordinated Debentures are considered to be common stock
equivalents.
Basic net income (loss) per common share is the amount of net income (loss) for
the period available to each share of common stock outstanding during the
reporting period. Diluted net income (loss) per share is the amount of net
income (loss) 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 net income (loss) per common
share, net income (loss) was the same for both the basic and diluted
calculations for all periods presented.
For the three and six months ended June 30, 2000, outstanding options to
purchase 2,465,210 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 net income (loss) per common share
because to include them would have been anti-dilutive.
For the three and six months ended July 2, 1999, outstanding options to purchase
2,261,997 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 net income (loss) per common share because to include
them would have been anti-dilutive.
10
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT AND RELATED INFORMATION
The Company's business units have been aggregated into three reportable
segments: Simulation, REALimage Solutions, 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 REALimage Solutions
segment provides graphics accelerator products, including graphics chips and
subsystems, to the personal PC workstation marketplace. The Applications segment
provides products for the entertainment, educational and real-estate planning
industries that use technologies from the Simulation and REALimage Solutions
segments.
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.
<TABLE>
<CAPTION>
(in thousands, unaudited) Simulation REALimage Applications Total
Solutions
--------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Three months ended June 30, 2000
Sales $ 21,734 $ 1,545 $ 2,310 $ 25,589
Operating income (loss) (30,251) (1,090) 123 (31,218)
Three months ended July 2, 1999
Sales $ 35,492 $ 6,751 $ 1,780 $ 44,023
Operating income (loss) 331 (4,724) (1,609) (6,002)
Six months ended June 30, 2000
Sales $ 62,122 $ 3,036 $ 6,386 $ 71,544
Operating income (loss) (33,971) (2,522) 624 (35,869)
Six months ended July 2, 1999
Sales $ 75,755 $ 14,870 $ 3,144 $ 93,769
Operating income (loss) 3,632 (6,239) (3,031) (5,638)
</TABLE>
8. 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- ----------------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
-------------- -------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
United States $ 16,075 $ 21,461 $ 44,040 $ 46,952
United Kingdom 2,553 10,465 11,026 25,797
Europe (excluding United Kingdom) 3,681 7,590 9,043 13,869
Pacific Rim 2,567 4,267 5,577 6,726
Other 713 240 1,858 425
-------------- -------------- --------------- ---------------
25,589 44,023 71,544 93,769
============== ============== =============== ===============
</TABLE>
11
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents property, plant and equipment by geographic
location based on the location of the assets (in thousands):
June 30, December 31,
2000 1999
----------------- -----------------
(Unaudited)
United States $ 49,697 $ 51,715
Europe 559 469
----------------- -----------------
$ 50,256 $ 52,184
================= =================
9. LEGAL PROCEEDINGS
On May 23, 2000, Lockheed Martin Corporation (the "Plaintiff") served the
Company with a civil complaint filed in the Circuit Court of the Ninth Judicial
Circuit in and for Orange County, Florida. The Plaintiff alleged in the
complaint that the Company breached a contract to provide certain visual systems
for the Combined Arms Tactical Trainer program for the United Kingdom Ministry
of Defence. The contract has an original value of $33.9 million. In the
complaint, the Plaintiff seeks compensatory damages of $8.5 million plus
interest as well as consequential damages and attorneys' fees. The $8.5 million
being sought from the Company by the Plaintiff was paid to the Company from May
1999 to March 2000 and was recognized as revenue by the Company during 1999. On
June 12, 2000, the Company filed its answer and counterclaim. In the
counterclaim, the Company alleges as grounds for recovery against the Plaintiff
(1) breach of contract, (2) breach of implied covenant of good faith and fair
dealing, (3) unjust enrichment, (4) unfair competition, (5) misappropriation of
trade secrets, (6) intentional interference with advantageous business
relationship, (7) replevin, and (8) promissory estoppel. In its counterclaim,
the Company seeks compensatory damages of not less than $10.0 million and not
more than $25.4 million. On June 14, 2000, the case was removed to the Orlando
Division of the United States District Court for the District of Florida where
it currently remains. On July 7, 2000, the Plaintiff answered the Company's
counterclaim but also filed a motion for dismissal of the Company's
counterclaims for unjust enrichment, unfair competition, promissory estoppel,
and incidental damages. On July 24, 2000, the Company filed its opposition to
the Plaintiff's motion to dismiss these certain counterclaims of the Company.
The Company anticipates that the court will render a decision regarding the
Plaintiff's motion within the next six weeks. Management disputes the
Plaintiff's allegations in the complaint and is vigorously defending the action
and asserting its counterclaims. Although management believes the Company will
ultimately prevail in defending the claims against it, an unfavorable outcome of
these matters would have a material adverse impact on the Company's financial
condition.
Except as discussed in the preceding paragraph, the Company is not a party to
any material legal proceeding. However, the Company from time to time is
involved in ordinary, routine litigation incidental to its business.
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 10-Q. Except for the historical information contained herein, 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 of 1934, including, among others, those
statements preceded by, followed by or including the words "estimates,"
"believes," "expects," "anticipates," "plans," "projects" 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, cancellation of contracts or significant penalties due to delays in the
timely delivery of the Company's products, 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.
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, REALimage Solutions, and Applications Groups.
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.
REALimage Solutions Group
The REALimage Solutions Group develops and sells graphics chips and graphics
subsystems for the personal workstation marketplace. This group sells to
personal workstation OEMs and to end-users.
In February 2000, the Company changed the strategic focus of the REALimage
Solutions Group to the high-end digital content creation ("DCC") segment. The
group will provide the base graphics and video processing technology to leading
hardware system-solution providers in the high-end DCC segment. The goal of the
group is to provide a "studio-on-a-chip" to bring together real-time graphics
and video in a unique and effective way to support all aspects of visual content
creation for broadcasting and netcasting applications.
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Applications Group
The Applications Group is composed of 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 and REALimage Solutions
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
capability. The group provides turnkey solutions incorporating visual systems
and sub-systems from the Simulation and REALimage Solutions 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 E&S RAPIDsite(TM) product 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. E&S RAPIDsite features fast
3D-model construction, accelerated graphics rendering performance and
easy-to-use interactive exploration of a proposed development on a Windows NT
computer with an Open GL(R) graphics accelerator.
Until March 28, 2000, the Application Group's digital video products provided
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 offered 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 were all-inclusive system solutions that incorporated visual system
components and subsystems from the Simulation and REALimage Solutions Groups.
E&S MindSet(TM), Virtual Studio System(TM) and the FuseBox(TM) controlled
software with real-time, frame-accurate camera tracking and enabled live talent
to perform in real time on a virtual set generated using E&S 3D computer
technology. On March 28, 2000, certain assets of this business unit were sold to
RT-SET Real Time Synthesized Entertainment Technology Ltd. and its subsidiary,
RT-SET America Inc.
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RESULTS OF OPERATIONS
The following table presents the percentage of total sales represented by
certain items of the Company for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ------------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
------------ ----------- ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 148.1 60.0 94.7 57.4
------------ ----------- ------------ -------------
Gross profit (48.1) 40.0 5.3 42.6
------------ ----------- ------------ -------------
Operating expenses:
Selling, general and administrative 34.0 27.1 26.5 23.6
Research and development 42.9 24.9 31.5 23.5
Amortization of goodwill and other
intangible assets 0.2 1.6 0.1 1.5
------------ ----------- ------------ -------------
Operating expenses 77.1 53.6 58.1 48.6
------------ ----------- ------------ -------------
(125.2) (13.6) (52.8) (6.0)
Gain on sale of business unit 3.2 - 2.7
------------ ----------- ------------ -------------
Operating loss (122.0) (13.6) (50.1) (6.0)
Other income (expense), net (1.5) 2.3 (0.8) 1.1
------------ ----------- ------------ -------------
Loss before income taxes (123.5) (11.3) (50.9) (4.9)
Income tax expense (benefit) 80.5 (3.5) 26.5 (1.5)
------------ ----------- ------------ -------------
Net loss (204.0) (7.8) (77.4) (3.4)
Accretion of preferred stock 0.2 0.1 0.2 0.1
------------ ----------- ------------ -------------
Net loss applicable to
common stock (204.2%) (7.9%) (77.6%) (3.5%)
============ =========== ============ =============
</TABLE>
Second Quarter 2000 Compared to Second Quarter 1999
Sales
In the second quarter of 2000, sales decreased $18.4 million, or 42% ($25.6
million in the second quarter of 2000 compared to $44.0 million in the second
quarter of 1999). Sales in the Simulation Group decreased $13.8 million, or 39%
($21.7 million in the second quarter of 2000 compared to $35.5 million in the
second quarter of 1999). Sales in the REALimage Solutions Group decreased $5.3
million, or 77% ($1.5 million in the second quarter of 2000 compared to $6.8
million in the second quarter of 1999). Sales in the Applications Group
increased $0.5 million, or 30% ($2.3 million in the second quarter of 2000
compared to $1.8 million in the second quarter of 1999). The decline in sales in
the Simulation Group is due to the cancellation of the contract with Lockheed
Martin Corporation ("Lockheed") for the delivery of visual systems to the United
Kingdom Ministry of Defence ("UK MOD") for the Combined Arms Tactical Trainer
program ("UK CATT"), and an adjustment to revenue on percent complete contracts
where a review of the estimated costs to complete the contracts resulted in a
negative adjustment to revenue. The cancellation of the UK CATT contract by
Lockheed resulted in minimal revenue being recognized on this contract in the
second quarter of 2000. The review of those contracts that are based on percent
complete accounting resulted in a negative adjustment to revenue of $10.9
million. With percent complete contracts, an increase in the estimated actual
costs at completion of contract means that the contract is proportionally less
complete, and the revenue must be adjusted downward. The revenue adjusted
downward should be recoverable as those contracts are completed in the future.
The decline in sales in the REALimage Solutions Group is due to a decrease in
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the number of units sold and decreased selling prices of existing products due
to increased competition and delays in the introduction of new products.
Management anticipates sales in the REALimage Solutions Group for the remaining
quarters of 2000 will continue to decline due to similar factors that caused the
decline in the second quarter of 2000. The increase in sales in the Applications
Group is due to an increase in sales volume of large-format entertainment
products and planetarium systems.
Gross Profit
Gross profit declined $29.9 million (a loss of $12.3 million in the second
quarter of 2000 compared to gross profit of $17.6 million in the second quarter
of 1999). As a percent of sales, gross profit declined to a negative 48.1% in
the second quarter of 2000 compared to a positive 40.0% in the second quarter of
1999. Gross profit in the second quarter of 2000 was negatively impacted by the
cancellation of the UK CATT contract due to the loss of revenue and the
write-off of obsolete and excess inventory specific to the UK CATT contract. The
gross profit impact of the adjustment for estimated actual costs at completion
of contract on percent complete contracts was $16.7 million ($10.9 million as a
reduction in revenue as discussed above, and $5.8 million as an increase in cost
of sales relating to contracts with total estimated actual costs that exceed the
contract value). The gross profit for the REALimage Solutions Group declined due
to lower revenue attributed to a decrease in the number of units sold and
decreased selling prices of existing products due to increased competition and
delays in the introduction of new products. The gross profit in the Applications
Group increased due to increased revenue from sales of large-format
entertainment products and planetarium systems.
Selling, General and Administrative
Selling, general and administrative expenses decreased $3.2 million, or 27%
($8.7 million in the second quarter of 2000 compared to $11.9 million in the
second quarter of 1999). As a percent of sales, selling, general and
administrative expenses were 34.0% in the second quarter of 2000 compared to
27.1% in the second quarter of 1999. The increase in selling, general and
administrative expenses as a percent of sales is due to a significant decrease
in sales for the second quarter of 2000 compared to the second quarter of 1999.
Selling, general and administrative expenses in the Simulation Group remained
relatively unchanged in the second quarter of 2000 compared to the second
quarter of 1999. The decrease in these expenses is due to decreased expenses in
the REALimage Solutions Group and Applications Group. The decreased expenses in
the REALimage Solutions Group is due to decreased sales volumes resulting in
decreased commissions and other selling-related costs and decreased general and
administrative expenses due to the restructuring in the third quarter of 1999.
The decreased expenses in the Applications Group is due to the reduction of
employees and related expenses as a result of the sale of certain assets of the
Company's digital video products business to RT-SET Real Time Synthesized
Entertainment Technology Ltd., and its subsidiary RT-SET America Inc. (together
"RT-SET").
Research and Development
Research and development expenses remained essentially unchanged ($11.0 million
in the second quarter of 2000 compared to $10.9 million in the second quarter of
1999). As a percent of sales, research and development expenses increased to
42.9% in the second quarter of 2000 from 24.9% in the second quarter of 1999.
The increase in research and development expenses as a percent of sales is due
to a significant decrease in sales for the second quarter of 2000 compared to
the second quarter of 1999. Research and development expenses relating to the
Simulation Group increased in the second quarter of 2000 compared to the second
quarter of 1999 due to increased efforts of the continued development of the
Company's SimFusion PC-simulation products. Research and development expenses
relating to the REALimage Solutions Group decreased in the second quarter of
2000 compared to the second quarter of 1999 due to significantly lower headcount
as a result of the group's restructuring in the third quarter of 1999.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets decreased $0.7 million, or
94% ($44,000 in the first quarter of 2000 compared to $0.7 million in the first
quarter of 1999). The decrease in this expense is due to the write-off of $9.3
million of goodwill and other intangible assets during the third quarter of
1999.
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Gain on Sale of Business Unit
During the first quarter of 2000, the Company sold certain assets of its
Applications Group relating to its digital video products business. In the first
quarter of 2000, the Company recognized $1.1 million of gain on the transaction.
In the second quarter of 2000 the Company recognized $0.8 million of gain as
certain contingent events were met subsequent to the transaction. There was no
such event in 1999.
Other Income (Expense), Net
Other income (expense), net decreased $1.4 million (net expense of $0.4 million
in the second quarter of 2000 compared to net income of $1.0 million in the
second quarter of 1999). The decrease is due to a decrease in interest income
and an increase in miscellaneous expenses. Interest income was $0.1 million and
$1.2 million in the second quarter of 2000 and the second quarter of 1999,
respectively. The decrease in interest income is due to interest received in
1999 for delayed income tax refunds.
Income Taxes
Income tax expense (benefit) increased $22.1 million (expense of $20.6 million
in the second quarter of 2000 compared to a benefit of $1.5 million in the
second quarter of 1999). During the second quarter of 2000, the Company
increased its deferred tax asset valuation allowance by $20.6 million. As a
result of the net operating loss in the second quarter of 2000, the cumulative
net operating losses for 2000, 1999 and 1998, and the cancellation of a
significant contract and the related civil complaint filed by Lockheed Martin
Corporation as discussed in Note 9 to the consolidated financial statements, the
Company fully reserved its net deferred tax assets which previously existed at
the end of the first quarter of 2000 and those deferred tax assets recognized
during the second quarter of 2000. These net deferred tax assets relate to
temporary differences, tax credit carry forwards and net operating loss carry
forwards. The valuation allowance was recorded in accordance with SFAS 109,
which requires that a valuation allowance be established when there is
significant uncertainty as to the realizability of the deferred tax assets. The
Company evaluates the realizability of its deferred tax assets on a quarterly
basis. If the deferred tax assets are realized in the future, or if a portion or
all of the valuation allowance is no longer deemed to be necessary, the related
tax benefits will reduce future income tax provisions.
Six Months Ended June 30, 2000 Compared to Six Months Ended July 2, 1999
Sales
In the first six months of 2000, sales decreased $22.3 million, or 24% ($71.5
million in the first six months of 2000 compared to $93.8 million in the first
six months of 1999). Sales in the Simulation Group decreased $13.7 million, or
18% ($62.1 million in the first six months of 2000 compared to $75.8 million in
the first six months of 1999). Sales in the REALimage Solutions Group decreased
$11.9 million, or 80% ($3.0 million in the first six months of 2000 compared to
$14.9 million in the first six months of 1999). Sales in the Applications Group
increased $3.3 million, or 103% ($6.4 million in the first six months of 2000
compared to $3.1 million in the first six months of 1999). The decline in sales
in the Simulation Group is due to the cancellation of the contract with Lockheed
for the delivery of visual systems to the UK MOD for the UK CATT program, and an
adjustment to revenue on percent complete contracts where a review of the
estimated costs to complete the contracts resulted in a negative adjustment to
revenue of $10.9 million. The decline in sales in the REALimage Solutions Group
is due to a decrease in the number of units sold and decreased selling prices of
existing products due to increased competition and delays in the introduction of
new products. Management anticipates sales in the REALimage Solutions Group for
the remaining quarters of 2000 will continue to decline due to similar factors
that caused the decline in the first six months of 2000. The increase in sales
in the Applications Group is due to an increase in sales volume of large-format
entertainment products and planetarium systems.
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Gross Profit
Gross profit declined $36.2 million, or 90% ($3.8 million in the first six
months of 2000 compared to $40.0 million in the first six months of 1999). As a
percent of sales, gross profit declined to 5.3% in the first six months of 2000
compared to 42.6% in the first six months of 1999. Gross profit in the first six
months of 2000 was negatively impacted by the cancellation of the UK CATT
contract due to the loss of revenue and the write-off of obsolete and excess
inventory specific to the UK CATT contract. The gross profit impact of the
adjustment for estimated actual costs at completion of contract on percent
complete contracts was $16.7 million ($10.9 million as a reduction in revenue as
discussed above, and $5.8 million as an increase in cost of sales relating to
contracts with total estimated actual costs that exceed the contract value). The
gross profit for the REALimage Solutions Group declined due to lower revenue
attributed to a decrease in the number of units sold and decreased selling
prices of existing products due to increased competition and delays in the
introduction of new products. The gross profit in the Applications Group
increased due to increased revenues from sales of large-format entertainment
products and planetarium systems.
Selling, General and Administrative
Selling, general and administrative expenses decreased $3.2 million, or 14%
($19.0 million in the first six months of 2000 compared to $22.2 million in the
first six months of 1999). As a percent of sales, selling, general and
administrative expenses were 26.5% in the first six months of 2000 compared to
23.6% in the first six months of 1999. The increase in selling, general and
administrative expenses as a percent of sales is due to a significant decrease
in sales for the second quarter of 2000 compared to the second quarter of 1999.
The decrease in these expenses is due to decreased expenses in the REALimage
Solutions Group and Applications Group. The decreased expenses in the REALimage
Solutions Group is due to decreased sales volumes resulting in decreased
commissions and other selling-related costs and decreased general and
administrative expenses due to the restructuring in the third quarter of 1999.
The decreased expenses in the Applications Group is due to the reduction of
employees and related expenses as a result of the sale of certain assets of the
Company's digital video products business to RT-SET.
Research and Development
Research and development expenses increased $0.5 million, or 2% ($22.5 million
in the first six months of 2000 compared to $22.0 million in the first six
months of 1999). As a percent of sales, research and development expenses were
31.5% in the first six months of 2000 compared to 23.5% in the first six months
of 1999. The increase in research and development expenses as a percent of sales
is due to a significant decrease in sales for the second quarter of 2000
compared to the second quarter of 1999. Research and development expenses
relating to the Simulation Group increased in the first six months of 2000
compared to the first six months of 1999 due to increased efforts of the
continued development of the Company's SimFusion PC-simulation products.
Research and development expenses relating to the REALimage Solutions Group
decreased in the first six months of 1999 due to significantly decreased
headcount as a result of the Group's restructuring in the third quarter of 1999.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets decreased $1.3 million, or
94% ($89,000 in the first six months of 2000 compared to $1.4 million in the
first six months of 1999). The decrease in this expense is due to the write-off
of $9.3 million of goodwill and other intangible assets during the third quarter
of 1999.
Gain on Sale of Business Unit
During the first quarter of 2000, the Company sold certain assets of its
Applications Group relating to its digital video business. In the first quarter
of 2000, the Company recognized $1.1 of gain on the transaction. In the second
quarter of 2000 the Company recognized $0.8 million of gain as certain
contingent events were met subsequent to the close of the transaction. There was
no such event in 1999.
18
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Other Income (Expense), Net
Other income (expense), net decreased $1.6 million (net expense of $0.6 million
in the first six months of 2000 compared to net income of $1.0 in the first six
months of 1999). The decrease is due to a decrease in interest income and an
increase in miscellaneous expenses. Interest income was $0.3 million and $1.5
million in the first six months of 2000 and the first six months of 1999,
respectively. The decrease in interest income is due to interest received in
1999 for delayed income tax refunds.
Income Taxes
Income tax expense (benefit) increased $20.3 million (expense of $18.9 million
in the first six months of 2000 compared to a benefit of $1.4 million in the
first six months of 1999). During the second quarter of 2000, the Company
increased its deferred tax asset valuation allowance by $20.6 million. As a
result of the net operating loss in the second quarter of 2000, the cumulative
net operating losses for 2000, 1999 and 1998, and the cancellation of a
significant contract and the related civil complaint filed by Lockheed Martin
Corporation as discussed in Note 9 to the consolidated financial statements, the
Company fully reserved its net deferred tax assets which previously existed at
the end of the first quarter of 2000 and those deferred tax assets recognized
during the second quarter of 2000. These net deferred tax assets relate to
temporary differences, tax credit carry forwards and net operating loss carry
forwards. The valuation allowance was recorded in accordance with SFAS 109,
which requires that a valuation allowance be established when there is
significant uncertainty as to the realizability of the deferred tax assets. The
Company evaluates the realizability of its deferred tax assets on a quarterly
basis. If the deferred tax assets are realized in the future, or if a portion or
all of the valuation allowance is no longer deemed to be necessary, the related
tax benefits will reduce future income tax provisions.
LIQUIDITY & CAPITAL RESOURCES
At June 30, 2000, the Company had working capital of $65.7 million, including
cash and cash equivalents of $19.4 million, compared to working capital of
$116.9 million at December 31, 1999 including cash, cash equivalents and
short-term investments of $22.9 million. During the first six months of 2000,
the Company used $2.3 million in its operating activities, used $3.1 million in
its investing activities and generated $2.8 million in its financing activities.
The primary uses of cash from the Company's operating activities included a net
loss for the six months ended June 30, 2000 of $55.4 million, a $5.4 million
increase in accounts receivable, a $3.0 million decrease in customer deposits, a
$2.0 million increase in inventory and a $1.7 million decrease in income taxes
payable. These uses of cash were offset by a $30.2 million decrease in net costs
and estimated earnings in excess of billings on uncompleted contracts, a $20.6
million decrease in deferred income taxes, and a $2.1 million increase in
accounts payable. The decrease in net costs and estimated earnings in excess of
billings on uncompleted contracts was due to the achievement of billing
milestones during the six months and the adjustment to revenue on percent
complete contracts due to the change in estimated actual costs to complete the
contracts.
The Company's investing activities included capital expenditures of $4.6 million
for building improvements and equipment and proceeds of $1.3 million for the
sale of certain assets of its digital video business.
The Company's financing activities during the first six months of 2000 included
borrowings, net of repayments of notes payable of $2.4 million.
On March 31, 2000, the Company entered into a financing facility (the
"Facility") with Zions First National Bank. The Facility provides for borrowings
of up to $15.0 million, which included a $7.0 million sublimit for the issuance
of letters of credit. Effective as of June 30, 2000, the Facility was amended to
allow the entire Facility amount to be used for the issuance of letters of
credit, modify certain covenants, increase the interest rate and allow for the
cash collateralization of up to $6.0 million of additional letter of credit
capacity beyond the $15.0 million Facility amount pursuant to the terms and
conditions of a supplemental letter of credit and reimbursement agreement and a
managed agency account assignment agreement. Borrowings under the Facility bear
interest at an indexed prime rate plus 4% per annum. The issuance of letters of
credit under the Facility and cash collateralized letters of credit outside the
Facility bear an annual issuance fee of 4% and 2%, respectively. The Facility
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expires on March 30, 2001. Except for certain permitted exceptions as identified
in the Facility, among other things, the Facility prevents the Company from (a)
declaring or paying any dividends except as are mandatorily required on the
Company's preferred stock, (b) making any distribution of assets to the
Company's shareholders, investors, or equity holders, whether in cash, assets,
or in obligations of the Company, (c) allocating or otherwise setting apart any
sum for the payment of any dividend or distribution on, or for the purchase,
redemption, or retirement of any shares of its capital stock or equity interests
in excess of $2.0 million for any year, (d) making any other distribution by
reduction of capital or otherwise in respect of any shares of its capital stock
or equity interests in excess of $250,000, or (e) creating, incurring, assuming,
or suffering to exist any debt or any encumbrance, mortgage or lien upon certain
real and personal property of the Company. The Company's obligations under the
Facility are secured by substantially all of the Company's assets, subject to
certain liens permitted under the Facility. As of June 30, 2000, borrowings of
$4.9 million were outstanding under the Facility and an additional $7.4 million
was reserved under the Facility, due to outstanding letters of credit. Such
amounts shall continue to be reserved and shall not otherwise be available to be
advanced to the Company, until the expiration or termination of such letters of
credit.
The Company has a $5.0 million unsecured letter of credit facility with First
Security Bank, N.A., of which approximately $2.6 million was unused and
available as of June 30, 2000. First Security Bank has notified the Company that
it must deposit cash collateral in the amount of $2.4 million with First
Security Bank to secure the Company's reimbursement obligation for all
outstanding letters of credit. Any additional issuance of letters of credit by
First Security Bank would also require cash collateral equal to the face amount
of the letter of credit issued. The First Security Bank letter of credit
facility matures on September 30, 2000, after which no further letters of credit
may be issued, and requires the Company to pay letter of credit fees. In
addition, the Company has unsecured letters of credit totaling approximately
$3.3 million outstanding with U.S. Bank, N.A. and Lloyds TSB Bank plc ("Lloyds")
that expire between September 2000 and June 2001.
On June 19, 2000, Evans & Sutherland Computer Limited, a wholly owned subsidiary
of Evans & Sutherland Computer Corporation, executed a $5.0 million overdraft
facility (the "Overdraft Facility") with Lloyds. Borrowings under the Overdraft
Facility bear interest at the bank's short-term offered rate plus 1.75% per
annum. The Overdraft Facility is subject to reduction or demand repayment for
any reason at any time at Lloyds' discretion and expires on November 30, 2000.
Evans & Sutherland Computer Corporation provided a parent guarantee to Lloyds to
cover the principal and interest and other costs under the Overdraft Facility
and agreed to maintain a one million Pound Sterling letter of credit in support
of the Overdraft Facility. Evans & Sutherland Computer Limited executed a letter
of negative pledge in favor of Lloyds against its assets. Covenants in the
agreement restrict dividend payments from Evans & Sutherland Computer Limited
and require maintenance of certain financial covenants.
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 through December 1999,
the Company repurchased 1,136,500 shares of its common stock, leaving 463,500
shares available for repurchase as of August 4, 2000. 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.
As of June 30, 2000, 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, borrowings available
under its various borrowing facilities and expected cash from future operations
will be sufficient to meet the Company's anticipated working capital needs,
routine capital expenditures and current debt service obligations for the next
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<PAGE>
twelve months provided that the Company will be able to renegotiate its existing
borrowing facilities or secure replacement financing. The Company's cash and
cash equivalents, subject to various restrictions previously set forth, are
available for working capital needs, capital expenditures, strategic
investments, mergers and acquisitions, stock repurchases and other potential
cash needs as they may arise. There can be no assurances that the Company would
be successful in renegotiating its existing borrowing facilities or obtaining
additional debt or equity financing.
TRADEMARKS USED IN THIS FORM 10-Q
Digistar, E&S, E&S RAPIDsite, REALimage, and StarRider 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.
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 38% of the Company's total sales in the
six months ended June 30, 2000 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 may enter
into foreign exchange forward sales or purchase contracts to offset those
exposures. Foreign currency purchase and sales contracts are entered into for
periods consistent with related underlying exposures and do not constitute
positions independent of those exposures. As of June 30, 2000, 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 June 30, 2000, 79%
of the Company's total debt was in fixed-rate instruments; however, the Company
has revolving facilities that provide for borrowings by the Company of up to
$20.0 million at variable rates of interest. If the Company were to draw on all
remaining revolving facilities availability, 59% 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.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On May 23, 2000, Lockheed Martin Corporation (the "Plaintiff") served the
Company with a civil complaint filed in the Circuit Court of the Ninth Judicial
Circuit in and for Orange County, Florida. The Plaintiff alleged in the
complaint that the Company breached a contract to provide certain visual systems
for the Combined Arms Tactical Trainer program for the United Kingdom Ministry
of Defence. The contract has an original value of $33.9 million. In the
complaint, the Plaintiff seeks compensatory damages of $8.5 million plus
interest as well as consequential damages and attorneys' fees. The $8.5 million
being sought from the Company by the Plaintiff was paid to the Company from May
1999 to March 2000 and was recognized as revenue by the Company during 1999. On
June 12, 2000, the Company filed its answer and counterclaim. In the
counterclaim, the Company alleges as grounds for recovery against the Plaintiff
(1) breach of contract, (2) breach of implied covenant of good faith and fair
dealing, (3) unjust enrichment, (4) unfair competition, (5) misappropriation of
trade secrets, (6) intentional interference with advantageous business
relationship, (7) replevin, and (8) promissory estoppel. In its counterclaim,
the Company seeks compensatory damages of not less than $10.0 million and not
more than $25.4 million. On June 14, 2000, the case was removed to the Orlando
Division of the United States District Court for the District of Florida where
it currently remains. On July 7, 2000, the Plaintiff answered the Company's
counterclaim but also filed a motion for dismissal of the Company's
counterclaims for unjust enrichment, unfair competition, promissory estoppel,
and incidental damages. On July 24, 2000, the Company filed its opposition to
the Plaintiff's motion to dismiss these certain counterclaims of the Company.
The Company anticipates that the court will render a decision regarding the
Plaintiff's motion within the next six weeks. Management disputes the
Plaintiff's allegations in the complaint and is vigorously defending the action
and asserting its counterclaims. Although management believes the Company will
ultimately prevail in defending the claims against it, an unfavorable outcome of
these matters would have a material adverse impact on the Company's financial
condition.
Except as discussed in the preceding paragraph, the Company is not a party to
any material legal proceeding. However, the Company from time to time is
involved in ordinary, routine litigation incidental to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 17, 2000. Proxies for
the meeting were solicited pursuant to Regulation 14A.
The Company's Board of Directors is divided into three classes whose terms
expire at successive annual meetings. Accordingly, not all Directors are elected
at each Annual Meeting of Shareholders. Mr. Peter O. Crisp and Mr. Ivan E.
Sutherland were re-elected as Directors and other continuing Directors are:
Stewart Carrell, Gerald S. Casilli and James R. Oyler.
The matters described below were voted on at the meeting and the results are as
follows:
1. Election of Peter O. Crisp and Ivan E. Sutherland to serve until the 2003
Annual Meeting of Shareholders
For Withheld
--- --------
Peter O. Crisp 8,293,330 1,027,592
Ivan E. Sutherland 8,293,328 1,027,594
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2. Amendment to the Evans & Sutherland Computer Corporation 1998 Stock
Option Plan (the "Plan") to (1) increase the aggregate number of shares
of common stock available for grant under the Plan from 850,000 shares
to 1,250,000 shares and (2) prohibit the committee and Board of
Directors from having the authority or discretion to adjust the
exercise price of outstanding options granted under the Plan
For Against Abstain Non-Vote
--- ------- ------- --------
5,014,273 4,012,047 294,602 -
3. The ratification of KPMG LLP as independent auditors of the Company for the
fiscal year ending December 31, 2000
For Against Abstain Non-Vote
--- ------- ------- --------
9,313,876 4,043 3,003 -
Item 5. OTHER INFORMATION
On June 7, 2000, the Company and American Stock Transfer and Trust Company (the
"Rights Agent") executed the First Amendment (the "Amendment") to the Rights
Agreement dated November 19, 1998 between the Company and the Rights Agent (as
amended, modified or supplemental from time to time, the "Rights Agreement"). At
the request of the State of Wisconsin Investment Board ("SWIB"), and as
permitted by the Rights Agreement, the Company amended the Rights Agreement to
exclude SWIB from the definition of "Acquiring Person" unless and until such
time as SWIB becomes the Beneficial Owner of more than 19.9% of the then
outstanding common shares of the Company. The Amendment and the Rights
Agreement, specifying the terms of the Rights, as amended, are exhibits to this
report on Form 10-Q. The foregoing description of the Amendment does not purport
to be complete and is qualified in its entirety by reference to such exhibits.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- ------------------------------------------------------
10.1 Letter of Credit and Reimbursement Agreement between Evans &
Sutherland Computer Corporation and Zions First National
Bank, dated April 24, 2000.
10.2 Supplemental Letter of Credit and Reimbursement Agreement
between Evans & Sutherland Computer Corporation and Zions
First National Bank, dated May 31, 2000.
10.3 Managed Agency Account Assignment Agreement between Evans &
Sutherland Computer Corporation and Zions First National
Bank, dated May 31, 2000.
10.4 Second Loan Modification Agreement made and entered into
effective June 30, 2000 by and among Evans & Sutherland
Computer Corporation, Evans & Sutherland Computer GmbH,
Evans & Sutherland Computer Limited, Evans & Sutherland
Graphics Corporation and Zions First National Bank, a
national banking association.
10.5 $15,000,000 Renewal and Substitute Promissory Note in favor
of Zions First National Bank, a national banking
association, dated June 30, 2000.
10.6 Employment agreement between Evans & Sutherland Computer
Corporation and James R. Oyler, dated May 16, 2000.
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10.7 Employment agreement between Evans & Sutherland Computer
Corporation and Richard J. Gaynor, dated May 16, 2000.
10.8 Employment agreement between Evans & Sutherland Computer
Corporation and David B. Figgins, dated May 16, 2000.
10.9 Employment agreement between Evans & Sutherland Computer
Corporation and George K. Saul, dated May 16, 2000.
10.10 Employment agreement between Evans & Sutherland Computer
Corporation and Robert H. Ard, dated May 16, 2000.
10.11 Employment agreement between Evans & Sutherland Computer
Corporation and Thomas Atchison, dated July 25, 2000.
10.12 Overdraft Facility dated June 15, 2000 between Evans &
Sutherland Computer Limited and Lloyds TSB Bank plc.
10.13 Form of Rights Agreement dated as of November 19, 1998
between Evans & Sutherland Computer Corporation and American
Stock Transfer & Trust Company which includes as Exhibit A,
the form of Certificate of Designation for the Rights, as
Exhibit B, the form of Rights Certificate, and as Exhibit C,
a Summary of Rights, filed as Exhibit 1 to the Company's
Registration Statement on Form 8-A filed December 8, 1998,
and incorporated herein by this reference.
10.14 First Amendment to Rights Agreement dated as of June 7,
2000 between Evans & Sutherland Computer Corporation and
American Stock Transfer & Trust Company.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVANS & SUTHERLAND COMPUTER CORPORATION
Date August 14, 2000 By: /S/ Richard J. Gaynor
-------------------------------------------
Richard J. Gaynor, Vice President
and Chief Financial Officer
(Principal Financial Officer)
24
